Annual Statements Open main menu

OP Bancorp - Quarter Report: 2021 June (Form 10-Q)

 

 

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 June 30, 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 August 3, 2021, there were 15,133,407 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

30

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

55

Item 4.

Controls and Procedures

56

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

57

Item 1A.

Risk Factors

57

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

57

Item 3.

Defaults Upon Senior Securities

57

Item 4.

Mine Safety Disclosures

57

Item 5.

Other Information

57

Item 6.

Exhibits

58

 

 

Signatures

59

 

 

 

2


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;

3


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.

4


Table of Contents

 

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

OP BANCORP

CONSOLIDATED BALANCE SHEETS (unaudited)

 

 

($ in thousands, except shares)

 

June 30,

2021

 

 

December 31,

2020

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

128,687

 

 

$

106,310

 

Securities available-for-sale, at fair value

 

 

111,832

 

 

 

91,791

 

Other investments

 

 

11,028

 

 

 

10,101

 

Loans held for sale

 

 

68,396

 

 

 

26,659

 

Loans receivable, net of allowance of $14,687 at June 30, 2021

   and $15,352 at December 31, 2020

 

 

1,231,179

 

 

 

1,084,384

 

Premises and equipment, net

 

 

4,271

 

 

 

4,544

 

Accrued interest receivable, net of allowance of $792 at June 30, 2021

   and $643 at December 31, 2020

 

 

3,469

 

 

 

3,985

 

Servicing assets

 

 

12,903

 

 

 

7,360

 

Company owned life insurance

 

 

11,005

 

 

 

10,879

 

Deferred tax assets

 

 

4,861

 

 

 

5,242

 

Operating right-of-use assets

 

 

6,065

 

 

 

6,786

 

Other assets

 

 

7,764

 

 

 

8,785

 

Total assets

 

$

1,601,460

 

 

$

1,366,826

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest bearing

 

$

668,244

 

 

$

522,754

 

Interest bearing:

 

 

 

 

 

 

 

 

Money market and others

 

 

386,612

 

 

 

328,323

 

Time deposits greater than $250,000

 

 

193,704

 

 

 

200,210

 

Other time deposits

 

 

185,543

 

 

 

148,803

 

Total deposits

 

 

1,434,103

 

 

 

1,200,090

 

Federal Home Loan Bank advances

 

 

 

 

 

5,000

 

Accrued interest payable

 

 

608

 

 

 

1,021

 

Operating lease liabilities

 

 

7,567

 

 

 

8,429

 

Other liabilities

 

 

7,220

 

 

 

8,920

 

Total liabilities

 

 

1,449,498

 

 

 

1,223,460

 

Shareholders’ equity

 

 

 

 

 

 

 

 

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

   issued or outstanding at June 30, 2021 and December 31, 2020

 

 

 

 

 

 

Common stock – no par value; 50,000,000 shares authorized; 15,133,407

   and 15,016,700 shares issued and outstanding at June 30, 2021

   and December 31, 2020, respectively

 

 

78,718

 

 

 

78,657

 

Additional paid-in capital

 

 

8,324

 

 

 

8,521

 

Retained earnings

 

 

64,700

 

 

 

55,348

 

Accumulated other comprehensive income

 

 

220

 

 

 

840

 

Total shareholders’ equity

 

 

151,962

 

 

 

143,366

 

Total liabilities and shareholders' equity

 

$

1,601,460

 

 

$

1,366,826

 

 

See accompanying notes to consolidated financial statements

5


Table of Contents

 

OP BANCORP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

($ in thousands, except per share data)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

14,971

 

 

$

12,549

 

 

$

28,255

 

 

$

26,243

 

Interest on securities available for sale

 

 

218

 

 

 

281

 

 

 

454

 

 

 

600

 

Other interest income

 

 

160

 

 

 

90

 

 

 

272

 

 

 

422

 

Total interest income

 

 

15,349

 

 

 

12,920

 

 

 

28,981

 

 

 

27,265

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

763

 

 

 

2,272

 

 

 

1,640

 

 

 

5,501

 

Total interest expense

 

 

763

 

 

 

2,272

 

 

 

1,640

 

 

 

5,501

 

Net interest income

 

 

14,586

 

 

 

10,648

 

 

 

27,341

 

 

 

21,764

 

(Reversal of) provision for loan losses

 

 

(1,112

)

 

 

1,988

 

 

 

(492

)

 

 

2,731

 

Net interest income after (reversal of) provision for loan losses

 

 

15,698

 

 

 

8,660

 

 

 

27,833

 

 

 

19,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposits

 

 

393

 

 

 

298

 

 

 

748

 

 

 

729

 

Loan servicing fees, net of amortization

 

 

302

 

 

 

514

 

 

 

833

 

 

 

906

 

Gain on sale of loans

 

 

1,210

 

 

 

936

 

 

 

3,092

 

 

 

2,091

 

Other income

 

 

315

 

 

 

314

 

 

 

513

 

 

 

632

 

Total noninterest income

 

 

2,220

 

 

 

2,062

 

 

 

5,186

 

 

 

4,358

 

Noninterest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

5,307

 

 

 

4,347

 

 

 

9,969

 

 

 

9,418

 

Occupancy and equipment

 

 

1,234

 

 

 

1,241

 

 

 

2,469

 

 

 

2,471

 

Data processing and communication

 

 

467

 

 

 

414

 

 

 

915

 

 

 

823

 

Professional fees

 

 

303

 

 

 

276

 

 

 

617

 

 

 

549

 

FDIC insurance and regulatory assessments

 

 

123

 

 

 

117

 

 

 

255

 

 

 

222

 

Promotion and advertising

 

 

176

 

 

 

163

 

 

 

353

 

 

 

324

 

Directors’ fees

 

 

128

 

 

 

223

 

 

 

244

 

 

 

456

 

Foundation donation and other contributions

 

 

640

 

 

 

245

 

 

 

1,147

 

 

 

575

 

Other expenses

 

 

411

 

 

 

308

 

 

 

786

 

 

 

703

 

Total noninterest expense

 

 

8,789

 

 

 

7,334

 

 

 

16,755

 

 

 

15,541

 

Income before income tax expense

 

 

9,129

 

 

 

3,388

 

 

 

16,264

 

 

 

7,850

 

Income tax expense

 

 

2,750

 

 

 

972

 

 

 

4,808

 

 

 

2,135

 

Net income

 

$

6,379

 

 

$

2,416

 

 

$

11,456

 

 

$

5,715

 

Earnings per share - Basic

 

$

0.42

 

 

$

0.16

 

 

$

0.75

 

 

$

0.37

 

Earnings per share - Diluted

 

$

0.42

 

 

$

0.16

 

 

$

0.75

 

 

$

0.37

 

Other comprehensive (loss)/income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized (losses)/gains

on securities available-for-sale

 

 

(133

)

 

 

(231

)

 

 

(879

)

 

 

1,063

 

Tax effect

 

 

39

 

 

 

68

 

 

 

259

 

 

 

(314

)

Total other comprehensive (loss)/income

 

 

(94

)

 

 

(163

)

 

 

(620

)

 

 

749

 

Comprehensive income

 

$

6,285

 

 

$

2,253

 

 

$

10,836

 

 

$

6,464

 

 

See accompanying notes to consolidated financial statements

 

6


Table of Contents

 

 

OP BANCORP

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

 

 

 

 

Common Stock

 

 

Additional

 

 

 

 

 

 

Accumulated

Other

 

 

Total

 

($ in thousands, except shares)

 

Shares

Outstanding

 

 

Amount

 

 

Paid-in

Capital

 

 

Retained

Earnings

 

 

Comprehensive

Income (Loss)

 

 

Shareholders’

Equity

 

Balance at April 1, 2020

 

 

15,115,868

 

 

$

80,422

 

 

$

7,882

 

 

$

48,695

 

 

$

1,100

 

 

$

138,099

 

Net income

 

 

 

 

 

 

 

 

 

 

 

2,416

 

 

 

 

 

 

2,416

 

Other comprehensive income(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(163

)

 

 

(163

)

Stock issued under stock-based

   compensation plans

 

 

22,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation, net

 

 

 

 

 

 

 

 

336

 

 

 

 

 

 

 

 

 

336

 

Repurchase of common stock

 

 

(70,027

)

 

 

(497

)

 

 

 

 

 

 

 

 

 

 

 

(497

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(1,055

)

 

 

 

 

 

(1,055

)

Balance at June 30, 2020

 

 

15,068,030

 

 

$

79,925

 

 

$

8,218

 

 

$

50,056

 

 

$

937

 

 

$

139,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2021

 

 

15,037,635

 

 

$

78,654

 

 

$

8,652

 

 

$

59,373

 

 

$

314

 

 

$

146,993

 

Net income

 

 

 

 

 

 

 

 

 

 

 

6,379

 

 

 

 

 

 

6,379

 

Other comprehensive income(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(94

)

 

 

(94

)

Stock issued under stock-based

   compensation plans

 

 

95,772

 

 

 

64

 

 

 

 

 

 

 

 

 

 

 

 

64

 

Stock-based compensation, net

 

 

 

 

 

 

 

 

(328

)

 

 

 

 

 

 

 

 

(328

)

Repurchase of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(1,052

)

 

 

 

 

 

(1,052

)

Balance at June 30, 2021

 

 

15,133,407

 

 

$

78,718

 

 

$

8,324

 

 

$

64,700

 

 

$

220

 

 

$

151,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2020

 

 

15,703,276

 

 

$

86,381

 

 

$

7,524

 

 

$

46,483

 

 

$

188

 

 

$

140,576

 

Net income

 

 

 

 

 

 

 

 

 

 

 

5,715

 

 

 

 

 

 

5,715

 

Other comprehensive income(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

749

 

 

 

749

 

Stock issued under stock-based

   compensation plans

 

 

152,235

 

 

 

305

 

 

 

 

 

 

 

 

 

 

 

 

305

 

Stock-based compensation, net

 

 

 

 

 

 

 

 

694

 

 

 

 

 

 

 

 

 

694

 

Repurchase of common stock

 

 

(787,481

)

 

 

(6,761

)

 

 

 

 

 

 

 

 

 

 

 

(6,761

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(2,142

)

 

 

 

 

 

(2,142

)

Balance at June 30, 2020

 

 

15,068,030

 

 

$

79,925

 

 

$

8,218

 

 

$

50,056

 

 

$

937

 

 

$

139,136

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2021

 

 

15,016,700

 

 

$

78,657

 

 

$

8,521

 

 

$

55,348

 

 

$

840

 

 

$

143,366

 

Net income

 

 

 

 

 

 

 

 

 

 

 

11,456

 

 

 

 

 

 

11,456

 

Other comprehensive income(loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(620

)

 

 

(620

)

Stock issued under stock-based

   compensation plans

 

 

120,537

 

 

 

89

 

 

 

 

 

 

 

 

 

 

 

 

89

 

Stock-based compensation, net

 

 

 

 

 

 

 

 

(197

)

 

 

 

 

 

 

 

 

(197

)

Repurchase of common stock

 

 

(3,830

)

 

 

(28

)

 

 

 

 

 

 

 

 

 

 

 

(28

)

Cash dividends declared

 

 

 

 

 

 

 

 

 

 

 

(2,104

)

 

 

 

 

 

(2,104

)

Balance at June 30, 2021

 

 

15,133,407

 

 

$

78,718

 

 

$

8,324

 

 

$

64,700

 

 

$

220

 

 

$

151,962

 

 

See accompanying notes to consolidated financial statements

 

 

7


Table of Contents

 

 

OP BANCORP

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

 

 

 

 

Six Months Ended June 30,

 

($ in thousands)

 

2021

 

 

2020

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

11,456

 

 

$

5,715

 

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

   by operating activities:

 

 

 

 

 

 

 

 

(Reversal of) provision for loan losses

 

 

(492

)

 

 

2,731

 

Depreciation and amortization of premises and equipment

 

 

657

 

 

 

655

 

Amortization of net premiums on securities

 

 

503

 

 

 

164

 

Amortization of servicing assets

 

 

1,401

 

 

 

821

 

Amortization of low-income housing partnerships

 

 

254

 

 

 

161

 

Stock-based compensation

 

 

236

 

 

 

716

 

Gain on sales of loans

 

 

(3,092

)

 

 

(2,091

)

Earnings on company owned life insurance

 

 

(126

)

 

 

(130

)

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

 

 

59

 

 

 

(89

)

Origination of loans held for sale

 

 

(76,270

)

 

 

(40,538

)

Proceeds from sales of loans held for sale

 

 

36,587

 

 

 

35,134

 

Net change in:

 

 

 

 

 

 

 

 

Accrued interest receivable

 

 

766

 

 

 

(1,657

)

Deferred tax assets

 

 

(122

)

 

 

(660

)

Other assets

 

 

1,826

 

 

 

(179

)

Accrued interest payable

 

 

(412

)

 

 

(722

)

Other liabilities

 

 

(2,373

)

 

 

(2,128

)

Net cash used in by operating activities

 

 

(29,142

)

 

 

(2,097

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Net change in loans receivable

 

 

(54,826

)

 

 

(53,354

)

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

 

 

18,368

 

 

 

12,573

 

Purchase of loans and servicing assets

 

 

(97,631

)

 

 

 

Purchase of securities available-for-sale

 

 

(39,791

)

 

 

(30,528

)

Purchase of FHLB stock

 

 

(963

)

 

 

(685

)

Purchase of premises and equipment, net

 

 

(385

)

 

 

(309

)

Net change in investments in low-income housing partnerships

 

 

(189

)

 

 

(810

)

Net cash used in investing activities

 

 

(175,417

)

 

 

(73,113

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Net change in deposits

 

 

234,012

 

 

 

100,009

 

Cash received from stock option exercises

 

 

89

 

 

 

305

 

Proceeds from (payment of) Federal Home Loan Bank advances

 

 

(5,000

)

 

 

10,000

 

Repurchase of common stock

 

 

(28

)

 

 

(6,761

)

Cash dividend paid on common stock

 

 

(2,104

)

 

 

(2,142

)

Payments related to tax-withholding for vested restricted stock awards

 

 

(33

)

 

 

(22

)

Net cash provided by financing activities

 

 

226,936

 

 

 

101,389

 

Net change in cash and cash equivalents

 

 

22,377

 

 

 

26,179

 

Cash and cash equivalents at beginning of period

 

 

106,310

 

 

 

85,943

 

Cash and cash equivalents at end of period

 

$

128,687

 

 

$

112,122

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

6,253

 

 

$

3,505

 

Interest

 

 

2,052

 

 

 

6,223

 

Supplemental noncash disclosure:

 

 

 

 

 

 

 

 

New commitments to low-income housing partnership investments

 

$

 

 

$

3,477

 

 

See accompanying notes to consolidated financial statements

8


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 Bank operates primarily in the traditional banking business arena that includes accepting deposits and making loans and investments. The Bank’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 Bank is operating with nine 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 Bank also has four 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. Certain items on the Consolidated Financial Statements and notes for the prior years have been reclassified to conform to the 2021 presentation. 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 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (“2020 Annual Report on Form 10-K”).

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.

 

The Company has added the following significant accounting policies as a result of an asset purchase of loan portfolio from Hana Small Business Lending, Inc. (“Hana”).

9


Table of Contents

 

Asset Purchase:

On May 24, 2021, the Company completed the purchase of Hana’s loan portfolio and paid approximately $97.6 million that included loans of $100.0 million at a fair value discount of $8.9 million, servicing assets of $6.1 million and accrued interest receivable of $398 thousand. The following table summarizes the consideration paid for the loan portfolio and the amounts of assets purchased:  

 

($ in thousands)

 

 

 

 

Consideration

 

 

 

 

Cash

 

$

97,631

 

 

 

 

 

 

Recognized amounts of identifiable assets purchased:

 

 

 

 

Loans (1)

 

$

100,003

 

Loan discounts

 

 

(8,867

)

Accrued interest receivable

 

 

398

 

Servicing assets

 

 

6,097

 

Total recognized identifiable assets

 

$

97,631

 

 

(1)

Consists of $92.2 million of SBA loans, $6.9 million of PPP loans and $919 thousand of real estate loans.

Asset Acquisitions: The Company follows the guidance in Accounting Standards Codification (“ASC”)  805, Business Combination, for determining the appropriate accounting treatment for acquisition. Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business, provides an initial fair value screen to determine if substantially all of the fair value of the assets acquired is concentrated in a single asset or group of similar assets. If the initial test is met, the assets acquired would not represent a business combination, but rather an asset acquisition. If the transaction is deemed to be an asset acquisition, the cost accumulation and allocation model is used in which the cost of the acquisition is allocated on a relative fair value basis to the assets acquired. The Company concluded that this transaction did not qualify as a business combination and was accounted for as an asset acquisition in accordance with the “Acquisition of Assets Rather Than a Business” subsections of ASC 805-50 using a cost accumulation model.

Purchased Performing Loans: The Company records purchased performing loans at fair value including a discount and recognizes discount accretion using the contractual cash flow method. The fair value discount is accreted as an adjustment to yield over the estimated lives of the loans. The Company evaluated $100.0 million of the loans purchased in accordance with the provisions of ASC 310-20, Nonrefundable Fees and Other Costs and recorded an $8.9 million discount. There was no allowance for loan losses established as of June 30, 2021 for the purchased performing loans. A provision for loan losses is recorded for any further deterioration in these loans subsequent to the acquisition.

Recent Accounting Pronouncements:

In June 2016, Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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 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 recognized in other comprehensive income (loss). 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, the 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 in October 2019, the 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 using a modified retrospective approach through a cumulative effect adjustment to retained earnings, except for debt securities that an other-than-temporary impairment had been previously recognized will be applied using the prospective transition approach. 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.

 

10


Table of Contents

 

 

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU is a new accounting standard related to contracts or hedging relationships that reference London Interbank Offered Rate (“LIBOR”) or other reference rates that are expected to be discontinued. The new standard provides temporary optional expedients and exceptions regarding existing accounting requirements related to contractual modifications of contracts, hedging relationships, and other transactions that are affected by reference rate reform. In January 2021, the FASB issued ASU 2021-01, as subsequent amendments, which permits entities to apply optional expedients in Topic 848 to derivative instruments modified because of discounting transition resulting from referent rate reform. ASU 2020-04 became effective upon issuance and may be applied prospectively to contract modifications made on or before December 31, 2022. ASU 2021-01 became effective upon issuance and may be applied on a full restrospective basis as of any date from the begining of an interim period that includes or subsequent to March 12, 2020 or prospectively for contract modifications made on or before December 31, 2022. The Company adopted this guidance on a prospective basis in January 2021 and the guidance did not have a material impact on the Company’s Consolidated Financial Statements. The Company will assess the impact in conjuction with the reference rate transition as it occurs over the next two years.

 

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 amendments 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 AFS as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies or sponsored agency securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

28,965

 

 

$

322

 

 

$

(81

)

 

$

29,206

 

Residential collateralized mortgage obligations

 

 

82,554

 

 

 

569

 

 

 

(497

)

 

 

82,626

 

Total available for sale

 

$

111,519

 

 

$

891

 

 

$

(578

)

 

$

111,832

 

 

($ in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored agency securities

 

$

1,000

 

 

$

5

 

 

$

 

 

$

1,005

 

U.S. Government agencies or sponsored agency securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

19,281

 

 

$

430

 

 

$

(7

)

 

$

19,704

 

Residential collateralized mortgage obligations

 

 

70,318

 

 

 

814

 

 

 

(50

)

 

 

71,082

 

Total available for sale

 

$

90,599

 

 

$

1,249

 

 

$

(57

)

 

$

91,791

 

 

11


Table of Contents

 

 

There were no sales of securities AFS in the three and six months ended June 30, 2021 and 2020. The amortized cost and estimated fair value of securities AFS at June 30, 2021, by contractual maturity, are shown below.

 

($ in thousands)

 

 

 

 

 

Amortized

Cost

 

 

Fair

Value

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies or sponsored agency securities:

 

 

 

 

 

 

 

 

 

 

 

 

After one year through five years

 

 

 

 

 

$

827

 

 

$

866

 

After five years through ten years

 

 

 

 

 

 

4,446

 

 

 

4,607

 

After ten years

 

 

 

 

 

 

106,246

 

 

 

106,359

 

Total available for sale

 

 

 

 

 

$

111,519

 

 

$

111,832

 

 

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 June 30, 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 presents the fair value and the associated gross unrealized losses on AFS securities by length of time those individual securities in each category have been in a continuous loss at June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

Less Than 12 Months

 

 

12 Months or Longer

 

 

Total

 

As of June 30, 2021:

 

Fair

Value

 

 

Gross Unrealized

Losses

 

 

Fair

Value

 

 

Gross Unrealized

Losses

 

 

Fair

Value

 

 

Gross Unrealized

Losses

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies or sponsored agency

  securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

12,229

 

 

$

(81

)

 

$

 

 

$

 

 

$

12,229

 

 

$

(81

)

Residential collateralized mortgage

   obligations

 

 

46,738

 

 

 

(491

)

 

 

1,844

 

 

 

(6

)

 

 

48,582

 

 

 

(497

)

Total available for sale

 

$

58,967

 

 

$

(572

)

 

$

1,844

 

 

$

(6

)

 

$

60,811

 

 

$

(578

)

 

($ in thousands)

 

Less Than 12 Months

 

 

12 Months or Longer

 

 

Total

 

As of December 31, 2020:

 

Fair

Value

 

 

Gross Unrealized

Losses

 

 

Fair

Value

 

 

Gross Unrealized

Losses

 

 

Fair

Value

 

 

Gross Unrealized

Losses

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies or sponsored agency

  securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

3,089

 

 

$

(7

)

 

$

 

 

$

 

 

$

3,089

 

 

$

(7

)

Residential collateralized mortgage

   obligations

 

 

13,593

 

 

 

(50

)

 

 

 

 

 

 

 

 

13,593

 

 

 

(50

)

Total available for sale

 

$

16,682

 

 

$

(57

)

 

$

 

 

$

 

 

$

16,682

 

 

$

(57

)

 

12


Table of Contents

 

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) on 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 both June 30, 2021 and December 31, 2020, management believes no securities with unrealized losses were OTTI.

 

As of June 30, 2021 and December 31, 2020, there were no pledged securities to secure public deposits, borrowing and letters of credit from the Federal Home Loan Bank (“FHLB”) and the Board of Governors of the Federal Reserve System (“FRB”), and for other purposes required or permitted by law. The following table presents the other investment securities, which are included in Other investments on the Consolidated Balance Sheet as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

 

 

 

 

June 30,

2021

 

 

December 31,

2020

 

Federal Home Loan Bank stock

 

 

 

 

 

$

7,005

 

 

$

6,043

 

Pacific Coast Bankers Bank stock

 

 

 

 

 

 

190

 

 

 

190

 

Mutual fund - CRA qualified

 

 

 

 

 

 

3,738

 

 

 

3,773

 

Total other investment securities

 

 

 

 

 

$

10,933

 

 

$

10,006

 

 

The Company has equity investment in a mutual fund with readily determinable fair value of $3.7 million and $3.8 million, as of June 30, 2021 and December 31, 2020, respectively, which is measured at fair value with changes in fair value recorded in net income. The Company invested in the mutual fund for CRA purposes. For the mutual fund, the Company recorded a $7 thousand and a $31 thousand unrealized gain for the three months ended June 30, 2021 and 2020, respectively, and a $59 thousand unrealized loss for the six months ended June 30, 2021 compared to a $89 thousand unrealized gain for the six months ended June 30, 2020. The unrealized gains (losses) of the mutual fund are included in Other income in the Statements of Income and Comprehensive Income.

 

Note 4. Loans and Allowance for Loan Losses

The following table presents the composition of the loan portfolio as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

June 30,

2021

 

 

December 31,

2020

 

Commercial real estate

 

$

684,082

 

 

$

651,684

 

SBA loans—real estate

 

 

217,356

 

 

 

136,224

 

SBA loans—non-real estate (1)

 

 

121,395

 

 

 

75,151

 

Commercial and industrial

 

 

102,562

 

 

 

107,307

 

Home mortgage

 

 

119,319

 

 

 

128,212

 

Consumer

 

 

1,152

 

 

 

1,158

 

Gross loans receivable

 

 

1,245,866

 

 

 

1,099,736

 

Allowance for loan losses

 

 

(14,687

)

 

 

(15,352

)

Loans receivable, net (2)

 

$

1,231,179

 

 

$

1,084,384

 

 

(1)

At June 30, 2021 and December 31, 2020, SBA loans - non-real estate balances include SBA Paycheck Protection Program ("PPP") loans of $103.9 million and $64.9 million, respectively.

(2)

Includes net deferred loan fees or costs, unamortized premiums and unaccreted discounts of $(12.5) million and $(5.9) million as of June 30, 2021 and December 31, 2020, respectively.

 

No loans were outstanding to related parties as of June 30, 2021 or December 31, 2020.  

13


Table of Contents

 

The following table summarizes the activity in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2021 and 2020:

 

 

 

 

 

 

 

 

 

 

SBA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

SBA Loans

 

 

Loans Non-

 

 

Commercial

 

 

Home

 

 

 

 

 

 

 

 

 

($ in thousands)

Real Estate

 

 

Real Estate

 

 

Real Estate

 

 

and Industrial

 

 

Mortgage

 

 

Consumer

 

 

Total

 

Three months ended June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

8,594

 

 

$

2,030

 

 

$

292

 

 

$

2,331

 

 

$

2,075

 

 

$

17

 

 

$

15,339

 

(Reversal of) provision for

loan losses (1)

 

(138

)

 

 

(33

)

 

 

(37

)

 

 

(45

)

 

 

(371

)

 

 

(1

)

 

 

(625

)

Charge-offs

 

 

 

 

 

 

 

(27

)

 

 

 

 

 

 

 

 

 

 

 

(27

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

8,456

 

 

$

1,997

 

 

$

228

 

 

$

2,286

 

 

$

1,704

 

 

$

16

 

 

$

14,687

 

Three months ended June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

6,210

 

 

$

1,082

 

 

$

192

 

 

$

1,292

 

 

$

1,921

 

 

$

51

 

 

$

10,748

 

(Reversal of) provision for

loan losses

 

935

 

 

 

264

 

 

 

33

 

 

 

628

 

 

 

153

 

 

 

(25

)

 

 

1,988

 

Charge-offs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries

 

 

 

 

 

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

28

 

Ending balance

$

7,145

 

 

$

1,346

 

 

$

253

 

 

$

1,920

 

 

$

2,074

 

 

$

26

 

 

$

12,764

 

 

(1)

Excludes (reversal of) provision for uncollectible accrued interest receivable of ($487) thousand for the three months ended June 30, 2021. There was no provision for uncollectible accrued interest receivable for the three months ended June 30, 2020.

 

 

 

 

 

 

 

 

 

 

SBA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

SBA Loans

 

 

Loans Non-

 

 

Commercial

 

 

Home

 

 

 

 

 

 

 

 

 

($ in thousands)

Real Estate

 

 

Real Estate

 

 

Real Estate

 

 

and Industrial

 

 

Mortgage

 

 

Consumer

 

 

Total

 

Six months ended June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

8,505

 

 

$

1,802

 

 

$

278

 

 

$

2,563

 

 

$

2,185

 

 

$

19

 

 

$

15,352

 

(Reversal of) provision for

loan losses (1)

 

(49

)

 

 

195

 

 

 

(23

)

 

 

(277

)

 

 

(481

)

 

 

(6

)

 

 

(641

)

Charge-offs

 

 

 

 

 

 

 

(27

)

 

 

 

 

 

 

 

 

 

 

 

(27

)

Recoveries

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

3

 

Ending balance

$

8,456

 

 

$

1,997

 

 

$

228

 

 

$

2,286

 

 

$

1,704

 

 

$

16

 

 

$

14,687

 

Six months ended June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

6,000

 

 

$

939

 

 

$

121

 

 

$

1,289

 

 

$

1,667

 

 

$

34

 

 

$

10,050

 

(Reversal of) provision for

loan losses

 

1,145

 

 

 

407

 

 

 

149

 

 

 

631

 

 

 

407

 

 

 

(8

)

 

 

2,731

 

Charge-offs

 

 

 

 

 

 

 

(45

)

 

 

 

 

 

 

 

 

 

 

 

(45

)

Recoveries

 

 

 

 

 

 

 

28

 

 

 

 

 

 

 

 

 

 

 

 

28

 

Ending balance

$

7,145

 

 

$

1,346

 

 

$

253

 

 

$

1,920

 

 

$

2,074

 

 

$

26

 

 

$

12,764

 

 

(1)

Excludes (reversal of) provision for uncollectible accrued interest receivable of ($149) thousand for the six months ended June 30, 2021. There was no provision for uncollectible accrued interest receivable for the six months ended June 30, 2020.

 

14


Table of Contents

 

 

The following table presents the allowance for loan losses and recorded investment by portfolio segment and impairment methodology as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

Loans

Individually

Evaluated

for Impairment

 

 

Loans

Collectively

Evaluated

for Impairment

 

 

Total

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses (1):

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

 

$

8,456

 

 

$

8,456

 

SBA loans—real estate

 

 

 

 

 

1,997

 

 

 

1,997

 

SBA loans—non-real estate

 

 

 

 

 

228

 

 

 

228

 

Commercial and industrial

 

 

323

 

 

 

1,963

 

 

 

2,286

 

Home mortgage

 

 

 

 

 

1,704

 

 

 

1,704

 

Consumer

 

 

 

 

 

16

 

 

 

16

 

Total

 

$

323

 

 

$

14,364

 

 

$

14,687

 

Loans (2):

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

 

$

686,042

 

 

$

686,042

 

SBA loans—real estate

 

 

396

 

 

 

217,752

 

 

 

218,148

 

SBA loans—non-real estate

 

 

 

 

 

121,951

 

 

 

121,951

 

Commercial and industrial

 

 

323

 

 

 

102,440

 

 

 

102,763

 

Home mortgage

 

 

 

 

 

119,778

 

 

 

119,778

 

Consumer

 

 

 

 

 

1,155

 

 

 

1,155

 

Total

 

$

719

 

 

$

1,249,118

 

 

$

1,249,837

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses (1):

 

 

 

 

 

 

 

 

 

 

 

 

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 (2):

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

(1)

Excludes allowance for uncollectible accrued interest receivable of $792 thousand and $643 thousand as of June 30, 2021 and December 31, 2020, respectively.

(2)

Includes accrued interest receivable of $4.0 million and $4.4 million as of June 30, 2021 and December 31, 2020, respectively.

 

15


Table of Contents

 

 

The following table presents the recorded investment of individually impaired loans and the specific allowance for loan losses as of June 30, 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 June 30, 2021

 

 

As of December 31, 2020

 

 

 

Recorded

 

 

Recorded

 

 

 

 

 

 

Recorded

 

 

Recorded

 

 

 

 

 

 

 

Investment

 

 

Investment

 

 

 

 

 

 

Investment

 

 

Investment

 

 

 

 

 

 

 

With No

 

 

With

 

 

Related

 

 

With No

 

 

With

 

 

Related

 

($ in thousands)

 

Allowance

 

 

Allowance

 

 

Allowance

 

 

Allowance

 

 

Allowance

 

 

Allowance

 

SBA loans—real estate

 

$

396

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

SBA loans—non-real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

174

 

 

 

87

 

Commercial and industrial

 

 

 

 

 

323

 

 

 

323

 

 

 

 

 

 

330

 

 

 

330

 

Total

 

$

396

 

 

$

323

 

 

$

323

 

 

$

 

 

$

504

 

 

$

417

 

 

The following table presents the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans by portfolio segment for the three and six months ended June 30, 2021 and 2020. The difference between interest income recognized and cash basis interest recognized was immaterial.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

Average

 

 

Interest

 

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

 

Recorded

 

 

Income

 

($ in thousands)

 

Investment

 

 

Recognized

 

 

Investment

 

 

Recognized

 

 

Investment

 

 

Recognized

 

 

Investment

 

 

Recognized

 

SBA loans—real estate

 

$

165

 

 

$

 

 

$

 

 

$

 

 

$

83

 

 

$

 

 

$

 

 

$

 

SBA loans—non-real estate

 

 

 

 

 

 

 

 

125

 

 

 

2

 

 

 

 

 

 

 

 

 

125

 

 

 

4

 

Commercial and industrial

 

 

325

 

 

 

3

 

 

 

330

 

 

 

3

 

 

 

327

 

 

 

6

 

 

 

331

 

 

 

7

 

Total

 

$

490

 

 

$

3

 

 

$

455

 

 

$

5

 

 

$

410

 

 

$

6

 

 

$

456

 

 

$

11

 

 

The following table presents the recorded investment in nonaccrual loans and loans past due 90 or more days and still accruing interest, by portfolio segment, as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

Nonaccrual

 

 

Loans 90 or More Days

Past Due & Still

Accruing

 

 

Total

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

SBA loans—real estate

 

$

396

 

 

$

 

 

$

396

 

SBA loans—non-real estate

 

 

38

 

 

 

 

 

 

38

 

Commercial and industrial

 

 

323

 

 

 

 

 

 

323

 

Total

 

$

757

 

 

$

 

 

$

757

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

SBA loans—non-real estate

 

$

56

 

 

$

 

 

$

56

 

Commercial and industrial

 

 

330

 

 

 

 

 

 

330

 

Home mortgage

 

 

599

 

 

 

 

 

 

599

 

Total

 

$

985

 

 

$

 

 

$

985

 

 

 Nonaccrual loans and loans past due 90 or more days and still accruing interest include both homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

16


Table of Contents

 

The following table represents the aging analysis of the recorded investment in past due loans as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

30-59 Days

Past Due

 

 

60-89 Days

Past Due

 

 

90 or More Days

Past Due

 

 

Total

Past Due

 

 

Total Current or Less Than 30 Days Past Due

 

 

Total

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

 

 

$

 

 

$

 

 

$

 

 

$

686,042

 

 

$

686,042

 

SBA—real estate

 

 

 

 

 

 

 

 

396

 

 

 

396

 

 

 

217,752

 

 

 

218,148

 

SBA—non-real estate

 

 

41

 

 

 

 

 

 

13

 

 

 

54

 

 

 

121,897

 

 

 

121,951

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102,763

 

 

 

102,763

 

Home mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

119,778

 

 

 

119,778

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,155

 

 

 

1,155

 

 

 

$

41

 

 

$

 

 

$

409

 

 

$

450

 

 

$

1,249,387

 

 

$

1,249,837

 

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: When, for economic or legal reasons related to a borrower’s financial difficulties, the Company grants a concession for other than an insignificant period of time to a borrower that the Company would not otherwise consider, the related loan is classified as a troubled debt restructuring (“TDR”), the balance of which totaled $323 thousand and $330 thousand as of June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021 and December 31, 2020, the Company has allocated $323 thousand and $330 thousand of specific reserves to the loans classified as 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 when the loan was previously identified as TDRs. There were no new loans identified as TDRs during the three and six months ended June 30, 2021 or 2020. There were no payment defaults during the three and six months ended June 30, 2021, or 2020, of loans that had been modified as TDRs within the previous twelve months.

Loan payment deferrals: Through June 30, 2021, the Company has processed loan deferments for borrowers across multiple industries representing 225 loan accounts, with an aggregate loan balance of $250.7 million under the interagency guidance and Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). COVID-19 related modifications are generally not classified as TDRs due to the relief under the CARES Act and the interagency guidance, both of which the Company elected to apply. Additionally,  the Company’s election to apply the TDR relief provided by the CARES Act and the interagency guidance impacts our regulatory capital ratios as these loan modifications related to COVID-19 are not adjusted to a higher risk-weighting normally required with TDR classification.

As of June 30, 2021, 216 loans with an aggregate balance of $235.0 million, including 66 home mortgage loans with an aggregate balance of $28.5 million, have resumed regular payments.

17


Table of Contents

 

The following table represents the loan deferment status change by loan type as of June 30, 2021:

 

Loan Deferment Status Change by Loan Type

 

 

 

Total deferments

 

 

Payment resumed

 

 

 

 

 

 

 

 

 

 

 

under the CARES Act

 

 

or paid off

 

 

Remaining deferments

 

($ in thousands)

 

as of June 30, 2021

 

 

through June 30, 2021

 

 

as of June 30, 2021

 

Loan Type

 

Number

of

accounts

 

 

Balance

 

 

Number

of

accounts

 

 

Balance

 

 

Number

of

accounts

 

 

Balance

 

Loans, excluding home mortgage and

   consumer loans

 

 

156

 

 

$

220,522

 

 

 

150

 

 

$

206,551

 

 

 

6

 

 

$

13,971

 

Home mortgage loans

 

 

69

 

 

 

30,205

 

 

 

66

 

 

 

28,497

 

 

 

3

 

 

 

1,708

 

Total

 

 

225

 

 

$

250,727

 

 

 

216

 

 

$

235,048

 

 

 

9

 

 

$

15,679

 

 

Paycheck Protection Program loans:  A provision in the CARES Act created the 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.   

As of June 30, 2021, the Company had loans outstanding with a carrying value of $103.9 million, which were recorded in the SBA – non-real estate. Since the PPP’s inception through June 30, 2021, we have funded $154.5 million, and $52.7 million of principal forgiveness has been provided on qualifying PPP loans.

Credit Quality Indicators: The Company monitor credit quality by evaluating various attributes and utilize such information in the evaluation of the appropriateness of the allowance for loan losses. 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.

18


Table of Contents

 

The following table presents the credit risk ratings by portfolio segment as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

Pass

 

 

Special

Mention

 

 

Substandard

 

 

Doubtful

 

 

Total

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

$

686,042

 

 

$

 

 

$

 

 

$

 

 

$

686,042

 

SBA loans—real estate

 

 

214,827

 

 

 

1,433

 

 

 

1,888

 

 

 

 

 

 

218,148

 

SBA loans—non-real estate

 

 

120,859

 

 

 

488

 

 

 

604

 

 

 

 

 

 

121,951

 

Commercial and industrial

 

 

98,105

 

 

 

 

 

 

4,658

 

 

 

 

 

 

102,763

 

Home mortgage

 

 

119,778

 

 

 

 

 

 

 

 

 

 

 

 

119,778

 

Consumer

 

 

1,155

 

 

 

 

 

 

 

 

 

 

 

 

1,155

 

 

 

$

1,240,766

 

 

$

1,921

 

 

$

7,150

 

 

$

 

 

$

1,249,837

 

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

 

 

$

 

 

$

1,104,108

 

 

 

Note 5. Premises and equipment

The Company’s premises and equipment consisted of the following as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

June 30, 2021

 

 

December 31, 2020

 

Leasehold improvements

 

$

6,935

 

 

$

6,878

 

Furniture and fixtures

 

 

3,334

 

 

 

3,307

 

Equipment and others

 

 

2,875

 

 

 

2,593

 

Total cost

 

 

13,144

 

 

 

12,778

 

Accumulated depreciation

 

 

(8,873

)

 

 

(8,234

)

Net book value

 

$

4,271

 

 

$

4,544

 

 

Total depreciation expense included in occupancy and equipment expenses was $329 thousand and $325 thousand for the three months ended June 30, 2021 and 2020, respectively, and $657 thousand and $655 thousand for the six months ended June 30, 2021 and 2020, respectively.  

Note 6. Servicing Assets

The Company recognizes the right to service SBA loans for others as servicing assets when the servicing income the Company receives is more than adequate compensation. Servicing assets are accounted for using the amortization method. Under this method, the Company amortizes the servicing assets over the period of the economic life of the assets arising from estimated net servicing revenue. The Company periodically stratifies its servicing assets into groupings based on risk characteristics and assesses each group for impairment based on fair value. The Servicing assets totaled $12.9 million at June 30, 2021 and $7.4 million at December 31, 2020.

19


Table of Contents

 

Based on the results of the impairment test, there were no valuation allowance for impairment as of June 30, 2021 and December 31, 2020. The following table presents an analysis of the changes in activity for loan servicing assets during the three and six months ended June 30, 2021 and 2020 is as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in thousands)

 

 

2021

 

 

 

2020

 

 

 

2021

 

 

 

2020

 

Beginning balance

 

$

7,492

 

 

$

6,963

 

 

$

7,360

 

 

$

7,024

 

Additions from loans sold with servicing retained

 

 

277

 

 

 

363

 

 

 

847

 

 

 

769

 

Additions from purchase of servicing rights

 

 

6,097

 

 

 

 

 

 

6,097

 

 

 

 

Amortized to expense

 

 

(963

)

 

 

(354

)

 

 

(1,401

)

 

 

(821

)

Ending balance

 

$

12,903

 

 

$

6,972

 

 

$

12,903

 

 

$

6,972

 

 

The fair value of the servicing assets was $15.5 million at June 30, 2021, which was determined using discount rates ranging from 4.8% to 11.9% and prepayment speeds ranging from 14.2% to 14.4%, depending on the stratification of the specific assets.

The fair value of the servicing assets was $8.2 million at June 30, 2020, which was determined using discount rates ranging from 5.4% to 11.9% and prepayment speeds ranging from 14.9% to 15.1%, depending on the stratification of the specific assets.

Note 7. Deposits

 

Time deposits that exceed the FDIC insurance limit of $250,000 at June 30, 2021 and December 31, 2020 were $193.7 million and $200.2 million, respectively.

 

The scheduled maturities of time deposits as of June 30, 2021 were as follows:

 

($ in thousands)

 

June 30, 2021

 

Remainder of 2021

 

$

224,417

 

2022

 

 

150,950

 

2023

 

 

2,060

 

2024

 

 

1,039

 

2025

 

 

674

 

Thereafter

 

 

107

 

Total

 

$

379,247

 

 

Deposits from principal officers, directors, and their affiliates as of June 30, 2021 and December 31, 2020 were $1.9 million and $1.5 million, respectively.

Note 8. Borrowing Arrangements

As of June 30, 2021, the Company did not have any borrowings from the FHLB of San Francisco, compared with $5.0 million as of December 31, 2020, which had a zero interest rate under the Recovery Advance Program to support pandemic relief. The Company had a letter of credit with the FHLB in the amount of $67.0 million to secure public deposits as of both June 30, 2021 and December 31, 2020.

The Company had available borrowings from the following institutions as of June 30, 2021:

 

($ in thousands)

 

June 30, 2021

 

Federal Home Loan Bank—San Francisco

 

$

296,815

 

Federal Reserve Bank—San Francisco

 

 

130,765

 

Pacific Coast Bankers Bank

 

 

50,000

 

Zions Bank

 

 

25,000

 

First Horizon Bank

 

 

25,000

 

Total

 

$

527,580

 

 

20


Table of Contents

 

 

The Company has pledged approximately $930.9 million and $909.2 million of loans as collateral for these lines of credit as of June 30, 2021 and December 31, 2020, respectively.  

Note 9. Income Taxes

The Company’s income tax expense was $2.8 million and $972 thousand for the three months ended June 30, 2021 and 2020, and $4.8 million and $2.1 million for the six months ended June 30, 2021 and 2020, respectively. The effective income tax rate was 30.1% and 28.7% for the three months ended June 30, 2021 and 2020, and 29.6% and 27.2% for the six months ended June 30, 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.

There were no significant unrealized tax benefits recorded as of June 30, 2021 and 2020, and the Company does not expect any significant increase in unrealized tax benefits in the next twelve months.

Note 10. Commitments and Contingencies

Off-Balance-Sheet Credit Risk: In the normal course of business, the Company enters into commitments to extend credit such as loan commitments and standby letters of credits (“SBLC”s). These commitments expose the Company to varying degrees of credit and market risk and are subject to the same credit and market risk limitation reviews as those instruments recorded on the Consolidated Balance Sheet. Loan commitments represent arrangements to lend funds or provide liquidity subject to specified contractual conditions. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These commitments generally have fixed expiration dates or contain termination clauses in the event the customer’s credit quality deteriorates. Since many of the commitments are expected to expire without being drawn upon, the commitment amounts do not necessarily represent future funding requirements.

The Company applies the same credit underwriting criteria to extend loans and commitments to customers. Each customer’s credit worthiness is evaluated on a case-by-case basis. Collateral may be obtained based on management’s assessment of a customer’s credit. Collateral 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 credit-related commitments as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

June 30,

2021

 

 

December 31,

2020

 

Loan commitments

 

$

122,150

 

 

$

75,740

 

Standby letters of credits

 

 

5,374

 

 

 

9,212

 

Commercial letters of credit

 

 

2,547

 

 

 

1,552

 

Total undisbursed credit related commitments

 

$

130,071

 

 

$

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 Company’s investments in low-income housing partnerships, net, and related unfunded commitments as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

June 30,

2021

 

 

December 31,

2020

 

Investments in low-income housing partnerships

 

$

4,679

 

 

$

4,932

 

Unfunded commitments to fund investments for low-income housing partnerships

 

 

1,967

 

 

 

2,154

 

These balances are reflected in other assets and other liabilities on the Consolidated Balance Sheets. The Company expects to finish fulfilling these commitments during the year ending 2034.

21


Table of Contents

 

Under the proportional amortization method, the Company amortizes the initial cost of the investment in proportion to the tax credit and other benefits received and recognizes the amortization in income tax expense on the Consolidated Statements of Income and Comprehensive Income. The Company recognized amortization expense of $127 thousand and $107 thousand for the three months ended June 30, 2021 and 2020, and $254 thousand and $161 thousand for the six months ended June 30, 2021 and 2020, respectively. Additionally, the Company recognized tax credits and other benefits received from the investments in low-income housing partnerships of $114 thousand and $99 thousand for the three months ended June 30, 2021 and 2020, and $228 thousand and $149 thousand for the six months ended June 30, 2021 and 2020, respectively.  

 

Note 11. Stock-based Compensation

The Company has three stock-based compensation plans currently in effect as of June 30, 2021, as described further below. Total compensation cost charged against income for these plans was $106 thousand and $236 thousand for the three and six months ended June 30, 2021, and total compensation cost charged against income for these plans was $358 thousand and $716 thousand for the three and six months ended June 30, 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.  

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 no future grants can be made under the 2005 Plan.  

A summary of the transactions under the 2005 Plan for the six months ended June 30, 2021 is as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Number of

 

 

Average

 

 

Aggregate

 

 

 

Options

 

 

Exercise

 

 

Intrinsic

 

($ in thousands, except per share data)

 

Outstanding

 

 

Price

 

 

Value

 

Outstanding, as of January 1, 2021

 

 

100,000

 

 

$

5.77

 

 

 

 

 

Options granted

 

 

 

 

 

 

 

 

 

 

Options exercised

 

 

(40,000

)

 

 

1.60

 

 

 

 

 

Options forfeited

 

 

 

 

 

 

 

 

 

 

Options expired

 

 

 

 

 

 

 

 

 

 

Outstanding, as of June 30, 2021

 

 

60,000

 

 

 

6.28

 

 

$

227

 

Fully vested and expected to vest

 

 

60,000

 

 

 

6.28

 

 

 

227

 

Vested

 

 

60,000

 

 

$

6.28

 

 

$

227

 

 

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in thousands)

 

 

2021

 

 

 

2020

 

 

 

2021

 

 

 

2020

 

Intrinsic value of options exercised

 

$

42

 

 

$

 

 

$

174

 

 

$

370

 

Cash received from option exercises

 

 

64

 

 

 

 

 

 

64

 

 

 

63

 

Tax benefit realized from option exercised

 

 

 

 

 

 

 

 

20

 

 

 

17

 

 

The weighted average remaining contractual term of stock options outstanding under the 2005 Plan as of June 30, 2021 was 2.24 years. All stock options that are outstanding under the 2005 Plan were fully vested and exercisable as of June 30, 2021.

2010 Plan: In 2010, the Board of Directors of the Bank approved an 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.

22


Table of Contents

 

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. The 2010 Plan expired in August 2020 and no future grants can be made under the 2010 Plan.

Restricted stock awards issued under the 2010 Plan may or may not be subject to vesting provisions. Owners of the restricted stock awards shall have all 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.

A summary of stock options outstanding under the 2010 Plan for the six months ended June 30, 2021 is as follows:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Number of

 

 

Average

 

 

Aggregate

 

 

 

Options

 

 

Exercise

 

 

Intrinsic

 

($ in thousands, except per share data)

 

Outstanding

 

 

Price

 

 

Value

 

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 June 30, 2021

 

 

210,000

 

 

 

8.00

 

 

$

433

 

Fully vested and expected to vest

 

 

210,000

 

 

 

8.00

 

 

 

433

 

Vested

 

 

210,000

 

 

$

8.00

 

 

$

433

 

 

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

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in thousands)

 

 

2021

 

 

 

2020

 

 

 

2021

 

 

 

2020

 

Intrinsic value of options exercised

 

$

 

 

$

89

 

 

$

86

 

 

$

608

 

Cash received from option exercises

 

 

 

 

 

 

 

 

25

 

 

 

242

 

Tax benefit realized from option exercised

 

 

 

 

 

23

 

 

 

 

 

 

157

 

 

The weighted average remaining contractual term of stock options outstanding under the 2010 Plan as of June 30, 2021 was 2.76 years. All stock options that are outstanding under the 2010 Plan were fully vested and exercisable as of June 30, 2021.

A summary of the changes in the Company’s non-vested restricted stock awards under the 2010 Plan for the six months ended June 30, 2021 is as follows:

 

($ in thousands, except share data)

 

Shares

Issued

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Aggregate

Intrinsic

Value

 

Non-vested, as of January 1, 2021

 

 

154,500

 

 

$

11.66

 

 

 

 

 

Awards granted

 

 

 

 

 

 

 

 

 

 

Awards vested

 

 

(128,500

)

 

 

12.34

 

 

 

 

 

Awards forfeited

 

 

 

 

 

 

 

 

 

 

Non-vested, as of June 30, 2021

 

 

26,000

 

 

$

8.29

 

 

$

262

 

 

Information related to non-vested restricted stock awards under the 2010 Plan for the periods indicated follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in thousands)

 

 

2021

 

 

 

2020

 

 

 

2021

 

 

 

2020

 

Tax benefit (provision) realized from awards vested

 

$

(85

)

 

$

(3

)

 

$

(85

)

 

$

(3

)

 

The Company had approximately $129 thousand of unrecognized compensation cost related to unvested restricted stock awards under the 2010 Plan as of June 30, 2021. The Company expects to recognize these costs over a weighted average period of 2.42 years. 

23


Table of Contents

 

2021 Plan: In 2021, the Board of Directors of the Company approved a new equity incentive plan for granting stock options and restricted stock awards to key employees, officers, and non-employee directors of the Company and the Bank (the “2021 Plan”). The 2021 Plan was approved by the Company’s shareholders at the 2021 Annual Meeting. The number of shares authorized to be issued under the 2021 Plan was 1,500,000 shares of the Company’s common stock.

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. There were no stock options granted under the 2021 Plan during the six months ended June 30, 2021.

Restricted stock awards issued under the 2021 Plan may or may not be subject to vesting provisions. Owners of the restricted stock awards shall have all 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.

A summary of the changes in the Company’s non-vested restricted stock awards under the 2021 Plan for the six months ended June 30, 2021 is as follows:

 

($ in thousands, except share data)

 

Shares

Issued

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Aggregate

Intrinsic

Value

 

Non-vested, as of January 1, 2021

 

 

 

 

$

 

 

 

 

 

Awards granted

 

 

176,793

 

 

 

9.90

 

 

 

 

 

Awards vested

 

 

(152

)

 

 

9.90

 

 

 

 

 

Awards forfeited

 

 

 

 

 

 

 

 

 

 

Non-vested, as of June 30, 2021

 

 

176,641

 

 

$

9.90

 

 

$

1,777

 

 

No tax benefits or expenses were realized from restricted stock awards under the 2021 Plan for the six months ended June 30, 2021.

Note 12. Employee Benefit Plan

The Company sponsors a defined contribution plan, 401(k) profit sharing plan (the “401(k) Plan”), designed to provide retirement benefits financed by participant contributions, as well as contributions from the Company. Employees are eligible to participate in the 401(k) Plan as of the first day of the first calendar month after the date they have completed three months of service with the Company and have attained the age of 18. 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 $195 thousand and $176 thousand for the three months ended June 30, 2021 and 2020, respectively, $369 thousand and $356 thousand for the six months ended June 30, 2021 and 2020, respectively.

 

Note 13. Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or the price that would be paid to transfer a liability on the measurement date and is determined using an exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Assets and liabilities recorded at fair value on a recurring basis, such as AFS securities and equity investments. Additionally, from time to time, the Company records fair value adjustments on a nonrecurring basis. These nonrecurring adjustments typically involve application of lower of cost or fair value accounting and write-downs of individual assets.

The Company classify its assets and liabilities recorded at fair value as one of the following three categories and a financial instrument’s level within the fair value hierarchy is based on the lowest level of input significant to the fair value measurement:

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.

24


Table of Contents

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Securities AFS: The fair values of investment securities AFS 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.

Assets and liabilities measured at fair value on a recurring basis as of June 30, 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

 

($ in thousands)

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies or sponsored agency securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

29,206

 

 

$

 

 

$

29,206

 

 

$

 

Residential collateralized mortgage obligations

 

 

82,626

 

 

 

 

 

 

82,626

 

 

 

 

Other investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund - CRA qualified

 

$

3,738

 

 

$

3,738

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government sponsored agency securities

 

$

1,005

 

 

$

 

 

$

1,005

 

 

$

 

U.S. Government agencies or sponsored agency securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

19,704

 

 

$

 

 

$

19,704

 

 

$

 

Residential collateralized mortgage obligations

 

 

71,082

 

 

 

 

 

 

71,082

 

 

 

 

Other investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mutual fund - CRA qualified

 

$

3,773

 

 

$

3,773

 

 

$

 

 

$

 

 

There were no transfers between Level 1 and Level 2 for the three and six months ended June 30, 2021 or 2020.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower of cost or fair value and write-downs of individual assets.

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.

25


Table of Contents

 

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.

The following table presents the fair value hierarchy and fair value of assets that were still held and had fair value adjustments measured on a nonrecurring basis as of June 30, 2021 and December 31, 2020:

 

 

 

 

 

 

 

Fair Value Measure Using

 

 

 

 

 

 

 

Quoted

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

 

Prices in

 

 

Observable

 

 

Unobservable

 

 

 

Total

 

 

Active Markets

 

 

Inputs

 

 

Inputs

 

($ in thousands)

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

396

 

 

$

 

 

$

 

 

$

396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

87

 

 

$

 

 

$

 

 

$

87

 

The following table presents the increase (decrease) in value of certain assets held at the end of the respective reporting periods presented for which a nonrecurring fair value adjustment was recognized during the period presented:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

3

 

 

$

1

 

 

$

7

 

 

$

(56

)

 

The following table presents information about significant unobservable inputs utilized in the Company’s nonrecurring Level 3 fair value measurements as of June 30, 2021 and December 31, 2020:

 

 

 

Fair Value

 

 

 

 

 

 

 

 

 

 

Weighted-

 

 

 

Measurements

 

 

Valuation

 

Unobservable

 

Range of

 

 

Average of

 

($ in thousands)

 

(Level 3)

 

 

Techniques

 

Inputs

 

Inputs

 

 

Inputs (1)

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial (2)

 

$

 

 

Income approach -

discounted cash flows

 

Discount rate

 

3.8%

 

 

3.8%

 

SBA loans—real estate

 

$

24

 

 

Market approach

 

Market data

comparison

 

(30.0)%

to (10.0)%

 

 

(20.6)%

 

SBA loans—real estate

 

$

372

 

 

Income approach  -

income capitalization

 

Capitalization rate

 

12.0%

 

 

12.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial (2)

 

$

 

 

Income approach -

discounted cash flows

 

Discount rate

 

3.8%

 

 

3.8%

 

SBA loans—non-real estate

 

$

62

 

 

Income approach -

discounted cash flows

 

Discount rate

 

5.3%

 

 

5.3%

 

SBA loans—non-real estate

 

$

25

 

 

Market approach

 

Market data

comparison

 

(3.5)%

to 7.1%

 

 

2.9%

 

 

(1)

Weighted-average of inputs is based on the relative fair value of the respective assets as of June 30, 2021 and December 31, 2020.

(2)

26


Table of Contents

 

Applying fair value adjustments on the impaired loan through the full specific reserve allowance of the loan carrying value resulted in a zero fair value balance as of June 30, 2021 and December 31, 2020.

Financial Instruments: The carrying amounts and estimated fair values of financial instruments that are not carried at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 are as follows. These financial assets and liabilities are measured at amortized cost basis on the Company’s Consolidated Balance Sheet:

 

($ in thousands)

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Estimated Fair Value

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

128,687

 

 

$

128,687

 

 

$

 

 

$

 

 

$

128,687

 

Loans held for sale

 

 

68,396

 

 

 

 

 

 

75,119

 

 

 

 

 

 

75,119

 

Loans receivable, net

 

 

1,231,179

 

 

 

 

 

 

 

 

 

1,235,981

 

 

 

1,235,981

 

Accrued interest receivable, net

 

 

3,469

 

 

 

11

 

 

 

279

 

 

 

3,179

 

 

 

3,469

 

Other investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB and PCBB stock

 

 

7,195

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Time deposits placed

 

 

95

 

 

 

 

 

 

95

 

 

 

 

 

 

95

 

Servicing assets

 

 

12,903

 

 

 

 

 

 

 

 

 

15,457

 

 

 

15,457

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit

 

$

1,434,103

 

 

$

 

 

$

1,434,482

 

 

$

 

 

$

1,434,482

 

Accrued interest payable

 

 

608

 

 

 

 

 

 

608

 

 

 

 

 

 

608

 

 

($ in thousands)

 

Carrying

Amount

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Estimated Fair Value

 

As of December 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

106,310

 

 

$

106,310

 

 

$

 

 

$

 

 

$

106,310

 

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

 

Time deposits placed

 

 

95

 

 

 

 

 

 

95

 

 

 

 

 

 

95

 

Servicing assets

 

 

7,360

 

 

 

 

 

 

 

 

 

9,106

 

 

 

9,106

 

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 14. 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 June 30, 2021, the capital conservation buffers for the Company is 2.50%. Management believes that as of June 30, 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.   

27


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"

 

($ in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

166,116

 

 

 

13.87

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

163,293

 

 

 

13.63

%

 

 

95,833

 

 

 

8.00

%

 

 

119,791

 

 

 

10.00

%

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

151,133

 

 

 

12.62

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

148,312

 

 

 

12.38

%

 

 

71,875

 

 

 

6.00

%

 

 

95,833

 

 

 

8.00

%

Common equity Tier 1 capital (to risk-weighted

   assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

151,133

 

 

 

12.62

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

148,312

 

 

 

12.38

%

 

 

53,906

 

 

 

4.50

%

 

 

77,864

 

 

 

6.50

%

Tier 1 leverage (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

151,133

 

 

 

9.96

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

148,312

 

 

 

9.77

%

 

 

60,705

 

 

 

4.00

%

 

 

75,882

 

 

 

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"

 

($ 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 leverage (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.

 

28


Table of Contents

 

 

Note 15. 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

 

 

 

June 30,

 

($ in thousands, except share data)

 

2021

 

 

2020

 

Basic

 

 

 

 

 

 

 

 

Net income

 

$

6,379

 

 

$

2,416

 

Undistributed earnings allocated to participating securities

 

 

(60

)

 

 

(45

)

Net income allocated to common shares

 

 

6,319

 

 

 

2,371

 

Weighted average common shares outstanding

 

 

15,056,484

 

 

 

15,072,423

 

Basic earnings per common share

 

$

0.42

 

 

$

0.16

 

Diluted

 

 

 

 

 

 

 

 

Net income allocated to common shares

 

$

6,319

 

 

$

2,371

 

Weighted average common shares outstanding for basic earnings per common share

 

 

15,056,484

 

 

 

15,072,423

 

Add: Dilutive effects of assumed exercises of stock options

 

 

72,967

 

 

 

40,195

 

Average shares and dilutive potential common shares

 

 

15,129,451

 

 

 

15,112,618

 

Diluted earnings per common share

 

$

0.42

 

 

$

0.16

 

 

  No stock options for shares of common stock were antidilutive for the three months ended June 30, 2021. Stock options for 212,000 shares of common stock were antidilutive for the three months ended June 30, 2020.  

 

 

 

Six Months Ended

 

 

 

June 30,

 

($ in thousands, except share data)

 

2021

 

 

2020

 

Basic

 

 

 

 

 

 

 

 

Net income

 

$

11,456

 

 

$

5,715

 

Undistributed earnings allocated to participating securities

 

 

(112

)

 

 

(106

)

Net income allocated to common shares

 

 

11,344

 

 

 

5,609

 

Weighted average common shares outstanding

 

 

15,039,773

 

 

 

15,279,486

 

Basic earnings per common share

 

$

0.75

 

 

$

0.37

 

Diluted

 

 

 

 

 

 

 

 

Net income allocated to common shares

 

$

11,344

 

 

$

5,609

 

Weighted average common shares outstanding for basic earnings per common share

 

 

15,039,773

 

 

 

15,279,486

 

Add: Dilutive effects of assumed exercises of stock options

 

 

59,630

 

 

 

54,801

 

Average shares and dilutive potential common shares

 

 

15,099,403

 

 

 

15,334,287

 

Diluted earnings per common share

 

$

0.75

 

 

$

0.37

 

 

No stock options for shares of common stock were antidilutive for the six months ended June 30, 2021. Stock options for 212,000 shares of common stock were antidilutive for the six months ended June 30, 2020.

29


Table of Contents

 

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

INTRODUCTION

The following discussion provides information about the results of operations, financial condition, liquidity, and capital recourses of OP Bancorp and its subsidiary bank, Open Bank. This information is intended to facilitate the understanding and assessment of significant changes and trends related to the Company’s results of operations and financial condition. This discussion and analysis should be read in conjunction with the Consolidated Financial Statement and the accompanying notes presented elsewhere in this report, and the Company’s annual report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 15, 2021. When we refer to “we”, “our”, and “us”, and “the Company” in this report, we mean OP Bancorp and our subsidiary bank, Open Bank on a consolidated basis. When we refer to the “Bank” in this report, we mean our only bank subsidiary, Open Bank. References to the “holding company” refer to OP Bancorp, the parent company on a stand-alone basis.

OVERVIEW

OP Bancorp, a California corporation, is a bank holding company registered under Bank Holding Company Act of 1956, as amended, with our corporate headquarters located in Los Angeles, California. We offer commercial banking services to small and medium-sized businesses with a strong focus on the financial service needs of the Korean-American community. Through nine full service branches and four loan production offices, we provide a full range of commercial and retail banking loan and deposit products. The Company’s principal activity is lending to and accepting deposits from businesses and individuals. The primarily source of revenue is net interest income, which is principally derived from the difference between interest earned on loans and securities, and interest paid on deposits and other funding sources.

Financial Performance Summary

Noteworthy items about the Company for the second quarter of 2021 compared with the same period in 2020:

 

Completion of Loan Purchase: On May 24, 2021, the Company completed the purchase of Hana’s loan portfolio and paid approximately $97.6 million that included loans of $100.0 million at a fair value discount of $8.9 million, servicing assets of $6.1 million and accrued interest receivable of $398 thousand.

 

Net Income: Net income was $6.4 million, or $0.42 per diluted common share, up $4.0 million, or 164%. The increase was primarily due to higher net interest income and a reversal of provision for loan losses, partially offset by increases in income tax expense and noninterest expense.

 

Pre-provision Net Revenue: Non-GAAP pre-provision net revenue was $8.0 million, up $2.6 million, or 49%. The increase was mainly due to higher net interest income. For details, refer to Item 2. MD&A – Reconciliation of GAAP to Non-GAAP Financial Measures in this report.

 

Net Interest Income and Net Interest Margin: Net interest income was $14.6 million, up $3.9 million, or 37%. Net interest margin was 3.98%, up 43 basis points. The increases in net interest income and net interest margin reflected average loan growth and lower average costs of deposits.

 

Provision for Loan Losses: Provision for loan losses decreased $3.1 million, primarily due to continued improvements in the economic environment in 2021.

 

Noninterest Income: Noninterest income was $2.2 million, up $158 thousand, or 8%. The increase was primarily due to higher gains on sale of loans and service charges on deposits, partially offset by lower loan servicing fees, net of amortization.

 

Noninterest Expense and Efficiency Ratio: Noninterest expense was $8.8 million, up $1.5 million, or 20%, primarily due to higher salaries and employee benefits, and foundation donation and other contributions. Efficiency ratio was 52.30%, an improvement from 57.70%.

 

Profitability: Return on average equity of 17.10% and return on average assets of 1.68%, up from 6.97% and 0.77%, respectively.

 

Total Assets: Total assets were $1.60 billion, up $313.4 million, or 24%. The increase was primarily due to loan portfolio growth.

 

Loans: Total loans were $1.31 billion, up $262.0 million, or 25%. The increase was primarily due to the Hana loan purchase during the second quarter of 2021. Participation in the PPP and an increase in commercial real estate loans have also contributed to the growth.

30


Table of Contents

 

 

Deposits: Deposits were $1.43 billion, up $313.4, or 28%. The increase was primarily due to growth in noninterest bearing and money market.

 

Allowance for Loan Losses: Allowance for loan losses was $14.7 million, up $1.9 million, or 15%. The increase was primarily due to loan portfolio growth and the deteriorating economic conditions during the second half of 2020 as a result of the COVID-19 pandemic, partially offset by improvements in the economic conditions in the first half of 2021.

Balance Sheet and Liquidity

Our balance sheet remained strong during second quarter 2021 with solid levels of liquidity and capital. Our total assets increased $234.6 million, or 17% from December 31, 2020 to $1.60 billion as of June 30, 2021 primarily driven by higher loans as a result of the Hana loan purchase, the origination of PPP and growth in commercial real estate in the first half of 2021.

Asset Quality

We maintained solid asset quality with low levels of nonperforming loans and net charge-offs. Nonperforming loans to gross loans of 0.06% remained low compared with 0.09% as of December 31, 2020. Net charge-offs were $27 thousand or 0.01% of average loans for the second quarter of 2021, compared with net recoveries of $28 thousand or 0.01% of average loans for the second quarter of 2020. The allowance for loan losses of $14.7 million as of June 30, 2021, decreased $665 thousand from December 31, 2020. The economic conditions, including employment and consumer spending, improved during the quarter. However, the economic outlook continues to be uncertain with the unprecedented impacts of COVID-19 pandemic. Therefore, we maintained our allowance at 1.18% of gross loans, and 19 times our nonperforming loans.

Capital

We maintained a solid capital position in the first half of 2021, with total equity of $152.0 million as of June 30, 2021, compared with $143.4 million as of December 31, 2020. Capital ratios remained strong during the quarter. Our common equity tier 1 and total risk-based ratios were 12.62% and 13.87% as of June 30, 2021, respectively, down from December 31, 2020 due to asset growth in the first half of 2021. We returned $2.1 million of capital in cash dividends to stockholders during the first half of 2021. The Company’s Board of Directors approved a 43% increase to the quarterly cash dividend to $0.10 per share, up from $0.07 per share.

CRITIAL 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.

31


Table of Contents

 

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.

SELECTED FINANCIAL DATA

 

Financial Highlights (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands, except per share data)

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

14,586

 

 

$

10,648

 

 

$

27,341

 

 

$

21,764

 

(Reversal of) provision for loan losses

 

 

(1,112

)

 

 

1,988

 

 

 

(492

)

 

 

2,731

 

Noninterest income

 

 

2,220

 

 

 

2,062

 

 

 

5,186

 

 

 

4,358

 

Noninterest expense

 

 

8,789

 

 

 

7,334

 

 

 

16,755

 

 

 

15,541

 

Income tax expense

 

 

2,750

 

 

 

972

 

 

 

4,808

 

 

 

2,135

 

Net Income

 

$

6,379

 

 

$

2,416

 

 

$

11,456

 

 

$

5,715

 

Diluted earnings per share

 

$

0.42

 

 

$

0.16

 

 

$

0.75

 

 

$

0.37

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (annualized)

 

 

1.68

%

 

 

0.77

%

 

 

1.56

%

 

 

0.94

%

Return on average equity (annualized)

 

 

17.10

%

 

 

6.97

%

 

 

15.58

%

 

 

8.21

%

Net interest margin (annualized)

 

 

3.98

%

 

 

3.55

%

 

 

3.90

%

 

 

3.74

%

Efficiency ratio (1)

 

 

52.30

%

 

 

57.70

%

 

 

51.51

%

 

 

59.49

%

 

(1)

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

 

 

Financial Highlights (unaudited)

 

 

 

 

 

 

 

 

($ in thousands, except per share data)

 

As of

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

Total loans (1)

 

$

1,314,262

 

 

$

1,126,395

 

Total deposits

 

$

1,434,103

 

 

 

1,200,090

 

Total assets

 

$

1,601,460

 

 

 

1,366,826

 

Shareholders’ equity

 

$

151,962

 

 

 

143,366

 

Credit Quality:

 

 

 

 

 

 

 

 

Nonperforming loans

 

$

757

 

 

$

985

 

Nonperforming assets

 

$

757

 

 

$

985

 

Quarterly net charge-offs to average gross loans (annualized)

 

 

0.01

%

 

 

0.00

%

Nonperforming assets to gross loans plus OREO

 

 

0.06

%

 

 

0.09

%

Allowance for loan losses to nonperforming loans

 

 

1,940

%

 

 

1,558

%

Allowance for loan losses to gross loans

 

 

1.18

%

 

 

1.40

%

Financial Ratios:

 

 

 

 

 

 

 

 

Total risk-based capital ratio

 

 

13.87

%

 

 

14.81

%

Tier 1 risk-based capital ratio

 

 

12.62

%

 

 

13.56

%

Common equity tier 1 ratio

 

 

12.62

%

 

 

13.56

%

Leverage ratio

 

 

9.96

%

 

 

10.55

%

Book value per common share

 

$

10.04

 

 

$

9.55

 

 

(1)

Includes loans held for sale.

 

 

32


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. It has caused significant economic and financial disruption that have adversely affected or otherwise impacted our businesses. The COVID-19 has not yet been globally contained and the number of cases continues to increase in many locations, including in the United States in which we operate. During the course of the continuing pandemic, there have been varying governmental and other responses to slow or control the spread of the COVID-19 and to mitigate the adverse impact of the COVID-19, such as stay at home orders, restrictions on business activities, health and safety guidelines, economic relief for individuals and businesses, and monetary policy measures, such responses have met varying degrees of success, and it remains uncertain whether these actions will be successful in a sustained manner. We cannot predict at this time the scope and duration of the pandemic.

Despite the continuing challenges in recent months, there has been some improvement in the economic environment and resilience in the markets in which we operate. With the seemingly wider availability and distribution of vaccinations and the easing of some restrictions in the United States, we have seen steps towards broader containment. However, there still remains much uncertainty around containment of the pandemic, which will depend on various factors, including but not limited to, the extent and spread of variants of the virus; efficacy of vaccines; and government and other actions to mitigate the spread of COVID-19.

Through the COVID-19 pandemic, 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.

Loan Payment Deferrals

 

In early 2020, we began providing payment deferrals of up to 12 months for our commercial and consumer borrowers who had been adversely impacted by the COVID-19 pandemic and had not been delinquent over 30 days on payments at the time of the borrowers’ deferral requests. For the loans modified under this program, in accordance with the provisions of Section 4013 of the CARES Act and the interagency statement issued by bank regulatory agencies, we elected to not apply troubled debt structuring classification who were current as of December 31, 2019. Through June 30, 2021, the Company has processed loan deferments for borrowers across multiple industries representing 225 loan accounts, with an aggregate loan balance of $250.7 million under the interagency guidance and Section 4013 of the CARES Act. As of June 30, 2021, total outstanding balance of remaining in deferment status balance was $15.7 million and represented 1.2% of the total portfolio, down from 2.7% as of December 31, 2020.

 

The following tables summarizes loan portfolio breakdown by industry and loan deferment as of June 30, 2021:

 

Loan Portfolio Breakdown by Industry

 

Excluding Home mortgage and consumer loans

 

 

 

($ in thousands)

 

As of June 30, 2021

 

Industry

 

Number of

accounts

 

 

% of total

 

 

Balance

 

 

% of total

 

Hotel / motel

 

 

304

 

 

 

7.7

%

 

$

195,816

 

 

 

16.4

%

Personal and laundry services

 

 

253

 

 

 

6.4

 

 

 

27,148

 

 

 

2.3

 

Wholesale

 

 

366

 

 

 

9.3

 

 

 

75,391

 

 

 

6.3

 

Food services / restaurant

 

 

524

 

 

 

13.4

 

 

 

60,242

 

 

 

5.0

 

Real estate lessor

 

 

247

 

 

 

6.3

 

 

 

395,194

 

 

 

33.1

 

Gas station

 

 

268

 

 

 

6.8

 

 

 

184,140

 

 

 

15.4

 

Other

 

 

1,962

 

 

 

50.0

 

 

 

255,860

 

 

 

21.4

 

Total (1)

 

 

3,924

 

 

 

100.0

%

 

$

1,193,791

 

 

 

100.0

%

 

(1)

Includes loans held for sale.

33


Table of Contents

 

 

 

Loan Deferment Summary by Industry

 

Excluding Home mortgage and consumer loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in thousands)

 

As of June 30, 2021

 

Industry

 

Number of

accounts

 

 

% of

deferment

 

 

% of

total

loans

 

 

Balance

 

 

% of

deferment

 

 

% of

total

loans

 

Hotel / motel

 

 

3

 

 

 

50.0

%

 

 

1.0

%

 

$

11,903

 

 

 

85.2

%

 

 

6.1

%

Personal and laundry services

 

 

1

 

 

 

16.7

 

 

 

0.4

 

 

 

959

 

 

 

6.9

 

 

 

3.5

 

Wholesale

 

 

1

 

 

 

16.7

 

 

 

0.3

 

 

 

480

 

 

 

3.4

 

 

 

0.6

 

Other

 

 

1

 

 

 

16.7

 

 

 

0.1

 

 

 

629

 

 

 

4.5

 

 

 

0.2

 

Total

 

 

6

 

 

 

100.0

%

 

 

0.2

%

 

$

13,971

 

 

 

100.0

%

 

 

1.2

%

 

Loan Deferment Summary by Loan Type

 

($ in thousands)

 

As of June 30, 2021

 

Loan Type

 

Number of

accounts

 

 

% of

deferment

 

 

% of

total

loans

 

 

Balance

 

 

% of

deferment

 

 

% of

total

loans

 

Real estate loans

 

 

5

 

 

 

55.6

%

 

 

1.3

%

 

$

13,491

 

 

 

86.0

%

 

 

2.0

%

C & I loans

 

 

1

 

 

 

11.1

 

 

 

0.4

 

 

 

480

 

 

 

3.1

 

 

 

0.5

 

Loans, excluding home mortgage and

   consumer loans

 

 

6

 

 

 

66.7

 

 

 

0.2

 

 

 

13,971

 

 

 

89.1

 

 

 

1.2

 

Home mortgage loans

 

 

3

 

 

 

33.3

 

 

 

1.0

 

 

 

1,708

 

 

 

10.9

 

 

 

1.4

 

Total

 

 

9

 

 

 

100.0

%

 

 

0.2

%

 

$

15,679

 

 

 

100.0

%

 

 

1.2

%

 

Loan Deferment Status Change by Loan Type

 

 

 

Total deferments

 

 

Payment resumed

 

 

 

 

 

 

 

 

 

 

 

under the CARES Act

 

 

or paid off

 

 

Remaining deferments

 

($ in thousands)

 

as of June 30, 2021

 

 

through June 30, 2021

 

 

as of June 30, 2021

 

Loan Type

 

Number

of

accounts

 

 

Balance

 

 

Number

of

accounts

 

 

Balance

 

 

Number

of

accounts

 

 

Balance

 

Loans, excluding home mortgage and

   consumer loans

 

 

156

 

 

$

220,522

 

 

 

150

 

 

$

206,551

 

 

 

6

 

 

$

13,971

 

Home mortgage loans

 

 

69

 

 

 

30,205

 

 

 

66

 

 

 

28,497

 

 

 

3

 

 

 

1,708

 

Total

 

 

225

 

 

$

250,727

 

 

 

216

 

 

$

235,048

 

 

 

9

 

 

$

15,679

 

Paycheck Protection Program

Beginning in April 2020, we accepted applications under the PPP administered by the SBA under the CARES Act, as amended by the Economic Aid Act enacted on December 27, 2020 and have originated loans to qualified small businesses. Under the terms of the program, loans funded through the PPP are eligible to be forgiven if certain requirements are met, including using the funds for certain costs relating to payroll, healthcare and qualifying mortgage interest, rent and utility payments. To the extent not forgiven, loans are subject to terms of the program. Since the PPP’s inception through June 30, 2021, we have funded $154.5 million, and $52.7 million of principal forgiveness has been provided on qualifying PPP loans. As of June 30, 2021, there were unamortized net deferred fees and unaccreted discounts of $3.9 million to be recognized over the estimated life of the loan as a yield adjustment on the loans. If a loan is paid off or forgiven by the SBA prior to its projected estimated life, the remaining unamortized deferred fees will be recognized as interest income in that period.

 

RESULFS OF OPERATIONS

 

Comparison for the Second Quarter of 2021 and 2020

The following discussion of our results of operations compares the second quarter of 2021 to the same quarter in 2020.

Second quarter 2021 net income was $6.4 million, or $0.42 per diluted common share, compared with second quarter 2020 net income of $2.4 million, or $0.16 per diluted common share, an increase of $4.0 million, or 164.0% in net income. The increase was primarily due to a $3.9 million increase in net interest income and a $3.1 million decrease in provision for loan losses, partially offset by a $1.8 million increase in income tax expense and a $1.5 million increase in noninterest expense.

34


Table of Contents

 

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.

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 June 30,

 

 

 

2021

 

 

2020

 

($ 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)

 

$

117,605

 

 

$

160

 

 

 

0.54

%

 

$

100,083

 

 

$

90

 

 

 

0.36

%

Securities available for sale

 

 

108,960

 

 

 

218

 

 

 

0.80

 

 

 

60,544

 

 

 

281

 

 

 

1.86

 

Total investments

 

 

226,565

 

 

 

378

 

 

 

0.67

 

 

 

160,627

 

 

 

371

 

 

 

0.92

 

Real estate loans

 

 

670,224

 

 

 

7,725

 

 

 

4.62

 

 

 

638,359

 

 

 

7,500

 

 

 

4.73

 

SBA loans

 

 

346,702

 

 

 

4,816

 

 

 

5.57

 

 

 

190,042

 

 

 

2,615

 

 

 

5.53

 

C & I loans

 

 

101,362

 

 

 

983

 

 

 

3.89

 

 

 

93,633

 

 

 

920

 

 

 

3.95

 

Home mortgage loans

 

 

122,588

 

 

 

1,431

 

 

 

4.67

 

 

 

119,998

 

 

 

1,476

 

 

 

4.92

 

Consumer & other loans

 

 

1,182

 

 

 

16

 

 

 

5.30

 

 

 

2,912

 

 

 

38

 

 

 

5.28

 

Total loans (2)

 

 

1,242,058

 

 

 

14,971

 

 

 

4.83

 

 

 

1,044,944

 

 

 

12,549

 

 

 

4.83

 

Total earning assets

 

 

1,468,623

 

 

 

15,349

 

 

 

4.19

 

 

 

1,205,571

 

 

 

12,920

 

 

 

4.31

 

Noninterest-earning assets

 

 

49,687

 

 

 

 

 

 

 

 

 

 

 

49,837

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,518,310

 

 

 

 

 

 

 

 

 

 

$

1,255,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits and others

 

$

366,922

 

 

$

281

 

 

 

0.31

%

 

$

304,941

 

 

$

483

 

 

 

0.64

%

Time deposits

 

 

366,603

 

 

 

482

 

 

 

0.53

 

 

 

426,645

 

 

 

1,789

 

 

 

1.69

 

Total interest-bearing deposits

 

 

733,525

 

 

 

763

 

 

 

0.42

 

 

 

731,586

 

 

 

2,272

 

 

 

1.25

 

Borrowings

 

 

3,025

 

 

 

 

 

 

0.00

 

 

 

3,959

 

 

 

 

 

 

0.00

 

Total interest-bearing liabilities

 

 

736,550

 

 

 

763

 

 

 

0.42

 

 

 

735,545

 

 

 

2,272

 

 

 

1.24

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

615,385

 

 

 

 

 

 

 

 

 

 

 

362,779

 

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

17,115

 

 

 

 

 

 

 

 

 

 

 

18,362

 

 

 

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

632,500

 

 

 

 

 

 

 

 

 

 

 

381,141

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

149,260

 

 

 

 

 

 

 

 

 

 

 

138,722

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,518,310

 

 

 

 

 

 

 

 

 

 

$

1,255,408

 

 

 

 

 

 

 

 

 

Net interest income / interest rate spreads

 

 

 

 

 

$

14,586

 

 

 

3.77

%

 

 

 

 

 

$

10,648

 

 

 

3.07

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.98

%

 

 

 

 

 

 

 

 

 

 

3.55

%

Cost of deposits & cost of funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits / cost of deposits

 

$

1,348,910

 

 

$

763

 

 

 

0.23

%

 

$

1,094,365

 

 

$

2,272

 

 

 

0.83

%

Total funding liabilities / cost of funds

 

$

1,351,935

 

 

$

763

 

 

 

0.23

%

 

$

1,098,324

 

 

$

2,272

 

 

 

0.83

%

 

(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.

35


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 June 30,

 

 

 

2021 over 2020

 

 

 

Change due to:

 

 

 

 

 

($ in thousands)

 

Volume

 

 

Rate

 

 

Interest

Variance

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds sold and other investments

 

$

19

 

 

$

51

 

 

$

70

 

Securities available for sale

 

 

151

 

 

 

(214

)

 

 

(63

)

Total investments

 

 

170

 

 

 

(163

)

 

 

7

 

Real estate loans

 

 

393

 

 

 

(168

)

 

 

225

 

SBA loans

 

 

2,182

 

 

 

19

 

 

 

2,201

 

C & I loans

 

 

77

 

 

 

(14

)

 

 

63

 

Home mortgage loans

 

 

31

 

 

 

(76

)

 

 

(45

)

Consumer & other loans

 

 

(22

)

 

 

-

 

 

 

(22

)

Total loans

 

 

2,661

 

 

 

(239

)

 

 

2,422

 

Total earning assets

 

 

2,831

 

 

 

(402

)

 

 

2,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits and others

 

 

84

 

 

 

(286

)

 

 

(202

)

Time deposits

 

 

(223

)

 

 

(1,084

)

 

 

(1,307

)

Total interest-bearing deposits

 

 

(139

)

 

 

(1,370

)

 

 

(1,509

)

Borrowings

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

(139

)

 

 

(1,370

)

 

 

(1,509

)

Net interest income

 

$

2,970

 

 

$

968

 

 

$

3,938

 

 

Net interest income increased $3.9 million, or 37.0%, to $14.6 million for the second quarter of 2021 from $10.6 million for the same period in 2020, primarily due to higher average loan balance and lower average cost of deposits.

Interest and fees on loans was $15.0 million for the second quarter of 2021, compared with $12.5 million for the same period in 2020, an increase of $2.4 million, or 19.3%. The increase was primarily due to average loan growth. For the second quarter of 2021, average loans increased $197.1 million, or 18.9%, to $1.24 billion from $1.04 billion for the same period in 2020, primarily due to the Hana loan purchase and organic growth in PPP and real estate loans. The average yield on loans remained flat at 4.83%.

Average interest-earning assets increased $263.1 million, or 21.8%, to $1.47 billion for the second quarter of 2021 from $1.21 billion for the same period in 2020. For the second quarter of 2021, average yield on interest-earning assets decreased 12 basis points to 4.19% from 4.31% for the same period in 2020.

Interest expense was $763 thousand for the second quarter of 2021, compared with $2.3 million for the same period in 2020, a decrease of $1.5 million, or 66.4%, primarily due to continued downward adjustments in deposit rates and changes in deposit mix.

Average cost of interest-bearing liabilities decreased 82 basis points to 0.42% for the second quarter of 2021 from 1.24% for the same period in 2020. The decrease in the average cost of interest-bearing liabilities primarily reflected the impact of lower interest rates and changes in deposit mix. Deposits are an importance source of funds and impact both net interest income and net interest margin. Average noninterest-bearing deposits increased $252.6 million, or 69.6%, to $615.4 million for the second quarter of 2021, compared with $362.8 million for the same period in 2020. The increase in average noninterest-bearing deposits was primarily driven by customers’ preferences for liquidity given the economic uncertainty associated with the COVID-19 pandemic, as well as PPP funds held in deposit accounts. Average interest-bearing liabilities increased $1.0 million, or 0.1%, to $736.6 million for the second quarter of 2021 compared with $735.5 million for the same period in 2020.

36


Table of Contents

 

The net interest spread and net interest margin for the second quarter of 2021, were 3.77% and 3.98%, respectively, compared with 3.07% and 3.55%, respectively, for the same period in 2020. Excluding the impact of the Hana loan purchase, adjusted net interest margin was 3.85% for the second quarter of 2021. For details, refer to Item 2. MD&A – Reconciliation of GAAP to Non-GAAP Financial Measures in this report on Form 10-Q.

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 Company recorded a reversal of its provision for loan losses of $1.1 million for the second quarter of 2021, compared with a provision for loan losses of $2.0 million for the same period in 2020, a decrease of $3.1 million, or 155.9%. The decrease was driven by continued improvements in the economic environment during the second quarter of 2021. The reversal of the provision for loan losses of $1.1 million included a $487 thousand reversal of provision for uncollectible accrued interest receivable for the second quarter of 2021. There was no provision for uncollectible accrued interest receivable for the second quarter of 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 second quarter of 2021 increased $158 thousand, or 7.7%, to $2.2 million compared with $2.1 million for the same period in 2020, primarily due to higher gains on sale of loans and service charges on deposits, partially offset by lower loan servicing fees, net of amortization.

The following table sets forth the various components of our noninterest income for the second quarter of 2021 and 2020:

 

 

 

Three Months Ended June 30,

 

($ in thousands)

 

2021

 

 

2020

 

 

Increase

(Decrease)

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposits

 

$

393

 

 

$

298

 

 

$

95

 

Loan servicing fees, net of amortization

 

 

302

 

 

 

514

 

 

 

(212

)

Gain on sale of loans

 

 

1,210

 

 

 

936

 

 

 

274

 

Other income

 

 

315

 

 

 

314

 

 

 

1

 

Total noninterest income

 

$

2,220

 

 

$

2,062

 

 

$

158

 

Gain on sale of loans was $1.2 million, an increase of $274 thousand from the same period in 2020. The increase was mainly driven by higher sales premiums. The Company sold $10.6 million in SBA loans at an average premium of 11.48%, compared with the sale of $14.9 million at an average premium of 7.94% for the same period in 2020.

Service charges on deposits were $393 thousand, an increase of $95 thousand from the same period in 2020. The increase was primarily due to increases in account analysis fees and wire fees.

Loan servicing fees, net of amortization, were $302 thousand, a decrease of $212 thousand from the same period in 2020. The decrease was primarily due to higher amortization of servicing assets associated with loan payoffs, partially offset by higher servicing fee income resulting from purchased loans. Servicing fee income, net of amortization, from the Hana loan purchase was $27 thousand.

 

37


Table of Contents

 

 

Noninterest Expense

Noninterest expense for the second quarter of 2021 was $8.8 million compared with $7.3 million for the same period in 2020, an increase of $1.5 million, or 19.9%. The increase was primarily attributable to higher salaries and employee benefits, and foundation and other contributions.

The following table sets forth the major components of our noninterest expense for the second quarter of 2021 and 2020:

 

 

 

Three Months Ended June 30,

 

($ in thousands)

 

2021

 

 

2020

 

 

Increase

(Decrease)

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

5,307

 

 

$

4,347

 

 

$

960

 

Occupancy and equipment

 

 

1,234

 

 

 

1,241

 

 

 

(7

)

Data processing and communication

 

 

467

 

 

 

414

 

 

 

53

 

Professional fees

 

 

303

 

 

 

276

 

 

 

27

 

FDIC insurance and regulatory assessments

 

 

123

 

 

 

117

 

 

 

6

 

Promotion and advertising

 

 

176

 

 

 

163

 

 

 

13

 

Directors' fees and stock-based compensation

 

 

128

 

 

 

223

 

 

 

(95

)

Foundation donation and other contributions

 

 

640

 

 

 

245

 

 

 

395

 

Other expenses

 

 

411

 

 

 

308

 

 

 

103

 

Total noninterest expense

 

$

8,789

 

 

$

7,334

 

 

$

1,455

 

 

Salaries and employee benefits were $5.3 million, an increase of $960 thousand from the same period in 2020. The increase was primarily attributable to higher SBA incentive expense and an increase in the number of employees to support continued growth of the Company. The average number of full-time equivalent employees was 179.3 for the second quarter of 2021, compared to 171.3 for the same period in 2020.

Foundation donation and other contributions were $640 thousand, an increase of $395 thousand from the same period in 2020. The increase was primarily due to higher donation accruals for Open Stewardship Foundation as a result of higher net income compared with the same period in 2020.

Income Tax Expense

Income tax expense was $2.8 million and $972 thousand for the second quarter of 2021 and 2020, respectively. The effective income tax rate increased to 30.1% for the second quarter of 2021 compared with 28.7% for the same period in 2020, primarily due a tax provision related to restricted stock awards vested in the second quarter of 2021.

Comparison for the first half of 2021 and 2020

The following discussion of our results of operations compares the first half of 2021 to the same period in 2020.

For the first half of 2021, net income was $11.5 million, or $0.75 per diluted common share, compared with $5.7 million, or $0.37 per diluted common share for the same period in 2020, an increase of $5.7 million, or 100.5%. The increase was primarily due to a $5.6 million increase in net interest income and a $3.2 million decrease in provision for loan losses, partially offset by a $2.7 million increase in income tax expense and a $1.2 million increase in noninterest expense.

38


Table of Contents

 

Net Interest Income

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.

 

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

($ 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)

 

$

108,528

 

 

$

272

 

 

 

0.50

%

 

$

89,169

 

 

$

422

 

 

 

0.94

%

Securities available for sale

 

 

101,000

 

 

 

454

 

 

 

0.90

 

 

 

57,595

 

 

 

600

 

 

 

2.08

 

Total investments

 

 

209,528

 

 

 

726

 

 

 

0.69

 

 

 

146,764

 

 

 

1,022

 

 

 

1.39

 

Real estate loans

 

 

661,907

 

 

 

15,191

 

 

 

4.63

 

 

 

636,161

 

 

 

15,698

 

 

 

4.96

 

SBA loans

 

 

307,787

 

 

 

8,096

 

 

 

5.30

 

 

 

164,471

 

 

 

5,282

 

 

 

6.46

 

C & I loans

 

 

108,803

 

 

 

2,055

 

 

 

3.81

 

 

 

97,160

 

 

 

2,197

 

 

 

4.55

 

Home mortgage loans

 

 

124,135

 

 

 

2,882

 

 

 

4.64

 

 

 

120,883

 

 

 

2,990

 

 

 

4.95

 

Consumer & other loans

 

 

1,184

 

 

 

31

 

 

 

5.24

 

 

 

2,843

 

 

 

76

 

 

 

5.40

 

Total loans (2)

 

 

1,203,816

 

 

 

28,255

 

 

 

4.73

 

 

 

1,021,518

 

 

 

26,243

 

 

 

5.16

 

Total earning assets

 

 

1,413,344

 

 

 

28,981

 

 

 

4.13

 

 

 

1,168,282

 

 

 

27,265

 

 

 

4.69

 

Noninterest-earning assets

 

 

51,024

 

 

 

 

 

 

 

 

 

 

 

49,012

 

 

 

 

 

 

 

 

 

Total assets

 

$

1,464,368

 

 

 

 

 

 

 

 

 

 

$

1,217,294

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits and others

 

$

351,943

 

 

$

551

 

 

 

0.32

%

 

$

301,071

 

 

$

1,440

 

 

 

0.96

%

Time deposits

 

 

364,216

 

 

 

1,089

 

 

 

0.60

 

 

 

429,208

 

 

 

4,061

 

 

 

1.90

 

Total interest-bearing deposits

 

 

716,159

 

 

 

1,640

 

 

 

0.46

 

 

 

730,279

 

 

 

5,501

 

 

 

1.51

 

Borrowings

 

 

4,007

 

 

 

 

 

 

0.00

 

 

 

2,002

 

 

 

 

 

 

0.00

 

Total interest-bearing liabilities

 

 

720,166

 

 

 

1,640

 

 

 

0.46

 

 

 

732,281

 

 

 

5,501

 

 

 

1.51

 

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

580,134

 

 

 

 

 

 

 

 

 

 

 

327,616

 

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

16,991

 

 

 

 

 

 

 

 

 

 

 

18,142

 

 

 

 

 

 

 

 

 

Total noninterest-bearing liabilities

 

 

597,125

 

 

 

 

 

 

 

 

 

 

 

345,758

 

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

147,077

 

 

 

 

 

 

 

 

 

 

 

139,255

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

1,464,368

 

 

 

 

 

 

 

 

 

 

$

1,217,294

 

 

 

 

 

 

 

 

 

Net interest income / interest rate spreads

 

 

 

 

 

$

27,341

 

 

 

3.67

%

 

 

 

 

 

$

21,764

 

 

 

3.18

%

Net interest margin

 

 

 

 

 

 

 

 

 

 

3.90

%

 

 

 

 

 

 

 

 

 

 

3.74

%

Cost of deposits & cost of funds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits / cost of deposits

 

$

1,296,293

 

 

$

1,640

 

 

 

0.26

%

 

$

1,057,895

 

 

$

5,501

 

 

 

1.05

%

Total funding liabilities / cost of funds

 

$

1,300,300

 

 

$

1,640

 

 

 

0.25

%

 

$

1,059,897

 

 

$

5,501

 

 

 

1.04

%

 

(1)

Includes income and average balances for FHLB and 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.

39


Table of Contents

 

 

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.

 

 

 

Six Months Ended June 30,

 

 

 

2021 over 2020

 

 

 

Change due to:

 

 

 

 

 

($ in thousands)

 

Volume

 

 

Rate

 

 

Interest

Variance

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds sold and other investments

 

$

77

 

 

$

(227

)

 

$

(150

)

Securities available for sale

 

 

304

 

 

 

(450

)

 

 

(146

)

Total investments

 

 

381

 

 

 

(677

)

 

 

(296

)

Real estate loans

 

 

602

 

 

 

(1,109

)

 

 

(507

)

SBA loans

 

 

3,915

 

 

 

(1,101

)

 

 

2,814

 

C & I loans

 

 

245

 

 

 

(387

)

 

 

(142

)

Home mortgage loans

 

 

79

 

 

 

(187

)

 

 

(108

)

Consumer & other loans

 

 

(44

)

 

 

(1

)

 

 

(45

)

Loans

 

 

4,797

 

 

 

(2,785

)

 

 

2,012

 

Total earning assets

 

 

5,178

 

 

 

(3,462

)

 

 

1,716

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits and others

 

 

208

 

 

 

(1,097

)

 

 

(889

)

Time deposits

 

 

(539

)

 

 

(2,433

)

 

 

(2,972

)

Total interest-bearing deposits

 

 

(331

)

 

 

(3,530

)

 

 

(3,861

)

Borrowings

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

 

(331

)

 

 

(3,530

)

 

 

(3,861

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

5,509

 

 

$

68

 

 

$

5,577

 

 

Net interest income increased $5.6 million, or 25.6%, to $27.3 million for the first half of 2021 from $21.8 million for the same period in 2020, primarily due to higher average loan balance and lower average cost of deposits, partially offset by lower average yield on loans.

Interest and fees on loans was $28.3 million for the first half of 2021, compared with $26.2 million for the same period in 2020, an increase of $2.0 million, or 7.7%. The increase was primarily due to average loan growth, partially offset by lower average yield on loans. For the first half of 2021, average loans increased $182.3 million, or 17.8%, to $1.20 billion from $1.02 billion for the same period in 2020, primarily due to SBA loans originations, increases in loans held for sale, and the Hana loan purchase. The average yield on loans was 4.73%, a 43 basis point decrease from 5.16% for the same period in 2020.

Average interest-earning assets increased $245.1 million, or 21.0%, to $1.41 billion for the first half of 2021 from $1.17 billion for the same period in 2020. For the first half of 2021, average yield on interest-earning assets decreased 56 basis points to 4.13% from 4.69% for the same period in 2020.

Interest expense was $1.6 million for the first half of 2021, compared with $5.5 million for the same period in 2020, a decrease of $3.9 million, or 70.2%, primarily due to continued downward adjustments in deposit rates and changes in deposit mix.

Average cost of interest-bearing liabilities decreased 105 basis points to 0.46% for the first half of 2021 from 1.51% for the same period in 2020. The decrease in the average cost of interest-bearing liabilities primarily reflected the impact of lower interest rates and changes in deposit mix. Average noninterest-bearing deposits increased $252.5 million, or 77.1%, to $580.1 million for the first half of 2021, compared with $327.6 million for the same period in 2020. The increase in average noninterest-bearing deposits was primarily driven by customers’ preferences for liquidity given the economic uncertainty associated with the COVID-19 pandemic, as well as PPP funds held in deposit accounts. Average interest-bearing liabilities decreased $12.1 million, or 1.7%, to $720.2 million for the first half of 2021 compared with $732.3 million for the same period in 2020.

The net interest spread and net interest margin for the first half of 2021, were 3.67% and 3.90%, respectively, compared with 3.18% and 3.74%, respectively, for the same period in 2020. Excluding the impact of the Hana loan purchase, adjusted net interest margin was 3.83% for the first half of 2021. For details, refer to Item 2. MD&A – Reconciliation of GAAP to Non-GAAP Financial Measures in this report on Form 10-Q.

40


Table of Contents

 

Provision for Loan Losses

The Company recorded a reversal of its provision for loan losses of $492 thousand for the first half of 2021, compared with a provision for loan losses of $2.7 million for the same period in 2020, a decrease of $3.2 million, or 118.0%. The decrease was driven by continued improvements in the economic environment in the first half of 2021. The reversal of the provision for loan losses of $492 thousand included a $149 thousand provision for uncollectible accrued interest receivable for the first half of 2021. There was no provision for uncollectible accrued interest receivable for the same period in 2020.

Noninterest Income

Noninterest income for the first half of 2021 increased $828 thousand, or 19.0%, to $5.2 million compared with $4.4 million for the same period in 2020, primarily due to higher gains on sale of loans.

The following table sets forth the various components of our noninterest income for the first half of 2021 and 2020:

 

 

 

Six Months Ended

June 30,

 

($ in thousands)

 

2021

 

 

2020

 

 

Increase

(Decrease)

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

Service charges on deposits

 

$

748

 

 

$

729

 

 

$

19

 

Loan servicing fees, net of amortization

 

 

833

 

 

 

906

 

 

 

(73

)

Gain on sale of loans

 

 

3,092

 

 

 

2,091

 

 

 

1,001

 

Other income

 

 

513

 

 

 

632

 

 

 

(119

)

Total noninterest income

 

$

5,186

 

 

$

4,358

 

 

$

828

 

Gain on sale of loans was $3.1 million, an increase of $1.0 million from the same period in 2020. The increase was primarily due to higher sales premiums. The Company sold $33.0 million in SBA loans at an average premium of 10.82%, compared with the sale of $32.5 million at an average premium of 8.19% for the same period in 2020.

Noninterest Expense

Noninterest expense for the first half of 2021 was $16.8 million compared with $15.5 million for the same period in 2020, an increase of $1.2 million, or 7.8%. The increase was primarily attributable to higher foundation donation and other contributions, and salaries and employee benefits.

The following table sets forth the major components of our noninterest expense for the first half of 2021 and 2020:

 

 

 

Six Months Ended

June 30,

 

($ in thousands)

 

2021

 

 

2020

 

 

Increase

(Decrease)

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

$

9,969

 

 

$

9,418

 

 

$

551

 

Occupancy and equipment

 

 

2,469

 

 

 

2,471

 

 

 

(2

)

Data processing and communication

 

 

915

 

 

 

823

 

 

 

92

 

Professional fees

 

 

617

 

 

 

549

 

 

 

68

 

FDIC insurance and regulatory assessments

 

 

255

 

 

 

222

 

 

 

33

 

Promotion and advertising

 

 

353

 

 

 

324

 

 

 

29

 

Directors' fees and stock-based compensation

 

 

244

 

 

 

456

 

 

 

(212

)

Foundation donation and other contributions

 

 

1,147

 

 

 

575

 

 

 

572

 

Other expenses

 

 

786

 

 

 

703

 

 

 

83

 

Total noninterest expense

 

$

16,755

 

 

$

15,541

 

 

$

1,214

 

41


Table of Contents

 

 

Salaries and employee benefits were $10.0 million, an increase of $551 thousand from the same period in 2020. The increase was primarily attributable to higher provision for employee compensation expense in line with higher net income, partially offset by higher deferred loan origination cost. The average number of full-time equivalent employees was 175.3 for the first half of 2021, compared with 172.2 for the same period in 2020.

Foundation donation and other contributions were $1.1 million, an increase of $572 thousand from the same period in 2020, primarily due to higher donation accruals for Open Stewardship Foundation as a result of higher net income compared with the same period in 2020.

Income Tax Expense

Income tax expense was $4.8 million and $2.1 million for the first half of 2021 and 2020, respectively. The effective income tax rate increased to 29.6% for the first half of 2021 compared with 27.2% for the same period in 2020, primarily due to lower tax benefits resulting from reduced number of exercises of non-qualified stock options during the first half of 2021 compared to the same period in 2020.

FINANCIAL CONDITION

Total assets increased $234.6 million, or 17.2%, to $1.60 billion at June 30, 2021 compared with $1.37 billion at December 31, 2020, primarily due to increases of $187.9 million, or 16.7%, in total loans, $22.4 million, or 21.0% in cash and cash equivalents, and $20.0 million, or 21.8%, in securities AFS. We funded our asset growth primarily with an increase of $234.0 million, or 19.5% in total deposits during the first half of 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 AFS or held-to-maturity at the time of purchase. Accounting guidance requires AFS 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 AFS securities.

All securities in our investment portfolio were classified as AFS as of both June 30, 2021 and December 31, 2020. There were no held-to-maturity securities in our investment portfolio as of both June 30, 2021 and December 31, 2020. All AFS securities are carried at fair value and consist primarily of US government agencies or sponsored agency securities as of both June 30, 2021 and December 31, 2020.

Securities AFS increased $20.0 million, or 21.8%, to $111.8 million at June 30, 2021 from $91.8 million at December 31, 2020, primarily due to purchases of $39.8 million, partially offset by principal paydowns and maturity of $18.4 million for the first half of 2021. No issuer of securities AFS, other than the U.S. Government and its agencies, comprised more than 10% of our shareholders’ equity as of June 30, 2021 or December 31, 2020.

42


Table of Contents

 

The following table summarizes the fair value of the AFS securities portfolio as of June 30, 2021 and December 31, 2020:

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

 

Amortized

 

 

Fair

 

 

Unrealized

 

 

Amortized

 

 

Fair

 

 

Unrealized

 

($ in thousands)

 

Cost

 

 

Value

 

 

Gain/(Loss)

 

 

Cost

 

 

Value

 

 

Gain/(Loss)

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored agency securities

 

$

-

 

 

$

-

 

 

$

-

 

 

$

1,000

 

 

$

1,005

 

 

$

5

 

U.S. Government agencies or sponsored agency securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

28,965

 

 

$

29,206

 

 

$

241

 

 

$

19,281

 

 

$

19,704

 

 

$

423

 

Residential collateralized mortgage obligations

 

 

82,554

 

 

 

82,626

 

 

 

72

 

 

 

70,318

 

 

 

71,082

 

 

 

764

 

Total available for sale

 

$

111,519

 

 

$

111,832

 

 

$

313

 

 

$

90,599

 

 

$

91,791

 

 

$

1,192

 

 

The Company’s AFS securities are carried at fair value with changes in fair values reflected in Other comprehensive income (loss) unless a security is deemed to be other than temporary impairment (“OTTI”). Net unrealized gains on AFS securities were $313 thousand as of June 30, 2021, which declined from net unrealized gains of $1.2 million. Gross unrealized losses on AFS securities totaled $578 thousand as of June 30, 2021, compared with $57 thousand as of December 31, 2020. Of the securities with gross unrealized losses, all were U.S. government agencies or sponsored agency securities as of both June 30, 2021 and December 31, 2020. As of June 30, 2021, the Company had no intention to sell securities with unrealized losses and believed it was more-likely-than-not that it would not be required to sell such securities before recovery of their amortized cost.

 

The Company assesses individual securities for OTTI for each reporting period. There were no OTTI credit losses recognized in earnings for the second quarter and first half of 2021 and 2020.

 

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of June 30, 2021. 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 June 30, 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

 

($ in thousands)

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

 

Cost

 

 

Yield

 

Available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government agencies or sponsored agency securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

 

 

 

%

 

$

827

 

 

 

1.96

%

 

$

3,798

 

 

 

1.87

%

 

$

24,340

 

 

 

1.09

%

Residential collateralized mortgage obligations

 

 

 

 

 

%

 

 

 

 

 

%

 

 

648

 

 

 

1.75

%

 

 

81,906

 

 

 

0.69

%

Total available for sale

 

$

 

 

 

%

 

$

827

 

 

 

1.96

%

 

$

4,446

 

 

 

1.85

%

 

$

106,246

 

 

 

0.78

%

 

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 $146.1 million, or 13.3%, to $1.25 billion at June 30, 2021, compared to $1.10 billion at December 31, 2020, primarily due to Hana loan purchase, originations of SBA PPP loans and organic growth in commercial real estate for the six months ended June 30, 2021. In response to the COVID-19 pandemic, the Company provided assistance to customers faced with financial difficulties by offering SBA PPP loans and also provided customers with payment relief through our loan deferment program. For more information, see MD&A — Overview – COVID-19 and Government Response in this report on Form 10-Q.

43


Table of Contents

 

Loans Loan purchase: On May 24, 2021, the Company completed the purchase of the Hana’s loan portfolio and paid approximately $97.6 million that included loans of $100.0 million at a fair value discount of $8.9 million, servicing assets of $6.1 million and accrued interest receivable of $398 thousand. The following table summarizes the consideration paid for the loan portfolio and the amounts of assets purchased:

 

($ in thousands)

 

 

 

 

Consideration

 

 

 

 

Cash

 

$

97,631

 

 

 

 

 

 

Recognized amounts of identifiable assets purchased:

 

 

 

 

Loans (1)

 

$

100,003

 

Loan discounts

 

 

(8,867

)

Accrued interest receivable

 

 

398

 

Servicing assets

 

 

6,097

 

Total recognized identifiable assets

 

$

97,631

 

 

(1)

Consists of $92.2 million of SBA loans, $6.9 million of PPP loans and $919 thousand of real estate loans.

The loan distribution table that follows sets forth our gross loans outstanding, and the percentage distribution in each category as of June 30, 2021 and December 31, 2020:

 

 

 

June 30, 2021

 

 

December 31, 2020

 

($ in thousands)

 

Amount

 

 

% of Total

 

 

Amount

 

 

% of Total

 

Commercial real estate

 

$

684,082

 

 

 

55

%

 

$

651,684

 

 

 

59

%

SBA loan - real estate

 

 

217,356

 

 

 

17

%

 

 

136,224

 

 

 

12

%

SBA loan - non-real estate

 

 

121,395

 

 

 

10

%

 

 

75,151

 

 

 

7

%

Commercial and industrial

 

 

102,562

 

 

 

8

%

 

 

107,307

 

 

 

10

%

Home mortgage

 

 

119,319

 

 

 

10

%

 

 

128,212

 

 

 

12

%

Consumer

 

 

1,152

 

 

<1%

 

 

 

1,158

 

 

<1%

 

Gross loans

 

 

1,245,866

 

 

 

100

%

 

 

1,099,736

 

 

 

100

%

Allowance for loan losses

 

 

(14,687

)

 

 

 

 

 

 

(15,352

)

 

 

 

 

Net loans (1)

 

$

1,231,179

 

 

 

 

 

 

$

1,084,384

 

 

 

 

 

 

(1)

Includes net deferred loan fees or costs, unamortized premiums and unaccreted discounts of $(12.5) million and $(5.9) million as of June 30, 2021 and December 31, 2020, respectively.

 

The following tables presents the maturity distribution of our loans as of June 30, 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 June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

Due after One Year

 

 

 

 

 

 

 

 

 

 

Due in One Year or Less

 

 

Through Five Years

 

 

Due after Five Years

 

 

 

 

 

 

 

 

 

 

 

Adjustable

 

 

 

 

 

 

Adjustable

 

 

 

 

 

 

Adjustable

 

 

 

 

 

($ in thousands)

 

Fixed Rate

 

 

Rate

 

 

Fixed Rate

 

 

Rate

 

 

Fixed Rate

 

 

Rate

 

 

Total

 

Commercial real estate

 

$

51,644

 

 

$

57,352

 

 

$

299,838

 

 

$

144,584

 

 

$

99,822

 

 

$

30,842

 

 

$

684,082

 

SBA loans - real estate

 

 

 

 

 

 

 

 

 

 

 

47

 

 

 

396

 

 

 

216,913

 

 

 

217,356

 

SBA loan - non-real estate

 

 

14,377

 

 

 

86

 

 

 

89,522

 

 

 

5,124

 

 

 

 

 

 

12,286

 

 

 

121,395

 

Commercial and industrial

 

 

131

 

 

 

27,489

 

 

 

207

 

 

 

40,674

 

 

 

23,164

 

 

 

10,897

 

 

 

102,562

 

Home mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

105,615

 

 

 

13,704

 

 

 

119,319

 

Consumer

 

 

 

 

 

379

 

 

 

 

 

 

773

 

 

 

 

 

 

 

 

 

1,152

 

Gross loans

 

$

66,152

 

 

$

85,306

 

 

$

389,567

 

 

$

191,202

 

 

$

228,997

 

 

$

284,642

 

 

$

1,245,866

 

44


Table of Contents

 

 

 

 

 

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

 

 

 

 

 

($ in thousands)

 

Fixed Rate

 

 

Rate

 

 

Fixed Rate

 

 

Rate

 

 

Fixed Rate

 

 

Rate

 

 

Total

 

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

 

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

 

 

Loans Commercial Real Estate: 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, 81.9% of our gross loans are secured by real property as of June 30, 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. As of June 30, 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. As of June 30, 2021, our average loan-to-value for commercial real estate loans was approximately 53%. Our commercial real estate loan portfolio totaled $684.1 million as of June 30, 2021 compared with $651.7 million as of December 31, 2020.

Loans SBA Loans: We are designated as 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.

As of June 30, 2021, our SBA portfolio totaled $338.8 million, including $103.9 million of SBA PPP loans, compared with $211.4 million, including $64.9 million of SBA PPP loans as of December 31, 2020, an increase of $127.4 million, or 60.3%. The increase was primarily due to the Hana loan purchase. During the first half of 2021, we originated $181.9 million of SBA loans, including $88.1 million of SBA PPP loans, compared with $110.0 million, including $65.0 million of SBA PPP loans during the same period in 2020. We sold $33.0 million and $32.5 million in SBA loans during the first half of 2021 and 2020, respectively.

As of June 30, 2021 and December 31, 2020, loans held for sale totaled $68.4 million and $26.7 million, respectively, and consisted of SBA loans. At the time of commitment to originate or purchase a loan, a loan is determined to be held for investment if it is the Company’s intent to hold the loan to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s evaluation processes, including liquidity and credit risk management. If the Company subsequently changes its intent to hold certain loans, those loans are transferred from held for investment to held for sale at the lower of cost or fair value.

Loans Commercial and Industrial: Commercial and industrial loans totaled $102.6 million at June 30, 2021, compared with $107.3 million at December 31, 2020.

Loans Home Mortgage: 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.

45


Table of Contents

 

Home mortgage loans totaled $119.3 million at June 30, 2021, compared with $128.2 million at December 31, 2020, a decrease of $8.9 million, or 6.9%. During the first half of 2021, home mortgage loan origination of $24.8 million were more than offset by payoffs, paydowns and sales of $33.7 million. In comparison, home mortgage loan origination of $18.4 million were slightly more than offset by payoffs, paydowns and sales of $19.1 million.

Loan Servicing

As of June 30, 2021, and December 31, 2020, we serviced $658.9 million and $388.8 million, respectively, of SBA loans for others. Activities for loan servicing rights for the second quarter and first half of 2021 and 2020 were as follows:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in thousands)

 

2021

 

 

2020

 

 

Increase

(decrease)

 

 

2021

 

 

2020

 

 

Increase

(decrease)

 

Beginning balance

 

$

7,492

 

 

$

6,963

 

 

$

529

 

 

$

7,360

 

 

$

7,024

 

 

$

336

 

Additions from loans sold with servicing retained

 

 

277

 

 

 

363

 

 

 

(86

)

 

 

847

 

 

 

769

 

 

 

78

 

Additions from purchase of servicing rights

 

 

6,097

 

 

 

 

 

 

6,097

 

 

 

6,097

 

 

 

 

 

 

6,097

 

Amortized to expense

 

 

(963

)

 

 

(354

)

 

 

(609

)

 

 

(1,401

)

 

 

(821

)

 

 

(580

)

Ending balance

 

$

12,903

 

 

$

6,972

 

 

$

5,931

 

 

$

12,903

 

 

$

6,972

 

 

$

5,931

 

 

Loan servicing rights are included in accrued interest receivable and other assets on our Consolidated Balance Sheets and reported net of amortization.

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 difficulty 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.

46


Table of Contents

 

As of June 30, 2021, the allowances for loan losses amounted to $14.7 million, or 1.18% of gross loans, compared with $15.4 million, or 1.40% of gross loans and $12.8 million, or 1.22% of gross loans as of December 31, 2020 and June 30, 2020, respectively. The decrease in the first half of 2021 was largely due to continued improvements in the economic environment in the first half of 2021. The increase from June 30, 2020 was primarily due to loan portfolio growth and the deteriorating economic conditions during the second half of 2020 as a result of the COVID-19 pandemic, partially offset by improved economic conditions during the first half of 2021. Excluding the impacts of the purchased Hana loans, PPP loans and the allowance for uncollectible accrued interest receivable, adjusted allowance to gross loans ratios were 1.46%, 1.54%, and 1.30% as of June 30, 2021, December 31, 2020 and June 30, 2020, respectively. For details, refer to Item 2. MD&A – Reconciliation of GAAP to Non-GAAP Financial Measures in this report on Form 10-Q.

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. 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.

Analysis of the Allowance for Loan Losses.

The following tables present a summary of activities in the allowance for loan losses by portfolio segment, as of and for the second quarter and first half of 2021 and 2020:

 

 

 

As of and For the Three Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

(Reversal

 

 

(Charge-

 

 

 

 

 

 

 

 

 

 

(Reversal

 

 

(Charge-

 

 

 

 

 

 

 

Beginning

 

 

of)

 

 

Offs)

 

 

Ending

 

 

Beginning

 

 

of)

 

 

Offs)

 

 

Ending

 

($ in thousands)

 

Balance

 

 

Provision (1)

 

 

Recoveries

 

 

Balance

 

 

Balance

 

 

Provision (1)

 

 

Recoveries

 

 

Balance

 

Commercial real estate

 

$

8,594

 

 

$

(138

)

 

$

 

 

$

8,456

 

 

$

6,210

 

 

$

935

 

 

$

 

 

$

7,145

 

SBA loans - real estate

 

 

2,030

 

 

 

(33

)

 

 

 

 

 

1,997

 

 

 

1,082

 

 

 

264

 

 

 

 

 

 

1,346

 

SBA loan - non-real estate

 

 

292

 

 

 

(37

)

 

 

(27

)

 

 

228

 

 

 

192

 

 

 

33

 

 

 

28

 

 

 

253

 

Commercial and industrial

 

 

2,331

 

 

 

(45

)

 

 

 

 

 

2,286

 

 

 

1,292

 

 

 

628

 

 

 

 

 

 

1,920

 

Home mortgage

 

 

2,075

 

 

 

(371

)

 

 

 

 

 

1,704

 

 

 

1,921

 

 

 

153

 

 

 

 

 

 

2,074

 

Consumer

 

 

17

 

 

 

(1

)

 

 

 

 

 

16

 

 

 

51

 

 

 

(25

)

 

 

 

 

 

26

 

Total

 

$

15,339

 

 

$

(625

)

 

$

(27

)

 

$

14,687

 

 

$

10,748

 

 

$

1,988

 

 

$

28

 

 

$

12,764

 

Gross loans (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,245,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,043,506

 

Average gross loans (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,198,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,035,751

 

Net charge-offs (recoveries)

  to average gross loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.01

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(0.01

)%

Allowance for loans losses to

   gross loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.18

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.22

%

 

(1)

Excludes (reversal of) provision for uncollectible accrued interest receivable of $(487) thousand for the second quarter of 2021. There was no provision for uncollectible accrued interest receivable for the second quarter of 2020.

(2)

Excludes loans held for sale.

 

47


Table of Contents

 

 

 

 

As of and For the Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net

 

 

 

 

 

 

 

 

 

 

 

(Reversal

 

 

(Charge-

 

 

 

 

 

 

 

 

 

 

(Reversal

 

 

(Charge-

 

 

 

 

 

 

 

Beginning

 

 

of)

 

 

Offs)

 

 

Ending

 

 

Beginning

 

 

of)

 

 

Offs)

 

 

Ending

 

($ in thousands)

 

Balance

 

 

Provision (1)

 

 

Recoveries

 

 

Balance

 

 

Balance

 

 

Provision (1)

 

 

Recoveries

 

 

Balance

 

Commercial real estate

 

$

8,505

 

 

$

(49

)

 

$

 

 

$

8,456

 

 

$

6,000

 

 

$

1,145

 

 

$

 

 

$

7,145

 

SBA loans - real estate

 

 

1,802

 

 

 

195

 

 

 

 

 

 

1,997

 

 

 

939

 

 

 

407

 

 

 

 

 

 

1,346

 

SBA loan - non-real estate

 

 

278

 

 

 

(23

)

 

 

(27

)

 

 

228

 

 

 

121

 

 

 

149

 

 

 

(17

)

 

 

253

 

Commercial and industrial

 

 

2,563

 

 

 

(277

)

 

 

 

 

 

2,286

 

 

 

1,289

 

 

 

631

 

 

 

 

 

 

1,920

 

Home mortgage

 

 

2,185

 

 

 

(481

)

 

 

 

 

 

1,704

 

 

 

1,667

 

 

 

407

 

 

 

 

 

 

2,074

 

Consumer

 

 

19

 

 

 

(6

)

 

 

3

 

 

 

16

 

 

 

34

 

 

 

(8

)

 

 

 

 

 

26

 

Total

 

$

15,352

 

 

$

(641

)

 

$

(24

)

 

$

14,687

 

 

$

10,050

 

 

$

2,731

 

 

$

(17

)

 

$

12,764

 

Gross loans (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,245,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,043,506

 

Average gross loans (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,169,338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,014,244

 

Net charge-offs (recoveries)

  to average gross loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.00

%

Allowance for loans losses to

   gross loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.18

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1.22

%

 

(1)

Excludes (reversal of) provision for uncollectible accrued interest receivable of $149 thousand for the first half of 2021. There was no provision for uncollectible accrued interest receivable for the first half of 2020.

(2)

Excludes loans held for sale.

The following table presents an allocation of the allowance for loan losses by portfolio as of June 30, 2021 and December 31, 2020:

 

 

 

June 30, 2021

 

 

December 31, 2020

 

($ in thousands)

 

Amount

 

 

% of Total

 

 

Amount

 

 

% of Total

 

Commercial real estate

 

$

8,456

 

 

 

58

%

 

$

8,505

 

 

 

55

%

SBA loan - real estate

 

 

1,997

 

 

 

14

%

 

 

1,802

 

 

 

12

%

SBA loan - non-real estate

 

 

228

 

 

 

1

%

 

 

278

 

 

 

2

%

Commercial and industrial

 

 

2,286

 

 

 

15

%

 

 

2,563

 

 

 

17

%

Home mortgage

 

 

1,704

 

 

 

12

%

 

 

2,185

 

 

 

14

%

Consumer

 

 

16

 

 

<1%

 

 

 

19

 

 

<1%

 

Gross loans

 

$

14,687

 

 

 

100

%

 

$

15,352

 

 

 

100

%

 

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans, past due loans 90 days or more but still accruing, performing TDR loans, and OREO. Generally, loans are placed on nonaccrual status when they become 90 days past due or more. Loans are considered past due when contractually required principal or interest payments have not been made on the due dates. Loans are also placed on nonaccrual status when management believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that full collection of principal or interest becomes uncertain regardless of the length of past due status. Once a loan is placed on nonaccrual status, interest accrual is discontinued, and all unpaid accrued interest is received is reversed against interest income. Interest payments received on nonaccrual loans are reflected as a reduction of principal and not as interest income. A loan is returned to accrual status when the borrower has demonstrated a satisfactory payment trend subject to management’s assessment of the borrower’s ability to repay the loan.

Foreclosed assets, consisting of other real estate owned (“OREO”), are included in Other assets on the Consolidated Balance Sheet. The Company did not have any OREO property as of both June 30, 2021 and December 30, 2020.

Nonperforming loans include loans 90 days past due and still accruing, loans accounted for on a non-accrual basis and performing TDR loans. Nonperforming loans were $757 thousand at June 30, 2021, a decrease of $228 thousand, compared with $985 thousand at December 31, 2020.

Classified loans were $7.2 million at June 30, 2021, a decrease of $175 thousand, compared with $7.3 million at December 31, 2020 and majority of classified loans as of June 30, 2021 was secured by real estate collaterals.

48


Table of Contents

 

The following table presents information regarding nonperforming assets as of June 30, 2021 and December 31, 2020:

 

($ in thousands)

 

June 30, 2021

 

 

December 31, 2020

 

Non-accrual loans

 

$

757

 

 

$

985

 

Past due loans 90 days or more and still accruing

 

 

 

 

 

 

Accruing troubled debt restructured loans

 

 

 

 

 

 

Total non-performing loans

 

 

757

 

 

 

985

 

Other real estate owned

 

 

 

 

 

 

Total non-performing assets

 

$

757

 

 

$

985

 

Nonperforming loans to gross loans

 

 

0.06

%

 

 

0.09

%

Nonperforming assets to total assets

 

 

0.05

%

 

 

0.07

%

Allowance for loan losses to non-performing loans

 

 

1,940

%

 

 

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 reached $1.43 billion as of June 30, 2021, an increase of $234.0 million, or 19.5% from $1.20 billion as of December 31, 2020, primarily driven by core broad-based growth in noninterest-bearing, money market and time deposits. Noninterest-bearing deposits were $668.2 million or 46.6% of total deposits as of June 30, 2021, up from $522.8 million or 43.6% of total deposits as of December 31, 2020. The increase in noninterest-bearing deposits was primarily due to customers’ preferences for liquidity given the economic uncertainty associated with the COVID-19, as well as PPP funds held in deposit account.

The following tables presents the maturity distribution of time deposits as of June 30, 2021 and December 31, 2020:

 

 

 

As of June 30, 2021

 

 

 

Maturity Within:

 

 

 

Three

 

 

Three to

 

 

Six to 12

 

 

After

 

 

 

 

 

($ in thousands)

 

Months

 

 

Six Months

 

 

Months

 

 

12 Months

 

 

Total

 

Time deposits (more than $250,000)

 

$

90,957

 

 

$

30,760

 

 

$

71,987

 

 

$

 

 

$

193,704

 

Time deposits ($250,000 or less)

 

 

59,503

 

 

 

43,197

 

 

 

76,513

 

 

 

6,330

 

 

 

185,543

 

Total time deposits

 

$

150,460

 

 

$

73,957

 

 

$

148,500

 

 

$

6,330

 

 

$

379,247

 

 

 

 

As of December 31, 2020

 

 

 

Maturity Within:

 

 

 

Three

 

 

Three to

 

 

Six to 12

 

 

After

 

 

 

 

 

($ 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 utilize 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. As of June 30, 2021 and December 31, 2020, we had maximum borrowing capacity from the FHLB of $400.4 million and $394.0 million, respectively. The Company did not have any FHLB borrowings as of June 30, 2021, compared with $5.0 million as of December 31, 2020, which had a zero interest rate under the Recovery Advance Program to support pandemic relief.

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.

49


Table of Contents

 

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.

Our gross loan to deposit ratio was 86.9% as of June 30, 2021, compared with 91.6% as of December 31, 2020.

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.

As of June 30, 2021, we had available borrowing capacity of $296.8 million with the FHLB and $130.8 million with the FRB. Eligible loans defined in guidelines from the FHLB and FRB were pledged to the FHLB and FRB discount window as collateral. Our unsecured federal funds lines of credit with correspondent, subject to availability, totaled $100.0 million as of June 30, 2021. We also maintain relationships in the capital markets with brokers to issue certificates of deposits 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” in our 2020 Annual Report on Form 10-K.

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 June 30, 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 June 30, 2021 and December 31, 2020 reflected in the table below. As of June 30, 2021, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since June 30, 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

 

($ in thousands)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

As of June 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

$

166,116

 

 

 

13.87

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

163,293

 

 

 

13.63

%

 

 

95,833

 

 

 

8.00

%

 

 

119,791

 

 

 

10.00

%

 

 

125,781

 

 

 

10.50

%

Tier 1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

151,133

 

 

 

12.62

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

148,312

 

 

 

12.38

%

 

 

71,875

 

 

 

6.00

%

 

 

95,833

 

 

 

8.00

%

 

 

101,822

 

 

 

8.50

%

CET1 capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

151,133

 

 

 

12.62

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

148,312

 

 

 

12.38

%

 

 

53,906

 

 

 

4.50

%

 

 

77,864

 

 

 

6.50

%

 

 

83,854

 

 

 

7.00

%

Tier 1 leverage (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

151,133

 

 

 

9.96

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

148,312

 

 

 

9.77

%

 

 

60,705

 

 

 

4.00

%

 

 

75,882

 

 

 

5.00

%

 

 

60,705

 

 

 

4.00

%

 

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

50


Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Requirements,

 

 

 

 

 

 

 

 

 

 

 

Regulatory

 

 

Minimum

 

 

including fully

 

 

 

 

 

 

 

 

 

 

 

Capital Ratio

 

 

To be Considered

 

 

phased in Capital

 

 

 

Actual

 

 

Requirements

 

 

"Well Capitalized"

 

 

Conservation Buffer

 

($ 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

%

 

 

62,894

 

 

 

6.00

%

 

 

83,859

 

 

 

8.00

%

 

 

89,101

 

 

 

8.50

%

CET1 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

%

 

 

47,171

 

 

 

4.50

%

 

 

68,136

 

 

 

6.50

%

 

 

73,377

 

 

 

7.00

%

Tier 1 leverage (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consolidated

 

 

142,147

 

 

 

10.55

%

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

 

N/A

 

Bank

 

 

139,092

 

 

 

10.32

%

 

 

53,915

 

 

 

4.00

%

 

 

67,393

 

 

 

5.00

%

 

 

53,915

 

 

 

4.00

%

 

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

CONTRACTUAL OBLIGATIONS

The following tables contain the Company’s significant fixed and determinable contractual obligations, along with categories of payment dates as of June 30, 2021 and December 31, 2020:

 

 

 

Payments Due at June 30, 2021

 

 

 

Within

 

 

One to

 

 

Three to

 

 

After Five

 

 

 

 

 

($ in thousands)

 

One Year

 

 

Three Years

 

 

Five Years

 

 

Years

 

 

Total

 

Deposits without a stated maturity

 

$

1,054,856

 

 

$

 

 

$

 

 

$

 

 

$

1,054,856

 

Time deposits

 

 

372,917

 

 

 

4,931

 

 

 

1,399

 

 

 

 

 

 

379,247

 

Operating lease commitments

 

 

2,079

 

 

 

3,659

 

 

 

1,698

 

 

 

777

 

 

 

8,213

 

Commitments to fund investments for low-income housing

   partnerships

 

 

1,334

 

 

 

566

 

 

 

22

 

 

 

45

 

 

 

1,967

 

Total contractual obligations

 

$

1,431,186

 

 

$

9,156

 

 

$

3,119

 

 

$

822

 

 

$

1,444,283

 

 

 

 

Payments Due at December 31, 2020

 

 

 

Within

 

 

One to

 

 

Three to

 

 

After Five

 

 

 

 

 

($ in thousands)

 

One Year

 

 

Three Years

 

 

Five Years

 

 

Years

 

 

Total

 

Deposits without a stated maturity

 

$

851,077

 

 

$

 

 

$

 

 

$

 

 

$

851,077

 

Time deposits

 

 

338,316

 

 

 

9,578

 

 

 

522

 

 

 

597

 

 

 

349,013

 

Operating lease commitments

 

 

2,047

 

 

 

3,844

 

 

 

2,376

 

 

 

956

 

 

 

9,223

 

Advanced from FHLB

 

 

5,000

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

Commitments to fund investments for low-income housing

   partnerships

 

 

1,042

 

 

 

1,036

 

 

 

29

 

 

 

47

 

 

 

2,154

 

Total contractual obligations

 

$

1,197,482

 

 

$

14,458

 

 

$

2,927

 

 

$

1,600

 

 

$

1,216,467

 

 

We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

51


Table of Contents

 

OFF-BALANCE SHEET ARRANGEMENT

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our Consolidated Balance Sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem collateral is necessary upon extension of credit, is based on management’s credit evaluation of the counterparty.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain condition, upon request of the borrower.

The following table summarized commitments as of the dates presented.

 

($ in thousands)

 

As of June 30, 2021

 

 

As of December 31, 2020

 

Loan commitments

 

$

122,150

 

 

$

75,740

 

Standby letters of credits

 

 

5,374

 

 

 

9,212

 

Commercial letters of credit

 

 

2,547

 

 

 

1,552

 

Total undisbursed credit related commitments

 

$

130,071

 

 

$

86,504

 

 

RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

In addition to GAAP measures, management uses certain non-GAAP financial measures to provide supplemental information regarding the Company’s performance.

Pre-provision net revenue removes provision for loan losses and income tax expense. Management believes that this non-GAAP measure, when taken together with the corresponding GAAP financial measures (as applicable), provides meaningful supplemental information regarding our performance. This non-GAAP financial measure also facilitates a comparison of our performance to prior periods.

During the second quarter of 2021, the Company purchased 638 loans from Hana for a total purchase price of $97.6 million. The Company evaluated $100.0 million of the loans purchased in accordance with the provisions of ASC 310-20, Nonrefundable Fees and Other Costs, which were recorded with a $8.9 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the expected life of the loans using the effective yield method. Adjusted loan yield and net interest margin for the three months ended June 30, 2021 excluded the impacts of contractual interest and discount accretion of the purchased loans as management does not consider purchasing loan portfolios to be normal or recurring transactions. Management believes that presenting the adjusted average loan yield and net interest margin provide comparability to prior periods and these non-GAAP financial measures provide supplemental information regarding the Company’s performance.

52


Table of Contents

 

Adjusted allowance to gross loans ratio removes the impacts of purchased loans, PPP loans and allowance on accrued interest receivable. Management believes that this ratio provides greater consistency and comparability between the Company’s results and those of its peer banks.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

($ in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Interest income

 

$

15,349

 

 

$

12,920

 

 

$

28,981

 

 

$

27,265

 

Interest expense

 

 

763

 

 

 

2,272

 

 

 

1,640

 

 

 

5,501

 

Net interest income

 

 

14,586

 

 

 

10,648

 

 

 

27,341

 

 

 

21,764

 

Noninterest income

 

 

2,220

 

 

 

2,062

 

 

 

5,186

 

 

 

4,358

 

Noninterest expense

 

 

8,789

 

 

 

7,334

 

 

 

16,755

 

 

 

15,541

 

Pre-provision net revenue

(a)

$

8,017

 

 

$

5,376

 

 

$

15,772

 

 

$

10,581

 

Reconciliation to Net Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Reversal of) provision for loan losses

(b)

 

(1,112

)

 

 

1,988

 

 

 

(492

)

 

 

2,731

 

Income tax expense

(c)

 

2,750

 

 

 

972

 

 

 

4,808

 

 

 

2,135

 

Net Income

(a) + (b) + (c)

$

6,379

 

 

$

2,416

 

 

$

11,456

 

 

$

5,715

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

($ in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Yield on Average Loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income on loans

 

$

14,971

 

 

$

12,549

 

 

$

28,255

 

 

$

26,243

 

Less: interest income on purchased loans

 

 

(860

)

 

 

 

 

 

(860

)

 

 

 

Adjusted interest income on loans

(a)

$

14,111

 

 

$

12,549

 

 

$

27,395

 

 

$

26,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

$

1,242,058

 

 

$

1,044,944

 

 

$

1,203,816

 

 

$

1,021,518

 

Less: Average purchased loans

 

 

(37,526

)

 

 

 

 

 

(18,867

)

 

 

 

Adjusted average loans

(b)

$

1,204,532

 

 

$

1,044,944

 

 

$

1,184,949

 

 

$

1,021,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loan yield (1)

 

 

4.83

%

 

 

4.83

%

 

 

4.73

%

 

 

5.16

%

Effect on average loan yield (1)

 

 

-0.13

%

 

 

0.00

%

 

 

-0.07

%

 

 

0.00

%

Adjusted average loan yield (1)

(a)/(b)

 

4.70

%

 

 

4.83

%

 

 

4.66

%

 

 

5.16

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

14,586

 

 

$

10,648

 

 

$

27,341

 

 

$

21,764

 

Less: interest income on purchased loans

 

 

(860

)

 

 

 

 

 

(860

)

 

 

 

Adjusted net interest income

(c)

$

13,726

 

 

$

10,648

 

 

$

26,481

 

 

$

21,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average interest-earning assets

 

$

1,468,623

 

 

$

1,205,571

 

 

$

1,413,344

 

 

$

1,168,282

 

Less: Average purchased loans

 

 

(37,526

)

 

 

 

 

 

(18,867

)

 

 

 

Adjusted average interest-earning assets

(d)

$

1,431,097

 

 

$

1,205,571

 

 

$

1,394,477

 

 

$

1,168,282

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest margin (1)

 

 

3.98

%

 

 

3.55

%

 

 

3.90

%

 

 

3.74

%

Effect on net interest margin (1)

 

 

-0.13

%

 

 

0.00

%

 

 

-0.07

%

 

 

0.00

%

Adjusted net interest margin (1)

(c)/(d)

 

3.85

%

 

 

3.55

%

 

 

3.83

%

 

 

3.74

%

 

53


Table of Contents

 

 

 

 

As of

 

 

 

June 30,

 

 

December 31,

 

 

June 30,

 

($ in thousands)

 

2021

 

 

2020

 

 

2020

 

Gross loans

 

$

1,245,866

 

 

$

1,099,736

 

 

$

1,043,506

 

Less: Purchased loans

 

 

(88,438

)

 

 

 

 

 

 

       PPP loans (1)

 

 

(97,673

)

 

 

(64,906

)

 

 

(63,424

)

Adjusted gross loans

(a)

$

1,059,755

 

 

$

1,034,830

 

 

$

980,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accrued interest receivable on loans

 

$

3,179

 

 

$

3,729

 

 

$

4,578

 

Less: Accrued interest receivable on purchased loans

 

 

(290

)

 

 

 

 

 

 

      Accrued interest receivable on PPP loans (2)

 

 

(461

)

 

 

(445

)

 

 

(115

)

Add: Allowance on accrued interest receivable

 

 

792

 

 

 

643

 

 

 

 

Adjusted accrued interest receivable on loans

(b)

$

3,220

 

 

$

3,927

 

 

$

4,463

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted gross loans and accrued interest receivable

(a) + (b) = (c)

$

1,062,975

 

 

$

1,038,757

 

 

$

984,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

$

14,687

 

 

$

15,352

 

 

$

12,764

 

Add: Allowance on accrued interest receivable

 

 

792

 

 

 

643

 

 

 

 

Adjusted Allowance

(d)

$

15,479

 

 

$

15,995

 

 

$

12,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted allowance to gross loans ratio

(d)/(c)

 

1.46

%

 

 

1.54

%

 

 

1.30

%

 

54


Table of Contents

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified interest rate risk as our primary source of market risk.

Interest Rate Risk

Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

Our board’s asset liability committee, or ALM, establishes broad policy limits with respect to interest rate risk. Our management’s asset liability committee, or ALCO, establishes specific operating guidelines within the parameters of the policies set by the ALM. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO monitors the level of interest rate risk sensitivity on a quarterly basis to ensure compliance with the ALM-approved risk limits. The policy requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis, and noninterest-bearing and interest-bearing deposit durations based on historical analysis.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Interest rate risk measurement is calculated and reported to the ALCO and ALM at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

Evaluation of Interest Rate Risk

We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run various hypothetical interest rate scenarios at least quarterly and compare these results against a scenario with no changes in interest rates. We use two approaches to model interest rate risk: Earnings at Risk, or EAR, and Economic Value of Equity, or EVE. Under EAR, net interest income is modeled utilizing various assumptions for assets and liabilities. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

Our simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

55


Table of Contents

 

Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of June 30, 2021 and December 31, 2020 are presented in the following table. The projections assume (i) immediate, parallel shifts downward of the yield curve of 100 basis points and (ii) immediate, parallel shifts upward of the yield curve of 100, 200, 300 and 400 basis points over 12 months. In the current interest rate environment, a downward shift of the yield curve of 200, 300 and 400 basis points does not provide us with meaningful results. In a downward parallel shift of the yield curve, interest rate at the short-end of the yield curve are not modeled to decline any further than 0%.

 

 

 

Net Interest Income Sensitivity

 

 

Economic Value of Equity Sensitivity

 

 

 

June 30, 2021

 

 

December 31, 2020

 

 

June 30, 2021

 

 

December 31, 2020

 

+400 basis points

 

 

15.65

%

 

 

30.27

%

 

 

(5.29

)%

 

 

10.14

%

+300 basis points

 

 

13.00

%

 

 

23.87

%

 

 

2.86

%

 

 

12.73

%

+200 basis points

 

 

9.57

%

 

 

16.85

%

 

 

8.11

%

 

 

13.55

%

+100 basis points

 

 

5.35

%

 

 

8.99

%

 

 

8.52

%

 

 

11.14

%

-100 basis points

 

 

(0.86

)%

 

 

%

 

 

(26.04

)%

 

 

(20.87

)%

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures  

The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered in this report.  Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting  

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

56


Table of Contents

 

PART II—OTHER INFORMATION

In the ordinary course of business, we are or may be involved in various legal or regulatory proceedings, claims, including claims related to, employment, wage-hour and labor law claims, lender liability claims, and consumer and privacy claims, some which may be styled as “class action” or representative cases.  We evaluate all claims and lawsuits with respect to their potential merits, our potential defenses and counterclaims, settlement or litigation potential and the expected effect on us.  The outcome of any claims or litigation, regardless of the merits, is inherently uncertain.  We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  The outcomes of our legal proceedings and other contingencies are, however, inherently unpredictable and subject to significant uncertainties. The Company and Bank presently do not have any adverse pending legal actions requiring disclosure.

Item 1A. Risk Factors

A discussion of the risk factors affecting us is set forth in Part I, Item 1A. Risk Factors in our 2020 Annual Report on Form 10-K. The discussion of risk factors provides a description of some of the important risk factors that could affect our actual results and could cause our results to vary materially from those expressed in public statements or documents. However, other factors besides those included in the discussion of risk factors or discussed elsewhere in other of our reports filed with or furnished to the SEC could affect our business or results. The readers should not consider any description of such factors to be a complete set of all potential risks that we may face.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On January 25, 2019, the Company announced that the Board of Directors approved a stock repurchase program that authorized the Company to repurchase up to 400,000 shares of its common stock in open market. During the first, second, and third quarter of 2019, the Company repurchased an aggregate of 395,000 shares at an average price of $9.10 per share. The first stock repurchase program was terminated as of August 23, 2019.

On August 28, 2019, the Company’s Board of Directors approved another stock repurchase program that authorized the Company to repurchase up to 475,000 shares of its common stock. The Company completed the second stock repurchase program in February 2020 at an average price of $9.75 per share.

On February 28, 2020, the Company announced that the Board of Directors approved another stock repurchase program that authorized the Company to repurchase up to 500,000 shares of its common stock. The Company completed the third stock repurchase program in May 2020 at an average price of $7.77 per share.

On September 9, 2020, the Company announced a fourth stock repurchase program that authorizes the Company to repurchase up to 500,000 shares of its common stock. During the first quarter of 2021, the Company repurchased an aggregate of 3,830 shares at an average price of $7.5 per share. The Company did not purchase any shares during the second quarter of 2021.

 

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

57


Table of Contents

 

Item 6. Exhibits

 

Exhibit

Number

 

Description

 

 

 

3.1

 

Articles of Incorporation of OP Bancorp included as Exhibit 3.1 to the Registration Statement on Form S-1 filed March 5, 2018 and incorporated herein by reference.

 

 

 

3.2

 

Amended and Restated Bylaws of OP Bancorp included as Exhibit 3.2 to the Registration Statement on Form S-1 filed March 5, 2018 and incorporated herein by reference.

 

 

 

3.3

 

First Amendment to the Amended and Restated Bylaws of OP Bancorp included as Exhibit 3.3 to the Annual Report on Form 10-K filed March 15, 2021 and incorporated herein by reference.

 

 

 

31.1

 

Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. +

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. +

 

 

 

101.INS

 

XBRL Instance Document – the instant document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

 

 

+ Filed herewith.

 

58


Table of Contents

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

OP Bancorp

 

 

 

 

Date:  August 6, 2021

 

By:

/s/ Min J. Kim

 

 

 

Min J. Kim

 

 

 

President and Chief Executive Officer

 

 

 

 

Date:  August 6, 2021

 

By:

/s/ Christine Oh

 

 

 

Christine Oh

 

 

 

Chief Financial Officer

 

59