FIRT CHOINPV
The purpose of this management's discussion and analysis of financial
condition and results of operations ("MD&A") is to focus on information about
our condensed consolidated financial condition at March 31, 2021 and December
31, 2020 , and our condensed consolidated results of operations for the quarters
ended March 31, 2021 , December 31, 2020 , and March 31, 2020 . Our condensed
consolidated financial statements and the accompanying notes appearing elsewhere
in this report, and our Annual Report on Form 10-K for the year ended December
31, 2020 , should be read in conjunction with this MD&A.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to the historical information, this Quarterly Report on Form 10-Q
includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 regarding management's beliefs, projections and
assumptions concerning future results and events. Forward-looking statements
include descriptions of management's plans or objectives for future operations,
products or services, and forecasts of the Company's revenues, earnings or other
measures of economic performance. These forward-looking statements involve risks
and uncertainties and are based on management's beliefs and assumptions and on
the information available to management at the time that this report was
prepared and can be identified by the fact that they do not relate strictly to
historical or current facts. They often include the words or phrases such as
"aim," "can," "may," "could," "predict," "should," "will," "would," "believe,"
"anticipate," "estimate," "expect," "hope," "intend," "plan," "potential,"
"project," "will likely result," "continue," "seek," "shall," "possible,"
"projection," "optimistic," and "outlook," and variations of these words and
similar expressions or the negative version of those words or phrases.
Forward-looking statements involve substantial risks and uncertainties, many of
which are difficult to predict and are generally beyond our control. There are
many factors that could cause actual results to differ materially from those
contemplated by these forward-looking statements. Risks and uncertainties that
could cause our financial performance to differ materially from our goals,
plans, expectations and projections expressed in forward-looking statements
include those set forth in our filings with the SEC , Item 1A of our Annual
Report on Form 10-K, and the following:
•The effects of the global COVID-19 pandemic and governmental and regulatory responses thereto.
•The effects of trade, monetary and fiscal policies and laws.
•Possible losses of businesses and population in the
•Loss of customer checking and money-market account deposits as customers pursue other higher-yield investments.
•Possible changes in consumer and business spending and saving habits and the related effect on our ability to increase assets and to attract deposits.
•Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans.
•Changes in the speed of loan prepayments, loan origination and sale volumes, loan loss provisions, charge-offs or actual loan losses.
•Compression of our net interest margin.
•Inability of our framework to manage risks associated with our business, including but not limited to operational risk, regulatory risk, cyber risk, liquidity risk, customer risk and credit risk, to mitigate all risk or loss to us.
•The effects of any damage to our reputation resulting from developments related to any of the items identified above.
For a more detailed discussion of some risks and uncertainties that could materially and adversely affect our financial condition and results of operations, see Part 1, Item 1A - Risk Factors in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 for discussion relating to risk factors impacting us. 35 -------------------------------------------------------------------------------- Forward-looking statements speak only as of the date they are made. The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made or to reflect the occurrence of unanticipated events and specifically disclaims any obligation to revise or update such forward-looking statements for any reason, except as may be required by applicable law. You should consider any forward-looking statements in light of this explanation, and the Company cautions you about relying on forward-looking statements.
Overview
First Choice Bancorp , headquartered inCerritos, California , is aCalifornia corporation that was incorporated onSeptember 1, 2017 and is the registered bank holding company forFirst Choice Bank . Incorporated inMarch 2005 and commencing commercial bank operations inAugust 2005 ,First Choice Bank is aCalifornia -chartered member bank.First Choice Bank has a wholly-owned subsidiary,PCB Real Estate Holdings, LLC , which was acquired as part of the acquisition ofPacific Commerce Bank .PCB Real Estate Holdings, LLC is used for holding other real estate owned and other assets acquired by foreclosure. References herein to "First Choice Bancorp ," "Bancorp" or the "holding company," refer toFirst Choice Bancorp on a stand-alone basis. The words "we," "us," "our," or the "Company" refer toFirst Choice Bancorp ,First Choice Bank andPCB Real Estate Holdings, LLC collectively and on a consolidated basis. References to the "Bank" refer toFirst Choice Bank andPCB Real Estate Holdings, LLC on a consolidated basis. Headquartered inCerritos, California , the Bank is a community-based financial institution that serves commercial and consumer clients in diverse communities. The Bank specializes in loans to small- to medium-sized businesses and private banking clients, commercial and industrial loans, and commercial real estate loans. The Bank is aPreferred Small Business Administration ("SBA") Lender and conducts business through eight full-service branches and two loan production offices located inLos Angeles ,Orange andSan Diego Counties. As aCalifornia -chartered member bank, the Bank is primarily regulated by theCalifornia Department of Financial Protection and Innovation (the "DFPI") and theBoard of Governors of theFederal Reserve System (the "Federal Reserve"). The Bank's deposits are insured up to the maximum legal limit by theFederal Deposit Insurance Corporation (the "FDIC") and, as a result, theFDIC also has examination authority over the Bank.
Recent Developments The COVID-19 pandemic has resulted in, and is likely to continue to result in, significant economic disruption affecting our business and the business of our clients. As of the date of this filing, significant uncertainty continues to exist concerning the magnitude of the impact and duration of the COVID-19 pandemic. For a more detailed discussion of some risks and uncertainties from or relating to the COVID-19 pandemic that could materially and adversely affect our financial condition and results of operations, see Part 1, Item 1A - Risk Factors in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 for discussion relating to risk factors impacting us. See also "CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS," herein. For accounting policies related to COVID-19 loan payment deferrals authorized under the CARES Act, please refer to NOTE 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Guidance On Non-TDR Loan Modifications Due To COVID-19 on Form 10-K for the year endedDecember 31, 2020 . Effective at the close of business onJanuary 29, 2021 , theRowland Heights branch was sold to a third party financial institutionwho acquired certain branch assets and assumed certain branch liabilities including deposits. No loans were sold as part of the transaction. The assets and liabilities of theRowland Heights branch that were sold in this transaction primarily consisted of$117 thousand of cash and cash equivalents and$22 million of deposits. The transaction resulted in a net cash payment to the third party financial institution of$21.6 million , and a gain on sale of$476 thousand as a component of other noninterest income in the condensed consolidated statement of income. 36 -------------------------------------------------------------------------------- OnApril 26, 2021 , the Company entered into a definitive merger agreement pursuant to which we will merge into Enterprise Financial Services Corp ("EFSC") in an all-stock transaction. Refer to Note 17. Subsequent Events included in Part I, Item 1 of this Quarterly Report on Form 10-Q, for more information about the definitive merger agreement.
Key Events Related to COVID-19 During First Quarter of 2021:
The ongoing COVID-19 pandemic has caused serious disruptions in theU.S. economy and financial markets, and entire industries within our loan portfolio, such as hospitality and restaurants, have been impacted due to quarantines and travel restrictions and other industries we serve are experiencing or likely to experience similar disruptions and economic hardships as the COVID-19 pandemic persists. OnApril 6, 2021 , the governor ofCalifornia announced that he aims to fully reopenCalifornia's economy byJune 15, 2021 , althoughCalifornia will encourage that all residents get vaccinated and will continue to require mask coverings, particularly in more crowded areas. TheU.S. economy appears to be recovering as the pandemic-related restrictions started easing in the first quarter of 2021. Although no assurances can be provided, we anticipate that the trend of cautiously lifting pandemic-related restrictions inCalifornia will continue in the second half of 2021, especially as COVID-19 vaccines become more widely available, which could positively impact commercial and consumer activity in the markets we serve and in the broaderU.S. economy.
COVID-19 Updates for the First Quarter of 2021:
Continued Support for Employees, Clients, and Communities.
•Originated more than 700 PPP loans totaling
•All branches re-opened with appropriate safety precautions in place. Implemented measures include: germ guards, social distancing markers, PPE (masks, gloves and hand sanitizer), daily enhanced cleaning with CDC recommended disinfectants, limited same time client entry and reduced lobby hours
•No COVID-19-related employee lay-offs, furloughs, or reduced hours
•$34,000 in donations to over 10 non-profit organizations within our footprint that serve communities disproportionately impacted by COVID-19 and the economic distress of this pandemic
Governmental Credit Assistance Programs
In response to the market volatility and instability resulting from the pandemic, the federal government passed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") inMarch 2020 which authorized certain government sponsored credit programs, including the Paycheck Protection Program ("PPP") and the Main Street Lending Program. The loan programs and the Company's participation in these programs are discussed below: Paycheck Protection Program. OnMarch 27, 2020 , the CARES Act was signed into law authorizing the SBA to guarantee an aggregate of up to$349 billion in forgivable PPP loans to assist small businesses nationwide adversely impacted by the COVID-19 pandemic. OnApril 24, 2020 , the PPP and Health Care Enhancement Act was signed into law and provided an additional$310 billion in funding and authority for the PPP. OnJune 5, 2020 , the PPP Flexibility Act of 2020 (the "Flexibility Act") was signed into law which changed key provisions of the PPP, including provisions relating to contractual maturity, the deferral of loan payments, and the forgiveness of such loans. Under the Flexibility Act, the maturity date for PPP loans funded beforeJune 5, 2020 remained at two years from funding while the maturity date for PPP loans funded afterJune 5, 2020 was five years from funding. The Flexibility Act also increased the period during which PPP loan proceeds may be used for purposes that qualify the loan for forgiveness (the "covered period") to 24 weeks. Under the Flexibility Act, borrowers are not required to make any payments of principal or interest before the date on which the SBA remits the loan forgiveness amount to the Bank (or notifies the Bank that no loan forgiveness is allowed). Interest continues to accrue during the PPP payment deferral period. Although PPP borrowers may submit an application for forgiveness at any time prior to the maturity date, if a forgiveness application is not submitted within 10 months after the end of the covered period, such borrowers will be required to begin paying principal and interest after that period. In the first quarter of 2021, we participated in the First Draw and Second Draw PPP Loan Programs signed into law onDecember 27, 2020 as part of the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act ("Economic Act"), which was included in the Consolidated Appropriations Act, 2021 (also known as "PPP Round 3"). Unless otherwise 37 -------------------------------------------------------------------------------- extended, PPP Round 3 is scheduled to expire onMay 31, 2021 . The maximum loan amount for First Draw borrowers is$10 million and is$2 million for the Second Draw borrowers. Like the 2020 PPP, loans originated in PPP Round 3 are fully guaranteed by the SBA and are subject to potential forgiveness by the SBA. During the first quarter of 2021, the Company originated more than 700 PPP Round 3 loans with outstanding principal of$194.3 million before net deferred fees of$6.5 million . At origination, we are paid a processing fee by the SBA ranging from 1% to 5% based on the size of the PPP loan. AtMarch 31, 2021 , PPP loans, net of deferred fees of$10.5 million , totaled$442.7 million . The deferred fees are accreted to interest income based on a contractual maturity of two years (loans originated beforeJune 5, 2020 ) or five years (all other PPP loans). The SBA began approving forgiveness applications in the fourth quarter of 2020. During the first quarter of 2021, approximately$67.9 million of PPP loans originated in 2020 were forgiven by the SBA or repaid by the borrowers. Net PPP deferred fees of$1.4 million were accelerated to income at the time of SBA forgiveness or borrower repayment. PPP loans forgiven-to-date totaled$140.9 million atMarch 31, 2021 . PPP Liquidity Facility. OnApril 14, 2020 , we were approved by theFederal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF"). The PPPLF enables us to borrow funds through theFederal Reserve Discount Window to fund PPP loans. AtMarch 31, 2021 , we had$210.0 million in borrowings under the PPPLF with a fixed-rate of 0.35% which are collateralized by PPP loans. Main Street Lending Program. In 2020, we participated in the Main Street Lending Program to support lending to small- and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Under this program, we originated loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sold a 95% participation interest in these loans toMain Street Facilities, LLC , a special purpose vehicle ("SPV") organized by theFederal Reserve to purchase the participation interest from eligible lenders, including the Bank. During the fourth quarter of 2020, the Company originated 28 loans under the Main Street Lending Program totaling$102.4 million in principal and sold participation interests totaling$97.3 million to the SPV, resulting in a gain on sale of$660 thousand . During the year endedDecember 31, 2020 , we originated 32 loans under the Main Street Lending Program totaling$172.2 million in principal and sold participation interests totaling$163.6 million to the SPV, resulting in a gain on sale of$1.1 million . The program expired onJanuary 8, 2021 and no Main Street loan origination or sales occurred in the first quarter of 2021. Payment Deferral Program. AtMarch 31, 2021 , we had five loans on payment deferral for COVID-19 related reasons, four of which were from one relationship totaling$5.7 million . AtDecember 31, 2020 , the Company had three loans totaling$3.3 million on payment deferral for COVID-19 related reasons. Loans that were granted deferrals before the fourth quarter of 2020 have resumed making regular, contractually agreed-upon payments or were paid off. AtMarch 31, 2021 , no loan on payment deferral was reported as non-accrual and none are reported as TDRs under Section 4013 of the CARES Act. SBA Debt Relief Program. As a part of the CARES Act, for borrowers with current SBA 7(a) loans in good standing, and subject to availability of funds, the SBA has agreed to pay up to six months of principal and interest for borrowers with loans that were approved on or beforeSeptember 27, 2020 . The program was extended and for all new SBA 7(a) loans approved during the period beginning onFebruary 1, 2021 and ending onSeptember 30, 2021 , the SBA had agreed to pay for borrowers up to an additional three months of principal and interest payments, capped at$9,000 per month and subject to availability of funds. For borrowers with SBA 7(a) loans approved beforeMarch 27, 2020 and considered to be underserved or hard-hit by the pandemic within specificStandard Industrial Classification (SIC) codes, the SBA had agreed to pay for each borrower up to an additional three months of principal and interest payments untilSeptember 2021 .
Impacts from COVID-19:
The ongoing COVID-19 global pandemic has caused significant disruption in the international andUnited States economies and financial markets. In response to the COVID-19 pandemic, the state government ofCalifornia has taken preventative or protective actions which have resulted in significant adverse effects for many different types of businesses, including, among others, those in the travel, hospitality and food and beverage industries, and have resulted in a significant number of layoffs and furloughs of employees nationwide and in the regions in which we operate. Because we have not recently experienced a comparable crisis which resulted in, among other things, the complete cessation of operations for 38 --------------------------------------------------------------------------------
entire industries in our portfolio, our ability to be predictive is uncertain. As a consequence, we cannot estimate the impact on our business, financial condition or near- or longer-term financial or operational results with reasonable certainty.
Net interest income and net interest margin. TheFederal Reserve's 150 basis point reduction in interest rates inMarch 2020 negatively impacted our net interest income and net interest margin for 2020, and put further pressure on our net interest margin during 2021. We have proactively worked to lower interest expense by lowering deposit rates, increasing our noninterest-bearing deposits as a percentage of total deposits and taking advantage of lower interest rate borrowing facilities. Participation in the PPP had a significant impact on our asset mix and net interest income for the three months endedMarch 31, 2021 and will continue to impact both asset mix and net interest income for 2021. These loans contributed$3.7 million of interest income, of which$1.4 million related to accelerated net deferred fee income from loan forgiveness for the three months endedMarch 31, 2021 . The weighted average loan yield for PPP loans was 3.76%, including the accelerated accretion of deferred fee income from PPP forgiveness which lowered the total loan yield by 30 basis points for the three months endedMarch 31, 2021 . We anticipate the accelerated deferred fee income as PPP loans payoff or are forgiven will partially offset the decrease in net interest margin from lower PPP interest rates. Provision for loan losses. No provision for loan losses was recognized for the first quarter of 2021 primarily as a result of net recoveries, decrease in specific reserves, loan risk rating upgrades, lower historical loss rates, partially offset by an increase in reserves for organic loan growth in the first quarter of 2021. No provision for loan losses was recognized on PPP loans as the SBA guarantees 100% of loan principal under the program. Loans to the hospitality industry. AtMarch 31, 2021 , our total loan commitments to the hospitality industry was$263.7 million , of which$238.1 million was outstanding, representing 11.7% of total loans including loans held for sale, and loans held for investment net of discount and deferred fees. The total outstanding balance consisted of$117.1 million CRE,$10.0 million C&I,$30.9 million Construction and Land and$80.1 million SBA, of which$51.3 million were SBA PPP loans which are fully guaranteed by the SBA. AtMarch 31, 2021 , non-accrual loans totaled$77 thousand and no loans were on deferment. Loans to the restaurant industry. AtMarch 31, 2021 , our total loan commitments to the restaurant industry was$125.5 million , of which$119.7 million was outstanding, representing 5.9% of total loans including loans held for sale, and loans held for investment net of discount and deferred fees. The total outstanding balance consisted of$7.1 million CRE,$14.7 million C&I,$97.9 million SBA, of which$80.4 million were SBA PPP loans which are fully guaranteed by the SBA. AtMarch 31, 2021 , there were no non-accrual loans and no loans were on deferment. Capital and liquidity. The Bank opted into the CBLR framework in the first quarter of 2020 and, because the Bank's CBLR was 9.75% as ofMarch 31, 2021 , we exceeded the reduced regulatory minimum required of 8.5%, and were considered "well-capitalized" atMarch 31, 2021 . The Bank's primary and secondary liquidity sources were over$900 million atMarch 31, 2021 .
Highlights for the First Quarter of 2021:
•Net income of$9.8 million , compared to$10.8 million for Q4'20 and$4.5 million for Q1'20 •Diluted earnings per common share of$0.82 , compared to$0.92 for Q4'20 and$0.39 for Q1'20 • Pre-tax pre-provision income was$14.0 million , compared to$15.4 million for Q4'20 and$9.1 million for Q1'20 •Net interest margin of 4.20%, compared to 4.31% for Q4'20 and 4.78% for Q1'20 •Cost of funds of 0.18%, improved 9 bps from Q4'20 and 54 bps from Q1'20 •Return on average assets of 1.64%, compared to 1.88% for Q4'20 and 1.06% for Q1'20 •Return on average equity of 13.86%, compared to 15.44% for Q4'20 and 6.90% for Q1'20 •Efficiency ratio of 46.4%, compared to 44.4% for Q4'20 and 56.0% for Q1'20 39 -------------------------------------------------------------------------------- •No provision for loan loss expense for Q1'21, compared to$100 thousand for Q4'20 and$2.7 million for Q1'20 •Sale of SBA and Main Street loans decreased from Q4'20 resulting in a$2.6 million decrease in gain on sale of loans •Total loans held for investment excluding Paycheck Protection Program ("PPP") loans increased$25.3 million , or 6.48% annualized •Noninterest-bearing demand deposits increased$177.8 million , up 21.7% over Q4'20, represented 52.7% of total deposits atMarch 31, 2021 , compared to 50.2% atDecember 31, 2020 and 46.5% atMarch 31, 2020 •Tangible book value per share of$17.69 , up$0.40 per share from Q4'20 and up$1.88 per share from Q1'20 •Community bank leverage ratio was 9.75% atMarch 31, 2021 •Quarterly cash dividend of$0.25 per share
Financial Highlights
At or for the Three Months Ended
December 31,
March 31, 2021 2020 March 31, 2020
(dollars in thousands, except per share amounts)
Results of Operations
Total interest and dividend income $ 24,792 $ 24,873 $ 21,744
Total interest expense 961 1,340 2,571
Net interest income 23,831 23,533 19,173
Total noninterest income 2,254 4,194 1,415
Total net interest income and noninterest income 26,085 27,727 20,588
Total noninterest expense 12,097 12,321 11,519
Pre-tax pre-provision income (1) 13,988 15,406 9,069
Provision for loan losses - 100 2,700
Income before taxes 13,988 15,306 6,369
Income taxes 4,230 4,512 1,823
NET INCOME $ 9,758 $ 10,794 $ 4,546
Performance Ratios
Net income per share-diluted $ 0.82 $ 0.92 $ 0.39
Return on average assets 1.64 % 1.88 % 1.06 %
Return on average equity 13.86 % 15.44 % 6.90 %
Return on average tangible common equity (1) 19.09 % 21.52 % 9.84 %
Net interest margin 4.20 % 4.31 % 4.78 %
Average loan yield 4.97 % 5.15 % 5.95 %
Cost of deposits 0.13 % 0.22 % 0.63 %
Cost of funds 0.18 % 0.27 % 0.72 %
Efficiency ratio (1) 46.4 % 44.4 % 56.0 %
(1) Non-GAAP measure. See - Non-GAAP Financial Measures in this MD&A.
Financial Performance
40
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March 31, 2021 December 31, 2020 (dollars in thousands, except per share
amounts)
Financial Conditions
Total assets $ 2,500,744 $ 2,283,115
Loans held for investment 2,028,599 1,880,777
Noninterest-bearing deposits 998,515 820,711
Total deposits 1,895,550 1,634,158
Shareholders' equity 287,412 280,741
Key Ratios
Noninterest-bearing deposits to total deposits 52.7 % 50.2 %
Equity to assets ratio 11.49 % 12.30 %
Tangible common equity to tangible asset ratio (1) 8.64 % 9.18 %
Book value per share $ 24.31 $ 23.98
Tangible book value per share (1) $ 17.69 $ 17.29
Credit Quality
Nonperforming loans as a percentage of total assets 0.17 % 0.28 %
Allowance for loan losses as a percentage of total loans held for investment
0.95 % 1.02 %
Allowance for loan losses as a percentage of total loans held for investment excluding PPP loans
1.22 % 1.23 %
(1) Non-GAAP measure. See - Non-GAAP Financial Measures in this MD&A.
Non-GAAP Financial Measures
The following tables present a reconciliation of non-GAAP financial measures
to GAAP financial measures for: (1) efficiency ratio, (2) pre-tax pre-provision
income; (3) average tangible common equity, (4) return on average tangible
common equity, (5) tangible common equity, (6) tangible assets, (7) tangible
common equity to tangible asset ratio, and (8) tangible book value per share. We
believe the presentation of certain non-GAAP financial measures provides useful
information to assess our consolidated financial condition and consolidated
results of operations and to assist investors in evaluating our financial
results relative to our peers. These non-GAAP financial measures complement our
GAAP reporting and are presented below to provide investors and others with
information that we use to manage our business each period. Because not all
companies use identical calculations, the presentation of these non-GAAP
financial measures may not be comparable to other similarly titled measures used
by other companies. These non-GAAP measures should be taken together with the
corresponding GAAP measures and should not be considered a substitute for the
GAAP measures.
Three Months Ended
December 31,
March 31, 2021 2020 March 31, 2020
(dollars in thousands)
Efficiency Ratio
Noninterest expense (numerator) $ 12,097 $ 12,321 $ 11,519
Net interest income $ 23,831 $ 23,533 $ 19,173
Plus: Noninterest income 2,254 4,194 1,415
Total net interest income and noninterest income
(denominator) $ 26,085 $ 27,727 $ 20,588
Efficiency ratio (1) 46.4 % 44.4 % 56.0 %
Pre-tax pre-provision income
Net interest income $ 23,831 $ 23,533 $ 19,173
41--------------------------------------------------------------------------------
Three Months Ended
December 31,
March 31, 2021 2020 March 31, 2020
(dollars in thousands)
Noninterest income 2,254 4,194 1,415
Total net interest income and noninterest income 26,085 27,727 20,588
Less: Noninterest expense 12,097 12,321 11,519
Pre-tax pre-provision income (1) $ 13,988 Return on Average Assets, Equity, and Tangible Equity Net income$ 9,758 $ 10,794 $ 4,546 Average assets$ 2,418,946 $ 2,288,205 $ 1,727,401 Average shareholders' equity 285,620 278,049 264,869 Less: Average intangible assets 78,309 78,501 79,083 Average tangible common equity (1)$ 207,311 $ 199,548 $ 185,786 Return on average assets 1.64 % 1.88 % 1.06 % Return on average equity 13.86 % 15.44 % 6.90 % Return on average tangible common equity (1) 19.09 % 21.52 % 9.84 % (1) Non-GAAP measure. December 31, March 31, 2021 2020 (dollars in thousands, except share and Tangible Common Equity Ratio/Tangible Book Value Per Share per share data) Shareholders' equity$ 287,412 $ 280,741 Less: Intangible assets 78,193 78,381 Tangible common equity (1)$ 209,219 $ 202,360 Total assets$ 2,500,744 $ 2,283,115 Less: Intangible assets 78,193 78,381 Tangible assets (1)$ 2,422,551 $ 2,204,734 Equity to asset ratio 11.49 % 12.30 % Tangible common equity to tangible asset ratio (1) 8.64 % 9.18 % Book value per share $ 24.31$ 23.98 Tangible book value per share (1) $ 17.69$ 17.29 Shares outstanding 11,824,487 11,705,684 (1) Non-GAAP measure. 42
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Results of Operations
In addition to net income, the primary factors we use to evaluate and manage our results of operations include net interest income, provision for loan losses, noninterest income and noninterest expense.
Net Interest Income
Net interest income is affected by changes in both interest rates and the
volume of average interest-earning assets and interest-bearing liabilities. The
following tables summarize the distribution of average assets, liabilities and
shareholders' equity, as well as interest income and yields earned on average
interest-earning assets and interest expense and rates paid on average
interest-bearing liabilities for the periods indicated:
Three Months Ended
March 31, 2021 December 31, 2020 March 31, 2020
Interest Interest Interest
Average Income / Yield / Average Income / Yield / Average Income /
Balance Expense Cost Balance Expense Cost Balance Expense Yield / Cost
Interest-earning assets: (dollars in thousands)
Loans (1) (2) $ 1,981,226 $ 24,267 4.97 % $ 1,885,451 $ 24,411 5.15 % $ 1,404,652 $ 20,780 5.95 %
Investment securities 44,354 152 1.39 % 46,292 154 1.32 % 36,200 218 2.42 %
Deposits at other financial
institutions 257,654 160 0.25 % 223,939 129 0.23 % 157,743 501 1.28 %
Restricted stock investments and
other bank stocks 16,034 213 5.39 % 15,056 179 4.73 % 14,524 245 6.78 %
Total interest-earning assets 2,299,268 24,792 4.37 % 2,170,738 24,873 4.56 % 1,613,119 21,744 5.42 %
Noninterest-earning assets 119,678 117,467 114,282
Total assets $ 2,418,946 $ 2,288,205 $ 1,727,401
Interest-bearing liabilities:
Interest checking $ 373,248 $ 138 0.15 % $ 276,539 $ 119 0.17 % $ 156,407 $ 262 0.67 %
Money market accounts 305,931 189 0.25 % 317,173 214 0.27 % 318,465 798 1.01 %
Savings accounts 32,080 11 0.14 % 32,655 11 0.13 % 28,264 49 0.70 %
Time deposits 66,457 119 0.73 % 78,775 134 0.68 % 117,567 490 1.68 %
Brokered time deposits 93,410 131 0.57 % 97,749 421 1.71 % 92,844 505 2.19 %
Total interest-bearing deposits 871,126 588 0.27 % 802,891 899 0.45 % 713,547 2,104 1.19 %
Borrowings 129,222 193 0.61 % 147,663 205 0.55 % 92,143 376 1.64 %
Paycheck Protection Program
Liquidity Facility 197,243 171 0.35 % 244,638 216 0.35 % - - - %
Senior secured notes 1,022 9 3.57 % 2,252 20 3.50 % 8,022 91 4.56 %
Total interest-bearing liabilities 1,198,613 961 0.33 % 1,197,444 1,340 0.45 % 813,712 2,571 1.27 %
Noninterest-bearing liabilities:
Demand deposits 917,194 794,542 631,809
Other liabilities 17,519 18,170 17,011
Shareholders' equity 285,620 278,049 264,869
Total liabilities and shareholders' equity$ 2,418,946 $ 2,288,205 $ 1,727,401 Net interest spread$ 23,831 4.04 %$ 23,533 4.11 %$ 19,173 4.15 % Net interest margin 4.20 % 4.31 % 4.78 % Total deposits$ 1,788,320 $ 588 0.13 %$ 1,597,433 $ 899 0.22 %$ 1,345,356 $ 2,104 0.63 % Total funding sources$ 2,115,807 $ 961 0.18 %$ 1,991,986 $ 1,340 0.27 %$ 1,445,521 $ 2,571 0.72 % (1) Average loans include net discounts, net deferred loan fees and costs and non-performing loans. (2) Interest income on loans includes$3.0 million ,$3.4 million and$292 thousand related to the accretion of net deferred loan fees for the three months endedMarch 31, 2021 ,December 31, 2020 andMarch 31, 2020 . In addition, interest income also includes$496 thousand ,$287 thousand , and$624 thousand of discount accretion on loans acquired in a business combination, including the interest recognized on the payoff of PCI loans, for the three months endedMarch 31, 2021 ,December 31, 2020 andMarch 31, 2020 . 43 --------------------------------------------------------------------------------
Rate/Volume Analysis
The volume and interest rate variance tables below set forth the dollar
difference in interest earned for each major category of interest-earning assets
and interest-bearing liabilities for the periods indicated, and the amount of
such change attributable to changes in average balances (volume) or in average
interest rates (rate). Volume variances are equal to the increase or decrease in
the average balance multiplied by the prior period rate, and rate variances are
equal to the increase or decrease in the average rate multiplied by the prior
period average balance. Variances attributable to both rate and volume changes
are allocated proportionately based on the amounts of the individual rate and
volume changes.
Three Months Ended
March 31, 2021 vs. December 31, 2020 March 31, 2021 vs. March 31, 2020
Change Attributable to Change Attributable to
Volume Rate Total Change Volume Rate Total Change
Interest income: (dollars in thousands)
Interest and fees on loans $ 906 $ (1,050) $
(144)
(7) 5 (2) 24 (90) (66)
Interest on deposits at other
financial institutions 20 11 31 199 (540) (341)
Dividends on restricted stock
investments and other bank
stocks 11 23 34 23 (55) (32)
Change in interest income 930 (1,011) (81) 7,516 (4,468) 3,048
Interest expense:
Savings, interest checking and
money market accounts 25 (31) (6) 133 (904) (771)
Time deposits (41) (264) (305) (159) (586) (745)
Borrowings (28) 16 (12) 118 (301) (183)
Paycheck Protection Program
Liquidity Facility (45) - (45) 171 - 171
Senior secured notes (12) 1 (11) (68) (14) (82)
Change in interest expense (101) (278) (379) 195 (1,805) (1,610)
Change in net interest income
298
First Quarter of 2021 Compared to Fourth Quarter of 2020
Net interest income for the first quarter of 2021 totaled$23.8 million , an increase of$298 thousand from the fourth quarter of 2020 due to lower interest expense of$379 thousand , partially offset with lower interest income of$81 thousand . The increase in net interest income was due primarily to higher discount accretion from loans acquired in a business combination, and organic loan growth, and lower cost of brokered time deposits, partially offset by there being two less days in the first quarter compared to the fourth quarter of 2020 and lower accelerated net deferred fees from PPP forgiveness. Average loans increased by$95.8 million from net organic loan growth and PPP loan originations in the first quarter of 2021. The Company commenced its participation in the latest round of PPP inJanuary 2021 and did not originate any PPP loans in the fourth quarter of 2020 as the prior rounds of PPP had expired. The decrease in interest expense for the first quarter of 2021 was due primarily to lower interest expense on brokered time deposits and lower borrowing interest expense. Interest expense on deposits decreased$311 thousand , coupled with a decrease of$68 thousand on total borrowings. Interest expense on the PPP Liquidity Facility ("PPPLF") was$171 thousand for the first quarter of 2021, compared to$216 thousand in the fourth quarter of 2020 due to lower average borrowings. Net interest margin for the first quarter of 2021 decreased 11 basis points to 4.20% from 4.31% for the fourth quarter of 2020. The decrease in the net interest margin was due primarily to an 18 basis point decrease in loan yields (including fees and discounts), partially offset by a 9 basis point decrease in total funding costs. The decrease in loan yields was due primarily to the lower accelerated deferred fee income from PPP forgiveness and lower yielding PPP Round 3 loans, offset by higher accelerated discount accretion in the first quarter of 2021. The yield on loans decreased to 4.97% for the first quarter of 2021, compared to 5.15% for the fourth quarter of 2020. The weighted average loan yield for PPP loans was 3.76% including the accelerated accretion of deferred fee income from PPP loan forgiveness, or 2.32% without the accelerated accretion income. The yield on loans, excluding PPP loans, was stable at 5.27% and 5.28% for the first quarter of 2021 and the fourth quarter of 2020, respectively. The discount accretion from loans acquired in a business combination of$496 44 --------------------------------------------------------------------------------
thousand contributed 9 basis points to the net interest margin in the first
quarter of 2021 compared to
The cost of funds decreased to 0.18% for the first quarter of 2021, compared to 0.27% for the fourth quarter of 2020, due primarily to higher average noninterest-bearing demand deposits which increased$122.7 million to$917.2 million and represented 51.3% of total average deposits for the first quarter of 2021, compared to$794.5 million , or 49.7% of total average deposits, for the fourth quarter of 2020, coupled with the lower brokered time deposit costs. The average cost of brokered time deposits decreased 114 basis points to 0.57% for the first quarter of 2021, compared to 1.71% for the fourth quarter of 2020. The increase in average noninterest-bearing demand deposits was attributable to core customer growth and increased deposits from the PPP Round 3 loans originated in the first quarter of 2021. The total cost of deposits decreased 9 basis points to 0.13% for the first quarter of 2021, compared to 0.22% for the fourth quarter of 2020. Average borrowings and senior secured notes decreased$18.4 million and$1.2 million to$129.2 million and$1.0 million , respectively for the first quarter of 2021. Average PPPLF decreased$47.4 million to$197.2 million during the first quarter of 2021. The average cost of total borrowings and senior secured notes increased 3 basis points for the first quarter of 2021.
First Quarter of 2021 Compared to First Quarter of 2020
Net interest income increased$4.7 million to$23.8 million for the first quarter of 2021 primarily due to higher interest income of$3.0 million , coupled with lower interest expense of$1.6 million . The increase in net interest income was due to a number of factors, including but not limited to the following: (i) higher average loans and other interest-earning assets offset by lower market interest rates, (ii) higher accelerated accretion of net deferred fee income from PPP loan forgiveness, (iii) higher noninterest-bearing demand deposits in relationship to total deposits, and (iv) lower costs on interest-bearing liabilities. Average loans increased by$576.6 million , of which$394.6 million was from PPP loans, net of earned fees, contributing an increase in interest income of$7.3 million , partially offset by a decrease in discount accretion on loans acquired in a business combination, and lower loan yields from the low market interest rate environment. Average PPP loans outstanding were$394.6 million and contributed$3.7 million to interest income for the first quarter of 2021. The decrease in interest expense was due primarily to lower market interest rates, lower average time deposits and lower average senior secured notes, partially offset by an increase in average PPPLF. Interest expense on total interest-bearing deposits decreased$1.5 million , coupled with a decrease of$265 thousand on borrowings and senior secured notes, offset by an increase of$171 thousand on PPPLF for the first quarter of 2021 as compared to the same quarter of 2020. Our net interest margin decreased 58 basis points to 4.20% for the first quarter of 2021 compared to 4.78% for the same quarter of 2020. The decrease in the net interest margin was due primarily to a 105 basis point decrease in interest-earnings asset yields, of which loan yields (including fees and discounts) decreased 98 basis points, and a change in the interest-earning asset mix, partially offset by a 54 basis points decrease in total funding costs. The net interest margin compression was driven by lower market interest rates resulting from the reduction in the target Federal Funds rate and lower-yielding PPP loans. The average yield on interest-earning assets decreased to 4.37% for the first quarter of 2021 compared to 5.42% for the same quarter of 2020 resulting from lower market interest rates and lower yielding PPP loans. Our loan yield decreased to 4.97% for the first quarter of 2021 compared to 5.95% for same quarter of 2020, driven by lower market interest rates, lower-yielding PPP loans, and lower discount accretion from loans acquired in a business combination. The discount accretion related to loans acquired in a business combination, including the interest income recognized on the payoff of PCI loans, of$496 thousand contributed 9 basis points to the net interest margin for the first quarter of 2021 compared to$624 thousand and 16 basis points for the same quarter of 2020. The weighted average loan yield for PPP loans was 3.76% including the$1.4 million accelerated accretion of deferred fee income from PPP loan forgiveness, or 2.32% without such accelerated accretion income for the first quarter of 2021. The yield on loans, excluding PPP loans, was 5.27% for the first quarter of 2021 compared to 5.95% for the same quarter of 2020. Our average cost of funds decreased 54 basis points to 0.18% for the first quarter of 2021 compared to 0.72% for the same quarter of 2020 due to lower market interest rates and higher average noninterest-bearing demand deposits as a percentage of total deposits. Average noninterest-bearing deposits increased$285.4 million to$917.2 million and represented 51.3% of total average deposits for the first quarter of 2021, compared to$631.8 million , or 47.0% of total average deposits, for the first quarter of 2020. Average interest-bearing liabilities were$1.20 billion during the first quarter of 2021 compared to$813.7 million for the same quarter of 2020. Our cost of interest-bearing liabilities decreased 94 basis points to 0.33% compared to 1.27% for the same quarter of 2020. Average borrowings increased$37.1 million to$129.2 45 -------------------------------------------------------------------------------- million, coupled with an increase of$197.2 million in average PPPLF. The average cost of borrowings decreased 103 basis points to 0.61%, partially offset by 35 basis points increase from the PPPLF. Average senior secured notes balance decreased$7.0 million to$1.0 million for the first quarter of 2021 compared to$8.0 million for the same quarter of 2020 and the average cost of such borrowings decreased 99 basis points to 3.57% for the first quarter of 2021.
Provision for Loan Losses
No provision for loan losses was recognized for the first quarter of 2021, compared to$100 thousand for the fourth quarter of 2020 and$2.7 million for the first quarter of 2020. The decrease in the first quarter provision for loan losses was driven primarily by$104 thousand in net recoveries, a decrease in specific reserves of$368 thousand from a risk rating upgrade of a nonperforming loan relationship, and lower historical loss rates in the first quarter of 2021, partially offset by an increase in reserves required for organic loan growth. While the economy gradually reopened in the first quarter of 2021 with the COVID-19 vaccine rollout, the timing of an economic recovery continues to remain uncertain. Accordingly, the assumptions underlying the COVID-19 related qualitative factors we used in determining the adequacy of the provision for loan losses continued to include (a) uncertain and volatile macroeconomic conditions caused by the pandemic; (b) a stabilized unemployment rate; and (c) the additional government stimulus package signed into law during the first quarter of 2021. No provision for loan losses was recognized on PPP loans in the current or prior quarters as the SBA guarantees 100% of loan principal under the program. The$2.7 million decrease in the first quarter of 2021 as compared to the first quarter of 2020 resulted primarily from a$1.9 million provision for loan losses in the first quarter of 2020 driven by an increase in qualitative factors relating to COVID-19 and macro-economic conditions when theWorld Health Organization declared a pandemic crisis andCalifornia Governor Newsom issued a stay-at-home order. Nonperforming assets were lower in the first quarter of 2021 and net recoveries were higher as compared to the same quarter of 2020. We recorded specific reserves of$76 thousand in the first quarter of 2021 as compared to$1.1 million in the same quarter of 2020.
Noninterest Income
The following table shows the components of noninterest income for the periods
indicated:
Three Months Ended
December 31,
March 31, 2021 2020 March 31, 2020
(dollars in thousands)
Gain on sale of loans $ 706 $ 3,286 $ 377
Service charges and fees on deposit accounts 441 468 555
Net servicing fees 400 201 224
Other income 707 239 259
Total noninterest income $ 2,254 $ 4,194 $ 1,415 First Quarter of 2021 Compared to Fourth Quarter of 2020
Noninterest income for the first quarter of 2021 was$2.3 million , a decrease of$1.9 million from$4.2 million for the fourth quarter of 2020 due primarily to lower gains on loan sales of$2.6 million , partially offset by higher net servicing fees of$199 thousand and higher other income of$468 thousand . SBA loans sold during the first quarter of 2021 totaled$7.4 million resulting in a gain on sale of$706 thousand , compared to$36.7 million resulting in a gain on sale of$2.6 million in the fourth quarter of 2020. Gain on loan sales for the fourth quarter of 2020 also included the sale of 95% participation interests in the Main Street loans resulting in gains of$660 thousand . There were no sales of Main Street loans in the first quarter of 2021 as the program expired onJanuary 8, 2021 . The$199 thousand increase in net servicing fees was due primarily to higher volume of loans serviced, and lower servicing asset amortization from early loan pay-offs for the first quarter of 2021 compared to the fourth quarter of 2020. Other income included$476 thousand gain from sale of theRowland Heights branch during the first quarter of 2021. There was no similar income in the fourth quarter of 2020. 46 --------------------------------------------------------------------------------
First Quarter of 2021 Compared to First Quarter of 2020
Noninterest income increased$839 thousand to$2.3 million for the first quarter of 2021 compared to$1.4 million for the same quarter of 2020 due primarily to higher gain on sale of loans, coupled with higher other income of$448 thousand . SBA loans sold during the first quarter of 2021 totaled$7.4 million resulting in a gain on sale of$706 thousand , compared to$3.4 million resulting in a gain on sale of$377 thousand in the same quarter of 2020. Other income was$707 thousand for the first quarter of 2021 compared to$259 thousand for the same quarter of 2020. The increase primarily related to the$476 thousand gain from sale of theRowland Heights branch during the first quarter of 2021. There was no similar income in the first quarter of 2020.
Noninterest Expense
The following table shows the components of noninterest expense for the periods
indicated:
Three Months Ended
December 31,
March 31, 2021 2020 March 31, 2020
(dollars in thousands)
Salaries and employee benefits $ 7,578 $ 7,884 $ 7,230
Occupancy and equipment 1,083 1,168 1,063
Data processing 1,022 1,017 807
Professional fees 437 462 471
Office, postage and telecommunications 290 300 258
Deposit insurance and regulatory assessments 295 318 61
Loan related 136 84 275
Customer service related 107 60 372
Amortization of core deposit intangible 188 192 193
Other expenses 961 836 789
Total noninterest expense $ 12,097 $ 12,321 $ 11,519
Efficiency ratio (1) 46.4 % 44.4 % 56.0 %
(1) Non-GAAP measure. See - Non-GAAP Financial Measures in this MD&A.
First Quarter of 2021 Compared to Fourth Quarter of 2020
Noninterest expense decreased$224 thousand to$12.1 million for the first quarter of 2021 from$12.3 million for the fourth quarter of 2020. This decrease was due primarily to lower salaries and employee benefit expenses, and lower occupancy and equipment, partially offset by higher other expenses. The$306 thousand decrease in salaries and employee benefits was due primarily to lower commission and incentive accruals and higher deferred origination costs, partially offset by higher payroll taxes and employee benefits resulting from a seasonally higher first quarter. The$85 thousand decrease in occupancy and equipment was due primarily to the reduction of rent expense from the branch sale and other office space consolidations during the first quarter of 2021. The increase in other expenses related primarily to a$200 thousand increase in the provision for unfunded loan commitments resulting from a volume increase in the first quarter of 2021. There was no provision for unfunded loan commitments recognized in the fourth quarter of 2020.
The efficiency ratio remained favorable and increased to 46.4% in the first quarter of 2021, compared to 44.4% in the fourth quarter of 2020. The higher efficiency ratio in the first quarter of 2021 was driven primarily by lower revenue.
First Quarter of 2021 Compared to First Quarter of 2020
Noninterest expense for the first quarter of 2021 increased$578 thousand to$12.1 million from$11.5 million for the same quarter of 2020. The increase was due to higher salaries and employee benefits expense, data processing expense,FDIC assessment fees and other expenses, partially offset by lower customer service and loan related expenses. 47 -------------------------------------------------------------------------------- The$348 thousand increase in salaries and employee benefits was due mostly to annual merit increases, higher bonus and incentives resulting from an increase in organic production and PPP originations and higher payroll taxes, partially offset by increased deferred loan origination costs during the first quarter of 2021. The$215 thousand increase in data processing expenses was due to increases in transaction volumes from loans and deposit growth and enhancing automation such as online account opening solutions, coupled with higher software amortization of new and upgraded technology. The$234 thousand increase inFDIC assessment fees was due primarily to the organic growth in the total assets during the first quarter of 2021. The$172 thousand increase in other expenses related primarily to an increase in the provision for unfunded loan commitments resulting from a volume increase in the first quarter of 2021. There was no provision for unfunded loan commitments recognized in the first quarter of 2020.
The
The efficiency ratio remained strong at 46.4% in the first quarter of 2021, compared to 56.0% in the first quarter of 2020. The lower efficiency ratio in the first quarter of 2021 was driven by higher revenues.
Income Taxes
Income tax expense was$4.2 million ,$4.5 million and$1.8 million for the first quarter of 2021, the fourth quarter of 2020 and the first quarter of 2020. The effective tax rates were 30.2%, 29.5% and 28.6% for the first quarter of 2021, the fourth quarter of 2020 and the first quarter of 2020. The difference in our effective tax rate compared to the statutory rate of 29.5% for the respective reporting periods was primarily attributable to the impact of the vesting and exercise of equity awards combined with changes in the Company's stock price over time. Financial Condition Total assets increased$217.6 million during the first quarter of 2021 to$2.50 billion atMarch 31, 2021 from$2.28 billion atDecember 31, 2020 . This increase was due mostly to a$73.1 million increase in cash and cash equivalents, a$2.7 million increase in loans held for sale and a$147.8 million increase in loans held for investment, partially offset by$4.7 million decrease in investment securities available-for sale. Total liabilities increased$211.0 million during the first quarter of 2021 to$2.21 billion atMarch 31, 2021 from$2.00 billion atDecember 31, 2020 . This increase was due mostly to a$261.4 million increase in total deposits and$5.3 million increase in PPPLF, partially offset by a$50.0 million decrease in borrowings, a$2.0 million decrease in senior secured notes, and a$3.7 million decrease in accrued interest payable and other liabilities.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and due from banks, and interest-bearing deposits at theFederal Reserve and other banks with original maturities of less than 90 days. Cash and cash equivalents totaled$309.4 million atMarch 31, 2021 , an increase of$73.1 million fromDecember 31, 2020 . The increase during the three months endedMarch 31, 2021 was primarily attributable to an increase in deposits and excess liquidity in the marketplace.
The following table presents the fair values of investment securities
available-for-sale and amortized cost of investment securities held-to-maturity
as of the periods indicated:
March 31, 2021 December 31, 2020
Fair Percentage of Fair Percentage of
Value Total Value Total
Securities available-for-sale: (dollars in thousands)
U.S. Government and agency securities $ 2,628 7.0 % $ 2,705 6.4 %
Mortgage-backed securities 4,897 13.1 % $ 5,653 13.5 %
Collateralized mortgage obligations 22,399 60.0 % 25,778 61.3 %
48
--------------------------------------------------------------------------------
SBA pools 7,452 19.9 % 7,891 18.8 %
$ 37,376 100.0 % $ 42,027 100.0 %
March 31, 2021 December 31, 2020
Amortized
Cost Percentage of Total Amortized Cost Percentage of Total
Securities held-to-maturity:
Mortgage-backed securities $ 1,348 100.0 % $ 1,358 100.0 %
$ 1,348 100.0 % $ 1,358 100.0 %
The following table presents the contractual maturities of investment securities
available-for-sale and held-to-maturity as of
March 31, 2021
After One After Five
Year Years
One Year Through Through Ten
or Less Five Years Years After Ten Years Total
Securities available-for-sale: (dollars in thousands)
U.S. Government and agency securities $ - $ -
$ -
- - - 4,897 4,897
Collateralized mortgage obligations - - - 22,399 22,399
SBA pools - - - 7,452 7,452
$ - $ -
$ -
- % - % - % 2.13 % 2.13 %
Mortgage-backed securities - % - % - % 1.90 % 1.90 %
Collateralized mortgage obligations - % - % - % 1.03 % 1.03 %
SBA pools - % - % - % 2.43 % 2.43 %
- % - % - % 1.49 % 1.49 %
March 31, 2021
After One After Five
Year Years
One Year Through Through Ten After Ten
or Less Five Years Years Years Total
Securities held-to-maturity: (dollars in thousands)
Mortgage-backed securities $ - $ - $ - $ 1,348 $ 1,348
$ - $ - $ - $ 1,348 $ 1,348
Weighted average yield:
Mortgage-backed securities - % - % - % 2.81 % 2.81 %
- % - % - % 2.81 % 2.81 %
At March 31, 2021 and December 31, 2020 , no issuer represented 10% or more of
our shareholders' equity. There were no sales, purchases, maturities or calls of
investment securities available-for-sale and held-to-maturity during the three
months ended March 31, 2021 . There were $8.0 million in purchases of investment
securities available-for-sale during the three months ended December 31, 2020 .
There were no sales, maturities or calls of any investment securities during the
three months ended December 31, 2020 . At March 31, 2021 , securities
held-to-maturity with a carrying amount of $1.3 million were pledged to the
Federal Reserve Bank as collateral for a secured line of credit.
49
--------------------------------------------------------------------------------Loans
Loans are the single largest contributor to our net income. It is our goal to
continue to grow the consolidated balance
sheet through the origination of loans, and to a lesser extent, through loan
purchases. This effort will serve to maximize our
yield on interest-earning assets. We continue to manage our loan portfolio in
accordance with what we believe are conservative and disciplined loan
underwriting policies. Every effort is made to minimize credit risk, while
tailoring loans to
meet the needs of our target market including assisting small and medium sized
businesses with new government approved
loan programs resulting from COVID-19. Our lending strategy emphasizes quality
loan growth, product diversification, and
competitive and profitable pricing. Continued balanced growth is anticipated
over the coming years.
The following table shows the composition of our loans held for investment as of
the periods indicated:
March 31, 2021 December 31, 2020
Amount Percentage of Total Amount Percentage of Total
(dollars in thousands)
Construction and land development $ 229,637 11.2 % $ 197,634 10.5 %
Real estate:
Residential 25,505 1.2 % 27,683 1.5 %
Commercial real estate - owner occupied 159,039 7.8 % 161,823 8.6 %
Commercial real estate - non-owner occupied 572,414 28.0 % 550,788 29.1 %
Commercial and industrial 366,706 18.1 % 388,814 20.5 %
SBA loans (1) 688,197 33.7 % 562,842 29.8 %
Consumer 3 - % 1 - %
Loans held for investment, net of discounts (2)
100.0 %$ 1,889,585 100.0 % Net deferred origination fees (3) (12,902) (8,808) Loans held for investment 2,028,599 1,880,777 Allowance for loan losses (19,271) (19,167) Loans held for investment, net$ 2,009,328 $ 1,861,610 (1) SBA loans include PPP loans with total gross outstanding principal of$453.2 million and$326.7 million atMarch 31, 2021 andDecember 31, 2020 . (2) Loans held for investment, net of discounts includes the net carrying value of PCI loans of$722 thousand , and$761 thousand atMarch 31, 2021 , andDecember 31, 2020 . (3) Net deferred origination fees include$10.5 million and$6.6 million for PPP loans atMarch 31, 2021 andDecember 31, 2020 . Total loans held for investment increased$147.8 million to$2.03 billion atMarch 31, 2021 due to net loan growth from PPP of$122.6 million , coupled with$25.3 million of organic loan growth. Organic loan growth for the first quarter of 2021 on an annualized basis was 6.48% overDecember 31, 2020 . During the first quarter of 2021 as compared toDecember 31, 2020 , construction and land development loans increased$32.0 million , commercial real estate loans ("CRE") increased$18.8 million , commercial and industrial ("C&I") loans decreased$22.1 million , SBA loans increased$125.4 million , of which$126.4 million related to gross PPP loans before net deferred fees, and residential loans decreased$2.2 million . Excluding the PPP loans totaling$453.2 million atMarch 31, 2021 , the diversification and portfolio composition remained similar atMarch 31, 2021 compared toDecember 31, 2020 . The most significant categories in the loan portfolio are SBA, CRE (non-owner occupied) and commercial and industrial loans which represent 33.7%, 28.0% and 18.1% of total loans held for investment, net of discounts atMarch 31, 2021 . In 2020, we participated in the Main Street Lending Program to support lending to small- and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic. Under this program, we originated loans to borrowers meeting the terms and requirements of the program, including requirements as to eligibility, use of proceeds and priority, and sold a 95% participation interest in these loans toMain Street Facilities, LLC , a special purpose vehicle ("SPV") organized by theFederal Reserve to purchase the participation interest from eligible lenders, including the Bank. During the year endedDecember 31, 2020 , the Company originated 32 loans under the Main Street Lending Program totaling$172.2 million in principal and sold participation interest totaling$163.6 million to the SPV, 50 --------------------------------------------------------------------------------
resulting in a gain on sale of
Per the regulatory definition of commercial real estate, atMarch 31, 2021 andDecember 31, 2020 , our concentration of such loans represented 315% and 308% of our total risk-based capital and were below our internal policy limit of 350% of our total risk-based capital. In addition, atMarch 31, 2021 andDecember 31, 2020 , total loans secured by commercial real estate under construction and land development represented 104% and 94% of our total risk-based capital and were likewise below our internal policy of 150% of our total risk-based capital. Historically, we have managed loan concentrations by selling participations in, or whole loan sales of, certain loans, primarily commercial real estate and construction and land development loan production. Loans to the hospitality industry totaled$238.1 million and$212.3 million , which included loans held for sale, atMarch 31, 2021 andDecember 31, 2020 . Some of the members of our Board of Directors are active in the hospitality sector, and therefore, are able to provide referrals for financing on hotel properties. There are no loans to any of our board members or to members of their immediate families, but often to other hotel owners referred to us by these directors. We carefully manage our concentration and the levels of hospitality loans are measured against our total risk-based capital and reported to our Board of Directors regularly. Our internal guidance is to limit CRE and construction hospitality industry commitments to 150% and 75% of total risk-based capital, respectively. AtMarch 31, 2021 andDecember 31, 2020 , total commitments to fund CRE loans to the hospitality industry represented 67% and 71% of our total risk-based capital. Total commitments to fund construction loans to the hospitality industry were 18% and 17% of our total risk-based capital atMarch 31, 2021 andDecember 31, 2020 . Please refer to the Recent Developments "COVID-19 Updates for the First Quarter of 2021" section for pandemic impact relating to hospitality loans. AtMarch 31, 2021 , non-accrual hospitality loans totaled$77 thousand and no loans were on deferment. We offer small business loans through the SBA 7(a) and 504 loan programs. The SBA 7(a) program provides up to a 75% guaranty for loans greater than$150,000 , an 85% guaranty for loans$150,000 or less, and, in certain circumstances, up to a 90% guaranty. The maximum SBA 7(a) loan amount is$5 million , with the exception of CARES Act SBA PPP loans. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender. The SBA 504 program consists of real estate backed commercial mortgages where we have the first mortgage and the SBA has the second mortgage on the property. Generally, we have a less than 50% loan-to-value ratio on SBA 504 loans at origination date. As a preferred SBA lender, we participated in the PPP administrated by the SBA, in assisting borrowers with additional liquidity. Borrowerswho used the funds from their PPP loans to maintain payroll and pay for certain eligible non-payroll expenses may have up to 100% of their loans forgiven by the SBA. These loans carry a fixed rate of 1.00% and a contractual maturity of two years (loans originated beforeJune 5, 2020 ) or five years (all other PPP loans). AtMarch 31, 2021 andDecember 31, 2020 , we had gross outstanding balances of$453.2 million and$326.7 million , or$442.7 million and$320.1 million , net of deferred fees of$10.5 million and$6.6 million , respectively. The SBA began approving forgiveness applications and making payments as forgiveness was approved in the fourth quarter of 2020. During the three months endedMarch 31, 2021 , approximately$67.9 million of PPP loans originated in 2020 were forgiven by the SBA or repaid. In the first quarter of 2021, net PPP deferred fees of$1.4 million were accelerated to income at the time of SBA forgiveness or borrower repayment. PPP loans forgiven-to-date totaled$140.9 million atMarch 31, 2021 . Refer to Note 3. Loans to the condensed consolidated financial statements. AtMarch 31, 2021 andDecember 31, 2020 , non-accrual SBA loans totaled$1.6 million and$3.3 million . Excluding PPP loans, our SBA portfolio represents 14.8% and 15.1% of total loans held for investment, net of discounts atMarch 31, 2021 andDecember 31, 2020 . Please refer to the Recent Developments "Key Events and Updates Related to COVID-19" section for pandemic impact relating to PPP loans. AtMarch 31, 2021 , there were two SBA 7(a) loans totaling$2.7 million on payment deferral. AtDecember 31, 2020 , there was one SBA 7(a) loan with an outstanding balance of$542 thousand on payment deferral. 51 --------------------------------------------------------------------------------
The following table summarizes the SBA loan types in the portfolio at the periods indicated:
December 31,
March 31, 2021 2020
(dollars in thousands)
SBA 7(a) (1) $ 544,457 $ 418,621
SBA 504 143,740 144,221
Total $ 688,197 $ 562,842 (1) SBA 7(a) includes PPP loans with total gross outstanding principal of
The following table summarizes the amount of guaranteed and unguaranteed SBA loans in the portfolio, and the collateral categories for the unguaranteed portion of SBA loans at the periods indicated:
December 31,
March 31, 2021 2020
(dollars in thousands)
Secured - industrial warehouse $ 62,608 $ 66,969
Secured - hospitality 24,870
25,172
Secured - retail center/building 26,220
24,960
Secured - other real estate 85,688
82,933
Unsecured or secured by other business assets 10,452 11,905 Total unguaranteed portion 209,838 211,939 Guaranteed portion (1) 478,359 350,903 Total$ 688,197 $ 562,842 (1) Guaranteed portion includes PPP loans with total gross outstanding principal of$453.2 million and$326.7 million as the SBA guarantees 100% of loans funded under the program.atMarch 31, 2021 andDecember 31, 2020 .
Loan Maturities
The following table presents the contractual maturities and the distribution
between fixed and adjustable interest rates for loans held for investment at
period indicated:
March 31, 2021
Within One Year After One Year Through Five Years After Five Years
Adjustable Adjustable Adjustable
Fixed Rate Fixed Rate Fixed Rate Total
(dollars in thousands)
Construction and land
development $ 9,052 $ 116,454 $ 25,452 $ 66,812 $ - $ 11,867 $ 229,637
Real estate:
Residential - - - 846 1,781 22,878 25,505
Commercial real estate -
owner occupied 2,260 1,216 18,884 37,978 18,457 80,244 159,039
Commercial real estate -
non-owner occupied 6,471 9,815 87,731 128,055 69,653 270,689 572,414
Commercial and industrial 4,093 93,845 24,197 90,340 20,710 133,521 366,706
SBA loans (1) - 19,308 455,920 11,761 9,631 191,577 688,197
Consumer 3 - - - - - 3
Total $ 21,879 $ 240,638 $ 612,184 $ 335,792 $ 120,232 $ 710,776 $ 2,041,501 (1) PPP loans with total gross outstanding principal of
Potential Problem Loans
Loans are considered delinquent when principal or interest payments are past due
30 days or more; delinquent loans may remain on accrual status between 30 days
and 89 days past due. Loans on which the accrual of interest has been
discontinued are designated as nonaccrual loans. Typically, the accrual of
interest on loans is discontinued when principal or interest payments are past
due 90 days or when, in the opinion of management, there is a reasonable doubt
as to collectability in the normal course of business. When loans are placed on
nonaccrual status, all interest previously accrued but not collected is reversed
against current period interest income.
52
--------------------------------------------------------------------------------
Loan delinquencies (30-89 days past due) totaled $1 thousand and $54 thousand at
March 31, 2021 and December 31, 2020 . Deferred payment loans which met the
requirement under Section 4013 of the CARES Act are not considered as TDRs and
are accruing interest as of March 31, 2021 .
The following tables present the recorded investment balances of substandard loans, excluding PCI loans, by loan class at the periods indicated:
March 31, 2021
Real Estate
Construction Commercial real Commercial real
and land estate - owner estate - non-owner Commercial and
development Residential occupied occupied industrial SBA loans Consumer Total
(dollars in thousands)Special Mention $ - $ - $ 3,396 $ 7,137 $ 300 $ - $ -$ 10,833 Substandard (1) - - 1,380 2,606 3,809 7,474 - 15,269 Total $ - $ - $ 4,776 $ 9,743$ 4,109 $ 7,474 $ -$ 26,102 (1)AtMarch 31, 2021 , substandard loans included$4.2 million of impaired loans and excluded$317 thousand of performing TDR. There were no loans classified as doubtful or loss atMarch 31, 2021 . December 31, 2020 Real Estate Construction Commercial real Commercial real and land estate - owner estate - non-owner Commercial and development Residential occupied occupied industrial SBA loans Consumer Total (dollars in thousands)
Substandard (1) $ -$ 254 $ 1,417 $ 3,536$ 3,967 $ 9,187 $ -$ 18,361 Total $ -$ 254 $ 1,417 $ 3,536$ 3,967 $ 9,187 $ -$ 18,361
(1)At
SinceDecember 31, 2020 , the increase in the special mention loans was due to six loans from two loan relationships totaling$10.8 million were downgraded. These loans are adequately secured by commercial real estate properties. The decrease in substandard loans was due to$2.5 million from risk rating upgrades, coupled with$568 thousand in payoffs and paydowns.
Nonperforming Assets
Nonperforming assets, excluding PCI loans, are defined as nonperforming loans
(accruing loans past due 90 days or more, non-accrual loans and non-accrual
TDRs) plus other real estate owned and other assets acquired through foreclosure
("Foreclosed assets"). The balances of nonperforming loans reflect our net
investment in these assets. The table below reflects the composition of
non-performing assets at the periods indicated:
December 31,
March 31, 2021 2020
(dollars in thousands)
Accruing loans past due 90 days or more $ - $ -
Non-accrual 4,114 6,099
Troubled debt restructurings on non-accrual 77 347
Total nonperforming loans 4,191 6,446
Foreclosed assets - -
Total nonperforming assets $ 4,191 $ 6,446
Troubled debt restructurings - on accrual $
317
Nonperforming loans as a percentage of total loans held for investment
0.21 % 0.34 %
Nonperforming assets as a percentage of total assets 0.17 % 0.28 %
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The following table shows our nonperforming loans by loan class as of the dates
indicated:
December 31,
March 31, 2021 2020
Nonperforming loans: (dollars in thousands)
Real estate:
Residential $ - $ 254
Commercial real estate - owner occupied 1,255 1,293
Commercial real estate - non-owner occupied 1,234 1,465
Commercial and industrial 120 183
SBA loans 1,582 3,251
Total nonperforming loans (1) $ 4,191 $ 6,446 (1) There were no purchased credit impaired loans on nonaccrual at
SinceDecember 31, 2020 , the decrease in nonperforming loans was due mostly to$1.7 million in loans upgraded and returned to accrual status, coupled with$521 thousand in payoffs and paydowns. There were no loans over 90 days past due that were still accruing interest atMarch 31, 2021 andDecember 31, 2020 .
Troubled Debt Restructurings
AtMarch 31, 2021 andDecember 31, 2020 , the total recorded investment for loans identified as a TDR was approximately$394 thousand and$666 thousand . There were no specific reserves allocated for these loans and we have not committed to lend any additional amounts to customers with outstanding loans that are classified as TDRs atMarch 31, 2021 andDecember 31, 2020 . During the three months endedMarch 31, 2021 , there were no new loan modifications resulting in TDRs. Loan modifications resulting in TDR status generally included one or a combination of the following concessions: extensions of the maturity date, principal payment deferments or signed forbearance agreements with a payment plan. During the three months endedMarch 31, 2021 , there were no TDRs for which there was a payment default within twelve months following the modification. During the three months endedDecember 31, 2020 , there was$82 thousand TDRs for which there was a payment default within twelve months following the modification. A loan is considered to be in payment default once it is 90 days contractually past due under the modification.
COVID Related Loan Deferments
AtMarch 31, 2021 , the Company had five loans on payment deferral for COVID-19 related reasons, four of which were from one relationship, totaling$5.7 million . AtDecember 31, 2020 , the Company had three loans totaling$3.3 million on payment deferral for COVID-19 related reasons. Loans that were granted deferrals before the fourth quarter of 2020 have resumed making regular, contractually agreed-upon payments or were paid off. AtMarch 31, 2021 , no loan on payment deferral was reported as non-accrual and none are reported as TDRs under Section 4013 of the CARES Act.
Allowance for Loan losses
The allowance for loan losses is a valuation allowance for probable incurred
credit losses. Loan losses are charged against the allowance when management
believes the un-collectability of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance. Management estimates the
allowance 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 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.
Amounts are charged-off when available information confirms that specific loans
or portions thereof, are uncollectible. This methodology for determining
charge-offs is consistently applied to each loan portfolio segment.
We determine a separate allowance for each loan portfolio segment. The allowance
consists of specific
and general reserves. Specific reserves relate to loans that are individually
classified as impaired. A loan is impaired when,
54
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based on current information and events, it is probable that we will be unable
to collect all amounts due according to the
contractual terms of the loan agreement. Factors considered in determining
impairment include payment status, collateral
value and the probability of collecting all amounts when due. Measurement of
impairment is based on the expected future
cash flows of an impaired loan, which are to be discounted at the loan's
effective interest rate, or measured by reference to an
observable market value, if one exists, or the fair value of the collateral for
a collateral-dependent loan. We select the
measurement method on a loan-by-loan basis except that collateral-dependent
loans for which foreclosure is probable are
measured at the fair value of the collateral, less estimated selling costs.
General reserves cover non-impaired loans and are based on historical loss rates
for each portfolio segment adjusted
for the effects of qualitative or environmental factors that are likely to cause
estimated credit losses as of the evaluation date
to differ from the portfolio segment's historical loss experience. Qualitative
factors include consideration of the following:
changes in lending policies and procedures; changes in economic conditions;
changes in the nature and volume of the
portfolio; changes in the experience, ability and depth of lending management
and other relevant staff; changes in the volume
and severity of past due, nonaccrual and other adversely graded loans; changes
in the loan review system; changes in the
value of the underlying collateral for collateral-dependent loans;
concentrations of credit; and the effect of other external
factors such as competition, COVID-19 pandemic and legal and regulatory
requirements.
Portfolio segments identified include construction and land development,
residential and commercial real estate, commercial and industrial, SBA loans,
and consumer loans. Relevant risk characteristics for these portfolio segments
generally include debt service coverage, loan-to-value ratios, collateral type,
borrower financial performance, credit scores, and debt-to-income ratios for
consumer loans.
In addition, the evaluation of the appropriate allowance for loan losses on
non-PCI loans in the various loan
segments considers discounts recorded as a part of the initial determination of
the fair value of the loans. For these loans, no
allowance for loan losses is recorded at the acquisition date. Interest and
credit discounts are components of the initial fair
value. Additional credit deterioration on acquired non-PCI loans, in excess of
the remaining discounts are being recognized in
the allowance through the provision for loan losses.
The evaluation of the appropriate allowance for loan losses for purchased
credit-impaired loans in the various loan
segments considers the expected cash flows to be collected from the borrower.
These loans are initially recorded at fair value
and, therefore, no allowance for loan losses is recorded at the acquisition
date. Subsequent to the acquisition date, the
expected cash flows of purchased loans are subject to evaluation. Decreases in
expected cash flows are recognized by
recording an allowance for loan losses with the related provision for loan
losses. If the expected cash flows on the purchased
loans increase, a previously recorded impairment allowance can be reversed.
Increases in expected cash flows of purchased
loans, when there are no reversals of previous impairment allowances, are
recognized over the remaining life of the loans.
At March 31, 2021 , we evaluated and considered the impacts relating to COVID-19
and macro-economic conditions on our qualitative factors. The assumptions
underlying these qualitative factors included (a) uncertain and volatile
macro-economic conditions caused by the pandemic; (b) a stabilized unemployment
rate; and (c) the additional government stimulus package signed into law during
the first quarter of 2021.
At March 31, 2021 , the allowance for loan losses was $19.3 million , or 0.95% of
loans held for investment, compared to $19.2 million , or 1.02% of loans held for
investment at December 31, 2020 . The allowance for loan losses as a percentage
of total loans held for investment without PPP loans was 1.22% at March 31,
2021 . At March 31, 2021 , the net carrying value of acquired loans totaled $152.9
million and included a remaining net discount of $3.4 million . The discount is
available to absorb losses on the acquired loans and represented 2.2% of the net
carrying value of acquired loans and 0.17% of total gross loans held for
investment.
Given the growth and the composition of our loan portfolio, as well as the
unamortized discount on loans acquired, the ALLL was considered adequate to
cover probable incurred losses inherent in the loan portfolio. We will continue
to assess the adequacy of the allowance for loan losses for specific loans and
the loan portfolio as a whole during the pandemic. Should any of the factors
considered by management in evaluating the appropriate level of the ALLL change,
our estimate of probable incurred loan losses could also change, which could
affect the level of future provisions for loan losses.
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The table below presents a summary of activity in our allowance for loan losses
for the periods indicated:
Three Months Ended
March 31, 2021 March 31, 2020
(dollars in
thousands)
Balance, beginning of period $ 19,167 $ 13,522
Charge-offs:
Commercial and industrial (2) (7)
SBA loans - (21)
Total charge-offs (2) (28)
Recoveries:
Commercial and industrial 106 12
SBA loans - 12
Total recoveries 106 24
Net recoveries (charge-offs) 104 (4)
Provision for loan losses - 2,700
Balance, end of period $ 19,271 $ 16,218 Allowance for loan losses as a percentage of total loans held for investment
0.95 % 1.13 %
Allowance for loan losses as a percentage of total loans held for investment excluding PPP loans
1.22 % 1.13 %
Annualized net recoveries (charge-offs) to average loans 0.02 % - %
The following table shows the allocation of the allowance for loan losses by
loan type at the dates indicated:
March 31, 2021 December 31, 2020
% of Loans in % of Loans in
Allowance for Each Category to Allowance for Each Category to
Loan Losses Total Loans Loan Losses Total Loans
(dollars in thousands)
Construction and land development $ 2,536 11.2 % $ 2,129 10.5 %
Real estate:
Residential 220 1.2 % 233 1.5 %
Commercial real estate - owner occupied 1,305 7.8 % 1,290 8.6 %
Commercial real estate - non-owner occupied 5,861 28.0 % 5,545 29.1 %
Commercial and industrial 6,363 18.1 % 6,714 20.5 %
SBA loans 2,986 33.7 % 3,256 29.8 %
Consumer - - % - - %
$ 19,271 100.0 % $ 19,167 100.0 %
Loan Held for Sale
Loans held for sale typically consist of the guaranteed portion of SBA 7a loans
and Main Street loans that are originated and intended for sale in the secondary
market and to the Main Street SPV and may also include commercial real estate
loans and SBA 504 loans. Loans held for sale are carried at the lower of
carrying value or estimated market value. At March 31, 2021 , loans held for sale
were $12.7 million , an increase of $2.8 million from $9.9 million at
December 31, 2020 . The change in loans held for sale was due to the origination
of $10.4 million in loans held for sale, offset by the sale of loans with a
carrying value of $7.4 million during the three months ended March 31, 2021 . In
addition, there were $277 thousand loans held for sale transferred to loans held
for investment during the three months ended March 31, 2021 . At March 31, 2021
and December 31, 2020 , loans held for sale consisted entirely of SBA 7a loans
and the fair value of loans held for sale totaled $13.7 million and $10.6
million .
56
--------------------------------------------------------------------------------Servicing Asset and Loan Servicing Portfolio
Loans serviced for others totaled$454.1 million and$454.3 million atMarch 31, 2021 andDecember 31, 2020 . The loan servicing portfolio includes SBA loans serviced for others of$223.7 million and$222.5 million for which there was a related servicing asset of$2.8 million and$2.9 million atMarch 31, 2021 andDecember 31, 2020 . The fair value of the servicing asset for SBA loans is measured quarterly and was$3.7 million and$3.4 million as ofMarch 31, 2021 andDecember 31, 2020 . The significant assumptions used in the valuation of the SBA servicing asset atMarch 31, 2021 included a weighted average discount rate of 8.4% and a weighted average prepayment speed assumption of 20.1%. In addition, the loan servicing portfolio includes construction and land development loans, commercial real estate loans and commercial & industrial loans participated out to various other institutions and the Main Street SPV of$230.4 million and$231.8 million for which there is no related servicing asset atMarch 31, 2021 andDecember 31, 2020 . Under the Main Street Lending Program, we are accruing servicing fee income of 0.25% per annum of the participation interest sold to the SPV. The Company and theFederal Reserve believe that the terms of the Servicing Agreement are commercially reasonable and comparable to terms that unaffiliated third parties would accept to provide Enhanced Reporting Services, under the terms and conditions set out in the Servicing Agreement, with respect to the participation interest. Therefore no servicing asset or liability was recorded at the time of sale.
In connection with the acquisition ofPacific Commerce Bancorp ("PCB"), we recognized goodwill of$73.4 million and a core deposit intangible ("CDI") of$6.9 million onJuly 31, 2018 . We evaluate goodwill for impairment annually, unless circumstances arise indicating potential impairment. We evaluated goodwill for impairment quarterly in 2020 due to the volatility in our stock price related to the COVID-19 pandemic. There were no changes in the carrying value ofGoodwill during the year endedDecember 31, 2020 . We plan to evaluate goodwill for impairment in the fourth quarter of 2021, and we observed no indications of potential impairment atMarch 31, 2021 . For the three months endedMarch 31, 2021 and 2020, we recognized CDI amortization of$188 thousand and$193 thousand . Deposits The following table presents the ending balance and percentage of deposits as of the periods indicated: March 31, 2021 December 31, 2020 Percentage of Percentage of Amount Total Amount Total (dollars in thousands) Noninterest-bearing demand$ 998,515 52.7 % $ 820,711 50.2 % Interest-bearing deposits: Interest checking (1) 385,675 20.3 % 297,337 18.2 % Money market (2) 312,452 16.5 % 309,488 19.0 % Savings 31,869 1.7 % 32,805 2.0 % Retail time deposits 57,200 3.0 % 62,742 3.8 % Wholesale time deposits 109,839 5.8 % 111,075 6.8 %$ 1,895,550 100.0 %$ 1,634,158 100.0 % (1) Included brokered deposits of$108.7 million and$33.7 million atMarch 31, 2021 andDecember 31, 2020 . (2) Included brokered deposits of$45.1 million and$45.0 million atMarch 31, 2021 andDecember 31, 2020 . Total deposits increased$261.4 million fromDecember 31, 2020 to$1.90 billion atMarch 31, 2021 due to an increase in both noninterest-bearing and interest-bearing nonmaturity deposits, partially offset by a decrease in time deposit accounts. AtMarch 31, 2021 , noninterest-bearing deposits totaled$998.5 million , an increase of$177.8 million in the first quarter of 2021 due primarily to the increase in core customer deposits, coupled with the increase in customers' accounts funded by the PPP funds. Interest-bearing nonmaturity deposits increased$90.4 million due primarily to an increase in low cost brokered deposits, coupled with an increase in core deposits from theFDIC Insurance Program through Demand Deposit 57 -------------------------------------------------------------------------------- Marketplace ("DDM") . Noninterest-bearing deposits represented 52.7% of total deposits atMarch 31, 2021 , compared to 50.2% of total deposits atDecember 31, 2020 .
Time deposits decreased
Wholesale time deposits includes brokered time deposits and collateralized time deposits from theState of California . There were no collateralized time deposits from theState of California atMarch 31, 2021 and$10.0 million atDecember 31, 2020 . TheState of California deposits are collateralized by letters of credit issued by the FHLB under the Bank's secured line of credit. Please refer to Note 6 - Deposits and Note 7 - Borrowing Arrangements to the condensed consolidated financial statements. Our ten largest depositor relationships accounted for approximately 28% of total deposits atMarch 31, 2021 andDecember 31, 2020 . The following table shows time deposits greater than$250,000 by time remaining until maturity: March 31, 2021 (dollars in thousands) Three months or less $ 2,440 Over three months through six months 1,870 Over six months through twelve months 4,206 Over twelve months 7,871 $ 16,387 Borrowings In addition to deposits, we use borrowings, including short-term and long-term FHLB advances,Federal Reserve secured lines of credit, federal funds unsecured lines of credit, Paycheck Protection Program Liquidity Facility ("PPPLF") and floating rate senior secured notes, as secondary sources of funds to meet our liquidity needs. The following tables presents the components of borrowings at the periods indicated: March 31, 2021 December 31, 2020 (dollars in
thousands)
FHLB advances $ 95,000 $ 145,000 Paycheck Protection Program Liquidity Facility 209,998 204,719 Senior secured notes - 2,000
Federal Home Loan Bank Secured Line of Credit
AtMarch 31, 2021 , we had a secured line of credit of$414.0 million from the FHLB, of which$259.0 million was available. This secured borrowing arrangement is collateralized under a blanket lien and is subject to us providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. AtMarch 31, 2021 , we had pledged$1.65 billion of loans under the blanket lien, including PPP loans, of which$871.6 million was considered as eligible collateral. PPP loans are not considered eligible collateral under this borrowing agreement. In addition, atMarch 31, 2021 , we used$60.0 million of our secured FHLB borrowing capacity by having the FHLB issue letters of credit to meet collateral requirements for deposits from other public agencies. AtMarch 31, 2021 , we also participated in the FHLB San Francisco's new Recovery Advance loan program for$5 million at zero percent interest with a maturity date inMay 2021 . 58 --------------------------------------------------------------------------------
The following table shows the interest rates and maturity dates of FHLB advances at the periods indicated:
March 31, 2021 December 31, 2020
Balance Rate Maturity Date Balance Rate Maturity Date
Advances: (dollars in thousands)
Recovery advance $ 5,000 - % 5/19/2021 $ 5,000 - % 5/19/2021
Term and fixed-rate advance - - % - 50,000 0.19 % 2/26/2021
Term and fixed-rate advance 30,000 0.25 % 5/26/2021 30,000 0.25 % 5/26/2021
Term and fixed-rate advance 30,000 0.21 % 5/27/2021 30,000 0.21 % 5/27/2021
Term and fixed-rate advance 30,000 1.93 % 6/11/2021 30,000 1.93 % 6/11/2021
$ 95,000 0.75 % $ 145,000 0.56 %
The average outstanding balance of total FHLB borrowings was $129.2 million and
$89.8 million with an average interest rate of 0.61% and 1.68% for the three
months ended March 31, 2021 and 2020.
Federal Reserve Bank Secured Line of Credit
AtMarch 31, 2021 , we had a secured line of credit of$149.5 million from theFederal Reserve Bank , including secured borrowing capacity through the Borrower-in-Custody ("BIC") program. AtMarch 31, 2021 , we had pledged qualifying loans with an unpaid principal balance of$226.6 million and securities held-to-maturity with a carrying value of$1.3 million as collateral for this line. Borrowings under this BIC program are overnight advances with interest chargeable at theFederal Reserve discount window ("Primary Credit") borrowing rate. There were no borrowings under this credit facility at or during the three months endedMarch 31, 2021 andDecember 31, 2020 .
Paycheck Protection Program Liquidity Facility
OnApril 14, 2020 , we were approved by theFederal Reserve to access its SBA Paycheck Protection Program Liquidity Facility ("PPPLF") through the discount window. The PPPLF enables the Company to fund PPP loans without taking on additional liquidity or funding risks by providing non-recourse loans collateralized by the PPP loans. Borrowings under the PPPLF have a fixed-rate of 0.35%, with a term that matches the contractual maturity of the underlying loans pledged. AtMarch 31, 2021 andDecember 31, 2020 , we had$210.0 million and$204.7 million in borrowings under the PPPLF which were collateralized by PPP loans. The average outstanding borrowings were$197.2 million during the three months endedMarch 31, 2021 .
Federal Funds Unsecured Lines of Credit
We have established unsecured overnight borrowing arrangements for an aggregate amount of$125.0 million , subject to availability, with five of our correspondent banks. In general, interest rates on these lines approximate the federal funds target rate. There were no borrowings under these credit facilities at or during the three months endedMarch 31, 2021 and there were no borrowings atDecember 31, 2020 .
Senior Secured Notes
The holding company has a senior secured revolving line of credit for$25 million , which matures onMarch 22, 2022 . AtMarch 31, 2021 , there were no outstanding borrowings under this secured line of credit. AtDecember 31, 2020 , the outstanding balance totaled$2.0 million with a floating interest rate equal to Wall Street Journal Prime, or 3.25%. The average outstanding borrowings under this facility totaled$1.0 million and$8.0 million with an average interest rate of 3.57% and 4.56% for the three months endedMarch 31, 2021 and 2020, respectively. AtMarch 31, 2021 , the Company was in compliance with all loan covenants on the facility and the remaining available credit was$25.0 million . One of our executives is also a member of the lending bank's board of directors. 59 --------------------------------------------------------------------------------
Shareholders' Equity
Total shareholders' equity increased$6.7 million to$287.4 million atMarch 31, 2021 from$280.7 million atDecember 31, 2020 . The increase in shareholders' equity was primarily due to$9.8 million in net earnings,$592 thousand of share-based compensation and$60 thousand of stock options exercised, partially offset by$3.0 million in cash dividends, and$353 thousand in stock repurchases and$430 thousand related to changes in the fair value of investment securities, available-for-sale and the resulting impact on accumulated other comprehensive income during the three months endedMarch 31, 2021 .
Liquidity and Capital Resources
Liquidity is the ability to raise funds on a timely basis at an acceptable cost in order to meet cash needs. Adequate liquidity is necessary to handle fluctuations in deposit levels, to provide for client credit needs, and to take advantage of investment opportunities as they are presented in the market place. Although we believe that we currently have the ability to generate sufficient liquidity from our operating activities to meet our funding requirements, we may, in the future, need to acquire additional liquidity to fund our activities.
Holding Company Liquidity
As a bank holding company, we currently have no significant assets other than our equity interest in the Bank. Our primary sources of liquidity at the holding company are dividends from the Bank, cash on hand at the holding company, which was approximately$218 thousand atMarch 31, 2021 , a$25.0 million secured line of credit of which$25.0 million was available atMarch 31, 2021 , and our ability to raise capital, issue subordinated debt, and secure other outside borrowings. The holding company's ability to declare and pay cash dividends to shareholders and repurchase our common stock depends upon cash on hand, availability on our senior secured revolving line of credit and dividends from the Bank. Dividends from the Bank to the holding company depend upon the Bank's earnings, financial position, regulatory standing, ability to meet current and anticipated regulatory capital requirements, and other factors deemed relevant by our Board of Directors. The Bank paid$5 million in dividends to the holding company during the three months endedMarch 31, 2021 . Please refer to the section "-Regulatory Capital " for a discussion of dividend limitations at both the holding company and the Bank.
Consolidated Company Liquidity
Our liquidity ratio is defined as liquid assets (cash and due from banks, fed funds sold and repos, interest-bearing deposits in other banks, other investments with a remaining maturity of one year or less, available-for-sale and equity securities, unpledged held-to-maturity securities and fully funded loans held for sale) divided by total assets. AtMarch 31, 2021 , our liquidity ratio was 14.2%. Our objective is to ensure adequate liquidity at all times by maintaining liquid assets, gathering deposits and arranging for secondary sources of funding. Having too little liquidity can present difficulties in meeting commitments to fund loans or honor deposit withdrawals. Having too much liquidity can result in lower income because highly liquid assets are short-term in nature and generally yield less than long-term assets. A proper balance is the goal of management and the Board of Directors, as administered by various policies and guidelines. Our policy targets a minimum daily liquidity ratio of 11.0%. Additional sources of liquidity available to us atMarch 31, 2021 included$259.0 million in remaining secured borrowing capacity with the FHLB,$149.5 million in secured borrowing capacity with theFederal Reserve Bank through the Borrower-in-Custody Program ("BIC"), unsecured lines of credit with correspondent banks with a remaining borrowing capacity of$125.0 million , and$243.2 million in PPPLF borrowing capacity with theFederal Reserve Bank through the Discount Window. SinceDecember 31, 2020 , there was an increase in deposit balances due to the influx of funds from government stimulus, the PPP and other government actions. We anticipate that these deposit balances will decline over time as the funds are used for intended business purposes; however, this deposit outflow should be partially offset as the associated PPP loans are forgiven and loan reimbursements are received from the SBA. 60 --------------------------------------------------------------------------------
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate liquidity levels. We expect to maintain adequate liquidity levels through profitability, loan payoffs, securities repayments and maturities, and continued deposit gathering activities. We also have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Stock Repurchase Plan
OnDecember 3, 2018 , we announced a stock repurchase plan, providing for the repurchase of up to 1.2 million shares, or approximately 10%, of our then outstanding shares (the "repurchase plan"). The repurchase plan permits shares to be repurchased in open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rules 10b5-1 and 10b-18. The repurchase plan may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of tentative investment opportunities, liquidity, and other factors management deems appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase plan does not obligate us to purchase any particular number of shares. OnMarch 17, 2020 , the Company suspended the stock repurchase plan. There were no repurchases of common stock during the three months endedMarch 31, 2021 , compared to 38,411 shares of the Company's common stock repurchased at an average price of$22.34 per share and a total cost of$858 thousand during the three months endedMarch 31, 2020 . The remaining number of shares authorized to be repurchased under this plan was 695,489 shares atMarch 31, 2021 . Although our Board approved the resumption of our stock repurchase plan in the first quarter of 2021, under the terms of the definitive merger agreement with Enterprise Financial Services Corp., we have agreed that we will not repurchase or otherwise redeem any of our outstanding common stock except in connection with the withholding of common stock to cover taxes as restricted shares of common stock vest.
Contractual Obligations
The following table summarizes aggregated information about our outstanding
contractual obligations and other long-term liabilities, excluding interest
payments, at
Payments Due by Period
More than
Less Than One to Three to After
Total One Year Three Years Five Years Five Years
(dollars in thousands)
Deposits without a stated maturity $ 1,728,511 $ 1,728,511 $ - $ - $ -
Time deposits 167,039 54,752 83,276 29,011 -
Borrowings 95,000 95,000 - - -
Paycheck Protection Program
Liquidity Facility 209,998 - 159,308 50,690 -
Operating lease obligations 4,471 1,720 2,706 45 -
$ 2,205,019 $ 1,879,983 $ 245,290 $ 79,746 $ -
Off-Balance-Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with GAAP, are not recorded in our consolidated financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. These transactions generally take the form of loan commitments, unused lines of credit and standby letters of credit. AtMarch 31, 2021 , we had unused loan commitments of$484.4 million , standby letters of credit of$3.4 million and commitments to contribute capital to a low-income housing tax credit project partnership and other CRA equity investments of$2.0 million and$61 thousand .
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
61
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regulators that, if undertaken, could have a direct material effect on our
consolidated 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
practices. Our capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
At March 31, 2021 , we qualify for treatment under the Small Bank Holding Company
Policy Statement (Regulation Y, Appendix C) and, therefore, are not subject to
consolidated capital rules at the bank holding company level. The Bank also
opted into the CBLR framework beginning with the first quarter of 2020. At March
31, 2021 and December 31, 2020 , the Bank's CBLR ratio was 9.75% and 10.28% which
exceeded all regulatory capital requirements under the CBLR framework and,
accordingly, the Bank was considered to be ''well-capitalized.''
Banks and their bank holding companies that have less than $10 billion in
total consolidated assets and meet other qualifying criteria, including a
leverage ratio (equal to tier 1 capital divided by average total consolidated
assets) of greater than 9%, will be eligible to opt into the CBLR framework.
Qualifying community banking organizations that elect to use the CBLR framework
and that maintain a leverage ratio of greater than 9% will be considered to have
satisfied the generally applicable risk-based and leverage capital requirements
in the agencies' capital rules (generally applicable rule) and, if applicable,
will be considered to have met the well-capitalized ratio requirements for
purposes of section 38 of the Federal Deposit Insurance Act. Accordingly, a
qualifying community banking organization that exceeds the 9% CBLR will be
considered to have met: (i) the generally applicable risk-based and leverage
capital requirements of the generally applicable capital rules; (ii) the capital
ratio requirements in order to be considered well-capitalized under the prompt
corrective action framework; and (iii) any other applicable capital or leverage
requirements. A qualifying community banking organization that elects to be
under the CBLR framework generally would be exempt from the current capital
framework, including risk-based capital requirements and capital conservation
buffer requirements. A banking organization meets the definition of a
"qualifying community banking organization" if the organization has:
•A leverage ratio of greater than 9%;
•Total consolidated assets of less than $10 billion ;
•Total off-balance sheet exposures (excluding derivatives other than sold credit
derivatives and unconditionally cancelable commitments) of 25% or less of total
consolidated assets; and
•Total trading assets plus trading liabilities of 5% or less of total
consolidated assets.
Even though a banking organization meets the above-stated criteria, federal
banking regulators have reserved the authority to disallow the use of the CBLR
framework by a depository institution or depository institution holding company,
based on the risk profile of the banking organization.
On April 6, 2020 , the federal banking regulators, implementing the applicable
provisions of the CARES Act, issued interim rules which modified the CBLR
framework so that: (i) beginning in the second quarter 2020 and until the end of
the year, a banking organization that has a leverage ratio of 8% or greater and
meets certain other criteria may elect to use the CBLR framework; and (ii)
community banking organizations will have until January 1, 2022 , before the CBLR
requirement is reestablished at greater than 9%. Under the interim rules, the
minimum CBLR is 8.5% for calendar year 2021, and 9% thereafter. The interim
rules also maintain a two-quarter grace period for a qualifying community
banking organization whose leverage ratio falls no more than 1% below the
applicable community bank leverage ratio. Assets originated under the PPP which
are also pledged under the PPPLF are deducted from average total consolidated
assets for purposes of the CBLR. However, such assets are included in total
consolidated assets for purposes of determining the eligibility to elect the
CBLR framework.
Dividends
Our general dividend policy is to pay cash dividends within the range of
typical peer payout ratios, provided that such payments do not adversely affect
our consolidated financial condition and are not overly restrictive to our
growth capacity. While we have paid a consistent level of quarterly cash
dividends since the first quarter of 2017, no assurance can be given that our
financial performance in any given year will justify the continued payment of a
certain level of cash dividend, or any cash dividend at all. During three months
ended March 31, 2021 and 2020, we declared cash dividends of $0.25 per share for
each period.
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The ability of the holding company and the Bank to pay dividends is limited by federal and state laws, regulations and policies of their respective banking regulators.California law allows aCalifornia corporation, such as the holding company, to pay dividends if retained earnings equal at least the amount of the proposed dividend. If aCalifornia corporation does not have sufficient retained earnings available for the proposed dividend, it may still pay a dividend to its shareholders if, immediately after the dividend, the value of its assets would equal or exceed the sum of its total liabilities. Policies of theFederal Reserve , our primary federal regulator, also limit the amount of dividends that bank holding companies may pay to income available over the past year, and only if prospective earnings retention is consistent with the institution's expected future needs and financial condition and consistent with theFederal Reserve's principle that bank holding companies should serve as a source of strength to their banking subsidiaries. The holding company's primary source of funds is dividends from the Bank, as well as availability under our$25 million secured line of credit. Under the California Financial Code, the Bank is permitted to pay a dividend in the following circumstances: (i) without the consent of either theCalifornia Department of Financial Protection and Innovation ("DFPI") or the Bank's shareholders, in an amount not exceeding the lesser of (a) the retained earnings of the Bank; or (b) the net income of the Bank for its last three fiscal years, less the amount of any distributions made during the prior period; (ii) with the prior approval of the DFPI, in an amount not exceeding the greatest of: (x) the retained earnings of the Bank; (y) the net income of the Bank for its last fiscal year; or (z) the net income for the Bank for its current fiscal year; and (iii) with the prior approval of the DFPI and the Bank's shareholders in connection with a reduction of its contributed capital. Further, as aFederal Reserve member bank, the Bank is prohibited from declaring or paying a dividend if the dividend would exceed the Bank's undivided profits as reportable on its Reports of Condition and Income in the absence of prior regulatory and shareholder approvals. TheFederal Reserve limits the amount of dividends that bank holding companies may pay on common stock to income available over the past year, and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. It is also theFederal Reserve's policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current financial and economic environment, theFederal Reserve has indicated that bank holding companies should carefully review their dividend policies. OnMay 24, 2018 , the Economic Growth, Regulatory Relief and Consumer Protection Act (the "Relief Act") was signed into law. Among the Relief Act's key provisions are targeted tailoring measures to reduce the regulatory burden on community banks, including increasing the threshold for institutions qualifying for relief under the Policy Statement from$1 billion to$3 billion .
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