OP BANCORP INTRODUCTION
The following discussion provides information about the results of operations, financial condition, liquidity, and capital recourses ofOP Bancorp and its subsidiary bank,Open Bank . This information is intended to facilitate the understanding and assessment of significant changes and trends related to the Company's results of operations and financial condition. This discussion and analysis should be read in conjunction with the Consolidated Financial Statement and the accompanying notes presented elsewhere in this report, and the Company's annual report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onMarch 15, 2021 . When we refer to "we", "our", and "us", and "the Company" in this report, we meanOP Bancorp and our subsidiary bank,Open Bank on a consolidated basis. When we refer to the "Bank" in this report, we mean our only bank subsidiary,Open Bank . References to the "holding company" refer toOP Bancorp , the parent company on a stand-alone basis.
OVERVIEW
OP Bancorp , aCalifornia corporation, is a bank holding company registered under Bank Holding Company Act of 1956, as amended, with our corporate headquarters located inLos Angeles, California . We offer commercial banking services to small and medium-sized businesses with a strong focus on the financial service needs of the Korean-American community. Through nine full service branches and four loan production offices, we provide a full range of commercial and retail banking loan and deposit products. The Company's principal activity is lending to and accepting deposits from businesses and individuals. The primarily source of revenue is net interest income, which is principally derived from the difference between interest earned on loans and securities, and interest paid on deposits and other funding sources.
Financial Performance Summary
Noteworthy items about the Company for the second quarter of 2021 compared with the same period in 2020:
• Completion of Loan Purchase: On
purchase of
included loans of
servicing assets of
thousand.
• Net Income: Net income was
up
interest income and a reversal of provision for loan losses, partially
offset by increases in income tax expense and noninterest expense.
• Pre-provision Net Revenue: Non-GAAP pre-provision net revenue was
million, up
interest income. For details, refer to Item 2. MD&A - Reconciliation of GAAP
to Non-GAAP Financial Measures in this report.
• Net Interest Income and Net Interest Margin: Net interest income was
million, up
points. The increases in net interest income and net interest margin
reflected average loan growth and lower average costs of deposits.
• Provision for Loan Losses: Provision for loan losses decreased
primarily due to continued improvements in the economic environment in 2021.
• Noninterest Income: Noninterest income was
or 8%. The increase was primarily due to higher gains on sale of loans and
service charges on deposits, partially offset by lower loan servicing fees,
net of amortization.
• Noninterest Expense and Efficiency Ratio: Noninterest expense was
million, up
employee benefits, and foundation donation and other contributions.
Efficiency ratio was 52.30%, an improvement from 57.70%.
• Profitability: Return on average equity of 17.10% and return on average
assets of 1.68%, up from 6.97% and 0.77%, respectively.
• Total Assets: Total assets were
The increase was primarily due to loan portfolio growth.
• Loans: Total loans were
increase was primarily due to the
quarter of 2021. Participation in the PPP and an increase in commercial real
estate loans have also contributed to the growth.
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• Deposits: Deposits were
primarily due to growth in noninterest bearing and money market.
• Allowance for Loan Losses: Allowance for loan losses was
growth and the deteriorating economic conditions during the second half of
2020 as a result of the COVID-19 pandemic, partially offset by improvements
in the economic conditions in the first half of 2021.
Balance Sheet and Liquidity
Our balance sheet remained strong during second quarter 2021 with solid levels of liquidity and capital. Our total assets increased$234.6 million , or 17% fromDecember 31, 2020 to$1.60 billion as ofJune 30, 2021 primarily driven by higher loans as a result of theHana loan purchase, the origination of PPP and growth in commercial real estate in the first half of 2021.
Asset Quality
We maintained solid asset quality with low levels of nonperforming loans and net charge-offs. Nonperforming loans to gross loans of 0.06% remained low compared with 0.09% as ofDecember 31, 2020 . Net charge-offs were$27 thousand or 0.01% of average loans for the second quarter of 2021, compared with net recoveries of$28 thousand or 0.01% of average loans for the second quarter of 2020. The allowance for loan losses of$14.7 million as ofJune 30, 2021 , decreased$665 thousand fromDecember 31, 2020 . The economic conditions, including employment and consumer spending, improved during the quarter. However, the economic outlook continues to be uncertain with the unprecedented impacts of COVID-19 pandemic. Therefore, we maintained our allowance at 1.18% of gross loans, and 19 times our nonperforming loans.
Capital
We maintained a solid capital position in the first half of 2021, with total equity of$152.0 million as ofJune 30, 2021 , compared with$143.4 million as ofDecember 31, 2020 . Capital ratios remained strong during the quarter. Our common equity tier 1 and total risk-based ratios were 12.62% and 13.87% as ofJune 30, 2021 , respectively, down fromDecember 31, 2020 due to asset growth in the first half of 2021. We returned$2.1 million of capital in cash dividends to stockholders during the first half of 2021. The Company's Board of Directors approved a 43% increase to the quarterly cash dividend to$0.10 per share, up from$0.07 per share.
CRITIAL ACCOUNTING POLICIES AND ESTIMATES
Our accounting and reporting policies conform to accounting principles generally accepted inthe United States of America ("GAAP") and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statement. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements. The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in the "Notes to Consolidated Financial Statements, Note 1. Summary of Significant Accounting Policies" of the audited Consolidated Financial Statements included in the Company's Form 10-K for the period endedDecember 31, 2020 .
Allowance for Loan Losses
The allowance for loan losses ("ALL") is a valuation allowance for probable
incurred credit losses. Loan losses are charged against the ALL when management
believes the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the ALL. Management estimates the ALL
balance required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
ALL may be made for specific loans, but the entire allowance is available for
any loan that, in management's judgment, should be charged off.
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The ALL is maintained at a level that management believes is appropriate to
provide for known and inherent incurred loan losses as of the date of the
Consolidated Balance Sheet and we have established methodologies for the
determination of its adequacy. The methodologies are set forth in a formal
policy and take into consideration the need for an overall general valuation
allowance as well as specific allowances that are determined on an individual
loan basis.
The evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available. While
management uses available information to recognize losses on loans, changes in
economic or other conditions may necessitate revision of the estimate in future
periods.
SELECTED FINANCIAL DATA
Financial Highlights (unaudited)
($ in thousands, except per share data) Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2021 2020 2021 2020
Income Statement Data:
Net interest income $ 14,586 $ 10,648 $ 27,341 $ 21,764
(Reversal of) provision for loan losses (1,112 ) 1,988 (492 ) 2,731
Noninterest income 2,220 2,062 5,186 4,358
Noninterest expense 8,789 7,334 16,755 15,541
Income tax expense 2,750 972 4,808 2,135
Net Income $ 6,379 $ 2,416 $ 11,456 $ 5,715
Diluted earnings per share $ 0.42 $ 0.16 $ 0.75 $ 0.37
Performance Ratios:
Return on average assets (annualized) 1.68 % 0.77 % 1.56 % 0.94 %
Return on average equity (annualized) 17.10 % 6.97 % 15.58 % 8.21 %
Net interest margin (annualized) 3.98 % 3.55 % 3.90 % 3.74 %
Efficiency ratio (1) 52.30 % 57.70 % 51.51 % 59.49 %
(1) Represents noninterest expense divided by the sum of net interest income and
noninterest income.
Financial Highlights (unaudited)
($ in thousands, except per share data) As of
June 30, December 31,
2021 2020
Balance Sheet Data:
Total loans (1) $ 1,314,262 $ 1,126,395
Total deposits $ 1,434,103 1,200,090
Total assets $ 1,601,460 1,366,826
Shareholders' equity $ 151,962 143,366
Credit Quality:
Nonperforming loans $ 757 $ 985
Nonperforming assets $ 757 $ 985
Quarterly net charge-offs to average gross loans 0.01 % 0.00 %
(annualized)
Nonperforming assets to gross loans plus OREO 0.06 % 0.09 %
Allowance for loan losses to nonperforming loans 1,940 % 1,558 %
Allowance for loan losses to gross loans 1.18 % 1.40 %
Financial Ratios:
Total risk-based capital ratio 13.87 % 14.81 %
Tier 1 risk-based capital ratio 12.62 % 13.56 %
Common equity tier 1 ratio 12.62 % 13.56 %
Leverage ratio 9.96 % 10.55 %
Book value per common share $ 10.04 $ 9.55
(1) Includes loans held for sale.
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COVID-19 AND GOVERNMENT RESPONSE
The COVID-19 pandemic has caused significant, unprecedented disruption around the world that has affected daily living and negatively impacted the local, state, national and global economies. It has caused significant economic and financial disruption that have adversely affected or otherwise impacted our businesses. The COVID-19 has not yet been globally contained and the number of cases continues to increase in many locations, including inthe United States in which we operate. During the course of the continuing pandemic, there have been varying governmental and other responses to slow or control the spread of the COVID-19 and to mitigate the adverse impact of the COVID-19, such as stay at home orders, restrictions on business activities, health and safety guidelines, economic relief for individuals and businesses, and monetary policy measures, such responses have met varying degrees of success, and it remains uncertain whether these actions will be successful in a sustained manner. We cannot predict at this time the scope and duration of the pandemic. Despite the continuing challenges in recent months, there has been some improvement in the economic environment and resilience in the markets in which we operate. With the seemingly wider availability and distribution of vaccinations and the easing of some restrictions inthe United States , we have seen steps towards broader containment. However, there still remains much uncertainty around containment of the pandemic, which will depend on various factors, including but not limited to, the extent and spread of variants of the virus; efficacy of vaccines; and government and other actions to mitigate the spread of COVID-19. Through the COVID-19 pandemic, the Company was able to react quickly to these changes because of the commitment and flexibility of its workforce coupled with a well-prepared business continuity plan. The Company has taken various steps to help our customers, employees, and communities, while maintaining safe and sound banking operations. The Company has been assisting customers with loan deferrals and the PPP loans and has provided employees remote working environment while maintaining fully functioning operations in all areas.
Loan Payment Deferrals
In early 2020, we began providing payment deferrals of up to 12 months for our commercial and consumer borrowers who had been adversely impacted by the COVID-19 pandemic and had not been delinquent over 30 days on payments at the time of the borrowers' deferral requests. For the loans modified under this program, in accordance with the provisions of Section 4013 of the CARES Act and the interagency statement issued by bank regulatory agencies, we elected to not apply troubled debt structuring classification who were current as ofDecember 31, 2019 . ThroughJune 30, 2021 , the Company has processed loan deferments for borrowers across multiple industries representing 225 loan accounts, with an aggregate loan balance of$250.7 million under the interagency guidance and Section 4013 of the CARES Act. As ofJune 30, 2021 , total outstanding balance of remaining in deferment status balance was$15.7 million and represented 1.2% of the total portfolio, down from 2.7% as ofDecember 31, 2020 .
The following tables summarizes loan portfolio breakdown by industry and loan
deferment as of
Loan Portfolio Breakdown by Industry
Excluding Home mortgage and consumer loans
($ in thousands) As of June 30, 2021
Number of
Industry accounts % of total Balance % of total
Hotel / motel 304 7.7 % $ 195,816 16.4 %
Personal and laundry services 253 6.4 27,148 2.3
Wholesale 366 9.3 75,391 6.3
Food services / restaurant 524 13.4 60,242 5.0
Real estate lessor 247 6.3 395,194 33.1
Gas station 268 6.8 184,140 15.4
Other 1,962 50.0 255,860 21.4
Total (1) 3,924 100.0 % $ 1,193,791 100.0 %
(1) Includes loans held for sale.
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Loan Deferment Summary by Industry
Excluding Home mortgage and consumer
loans
($ in thousands) As of June 30, 2021
% of % of
Number of % of total % of total
Industry accounts deferment loans Balance deferment loans
Hotel / motel 3 50.0 % 1.0 % $ 11,903 85.2 % 6.1 %
Personal and laundry 1 16.7 0.4 959 6.9 3.5
services
Wholesale 1 16.7 0.3 480 3.4 0.6
Other 1 16.7 0.1 629 4.5 0.2
Total 6 100.0 % 0.2 % $ 13,971 100.0 % 1.2 %
Loan Deferment Summary by Loan Type
($ in thousands) As of June 30, 2021
% of % of
Number of % of total % of total
Loan Type accounts deferment loans Balance deferment loans
Real estate loans 5 55.6 % 1.3 % $ 13,491 86.0 % 2.0 %
C & I loans 1 11.1 0.4 480 3.1 0.5
Loans, excluding home
mortgage and
consumer loans 6 66.7 0.2 13,971 89.1 1.2
Home mortgage loans 3 33.3 1.0 1,708 10.9 1.4
Total 9 100.0 % 0.2 % $ 15,679 100.0 % 1.2 %
Loan Deferment Status Change by Loan Type
Total deferments Payment resumed
under the CARES Act or paid off Remaining deferments
($ in thousands) as of June 30, 2021 through June 30, 2021 as of June 30, 2021
Number Number Number
of of of
Loan Type accounts Balance accounts Balance accounts Balance
Loans, excluding home
mortgage and
consumer loans 156 $ 220,522 150 $ 206,551 6 $ 13,971
Home mortgage loans 69 30,205 66 28,497 3 1,708
Total 225 $ 250,727 216 $ 235,048 9 $ 15,679
Paycheck Protection Program
Beginning in April 2020 , we accepted applications under the PPP administered by
the SBA under the CARES Act, as amended by the Economic Aid Act enacted on
December 27, 2020 and have originated loans to qualified small businesses. Under
the terms of the program, loans funded through the PPP are eligible to be
forgiven if certain requirements are met, including using the funds for certain
costs relating to payroll, healthcare and qualifying mortgage interest, rent and
utility payments. To the extent not forgiven, loans are subject to terms of the
program. Since the PPP's inception through June 30, 2021 , we have funded $154.5
million , and $52.7 million of principal forgiveness has been provided on
qualifying PPP loans. As of June 30, 2021 , there were unamortized net deferred
fees and unaccreted discounts of $3.9 million to be recognized over the
estimated life of the loan as a yield adjustment on the loans. If a loan is paid
off or forgiven by the SBA prior to its projected estimated life, the remaining
unamortized deferred fees will be recognized as interest income in that period.
RESULFS OF OPERATIONS
Comparison for the Second Quarter of 2021 and 2020
The following discussion of our results of operations compares the second quarter of 2021 to the same quarter in 2020.
Second quarter 2021 net income was$6.4 million , or$0.42 per diluted common share, compared with second quarter 2020 net income of$2.4 million , or$0.16 per diluted common share, an increase of$4.0 million , or 164.0% in net income. The increase was primarily due to a$3.9 million increase in net interest income and a$3.1 million decrease in provision for loan losses, partially offset by a$1.8 million increase in income tax expense and a$1.5 million increase in noninterest expense. 34
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Net Interest Income
The management of interest income and expense is fundamental to our financial
performance. Net interest income, the difference between interest income and
interest expense, is the largest component of the Company's total revenue.
Management closely monitors both total net interest income and the net interest
margin (net interest income divided by average earning assets). We seek to
maximize net interest income without exposing the Company to an excessive level
of interest rate risk through our asset and liability policies. Interest rate
risk is managed by monitoring the pricing, maturity and repricing options of all
classes of interest-bearing assets and liabilities. Our net interest margin is
also adversely impacted by the reversal of interest on nonaccrual loans and the
reinvestment of loan payoffs into lower yielding investment securities and other
short-term investments.
The following table presents, for the periods indicated, information about:
(i) weighted average balances, the total dollar amount of interest income from
interest-earning assets and the resultant average yields, (ii) average balances,
the total dollar amount of interest expense on interest-bearing liabilities and
the resultant average rates, (iii) net interest income, (iv) the interest rate
spread, and (v) the net interest margin.
Three Months Ended June 30,
2021 2020
Average Interest Yield / Average Interest Yield /
($ in thousands) Balance and Fees Rate Balance and Fees Rate
Interest-earning assets:
Federal Funds sold and other $ 117,605 $ 160 0.54 % $ 100,083 $ 90 0.36 %
investments (1)
Securities available for sale 108,960 218 0.80 60,544 281 1.86
Total investments 226,565 378 0.67 160,627 371 0.92
Real estate loans 670,224 7,725 4.62 638,359 7,500 4.73
SBA loans 346,702 4,816 5.57 190,042 2,615 5.53
C & I loans 101,362 983 3.89 93,633 920 3.95
Home mortgage loans 122,588 1,431 4.67 119,998 1,476 4.92
Consumer & other loans 1,182 16 5.30 2,912 38 5.28
Total loans (2) 1,242,058 14,971 4.83 1,044,944 12,549 4.83
Total earning assets 1,468,623 15,349 4.19 1,205,571 12,920 4.31
Noninterest-earning assets 49,687 49,837
Total assets $ 1,518,310 $ 1,255,408
Interest-bearing liabilities:
Money market deposits and others $ 366,922 $ 281 0.31 % $ 304,941 $ 483 0.64 %
Time deposits 366,603 482 0.53 426,645 1,789 1.69
Total interest-bearing deposits 733,525 763 0.42 731,586 2,272 1.25
Borrowings 3,025 - 0.00 3,959 - 0.00
Total interest-bearing 736,550 763 0.42 2,272 1.24
liabilities 735,545
Noninterest-bearing liabilities:
Noninterest-bearing deposits 615,385 362,779
Other noninterest-bearing 17,115 18,362
liabilities
Total noninterest-bearing 632,500 381,141
liabilities
Shareholders' equity 149,260 138,722
Total liabilities and $ 1,518,310 $ 1,255,408
shareholders' equity
Net interest income / interest $ 14,586 3.77 % $ 10,648 3.07 %
rate spreads
Net interest margin 3.98 % 3.55 %
Cost of deposits & cost of
funds:
Total deposits / cost of $ 1,348,910 $ 763 0.23 % $ 1,094,365 $ 2,272 0.83 %
deposits
Total funding liabilities / cost $ 1,351,935 $ 763 0.23 % $ 1,098,324 $ 2,272 0.83 %
of funds
(1) Includes income and average balances for
federal funds, interest-earning time deposits and other miscellaneous
interest-earning assets.
(2) Average loan balances include non-accrual loans and loans held for sale.
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Increases and decreases in interest income and interest expense result from
changes in average balances (volume) of interest-earning assets and
interest-bearing liabilities, as well as changes in average interest rates. The
following tables set forth the effects of changing rates and volumes on our net
interest income during the period shown. Information is provided with respect to
(i) effects on interest income attributable to changes in volume (change in
volume multiplied by prior rate) and (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume).
Change applicable to both volume and rate have been allocated to volume and rate
ratably.
Three Months Ended June 30,
2021 over 2020
Change due to:
Interest
($ in thousands) Volume Rate Variance
Interest earning assets:
Federal Funds sold and other investments $ 19 $ 51 $ 70
Securities available for sale 151 (214 ) (63 )
Total investments 170 (163 ) 7
Real estate loans 393 (168 ) 225
SBA loans 2,182 19 2,201
C & I loans 77 (14 ) 63
Home mortgage loans 31 (76 ) (45 )
Consumer & other loans (22 ) - (22 )
Total loans 2,661 (239 ) 2,422
Total earning assets 2,831 (402 ) 2,429
Money market deposits and others 84 (286 ) (202 )
Time deposits (223 ) (1,084 ) (1,307 )
Total interest-bearing deposits (139 ) (1,370 ) (1,509 )
Borrowings - - -
Total interest-bearing liabilities (139 ) (1,370 ) (1,509 ) Net interest income$ 2,970 $ 968 $ 3,938 Net interest income increased$3.9 million , or 37.0%, to$14.6 million for the second quarter of 2021 from$10.6 million for the same period in 2020, primarily due to higher average loan balance and lower average cost of deposits. Interest and fees on loans was$15.0 million for the second quarter of 2021, compared with$12.5 million for the same period in 2020, an increase of$2.4 million , or 19.3%. The increase was primarily due to average loan growth. For the second quarter of 2021, average loans increased$197.1 million , or 18.9%, to$1.24 billion from$1.04 billion for the same period in 2020, primarily due to theHana loan purchase and organic growth in PPP and real estate loans. The average yield on loans remained flat at 4.83%. Average interest-earning assets increased$263.1 million , or 21.8%, to$1.47 billion for the second quarter of 2021 from$1.21 billion for the same period in 2020. For the second quarter of 2021, average yield on interest-earning assets decreased 12 basis points to 4.19% from 4.31% for the same period in 2020. Interest expense was$763 thousand for the second quarter of 2021, compared with$2.3 million for the same period in 2020, a decrease of$1.5 million , or 66.4%, primarily due to continued downward adjustments in deposit rates and changes in deposit mix. Average cost of interest-bearing liabilities decreased 82 basis points to 0.42% for the second quarter of 2021 from 1.24% for the same period in 2020. The decrease in the average cost of interest-bearing liabilities primarily reflected the impact of lower interest rates and changes in deposit mix. Deposits are an importance source of funds and impact both net interest income and net interest margin. Average noninterest-bearing deposits increased$252.6 million , or 69.6%, to$615.4 million for the second quarter of 2021, compared with$362.8 million for the same period in 2020. The increase in average noninterest-bearing deposits was primarily driven by customers' preferences for liquidity given the economic uncertainty associated with the COVID-19 pandemic, as well as PPP funds held in deposit accounts. Average interest-bearing liabilities increased$1.0 million , or 0.1%, to$736.6 million for the second quarter of 2021 compared with$735.5 million for the same period in 2020. 36
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The net interest spread and net interest margin for the second quarter of 2021, were 3.77% and 3.98%, respectively, compared with 3.07% and 3.55%, respectively, for the same period in 2020. Excluding the impact of theHana loan purchase, adjusted net interest margin was 3.85% for the second quarter of 2021. For details, refer to Item 2. MD&A - Reconciliation of GAAP to Non-GAAP Financial Measures in this report on Form 10-Q.
Provision for Loan Losses
Credit risk is inherent in the business of making loans. We establish an allowance for loan losses through charges to earnings, which are shown in the statements of operations as the provision for loan losses. Specifically, identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for loan losses and charging the shortfall or excess, if any, to the current quarter's expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for loan losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management's assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area. The Company recorded a reversal of its provision for loan losses of$1.1 million for the second quarter of 2021, compared with a provision for loan losses of$2.0 million for the same period in 2020, a decrease of$3.1 million , or 155.9%. The decrease was driven by continued improvements in the economic environment during the second quarter of 2021. The reversal of the provision for loan losses of$1.1 million included a$487 thousand reversal of provision for uncollectible accrued interest receivable for the second quarter of 2021. There was no provision for uncollectible accrued interest receivable for the second quarter of 2020. Noninterest Income While interest income remains the largest single component of total revenues, noninterest income is also an important component. A portion of our noninterest income is associated with SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. Other sources of noninterest income include loan servicing fees, service charges and fees, and gains on the sale of securities. Noninterest income for the second quarter of 2021 increased$158 thousand , or 7.7%, to$2.2 million compared with$2.1 million for the same period in 2020, primarily due to higher gains on sale of loans and service charges on deposits, partially offset by lower loan servicing fees, net of amortization.
The following table sets forth the various components of our noninterest income for the second quarter of 2021 and 2020:
Three Months Ended June 30,
Increase
($ in thousands) 2021 2020 (Decrease)
Noninterest income:
Service charges on deposits $ 393 $ 298 $ 95
Loan servicing fees, net of amortization 302 514 (212 )
Gain on sale of loans 1,210 936 274
Other income 315 314 1
Total noninterest income $ 2,220 $ 2,062 $ 158
Gain on sale of loans was $1.2 million , an increase of $274 thousand from the
same period in 2020. The increase was mainly driven by higher sales premiums.
The Company sold $10.6 million in SBA loans at an average premium of 11.48%,
compared with the sale of $14.9 million at an average premium of 7.94% for the
same period in 2020.
Service charges on deposits were $393 thousand , an increase of $95 thousand from
the same period in 2020. The increase was primarily due to increases in account
analysis fees and wire fees.
Loan servicing fees, net of amortization, were $302 thousand , a decrease of $212
thousand from the same period in 2020. The decrease was primarily due to higher
amortization of servicing assets associated with loan payoffs, partially offset
by higher servicing fee income resulting from purchased loans. Servicing fee
income, net of amortization, from the Hana loan purchase was $27 thousand .
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Table of Contents Noninterest Expense Noninterest expense for the second quarter of 2021 was$8.8 million compared with$7.3 million for the same period in 2020, an increase of$1.5 million , or 19.9%. The increase was primarily attributable to higher salaries and employee benefits, and foundation and other contributions.
The following table sets forth the major components of our noninterest expense for the second quarter of 2021 and 2020:
Three Months Ended June 30,
Increase
($ in thousands) 2021 2020 (Decrease)
Noninterest expense:
Salaries and employee benefits $ 5,307 $ 4,347 $ 960
Occupancy and equipment 1,234 1,241 (7 )
Data processing and communication 467 414 53
Professional fees 303 276
27
FDIC insurance and regulatory assessments 123 117 6 Promotion and advertising 176 163
13
Directors' fees and stock-based compensation 128 223 (95 ) Foundation donation and other contributions 640 245 395 Other expenses 411 308 103 Total noninterest expense$ 8,789 $ 7,334 $ 1,455 Salaries and employee benefits were$5.3 million , an increase of$960 thousand from the same period in 2020. The increase was primarily attributable to higher SBA incentive expense and an increase in the number of employees to support continued growth of the Company. The average number of full-time equivalent employees was 179.3 for the second quarter of 2021, compared to 171.3 for the same period in 2020. Foundation donation and other contributions were$640 thousand , an increase of$395 thousand from the same period in 2020. The increase was primarily due to higher donation accruals forOpen Stewardship Foundation as a result of higher net income compared with the same period in 2020.
Income Tax Expense
Income tax expense was$2.8 million and$972 thousand for the second quarter of 2021 and 2020, respectively. The effective income tax rate increased to 30.1% for the second quarter of 2021 compared with 28.7% for the same period in 2020, primarily due a tax provision related to restricted stock awards vested in the second quarter of 2021.
Comparison for the first half of 2021 and 2020
The following discussion of our results of operations compares the first half of 2021 to the same period in 2020.
For the first half of 2021, net income was$11.5 million , or$0.75 per diluted common share, compared with$5.7 million , or$0.37 per diluted common share for the same period in 2020, an increase of$5.7 million , or 100.5%. The increase was primarily due to a$5.6 million increase in net interest income and a$3.2 million decrease in provision for loan losses, partially offset by a$2.7 million increase in income tax expense and a$1.2 million increase in noninterest expense. 38
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Net Interest Income
The following table presents, for the periods indicated, information about:
(i) weighted average balances, the total dollar amount of interest income from
interest-earning assets and the resultant average yields, (ii) average balances,
the total dollar amount of interest expense on interest-bearing liabilities and
the resultant average rates, (iii) net interest income, (iv) the interest rate
spread, and (v) the net interest margin.
Six Months Ended June 30,
2021 2020
Average Interest Yield / Average Interest Yield /
($ in thousands) Balance and Fees Rate Balance and Fees Rate
Interest-earning assets:
Federal Funds sold and other $ 108,528 $ 272 0.50 % $ 89,169 $ 422 0.94 %
investments (1)
Securities available for sale 101,000 454 0.90 57,595 600 2.08
Total investments 209,528 726 0.69 146,764 1,022 1.39
Real estate loans 661,907 15,191 4.63 636,161 15,698 4.96
SBA loans 307,787 8,096 5.30 164,471 5,282 6.46
C & I loans 108,803 2,055 3.81 97,160 2,197 4.55
Home mortgage loans 124,135 2,882 4.64 120,883 2,990 4.95
Consumer & other loans 1,184 31 5.24 2,843 76 5.40
Total loans (2) 1,203,816 28,255 4.73 1,021,518 26,243 5.16
Total earning assets 1,413,344 28,981 4.13 1,168,282 27,265 4.69
Noninterest-earning assets 51,024 49,012
Total assets $ 1,464,368 $ 1,217,294
Interest-bearing liabilities:
Money market deposits and others $ 351,943 $ 551 0.32 % $ 301,071 $ 1,440 0.96 %
Time deposits 364,216 1,089 0.60 429,208 4,061 1.90
Total interest-bearing deposits 716,159 1,640 0.46 730,279 5,501 1.51
Borrowings 4,007 - 0.00 2,002 - 0.00
Total interest-bearing 720,166 1,640 0.46 732,281 5,501 1.51
liabilities
Noninterest-bearing liabilities:
Noninterest-bearing deposits 580,134 327,616
Other noninterest-bearing 16,991 18,142
liabilities
Total noninterest-bearing 597,125 345,758
liabilities
Shareholders' equity 147,077 139,255
Total liabilities and $ 1,464,368 $ 1,217,294
shareholders' equity
Net interest income / interest $ 27,341 3.67 % $ 21,764 3.18 %
rate spreads
Net interest margin 3.90 % 3.74 %
Cost of deposits & cost of
funds:
Total deposits / cost of $ 1,296,293 $ 1,640 0.26 % $ 1,057,895 $ 5,501 1.05 %
deposits
Total funding liabilities / cost $ 1,300,300 $ 1,640 0.25 % $ 1,059,897 $ 5,501 1.04 %
of funds
(1) Includes income and average balances for FHLB and PCBB stock, CRA qualified
mutual fund, term federal funds, interest-earning time deposits and other
miscellaneous interest-earning assets.
(2) Average loan balances include non-accrual loans and loans held for sale.
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The following tables set forth the effects of changing rates and volumes on our
net interest income during the period shown. Information is provided with
respect to (i) effects on interest income attributable to changes in volume
(change in volume multiplied by prior rate) and (ii) effects on interest income
attributable to changes in rate (changes in rate multiplied by prior volume).
Change applicable to both volume and rate have been allocated to volume and rate
ratably.
Six Months Ended June 30,
2021 over 2020
Change due to:
Interest
($ in thousands) Volume Rate Variance
Interest earning assets:
Federal Funds sold and other investments $ 77 $ (227 ) $ (150 )
Securities available for sale 304 (450 ) (146 )
Total investments 381 (677 ) (296 )
Real estate loans 602 (1,109 ) (507 )
SBA loans 3,915 (1,101 ) 2,814
C & I loans 245 (387 ) (142 )
Home mortgage loans 79 (187 ) (108 )
Consumer & other loans (44 ) (1 ) (45 )
Loans 4,797 (2,785 ) 2,012
Total earning assets 5,178 (3,462 ) 1,716
Money market deposits and others 208 (1,097 ) (889 )
Time deposits (539 ) (2,433 ) (2,972 )
Total interest-bearing deposits (331 ) (3,530 ) (3,861 )
Borrowings - - -
Total interest-bearing liabilities (331 ) (3,530 ) (3,861 ) Net interest income$ 5,509 $ 68 $ 5,577 Net interest income increased$5.6 million , or 25.6%, to$27.3 million for the first half of 2021 from$21.8 million for the same period in 2020, primarily due to higher average loan balance and lower average cost of deposits, partially offset by lower average yield on loans. Interest and fees on loans was$28.3 million for the first half of 2021, compared with$26.2 million for the same period in 2020, an increase of$2.0 million , or 7.7%. The increase was primarily due to average loan growth, partially offset by lower average yield on loans. For the first half of 2021, average loans increased$182.3 million , or 17.8%, to$1.20 billion from$1.02 billion for the same period in 2020, primarily due to SBA loans originations, increases in loans held for sale, and theHana loan purchase. The average yield on loans was 4.73%, a 43 basis point decrease from 5.16% for the same period in 2020. Average interest-earning assets increased$245.1 million , or 21.0%, to$1.41 billion for the first half of 2021 from$1.17 billion for the same period in 2020. For the first half of 2021, average yield on interest-earning assets decreased 56 basis points to 4.13% from 4.69% for the same period in 2020. Interest expense was$1.6 million for the first half of 2021, compared with$5.5 million for the same period in 2020, a decrease of$3.9 million , or 70.2%, primarily due to continued downward adjustments in deposit rates and changes in deposit mix. Average cost of interest-bearing liabilities decreased 105 basis points to 0.46% for the first half of 2021 from 1.51% for the same period in 2020. The decrease in the average cost of interest-bearing liabilities primarily reflected the impact of lower interest rates and changes in deposit mix. Average noninterest-bearing deposits increased$252.5 million , or 77.1%, to$580.1 million for the first half of 2021, compared with$327.6 million for the same period in 2020. The increase in average noninterest-bearing deposits was primarily driven by customers' preferences for liquidity given the economic uncertainty associated with the COVID-19 pandemic, as well as PPP funds held in deposit accounts. Average interest-bearing liabilities decreased$12.1 million , or 1.7%, to$720.2 million for the first half of 2021 compared with$732.3 million for the same period in 2020. The net interest spread and net interest margin for the first half of 2021, were 3.67% and 3.90%, respectively, compared with 3.18% and 3.74%, respectively, for the same period in 2020. Excluding the impact of theHana loan purchase, adjusted net interest margin was 3.83% for the first half of 2021. For details, refer to Item 2. MD&A - Reconciliation of GAAP to Non-GAAP Financial Measures in this report on Form 10-Q. 40
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Table of Contents Provision for Loan Losses The Company recorded a reversal of its provision for loan losses of$492 thousand for the first half of 2021, compared with a provision for loan losses of$2.7 million for the same period in 2020, a decrease of$3.2 million , or 118.0%. The decrease was driven by continued improvements in the economic environment in the first half of 2021. The reversal of the provision for loan losses of$492 thousand included a$149 thousand provision for uncollectible accrued interest receivable for the first half of 2021. There was no provision for uncollectible accrued interest receivable for the same period in 2020.
Noninterest Income
Noninterest income for the first half of 2021 increased
The following table sets forth the various components of our noninterest income for the first half of 2021 and 2020:
Six Months Ended
June 30,
Increase
($ in thousands) 2021 2020 (Decrease)
Noninterest income:
Service charges on deposits $ 748 $ 729 $ 19
Loan servicing fees, net of amortization 833 906 (73 )
Gain on sale of loans 3,092 2,091 1,001
Other income 513 632 (119 )
Total noninterest income $ 5,186 $ 4,358 $ 828
Gain on sale of loans was $3.1 million , an increase of $1.0 million from the
same period in 2020. The increase was primarily due to higher sales premiums.
The Company sold $33.0 million in SBA loans at an average premium of 10.82%,
compared with the sale of $32.5 million at an average premium of 8.19% for the
same period in 2020.
Noninterest Expense
Noninterest expense for the first half of 2021 was $16.8 million compared with
$15.5 million for the same period in 2020, an increase of $1.2 million , or 7.8%.
The increase was primarily attributable to higher foundation donation and other
contributions, and salaries and employee benefits.
The following table sets forth the major components of our noninterest expense for the first half of 2021 and 2020:
Six Months Ended
June 30,
Increase
($ in thousands) 2021 2020 (Decrease)
Noninterest expense:
Salaries and employee benefits $ 9,969 $ 9,418 $ 551
Occupancy and equipment 2,469 2,471 (2 ) Data processing and communication 915 823
92
Professional fees 617 549
68
FDIC insurance and regulatory assessments 255 222
33
Promotion and advertising 353 324
29
Directors' fees and stock-based compensation 244 456
(212 )
Foundation donation and other contributions 1,147 575 572
Other expenses 786 703 83
Total noninterest expense $ 16,755 $ 15,541 $ 1,214
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Table of Contents Salaries and employee benefits were$10.0 million , an increase of$551 thousand from the same period in 2020. The increase was primarily attributable to higher provision for employee compensation expense in line with higher net income, partially offset by higher deferred loan origination cost. The average number of full-time equivalent employees was 175.3 for the first half of 2021, compared with 172.2 for the same period in 2020. Foundation donation and other contributions were$1.1 million , an increase of$572 thousand from the same period in 2020, primarily due to higher donation accruals forOpen Stewardship Foundation as a result of higher net income compared with the same period in 2020.
Income Tax Expense
Income tax expense was$4.8 million and$2.1 million for the first half of 2021 and 2020, respectively. The effective income tax rate increased to 29.6% for the first half of 2021 compared with 27.2% for the same period in 2020, primarily due to lower tax benefits resulting from reduced number of exercises of non-qualified stock options during the first half of 2021 compared to the same period in 2020. FINANCIAL CONDITION Total assets increased$234.6 million , or 17.2%, to$1.60 billion atJune 30, 2021 compared with$1.37 billion atDecember 31, 2020 , primarily due to increases of$187.9 million , or 16.7%, in total loans,$22.4 million , or 21.0% in cash and cash equivalents, and$20.0 million , or 21.8%, in securities AFS. We funded our asset growth primarily with an increase of$234.0 million , or 19.5% in total deposits during the first half of 2021.
Investment portfolio
The securities portfolio is the second largest component of our interest earning assets, and the structure and composition of this portfolio is important to an analysis of our financial condition. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, because it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and our other funding sources; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans. We classify our securities as either AFS or held-to-maturity at the time of purchase. Accounting guidance requires AFS securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders' equity. Monthly adjustments are made to reflect changes in the fair value of our AFS securities. All securities in our investment portfolio were classified as AFS as of bothJune 30, 2021 andDecember 31, 2020 . There were no held-to-maturity securities in our investment portfolio as of bothJune 30, 2021 andDecember 31, 2020 . All AFS securities are carried at fair value and consist primarily of US government agencies or sponsored agency securities as of bothJune 30, 2021 andDecember 31, 2020 . Securities AFS increased$20.0 million , or 21.8%, to$111.8 million atJune 30, 2021 from$91.8 million atDecember 31, 2020 , primarily due to purchases of$39.8 million , partially offset by principal paydowns and maturity of$18.4 million for the first half of 2021. No issuer of securities AFS, other than theU.S. Government and its agencies, comprised more than 10% of our shareholders' equity as ofJune 30, 2021 orDecember 31, 2020 . 42
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The following table summarizes the fair value of the AFS securities portfolio as
of
June 30, 2021 December 31, 2020
Amortized Fair Unrealized Amortized Fair Unrealized
($ in thousands) Cost Value Gain/(Loss) Cost Value Gain/(Loss)
Available for sale
U.S. Government -sponsored agency
securities $ - $ - $ - $ 1,000 $ 1,005 $ 5
U.S. Government agencies or
sponsored agency securities:
Residential mortgage-backed
securities $ 28,965 $ 29,206 $ 241 $ 19,281 $ 19,704 $ 423
Residential collateralized mortgage
obligations 82,554 82,626 72 70,318 71,082 764
Total available for sale $ 111,519 $ 111,832 $ 313 $ 90,599 $ 91,791 $ 1,192
The Company's AFS securities are carried at fair value with changes in fair
values reflected in Other comprehensive income (loss) unless a security is
deemed to be other than temporary impairment ("OTTI"). Net unrealized gains on
AFS securities were $313 thousand as of June 30, 2021 , which declined from net
unrealized gains of $1.2 million . Gross unrealized losses on AFS securities
totaled $578 thousand as of June 30, 2021 , compared with $57 thousand as of
December 31, 2020 . Of the securities with gross unrealized losses, all were U.S.
government agencies or sponsored agency securities as of both June 30, 2021 and
December 31, 2020 . As of June 30, 2021 , the Company had no intention to sell
securities with unrealized losses and believed it was more-likely-than-not that
it would not be required to sell such securities before recovery of their
amortized cost.
The Company assesses individual securities for OTTI for each reporting period.
There were no OTTI credit losses recognized in earnings for the second quarter
and first half of 2021 and 2020.
The following table sets forth certain information regarding contractual
maturities and the weighted average yields of our investment securities as of
June 30, 2021 . Expected maturities may differ from contractual maturities if
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
As of June 30, 2021
Due in One Year Due after One Year Due after Five Years
or Less Through Five Years Through Ten Years Due after Ten Years
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average ($ in thousands)
Cost Yield Cost Yield Cost Yield Cost Yield
Available for saleU.S. Government agencies or sponsored agency securities: Residential mortgage-backed securities $ - - %$ 827 1.96 %$ 3,798 1.87 %$ 24,340 1.09 % Residential collateralized mortgage obligations - - % - - % 648 1.75 % 81,906 0.69 % Total available for sale $ - - %$ 827 1.96 %$ 4,446 1.85 %$ 106,246 0.78 %
We have not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities to otherwise mitigate interest rate risk.
Loans
Our loans represent the largest portion of our earning assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition. Gross loans including net deferred costs increased$146.1 million , or 13.3%, to$1.25 billion atJune 30, 2021 , compared to$1.10 billion atDecember 31, 2020 , primarily due toHana loan purchase, originations of SBA PPP loans and organic growth in commercial real estate for the six months endedJune 30, 2021 . In response to the COVID-19 pandemic, the Company provided assistance to customers faced with financial difficulties by offering SBA PPP loans and also provided customers with payment relief through our loan deferment program. For more information, see MD&A - Overview - COVID-19 and Government Response in this report on Form 10-Q. 43
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Loans - Loan purchase: OnMay 24, 2021 , the Company completed the purchase of theHana's loan portfolio and paid approximately$97.6 million that included loans of$100.0 million at a fair value discount of$8.9 million , servicing assets of$6.1 million and accrued interest receivable of$398 thousand . The following table summarizes the consideration paid for the loan portfolio and the amounts of assets purchased: ($ in thousands) Consideration Cash$ 97,631
Recognized amounts of identifiable assets purchased: Loans (1)
$ 100,003 Loan discounts (8,867 ) Accrued interest receivable 398 Servicing assets 6,097 Total recognized identifiable assets$ 97,631
(1) Consists of
thousand of real estate loans.
The loan distribution table that follows sets forth our gross loans outstanding, and the percentage distribution in each category as ofJune 30, 2021 andDecember 31, 2020 : June 30, 2021 December 31, 2020 ($ in thousands) Amount % of Total Amount % of Total Commercial real estate$ 684,082 55 %$ 651,684 59 % SBA loan - real estate 217,356 17 % 136,224 12 % SBA loan - non-real estate 121,395 10 % 75,151 7 % Commercial and industrial 102,562 8 % 107,307 10 % Home mortgage 119,319 10 % 128,212 12 % Consumer 1,152 <1% 1,158 <1% Gross loans 1,245,866 100 % 1,099,736 100 % Allowance for loan losses (14,687 ) (15,352 ) Net loans (1)$ 1,231,179 $ 1,084,384
(1) Includes net deferred loan fees or costs, unamortized premiums and unaccreted
discounts of $(12.5) million and $(5.9) million as of June 30, 2021 and
December 31, 2020 , respectively.
The following tables presents the maturity distribution of our loans as of June
30, 2021 and December 31, 2020 . The table shows the distribution of such loans
between those loans with predetermined (fixed) interest rates and those with
variable (floating) interest rates.
As of June 30, 2021
Due after One Year
Due in One Year or Less Through Five Years Due after Five Years
Adjustable Adjustable Adjustable
($ in thousands) Fixed Rate Rate Fixed Rate Rate Fixed Rate Rate Total
Commercial real
estate $ 51,644 $ 57,352 $ 299,838 $ 144,584 $ 99,822 $ 30,842 $ 684,082
SBA loans - real
estate - - - 47 396 216,913 217,356
SBA loan - non-real
estate 14,377 86 89,522 5,124 - 12,286 121,395
Commercial and
industrial 131 27,489 207 40,674 23,164 10,897 102,562
Home mortgage - - - - 105,615 13,704 119,319
Consumer - 379 - 773 - - 1,152
Gross loans $ 66,152 $ 85,306 $ 389,567 $ 191,202 $ 228,997 $ 284,642 $ 1,245,866
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As of December 31, 2020
Due after One Year
Due in One Year or Less Through Five Years Due after Five Years
Adjustable Adjustable Adjustable
($ in thousands) Fixed Rate Rate Fixed Rate Rate Fixed Rate Rate Total
Commercial real
estate $ 58,101 $ 44,439 $ 293,045 $ 155,303 $ 74,302 $ 26,494 $ 651,684
SBA loans - real
estate - - - - - 136,224 136,224
SBA loan - non-real
estate - 11 64,906 952 - 9,282 75,151
Commercial and
industrial 8,933 43,618 221 36,853 4,887 12,795 107,307
Home mortgage - - - - 114,141 14,071 128,212
Consumer - 271 - 887 - - 1,158
Gross loans $ 67,034 $ 88,339 $ 358,172 $ 193,995 $ 193,330 $ 198,866 $ 1,099,736
Loans - Commercial Real Estate : Our loan portfolio is concentrated in commercial
real estate, commercial (primarily manufacturing, wholesale, and
services-oriented entities), SBA loans (primarily unguaranteed portion) with the
remaining balance in home mortgage, and consumer loans. We do not have any
material concentrations by industry or group of industries in the loan
portfolio. However, 81.9% of our gross loans are secured by real property as of
June 30, 2021 , compared to 83.3% as of December 31, 2020 .
We have established concentration limits in the loan portfolio for commercial
real estate loans, commercial and industrial loans, and unsecured lending, among
others. All loan types are within established limits. We use underwriting
guidelines to assess the borrowers' historical cash flow to determine debt
service, and we further stress test the debt service under higher interest rate
scenarios. Financial and performance covenants are used in commercial lending
agreements to allow us to react to a borrower's deteriorating financial
condition, should that occur.
Commercial real estate loans include owner-occupied and non-occupied commercial
real estate. We originate both fixed and adjustable-rate loans. Adjustable-rate
loans are based on the Wall Street Journal prime rate. As of June 30, 2021 ,
approximately 66% of the commercial real estate portfolio consisted of
fixed-rate loans. Our policy maximum loan-to-value, or LTV, is 70% for
commercial real estate loans. As of June 30, 2021 , our average loan-to-value for
commercial real estate loans was approximately 53%. Our commercial real estate
loan portfolio totaled $684.1 million as of June 30, 2021 compared with
$651.7 million as of December 31, 2020 .
Loans - SBA Loans: We are designated as an SBA Preferred Lender under the SBA
Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We
generally sell the 75% guaranteed portion of the SBA loans that we originate.
Our SBA loans are typically made to small-sized manufacturing, wholesale,
retail, hotel/motel, and service businesses for working capital needs or
business expansions. SBA loans have maturities up to 25 years. Typically,
non-real estate secured loans mature in less than 10 years. Collateral may also
include inventory, accounts receivable and equipment, and may include personal
guarantees. Our unguaranteed SBA loans collateralized by real estate are
monitored by collateral type and included in our CRE Concentration Guidance.
As of June 30, 2021 , our SBA portfolio totaled $338.8 million , including $103.9
million of SBA PPP loans, compared with $211.4 million , including $64.9 million
of SBA PPP loans as of December 31, 2020 , an increase of $127.4 million , or
60.3%. The increase was primarily due to the Hana loan purchase. During the
first half of 2021, we originated $181.9 million of SBA loans, including $88.1
million of SBA PPP loans, compared with $110.0 million , including $65.0 million
of SBA PPP loans during the same period in 2020. We sold $33.0 million and $32.5
million in SBA loans during the first half of 2021 and 2020, respectively.
As of June 30, 2021 and December 31, 2020 , loans held for sale totaled $68.4
million and $26.7 million , respectively, and consisted of SBA loans. At the time
of commitment to originate or purchase a loan, a loan is determined to be held
for investment if it is the Company's intent to hold the loan to maturity or for
the "foreseeable future," subject to periodic reviews under the Company's
evaluation processes, including liquidity and credit risk management. If the
Company subsequently changes its intent to hold certain loans, those loans are
transferred from held for investment to held for sale at the lower of cost or
fair value.
Loans - Commercial and Industrial: Commercial and industrial loans totaled
Loans - Home Mortgage: We originate mainly non-qualified single-family home
mortgage loans ("home mortgage") primarily through broker relationships, but
also through our branch network. We offer a five-year or seven-year hybrid
adjustable-rate mortgage loans, which reprice annually after the initial fixed
rate period. These loans are held for investment.
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Home mortgage loans totaled$119.3 million atJune 30, 2021 , compared with$128.2 million atDecember 31, 2020 , a decrease of$8.9 million , or 6.9%. During the first half of 2021, home mortgage loan origination of$24.8 million were more than offset by payoffs, paydowns and sales of$33.7 million . In comparison, home mortgage loan origination of$18.4 million were slightly more than offset by payoffs, paydowns and sales of$19.1 million .
Loan Servicing
As ofJune 30, 2021 , andDecember 31, 2020 , we serviced$658.9 million and$388.8 million , respectively, of SBA loans for others. Activities for loan servicing rights for the second quarter and first half of 2021 and 2020 were as follows: Three Months Ended June 30, Six Months Ended June 30, Increase Increase ($ in thousands) 2021 2020 (decrease) 2021 2020 (decrease) Beginning balance$ 7,492 $ 6,963 $ 529 $ 7,360 $ 7,024 $ 336 Additions from loans sold with servicing retained 277 363 (86 ) 847 769 78 Additions from purchase of servicing rights 6,097 - 6,097 6,097 - 6,097 Amortized to expense (963 ) (354 ) (609 ) (1,401 ) (821 ) (580 ) Ending balance$ 12,903 $ 6,972 $ 5,931 $ 12,903 $ 6,972 $ 5,931
Loan servicing rights are included in accrued interest receivable and other assets on our Consolidated Balance Sheets and reported net of amortization.
Allowance for loan losses
The allowance for loan losses is an estimate of probable incurred losses in the
loan portfolio. Loans are charged-off against the allowance when management
believes a loan balance is uncollectible. Subsequent recoveries, if any, are
credited to the allowance for loan losses. Management's methodology for
estimating the allowance balance consists of several key elements, which include
specific allowances on individual impaired loans and the formula driven
allowances on pools of loans with similar risk characteristics. Allocations of
the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
The allowance for loan losses is determined on a quarterly basis and reflects
management's estimate of probable incurred credit losses inherent in the loan
portfolio. We also rely on internal and external loan review procedures to
further assess individual loans and loan pools, and economic data for overall
industry and geographic trends. The computation includes element of judgment and
high levels of subjectivity.
A loan is considered impaired when it is probable that we will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Impaired loans include loans on non-accrual status and performing
restructured loans. Income from loans on non-accrual status is recognized to the
extent cash is received and when the loan's principal balance is deemed
collectible. Depending on a particular loan's circumstances, we measure
impairment of a loan based upon either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral less estimated costs to sell
if the loan is collateral dependent. A loan is considered collateral dependent
when repayment of the loan is based solely on the liquidation of the collateral.
Fair value, where possible, is determined by independent appraisals, typically
on an annual basis. Between appraisal periods, the fair value may be adjusted
based on specific events, such as if deterioration of quality of the collateral
comes to our attention as part of our problem loan monitoring process, or if
discussions with the borrower lead us to believe the last appraised value no
longer reflects the actual market value for the collateral. The impairment
amount on a collateral-dependent loan is charged-off to the allowance if deemed
not collectible and the impairment amount on a loan that is not
collateral-dependent is set up as a specific reserve.
In cases where a borrower experiences financial difficulty and we make certain
concessionary modifications to contractual terms, the loan is classified as a
troubled debt restructuring. These concessions may include a reduction of the
interest rate, principal or accrued interest, extension of the maturity date or
other actions intended to minimize potential losses. Loans restructured at a
rate equal to or greater than that of a new loan with comparable risk at the
time the loan is modified may be excluded from restructured loan disclosures in
years subsequent to the restructuring if the loans are in compliance with their
modified terms. A restructured loan is considered impaired despite its accrual
status and a specific reserve is calculated based on the present value of
expected cash flows discounted at the loan's effective interest rate or the fair
value of the collateral less estimated costs to sell if the loan is collateral
dependent. Interest income on impaired loans is accrued as earned unless the
loan is placed on non-accrual status.
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As ofJune 30, 2021 , the allowances for loan losses amounted to$14.7 million , or 1.18% of gross loans, compared with$15.4 million , or 1.40% of gross loans and$12.8 million , or 1.22% of gross loans as ofDecember 31, 2020 andJune 30, 2020 , respectively. The decrease in the first half of 2021 was largely due to continued improvements in the economic environment in the first half of 2021. The increase fromJune 30, 2020 was primarily due to loan portfolio growth and the deteriorating economic conditions during the second half of 2020 as a result of the COVID-19 pandemic, partially offset by improved economic conditions during the first half of 2021. Excluding the impacts of the purchasedHana loans, PPP loans and the allowance for uncollectible accrued interest receivable, adjusted allowance to gross loans ratios were 1.46%, 1.54%, and 1.30% as ofJune 30, 2021 ,December 31, 2020 andJune 30, 2020 , respectively. For details, refer to Item 2. MD&A - Reconciliation of GAAP to Non-GAAP Financial Measures in this report on Form 10-Q. In determining the allowance and the related provision for loan losses, we consider two principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired commercial and industrial, commercial real estate, construction and land development loans; and (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors. It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. Based on information currently available, management believes that our allowance for loan losses is adequate. However, the loan portfolio can be adversely affected ifCalifornia's economic conditions and the real estate market in our market area were to weaken. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.
Analysis of the Allowance for Loan Losses.
The following tables present a summary of activities in the allowance for loan
losses by portfolio segment, as of and for the second quarter and first half of
2021 and 2020:
As of and For the Three Months Ended
2021 2020
Net Net
(Reversal (Charge- (Reversal (Charge-
Beginning of) Offs) Ending Beginning of) Offs) Ending
($ in thousands) Balance Provision (1) Recoveries Balance Balance Provision (1) Recoveries Balance
Commercial real estate $ 8,594 $ (138 ) $ - $ 8,456 $ 6,210 $ 935 $ - $ 7,145
SBA loans - real estate 2,030 (33 ) - 1,997 1,082 264 - 1,346
SBA loan - non-real estate 292 (37 ) (27 ) 228 192 33 28 253
Commercial and industrial 2,331 (45 ) - 2,286 1,292 628 - 1,920
Home mortgage 2,075 (371 ) - 1,704 1,921 153 - 2,074
Consumer 17 (1 ) - 16 51 (25 ) - 26
Total $ 15,339 $ (625 ) $ (27 ) $ 14,687 $ 10,748 $ 1,988 $ 28 $ 12,764
Gross loans (2) $ 1,245,866 $ 1,043,506
Average gross loans (2) 1,198,890 1,035,751Net charge-offs (recoveries)
to average gross loans 0.01 % (0.01 )% Allowance for loans losses to gross loans 1.18 % 1.22 %
(1) Excludes (reversal of) provision for uncollectible accrued interest
receivable of
provision for uncollectible accrued interest receivable for the second
quarter of 2020.
(2) Excludes loans held for sale.
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As of and For the Six Months Ended
2021 2020
Net Net
(Reversal (Charge- (Reversal (Charge-
Beginning of) Offs) Ending Beginning of) Offs) Ending
($ in thousands) Balance Provision (1) Recoveries Balance Balance Provision (1) Recoveries Balance
Commercial real estate $ 8,505 $ (49 ) $ - $ 8,456 $ 6,000 $ 1,145 $ - $ 7,145
SBA loans - real estate 1,802 195 - 1,997 939 407 - 1,346
SBA loan - non-real estate 278 (23 ) (27 ) 228 121 149 (17 ) 253
Commercial and industrial 2,563 (277 ) - 2,286 1,289 631 - 1,920
Home mortgage 2,185 (481 ) - 1,704 1,667 407 - 2,074
Consumer 19 (6 ) 3 16 34 (8 ) - 26
Total $ 15,352 $ (641 ) $ (24 ) $ 14,687 $ 10,050 $ 2,731 $ (17 ) $ 12,764
Gross loans (2) $ 1,245,866 $ 1,043,506
Average gross loans (2) 1,169,338 1,014,244Net charge-offs (recoveries)
to average gross loans 0.00 % 0.00 % Allowance for loans losses to gross loans 1.18 % 1.22 %
(1) Excludes (reversal of) provision for uncollectible accrued interest
receivable of
provision for uncollectible accrued interest receivable for the first half of
2020.
(2) Excludes loans held for sale.
The following table presents an allocation of the allowance for loan losses by
portfolio as of
June 30, 2021 December 31, 2020
($ in thousands) Amount % of Total Amount % of Total
Commercial real estate $ 8,456 58 % $ 8,505 55 %
SBA loan - real estate 1,997 14 % 1,802 12 %
SBA loan - non-real estate 228 1 % 278 2 %
Commercial and industrial 2,286 15 % 2,563 17 %
Home mortgage 1,704 12 % 2,185 14 %
Consumer 16 <1% 19 <1%
Gross loans $ 14,687 100 % $ 15,352 100 %
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans, past due loans 90 days
or more but still accruing, performing TDR loans, and OREO. Generally, loans are
placed on nonaccrual status when they become 90 days past due or more. Loans are
considered past due when contractually required principal or interest payments
have not been made on the due dates. Loans are also placed on nonaccrual status
when management believes, after considering economic and business conditions and
collection efforts, that the borrower's financial condition is such that full
collection of principal or interest becomes uncertain regardless of the length
of past due status. Once a loan is placed on nonaccrual status, interest accrual
is discontinued, and all unpaid accrued interest is received is reversed against
interest income. Interest payments received on nonaccrual loans are reflected as
a reduction of principal and not as interest income. A loan is returned to
accrual status when the borrower has demonstrated a satisfactory payment trend
subject to management's assessment of the borrower's ability to repay the loan.
Foreclosed assets, consisting of other real estate owned ("OREO"), are included
in Other assets on the Consolidated Balance Sheet. The Company did not have any
OREO property as of both June 30, 2021 and December 30, 2020 .
Nonperforming loans include loans 90 days past due and still accruing, loans
accounted for on a non-accrual basis and performing TDR loans. Nonperforming
loans were $757 thousand at June 30, 2021 , a decrease of $228 thousand , compared
with $985 thousand at December 31, 2020 .
Classified loans were
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The following table presents information regarding nonperforming assets as of
($ in thousands) June 30, 2021 December 31, 2020 Non-accrual loans $ 757 $ 985 Past due loans 90 days or more and still accruing - - Accruing troubled debt restructured loans - - Total non-performing loans 757 985 Other real estate owned - - Total non-performing assets $ 757 $ 985 Nonperforming loans to gross loans 0.06 % 0.09 % Nonperforming assets to total assets 0.05 % 0.07 % Allowance for loan losses to non-performing loans 1,940 % 1,558 % Deposits We gather deposits primarily through our branch locations. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We focus our efforts to originate noninterest demand deposits accounts through marketing to our existing and new loan customers, customer referrals, and the involvement of our marketing staff in various community networks. Total deposits reached$1.43 billion as ofJune 30, 2021 , an increase of$234.0 million , or 19.5% from$1.20 billion as ofDecember 31, 2020 , primarily driven by core broad-based growth in noninterest-bearing, money market and time deposits. Noninterest-bearing deposits were$668.2 million or 46.6% of total deposits as ofJune 30, 2021 , up from$522.8 million or 43.6% of total deposits as ofDecember 31, 2020 . The increase in noninterest-bearing deposits was primarily due to customers' preferences for liquidity given the economic uncertainty associated with the COVID-19, as well as PPP funds held in deposit account.
The following tables presents the maturity distribution of time deposits as of
As of June 30, 2021
Maturity Within:
Three Three to Six to 12 After
($ in thousands) Months Six Months Months 12 Months Total
Time deposits (more than $250,000 ) $ 90,957 $ 30,760 $ 71,987 $ - $ 193,704
Time deposits ($250,000 or less) 59,503 43,197 76,513 6,330 185,543
Total time deposits $ 150,460 $ 73,957 $ 148,500 $ 6,330 $ 379,247
As of December 31, 2020
Maturity Within:
Three Three to Six to 12 After
($ in thousands) Months Six Months Months 12 Months Total
Time deposits (more than $250,000 ) $ 107,198 $ 25,498 $ 63,818 $ 3,696 $ 200,210
Time deposits ($250,000 or less) 33,474 28,020 80,308 7,001 148,803
Total time deposits $ 140,672 $ 53,518 $ 144,126 $ 10,697 $ 349,013
Borrowed Funds
Other than deposits, we also utilize FHLB advances as a supplementary funding
source to finance our operations. The advances from the FHLB are collateralized
by residential and commercial real estate loans. As of June 30, 2021 and
December 31, 2020 , we had maximum borrowing capacity from the FHLB of
$400.4 million and $394.0 million , respectively. The Company did not have any
FHLB borrowings as of June 30, 2021 , compared with $5.0 million as of December
31, 2020 , which had a zero interest rate under the Recovery Advance Program to
support pandemic relief.
Liquidity
Liquidity refers to the measure of our ability to meet the cash flow
requirements of depositors and borrowers, while at the same time meeting our
operating, capital and strategic cash flow needs, all at a reasonable cost. We
continuously monitor our liquidity position to ensure that assets and
liabilities are managed in a manner that will meet all short-term and long-term
cash requirements. We manage our liquidity position to meet the daily cash flow
needs of customers, while maintaining an appropriate balance between assets and
liabilities to meet the return on investment objectives of our shareholders.
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Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, Federal Funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB advances, and theFederal Reserve discount window.
Our gross loan to deposit ratio was 86.9% as of
Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis. As ofJune 30, 2021 , we had available borrowing capacity of$296.8 million with the FHLB and$130.8 million with the FRB. Eligible loans defined in guidelines from the FHLB and FRB were pledged to the FHLB and FRB discount window as collateral. Our unsecured federal funds lines of credit with correspondent, subject to availability, totaled$100.0 million as ofJune 30, 2021 . We also maintain relationships in the capital markets with brokers to issue certificates of deposits and money market accounts.
Capital Requirements
We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for "prompt corrective action," we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators regarding components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and various ratios of CET1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, referred to as the "leverage ratio." For further information, see "Supervision and Regulation" in our 2020 Annual Report on Form 10-K. The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered "well-capitalized" from a regulatory perspective, as well as our and the Bank's capital ratios as ofJune 30, 2021 andDecember 31, 2020 . The Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be "well-capitalized" as ofJune 30, 2021 andDecember 31, 2020 reflected in the table below. As ofJune 30, 2021 , theFDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events sinceJune 30, 2021 that management believes would change this classification. Regulatory Capital Ratio Requirements, Regulatory Minimum including fully Capital Ratio To be Considered phased in Capital Actual Requirements
"Well Capitalized" Conservation Buffer ($ in thousands)
Amount Ratio Amount Ratio Amount Ratio Amount Ratio
As of June 30, 2021 :
Total capital (to
risk-weighted assets)
Consolidated $ 166,116 13.87 % N/A N/A N/A N/A N/A N/A
Bank 163,293 13.63 % 95,833 8.00 % 119,791 10.00 % 125,781 10.50 %
Tier 1 capital (to
risk-weighted assets)
Consolidated 151,133 12.62 % N/A N/A N/A N/A N/A N/A
Bank 148,312 12.38 % 71,875 6.00 % 95,833 8.00 % 101,822 8.50 %
CET1 capital (to
risk-weighted assets)
Consolidated 151,133 12.62 % N/A N/A N/A N/A N/A N/A
Bank 148,312 12.38 % 53,906 4.50 % 77,864 6.50 % 83,854 7.00 %
Tier 1 leverage (to average
assets)
Consolidated 151,133 9.96 % N/A N/A N/A N/A N/A N/A
Bank 148,312 9.77 % 60,705 4.00 % 75,882 5.00 % 60,705 4.00 %
Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.
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Regulatory
Capital Ratio
Requirements,
Regulatory Minimum including fully
Capital Ratio To be Considered phased in Capital
Actual Requirements "Well Capitalized" Conservation Buffer
($ in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio
As of December 31, 2020 :
Total capital (to
risk-weighted assets)
Consolidated $ 155,287 14.81 % N/A N/A N/A N/A N/A N/A
Bank 152,232 14.52 % 83,859 8.00 % 104,824 10.00 % 110,065 10.50 %
Tier 1 capital (to
risk-weighted assets)
Consolidated 142,147 13.56 % N/A N/A N/A N/A N/A N/A
Bank 139,092 13.27 % 62,894 6.00 % 83,859 8.00 % 89,101 8.50 %
CET1 capital (to
risk-weighted assets)
Consolidated 142,147 13.56 % N/A N/A N/A N/A N/A N/A
Bank 139,092 13.27 % 47,171 4.50 % 68,136 6.50 % 73,377 7.00 %
Tier 1 leverage (to average
assets)
Consolidated 142,147 10.55 % N/A N/A N/A N/A N/A N/A
Bank 139,092 10.32 % 53,915 4.00 % 67,393 5.00 % 53,915 4.00 %
Note: The capital requirements are only applicable to the Bank, and the Company's ratios are included for comparison purpose.
CONTRACTUAL OBLIGATIONS
The following tables contain the Company's significant fixed and determinable contractual obligations, along with categories of payment dates as ofJune 30, 2021 andDecember 31, 2020 : Payments Due at June 30, 2021 Within One to Three to After Five ($ in thousands) One Year Three Years Five Years Years Total Deposits without a stated maturity$ 1,054,856 $ - $ - $ -$ 1,054,856 Time deposits 372,917 4,931 1,399 - 379,247 Operating lease commitments 2,079 3,659 1,698 777 8,213 Commitments to fund investments for low-income housing partnerships 1,334 566 22 45 1,967
Total contractual obligations
3,119$ 822 $ 1,444,283 Payments Due at December 31, 2020 Within One to Three to After Five ($ in thousands) One Year Three Years Five Years Years Total Deposits without a stated maturity$ 851,077 $ - $ - $ -$ 851,077 Time deposits 338,316 9,578 522 597 349,013 Operating lease commitments 2,047 3,844 2,376 956 9,223 Advanced from FHLB 5,000 - - - 5,000 Commitments to fund investments for low-income housing partnerships 1,042 1,036 29 47 2,154
Total contractual obligations
2,927$ 1,600 $ 1,216,467 We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs. 51
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Table of Contents OFF-BALANCE SHEET ARRANGEMENT We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in our Consolidated Balance Sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem collateral is necessary upon extension of credit, is based on management's credit evaluation of the counterparty.
Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain condition, upon request of the borrower.
The following table summarized commitments as of the dates presented.
As of December
($ in thousands) As of June 30, 2021 31, 2020
Loan commitments $ 122,150 $ 75,740
Standby letters of credits 5,374 9,212
Commercial letters of credit 2,547 1,552
Total undisbursed credit related commitments $ 130,071 $ 86,504
RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
In addition to GAAP measures, management uses certain non-GAAP financial measures to provide supplemental information regarding the Company's performance.
Pre-provision net revenue removes provision for loan losses and income tax expense. Management believes that this non-GAAP measure, when taken together with the corresponding GAAP financial measures (as applicable), provides meaningful supplemental information regarding our performance. This non-GAAP financial measure also facilitates a comparison of our performance to prior periods. During the second quarter of 2021, the Company purchased 638 loans fromHana for a total purchase price of$97.6 million . The Company evaluated$100.0 million of the loans purchased in accordance with the provisions of ASC 310-20, Nonrefundable Fees and Other Costs, which were recorded with a$8.9 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the expected life of the loans using the effective yield method. Adjusted loan yield and net interest margin for the three months endedJune 30, 2021 excluded the impacts of contractual interest and discount accretion of the purchased loans as management does not consider purchasing loan portfolios to be normal or recurring transactions. Management believes that presenting the adjusted average loan yield and net interest margin provide comparability to prior periods and these non-GAAP financial measures provide supplemental information regarding the Company's performance. 52
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Adjusted allowance to gross loans ratio removes the impacts of purchased loans,
PPP loans and allowance on accrued interest receivable. Management believes that
this ratio provides greater consistency and comparability between the Company's
results and those of its peer banks.
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
($ in thousands) 2021 2020 2021 2020
Interest income $ 15,349 $ 12,920 $ 28,981 $ 27,265
Interest expense 763 2,272 1,640 5,501
Net interest income 14,586 10,648 27,341 21,764
Noninterest income 2,220 2,062 5,186 4,358
Noninterest expense 8,789 7,334 16,755 15,541
Pre-provision net revenue (a) $ 8,017 $ 5,376 $ 15,772 $ 10,581
Reconciliation to Net Income:
(Reversal of) provision for loan losses (b) (1,112 ) 1,988 (492 ) 2,731
Income tax expense (c) 2,750 972 4,808 2,135
Net Income (a) +
(b) +
(c) $ 6,379 $ 2,416 $ 11,456 $ 5,715
Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
($ in thousands) 2021 2020 2021 2020
Yield on Average Loans
Interest income on loans $ 14,971 $ 12,549 $ 28,255 $ 26,243
Less: interest income on purchased loans (860 ) - (860 ) -
Adjusted interest income on loans (a) $ 14,111 $
12,549
Average loans$ 1,242,058 $ 1,044,944 $ 1,203,816 $ 1,021,518 Less: Average purchased loans (37,526 ) - (18,867 ) - Adjusted average loans (b)$ 1,204,532 $ 1,044,944 $ 1,184,949 $ 1,021,518 Average loan yield (1) 4.83 % 4.83 % 4.73 % 5.16 % Effect on average loan yield (1) -0.13 % 0.00 % -0.07 % 0.00 % Adjusted average loan yield (1) (a)/(b) 4.70 % 4.83 % 4.66 % 5.16 % Net Interest Margin Net interest income$ 14,586 $ 10,648 $ 27,341 $ 21,764 Less: interest income on purchased loans (860 ) - (860 ) - Adjusted net interest income (c)$ 13,726 $
10,648
Average interest-earning assets$ 1,468,623 $ 1,205,571 $ 1,413,344 $ 1,168,282 Less: Average purchased loans (37,526 ) - (18,867 ) -
Adjusted average interest-earning assets (d)
Net interest margin (1) 3.98 % 3.55 % 3.90 % 3.74 % Effect on net interest margin (1) -0.13 %
0.00 % -0.07 % 0.00 % Adjusted net interest margin (1) (c)/(d) 3.85 % 3.55 % 3.83 % 3.74 %
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As of
June 30, December 31, June 30,
($ in thousands) 2021 2020 2020
Gross loans $ 1,245,866 $ 1,099,736 $ 1,043,506
Less: Purchased loans (88,438 ) - -
PPP loans (1) (97,673 ) (64,906 ) (63,424 )
Adjusted gross loans (a) $ 1,059,755 $ 1,034,830 $ 980,082
Accrued interest receivable on loans $ 3,179 $ 3,729 $ 4,578
Less: Accrued interest receivable on
purchased loans (290 ) - -
Accrued interest receivable on PPP
loans (2) (461 ) (445 ) (115 )
Add: Allowance on accrued interest
receivable 792 643 -
Adjusted accrued interest receivable on (b) loans
$ 3,220 $
3,927
Adjusted gross loans and accrued interest (a) +
receivable (b) =
(c) $ 1,062,975 $ 1,038,757 $ 984,545
Allowance for loan losses $ 14,687 $ 15,352 $ 12,764
Add: Allowance on accrued interest
receivable 792 643 -
Adjusted Allowance (d) $ 15,479 $ 15,995 $ 12,764
Adjusted allowance to gross loans ratio (d)/(c) 1.46 % 1.54 % 1.30 %
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