RBB BANCORP CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (the "Report") contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our results of operations, financial condition and financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and "outlook," or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. The COVID-19 pandemic is adversely affecting us, our customers, counterparties, employees, and third party service providers, and the ultimate extent of the impacts on our business, financial position, results of operations, liquidity, and prospects is uncertain. Continued deterioration in general business and economic conditions, including further increases in unemployment rates, or turbulence in domestic or global financial markets could adversely affect our revenues and the values of our assets and liabilities, reduce the availability of funding, lead to a tightening of credit, and further increase stock price volatility, which could result in impairment to our goodwill in future periods. Changes to statutes, regulations, or regulatory policies or practices as a result of, or in response to COVID-19, could affect us in substantial and unpredictable ways, including the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance. In addition to the foregoing, there are or will be other important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:
• business and economic conditions generally and in the financial services
industry, nationally and within our current and future geographic market
areas;
• economic, market, operational, liquidity, credit and interest rate risks
associated with our business;
• lack of seasoning in our loan portfolio;
• deteriorating asset quality and higher loan charge-offs;
• the laws and regulations applicable to our business;
• our ability to achieve organic loan and deposit growth and the composition
of such growth;
• our ability to originate and sell non-qualified mortgages;
• increased competition in the financial services industry, nationally,
regionally or locally;
• our ability to maintain our historical earnings trends;
• our ability to raise additional capital to implement our business plan;
• material weaknesses in our internal control over financial reporting;
• systems failures or interruptions involving our information technology and
telecommunications systems or third-party servicers;
• the composition of our management team and our ability to attract and
retain key personnel;
• the fiscal position of the
other financial institutions;
• our ability to monitor our lending relationships;
• the composition of our loan portfolio, and the concentration of loans in
mortgage-related industries;
• the portion of our loan portfolio that is comprised of participations and
shared national credits;
• the amount of nonperforming and classified assets we hold;
• time and effort necessary to resolve nonperforming assets;
39
--------------------------------------------------------------------------------
• the effect of acquisitions we may make, such as our recently completed
acquisition of PGBH, including, without limitation, the failure to achieve
the expected revenue growth and/or expense savings from such acquisitions,
and/or the failure to effectively integrate an acquisition target into our
operations;
• our limited operating history as an integrated company and our recent
acquisitions;
• environmental liability associated with our lending activities;
• geopolitical and public health conditions such as acts or threats of
terrorism, military conflicts, pandemics and public health issues or
crises, such as that related to the COVID-19 pandemic;
• the geographic concentration of our markets in
Vegas (
and the southwest
• the commencement and outcome of litigation and other legal proceedings
against us or to which we may become subject;
• the impact of recent and future legislative and regulatory changes,
including changes in banking, securities and tax laws and regulations and
their application by our regulators;
• uncertainty relating to the LIBOR calculation process, the phasing out of
LIBOR after 2021, and uncertainty regarding potential alternative
reference rates, including SOFR;
• possible impairment charges to goodwill;
• natural disasters, earthquakes, fires and severe weather;
• the effect of changes in accounting policies and practices as may be
adopted from time to time by our regulatory agencies, as well as by the
Public Company Accounting Oversight Board , the Financial Accounting
Standards Board and other accounting standards setters, including ASU
2016-13 (Topic 326), "Measurement of Credit Losses on FinancialInstruments," commonly referenced as the CECL model, which will change how
we estimate credit losses and may increase the required level of our
allowance for loan losses after adoption;
• requirements to remediate adverse examination findings;
• changes in the scope and cost of FDIC deposit insurance premiums;
• implementation of regulatory initiatives regarding bank capital
requirements that may require heightened capital;
• the obligations associated with being a public company;
• cybersecurity threats and the cost of defending against them;
• RBB's status as an EGC and the potential effects of no longer qualifying
as an EGC in future periods;
• our success at managing the risks involved in the foregoing items;
• our modeling estimates related to an increased interest rate environment;
• our ability to achieve the cost savings and efficiencies in connection
with branch closures;
• our estimates as to our expected operational leverage and the expected
additional loan capacity of our relationship managers; and
• our success at managing the risks involved in the foregoing items.
The foregoing factors should not be construed as exhaustive and should be read
together with the other cautionary statements included in this Report. If one or
more events related to these or other risks or uncertainties materialize, or if
our underlying assumptions prove to be incorrect, actual results may differ
materially from what we anticipate. Accordingly, you should not place undue
reliance on any such forward-looking statements. Any forward-looking statement
speaks only as of the date on which it is made, and we do not undertake any
obligation to publicly update or review any forward-looking statement, whether
as a result of new information, future developments or otherwise. New factors
emerge from time to time, and it is not possible for us to predict which will
arise. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
40
--------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company's unaudited consolidated financial
statements are based upon its unaudited consolidated financial statements, which
have been prepared in accordance with GAAP. The preparation of these unaudited
consolidated financial statements requires management to make estimates and
judgments that affect the reported amounts of assets and liabilities, revenues
and expenses, and related disclosures of contingent assets and liabilities at
the date of our financial statements. Actual results may differ from these
estimates under different assumptions or conditions.
The following is a summary of the more judgmental and complex accounting
estimates and principles. In each area, we have identified the variables we
believe are most important in our estimation process. We utilize information
available to us to make the necessary estimates to value the related assets and
liabilities. Actual performance that differs from our estimates and future
changes in the key variables and information could change future valuations and
impact the results of operations.
• Loans held for investment
• Loans available for sale
• Securities
• Allowance for loan losses ("ALLL")
• Goodwill and other intangible assets
• Deferred income taxes
• Servicing rights
• Income taxes
• Stock-based compensation
Our significant accounting policies are described in greater detail in our 2019
audited consolidated financial statements included in our 2019 Annual Report,
which are essential to understanding Management's Discussion and Analysis of
Financial Condition and Results of Operations.
GENERAL
RBB is a financial holding company registered under the Bank Holding Company Act
of 1956, as amended. Our principal business is to serve as the holding company
for the Bank and RAM. At June 30, 2020 , RBB had total consolidated assets of
$3.1 billion , gross consolidated loans of $2.6 billion HFI and HFS, total
consolidated deposits of $2.4 billion and total consolidated stockholders'
equity of $414.0 million . RBB's common stock trades on the Nasdaq Global Select
Market under the symbol "RBB".
The Bank provides business banking services to the Chinese-American communities
in Los Angeles County , Orange County , Ventura County (California ), Brooklyn ,
Queens and Manhattan (New York City ), Chinatown and Bridgeport (Chicago ) and in
Las Vegas (Clark County, Nevada ), including remote deposit, E-banking, mobile
banking, commercial and investor real estate loans, business loans and lines of
credit, SBA 7A and 504 loans, mortgage loans, trade finance and a full range of
depository accounts. RAM was formed to hold and manage problem assets acquired
in business combinations.
RBB operates full-service banking offices in Arcadia , Cerritos , Diamond Bar ,
Irvine , Los Angeles , Monterey Park , Oxnard , Rowland Heights , San Gabriel , Silver
Lake , Torrance , West Los Angeles , and Westlake Village (California ), Brooklyn ,
Queens and Manhattan (New York City ), Chinatown and Bridgeport (Chicago ) and Las
Vegas (Nevada ). The Bank opened a new banking office in Flushing (Queens, New
York ) in February 2019 , and we plan to open a new branch in Edison New Jersey in
2020. We closed one banking office in Manhattan in April 2019 and also one in
March 2020 . The Bank is a Community Development Financial Institution and as
such is able to receive grants from the United States Treasury Department . Any
grants we receive will be used to invest in low-to-moderate income areas in the
communities we serve.
RBB has completed six acquisitions since 2011, including the acquisition of PGBH
which was completed on
41
--------------------------------------------------------------------------------
In response to the COVID-19 pandemic and declaration of a national emergency by
the Trump administration, the Company fully implemented our Business Continuity
Plan to safeguard its employees and operations. The banking and finance sectors
have been identified as one of the 13 critical infrastructure sectors essential
to our nation's security, and economic and social stability. All Bank branches
remain open, with routine banking services offered through online banking,
drive-up windows and limited lobby access.
We implemented a number of actions to support a healthy workforce:
• Flexible work practices such as work-from-home options, working in shifts
and placing greater distances between employees;
• Discontinued non-essential business travel and meetings; and
• Utilizing online meeting platforms.
We have been and will continue to actively address client needs, including
offering loan relief to all impacted clients. We have enrolled clients in the
SBA Paycheck Protection Program ("PPP"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Analysis of
Financial Condition - COVID-19 Impact on Loan Quality" for a discussion of the
pandemic's effect on the Company's loan portfolio with certain information
provided as of June 30, 2020 .
As of mid-July all of our employees have returned to working at their office,
unless they require working remotely from home. We implemented "social
distancing" to space employees in work areas. Employees wear masks as a further
precaution.
Although it is too early for us to determine the exact impact of COVID-19 on our
financial performance, we expect our financial performance to be affected in the
following manner:
• We expect similar single-family loan growth except we expect the mix will
change. We expect higher
mortgage originations;
• We expect lower loan sales volume and gains due to the closing of all
jumbo and non-qualified mortgage secondary market purchasers and lower
non-qualified mortgage originations;
• We expect commercial real estate loan origination volume to remain stable;
however, we have implemented stricter loan underwriting standards by
lowering our loan-to-value maximum and requiring six to twelve months of
principal and interest in a deposit account as additional collateral;
• We have not currently experienced any run-off in deposits. We borrowed
and obtain funding at an attractive interest rate. In addition, deposit
customers are not as rate sensitive and we have lowered deposit rates
significantly;
• We expect higher loan losses in the fourth quarter and first quarter of
2021 after loan deferment agreements expire. See "COVID-19 Impact on Loan
Quality" for further discussion; and
• We performed a goodwill impairment analysis as of
30, 2020 and found no impairment. However, depending on the severity of
the recession, we may be subject to goodwill impairment in future periods.
Pursuant to recent regulatory guidance, we have elected under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") to not apply GAAP requirements to loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR, and have suspended the determination of loan modifications related to the pandemic from being treated as TDRs. Modifications include the following: (1) forbearance agreements, (2) interest-rate modifications, (3) repayment plans, and (4) any other similar arrangements that defer or delay payments of principal or interest. The relief from TDR treatment applies to modifications of loans that were not more than 30 days past due as ofDecember 31, 2019 , and that occur beginning onMarch 1, 2020 , until the earlier of the following dates: (1) 60 days after the date on which the national emergency related to the COVlD-19 pandemic outbreak is terminated, or (2)December 31, 2020 . The suspension of TDR accounting and reporting guidance may not be applied to any loan of a borrower that is not related to the COVID-19 pandemic. 42
--------------------------------------------------------------------------------
OVERVIEW
The following discussion provides information about the results of operations,
financial condition, liquidity and capital resources of RBB and its wholly owned
subsidiaries. This information is intended to facilitate the understanding and
assessment of significant changes and trends related to our financial condition
and the results of our operations. This discussion and analysis should be read
in conjunction with our audited financial statements included in our 2019 Annual
Report, and the unaudited consolidated financial statements and accompanying
notes presented elsewhere in this Report.
For the second quarter of 2020, we reported net earnings of $6.5 million ,
compared with $10.1 million for the second quarter of 2019. This represented a
decrease of $3.6 million from the second quarter of 2019. Diluted earnings per
share were $0.33 per share for the second quarter of 2020, compared to $0.50 for
the same period last year.
At June 30, 2020 , total assets were $3.1 billion , an increase of $347.6 million ,
or 12.5%, from total assets of $2.8 billion at December 31, 2019 .
Interest-earning assets were $3.0 billion as of June 30, 2020 , an increase of
$334.0 million , or 12.7%, compared with $2.6 billion at December 31, 2019 . The
increase in interest-earning assets was primarily due to a $59.0 million
increase in investment securities and a $397.7 million increase in loans held
for investment, with $172.4 due to the PGBH acquisition, partially offset by a
$92.7 million decrease in mortgage loans held for sale and $30.0 million
decrease in cash and cash equivalents.
At June 30, 2020 , AFS investment securities totaled $185.8 million inclusive of
a pre-tax net unrealized gain of $1.6 million , compared to $126.1 million ,
inclusive of a pre-tax unrealized gain of $340,000 , at December 31, 2019 . HTM
investment securities totaled $7.6 million at June 30, 2020 and $8.3 million at
December 31 . 2019.
Total HFI loans and leases, net of deferred fees and discounts, were $2.6
billion at June 30, 2020 , compared to $2.2 billion at December 31, 2019 . HFI
loans and leases, net of deferred fees and discounts, increased $397.7 million ,
or 18.1%, from December 31, 2019 . The increase was primarily due to $173.2
million in loans from the PGBH acquisition, a $53.1 million transfer of HFS
loans to HFI, and organic loan growth. Between December 31, 2019 and June 30,
2020 , within HFI loans, SBA loans increased by $29.1 million , construction and
land development ("C&D") loans increased by $49.7 million , commercial real
estate ("CRE") loans increased by $107.0 million , and single-family residential
("SFR") mortgage loans increased by $217.7 million , slightly offset by a $7.1
million decrease in commercial and industrial ("C&I") loans.
HFS loans were
Noninterest-bearing deposits were$574.6 million atJune 30, 2020 , an increase of$115.8 million , or 25.2%, compared to$458.8 million atDecember 31, 2019 . Interest-bearing deposits were$1.9 billion atJune 30, 2020 , an increase of$71.8 million , or 4.0%, compared to$1.8 billion atDecember 31, 2019 . The increases were driven by the PGBH acquisition and normal business growth. The PGBH acquisition added$188.4 million in deposits. AtJune 30, 2020 , noninterest-bearing deposits were 23.6% of total deposits, compared to 20.4% atDecember 31, 2019 . Our average cost of total deposits was 1.10% for the quarter endedJune 30, 2020 , compared to 1.62% for the same period last year. The decrease is primarily due to an increase of$74.7 million in average demand deposits, and a decrease in the average rate paid on interest-bearing deposits to 1.42% from 1.99% due to the decline in market rates. Borrowings, consisting of long-term and short-term FHLB advances, long-term debt and subordinated debt, increased to$268.4 million atJune 30, 2020 , compared to$113.7 million as ofDecember 31, 2019 . Borrowings increased by$154.7 million fromDecember 31, 2019 . During the six months endedJune 03, 2020 , the Company borrowed$150.0 million in five-year FHLB advances. The average fixed rate is 1.18% and the advances will mature byMarch 2025 . The purpose was to enhance our liquidity in light of the COVID-19 pandemic at an attractive interest rate. As ofJune 30, 2020 andDecember 31, 2019 , we had no short-term advances from the FHLB. The allowance for loan losses was$22.8 million atJune 30, 2020 , compared to$18.8 million atDecember 31, 2019 . The allowance for loan losses increased by$4.0 million during the six-month period endingJune 30, 2020 . The increase was due to a$5.0 million loan and credit loss provision, attributable to increases in non-performing loans and loans held-for-investment 30 to 89 days past due increasing to$23.9 million atJune 30, 2020 , up from$5.3 million atDecember 31, 2019 , as well as an increase in our general reserve qualitative factors as a result of economic conditions resulting from the COVID-19 pandemic. The allowance for loan losses to total loans and leases outstanding was 0.88% and 0.86% as ofJune 30, 2020 andDecember 31, 2019 , respectively. Shareholders' equity increased$6.3 million , or 1.6%, to$414.0 million during the six-month period endingJune 30, 2020 due to$13.3 million of net income,$712,000 from the exercise of stock options,$327,000 from stock-based compensation, and an$887,000 increase in net accumulated other comprehensive income, which was partially offset by$5.3 million from the repurchase of common stock and$3.6 million of common stock dividends declared. The increase in accumulated other comprehensive income primarily resulted from increases in unrealized gains on AFS securities. 43 -------------------------------------------------------------------------------- Our capital ratios under the revised capital framework referred to as Basel III remain well capitalized. As ofJune 30, 2020 , the Company's Tier 1 leverage capital ratio was 11.48%, our common equity Tier 1 ratio was 14.87%, our Tier 1 risk-based capital ratio was 15.49%, and our total risk-based capital ratio was 21.10%. See "Regulatory Capital Requirements" herein for a further discussion of our regulatory capital requirements. ANALYSIS OF RESULTS OF OPERATIONS
Financial Performance
For the Three Months Ended June 30, Increase (Decrease) For the Six Months Ended June 30, Increase (Decrease)
(dollars in thousands
except per share amounts) 2020 2019 $ or # % 2020 2019 $ or # %
Interest income $ 34,103 $ 35,943
9,069 11,626 (2,557 ) (22.0) 19,504 22,920 (3,416 ) (14.9)
Net interest income 25,034 24,317 717 3.0 48,627 50,229 1,602 3.2
Provision (recapture) for
loan
losses 3,009 357 2,652 742.9 4,954 907 4,047 446.2
Net interest income
after provision for
loan losses 22,025 23,960 (1,935 ) (8.1) 43,673 49,322 (5,649 ) (11.5)
Noninterest income 2,208 5,496 (3,288 ) (59.8) 6,823 9,698 (2,875 ) (29.7)
Noninterest expense 14,819 14,899 (80 ) (0.5) 31,082 30,224 858 2.8
Income before income taxes 9,414 14,557 (5,143 ) (35.3) 19,414 28,796 (9,382 ) (32.6)
Income tax expense 2,901 4,415 (1,514 ) (34.3) 6,153 8,274 (2,121 ) (25.6)
Net income 6,513 $ 10,142 $ (3,629 ) (35.8) $ 13,261 $ 20,522 $ (7,261 ) (35.4)
Earnings per common share
(1):
Basic $ 0.33 $ 0.51 $ (0.18 ) (0.4 ) $ 0.67 $ 1.02 $ (0.35 ) (0.3 )
Diluted 0.33 0.50 (0.17 ) (0.3 ) 0.66 1.00 (0.34 ) (0.3 )
Weighted average shares
outstanding (1): Basic 19,710,330 20,074,651 (364,321 ) (1.8) 19,841,093 20,061,258 (220,165 ) -1.1 % Diluted 19,806,304 20,445,013 (638,709 ) (3.1) 20,036,316 20,440,900 (404,584 ) -2.0 % Return on average assets, annualized 0.83% 1.43% (0.6)% (42.0)% 0.86% 1.44% (0.6)% (41.7)% Return on average shareholders' equity, annualized 6.34 10.42 (4.08 ) (39.2) 6.47 10.69 (4.22 ) (39.5) Noninterest income to average assets, annualized 0.28 0.77 (0.49 ) (63.6) 0.44 0.68 (0.24 ) (35.3) Noninterest expense to average assets, annualized 1.89 2.10 (0.21 ) (10.0) 2.02
2.11 (0.09 ) (4.3) Efficiency ratio (2) 54.40 49.97 4.43 8.9 56.05 50.43 5.62 11.1 Dividend payout ratio 18.18 19.61
(1.43 ) (7.3) 26.87 19.92 6.95 34.9
Average equity to assets
ratio 13.09 13.70 (0.61 ) (4.5) 13.32 13.42 (0.10 ) (0.8)
Tangible book value per
share (3) $ 17.17 $ 16.37 $ 0.80 4.9 $ 17.17 $ 16.37 $ 0.80 4.9
Return on average tangible
common equity (3) 7.77% 12.51% (4.74)% (37.9) 7.95% 12.88% (4.93)% (38.3)
(1) Basic earnings per share are calculated by dividing earnings to common
shareholders by the weighted average number of common shares outstanding.
Diluted earnings per share are calculated by dividing earnings by the
weighted average number of shares adjusted for the dilutive effect of
outstanding stock options using the treasury stock method.
(2) Efficiency ratio represents noninterest expenses divided by the sum of
fully taxable equivalent net interest income plus noninterest income.
(3) Tangible book value per share, and return on average tangible common
equity are non-GAAP financial measures. See "Non-GAAP Financial Measures"
for a reconciliation of these measures to their most comparable GAAP
measures.
44
--------------------------------------------------------------------------------
Net Interest Income
The principal component of our earnings is net interest income, which is the
difference between the interest and fees earned on loans and investments
(interest-earning assets) and the interest paid on deposits and borrowed funds
(interest-bearing liabilities). Net interest margin is net interest income as a
percentage of average interest-earning assets for the period. The level of
interest rates and the volume and mix of interest-earning assets and
interest-bearing liabilities impact net interest income and net interest margin.
The net interest spread is the yield on average interest earning assets minus
the cost of average interest-bearing liabilities. Net interest margin and net
interest spread are included on a tax equivalent ("TE") basis by adjusting
interest income utilizing the federal statutory tax rate of 21% for 2019 and
2020. Our net interest income, interest spread, and net interest margin are
sensitive to general business and economic conditions. These conditions include
short-term and long-term interest rates, inflation, monetary supply, and the
strength of the international, national and state economies, in general, and
more specifically, the local economies in which we conduct business. Our ability
to manage net interest income during changing interest rate environments will
have a significant impact on our overall performance. We manage net interest
income through affecting changes in the mix of interest-earning assets as well
as the mix of interest-bearing liabilities, changes in the level of
interest-bearing liabilities in proportion to interest-earning assets, and in
the growth and maturity of earning assets. For additional information see the
sections on "Capital Resources and Liquidity Management" and Item 3.
Quantitative and Qualitative Disclosures about Market Risk included in this
Report.
The following tables present average balance sheet information, interest income,
interest expense and the corresponding average yields earned and rates paid for
the three and six months ended June 30, 2020 and 2019. The average balances are
principally daily averages and, for loans, include both performing and
nonperforming balances. Interest income on loans includes the effects of
discount accretion and net deferred loan origination costs accounted for as
yield adjustments.
45
--------------------------------------------------------------------------------Interest-Earning Assets and Interest-Bearing Liabilities
For the Three Months Ended June 30,
2020 2019
Average Interest Yield / Average Interest Yield /
(tax-equivalent basis,
dollars in thousands) Balance & Fees Rate Balance & Fees Rate
Earning assets:
Federal funds sold, cash
equivalents
and other (1) $ 231,943 $ 583 1.01% $ 120,818 $ 1,018 3.38 %
Securities
Available for sale 171,298 823 1.93 87,347 610 2.80
Held to maturity (2) 7,661 72 3.78 9,127 84 3.69
Mortgage loans held for
sale 25,130 303 4.85 355,168 4,245 4.79
Loans held for investment:
(3)
Real estate 2,147,646 28,216 5.28 1,763,749 24,394 5.55
Commercial 364,189 4,114 4.54 347,236 5,601 6.47
Total loans 2,511,835 32,330 5.18 2,110,985 29,995 5.70
Total earning assets 2,947,867 $ 34,111 4.65 2,683,445 $ 35,952 5.37
Noninterest-earning assets 206,833 166,719
Total assets $ 3,154,700 $ 2,850,164
Interest-bearing
liabilities
NOW and money market
deposits $ 462,027 $ 751 0.65 387,363 $ 1,188 1.23 %
Savings deposits 123,868 31 0.10 97,584 50 0.21
Time deposits 1,314,232 5,933 1.82 1,338,631 7,797 2.34
Total interest-bearing
deposits 1,900,127 6,715 1.42 1,823,578 9,035 1.99
FHLB advances 150,000 439 1.18 95,220 662 2.79
Long-term debt 104,168 1,747 6.75 103,826 1,748 6.75
Subordinated debentures 14,141 168 4.78 9,564 181 7.59
Total interest-bearing
liabilities 2,168,436 9,069 1.68 2,032,188 $ 11,626 2.29
Noninterest-bearing
liabilities
Noninterest-bearing
deposits 557,903 408,219
Other noninterest-bearing
liabilities 15,509 19,183
Total noninterest-bearing liabilities 573,412 427,402 Shareholders' equity 412,852 390,574 Total liabilities and shareholders' equity$ 3,154,700 $ 2,850,164 Net interest income / interest rate spreads$ 25,042 2.97%$ 24,326 3.08 % Net interest margin 3.42 % 3.64 %
(1) Includes income and average balances for FHLB stock, term federal funds,
interest-bearing time deposits and other miscellaneous interest-bearing
assets.
(2) Interest income and average rates for tax-exempt securities are presented
on a tax-equivalent basis.
(3) Average loan balances include nonaccrual loans. Interest income on loans
includes amortization of deferred loan fees, net of deferred loan costs.
46
--------------------------------------------------------------------------------
For the six months ended June 30,
2020 2019
Average Interest Yield / Average Interest Yield /
(tax-equivalent basis,
dollars in thousands) Balance & Fees Rate Balance & Fees Rate
Earning assets:
Federal funds sold, cash
equivalents
and other (1) $ 240,755 $ 1,514 1.26% $ 111,601 $ 1,798 3.25 %
Securities
Available for sale 154,936 1,578 2.05 78,079 1,118 2.89
Held to maturity (2) 7,839 147 3.77 9,377 173 3.72
Mortgage loans held for
sale 51,595 1,284 5.00 402,237 9,735 4.88
Loans held for investment:
(3)
Real estate 2,077,467 54,644 5.29 1,764,278 48,879 5.59
Commercial 350,869 8,981 5.15 349,818 11,465 6.61
Total loans 2,428,336 63,625 5.27 2,114,096 60,344 5.76
Total earning assets 2,883,461 $ 68,148 4.75 2,715,390 $ 73,168 5.43
Noninterest-earning assets 209,699 166,968
Total assets $ 3,093,160 $ 2,882,358
Interest-bearing
liabilities
NOW and money market
deposits $ 468,935 $ 1,939 0.83 400,584 $ 2,430 1.22
Savings deposits 119,410 86 0.14 99,095 102 0.21
Time deposits 1,336,435 13,019 1.96 1,239,474 13,750 2.24
Total interest-bearing
deposits 1,924,780 15,044 1.57 1,739,153 16,282 1.89
FHLB advances 100,989 589 1.17 216,638 2,776 2.58
Long-term debt 104,125 3,495 6.75 103,784 3,495 6.79
Subordinated debentures 14,234 376 5.31 9,544 367 7.75
Total interest-bearing
liabilities 2,144,128 19,504 1.83 2,069,119 $ 22,920 2.23
Noninterest-bearing
liabilities
Noninterest-bearing
deposits 521,729 406,713
Other noninterest-bearing
liabilities 15,282 19,582
Total noninterest-bearing liabilities 537,011 426,295 Shareholders' equity 412,021 386,944 Total liabilities and shareholders' equity$ 3,093,160 $ 2,882,358 Net interest income / interest rate spreads$ 48,644 2.92%$ 50,248 3.20 % Net interest margin 3.39 % 3.73 %
(1) Includes income and average balances for FHLB stock, term federal funds,
interest-bearing time deposits and other miscellaneous interest-bearing
assets.
(2) Interest income and average rates for tax-exempt securities are presented
on a tax-equivalent basis.
(3) Average loan balances include nonaccrual loans. Interest income on loans
includes amortization of deferred loan fees, net of deferred loan costs.
47
--------------------------------------------------------------------------------
Interest Rates and Operating Interest Differential
Increases and decreases in interest income and interest expense result from
changes in average balances (volume) of interest-earning assets and
interest-bearing liabilities, as well as changes in average interest rates. The
following table shows the effect that these factors had on the interest earned
on our interest-earning assets and the interest incurred on our interest-bearing
liabilities. The effect of changes in volume is determined by multiplying the
change in volume by the previous period's average rate. Similarly, the effect of
rate changes is calculated by multiplying the change in average rate by the
previous period's volume. Changes which are not due solely to volume or rate
have been allocated to these categories based on the respective percent changes
in average volume and average rate as they compare to each other.
Comparison of Three Months Ended Comparison of Six Months Ended
June 30, 2020 and June 30, 2019 June 30, 2020 and June 30, 2019
Change due to: Change due to:
(tax-equivalent basis, Interest Interest
dollars in thousands) Volume Rate Variance Volume Rate Variance
Earning assets:
Federal funds sold, cash
equivalents &
other (1) $ 3 $ (438 ) $ (435 ) $ 8 $ (292 ) $ (284 )
Securities (2)
Available for sale 405 (192 ) 213 788 (328 ) 460
Held to maturity (14 ) 2 (12 ) (29 ) 3 (26 )
Mortgage loans held for
sale (4,002 ) 60 (3,942 ) (8,766 ) 315 (8,451 )
Loans held for
investment: (3)
Real estate 5,067 (1,245 ) 3,822 8,284 (2,519 ) 5,765
Commercial 192 (1,679 ) (1,487 ) 27 (2,511 ) (2,484 )
Total loans 5,259 (2,924 ) 2,335
8,311 (5,030 ) 3,281
Total earning assets
Interest-bearing liabilities: NOW and money market deposits$ 121 $ (558 ) $ (437 ) $ 284 $ (775 ) $ (491 ) Savings deposits 7 (26 ) (19 ) 14 (30 ) (16 ) Time deposits (111 ) (1,753 ) (1,864 ) 950 (1,681 ) (731 ) Total interest-bearing deposits 17 (2,337 ) (2,320 ) 1,248 (2,486 ) (1,238 ) FHLB advances 162 (385 ) (223 ) (677 ) (1,510 ) (2,187 ) Long-term debt 6 (7 ) (1 ) 12 (12 ) - Subordinated debentures 55 (68 ) (13 ) 125 (116 ) 9 Total interest-bearing liabilities 240 (2,797 ) (2,557 ) 708 (4,124 ) (3,416 ) Net interest$ 1,411 $ (695 ) $ 716 $ (396 ) $ (1,208 ) $ (1,604 )
(1) Includes income and average balances for FHLB stock, term federal funds,
interest-bearing time deposits and other miscellaneous interest-bearing
assets.
(2) Interest income and average rates for tax-exempt securities are presented
on a tax-equivalent basis.
(3) Average loan balances include nonaccrual loans. Interest income on loans
includes amortization of deferred loan fees, net of deferred loan costs.
Results of Operations-Comparison of Results of Operations for the Three Months
Ended
The following discussion of our results of operations compares the three months endedJune 30, 2020 and the three months endedJune 30, 2019 . The results of operations for the three months endedJune 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year endingDecember 31, 2020 . Net Interest Income/Average Balance Sheet. In the second quarter of 2020, we generated$25.0 million of taxable-equivalent net interest income, which was an increase of$716,000 , or 2.9%, from the$24.3 million of taxable-equivalent net interest income we earned in the second quarter of 2019. The increase in net interest income was primarily due to a$264.4 million increase in average earning assets, a 61 basis point decrease in the average rate paid on interest-bearing deposits and a$149.7 million increase in average demand deposits, partially offset by a 72 basis point decrease in the average yield on interest-earning assets and a$136.2 million increase in average interest-bearing liabilities. The increase in average interest-earning assets reflected increases in average cash equivalents, average investment securities and total loan average balances (average HFS loans decreased by$330.0 million and average HFI loans increased by$400.9 million ). 48 -------------------------------------------------------------------------------- Our average interest bearing deposit balances increased by$76.5 million , primarily as a result of deposits acquired in the PGBH acquisition and organic growth. The decrease in interest expense was primarily due to a 61 basis point decrease in the average rate paid on interest-bearing liabilities, and a$149.7 million increase in average demand deposits. For the three months endedJune 30, 2020 and 2019, our net interest margin was 3.42% and 3.64%, respectively. Our net interest margin benefits from discount accretion on our purchased loan portfolios. Our net interest margin for the three months endedJune 30, 2020 and 2019, excluding accretion income, would have been 3.28% and 3.48%, respectively. Total interest income was$34.1 million for the second quarter of 2020 compared to$35.9 million for the second quarter of 2019. The$1.8 million , or 5.1%, decrease in total interest income was primarily due to a 72 basis point decrease in the yield on average earning assets, partially offset by an increase in average earning assets of approximately$264.4 million . Interest and fees on HFI and HFS loans for the second quarter of 2020 was$32.6 million compared to$34.2 million for the second quarter of 2019. The$1.6 million , or 4.7%, decrease was primarily due to a 40 basis point decrease in the average yield on loans, reflecting the decline in interest rates, partially offset by a$70.8 million , or 2.9%, increase in the average balance of total loans outstanding. The increase in the average loan balance was primarily due to loans from the PGBH acquisition and organic loan growth. Purchased loan discount accretion income totaled$1.0 million in the second quarter of 2020 compared to$1.1 million in the second quarter of 2019. The average yield on loans benefits from discount accretion on our purchased loan portfolio. For the three months endedJune 30, 2020 and 2019, the yield on total HFI and HFS loans was 5.17% and 5.57%, respectively, while the yield on total loans excluding accretion income would have been 5.01% and 5.40%, respectively. Discount on purchased loans increased by$886,000 due to the PGBH acquisition. Due to payoffs of acquired loans, we expect accretion income to decline through the remainder of 2020. As of and for the Three Months Ended As of and for the Six Months Ended June 30, June 30, (dollars in thousands) 2020 2019 2020 2019 Beginning balance of discount on purchased loans $ 5,065 $ 7,809 $ 5,068 $ 9,228 Additions due to acquisitions: Commercial and industrial - - 35 - SBA - - - - Construction and land development - - 10 - Commercial real estate - - 145 - Single-family residential mortgages - - 696 - Total additions - - 886 - Accretion: Commercial and industrial 2 34 1 18 SBA 3 3 11 7 Construction and land development 3 - 4 - Commercial real estate 1,063 740 1,492 1,569 Single-family residential mortgages (82 ) 278 370 880 Total accretion 989 1,055 1,878 2,474 Ending balance of discount on purchased loans $ 4,076 $ 6,754 $ 4,076 $ 6,754 Interest income on our securities portfolio increased$202,000 , or 29.5%, to$887,000 in the second quarter of 2020 compared to$685,000 in the second quarter of 2019. This increase is primarily attributable to$82.5 million , or 85.5%, increase in the average balance, partially offset by an 87 basis point decrease in the yield on average securities from the second quarter of 2019 as compared to the second quarter of 2020. Securities income reported in the average balance sheet has been adjusted to a tax-equivalent basis; interest income reported in the Company's consolidated statements of income has not been grossed-up. Interest income on interest earning deposits, dividend income on FHLB stock, federal funds sold, cash equivalents and other investments decreased to$583,000 for the three months endedJune 30, 2020 compared to$1.0 million for the three months endedJune 30, 2019 . This decrease was primarily due to a 237 basis point decrease in the average yield between the two periods, partially offset by a$111.1 million increase in the average balance of short-term cash investments. Interest expense on interest-bearing liabilities decreased$2.6 million , or 22.0%, to$9.1 million for the second quarter of 2020 as compared to$11.6 million in the second quarter of 2019 due to decreases in interest rates on both deposits and borrowings, partially offset by increases in most interest-bearing balances and an$149.7 million increase in average non-interest bearing deposits. With the PGBH acquisition inJanuary 2020 ,$188.4 million in deposits were acquired. 49
-------------------------------------------------------------------------------- Interest expense on deposits decreased to$6.7 million for the second quarter of 2020 as compared to$9.0 million for the second quarter of 2019. The$2.3 million , or 25.7%, decrease in interest expense on deposits was primarily due to a 57 basis point decrease in the average rate paid on interest-bearing deposits plus a$149.7 million increase in average demand deposits, partially offset by the increase in average interest-bearing deposits. Deposits increased due to the PGB acquisition and organic deposit growth. The average balance of interest-bearing deposits increased$76.5 million , or 4.2%, from$1.8 billion in the second quarter of 2019 compared to$1.9 billion in the second quarter of 2020. Average brokered certificates of deposit were$32.8 million in the second quarter of 2020 and$177.6 million in the second quarter of 2019. Average non-interest bearing deposits increased to$557.9 million , or 36.7%, from$408.2 million in the second quarter of 2019. The 61 basis point decrease in the average rate paid on interest-bearing deposits was primarily due to lower market interest rates. Interest expense on FHLB advances decreased$223,000 from$662,000 in the second quarter of 2019 to$439,000 in the second quarter of 2020. The average balance increased from$95.2 million to$150.0 million between the two quarters. The$150.0 million in FHLB advances atJune 30, 2020 were five-year fixed-rate FHLB advances. The purpose of this borrowing was to obtain funding in order to enhance liquidity in light of the COVID-19 pandemic and obtain funding at an attractive interest rate. The long-term advance average rate is 1.18% and they mature in the first quarter of 2025. Interest expense on long-term debt and subordinated debentures decreased$14,000 to$1.9 million in the second quarter of 2020 as compared to$1.9 million in the second quarter of 2019. The average long-term debt and subordinated debentures increased to$118.3 million in the second quarter of 2020, compared to$113.4 million in the second quarter of 2019, due to the acquisition of PGBH. Provision for Loan Losses. The$2.7 million increase in the provision for loan losses, to$3.0 million in the second quarter of 2020 compared to$357,000 in the second quarter of 2019, was primarily attributable to the higher loan balances, an increase in 30-89 day past due loans, an increase in non-performing loans and increased qualitative factors due to impact of the COVID-19 pandemic. There were$320,000 in net loan charge-offs in the second quarter of 2020, as compared to a$32,000 loan charge-off in the second quarter of 2019 Noninterest Income. Noninterest income decreased$3.3 million , or 59.8%, to$2.2 million for the second quarter of 2020, compared to$5.5 million in the same quarter in the prior year. The following table sets forth the major components of our noninterest income for the three and six months endedJune 30, 2020 and 2019: For the Three Months Ended For the Six Months Ended June 30, Increase (Decrease) June 30, Increase (Decrease) (dollars in thousands) 2020 2019 $ % 2020 2019 $ % Noninterest income: Service charges, fees and other$ 1,065 $ 1,222 $ (157 ) (12.8 ) %$ 2,144 $ 2,042 $ 102 5.0 % Gain on sale of loans 81 3,120 (3,039 ) (97.4 ) 2,792 5,318 (2,526 ) (47.5 ) Loan servicing fee, net of amortization 708 899 (191 ) (21.2 ) 1,300 1,739 (439 ) (25.2 ) Recoveries on loans acquired in business combinations 5 55 (50 ) (90.9 ) 47 61 (14 ) (23.0 ) Unrealized gain on equity securities - - - - - 147 (147 ) (100.0 ) Increase (decrease) in cash surrender of life insurance 191 194 (3 ) (1.5 ) 382 385 (3 ) (0.8 ) Gain on sale of AFS securities 158 - 158 100.0 158 - 158 100.0 Gain on sale of fixed assets - 6 (6 ) (100.0 ) - 6 (6 ) (100.0 ) Total noninterest income$ 2,208 $ 5,496 $ (3,288 ) (59.8 )$ 6,823 $ 9,698 $ (2,875 ) (29.6 ) Service charges, fees and other income. Service charges, fees and other income totaled$1.1 million in the second quarter of 2020, compared to$1.2 million in the second quarter of 2019. The decrease was due a$77,000 reduction in wealth management commissions, a$233,000 CDFI grant received in the second quarter of 2019, partially offset by a$115,000 increase in account analysis charges. Gain on sale of loans. Gains on sale of loans are comprised of gains on sale of SFR mortgage loans and SBA loans. Gains on sale of loans totaled$81,000 in the second quarter of 2020, compared to$3.1 million in the second quarter of 2019. The decrease was primarily caused by the effect of the COVID-19 pandemic upon the mortgage and housing markets which slowed non-qualified mortgage origination and caused mortgage securitization to pause. 50 --------------------------------------------------------------------------------
The following table presents information on loans sold and gains on loans sold
for the three and six months ended
For the Three Months Ended For the Six Months Ended
June 30, Increase (Decrease) June 30, Increase (Decrease)
(dollars in thousands) 2020 2019 $ % 2020 2019 $ %
Loans sold:
SBA $ 1,249 $ 10,025 $ (8,776 ) -87.5 % $ 2,646 $ 13,765 $ (11,119 ) -80.8 %
SFR mortgages 5,212 175,032 (169,820 ) -97.0 % 105,676 346,419 (240,743 ) -69.5 %
Commercial real estate - 1,584 (1,584 ) -100.0 % - 10,422 (10,422 ) -100.0 %
$ 6,461 $ 186,641 $ (180,180 ) -96.5 % $ 108,322 $ 370,606 $ (262,284 ) -70.8 %
Gain on loans sold:
SBA $ 69 $ 616 $ (547 ) -88.8 % $ 159 $ 741 $ (582 ) -78.5 %
SFR mortgages 12 2,504 (2,492 ) -99.5 % 2,633 4,425 (1,792 ) -40.5 %
Commercial real estate - - - 100.0 % - 152 (152 ) -100.0 %
$ 81 $ 3,120 $ (3,039 ) -97.4 % $ 2,792 $ 5,318 $ (2,526 ) -47.5 %
Loan servicing income, net of amortization. Loan servicing income, net of
amortization decreased due to the increase in the payoffs in the SFR mortgage
portfolio. The decrease in SBA loans serviced is due greater SBA loan
prepayments in 2019, which were greater than SBA loan sales in 2019 and
2020. The following table presents information on loans servicing income for the
three and six months ended June 30, 2020 and 2019.
(dollars in For the Six Months Ended
thousands) For the Three Months Ended June 30, Increase June 30, Increase
For the period 2020 2019 $ % 2020 2019 $ %
Loan servicing
income, net of
amortization
SFR mortgage loans $ 405 $ 752 $ (347 ) -46.1 % $ 942 $ 1,432 $ (490 ) -34.2 %
SBA loans 303 147 156 106.1 % 358 307 51 16.6 %
Total $ 708 $ 899 $ (191 ) -21.2 % $ 1,300 $ 1,739 $ (439 ) -25.2 %
Our loan servicing income, net of amortization, decreased by
The following table shows loans serviced for others as ofJune 30, 2020 and 2019: June 30, Increase (Decrease) (dollars in thousands) 2020 2019 $ % As of period-end SFR loans serviced$ 1,617,875 $ 1,734,204 $ (116,329 ) -6.7 % SBA loans serviced 155,244 181,719 (26,475 ) -14.6 % CRE loans serviced 4,181 4,251 (70 ) -1.6 % We are servicing SFR mortgage loans for other financial institutions andFNMA , and we are servicing SBA and CRE loans as ofJune 30, 2020 . The change in the respective servicing portfolios reflects prepayment of loans and sales of loans from 2019 through the second quarter of 2020.
Recoveries on loans acquired in business combinations. Recoveries on loans
acquired in business combinations was
Cash surrender value of life insurance. The income from the cash surrender value of life insurance decreased$3,000 in the quarter endedJune 30, 2020 compared to the same quarter in 2019.
Gain on sale of fixed assets. No fixed assets were sold in the second quarter of
2020. There was a gain of
51
--------------------------------------------------------------------------------
Noninterest expense. Noninterest expense decreased $80,000 , or 0.5%, to $14.8
million in the second quarter of 2020 compared to $14.9 million in the second
quarter of 2019. The following table sets forth major components of our
noninterest expense for the three and six months ended June 30, 2020 and 2019:
For the Three Months Ended For the Six Months Ended
June 30, Increase (Decrease) June 30, Increase (Decrease)
(dollars in
thousands) 2020 2019 $ % 2020 2019 $ %
Noninterest expense:
Salaries and employee
benefits $ 8,103 $ 8,169 $ (66 ) -0.8 % $ 17,608 $ 17,287 $ 321 1.9
Occupancy and
equipment expenses 2,527 2,674 (147 ) (5.5 ) 4,931 4,926 5 0.1
Data processing 882 1,219 (337 ) (27.6 ) 2,024 2,228 (204 ) (9.2 )
Legal and
professional 670 656 14 2.1 1,274 1,081 193 17.9
Office expenses 337 294 43 14.6 660 630 30 4.8
Marketing and
business promotion 111 316 (205 ) (64.9 ) 325 678 (353 ) (52.1 )
Insurance and
regulatory
assessments 234 284 (50 ) (17.6 ) 411 582 (171 ) (29.4 )
Core deposit premium 357 385 (28 ) (7.3 ) 714 773 (59 ) (7.6 )
OREO expenses
(income) 14 81 (67 ) (82.7 ) 28 162 (134 ) (82.7 )
Merger and conversion
expenses 276 15 261 1,740.0 679 86 593 689.5
Other expenses 1,308 806 502 62.3 2,428 1,791 637 35.6
Total noninterest
expense $ 14,819 $ 14,899 $ (80 ) (0.5 ) $ 31,082 $ 30,224 $ 858 2.8
Salaries and employee benefits expense. Salaries and employee benefits expense
decreased $66,000 , or 0.8%, to $8.1 million for the second quarter of 2020
compared to $8.2 million for the second quarter of 2019. The Company incurred
approximately $519,000 in severance pay in the second quarter of 2020. The
number of full-time equivalent employees was 350 at June 30, 2020 , 382 at March
31, 2020 , 355 at December 31, 2019 and 372 at June 30, 2019 . None of our
employees are represented by a labor union, or governed by any collective
bargaining agreements. We consider relations with our employees to be
satisfactory.
Occupancy and equipment expense. Occupancy and equipment expense decreased
$147,000 , or 5.5%, to $2.5 million for the second quarter of 2020 compared to
$2.7 million for the second quarter of 2019. On June 30, 2020 , the Company had
27 branch and office locations, compared to 25 at December 31, 2019 and 25 at
June 30, 2019 . On March 31, 2020 , we closed the Grand Street branch in New York
City . The lease for this branch expired in April 2020 . Branch operations and
staff were transferred to the Bowery branch. With the acquisition of PGBH, we
acquired three branches located in the Chicago neighborhoods of Chinatown and
Bridgeport . The Bank plans to open a new full service banking branch in Edison,
New Jersey in the second half of 2020. The branch will be located at 561 US-1,
in the Wicks Shopping Plaza in Edison . The Bank entered into an agreement to
purchase a property located at 2057 86th Street, Brooklyn, New York, in the
Bensonhurst neighborhood, to house a full-service branch. We expect this branch
to open in 2021.
Data processing expense. Data processing expense decreased $337,000 , or 27.6%,
to $882,000 for the second quarter of 2020, compared to $1.2 million for the
second quarter of 2019. This decrease resulted primarily from reducing
duplicative services in our regions and applying a $90,000 credit from the data
processing agreement. Effective June 2019 , the Company renegotiated its data
processing master agreement with the vendor, under which the Company is allowed
to offset future monthly data processing expenses up to approximately $2.2
million through January 2026 . As of June 30, 2020 , $2.0 million of this benefit
remained for future use.
Legal and professional expense. Legal and professional expense increased $14,000
to $670,000 in the three months ended June 30, 2020 compared to $656,000 for the
three months ended June 30, 2019 . This increase was primarily due to normal
business activity.
Office expenses. Office expenses are comprised of communications, postage,
armored car, and office supplies and were
Marketing and business promotion expenses. Marketing and business promotion expense decreased$205,000 , or 64.9%, to$111,000 in the second quarter of 2020, compared to$316,000 for the second quarter of 2019. The decrease was primarily due the slowed economy and cost saving measures in the second quarter of 2020. 52 -------------------------------------------------------------------------------- Insurance and regulatory expenses. Insurance and regulatory assessments decreased$50,000 , or 17.6%, to$234,000 in the second quarter of 2020. The decrease was primarily due to aFDIC small bank assessment credit of$179,000 received in the first quarter of 2020. Amortization expenses. Amortization of CDI was$357,000 in the second quarter of 2020, compared to$385,000 in the same period of 2019. InJanuary 2020 we added$491,000 of CDI in connection with the PGBH acquisition. CDI amortization occurs over 8 to 10 years.
Merger and conversion expenses. Merger and conversion expense was
Other Expenses. Other expenses increased$502,000 , or 62.3%, to$1.3 million for the second quarter of 2020, compared to$806,000 in the second quarter of 2019. The provision for unfunded commitments was$51,000 in the second quarter of 2020 compared to a credit of$18,000 in the second quarter of 2019. AtJune 30, 2020 , the Company recorded an impairment writedown of$366,000 on mortgage servicing rights due to the impact of the COVID-19 pandemic. Income Tax Expense. During the three months endedJune 30, 2020 and 2019, the Company recorded an income tax provision of$2.9 million and$4.4 million , respectively, reflecting an effective tax rate of 30.8% and 30.3% for the three months endedJune 30, 2020 and 2019, respectively. The Company recognized tax expense from stock option exercises of$1,000 and$52,000 for the three months endedJune 30, 2020 and 2019, respectively. Net Income. Net income after tax amounted to$6.5 million for the second quarter 2020, a$3.6 million , or a 35.8% decrease from$10.1 million in the second quarter of 2019. For the second quarter of 2020 as compared to the second quarter of 2019, net interest income before the provision for loan losses decreased by$2.6 million , the provision for loan losses increased by$2.7 million , non-interest income decreased by$3.3 million , non-interest expense decreased by$80,000 , and income tax expense decreased by$1.5 million .
Results of Operations-Comparison of Results of Operations for the Six Months
Ended
The following discussion of our results of operations compares the first half endedJune 30, 2020 andJune 30, 2019 , respectively. The results of operations for the six months endedJune 30, 2020 are not necessarily indicative of the results of operations that may be expected for the year endingDecember 31, 2020 . Net Interest Income/Average Balance Sheet. In the first half of 2020, we generated net interest income of$48.6 million , a decrease of$1.6 million , or 3.2%, from the$50.2 million in net interest income of the first half of 2019. This decrease was largely due to a 68 basis point decrease in the average yield on interest-earning assets, partially offset by a$168.1 million increase in the average balance of interest-earning assets. The increase in the average balance of interest-earning assets was primarily due to organic HFI loan growth, an increase in Federal funds sold and cash equivalents, and investment securities, partially offset by a decrease in average HFS loans. For the six-months endedJune 30, 2020 and 2019, our net interest margin was 3.39% and 3.73%, respectively. Our net interest margin benefits from discount accretion on our purchased loan portfolios. The net interest margin for the six-months endedJune 30, 2020 and 2019, excluding accretion income, would have been 3.26% and 3.60%, respectively. Total interest income was$68.1 million for the first half of 2020 compared to$73.1 million for the first half of 2019. The$5.0 million , or 6.9%, decrease in total interest income was due to decreases in interest earned on our loan portfolio and federal funds sold, partially offset by an increase on our securities portfolio. Interest and fees on loans was$64.9 million for the first half of 2020 compared to$70.1 million for the first half of 2019. The$5.2 million , or 7.4%, decrease in interest income on loans was primarily due to a 36 basis point decrease in the average yield on total loans, reflecting the decline in market rates. The average yield on loans benefits from discount accretion on our acquired loan portfolios. For the six months endedJune 30, 2020 and 2019, the average yield on total loans was 5.26% and 5.62%, respectively, while the average yield on total loans excluding accretion income would have been 5.11% and 5.44%, respectively. A substantial portion of our acquired loan portfolio that is subject to discount accretion consists of commercial real estate loans. The table on page 10 illustrates by loan type the accretion income for the first half of 2020 and 2019. 53
-------------------------------------------------------------------------------- Interest income on our securities portfolio increased$435,000 , or 34.2%, to$1.7 million in the first half of 2020 compared to$1.3 million in the first half of 2019. The increase in interest income on securities was primarily due to an increase in the average balance of the portfolio of$75.3 million , or 86.1%, partially offset by a 85 basis point decrease in the average yield on securities. Securities income reported in the average balance sheet has been adjusted to a tax-equivalent basis; interest income reported in the Company's consolidated statements of income has not been grossed-up. Interest income on our federal funds sold, cash equivalents and other investments decreased$284,000 , or 15.8%, to$1.5 million in the first half of 2020 compared to$1.8 million in the first half of 2019. The decrease in interest income on these cash equivalents was due to a 199 basis point decrease in the average yield partially offset by an increase in the average balance of$129.2 million . The reasons for the decreased yield were the decrease in the federal funds rate over the period plus a$192,000 decrease in the FHLB dividend. Interest expense on interest-bearing liabilities decreased$3.4 million , or 14.9%, to$19.5 million in in the first half of 2020 compared to$22.9 million in the first half of 2019 due to lower rates on interest bearing liabilities (NOW, money market and time deposits, and FHLB advances), partially offset by increases in balances of$75.0 million (deposits, FHLB long- and short-term advances, long-term debt and subordinated debentures). Interest expense on deposits decreased to$15.0 million in the first half of 2020 compared to$16.3 million in the first half of 2019. The$1.2 million , or 7.6%, decrease in interest expense on deposits was primarily due to a 29 basis point decrease in average deposit rates, partially offset by a$300.6 million , or 14.0%, increase in the average balance of total deposits. The increase in the average balance of deposits resulted primarily from normal business growth. Interest expense on borrowings (FHLB advances, long-term debt and subordinated debentures) decreased to$4.5 million in the first half of 2020 compared to$6.6 million in the first half of 2018. This decrease was primarily due the average FHLB advance decreasing to$100.9 million in the first half of 2020 compared to$216.6 million in the first half of 2019. FHLB advances were primarily used to fund held-for-sale loans. Provision for Loan Losses. Provision for loan loss expense in the first half of 2020 was$5.0 million due to the economic impact of the COVID-19 pandemic and normal loan growth, compared to a$907,000 provision in the first half of 2019. Noninterest Income. Noninterest income decreased$2.9 million , or 29.6%, to$6.8 million in the first half of 2020 compared to$9.7 million in the first half of 2019. The table on page 11 sets forth major components of our noninterest income for the respective periods. Service charges, fees and other income. Service charges, fees and other income increased to$2.1 million in the first half of 2020 compared to$2.0 million in the first half of 2019. The increase primarily resulted from increased account analysis charges. Gain on sale of loans. Gain on sale of loans decreased to$2.8 million in the first half of 2020 compared to$5.3 million in the first half of 2019 due to a decreased amount of mortgage loan sales. As noted in the table on page 12, we sold$108.3 million in SFR mortgage, SBA and CRE loans in the first half of 2020 compared to$370.6 million in the same period of 2019. Loan servicing income, net of amortization. Our loan servicing income, net of amortization decreased by$439,000 to$1.3 million for the six months endedJune 30, 2020 compared to$1.7 million for the six months endedJune 30, 2019 . The reduction in income is due to the decrease in loans being serviced in 2020, partially offset by write-downs in serving assets due to pay-offs of SBA serviced loans. We were servicing$1.8 billion in SFR mortgage, SBA and CRE loans as ofJune 30, 2020 compared to$1.9 billion as ofJune 30, 2019 . Additional details are reflected in the table on page 12.
Recoveries on loans acquired in business combinations. Recoveries on loans
acquired in business combinations decreased
Unrealized Gain on
Increase in cash surrender of life insurance. Cash surrender of life insurance value decreased by$3,000 to$382,000 for the six months endedJune 30, 2020 compared to$385,000 for the six months endedJune 30, 2019 .
Gain on sale of fixed assets. In the second quarter of 2019, the Company sold
fixed assets for a
54
--------------------------------------------------------------------------------
Noninterest expense. Noninterest expense increased $858,000 , or 2.8%, to $31.1
million for the first half of 2020 compared to $30.2 million in the same period
of 2019. The table on page 13 sets forth major components of our noninterest
expense for the six months ended June 30, 2020 compared to the six months ended
June 30, 2019 . The primary reason for the increase was the PGBH acquisition plus
normal business growth.
Salaries and employee benefits expense. Salaries and employee benefits expense
increased $321,000 , or 1.9%, to $17.6 million in the first half of 2020 compared
to $17.3 million in the same period of 2019. This increase was primarily
attributable to severance pay in the second quarter of 2020, largely offset by a
decrease in all other salaries and employee benefits. The number of full-time
equivalent employees was 350 at June 30, 2020 , 355 at December 31, 2019 and 372
at June 30, 2019 .
Occupancy and equipment expense. Occupancy and equipment expense increased
$5,000 , or 0.1%, to $4.9 million in the first half of 2020 compared to the same
amount in the first half of 2019. The increase in occupancy expense is mainly
due to the PGBH acquisition, partially offset by the closing of the Grand Street
branch in April 2020 .
Data processing expense. Data processing expense decreased $204,000 , or 9.2%, to
$2.0 million in the first half of 2020 compared to $2.2 million for the first
half of 2019, mainly due to the $185,000 application of a credit per the data
processing agreement discussed above.
Legal and professional expenses. Legal and professional expense increased
$193,000 , or 17.9%, from $1.1 million in the first half of 2019 compared to $1.3
million for the first half of 2020. This increase was primarily due to normal
business growth.
Office expenses. Office expenses are comprised of communications, postage,
armored car, and office supplies and totaled
Marketing and business promotion expenses. Marketing and business promotion
expense decreased
Insurance and regulatory expenses. Insurance and regulatory assessments
decreased
Amortization expenses. Amortization of CDI was$714,000 in the first half of 2020, compared to$773,000 in the first half of 2019. This decrease was due the runoff of CDI from prior acquisitions. Merger and conversion expenses. Merger and conversion expense was$679,000 in the first half of 2020 compared to$86,000 in the first half of 2019, following the completion of the PGBH acquisition inJanuary 2020 . Other Noninterest expense. Other noninterest expense totaled$2.4 million in the first half of 2020 compared to$1.8 million for the same period of 2019. The increase is partially attributable to an increase in the provision for off-balance sheet commitments of$69,000 , a$357,000 increase in other loan related expenses and a mortgage servicing asset writedown of$366,000 . Income Tax Expense. Income tax expense was$6.2 million in the first half of 2020 compared to$8.3 million in the same period of 2019. This decrease was due to the$50,000 decrease in tax deductions for stock option exercises and$9.4 million decrease in pre-tax income. Effective tax rates were 31.7% and 28.7% in the first half of 2020 and 2019, respectively. Net Income. Net income decreased$7.3 million to$13.3 million in the first half of 2020, compared to$20.5 million in the same period of 2019. The decrease is primarily due to the decrease in net interest income, increase in the provision for loan and lease losses, decrease in non-interest income and increase in non-interest expense, partially offset by decreased income tax expense. 55 --------------------------------------------------------------------------------
ANALYSIS OF FINANCIAL CONDITION
Assets
Total assets were $3.1 billion as of June 30, 2020 and $2.8 billion as of
December 31, 2019 . Cash and cash equivalents decreased by $29.9 million , the
total gross loan portfolio increased by $305.0 million , primarily with increases
in SBA, CRE, SFR mortgage and C&D loans. SFR mortgage loans held for sale
decreased by $92.7 million in the six months ended June 30, 2020 .
Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions.
The following table sets forth the book value and percentage of each category of securities atJune 30, 2020 andDecember 31, 2019 . The book value for securities classified as available for sale is reflected at fair market value and the book value for securities classified as held to maturity is reflected at amortized cost. June 30, 2020 December 31, 2019 (dollars in thousands) Amount % of Total Amount % of Total Securities, available for sale, at fair valueU.S. government agency securities$ 1,444 0.7 %$ 1,572 1.2% SBA agency securities 4,615 2.4 % 4,691 3.5% Mortgage-backed securities, government sponsored agencies 15,353 7.9 % 19,171 14.3% Collateralized mortgage obligations 14,571 7.5 % 11,654 8.7% Commercial paper 114,920 59.5 % 69,899 52.0% Corporate debt securities (1) 34,853 18.1 % 19,082 14.1 % Total securities, available for sale, at fair value$ 185,756 96.1 %$ 126,069 93.8% Securities, held to maturity, at amortized cost Taxable municipal securities$ 2,798 1.4 %$ 3,505 2.6% Tax-exempt municipal securities 4,817 2.5 % 4,827 3.6% Total securities, held to maturity, at amortized cost 7,615 3.9 % 8,332 6.2% Total securities$ 193,371 100.0 %$ 134,401 100.0 %
(1) Comprised of corporate note securities, commercial paper and financial
institution subordinated debentures.
56
--------------------------------------------------------------------------------
The tables below set forth investment securities AFS and HTM for the periods
presented.
Gross Gross
(dollars in thousands) Amortized Unrealized Unrealized Fair
June 30, 2020 Cost Gains Losses Value
Available for sale
U.S. government agency
securities $ 1,409 $ 35 $ - $ 1,444
SBA securities 4,377 238 - 4,615
Mortgage-backed securities -
Government sponsored
agencies 14,946 407 - 15,353
Collateralized mortgage
obligations 14,083 488 - 14,571
Commercial paper 114,920 - - 114,920
Corporate debt securities 34,422 507 (76 ) 34,853
$ 184,157 $ 1,675 $ (76 ) $ 185,756
Held to maturity
Municipal taxable securities $ 2,798 $ 155 $ - $ 2,953
Municipal securities 4,817 254 - 5,071
$ 7,615 $ 409 $ - $ 8,024
December 31, 2019
Available for sale
U.S. government agency
securities $ 1,591 $ - $ (19 ) $ 1,572
SBA securities 4,671 42 (22 ) 4,691
Mortgage-backed securities-
Government sponsored
agencies 19,126 74 (29 ) 19,171
Collateralized mortgage
obligations 11,641 38 (25 ) 11,654
Commercial paper 69,899 - - 69,899
Corporate debt securities 18,801 281 - 19,082
$ 125,729 $ 435 $ (95 ) $ 126,069
Held to maturity
Municipal taxable securities $ 3,505 $ 147 $ - $ 3,652
Municipal securities 4,827 153 - 4,980
$ 8,332 $ 300 $ - $ 8,632
The weighted-average taxable equivalent book yield on the total investment
portfolio at June 30, 2020 was 1.58% with a weighted-average life of 2.31 years.
This compares to a weighted-average yield of 2.27% with a weighted-average life
of 3.0 years at December 31, 2019 . The weighted average life is the average
number of years that each dollar of unpaid principal due remains outstanding.
Average life is computed as the weighted-average time to the receipt of all
future cash flows, using as the weights the dollar amounts of the principal
pay-downs.
57
--------------------------------------------------------------------------------
The table below shows the Company's investment securities' gross unrealized
losses and estimated fair value by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
June 30, 2020 and December 31, 2019 . The unrealized losses on these securities
were primarily attributed to changes in interest rates. The issuers of these
securities have not, to our knowledge, evidenced any cause for default on these
securities. These securities have fluctuated in value since their purchase dates
as market rates have fluctuated. However, we have the ability and the intention
to hold these securities until their fair values recover to cost or maturity. As
such, management does not deem these securities to be
other-than-temporarily-impaired A summary of our analysis of these securities
and the unrealized losses is described more fully in Note 4 - Investment
Securities in the Notes to the 2019 consolidated financial statements included
in our 2019 Annual Report. Economic trends may adversely affect the value of the
portfolio of investment securities that we hold.
Less than Twelve Months Twelve Months or More Total
Unrealized Estimated No. of Unrealized Estimated No. of Unrealized Estimated No. of
(dollars in thousands) Losses Fair Value Issuances Losses Fair Value Issuances Losses Fair Value Issuances
June 30, 2020
Corporate debt securities $ (76 ) $ 8,419 5 - - - $ (76 ) $ 8,419 5
Total available for sale $ (76 ) $ 8,419 5 $ - $ - - $ (76 ) $ 8,419 5
December 31, 2019
Government agency securities $ (19 ) $ 1,572 2 $ - $ - - $ (19 ) $ 1,572 2
SBA securities (22 ) 1,469 2 - - - (22 ) 1,469 2
Mortgage-backed securities-
Government sponsored agencies (5 ) 2,631 4 (24 ) 3,912 6 (29 ) 6,543 10
Collateralized mortgage
obligations (10 ) 5,738 3 (15 ) 953 2 (25 ) 6,691 5
Total available for sale $ (56 ) $ 11,410 11 $ (39 ) $ 4,865 8 $ (95 ) $ 16,275 19
The Company did not record any charges for other-than-temporary impairment
losses for the three months ended
Loans
AtJune 30, 2020 , total loans held for investment, net of allowance for loan losses, totaled$2.6 billion . The following table presents the balance and associated percentage of each major category in our loan portfolio atJune 30, 2020 andDecember 31, 2019 : As of June 30, 2020 As of December 31, 2019 (dollars in thousands) Amount % Amount % Loans: (1) Commercial and industrial$ 267,481 10.3$ 274,586 12.5 SBA 104,069 4.0 74,985 3.4 Construction and land development 145,754 5.6 96,020 4.4 Commercial real estate (2) 900,302 34.7 793,268 36.1 Single-family residential mortgages 1,174,927 45.3 957,254 43.6 Other loans 2,087 0.1 821 0.0 Total loans$ 2,594,620 100.0$ 2,196,934 100.0 Allowance for loan losses (22,820 ) (18,816 ) Total loans, net$ 2,571,800 $ 2,178,118
(1) Net of discounts and deferred fees and costs.
(2) Includes non-farm & non-residential real estate loans, multifamily
residential and single-family residential loans for a business purpose.
Total loans (HFI and HFS) increased$305.0 million , or 13.2%, to$2.6 billion atJune 30, 2020 compared to$2.3 billion atDecember 31, 2019 . The Company acquired$172.4 million in loans with the acquisition of PGB inJanuary 2020 and$32.8 million were originated through the PPP loan program. The total loan portfolio increased primarily in SBA, CRE, SFR mortgage loans and C&D loans. 58 -------------------------------------------------------------------------------- Commercial and industrial loans. We provide a mix of variable and fixed rate commercial and industrial loans. The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and for international trade financing. Commercial and industrial loans include lines of credit with a maturity of one year or less, commercial and industrial term loans with maturities of five years or less, shared national credits with maturities of five years or less, mortgage warehouse lines with a maturity of one year or less, bank subordinated debentures with a maturity of 10 years, purchased receivables with a maturity of two months or less and international trade discounts with a maturity of three months or less. Substantially all of our commercial and industrial loans are collateralized by business assets or by real estate.
Commercial and industrial loans decreased
Commercial real estate loans. Commercial real estate loans include
owner-occupied and non-occupied commercial real estate, multi-family residential
and SFR mortgage loans originated for a business purpose. The interest rate for
the majority of these loans are prime-based and have a maturity of five years or
less except for the SFR mortgage loans originated for a business purpose which
may have a maturity of one year. Our policy maximum loan-to-value ("LTV") ratio
is 75% for commercial real estate loans. The total commercial real estate
portfolio increased $217.7 million , or 22.7%, to $900.3 million at June 30,
2020 , compared to $793.3 million at December 31, 2019 . The Company acquired
$32.8 million in CRE loans with the PGBH acquisition. The multi-family
residential loan portfolio was $254.6 million as of June 30, 2020 and $235.8
million as of December 31, 2019 . The SFR mortgage loan portfolio originated for
a business purpose totaled $17.9 million as of June 30, 2020 and $19.2 million
as of December 31, 2019 .
Construction and land development loans. Construction and land development loans
increased $49.7 million , or 51.8%, to $145.8 million at June 30, 2020 as
compared to $96.0 million at December 31, 2019 , as originations exceeded loan
repayments. The following table shows the categories of our construction and
land development portfolio as of June 30, 2020 and December 31, 2019 :
As of June 30, 2020 As of December 31, 2019
(dollars in thousands) Amount % Mix Amount % Mix
Residential construction $ 88,262 60.5 $ 60,749 63.3
Commercial construction 40,909 28.1 29,871 31.1
Land development 16,583 11.4 5,400 5.6
Total construction and land
development loans $ 145,754 100.0 $ 96,020 100.0
Small Business Administration guaranteed loans. We are designated a Preferred
Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a)
variable-rate loans. We generally sell the 75% guaranteed portion of the SBA
loans that we originate. Our SBA loans are typically made to small-sized
manufacturing, wholesale, retail, hotel/motel and service businesses for working
capital needs or business expansions. SBA loans can have any maturity up to 25
years. Typically, non-real estate secured loans mature in less than 10
years. Collateral may also include inventory, accounts receivable and equipment,
and includes personal guarantees. Our unguaranteed SBA loans collateralized by
real estate are monitored by collateral type and are included in our CRE
Concentration Guidance.
SBA loans increased $29.1 million , or 38.8%, to $104.1 million at June 30, 2020
compared to $75.0 million at December 31, 2019 . This increase was primarily due
to $38.9 million in originations, partially offset by loan sales of $2.7 million
and $5.2 million in loan pay-offs in the six months ended June 30, 2020 . Of the
$38.9 million originated, $32.8 million were from the PPP loan program.
SFR Loans. We originate mainly non-qualified, alternative documentation SFR
mortgage loans through correspondent relationships or through our branch network
or retail channel to accommodate the needs of the Asian-American market. As of
June 30, 2020 , we had $1.2 billion of SFR real estate loans, representing 45.3%
of our HFI loan portfolio, excluding available for sale SFR loans.
Our SFR loan product is a seven-year hybrid adjustable mortgage which re-prices
at seven years to the one-year Constant Maturity Treasury rate plus 2.50%. The
start rate for the five-year hybrid in the Eastern region is 4.375% plus 1% in
points. In the Western region we offer a seven-year hybrid and the start rate is
5.00%.
We originate these non-qualified SFR mortgage loans both to sell and hold for
investment. The loans held for investment are generally originated through our
retail branch network to our customers, many of whom establish a deposit
relationship with us. We sell many of these non-qualified SFR mortgage loans to
other Asian-American banks, FNMA and other investors.
59
--------------------------------------------------------------------------------
Except for SFR loans sold to FNMA , the loans are sold with no representation or
warranties and with a replacement feature for the first 90-days if the loan pays
off early. As a condition of the sale, the buyer must have the loans audited for
underwriting and compliance standards. We originate qualified mortgages and sell
them directly to FNMA . These loans are underwritten under FNMA guidelines and
sold with the normal FNMA conditions. In addition, we may sell some of our
non-qualified SFR mortgage loans to FNMA in a bulk sale with limited recourse to
us.
As of June 30, 2020 , the weighted average loan-to-value of the portfolio was
55.7%, the weighted average FICO score was 758 and the average duration of the
portfolio was 2.4 years. We also offer qualified SFR mortgage loans as a
correspondent to a national financial institution.
SFR mortgage real estate loans (which include $17.9 million of home equity
loans) increased $217.7 million , or 22.7%, to $1.2 billion as of June 30, 2020
as compared to $957.3 million as of December 31, 2019 . This increase includes
$53.1 million HFS loans transferred to HFI In addition, loans held for sale
decreased $92.7 million , or 85.7% to $15.5 million as of June 30, 2020 compared
to $108.2 million December 31, 2019 . The decrease in loans held for sale is
primarily due the disruption in the non-qualified secondary market caused by the
COVID-19 pandemic.
Loan Quality
We use what we believe is a comprehensive methodology to monitor credit quality
and prudently manage credit concentration within our loan portfolio. Our
underwriting policies and practices govern the risk profile and credit and
geographic concentration for our loan portfolio. We also have what we believe to
be a comprehensive methodology to monitor these credit quality standards,
including a risk classification system that identifies potential problem loans
based on risk characteristics by loan type as well as the early identification
of deterioration at the individual loan level. In addition to our allowance for
loan losses, our purchase discounts on acquired loans provide additional
protections against credit losses.
Discounts on Purchased Loans. In connection with our acquisitions, we hire a
third-party to determine the fair value of loans acquired. In many instances,
fair values were determined by estimating the cash flows expected to result from
those loans and discounting them at appropriate market rates. The excess of
expected cash flows above the fair value of the majority of loans will be
accreted to interest income over the remaining lives of the loans in accordance
with FASB ASC 310-20 Receivables-Nonrefundable Fees and Other Costs.
Analysis of the Allowance for Loan Losses. The following table allocates the allowance for loan losses, or the allowance, by category:
As of June 30, 2020 As of December 31, 2019
(dollars in thousands) Amount % (1) Amount % (1)
Loans:
Commercial and industrial$ 2,854 12.5 %$ 2,736 14.5 % SBA 959 4.2 852 4.5 Construction and land development 1,938 8.5 1,268 6.7 Commercial real estate (2) 9,379 41.1 7,668 40.8 Single-family residential mortgages 7,668 33.6 6,182 32.9 Other 22 0.1 9 0.0 Unallocated - 0.0 101 0.5 Allowance for loan losses$ 22,820 100.0 % 18,816 100.0 %
(1) Represents the percentage of the allowance to total loans to the total
ALLL.
(2) Includes non-farm and non-residential real estate loans, multi-family
residential and single-family residential loans originated for a business
purpose.
The allowance and the balance of accretable credit discounts represent our estimate of probable and reasonably estimable credit losses inherent in loans held for investment as of the respective balance sheet date. The accretable credit discount was$5.8 million atJune 30, 2020 and$5.1 million atDecember 31, 2019 . 60
-------------------------------------------------------------------------------- Allowance for loan losses. Our methodology for assessing the appropriateness of the allowance for loan losses includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans or loans considered by management to be in a high-risk category. General allowances are established based on a number of factors, including historical loss rates, an assessment of portfolio trends and conditions, accrual status and economic conditions. For commercial and industrial, SBA, commercial real estate, construction and land development and SFR mortgage loans held for investment, a specific allowance may be assigned to individual loans based on an impairment analysis. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is based on an analysis of the most probable source of repayment, including the present value of the loan's expected future cash flows, the estimated market value or the fair value of the underlying collateral. Interest income on impaired loans is accrued as earned, unless the loan is placed on nonaccrual status. Credit-discount on loans purchased through bank acquisitions. Purchased loans are recorded at market value in two categories, credit discount, and liquidity discount and premiums. The remaining credit discount at the end of a period is compared to the analysis for loan losses for each acquisition. If the credit discount is greater than the expected loss no additional provision is needed. The following table shows our credit discounts by loan portfolio for purchased loans only as ofJune 30, 2020 andDecember 31, 2019 . We have recorded additional reserves of$1.8 million due to the credit discounts on acquired loans being less than the analysis for loan losses on those acquisitions as ofJune 30, 2020 . As of June 30, As of December 31, (dollars in thousands) 2020 2019 Commercial and industrial $ 79 $ 37 SBA 39 42 Construction and land development 10 - Commercial real estate 1,625
1,657
Single-family residential mortgages 4,062
3,573
Total credit discount on purchased loans $ 5,815 $
5,309
Total remaining balance of purchased loans through acquisitions$ 662,030 $
579,329
Credit-discount to remaining balance of purchased loans 0.88 % 0.92 % Individual loans considered to be uncollectible are charged off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged off are added to the allowance. Net charge-offs (recoveries) to average loans were 0.05% and 0.01% for the three months, and 0.06% and (0.01)% for the six months, endedJune 30, 2020 and 2019, respectively. The allowance for loan losses was$22.8 million atJune 30, 2020 compared to$18.8 million atDecember 31, 2019 . The$4.0 million increase was due to a$5.0 million loan loss provision primarily attributable to the higher loan balances, an increase in 30-89 day past due loans, an increase in non-performing loans and the expected impact of increased qualitative factors due to the COVID-19 pandemic. We analyze the loan portfolio, including delinquencies, concentrations, and risk characteristics, at least quarterly in order to assess the overall level of the allowance and nonaccretable discounts. We also rely on internal and external loan review procedures to further assess individual loans and loan pools, and economic data for overall industry and geographic trends. In determining the allowance and the related provision for loan losses, we consider three 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, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors and (iii) review of the credit discounts in relationship to the valuation allowance calculated for purchased loans. Provisions for loan losses are charged to operations to record changes to the total allowance to a level deemed appropriate by us. 61 --------------------------------------------------------------------------------
The following table provides an analysis of the allowance for loan losses,
provision for loan losses and net charge-offs for the three and six months ended
For the Three Months Ended June 30, For the Six Months Ended June 30,
(dollars in thousands) 2020 2019 2020 2019
Balance, beginning of period $ 20,130 $ 18,236 $ 18,816 $ 17,577
Charge-offs:
Commercial and industrial 200 32 200 32
SBA 119 - 750 -
Total charge-offs 319 32 950 32
Recoveries:
Commercial and industrial - - - -
SBA - - - -
Construction and land
development - - - 109
Commercial real estate - - - -
Single-family residential
mortgages - - - -
Total recoveries - - - 109
Net charge-offs (recoveries) 319 32 950 (77 )
Provision for loan losses 3,009 357 4,954 907
Balance, end of period $ 22,820 $ 18,561 $ 22,820 $ 18,561
Total loans at end of period (1)
(2) $ 2,594,620 $ 2,092,438 $ 2,594,620 $ 2,092,438
Average loans (2) $ 2,511,835 $ 2,110,985 $ 2,428,336 $ 2,114,097
Net charge-offs (recoveries)
annualized, to average
loans 0.05 % 0.01 % 0.05 % -0.01 %
Allowance for loan losses to
total loans 0.88 % 0.89 % 0.88 % 0.89 %
Credit-discount on loans
purchased through
acquisitions $ 5,815 $ 6,308 $ 5,815 $ 6,308
(1) Total loans are net of discounts and deferred fees and costs.
(2) Excludes loans held for sale.
Problem Loans. Loans are considered delinquent when principal or interest
payments are past due 30 days or more; delinquent loans may remain on accrual
status between 30 days and 89 days past due. Loans on which the accrual of
interest has been discontinued are designated as nonaccrual loans. Typically,
the accrual of interest on loans is discontinued when principal or interest
payments are past due 90 days or when, in the opinion of management, there is a
reasonable doubt as to collectability in the normal course of business. When
loans are placed on nonaccrual status, all interest previously accrued but not
collected is reversed against current period interest income. Income on
nonaccrual loans is subsequently recognized only to the extent that cash is
received and the loan's principal balance is deemed collectible. Loans are
restored to accrual status when loans become well-secured and management
believes full collectability of principal and interest is probable.
A loan is considered impaired when it is probable that we will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. Impaired loans include loans on nonaccrual status and performing
restructured loans. Income from loans on nonaccrual status is recognized to the
extent cash is received and when the loan's principal balance is deemed
collectible. Depending on a particular loan's circumstances, we measure
impairment of a loan based upon either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's observable
market price, or the fair value of the collateral less estimated costs to sell
if the loan is collateral dependent. A loan is considered collateral dependent
when repayment of the loan is based solely on the liquidation of the collateral.
Fair value, where possible, is determined by independent appraisals, typically
on an annual basis. Between appraisal periods, the fair value may be adjusted
based on specific events, such as if deterioration of quality of the collateral
comes to our attention as part of our problem loan monitoring process, or if
discussions with the borrower lead us to believe the last appraised value no
longer reflects the actual market for the collateral. The impairment amount on a
collateral-dependent loan is charged-off to the allowance if deemed not
collectible and the impairment amount on a loan that is not collateral-dependent
is set up as a specific reserve.
In cases where a borrower experiences financial difficulties and we make certain
concessionary modifications to contractual terms, the loan is classified as a
TDR. These concessions may include a reduction of the interest rate, principal
or accrued interest, extension of the maturity date or other actions intended to
minimize potential losses. Loans restructured at a rate equal to or greater than
that of a new loan with comparable risk at the time the loan is modified may be
excluded from restructured loan disclosures in years subsequent to the
restructuring if the loans are in compliance with their modified terms. A
restructured loan is considered impaired despite its accrual status and a
specific reserve is calculated based on the present value of expected cash flows
discounted at the loan's effective interest rate or the fair value of the
collateral less estimated costs to sell if the loan is collateral dependent.
62
--------------------------------------------------------------------------------
Pursuant to recent regulatory guidance, we have elected under the CARES Act to
not apply GAAP requirements to loan modifications related to the COVID-19
pandemic that would otherwise be categorized as a TDR, and have suspended the
determination of loan modifications related to the pandemic from being treated
as TDRs. Modifications include the following: (1) forbearance agreements, (2)
interest-rate modifications, (3) repayment plans, and (4) any other similar
arrangements that defer or delay payments of principal or interest. The relief
from TDR guidance applies to modifications of loans that were not more than 30
days past due as of December 31, 2019 , and that occur beginning on March 1,
2020 , until the earlier of the following dates: (1) 60 days after the date on
which the national emergency related to the COVlD-19 pandemic outbreak is
terminated, or (2) December 31, 2020 . The suspension of TDR accounting and
reporting guidance may not be applied to any loan of a borrower that is not
related to the COVID-19 pandemic.
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold, and is carried at estimated fair value less estimated costs to sell.
The following table sets forth the allocation of our nonperforming assets among
our different asset categories as of the dates indicated. Nonperforming loans
include nonaccrual loans, loans past due 90 days or more and still accruing
interest (of which there were none during the periods presented), and loans
modified under TDRs. Nonperforming loans exclude PCI loans. The balances of
nonperforming loans reflect the net investment in these assets.
As of June 30, As of December 31,
(dollars in thousands) 2020 2019
Accruing troubled debt restructured loans:
Commercial and industrial $ 503 $ -
SBA -
45
Construction and land development 257
264
Commercial real estate 454
1,472
Total troubled debt restructured loans 1,214
1,781
Non-accruing troubled debt restructured loans: Commercial and industrial $ 802 $ - SBA 40 - Commercial real estate 998 - Total non-accruing troubled debt restructured loans 1,840 - Non-accrual loans: Commercial and industrial $ 1,755 $ - SBA 9,707 9,378 Construction and land development 173
-
Commercial real estate 2,035
725
Single-family residential mortgages 2,244 1,334 Other 89 - Total non-accrual loans 16,003 11,437 Loans past due 90 days or more, still accruing - - Total non-performing loans 17,217 13,218 Other real estate owned 293 293 Nonperforming assets $ 17,510 $ 13,511 Allowance for loan losses to nonperforming loans 132.54 % 142.35 % Nonperforming loans to total loans (excluding HFS loans) 0.66 % 0.60 % Nonperforming assets to total assets 0.56 % 0.43 %
The
Our 30-89 day delinquent loans increased to$23.9 million as ofJune 30, 2020 from$5.3 million as ofDecember 31, 2019 . Refer to Note 5 to the quarterly financial statements for the detail of past due loans as ofJune 30, 2020 andDecember 31, 2020 . The increase in past due loans was due to the economic impact of the COVID-19 pandemic. 63
-------------------------------------------------------------------------------- We did not recognize any interest income on nonaccrual loans during the periods endedJune 30, 2020 andDecember 31, 2019 while the loans were in nonaccrual status. We recognized interest income on loans modified under TDRs of$70,000 and$15,000 during the three months endedJune 30, 2020 and 2019, and$129,000 and$33,000 for the six months endedJune 30, 2020 and 2019, respectively. We utilize an asset risk classification system in compliance with guidelines established by theFDIC as part of our efforts to improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: "substandard," "doubtful," and "loss." Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value that continuance as an asset is not warranted. We use a risk grading system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 6, which are "special mention," loans with a risk grade of 7, which are "substandard" loans that are generally not considered to be impaired and loans with a risk grade of 8, which are "doubtful" loans generally considered to be impaired. These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank's senior management.
COVID-19 Impact on Loan Quality
We increased SBA lending during the second quarter of 2020 as many of the Bank's customers sought to participate in the SBA's PPP Program. As ofJune 30, 2020 , the Company has processed approximately 258 PPP loans with the SBA in the total amount of approximately$32.8 million or 1.3% of the Company's total HFI loan portfolio. In addition to actively participating in the PPP loan program, we are making available to our SBA customers the SBA six-month payment guarantee program. As ofJune 30, 2020 , borrowers representing approximately470 SFR mortgage loans totaling$219.2 million , or 8.5% of the Company's total HFI loan portfolio, and 94 commercial borrowers representing$191.7 million , or 7.3% of the Company's HFI loan portfolio, have requested some form of payment deferral. The majority of our non-single-family residential loan portfolio customer requests is to defer payment for three months. It is too early in the pandemic-induced economic slowdown to determine the total amount of loans that will ultimately require payment deferrals. Cash and Cash Equivalents. Cash and cash equivalents decreased$29.9 million , or 16.5%, to$151.8 million as ofJune 30, 2020 as compared to$181.8 million atDecember 31, 2019 . This decrease was primarily due to$70.1 million in cash from operating activities,$141.2 million in cash from financing activities, partially offset by$241.2 million used in investing activities. TheFederal Reserve announced the reduction of the reserve requirement ratio to zero percent across all deposit tiers, effectiveMarch 26, 2020 . Depository institutions that were required to maintain deposits in aFederal Reserve Bank account to satisfy reserve requirements will no longer be required to do so and can use the additional liquidity to lend to individuals and businesses. It is our understanding that theFederal Reserve currently has no current plans to reinstate the reserve requirement. However, theFederal Reserve may adjust reserve requirement ratios in the future if conditions warrant.Goodwill and Other Intangible Assets.Goodwill was$69.2 million atJune 30, 2020 and$58.6 million atDecember 31, 2019 .Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired. Other intangible assets, which consist of core deposit intangibles, were$5.9 million and$6.1 million atJune 30, 2020 andDecember 31, 2019 , respectively. The goodwill balance increased fromDecember 31, 2019 as a result of the PGBH acquisition. The CDI assets are amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of eight to ten years. We performed a goodwill impairment analysis as ofMarch 31, 2020 andJune 30, 2020 and found no impairment. Liabilities. Total liabilities increased by$341.3 million to$2.7 billion atJune 30, 2020 from$2.4 billion atDecember 31, 2019 , primarily due to a$150.0 FHLB long-term advances plus$187.6 million in deposit growth. 64 -------------------------------------------------------------------------------- Deposits. As a Chinese-American business bank that focuses on successful businesses and their owners, many of our depositors choose to leave large deposits with us. The Bank measures core deposits by reviewing all relationships over$250,000 on a quarterly basis. We track all deposit relationships over$250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under$250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than$250,000 . As many of our customers have more than$250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base. As ofJune 30, 2020 , the Bank considers$2.2 billion or 88.9% of our deposits as core relationships. As ofJune 30, 2020 , our top ten deposit relationships totaled$333.0 million , of which four are related to directors and shareholders of the Company for a total of$116.6 million , or 35.0% of our top ten deposit relationships. As ofJune 30, 2020 , our directors and shareholders with deposits over$250,000 totaled$126.4 million or 8.1% of all relationships over$250,000 . The following table summarizes our average deposit balances and weighted average rates for the three months endedJune 30, 2020 and year endedDecember 31, 2019 : For the Three Months Ended For the Year Ended June 30, 2020 December 31, 2019 Weighted Weighted Average Average Average Average (dollars in thousands) Balance Rate (%) Balance Rate (%) Noninterest-bearing demand $ 557,903 -$ 421,174 - Interest-bearing: NOW 57,547 0.42 24,925 0.27 Savings 123,868 0.10 97,670 0.20 Money market 404,480 0.63 370,451 1.19 Time, less than$250,000 725,142 1.73 712,534 2.25 Time,$250,000 and over 589,090 1.91 566,810 2.35 Total interest-bearing 1,900,127 1.42 1,772,390 1.93 Total deposits$ 2,458,030 1.10$ 2,193,564 1.56
The following table sets forth the maturity of time deposits of
(dollars in thousands) Three Months Three to Six Months
Six to 12 Months After 12 Months Total
Time deposits,
96,683 $ 280,037 $ 25,806 $ 573,898
Wholesale deposits (1) 4,401 11,890 49,520 20,545 86,356
Time, brokered - - - 2,378 2,378
Total $ 175,773 $ 108,573 $ 329,557 $ 48,729 $ 662,632 (1) Wholesale deposits are defined as time deposits originated through via
internet rate line and/or through other deposit originators.
We acquire wholesale time deposits from the internet and outside deposits originators as needed to supplement liquidity. These time deposits are primarily under$250,000 and we do not consider them core deposits. The total amount of such deposits was$86.4 million as ofJune 30, 2020 and$93.2 million as ofDecember 31, 2019 . The Bank had$2.4 million in brokered deposits atJune 30, 2020 and$67.1 million as ofDecember 31, 2019 . The brokered deposits were acquired to support our HFS SFR mortgage loans.
Total deposits increased
As of
65
--------------------------------------------------------------------------------
FHLB Borrowings. In addition to deposits, we have used long- and short-term
borrowings, such as federal funds purchased and FHLB long-and short-term
advances, as a source of funds to meet the daily liquidity needs of our
customers and fund growth in earning assets. We had no FHLB short-term advances
at June 30, 2020 and December 31, 2019 , respectively. In the first quarter of
2020, the Company obtained $150.0 million in long-term FHLB advances. The term
is five years, maturing by March 2025 . The average fixed interest rate is
1.18%. The Company secured this funding in case there is a liquidity issue
caused by the COVID-19 pandemic and to obtain an attractive interest rate. The
following table sets forth information on our total FHLB advances during the
periods presented:
As of and for the Three Months Ended As of and for the Six Months Ended
June 30, June 30,
(dollars in thousands) 2020 2019 2020 2019
Outstanding at period-end $ 150,000 $ 40,000 $ 150,000 $ 40,000 Average amount outstanding
150,000 95,220 100,989 216,638
Maximum amount outstanding at any
month-end 150,000 110,000 364,500 364,500
Weighted average interest rate:
During period 1.18 % 2.75 % 1.17 % 2.58 %
End of period 1.18 % 2.52 % 1.18 % 2.52 %
Long-term Debt. In March 2016 , the Company issued $50.0 million , 6.5%
fixed-to-floating rate subordinated notes due March 31, 2026 . The Company used
the net proceeds from the offering for general corporate purposes, including
providing capital to the Bank and maintaining adequate liquidity at the Company.
The subordinated notes bear interest at the initial rate of 6.5% per annum from
March 31, 2016 until April 1, 2021 , payable on September 30 and December 30 of
each year. Thereafter, the Company will pay interest on the principal amount of
these notes at a variable rate equal to three month LIBOR plus 516 basis points
each March 31 , June 30 , September 30 and December 31 .
In November 2018 , the Company issued $55.0 million , 6.18% fixed-to-floating rate
subordinated notes due December 1, 2028 . The Company used the net proceeds from
the offering for general corporate purposes, including providing capital to the
Bank and maintaining adequate liquidity at the Company. The subordinated notes
bear interest at the initial rate of 6.18% per annum from December 1, 2018 until
but excluding December 1, 2023 , payable on June 1 and December 1 of each year.
Thereafter, the Company will pay interest on the principal amount of this note
at a variable rate equal to three month LIBOR plus 315 basis points each March
1 , June 1 , September 1 and December 1 .
Subordinated Debentures. Subordinated debentures consist of subordinated
notes. As of June 30, 2020 and December 31, 2019 , the amount outstanding was
$14.2 million and $9.7 million , respectively. Under the terms of our
subordinated notes and the related subordinated notes purchase agreements, we
are not permitted to declare or pay any dividends on our capital stock if an
event of default occurs under the terms of the long term debt. These
subordinated notes consist of the following:
The Company maintains the Trust, which has issued a total of $5.2 million
securities ($5.0 million in capital securities and $155,000 in common
securities). These trust preferred securities were originally issued by the
Trust, which was a subsidiary of TFC, which was acquired by the Company in
February 2016 . The Company determined the fair value as of the valuation date of
the Trust issuance was $3.3 million , indicating a discount of $1.9 million . The
underlying debentures bear interest equal to three month LIBOR plus 1.65%,
payable each March 15 , June 15 , September 15 and December 15 . The maturity date
is March 15, 2037 . The subordinated debentures have a variable rate of interest
equal to the three month LIBOR plus 1.65%, which was 1.96% as of June 30, 2020
and 3.54% at December 31, 2019 .
The Company holds maintains FAIC Trust , which has issued a total of $7.2 million
securities ($7.0 million in capital securities and $217,000 in common
securities). These trust preferred securities were originally issued by FAIC
Trust , which was a subsidiary of FAIC, which the Company acquired in October
2018 . The Company determined the fair value as of the valuation date of the FAIC
Trust issuance was $6.0 million , with a discount of $1.2 million . The underlying
debentures bear interest equal to three month LIBOR plus 2.25%, payable each
March 15 , June 15 , September 15 and December 15 . The maturity is December 15,
2034 . The rate at June 30, 2020 was 2.56% and 4.14% at December 31, 2019 .
66
--------------------------------------------------------------------------------
In January 2020 , the Company, through the acquisition of PGBH, acquired PGBH
Trust , a Delaware statutory trust formed in December 2004 . PGBH Trust issued
5,000 units of fixed-to-floating rate capital securities with an aggregate
liquidation amount of $5.0 million and 155 common securities with an aggregate
liquidation amount of $155,000 . There was a $763,000 valuation reserve recorded
to arrive at market value which is treated as a yield adjustment and is
amortized over the life of the security. The Company has the option to defer
interest payments on the subordinated debentures from time to time for a period
not to exceed five consecutive years. The subordinated debentures have a
variable rate of interest equal to the three-month LIBOR plus 2.10% through
final maturity on December 15, 2034 . The rate at June 30, 2020 was 2.41%.
In July 2017 , British banking regulators announced plans to eliminate the LIBOR
rate by the end of 2021, before these subordinated notes and debentures
mature. For these subordinated debentures, there are provisions for amendments
to establish a new interest rate benchmark.
Capital Resources and Liquidity Management
Capital Resources. Shareholders' equity is influenced primarily by earnings, dividends, sales and redemptions of common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available for sale investment securities.
Shareholders' equity increased$6.3 million , or 1.6%, to$414.0 million during the six-month period endingJune 30, 2020 due to$13.3 million of net income,$712,000 from the exercise of stock options,$327,000 from stock-based compensation, and a$887,000 increase in net accumulated other comprehensive income, which was partially offset by$3.6 million of common dividends declared and by$5.3 million of common stock repurchases. The increase in accumulated other comprehensive income primarily resulted from increases in unrealized gains on AFS securities. Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. Our liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in banks, federal funds sold, available for sale securities, term federal funds, purchased receivables and maturing or prepaying balances in our securities and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market noncore deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, additional borrowings through theFederal Reserve's discount window and the issuance of preferred or common securities. Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, debt financing and increases in customer deposits. For additional information regarding our operating, investing and financing cash flows, see the consolidated statements of cash flows provided in our consolidated financial statements. Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis. As ofJune 30, 2020 andDecember 31, 2019 , we had$47.0 million of unsecured federal funds lines with no amounts advanced against the lines as of such dates. In addition, lines of credit from the Federal Reserve Discount Window were$12.5 million atJune 30, 2020 and$14.3 million atDecember 31, 2019 , respectively. Federal Reserve Discount Window lines were collateralized by a pool of CRE loans totaling$28.5 million and$28.7 million as ofJune 30, 2020 andDecember 31, 2019 , respectively. We did not have any borrowings outstanding with theFederal Reserve atJune 30, 2020 andDecember 31, 2019 , and our borrowing capacity is limited only by eligible collateral. AtJune 30, 2020 , we had$150.0 million in FHLB long-term advances outstanding, and none atDecember 31, 2019 . Based on the values of loans pledged as collateral, we had$1.1 billion and$636.5 million of additional borrowing capacity with the FHLB as ofJune 30, 2020 andDecember 31, 2019 , respectively. We also maintain relationships in the capital markets with brokers and dealers to issue certificates of deposit. 67 -------------------------------------------------------------------------------- RBB is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. RBB's main source of funding is dividends declared and paid to RBB by the Bank and RAM. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to RBB. Management believes that these limitations will not impact our ability to meet the Company's ongoing short-term cash obligations.
Regulatory Capital Requirements
We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for "prompt corrective action" (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. In the wake of the global financial crisis of 2008-2009, the role of capital has become fundamentally more important, as banking regulators have concluded that the amount and quality of capital held by banking organizations was insufficient to absorb losses during periods of severely distressed economic conditions. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, and banking regulations promulgated by theU.S. federal banking regulators to implement Basel III have established strengthened capital standards for banks and bank holding companies and require more capital to be held in the form of common stock. These provisions, which generally became applicable to RBB and the Bank onJanuary 1, 2015 , impose meaningfully more stringent regulatory capital requirements than those applicable to RBB and the Bank prior to that date. In addition, the Basel III regulations implemented a concept known as the "capital conservation buffer." In general, banks and bank holding companies are required to hold a buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets over each minimum capital ratio to avoid being subject to limits on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive officers. For community banks, the capital conservation buffer requirement commenced onJanuary 1, 2016 , with a gradual phase-in. Full compliance with the capital conservation buffer was required byJanuary 1, 2019 . The table below summarizes the minimum capital requirements applicable to RBB and the Bank pursuant to Basel III regulations as of the dates reflected and assuming the capital conservation buffer has been fully-phased in. The minimum capital requirements are only regulatory minimums and banking regulators can impose higher requirements on individual institutions. For example, banks and bank holding companies experiencing internal growth or making acquisitions generally will be expected to maintain strong capital positions substantially above the minimum supervisory levels. Higher capital levels may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The table below also summarizes the capital requirements applicable to RBB and the Bank in order to be considered "well-capitalized" from a regulatory perspective, as well as RBB's and the Bank's capital ratios as ofJune 30, 2020 andDecember 31, 2019 . RBB and the Bank exceeded all regulatory capital requirements under Basel III and the Bank was considered to be "well-capitalized" as of the dates reflected in the table below: Regulatory Capital Ratio Requirements, Minimum including fully Requirement phased-in for "Well Ratio at Ratio at Regulatory Capital Capitalized" June 30,
2020 2019 Requirements Buffer Institution
Tier 1 Leverage Ratio
Consolidated 11.48 % 12.89 % 4.00 % 5.00 % 5.00 %
Bank 14.14 % 15.23 % 4.00 % 5.00 % 5.00 %
Common Equity Tier 1 Risk-Based Capital Ratio
Consolidated 14.87 % 17.16 % 7.00 % 6.50 % 6.50 %
Bank 19.09 % 20.87 % 7.00 % 6.50 % 6.50 %
Tier 1 Risk-Based Capital Ratio
Consolidated 15.49 % 17.65 % 8.50 % 8.00 % 8.00 %
Bank 19.09 % 20.87 % 8.50 % 8.00 % 8.00 %
Total Risk-Based Capital Ratio
Consolidated 21.10 % 23.82 % 10.50 % 10.00 % 10.00 %
Bank 21.13 % 21.86 % 10.50 % 10.00 % 10.00 %
68
-------------------------------------------------------------------------------- The Basel III regulations also revised the definition of capital and describe the capital components and eligibility criteria for common equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital. The most significant changes to the capital criteria were that: (i) the prior concept of unrestricted Tier 1 capital and restricted Tier 1 capital has been replaced with additional Tier 1 capital and a regulatory capital ratio that is based on common equity Tier 1 capital; and (ii) trust preferred securities and cumulative perpetual preferred stock issued afterMay 19, 2010 no longer qualify as Tier 1 capital. This change is already effective due to the Dodd-Frank Act, although such instruments issued prior toMay 19, 2010 continue to qualify as Tier 1 capital (assuming they qualified as such under the prior regulatory capital standards), subject to the 25% of Tier 1 capital limit.
Contractual Obligations
The following table contains supplemental information regarding our total
contractual obligations at
Payments Due
Within One to Three to After Five
(dollars in thousands) One Year Three Years Five Years Years Total
Deposits without a stated $ 1,176,494 $ - $ - $ - $ 1,176,494
maturity
Time deposits 1,151,925 92,917 15,182 2 1,260,026
FHLB advances and other
borrowings - - 150,000 - 150,000
Long-term debt - - - 104,220 104,220
Subordinated debentures - - - 14,174 14,174
Leases 5,313 8,376 4,725 7,980 26,394
Total contractual $ 2,333,732 $ 101,293 $ 169,907 $ 126,376 $ 2,731,308
obligations
Off-Balance Sheet Arrangements
We have limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company's financial statements.
The Company's exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in its financial statements.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management's credit evaluation of the customer.
Non-GAAP Financial Measures
Some of the financial measures included herein are not measures of financial
performance recognized by GAAP. These non-GAAP financial measures include
"tangible common equity to tangible assets," "tangible book value per share,"
"return on average tangible common equity," "adjusted earnings," "adjusted
diluted earnings per share," "adjusted return on average assets," and "adjusted
return on average tangible common equity." And "efficiency ratio". Our
management uses these non-GAAP financial measures in its analysis of our
performance.
Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per
Share. The tangible common equity to tangible assets ratio and tangible book
value per share are non-GAAP measures generally used by financial analysts and
investment bankers to evaluate capital adequacy. We calculate: (i) tangible
common equity as total shareholders' equity less goodwill and other intangible
assets (excluding mortgage servicing rights); (ii) tangible assets as total
assets less goodwill and other intangible assets; and (iii) tangible book value
per share as tangible common equity divided by shares of common stock
outstanding.
69
--------------------------------------------------------------------------------
Our management, banking regulators, many financial analysts and other investors
use these measures in conjunction with more traditional bank capital ratios to
compare the capital adequacy of banking organizations with significant amounts
of goodwill or other intangible assets, which typically stem from the use of the
purchase accounting method of accounting for mergers and acquisitions. Tangible
common equity, tangible assets, tangible book value per share and related
measures should not be considered in isolation or as a substitute for total
shareholders' equity, total assets, book value per share or any other measure
calculated in accordance with GAAP. Moreover, the manner in which we calculate
tangible common equity, tangible assets, tangible book value per share and any
other related measures may differ from that of other companies reporting
measures with similar names. The following table reconciles shareholders' equity
(on a GAAP basis) to tangible common equity and total assets (on a GAAP basis)
to tangible assets, and calculates our tangible book value per share:
(dollars in thousands) June 30, 2020 December 31, 2019
Tangible common equity:
Total shareholders' equity $ 414,025 $ 407,690
Adjustments
Goodwill (69,209 ) (58,563 )
Core deposit intangible (5,876 ) (6,100 )
Tangible common equity $ 338,940 $ 343,027
Tangible assets:
Total assets-GAAP $ 3,136,181 $ 2,788,535
Adjustments
Goodwill (69,209 ) (58,563 )
Core deposit intangible (5,876 ) (6,100 )
Tangible assets: $ 3,061,096 $ 2,723,872
Common shares outstanding 19,739,280 20,030,866
Tangible common equity to tangible assets ratio 11.07 % 12.59 %
Book value per share $ 20.97 $ 20.35
Tangible book value per share $ 17.17 $ 17.12
Return on Average Tangible Common Equity. Management measures return on average
tangible common equity ("ROATCE") to assess the Company's capital strength and
business performance. Tangible equity excludes goodwill and other intangible
assets (excluding mortgage servicing rights), and is reviewed by banking and
financial institution regulators when assessing a financial institution's
capital adequacy. This non-GAAP financial measure should not be considered a
substitute for operating results determined in accordance with GAAP and may not
be comparable to other similarly titled measures used by other companies. The
following table reconciles return on average tangible common equity to its most
comparable GAAP measure:
For the Three Months Ended June 30, For the Six Months Ended June 30,
(dollars in thousands) 2020 2019 2020 2019
Net income available to common
shareholders $ 6,513 $ 10,142 $ 13,261 $ 20,522
Average shareholder's equity 412,852 390,574 412,021 386,944
Adjustments:
Goodwill (69,466 ) (58,383 ) (70,506 ) (58,383 )
Core deposit intangible (6,094 ) (7,067 ) (6,034 ) (7,264 )
Adjusted average tangible common
equity $ 337,292 $ 325,124 $ 335,481 $ 321,297
Return on average tangible
common equity 7.77 % 12.51 % 7.95 % 12.88 %
70
-------------------------------------------------------------------------------- Efficiency Ratio. The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company's performance. The efficiency ratio is non-interest expense divided by net interest income plus non-interest income. The efficiency ratio is presented for the quarters endedJune 30, 2020 ,March 31, 2020 andJune 30, 2019 , plus the six-month periods endingJune 30, 2020 and 2019. For the three months ended For the six months ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Efficiency Ratio (non-GAAP) Non-interest expense$ 14,819 $ 16,263 $ 31,082 $ 30,224 Net interest income 25,034 23,593 48,627 50,229 Non-interest income 2,208 4,615 6,823 9,698 Net interest income and non-interest income$ 27,242 $ 28,208 $ 55,450 $ 59,927 Efficiency ratio 54.40 % 57.65 % 56.05 % 50.43 %
Regulatory Reporting to Financial Statements
Core Deposits to Total Deposits Ratio. The Bank measures core deposits by reviewing all relationships over$250,000 on a quarterly basis. After discussions with our regulators on the proper way to measure core deposits, we now track all deposit relationships over$250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under$250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than$250,000 . As many of our customers have more than$250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base. The following table reconciles the adjusted core deposit to total deposits. As of (dollars in thousands) June 30, 2020 December 31, 2019 Adjusted core deposit to total deposit ratio: Core deposits (1)$ 1,874,532 $
1,651,678
Adjustments to core deposits CD >$250,000 considered core deposits (2) 439,183
446,968
Less brokered deposits considered non-core (2,378 ) (67,089 ) Less internet deposits <$250,000 considered non-core (3) (86,356 ) (26,025 ) Less other deposits not considered core (4) (59,772 ) (60,719 ) Adjusted core deposits$ 2,165,209 1,944,813 Total deposits$ 2,436,520 $ 2,249,061 Adjusted core deposits to total deposits ratio 88.86 % 86.47 %
(1) Core deposits comprise all demand and savings deposits of any amount plus
time deposits less than
(2) Comprised of time deposits to core customers over
the lead-in to the table above.
(3) Comprised of internet and outside deposit originator time deposits less
than
(4) Comprised of demand and savings deposits in relationships over
which are considered non-core deposits because they do not satisfy the
definition of core deposits set forth in the lead-in to the table above.
71
-------------------------------------------------------------------------------- Net Non-Core Funding Dependency Ratio. Management measures net non-core funding dependency ratio by using the data provided under "Core Deposits to Total Deposits Ratio" above to make adjustments to the traditional definition of net non-core funding dependency ratio. The traditional net non-core funding dependency ratio measures non-core funding sources less short-term assets divided by total earning assets. The ratio indicates the dependency of the Company on non-core funding. As ofJune 30, 2020 , short-term borrowings consist of FHLB open advances that reprice daily without a fixed maturity date. The following table reconciles the adjusted net non-core dependency ratio. As of As of (dollars in thousands) June 30, 2020 December 31, 2019 Non-core deposits (1)$ 561,989 $ 597,382 Adjustment to Non-core deposits: CD >$250,000 considered core deposits (2) (439,183 ) (446,968 ) Brokered deposits 2,378
67,089
Internet deposits considered non-core (3) 86,356
26,025
Other deposits not considered core (4) 59,772
60,719
Adjusted non-core deposits 271,312
304,247
Short term borrowings outstanding - - Adjusted non-core liabilities (A) 271,312
304,247
Short term assets (5) 272,118
71,303
Adjustment to short term assets: Purchased receivables with maturities less than 90-days - - Adjusted short term assets (B) 272,118 71,303 Net non-core funding (A-B) $ (806 ) $ 232,944 Total earning assets$ 2,943,722 $ 2,587,093 Adjusted net non-core funding dependency ratio -0.03 % 9.00 % (1) Non-core deposits are time deposits greater than$250,000 . (2) Time deposits to core customers over$250,000 .
(3) Internet and outside deposit originator time deposits less than
(4) Comprised of demand and savings deposits in relationships over
which are considered non-core deposits because they do not satisfy the
definition of core deposits set forth in the lead-in to the table above.
(5) Short term assets include cash equivalents and investment with maturities
less than one year.
72
--------------------------------------------------------------------------------
© Edgar Online, source
