HOME BANCORP, INC. (HBCP) FY 2021 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is an analysis and discussion of the financial condition and results of operations of Home Bancorp, Inc. (the “Company”), and its wholly owned subsidiary, Home Bank, N.A. (the “Bank”). This discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related notes included herein in Part II, Item 8, “Financial Statements and Supplementary Data” and the description of our business included herein in Part 1, Item 1 “Business”.

EXECUTIVE OVERVIEW

The Company reported net income for 2021 of $48.6 million, or $5.77 diluted EPS compared to $24.8 million, or $2.85 diluted EPS, reported for 2020. Our 2021 results reflect a $10.2 million reversal of reserve builds made in 2020 primarily due to improvements in our assessment of the economic impact of the COVID-19 pandemic.

Highlights of the Company’s performance for the year ended December 31, 2021 are summarized below.

•Assets increased $346.4 million, or 13.4%, from December 31, 2020 to $2.9 billion at December 31, 2021.

•Loans decreased by $139.9 million, or 7.1%, from December 31, 2020 to $1.8 billion at December 31, 2021. Excluding PPP loans, loans increased by $37.7 million, or 2.1%.

•During the year ended December 31, 2021, the Company reversed $10.2 million of the allowance for loan losses compared to $12.7 million provisioned for the year ended December 31, 2020. This reversal was primarily due to improvements in our assessment of the economic impact of the COVID-19 pandemic.

•The ALL totaled $21.1 million, or 1.15% of total loans, at December 31, 2021. The ACL, which is comprised of the allowance for loan losses plus the allowance for unfunded lending commitments, totaled $22.9 million, or 1.24% of total loans at December 31, 2021. Excluding PPP loans, the ratios of ALL to total loans and ACL to total loans were 1.17% and 1.27%, respectively.

•Total deposits increased $322.0 million, or 14.5%, from December 31, 2020 to $2.5 billion at December 31, 2021 primarily due to increases in demand deposit and NOW accounts.

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•The Company repurchased 246,012 shares of common stock at an average price of $36.18 per share.

•The net interest margin was 3.88% for the year ended December 31, 2021, down 8 bps compared to 2020, primarily due to a decrease in the average yield earned on interest-earning assets during 2021.

•Loan income from the recognition of deferred PPP lender fees increased $7.3 million, or 178.8% from December 31, 2020 to $11.4 million at December 31, 2021.

•The average rate paid on total interest-bearing deposits during 2021 was 0.32%, down 40 bps compared to 2020.

•Noninterest income increased $2.0 million, or 13.7%, in 2021 compared to 2020 primarily due to the receipt of non-taxable life insurance proceeds of $1.7 million from a BOLI policy following the death of an employee in 2021.

•Noninterest expense increased $4.0 million, or 6.4%, in 2021 compared to 2020. Increases across several noninterest expense categories (including, but not limited to, compensation, data processing, marketing, provision for credit losses on unfunded commitments and other expenses) were partially offset by decreases in amortization of acquisition intangibles, foreclosed assets, and regulatory fees.

SELECTED FINANCIAL DATA

Set forth below is selected summary historical financial and other data of the Company. When you read this summary historical financial data, it is important that you also read the historical financial statements and related notes contained in Item 8 of this Form 10-K. Taxable equivalent (“TE”) ratios have been calculated using a marginal tax rate of 21%.

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(1)With the exception of end-of-period ratios, all ratios are based on average monthly balances during the respective periods.

(2)Average interest rate spread represents the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.

(3)Net interest margin represents net interest income as a percentage of average interest-earning assets. Taxable equivalent yields are calculated using a marginal tax rate of 21% for the years ended December 31, 2021, 2020, 2019 and 2018 and 35% for the year ended December 31, 2017.

(4)The efficiency ratio represents noninterest expense as a percentage of total revenues. Total revenues is the sum of net interest income and noninterest income.

(5)Asset quality and capital ratios are end of period ratios.

(6)Due to the adoption of ASC 326, asset quality ratios are based on total non-performing assets at December 31, 2021. For the periods prior to January 1, 2020, asset quality ratios represent originated non-performing assets. Acquired nonimpaired loans, which were on nonaccrual or 90 days or more past due, and acquired assets, which were foreclosed assets or ORE, are not included for periods prior to January 1, 2020. Acquired nonimpaired loans, which were on nonaccrual or 90 days or more past due totaled $8.7 million, $9.8 million, $9.0 million and $2.7 million at December 31, 2020, 2019, 2018 and 2017, respectively. Acquired assets, which were foreclosed assets or ORE, totaled $880,000, $2.4 million, $1.4 million and $584,000, at December 31, 2020, 2019, 2018 and 2017, respectively. Refer to Note 2 to the Consolidated Financial Statements for more information on the adoption of ASC 326.

(7)Capital ratios are for Home Bank only.

(8)Tangible calculation eliminates goodwill, core deposit intangible and the corresponding amortization expense, net of tax.

(9)Tangible calculation eliminates goodwill and core deposit intangible.

This Selected Financial Data contains financial information prepared other than in accordance with generally accepted accounting principles (“GAAP”). The Company uses these non-GAAP financial measures in its analysis of the Company’s performance. Management believes that the non-GAAP information provides useful data in understanding the Company’s operations and in comparing the Company’s results to peers. This non-GAAP information should be considered in addition to the Company’s financial information prepared in accordance with GAAP, and is not a substitute for, or superior to, GAAP results. A reconciliation of GAAP to non-GAAP disclosures is included in the table below.

Non-GAAP Reconciliation

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COVID-19 RESPONSE

Mississippi's COVID-19 restrictions were lifted during the first quarter of 2021. After an increase in COVID-19 cases during the third quarter of 2021, Louisiana reinstituted its indoor mask mandate in August 2021. The mask mandate was lifted in October 2021 but was reinstituted in the city of New Orleans in January 2022.

Under the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP"), the Company funded approximately 4,875 PPP loans totaling $388.7 million during 2020 and 2021, in aggregate. At December 31, 2021, the total recorded net investment in PPP loans was $43.6 million, of which approximately 177 loans with an aggregate outstanding balance of $5.0 million were for amounts of $150,000 or less.

To give immediate financial support to our customers, the Company began providing principal and/or interest payment relief options in March 2020. When we last reported the level of such deferrals in our third quarter Form 10-Q (as of September 30, 2021), $4.5 million, or less than 1% of total loans, were under deferral agreements. As of December 31, 2021, the level of deferrals decreased to $3.9 million, or less than 1% of total loans. The level of COVID-19 related deferrals formerly totaled $558.8 million, or 28% of total loans, at June 30, 2020. Of the loans that have exited deferral agreements, $372.6 million, or 99%, were current and performing as of December 31, 2021.

CRITICAL ACCOUNTING ESTIMATES

SEC guidance requires disclosure of “critical accounting estimates.” The SEC defines “critical accounting estimates” as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant.

We follow financial accounting and reporting policies that are in accordance with accounting principles generally accepted in the United States. Our accounting policies are discussed in detail in Note 2 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included elsewhere in this report. Not all significant accounting policies require management to make difficult, subjective or complex judgments. However, management believes the policy noted below meets the SEC’s definition of a critical accounting policy.

Allowance for Credit Losses

Management considers the policies related to the allowance for credit losses as the most critical to the financial statement presentation. The total allowance for credit losses includes activity related to allowances calculated in accordance with Accounting Standards Codification 326, Credit Losses. The allowance for credit losses is established through a provision for credit losses charged to current earnings. The amount maintained in the allowance reflects management’s continuing evaluation of the credit losses expected to be recognized over the life of the loans in our portfolio. The allowance for credit losses on loans is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. For purposes of determining the allowance for credit losses, the loan portfolio is segregated by product types in order to recognize differing risk profiles among categories. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. Management estimates the allowance balance using relevant available information from internal and external sources relating to past events, current conditions and reasonable and supportable forecasts. Adjustments to historical loss information are made to incorporate our reasonable and supportable forecast of future losses at the portfolio segment level, as well as any necessary qualitative adjustments, including, but not limited to, changes in current and expected future economic conditions, changes in industry experience and industry loan concentrations, changes in the volume and severity of nonperforming assets, changes in lending policies and personnel and changes in the competitive and regulatory environment of the banking industry. Loans that do not share similar risk characteristics are individually evaluated and are excluded from the pooled loan analysis.

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ACQUISITION ACTIVITY

The Company has completed five acquisitions since 2010. The following table is a summary of the Company’s acquisition activity as recorded.

SUMMARY OF ACQUISITION ACTIVITY

We expect our pending acquisition of Friendswood Capital Corporation and its wholly owned subsidiary, Texan Bank, N.A., to be consummated in the first quarter of 2022.

FINANCIAL CONDITION

Loans, Allowance for Credit Losses and Asset Quality

Loans

The types of loans originated by the Company are subject to federal and state laws and regulations. Interest rates charged on loans are affected principally by the demand for such loans and the supply of money available for lending purposes and the rates offered by our competitors. These factors are, in turn, affected by general and economic conditions, the monetary policy of the federal government, including the FRB, legislative tax policies and governmental budgetary matters.

The Company’s lending activities are subject to underwriting standards and loan origination procedures established by our Board of Directors and management. Loan originations are obtained through a variety of sources, primarily existing customers as well as new customers obtained from referrals and local advertising and promotional efforts. Single-family residential mortgage loan applications and consumer loan applications are taken at any of the Bank’s branch offices. Applications for other loans typically are taken personally by one of our loan officers, although they may be received by a branch office initially and then referred to a loan officer. All loan applications are processed and underwritten centrally at the Bank’s main office.

Total loans in portfolio (which does not include mortgage loans held for sale) decreased $139.9 million, or 7.1%, from December 31, 2020 to $1.8 billion at December 31, 2021. At December 31, 2021, the total recorded net investment in PPP loans was $43.6 million, which are included in commercial and industrial loans. The recorded investment in PPP loans is net of $1.3 million in deferred lender fees, which will be amortized into interest income over the life of the loans. Excluding PPP loans, total loans increased by $37.7 million, or 2.1%.

The following table summarizes the composition of the Company’s loan portfolio as of the dates indicated.

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The following table reflects contractual loan maturities as of December 31, 2021, unadjusted for scheduled principal reductions, prepayments, or repricing opportunities. The table also reflects the portion of loans due after one year that have fixed or variable interest rates.

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Allowance for Credit Losses

Effective January 1, 2020, the Company adopted the guidance under ASC 326, which introduced a new model known as CECL. For reporting periods beginning on and after January 1, 2020 and the adoption of ASC 326, the ACL is maintained at level that reflects expected losses for the full life of the financial assets. Prior to January 1, 2020 and the adoption of ASC 326, the ALL was maintained at an amount which management determined covered reasonably estimable and probable losses. The day one impact of the change in accounting principle is reflected in the table below as an increase to the beginning balance in 2020. Management recalculates the ACL at least quarterly to reassess the estimate of credit losses for the total portfolio at the relevant reporting date. For more information on the adoption of ASC 326 and the Company's relevant accounting policies, refer to Note 2 of the Consolidated Financial Statements.

The following table presents the activity in the allowance for credit losses for the years indicated.

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At December 31, 2021, the ALL totaled $21.1 million, or 1.15% of total loans, and the ACL, which includes the reserve for unfunded lending commitments, totaled $22.9 million, or 1.24% of total loans. For the year ended December 31, 2021, the Company reversed $10.2 million of the allowance for loan losses compared to $12.7 million provision for the year ended December 31, 2020. The provision for loan losses during 2020 reflected our assessment of the change in expected losses due primarily to the economic impact of the COVID-19 pandemic.

The following table presents the allocation of the allowance for loan losses as of December 31 for the years indicated.

The following table shows credit ratios at and for the periods indicated and each component of the ratio's calculation:

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Additional Information on Loan Portfolio Composition and the Allowance for Credit Losses

As the fallout of the COVID-19 pandemic continues to impact the national, regional and local economies, management continues to proactively monitor the loan portfolio to identify potential weaknesses that may develop. Specifically, management has identified and is monitoring exposures to borrowers and industries that may be impacted more immediately and acutely than others. In many instances, management has directly reached out to specific borrowers to provide guidance and assistance as appropriate. On a portfolio level, management continues to monitor aggregate exposures to highly sensitive segments for changes in asset quality, payment performance and liquidity levels. Additionally, management is monitoring unfunded commitments, such as lines of credit and overdraft protection, to monitor liquidity and funding issues that may arise with our customers.

The following table provides a summary of the loan portfolio and related reserves at December 31, 2021. We have separately identified certain information regarding PPP loans which, due to the existence of full repayment guarantees from the SBA as well as the likelihood that the vast majority of such loans will be forgiven, we believe entail minimal credit risk to the Company.

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(1)At December 31, 2021, the allowance of $1.8 million related to unfunded lending commitments of $434.6 million. The ACL on unfunded lending commitments is recorded within accrued interest payable and other liabilities on the Consolidated Statements of Financial Condition.

Asset Quality

One of management’s key objectives has been, and continues to be, maintaining a high level of asset quality. In addition to maintaining credit standards for new loan originations, we proactively monitor loans and collection and workout processes of delinquent or problem loans. When a borrower fails to make a scheduled payment, we attempt to cure the deficiency by making personal contact with the borrower. Initial contacts are generally made within 10 days after the date payment is due. In most cases, deficiencies are promptly resolved. If the delinquency continues, late charges are assessed and additional efforts are made to collect the deficiency. All loans which are designated as “special mention,” classified or which are delinquent 90 days or more are reported to the Board of Directors of the Bank monthly. For loans where the collection of principal or interest payments is doubtful, the accrual of interest income ceases. It is our policy, with certain limited exceptions, to discontinue accruing interest and reverse any interest accrued on any loan which is 90 days or more past due. On occasion, this action may be taken earlier if the financial condition of the borrower raises significant concern with regard to their ability to service the debt in accordance with the terms of the loan agreement. Interest income is not accrued on these loans until the borrower’s financial condition and payment record demonstrate an ability to service the debt.

An impaired loan generally is one for which it is probable, based on current information, that the lender will not collect all the amounts due under the contractual terms of the loan. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Loans collectively evaluated for impairment include smaller balance commercial loans, residential real estate loans and consumer loans. These loans are evaluated as a group because they have similar characteristics and performance experience. Larger (i.e., loans with balances of $500,000 or greater) commercial real estate loans, multi-family residential loans, construction and land loans and commercial and industrial loans are individually evaluated for impairment. Third party property valuations are obtained at the time of origination for real estate secured loans. When a determination is made that a loan has deteriorated to the point of becoming a problem loan, updated valuations may be ordered to help determine if there is impairment, which may lead to a recommendation for partial charge off or appropriate allowance allocation. Property valuations are ordered through, and are reviewed by, an appraisal officer at the Bank. The Company typically orders an “as is” valuation for collateral property if a loan is in a criticized loan classification. The Board of Directors is provided with monthly reports on impaired loans.

At December 31, 2021 and 2020, loans identified as impaired and individually evaluated for expected losses were $4.6 million and $9.0 million, respectively. Due to the adoption of ASC 326, total loans identified as impaired and individually evaluated at December 31, 2021 included $1.1 million of acquired loans, of which none were acquired with deteriorated credit quality. For more information on the adoption of ASC 326, refer to Note 2 of the Consolidated Financial Statements.

The following tables provide a summary of loans identified as impaired and individually evaluated for expected losses as of the dates indicated.

Federal regulations and our policies require that we utilize an internal asset classification system as a means of reporting problem and potential problem assets. We have incorporated an internal asset classification system, substantially consistent with Federal banking regulations, as a part of our credit monitoring system. Federal banking regulations set forth a classification scheme for problem and potential problem assets as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. In addition to classified assets, assets which do not currently expose the Bank to sufficient risk to be classified may be categorized as "special mention." Special mention assets have an existing weakness that could cause future impairment.

At December 31, 2021 and 2020, we had a total of $17.5 million and $35.3 million, respectively, in loans classified as substandard. We had no assets classified as doubtful or loss at either date. For additional information, see Note 5 to the Consolidated Financial Statements.

A bank’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by Federal bank regulators which can order the establishment of additional general or specific loss allowances. The Federal banking agencies have adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management analyze all significant factors that affect the collectability of the portfolio in a reasonable manner; and that management establish acceptable allowance evaluation

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processes that meet the objectives set forth in the policy statement. Due to the adoption of ASC 326 on January 1, 2020, management maintains, based on current and forecasted information, an ACL that reflects a current estimate of expected credit losses for the estimated life of the loan portfolio at reporting periods subsequent to the adoption date. For reporting periods prior to January 1, 2020, management maintained an ALL at a level which reflected losses that were probable and reasonably estimable at the relevant reporting date. For all reporting periods, actual losses are uncertain and dependent upon future events and, as such, further additions to the level of ACL may become necessary.

The following table sets forth the composition of the Company’s total nonperforming assets and troubled debt restructurings as of the dates indicated.

(1)Prior to January 1, 2020, PCD loans were classified as PCI under ASC 310-30 and excluded from nonperforming loans because they continued to earn interest income from the accretable yield at the pool level regardless of their status as past due or otherwise not in compliance with their contractual terms. At adoption, the pools were discontinued and performance is based on contractual terms for individual loans. Refer to Note 2 to the Consolidated Financial Statements for more information on the adoption of ASC 326. PCI loans that were 90 days or more past due and were accounted for under ASC 310-30 totaled $2.2 million, $1.7 million and $4.3 million at December 31, 2019, 2018 and 2017, respectively.

As a result of Section 4013 of the CARES Act and recent interagency guidance issued by Federal banking regulators, modifications, such as deferrals of principal and/or interest payments, to borrowers affected by the COVID-19 pandemic are not deemed to be TDRs if such modifications are made on loans that were current as of December 31, 2019. Such deferrals and loan modifications totaled $3.9 million, or less than 1% of total loans, at December 31, 2021 compared to $558.8 million (28% of total loans) at June 30, 2020. We will continue to follow the guidance of Federal banking regulators in making any TDR determinations.

Total nonperforming assets decreased by $5.5 million, or 27.6%, to $14.5 million at December 31, 2021, compared to $20.0 million at December 31, 2020. The ratio of non-performing assets to total assets was 0.49% at December 31, 2021, compared to 0.77% at December 31, 2020.

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As of December 31, 2021, total nonperforming loans were down $5.4 million, or 29.0%, from December 31, 2020 primarily due to pay-downs on nonaccrual loans. Foreclosed assets and ORE were also down $113,000, or 8.7%, from December 31, 2020.

Investment Securities

The Company invests in securities pursuant to our Investment Policy, which has been approved by our Board of Directors. The Investment Policy is designed primarily to manage the interest rate sensitivity of our assets and liabilities, to generate a favorable return without incurring undue interest rate or credit risk and to provide and maintain liquidity. The Asset-Liability Committee (“ALCO”), comprised of the Chief Executive Officer, Chief Financial Officer, Chief Operations Officer, Chief Credit Officer and Director of Financial Management, monitors investment activity and ensures that investments are consistent with the Investment Policy. The Board of Directors of the Company reviews investment activity monthly.

The investment securities portfolio increased by an aggregate of $72.0 million, or 28.0%, during 2021. Securities available for sale made up 99.4% of the investment securities portfolio as of December 31, 2021. The following table sets forth the amortized cost and market value of our investment securities portfolio as of the dates indicated.

The following table sets forth the fixed versus adjustable rate profile of the investment securities portfolio as of the dates indicated. All amounts are shown at amortized cost.

The following table sets forth the amount of investment securities which mature during each of the periods indicated and the weighted average yields for each range of maturities as of December 31, 2021. No tax-exempt yields have been adjusted to a tax-equivalent basis. All amounts are shown at amortized cost.

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The following table summarizes activity in the Company’s investment securities portfolio during 2021.

As of December 31, 2021, the Company had a net unrealized loss on its available for sale investment securities portfolio of $653,000, compared to a net unrealized gain of $6.5 million as of December 31, 2020.

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Funding Sources

General

Deposits, loan repayments and prepayments, proceeds from investment securities sales, calls, maturities and paydowns, cash flows generated from operations and FHLB advances are our primary, ongoing sources of funds for use in lending, investing and for other general purposes.

Deposits

The Company offers a variety of deposit accounts with a range of interest rates and terms. Our deposits consist of checking, both interest-bearing and noninterest-bearing, money market, savings and certificate of deposit accounts.

The flow of deposits is influenced significantly by general economic conditions, changes in market interest rates and competition. Our deposits are obtained predominantly from the areas where our branch offices are located. We have historically relied primarily on a high level of customer service and long-standing relationships with customers to attract and retain deposits; however, market interest rates and rates offered by competitors significantly affect our ability to attract and retain deposits.

Total deposits were $2.5 billion as of December 31, 2021, up $322.0 million, or 14.5%, compared to December 31, 2020. Certificates of deposits totaled $319.3 million as of December 31, 2021, down $49.5 million, or 13.4%, compared to December 31, 2020. The following table sets forth the composition of the Company’s deposits as of the dates indicated.

The following table shows the daily average balances of deposits by type and weighted-average rate paid for the periods indicated.

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The total amount of our uninsured deposits (deposits in excess of $250,000, as calculated in accordance with FDIC regulations) were $820.0 million at December 31, 2021 and $596.0 million at December 31, 2020. Certificates of deposit in the amount of $250,000 and over decreased $5.8 million, or 8.5%, from $69.1 million at December 31, 2020 to $63.2 million at December 31, 2021. The following table details the remaining maturity of large-denomination certificates of deposit of $250,000 and over as of the dates indicated.

Federal Home Loan Bank Advances

Advances from the FHLB may be obtained by the Company upon the security of the common stock it owns in the FHLB and certain real estate loans and investment securities, provided certain standards related to creditworthiness have been met. Such advances are made pursuant to several credit programs, each of which has its own interest rate and range of maturities. Advances from the FHLB may be either short-term, maturities of one year or less, or long-term, maturities in excess of one year.

The Company had no short-term FHLB advances as of December 31, 2021 and 2020. Long-term FHLB advances totaled $26.0 million as of December 31, 2021, down $2.8 million, or 9.6%, compared to $28.8 million as of December 31, 2020.

Average FHLB advances were $27.3 million during 2021, down $17.7 million, or 39.4%, from 2020.

Shareholders’ Equity

Shareholders’ equity provides a source of permanent funding, allows for future growth and provides the Company with a cushion to withstand unforeseen adverse developments. At December 31, 2021, shareholders’ equity totaled $351.9 million, up $30.1 million, or 9.3%, compared to $321.8 million at December 31, 2020. The increase was primarily due to the Company’s earnings for the year ended December 31, 2021, which was partially offset by other comprehensive loss, share repurchases, and dividends paid during 2021.

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RESULTS OF OPERATIONS

Net income in 2021 was $48.6 million, up $23.9 million, or 96.3%, compared to 2020. Diluted EPS for 2021 was $5.77, up $2.92, or 102.5% from 2020. The net income in 2021 was significantly impacted by the reversal of provision for loan losses primarily due to improvement in our assessment of the economic impact of the COVID-19 pandemic over the prior year and the recognition of PPP lender fees. For the year ended December 31, 2021, the Company reversed $10.2 million of the allowance for loan losses compared to $12.7 million provision for the year ended December 31, 2020. The provision for loan losses during 2020 reflected our assessment of expected losses due primarily to the economic impact of the COVID-19 pandemic.

Net income in 2020 was $24.8 million, down $3.2 million, or 11.3%, compared to 2019. Diluted EPS for 2020 was $2.85, down $0.20, or 6.6% from 2019. The decrease in net income was primarily due to the provision for loan losses in 2020 (most of which was recorded in the first and second quarters of the year).

Net Interest Income

Net interest income is the difference between the interest income earned on interest-earning assets, such as loans and investment securities, and the interest expense paid on interest-bearing liabilities, such as deposits and borrowings. Our net interest income is largely determined by our net interest spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. The Company’s net interest spread was 3.76%, 3.72% and 3.94% for the years ended December 31, 2021, 2020, and 2019, respectively.

Net interest income totaled $101.0 million in 2021, up $8.8 million, or 9.5%, compared to $92.2 million in 2020. The increase was primarily due to lower deposit costs and an increase in loan income primarily due to PPP loans. Total interest expense on deposits decreased $5.8 million, or 52.6%, in 2021 compared to 2020. The average cost of total interest-bearing deposits decreased by 40 basis points to 0.32% in 2021.

The Company recognized $11.4 million and $4.1 million of PPP lender fees in loan interest income in 2021 and 2020, respectively. The remaining balance of $1.3 million in deferred lender fees at December 31, 2021 will be amortized into interest income over the life of the PPP loans. Outstanding PPP loans positively impacted the average loan yield by 24 basis points and the net interest margin by 27 basis points during 2021.

In addition, the increase in average cash and cash equivalents from 2020 to 2021 negatively impacted the average yield on total interest-earning assets and the net interest margin by 39 basis points and 37 basis points, respectively. Average cash and cash equivalents are reflected in the increase in the average balance of other interest-earning assets. Average other interest-earning assets during 2021 were up $225.1 million from the average of $142.2 million during 2020.

In 2020, net interest income totaled $92.2 million, up $6.2 million, or 7.2%, compared to $86.0 million in 2019. The increase in net interest income for 2020 compared to 2019 was primarily due to lower deposit costs and an increase in loan income primarily due to PPP loans during 2020. Total interest expense on deposits decreased $4.0 million, or 26.7%, in 2020 compared to 2019. The average cost of total interest-bearing deposits in 2020 totaled 0.72%, down 38 basis points from 2019.

The Company’s net interest margin, which is net interest income as a percentage of average interest-earning assets, was 3.88%, 3.96%, and 4.26% during the years ended December 31, 2021, 2020, and 2019, respectively.

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The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income to the Company from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) net interest spread; and (v) net interest margin. Information is based on average monthly balances during the indicated periods. Taxable equivalent (“TE”) yields have been calculated using a marginal tax rate of 21%.

(1)Nonperforming loans are included in the respective average loan balances, net of deferred fees, discounts and loans in process. Acquired loans were recorded at fair value upon acquisition and accrete interest income over the remaining life of the respective loans.

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The following table displays the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in average volume between periods times prior year rate), (ii) changes attributable to rate (changes in average rate between periods times prior year volume) and (iii) total increase (decrease).