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Item 7. Management’s Discussion and Analysis

2022-03-04 compared with 2021-03-11 · 372 added, 250 removed, 535 unchanged (54% of the section changed)

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

You should read the following discussion and analysis of financial condition and results of operations together with the Consolidated Financial Statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K.

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Actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A “Risk Factors” and “Forward Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K.

Critical Accounting Policies

Critical Accounting Estimates

The Company follows accounting and reporting policies and procedures that conform, in all material respects, to GAAP and to practices generally applicable to the financial services industry, the most significant of which are described in Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

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concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326).” The amendments in this ASU require that entities change the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model.

Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument.

It includes financial assets such as loan receivables, held-to-maturity debt securities, net investment in leases that are not accounted for at fair value through net income, and certain off-balance sheet credit exposures.

This ASU is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

In 2019, the FASB amended this ASU, which delays the effective date to 2023 for certain SEC filers that are Smaller Reporting Companies, which would apply to the Company.

The Company plans to adopt this ASU at the delayed effective date of January 1, 2023.

The Company has formed a committee, developed an implementation plan, and engaged a software vendor to assist the Company to build a model.

The Company is in the process of completing a readiness assessment and is engaged in the implementation phase of the project.

The Company is working on:

(i) developing a new expected loss model with supportable assumptions;

(ii) identifying data, reporting, and disclosure gaps;

(iii) assessing updates to accounting and credit risk policies;

and (iv) documenting new processes and controls.

Based on the Company’s initial assessment of this ASU, the Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses which could potentially have a material impact on its consolidated financial statements as of the beginning of the first reporting period in which this ASU is effective.

Non-GAAP Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance.

Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated, and presented in accordance with GAAP.

However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures and may not be comparable to non-GAAP financial measures that may be presented by other companies.

The following table presents reconciliation of allowance for loan losses to loans held-for-investment, excluding SBA PPP loans to its most comparable GAAP measure.

The Company believes that this non-GAAP measure enhances comparability to prior periods in which there were no SBA PPP loans and provides supplemental information regarding the Company’s credit quality trend.

($ in thousands) 2021 2020 2019 2018 2017

Loans held-for-investment $ 1,732,205 $ 1,583,578 $ 1,450,831 $ 1,338,682 $ 1,189,999

SBA PPP loans 65,329 135,654 — — —

Loans held-for-investment, excluding SBA PPP loans $ 1,666,876 $ 1,447,924 $ 1,450,831 $ 1,338,682 $ 1,189,999

Allowance for loan losses $ 22,381 $ 26,510 $ 14,380 $ 13,167 $ 12,224

Allowance for loan losses to loans held-for-investment 1.29 % 1.67 % 0.99 % 0.98 % 1.03 %

Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans 1.34 % 1.83 % 0.99 % 0.98 % 1.03 %

Five-Year Summary of Selected Financial Data

The following table presents certain selected financial data as of the dates or for the periods indicated:

As of or For the Year Ended December 31,

($ in thousands, except per share data) 2021 2020 2019 2018 2017

Selected balance sheet data:

Cash and cash equivalents $ 203,285 $ 194,098 $ 146,228 $ 162,273 $ 73,658

Securities available-for-sale 123,198 120,527 97,566 146,991 129,689

Securities held-to-maturity — — 20,154 21,760 21,070

Loans held-for-sale 37,026 1,979 1,975 5,781 5,297

Loans held-for-investment 1,732,205 1,583,578 1,450,831 1,338,682 1,189,999

Allowance for loan losses (22,381) (26,510) (14,380) (13,167) (12,224)

Total assets 2,149,735 1,922,853 1,746,328 1,697,028 1,441,999

Total deposits 1,867,134 1,594,851 1,479,307 1,443,753 1,251,290

Shareholders’ equity 256,286 233,788 226,834 210,296 142,184

Selected income statement data:

Interest income $ 81,472 $ 79,761 $ 92,945 $ 83,699 $ 65,267

Interest expense 4,335 13,572 23,911 17,951 10,097

Net interest income 77,137 66,189 69,034 65,748 55,170

Provision for loan losses (4,596) 13,219 4,237 1,231 1,827

Noninterest income 18,434 11,740 11,869 10,454 13,894

Noninterest expense 43,208 41,699 42,315 40,226 35,895

Income before income taxes 56,959 23,011 34,351 34,745 31,342

Income tax expense 16,856 6,836 10,243 10,444 14,939

Net income 40,103 16,175 24,108 24,301 16,403

Per share data:

Earnings per common share, basic $ 2.66 $ 1.05 $ 1.52 $ 1.69 $ 1.22

Earnings per common share, diluted 2.62 1.04 1.49 1.65 1.21

Book value per common share (1)

17.24 15.19 14.44 13.16 10.60

Cash dividends declared per common share 0.44 0.40 0.25 0.12 0.12

Outstanding share data:

Number of common shares outstanding 14,865,825 15,385,878 15,707,016 15,977,754 13,417,899

Weighted-average common shares outstanding, basic 15,017,637 15,384,231 15,873,383 14,397,075 13,408,030

Weighted-average common shares outstanding, diluted 15,253,820 15,448,892 16,172,282 14,691,370 13,540,293

Selected performance ratios:

Return on average assets 1.96 % 0.84 % 1.40 % 1.53 % 1.22 %

Return on average shareholders’ equity 16.52 % 7.08 % 10.88 % 14.26 % 12.00 %

Dividend payout ratio (2)

16.54 % 38.10 % 16.45 % 7.10 % 9.84 %

Efficiency ratio (3)

45.21 % 53.51 % 52.30 % 52.79 % 51.97 %

Yield on average interest-earning assets 4.05 % 4.25 % 5.53 % 5.38 % 4.99 %

Cost of average interest-bearing liabilities 0.41 % 1.15 % 2.09 % 1.65 % 1.14 %

Net interest spread 3.64 % 3.10 % 3.44 % 3.73 % 3.85 %

Net interest margin (4)

3.83 % 3.53 % 4.11 % 4.23 % 4.22 %

Total loans to total deposits ratio (5)

94.76 % 99.42 % 98.21 % 93.12 % 95.53 %

As of or For the Year Ended December 31,

($ in thousands, except per share data) 2021 2020 2019 2018 2017

Asset quality:

Loans 30 to 89 days past due and still accruing

$ 554 $ 338 $ 1,818 $ 377 $ 1,341

Loans past due 90 days or more and still accruing

Nonaccrual loans

994 3,163 2,537 1,061 3,234

Nonperforming loans

994 3,163 2,824 1,061 3,234

Nonperforming assets (6)

994 4,564 2,824 1,061 3,333

Net charge-offs (recoveries) (467) 1,089 3,024 288 923

Loans 30 to 89 days past due and still accruing to loans held-for-investment

0.03 % 0.02 % 0.13 % 0.03 % 0.11 %

Nonaccrual loans to loans held-for-investment

0.06 % 0.20 % 0.17 % 0.08 % 0.27 %

Nonaccrual loans to allowance for loan losses 4.44 % 11.93 % 17.64 % 8.06 % 26.46 %

Nonperforming loans to loans held-for-investment

0.06 % 0.20 % 0.19 % 0.08 % 0.27 %

Nonperforming loans to allowance for loan losses

4.44 % 11.93 % 19.64 % 8.06 % 26.46 %

Nonperforming assets to total assets

0.05 % 0.24 % 0.16 % 0.06 % 0.23 %

Allowance for loan losses to loans held-for-investment

1.29 % 1.67 % 0.99 % 0.98 % 1.03 %

Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (7)

1.34 % 1.83 % 0.99 % 0.98 % 1.03 %

Allowance for loan losses to nonaccrual loans

2,251.61 % 838.13 % 566.81 % 1,241.00 % 377.98 %

Allowance for loan losses to nonperforming loans

2,251.61 % 838.13 % 509.21 % 1,241.00 % 377.98 %

Net charge-offs (recoveries) to average loans held-for-investment (0.03) % 0.07 % 0.22 % 0.02 % 0.08 %

Capital ratios:

Shareholders’ equity to total assets

11.92 % 12.16 % 12.99 % 12.39 % 9.86 %

Average equity to average assets

11.86 % 11.94 % 12.88 % 10.72 % 10.20 %

Common tier 1 capital (to risk-weighted assets)

14.79 % 15.97 % 15.87 % 16.28 % 12.15 %

Total capital (to risk-weighted assets)

16.04 % 17.22 % 16.90 % 17.31 % 13.20 %

Tier 1 capital (to risk-weighted assets)

14.79 % 15.97 % 15.87 % 16.28 % 12.15 %

Tier 1 capital (to average assets)

12.11 % 11.94 % 13.23 % 12.60 % 10.01 %

Pacific City Bank

Common tier 1 capital (to risk-weighted assets)

14.48 % 15.70 % 15.68 % 16.19 % 12.06 %

Total capital (to risk-weighted assets)

15.73 % 16.95 % 16.71 % 17.21 % 13.12 %

Tier 1 capital (to risk-weighted assets)

14.48 % 15.70 % 15.68 % 16.19 % 12.06 %

Tier 1 capital (to average assets)

11.85 % 11.74 % 13.06 % 12.53 % 9.94 %

(1) Shareholders' equity divided by common shares outstanding

(2) Dividends declared per common share divided by basic earnings per common share.

(3) Noninterest expenses divided by the sum of net interest income and noninterest income.

(4) Net interest income divided by average total interest-earning assets.

(5) Total loans include both loans held-for-sale and loans held-for-investment, net of unearned loan costs (fees).

(6) Nonperforming assets include nonperforming loans (nonaccrual loans plus loans past due 90 days or more and still accruing) and other real estate owned.

(7) This ratio is not presented in accordance with GAAP.

See "Non-GAAP measure" for reconciliation of this measure to its most comparable GAAP measure.

Executive Summary

Net income was $16.2 million for the year ended December 31, 2020, a decrease of $7.9 million, or 32.9%, from $24.1 million for the year ended December 31, 2019.

The decrease was primarily due to an increase in provision for loan losses and a decrease in net interest income.

Provision for loan losses increased primarily due to the increase in risks associated with economic and business conditions, as well an increases in special mention and substandard loans, as a result of the COVID-19 pandemic, and net interest income decreased primarily due to the lower market rates during the year ended December 31, 2020.

For the year ended December 31, 2019, net income was $24.1 million, a decrease of $193 thousand, or 0.8%, from $24.3 million for the year ended December 31, 2018.

The decrease was primarily due to increases in provision for loan losses and noninterest expense, partially offset by increases in net interest income and noninterest income.

Provision for loan losses increased primarily due to increased charge-offs and noninterest expense increased primarily due to expansion of the Company's infrastructure for being a public company and enhancement of the controls and processes on BSA/AML compliance during the year ended December 31, 2019.

Net interest income increased primarily due to the loan growth and higher average market rates and noninterest income increased primarily due to higher sales of loans and securities available-for-sale during the year ended December 31, 2019

Total assets were $1.92 billion at December 31, 2020, an increase of $176.5 million, or 10.1%, from $1.75 billion at December 31, 2019.

The increase was primarily due to an increase in loans held-for-investment and cash and cash equivalents.

Loans held-for-investment increased primarily due to the SBA PPP loan production and cash and cash equivalents increased primarily due to increases in deposits and borrowings as the Company maintains most of its cash at the Federal Reserve Bank account.

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on recent global economic and market conditions, including significant disruption of, and volatility in, financial markets;

global supply chain disruptions;

and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment throughout the U.S., but also specifically in California, where most of the Company’s operations and a large majority of its customers are located.

Since the beginning of the crisis, the Company has taken a number of steps to protect the safety of its employees and to support its customers.

The Company has enabled its staff to work remotely and established safety measures within its bank premises and branches for both employees and customers.

In order to support its customers, the Company has been in close contact with its customers, assessing the level of impact on their businesses, and putting a process in place to evaluate each client’s specific situation and provide relief programs where appropriate.

SBA PPP loans totaled $135.7 million (1,585 loans) and loans with modifications related to the COVID-19 pandemic totaled $36.1 million (39 loan customers) as of December 31, 2020.

In December 2020, the Company received SBA PPP forgiveness of $1.8 million for 57 SBA PPP loans.

On January 13, 2021, SBA began accepting applications for (i) first draw PPP loans for businesses that did not seek a PPP loan under the original CARES Act, and (ii) second draw PPP loans for businesses that were extended a PPP loan previously.

The Company had funded 819 loans totaling $88.1 million by February 28, 2021 and will continue to receive applications as long as funding remains available.

In addition, the Company has been monitoring its liquidity and capital closely.

As of December 31, 2020, the Company maintained $194.1 million, or 10.1% of total assets, of cash and cash equivalents and $526.1 million, or 27.4% of total assets, of available borrowing capacity.

All regulatory capital ratios were also well above the regulatory well capitalized requirements as of December 31, 2020, while establishing additional provision for loan losses of $13.2 million for the year ended December 31, 2020.

At this time, the Company cannot estimate the long-term impact of the COVID-19 pandemic, but these conditions impacted and are expected to impact its business, results of operations, and financial condition negatively.

Financial Highlights

• Net income was $16.2 million for the year ended December 31, 2020, a decrease of $7.9 million, or 32.9%, from $24.1 million for the year ended December 31, 2019;

◦ The Company recorded a provision for loan losses of $13.2 million primarily due to an increase in the economic uncertainty, as well as increases in special mention and substandard loans, as a result of the COVID-19 pandemic for the year ended December 31, 2020.

• Net income was $40.1 million for the year ended December 31, 2021, an increase of $23.9 million, or 147.9%, from $16.2 million for the year ended December 31, 2020;

◦ Provision (reversal) for loan losses was $(4.6) million, $13.2 million and $4.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.

◦ Diluted earnings per common share was $2.62, $1.04 and $1.49 for the years ended December 31, 2021, 2020 and 2019, respectively.

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• Loans held-for-investment, net of deferred costs (fees), were $1.73 billion at December 31, 2021, an increase of $148.6 million, or 9.4%, from $1.58 billion at December 31, 2020.

◦ SBA PPP loans totaled $135.7 million at December 31, 2020.

◦ Loans with modifications related to COVID-19 totaled $36.1 million at December 31, 2020 compared with $484.0 million at June 30, 2020.

◦ Allowance for loan losses to total loans held-for-investment ratio was 1.67% at December 31, 2020 compared with 0.99% at December 31, 2019.

Excluding SBA PPP loans, loans held-for-investment were $1.67 billion at December 31, 2021, an increase of $219.0 million, or 15.1%, from $1.45 billion at December 31, 2020;

◦ SBA PPP loans were $65.3 million and $135.7 million at December 31, 2021 and 2020, respectively.

◦ Loans with modifications related to COVID-19 were none and $36.1 million at December 31, 2021 and 2020, respectively.

• Total deposits were $1.87 billion at December 31, 2021, an increase of $272.3 million, or 17.1%, from $1.59 billion at December 31, 2020;

• The consent order related to the Bank’s BSA/AML compliance was terminated on September 30, 2020;

• BOLI of $29.3 million was purchased during the year ended December 31, 2021;

• The Company declared and paid cash dividends of $0.44, $0.40, and $0.25 per common share for the years ended December 31, 2021, 2020 and 2019, respectively.

The increase in net income for the year ended December 31, 2021 compared with the year ended December 31, 2020 was primarily due to increases in net interest income and noninterest income and the reversal for loan losses.

Net interest income increased primarily due to a decrease in cost of interest-bearing liabilities and an increase in average earning assets.

Noninterest income increased primarily due to an increase in gain on sale of SBA loans.

Reversal for loan losses was primarily due to a decrease in qualitative adjustment factor allocations related to economic implications of the COVID-19 pandemic during the year ended December 31, 2021.

The decrease in net income for the year ended December 31, 2020 compared with the year ended December 31, 2019 was primarily due to an increase in provision for loan losses and a decrease in net interest income.

The increase in total assets for the year ended December 31, 2021 was primarily due to increases in loans held-for-investment and loans held-for-sale and the BOLI purchase of $29.3 million.

Loans held-for-investment increased primarily due to the increased commercial property and residential property loan production.

Loans held-for-sale increased primarily due to the increased SBA loan production.

The Company is committed to making corporate decisions that directly benefit its shareholders, and during the year ended December 31, 2021, increased its dividend per common share by $0.04, or 10.0%, to $0.44 from $0.40 for the year ended December 31, 2020.

During the year ended December 31, 2021, the Company also repurchased 680,269 shares of common stock, totaling $10.9 million.

Overall, the Company returned 43.7% of its earnings to common shareholders through dividends and common share repurchases during the year ended December 31, 2021.

COVID-19 Pandemic

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on global economic and market conditions.

government has enacted a number of monetary and fiscal policies to provide fiscal stimulus and relief in order to mitigate the impact of the COVID-19 pandemic.

However, the COVID-19 pandemic continues to be a challenge to public health, including the emergence of new variants, and impact global economic and market conditions, including global supply chain disruptions and high inflation.

Since the beginning of the crisis, the Company has taken a number of steps to protect the safety of its employees and to support its customers.

The Company has enabled its staff to work remotely and established safety measures within its bank premises and branches for both employees and customers.

In order to support its customers, the Company has been in close contact with them, assessing the level of impact on their businesses, and putting a process in place to evaluate each client’s specific situation and provide relief programs where appropriate, including SBA PPP loans and loan modifications related to the COVID-19 pandemic.

In addition, the Company has been monitoring its liquidity and capital closely.

As of December 31, 2021, the Company maintained $203.3 million, or 9.5% of total assets, of cash and cash equivalents and $610.4 million, or 28.4% of total assets, of available borrowing capacity.

All regulatory capital ratios were also well above the regulatory well-capitalized requirements as of December 31, 2021.

At this time, the Company cannot estimate the long term impact of the COVID-19 pandemic, but these conditions are expected to continue to impact its business, results of operations, and financial condition negatively.

Network and Data Incident

On August 30, 2021, the Bank identified unusual activity on its network.

The Bank responded promptly to disable the activity, investigate its source and monitor the Bank’s network.

The Bank subsequently became aware of claims that it had been the target of a ransomware attack.

On September 7, 2021, the Bank determined that an external actor had illegally accessed and/or acquired certain data on its network.

The Bank has been working with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/or acquired and who may have been impacted.

The investigation revealed that this incident impacted certain files containing certain Bank customer information.

Some of these files contained documents related to loan applications, such as tax returns, Form W-2 information of their employees, and payroll records.

The Bank has notified all individuals identified as impacted, consistent with applicable laws.

All impacted individuals were offered free Equifax Complete Premier credit monitoring and identify theft protection services.

The Bank has notified law enforcement and appropriate authorities of the incident.

On December 16, 2021, a complaint based on the incident was filed in the Los Angeles County Superior Court seeking damages, injunctive relief, and equitable relief.

The Bank expresses no opinion on the merits of the Matter and intends to answer, respond, and/or otherwise vigorously defend itself from the claims and causes of action asserted in the complaint to the fullest extent permitted by applicable law.

Those defenses will be based in part on the fact that the Bank has implemented security procedures, practices, and a robust information security program pursuant to guidance from financial regulators.

Please see Part I Item 3 for more information about the litigation.

The Company continues to monitor and evaluate the data incident for its magnitude and concomitant financial, legal or reputational consequences.

To date, such consequences are not material, however the data incident is still recent and notices to affected individuals only recently began and the lawsuit mentioned above is in its very early stages.

During the year ended December 31, 2021, expenses associated with the data incident, all of which are included in Other Expense in Consolidated Statements of Income (Unaudited), totaled $100 thousand, which represents the retention amount on its insurance claims.

The Company anticipates additional expenses will be incurred in future periods;

however, the Company does have a cyber-liability insurance policy that should provide insurance coverage for this incident.

During its most recent review of disclosure controls and procedures, the Company considered the data incident and concluded that its disclosure controls and procedures were effective.

Nevertheless, the Company continues to enhance and update its disclosure controls and procedures, including as part of its efforts to enhance its cybersecurity safeguards and measures.

With respect to the data incident, upon discovery the Bank engaged experienced outside counsel and continues to work with its experienced third-party forensics firm to investigate and remediate the matter.

The Board of Directors was kept apprised of, and a director with experience in data security participated in, the investigation and remediation efforts.

As a result of this incident and based on information known at this date, the Company determined that its disclosure controls and procedures were effective and the data incident did not materially affect, nor was it reasonably likely to affect, the Company’s internal control over financial reporting.

Result of Operations

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5,755 146 2.54 % 5,811 150 2.58 % 5,833 154 2.64 %

Corporate bonds 1,841 68 3.69 % — — — % — — — %

Interest-bearing deposits in other financial institutions 170,814 220 0.13 % 204,708 631 0.31 % 126,803 2,781 2.19 %

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Time deposits 609,351 2,795 0.46 % 708,306 10,564 1.49 % 783,353 18,245 2.33 %

Borrowings 94,319 614 0.65 % 25,388 472 1.86 % 34,904 611 1.75 %

Other borrowings 31,302 292 0.93 % 94,319 614 0.65 % 25,388 472 1.86 %

Total interest-bearing liabilities 1,053,401 4,335 0.41 % 1,182,483 13,572 1.15 % 1,146,268 23,911 2.09 %

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(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans.

Net amortization of deferred loan fees (cost) of $2.9 million, $452 thousand and $515 thousand, respectively, and net accretion of discount on loans of $3.3 million, $4.0 million and $4.4 million, respectively, are included in the interest income for the years ended December 31, 2020, 2019 and 2018, respectively.

Net amortization of deferred loan fees (cost) of $6.1 million, $2.9 million and $452 thousand, respectively, and net accretion of discount on loans of $3.5 million, $3.3 million and $4.0 million, respectively, are included in the interest income for the years ended December 31, 2021, 2020 and 2019, respectively.

(2) The yield on municipal bonds has not been computed on a tax-equivalent basis.

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Interest on deposits 4,043 12,958 (8,915) (68.8) %

Interest on borrowings 614 472 142 30.1 %

Interest on other borrowings 292 614 (322) (52.4) %

Total interest expense 4,335 13,572 (9,237) (68.1) %

Net interest income $ 77,137 $ 66,189 $ 10,948 16.5 %

Net interest income decreased primarily due to a 128 basis point decrease in average yield on interest-earning assets and a 3.2% increase in average balance of interest-bearing liabilities, partially offset by a 11.8% increase in average balance of interest-earning assets and a 94 basis point decrease in average cost of interest-bearing liabilities.

The increase in average balance of interest-earning assets was primarily due to growth in the loan and other interest-earning assets, supported by deposit growth.

The decreases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the lower market rates in 2020.

Interest and fees on loans decreased primarily due to a 123 basis point decrease in average yield, partially offset by a 11.4% increase in average balance.

The decrease in average yield was primarily due to the lower market rates, the 1% interest rate on SBA PPP loans, and a decrease in net accretion of discount, partially offset by an increase in net amortization of deferred fees on SBA PPP loans.

The increase in average balance was primarily due to the SBA PPP loan production as well as an increase in commercial property loans.

Interest on investment securities decreased primarily due to a 23.7% decrease in average balance and a 73 basis point decrease in average yield.

The decrease in average balance was primarily due to a sale of investment securities of $32.8 million in December 2019, which lead to a lower average balance in 2020, partially offset by new investment securities purchased in 2020.

The decrease in average yield was primarily due to new investment securities purchased at lower market rates, as well as the sales of securities available-for-sale in December 2019 with a weighted-average book yield of 3.02%.

Net interest income increased primarily due to a 7.2% increase in average balance of interest-earning assets and a 74 basis point decrease in average cost of interest-bearing liabilities, partially offset by a 20 basis point decrease in average yield on interest-earning assets and a 10.9% decrease in average balance of interest-bearing liabilities.

The increase in average balance of interest-earning assets was primarily due to growth in the loan and investment securities, supported by deposit growth.

The decreases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the lower market rates during the year ended December 31, 2021.

Interest and fees on loans increased primarily due to a 10.4% increase in average balance, partially offset by a 31 basis point decrease in average yield.

The increase in average balance was primarily due to an increase in commercial property loans, partially offset by decreases in commercial term and SBA PPP loans.

The decrease in average yield was primarily due to the lower market rates, partially offset by increases in net amortization of deferred fees on SBA PPP loans and net accretion of discount.

Interest on investment securities decreased primarily due to a 49 basis point decrease in average yield, partially offset by a 6.3% increase in average balance.

The decrease in average yield was primarily due to new investment securities purchased at lower market rates.

The Company purchased $47.3 million and $39.4 million, respectively, of investment securities during the years ended December 31, 2021 and 2020.

For the years ended December 31, 2021 and 2020, average yield on total investment securities was 1.24% and 1.73%, respectively.

Interest income on other interest-earning assets decreased primarily due to a 195 basis point decrease in average yield, partially offset by a 58.0% increase in average balance.

Interest income on other interest-earning assets decreased primarily due to a 12 basis point decrease in average yield and a 15.8% decrease in average balance.

The decrease in average yield was primarily due to the lower market rates.

The increase in average balance was primarily due to increases in deposits and other borrowings as the Company maintains most of its cash at the Federal Reserve Bank account.

The decrease in average balance was primarily due to increases in loans and investment securities.

For the years ended December 31, 2021 and 2020, yield on total other interest-earning assets was 0.39% and 0.51%, respectively.

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For the years ended December 31, 2021 and 2020, average cost on total interest-bearing deposits was 0.40% and 1.19%, respectively.

Interest expense on other borrowings increased primarily due to a 271.5% increase in average balance, partially offset by a 121 basis point decrease in average cost.

The decrease in average cost was primarily due to the lower market rates.

The increase in average balance was primarily due to the Company’s liquidity management plan in response to the COVID-19 pandemic.

Interest expense on other borrowings decreased primarily due to a 66.8% decrease in average balance, partially offset by a 28 basis point increase in average cost.

The increase in average cost was primarily due to matured borrowings with lower interest rates during the year ended December 31, 2021.

Matured FHLB advances totaled $70.0 million with a weighted-average rate of 0.47% for the year ended December 31, 2021.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

12 unchanged sentences

Net interest income $ 66,189 $ 69,034 $ (2,845) (4.1) %

Net interest income increased primarily due to a 7.9% increase in average balance of interest-earning assets and a 15 basis point increase in average yield on interest-earning assets, partially offset by a 5.3% increase in average balance of interest-bearing liabilities and a 44 basis point increase in average cost of interest-bearing liabilities.

The increase in average balance of interest-earning assets was primarily due to growth in the loan and investment security portfolios, supported by deposit growth.

The increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to higher average market rates in 2019.

Interest and fees on loans increased primarily due to a 9.4% increase in average balance and a 11 basis point increase in average yield.

The increase in average balance was primarily due to organic loan growth primarily in commercial property loans and commercial lines of credit.

The increase in average yield was primarily due to the rising interest rate environment in 2018 and higher average market rates in 2019.

The Company had benefited from its high proportion of variable rate loans that had repriced along with such interest rate environment;

however, the Company strategically had increased the proportion of fixed rate loans to 43.4% at December 31, 2019 from 34.4% at December 31, 2018 in order to improve its asset composition to align with the current and potential future interest rate environment.

Interest on investment securities increased primarily due to a 4.2% increase in average balance and a 5 basis point increase in average yield.

The increase in average balance was primarily due to a steep increase in investment securities throughout 2018, which lead to a higher average balance in 2019, partially offset by a sale of investment securities of $32.8 million in December 2019.

The increase in average yield was primarily due to additional purchases of investment securities along with the rising interest rate environment in 2018 and higher average market rates in 2019.

The increase in average balance of interest-earning assets was primarily due to growth in the loan and other interest-earning assets, supported by deposit growth.

The decreases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the lower market rates during the year ended December 31, 2020.

Interest and fees on loans decreased primarily due to a 123 basis point decrease in average yield, partially offset by an 11.4% increase in average balance.

The increase in average balance was primarily due to the SBA PPP loan production as well as an increase in commercial property loans.

Interest on investment securities decreased primarily due to a 23.7% decrease in average balance and a 73 basis point decrease in average yield.

The Company purchased $39.4 million and $14.1 million, respectively, of investment securities during the years ended December 31, 2020 and 2019.

For the years ended December 31, 2020 and 2019, average yield on total investment securities was 1.73% and 2.46%, respectively.

Interest income on other interest-earning assets increased primarily due to an 18 basis point increase in average yield, partially offset by a 2.0% decrease in average balance.

The increase in average yield was primarily due to a higher average federal funds rate in 2019, partially offset by a decrease in dividend on FHLB stock.

The decrease in average balance was primarily due to cash deployed to support the loan growth.

Interest income on other interest-earning assets decreased primarily due to a 195 basis point decrease in average yield, partially offset by a 58.0% increase in average balance.

The decrease in average yield was primarily due to the lower market rates.

The increase in average balance was primarily due to increases in deposits and other borrowings as the Company maintains most of its cash at the Federal Reserve Bank account.

For the years ended December 31, 2020 and 2019, yield on total other interest-earning assets was 0.51% and 2.46%, respectively.

Interest expense on deposits increased primarily due to a 6.4% increase in average balance and a 44 basis point increase in average cost.

The increase in average balance was primarily due to increases in time deposits, and NOW and money market accounts.

The increase in average cost was primarily due to the impact of higher average market rates on deposits and competition in the Company’s deposit target markets.

Interest expense on deposits decreased primarily due to a 2.9% decrease in average balance of interest-bearing deposits and a 90 basis point decrease in average cost of interest-bearing deposits.

The decrease in average balance was primarily due to a decrease in time deposits, partially offset by increases in savings, NOW and money market accounts.

The decrease in average cost was primarily due to the lower market rates.

For the years ended December 31, 2020 and 2019, average cost on total interest-bearing deposits was 1.19% and 2.09%, respectively.

Interest expense on other borrowings decreased primarily due to less utilization of FHLB advances.

During the year ended December 31, 2019, the Bank did not renew the maturing borrowings of $10.0 million as the Bank maintained a sufficient level of on-balance sheet liquidity.

Provision for Loan Losses

Provision for loan losses was $13.2 million, $4.2 million and $1.2 million for the years ended December 31, 2020, 2019 and 2018.

The increase in provision for loan losses was primarily due to the increase in risks associated with economic and business conditions and uncertainty, as well as the increases in special mention and classified loans, as a result of the COVID-19 pandemic for the year ended December 31, 2020.

Interest expense on other borrowings increased primarily due to a 271.5% increase in average balance, partially offset by a 121 basis point decrease in average cost.

The decrease in average cost was primarily due to the lower market rates.

The increase in average balance was primarily due to the Company’s liquidity management plan in response to the COVID-19 pandemic.

Provision (reversal) for Loan Losses

Provision (reversal) for loan losses was $(4.6) million, $13.2 million and $4.2 million for the years ended December 31, 2021, 2020 and 2019.

The reversal for loan losses for the year ended December 31, 2021 was primarily due to a decrease in qualitative adjustment factor allocations related to economic implications of the COVID-19 pandemic.

The increase for the year ended December 31, 2020 in provision for loan losses was primarily due to the increase in risks associated with economic and business conditions and uncertainty, as well as the increases in special mention and classified loans, as a result of the COVID-19 pandemic.

See further discussion in “Loans Held-For-Investment and Allowance for Loan Losses.”

6 unchanged sentences

Loan servicing income 2,770 2,710 60 2.2 %

Bank-owned life insurance income 108 — 108 — %

Gain on sale of loans 12,932 6,527 6,405 98.1 %

Gain on sale of securities — 786 (786) (100.0) %

Other income 1,429 1,247 182 14.6 %

2 unchanged sentences

Loan servicing income represents fees received on loans that the Company services, net of amortization of servicing assets.

The increase was primarily due to a decrease in amortization of servicing assets from decreased prepayments of loans being serviced.

Gain on sale of loans increased primarily due to increases in sales volume and premium.

The increase in premium on SBA loans was primarily due to the market condition and the increase in sale volume of residential property loans was primarily due to increased refinancing activities during the year ended December 31, 2020.

The Company sold SBA loans of $89.8 million with a gain of $6.0 million and residential property loans of $51.9 million with a gain of $489 thousand during the year ended December 31, 2020.

The increase was primarily due to an increase in servicing income received, partially offset by an increase in amortization of servicing assets from increased prepayments of loans being serviced.

The Company purchased bank-owned life insurance of $29.3 million during November 2021.

Bank-owned life insurance income represents the increase in cash surrender value of the insurance policy.

Gain on sale of loans increased primarily due to increases in sales volume and gain margin.

The increase in gain margin on SBA loans was primarily due to the temporary increase of SBA guaranteed portion until September 30, 2021 under the Economic Aid Act.

The Company sold SBA loans of $126.8 million with a gain of $12.8 million, residential property loans of $10.4 million with a gain of $151 thousand and certain commercial property loans of $8.6 million with a gain of $6 thousand during the year ended December 31, 2021.

During the year ended December 31, 2020, the Company sold SBA loans of $89.8 million with a gain of $6.0 million and residential property loans of $51.9 million with a gain of $489 thousand.

The Company sold securities available-for-sale of $32.8 million during the year ended December 31, 2019, while the Company did not sell any securities for the year ended December 31, 2020.

Other income included wire and remittance fees of $596 thousand and $530 thousand, respectively, and debit card interchange fees of $306 thousand and $252 thousand, respectively, for the years ended December 31, 2021 and 2020.

9 unchanged sentences

Total noninterest income $ 11,740 $ 11,869 $ (129) (1.1) %

Service charges and fees on deposits increased primarily due to an increase in the level of transactional based deposit accounts.

Loan servicing income increased primarily due to a decreased amortization of servicing assets from decreased prepayments of loans being serviced, partially offset by a decrease in servicing income.

Servicing income decreased due to a decrease in the average balance of servicing portfolio.

Gain on sale of loans increased primarily due to an increase in sales volume.

Service charges and fees on deposits decreased primarily due to a decrease in fee-based transactions.

The increase was primarily due to a decrease in amortization of servicing assets from decreased prepayments of loans being serviced.

Gain on sale of loans increased primarily due to increases in sales volume and premium.

The Company sold SBA loans of $89.8 million with a gain of $6.0 million and residential property loans of $51.9 million with a gain of $489 thousand during the year ended December 31, 2020.

During the year ended December 31, 2018, the Company sold SBA loans of $91.7 million with a gain of $5.3 million, residential property loans of $11.6 million with a gain of $220 thousand, and other loans of $1.9 million with a gain of $62 thousand.

During the year ended December 31, 2019, the Company sold SBA loans of $99.6 million with a gain of $5.9 million and residential property loans of $10.1 million with a gain of $81 thousand.

The Company sold securities available-for-sale of $32.8 million during the year ended December 31, 2019, while the Company did not sell any securities for the year ended December 31, 2020.

14 unchanged sentences

Total noninterest expense $ 43,208 $ 41,699 $ 1,509 3.6 %

Salaries and employee benefits increased primarily due to increases in wages, other employee benefits and vacation accrual, partially offset by a direct loan origination cost of $1.1 million related to SBA PPP loan production and a decrease in bonus accrual.

Salaries and employee benefits increased primarily due to increases in wages, bonus accrual, and incentives tied to LPO originated SBA loan sales, partially offset by decreases in vacation and stock compensation expense.

The number of full-time equivalent employees averaged 247.9 for the year ended December 31, 2021 compared to 251.8 for the year ended December 31, 2020.

Occupancy and equipment expense increased primarily due to increases in rent and equipment maintenance expenses.

Professional fees decreased primarily due to a decrease in expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs.

The consent order with the FDIC and CDFPI related to the BSA/AML compliance was terminated on September 30, 2020.

Marketing and business promotion expense decreased primarily due to fewer marketing activities related to the COVID-19 pandemic for the year ended December 31, 2020.

Occupancy and equipment expense decreased primarily due to a decrease in depreciation, partially offset by an increase in equipment maintenance expense.

Professional fees decreased primarily due to a decrease in expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs, partially offset by an increase in audit fees.

Marketing and business promotion expense increased primarily due to increased marketing activities and advertisement.

Data processing expense increased primarily due to an increase in processing costs from a greater number of accounts and transactions.

Director fees and expenses decreased primarily due to the Company's Board of Directors decision to temporarily decrease director fees from the second quarter of 2020, partially offset by a severance payment of $45 thousand for a former director during the three months end March 31, 2020.

Regulatory assessment expense increased primarily due to a small bank credit of $345 thousand received from the FDIC during the year ended December 31, 2019, as well as an increase in balance sheet.

Other expense decreased primarily due to decreases in office expenses, provision for unfunded loan commitments, other loan related legal expenses, and armed guard expenses.

Other expenses included office expenses of $1.4 million and $1.7 million, respectively, provision (reversal) for unfunded loan commitments was $(63) thousand and $162 thousand, respectively, Other loan related legal expenses were $426 thousand and $486 thousand, respectively, and armed guard expense of $506 thousand and $555 thousand, respectively, for the years ended December 31, 2020 and 2019, respectively.

Director fees and expenses decreased primarily due to a severance payment of $45 thousand for a former director during the year ended December 31, 2020.

Regulatory assessment expense decreased primarily due to a decrease in assessment rate, partially offset by an increase in balance sheet.

Other expense decreased primarily due to a decrease in other loan related legal expense, partially offset by an increase in armed guard expenses.

Other loan related legal expenses were $302 thousand and $426 thousand, respectively, and armed guard expense of $546 thousand and $506 thousand, respectively, for the years ended December 31, 2021 and 2020, respectively.

Other expenses also included office expenses of $1.4 million and $1.4 million, respectively, and reversal for unfunded loan commitments was $24 thousand and $63 thousand, respectively for the years ended December 31, 2021 and 2020, respectively.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

11 unchanged sentences

Total noninterest expense $ 41,699 $ 42,315 $ (616) (1.5) %

Salaries and employee benefits increased primarily due to the hiring of new experienced employees with higher salaries in order to support the expansion of the Company's infrastructure for being a public company and to enhance the controls and processes on BSA/AML compliance, partially offset by a decrease in bonus accrual.

The number of full-time equivalent employees averaged 251.8 for the year ended December 31, 2020 compared to 250.2 for the year ended December 31, 2019.

Occupancy and equipment expense increased primarily due to an establishment of new loan production office in Artesia, California in December 2018 and an increase in equipment maintenance expense.

Professional fees increased primarily due to increases in audit and other professional fees for being a public company and expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs, partially offset by decreases in legal and professional fees attributed to the portion of expenses related the Company's initial public offering in 2018 that were not capitalized.

Marketing and business promotion expense decreased primarily due to a less advertisement activities for the year ended December 31, 2019.

Occupancy and equipment expense increased primarily due to increases in rent and equipment maintenance expenses.

Professional fees decreased primarily due to a decrease in expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs.

The consent order with the FDIC and CDFPI related to the BSA/AML compliance was terminated on September 30, 2020.

Marketing and business promotion expense decreased primarily due to fewer marketing activities related to the COVID-19 pandemic for the year ended December 31, 2020.

Data processing expense increased primarily due to an increase in processing costs from a greater number of accounts and transactions.

Director fees and expenses decreased primarily due to a fewer number of directors for the year ended December 31, 2019.

Regulatory assessment expense increased primarily due to an increase in assessment rate from the consent order relating to the Bank’s compliance with BSA/AML, partially offset by a small bank assessment credit of $345 thousand from the FDIC during the year ended December 31, 2019.

Other expense decreased primarily due to a write-off related to a $577 thousand reimbursement paid to SBA in 2018, partially offset by increases in other loan related legal expenses as well as the increase in provision for unfunded loan commitments.

Other loan related legal expenses were $486 thousand and $353 thousand, respectively, and provision for unfunded loan commitments was $162 thousand and $18 thousand, respectively, for the years ended December 31, 2019 and 2018.

Other expenses also included office expense of $1.7 million and $1.6 million, respectively, and armed guard expense of $555 thousand and $504 thousand, respectively, for the years ended December 31, 2019 and 2018, respectively.

Regulatory assessment expense increased primarily due to a small bank credit of $345 thousand received from the FDIC during the year ended December 31, 2019, as well as an increase in balance sheet.

Other expense decreased primarily due to decreases in office expenses, provision for unfunded loan commitments, other loan related legal expenses, and armed guard expenses.

Income Tax Expense

2 unchanged sentences

Investment Securities

On June 30, 2020, the Company transferred securities held-to-maturity to securities available-for-sale as a part of the Company’s liquidity management plan in response to the COVID-19 pandemic.

Management determined that its securities held-to-maturity no longer adhere to the Company’s current liquidity management plan and could be sold to potentially improve the Company’s liquidity position.

Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and the Company’s ability to assert that it has the intent and ability to hold to maturity debt securities will be limited for up to two years from the date of transfer.

The Company transferred all securities held-to-maturity of $18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of $787 thousand.

The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:

9 unchanged sentences

Municipal bonds 5,329 5,686 357 5,370 5,826 456

Corporate bonds 5,000 5,071 71 — — —

Total securities available-for-sale $ 123,185 $ 123,198 $ 13 $ 117,961 $ 120,527 $ 2,566

Securities held-to-maturity:

government agency and U.S.

government sponsored enterprise mortgage-backed securities $ — $ — $ — $ 15,215 $ 15,204 $ (11)

Municipal bonds — — — 4,939 5,276 337

Total securities held-to-maturity $ — $ — $ — $ 20,154 $ 20,480 $ 326

On June 30, 2020, the Company transferred securities held-to-maturity to securities available-for-sale as a part of the Company’s liquidity management plan in response to the COVID-19 pandemic.

Total carrying value of investment securities were $123.2 million at December 31, 2021, an increase of $2.7 million, or 2.2%, from $120.5 million at December 31, 2020.

The increase was primarily due to purchases of $39.4 million and an increase in fair value of securities available-for-sale of $2.9 million, partially offset by principal paydowns and calls of $38.5 million and net premium amortization of $938 thousand.

The increase was primarily due to purchases of $47.3 million, partially offset by principal paydowns and calls of $41.1 million, a decrease in fair value of securities available-for-sale of $2.6 million and net premium amortization of $1.0 million.

All individual securities in a continuous unrealized loss position for 12 months or more as of December 31, 2021 and December 31, 2020 had an investment grade rating upon purchase.

4 unchanged sentences

The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of December 31, 2021.

Weighted-average yields are based upon the amortized cost of securities and are calculated using the interest method which takes into consideration of premium amortization and discount accretion.

Weighted-average yields on tax-exempt debt securities exclude the federal income tax benefit.

December 31, 2021

8 unchanged sentences

Municipal bonds 305 1.72 % 1,851 2.07 % 830 2.27 % 2,343 3.53 % 5,329 2.72 %

Corporate bonds — — % — — % 5,000 3.75 % — — % 5,000 3.75 %

Total securities available-for-sale $ 305 1.72 % $ 2,993 2.05 % $ 25,115 1.64 % $ 94,772 1.55 % $ 123,185 1.58 %

24 unchanged sentences

Loans held-for-investment were $1.73 billion at December 31, 2021, an increase of $148.6 million, or 9.4%, from $1.58 billion at December 31, 2020.

The increase was primarily due to new funding of $345.9 million, advances of $100.5 million, and transfers from loan held-for-sale of $697 thousand, partially offset by paydowns and payoffs of $311.5 million, transfers to loans held-for-sale of $1.4 million and charge-offs of $1.5 million.

SBA PPP loan production contributed significantly to the Company’s loan growth for the year ended December 31, 2020.

The increase was primarily due to new funding of $619.7 million and advances of $118.9 million, partially offset by paydowns and payoffs of $581.0 million, transfers to loans held-for-sale of $8.8 million and charge-offs of $227 thousand.

The increase for the year ended December 31, 2021 was primarily due to increases in commercial property and residential property loans, partially offset by decreases in SBA PPP and commercial term loans.

As of December 31, 2021, the Company recognized $181.8 million in forgiveness.

The following table shows the contractual maturities of loans held-for-investment and the distribution between fixed and floating interest rate loans at December 31, 2021:

December 31, 2021

($ in thousands) Within One Year Due After One Year to Five Years Due After Five Years Total

($ in thousands) Within One Year Due After One Year to Five Years Due After Five Years to 15 Years Due After 15 Years Total

Real estate loans:

18 unchanged sentences

SBA Paycheck Protection Program

The following table presents a summary of SBA PPP loans as of December 31, 2020:

December 31, 2020

($ in thousands) Number of Loans Carrying Value Contractual Balance

The following table presents a summary of SBA PPP loans as of the dates indicated:

($ in thousands) Number of Loans Carrying Value Contractual Balance Number of Loans Carrying Value Contractual Balance

$50,000 or less 145 $ 2,915 $ 3,074 1,017 $ 20,518 $ 20,632

4 unchanged sentences

Loan Modifications Related to the COVID-19 Pandemic

The following table presents a summary of loans under modified terms related to the COVID-19 pandemic as of December 31, 2020:

The Company started providing modifications related to the COVID-19 pandemic during the three months ended June 30, 2020.

The Company had no outstanding modification since September 30, 2021.

The following table presents activity in loans under modified terms related to the COVID-19 pandemic for the year ended December 31, 2021.

Real Estate Loans Commercial and Industrial Loans

($ in thousands) Commercial Property Residential Property SBA Property Commercial Term SBA Commercial Term Total

Balance at December 31, 2020 $ 24,132 $ 425 $ 4,192 $ 5,527 $ 1,841 $ 36,117

Modification early terminated (1)

— — (2,576) — (1,338) (3,914)

Modification expired (33,943) (1,100) (1,627) (8,330) (513) (45,513)

Subsequent modification 11,829 328 — 2,878 — 15,035

New modification — 349 — — — 349

Amortization (2,018) (2) 11 (75) 10 (2,074)

Balance at December 31, 2021 $ — $ — $ — $ — $ — $ —

(1) Termination of modifications at the request of the borrower.

The following table presents the risk categories and accrued interest receivable for loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as of December 31, 2021:

December 31, 2021

Modification Type

($ in thousands) Payment Deferment Interest Only Payment Total Weighted-Average Contractual Rate Loan-to-Value (1)

Accrued Interest Receivable

Carrying Value Per Risk Category Accrued Interest Receivable

($ in thousands) Pass Special Mention Substandard Doubtful Total

Real estate loans:

Commercial property $ 291,759 $ 11,739 $ 1,525 $ — $ 305,023 $ 730

$ 9,688 $ 14,444 $ 24,132 4.10 % 44.2 % $ 151

Residential property 25,620 — — — 25,620 537

425 — 425 4.75 % 65.5 % 12

SBA property 3,683 251 — — 3,934 15

1 unchanged sentence

Commercial term 29,744 3,563 1,114 — 34,421 84

2,462 3,065 5,527 3.88 % 98

SBA commercial term 1,663 — 57 — 1,720 6

Other consumer loans 699 — — — 699 2

Total $ 353,168 $ 15,553 $ 2,696 $ — $ 371,417 $ 1,374

Loans that were granted modifications related to the COVID-19 pandemic in excess of 6 months, on a cumulative basis, were classified as special mention or substandard.

There were no past due or nonaccrual loans that were previously modified in response to the COVID-19 pandemic, but that had reverted back to previous contractual payment terms as of December 31, 2021.

Allowance for loan losses

The following table reflects allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated:

2021 2020 2019 2018 2017

Loans held-for-investment $ 1,583,578

SBA PPP loans 135,654

Loans held-for-investment, excluding SBA PPP loans $ 1,447,924

Total loans under modified terms related to the COVID-19 pandemic to loans held-for-investment, excluding SBA PPP loans

(1) Collateral value at origination

All of these loans under modified terms related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs.

The following table presents a summary of remaining modifications terms of loans under modified terms related to the COVID-19 pandemic as of December 31, 2020:

December 31, 2020

Remaining Terms of

($ in thousands) Three Months or Less Three to Six Months Seven Months Total

($ in thousands) Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans

Real estate loans:

1 unchanged sentence

Residential property 1,869 12.1 % 2,680 12.5 % 1,167 16.3 % 1,152 17.5 % 833 14.2 %

SBS property — 4,192 — 4,192

SBA property 1,253 7.5 % 2,179 8.0 % 1,446 8.9 % 1,225 9.0 % 1,124 11.1 %

Construction 89 0.5 % 225 1.0 % 299 1.3 % 511 2.0 % 184 1.9 %

Total real estate loans 16,797 84.0 % 18,894 77.0 % 9,854 81.9 % 9,104 81.6 % 8,507 82.7 %

Commercial and industrial loans:

Commercial term 2,715 4.2 % 4,090 5.5 % 1,848 7.1 % 1,525 7.6 % 1,513 6.5 %

Commercial lines of credit 2,071 5.8 % 2,359 6.1 % 1,805 7.7 % 1,443 6.9 % 1,126 5.3 %

SBA commercial term 524 1.0 % 773 1.4 % 701 1.7 % 909 2.0 % 909 2.6 %

SBA PPP — 3.8 % — 8.6 % — — % — — % — — %

Total commercial and industrial loans 5,310 14.8 % 7,222 21.6 % 4,354 16.5 % 3,877 16.5 % 3,548 14.4 %

Other consumer loans 274 1.2 % 394 1.4 % 172 1.6 % 186 1.9 % 169 2.9 %

Total $ 22,381 100.0 % $ 26,510 100.0 % $ 14,380 100.0 % $ 13,167 100.0 % $ 12,224 100.0 %

The following table presents a summary of loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as of December 31, 2020:

December 31, 2020

($ in thousands) Carrying Value Accrued Interest Receivable

Allowance for loan losses to loans held-for-investment 1.29 % 1.67 % 0.99 % 0.98 % 1.03 %

Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (1)

1.34 % 1.83 % 0.99 % 0.98 % 1.03 %

(1) This ratio is not presented in accordance with GAAP.

See "Non-GAAP measure" for reconciliation of this measure to its most comparable GAAP measure.

The SBA guarantee on PPP loans cannot be separated from the loan and therefore is not a separate unit of account.

The Company considered the SBA guarantee in the allowance for loan losses evaluation and determined that it is not required to reserve an allowance on SBA PPP loans at December 31, 2021 and 2020.

The decrease in allowance for loan losses for the year ended December 31, 2021 was primarily due to a decrease in qualitative adjustment factor allocations related to economic implications of the COVID-19 pandemic.

The increase in allowance for loan losses for the year ended December 31, 2020 was primarily due to increased risks associated with economic and business conditions, as well as increases in special mention and substandard loans, as a result of the COVID-19 pandemic.

The following tables present net charge-offs as a percentage to the average loan held for investment balances in each of the loan categories for the periods indicated:

For the Year Ended December 31,

2021 2020 2019

($ in thousands) Average Balance Net Charge-offs (Recoveries) Percentage Average Balance Net Charge-offs (Recoveries) Percentage Average Balance Net Charge-offs (Recoveries) Percentage

Real estate loans:

Commercial property $ 983,129 $ — — % $ 826,288 $ — — % $ 744,513 $ — — %

$ 349,006 $ 4,308

Residential property 197,741 — — % 221,296 — — % 237,825 — — %

SBA property 125,051 (39) (0.03) % 124,996 117 0.09 % 125,785 25 0.02 %

Construction 12,715 — — % 20,285 — — % 22,384 — — %

Total real estate loans 1,318,636 (39) (0.01) % 1,192,865 117 0.01 % 1,130,507 25 0.01 %

Commercial and industrial loans:

Commercial term 77,383 (200) (0.26) % 97,247 (96) (0.10) % 104,427 179 0.17 %

Commercial lines of credit 92,874 (146) (0.16) % 100,154 709 0.71 % 93,344 2,597 2.78 %

SBA commercial term 19,390 (104) (0.54) % 23,868 255 1.07 % 25,911 196 0.76 %

SBA PPP 150,043 — — % 92,818 — — % — — — %

Total commercial and industrial loans 339,690 (450) (0.13) % 314,087 868 0.28 % 223,682 2,972 1.33 %

Other consumer loans 21,101 22 0.10 % 22,033 104 0.47 % 22,884 27 0.12 %

$ 437,865 $ 5,239

The Company started providing modifications related to the COVID-19 pandemic during the three months ended June 30, 2020.

The following table presents activity in loans under modified terms related to the COVID-19 pandemic for the six months ended December 31, 2020.

Real Estate Loans Commercial and Industrial Loans

($ in thousands) Commercial Property Residential Property SBA Property Commercial Term SBA Commercial Term Other Consumer Loans Total

Balance at July 1, 2020 $ 379,566 $ 44,804 $ — $ 58,159 $ — $ 1,507 $ 484,036

Modification early terminated (1)

(67,996) (1,019) — (24,734) — (4) (93,753)

Modification expired (291,983) (40,053) — (27,748) (72) (1,252) (361,108)

Subsequent modification 10,973 425 — 5,527 72 — 16,997

New modification 14,269 260 4,192 — 1,841 6 20,568

Amortization (20,697) (3,992) — (5,677) — (257) (30,623)

Balance at December 31, 2020 $ 24,132 $ 425 $ 4,192 $ 5,527 $ 1,841 $ — $ 36,117

(1) Termination of modifications at the request of the borrower.

Allowance for loan losses

The following table reflects allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated:

2020 2019 2018 2017 2016

Total loans held-for-investment $ 1,679,427 $ (467) (0.03) % $ 1,528,985 $ 1,089 0.07 % $ 1,377,073 $ 3,024 0.22 %

For the Year Ended December 31,

($ in thousands) Average Balance Net Charge-offs (Recoveries) Percentage Average Balance Net Charge-offs (Recoveries) Percentage

Real estate loans:

8 unchanged sentences

SBA commercial term 28,950 114 0.39 % 29,193 459 1.57 %

SBA PPP — 8.6 % — — % — — % — — % — — %

Total commercial and industrial loans 184,198 (84) (0.05) % 156,214 740 0.47 %

Other consumer loans 30,135 204 0.68 % 32,951 16 0.05 %

Total $ 26,510 100.0 % $ 14,380 100.0 % $ 13,167 100.0 % $ 12,224 100.0 % $ 11,320 100.0 %

The SBA guarantee on PPP loans cannot be separated from the loan and therefore is not a separate unit of account.

The Company considered the SBA guarantee in the allowance for loan losses evaluation and determined that it is not required to reserve an allowance on SBA PPP loans at December 31, 2020.

The increase in allowance for loan losses was primarily due to increased risks associated with economic and business conditions, as well as increases in special mention and substandard loans, as a result of the COVID-19 pandemic for the year ended December 31, 2020.

The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs as of the dates or for the periods indicated:

As of or For the Year Ended December 31,

($ in thousands) 2020 2019 2018 2017 2016

Allowance for loan losses:

Balance at beginning of year $ 14,380 $ 13,167 $ 12,224 $ 11,320 $ 9,345

Real estate 175 31 381 168 —

Commercial and industrial 1,104 3,350 272 1,320 729

Other consumer 250 198 356 88 38

Total charge-offs

1,529 3,579 1,009 1,576 767

Recoveries on loans previously charged off

Real estate 58 6 213 1 1

Commercial and industrial 236 378 356 580 406

Other consumer 146 171 152 72 52

Total recoveries

440 555 721 653 459

Net charge-offs 1,089 3,024 288 923 308

Provision for loan losses 13,219 4,237 1,231 1,827 2,283

Balance at end of year $ 26,510 $ 14,380 $ 13,167 $ 12,224 $ 11,320

Loans held-for-investment:

Balance at end of year $ 1,583,578 $ 1,450,831 $ 1,338,682 $ 1,189,999 $ 1,031,112

Average balance 1,528,985 1,378,073 1,254,512 1,099,725 942,037

Net charge-offs to average loans held-for-investment 0.07 % 0.22 % 0.02 % 0.08 % 0.03 %

Allowance for loan losses to loans held-for-investment 1.67 % 0.99 % 0.98 % 1.03 % 1.10 %

Total loans held-for-investment $ 1,254,512 $ 288 0.02 % $ 1,099,725 $ 923 0.08 %

Loans 30 to 89 Days Past Due and Still Accruing

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Commercial and industrial loans:

Commercial term — — — — 442

Commercial lines of credit — — — — 1,500

SBA commercial term — — 189 — 2

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$ 994 $ 4,564 $ 2,824 $ 1,061 $ 3,333

Nonaccrual loans to loans held-for-investment 0.06 % 0.20 % 0.17 % 0.08 % 0.27 %

Nonperforming loans to loans held-for-investment

0.06 % 0.20 % 0.19 % 0.08 % 0.27 %

Allowance for loan losses to:

Nonaccrual loans 2,251.61 % 838.13 % 566.81 % 1,241.00 % 377.98 %

Nonperforming loans 2,251.61 % 838.13 % 509.21 % 1,241.00 % 377.98 %

Nonperforming assets to total assets

0.05 % 0.24 % 0.16 % 0.06 % 0.23 %

Total nonaccrual loans were $3.2 million at December 31, 2020, an increase of $626 thousand, or 24.7%, from $2.5 million at December 31, 2019.

The increase was primarily due to loans placed on nonaccrual status during the year ended December 31, 2020 of $2.8 million, partially offset by payoffs and paydowns of $915 thousand and charge-offs of $1.3 million.

Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection.

Total nonaccrual loans were $994 thousand at December 31, 2021, a decrease of $2.2 million, or 68.6%, from $3.2 million at December 31, 2020.

The decrease was primarily due to payoffs and paydowns of $2.1 million, a loan transferred to OREO of $905 thousand and charge-offs of $86 thousand, partially offset by loans placed on nonaccrual status during the year ended December 31, 2021 of $958 thousand.

Loans are generally placed on nonaccrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection.

Past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued.

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Total TDRs were $593 thousand at December 31, 2021, a decrease of $46 thousand, or 7.2%, from $639 thousand at December 31, 2020.

The decrease was primarily due to payoffs and paydowns of $86 thousand and charge-offs of $133 thousand, partially offset by new TDRs of $37 thousand.

The decrease was primarily due to payoffs and paydowns of $39 thousand and charge-offs of $6 thousand.

There were no new TDRs for the year ended December 31, 2021.

Loans Held-For-Sale

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$ 37,026 1,979 $ 1,975 $ 5,781 $ 5,297

Loans held-for-sale were $2.0 million at December 31, 2020, an increase of $4 thousand, or 0.2%, from $2.0 million at December 31, 2019.

The increase was primarily due to originations of $141.2 million and transfers from loans held-for-investment of $1.4 million, partially offset by sales of $141.7 million and a transfer to loans held-for-investment of $697 thousand.

Loans held-for-sale were $37.0 million at December 31, 2021, an increase of $35.0 million, or 1,770.9%, from $2.0 million at December 31, 2020.

The increase was primarily due to originations of $172.2 million and transfers from loans held-for-investment of $8.8 million, partially offset by sales of $145.8 million.

The Bank gathers deposits primarily through its branch locations.

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$ 1,867,134 $ 1,594,851 $ 272,283 17.1 %

Total deposits not covered by deposit insurance $ 919,584 $ 737,215 $ 182,369 24.7 %

Time deposits not covered by deposit insurance $ 216,269 $ 224,718 $ (8,449) (3.8) %

The increase in noninterest-bearing demand deposits was primarily due to the overall liquid deposit market.

A total of $117.9 million of SBA PPP loans were funded through the Bank's noninterest-bearing demand deposits and deposit customers also received $93.5 million of SBA Economic Injury Disaster Loans during the past 9-month period.

The decrease in retail time deposits was primarily due to matured and closed accounts of $639.5 million, partially offset by new accounts of $97.0 million and renewals of the matured accounts of $391.7 million.

A total of $93.9 million of SBA PPP loans were funded through the Bank's noninterest-bearing demand deposits and deposit customers also received $201.1 million of SBA Economic Injury Disaster Loans and SBA Revitalization Funds during the year ended December 31, 2021.

The decrease in retail time deposits was primarily due to matured and closed accounts of $583.2 million, partially offset by new accounts of $101.6 million, renewals of the matured accounts of $428.8 million, and balance increases of $13.9 million.

As of December 31, 2021 and 2020, total deposits were comprised of 44.5% and 33.7%, respectively, of noninterest-bearing demand accounts, 22.6% and 25.7%, respectively, of savings, NOW and money market accounts and 32.9% and 40.6%, respectively, of time deposits.

The following table presents the maturity of time deposits as of the dates indicated:

($ in thousands) Three Months or Less Three to Six Months Six Months to One Year One to Three Years Over Three Years Total

($ in thousands) Three Months or Less Three to Six Months Six Months to One Year One to Three Years Total

December 31, 2021

Time deposits less than $100,000

$ 83,751 $ 18,482 $ 32,112 $ 7,975 $ 1,528 $ 143,848

Time deposits of $100,000 through $250,000

91,727 57,715 81,622 4,421 — 235,485

Time deposits of $250,000 or less $ 143,594 $ 60,686 $ 129,627 $ 8,049 $ 341,956

Time deposits of more than $250,000

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Total $ 300,096 $ 117,987 $ 184,931 $ 11,211 $ 614,225

Not covered by deposit insurance $ 136,219 $ 38,229 $ 38,780 $ 3,041 $ 216,269

December 31, 2020

Time deposits less than $100,000

$ 41,456 $ 29,899 $ 92,695 $ 10,165 $ 1,557 $ 175,772

Time deposits of $100,000 through $250,000

111,182 53,198 121,674 5,537 — 291,591

Time deposits of $250,000 or less $ 175,478 $ 76,197 $ 113,734 $ 13,924 $ 379,333

Time deposits of more than $250,000

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Total $ 331,985 $ 111,197 $ 186,287 $ 18,547 $ 648,016

Not covered by deposit insurance $ 145,247 $ 23,338 $ 51,820 $ 4,313 $ 224,718

Shareholders’ Equity and Regulatory Capital

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Shareholders’ equity was $256.3 million at December 31, 2021, an increase of $22.5 million, or 9.6%, from $233.8 million at December 31, 2020.

The increase was primarily due to the net income of $16.2 million and other comprehensive income from the fair value change in securities available-for-sale of $2.0 million, partially offset by repurchase of common stock of $6.5 million and cash dividends declared on common stock of $6.2 million.

The increase was primarily due to the net income of $40.1 million and stock option exercised of $1.3 million, partially offset by repurchase of common stock of $10.9 million, cash dividends declared on common stock of $6.7 million and other comprehensive loss from the fair value change in securities available-for-sale of $1.8 million.

Stock Repurchase

On April 8, 2021, the Company’s Board of Directors approved a repurchase program authorizing the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 775,000 shares, through September 7, 2021.

The Company repurchased and retired 680,269 shares of common stock at a weighted-average price of $15.99 per share, totaling $10.9 million under this repurchase program.

Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators.

The Company is not currently subject to separate minimum capital measurements under the definition of a “Small Bank Holding Company.” At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank.

Federal banking agencies also require a capital conservation buffer of 2.50% in addition to the ratios required to generally be considered “adequately capitalized” under the PCA regulations.

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 the Company’s financial statements.

Under capital adequacy guidelines and the regulatory framework for the PCA, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies.

In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

The following table presents a summary of the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of December 31, 2020 and 2019.

The following table presents a summary of the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective as of December 31, 2021 and 2020.

For comparison purpose, the Company’s ratios are included as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.

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The Company and the Bank’s capital conservation buffer was 8.04% and 7.73%, respectively, as of December 31, 2021, and 9.22% and 8.95%, respectively, as of December 31, 2020.

Emergency Capital Investment Program

On December 14, 2021, the U.S.

Treasury informed the Company that the U.S Treasury has reviewed the Company’s application to receive a capital investment from the U.S Treasury under the Emergency Capital Investment Program (“ECIP”), and that the Company would be eligible to receive an ECIP investment in an amount up to $69,141,000 in the form of non-dilutive Tier 1 senior perpetual preferred capital.

The Company determined to accept the offer to receive the ECIP investment for the full amount.

In order to receive the ECIP investment from the U.S Treasury, the Company will be required to fulfill certain conditions established by the U.S Treasury and will be subject to certain restrictions following its acceptance of the investment.

In addition, the final amount of the ECIP will be determined by the U.S.

Treasury and it may differ from the eligible amount.

The Company expects to close the investment in the second quarter of 2022, but the ultimate timing will be controlled by the U.S.

Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions and minority depository institutions such as the Bank to augment their efforts to support small businesses and consumers in their communities.

Liquidity refers to the measure of ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting operating, capital and strategic cash flow needs, all at a reasonable cost.

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On June 30, 2020, the Company also transferred securities held-to-maturity of $18.8 million to securities available-for-sale in order to secure additional liquidity on balance sheet.

As of December 31, 2020, management was able to maintain strong on-and off-balance sheet liquidity as a result of proactive liquidity management in response to the COVID-19 pandemic evidenced by the fact that as of December 31, 2020, the Company maintained $194.1 million, or 10.1% of total assets, of cash and cash equivalents and $526.1 million, or 27.4% of total assets, of available borrowing capacity.

Since the beginning of the crisis, management has been able to maintain strong on-and off-balance sheet liquidity as a result of proactive liquidity management in response to the COVID-19 pandemic evidenced by the fact that as of December 31, 2021, the Company maintained $203.3 million, or 9.5% of total assets, of cash and cash equivalents and $610.4 million, or 28.4% of total assets, of available borrowing capacity.

PCB Bancorp, on a stand-alone holding company basis, must provide for its own liquidity and its main source of funding is dividends from the Bank.

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Management believes that these limitations will not impact the Company’s ability to meet its ongoing short- and long-term cash obligations.

Off-Balance Sheet Activities and Contractual Obligations

Off-Balance Sheet Arrangements

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The following table presents outstanding financial commitments whose contractual amount represents credit risk as of the dates indicated:

($ in thousands) 2020 2019

Commitments to extend credit

$ 193,496 $ 171,608

($ in thousands) Fixed Rate Variable Rate Fixed Rate Variable Rate

Unused lines of credit $ 8,261 $ 160,739 $ 6,623 $ 150,247

Unfunded loan commitments 595 29,688 1,752 34,874

Standby letters of credit

3,078 1,431 2,971 1,814

Commercial letters of credit

8 unchanged sentences

Time deposits $ 603,014 $ 10,850 $ 361 $ — $ 614,225

$ 629,469 $ 17,019 $ 1,528 $ — $ 648,016

FHLB advances 10,000 — — — 10,000

70,000 10,000 — — 80,000

Operating leases 2,706 3,023 1,235 710 7,674

2,494 4,342 1,413 818 9,067

Total $ 615,720 $ 13,873 $ 1,596 $ 710 $ 631,899

1 unchanged sentence

Time deposits $ 629,469 $ 17,019 $ 1,528 $ — $ 648,016

$ 734,003 $ 21,529 $ 1,557 $ — $ 757,089

FHLB advances 70,000 10,000 — — 80,000

10,000 10,000 — — 20,000

Operating leases 2,494 4,342 1,413 818 9,067

2,686 4,454 2,375 1,352 10,867

Total $ 701,963 $ 31,361 $ 2,941 $ 818 $ 737,083

2 unchanged sentences

The Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.

- Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss due to changes in market values of assets and liabilities.

Market risk occurs in the normal course of business through exposures to market interest rates, equity prices, and credit spreads.

Interest rate risk is the risk to earnings and value arising from changes in market interest rates.

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

Treasuries and London Interbank Offered Rate (“LIBOR”) (basis risk).

The Company’s Board ALCO establishes broad policy limits with respect to interest rate risk.

Board ALCO establishes specific operating guidelines within the parameters of the Board of Directors’ policies.

In general, The Company seeks to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities.

Board ALCO meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the Board of Directors’ approved risk limits.

As discussed earlier, the Company also has a Management ALCO, which is comprised of senior management team and Chief Executive Officer, to proactively monitor interest rate risk.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities.

Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

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

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

Interest rate risk measurement is calculated and reported to the Board ALCO at least quarterly.

The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

The Company uses two approaches to model interest rate risk:

Net Interest Income at Risk (“NII at Risk”), and Economic Value of Equity (“EVE”).

Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives.

EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change.

EVE is a period end measurement.

The following table presents the projected changes in NII at Risk and EVE that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change as of the dates indicated:

Simulated Rate Changes Net Interest Income Sensitivity Economic Value of Equity Sensitivity Net Interest Income Sensitivity Economic Value of Equity Sensitivity

+300 28.9 % 17.4 % 29.9 % 9.2 %

+200 19.4 % 13.3 % 20.3 % 7.7 %

+100 9.8 % 7.6 % 10.4 % 4.7 %

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis