What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-09 compared with 2022-03-04 · 216 added, 226 removed, 681 unchanged (39% of the section changed)

19 unchanged sentences

Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible.

This methodology for determining charge-offs is consistently applied to each segment.

This methodology for determining charge-offs is consistently applied to each loan segment.

The Company determines a separate allowance for loan losses for each portfolio segment.

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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.

This ASU was 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.

The Company plans to adopt this ASU, as well as any subsequent ASUs related to this ASU, at the delayed effective date of January 1, 2023.

The Company will adopt this ASU during the three months ended March 31, 2023.

The Company is currently in its final stage of CECL implementation.

The Company is testing its designed models with an independent third party and completing development of its methodologies, and data/input gathering and validation.

In addition, the Company is devising risk documentation, policies and procedures associated with CECL to support the ongoing estimation activities and the continuous assessment of risks related to the model, its methodologies, and data governance.

The Company completed its parallel-runs during the year ended December 31, 2022.

Based on the Company’s current assessment of this ASU, the Company expects to recognize coverage ratio of allowance for credit losses (“ACL”) on loans from 1.12% to 1.32% of loans held-for-investment.

In addition, the Company expects to recognize additional reserve for ACL on off-balance sheet items ranging from $1.1 million to $1.4 million.

The Company expects to recognize no ACL on securities available-for-sale.

The adjustment recorded upon adoption of CECL may differ from management’s estimated change based on material changes in the economic forecast and conditions, and composition of the loan portfolio used in calculating the ACL upon adoption.

This impact will be recorded as a cumulative-effect adjustment to retained earnings as of January 1, 2023.

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326) - Troubled Debt Restructuring and Vintage Disclosures.” The amendments in this ASU eliminates the accounting guidance for TDRs by creditors in ASC 310-40, “ Receivables - Troubled Debt Restructurings by Creditors, ” while enhancing disclosure requirements for restructurings involving borrowers that are experiencing financial difficulty.

This Update also requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases.

The Company will adopt this ASU with ASU 2016-13, discussed above.

The Company does not expect to have a material impact on its consolidated financial statements upon adoption of this ASU.

Non-GAAP Measures

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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 tables present reconciliation of return on average tangible common equity, tangible common equity per common share and tangible common equity to tangible assets ratios to their most comparable GAAP measures as of the dates or for the periods indicated.

These non-GAAP measures are used by management in its analysis of the Company's performance.

Year Ended December 31,

($ in thousands) 2022 2021 2020 2019 2018

Average total shareholders' equity $ 306,440 $ 242,766 $ 228,553 $ 221,576 $ 170,429

average preferred stock 42,053 — — — —

Average tangible common equity $ 264,387 $ 242,766 $ 228,553 $ 221,576 $ 170,429

Net income $ 34,987 $ 40,103 $ 16,175 $ 24,108 $ 24,301

Return on average shareholders' equity 11.42 % 16.52 % 7.08 % 10.88 % 14.26 %

Return on average tangible common equity 13.23 % 16.52 % 7.08 % 10.88 % 14.26 %

($ in thousands, except per share data) 2022 2021 2020 2019 2018

Total shareholders' equity $ 335,442 $ 256,286 $ 233,788 $ 226,834 $ 210,296

preferred stock 69,141 — — — —

Tangible common equity $ 266,301 $ 256,286 $ 233,788 $ 226,834 $ 210,296

Outstanding common shares 14,625,474 14,865,825 15,385,878 15,707,016 15,977,754

Book value per common share $ 22.94 $ 17.24 $ 15.19 $ 14.44 $ 13.16

Tangible common equity per common share $ 18.21 $ 17.24 $ 15.19 $ 14.44 $ 13.16

Total assets $ 2,420,036 $ 2,149,735 $ 1,922,853 $ 1,746,328 $ 1,697,028

Total shareholders' equity to total assets 13.86 % 11.92 % 12.16 % 12.99 % 12.39 %

Tangible common equity to total assets 11.00 % 11.92 % 12.16 % 12.99 % 12.39 %

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.

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22.94 17.24 15.19 14.44 13.16

Tangible common equity per common share (8)

18.21 17.24 15.19 14.44 13.16

Cash dividends declared per common share 0.60 0.44 0.40 0.25 0.12

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Return on average shareholders’ equity 11.42 % 16.52 % 7.08 % 10.88 % 14.26 %

Return on average tangible common equity (8)

13.23 % 16.52 % 7.08 % 10.88 % 14.26 %

Dividend payout ratio (2)

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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)

Nonaccrual loans held-for-investment 3,360 994 3,163 2,537 1,061

NPLs held-for-investment 3,360 994 3,163 2,824 1,061

NPLs held-for-sale 4,000 — — — —

Total NPLs 7,360 994 3,163 2,824 1,061

7,360 994 4,564 2,824 1,061

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0.01 % 0.03 % 0.02 % 0.13 % 0.03 %

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 %

Nonaccrual loans held-for-investment to loans held-for-investment 0.16 % 0.06 % 0.20 % 0.17 % 0.08 %

Nonaccrual loans held-for-investment to allowance for loan losses 13.47 % 4.44 % 11.93 % 17.64 % 8.06 %

NPLs held-for-investment to loans held-for-investment 0.16 % 0.06 % 0.20 % 0.19 % 0.08 %

NPLs held-for-investment to allowance for loan losses 13.47 % 4.44 % 11.93 % 19.64 % 8.06 %

NPAs to total assets 0.30 % 0.05 % 0.24 % 0.16 % 0.06 %

Allowance for loan losses to loans held-for-investment

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1.22 % 1.34 % 1.83 % 0.99 % 0.98 %

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 %

Allowance for loan losses to nonaccrual loans held-for-investment 742.32 % 2,251.61 % 838.13 % 566.81 % 1,241.00 %

Allowance for loan losses to NPLs held-for-investment 742.32 % 2,251.61 % 838.13 % 509.21 % 1,241.00 %

Net charge-offs (recoveries) to average loans held-for-investment 0.06 % -0.03 % 0.07 % 0.22 % 0.02 %

2 unchanged sentences

13.86 % 11.92 % 12.16 % 12.99 % 12.39 %

Tangible common equity to total assets (8)

11.00 % 11.92 % 12.16 % 12.99 % 12.39 %

Average equity to average assets

8 unchanged sentences

14.33 % 12.11 % 11.94 % 13.23 % 12.60 %

Pacific City Bank

Common tier 1 capital (to risk-weighted assets)

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(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.

(6) NPAs include total NPLs (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.

(8) Non-GAAP measure.

See "Non-GAAP Measures" for a reconciliation to its most comparable GAAP measure.

Executive Summary

Financial Highlights

• 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;

• Net income was $35.0 million for the year ended December 31, 2022, a decrease of $5.1 million, or 12.8%, from $40.1 million for the year ended December 31, 2021, but an increase of $18.8 million, or 116.3%, from $16.2 million for the year ended December 31, 2020;

◦ Provision (reversal) for loan losses was $3.6 million, $(4.6) million and $13.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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• Total assets were $2.42 billion at December 31, 2022, an increase of $270.3 million, or 12.6%, from $2.15 billion at December 31, 2021;

• 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.

• Loans held-for-investment were $2.05 billion at December 31, 2022, an increase of $313.9 million, or 18.1%, from $1.73 billion at December 31, 2021.

Excluding SBA PPP loans, loans held-for-investment were $2.04 billion at December 31, 2022, an increase of $378.0 million, or 22.7%, from $1.67 billion at December 31, 2021;

◦ 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 $2.05 billion at December 31, 2022, an increase of $178.8 million, or 9.6%, from $1.87 billion at December 31, 2021;

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

• The Company declared and paid cash dividends of $0.60, $0.44, and $0.40 per common share for the years ended December 31, 2022, 2021 and 2020, respectively.

The decrease in net income for the year ended December 31, 2022 compared with the year ended December 31, 2021 was primarily due to an increase in noninterest expense, a decrease in noninterest income and additional provision for loan losses, partially offset by an increase in net interest income.

Noninterest income decreased primarily due to a decrease in gain on sale of SBA loans.

Additional provision for loan losses was primarily due to an increase in gross loan balance and changes in qualitative adjustment factors related to current economic conditions.

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.

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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, 2020.

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.

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.

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.

The increase in total assets for the year ended December 31, 2022 was primarily due to an increase in loans held-for-investment.

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, 2022, increased its dividend per common share by $0.16, or 36.4%, to $0.60 from $0.44 for the year ended December 31, 2021.

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Overall, the Company returned 44.8% of its earnings to common shareholders through dividends and common share repurchases during the year ended December 31, 2022.

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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(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 $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.

Net amortization of deferred loan fees (cost) of $2.2 million, $6.1 million and $2.9 million, respectively, and net accretion of discount on loans of $3.6 million, $3.5 million and $3.3 million, respectively, are included in the interest income for the years ended December 31, 2022, 2021 and 2020, respectively.

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

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Net interest income $ 89,632 $ 77,137 $ 12,495 16.2 %

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.

Net interest income increased primarily due to a 9.3% increase in average balance of interest-earning assets and a 58 basis point increase in average yield on interest-earning assets, partially offset by a 6.1% increase in average balance of interest-bearing liabilities and a 67 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 loans and investment securities, supported by deposit growth.

The increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the rising market rates during the year ended December 31, 2022.

Interest and fees on loans increased primarily due to a 10.0% increase in average balance and a 43 basis point increase in average yield.

The increase in average balance was primarily due to an increase in commercial and residential property loans, and commercial lines of credit, partially offset by a decrease in commercial term loans.

The increase in average yield was primarily due to the rising market rates, partially offset by a decrease in net amortization of deferred fees on SBA PPP loans.

Interest on investment securities increased primarily due to a 95 basis point increase in average yield and a 1.6% increase in average balance.

The increase in average yield was primarily due to new investment securities purchased at higher market rates and a decrease in net amortization.

The Company purchased $57.4 million and $47.3 million, respectively, of investment securities during the years ended December 31, 2022 and 2021.

For the years ended December 31, 2022 and 2021, average yield on total investment securities was 2.19% and 1.24%, respectively.

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

Interest income on other interest-earning assets increased primarily due to a 156 basis point increase in average yield and an 8.3% increase in average balance.

The increase in average yield was primarily due to the rising market rates.

The increase in average balance was primarily due to an increase in average balance of deposits and the Emergency Capital Investment Program (“ECIP”) capital investment, partially offset by an increase in loans.

For the years ended December 31, 2022 and 2021, yield on total other interest-earning assets was 1.95% and 0.39%, respectively.

Interest expense on deposits decreased primarily due to a 6.1% decrease in average balance of interest-bearing deposits and a 79 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.

Interest expense on deposits increased primarily due to an 8.7% increase in average balance of interest-bearing deposits and a 68 basis point increase in average cost of interest-bearing deposits.

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

The increase in average cost was primarily due to the rising market rates.

For the years ended December 31, 2022 and 2021, average cost on total interest-bearing deposits was 1.08% and 0.40%, respectively.

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.

Interest expense on other borrowings increased primarily due to a 122 basis point increase in average cost, partially offset by a 79.9% decrease in average balance.

The increase in average cost was primarily due to the rising market rates.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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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 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 decreased primarily due to a 123 basis point decrease in average yield, partially offset by an 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%.

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.

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.

Provision (reversal) for loan losses was $3.6 million, $(4.6) million and $13.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The additional provision for loan losses for the year ended December 31, 2022 was primarily due to an increase in gross loan balance and changes in qualitative adjustment factors related to current economic conditions.

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.

The additional provision for loan losses for the year ended December 31, 2020 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.”

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Total noninterest income $ 14,499 $ 18,434 $ (3,935) (21.3) %

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

Service charges and fees on deposits increased primarily due to an increase in fee-based transactions.

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

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.

The Company purchased bank-owned life insurance of $29.3 million in 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.

Gain on sale of loans decreased primarily due to decreases in sales volume and gain margin.

During the year ended December 31, 2021, SBA guaranteed portion was temporarily increased until September 30, 2021 under the Economic Aid Act, which resulted in a higher gain margin on sold SBA loans.

The Company sold SBA loans of $122.9 million with a gain of $8.0 million and residential property loans of $858 thousand with a gain of $8 thousand during the year ended December 31, 2022.

During the year ended December 31, 2021, the Company sold SBA loans of $126.8 million with a gain of $12.8 million and 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.

Other income included wire and remittance fees of $643 thousand and $596 thousand, respectively, and debit card interchange fees of $335 thousand and $306 thousand, respectively, for the years ended December 31, 2022 and 2021.

5 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 available-for-sale — 786 (786) (100.0) %

Other income 1,429 1,247 182 14.6 %

1 unchanged sentence

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 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.

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

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 in 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.

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.

13 unchanged sentences

Total noninterest expense $ 51,126 $ 43,208 $ 7,918 18.3 %

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.

Salaries and employee benefits increased primarily due to increases in wages, vacation accrual, and other employee benefits, partially offset by decreases in incentives tied to LPO originated SBA loan sales and loan origination cost, which offsets the recognition of salaries.

The number of full-time equivalent employees averaged 268.3 for the year ended December 31, 2022 compared to 247.9 for the year ended December 31, 2021.

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.

Occupancy and equipment expense increased primarily due to new branch openings.

The Company opened 3 new branches in Dallas and Carrollton, Texas, and Palisades Park, New Jersey during the year ended December 31, 2022.

Professional fees increased primarily due to the additional legal expenses associated with the on-going legal matters related to the 2021 Network and Data Incident, partially offset by a decrease in internal 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 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.

Director fees and expenses increased primarily due to a new director appointed during the fourth quarter of 2021.

Regulatory assessment expense increased primarily due to an increase in balance sheet.

Other expense included other loan related legal expenses of $389 thousand and $302 thousand, respectively, armed guard expense of $656 thousand and $546 thousand, respectively, office expenses of $1.9 million and $1.4 million, respectively, and provision (reversal) for unfunded loan commitments was $85 thousand and $(24) thousand, respectively, for the years ended December 31, 2022 and 2021.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

11 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.

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.

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 year ended December 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.

Income Tax Expense

20 unchanged sentences

Total carrying value of investment securities were $141.9 million at December 31, 2022, an increase of $18.7 million, or 15.2%, from $123.2 million at December 31, 2021.

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.

The increase was primarily due to purchases of $57.4 million, partially offset by principal paydowns and calls of $23.2 million, a decrease in fair value of securities available-for-sale of $15.1 million and net premium amortization of $367 thousand.

All individual securities in a continuous unrealized loss position for 12 months or more as of December 31, 2022 and December 31, 2021 had an investment grade rating upon purchase.

3 unchanged sentences

The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized at December 31, 2022 and 2021.

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

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

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.

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Loans held-for-investment were $2.05 billion at December 31, 2022, an increase of $313.9 million, or 18.1%, from $1.73 billion at December 31, 2021.

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:

The increase was primarily due to new funding of $631.9 million and advances of $162.4 million, partially offset by paydowns and payoffs of $474.8 million, transfers to loans held-for-sale of $4.5 million and charge-offs of $1.2 million.

The increase for the year ended December 31, 2022 was primarily due to increases in commercial and residential property loans, and commercial lines of credit, partially offset by a decrease in SBA PPP loans.

The following table shows the contractual maturities of loans held-for-investment and the distribution between fixed and floating interest rate loans at the date indicated:

December 31, 2022

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

Real estate loans:

17 unchanged sentences

Total $ 295,171 $ 787,941 $ 501,988 $ 460,963 $ 2,046,063

SBA Paycheck Protection Program

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

Over $50,000 and less than $350,000 156 25,417 26,146 496 60,692 62,011

Over $350,000 and less than $2,000,000 52 33,812 34,432 69 46,054 46,718

$2,000,000 or more 1 3,185 3,187 3 8,390 8,427

Total 354 $ 65,329 $ 66,839 1,585 $ 135,654 $ 137,788

Loan Modifications Related to the COVID-19 Pandemic

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

Loan Modifications Related to the COVID-19 Pandemic:

As a part of the CARES Act, the temporal relief from TDRs provided an option for financial institutions to suspend the GAAP requirements and regulatory determinations for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR from March 1, 2020, through the earlier of 60 days after the date of the COVID-19 National Emergency comes to an end or December 31, 2020.

On April 7, 2020, the federal banking regulators also issued the Interagency Statement to encourage banks to work prudently with borrowers and describe the banking regulators’ interpretation of how accounting rules for TDR apply to certain modifications related to the COVID-19 pandemic.

On December 27, 2020, the Economic Aid Act was signed into law, which extended the applicable period of the temporary relief from TDRs under the CARES Act to the earlier of 60 days after the date of the COVID-19 National Emergency comes to an end or January 1, 2022.

As of December 31, 2021, there were no loans under modified terms related to the COIVD-19 pandemic.

Carrying Value Per Risk Category Accrued Interest Receivable

($ in thousands) Pass Special Mention Substandard Doubtful Total

December 31, 2022

Real estate loans:

7 unchanged sentences

Total $ 256,577 $ 3,772 $ 1,753 $ — $ 262,102 $ 1,221

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.

December 31, 2021

Real estate loans:

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

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

SBA property 3,683 251 — — 3,934 15

Commercial and industrial loans:

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

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

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.

All types of modifications have initial modification terms of 6-months or less and 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 a nonaccrual residential property loan of $372 thousand and a 30 to 59 past due but still accruing other consumer loan of $15 thousand as of December 31, 2022.

All of these loans were current as of December 31, 2021.

Allowance for loan losses

22 unchanged sentences

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 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.

The increase in allowance for loan losses for the year ended December 31, 2022 was primarily due to an increase in gross loan balance and changes in qualitative adjustment factors related to current economic conditions.

The decrease 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 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:

46 unchanged sentences

($ in thousands) 2022 2021 2020 2019 2018

Nonaccrual loans:

Nonaccrual loans held-for-investment:

Real estate loans:

4 unchanged sentences

Commercial and industrial loans:

Commercial term — — — — 4

Commercial lines of credit — — 904 1,888 —

2 unchanged sentences

Other consumer loans 3 35 66 48 16

Total nonaccrual loans

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

Total nonaccrual loans held-for-investment 3,360 994 3,163 2,537 1,061

Loans past due 90 days or more still on accrual — — — 287 —

Total nonperforming loans

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

NPLs held-for-investment 3,360 994 3,163 2,824 1,061

NPLs held-for-sale 4,000 — — — —

Total NPLs 7,360 994 3,163 2,824 1,061

Other real estate owned

— — 1,401 — —

Total nonperforming assets

$ 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 %

NPAs $ 7,360 $ 994 $ 4,564 $ 2,824 $ 1,061

Nonaccrual loans held-for-investment to loans held-for-investment 0.16 % 0.06 % 0.20 % 0.17 % 0.08 %

NPLs held-for-investment to loans held-for-investment 0.16 % 0.06 % 0.20 % 0.19 % 0.08 %

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 $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.

Nonaccrual loans held-for-investment 742.32 % 2,251.61 % 838.13 % 566.81 % 1,241.00 %

NPLs held-for-investment 742.32 % 2,251.61 % 838.13 % 509.21 % 1,241.00 %

NPAs to total assets 0.30 % 0.05 % 0.24 % 0.16 % 0.06 %

Total nonaccrual loans held-for-investment were $3.4 million at December 31, 2022, an increase of $2.4 million, or 238.0%, from $994 thousand at December 31, 2021.

The increase was primarily due to loans placed on nonaccrual status during the year ended December 31, 2022 of $7.4 million, partially offset by payoffs and paydowns of $966 thousand, loans transferred to loans held-for-sale of $4.0 million and charge-offs of $35 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.

7 unchanged sentences

As of December 31, 2022, using regulatory definitions in the CRE Concentration Guidance, CRE loans represented 253.9% of total risk-based capital, as compared to 269.8%, 256.1%, 243.6% and 253.6% as of December 31, 2021, 2020, 2019 and 2018, respectively.

The reduction in CRE concentration ratio in 2018 was primarily due to the additional capital from the Company’s IPO during the year ended December 31, 2018.

The management believes that the Bank has a robust risk management framework in place for CRE concentration issues including board approved CRE concentration contingency plans.

13 unchanged sentences

Commercial term — 2 18 28 68

Commercial lines of credit — — — — 10

SBA commercial term — 6 13 39 180

17 unchanged sentences

Commercial and industrial loans:

Commercial lines of credit

4,000 — — — —

SBA commercial term 2,338 3,423 268 1,065 300

1 unchanged sentence

$ 22,811 37,026 $ 1,979 $ 1,975 $ 5,781

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.

Loans held-for-sale were $22.8 million at December 31, 2022, a decrease of $14.2 million, or 38.4%, from $37.0 million at December 31, 2021.

The decrease was primarily due to sales of $123.7 million, partially offset by originations of $105.6 million and transfers from loans held-for-investment of $4.5 million.

The Bank gathers deposits primarily through its branch locations.

The Bank offers a variety of deposit products including demand deposits accounts, NOW and money market accounts, savings accounts and time deposits.

The following table presents summary of the Company’s deposit as of the dates indicated:

The following table presents a summary of the Company’s deposit as of the dates indicated:

December 31, Amount Change Percentage Change

14 unchanged sentences

353,876 172,269 181,607 105.4 %

Time deposits from internet rate service providers

— 24,902 (24,902) — %

Brokered time deposits

8 unchanged sentences

Time deposits not covered by deposit insurance $ 293,951 $ 216,269 $ 77,682 35.9 %

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

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.

The decrease in noninterest-bearing demand deposits was primarily due to strong deposit market competition and the migration of noninterest-bearing demand deposits to money market accounts and time deposits attributable to the rising market rates.

To remain competitive in this rising interest rate environment, the Bank started to offer higher rates on deposit products to retain and attract new customers.

The increase in retail time deposits was primarily due to new accounts of $636.7 million, renewals of the matured accounts of $602.9 million, and balance increases of $23.4 million, partially offset by matured and closed accounts of $1.04 billion.

As of December 31, 2022 and 2021, total deposits were comprised of 35.9% and 44.5%, respectively, of noninterest-bearing demand accounts, 25.2% and 22.6%, respectively, of savings, NOW and money market accounts and 38.9% and 32.9%, respectively, of time deposits.

17 unchanged sentences

Shareholders’ equity was $335.4 million at December 31, 2022, an increase of $79.2 million, or 30.9%, from $256.3 million at December 31, 2021.

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.

The increase was primarily due to the net income of $35.0 million, issuance of preferred stock of $69.1 million and stock options exercised of $840 thousand, partially offset by repurchase of common stock of $6.7 million, cash dividends declared on common stock of $8.9 million and an increase in other comprehensive loss from the fair value change in securities available-for-sale of $10.7 million.

Regulatory Capital Requirements

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.

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 the dates indicated.

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.

PCB Bancorp Pacific City Bank Minimum Regulatory Requirements Well Capitalized Requirements (Bank)

PCB Bancorp PCB Bank Minimum Regulatory Requirements Well Capitalized Requirements (Bank)

December 31, 2022

10 unchanged sentences

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.

On May 24, 2022, the Company issued 69,141 shares of Series C Preferred Stock for the capital investment of $69.1 million from the U.S.

Treasury under the ECIP.

ECIP investment is treated as tier 1 capital for the regulatory capital treatment.

The Series C Preferred Stock bears no dividend for the first 24 months following the investment date.

Thereafter, the dividend rate will be adjusted based on the lending growth criteria listed in the terms of the ECIP investment with the annual dividend rate up to 2%.

After the tenth anniversary of the investment date, the dividend rate will be fixed based on the average annual amount of lending in years 2 through 10.

Dividends will be payable quarterly in arrears on March 15, June 15, September 15, and December 15.

The Series C Preferred Stock may be redeemed at the option of the Company on or after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator and in accordance with the federal banking agencies’ regulatory capital regulations.

Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions and minority depository institutions to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially low-income and underserved communities, including persistent poverty counties, that may be disproportionately impacted by the economic effect of the COVID-19 pandemic by providing direct and indirect capital investments in low- and moderate-income community financial institutions.

Stock Repurchase

On March 28, 2019, the Company’s Board of Directors approved the repurchase of up to $6.5 million of the Company’s common stock through March 27, 2020.

During the year ended December 31, 2019, the Company completed the repurchase program, and repurchased and retired 396,715 shares of common stock at a weighted-average price of $16.33 per share.

On January 23, 2020, the Company announced that on November 22, 2019, its Board of Directors approved a $6.5 million stock repurchase program to commence upon the opening of the Company’s trading window for the first quarter of 2020 and continue through November 20, 2021.

The Company completed the repurchase program in March 2020.

The Company repurchased and retired 428,474 shares of common stock at a weighted-average price of $15.14 per share.

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.

On July 28, 2022, the Company’s Board of Directors approved a repurchase program authorizing for the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 747,938 shares, through February 1, 2023.

The Company repurchased and retired 362,557 shares of common stock at a weighted-average price of $18.57 per share, totaling $6.7 million under this repurchase program as of December 31, 2022.

On January 26, 2023, the Company announced an amendment to the repurchase program, which extended the program expiration from February 1, 2023 to February 1, 2024.

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.

The Company continuously monitors liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of the Company’s shareholders.

The Company continuously monitors its liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of the Company’s shareholders.

The Company’s liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds.

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To the extent the Company is unable to obtain sufficient liquidity through core deposits, the Company seeks to meet its liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.

The Company had $10.0 million and $80.0 million of outstanding FHLB advances at December 31, 2021 and 2020, respectively.

Based on the values of loans pledged as collateral, the Company had $516.2 million and $425.3 million of additional borrowing capacity with FHLB as of December 31, 2021 and 2020, respectively.

As of December 31, 2021 and 2020, the Company had $65.0 million and $65.0 million of available unused unsecured federal funds lines, respectively.

In addition, available unused secured borrowing capacity from Federal Reserve Discount Window at December 31, 2021 and 2020 was $29.2 million and $35.8 million, respectively.

Federal Reserve Discount Window was collateralized by loans totaling $36.6 million and $44.1 million as of December 31, 2021 and 2020, respectively.

The Company’s borrowing capacity from the Federal Reserve Discount Window is limited by eligible collateral.

The Company also maintains relationships in the capital markets with brokers and dealers to issue certificates of deposit.

As of December 31, 2021 and 2020, total cash and cash equivalents represented 9.5% and 10.1% of total assets, respectively.

The following table presents a summary of the Company’s liquidity position as of the dates indicated:

December 31, Amount Change Percentage Change

($ in thousands) 2022 2021

Cash and cash equivalents $ 147,031 $ 203,285 $ (56,254) (27.7) %

Cash and cash equivalents to total assets 6.1 % 9.5 %

Available borrowing capacity:

FHLB advances $ 561,745 $ 516,158 45,587 8.8 %

Federal Reserve Discount Window 23,902 29,198 (5,296) (18.1) %

Overnight federal funds lines 65,000 65,000 — — %

Total $ 650,647 $ 610,356 $ 40,291 6.6 %

Total available borrowing capacity to total assets 26.9 % 28.4 %

The Company also maintains relationships in the capital markets with brokers and dealers to issue time deposits and money market accounts.

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.

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.

Since the beginning of the COVID-19 pandemic, 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 the Company maintained strong liquidity, well within its policy for liquidity management.

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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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