Item 5. Market for Registrant’s Common Equity
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
 
Market Information
 
Our common stock began trading on the NASDAQ Global Select Market (NASDAQ) under the symbol “RBB” on July 27, 2017. Prior to that, there was no public market for our common stock.
 
Shareholders
 
As of March 9, 2022, the Company had approximately 177 common stock shareholders of record, and the closing price of the Company’s common stock was $24.11 per share. The number of holders of record does not represent the actual number of beneficial owners of our common stock because securities dealers and others frequently hold shares in “street name” for the benefit of individual owners who have the right to vote shares.
 
Dividend Policy
 
It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to generally maintain our current dividend levels. Our dividend policy and practice may change in the future, however, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may deem relevant.
 
Under the terms of our subordinated notes issued in March 2016, November 2018 and March 2021, and the related subordinated note purchase agreements, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the subordinated notes. Additionally, under the terms of such notes, we are not permitted to declare or pay any dividends on our capital stock if we are not “well capitalized” for regulatory purposes immediately prior to the payment of such dividend. The terms of the debentures underlying our Trust Preferred Securities also prohibit us from paying dividends on our capital stock if we are in deferral of interest payments on those debentures.
 
As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the Federal Reserve. Information on regulatory restrictions on our ability to pay dividends is set forth in “Part I, Item I – Business – Supervision and Regulation – The Company – Dividend Payments”. In addition, because we are a holding company, we are dependent upon the payment of dividends by the Bank to us as our principal source of funds to pay dividends in the future, if any, and to make other payments. The Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to us, as further discussed in “Part I, Item I – Business – Supervision and Regulation—The Bank—Dividend Payments”.
 
 
44
 
 
Stock Performance Graph
 
The following graph compares the cumulative total shareholder return on the Company's common stock from July 27, 2017 (the date of the Company’s initial public offering and listing on NASDAQ) through December 31, 2021. The graph compares the Company's common stock with the Russell 2000 Index and the SNL Bank $1B-$5B Index. The graph assumes an investment of $100.00 in the Company's common stock and each index on July 27, 2017 and reinvestment of all quarterly dividends. Measurement points are July 27, 2017 and the last trading day of each year-end through December 31, 2021. There is no assurance that the Company's common stock performance will continue in the future with the same or similar results as shown in the graph.
 
 
 
 
Period Ending
 
 
 
Index
07/26/17
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
RBB Bancorp
100.00
117.60
76.45
94.02
69.86
121.82
Russell 2000 Index
100.00
107.12
95.32
119.65
143.53
164.80
KBW Nasdaq Regional Banking Index
100.00
106.56
87.92
108.85
99.37
135.78
 
 
 
 
 
 
 
Source: S&P Global Market Intelligence
 
 
 
 
 
 
© 2022
 
 
 
 
 
 
 
Unregistered Sales and Issuer Purchases of Equity Securities
 
On April 22, 2021, the Board of Directors approved a stock repurchase program to buy back up to an aggregate of 500,000 shares of our common stock.  As of December 31, 2021, the Company may repurchase up to 335,650 shares under the repurchase program.  The Company has repurchased 75,849 shares of its outstanding common stock during the fourth quarter of 2021.
 
 
 
 
Issuer Purchases of Equity Securities
 
 
 
 
 
 
 
(a)
 
 
(b)
 
 
(c)
 
 
(d)
 
Period
 
Total Number of Shares Purchased
 
 
Average Price Paid per Share
 
 
Total Number of Shares Purchased as Part of Publically Announced Plan
 
 
Maximum Number of Shares that May Yet Be Purchased Under the Plan
 
October 1, 2021 to October 31, 2021
 
 
—
 
 
$
—
 
 
 
—
 
 
 
411,499
 
November 1, 2021 to November 30, 2021
 
 
—
 
 
$
—
 
 
 
—
 
 
 
411,499
 
December 1, 2021 to December 31, 2021
 
 
75,849
 
 
$
24.53
 
 
 
75,849
 
 
 
335,650
 
Total
 
 
75,849
 
 
$
24.53
 
 
 
75,849
 
 
 
335,650
 
 
45
 
 
Item 6. Selected Financial Data.
 
The following consolidated selected financial data is derived from the Company’s audited consolidated financial statements as of and for the five years ended December 31, 2021. This information should be read in connection with our audited consolidated financial statements, related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this report.
 
 
 
As of and for the Year Ended December 31,
 
(Dollars in thousands, except per share data)
 
2021
 
 
2020
 
 
2019
 
 
2018
 
 
2017
 
Balance sheet data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
4,228,194
 
 
$
3,350,072
 
 
$
2,788,535
 
 
$
2,974,002
 
 
$
1,691,059
 
Total loans, held for investment, net of unaccreted discount and deferred costs and fees
 
 
2,931,350
 
 
 
2,706,766
 
 
 
2,196,934
 
 
 
2,142,015
 
 
 
1,249,074
 
Allowance for loan losses
 
 
(32,912
)
 
 
(29,337
)
 
 
(18,816
)
 
 
(17,577
)
 
 
(13,773
)
Mortgage loans held for sale
 
 
5,957
 
 
 
49,963
 
 
 
108,194
 
 
 
434,522
 
 
 
125,847
 
Securities
 
 
374,512
 
 
 
218,041
 
 
 
134,401
 
 
 
83,723
 
 
 
74,966
 
Goodwill
 
 
69,243
 
 
 
69,243
 
 
 
58,563
 
 
 
58,383
 
 
 
29,940
 
Total deposits
 
 
3,385,532
 
 
 
2,635,128
 
 
 
2,248,938
 
 
 
2,144,041
 
 
 
1,337,281
 
FHLB Advances
 
 
150,000
 
 
 
150,000
 
 
 
—
 
 
 
319,500
 
 
 
25,000
 
Long-term debt
 
 
173,007
 
 
 
104,391
 
 
 
104,049
 
 
 
103,708
 
 
 
49,528
 
Subordinated debentures
 
 
14,502
 
 
 
14,283
 
 
 
9,673
 
 
 
9,506
 
 
 
3,424
 
Total shareholders' equity
 
 
466,683
 
 
 
428,488
 
 
 
407,690
 
 
 
374,621
 
 
 
265,176
 
Tangible common equity
 
 
393,365
 
 
 
354,049
 
 
 
343,027
 
 
 
308,637
 
 
 
233,798
 
Income statement data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest income
 
$
147,063
 
 
$
139,120
 
 
$
141,725
 
 
$
102,115
 
 
$
74,104
 
Total interest expense
 
 
22,720
 
 
 
34,365
 
 
 
44,861
 
 
 
23,645
 
 
 
13,938
 
Net interest income
 
 
124,343
 
 
 
104,755
 
 
 
96,864
 
 
 
78,470
 
 
 
60,166
 
Provision (recapture) for loan losses
 
 
3,959
 
 
 
11,823
 
 
 
2,390
 
 
 
4,469
 
 
 
(1,053
)
Noninterest income
 
 
18,745
 
 
 
14,040
 
 
 
18,320
 
 
 
12,842
 
 
 
13,201
 
Noninterest expense
 
 
58,192
 
 
 
59,513
 
 
 
57,473
 
 
 
40,637
 
 
 
27,623
 
Income before income taxes
 
 
80,937
 
 
 
47,459
 
 
 
55,321
 
 
 
46,206
 
 
 
46,797
 
Income tax expense
 
 
24,031
 
 
 
14,531
 
 
 
16,112
 
 
 
10,101
 
 
 
21,269
 
Net income
 
 
56,906
 
 
 
32,928
 
 
 
39,209
 
 
 
36,105
 
 
 
25,528
 
Revenue (13)
 
 
165,808
 
 
 
153,160
 
 
 
160,045
 
 
 
114,957
 
 
 
87,305
 
Non-interest income / revenue
 
11.31
%
 
 
9.17
%
 
 
11.45
%
 
 
11.17
%
 
 
15.12
%
Per share data (common stock):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic (1)
 
$
2.92
 
 
$
1.66
 
 
$
1.96
 
 
$
2.11
 
 
$
1.81
 
Diluted (1)
 
 
2.86
 
 
 
1.65
 
 
 
1.92
 
 
 
2.01
 
 
 
1.68
 
Dividends declared
 
 
0.51
 
 
 
0.33
 
 
 
0.40
 
 
 
0.35
 
 
 
0.38
 
Book value (2)
 
23.99
 
 
 
21.90
 
 
 
20.35
 
 
 
18.73
 
 
 
16.67
 
Tangible book value (3)
 
20.22
 
 
 
18.10
 
 
 
17.12
 
 
 
15.43
 
 
 
14.70
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
19,423,549
 
 
 
19,763,422
 
 
 
20,017,306
 
 
 
17,151,222
 
 
 
14,078,281
 
Diluted
 
 
19,834,306
 
 
 
19,921,859
 
 
 
20,393,424
 
 
 
17,967,653
 
 
 
15,238,365
 
Shares outstanding at period end
 
 
19,455,544
 
 
 
19,565,921
 
 
 
20,030,866
 
 
 
20,000,022
 
 
 
15,908,893
 
Performance metrics
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets
 
 
1.48
%
 
 
1.03
%
 
 
1.38
%
 
 
1.78
%
 
 
1.66
%
Return on average shareholders' equity
 
 
12.71
%
 
 
7.88
%
 
 
9.95
%
 
 
12.16
%
 
 
11.67
%
Return on average tangible common equity (3)
 
 
15.22
%
 
 
9.62
%
 
 
11.93
%
 
 
13.66
%
 
 
13.64
%
Yield on average earning assets
 
 
4.09
%
 
 
4.67
%
 
 
5.31
%
 
 
5.36
%
 
 
5.13
%
Cost of average interest-bearing liabilities
 
 
0.94
%
 
 
1.57
%
 
 
2.24
%
 
 
1.69
%
 
 
1.28
%
Net interest spread
 
 
3.15
%
 
 
3.10
%
 
 
3.07
%
 
 
3.67
%
 
 
3.85
%
Net interest margin (4)
 
 
3.46
%
 
 
3.52
%
 
 
3.63
%
 
 
4.12
%
 
 
4.16
%
Efficiency ratio
 
 
40.67
%
 
 
50.10
%
 
 
49.90
%
 
 
44.50
%
 
 
37.65
%
Common stock dividend payout ratio (5)
 
 
17.47
%
 
 
19.88
%
 
 
20.41
%
 
 
16.59
%
 
 
20.99
%
Loan to deposit ratio (6)
 
86.58
%
 
 
102.72
%
 
 
97.69
%
 
 
99.41
%
 
 
93.40
%
Core deposits / total deposits (7)
 
 
82.91
%
 
 
77.31
%
 
 
73.44
%
 
 
77.92
%
 
 
74.09
%
Adjusted core deposits / total deposits (8)
 
 
87.48
%
 
 
87.72
%
 
 
86.47
%
 
 
91.19
%
 
 
75.16
%
Net non-core funding dependence ratio (9)
 
 
-6.50
%
 
 
9.11
%
 
 
13.17
%
 
 
22.32
%
 
 
13.72
%
Adjusted net non-core funding dependence ratio (10)
 
 
-10.38
%
 
 
0.38
%
 
 
1.84
%
 
 
12.19
%
 
 
12.18
%
 
46
 
 
 
 
As of and for the Year Ended December 31,
 
(Dollars in thousands, except per share data)
 
2021
 
 
2020
 
 
2019
 
 
2018
 
 
2017
 
Credit quality Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans 30-89 days past due
 
$
21,080
 
 
$
9,612
 
 
$
5,277
 
 
$
4,677
 
 
$
3,636
 
Loans 30-89 days past due to total loans
 
 
0.72
%
 
 
0.36
%
 
 
0.24
%
 
 
0.22
%
 
 
0.29
%
Nonperforming loans (11)
 
$
20,725
 
 
$
19,554
 
 
$
13,218
 
 
$
3,282
 
 
$
2,575
 
Nonperforming loans to total loans (11)
 
 
0.71
%
 
 
0.72
%
 
 
0.60
%
 
 
0.15
%
 
 
0.21
%
Nonperforming assets (12)
 
$
21,018
 
 
$
19,847
 
 
$
13,511
 
 
$
4,383
 
 
$
2,868
 
Nonperforming assets to total assets (12)
 
 
0.50
%
 
 
0.59
%
 
 
0.48
%
 
 
0.15
%
 
 
0.16
%
Allowance for loan losses to total loans
 
 
1.12
%
 
 
1.08
%
 
 
0.86
%
 
 
0.82
%
 
 
1.10
%
Allowance for loan losses to nonperforming loans (11)
 
 
158.80
%
 
 
150.03
%
 
 
142.35
%
 
 
535.55
%
 
 
534.87
%
Net charge-offs (recoveries) to average loans
 
 
-0.01
%
 
 
0.05
%
 
 
0.05
%
 
 
0.05
%
 
 
-0.06
%
Regulatory and other capital ratios—Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tangible common equity to tangible assets (3)
 
 
9.47
%
 
 
10.81
%
 
 
12.59
%
 
 
10.61
%
 
 
14.09
%
Tier 1 leverage ratio
 
 
10.21
%
 
 
11.32
%
 
 
12.89
%
 
 
11.80
%
 
 
14.35
%
Tier 1 common capital to risk-weighted assets
 
 
14.86
%
 
 
14.62
%
 
 
17.16
%
 
 
15.28
%
 
 
17.54
%
Tier 1 capital to risk-weighted assets
 
 
15.40
%
 
 
15.21
%
 
 
17.65
%
 
 
15.74
%
 
 
17.80
%
Total capital to risk-weighted assets
 
 
23.15
%
 
 
20.77
%
 
 
23.82
%
 
 
21.71
%
 
 
22.55
%
Regulatory capital ratios—Bank only
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
 
 
12.45
%
 
 
14.11
%
 
 
15.23
%
 
 
13.66
%
 
 
14.50
%
Tier 1 common capital to risk-weighted assets
 
 
18.80
%
 
 
18.94
%
 
 
20.87
%
 
 
18.17
%
 
 
17.42
%
Tier 1 capital to risk-weighted assets
 
 
18.80
%
 
 
18.94
%
 
 
20.87
%
 
 
18.17
%
 
 
17.42
%
Total capital to risk-weighted assets
 
 
20.05
%
 
 
20.19
%
 
 
21.86
%
 
 
19.07
%
 
 
18.47
%
 
(1)
Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing earnings to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing earnings by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options using the treasury stock method.
(2)
For purposes of computing book value per common share, book value equals total common shareholders’ equity.
(3)
Tangible book value per share, return on average tangible common equity and tangible common equity to tangible assets are non-GAAP financial measures. See “Non-GAAP Financial Measures” for a reconciliation of these measures to their most comparable GAAP measures.
(4)
Net interest margin is presented on a fully taxable equivalent (“FTE”) basis. Our management believes that measuring net interest margin, net of purchase accounting accretion, is useful when assessing our net interest margin as compared to the net interest margin of banks that do not reflect purchase accounting adjustments because they are not active acquirers of financial institutions. The effect of accretion income from acquired loans on our net interest margin was an increase of 0.03%, 0.08%, 0.11%, 0.12%, and 0.37%, for the twelve-month periods ended December 31, 2021, 2020, 2019, 2018 and 2017, respectively. We anticipate that the impact of purchase accounting on our net interest margin will decrease as our previously acquired loans are paid off, charged off, foreclosed upon or sold, offset with new acquired loans.
(5)
Common stock dividend payout ratio represents dividends per share divided by basic earnings per share. See “Dividend Policy.” The common stock dividend payout ratio reflected for the year ended December 31, 2016 represents the dividends declared and paid by the Company during 2016 based on the Company’s earnings for the 12 months ended December 31, 2016.
(6)
For the purposes of calculating the loan to deposit ratio, short-term loans with maturities of less than 90-days, specifically “Term Fed Funds” and purchased receivables are not included as loans as defined by the regulatory agencies.
(7)
Unadjusted core deposits include non-maturity deposits (non-interest bearing demand deposits, savings deposits, NOW accounts, money market demand accounts) and certificates of deposit under $250,000.
(8)
The Bank measures adjusted core deposits by reviewing all relationships over $250,000 on a quarterly basis. We track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base. Adjusted core deposits ratio is a ratio management uses to measure core deposits. See “Non-GAAP Financial Measures”.
(9)
Net non-core funding dependency ratio represents the degree to which the Bank is funding longer term assets with non-core funds. We calculate this ratio as non-core liabilities, less short term investments, divided by long term assets.
(10)
Adjusted non-core funding dependency ratio is a ratio management uses to measure dependency on non-core deposits. To determine non-core liabilities we review each deposit relationship using the criteria for determining whether a relationship is core as described in footnote 8 above.
(11)
Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and loans modified under troubled debt restructurings. Nonperforming loans exclude purchase credit impaired ("PCI") loans acquired in prior acquisitions. Nonperforming loans include a SBA guaranteed loan at December 31, 2016 as to which we received a $3.6 million payment in July 2017 pursuant to a SBA loan guaranty. SBA guaranteed loans at December 31, 2021 were $17.9 million.
(12)
Nonperforming assets include nonperforming loans and other repossessed assets. As discussed in footnote 11, above, nonperforming loans exclude PCI loans. This ratio may therefore not be comparable to a similar ratio of our peers.
(13)
Revenue consists of interest income plus non-interest income.
 
 
47
 
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
CRITICAL ACCOUNTING POLICIES
 
The discussion and analysis of the Company’s audited consolidated financial statements are based upon its audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these audited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
 
The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.
 
 
●
Loans held for investment
 
●
Loans available for sale
 
●
Securities
 
●
ALLL
 
●
Goodwill and other intangible assets
 
●
Deferred income taxes
 
●
Servicing rights
 
●
Income Taxes
 
●
Stock-Based Compensation
 
Our significant accounting policies are described in greater detail in our 2021 audited financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K, specifically in “Note 2 – Summary of Significant Accounting Policies” which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
OVERVIEW
 
For the year 2021, we reported net earnings of $56.9 million, compared with $32.9 million for the year 2020. This represented an increase of $24.0 million, or 72.8%, over the prior year. The increase in net earnings reflected a $19.6 million increase in net interest income, a $4.7 million increase in non-interest income, $7.9 million decrease in the provision for loan losses and a $1.3 million  decrease in non-interest expenses, which was partially offset by a $9.5 million increase in income tax expense.
 
At December 31, 2021, total assets were $4.2 billion, an increase of $878.1 million, or 26.2%, from total assets of $3.4 billion at December 31, 2020. Interest-earning assets were $4.0 billion as of December 31, 2021, an increase of $831.3 million, or 26.3%, compared to $3.2 billion at December 31, 2020. The increase in interest-earning assets was primarily due to net HFI loan growth of $224.6 million and investment securities growth of $156.5 million, partially offset by a decrease of $44.0 million in mortgage loans available for sale.
 
48
 
 
At December 31, 2021, available for sale (“AFS”) investment securities totaled $368.3 million inclusive of a pre-tax net unrealized loss of $2.4 million, compared to $210.9 million inclusive of a pre-tax net unrealized gain of $1.6 million at December 31, 2020. At December 31, 2021, held to maturity (“HTM”) investment securities totaled $6.3 million, compared to $7.2 million as of December 31, 2020.
 
Net loans and leases (held for investment, net of deferred fees, discounts, and the allowance for loan losses) were $2.9 billion at December 31, 2021, compared to $2.7 billion at December 31, 2020. Net loans and leases increased $221.0 million, or 8.3%, from December 31, 2020. The increase in net loans was due to organic growth.  The increase in net loans included approximately $244.4 million in CRE loans, $116.4 million in construction loans and $26.7 million in other loans, partially offset by a $119.8 million decrease in SFR mortgage loans, $21.4 million in C&I loans and $21.7 million in SBA loans.
 
Total deposits were $3.4 billion at December 31, 2021, an increase of $750.4 million, or 28.5%, compared to $2.6 billion at December 31, 2020. The increase is due to an increase of $870.8 million in non-maturity deposits, partially offset by a net decrease of $120.4 million from time  deposits, and the remainder from organic growth.
 
Noninterest-bearing deposits were $1.3 billion at December 31, 2021, an increase of $674.3 million, or 109.2%, from $617.2 million at December 31, 2020.  At December 31, 2021, noninterest-bearing deposits were 38.1% of total deposits, compared to 23.4% at December 31, 2020.
 
Our average cost of total deposits was 0.40% for the year 2021, compared to 1.01% for 2020. The decrease is due to a 73 basis point decrease in the average rate paid on interest bearing deposits. Borrowings, consisting of FHLB long-term advances, long-term debt and subordinated debt, increased $68.8 million to $337.5 million as of December 31, 2021 compared to $268.7 million as of December 31, 2020. The Company had no short-term FHLB advances, and $150.0 million in long-term advances at December 31, 2021 and at December 31, 2020.
 
The allowance for loan losses was $32.9 million at December 31, 2021, an increase of $3.6 million or 12.2%, from $29.3 million at December 31, 2020.  During 2021, there was a $4.0 million provision for loan losses compared to $11.8 million for 2020. The ALLL to HFI loans and leases outstanding was 1.12% and 1.08% as of December 31, 2021 and December 31, 2020, respectively.
 
Shareholders’ equity increased $38.2 million, or 8.9%, to $466.7 million as of December 31, 2021 from $428.5 million at December 31, 2020.  The increase during 2021 was primarily due to $56.9 million of net income, less $9.9 million of common dividends paid and $10.5 million from the repurchase of common stock.
 
Our capital ratios under the Basel III capital framework regulatory standards remain well capitalized. As of December 31, 2021, the Company’s Tier 1 leverage capital ratio was 10.21%, common equity Tier 1 ratio was 14.86%, Tier 1 risk-based capital ratio totaled 15.40%, and total risk-based capital ratio was 23.15%.
 
49
 
 
ANALYSIS OF THE RESULTS OF OPERATIONS
 
Financial Performance
 
 
 
Years Ended December 31,
 
 
2021 vs. 2020 Variance Increase (Decrease)
 
 
Year Ended
 
 
2020 vs. 2019 Variance Increase (Decrease)
 
 
 
2021
 
 
2020
 
 
$ or #
 
 
%
 
 
December 31, 2019
 
 
$ or #
 
 
%
 
 
 
(Dollars in thousands, except per share amounts)
 
Interest income
 
$
147,063
 
 
$
139,120
 
 
$
7,943
 
 
 
5.7
%
 
$
141,725
 
 
$
(2,605
)
 
 
(1.8
)%
Interest expense
 
 
22,720
 
 
 
34,365
 
 
 
(11,645
)
 
 
(33.9
)%
 
 
44,861
 
 
 
(10,496
)
 
 
(23.4
)%
Net interest income
 
 
124,343
 
 
 
104,755
 
 
 
19,588
 
 
 
18.7
%
 
 
96,864
 
 
 
7,891
 
 
 
8.1
%
Provision for loan losses
 
 
3,959
 
 
 
11,823
 
 
 
(7,864
)
 
 
(66.5
)%
 
 
2,390
 
 
 
9,433
 
 
 
394.7
%
Net interest income after provision (recapture) for loan losses
 
 
120,384
 
 
 
92,932
 
 
 
27,452
 
 
 
29.5
%
 
 
94,474
 
 
 
(1,542
)
 
 
(1.6
)%
Noninterest income
 
 
18,745
 
 
 
14,040
 
 
 
4,705
 
 
 
33.5
%
 
 
18,320
 
 
 
(4,280
)
 
 
(23.4
)%
Noninterest expense
 
 
58,192
 
 
 
59,513
 
 
 
(1,321
)
 
 
(2.2
)%
 
 
57,473
 
 
 
2,040
 
 
 
3.5
%
Income before income taxes
 
 
80,937
 
 
 
47,459
 
 
 
33,478
 
 
 
70.5
%
 
 
55,321
 
 
 
(7,862
)
 
 
(14.2
)%
Income tax expense
 
 
24,031
 
 
 
14,531
 
 
 
9,500
 
 
 
65.4
%
 
 
16,112
 
 
 
(1,581
)
 
 
(9.8
)%
Net income
 
$
56,906
 
 
$
32,928
 
 
$
23,978
 
 
 
72.8
%
 
$
39,209
 
 
$
(6,281
)
 
 
(16.0
)%
Share Data
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
2.92
 
 
$
1.66
 
 
$
1.26
 
 
 
 
 
 
$
1.96
 
 
$
(0.30
)
 
 
 
 
Diluted (1)
 
 
2.86
 
 
 
1.65
 
 
 
1.21
 
 
 
 
 
 
 
1.92
 
 
 
(0.27
)
 
 
 
 
Performance Ratios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets, annualized
 
 
1.48
%
 
 
1.03
%
 
 
0.45
%
 
 
 
 
 
 
1.38
%
 
 
(0.35
)%
 
 
 
 
Return on average shareholders’ equity, annualized
 
 
12.71
%
 
 
7.88
%
 
 
4.83
%
 
 
 
 
 
 
9.95
%
 
 
(2.07
)%
 
 
 
 
Efficiency ratio
 
 
40.67
%
 
 
50.10
%
 
 
(9.43
)%
 
 
 
 
 
 
49.90
%
 
 
0.20
%
 
 
 
 
Tangible comon equity to tangible assets (2)
 
 
9.47
%
 
 
10.81
%
 
 
(1.34
)%
 
 
 
 
 
 
12.59
%
 
 
(1.78
)%
 
 
 
 
Return on average tangible common equity, annualized (2)
 
 
15.22
%
 
 
9.62
%
 
 
5.60
%
 
 
 
 
 
 
11.93
%
 
 
(2.31
)%
 
 
 
 
Tangible book value per share (2)
 
$
20.22
 
 
$
18.10
 
 
$
2.12
 
 
 
 
 
 
$
17.12
 
 
$
0.98
 
 
 
 
 
 
(1)
Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing earnings to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing earnings by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options using the treasury stock method.
(2)
Tangible book value per share, return on average tangible common equity, and tangible common equity to tangible assets are non-GAAP financial measures. See "Non-GAAP Financial Measures" for a reconciliation of these measures to their most comparable GAAP measures.
 
Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2021 to December 31, 2020
 
Net Interest Income/Average Balance Sheet
 
In 2021, we generated fully-taxable equivalent net interest income of $124.4 million, an increase of $19.6 million, or 18.7%, from the net interest income produced in 2020. This increase was largely due to a 20.7% increase in the average balance of interest-earning assets, in part due to organic loan growth, partially offset by an 6 basis point decrease in the net interest margin. For the years ended December 31, 2021 and 2020 our reported net interest margin was 3.46% and 3.52%, respectively. Our net interest margin benefits from discount accretion on our purchased loan portfolios.
 
Interest Income . Total fully-taxable equivalent interest income was $147.1 million in 2021 compared to $139.2 million in 2020. The $8.0 million, or 5.7%, increase in total interest income was mainly due to increases in the average balance of total loans of $180.9 million, average balance of securities of $144.1 million, and average balance of Federal funds sold, cash equivalents and other investments of $292.2 million. This was partially offset by a decrease in the average total loan yield of 6 basis points.
 
50
 
 
Interest and fees on loans was $141.6 million in 2021 compared to $133.9 million in 2020. The $7.7 million, or 5.7%, increase in interest income on loans was primarily due to a $180.9 million increase in the average balance of total loans outstanding, partially offset by 6 basis point decrease in the average yield on total loans. The increase in the average balance of loans outstanding was primarily due to organic growth in commercial real estate and single-family residential mortgage loans during 2021. The yield on the loan portfolio benefited from accretion income associated with purchase accounting discounts established on loans acquired in prior acquisitions. For the years 2021 and 2020, the reported yield on total loans was 5.12% and 5.18%, respectively. The impact of accretion income on our yield on total loans for the years 2021 and 2020 was to increase our reported yield on total loans by 0.03% and 0.08%, respectively.  A substantial portion of our acquired loan portfolio that is subject to discount accretion consists of commercial real estate loans and single family residential mortgages.
 
The table below illustrates by loan type the accretion income for the years 2021, 2020 and 2019:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
 
2021
 
 
2020
 
 
2019
 
Beginning balance of discount on purchased loans
 
$
2,872
 
 
$
5,068
 
 
$
9,228
 
Additions due to acquisitions:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
—
 
 
 
39
 
 
 
—
 
Construction and land development
 
 
—
 
 
 
—
 
 
 
—
 
Commercial real estate
 
 
—
 
 
 
397
 
 
 
—
 
Single family residential mortgages
 
 
—
 
 
 
449
 
 
 
—
 
Total additions
 
$
—
 
 
$
885
 
 
$
—
 
Accretion:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
(9
)
 
 
—
 
 
 
15
 
SBA
 
 
11
 
 
 
17
 
 
 
18
 
Construction and land development
 
 
—
 
 
 
5
 
 
 
—
 
Commercial real estate
 
 
146
 
 
 
2,345
 
 
 
2,893
 
Single family residential mortgages
 
 
998
 
 
 
714
 
 
 
1,234
 
Total accretion
 
$
1,146
 
 
$
3,081
 
 
$
4,160
 
Ending balance of discount on purchased loans
 
$
1,726
 
 
$
2,872
 
 
$
5,068
 
 
Interest income from our securities portfolio increased $454,000, or 15.1%, to $3.5 million in 2021. The increase in interest income on securities was primarily due to an increased average balance of $144.1 million, or 78.8%, partially offset by a 58 basis point decrease in the average yield of securities.
 
Interest income on our federal funds sold, cash equivalents and other investments decreased $143,000, or 6.3%, to $2.1 million in 2021. The decrease in interest income on these earning assets was primarily due to a 64 basis point decrease in average yield of cash equivalents, partially offset by a $292.2 million increase in the average balance. The increase in the average balance resulted from pending utilization of these funds to higher yielding loans and securities.
 
Interest Expense. Interest expense on interest-bearing liabilities decreased $11.6 million, or 33.9%, to $22.7 million in 2021 primarily due to a 63 basis point decrease in the average rate on these liabilities plus an increase in average non-interest bearing deposits of $374.6 million, partially offset by a $216.5 million increase in the average balance of interest bearing liabilities.
 
Interest expense on total deposits decreased to $12.0 million in 2021. The $13.2 million, or 52.6%, decrease in interest expense on total deposits was primarily due to a 73 basis point decrease in the average rate paid on total average interest bearing deposits, partially offset by a $141.9 million increase in the average balance of interest-bearing deposits. The increase in the average balance of deposits resulted primarily from organic growth in 2021.
 
Interest expense on borrowings increased 17.5% from $9.2 million in 2020 to $10.8 million in 2021. This increase reflected increased average balances in long term debt. In 2021, the average rate on these liabilities was 3.34% compared to 3.70% in 2020. 
 
51
 
 
Average Balance Sheet, Interest and Yield/Rate Analysis
 
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (“TE”) basis by adjusting interest income utilizing the federal statutory tax rate of 21% for 2021,  2020 and 2019. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See “Analysis of Financial Condition— Capital Resources and Liquidity Management” and Item 7A Quantitative and Qualitative Disclosures about Market Risk included herein.
 
The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years 2021, 2020 and 2019. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.
 
 
 
Years Ended December 31,
 
 
 
2021
 
 
2020
 
 
2019
 
(tax-equivalent basis, dollars in
 
Average
 
 
Interest
 
 
Yield /
 
 
Average
 
 
Interest
 
 
Yield /
 
 
Average
 
 
Interest
 
 
Yield /
 
thousands)
 
Balance
 
 
& Fees
 
 
Rate
 
 
Balance
 
 
& Fees
 
 
Rate
 
 
Balance
 
 
& Fees
 
 
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold, cash equivalents and other (1)
 
$
504,809
 
 
$
2,115
 
 
 
0.42
%
 
$
212,594
 
 
$
2,258
 
 
 
1.06
%
 
$
135,133
 
 
$
3,914
 
 
 
2.90
%
Securities: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
320,544
 
 
 
3,217
 
 
 
1.00
%
 
 
175,307
 
 
 
2,714
 
 
 
1.55
%
 
 
85,775
 
 
 
2,354
 
 
 
2.74
%
Held to maturity
 
 
6,543
 
 
 
238
 
 
 
3.64
%
 
 
7,665
 
 
 
287
 
 
 
3.74
%
 
 
8,978
 
 
 
334
 
 
 
3.72
%
Mortgage loans held for sale
 
 
20,817
 
 
 
670
 
 
 
3.22
%
 
 
41,019
 
 
 
1,779
 
 
 
4.34
%
 
 
325,039
 
 
 
15,754
 
 
 
4.85
%
Loans held for investment: (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
 
 
2,363,846
 
 
 
122,204
 
 
 
5.17
%
 
 
2,176,695
 
 
 
113,966
 
 
 
5.24
%
 
 
1,767,923
 
 
 
97,024
 
 
 
5.49
%
Commercial
 
 
381,646
 
 
 
18,695
 
 
 
4.90
%
 
 
367,718
 
 
 
18,149
 
 
 
4.94
%
 
 
345,010
 
 
 
22,381
 
 
 
6.49
%
Total loans held for investment
 
 
2,745,492
 
 
 
140,899
 
 
 
5.13
%
 
 
2,544,413
 
 
 
132,115
 
 
 
5.19
%
 
 
2,112,933
 
 
 
119,405
 
 
 
5.65
%
Total earning assets
 
 
3,598,205
 
 
$
147,139
 
 
 
4.09
%
 
 
2,980,998
 
 
$
139,153
 
 
 
4.67
%
 
 
2,667,858
 
 
$
141,761
 
 
 
5.31
%
Noninterest-earning assets
 
 
235,267
 
 
 
 
 
 
 
 
 
 
 
204,617
 
 
 
 
 
 
 
 
 
 
 
167,324
 
 
 
 
 
 
 
 
 
Total assets
 
$
3,833,472
 
 
 
 
 
 
 
 
 
 
$
3,185,615
 
 
 
 
 
 
 
 
 
 
$
2,835,182
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW deposits
 
$
69,211
 
 
$
184
 
 
 
0.27
%
 
$
55,795
 
 
$
201
 
 
 
0.36
%
 
$
24,925
 
 
$
68
 
 
 
0.27
%
Money market deposits
 
 
637,539
 
 
 
2,468
 
 
 
0.39
%
 
 
449,110
 
 
 
3,190
 
 
 
0.71
%
 
 
370,451
 
 
 
4,621
 
 
 
1.25
%
Savings deposits
 
 
137,534
 
 
 
134
 
 
 
0.10
%
 
 
123,568
 
 
 
149
 
 
 
0.12
%
 
 
97,670
 
 
 
197
 
 
 
0.20
%
Time deposits, less than $250,000
 
 
640,747
 
 
 
4,462
 
 
 
0.70
%
 
 
715,181
 
 
 
11,466
 
 
 
1.60
%
 
 
712,535
 
 
 
16,044
 
 
 
2.25
%
Time deposits, $250,000 and over
 
 
597,770
 
 
 
4,708
 
 
 
0.79
%
 
 
597,262
 
 
 
10,199
 
 
 
1.71
%
 
 
566,810
 
 
 
13,303
 
 
 
2.35
%
Total interest-bearing deposits
 
 
2,082,801
 
 
 
11,956
 
 
 
0.57
%
 
 
1,940,916
 
 
 
25,205
 
 
 
1.30
%
 
 
1,772,391
 
 
 
34,233
 
 
 
1.93
%
FHLB advances
 
 
150,000
 
 
 
1,765
 
 
 
1.18
%
 
 
129,071
 
 
 
1,483
 
 
 
1.15
%
 
 
114,388
 
 
 
2,930
 
 
 
2.56
%
Long-term debt
 
 
157,719
 
 
 
8,404
 
 
 
5.33
%
 
 
104,210
 
 
 
6,990
 
 
 
6.71
%
 
 
103,870
 
 
 
6,991
 
 
 
6.73
%
Subordinated debentures
 
 
14,385
 
 
 
595
 
 
 
4.14
%
 
 
14,228
 
 
 
687
 
 
 
4.83
%
 
 
9,586
 
 
 
707
 
 
 
7.38
%
Total interest-bearing liabilities
 
 
2,404,905
 
 
 
22,720
 
 
 
0.94
%
 
 
2,188,425
 
 
 
34,365
 
 
 
1.57
%
 
 
2,000,235
 
 
 
44,861
 
 
 
2.24
%
Noninterest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing deposits
 
 
938,710
 
 
 
 
 
 
 
 
 
 
 
564,111
 
 
 
 
 
 
 
 
 
 
 
421,174
 
 
 
 
 
 
 
 
 
Other noninterest-bearing liabilities
 
 
42,143
 
 
 
 
 
 
 
 
 
 
 
15,164
 
 
 
 
 
 
 
 
 
 
 
19,879
 
 
 
 
 
 
 
 
 
Total noninterest-bearing liabilities
 
 
980,853
 
 
 
 
 
 
 
 
 
 
 
579,275
 
 
 
 
 
 
 
 
 
 
 
441,053
 
 
 
 
 
 
 
 
 
Shareholders' equity
 
 
447,714
 
 
 
 
 
 
 
 
 
 
 
417,915
 
 
 
 
 
 
 
 
 
 
 
393,895
 
 
 
 
 
 
 
 
 
Total liabilities and shareholders' equity
 
$
3,833,472
 
 
 
 
 
 
 
 
 
 
$
3,185,615
 
 
 
 
 
 
 
 
 
 
$
2,835,183
 
 
 
 
 
 
 
 
 
Net interest income / interest rate spreads
 
 
 
 
 
$
124,419
 
 
 
3.15
%
 
 
 
 
 
$
104,788
 
 
 
3.10
%
 
 
 
 
 
$
96,900
 
 
 
3.07
%
Net interest margin
 
 
 
 
 
 
 
 
 
 
3.46
%
 
 
 
 
 
 
 
 
 
 
3.52
%
 
 
 
 
 
 
 
 
 
 
3.63
%
 
(1)
Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.
(2)
Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis.
(3)
Average loan balances include nonaccrual loans and loans held for sale. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
 
52
 
 
Interest Rates and Operating Interest Differential
 
Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables show the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percent changes in average volume and average rate as they compare to each other.
 
 
 
Year Ended December 31, 2021 Compared with Year Ended December 31, 2020
 
 
Year Ended December 31, 2020 Compared with Year Ended December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change due to:
 
 
 
 
 
 
Change due to:
 
 
 
 
 
(tax-equivalent basis, dollars in thousands)
 
Volume
 
 
Rate
 
 
Interest Variance
 
 
Volume
 
 
Rate
 
 
Interest Variance
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal funds sold, cash equivalents & other (1)
 
$
1,792
 
 
$
(1,935
)
 
$
(143
)
 
$
1,574
 
 
$
(3,230
)
 
$
(1,656
)
Securities: (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
1,702
 
 
 
(1,199
)
 
 
503
 
 
 
1,696
 
 
 
(1,336
)
 
 
360
 
Held to maturity
 
 
(41
)
 
 
(8
)
 
 
(49
)
 
 
(49
)
 
 
2
 
 
 
(47
)
Mortgage loans held for sale
 
 
(728
)
 
 
(381
)
 
 
(1,109
)
 
 
(12,474
)
 
 
(1,501
)
 
 
(13,975
)
Loans held for investment: (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate
 
 
9,768
 
 
 
(1,530
)
 
 
8,238
 
 
 
21,540
 
 
 
(4,598
)
 
 
16,942
 
Commercial
 
 
692
 
 
 
(146
)
 
 
546
 
 
 
1,397
 
 
 
(5,629
)
 
 
(4,232
)
Total loans held for investment
 
 
10,460
 
 
 
(1,676
)
 
 
8,784
 
 
 
22,937
 
 
 
(10,227
)
 
 
12,710
 
Total
 
$
13,185
 
 
$
(5,199
)
 
$
7,986
 
 
$
13,684
 
 
$
(16,292
)
 
$
(2,608
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW
 
$
41
 
 
$
(58
)
 
$
(17
)
 
$
105
 
 
$
28
 
 
$
133
 
Money market
 
 
1,038
 
 
 
(1,760
)
 
 
(722
)
 
 
847
 
 
 
(2,278
)
 
 
(1,431
)
Saving deposits
 
 
14
 
 
 
(29.00
)
 
 
(15
)
 
 
43
 
 
 
(91
)
 
 
(48
)
Time deposits, less than $250,000
 
 
(1,094
)
 
 
(5,910
)
 
 
(7,004
)
 
 
60
 
 
 
(4,638
)
 
 
(4,578
)
Time deposits, $250,000 and over
 
 
9
 
 
 
(5,500
)
 
 
(5,491
)
 
 
684
 
 
 
(3,788
)
 
 
(3,104
)
Total interest-bearing deposits
 
 
8
 
 
 
(13,257
)
 
 
(13,249
)
 
 
1,739
 
 
 
(10,767
)
 
 
(9,028
)
FHLB advances
 
 
243
 
 
 
39
 
 
 
282
 
 
 
336
 
 
 
(1,783
)
 
 
(1,447
)
Long-term debt
 
 
3,063
 
 
 
(1,649
)
 
 
1,414
 
 
 
21
 
 
 
(22
)
 
 
(1
)
Subordinated debentures
 
 
8
 
 
 
(100
)
 
 
(92
)
 
 
273
 
 
 
(293
)
 
 
(20
)
Total interest-bearing liabilities
 
 
3,322
 
 
 
(14,967
)
 
 
(11,645
)
 
 
2,369
 
 
 
(12,865
)
 
 
(10,496
)
Changes in net interest income
 
$
9,863
 
 
$
9,768
 
 
$
19,631
 
 
$
11,315
 
 
$
(3,427
)
 
$
7,888
 
 
(1)
Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.
(2)
Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis.
(3)
Average loan balances include nonaccrual loans and loans held for sale. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
 
53
 
 
Provision for Loan Losses
 
The provision for loan losses in 2021 was $4.0 million compared to $11.8 million in 2020. The decrease in the 2021 provision expense was primarily attributable to a decrease in COVID-19 pandemic related market effects from 2020, partially offset by increases in past due loans, substandard loans and impaired loans. Non-performing loans that increased during the year were individually analyzed,  with $30,000 in 2021 and $525,000 in 2020,  net addition to the allowance for loan losses.
 
Noninterest Income
 
Noninterest income increased $4.7 million, or 33.5%, to $18.7 million in 2021 from $14.0 million in 2020. The following table sets forth the major components of noninterest income for the years ended December 31, 2021, 2020 and 2019:
 
 
 
Years Ended December 31,
 
 
2021 vs. 2020 Increase (Decrease)
 
 
2020 vs. 2019 Increase (Decrease)
 
(dollars in thousands)
 
2021
 
 
2020
 
 
2019
 
 
$
 
 
%
 
 
$
 
 
%
 
Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service charges, fees and other
 
$
7,235
 
 
$
4,852
 
 
$
4,072
 
 
$
2,383
 
 
 
49.1
%
 
$
780
 
 
 
19.2
%
Gain on sale of loans
 
 
9,991
 
 
 
5,997
 
 
 
9,893
 
 
 
3,994
 
 
 
66.6
%
 
 
(3,896
)
 
 
(39.4
)%
Loan servicing income, net of amortization
 
 
684
 
 
 
2,052
 
 
 
3,383
 
 
 
(1,368
)
 
 
(66.7
)%
 
 
(1,331
)
 
 
(39.3
)%
Recoveries on loans acquired in business combinations
 
 
82
 
 
 
84
 
 
 
143
 
 
 
(2
)
 
 
(2.4
)%
 
 
(59
)
 
 
(41.3
)%
Unrealized (loss) gain on equity investments
 
 
(360
)
 
 
—
 
 
 
147
 
 
 
(360
)
 
 
100.0
%
 
 
(147
)
 
 
(100.0
)%
Gain on derivatives
 
 
46
 
 
 
78
 
 
 
—
 
 
 
(32
)
 
 
(41.0
)%
 
 
78
 
 
 
100.0
%
Increase in cash surrender of life insurance
 
 
1,067
 
 
 
767
 
 
 
775
 
 
 
300
 
 
 
39.1
%
 
 
(8
)
 
 
(1.0
)%
Gain on sale of securities
 
 
—
 
 
 
210
 
 
 
7
 
 
 
(210
)
 
 
(100.0
)%
 
 
203
 
 
 
2900.0
%
Loss on sale of OREO
 
 
—
 
 
 
—
 
 
 
(106
)
 
 
—
 
 
 
—
 
 
 
106
 
 
 
(100.0
)%
Gain on sale of fixed assets
 
 
—
 
 
 
—
 
 
 
6
 
 
 
—
 
 
 
—
 
 
 
(6
)
 
 
(100.0
)%
Total noninterest income
 
$
18,745
 
 
$
14,040
 
 
$
18,320
 
 
$
4,705
 
 
 
33.5
%
 
$
(4,280
)
 
 
(23.4
)%
 
Service charges, fees and others. The increase in noninterest income from service charges, fees and other income was primarily from service charges on the additional transactional deposit accounts originated organically.  
 
Gain on sale of loans . The gain on sales of loans increased $4.0 million due primarily to the increase in gains of $2.7 million in SFR mortgage loans sold and increase in gains of $1.3 million in SBA loans sold. In creases in gain on sales of loans were due to increases of $7.2 million on SBA loans sold and $92.4 million on mortgage loans held for sale.   The increase in the mortgage loan sales is attributable to the favorable change in market conditions in the secondary market.
 
 
 
Years Ended December 31,
 
 
2021 vs. 2020 Increase (Decrease)
 
 
2020 vs. 2019 Increase (Decrease)
 
(dollars in thousands)
 
2021
 
 
2020
 
 
2019
 
 
$
 
 
%
 
 
$
 
 
%
 
Loans sold:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SBA
 
$
20,922
 
 
$
13,733
 
 
$
28,803
 
 
$
7,189
 
 
 
52.3
%
 
$
(15,070
)
 
 
(52.3
)%
Single family residential mortgage
 
 
276,650
 
 
 
184,220
 
 
 
472,477
 
 
 
92,430
 
 
 
50.2
%
 
 
(288,257
)
 
 
(61.0
)%
Commercial real estate
 
 
—
 
 
 
—
 
 
 
10,422
 
 
 
—
 
 
 
—
 
 
 
(10,422
)
 
 
(100.0
)%
 
 
$
297,572
 
 
$
197,953
 
 
$
511,702
 
 
$
99,619
 
 
 
50.3
%
 
$
(313,749
)
 
 
(61.3
)%
Gain on loans sold:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SBA
 
$
2,091
 
 
$
754
 
 
$
1,542
 
 
$
1,337
 
 
 
177.3
%
 
$
(788
)
 
 
(51.1
)%
Single family residential mortgage
 
 
7,900
 
 
 
5,243
 
 
 
8,199
 
 
 
2,657
 
 
 
50.7
%
 
 
(2,956
)
 
 
(36.1
)%
Commercial real estate
 
 
—
 
 
 
—
 
 
 
152
 
 
 
—
 
 
 
—
 
 
 
(152
)
 
 
(100.0
)%
 
 
$
9,991
 
 
$
5,997
 
 
$
9,893
 
 
$
3,994
 
 
 
66.6
%
 
$
(3,896
)
 
 
(39.4
)%
 
54
 
 
Loan servicing income, net of amortization. Servicing income decreased due to increased loan pre-payments in the SFR loans serviced causing a decrease in the volume of mortgage loans we are servicing. SBA loan servicing income decreased due to a decline in SBA pre-payments.
 
(dollars in thousands)
 
Years Ended December 31,
 
 
2021 vs. 2020 Increase (Decrease)
 
 
2020 vs. 2019 Increase (Decrease)
 
For the period
 
2021
 
 
2020
 
 
2019
 
 
$
 
 
%
 
 
$
 
 
%
 
Loan servicing income, net of amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family residential loans serviced
 
$
268
 
 
$
1,440
 
 
$
2,981
 
 
$
(1,172
)
 
 
(81.4
)%
 
$
(1,541
)
 
 
(51.7
)%
SBA loans serviced
 
 
416
 
 
 
612
 
 
 
402
 
 
 
(196
)
 
 
(32.0
)%
 
 
210
 
 
 
52.2
%
Total
 
$
684
 
 
$
2,052
 
 
$
3,383
 
 
$
(1,368
)
 
 
(66.7
)%
 
$
(1,331
)
 
 
(39.3
)%
 
 
 
Years Ended December 31,
 
 
2021 vs. 2020 Increase (Decrease)
 
 
2020 vs. 2019 Increase (Decrease)
 
(dollars in thousands)
 
2021
 
 
2020
 
 
2019
 
 
 
 
 
 
$%
 
 
 
 
 
 
$%
 
As of year-end, dollars in thousands
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family residential loans serviced
 
$
1,308,672
 
 
$
1,512,969
 
 
$
1,683,298
 
 
$
(204,297
)
 
 
(13.5
)%
 
$
(170,329
)
 
 
(10.1
)%
SBA loans serviced
 
 
138,173
 
 
 
156,222
 
 
 
170,849
 
 
 
(18,049
)
 
 
(11.6
)%
 
 
(14,627
)
 
 
(8.6
)%
Total
 
$
1,446,845
 
 
$
1,669,191
 
 
$
1,854,147
 
 
$
(222,346
)
 
 
(13.3
)%
 
$
(184,956
)
 
 
(10.0
)%
 
Recoveries on loans acquired in business combinations. Recoveries on loans acquired in business combinations decreased by $2,000 to $82,000 in 2021 compared to $84,000 in 2020. 
 
Gain on derivatives.  Due to the amount of loans that were committed to be delivered to FNMA at year-end, we recorded derivatives which resulted in a gain of $46,000 in 2021 and $78,000 in 2020. In 2021 and 2020, the income from interest rate lock commitments ("IRLCs") was ($41,000) and $182,000, respectively, and was recorded as service charges, fees and other.  The income from forward mortgage loan sales commitments ("FMLSCs") was $46,000 and $78,000 in 2021 and 2020, respectively, and is reported in the income statement.  There was no IRLC and FMLSC income in 2019.
 
Cash surrender value income of bank owned life insurance. Cash surrender value income of bank owned life insurance (“BOLI”) increased $300,000 due to additional BOLI investment of $19.9 million in June 2021.
 
Gain on sales of securities, net. Gain on sales of securities, net was $210,000 in 2020 from the sale of $11.7 million securities.  There was no gain on sale of securities in 2021. 
 
55
 
 
Noninterest Expense
 
Noninterest expense decreased $1.3 million, or 2.2%, to $58.2 million in 2021 from $59.5 million in 2020. The following table sets forth the major components of our noninterest expense for the years ended December 31, 2021, 2020 and 2019:
 
 
 
Years Ended December 31,
 
 
2021 vs. 2020 Increase (Decrease)
 
 
2020 vs. 2019 Increase (Decrease)
 
(dollars in thousands)
 
2021
 
 
2020
 
 
2019
 
 
 
 
 
$%
 
 
 
 
 
$%
 
Noninterest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
$
33,568
 
 
$
33,312
 
 
$
32,909
 
 
$
256
 
 
 
0.8
%
 
$
403
 
 
 
1.2
%
Occupancy and equipment expenses
 
 
8,691
 
 
 
9,691
 
 
 
9,750
 
 
 
(1,000
)
 
 
(10.3
)%
 
 
(59
)
 
 
(0.6
)%
Data processing
 
 
4,474
 
 
 
4,236
 
 
 
3,699
 
 
 
238
 
 
 
5.6
%
 
 
537
 
 
 
14.5
%
Legal and professional
 
 
3,773
 
 
 
2,743
 
 
 
1,832
 
 
 
1,030
 
 
 
37.6
%
 
 
911
 
 
 
49.7
%
Office expenses
 
 
1,197
 
 
 
1,226
 
 
 
1,257
 
 
 
(29
)
 
 
(2.4
)%
 
 
(31
)
 
 
(2.5
)%
Marketing and business promotion
 
 
1,157
 
 
 
751
 
 
 
1,308
 
 
 
406
 
 
 
54.1
%
 
 
(557
)
 
 
(42.6
)%
Insurance and regulatory assessments
 
 
1,561
 
 
 
984
 
 
 
900
 
 
 
577
 
 
 
58.6
%
 
 
84
 
 
 
9.3
%
Amortization of core deposit intangible
 
 
1,121
 
 
 
1,395
 
 
 
1,501
 
 
 
(274
)
 
 
(19.6
)%
 
 
(106
)
 
 
(7.1
)%
OREO expenses
 
 
17
 
 
 
35
 
 
 
337
 
 
 
(18
)
 
 
(51.4
)%
 
 
(302
)
 
 
(89.6
)%
Merger expenses
 
 
137
 
 
 
746
 
 
 
471
 
 
 
(609
)
 
 
(81.6
)%
 
 
275
 
 
 
58.4
%
Other expenses
 
 
2,496
 
 
 
4,394
 
 
 
3,509
 
 
 
(1,898
)
 
 
(43.2
)%
 
 
885
 
 
 
25.2
%
Total noninterest expense
 
$
58,192
 
 
$
59,513
 
 
$
57,473
 
 
$
(1,321
)
 
 
(2.2
)%
 
$
2,040
 
 
 
3.5
%
 
Salaries and employee benefits. Salaries and employee benefits expense increased $256,000 due to normal salary increases. The number of full-time equivalent employees were 365 at December, 31, 2021, 366 at year-end 2020 and 355 at year-end 2019.  None of our employees are represented by a labor union, or governed by any collective bargaining agreements. We consider relations with our employees to be satisfactory. On a periodic basis, the human resources department will advise senior management of the following human capital management metrics: (1) open positions, (2) overtime expense, (3) staff turnover, and (4) employee headcount.
 
Occupancy and equipment. Occupancy and equipment expense decreased $1.0 million from 2020 to 2021 mainly due t o the savings from branch closures in 2020 and in early 2021 . 
 
Data processing. Data processing expense increased $238,000 in 2021. This increase was primarily due to upgrading our infrastructure. Effective June 2019, the Company renegotiated its data processing master agreement with its vendor, under which the Company is allowed to offset future monthly data processing expenses up to approximately $2.2 million through January 2026. As of December 31, 2021, this offset benefit amounted to $1.2 million to be recognized through January 2026.
 
Legal and professional. Legal and professional expense increased $1.0 million in 2021 due to increases in internal control audits, professional expense associated with emerging growth company status and problem loan collections. 
 
56
 
 
Office expenses. Office expenses, comprised of communications, postage, armored car, and office supplies, decreased by $29,000 in 2021. 
 
Marketing and business promotion. Marketing and business promotion expense increased $406,000, due to increased marketing efforts following the COVID-19 pandemic.  
 
Insurance and regulatory assessments. Insurance and regulatory assessments expense increased by $577,000 to $1.6 million in 2021 compared to $984,000 in 2020. The FDIC insurance assessment was $949,000 in 2021 and $455,000 in 2020, an increase of $494,000. The California DFPI regulatory assessment increased by $20,000 from $163,000 for the year 2020 to $183,000 for year 2021.  The corporate insurance expenses (including directors and officers insurance and fidelity bond), was $435,000 for 2021 compared to $363,000 for 2020.
 
Amortization of intangibles. Amortization of intangibles totaled $1.1 million in 2021 as compared to $1.4 million for 2020. The decrease was due to continued amortization of the core deposit intangible asset, following the additional core deposit intangible asset of $491,000 recognized in connection with the 2020 PGBH acquisition.
 
OREO expenses. OREO expenses were $17,000 in 2021 and $35,000 in 2020. The $18,000 decrease was due to no further ongoing expenses for past OREOs.
 
Merger expenses. Merger expenses were $137,000 in 2021 compared to $746,000 in 2020. The 2021 expense includes expenses relating to the acquisition of the Hawaii branch.  While the 2020 expenses relate to the PGBH acquisition.
 
Other noninterest expenses. Other expenses decreased by $1.9 million from 2020, primarily due to the provision (benefit) for credit losses associated with unfunded commitments as of the balance sheet date of ($180,000) in 2021 compared to $558,000 in 2020. The off-balance sheet liabilities are letters of credit and other commitments to lend. The provision for off-balance sheet liabilities is a function of the volume of undisbursed loans and other loan commitments multiplied by a risk factor. Other expense increases included a $416,000 decrease in mortgage servicing rights impairment due to reversal of write-downs reflecting the decline in market rates of interest.
 
Income Tax Expense
 
Income tax expense was $24.0 million in 2021 compared to $14.5 million in 2020, an increase of $9.5 million, or 65.4%. The effective tax rate for 2021 was 29.7% and 30.6% for 2020. Income tax expense for 2021 included a $873,000 benefit for stock options exercised and a $26,000 benefit for 2020.
 
Net Income
 
Net income increased $24.0 million to $56.9 million in 2021, compared to $32.9 million in 2020.  The increase is primarily due to a increase in net interest income of $19.6 million, an increase in non-interest income of $4.7 million, a $1.3 million decrease in non-interest expense and a $7.9 million decrease in the credit loss provision, partially offset by a $9.5 million increase in tax expense.
 
 
Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2020 to December 31, 2019
 
Net Interest Income/Average Balance Sheet
 
In 2020, we generated fully-taxable equivalent net interest income of $104.8 million, an increase of $7.9 million, or 8.1%, from the net interest income produced in 2019. This increase was largely due to a 11.7% increase in the average balance of interest-earning assets, in part due to the PGBH acquisition and organic loan growth, partially offset by an 11 basis point decrease in the net interest margin. For the years ended December 31, 2020 and 2019 our reported net interest margin was 3.52% and 3.63%, respectively. Our net interest margin benefits from discount accretion on our purchased loan portfolios.
 
57
 
 
Interest Income . Total interest income was $139.1 million in 2020 compared to $141.7 million in 2019. The $2.6 million, or 1.8%, decrease in total interest income was mainly due to a decrease in the average loan yield of 37 basis points. This was partially offset by increases in the average balance of total loans of $147.5 million, average balance of securities of $88.2 million, and average balance of Federal funds sold, cash equivalents and other investments of $77.5 million.
 
Interest and fees on loans was $133.9 million in 2020 compared to $135.2 million in 2019. The $1.3 million, or 0.94%, decrease in interest income on loans was primarily due to a 46 basis point decrease in the average yield on loans held for investment and 51 basis point decrease in the average yield on loans held for sale, partially offset by a $147.5 million increase in the average balance of held for investment and held for sale loans outstanding. The increase in the average balance of loans outstanding was primarily due to the PGBH acquisition in January 2020 plus organic growth in commercial real estate and single-family residential mortgage loans during 2020. The yield on the loan portfolio benefited from accretion income associated with purchase accounting discounts established on loans acquired in prior acquisitions. For the years 2020 and 2019, the reported yield on total loans was 5.19% and 5.65%, respectively. The impact of accretion income on our yield on total loans for the years 2020 and 2019 was to increase our reported yield on total loans by 0.08% and 0.11%, respectively. A substantial portion of our acquired loan portfolio that is subject to discount accretion consists of commercial real estate loans and single family residential mortgages.
 
Interest income from our securities portfolio increased $315,000, or 11.7%, to $3.0 million in 2020. The increase in interest income on securities was primarily due to an increased average balance of $88.2 million, or 93.1%, partially offset by a 120 basis point decrease in the average yield of securities.
 
Interest income on our federal funds sold, cash equivalents and other investments decreased $1.7 million, or 42.3%, to $2.3 million in 2020. The decrease in interest income on these earning assets was primarily due to by a 184 basis point decrease in average yield of cash equivalents, partially offset by a $77.5 million increase in the average balance. The increase in the average balance resulted from pending utilization of these funds to higher yielding loans and securities.
 
Interest Expense. Interest expense on interest-bearing liabilities decreased $10.5 million, or 23.4%, to $34.4 million in 2020 primarily due to a 67 basis point decrease in the average rate on these liabilities plus an increase in non-interest bearing deposits of $142.9 million, partially offset by a $188.2 million increase in the average balance of interest bearing liabilities.
 
Interest expense on total deposits decreased to $25.2 million in 2020. The $9.0 million, or 26.4%, decrease in interest expense on total deposits was primarily due to a 63 basis point decrease in the average rate paid on total interest bearing deposits, partially offset by a $168.5 million increase in the average balance of interest-bearing deposits. The increase in the average balance of deposits resulted primarily from the PGBH acquisition in early 2020 and organic growth in 2020.
 
Interest expense on borrowings decreased from $10.6 million in 2019 to $9.2 million or 13.8% in 2020. This decrease reflected decreased interest expense on subordinated notes, subordinated debentures, and other borrowed funds consisting of FHLB short-term and long-term advances. In 2020, the average rate on these liabilities was 3.70% compared to 4.66% in 2019. A five year FHLB advance was obtained in March 2020 to provide for additional liquidity.
 
58
 
 
Provision for Loan Losses
 
The provision for loan losses in 2020 was $11.8 million compared to $2.4 million in 2019. The increase in the 2020 provision expense was primarily attributable to COVID-19 pandemic related market effects of $2.3 million, increases in the size of our overall loan portfolio, and increases in past due loans, substandard loans and impaired loans. Non-performing loans that increased during the year were individually analyzed, with $525,000 in 2020 and none in 2019, net addition to the allowance for loan losses.
 
Noninterest Income
 
Noninterest income decreased $4.3 million, or 23.4%, to $14.0 million in 2020 from $18.3 million in 2019.
 
Service charges, fees and others. The increase in noninterest income from service charges, fees and other income was primarily from service charges on the additional transactional deposit accounts originated organically and acquired in the PGBH acquisition in 2020.  In 2020, the income from interest rate lock commitments ("IRLCs") was $182,000 and was recorded as service charges, fees and other.  The income from forward mortgage loan sales commitments ("FMLSCs") was $78,000 and is reported in the income statement as a gain on derivatives.  There was no IRLC and FMLSC income in 2019.
Gain on sale of loans . The gain on sales of loans decreased $3.9 million due primarily to the decrease of $2.9 million in SFR mortgage loans sold and a $788,000 decrease in premiums received on SBA loans sold. Decreases in gain on sales of loans were due to decreases of $15.1 million on SBA loans sold and $288.3 million on mortgage loans held for sale.  The decrease in the mortgage loan sales is attributable to the change in market conditions in the secondary market primarily caused by COVID-19.
Loan servicing income, net of amortization. Servicing income decreased due to increased loan pre-payments in the SFR loans serviced causing a decrease in the volume of mortgage loans we are servicing. SBA loan servicing income increased due to a decline in SBA pre-payments.
 
Recoveries on loans acquired in business combination s . Recoveries on loans acquired in business combinations decreased by $59,000 to $84,000 in 2020 compared to $143,000 in 2019.
 
Gain on derivatives.   Due to the amount of loans that were committed to be delivered to FNMA at year-end, we recorded a derivative which resulted in a gain of $78,000 in 2020.
 
Cash surrender value income of bank owned life insurance. Cash surrender value income of BOLI decreased $8,000 due to slightly lower rates.
 
Gain on sales of securities, net. Gain on sales of securities, net was $210,000 in 2020 from the sale of $11.7 million securities. 
 
L oss  on Sale of OREO. In 2020, there were no sales of OREO. A $106,000 loss on sale of OREO was recognized in 2019 from the sale of two OREO properties.
 
Noninterest Expense
 
Noninterest expense increased $2.0 million, or 3.5%, to $59.5 million in 2020 from $57.5 million in 2019.
 
59
 
 
Salaries and employee benefits. Salaries and employee benefits expense increased $403,000 due to severance pay to terminated employees in connection with the PGBH merger. The number of full-time equivalent employees were 366 in 2020, 355 in 2019 and 365 in 2018. None of our employees are represented by a labor union, or governed by any collective bargaining agreements. We consider relations with our employees to be satisfactory. On a periodic basis, the human resources department will advise senior management of the following human capital management metrics: (1) open positions, (2) overtime expense, (3) staff turnover, and (4) employee headcount.
 
Occupancy and equipment. Occupancy and equipment expense decreased $59,000 from 2019 to 2020 mainly due to closing three branches in 2020, partially offset by the addition of three branches in Chicago (one leased and two owned)  and opening one branch in Edison, New Jersey. 
 
Data processing. Data processing expense increased $537,000 in 2020. This increase was primarily due to upgrading our infrastructure and also reflected the impact of increased processing costs incurred subsequent to the PGBH acquisition. Effective June 2019, the Company renegotiated its data processing master agreement with its vendor, under which the Company is allowed to offset future monthly data processing expenses up to approximately $2.2 million through January 2026. As of December 31, 2020, this offset benefit amounted to $1.6 million to be recognized through January 2026. Conversion expense associated with the PGBH and FAIC acquisitions is in the “other expenses” line item.
 
Legal and professional. Legal and professional expense increased $911,000 in 2020 due to increases in problem loan collection expenses, and commission expense recognized in connection with the purchase of a new branch location. 
 
Office expenses. Office expenses comprised of communications, postage, armored car, and office supplies, decreased by $31,000 in 2020. The decrease was primarily due to cost saving implemented in 2020 (following the acquisition of PGBH in January).
 
Marketing and business promotion. Marketing and business promotion expense decreased $557,000. In 2020, marketing and promotion activity decreased due to COVID-19 pandemic. 
 
Insurance and regulatory assessments. Insurance and regulatory assessments expense increased by $84,000 to $984,000 in 2020 compared to $900,000 in 2019, following the PGBH acquisition in 2020. The FDIC insurance assessment was $455,000 in 2020 and $386,000 in 2019, an increase of $69,000. The DFPI regulatory assessment increased by $14,000 from $149,000 for the year 2019 to $163,000 for year 2020.  The corporate insurance expenses (including directors and officers insurance and fidelity bond), were $363,000 for 2020 compared to $360,000 for 2019.
 
Amortization of intangibles. Amortization of intangibles totaled $1.4 million in 2020 as compared to $1.5 million for 2019. The decrease was due to continued amortization of the core deposit intangible asset, following the additional core deposit intangible asset of $491,000 recognized in connection with the PGBH acquisition.
 
OREO expenses. OREO expenses were $35,000 in 2020 and $337,000 in 2019. The $302,000 decrease was due to payments made for delinquent property taxes and construction costs during the year ended 2019.
 
Merger expenses. Merger expenses were $746,000 in 2020 compared to $471,000 in 2019. The 2020 and 2019 expenses are for the PGBH acquisition which closed in January 2020.
 
Other noninterest expenses. Other expenses increased by $885,000 from 2019, primarily due to the provision for credit losses associated with unfunded commitments as of the balance sheet date of $558,000 in 2020 compared to $137,000 in 2019. The off-balance sheet liabilities are letters of credit and other commitments to lend. The provision for off-balance sheet liabilities is a function of the volume of undisbursed loans and other loan commitments multiplied by a risk factor. Other expense increases included a $416,000 increase in mortgage servicing rights impairment due to write-downs reflecting the decline in market rates of interest.
 
Income Tax Expense
 
Income tax expense was $14.5 million in 2020 compared to $16.1 million in 2019, a decrease of $1.6 million or 9.8%. The effective tax rate for 2020 was 30.6% and 29.2% for 2019. Income tax expense for 2020 included a $26,000 benefit for stock options exercised and a $78,000 benefit for 2019.
 
60
 
 
Net Income
 
Net income decreased $6.3 million to $32.9 million in 2020, compared to $39.2 million in 2019.  The decrease was primarily due to a decrease in net interest income of $1.5 million, a decrease in non-interest income of $4.3 million, a $2.0 million increase in non-interest expense and a $9.4 million increase in the loan loss provision, partially offset by a $10.5 million decrease in interest expense.
 
ANALYSIS OF FINANCIAL CONDITION
 
Assets
 
Total assets were $4.2 billion as of December 31, 2021 and $3.4 billion as of December 31, 2020. We increased our net loans held for investment by $221.0 million.  This increase was from organic loan growth. Organic loan growth increased mainly in commercial real estate loans and construction loans. Our mortgage loans held for sale decreased by $44.0 million in 2021. The increase in assets was funded by an increase in deposits of $750.4 million, and a $38.2 million increase in equity (primarily resulting from $56.9 million in net income, less $10.5 million in repurchase of common stock and $9.9 million in dividends paid).
 
Investment Securities. We manage our securities portfolio and cash to maintain adequate liquidity and to ensure the safety and preservation of invested principal, with a secondary focus on yield and returns. Specific goals of our investment portfolio are as follows:
 
 
●
provide a ready source of balance sheet liquidity, ensuring adequate availability of funds to meet fluctuations in loan demand, deposit balances and other changes in balance sheet volumes and composition;
 
 
●
serve as a means for diversification of our assets with respect to credit quality, maturity and other attributes; and
 
 
●
serve as a tool for modifying our interest rate risk profile pursuant to our established policies.
 
Our investment portfolio is comprised primarily of U.S. government agency securities, corporate note securities, mortgage-backed securities backed by government-sponsored entities and taxable and tax exempt municipal securities.
 
Our investment policy is reviewed annually by our board of directors. Overall investment goals are established by our board, CEO, CFO and members of our Asset Liability Committee (“ALCO”) of our board of directors. Our board of directors has delegated the responsibility of monitoring our investment activities to our ALCO. Day-to-day activities pertaining to the securities portfolio are conducted under the supervision of our CEO and CFO. We actively monitor our investments on an ongoing basis to identify any material changes in the securities. We also review our securities for potential other-than-temporary impairment at least quarterly.
 
61
 
 
The following table sets forth the book value and percentage of each category of securities at December 31, 2021, 2020 and 2019. The book value for securities classified as available for sale is equal to fair market value and the book value for securities classified as held to maturity is equal to amortized cost.
 
 
 
December 31, 2021
 
 
December 31, 2020
 
 
December 31, 2019
 
(dollars in thousands)
 
 
Amount
 
 
 
% of Total
 
 
 
Amount
 
 
 
% of Total
 
 
 
Amount
 
 
 
% of Total
 
Securities, available for sale, at fair value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
 
$
5,610
 
 
 
1.5
%
 
$
1,294
 
 
 
0.6
%
 
$
1,572
 
 
 
1.2
%
SBA agency securities
 
 
3,469
 
 
 
0.9
%
 
 
4,394
 
 
 
2.0
%
 
 
4,691
 
 
 
3.5
%
Mortgage-backed securities - Government sponsored agencies
 
 
55,025
 
 
 
14.7
%
 
 
17,677
 
 
 
8.1
%
 
 
19,171
 
 
 
14.3
%
Collateralized mortgage obligations
 
 
119,511
 
 
 
31.9
%
 
 
48,874
 
 
 
22.4
%
 
 
11,654
 
 
 
8.7
%
Commercial paper
 
 
129,926
 
 
 
34.7
%
 
 
102,448
 
 
 
47.0
%
 
 
69,899
 
 
 
51.9
%
Corporate debt securities (1)
 
 
42,205
 
 
 
11.3
%
 
 
34,563
 
 
 
15.9
%
 
 
19,082
 
 
 
14.2
%
Municipal securities
 
 
12,514
 
 
 
3.3
%
 
 
1,617
 
 
 
0.7
%
 
 
—
 
 
 
0.0
%
Total securities, available for sale, at fair value
 
$
368,260
 
 
 
98.3
%
 
$
210,867
 
 
 
96.7
%
 
$
126,069
 
 
 
93.8
%
Securities, held to maturity, at amortized cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable municipal securities
 
$
1,506
 
 
 
0.4
%
 
$
2,407
 
 
 
1.1
%
 
$
3,505
 
 
 
2.6
%
Tax-exempt municipal securities
 
 
4,746
 
 
 
1.3
%
 
 
4,767
 
 
 
2.2
%
 
 
4,827
 
 
 
3.6
%
Total securities, held to maturity, at amortized cost
 
 
6,252
 
 
 
1.7
%
 
 
7,174
 
 
 
3.3
%
 
 
8,332
 
 
 
6.2
%
Total securities
 
$
374,512
 
 
 
100.0
%
 
$
218,041
 
 
 
100.0
%
 
$
134,401
 
 
 
100.0
%
 
 
(1)
Comprised of corporate debt securities and financial institution subordinated debentures
 
62
 
 
The tables below set forth investment securities AFS and HTM for the periods presented.
 
(dollars in thousands)
 
Amortized
 
 
Unrealized
 
 
Unrealized
 
 
Fair
 
December 31, 2021
 
Cost
 
 
Gains
 
 
Losses
 
 
Value
 
Available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
 
$
5,689
 
 
$
4
 
 
$
(83
)
 
$
5,610
 
SBA agency securities
 
 
3,351
 
 
 
118
 
 
 
—
 
 
 
3,469
 
Mortgage-backed securities- Government sponsored agencies
 
 
55,534
 
 
 
31
 
 
 
(540
)
 
 
55,025
 
Collateralized mortgage obligations
 
 
121,377
 
 
 
128
 
 
 
(1,994
)
 
 
119,511
 
Commercial paper
 
 
129,962
 
 
 
—
 
 
 
(36
)
 
 
129,926
 
Corporate debt securities
 
 
41,999
 
 
 
460
 
 
 
(254
)
 
 
42,205
 
Municipal securities
 
 
12,701
 
 
 
—
 
 
 
(187
)
 
 
12,514
 
 
 
$
370,613
 
 
$
741
 
 
$
(3,094
)
 
$
368,260
 
Held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal taxable securities
 
$
1,506
 
 
$
77
 
 
$
—
 
 
$
1,583
 
Municipal securities
 
 
4,746
 
 
 
248
 
 
 
—
 
 
 
4,994
 
 
 
$
6,252
 
 
$
325
 
 
$
—
 
 
$
6,577
 
December 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
 
$
1,257
 
 
$
37
 
 
$
—
 
 
$
1,294
 
SBA securities
 
 
4,125
 
 
 
269
 
 
 
—
 
 
 
4,394
 
Mortgage-backed securities- Government sponsored agencies
 
 
17,415
 
 
 
270
 
 
 
(8
)
 
 
17,677
 
Collateralized mortgage obligations
 
 
48,476
 
 
 
491
 
 
 
(93
)
 
 
48,874
 
Commercial paper
 
 
102,462
 
 
 
—
 
 
 
(14
)
 
 
102,448
 
Corporate debt securities
 
 
33,907
 
 
 
662
 
 
 
(6
)
 
 
34,563
 
Municipal securities
 
 
1,621
 
 
 
2
 
 
 
(6
)
 
 
1,617
 
 
 
$
209,263
 
 
$
1,731
 
 
$
(127
)
 
$
210,867
 
Held to maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal taxable securities
 
$
2,407
 
 
$
139
 
 
$
—
 
 
$
2,546
 
Municipal securities
 
 
4,767
 
 
 
290
 
 
 
—
 
 
 
5,057
 
 
 
$
7,174
 
 
$
429
 
 
$
—
 
 
$
7,603
 
 
The weighted-average yield on the total investment portfolio at December 31, 2021 was 1.03% with a weighted-average life of 3.8 years. This compares to a weighted-average yield of 1.14% at December 31, 2020 with a weighted-average life of 3.3 years. The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs.
 
Approximately 17.1% of the securities in the total investment portfolio at December 31, 2021, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of December 31, 2021, no U.S. government agency bonds are callable.
 
63
 
 
The table below shows the Company’s investment securities’ amortized cost and fair value by maturity in the following maturity groupings as of December 31, 2021.  The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
Less than One Year
 
 
More than One Year to Five Years
 
 
More than Five Years to Ten Years
 
 
More than Ten Years
 
 
Total
 
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
 
Amortized
 
 
Estimated
 
(dollars in thousands)
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
 
Cost
 
 
Fair Value
 
December 31, 2021
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government agency securities
 
$
—
 
 
$
—
 
 
$
5,689
 
 
$
5,610
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
5,689
 
 
$
5,610
 
SBA securities
 
 
—
 
 
 
—
 
 
 
1,551
 
 
 
1,582
 
 
 
1,800
 
 
 
1,887
 
 
 
—
 
 
 
—
 
 
 
3,351
 
 
 
3,469
 
Mortgage-backed securities- Government sponsored agencies
 
 
5,001
 
 
 
4,998
 
 
 
35,254
 
 
 
35,000
 
 
 
15,279
 
 
 
15,027
 
 
 
—
 
 
 
—
 
 
 
55,534
 
 
 
55,025
 
Collateralized mortgage obligations
 
 
117
 
 
 
117
 
 
 
78,021
 
 
 
76,496
 
 
 
43,239
 
 
 
42,898
 
 
 
—
 
 
 
—
 
 
 
121,377
 
 
 
119,511
 
Commercial paper
 
 
129,962
 
 
 
129,926
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
129,962
 
 
 
129,926
 
Corporate debt securities
 
 
7,999
 
 
 
8,007
 
 
 
8,389
 
 
 
8,633
 
 
 
22,927
 
 
 
22,931
 
 
 
2,684
 
 
 
2,634
 
 
 
41,999
 
 
 
42,205
 
Municipal securities
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
12,701
 
 
 
12,514
 
 
 
12,701
 
 
 
12,514
 
Total available for sale
 
$
143,079
 
 
$
143,048
 
 
$
128,904
 
 
$
127,321
 
 
$
83,245
 
 
$
82,743
 
 
$
15,385
 
 
$
15,148
 
 
$
370,613
 
 
$
368,260
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal taxable securities
 
$
500
 
 
$
502
 
 
$
1,006
 
 
$
1,081
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
1,506
 
 
$
1,583
 
Municipal securities
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
1,743
 
 
 
1,818
 
 
 
3,003
 
 
 
3,176
 
 
 
4,746
 
 
 
4,994
 
Total held to maturity
 
$
500
 
 
$
502
 
 
$
1,006
 
 
$
1,081
 
 
$
1,743
 
 
$
1,818
 
 
$
3,003
 
 
$
3,176
 
 
$
6,252
 
 
$
6,577
 
 
64
 
 
The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2021 and December 31, 2020. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily-impaired A summary of our analysis of these securities and the unrealized losses is described more fully in Note 4 — Investment Securities in the notes to the 2021 consolidated financial statements included in the Form 10-K. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.
 
 
 
Less than Twelve Months
 
 
Twelve Months or More
 
 
Total
 
(dollars in thousands)
 
Unrealized
 
 
Estimated
 
 
No. of
 
 
Unrealized
 
 
Estimated
 
 
No. of
 
 
Unrealized
 
 
Estimated
 
 
No. of
 
December 31, 2021
 
Losses
 
 
Fair Value
 
 
Issuances
 
 
Losses
 
 
Fair Value
 
 
Issuances
 
 
Losses
 
 
Fair Value
 
 
Issuances
 
Government sponsored agencies
 
$
(83
)
 
$
4,860
 
 
 
1
 
 
$
—
 
 
$
—
 
 
 
—
 
 
$
(83
)
 
$
4,860
 
 
 
1
 
Mortgage-backed securities- Government sponsored agencies
 
 
(536
)
 
 
44,009
 
 
 
12
 
 
 
(4
)
 
 
9,974
 
 
 
2
 
 
$
(540
)
 
 
53,983
 
 
 
14
 
Collateralized mortgage obligations
 
 
(1,916
)
 
 
79,851
 
 
 
23
 
 
 
(78
)
 
 
17,782
 
 
 
4
 
 
 
(1,994
)
 
 
97,633
 
 
 
27
 
Commercial paper
 
 
(36
)
 
 
129,926
 
 
 
19
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(36
)
 
 
129,926
 
 
 
19
 
Corporate debt securities
 
 
(254
)
 
 
13,208
 
 
 
12
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(254
)
 
 
13,208
 
 
 
12
 
Municipal securities
 
 
(160
)
 
 
11,447
 
 
 
9
 
 
 
(27
)
 
 
1,067
 
 
 
2
 
 
 
(187
)
 
 
12,514
 
 
 
11
 
Total available for sale
 
$
(2,985
)
 
$
283,301
 
 
 
76
 
 
$
(109
)
 
$
28,823
 
 
 
8
 
 
$
(3,094
)
 
$
312,124
 
 
 
84
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities- Government sponsored agencies
 
$
(8
)
 
$
12,982
 
 
 
3
 
 
$
—
 
 
$
—
 
 
 
—
 
 
$
(8
)
 
$
12,982
 
 
 
3
 
Collateralized mortgage obligations
 
 
(93
)
 
 
28,521
 
 
 
6
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(93
)
 
 
28,521
 
 
 
6
 
Commercial paper
 
 
(14
)
 
 
16,982
 
 
 
4
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(14
)
 
 
16,982
 
 
 
4
 
Corporate debt securities
 
 
(6
)
 
 
994
 
 
 
2
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(6
)
 
 
994
 
 
 
2
 
Municipal securities
 
 
(6
)
 
 
1,092
 
 
 
2
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
(6
)
 
 
1,092
 
 
 
2
 
Total available for sale
 
$
(127
)
 
$
60,571
 
 
 
17
 
 
$
—
 
 
$
—
 
 
 
—
 
 
$
(127
)
 
$
60,571
 
 
 
17
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Company did not record any charges for other-than-temporary impairment losses for the twelve months ended December 31, 2021 and 2020.
 
Loans
 
The loan portfolio is the largest category of our earning assets. At December 31, 2021, total loans held for investment, net of ALLL, totaled $2.9 billion.
 
65
 
 
The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31 for the past five years:
 
 
 
As of December 31,
 
 
 
2021
 
 
2020
 
 
2019
 
 
2018
 
 
2017
 
(dollars in thousands)
 
$
 
 
Mix %
 
 
$
 
 
Mix %
 
 
$
 
 
Mix %
 
 
$
 
 
Mix %
 
 
$
 
 
Mix %
 
Loans:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
268,709
 
 
 
9.2
%
 
$
290,139
 
 
 
10.7
%
 
$
274,586
 
 
 
12.5
%
 
$
304,084
 
 
 
14.2
%
 
$
280,766
 
 
 
22.5
%
SBA
 
 
76,136
 
 
 
2.6
%
 
 
97,821
 
 
 
3.6
%
 
 
74,985
 
 
 
3.4
%
 
 
84,500
 
 
 
3.9
%
 
 
131,421
 
 
 
10.5
%
Construction and land development
 
 
303,144
 
 
 
10.3
%
 
 
186,723
 
 
 
6.9
%
 
 
96,020
 
 
 
4.4
%
 
 
113,235
 
 
 
5.3
%
 
 
91,908
 
 
 
7.4
%
Commercial real estate (2)
 
 
1,247,999
 
 
 
42.6
%
 
 
1,003,637
 
 
 
37.1
%
 
 
793,268
 
 
 
36.1
%
 
 
758,721
 
 
 
35.4
%
 
 
496,039
 
 
 
39.7
%
Single-family residential mortgages
 
 
1,004,576
 
 
 
34.3
%
 
 
1,124,357
 
 
 
41.5
%
 
 
957,254
 
 
 
43.6
%
 
 
881,249
 
 
 
41.1
%
 
 
248,940
 
 
 
19.9
%
Other loans
 
 
30,786
 
 
 
1.0
%
 
 
4,089
 
 
 
0.2
%
 
 
821
 
 
 
0.0
%
 
 
226
 
 
 
0.1
%
 
 
—
 
 
 
0.0
%
Total loans
 
 
2,931,350
 
 
 
100.0
%
 
 
2,706,766
 
 
 
100
%
 
 
2,196,934
 
 
 
100.0
%
 
 
2,142,015
 
 
 
100.0
%
 
 
1,249,074
 
 
 
100.0
%
Allowance for loan losses
 
 
(32,912
)
 
 
 
 
 
 
(29,337
)
 
 
 
 
 
 
(18,816
)
 
 
 
 
 
 
(17,577
)
 
 
 
 
 
 
(13,773
)
 
 
 
 
Total loans, net
 
$
2,898,438
 
 
 
 
 
 
$
2,677,429
 
 
 
 
 
 
$
2,178,118
 
 
 
 
 
 
$
2,124,438
 
 
 
 
 
 
$
1,235,301
 
 
 
 
 
(1)
Includes non-farm and non-residential real estate loans, multifamily residential and 1-4 family SFR loans originated for a business purpose
(2)
Net of discounts and deferred fees and costs
 
Net loans held for investment increased $221.0 million, or 8.3%, to $2.9 billion at December 31, 2021 as compared to $2.7 billion at December 31, 2020. The increase in net loans resulted from organic growth.
 
Commercial and industrial loans. We provide a mix of variable and fixed rate C&I loans. The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and for international trade financing. C&I loans include lines of credit with a maturity of one year or less, C&I term loans with maturities of five years or less, shared national credits with maturities of five years or less, mortgage warehouse lines with a maturity of one year or less, bank subordinated debentures with a maturity of 10 years, purchased receivables with a maturity of two months or less and international trade discounts with a maturity of three months or less. Substantially all of our C&I loans are collateralized by business assets or by real estate.
 
We originate commercial and industrial lines of credit, term loans, mortgage warehouse lines and international trade discounts which totaled $268.7 million as of December 31, 2021 and $290.1 million at December 31, 2020. The interest rate on these loans are generally Wall Street Journal Prime rate based.
 
The loan to value and the rate on the underlying loans are based on the policy guidance of the Company .
 
66
 
 
Our trade finance unit supplies financial needs to many of our core customers including trade financing needs for many of our commercial and industrial loan customers. The unit provides international letters of credit, SWIFT, export advice, trade finance discounts and foreign exchange. Our trade finance area has a correspondent relationship with many of the largest banks in China, Taiwan, Vietnam, Hong Kong and Singapore. All of our international letters of credit, SWIFT, export advice and trade finance discounts are denominated in U.S. currency, and all foreign exchange is issued through a major bank that is also denominated in U.S. currency. As a result, we and our clients are not subject to foreign currency fluctuations, and, therefore, we do not have a need to engage in transactions designed to hedge against foreign currency fluctuations and risk.
 
Commercial and industrial loans decreased $21.4 million, or 7.4%, to $268.7 million as of December 31, 2021 compared to $290.1 million at December 31, 2020. This decrease resulted primarily from a $31.1 million decrease in mortgage warehouse lines, partially offset by a $15.4 million increase in commercial lines of credit.
 
Commercial real estate loans.   CRE loans include owner-occupied and non-occupied commercial real estate, multi-family residential and SFR loans originated for a business purpose. Except for the multi-family residential loan portfolio, the interest rate for the majority of these loans are Prime based and have a maturity of five years or less except for the SFR loans originated for a business purpose which may have a maturity of one year. The interest rate for multi-family residential loans are based on the 5 -y ear treasury, are 10 year maturity with a five year fixed rate period followed by a five year floating rate period, and have a declining prepayment penalty for the first five years. At December 31, 2021, approximately 14.7% of the CRE portfolio consisted of fixed-rate loans. Our policy maximum loan-to-value ("LTV") is 75% for CRE loans. The total CRE portfolio totaled $1.2 billion at December 31, 2021 and $1.0 billion as of December 31, 2020, of which $222.8 million and $198.8 million, respectively, are secured by owner occupied properties. The multi-family residential loan portfolio totaled $545.9 million as of December 31, 2021 and $346.6 million as of December 31, 2020. The SFR loan portfolio originated for a business purpose totaled $65.6 million as of December 31, 2021 and $24.0 million as of December 31, 2020.
 
Construction & land development loans . Our construction and land development loans are comprised of residential construction, commercial construction and land acquisition and development construction. Interest reserves are generally established on real estate construction loans. These loans are typically Prime based and have maturities of less than 18 months. Our LTV policy limits are 75% for construction and land development loans. C&D loans increased $116.4 million or 62.3%, to $303.1 million at December 31, 2021 as compared to $186.7 million at December 31, 2020. This increase was primarily due to increases in residential construction loans. As of December 31, 2021 and 2020, our real estate construction loan portfolio was divided among the foregoing categories as shown in the table below.
 
 
 
As of December 31, 2021
 
 
As of December 31, 2020
 
 
Increase (Decrease)
 
(dollars in thousands)
 
$
 
 
Mix %
 
 
$
 
 
Mix %
 
 
$
 
 
%
 
Residential construction
 
$
211,850
 
 
 
69.9
%
 
$
124,255
 
 
 
66.5
%
 
$
87,595
 
 
 
70.5
%
Commercial construction
 
 
71,918
 
 
 
23.7
%
 
 
45,540
 
 
 
24.4
%
 
 
26,378
 
 
 
57.9
%
Land development
 
 
19,376
 
 
 
6.4
%
 
 
16,928
 
 
 
9.1
%
 
 
2,448
 
 
 
14.5
%
Total construction and land development loans
 
$
303,144
 
 
 
100.0
%
 
$
186,723
 
 
 
100.0
%
 
$
116,421
 
 
 
62.3
%
 
 
SBA guaranteed loans. We are designated a Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or business expansions. SBA loans can have any maturity up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and includes personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and are included in our CRE Concentration Guidance.
 
We originate SBA loans through our branch staff, loan officers and through SBA brokers. In 2021, we originated $60.3  million  in SBA loans, of which $22.5 million were PPP loans and $26.2 million were SBA 7A originations and $11.6 million were SBA 504 originations. Of SBA loan originations, $43.9 million or  72.8 %  were produced by branch staff and loan officers. The remaining $16.4 million or 27.2% was referred to us through SBA brokers.
 
67
 
 
As of December 31, 2021 our SBA portfolio totaled $76.1 million of which $17.9 million is guaranteed by the SBA and $58.2 million is unguaranteed, of which $56.6 million is secured by real estate and $1.6 million is unsecured or secured by business assets. We monitor the unguaranteed portfolio by type of real estate collateral. As of December 31, 2021, $25.4 million or 43.6% is secured by hotel/motels; $5.0 million or 8.6% by gas stations; and $27.9 million or 47.9% in other real estate types. We further analyze the unguaranteed portfolio by location. As of December 31, 2021, $27.8 million or 47.8% is located in California; $6.0 million or 10.3% is located in Washington state; $5.1 million or 8.7% is located in Nevada; $5.0 million or 8.5% is located in Texas; $3.4 million or 5.8% is located in New York; and $11.0 million or 19.0% is located in other states.
 
SBA loans decreased $21.7 million, or 22.2%, to $76.1 million at December 31, 2021 compared to $97.8 million at December 31, 2020. This decrease was primarily due to SBA loan sales of $20.9  million, and $50.9 million in mainly PPP loan payments in 2021 less $22.5 million in PPP loan origination, and SBA 7A loans originations of $26.2  million.
 
SFR real estate loans. We originate qualified SFR mortgage loans and non-qualified, alternative documentation SFR mortgage loans through correspondent relationships or through our branch network or retail channel. The loan product is a five- or seven-year hybrid adjustable mortgage which re-prices between five or seven years to the one-year CMT plus 3.00%. The qualified SFR mortgage loans, 15-year and 30-year conforming mortgages, are originated by our branch network and are sold directly to FNMA within seven days of funding.
 
We originate these non-qualified SFR mortgage loans both to sell and hold for investment. The loans held for investment are generally originated through our retail branch network to our customers, many of whom establish a deposit relationships with us. During 2021, we originated $410.0 million of such loans through our retail channel, and $62.1 million through our wholesale and correspondent channel. We sell many of these non-qualified SFR mortgage loans to other Asian-American banks and private investors. 
 
The loans sold to other banks are sold with no representation or warranties and with a replacement feature for the first 90-days if the loan pays off early.  For SFR loans sold to FNMA and to investment funds we provide limited representations and warranties and with a repurchase and premium refund for loans that become delinquent in the first 90-days or a premium refund if paid-off in the first 90-days with respect to all loans sold.  As a condition of the sale, the buyer must have the loans audited for underwriting and compliance standards.
 
During 2021, we originated $472.1 million of SFR mortgage loans and sold $276.7 million to FNMA, investment funds and other banks in our market. SFR real estate loans include home equity loans acquired in the LANB, FAIC and PGBH acquisitions. As of December 31, 2021, we had $3.9 million in home equity loans.
 
SFR real estate loans held for investment, which include $3.9 million of home equity loans, decreased $119.8 million, or 10.7%, to $1.0 billion as of December 31, 2021 as compared to $1.1 billion as of December 31, 2020. Loans held for sale decreased $44.0 million or 88.1% to $6.0 million as of December 31, 2021 compared to $50.0 million December 31, 2020. In addition, our SFR mortgage lending unit originates mortgage warehouse lines to our correspondents. These loans are included in our commercial and industrial lending unit and totaled $47.2 million as of December 31, 2021 and $78.3 million as of December 31, 2020.
 
68
 
 
The loan maturities in the table below are based on contractual maturities as of December 31, 2021. As is customary in the banking industry, loans that meet underwriting criteria can be renewed by mutual agreement between us and the borrower. Because we are unable to estimate the extent to which our borrowers will renew their loans, the table is based on contractual maturities. As a result, the data shown below should not be viewed as an indication of future cash flows.
 
(dollars in thousands)
 
One Year or Less
 
 
After One Year to Five Years
 
 
After Five Years to Fifteen Years
 
 
Over Fifteen Years
 
 
Total
 
Construction & land development
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
—
 
 
$
184
 
 
$
11
 
 
$
—
 
 
$
195
 
Floating rate
 
 
226,964
 
 
 
75,372
 
 
 
538
 
 
 
75
 
 
 
302,949
 
Commercial & industrial
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
30,291
 
 
$
2,428
 
 
$
812
 
 
$
3
 
 
$
33,534
 
Floating rate
 
 
134,646
 
 
 
75,075
 
 
 
25,454
 
 
 
—
 
 
 
235,175
 
Commercial real estate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
20,070
 
 
$
124,999
 
 
$
38,369
 
 
$
—
 
 
$
183,438
 
Floating rate
 
 
185,775
 
 
 
210,812
 
 
 
417,360
 
 
 
250,614
 
 
 
1,064,561
 
SBA
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
3,605
 
 
$
338
 
 
$
17,659
 
 
$
—
 
 
$
21,602
 
Floating rate
 
 
37
 
 
 
2,374
 
 
 
5,028
 
 
 
47,095
 
 
 
54,534
 
SFR mortgage
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
146
 
 
$
2,271
 
 
$
16,799
 
 
$
980,835
 
 
$
1,000,051
 
Floating rate
 
 
—
 
 
 
606
 
 
 
3,919
 
 
 
—
 
 
 
4,525
 
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
24,421
 
 
$
2,365
 
 
$
4,000
 
 
$
—
 
 
$
30,786
 
Floating rate
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Total loans
 
$
625,955
 
 
$
496,824
 
 
$
529,949
 
 
$
1,278,622
 
 
$
2,931,350
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate
 
$
78,533
 
 
$
132,585
 
 
$
77,650
 
 
$
980,838
 
 
$
1,269,606
 
Floating rate
 
 
547,422
 
 
 
364,239
 
 
 
452,299
 
 
 
297,784
 
 
 
1,661,744
 
Total loans
 
$
625,955
 
 
$
496,824
 
 
$
529,949
 
 
$
1,278,622
 
 
$
2,931,350
 
Allowance for loan losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(32,912
)
Net loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
2,898,438
 
Mortgage loans held for sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
5,957
 
 
Loan Quality
 
We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile and credit and geographic concentration for our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level. In addition to our ALLL, our purchase discounts on acquired loans provide additional protections against credit losses.
 
Discounts on Purchased Loans. At acquisition we hire a third-party to determine the fair value of loans acquired. In many of the cases fair values were determined by estimating the cash flows expected to result from those loans and discounting them at appropriate market rates. The excess of expected cash flows above the fair value of the majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with FASB Accounting Standards Codification (ASC) 310-20.
 
69
 
 
None of the loans we acquired after 2011 had evidence of deterioration of credit quality since origination for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. Loans acquired that had evidence of deterioration of credit quality since origination are referred to as PCI (purchase credit impaired) loans.
 
Analysis of the ALLL. The following table allocates the ALLL, or the allowance, by category:
 
 
 
As of December 31, 2021
 
 
 
2021
 
 
2020
 
 
2019
 
 
2018
 
 
2017
 
(dollars in thousands)
 
 
 
 
$% (1)
 
 
 
 
 
$% (1)
 
 
 
 
 
$% (1)
 
 
 
 
 
$% (1)
 
 
 
 
 
$% (1)
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
2,813
 
 
 
1.05
%
 
$
3,690
 
 
 
1.27
%
 
$
2,736
 
 
 
1.00
%
 
$
3,112
 
 
 
1.02
%
 
$
3,014
 
 
 
1.07
%
SBA
 
 
980
 
 
 
1.29
%
 
 
927
 
 
 
0.95
%
 
 
852
 
 
 
1.14
%
 
 
1,027
 
 
 
1.22
%
 
 
1,030
 
 
 
0.78
%
Construction and land development
 
 
4,150
 
 
 
1.37
%
 
 
2,473
 
 
 
1.32
%
 
 
1,268
 
 
 
1.32
%
 
 
1,500
 
 
 
1.32
%
 
 
1,214
 
 
 
1.32
%
Commercial real estate (2)
 
 
16,603
 
 
 
1.33
%
 
 
13,718
 
 
 
1.37
%
 
 
7,668
 
 
 
0.97
%
 
 
6,449
 
 
 
0.85
%
 
 
4,925
 
 
 
0.99
%
Single family residential mortgages
 
 
7,839
 
 
 
0.78
%
 
 
8,486
 
 
 
0.75
%
 
 
6,182
 
 
 
0.65
%
 
 
5,489
 
 
 
0.62
%
 
 
3,170
 
 
 
1.27
%
Other
 
 
527
 
 
 
1.71
%
 
 
43
 
 
 
1.05
%
 
 
9
 
 
 
1.10
%
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Unallocated
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
101
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
420
 
 
 
—
 
Allowance for loan losses
 
$
32,912
 
 
 
1.12
%
 
$
29,337
 
 
 
1.08
%
 
$
18,816
 
 
 
0.86
%
 
$
17,577
 
 
 
0.82
%
 
$
13,773
 
 
 
1.10
%
 
(1)
Represents the percentage of the allowance to total loans in the respective category.
(2)
Includes non-farm and non-residential real estate loans, multi-family residential and SFR loans originated for a business purpose.
 
The allowance and the balance of accretable credit discounts represent our estimate of probable and reasonably estimable credit losses inherent in loans held for investment as of the respective balance sheet date. The accretable credit discount balance was $3.3 million at December 31, 2021 and $4.8 million at December 31, 2020.
 
Allowance for loan losses. Our methodology for assessing the appropriateness of the ALLL includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans or loans considered by management to be in a high-risk category. General allowances are established based on a number of factors, including historical loss rates, an assessment of portfolio trends and conditions, accrual status and economic conditions.
 
For C&I, SBA, CRE, C&D and SFR mortgage loans held for investment, a specific allowance may be assigned to individual loans based on an impairment analysis. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is based on an analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the estimated market value or the fair value of the underlying collateral. Interest income on impaired loans is accrued as earned, unless the loan is placed on nonaccrual status.
 
70
 
 
Credit-discount on loans purchased through acquisition. Purchased loans are recorded at market value in two categories, credit discount and liquidity discount and premiums. The remaining credit discount at the end of a period is compared to the analysis for loan losses for each acquisition. If the credit discount is greater than the expected loss no additional provision is needed. The following table shows our credit discounts by loan portfolio for purchased loans only as of December 31, 2021 and December 31, 2020. We have recorded additional reserves of $1.6 million at December 31, 2021 and $2.1 million at December 31, 2020 due to the credit discounts on the bank acquisitions being less than the analysis for loan losses on those acquisitions as of December 31, 2021.
 
 
 
As of December 31,
 
 
As of December 31,
 
(dollars in thousands)
 
2021
 
 
2020
 
Commercial and industrial
 
$
38
 
 
$
53
 
SBA
 
 
31
 
 
 
36
 
Construction and land development
 
 
2
 
 
 
6
 
Commercial real estate
 
 
629
 
 
 
1,029
 
Single-family residential mortgages
 
 
2,619
 
 
 
3,653
 
Total credit discount on purchased loans
 
$
3,319
 
 
$
4,777
 
Total remaining balance of purchased loans through acquisition
 
$
418,038
 
 
$
583,605
 
Credit-discount to remaining balance of purchased loans
 
 
0.79
%
 
 
0.82
%
 
 
Individual loans considered to be uncollectible are charged off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged off are added to the allowance. Net charge-offs to average loans were 0.01% and 0.05% for both the twelve months ended December 31, 2021 and 2020, respectively
 
The ALLL was $32.9 million at December 31, 2021 compared to $29.3 million at December 31, 2020. The $3.6 million increase in 2021 was primarily due to loan growth and a $1.2 million increase in non-performing loans.  The COVID-19 portion of the ALLL equates to a 2.63 basis point reserve on the loan portfolio, excluding impaired and cash secured loans, at December 31, 2021.  
 
We analyze the loan portfolio, including delinquencies, concentrations, and risk characteristics, at least quarterly in order to assess the overall level of the allowance and nonaccretable discounts. We also rely on internal and external loan review procedures to further assess individual loans and loan pools, and economic data for overall industry and geographic trends.
 
In determining the allowance and the related provision for loan losses, we consider three principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired C&I, CRE, C&D loans, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors and (iii) review of the credit discounts in relationship to the valuation allowance calculated for purchased loans. Provisions for loan losses are charged to operations to record changes to the total allowance to a level deemed appropriate by us.
 
71
 
 
The following table provides an analysis of the ALLL, provision for credit losses and net charge-offs for the years 2017 to 2021:
 
 
 
Years Ended December 31,
 
(dollars in thousands)
 
2021
 
 
2020
 
 
2019
 
 
2018
 
 
2017
 
Balance, beginning of period
 
$
29,337
 
 
$
18,816
 
 
$
17,577
 
 
$
13,773
 
 
$
14,162
 
Charge-offs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—
 
Commercial and industrial
 
 
(500
)
 
 
(200
)
 
 
—
 
 
 
—
 
 
 
—
 
SBA
 
 
(1
)
 
 
(973
)
 
 
(1,093
)
 
 
—
 
 
 
(83
)
Commercial real estate
 
 
(67
)
 
 
(85
)
 
 
(166
)
 
 
(701
)
 
 
—
 
Other
 
 
(59
)
 
 
(45
)
 
 
—
 
 
 
—
 
 
 
—
 
Total charge-offs
 
 
(627
)
 
 
(1,303
)
 
 
(1,259
)
 
 
(701
)
 
 
(83
)
Recoveries:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
1
 
 
 
—
 
 
 
—
 
 
 
36
 
 
 
—
 
SBA
 
 
95
 
 
 
1
 
 
 
108
 
 
 
—
 
 
 
747
 
Commercial real estate
 
 
61
 
 
 
—
 
 
 
 
 
 
 
 
 
 
 
 
 
Other
 
 
86
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
—
 
Total recoveries
 
 
243
 
 
 
1
 
 
 
108
 
 
 
36
 
 
 
747
 
Net (charge-offs)/recoveries
 
 
(384
)
 
 
(1,302
)
 
 
(1,151
)
 
 
(665
)
 
 
664
 
Provision for loan losses
 
 
3,959
 
 
 
11,823
 
 
 
2,390
 
 
 
4,469
 
 
 
(1,053
)
Balance, end of period
 
$
32,912
 
 
$
29,337
 
 
$
18,816
 
 
$
17,577
 
 
$
13,773
 
Total HFI loans at end of period
 
 
2,931,350
 
 
 
2,706,766
 
 
 
2,196,934
 
 
 
2,142,015
 
 
 
1,249,074
 
Average HFI loans
 
 
2,745,492
 
 
 
2,544,413
 
 
 
2,112,933
 
 
 
1,456,480
 
 
 
1,151,965
 
Net charge-offs to average HFI loans
 
 
0.01
%
 
 
0.05
%
 
 
0.05
%
 
 
0.05
%
 
 
-0.06
%
Allowance for loan losses to total loans
 
 
1.12
%
 
 
1.08
%
 
 
0.86
%
 
 
0.82
%
 
 
1.10
%
Credit discount on loans purchased through acquisitions
 
$
3,319
 
 
$
4,777
 
 
$
5,309
 
 
$
8,060
 
 
$
1,689
 
 
Problem Loans. Loans are considered delinquent when principal or interest payments are past due 30 days or more; delinquent loans may remain on accrual status between 30 days and 89 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.
 
A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing restructured loans. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.
 
72
 
 
In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a TDR. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms. A restructured loan is considered impaired despite its accrual status and a specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.
 
Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold, and is carried at the balance of the loan at the time of foreclosure or at estimated fair value less estimated costs to sell, whichever is less.
 
The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings. Nonperforming loans exclude PCI loans. The Company did not have any loans past due 90 days or more but still accruing interest at any of the dates presented.  The balances of nonperforming loans reflect the net investment in these assets.
 
 
 
 
As of December 31,
 
(dollars in thousands)
 
2021
 
 
2020
 
 
2019
 
 
2018
 
 
2017
 
Accruing troubled debt restructured loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
410
 
 
$
502
 
 
$
—
 
 
$
—
 
 
$
—
 
SBA
 
 
—
 
 
 
34
 
 
 
45
 
 
 
58
 
 
 
—
 
Construction and land development
 
 
—
 
 
 
—
 
 
 
264
 
 
 
276
 
 
 
289
 
Commercial real estate
 
 
1,328
 
 
 
1,434
 
 
 
1,472
 
 
 
2,033
 
 
 
2,131
 
Total accruing troubled debt restructured loans
 
 
1,738
 
 
 
1,970
 
 
 
1,781
 
 
 
2,367
 
 
 
2,420
 
Non-accrual loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
 
3,712
 
 
 
1,661
 
 
 
—
 
 
 
—
 
 
 
—
 
SBA
 
 
6,263
 
 
 
6,828
 
 
 
9,378
 
 
 
914
 
 
 
155
 
Construction and land development
 
 
149
 
 
 
173
 
 
 
—
 
 
 
—
 
 
 
—
 
Commercial real estate
 
 
4,672
 
 
 
1,193
 
 
 
725
 
 
 
—
 
 
 
—
 
Single-family residential mortgages
 
 
4,191
 
 
 
7,714
 
 
 
1,334
 
 
 
—
 
 
 
—
 
Other
 
 
—
 
 
 
15
 
 
 
—
 
 
 
—
 
 
 
—
 
Total non-accrual loans
 
 
18,987
 
 
 
17,584
 
 
 
11,437
 
 
 
914
 
 
 
155
 
Total non-performing loans
 
 
20,725
 
 
 
19,554
 
 
 
13,218
 
 
 
3,281
 
 
 
2,575
 
OREO
 
 
293
 
 
 
293
 
 
 
293
 
 
 
1,101
 
 
 
293
 
Nonperforming assets
 
$
21,018
 
 
$
19,847
 
 
$
13,511
 
 
$
4,382
 
 
$
2,868
 
Nonperforming loans to total loans
 
 
0.71
%
 
 
0.72
%
 
 
0.60
%
 
 
0.15
%
 
 
0.21
%
Nonperforming assets to total assets
 
 
0.50
%
 
 
0.59
%
 
 
0.48
%
 
 
0.15
%
 
 
0.17
%
 
The $1.2 million increase in nonperforming loans at December 31, 2021 was primarily due to the addition of eight SFR mortgage loans for $3.0 million, four commercial and industrial loans for $3.7 million, two SBA loans for $1.6 million and four commercial real estate loans for $4.2 million, partially offset by four loans removed from non-accrual status in the amount of $5.6 million, net charge offs of six non-accrual loans of $422,000, payoffs of $2.7 million and paydowns of $2.6 million.
 
Our 30-89 day delinquent loans, excluding non-accrual loans, increased to $17.6 million as of December 31, 2021, compared to $8.9 million at December 31, 2020.  From December 31, 2020 to December 31, 2021, the increase in past due loans (excluding non-accrual loans) resulted from increases of $3.9 million in SFR mortgage loans, $1.7 million in SBA loans, $1.6 million in commercial and industrial loans, and $1.5 million in CRE loans.
 
73
 
 
We did not recognize any interest income on nonaccrual loans during the years ended December 31, 2021 and December 31, 2020 while the loans were in nonaccrual status. We recognized interest income on loans modified under troubled debt restructurings of $159,000 and $170,000 during the years ended December 31, 2021 and December 31, 2020, respectively.
 
We utilize an asset risk classification system in compliance with guidelines established by the FDIC as part of our efforts to improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard”, “doubtful”, and “loss”. Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value that continuance as an asset is not warranted.
 
We use a risk grading system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 6, which are “special mention”, loans with a risk grade of 7, which are “substandard” loans that are generally not considered to be impaired and loans with a risk grade of 8, which are “doubtful” loans generally considered to be impaired. These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank’s senior management.
 
Impact of the COVID-19 Pandemic on the Loan Portfolio
 
As of December 31, 2021, the Bank had 69 loans totaling $11.8 million, or 0.40% of the Company’s total loan portfolio that had been originated pursuant to the PPP due to the COVID-19 pandemic and were still outstanding as of such date.  Presently none of our SBA customers are on a payment deferral plan due to the COVID-19 pandemic. 
 
As of January 15, 2022, the Company had no loans deferred as a result of the COVID-19 pandemic.
 
The Company does not have any shared national credits or loans, backed by airlines or cruise lines, on deferral as of January 15, 2022.
 
Cash and Cash Equivalents. Cash and cash equivalents increased $499.7 million, or 256.7%, to $694.4 million as of December 31, 2021 as compared to $194.7 million at December 31, 2020.
 
Goodwill and Other Intangible Assets. Goodwill was $69.2 million both at December 31, 2021 and 2020. Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired. Our other intangible assets, which consist of core deposit intangibles, were $4.1 million and $5.2 million at December 31, 2021 and December 31, 2020. These core deposit intangible assets are amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 3 to 10 years.
 
Liabilities. Total liabilities increased $839.9 million to $3.8 billion, or 28.7%, at December 31, 2021 from $2.9 billion at December 31, 2020, primarily due to a $750.4 million increase in deposits. 
 
Deposits. As a Chinese-American business bank that focuses on successful businesses and their owners, many of our depositors choose to leave large deposits with us. The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis. We track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base. As of December 31, 2021, the Bank considers $2.96 billion or 87.5% of our deposits as adjusted core relationships. As of December 31, 2021, our top ten deposit relationships totaled $884.7 million, of which two are related to directors and shareholders of the Company for a total of $54.5 million or 1.6% of our top ten deposit relationships. As of December 31, 2021, our directors and shareholders with deposits over $250,000 totaled $56.9 million or 2.3% of all relationships over $250,000.
 
74
 
 
The following table summarizes our average deposit balances and weighted average rates at December 31, 2021, 2020 and 2019:
 
 
 
For the year ended
 
 
 
December 31, 2021
 
 
December 31, 2020
 
 
December 31, 2019
 
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
Weighted
 
 
 
Average
 
 
Average
 
 
Average
 
 
Average
 
 
Average
 
 
Average
 
(dollars in thousands)
 
Balance
 
 
Rate (%)
 
 
Balance
 
 
Rate (%)
 
 
Balance
 
 
Rate (%)
 
Noninterest-bearing demand
 
$
938,710
 
 
 
—
 
 
$
564,111
 
 
 
—
 
 
$
421,174
 
 
 
—
 
Interest-bearing:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW
 
 
69,211
 
 
 
0.27
%
 
 
55,794
 
 
 
0.36
%
 
 
24,925
 
 
 
0.27
%
Money market
 
 
637,539
 
 
 
0.39
%
 
 
449,111
 
 
 
0.71
%
 
 
370,451
 
 
 
1.19
%
Savings
 
 
137,534
 
 
 
0.10
%
 
 
123,568
 
 
 
0.12
%
 
 
97,670
 
 
 
0.00
%
Time, less than $250,000
 
 
640,747
 
 
 
0.70
%
 
 
715,181
 
 
 
1.60
%
 
 
712,534
 
 
 
2.25
%
Time, $250,000 and over
 
 
597,770
 
 
 
0.79
%
 
 
597,262
 
 
 
1.71
%
 
 
566,810
 
 
 
2.35
%
Total interest-bearing
 
 
2,082,801
 
 
 
0.57
%
 
 
1,940,916
 
 
 
1.30
%
 
 
1,772,390
 
 
 
1.93
%
Total deposits
 
$
3,021,511
 
 
 
0.40
%
 
$
2,505,027
 
 
 
1.01
%
 
$
2,193,564
 
 
 
1.56
%
 
The following table sets forth the maturity of non-core time deposits as of December 31, 2021:
 
 
 
Maturity Within:
 
(dollars in thousands)
 
Three Months
 
 
After Three to Six Months
 
 
Six to 12 Months
 
 
After 12 Months
 
 
Total
 
Time, $250,000 and over
 
$
156,655
 
 
$
175,970
 
 
$
241,438
 
 
$
12,437
 
 
$
586,500
 
Wholesale deposits (1)
 
 
30,490
 
 
 
22,458
 
 
 
7,990
 
 
 
6,156
 
 
 
67,094
 
Time, brokered
 
 
2,398
 
 
 
—
 
 
 
—
 
 
 
—
 
 
 
2,398
 
Total
 
$
189,543
 
 
$
198,428
 
 
$
249,428
 
 
$
18,593
 
 
$
655,992
 
 
(1)
Wholesale deposits are defined as time deposits under $250,000 originated through via internet rate line and/or through other deposit originators, and are considered non-core deposits.
 
The following table sets forth the estimated deposits exceeding the FDIC insurance limit:
 
(dollars in thousands)
 
For the year ended December 31,
 
 
 
2021
 
 
2020
 
Uninsured deposits
 
$
1,823,410
 
 
$
1,081,383
 
 
The estimated aggregate amount of time deposits in excess of the FDIC insurance limit is $475.6 milllion at December 31, 2021.  The following table sets forth the maturity distribution of the estimated uninsured time deposits.
 
(dollars in thousands)
 
December 31, 2021
3 months or less
 
$ 93,993
Over 3 months through 6 months
 
146,149
Over 6 months through 12 months
 
222,872
Over 12 months
 
12,550
Total
 
$ 475,564
 
We acquired time deposits from the internet and outside deposits originators as needed to supplement liquidity. These time deposits are primarily under $250,000 and we do not consider them core deposits. The total amount of such deposits as of December 31, 2021 was $70.1 million or 2.1% of total deposits. The balance of such deposits as of December 31, 2020 were $93.7 million or 3.6% of total deposits.
 
Total deposits increased $750.4 million to $3.4 billion at December 31, 2021 as compared to $2.6 billion at December 31, 2020, as a result of organic growth. As of December 31, 2021, total deposits were comprised of 38.1% noninterest-bearing demand accounts, 27.4% interest-bearing non-maturity deposit accounts and 34.5% of time deposits.
 
As of December 31, 2021, $20 ,0 00 in deposit overdrafts were reclassified as other loans. As of December 31, 2020, the amount was $131,000.
 
75
 
 
FHLB Borrowings. In addition to deposits, we have used long- and short-term borrowings, such as federal funds purchased and FHLB long-and short-term advances, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. We had no FHLB short-term advances at December 31, 2021 and at December 31, 2020. In the first quarter of 2020, the Company obtained $150.0 million in long-term FHLB advances. The term is five years, maturing by March 2025. The average fixed interest rate is 1.18%. The Company secured this funding in case there was a liquidity issue caused by the COVID-19 pandemic and to obtain an attractive interest rate. The following table sets forth information on our total FHLB advances during the periods presented:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Years Ended December 31,
 
(dollars in thousands)
 
2021
 
 
2020
 
 
2019
 
Outstanding at period-end
 
$
150,000
 
 
$
150,000
 
 
$
—
 
Average amount outstanding
 
 
150,000
 
 
 
129,071
 
 
 
114,388
 
Maximum amount outstanding at any month-end
 
 
150,000
 
 
 
190,000
 
 
 
364,500
 
Weighted average interest rate:
 
 
 
 
 
 
 
 
 
 
 
 
During period
 
 
1.18
%
 
 
1.15
%
 
 
2.56
%
End of period
 
 
1.18
%
 
 
1.18
%
 
 
0.00
%
 
Long-Term Debt . Long-term debt consists of subordinated notes. As of December 31, 2021 the amount of subordinated notes outstanding was $173.0 million as compared to $104.4 million at December 31, 2020.
 
In March and April 2016, we issued an aggregate of $50.0 million of subordinated notes for aggregate proceeds of $49.4 million. The subordinated notes have a maturity date of April 1, 2026 at a fixed rate of 6.5% for the first five years and a floating rate based on the three-month LIBOR plus 516 basis points thereafter. The Company redeemed these subordinated debentures on March 31, 2021.  The redemption price for the subordinated debentures was equal to 100% of principal amount of the Notes redeemed, plus any accrued and unpaid interest to, but excluding, the redemption date of March 31, 2021.
 
In November 2018, the Company issued $55.0 million in fixed-to-floating rate subordinated notes due December 1, 2028. The Notes bear a fixed rate of 6.18% for the first five years and will reset quarterly thereafter to the then-current three-month LIBOR rate plus 315 basis points. The Notes were assigned an investment grade rating of BBB by the Kroll Bond Rating Agency, Inc. Under the terms of our subordinated notes and the related subordinated notes purchase agreements, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the long term debt.
 
In connection with the November 2018 issuance of subordinated notes, Bancorp entered into a registration rights agreement with the purchasers of such notes pursuant to which the Company exchanged the notes for subordinated notes that were registered under the Securities Act and that have substantially the same terms as the privately issued notes. The exchange of notes was completed in March 2019.
 
In March 2021, the Company issued $120 million of 4.00% fixed to floating rate subordinated debentures, due April 1, 2031. The interest rate is fixed through April 1, 2026 and floats at three month SOFR plus 329 basis points thereafter. The Company can redeem these subordinated debentures beginning April 1, 2026. The subordinated debentures are considered Tier 2 capital at the Company.
 
The Company used the net proceeds from these subordinated debt offerings for general corporate purposes, including providing capital to the Bank and maintaining adequate liquidity at Bancorp. The subordinated notes qualified as Tier 2 capital for Bancorp for regulatory purposes and the portion that Bancorp contributed to the Bank qualified as Tier 1 capital for the Bank.
 
Subordinated Debentures. Subordinated debentures consist of subordinated notes. As of December 31, 2021 and December 31, 2020, the amount outstanding was $14.5 million and $14.3 million, respectively. Under the terms of our subordinated notes issued in connection with the issuance of trust preferred securities, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the long term debt. These subordinated notes consist of the following:
 
In 2016, Bancorp acquired $5.2 million of subordinated debentures as part of the TFC acquisition (TFC Trust) and recorded them at fair value of $3.3 million. The fair value adjustment is being accreted over the remaining life of the securities. These debentures mature on March 15, 2037 and have a variable rate of interest equal to the three-month LIBOR plus 1.65%. The rate at December 31, 2021 was 1.85% and 1.87% at December 31, 2020.
 
In October 2018, the Company, through the acquisition of FAIC, acquired the FAIC Trust. The FAIC Trust issued thirty-year fixed to floating rate capital securities with an aggregate liquidation amount of $7,000,000 to an independent investor, and all of its common securities, amounting to $217,000, financed by the issuance of $7.2 million of debentures. There was a $1.2 million valuation reserve recorded to arrive at market value which is treated as a yield adjustment and is amortized over the life of the security. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The subordinated debentures have a variable rate of interest equal to the three-month LIBOR plus 2.25% through final maturity on December 15, 2034. The rate at December 31, 2021 was 2.45% and 2.47% at December 31, 2020.
 
76
 
 
In January 2020, the Company, through the acquisition of PGBH, acquired PGBH Trust, a Delaware statutory trust formed in December 2004. PGBH Trust issued 5,000 fixed-to-floating rate capital securities with an aggregate liquidation amount of $5.0 million and 155 common securities with an aggregate liquidation amount of $155,000. There was a $763,000 valuation reserve recorded to arrive at market value which is treated as a yield adjustment and is amortized over the life of the security. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The subordinated debentures have a variable rate of interest equal to the three-month LIBOR plus 2.10% through final maturity on December 15, 2034. The rate at December 31, 2021 was 2.30% and 2.32% at December 31, 2020.
 
In July 2017, British banking regulators announced plans to eliminate the LIBOR rate by June 3023, before these subordinated notes and debentures mature. For these subordinated notes and debentures, there are provisions for amendments to establish a new interest rate benchmark.  At this time, SOFR is the alternative reference rate we plan to adopt as the index rate for U.S. dollar LIBOR.
Capital Resources and Liquidity Management
 
Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, sales and redemptions of common stock and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on available for sale investment securities.
 
Shareholders’ equity increased $38.2 million, or 8.9%, to $466.7 million during 2021 due to $56.9 million of net income, $3.5 million of additional paid in capital from the exercise of stock options and $1.1 million from stock based compensation, partially offset by $9.9 million of cash dividends declared during the year, $10.5 million from the repurchase of shares of the Company’s common stock and a $2.8 million decrease in other comprehensive income. The decrease in accumulated other comprehensive income primarily resulted from decreases in unrealized gains on available for sale securities.
 
Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.
 
Our liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-earning deposits in banks, federal funds sold, available for sale securities, term federal funds, purchased receivables and maturing or prepaying balances in our securities and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market noncore deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, additional borrowings through the Federal Reserve’s discount window and the issuance of preferred or common securities. Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, debt financing and increases in customer deposits. For additional information regarding our operating, investing and financing cash flows, see the consolidated statements of cash flows provided in our consolidated financial statements.
 
Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.
 
As of December 31, 2021 and December 31, 2020, we had $92.0 million for both years, respectively, of unsecured federal funds lines, with no amounts advanced against the lines as of such dates. In addition, lines of credit from the Federal Reserve Discount Window at December 31, 2021 and December 31, 2020 were $22.3 million and $9.8 million, respectively. Federal Reserve Discount Window lines were collateralized by a pool of CRE loans totaling $33.2 million and $20.1 million as of December 31, 2021 and December 31, 2020, respectively. We did not have any borrowings outstanding with the Federal Reserve at December 31, 2021 and December 31, 2020 and our borrowing capacity is limited only by eligible collateral.
 
77
 
 
At December 31, 2021 and 2020 there were $150.0 million in FHLB long-term advances outstanding. Based on the values of loans pledged as collateral, we had $833.6 million and $915.2 million of additional borrowing capacity with the FHLB as of December 31, 2021 and December 31, 2020, respectively. We also maintain relationships in the capital markets with brokers and dealers to issue certificates of deposit.
 
Bancorp is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. Bancorp’s main source of funding is dividends declared and paid to us by the Bank and RAM. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to Bancorp. Management believes that these limitations will not impact our ability to meet our ongoing short-term cash obligations.
 
Regulatory Capital Requirements
 
We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies.
 
The table below summarizes the minimum capital requirements applicable to us and the Bank pursuant to Basel III regulations as of the dates reflected and assuming the capital conservation buffer has been fully-phased in. The minimum capital requirements are only regulatory minimums and banking regulators can impose higher requirements on individual institutions. For example, banks and bank holding companies experiencing internal growth or making acquisitions generally will be expected to maintain strong capital positions substantially above the minimum supervisory levels. Higher capital levels may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of December 31, 2021 and December 31, 2020.  The Bank exceeded all regulatory capital requirements under Basel III and was considered to be “well-capitalized” as of the dates reflected in the table below:
 
 
 
Ratio at December 31, 2021
 
 
Ratio at December 31, 2020
 
 
Regulatory Capital Ratio Requirements
 
 
Regulatory Capital Ratio Requirements, including fully phased-in Capital Conservation Buffer
 
 
Minimum Requirement for "Well Capitalized" Depository Institution
 
Tier 1 Leverage Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
10.21%
 
 
11.32%
 
 
4.00%
 
 
4.00%
 
 
5.00%
 
Bank
 
12.45%
 
 
14.11%
 
 
4.00%
 
 
4.00%
 
 
5.00%
 
Common Equity Tier 1 Risk-Based Capital Ratio (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
14.86%
 
 
14.62%
 
 
4.50%
 
 
7.00%
 
 
6.50%
 
Bank
 
18.80%
 
 
18.94%
 
 
4.50%
 
 
7.00%
 
 
6.50%
 
Tier 1 Risk-Based Capital Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
15.40%
 
 
15.21%
 
 
6.00%
 
 
8.50%
 
 
8.00%
 
Bank
 
18.80%
 
 
18.94%
 
 
6.00%
 
 
8.50%
 
 
8.00%
 
Total Risk-Based Capital Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated
 
23.15%
 
 
20.77%
 
 
8.00%
 
 
10.50%
 
 
10.00%
 
Bank
 
20.05%
 
 
20.19%
 
 
8.00%
 
 
10.50%
 
 
10.00%
 
 
(1)
The common equity tier 1 risk-based ratio, or CET1, is a ratio created by the Basel III regulations beginning January 1, 2015.
 
78
 
 
Contractual Obligations
 
The following table contains supplemental information regarding our total contractual obligations at December 31, 2021:
 
 
 
Payments Due
 
 
 
Within
 
 
One to
 
 
Three to
 
 
After Five
 
 
 
 
 
(dollars in thousands)
 
One Year
 
 
Three Years
 
 
Five Years
 
 
Years
 
 
Total
 
Deposits without a stated maturity
 
$
2,219,093
 
 
$
—
 
 
$
—
 
 
$
—
 
 
$
2,219,093
 
Time deposits
 
 
1,119,404
 
 
 
44,612
 
 
 
2,423
 
 
 
—
 
 
 
1,166,439
 
FHLB advances
 
 
—
 
 
 
—
 
 
 
150,000
 
 
 
—
 
 
 
150,000
 
Long-term debt
 
 
—
 
 
 
—
 
 
 
—
 
 
 
173,007
 
 
 
173,007
 
Subordinated debentures
 
 
—
 
 
 
—
 
 
 
—
 
 
 
14,502
 
 
 
14,502
 
Leases
 
 
4,490
 
 
 
6,803
 
 
 
5,428
 
 
 
6,875
 
 
 
23,596
 
Total contractual obligations
 
$
3,342,987
 
 
$
51,415
 
 
$
157,851
 
 
$
194,384
 
 
$
3,746,637
 
 
Off-Balance Sheet Arrangements
 
We have limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
 
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company’s financial statements.
 
The Company’s exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements.
 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer.
 
Non-GAAP Financial Measures
 
Some of the financial measures included in this Annual Report on Form 10-K are not measures of financial performance recognized by GAAP. These non-GAAP financial measures include “tangible common equity to tangible assets”, “tangible book value per share”, “return on average tangible common equity”, “adjusted earnings”, “adjusted diluted earnings per share”, “adjusted return on average assets”, and “adjusted return on average tangible common equity”. Our management uses these non-GAAP financial measures in its analysis of our performance.
 
Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share. The tangible common equity to tangible assets ratio and tangible book value per share are non-GAAP measures generally used by financial analysts and investment bankers to evaluate capital adequacy. We calculate: (i) tangible common equity as total shareholders’ equity less goodwill and other intangible assets (excluding mortgage servicing rights); (ii) tangible assets as total assets less goodwill and other intangible assets; and (iii) tangible book value per share as tangible common equity divided by shares of common stock outstanding.
 
79
 
 
Our management, banking regulators, many financial analysts and other investors use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible common equity, tangible assets, tangible book value per share and related measures should not be considered in isolation or as a substitute for total shareholders’ equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible common equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles shareholders’ equity (on a GAAP basis) to tangible common equity and total assets (on a GAAP basis) to tangible assets, and calculates our tangible book value per share:
 
(dollars in thousands)
 
December 31, 2021
 
 
December 31, 2020
 
Tangible common equity:
 
 
 
 
 
 
 
 
Total shareholders' equity
 
$
466,683
 
 
$
428,488
 
Adjustments
 
 
 
 
 
 
 
 
Goodwill
 
 
(69,243
)
 
 
(69,243
)
Core deposit intangible
 
 
(4,075
)
 
 
(5,196
)
Tangible common equity
 
$
393,365
 
 
$
354,049
 
Tangible assets:
 
 
 
 
 
 
 
 
Total assets-GAAP
 
$
4,228,194
 
 
$
3,350,072
 
Adjustments
 
 
 
 
 
 
 
 
Goodwill
 
 
(69,243
)
 
 
(69,243
)
Core deposit intangible
 
 
(4,075
)
 
 
(5,196
)
Tangible assets:
 
$
4,154,876
 
 
$
3,275,633
 
Common shares outstanding
 
 
19,455,544
 
 
 
19,565,921
 
Tangible common equity to tangible assets ratio
 
 
9.47
%
 
 
10.81
%
Tangible book value per share
 
$
20.22
 
 
$
18.10
 
 
Return on Average Tangible Common Equity. Management measures return on average tangible common equity (“ROATCE”) to assess the Company’s capital strength and business performance. Tangible equity excludes goodwill and other intangible assets (excluding mortgage servicing rights), and is reviewed by banking and financial institution regulators when assessing a financial institution’s capital adequacy. This non-GAAP financial measure should not be considered a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled measures used by other companies. The following table reconciles return on average tangible common equity to its most comparable GAAP measure:
 
 
 
 
For the year-ended
 
(dollars in thousands)
 
2021
 
 
2020
 
 
2019
 
Net income available to common shareholders
 
$
56,906
 
 
$
32,928
 
 
$
39,209
 
Average shareholders equity
 
 
447,714
 
 
 
417,915
 
 
 
393,895
 
Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill
 
 
(69,243
)
 
 
(69,863
)
 
 
(58,446
)
Core deposit intangible
 
 
(4,657
)
 
 
(5,806
)
 
 
(6,873
)
Adjusted average tangible common equity
 
$
373,814
 
 
$
342,246
 
 
$
328,576
 
Return on average tangible common equity
 
 
15.22
%
 
 
9.62
%
 
 
11.93
%
Regulatory Reporting to Financial Statements
Some of the financial measures included in this Annual Report on Form 10-K differ from those reported on the FRB Y-9C report. These financial measures include “core deposits to total deposits” and “net non-core funding dependency ratio.” Our management uses these financial measures in its analysis of our performance.
 
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Core Deposits and Non-core Funding Dependency. The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis. We track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base. The following table reconciles the adjusted core deposit to total deposits and the adjusted net non-core dependency ratio.
 
 
 
 
As of
 
(dollars in thousands)
 
December 31, 2021
 
 
December 31, 2020
 
 
 
 
 
 
 
 
 
 
Adjusted core deposit to total deposit ratio:
 
 
 
 
 
 
 
 
Core deposits: demand and savings deposits of any amount plus time deposits less than $250,000
 
$
2,807,033
 
 
$
2,037,164
 
Adjustments:
 
 
 
 
 
 
 
 
CDs > $250,000 considered core deposits (1)
 
 
317,501
 
 
 
448,159
 
Less brokered deposits considered non-core
 
 
(2,398
)
 
 
(17,374
)
Less internet and outside deposit originated time deposits < $250,000 considered non-core
 
 
(70,303
)
 
 
(76,356
)
Less other deposits not considered core (2)
 
 
(90,116
)
 
 
(80,016
)
Total adjustments
 
 
154,684
 
 
 
274,413
 
Adjusted core deposits
 
 
2,961,717
 
 
 
2,311,577
 
Total deposits
 
$
3,385,532
 
 
$
2,635,128
 
Adjusted core deposits to total deposits ratio
 
 
87.48
%
 
 
87.72
%
Non-core deposits: Time deposits greater than $250,000
 
$
578,499
 
 
 
597,963
 
Less total adjustments
 
 
(154,684
)
 
 
(274,413
)
Total adjusted non-core deposits
 
 
423,815
 
 
 
323,550
 
Short term borrowing outstanding
 
 
—
 
 
 
—
 
Adjusted non-core liabilities (A)
 
 
423,815
 
 
 
323,550
 
Short term assets (3)
 
 
837,941
 
 
 
311,598
 
Adjustment to short term assets:
 
 
 
 
 
 
 
 
Purchased receivables with maturities less than 90-days
 
 
—
 
 
 
—
 
Adjusted short term assets (B)
 
 
837,941
 
 
 
311,598
 
Net non-core funding (A-B)
 
$
(414,126
)
 
$
11,952
 
Total earning assets
 
 
3,988,715
 
 
 
3,141,819
 
Net non-core funding dependency ratio
 
 
-6.50
%
 
 
9.11
%
Adjusted net non-core funding dependency ratio
 
 
-10.38
%
 
 
0.38
%
(1)
Comprised of time deposits to core customers over $250,000 as defined in the lead-in to the table above.
(2)
Comprised of demand and savings deposits in relationships over $250,000, which are considered non-core deposits because they do not satisfy the definition of core deposits set forth in the lead-in to the table above.
(3)
Short term assets include cash equivalents and investment with maturities less than one year.
 
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.