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Item 5. Market for Registrant’s Common Equity

2023-04-07 compared with 2022-03-11 · 423 added, 535 removed, 747 unchanged (56% of the section changed)

11 unchanged sentences

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.

Under the terms of our subordinated notes issued in 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”

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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 following graph compares the cumulative total shareholder return on the Company's common stock from December 29, 2017 through December 31, 2022.

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.

The graph assumes an investment of $100.00 in the Company's common stock and each index on December 29, 2017 and reinvestment of all quarterly dividends.

Measurement points are December 29, 2017 and the last trading day of each year-end through December 31, 2022.

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.

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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.

On April 22, 2021, March 16, 2022 and June 14, 2022 the Board of Directors approved a stock repurchase program to buy back up to an aggregate of 500,000 shares, 500,000 shares and 500,000 shares, respectively, of our common stock.

As of December 31, 2022, the Company may repurchase up to 433,124 shares under the repurchase program.

The Company repurchased 48,896 shares of its outstanding common stock during the fourth quarter of 2022.

Issuer Purchases of Equity Securities

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Average Price Paid per Share

Total Number of Shares Purchased as Part of Publically Announced Plan

Total Number of Shares Purchased as Part of Publicly Announced Plan

Maximum Number of Shares that May Yet Be Purchased Under the Plan

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December 1, 2022 to December 31, 2022

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)

Balance sheet data:

Total loans, held for investment, net of unaccreted discount and deferred costs and fees

Allowance for loan losses

Mortgage loans held for sale

Total deposits

FHLB Advances

Long-term debt

Subordinated debentures

Total shareholders' equity

Tangible common equity

Income statement data:

Total interest income

Total interest expense

Net interest income

Provision (recapture) for loan losses

Noninterest income

Noninterest expense

Income before income taxes

Income tax expense

Non-interest income / revenue

Per share data (common stock):

Dividends declared

Book value (2)

Tangible book value (3)

Weighted average shares outstanding:

Shares outstanding at period end

Performance metrics

Return on average assets

Return on average shareholders' equity

Return on average tangible common equity (3)

Yield on average earning assets

Cost of average interest-bearing liabilities

Net interest spread

Net interest margin (4)

Efficiency ratio

Common stock dividend payout ratio (5)

Loan to deposit ratio (6)

Core deposits / total deposits (7)

Adjusted core deposits / total deposits (8)

Net non-core funding dependence ratio (9)

Adjusted net non-core funding dependence ratio (10)

As of and for the Year Ended December 31,

(Dollars in thousands, except per share data)

Credit quality Data:

Loans 30-89 days past due

Loans 30-89 days past due to total loans

Nonperforming loans (11)

Nonperforming loans to total loans (11)

Nonperforming assets (12)

Nonperforming assets to total assets (12)

Allowance for loan losses to total loans

Allowance for loan losses to nonperforming loans (11)

Net charge-offs (recoveries) to average loans

Regulatory and other capital ratios—Company

Tangible common equity to tangible assets (3)

Tier 1 leverage ratio

Tier 1 common capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Total capital to risk-weighted assets

Regulatory capital ratios—Bank only

Tier 1 leverage ratio

Tier 1 common capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Total capital to risk-weighted assets

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.

For purposes of computing book value per common share, book value equals total common shareholders’

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.

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.

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.

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.

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.

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”.

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.

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.

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.

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.

Revenue consists of interest income plus non-interest income.

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

The Company has sufficient capital and does not anticipate any need for additional liquidity as of December 31, 2022, As of December 31, 2022 and based on the values of loans pledged as collateral, we had $1.1 billion and $833.6 million of additional borrowing capacity with the FHLB.

We also maintain relationships in the capital markets with brokers and dealers to issue certificates of deposit. As of December 31, 2022, we had $92.0 million of unsecured federal funds lines.

In addition, lines of credit from the Federal Reserve Discount Window were $12.0 million at December 31, 2022.

We did not have any borrowings outstanding with the federal fund lines or Federal Reserve Discount Window at December 31, 2022. The Bank and the Company exceeded all regulatory capital requirements under Basel III and were considered to be “well-capitalized”

at December 31, 2022.

Allowance for Credit Losses on Loans Held for Investment

 The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination.

The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated balance sheet.

Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts.

 The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios and related scenario-weighting, as well as determining the appropriate length of the forecast horizon management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. 

Any unexpected adverse changes or uncertainties to these factors that are beyond the Company’s control could result in increases in to the ACL through additional provision for credit losses.

A sensitivity analysis of our ACL was performed as of December 31, 2022.

Based on this sensitivity analysis, a positive 25% change in prepayment speed would result in a $1.2 million, or 3.0%, decrease to the ACL.

A negative 25% change in prepayment speed would result in a $1.7 million, or 4.0%, increase to the ACL.

Additionally, a 1% increase in the unemployment rate would result in a $644,000, or 2.0%, increase to the ACL and a 1% decrease in the unemployment rate would result in a $919,000, or 2.2%, decrease to the ACL.

Management reviews the results using the comparison scenario for sensitivity analysis and considered the results when evaluating the qualitative factor adjustments.

Investment Securities

Effective January 1, 2022, upon the adoption of ASU 2016-13, the Company accounts for credit losses on available for sale ("AFS") securities in accordance with ASC 326-30.

Debt securities are measured at fair value and subject to impairment testing.

When a debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit loss by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value change.

If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security.

 Our significant accounting policies are described in greater detail in our 2022 audited financial statements included in Item 8.

Financial Statements and Supplementary Data of this Annual Report, 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.

For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

For debt securities AFS that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

The determination of credit losses when fair value decline in available for sale security involves significant judgment. 

Adverse changes in management’s assessment that concluded a credit impairment on investment security could result in an increase in impairment charges that negatively impacted our earnings.

Goodwill and Other Intangible Assets

Deferred income taxes

Servicing rights

Stock-Based Compensation

Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

Goodwill resulting from whole bank acquisitions is not amortized, but tested for impairment at least annually.

The Company performs goodwill impairment test in accordance with ASC 350 “Intangibles- Goodwill and Other.” 

Fair value of goodwill is based on selection and weighting of valuations methods using management assumptions not limited to discounted cash flow, diversification, market position, customer dependence, access to capital markets, financial risk, growth, and earnings trends. 

Consideration of economic conditions is also an important part of the valuation process.

Changes to assumptions, to selection and weighting in the valuation methods and to economic conditions could result in goodwill impairment losses that negatively impact our earnings.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

Deferred tax assets are also recognized for operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The value of deferred tax assets and liabilities are based on many factors including:

estimates of the timing of reversals of temporary differences, the application of federal and state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities.

Actual results could differ from the estimates and interpretations used in determining the current and deferred income tax liabilities. 

Under ASC 740, a valuation allowance is required to be recognized if it is “more likely than not”

that all or a portion of the Company's deferred tax assets will not be realized.

The Company's policy is to evaluate the deferred tax assets on a quarterly basis and record a valuation allowance for the Company's deferred tax assets if there is not sufficient positive evidence available to demonstrate utilization of the Company's deferred tax assets. 

Initial setup or an increase to deferred tax asset valuation allowance would be charged to income tax expense that would negatively impacted our earnings.

Our significant accounting policies are described in greater detail in our 2022 audited financial statements included in Item 8.

Financial Statements and Supplementary Data of this Annual Report on Form 10-K, specifically in “Note 2 –

Financial Statements and Supplementary Data of this Annual Report, 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.

For the year 2021, we reported net earnings of $56.9 million, compared with $32.9 million for the year 2020.

For the year 2022, we reported net earnings of $64.3 million, compared with $56.9 million for the year 2021.

This represented an increase of $7.4 million, or 13.0%, 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.

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.

The increase in net earnings reflected a $25.2 million increase in net interest income, which was partially offset by a $7.5 million decrease in non-interest income, a $2.1 million increase in the provision for credit losses, a $5.2 million increase in non-interest expenses and a $3.0 million increase in income tax expense.

At December 31, 2022, total assets were $3.9 billion, a decrease of $309.1 million, or 7.3%, from total assets of $4.2 billion at December 31, 2021.

The decrease in assets was primarily due to a $417.8 million decrease in interest bearing cash and due from banks, a $193.0 million decrease in federal funds sold and a decrease of $112.0 million in investment securities, partially offset by an increase of $405.1 million in HFI loans.

At December 31, 2022, available for sale (“AFS”) investment securities totaled $256.8 million inclusive of a pre-tax net unrealized loss of $31.3 million, compared to $368.3 million inclusive of a pre-tax net unrealized loss of $2.4 million at December 31, 2021.

At December 31, 2022, held to maturity (“HTM”) investment securities totaled $5.7 million, compared to $6.3 million as of December 31, 2021.

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 (held for investment, net of deferred fees, discounts, and the allowance for credit losses) were $3.3 billion at December 31, 2022, compared to $2.9 billion at December 31, 2021.

Net loans and leases increased $397.0 million, or 13.7%, from December 31, 2021.

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.

The increase in net loans was due to organic growth. The increase in net loans is mainly due to increases of $459.5 million in SFR mortgage loans and $64.1 million in CRE loans, partially offset by a $67.5 million decrease in C&I loans, a $26.3 million decrease in construction loans, a $14.7 million decrease in SBA loans and a $10.1 million decrease in other loans.

Total deposits were $3.0 billion at December 31, 2022, a decrease of $407.8 million, or 12.0%, compared to $3.4 billion at December 31, 2021, primarily due to a decrease of $805.0 million in non-maturity deposits, partially offset by an increase of $397.2 million of time deposits.

Noninterest-bearing deposits were $798.7 million at December 31, 2022, a decrease of $492.7 million, or 38.2%, from $1.3 billion at December 31, 2021. At December 31, 2022, noninterest-bearing deposits were 26.8% of total deposits, compared to 38.1% at December 31, 2021.

Borrowings, consisting of FHLB advances, long-term debt and subordinated debt, increased $70.8 million to $408.3 million as of December 31, 2022 compared to $337.5 million as of December 31, 2021.

The Company had $70.0 million in short-term FHLB advances and $150.0 million in long-term advances at December 31, 2022, compared to no short-term FHLB advances and $150.0 million in long-term advances at December 31, 2021.

The allowance for credit losses was $41.1 million at December 31, 2022, an increase of $8.2 million or 24.8%, from $32.9 million at December 31, 2021.

During 2022, there was a $6.0 million provision for credit losses excluding provision for unfunded commitments compared to $4.0 million for 2021. The Company retroactively adopted CECL to January 1, 2022.

Upon adoption of CECL, the Company recorded a $2.1 million transition adjustment for the allowance for credit losses through retained earnings on January 1, 2022. The increase in the 2022 provision expense was reflective of changes in forecasts of GDP growth rates, levels of unemployment, vacancy rates, and changes in the value of commercial real estate properties in the Company's CECL model adopted and loan growth.

The ACL to HFI loans outstanding was 1.23% and 1.12% as of December 31, 2022 and December 31, 2021, 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.

equity increased $17.9 million, or 3.8%, to $484.6 million as of December 31, 2022 from $466.7 million at December 31, 2021. The increase during 2022 was primarily due to $64.3 million of net income and $5.5 million from the exercise of stock options, partially offset by $10.7 million of cash dividends, a $20.0 million increase in net accumulated other comprehensive loss and $19.8 million from the repurchase of common stock.

There was also a one-time $2.2 million cumulative-effect adjustment to the opening balance of retained earnings upon the adoption of the new CECL accounting standard.

Our capital ratios under the Basel III capital framework regulatory standards remain well capitalized.

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Financial Performance

Years Ended December 31,

2020 Variance Increase (Decrease)

2019 Variance Increase (Decrease)

Year Ended December 31,

2021 Variance

2020 Variance

Increase (Decrease)

December 31, 2020

(Dollars in thousands, except per share amounts)

Increase (Decrease)

(Dollars in thousands, except per share data)

Interest income

1 unchanged sentence

Net interest income

Provision for loan losses

Net interest income after provision (recapture) for loan losses

Provision for credit losses

Net interest income after provision for credit losses

Noninterest income

8 unchanged sentences

Efficiency ratio

Tangible comon equity to tangible assets (2)

Tangible common equity to tangible assets (2)

Return on average tangible common equity, annualized (2)

5 unchanged sentences

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

Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2022 to December 31,  2021

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.

In 2022, we generated fully-taxable equivalent net interest income of $149.7 million, an increase of $25.2 million, or 20.3%, from $124.4 million in 2021.

This increase was largely due to a $121.1 million increase in the average balance of interest-earning assets, in part due to organic loan growth, and a 78 basis point increase in the average yield of interest-earning assets, partially offset by a 37 basis point increase in the cost of interest bearing liabilities.

For the years ended December 31, 2022 and 2021, our reported net interest margin was 4.02% and 3.46%, 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.

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:

Total fully-taxable equivalent interest income was $181.1 million in 2022 compared to $147.1 million in 2021.

The $33.9 million, or 23.1%, increase in total interest income was mainly due to an increase in the average balance of HFI loans of $351.3 million and an increase in the average balance of securities of $17.2 million, partially offset by a decrease of $227.9 million in the average balance of Federal funds sold, cash equivalents and other investments.

Interest and fees on total loans was $171.1 million in 2022 compared to $141.6 million in 2021.

The $29.5 million, or 20.9%, increase in interest income on loans was primarily due to a $331.7 million increase in the average balance of total loans outstanding and a 41 basis point increase in the average yield on total loans.

The increase in the average balance of loans outstanding was primarily due to organic growth in single-family residential mortgage loans and commercial real estate loans during 2022.

The yield on the loan portfolio benefited from accretion income associated with purchase accounting discounts on loans acquired in prior acquisitions.

For the years 2022 and 2021, the yield on total loans was 5.52% and 5.12%, respectively.

The table below presents the accretion income by loan type for the years 2022, 2021 and 2020:

(dollars in thousands)

2 unchanged sentences

Commercial and industrial

Construction and land development

Commercial real estate

7 unchanged sentences

Ending balance of discount on purchased loans

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 income from our securities portfolio increased $2.7 million, or 78.9%, to $6.2 million in 2022.

The increase in interest income on securities was primarily due to an increased average balance of $17.2 million, or 5.3%, and a 74 basis point increase in the average yield of securities.

Interest income on our federal funds sold, cash equivalents and other investments increased $1.7 million, or 79.1%, to $3.8 million in 2022.

The increase in interest income on these earning assets was primarily due to a 95 basis point increase in average yield of cash equivalents, partially offset by a $227.9 million decrease in the average balance.

The decrease in the average balance resulted from utilization of these funds to fund 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. 

Interest expense on interest-bearing liabilities increased $8.7 million, or 38.3%, to $31.4 million in 2022 primarily due to a 37 basis point increase in the average rate on these liabilities, partially offset by a $1.2 million decrease in the average balance of interest bearing liabilities.

Our average cost of total deposits was 0.61% for 2022, compared to 0.40% for 2021.

The increase was due to a 36 basis point increase in the average rate paid on interest bearing deposits.

Interest expense on total deposits increased to $18.9 million in 2022.

The $6.9 million, or 58.0%, increase in interest expense on total deposits was primarily due to a 36 basis point increase in the average rate paid on total average interest bearing deposits due to higher rates paid on time deposits, partially offset by a $64.0 million decrease in the average balance of time deposits.

Noninterest-bearing demand deposits decreased primarily due to the continued reduction of a single deposit relationship and the withdrawal of $451.7 million of deposits by digital currency businesses.

The average balance of interest-bearing deposits decreased $59.4 million, or 2.9%, from $2.1 billion in 2021 compared to $2.0 billion in 2022 due to customers shifting their deposit balances into higher yielding alternatives available in the market.

Average Balance Sheet, Interest and Yield/Rate Analysis

10 unchanged sentences

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.

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 2022, 2021 and 2020.

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,

Year Ended December 31,

(tax-equivalent basis, dollars in

30 unchanged sentences

Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

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.

The following table summarizes the extent to which changes in (1) interest rates, and (2) volume of average interest-earning assets and average interest-bearing liabilities affected by the Company’s net interest income for the periods presented.

The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate.

Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average yield/rate.

Year Ended December 31, 2022 Compared with Year Ended December 31, 2021

26 unchanged sentences

Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

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.

Provision for Credit Losses

Effective January 1, 2022, the Company adopted the provisions of ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination.

As a result, the Company recorded an increase of $2.1 million to allowance for credit losses and an increase of $1.0 million to allowance for unfunded commitments. For unfunded commitments, the ACL is a liability account that is reported as reserve for unfunded commitments in our consolidated balance sheet.

The Company applied the modified retrospective transition approach, and recorded a decrease of $2.2 million, net of tax, to the beginning balance of retained earnings as of January 1, 2022 for the cumulative effect adjustment.

The provision for credit losses in 2022 was $4.9 million compared to $4.0 million in 2021.

The increase in the 2022 provision expense was reflective of 

forecasts employed in the Company’s CECL model adopted as of January 1, 2022 and loan growth. Non-performing loans that were individually analyzed, 

with $48,000 in 2022 and $30,000 in 2021, 

net addition to the allowance for credit 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,

Noninterest income decreased $7.5 million, or 40.0%, to $11.3 million in 2022 from $18.7 million in 2021.

The following table sets forth the major components of noninterest income for the years ended December 31, 2022, 2021 and 2020:

Year Ended December 31,

2021 Increase (Decrease)

7 unchanged sentences

Unrealized (loss) gain on equity investments

Gain on derivatives

(Loss) gain on derivatives

Increase in cash surrender of life insurance

Gain on sale of securities

Loss on sale of OREO

Gain on sale of fixed assets

1 unchanged sentence

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.  

The $2.2 million decrease in noninterest income from service charges, fees and other income was primarily due to a $1.8 million CDFI RRP award received in 2021 and $447,000 decrease in analysis charges, mainly due to the reduction in wire volume and associated fees on a digital currency related client.

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,

Gains on sale of loans are comprised primarily of gains on sale of SFR mortgage loans and SBA loans.

Gains on sale of loans totaled $1.9 million in 2022, compared to $10.0 million in 2021.

The $8.1 million or 81.0% decrease was primarily caused by a decrease of $238.8 million in loan sale volume, primarily due to the increase in interest rates, which resulted in the decreases in FNMA mortgage loan originations and loan sales.

Year Ended December 31,

2021 Increase (Decrease)

2 unchanged sentences

Single family residential mortgage

Commercial real estate

Gain on loans sold:

Single family residential mortgage

Commercial real estate

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.

Loan servicing income, net of amortization, increased by $1.5 million to $2.2 million for 2022 compared to net servicing income of $684,000 for 2021.

The increase was due to higher interest rates, which decreased the pre-payment speeds on loans serviced.

We are experienced lower loan pre-payments in SFR loans due to higher mortgage rates.

We experienced an increase in SBA loan servicing income due to less loan payoffs for 2022 compared to loan payoffs in 2021, though the volume of SBA loans we service is decreasing due to lower originations. 

(dollars in thousands)

Years Ended December 31,

Year Ended December 31,

2021 Increase (Decrease)

4 unchanged sentences

SBA loans serviced

Years Ended December 31,

Year Ended December 31,

2021 Increase (Decrease)

4 unchanged sentences

SBA loans serviced

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. 

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. 

Unrealized (loss) gain on equity investments. 

There was no unrealized loss on equity investments for 2022, compared to $360,000 unrealized loss in 2021.

The balance of the equity investments remained unchanged from December 31, 2021 to December 31, 2022.

(Loss) gain on derivatives.

 Loss on derivatives in 2022 was $247,000 compared to a gain of $5,000 for 2021.

The loss in 2022 were caused by lower amounts of loans that were committed to be delivered to FNMA due to interest rate hikes during 2022.

Increase in cash surrender of life insurance. 

The income from the cash surrender value of life insurance increased $255,000 in 2022 compared to 2021.

We purchased additional BOLI of $19.8 million in June 2021.

Gain on sale of fixed assets.

 A $757,000 gain on sale of fixed assets was recorded from the sale of a real estate asset during 2022, which was used to house staff while traveling.

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,

Noninterest expense increased $5.2 million, or 9.0%, to $63.4 million in 2022 from $58.2 million in 2021.

The following table sets forth the major components of our noninterest expense for the years ended December 31, 2022, 2021 and 2020:

Year Ended December 31,

2021 Increase (Decrease)

10 unchanged sentences

Amortization of core deposit intangible

OREO expenses

Merger expenses

1 unchanged sentence

Total noninterest expense

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. 

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.

Salaries and employee benefits expense.

Salaries and employee benefits expense increased $1.9 million due to normal salary increases.

The number of full-time equivalent employees was 379 at December, 31, 2022, 365 at December 31, 2021 and 366 at December 31, 2020. None of our employees are represented by a labor union, or governed by any collective bargaining agreements.

Occupancy and equipment expense. 

Occupancy and equipment expense increased $401,000, or 4.6%, to $9.1 million for 2022 compared to $8.7 million for 2021 due to higher expenses from a new branch in Brooklyn, New York. 

Data processing expense.

 Data processing expense increased $586,000, or 13.1%, to $5.1 million for 2022, compared to $4.5 million for 2021 due to increases in ATM processing fees and data line expenses.

As of December 31, 2022, $732,000 of this benefit remained for future use.

Legal and professional expense.

Legal and professional expense increased $1.6 million in 2022 due to a previously disclosed special investigation led by the Company's board of directors. 

Marketing and business promotion expense.

Marketing and business promotion expense increased $421,000, due to increases in business promotion and CRA donation expenses.

Insurance and regulatory assessments. 

Insurance and regulatory assessments increased $289,000, or 18.5%, to $1.9 million in 2022 due to an increase in the FDIC assessment by $116,000.

Other noninterest expenses. 

Other expenses increased by $977,000, or 38.9%, to $3.5 million primarily due to a $331,000 increase in director restricted stock unit compensation expense, a $264,000 increase in loan servicing expense and a $417,000 reversal in mortgage servicing rights valuation that occurred in 2021.

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 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

Income tax expense was $27.0 million in 2022 compared to $24.0 million in 2021, an increase of $3.0 million, or 12.4%.

The effective tax rate for 2022 was 29.6% and 29.7% for 2021.

Income tax expense included a $587,000 benefit for stock options exercised in 2022 and an $873,000 benefit in 2021. The Company amended its 2020 tax returns and 2018 California state tax return and recorded a total of $315,000 tax expense reduction in 2022 .

Net income increased $7.4 million to $64.3 million in 2022, compared to $56.9 million in 2021. The increase is primarily due to an increase in net interest income of $25.2 million, partially offset by a decrease in non-interest income of $7.5 million, a $5.2 million increase in non-interest expense, and a $2.1 million increase in the credit loss provision and a $3.0 million increase in tax expense.

Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2021 with December 31, 2020

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.

In 2021, we generated fully-taxable equivalent net interest income of $124.4 million, an increase of $19.6 million, or 18.7%, from $104.8 million 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 a 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 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.

Total fully-taxable equivalent interest income was $147.1 million in 2021 compared to $139.2 million in 2020.

This was partially offset by a decrease in the average total loan yield of 6 basis points.

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 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.

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.

Taxable equivalent interest income from our securities portfolio increased $454,000, or 15.1%, to $3.5 million in 2021.

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 $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 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 $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.

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.

A five year FHLB advance was obtained in March 2020 to provide for additional liquidity.

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.

Provision for Credit Losses

The provision for credit 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 credit losses.

The Company calculated the allowance for loan losses under ASC 310 and ASC 450 in 2021 and 2020.

Noninterest Income

Noninterest income decreased $4.3 million, or 23.4%, to $14.0 million in 2020 from $18.3 million in 2019.

Noninterest income increased $4.7 million, or 33.5%, to $18.7 million in 2021 from $14.0 million in 2020.

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.

The increase in noninterest income from service charges, fees and other income was primarily from receiving a $1.8 million CDFI RRP award in 2021 and $800,000 in service charges on the additional transactional deposit accounts originated organically.

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.

The gain on sale 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 gains on sale 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 was attributable to the favorable change in market conditions in the secondary market for FNMA loans.

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.

SBA loan servicing income decreased 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.

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 a derivative which resulted in a gain of $78,000 in 2020.

 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 a net to gain on derivatives. 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.

Cash surrender value income of bank owned life insurance.

Cash surrender value income of BOLI decreased $8,000 due to slightly lower rates.

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. 

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.

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. 

Noninterest Expense

Noninterest expense increased $2.0 million, or 3.5%, to $59.5 million in 2020 from $57.5 million in 2019.

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.

Noninterest expense decreased $1.3 million, or 2.2%, to $58.2 million in 2021 from $59.5 million in 2020.

Salaries and employee benefits expense.

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 December 31, 2020 and 355 at December 31, 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.

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(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.

Occupancy and equipment expense.

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 expense.

Data processing expense increased $238,000 in 2021.

This increase was primarily due to upgrading our infrastructure and also reflected the impact of increased processing costs incurred subsequent to the PGBH acquisition.

This increase was primarily due to upgrading our infrastructure.

As of December 31, 2021, this offset benefit amounted to $1.2 million to be recognized through January 2026.

Conversion expense associated with the PGBH and FAIC acquisitions is in the “other expenses”

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. 

Legal and professional expense.

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.

Office expenses.

Office expenses, comprised of communications, postage, armored car, and office supplies, decreased by $29,000 in 2021.

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.

Marketing and business promotion expense.

Marketing and business promotion expense increased $406,000, due to increased marketing efforts following the COVID-19 pandemic. 

Insurance and regulatory assessments expense.

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 expense (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 $1.4 million in 2020 as compared to $1.5 million for 2019.

Amortization of intangibles totaled $1.1 million in 2021 as compared to $1.4 million for 2020.

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.

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 $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.

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 from BOTO, while the 2020 expenses relate to the PGBH acquisition.

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.

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 increase in mortgage servicing rights impairment due to write-downs reflecting the decline in market rates of interest.

Other expense increases included a $417,000 decrease in mortgage servicing rights valuation due to reversal of 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.

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.

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 an $873,000 benefit for stock options exercised and a $26,000 benefit for 2020.

Net income increased $24.0 million to $56.9 million in 2021, compared to $32.9 million in 2020. The increase was primarily due to an 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.

ANALYSIS OF FINANCIAL CONDITION

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).

Total assets were $3.9 billion as of December 31, 2022 and $4.2 billion as of December 31, 2021.

We increased our net loans held for investment by $396.9 million, which resulted from organic loan growth.

Organic loan growth increased mainly in single family residential mortgages and commercial real estate loans. Our mortgage loans held for sale decreased by $6.0 million in 2022 to none.

The decrease in assets was primarily due to a decrease in cash and cash equivalents. The decline in cash and cash equivalents was due to the decreases in the balances of demand deposits and money market accounts due to the continued reduction of concentration with certain deposit customers and higher yielding alternatives available in the market. 

Investment Securities.

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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.

Overall investment goals are established by our board of directors, 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.

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We also review our securities for potential other-than-temporary impairment at least quarterly.

The following table sets forth the book value and percentage of each category of securities at December 31, 2021, 2020 and 2019.

Effective January 1, 2022, upon the adoption of ASU 2016-13, Financial Instruments - Credit Losses, debt securities available-for-sale are measured at fair value and subject to impairment testing.

When an AFS debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit losses by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value change.

The following table sets forth the book value and percentage of each category of securities at December 31, 2022, 2021 and 2020.

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.

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SBA agency securities

Mortgage-backed securities - Government sponsored agencies

Mortgage-backed securities:

Collateralized mortgage obligations:

Commercial paper

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Total securities

Comprised of corporate debt securities and financial institution subordinated debentures

Comprised of corporate debt securities and individual financial institution subordinated debentures

The tables below set forth investment securities AFS and HTM for the periods presented.

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SBA agency securities

Mortgage-backed securities- Government sponsored agencies

Mortgage-backed securities:

Collateralized mortgage obligations:

Commercial paper

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SBA securities

Mortgage-backed securities- Government sponsored agencies

Mortgage-backed securities:

Collateralized mortgage obligations:

Commercial paper

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Municipal securities

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 yield on the total investment portfolio at December 31, 2022 was 2.55% with a weighted-average life of 5.8 years.

This compares to a weighted-average yield of 1.03% at December 31, 2021 with a weighted-average life of 3.8 years.

The weighted average life is the average number of years that each dollar of unpaid principal due remains outstanding.

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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.

amortized cost and fair value by maturity in the following maturity groupings as of December 31, 2022. 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.

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SBA securities

Mortgage-backed securities- Government sponsored agencies

Mortgage-backed securities:

Collateralized mortgage obligations:

Commercial paper

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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.

The issuers of these securities have not 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.

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 consolidated financial statements included in this Annual Report.

Less than Twelve Months

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Government sponsored agencies

Mortgage-backed securities- Government sponsored agencies

SBA securities

Mortgage-backed securities:

Collateralized mortgage obligations:

Commercial paper

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Total available for sale

Municipal taxable securities

Municipal securities

Total held to maturity

Less than Twelve Months

Twelve Months or More

December 31, 2021

Mortgage-backed securities- Government sponsored agencies

Government sponsored agencies

Mortgage-backed securities:

Collateralized mortgage obligations:

Commercial paper

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Total available for sale

The Company did not record any charges for other-than-temporary impairment losses for the twelve months ended December 31, 2021 and 2020.

The Company did not record any charges for other-than-temporary impairment losses for the twelve months ended December 31, 2022 and 2021.

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.

At December 31, 2022, total loans held for investment, net of ACL, totaled $3.3 billion.

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:

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Single-family residential mortgages

Allowance for loan losses

Allowance for credit losses

Total loans, net

Includes non-farm and non-residential real estate loans, multifamily residential and 1-4 family SFR loans originated for a business purpose

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.

Includes non-farm and non-residential real estate loans, multifamily residential and 1-4 family SFR loans originated for a business purpose

Net loans held for investment increased $396.9 million, or 13.7%, to $3.3 billion at December 31, 2022 as compared to $2.9 billion at December 31, 2021.

The increase in net loans resulted from organic growth in single family residential mortgages loans and commercial real estate.

Commercial and industrial loans.

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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.

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 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.

We originate commercial and industrial lines of credit, term loans, mortgage warehouse lines and international trade discounts which totaled $201.2 million as of December 31, 2022 and $268.7 million at December 31, 2021.

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 .

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.

Our trade finance 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.

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.  

C&I loans decreased $67.5 million, or 25.1%, to $201.2 million as of December 31, 2022 compared to $268.7 million at December 31, 2021.

This decrease resulted primarily from a $46.7 million decrease in commercial loans and lines of credit and a $20.9 million decrease in mortgage warehouse lines.

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.

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At December 31, 2022, approximately 14.5% 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.

In mid-2022 we decreased our policy maximum loan-to-value (“LTV”) to 70% from 75% for CRE loans originated after the effective date.

The total CRE portfolio totaled $1.3 billion as of December 31, 2022 and $1.2 billion as of December 31, 2021, of which $255.2 million and $222.8 million, respectively, are secured by owner occupied properties.

The multi-family residential loan portfolio totaled $643.2 million as of December 31, 2022 and $545.9 million as of December 31, 2021.

The SFR loan portfolio originated for a business purpose totaled $69.3 million as of December 31, 2022 and $65.6 million as of December 31, 2021.

Construction & land development loans .

Our construction and land development loans are comprised of residential construction, commercial construction and land acquisition and development construction.

Construction and land development loans .

Our C&D 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.

In mid-2022 we decreased our LTV policy limits to 70% from 75% for construction and land development loans originated after the effective date.

C&D loans decreased $26.3 million or 8.7%, to $276.9 million at December 31, 2022 as compared to $303.1 million at December 31, 2021.

This decrease was primarily due to decreases in residential construction loans.

As of December 31, 2022 and 2021, our real estate construction loan portfolio was divided among the foregoing categories as shown in the table below.

As of December 31, 2022

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In 2022, we originated $29.7  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.

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.

in SBA loans, $17.8 million were SBA 7A originations and $11.9 million were SBA 504 originations.

As of December 31, 2022 our SBA portfolio totaled $61.4 million of which $6.1 million is guaranteed by the SBA and $55.3 million is unguaranteed, of which $54.1 million is secured by real estate and $1.2 million is unsecured or secured by business assets.

We monitor the unguaranteed portfolio by type of real estate collateral.

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and $23.7 million or 42.8% in other real estate types.

We further analyze the unguaranteed portfolio by location.

As of December 31, 2022, $34.5 million or 62.3% 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;

$4.1 million or 7.4% is located in Texas;

$3.4 million or 5.8% is located in New York;

$4.0 million or 7.2% is located in Nevada;

$3.5 million or 6.3% is located in Washington;

and $9.2 million or 16.8% 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 

SBA loans decreased $14.7 million, or 19.3%, to $61.4 million at December 31, 2022 compared to $76.1 million at December 31, 2021.

This decrease was primarily due to SBA loan sales of $12.7  million, and $31.8 million in net loan payoffs and payments in 2022, partially offset by SBA 7A loan originations of $17.8 

million and SBA 504 originations of $11.9 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 2022, we originated $672.1 million of SFR mortgage loans.

The loans are generally originated through our retail branch network to our customers, many of whom establish a deposit relationship with us.

During 2022, we originated $386.1 million of such loans through our retail channel, and $286.0 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.

We originated $39.5 million in FNMA loans in 2022 and sold $46.1 million to FNMA. In 2022 we did not sell any non-qualified SFR mortgages due to the market environment. However, when market conditions are correct we plan to sell 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.

SFR real estate loans held for investment increased $459.5 million, or 45.7%, to $1.5 billion as of December 31, 2022 as compared to $1.0 billion as of December 31, 2021.

There were no loans held for sale as of December 31, 2022 compared to $6.0 million as of December 31, 2021. 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 $29.3 million as of December 31, 2022 and $47.2 million as of December 31, 2021.

The loan maturities in the table below are based on contractual maturities as of December 31, 2022.

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Floating rate

Allowance for loan losses

Mortgage loans held for sale

Allowance for credit losses

We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio.

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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.

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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:

Analysis of the ACL.

The following table allocates the ACL, or the allowance, by category:

As of December 31,

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Single family residential mortgages

Allowance for loan losses

Allowance for credit losses

Represents the percentage of the allowance to total loans in the respective category.

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.

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,

(dollars in thousands)

Commercial and industrial

Construction and land development

Commercial real estate

Single-family residential mortgages

Total credit discount on purchased loans

Total remaining balance of purchased loans through acquisition

Credit-discount to remaining balance of purchased loans

Allowance for credit losses.

The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination.

The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated balance sheet.

Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts.

The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics.

The Company has elected to utilize a discounted cash flow (“DCF”) approach for all segments except consumer loans and warehouse mortgage loans, for these a remaining life approach was elected. 

The Company’s discounted cash flow methodology incorporates a probability of default, loss given default and exposure at default model, as well as expectations of future economic conditions, using reasonable and supportable forecasts.

The use of reasonable and supportable forecasts requires significant judgment, such as selecting unemployment forecast scenarios and related scenario-weighting, as well as determining the appropriate length of the forecast horizon.

Management estimates the allowance balance required using past loan loss experience from peers with similar portfolio sizes and geographic locations to the Company, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. The Company’s CECL methodology utilizes a four-quarter reasonable and supportable forecast period, and a four-quarter reversion period.

The Company is using the Federal Open Market Committee to obtain forecasts for the unemployment rate, while reverting to a long-run average of each considered economic factor. 

The Company uses both internal and external qualitative factors within the CECL model:

lending policies, procedures, and strategies;

changes in nature and volume of the portfolio;

credit & lending personnel experience;

changes in volume and trends in classified loans, delinquencies, and nonaccrual;

concentration risk;

collateral values;

regulatory and business environment;

loan review results;

and economic conditions.

Individual loans considered to be uncollectible are charged off against the allowance.

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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.

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,

Net charge-offs to average loans were 0.00% and 0.01% for the twelve months ended December 31, 2022 and 2021, respectively

The ACL was $41.1 million at December 31, 2022 compared to $32.9 million at December 31, 2021.

The $8.2 million increase in 2022 was primarily due to $2.1 million increase in the allowance from the adoption of ASU 2016-13 on January 1, 2022, net recoveries of $2,000 and a provision for credit losses of $6.0 million, excluding the provision for unfunded commitments.

Prior to the Company's adoption of ASC 326 on January 1, 2022, the Company maintained an allowance for loan losses (“ALLL”) in accordance with ASC 450, Contingencies and ASC 310, Receivables .

The allowance for loan losses was a valuation allowance for probable incurred credit losses.

Loan losses were charged against the allowance when management believed the uncollectibility of a loan balance was confirmed.

Subsequent recoveries, if any, were credited to the allowance.

Management estimated the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

The following table provides an analysis of the ACL, provision for credit losses and net charge-offs for the years 2018 to 2022:

Year Ended December 31,

(dollars in thousands)

Balance, beginning of period

ASU 2016-13 transition adjustment

Adjusted beginning balance

Commercial and industrial

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Net (charge-offs)/recoveries

Provision for loan losses

Provision for credit losses

Balance, end of period

Reserve for off-balance sheet credit commitments

Balance at beginning of year

Impact of ASU 2016-13 adoption

Adjusted beginning balance

(Reversal)/provision for credit losses

Balance at the end of period

Total HFI loans at end of period

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Net charge-offs to average HFI loans

Allowance for loan losses to total loans

Credit discount on loans purchased through acquisitions

Allowance for credit losses to total loans

Reserve was under the Allowance for Loan Loss (ALLL) method in accordance with ASC 450 and ASC 310

Problem Loans.

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Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Impaired loans include loans on nonaccrual status and performing restructured loans.

Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible.

Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.

A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral.

Fair value, where possible, is determined by independent appraisals, typically on an annual basis.

Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral.

The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a TDR.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a modified loan.

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.

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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.

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,

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Nonperforming assets to total assets (1)

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.

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.

2022 nonperforming loans, nonperforming assets, nonperforming loans to total loans and nonperforming assets to total assets were updated from the amounts reported in the fourth quarter earnings release published on January 23, 2023

The $2.8 million increase in nonperforming loans at December 31, 2022 was primarily due to two commercial real estate loans of $12.3 million, eight SFR loans of $6.3 million, three SBA loan of $1.4 million, five C&I loans of $1.2 million, one CRE loan of $290,000 and fifteen other consumers loans of $129,000 that migrated into non-accrual status during 2022.

Offsetting the increases were non-accrual and accruing modified loan payoffs or paydowns of $17.4 million and loans that migrated to accruing status of $1.4 million.

Additionally, there was $181,000 in net loan recoveries of non-accrual loans that had been previously charged off. 

Our 30-89 day delinquent loans, excluding non-accrual loans, decreased to $15.2 million as of December 31, 2022, compared to $17.6 million at December 31, 2021. From December 31, 2021 to December 31, 2022, the decrease in past due loans (excluding non-accrual loans) resulted from decreases of $1.6 million in C&I loans, $1.6 million in SBA loans, $1.1 million in commercial real estate loans, partially offset by a $1.7 million increase in SFR mortgage loans and a $167,000 increase in other loans.

We did not recognize any interest income on nonaccrual loans during the years ended December 31, 2022 and December 31, 2021 while the loans were in nonaccrual status.

We recognized interest income on modified loans of $143,000 and $159,000 during the years ended December 31, 2022 and December 31, 2021, 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.

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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”

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”

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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.

Cash and cash equivalents decreased $610.8 million, or 88.0%, to $83.5 million as of December 31, 2022 as compared to $694.4 million at December 31, 2021. This decrease was primarily due to $444.5 million used in financing activities and $260.2 million used in investing activities, partially offset by $93.8 million provided by cash from operating activities.

The Federal Reserve announced the reduction of the reserve requirement ratio to zero percent across all deposit tiers, effective March 26, 2020.

Depository institutions that were required to maintain deposits in a Federal Reserve Bank account to satisfy reserve requirements are no longer be required to do so and can use the additional liquidity to lend to individuals and businesses.

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.

Goodwill was $71.5 million at December 31, 2022 and $69.2 million at December 31, 2021.

Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired. Goodwill in the amount of $2.3 million was recognized in conjunction with the acquisition of the Hawaii Branch from BOTO.

Our other intangible assets, which consist of core deposit intangibles, were $3.7 million and $4.1 million at December 31, 2022 and December 31, 2021.

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.

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. 

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.

Total liabilities decreased $327.0 million to $3.4 billion, or 8.7%, at December 31, 2022 from $3.8 billion at December 31, 2021, primarily due to a $407.8 million decrease in deposits, partially offset by a $70.0 million increase in short-term FHLB advances. 

As an Asian-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.

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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, 2022, the Bank considers $2.24 billion or 75.2% of our deposits as adjusted core relationships.

As of December 31, 2022, our top ten deposit relationships totaled $411.4 million, of which two are related to directors and large shareholders of the Company for a total of $74.3 million or 2.5% of our top ten deposit relationships.

As of December 31, 2022, our directors and shareholders with deposits over $250,000 totaled $58.0 million or 2.8% of all relationships over $250,000.

The following table summarizes our average deposit balances and weighted average rates at December 31, 2021, 2020 and 2019:

The following table summarizes our average deposit balances and weighted average rates at December 31, 2022, 2021 and 2020:

For the Year Ended

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Time, brokered

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.

Wholesale deposits are defined as time deposits under $250,000 originated through via internet rate line and/or through other deposit originators.

The following table sets forth the estimated deposits exceeding the FDIC insurance limit:

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Uninsured deposits

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.

The estimated aggregate amount of time deposits in excess of the FDIC insurance limit is $581.2 million at December 31, 2022. The following table sets forth the maturity distribution of time deposits in amounts of more than $250,000 as of December 31, 2022.

(dollars in thousands)

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Over 12 months

We acquired time deposits from the internet and outside deposits originators as needed to supplement liquidity.

We acquired wholesale 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.

The total amount of such deposits as of December 31, 2022 was $7.1 million or 0.2% of total deposits.

The balance of such deposits as of December 31, 2021 were $70.1 million or 2.1% of total deposits.

Total deposits decreased $407.8 million to $3.0 billion at December 31, 2022 as compared to $3.4 billion at December 31, 2021. The decrease was expected and mainly due to managing large deposit concentration limits and customers moving such funds out of the Bank and into other higher yielding investments.

During 2022 noninterest-bearing deposits decreased by $492.7 million due to the continued reduction of a single deposit relationship and the withdrawal of $451.7 million of deposits by digital currency businesses and interest-bearing non-maturity deposits decreased by $312.3 million due to the Bank's customers pursuing higher rates offered by the Bank's time deposits, and time deposits increased by $397.2 million. As of December 31, 2022, total deposits were comprised of 26.8% noninterest-bearing demand accounts, 20.7% interest-bearing non-maturity deposit accounts and 52.5% of time deposits.

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.

We had $70.0 million and no FHLB short-term advances at December 31, 2022 and at December 31, 2021, respectively.

The Company secured these short-term FHLB advances in order to maintain its liquidity to meet its funding needs due to reduced concentration of certain deposit customers and other deposit outflows.

In the first quarter of 2020, the Company obtained $150.0 million in long-term FHLB advances.

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The following table sets forth information on our total FHLB advances during the periods presented:

Years Ended December 31,

Year Ended December 31,

(dollars in thousands)

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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.

As of December 31, 2022 the amount of subordinated notes outstanding was $173.6 million as compared to $173.0 million at December 31, 2021.

In March and April 2016, we issued an aggregate of $50.0 million of subordinated notes for net 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.

The Company redeemed these subordinated notes on March 31, 2021. The redemption price for the subordinated notes 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.

The subordinated 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.

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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.

In March 2021, the Company issued $120 million of 4.00% fixed to floating rate subordinated notes 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 can redeem these subordinated notes beginning April 1, 2026.

The subordinated notes 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.

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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:

Subordinated debentures consist of subordinated debentures issued in connection with trust preferred securities.

As of December 31, 2022 and December 31, 2021, the amount outstanding was $14.7 million and $14.5 million, respectively.

Under the terms of our subordinated debentures 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 debentures 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.

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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.

The rate at December 31, 2022 was 6.42% and 1.85% at December 31, 2021.

In October 2018, the Company, through the acquisition of FAIC, acquired the FAIC Trust.

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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.

The rate at December 31, 2022 was 7.02% and 2.45% at December 31, 2021.

In January 2020, the Company, through the acquisition of PGBH, acquired PGBH Trust, a Delaware statutory trust formed in December 2004.

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The rate at December 31, 2022 was 6.87% and 2.30% at December 31, 2021.

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.

In March 2021, the United Kingdom’s Financial Conduct Authority and Intercontinental Exchange Benchmark Administration announced that the one-week and two-month USD LIBOR settings and non-USD LIBOR settings would cease to be published after December 31, 2021.

The publication of the overnight, one-, three-, six- and 12-month USD LIBOR settings has been extended through June 30, 2023.

On December 16, 2022, the Federal Reserve adopted a final rule that implements the LIBOR Act by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023.

For these subordinated notes and debentures, there are provisions for amendments to establish a new interest rate benchmark. After the LIBOR replacement date June 30, 2023, the Company will adopt SOFR with relevant spread adjustment as the alternative reference rate to replace LIBOR with respect to the Company’s subordinated notes and subordinated debentures.

Capital Resources and Liquidity Management

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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.

equity increased $17.9 million, or 3.8%, to $484.6 million as of December 31, 2022 from $466.7 million at December 31, 2021. The increase during 2022 was primarily due to $64.3 million of net income and $5.5 million from the exercise of stock options, less $10.7 million of common dividends paid, a $20.0 million decrease in net accumulated other comprehensive income and $19.8 million from the repurchase of common stock.

There was also a $2.2 million cumulative-effect adjustment to the opening balance of retained earnings upon the adoption of the new CECL accounting standard.

Liquidity Management.

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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.

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.

As of December 31, 2022 and December 31, 2021, we had $92.0 million for both years 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, 2022 and December 31, 2021 were $12.0 million and $22.3 million, respectively.

Federal Reserve Discount Window lines were collateralized by a pool of CRE loans totaling $16.8 million and $33.2 million as of December 31, 2022 and December 31, 2021, respectively.

We did not have any borrowings outstanding with the Federal Reserve at December 31, 2022 and December 31, 2021 and our borrowing capacity is limited only by eligible collateral.

At December 31, 2022 and 2021, there were $150.0 million in FHLB long-term advances outstanding. At December 31, 2022 we had $70.0 million FHLB short-term advances outstanding and zero outstanding at December 31, 2021.

Based on the values of loans pledged as collateral, we had $1.1 billion and $833.6 million of additional borrowing capacity with the FHLB as of December 31, 2022 and December 31, 2021, respectively.

We also maintain relationships in the capital markets with brokers and dealers to issue certificates of deposit.

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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”

from a regulatory perspective, as well as our and the Bank’s capital ratios as of December 31, 2022 and December 31, 2021. 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:

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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.

Some of the financial measures included in this Annual Report 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”.

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Common shares outstanding

Common equity to assets ratio

Book value per share

Tangible common equity to tangible assets ratio

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The following table reconciles return on average tangible common equity to its most comparable GAAP measure:

For the year-ended

(dollars in thousands)

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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.

Some of the financial measures included in this Annual Report 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.

Core Deposits and Non-core Funding Dependency.

Adjusted Core Deposits and Non-core Funding Dependency.

The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis.

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

What changed 10-K

Item 5. Market for Registrant’s Common Equity