PCB BANCORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
You should read the following discussion and analysis of financial condition and results of operations together with the Consolidated Financial Statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A "Risk Factors" and "Forward Looking Statements" immediately preceding Part I of this Annual Report on Form 10-K.
Critical accounting estimates
The Company follows accounting and reporting policies and procedures that conform, in all material respects, to GAAP and to practices generally applicable to the financial services industry, the most significant of which are described in Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make judgments and accounting estimates that affect the amounts reported for assets, liabilities, revenues and expenses on the Consolidated Financial Statements and accompanying notes, and amounts disclosed as contingent assets and liabilities. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. Accounting estimates are necessary in the application of certain accounting policies and procedures that are particularly susceptible to significant change. Critical accounting policies are defined as those that require the most complex or subjective judgment and are reflective of significant uncertainties, and could potentially result in materially different results under different assumptions and conditions The following is a summary of the more subjective and complex accounting estimates and principles affecting the financial condition and results reported in financial statements. In each area, the Company has identified the variables that management believes to be the most important in the estimation process. The Company uses the best information available to make the estimations necessary to value the related assets and liabilities in each of these areas.
Allowance for loan losses
Allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance for loan losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. The Company estimates the allowance for loan losses 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. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management's judgment, should be charged-off. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each segment. The Company determines a separate allowance for loan losses for each portfolio segment. The allowance for loan losses consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan's effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral. The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired with measurement of impairment as described above. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected solely from the collateral. General reserves cover non-impaired loans and are based on the Company's historical loss rates for each portfolio segment, adjusted for the effects of qualitative factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment's historical loss experience. 46 -------------------------------------------------------------------------------- Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements. InJune 2016 , the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326)." The amendments in this ASU require that entities change the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. It includes financial assets such as loan receivables, held-to-maturity debt securities, net investment in leases that are not accounted for at fair value through net income, and certain off-balance sheet credit exposures. This ASU is effective for public business entities that areSEC filers for fiscal years beginning afterDecember 15, 2019 , including interim periods within those fiscal years. In 2019, the FASB amended this ASU, which delays the effective date to 2023 for certainSEC filers that are Smaller Reporting Companies, which would apply to the Company. The Company plans to adopt this ASU at the delayed effective date ofJanuary 1, 2023 . The Company has formed a committee, developed an implementation plan, and engaged a software vendor to assist the Company to build a model. The Company is in the process of completing a readiness assessment and is engaged in the implementation phase of the project. The Company is working on: (i) developing a new expected loss model with supportable assumptions; (ii) identifying data, reporting, and disclosure gaps; (iii) assessing updates to accounting and credit risk policies; and (iv) documenting new processes and controls. Based on the Company's initial assessment of this ASU, the Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses which could potentially have a material impact on its consolidated financial statements as of the beginning of the first reporting period in which this ASU is effective. Non-GAAP Measures The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company's operational performance and to enhance investors' overall understanding of such financial performance. Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated, and presented in accordance with GAAP. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures and may not be comparable to non-GAAP financial measures that may be presented by other companies. The following table presents reconciliation of allowance for loan losses to loans held-for-investment, excluding SBA PPP loans to its most comparable GAAP measure. The Company believes that this non-GAAP measure enhances comparability to prior periods in which there were no SBA PPP loans and provides supplemental information regarding the Company's credit quality trend. December 31, ($ in thousands) 2021 2020 2019 2018 2017 Loans held-for-investment$ 1,732,205 $
1,583,578
Less: SBA PPP loans
65,329 135,654 - - - Loans held-for-investment, excluding SBA PPP loans$ 1,666,876 $
1,447,924
Allowance for loan losses
$ 22,381 $
26,510
Allowance for loan losses on loans held for investment
1.29 % 1.67 % 0.99 % 0.98 % 1.03 %
Allowance for loan losses to loans
held-for-investment, excluding SBA PPP
loans 1.34 % 1.83 % 0.99 % 0.98 % 1.03 %
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Five-year summary of selected financial data
The following table presents selected financial data on the dates or for the periods indicated:
As of or For the Year Ended December 31,
($ in thousands, except per share data) 2021 2020 2019 2018 2017
Selected balance sheet data:
Cash and cash equivalents $ 203,285 $
194,098
Titles available for sale
123,198 120,527 97,566 146,991 129,689 Securities held-to-maturity - - 20,154 21,760 21,070 Loans held-for-sale 37,026 1,979 1,975 5,781 5,297 Loans held-for-investment 1,732,205 1,583,578 1,450,831 1,338,682 1,189,999 Allowance for loan losses (22,381) (26,510) (14,380) (13,167) (12,224) Total assets 2,149,735 1,922,853 1,746,328 1,697,028 1,441,999 Total deposits 1,867,134 1,594,851 1,479,307 1,443,753 1,251,290 Shareholders' equity 256,286 233,788 226,834 210,296 142,184 Selected income statement data: Interest income$ 81,472 $ 79,761 $ 92,945 $ 83,699 $ 65,267 Interest expense 4,335 13,572 23,911 17,951 10,097 Net interest income 77,137 66,189 69,034 65,748 55,170 Provision for loan losses (4,596) 13,219 4,237 1,231 1,827 Noninterest income 18,434 11,740 11,869 10,454 13,894 Noninterest expense 43,208 41,699 42,315 40,226 35,895 Income before income taxes 56,959 23,011 34,351 34,745 31,342 Income tax expense 16,856 6,836 10,243 10,444 14,939 Net income 40,103 16,175 24,108 24,301 16,403 Per share data: Earnings per common share, basic$ 2.66 $
1.05
Earnings per common share, diluted
2.62 1.04 1.49 1.65 1.21
Book value per common share (1) 17.24 15.19 14.44 13.16 10.60
Cash dividends declared per common
share 0.44 0.40 0.25 0.12 0.12
Outstanding share data:
Number of common shares outstanding 14,865,825 15,385,878 15,707,016 15,977,754 13,417,899
Weighted-average common shares
outstanding, basic 15,017,637 15,384,231 15,873,383 14,397,075 13,408,030
Weighted-average common shares
outstanding, diluted 15,253,820 15,448,892 16,172,282 14,691,370 13,540,293
Selected performance ratios:
Return on average assets 1.96 % 0.84 % 1.40 % 1.53 % 1.22 %
Return on average shareholders' equity 16.52 % 7.08 % 10.88 % 14.26 % 12.00 %
Dividend payout ratio (2) 16.54 % 38.10 % 16.45 % 7.10 % 9.84 %
Efficiency ratio (3) 45.21 % 53.51 % 52.30 % 52.79 % 51.97 %
Yield on average interest-earning
assets 4.05 % 4.25 % 5.53 % 5.38 % 4.99 %
Cost of average interest-bearing
liabilities 0.41 % 1.15 % 2.09 % 1.65 % 1.14 %
Net interest spread 3.64 % 3.10 % 3.44 % 3.73 % 3.85 %
Net interest margin (4) 3.83 % 3.53 % 4.11 % 4.23 % 4.22 %
Total loans to total deposits ratio (5) 94.76 % 99.42 % 98.21 % 93.12 % 95.53 %
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As of or For the Year Ended December 31,
($ in thousands, except per share data) 2021 2020 2019 2018 2017
Asset quality:
Loans 30 to 89 days past due and still
accruing $ 554
Loans 90 days or more past due and still outstanding
- - 287 - - Nonaccrual loans 994 3,163 2,537 1,061 3,234 Nonperforming loans 994 3,163 2,824 1,061 3,234 Nonperforming assets (6) 994 4,564 2,824 1,061 3,333 Net charge-offs (recoveries) (467) 1,089 3,024 288 923 Loans 30 to 89 days past due and still accruing to loans held-for-investment 0.03 % 0.02 % 0.13 % 0.03 % 0.11 % Nonaccrual loans to loans held-for-investment 0.06 % 0.20 % 0.17 % 0.08 % 0.27 % Nonaccrual loans to allowance for loan losses 4.44 % 11.93 % 17.64 % 8.06 % 26.46 % Nonperforming loans to loans held-for-investment 0.06 % 0.20 % 0.19 % 0.08 % 0.27 % Nonperforming loans to allowance for loan losses 4.44 % 11.93 % 19.64 % 8.06 % 26.46 % Nonperforming assets to total assets 0.05 % 0.24 % 0.16 % 0.06 % 0.23 % Allowance for loan losses to loans held-for-investment 1.29 % 1.67 % 0.99 % 0.98 % 1.03 % Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (7) 1.34 % 1.83 % 0.99 % 0.98 % 1.03 % Allowance for loan losses to nonaccrual loans 2,251.61 %
838.13% 566.81% 1,241.00% 377.98% Provision for loan losses on non-performing loans
2,251.61 %
838.13% 509.21% 1,241.00% 377.98% Net charges (recoveries) on average loans held for investment
(0.03) % 0.07 % 0.22 % 0.02 % 0.08 %
Capital ratios:
Shareholders' equity to total assets 11.92 % 12.16 % 12.99 % 12.39 % 9.86 %
Average equity to average assets 11.86 % 11.94 % 12.88 % 10.72 % 10.20 %
PCB Bancorp
Common tier 1 capital (to risk-weighted
assets) 14.79 % 15.97 % 15.87 % 16.28 % 12.15 %
Total capital (to risk-weighted assets) 16.04 % 17.22 % 16.90 % 17.31 % 13.20 %
Tier 1 capital (to risk-weighted assets) 14.79 % 15.97 % 15.87 % 16.28 % 12.15 %
Tier 1 capital (to average assets) 12.11 % 11.94 % 13.23 % 12.60 % 10.01 %
Pacific City Bank
Common tier 1 capital (to risk-weighted
assets) 14.48 % 15.70 % 15.68 % 16.19 % 12.06 %
Total capital (to risk-weighted assets) 15.73 % 16.95 % 16.71 % 17.21 % 13.12 %
Tier 1 capital (to risk-weighted assets) 14.48 % 15.70 % 15.68 % 16.19 % 12.06 %
Tier 1 capital (to average assets) 11.85 % 11.74 % 13.06 % 12.53 % 9.94 %
(1) Shareholders' equity divided by common shares outstanding
(2) Dividends declared per common share divided by basic earnings per common
share.
(3) Noninterest expenses divided by the sum of net interest income and
noninterest income.
(4) Net interest income divided by average total interest-earning assets.
(5) Total loans include both loans held-for-sale and loans held-for-investment,
net of unearned loan costs (fees).
(6) Nonperforming assets include nonperforming loans (nonaccrual loans plus
loans past due 90 days or more and still accruing) and other real estate owned.
(7) This ratio is not presented in accordance with GAAP. See "Non-GAAP measure"
for reconciliation of this measure to its most comparable GAAP measure.
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Executive Summary Financial Highlights •Net income was$40.1 million for the year endedDecember 31, 2021 , an increase of$23.9 million , or 147.9%, from$16.2 million for the year endedDecember 31, 2020 ;
• The allowance (reversal) for loan losses has been
• Diluted earnings per common share were
• The net interest margin was 3.83%, 3.53% and 4.11% for the years ended
• Total assets were
•Loans held-for-investment, net of deferred costs (fees), were$1.73 billion atDecember 31, 2021 , an increase of$148.6 million , or 9.4%, from$1.58 billion atDecember 31, 2020 . Excluding SBA PPP loans, loans held-for-investment were$1.67 billion atDecember 31, 2021 , an increase of$219.0 million , or 15.1%, from$1.45 billion atDecember 31, 2020 ;
• SBA PPP loans have been
• Loans with modifications related to COVID-19 were void and
• Total deposits were
•BOLI of
• The Company declared and paid cash dividends of
The increase in net income for the year endedDecember 31, 2021 compared with the year endedDecember 31, 2020 was primarily due to increases in net interest income and noninterest income and the reversal for loan losses. Net interest income increased primarily due to a decrease in cost of interest-bearing liabilities and an increase in average earning assets. Noninterest income increased primarily due to an increase in gain on sale of SBA loans. Reversal for loan losses was primarily due to a decrease in qualitative adjustment factor allocations related to economic implications of the COVID-19 pandemic during the year endedDecember 31, 2021 . The decrease in net income for the year endedDecember 31, 2020 compared with the year endedDecember 31, 2019 was primarily due to an increase in provision for loan losses and a decrease in net interest income. Provision for loan losses increased primarily due to the increase in risks associated with economic and business conditions, as well an increases in special mention and substandard loans, as a result of the COVID-19 pandemic, and net interest income decreased primarily due to the lower market rates during the year endedDecember 31, 2020 . The increase in total assets for the year endedDecember 31, 2021 was primarily due to increases in loans held-for-investment and loans held-for-sale and the BOLI purchase of$29.3 million . Loans held-for-investment increased primarily due to the increased commercial property and residential property loan production. Loans held-for-sale increased primarily due to the increased SBA loan production. The Company is committed to making corporate decisions that directly benefit its shareholders, and during the year endedDecember 31, 2021 , increased its dividend per common share by$0.04 , or 10.0%, to$0.44 from$0.40 for the year endedDecember 31, 2020 . During the year endedDecember 31, 2021 , the Company also repurchased 680,269 shares of common stock, totaling$10.9 million . Overall, the Company returned 43.7% of its earnings to common shareholders through dividends and common share repurchases during the year endedDecember 31, 2021 . COVID-19 Pandemic The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on global economic and market conditions. TheU.S. government has enacted a number of monetary and fiscal policies to provide fiscal stimulus and relief in order to mitigate the impact of the COVID-19 pandemic. However, the COVID-19 pandemic continues to be a challenge to public health, including the emergence of new variants, and impact global economic and market conditions, including global supply chain disruptions and high inflation. 50 -------------------------------------------------------------------------------- Since the beginning of the crisis, the Company has taken a number of steps to protect the safety of its employees and to support its customers. The Company has enabled its staff to work remotely and established safety measures within its bank premises and branches for both employees and customers. In order to support its customers, the Company has been in close contact with them, assessing the level of impact on their businesses, and putting a process in place to evaluate each client's specific situation and provide relief programs where appropriate, including SBA PPP loans and loan modifications related to the COVID-19 pandemic. In addition, the Company has been monitoring its liquidity and capital closely. As ofDecember 31, 2021 , the Company maintained$203.3 million , or 9.5% of total assets, of cash and cash equivalents and$610.4 million , or 28.4% of total assets, of available borrowing capacity. All regulatory capital ratios were also well above the regulatory well-capitalized requirements as ofDecember 31, 2021 . At this time, the Company cannot estimate the long term impact of the COVID-19 pandemic, but these conditions are expected to continue to impact its business, results of operations, and financial condition negatively.
Network and data incident
OnAugust 30, 2021 , the Bank identified unusual activity on its network. The Bank responded promptly to disable the activity, investigate its source and monitor the Bank's network. The Bank subsequently became aware of claims that it had been the target of a ransomware attack. OnSeptember 7, 2021 , the Bank determined that an external actor had illegally accessed and/or acquired certain data on its network. The Bank has been working with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/or acquired and who may have been impacted. The investigation revealed that this incident impacted certain files containing certain Bank customer information. Some of these files contained documents related to loan applications, such as tax returns, Form W-2 information of their employees, and payroll records. The Bank has notified all individuals identified as impacted, consistent with applicable laws. All impacted individuals were offered free Equifax Complete Premier credit monitoring and identify theft protection services. The Bank has notified law enforcement and appropriate authorities of the incident. OnDecember 16, 2021 , a complaint based on the incident was filed in theLos Angeles County Superior Court seeking damages, injunctive relief, and equitable relief. The Bank expresses no opinion on the merits of the Matter and intends to answer, respond, and/or otherwise vigorously defend itself from the claims and causes of action asserted in the complaint to the fullest extent permitted by applicable law. Those defenses will be based in part on the fact that the Bank has implemented security procedures, practices, and a robust information security program pursuant to guidance from financial regulators. Please see Part I Item 3 for more information about the litigation. The Company continues to monitor and evaluate the data incident for its magnitude and concomitant financial, legal or reputational consequences. To date, such consequences are not material, however the data incident is still recent and notices to affected individuals only recently began and the lawsuit mentioned above is in its very early stages. During the year endedDecember 31, 2021 , expenses associated with the data incident, all of which are included in Other Expense in Consolidated Statements of Income (Unaudited), totaled$100 thousand , which represents the retention amount on its insurance claims. The Company anticipates additional expenses will be incurred in future periods; however, the Company does have a cyber-liability insurance policy that should provide insurance coverage for this incident. During its most recent review of disclosure controls and procedures, the Company considered the data incident and concluded that its disclosure controls and procedures were effective. Nevertheless, the Company continues to enhance and update its disclosure controls and procedures, including as part of its efforts to enhance its cybersecurity safeguards and measures. With respect to the data incident, upon discovery the Bank engaged experienced outside counsel and continues to work with its experienced third-party forensics firm to investigate and remediate the matter. The Board of Directors was kept apprised of, and a director with experience in data security participated in, the investigation and remediation efforts. As a result of this incident and based on information known at this date, the Company determined that its disclosure controls and procedures were effective and the data incident did not materially affect, nor was it reasonably likely to affect, the Company's internal control over financial reporting. Result of Operations Net Interest Income A principal component of the Company's earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest-earning assets is referred to as the net interest margin. The net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities. Net interest income is affected by changes in the balances of interest-earning assets and interest-bearing liabilities and changes in the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. 51 -------------------------------------------------------------------------------- The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their correspondent yields and costs expressed both in dollars and rates for the periods indicated: Year Ended December 31, 2021 2020 2019 ($ in thousands) Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost Interest-earning assets: Total loans (1)$ 1,702,073 $ 79,155 4.65 %$ 1,541,740 $ 76,546 4.96 %$ 1,383,562 $ 85,667 6.19 % Mortgage-backed securities 89,693 989 1.10 % 68,496 1,260 1.84 % 82,848 2,081 2.51 % Collateralized mortgage obligation 22,633 221 0.98 % 35,299 462 1.31 % 51,441 1,185 2.30 % SBA loan pool securities 10,515 189 1.80 % 13,120 255 1.94 % 20,681 536 2.59 % Municipal securities - tax exempt (2) 5,755 146 2.54 % 5,811 150 2.58 % 5,833 154 2.64 % Corporate bonds 1,841 68 3.69 % - - - % - - - % Interest-bearing deposits in other financial institutions 170,814 220 0.13 % 204,708 631 0.31 % 126,803 2,781 2.19 % FHLB and other bank stock 8,539 484 5.67 % 8,416 457 5.43 % 8,067 541 6.71 % Total interest-earning assets 2,011,863 81,472 4.05 % 1,877,590 79,761 4.25 % 1,679,235 92,945 5.53 % Noninterest-earning assets: Cash and cash equivalents 19,676 17,542 18,614 Allowances for loan losses (25,270) (19,693) (13,197) Other assets 41,187 39,385 35,010 Total noninterest-earning assets 35,593 37,234 40,427 Total assets$ 2,047,456 $ 1,914,824 $ 1,719,662 Interest-bearing liabilities: Deposits: NOW and money market accounts$ 400,446 1,242 0.31 %$ 371,315 2,385 0.64 %$ 329,562 5,162 1.57 % Savings 12,302 6 0.05 % 8,543 9 0.11 % 7,965 32 0.40 % Time deposits 609,351 2,795 0.46 % 708,306 10,564
1.49 % 783,353 18,245 2.33 % Other borrowings 31,302 292 0.93 % 94,319 614 0.65 % 25,388 472 1.86 % Total interest-bearing liabilities 1,053,401 4,335 0.41 % 1,182,483 13,572 1.15 % 1,146,268 23,911 2.09 % Noninterest-bearing liabilities: Demand deposits 737,216 486,820 329,731 Other liabilities 14,073 16,968 22,087 Total noninterest-bearing liabilities 751,289 503,788 351,818 Total liabilities 1,804,690 1,686,271 1,498,086 Shareholders' equity 242,766 228,553 221,576 Total liabilities and shareholders' equity$ 2,047,456 $ 1,914,824 $ 1,719,662 Net interest income$ 77,137 $ 66,189 $ 69,034 Net interest spread (3) 3.64 % 3.10 % 3.44 % Net interest margin (4) 3.83 % 3.53 % 4.11 % Cost of funds (5) 0.24 % 0.81 % 1.62 % (1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees (cost) of$6.1 million ,$2.9 million and$452 thousand , respectively, and net accretion of discount on loans of$3.5 million ,$3.3 million and$4.0 million , respectively, are included in the interest income for the years endedDecember 31, 2021 , 2020 and 2019, respectively. (2) The yield on municipal bonds has not been computed on a tax-equivalent basis. (3) Net interest spread is calculated by subtracting average rate on interest-bearing liabilities from average yield on interest-earning assets. (4) Net interest margin is calculated by dividing net interest income by average interest-earning assets. (5) Cost of funds is calculated by dividing interest expense on deposits by the sum of interest-bearing and noninterest-bearing demand deposits. 52 -------------------------------------------------------------------------------- The following table presents the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. Information is provided on changes attributable to: (i) changes in volume multiplied by the prior rate; and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. Year Ended December 31, 2021 vs. 2020 Year Ended December 31, 2020 vs. 2019 Increase (Decrease) Due to Net Increase Increase (Decrease) Due to Net Increase ($ in thousands) Volume Rate (Decrease) Volume Rate (Decrease) Interest earned on: Total loans$ 7,960 $ (5,351) $ 2,609 $ 9,794 $ (18,915) $ (9,121) Investment securities 134 (648) (514) (937) (892) (1,829) Other interest-earning assets (172) (212) (384) 1,927 (4,161) (2,234) Total interest income 7,922 (6,211) 1,711 10,784 (23,968) (13,184) Interest paid on: Savings, NOW, and money market deposits 207 (1,353) (1,146) 651 (3,451) (2,800) Time deposits (1,476) (6,293) (7,769) (1,748) (5,933) (7,681) Other borrowings (410) 88 (322) 1,282 (1,140) 142 Total interest expense (1,679) (7,558) (9,237) 185 (10,524) (10,339)
Change in net interest income
Year ended
The following table presents the components of net interest income for the
periods indicated:
Year Ended December 31,
($ in thousands) 2021 2020 Amount Change Percentage Change
Interest income:
Interest and fees on loans $ 79,155 $ 76,546 $ 2,609 3.4 %
Interest on investment securities 1,613 2,127 (514) (24.2) %
Interest and dividends on other
interest-earning assets 704 1,088 (384) (35.3) %
Total interest income 81,472 79,761 1,711 2.1 %
Interest expense:
Interest on deposits 4,043 12,958 (8,915) (68.8) %
Interest on other borrowings 292 614 (322) (52.4) %
Total interest expense 4,335 13,572 (9,237) (68.1) %
Net interest income $ 77,137 $ 66,189 $ 10,948 16.5 %
Net interest income increased primarily due to a 7.2% increase in average
balance of interest-earning assets and a 74 basis point decrease in average cost
of interest-bearing liabilities, partially offset by a 20 basis point decrease
in average yield on interest-earning assets and a 10.9% decrease in average
balance of interest-bearing liabilities. The increase in average balance of
interest-earning assets was primarily due to growth in the loan and investment
securities, supported by deposit growth. The decreases in average yield on
interest-earning assets and average cost of interest-bearing liabilities were
primarily due to the lower market rates during the year ended December 31, 2021 .
Interest and fees on loans increased primarily due to a 10.4% increase in
average balance, partially offset by a 31 basis point decrease in average yield.
The increase in average balance was primarily due to an increase in commercial
property loans, partially offset by decreases in commercial term and SBA PPP
loans. The decrease in average yield was primarily due to the lower market
rates, partially offset by increases in net amortization of deferred fees on SBA
PPP loans and net accretion of discount.
Interest on investment securities decreased primarily due to a 49 basis point
decrease in average yield, partially offset by a 6.3% increase in average
balance. The decrease in average yield was primarily due to new investment
securities purchased at lower market rates. The Company purchased $47.3 million
and $39.4 million , respectively, of investment securities during the years ended
December 31, 2021 and 2020. For the years ended December 31, 2021 and 2020,
average yield on total investment securities was 1.24% and 1.73%, respectively.
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Interest income on other interest-earning assets decreased primarily due to a 12
basis point decrease in average yield and a 15.8% decrease in average balance.
The decrease in average yield was primarily due to the lower market rates. The
decrease in average balance was primarily due to increases in loans and
investment securities. For the years ended December 31, 2021 and 2020, yield on
total other interest-earning assets was 0.39% and 0.51%, respectively.
Interest expense on deposits decreased primarily due to a 6.1% decrease in
average balance of interest-bearing deposits and a 79 basis point decrease in
average cost of interest-bearing deposits. The decrease in average balance was
primarily due to a decrease in time deposits, partially offset by increases in
savings, NOW and money market accounts. The decrease in average cost was
primarily due to the lower market rates. For the years ended December 31, 2021
and 2020, average cost on total interest-bearing deposits was 0.40% and 1.19%,
respectively.
Interest expense on other borrowings decreased primarily due to a 66.8% decrease
in average balance, partially offset by a 28 basis point increase in average
cost. The increase in average cost was primarily due to matured borrowings with
lower interest rates during the year ended December 31, 2021 . Matured FHLB
advances totaled $70.0 million with a weighted-average rate of 0.47% for the
year ended December 31, 2021 .
Year ended
The following table presents the components of net interest income for the
periods indicated:
Year Ended December 31,
($ in thousands) 2020 2019 Amount Change Percentage Change
Interest income:
Interest and fees on loans $ 76,546 $ 85,667 $ (9,121) (10.6) %
Interest on investment securities 2,127 3,956 (1,829) (46.2) %
Interest and dividends on other
interest-earning assets 1,088 3,322 (2,234) (67.2) %
Total interest income 79,761 92,945 (13,184) (14.2) %
Interest expense:
Interest on deposits 12,958 23,439 (10,481) (44.7) %
Interest on borrowings 614 472 142 30.1 %
Total interest expense 13,572 23,911 (10,339) (43.2) %
Net interest income $ 66,189 $ 69,034 $ (2,845) (4.1) %
Net interest income decreased primarily due to a 128 basis point decrease in
average yield on interest-earning assets and a 3.2% increase in average balance
of interest-bearing liabilities, partially offset by a 11.8% increase in average
balance of interest-earning assets and a 94 basis point decrease in average cost
of interest-bearing liabilities. The increase in average balance of
interest-earning assets was primarily due to growth in the loan and other
interest-earning assets, supported by deposit growth. The decreases in average
yield on interest-earning assets and average cost of interest-bearing
liabilities were primarily due to the lower market rates during the year ended
December 31, 2020 .
Interest and fees on loans decreased primarily due to a 123 basis point decrease
in average yield, partially offset by an 11.4% increase in average balance. The
decrease in average yield was primarily due to the lower market rates, the 1%
interest rate on SBA PPP loans, and a decrease in net accretion of discount,
partially offset by an increase in net amortization of deferred fees on SBA PPP
loans. The increase in average balance was primarily due to the SBA PPP loan
production as well as an increase in commercial property loans.
Interest on investment securities decreased primarily due to a 23.7% decrease in
average balance and a 73 basis point decrease in average yield. The decrease in
average balance was primarily due to a sale of investment securities of $32.8
million in December 2019 , which lead to a lower average balance in 2020,
partially offset by new investment securities purchased in 2020. The decrease in
average yield was primarily due to new investment securities purchased at lower
market rates, as well as the sales of securities available-for-sale in December
2019 with a weighted-average book yield of 3.02%. The Company purchased $39.4
million and $14.1 million , respectively, of investment securities during the
years ended December 31, 2020 and 2019. For the years ended December 31, 2020
and 2019, average yield on total investment securities was 1.73% and 2.46%,
respectively.
Interest income on other interest-earning assets decreased primarily due to a
195 basis point decrease in average yield, partially offset by a 58.0% increase
in average balance. The decrease in average yield was primarily due to the lower
market rates. The increase in average balance was primarily due to increases in
deposits and other borrowings as the Company maintains most of its cash at the
Federal Reserve Bank account. For the years ended December 31, 2020 and 2019,
yield on total other interest-earning assets was 0.51% and 2.46%, respectively.
54
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Interest expense on deposits decreased primarily due to a 2.9% decrease in
average balance of interest-bearing deposits and a 90 basis point decrease in
average cost of interest-bearing deposits. The decrease in average balance was
primarily due to a decrease in time deposits, partially offset by increases in
savings, NOW and money market accounts. The decrease in average cost was
primarily due to the lower market rates. For the years ended December 31, 2020
and 2019, average cost on total interest-bearing deposits was 1.19% and 2.09%,
respectively.
Interest expense on other borrowings increased primarily due to a 271.5%
increase in average balance, partially offset by a 121 basis point decrease in
average cost. The decrease in average cost was primarily due to the lower market
rates. The increase in average balance was primarily due to the Company's
liquidity management plan in response to the COVID-19 pandemic.
Allowance (reversal) for loan losses
Provision (reversal) for loan losses was$(4.6) million ,$13.2 million and$4.2 million for the years endedDecember 31, 2021 , 2020 and 2019. The reversal for loan losses for the year endedDecember 31, 2021 was primarily due to a decrease in qualitative adjustment factor allocations related to economic implications of the COVID-19 pandemic. The increase for the year endedDecember 31, 2020 in provision for loan losses was primarily due to the increase in risks associated with economic and business conditions and uncertainty, as well as the increases in special mention and classified loans, as a result of the COVID-19 pandemic.
See further discussion in “Loans Held for Investment Purposes and Allowance for Loan Losses”.
55 --------------------------------------------------------------------------------
Non-interest income
Year ended
The following table presents the components of noninterest income for the
periods indicated:
Year Ended December 31,
($ in thousands) 2021 2020 Amount Change Percentage Change
Service charges and fees on deposits $ 1,195 $ 1,256 $ (61) (4.9) %
Loan servicing income 2,770 2,710 60 2.2 %
Bank-owned life insurance income 108 - 108 - %
Gain on sale of loans 12,932 6,527 6,405 98.1 %
Other income 1,429 1,247 182 14.6 %
Total noninterest income $ 18,434 $ 11,740 $ 6,694 57.0 %
Service charges and deposit fees decreased primarily due to a decrease in commission-based transactions.
Loan servicing income represents fees received on loans that the Company services, net of amortization of servicing assets. The increase was primarily due to an increase in servicing income received, partially offset by an increase in amortization of servicing assets from increased prepayments of loans being serviced. The Company purchased bank-owned life insurance of$29.3 million duringNovember 2021 . Bank-owned life insurance income represents the increase in cash surrender value of the insurance policy. Gain on sale of loans increased primarily due to increases in sales volume and gain margin. The increase in gain margin on SBA loans was primarily due to the temporary increase of SBA guaranteed portion untilSeptember 30, 2021 under the Economic Aid Act. The Company sold SBA loans of$126.8 million with a gain of$12.8 million , residential property loans of$10.4 million with a gain of$151 thousand and certain commercial property loans of$8.6 million with a gain of$6 thousand during the year endedDecember 31, 2021 . During the year endedDecember 31, 2020 , the Company sold SBA loans of$89.8 million with a gain of$6.0 million and residential property loans of$51.9 million with a gain of$489 thousand .
Other income included transfer and remittance fees
Year ended
The following table presents the components of noninterest income for the
periods indicated:
Year Ended December 31,
($ in thousands) 2020 2019 Amount Change Percentage Change
Service charges and fees on deposits $ 1,256 $ 1,544 $ (288) (18.7) %
Loan servicing income 2,710 2,309 401 17.4 %
Gain on sale of loans 6,527 5,996 531 8.9 %
Gain on sale of securities available-for-sale - 786 (786) (100.0) %
Other income 1,247 1,234 13 1.1 %
Total noninterest income $ 11,740 $ 11,869 $ (129) (1.1) %
Service charges and deposit fees decreased primarily due to a decrease in commission-based transactions.
The increase is mainly attributable to a decrease in the amortization of management assets due to the decrease in prepayments of loans under management.
Gain on sale of loans increased primarily due to increases in sales volume and premium. The increase in premium on SBA loans was primarily due to the market condition and the increase in sale volume of residential property loans was primarily due to increased refinancing activities during the year endedDecember 31, 2020 . The Company sold SBA loans of$89.8 million with a gain of$6.0 million and residential property loans of$51.9 million with a gain of$489 thousand during the year endedDecember 31, 2020 . During the year endedDecember 31, 2019 , the Company sold SBA loans of$99.6 million with a gain of$5.9 million and residential property loans of$10.1 million with a gain of$81 thousand . The Company sold securities available-for-sale of$32.8 million during the year endedDecember 31, 2019 , while the Company did not sell any securities for the year endedDecember 31, 2020 .
Other income included transfer and remittance fees
56 --------------------------------------------------------------------------------
Non-interest expenses
Year ended
The following table presents the components of noninterest expense for the
periods indicated:
Year Ended December 31,
($ in thousands) 2021 2020 Amount Change Percentage Change
Salaries and employee benefits $ 27,974 $ 26,147 $ 1,827 7.0 %
Occupancy and equipment 5,575 5,620 (45) (0.8) %
Professional fees 2,159 2,256 (97) (4.3) %
Marketing and business promotion 1,656 1,360 296 21.8 %
Data processing 1,572 1,472 100 6.8 %
Director fees and expenses 594 599 (5) (0.8) %
Regulatory assessments 537 978 (441) (45.1) %
Other expenses 3,141 3,267 (126) (3.9) %
Total noninterest expense $ 43,208 $ 41,699 $ 1,509 3.6 %
Salaries and employee benefits increased primarily due to increases in wages,
bonus accrual, and incentives tied to LPO originated SBA loan sales, partially
offset by decreases in vacation and stock compensation expense. The number of
full-time equivalent employees averaged 247.9 for the year ended December 31,
2021 compared to 251.8 for the year ended December 31, 2020 .
Occupancy and equipment expenses decreased primarily due to lower depreciation, partially offset by an increase in equipment maintenance expenses.
Professional fees decreased primarily due to a decrease in expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs, partially offset by an increase in audit fees.
Marketing and trade promotion expenses increased primarily due to increased marketing and advertising activities.
Data processing fees increased primarily due to an increase in the costs of processing more accounts and transactions.
Directors’ fees and expenses decreased mainly due to a severance payment of
Regulatory valuation expense decreased primarily due to a lower valuation rate, partially offset by an increase in the balance sheet.
Other expense decreased primarily due to a decrease in other loan related legal expense, partially offset by an increase in armed guard expenses. Other loan related legal expenses were$302 thousand and$426 thousand , respectively, and armed guard expense of$546 thousand and$506 thousand , respectively, for the years endedDecember 31, 2021 and 2020, respectively. Other expenses also included office expenses of$1.4 million and$1.4 million , respectively, and reversal for unfunded loan commitments was$24 thousand and$63 thousand , respectively for the years endedDecember 31, 2021 and 2020, respectively. 57 --------------------------------------------------------------------------------
Year ended
The following table presents the components of noninterest expense for the
periods indicated:
Year Ended December 31,
($ in thousands) 2020 2019 Amount Change Percentage Change
Salaries and employee benefits $ 26,147 $ 26,139 $ 8 - %
Occupancy and equipment 5,620 5,545 75 1.4 %
Professional fees 2,256 2,730 (474) (17.4) %
Marketing and business promotion 1,360 1,550 (190) (12.3) %
Data processing 1,472 1,365 107 7.8 %
Director fees and expenses 599 751 (152) (20.2) %
Regulatory assessments 978 551 427 77.5 %
Other expenses 3,267 3,684 (417) (11.3) %
Total noninterest expense $ 41,699 $ 42,315 $ (616) (1.5) %
Salaries and employee benefits increased primarily due to increases in wages,
other employee benefits and vacation accrual, partially offset by a direct loan
origination cost of $1.1 million related to SBA PPP loan production and a
decrease in bonus accrual. The number of full-time equivalent employees averaged
251.8 for the year ended December 31, 2020 compared to 250.2 for the year ended
December 31, 2019 .
Occupancy and equipment expenses increased primarily due to increased rent and equipment maintenance expenses.
Professional fees decreased primarily due to a decrease in expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs. The consent order with theFDIC and CDFPI related to the BSA/AML compliance was terminated onSeptember 30, 2020 .
Marketing and trade promotion expenses decreased primarily due to lower marketing activities related to the COVID-19 pandemic for the year ended
Data processing fees increased primarily due to an increase in the costs of processing more accounts and transactions.
Director fees and expenses decreased primarily due to the Company's Board of Directors decision to temporarily decrease director fees from the second quarter of 2020, partially offset by a severance payment of$45 thousand for a former director during the year endedDecember 31, 2020 . Regulatory assessment expense increased primarily due to a small bank credit of$345 thousand received from theFDIC during the year endedDecember 31, 2019 , as well as an increase in balance sheet. Other expense decreased primarily due to decreases in office expenses, provision for unfunded loan commitments, other loan related legal expenses, and armed guard expenses. Other expenses included office expenses of$1.4 million and$1.7 million , respectively, provision (reversal) for unfunded loan commitments was$(63) thousand and$162 thousand , respectively, Other loan related legal expenses were$426 thousand and$486 thousand , respectively, and armed guard expense of$506 thousand and$555 thousand , respectively, for the years endedDecember 31, 2020 and 2019, respectively.
income tax expense
The income tax expense was
58 --------------------------------------------------------------------------------
Financial condition
OnJune 30, 2020 , the Company transferred securities held-to-maturity to securities available-for-sale as a part of the Company's liquidity management plan in response to the COVID-19 pandemic. Management determined that its securities held-to-maturity no longer adhere to the Company's current liquidity management plan and could be sold to potentially improve the Company's liquidity position. Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and the Company's ability to assert that it has the intent and ability to hold to maturity debt securities will be limited for up to two years from the date of transfer. The Company transferred all securities held-to-maturity of$18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of$787 thousand .
The following table shows the amortized cost and fair value of the investment securities portfolio at the dates indicated:
December 31,
2021 2020
Unrealized Gain Unrealized Gain
($ in thousands) Amortized Cost Fair Value (Loss) Amortized Cost Fair Value (Loss)
Securities available-for-sale:
U.S. government agency and U.S.
government sponsored enterprise
securities:
Mortgage-backed securities $ 85,346 $ 84,713 $ (633) $ 74,622 $ 76,154 $ 1,532
Collateralized mortgage
obligations 18,990 19,056 66 26,216 26,467 251
SBA loan pool securities 8,520 8,672 152 11,753 12,080 327
Municipal bonds 5,329 5,686 357 5,370 5,826 456
Corporate bonds 5,000 5,071 71 - - -
Total securities
available-for-sale $ 123,185 $ 123,198 $ 13 $ 117,961 $ 120,527 $ 2,566
Total carrying value of investment securities were $123.2 million at
December 31, 2021 , an increase of $2.7 million , or 2.2%, from $120.5 million at
December 31, 2020 . The increase was primarily due to purchases of $47.3 million ,
partially offset by principal paydowns and calls of $41.1 million , a decrease in
fair value of securities available-for-sale of $2.6 million and net premium
amortization of $1.0 million .
All individual securities in a continuous unrealized loss position for 12 months
or more as of December 31, 2021 and December 31, 2020 had an investment grade
rating upon purchase. The issuers of these securities have not established any
cause for default on these securities and various rating agencies have
reaffirmed their long-term investment grade status as of December 31, 2021 and
2020. These securities have fluctuated in value since their purchase dates as
market interest rates fluctuated. The Company does not intend to sell these
securities and it is more likely than not that the Company will not be required
to sell before the recovery of its amortized cost basis. The Company determined
that the investment securities with unrealized losses for twelve months or more
are not other-than-temporary impaired, and, therefore, no impairment was
recognized at December 31, 2021 and 2020.
59
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The following table presents the contractual maturity schedule for securities,
at amortized cost, and their weighted-average yields as of December 31, 2021 .
Weighted-average yields are based upon the amortized cost of securities and are
calculated using the interest method which takes into consideration of premium
amortization and discount accretion. Weighted-average yields on tax-exempt debt
securities exclude the federal income tax benefit.
December 31, 2021
Within One Year More than One Year through Five Years More than Five Years through Ten Years More than Ten Years Total
($ in thousands) Amortized Cost
Weighted average return Amortized cost Weighted average return Amortized cost Weighted average return Amortized cost Weighted average return
Amortized Cost Weighted-Average Yield Securities available-for-sale:U.S. government agency andU.S. government sponsored enterprise securities: Mortgage-backed securities $ - - % $ 623 1.56 %$ 7,932 1.59 %$ 76,791 1.45 %$ 85,346 1.47 % Collateralized mortgage obligations - - % - - % 9,927 0.71 % 9,063 1.51 % 18,990 1.09 % SBA loan pool securities - - % 519 2.57 % 1,426 0.66 % 6,575 2.03 % 8,520 1.84 % Municipal bonds 305 1.72 % 1,851 2.07 % 830 2.27 % 2,343 3.53 % 5,329 2.72 % Corporate bonds - - % - - % 5,000 3.75 % - - % 5,000 3.75 % Total securities available-for-sale $ 305 1.72 %$ 2,993 2.05 %$ 25,115 1.64 %$ 94,772 1.55 %$ 123,185 1.58 % 60
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Loans held for investment and allowance for loan losses
The following table shows the composition of the Company’s loans held for investment purposes on the dates indicated:
December 31,
2021 2020 2019 2018 2017
Percentage to Percentage to Percentage to Percentage to Percentage to
($ in thousands) Amount Total Amount Total Amount Total Amount Total Amount Total
Real estate loans:
Commercial property 1,105,843 63.9 % 880,736 55.5 % 803,014 55.4 % 709,409 53.1 % 662,031 55.5 %
Residential property 209,485 12.1 % 198,431 12.5 % 235,046 16.3 % 233,816 17.5 % 168,560 14.2 %
SBA property 129,661 7.5 % 126,570 8.0 % 129,837 8.9 % 120,939 9.0 % 131,740 11.1 %
Construction 8,252 0.5 % 15,199 1.0 % 19,164 1.3 % 27,323 2.0 % 23,117 1.9 %
Total real estate loans 1,453,241 84.0 % 1,220,936 77.0 % 1,187,061 81.9 % 1,091,487 81.6 % 985,448 82.7 %
Commercial and industrial loans:
Commercial term 73,438 4.2 % 87,250 5.5 % 103,380 7.1 % 102,133 7.6 % 77,402 6.5 %
Commercial lines of credit 100,936 5.8 % 96,087 6.1 % 111,768 7.7 % 91,994 6.9 % 62,751 5.3 %
SBA commercial term 17,640 1.0 % 21,878 1.4 % 25,332 1.7 % 27,147 2.0 % 30,376 2.6 %
SBA PPP 65,329 3.8 % 135,654 8.6 % - - % - - % - - %
Total commercial and industrial loans 257,343 14.8 % 340,869 21.6 % 240,480 16.5 % 221,274 16.5 % 170,529 14.4 %
Other consumer loans 21,621 1.2 % 21,773 1.4 % 23,290 1.6 % 25,921 1.9 % 34,022 2.9 %
Loans held-for-investment 1,732,205 100.0 % 1,583,578 100.0 % 1,450,831 100.0 % 1,338,682 100.0 % 1,189,999 100.0 %
Allowance for loan losses (22,381) (26,510) (14,380) (13,167) (12,224)
Net loans held-for-investment $ 1,709,824 $ 1,557,068 $ 1,436,451 $ 1,325,515 $ 1,177,775
Loans held-for-investment were $1.73 billion at December 31, 2021 , an increase
of $148.6 million , or 9.4%, from $1.58 billion at December 31, 2020 . The
increase was primarily due to new funding of $619.7 million and advances of
$118.9 million , partially offset by paydowns and payoffs of $581.0 million ,
transfers to loans held-for-sale of $8.8 million and charge-offs of $227
thousand . The increase for the year ended December 31, 2021 was primarily due to
increases in commercial property and residential property loans, partially
offset by decreases in SBA PPP and commercial term loans. As of December 31,
2021 , the Company recognized $181.8 million in forgiveness.
61
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The following table shows the contractual maturities of loans held for investment purposes and the breakdown between fixed and variable interest rate loans at
December 31, 2021
Due
After a due after five
Within One Year to Five Years to 15 Due After 15 ($ in thousands) Year Years Years Years Total Real estate loans: Commercial property$ 96,753 $ 669,819 $ 338,503 $ 768 $ 1,105,843 Residential property - - - 209,485 209,485 SBA property 10 116 10,011 119,524 129,661 Construction 8,252 - - - 8,252 Total real estate loans 105,015 669,935 348,514 329,777 1,453,241 Commercial and industrial loans: Commercial term 3,401 55,900 14,137 - 73,438 Commercial lines of credit 100,936 - - - 100,936 SBA commercial term 52 5,597 11,991 - 17,640 SBA PPP 5,158 60,171 - - 65,329 Total commercial and industrial loans 109,547 121,668 26,128 - 257,343 Other consumer loans 3,079 17,930 612 - 21,621 Loans held-for-investment$ 217,641 $
809 533
Loans with variable (floating) interest rates
$ 187,046 $
307 905
Adjustable interest rate loans (fixed to variable)
- 62,899 263,135 178,606 504,640 Loans with predetermined (fixed) interest rates 30,595 438,729 21,069 947 491,340 Total$ 217,641 $ 746,634 $ 112,119 $ 329,777 $ 1,732,205
SBA Paycheck Protection Program
The following table presents a summary of SBA PPP loans as of the dates
indicated:
December 31,
2021 2020
Carrying Contractual Contractual
($ in thousands) Number of Loans Value Balance Number of Loans Carrying Value Balance
Loan amount:
$50,000 or less 145 $ 2,915 $ 3,074 1,017 $ 20,518 $ 20,632
Over $50,000 and less than
$350,000 156 25,417 26,146 496 60,692 62,011
Over $350,000 and less than
$2,000,000 52 33,812 34,432 69 46,054 46,718
$2,000,000 or more 1 3,185 3,187 3 8,390 8,427
Total 354 $ 65,329 $ 66,839 1,585 $ 135,654 $ 137,788
62
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Loan modifications related to the COVID-19 pandemic
The Company started providing modifications related to the COVID-19 pandemic during the three months endedJune 30, 2020 . The Company had no outstanding modification sinceSeptember 30, 2021 . The following table presents activity in loans under modified terms related to the COVID-19 pandemic for the year endedDecember 31, 2021 . Real Estate Loans Commercial and Industrial Loans Commercial Residential SBA Commercial ($ in thousands) Property Property SBA Property Commercial Term Term Total Balance at December 31, 2020$ 24,132 $ 425$ 4,192 $ 5,527$ 1,841 $ 36,117 Modification early terminated(1) - - (2,576) - (1,338) (3,914) Modification expired (33,943) (1,100) (1,627) (8,330) (513) (45,513) Subsequent modification 11,829 328 - 2,878 - 15,035 New modification - 349 - - - 349 Amortization (2,018) (2) 11 (75) 10 (2,074) Balance at December 31, 2021 $ - $ - $ - $ - $ - $ -
(1) Termination of Amendments at Borrower’s Request.
The following table presents the risk categories and accrued interest receivable for loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as ofDecember 31, 2021 : December 31, 2021 Carrying Value Per Risk Category Special Accrued Interest ($ in thousands) Pass Mention Substandard Doubtful Total Receivable Real estate loans: Commercial property$ 291,759 $ 11,739 $ 1,525 $ -$ 305,023 $ 730 Residential property 25,620 - - - 25,620 537 SBA property 3,683 251 - - 3,934 15 Commercial and industrial loans: Commercial term 29,744 3,563 1,114 - 34,421 84 SBA commercial term 1,663 - 57 - 1,720 6 Other consumer loans 699 - - - 699 2 Total$ 353,168 $ 15,553 $ 2,696 $ -$ 371,417 $ 1,374 Loans that were granted modifications related to the COVID-19 pandemic in excess of 6 months, on a cumulative basis, were classified as special mention or substandard. There were no past due or nonaccrual loans that were previously modified in response to the COVID-19 pandemic, but that had reverted back to previous contractual payment terms as ofDecember 31, 2021 . 63 --------------------------------------------------------------------------------
Allowance for loan losses
The following table reflects allocation of the allowance for loan losses by loan
category and the ratio of each loan category to total loans as of the dates
indicated:
December 31,
2021 2020 2019 2018 2017
Percentage of Percentage of Percentage of Percentage of Percentage of
Allowance for Loans to Total Allowance for Loans to Total Allowance for
Loans in total Allowance for loans in total
Allowance for Loans to Total ($ in thousands) Loan Losses Loans Loan Losses Loans Loan Losses Loans Loan Losses Loans Loan Losses Loans Real estate loans: Commercial property$ 13,586 63.9 %$ 13,810 55.5 %$ 6,942 55.4 %$ 6,216 53.1 %$ 6,366 55.5 % Residential property 1,869 12.1 % 2,680 12.5 % 1,167 16.3 % 1,152 17.5 % 833 14.2 % SBA property 1,253 7.5 % 2,179 8.0 % 1,446 8.9 % 1,225 9.0 % 1,124 11.1 % Construction 89 0.5 % 225 1.0 % 299 1.3 % 511 2.0 % 184 1.9 % Total real estate loans 16,797 84.0 % 18,894 77.0 % 9,854 81.9 % 9,104 81.6 % 8,507 82.7 % Commercial and industrial loans: Commercial term 2,715 4.2 % 4,090 5.5 % 1,848 7.1 % 1,525 7.6 % 1,513 6.5 % Commercial lines of credit 2,071 5.8 % 2,359 6.1 % 1,805 7.7 % 1,443 6.9 % 1,126 5.3 % SBA commercial term 524 1.0 % 773 1.4 % 701 1.7 % 909 2.0 % 909 2.6 % SBA PPP - 3.8 % - 8.6 % - - % - - % - - % Total commercial and industrial loans 5,310 14.8 % 7,222 21.6 % 4,354 16.5 % 3,877 16.5 % 3,548 14.4 % Other consumer loans 274 1.2 % 394 1.4 % 172 1.6 % 186 1.9 % 169 2.9 % Total$ 22,381 100.0 %$ 26,510 100.0 %$ 14,380 100.0 %$ 13,167 100.0 %$ 12,224 100.0 % Allowance for loan losses to loans held-for-investment 1.29 % 1.67 % 0.99 % 0.98 % 1.03 % Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (1) 1.34 % 1.83 % 0.99 % 0.98 % 1.03 %
(1) This ratio is not presented in accordance with GAAP. See “Non-GAAP Measure” for a reconciliation of this measure to its most comparable GAAP measure.
The SBA guarantee on PPP loans cannot be separated from the loan and therefore is not a separate unit of account. The Company considered the SBA guarantee in the allowance for loan losses evaluation and determined that it is not required to reserve an allowance on SBA PPP loans atDecember 31, 2021 and 2020. The decrease in allowance for loan losses for the year endedDecember 31, 2021 was primarily due to a decrease in qualitative adjustment factor allocations related to economic implications of the COVID-19 pandemic. The increase in allowance for loan losses for the year endedDecember 31, 2020 was primarily due to increased risks associated with economic and business conditions, as well as increases in special mention and substandard loans, as a result of the COVID-19 pandemic. 64 -------------------------------------------------------------------------------- The following tables present net charge-offs as a percentage to the average loan held for investment balances in each of the loan categories for the periods indicated: For the Year Ended December 31, 2021 2020 2019 Net Charge-offs Net Charge-offs Net Charge-offs ($ in thousands) Average Balance (Recoveries) Percentage Average Balance (Recoveries) Percentage Average Balance (Recoveries) Percentage Real estate loans: Commercial property$ 983,129 $ - - %$ 826,288 $ - - %$ 744,513 $ - - % Residential property 197,741 - - % 221,296 - - % 237,825 - - % SBA property 125,051 (39) (0.03) % 124,996 117 0.09 % 125,785 25 0.02 % Construction 12,715 - - % 20,285 - - % 22,384 - - % Total real estate loans 1,318,636 (39) (0.01) % 1,192,865 117 0.01 % 1,130,507 25 0.01 % Commercial and industrial loans: Commercial term 77,383 (200) (0.26) % 97,247 (96) (0.10) % 104,427 179 0.17 % Commercial lines of credit 92,874 (146) (0.16) % 100,154 709 0.71 % 93,344 2,597 2.78 % SBA commercial term 19,390 (104) (0.54) % 23,868 255 1.07 % 25,911 196 0.76 % SBA PPP 150,043 - - % 92,818 - - % - - - % Total commercial and industrial loans 339,690 (450) (0.13) % 314,087 868 0.28 % 223,682 2,972 1.33 % Other consumer loans 21,101 22 0.10 % 22,033 104 0.47 % 22,884 27 0.12 % Total loans held-for-investment$ 1,679,427 $ (467) (0.03) %$ 1,528,985 $ 1,089 0.07 %$ 1,377,073 $ 3,024 0.22 % For the Year Ended December 31, 2018 2017 Net Charge-offs Net Charge-offs ($ in thousands) Average Balance (Recoveries) Percentage Average Balance (Recoveries) Percentage Real estate loans: Commercial property$ 683,739 $ 4 0.01 %$ 623,203 $ - - % Residential property 200,061 - - % 149,168 - - % SBA property 129,472 164 0.13 % 117,154 167 0.14 % Construction 26,907 - - % 21,035 - - % Total real estate loans 1,040,179 168 0.02 % 910,560 167 0.02 % Commercial and industrial loans: Commercial term 86,168 (170) (0.20) % 73,239 281 0.38 % Commercial lines of credit 69,080 (28) (0.04) % 53,782 - - % SBA commercial term 28,950 114 0.39 % 29,193 459 1.57 % Total commercial and industrial loans 184,198 (84) (0.05) % 156,214 740 0.47 % Other consumer loans 30,135 204 0.68 % 32,951 16 0.05 % Total loans held-for-investment$ 1,254,512 $ 288 0.02 %$ 1,099,725 $ 923 0.08 % 65
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Loans 30 to 89 days past due and still in progress
The following table provides a summary of loans 30 to 89 days past due and still outstanding on the dates indicated:
December 31,
($ in thousands) 2021 2020 2019 2018 2017
Real estate loans:
Residential property $ 461 $ 182 $ 697 $ 95 $ 1,045
SBA property - - 794 183 -
Total real estate loans 461 182 1,491 278 1,045
Commercial and industrial loans:
SBA commercial term - - 189 - 2
Total commercial and industrial loans - - 189 - 2
Other consumer loans 93 156 138 99 294
Total $ 554 $ 338 $ 1,818 $ 377 $ 1,341
Non-performing loans and non-performing assets
The following table presents a summary of total NPLs and NPAs as of the dates
indicated:
December 31,
($ in thousands) 2021 2020 2019 2018 2017
Nonaccrual loans:
Real estate loans:
Commercial property $ - $ 524 $ - $ - $ 318
Residential property - 189 - 302 730
SBA property 746 885 442 540 1,810
Total real estate loans 746 1,598 442 842 2,858
Commercial and industrial loans:
Commercial term - - - - 4
Commercial lines of credit - 904 1,888 - 10
SBA commercial term 213 595 159 203 338
Total commercial and industrial loans 213 1,499 2,047 203 352
Other consumer loans 35 66 48 16 24
Total nonaccrual loans 994 3,163 2,537 1,061 3,234
Loans past due 90 days or more still on
accrual - - 287 - -
Total nonperforming loans 994 3,163 2,824 1,061 3,234
Other real estate owned - 1,401 - - 99
Total nonperforming assets $ 994 $ 4,564
Nonaccrual loans to loans held-for-investment 0.06 % 0.20 % 0.17 % 0.08 % 0.27 % Nonperforming loans to loans held-for-investment 0.06 % 0.20 % 0.19 % 0.08 % 0.27 % Allowance for loan losses to: Nonaccrual loans 2,251.61 % 838.13
% 566.81% 1,241.00% 377.98% Delinquent loans
2,251.61 % 838.13
% 509.21% 1,241.00% 377.98% Non-performing assets to total assets
0.05 % 0.24 % 0.16 % 0.06 % 0.23 % Total nonaccrual loans were$994 thousand atDecember 31, 2021 , a decrease of$2.2 million , or 68.6%, from$3.2 million atDecember 31, 2020 . The decrease was primarily due to payoffs and paydowns of$2.1 million , a loan transferred to OREO of$905 thousand and charge-offs of$86 thousand , partially offset by loans placed on nonaccrual status during the year endedDecember 31, 2021 of$958 thousand . 66 -------------------------------------------------------------------------------- Loans are generally placed on nonaccrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection. Past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower experiences changes to their financial condition, causing an inability to meet the original repayment terms, and where management believe the borrower will eventually overcome those circumstances and repay the loan in full. Additional income of approximately$54 thousand would have been recorded during the year endedDecember 31, 2021 , had these loans been paid in accordance with their original terms throughout the periods indicated.
CRE concentration
The Bank has policies and procedures in place to monitor compliance with the CRE Concentration Guidance. The Bank has set targets for CRE concentration limits as a percentage of total capital in accordance with interagency guidelines and actively manages the Bank's exposure to CRE lending. The Bank's construction and land development loans remain a small portion of the loan portfolio and as a percentage of total capital (as defined by the federal bank regulators) were 5.8% and 9.5%, respectively, atDecember 31, 2021 and 2020. As ofDecember 31, 2021 , using regulatory definitions in the CRE Concentration Guidance, CRE loans represented 269.8% of total risk-based capital, as compared to 256.1%, 243.6%, 253.6% and 355.1% as ofDecember 31, 2020 , 2019, 2018 and 2017, respectively. The reduction in CRE concentration ratio in 2018 was primarily due to the additional capital from the Company's IPO during the year endedDecember 31, 2018 . The management believes that the Bank has a robust risk management framework in place for CRE concentration issues including board approved CRE concentration contingency plans. The CRE concentration contingency plan contains overview of the Bank's strategies to mitigate and manage the concentration risks including the plans to maintain stable capital levels, having access to additional capital, maintaining adequate amount of allowance for loan losses, potentially implementing more conservative growth/lending strategies if necessary, maintaining liquidity within the CRE portfolio, and strengthening the loan workout infrastructure.
Distressed Debt Restructurings
Loans that the Bank modifies or restructures where the debtor is experiencing
financial difficulties and makes a concession to the borrower in the form of
changes in the amortization terms, reductions in the interest rates, the
acceptance of interest only payments and, in limited cases, reductions in the
outstanding loan balances are classified as TDRs. TDRs are loans modified for
the purpose of alleviating temporary impairments to the borrower's financial
condition. A workout plan between a borrower and the Bank is designed to provide
a bridge for the cash flow shortfalls in the near term. If the borrower works
through the near term issues, in most cases, the original contractual terms of
the loan will be reinstated. The following table presents the composition of
loans that were modified as TDRs by portfolio segment as of the dates indicated:
December 31,
($ in thousands) 2021 2020 2019 2018 2017
Real estate loans:
Commercial property $ 326 $ 333 $ 339 $ - $ 318
SBA property 259 275 415 315 1,373
Total real estate loans 585 608
754 315 1,691
Commercial and industrial loans:
Commercial term 2 18
28 68 199
Commercial lines of credit - - - - 10
SBA commercial term 6 13
39 180 367
Total commercial and industrial loans 8 31
67,248,576
Total TDRs$ 593 $ 639 $
821
Total unaccounted RDTs, included above
Total TDRs were$593 thousand atDecember 31, 2021 , a decrease of$46 thousand , or 7.2%, from$639 thousand atDecember 31, 2020 . The decrease was primarily due to payoffs and paydowns of$39 thousand and charge-offs of$6 thousand . There were no new TDRs for the year endedDecember 31, 2021 . 67 --------------------------------------------------------------------------------
Loans held for sale
Loans held-for-sale are carried at the lower of cost or fair value. When a determination is made at the time of commitment to originate as held-for-investment, it is the Company's intent to hold these loans to maturity or for the "foreseeable future," subject to periodic reviews under the Company's management evaluation processes, including asset/liability management and credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred to held-for-sale at the lower of cost or fair value. Certain loans are transferred to held-for-sale with write-downs to allowance for loan losses.
The following table presents the composition of the loans held for sale of the Company on the dates indicated:
December 31, ($ in thousands) 2021 2020 2019 2018 2017 Real estate loans: Residential property $ - 300$ 760 $ -$ 270 SBA property 33,603 1,411 150 5,481 3,857
Commercial and industrial loans:
SBA commercial term 3,423 268 1,065 300 1,170 Loans held-for-sale$ 37,026 1,979$ 1,975 $ 5,781 $ 5,297 Loans held-for-sale were$37.0 million atDecember 31, 2021 , an increase of$35.0 million , or 1,770.9%, from$2.0 million atDecember 31, 2020 . The increase was primarily due to originations of$172.2 million and transfers from loans held-for-investment of$8.8 million , partially offset by sales of$145.8 million . 68 --------------------------------------------------------------------------------
Deposits
The Bank gathers deposits primarily through its branch locations. The Bank
offers a variety of deposit products including demand deposits accounts, NOW and
money market accounts, savings accounts and time deposits. The following table
presents summary of the Company's deposit as of the dates indicated:
December
31,
($ in thousands) 2021 2020 Amount Change Percentage Change Noninterest-bearing demand deposits$ 830,383 $ 538,009 $ 292,374 54.3 % Interest-bearing deposits: Savings 16,299 10,481 5,818 55.5 % NOW 20,185 21,604 (1,419) (6.6) % Retail money market accounts 386,041 351,739 34,302 9.8 % Brokered money market accounts 1 25,002 (25,001) (100.0) % Retail time deposits of:$250,000 or less 256,956 299,431 (42,475) (14.2) % More than$250,000 172,269 168,683 3,586 2.1 % Time deposits from internet rate service providers - 24,902 (24,902) - % Brokered time deposits 85,000 55,000 30,000 54.5 % Time deposits from California State Treasurer 100,000 100,000 - - % Total interest-bearing deposits 1,036,751 1,056,842 (20,091) (1.9) % Total deposits$ 1,867,134 $ 1,594,851 $ 272,283 17.1 %
Total deposits not covered by deposit insurance
24.7 %
Term deposits not covered by deposit insurance
(3.8) % The increase in noninterest-bearing demand deposits was primarily due to the overall liquid deposit market. A total of$93.9 million of SBA PPP loans were funded through the Bank's noninterest-bearing demand deposits and deposit customers also received$201.1 million of SBA Economic Injury Disaster Loans and SBA Revitalization Funds during the year endedDecember 31, 2021 . The decrease in retail time deposits was primarily due to matured and closed accounts of$583.2 million , partially offset by new accounts of$101.6 million , renewals of the matured accounts of$428.8 million , and balance increases of$13.9 million . As ofDecember 31, 2021 and 2020, total deposits were comprised of 44.5% and 33.7%, respectively, of noninterest-bearing demand accounts, 22.6% and 25.7%, respectively, of savings, NOW and money market accounts and 32.9% and 40.6%, respectively, of time deposits. The following table presents the maturity of time deposits as of the dates indicated: Three Months Three to Six Six Months to One to Three ($ in thousands) or Less Months One Year Years Total December 31, 2021
Term deposits of
$ 129,627 $ 8,049 $ 341,956 Time deposits of more than$250,000 156,502 57,301 55,304 3,162 272,269 Total$ 300,096 $ 117,987 $ 184,931 $ 11,211 $ 614,225
Not covered by deposit insurance
$ 38,780 $ 3,041 $ 216,269
Term deposits of
$ 113,734 $ 13,924 $ 379,333 Time deposits of more than$250,000 156,507 35,000 72,553 4,623 268,683 Total$ 331,985 $ 111,197 $ 186,287 $ 18,547 $ 648,016
Not covered by deposit insurance
$ 51,820 $ 4,313 $ 224,718 69 --------------------------------------------------------------------------------
Capital resources
Equity is influenced primarily by earnings, dividends paid on common stock and preferred stock, sales and redemptions of common stock and preferred stock, and changes in accumulated other comprehensive income primarily caused by fluctuations in unrealized gains or losses, net of tax, on available-for-sale securities.
Shareholders' equity was$256.3 million atDecember 31, 2021 , an increase of$22.5 million , or 9.6%, from$233.8 million atDecember 31, 2020 . The increase was primarily due to the net income of$40.1 million and stock option exercised of$1.3 million , partially offset by repurchase of common stock of$10.9 million , cash dividends declared on common stock of$6.7 million and other comprehensive loss from the fair value change in securities available-for-sale of$1.8 million . Stock Repurchase OnApril 8, 2021 , the Company's Board of Directors approved a repurchase program authorizing the repurchase of up to 5% of the Company's outstanding common stock as of the date of the board meeting, which represented 775,000 shares, throughSeptember 7, 2021 . The Company repurchased and retired 680,269 shares of common stock at a weighted-average price of$15.99 per share, totaling$10.9 million under this repurchase program.
Regulatory capital requirements
The following table presents a summary of the capital requirements applicable to the Bank in order to be considered “well capitalized” from a regulatory point of view as of
Minimum Regulatory Well Capitalized
PCB Bancorp Pacific City Bank Requirements Requirements (Bank)
December 31, 2021
Common tier 1 capital (to risk-weighted
assets) 14.79 % 14.48 % 4.5 % 6.5 %
Total capital (to risk-weighted assets) 16.04 % 15.73 % 8.0 % 10.0 %
Tier 1 capital (to risk-weighted assets) 14.79 % 14.48 % 6.0 % 8.0 %
Tier 1 capital (to average assets) 12.11 % 11.85 % 4.0 % 5.0 %
December 31, 2020
Common tier 1 capital (to risk-weighted
assets) 15.97 % 15.70 % 4.5 % 6.5 %
Total capital (to risk-weighted assets) 17.22 % 16.95 % 8.0 % 10.0 %
Tier 1 capital (to risk-weighted assets) 15.97 % 15.70 % 6.0 % 8.0 %
Tier 1 capital (to average assets) 11.94 % 11.74 % 4.0 % 5.0 %
The capital conservation buffer of the Company and the Bank was 8.04% and 7.73%, respectively, as at
Emergency Capital Investment Program
OnDecember 14, 2021 , theU.S. Treasury informed the Company that theU.S Treasury has reviewed the Company's application to receive a capital investment from theU.S Treasury under the Emergency Capital Investment Program ("ECIP"), and that the Company would be eligible to receive an ECIP investment in an amount up to$69,141,000 in the form of non-dilutive Tier 1 senior perpetual preferred capital. The Company determined to accept the offer to receive the ECIP investment for the full amount. In order to receive the ECIP investment from theU.S Treasury, the Company will be required to fulfill certain conditions established by theU.S Treasury and will be subject to certain restrictions following its acceptance of the investment. In addition, the final amount of the ECIP will be determined by theU.S. Treasury and it may differ from the eligible amount. The Company expects to close the investment in the second quarter of 2022, but the ultimate timing will be controlled by theU.S. Treasury . Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions and minority depository institutions such as the Bank to augment their efforts to support small businesses and consumers in their communities. 70 --------------------------------------------------------------------------------
Liquidity
Liquidity refers to the measure of ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting operating, capital and strategic cash flow needs, all at a reasonable cost. The Company continuously monitors liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of the Company's shareholders. The Company's liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in financial institutions, federal funds sold, and unpledged securities available-for-sale. Liquid liabilities may include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market noncore deposits, additional collateralized borrowings such as FHLB advances and Federal Reserve Discount Window, and the issuance of debt securities and preferred or common securities. The Company's short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in loan and investment securities portfolios, increases in debt financing and other borrowings, and increases in customer deposits. Integral to the Company's liquidity management is the administration of borrowings. To the extent the Company is unable to obtain sufficient liquidity through core deposits, the Company seeks to meet its liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis. The Company had$10.0 million and$80.0 million of outstanding FHLB advances atDecember 31, 2021 and 2020, respectively. Based on the values of loans pledged as collateral, the Company had$516.2 million and$425.3 million of additional borrowing capacity with FHLB as ofDecember 31, 2021 and 2020, respectively. As ofDecember 31, 2021 and 2020, the Company had$65.0 million and$65.0 million of available unused unsecured federal funds lines, respectively. In addition, available unused secured borrowing capacity fromFederal Reserve Discount Window atDecember 31, 2021 and 2020 was$29.2 million and$35.8 million , respectively. Federal Reserve Discount Window was collateralized by loans totaling$36.6 million and$44.1 million as ofDecember 31, 2021 and 2020, respectively. The Company's borrowing capacity from the Federal Reserve Discount Window is limited by eligible collateral. The Company also maintains relationships in the capital markets with brokers and dealers to issue certificates of deposit. As ofDecember 31, 2021 and 2020, total cash and cash equivalents represented 9.5% and 10.1% of total assets, respectively. OnJune 30, 2020 , the Company also transferred securities held-to-maturity of$18.8 million to securities available-for-sale in order to secure additional liquidity on balance sheet. Since the beginning of the crisis, management has been able to maintain strong on-and off-balance sheet liquidity as a result of proactive liquidity management in response to the COVID-19 pandemic evidenced by the fact that as ofDecember 31, 2021 , the Company maintained$203.3 million , or 9.5% of total assets, of cash and cash equivalents and$610.4 million , or 28.4% of total assets, of available borrowing capacity.PCB Bancorp , on a stand-alone holding company basis, must provide for its own liquidity and its main source of funding is dividends from the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the holding company. Management believes that these limitations will not impact the Company's ability to meet its ongoing short- and long-term cash obligations. 71 --------------------------------------------------------------------------------
Off-balance sheet arrangements
The Company has limited off-balance sheet arrangements that have, or are reasonably likely to have, a material current or future effect on its financial condition, results of operations, liquidity, capital expenditures or capital resources.
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company's financial statements.
The Company’s exposure to loan losses in the event of non-performance of these financial covenants is represented by the contractual amount of these instruments. The Company uses the same credit policies for making commitments as for the loans reflected in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
amounts do not necessarily represent future cash requirements. The Company
evaluates each client's credit worthiness on a case-by-case basis. The amount of
collateral obtained if deemed necessary is based on management's credit
evaluation of the customer. The following table presents outstanding financial
commitments whose contractual amount represents credit risk as of the dates
indicated:
December 31,
2021 2020
($ in thousands) Fixed Rate Variable Rate Fixed Rate Variable Rate
Unused lines of credit $ 8,261 $ 160,739 $ 6,623 $ 150,247
Unfunded loan commitments 595 29,688 1,752 34,874
Standby letters of credit 3,078 1,431 2,971 1,814
Commercial letters of credit 91 524 - -
Total $ 12,025 $ 192,382 $ 11,346 $ 186,935
The Company's exposure to loan loss in the event of nonperformance on
commitments to extend credit and standby letters of credit is represented by the
contractual amount of those instruments. The Company uses the same credit
policies in making commitments as it does for the loans reflected in the
consolidated financial statements. The Company maintained reserve for
off-balance sheet items of $214 thousand and $238 thousand , respectively, at
December 31, 2021 and 2020.
Contractual Obligations
The following table provides additional information regarding the total contractual obligations as of the dates indicated:
Within One One to Three Three to Five
($ in thousands) Year Years Years Over Five Years Total
December 31, 2021
Time deposits $ 603,014 $ 10,850 $ 361 $ - $ 614,225
FHLB advances 10,000 - - - 10,000
Operating leases 2,706 3,023 1,235 710 7,674
Total $ 615,720 $ 13,873 $ 1,596 $ 710 $ 631,899
December 31, 2020
Time deposits $ 629,469 $ 17,019 $ 1,528 $ - $ 648,016
FHLB advances 70,000 10,000 - - 80,000
Operating leases 2,494 4,342 1,413 818 9,067
Total $ 701,963 $ 31,361 $ 2,941 $ 818 $ 737,083
Management believes that the Company will be able to meet its contractual
obligations as they come due through the maintenance of adequate cash levels.
Management expects to maintain adequate cash levels through profitability, loan
and securities repayment and maturity activity and continued deposit gathering
activities. The Company has in place various borrowing mechanisms for both
short-term and long-term liquidity needs.
72
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