PCB BANCORP The following is management's discussion and analysis of the major factors that influenced the Company's results of operations and financial condition as of and for the three and nine months endedSeptember 30, 2021 . This analysis should be read in conjunction with the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and with the unaudited consolidated financial statements and notes (unaudited) thereto set forth in this Quarterly Report on Form 10-Q. Critical Accounting Policies The Company's consolidated financial statements are prepared in accordance with GAAP and general practices within the banking industry. Within these financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the consolidated statements of financial condition dates and the Company's results of operations for the reporting periods. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, the Company has established critical accounting policies to facilitate making the judgment necessary to prepare financial statements. The Company's critical accounting policies are described in Note 1 to Consolidated Financial Statements and in the "Critical Accounting Policies" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the year endedDecember 31, 2020 and in Note 1 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q. 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 enhance comparability to prior periods and provide supplemental information regarding the Company's credit quality trend. ($ in thousands) September
30, 2021
$
1,707,878
101,901 135,654 136,418
Loans held-for-investment, excluding SBA PPP loans $
1,605,977
$ 23,807 $ 26,510 $ 24,546 Allowance for loan losses to loans held-for-investment
1.39 % 1.67 % 1.55 %
Allowance for loan losses to loans held-for-investment,
excluding SBA PPP loans 1.48 % 1.83 % 1.70 %
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Selected Financial Data
The following table presents certain selected financial data as of the dates or
for the periods indicated:
As of or For the Three Months Ended As of or For the Nine Months Ended
September 30, September 30,
($ in thousands, except per share data) 2021 2020 2021 2020
Selected balance sheet data:
Cash and cash equivalents $ 214,973 $ 257,382 $ 214,973 $ 257,382
Securities available-for-sale 133,102 128,982 133,102 128,982
Loans held-for-sale 29,020 30,878 29,020 30,878
Loans held-for-investment, net of deferred
loan costs (fees) 1,707,878 1,578,804 1,707,878 1,578,804
Allowance for loan losses (23,807) (24,546) (23,807) (24,546)
Total assets 2,104,699 2,021,187 2,104,699 2,021,187
Total deposits 1,832,666 1,647,107 1,832,666 1,647,107
Shareholders' equity 247,598 229,339 247,598 229,339
Selected income statement data:
Interest income $ 21,168 $ 19,620 $ 60,477 $ 60,253
Interest expense 941 2,767 3,435 11,471
Net interest income 20,227 16,853 57,042 48,782
Provision (reversal) for loan losses (1,053) 4,326 (3,134) 11,077
Noninterest income 5,588 2,272 13,596 7,216
Noninterest expense 11,232 9,886 32,040 30,149
Income before income taxes 15,636 4,913 41,732 14,772
Income tax expense 4,613 1,464 12,305 4,384
Net income 11,023 3,449 29,427 10,388
Per share data:
Earnings per common share, basic $ 0.74 $ 0.22 $ 1.94 $ 0.67
Earnings per common share, diluted 0.73 0.22 1.92 0.67
Book value per common share (1) 16.68 14.91 16.68 14.91
Cash dividends declared per common share 0.12 0.10 0.32 0.30
Outstanding share data:
Number of common shares outstanding 14,841,626 15,379,538 14,841,626 15,379,538
Weighted-average common shares outstanding,
basic 14,779,707 15,343,888 15,090,989 15,395,475
Weighted-average common shares outstanding,
diluted 15,031,558 15,377,531 15,298,065 15,466,207
Selected performance ratios:
Return on average assets (2) 2.11 % 0.69 % 1.94 % 0.73 %
Return on average shareholders' equity (2) 17.98 % 5.98 % 16.40 % 6.10 %
Dividend payout ratio (3) 16.22 % 45.45 % 16.49 % 44.78 %
Efficiency ratio (4) 43.51 % 51.69 % 45.36 % 53.84 %
Yield on average interest-earning assets (2) 4.12 % 4.00 % 4.05 % 4.31 %
Cost of funds (2) 0.21 % 0.63 % 0.26 % 0.92 %
Net interest spread (2) 3.75 % 3.08 % 3.62 % 3.03 %
Net interest margin (2), (5) 3.93 % 3.43 % 3.82 % 3.49 %
Total loans to total deposits ratio (6) 94.77 % 97.73 % 94.77 % 97.73 %
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As of or For the Three Months Ended As of or For the Nine Months Ended
September 30, September 30,
($ in thousands, except per share data) 2021 2020 2021 2020
Asset quality:
Loans 30 to 89 days past due and still accruing $ 292 $ 301 $ 292 $ 301
Nonperforming loans (7) 1,116 3,592 1,116 3,592
Nonperforming assets (8) 1,116 3,968 1,116 3,968
Net charge-offs (recoveries) 29 28 (431) 911
Loans 30 to 89 days past due and still accruing
to loans held-for-investment 0.02 % 0.02 % 0.02 % 0.02 %
Nonperforming loans to loans
held-for-investment 0.07 % 0.23 % 0.07 % 0.23 %
Nonperforming loans to allowance for loan
losses 4.69 % 14.63 % 4.69 % 14.63 %
Nonperforming assets to total assets 0.05 % 0.20 % 0.05 % 0.20 %
Allowance for loan losses to loans
held-for-investment 1.39 % 1.55 % 1.39 % 1.55 %
Allowance for loan losses to loans
held-for-investment, excluding SBA PPP loans
(9) 1.48 % 1.70 % 1.48 % 1.70 %
Allowance for loan losses to nonaccrual loans 2,138.99 % 848.46 % 2,138.99 % 848.46 %
Allowance for loan losses to nonperforming
loans 2,133.24 % 683.35 % 2,133.24 % 683.35 %
Net charge-offs (recoveries) to average loans
held-for-investment (2) 0.01 % 0.01 % (0.04) % 0.08 %
Capital ratios:
Shareholders' equity to total assets 11.76 % 11.35 % 11.76 % 11.35 %
Average equity to average assets 11.75 % 11.52 % 11.84 % 11.92 %
PCB Bancorp
Common tier 1 capital (to risk-weighted assets) 15.07 % 15.60 % 15.07 % 15.60 %
Total capital (to risk-weighted assets) 16.32 % 16.86 % 16.32 % 16.86 %
Tier 1 capital (to risk-weighted assets) 15.07 % 15.60 % 15.07 % 15.60 %
Tier 1 capital (to average assets) 11.91 % 11.40 % 11.91 % 11.40 %
Pacific City Bank
Common tier 1 capital (to risk-weighted assets) 14.76 % 15.34 % 14.76 % 15.34 %
Total capital (to risk-weighted assets) 16.01 % 16.60 % 16.01 % 16.60 %
Tier 1 capital (to risk-weighted assets) 14.76 % 15.34 % 14.76 % 15.34 %
Tier 1 capital (to average assets) 11.66 % 11.21 % 11.66 % 11.21 %
(1) Shareholders' equity divided by common shares outstanding.
(2) Annualized.
(3) Dividends declared per common share divided by basic earnings per common
share.
(4) Noninterest expenses divided by the sum of net interest income and
noninterest income.
(5) Net interest income divided by average total interest-earning assets.
(6) Total loans include both loans held-for-sale and loans held-for-investment,
net of unearned loan costs (fees).
(7) Nonperforming loans include nonaccrual loans and loans past due 90 days or
more and still accruing.
(8) Nonperforming assets include nonperforming loans and other real estate
owned.
(9) Non-GAAP measure. See "Non-GAAP Measures" for a reconciliation to its most
comparable GAAP measure.
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Executive Summary
Q3 2021 Financial Highlights
•Net income was $11.0 million for the three months ended September 30, 2021 , an
increase of $7.6 million , or 219.6%, from $3.4 million for the three months
ended September 30, 2020 ;
•The Company recorded a provision (reversal) for loan losses of $(1.1) million
for the three months ended September 30, 2021 compared with $4.3 million for the
three months ended September 30, 2020 .
•Net interest income was $20.2 million for the three months ended September 30,
2021 compared with $16.9 million for the three months ended September 30, 2020 .
Net interest margin was 3.93% for the three months ended September 30, 2021
compared with 3.43% for the three months ended September 30, 2020 .
•Gain on sale of loans was $4.3 million for the three months ended September 30,
2021 compared with $821 thousand for the three months ended September 30, 2020 .
•Total assets were $2.10 billion at September 30, 2021 , an increase of $181.8
million , or 9.5%, from $1.92 billion at December 31, 2020 ;
•Loans held-for-investment, net of deferred costs (fees), were $1.71 billion at
September 30, 2021 , an increase of $124.3 million , or 7.8%, from $1.58 billion
at December 31, 2020 ; and
•SBA PPP loans totaled $101.9 million and $135.7 million at September 30, 2021
and December 31, 2020 , respectively. During the nine months ended September 30,
2021 , the Company funded SBA PPP loans of $107.3 million and recognized $144.9
million in forgiveness and payoffs.
•Loans under modified terms related to COVID-19 pandemic totaled none and $36.1
million at September 30, 2021 and December 31, 2020 , respectively.
•Allowance for loan losses to total loans held-for-investment ratio was 1.39% at
September 30, 2021 compared with 1.67% at December 31, 2020 .
•Total deposits were $1.83 billion at September 30, 2021 , an increase of $237.8
million , or 14.9%, from $1.59 billion at December 31, 2020 .
The ongoing COVID-19 pandemic, and governmental and societal responses thereto,
have had a severe impact on recent global economic and market conditions,
including significant disruption of, and volatility in, financial markets;
global supply chain disruptions; and the institution of social distancing and
shelter-in-place requirements that have resulted in temporary closures of many
businesses, lost revenues, and increased unemployment throughout the U.S. , but
also specifically in California , where most of the Company's operations and a
large majority of its customers are located. While California's and New York's
shelter-at-home limits were largely lifted in June, the local economies in the
Company's primary markets have not yet fully recovered. Since the beginning of
the crisis, the Company has taken a number of steps to protect the safety of its
employees and to support its customers. The Company has enabled its staff to
work remotely and established safety measures within its bank premises and
branches for both employees and customers.
In order to support its customers, the Company has been in close contact with
its customers, assessing the level of impact on their businesses, and putting a
process in place to evaluate each client's specific situation and provide relief
programs where appropriate.
In addition, the Company has been monitoring its liquidity and capital closely.
As of September 30, 2021 , the Company maintained $215.0 million , or 10.2% of
total assets, of cash and cash equivalents and $606.9 million , or 28.8% of total
assets, of available borrowing capacity. All regulatory capital ratios were also
well above the regulatory well capitalized requirements as of September 30,
2021 . At this time, the Company cannot estimate the long term impact of the
COVID-19 pandemic, but these conditions impacted and are expected to impact its
business, results of operations, and financial condition negatively.
Results of Operations
Net Interest Income
A principal component of the Company's earnings is net interest income, which is
the difference between the interest and fees earned on loans and investments and
the interest paid on deposits and borrowed funds. Net interest income expressed
as a percentage of average interest earning assets is referred to as the net
interest margin. The net interest spread is the yield on average interest
earning assets less the cost of average interest bearing liabilities. Net
interest income is affected by changes in the balances of interest earning
assets and interest bearing liabilities and changes in the yields earned on
interest earning assets and the rates paid on interest bearing liabilities.
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The following table presents interest income, average interest-earning assets,
interest expense, average interest-bearing liabilities, and their corresponding
yields and costs expressed both in dollars and rates, on a consolidated
operations basis, for the periods indicated:
Three Months Ended September 30,
2021 2020
Yield/ Cost Yield/ Cost
($ in thousands) Average Balance Interest (6) Average Balance Interest (6)
Interest-earning assets:
Total loans (1) $ 1,715,106 $ 20,537 4.75 % $ 1,564,704 $ 18,938 4.81 %
Mortgage backed securities 95,908 278 1.15 % 75,832 339 1.78 %
Collateralized mortgage obligation 22,534 57 1.00 % 33,393 82 0.98 %
SBA loan pool securities 10,390 45 1.72 % 12,996 57 1.74 %
Municipal bonds - tax exempt (2) 5,759 36 2.48 % 5,991 37 2.46 %
Corporate bonds 2,283 21 3.65 % - - - %
Interest-bearing deposits in other
financial institutions 179,560 69 0.15 % 251,979 64 0.10 %
FHLB and other bank stock 8,577 125 5.78 % 8,447 103 4.85 %
Total interest-earning assets 2,040,117 21,168 4.12 % 1,953,342 19,620 4.00 %
Noninterest-earning assets:
Cash and cash equivalents 19,915 17,094
Allowance for loan losses (24,854) (21,268)
Other assets 35,187 42,446
Total noninterest earning assets 30,248 38,272
Total assets $ 2,070,365 $ 1,991,614
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 387,661 291 0.30 % $ 365,093 391 0.43 %
Savings 12,806 2 0.06 % 9,517 2 0.08 %
Time deposits 599,865 592 0.39 % 689,352 2,206 1.27 %
Borrowings 18,152 56 1.22 % 130,000 168 0.51 %
Total interest-bearing liabilities 1,018,484 941 0.37 % 1,193,962 2,767 0.92 %
Noninterest-bearing liabilities:
Demand deposits 794,165 552,255
Other liabilities 14,531 15,934
Total noninterest-bearing
liabilities 808,696 568,189
Total liabilities 1,827,180 1,762,151
Shareholders' equity 243,185 229,463
Total liabilities and shareholders'
equity $ 2,070,365 $ 1,991,614
Net interest income $ 20,227 $ 16,853
Net interest spread (3) 3.75 % 3.08 %
Net interest margin (4) 3.93 % 3.43 %
Cost of funds (5) 0.21 % 0.63 %
(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 $3.4 million and $1.2 million , respectively, and net
accretion of discount on loans of $1.9 million and $743 thousand , respectively,
are included in the interest income for the three months ended September 30,
2021 and 2020.
(2) The yield on municipal bonds has not been computed on a tax-equivalent
basis.
(3) Net interest spread is calculated by subtracting average rate on
interest-bearing liabilities from average yield on interest-earning assets.
(4) Net interest margin is calculated by dividing net interest income by
average interest-earning assets.
(5) Cost of funds is calculated by dividing annualized interest expense on
total interest-bearing liabilities by the sum of average total interest-bearing
liabilities and noninterest-bearing demand deposits.
(6) Annualized.
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The following table presents interest income, average interest-earning assets,
interest expense, average interest-bearing liabilities, and their corresponding
yields and costs expressed both in dollars and rates, on a consolidated
operations basis, for the nine months ended September 30, 2021 and 2020:
Nine Months Ended September 30,
2021 2020
Yield/ Cost Yield/ Cost
($ in thousands) Average Balance Interest (6) Average Balance Interest (6)
Interest-earning assets:
Total loans (1) $ 1,683,084 $ 58,792 4.67 % $ 1,524,628 $ 57,617 5.05 %
Mortgage backed securities 90,095 726 1.08 % 65,713 985 2.00 %
Collateralized mortgage obligation 23,442 168 0.96 % 37,500 402 1.43 %
SBA loan pool securities 10,959 148 1.81 % 13,351 198 1.98 %
Municipal bonds - tax exempt (2) 5,774 109 2.52 % 5,807 113 2.60 %
Corporate bonds 769 21 3.65 % - - - %
Interest-bearing deposits in other
financial institutions 172,136 156 0.12 % 213,292 585 0.37 %
FHLB and other bank stock 8,527 357 5.60 % 8,406 353 5.61 %
Total interest-earning assets 1,994,786 60,477 4.05 % 1,868,697 60,253 4.31 %
Noninterest-earning assets:
Cash and cash equivalents 19,359 17,324
Allowance for loan losses (25,753) (17,676)
Other assets 37,371 38,255
Total noninterest earning assets 30,977 37,903
Total assets $ 2,025,763 $ 1,906,600
Interest-bearing liabilities:
Deposits:
NOW and money market accounts $ 398,459 941 0.32 % $ 367,222 2,058 0.75 %
Savings 11,676 4 0.05 % 7,706 8 0.14 %
Time deposits 616,707 2,251 0.49 % 725,927 8,934 1.64 %
Borrowings 37,363 239 0.86 % 95,276 471 0.66 %
Total interest-bearing liabilities 1,064,205 3,435 0.43 % 1,196,131 11,471 1.28 %
Noninterest-bearing liabilities:
Demand deposits 707,800 465,634
Other liabilities 13,925 17,493
Total noninterest-bearing
liabilities 721,725 483,127
Total liabilities 1,785,930 1,679,258
Shareholders' equity 239,833 227,342
Total liabilities and shareholders'
equity $ 2,025,763 $ 1,906,600
Net interest income $ 57,042 $ 48,782
Net interest spread (3) 3.62 % 3.03 %
Net interest margin (4) 3.82 % 3.49 %
Cost of funds (5) 0.26 % 0.92 %
(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 $4.7 million and $2.0 million , respectively, and net
accretion of discount on loans of $2.7 million and $2.3 million , respectively,
are included in the interest income for the nine months ended September 30, 2021
and 2020.
(2) The yield on municipal bonds has not been computed on a tax-equivalent
basis.
(3) Net interest spread is calculated by subtracting average rate on
interest-bearing liabilities from average yield on interest-earning assets.
(4) Net interest margin is calculated by dividing net interest income by
average interest-earning assets.
(5) Cost of funds is calculated by dividing annualized interest expense on
total interest-bearing liabilities by the sum of average total interest-bearing
liabilities and noninterest-bearing demand deposits.
(6) Annualized.
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The following table presents the changes in interest income and interest expense
for major components of interest-earning assets and interest-bearing
liabilities. Information is provided on changes attributable to: (i) changes in
volume multiplied by the prior rate; and (ii) changes in rate multiplied by the
prior volume. Changes attributable to both rate and volume which cannot be
segregated have been allocated proportionately to the change due to volume and
the change due to rate.
Three Months Ended September 30, Nine Months Ended September 30,
2021 vs. 2020 2021 vs. 2020
Increase (Decrease) Due to Net Increase Increase (Decrease) Due to Net Increase
($ in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
Interest earned on:
Total loans $ 1,820 $ (221) $ 1,599 $ 5,988 $ (4,813) $ 1,175
Investment securities 35 (113) (78) 120 (646) (526)
Other interest-earning assets (46) 73 27 (174) (251) (425)
Total interest income 1,809 (261) 1,548 5,934 (5,710) 224
Interest incurred on:
Savings, NOW, and money market
deposits 27 (127) (100) 194 (1,315) (1,121)
Time deposits (286) (1,328) (1,614) (1,344) (5,339) (6,683)
Borrowings (145) 33 (112) (286) 54 (232)
Total interest expense (404) (1,422) (1,826) (1,436) (6,600) (8,036)
Change in net interest income
Three Months Ended
Three Months Ended September 30,
($ in thousands) 2021 2020 Amount Change Percentage Change
Interest income:
Interest and fees on loans $ 20,537 $ 18,938 $ 1,599 8.4 %
Interest on investment securities 437 515 (78) (15.1) %
Interest and dividends on other
interest-earning assets 194 167 27 16.2 %
Total interest income 21,168 19,620 1,548 7.9 %
Interest expense:
Interest on deposits 885 2,599 (1,714) (65.9) %
Interest on borrowings 56 168 (112) (66.7) %
Total interest expense 941 2,767 (1,826) (66.0) %
Net interest income $ 20,227 $ 16,853 $ 3,374 20.0 %
Net interest income increased primarily due to a 55 basis point decrease in
average cost on interest-bearing liabilities, a 12 basis point increase in
average yield on interest-earning assets, a 4.4% increase in average balance of
interest-earning assets, and a 14.7% decrease in average balance of
interest-bearing liabilities.
Interest and fees on loans increased primarily due to a 9.6% increase in average
balance, partially offset by a 6 basis point decrease in average yield. The
decrease in average yield was primarily due to the lower market rates, partially
offset by increases in amortization of net deferred fees and net accretion of
discount. The increase in net accretion of discount was primarily due to an
increase in loan payoffs on SBA loans. The increase in amortization of net
deferred fees was primarily due to the payoffs and forgiveness of SBA PPP loans.
Interest on investment securities decreased primarily due to a 33 basis point
decrease in average yield, partially offset by a 6.8% increase in average
balance. The decrease in average yield and the increase in average balance were
primarily due to new investment securities purchased under low market rates
during the past 12-month period. The Company purchased new investment securities
of $50.0 million during the past 12-month period. For the three months ended
September 30, 2021 and 2020, yield on total investment securities was 1.27% and
1.60%, respectively.
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Interest income on other interest-earning assets increased primarily due to a 15
basis point increase in average yield, partially offset by a 27.8% decrease in
average balance. The increase in average yield was primarily due to an increase
in dividend income on Federal Home Loan Bank stock. The decrease in average
balance was primarily due to an increase in loans, partially offset by an
increase in deposits. For the three months ended September 30, 2021 and 2020,
yield on total other interest-earning assets was 0.41% and 0.26%, respectively.
Interest expense on deposits decreased primarily due to a 62 basis point
decrease in average cost of interest-bearing deposits and a 13.0% decrease in
average balance of time deposits, partially offset by a 6.9% increase in
savings, NOW and money market accounts. The decrease in average cost was
primarily due to the lower market rates. The decrease in average balance of time
deposits was primarily due to a lower level of new time deposits. For the three
months ended September 30, 2021 and 2020, average cost on total interest-bearing
deposits was 0.35% and 0.97%, respectively, and average cost on total deposits
were 0.20% and 0.64%, respectively.
Interest expense on borrowings decreased primarily due to a decrease in average
balance, partially offset by an increase in average cost of FHLB advances. The
Company maintained a lower balance of other borrowings primarily due to the
increase in deposits.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020
The following table presents the components of net interest income for the
periods indicated:
Nine Months Ended September 30,
($ in thousands) 2021 2020 Amount Change Percentage Change
Interest income:
Interest and fees on loans $ 58,792 $ 57,617 $ 1,175 2.0 %
Interest on investment securities 1,172 1,698 (526) (31.0) %
Interest and dividends on other
interest-earning assets 513 938 (425) (45.3) %
Total interest income 60,477 60,253 224 0.4 %
Interest expense:
Interest on deposits 3,196 11,000 (7,804) (70.9) %
Interest on borrowings 239 471 (232) (49.3) %
Total interest expense 3,435 11,471 (8,036) (70.1) %
Net interest income $ 57,042 $ 48,782 $ 8,260 16.9 %
Net interest income increased primarily due to an 85 basis point decrease in
average cost on interest-bearing liabilities, a 6.7% increase in average balance
of interest-earning assets, and an 11.0% decrease in average balance of
interest-bearing liabilities, partially offset by a 26 basis point decrease in
average yield on interest-earning assets.
Interest and fees on loans increased primarily due to a 10.4% increase in
average balance, partially offset by a 38 basis point decrease in average yield.
The decrease in average yield was primarily due to the lower market rates,
partially offset by increases in amortization of net deferred fees and net
accretion of discount. The increase in net accretion of discount was primarily
due to an increase in loan payoffs on SBA loans. The increase in amortization of
net deferred fees was primarily due to the payoffs and forgiveness of SBA PPP
loans.
Interest on investment securities decreased primarily due to a 65 basis point
decrease in average yield, partially offset by a 7.1% increase in average
balance. The decrease in average yield and the increase in average balance were
primarily due to new investment securities purchased under low market rates
during the past 12-month period. The Company purchased new investment securities
of $50.0 million during the past 12-month period. For the nine months ended
September 30, 2021 and 2020, yield on total investment securities was 1.20% and
1.85%, respectively.
Interest income on other interest-earning assets decreased primarily due to a 19
basis point decrease in average yield and an 18.5% decrease in average balance.
The decrease in average yield was primarily due to the lower rates on the
account with Federal Reserve Bank . The decrease in average balance was primarily
due to an increase in loans, partially offset by an increase in deposits. For
the nine months ended September 30, 2021 and 2020, yield on total other
interest-earning assets was 0.38% and 0.57%, respectively.
47
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Interest expense on deposits decreased primarily due to a 91 basis point
decrease in average cost of interest-bearing deposits and a 15.0% decrease in
average balance of time deposits, partially offset by a 9.4% increase in
savings, NOW and money market accounts. The decrease in average cost was
primarily due to the lower market rates. The decrease in average balance of time
deposits was primarily due to a lower level of new time deposits. For the nine
months ended September 30, 2021 and 2020, average cost on total interest-bearing
deposits was 0.42% and 1.33%, respectively, and average cost on total deposits
were 0.25% and 0.94%, respectively.
Interest expense on borrowings decreased primarily due to a decrease in average
balance, partially offset by an increase in average cost of FHLB advances. The
Company maintained a lower balance of other borrowings primarily due to the
increase in deposits.
Provision (reversal) for Loan Losses
Provision (reversal) for loan losses was $(1.1) million and $4.3 million for the
three months ended September 30, 2021 and 2020, respectively. For the nine
months ended September 30, 2021 and 2020, provision (reversal) for loan losses
was $(3.1) million and $11.1 million , respectively. The reversal for loan losses
for the three and nine months ended September 30, 2021 was primarily due to a
decrease in historical loss and qualitative adjustment factor allocations as a
result of improving economic conditions, partially offset by an increase in
commercial property loans.
See further discussion in "Allowance for Loan Losses."
48
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Noninterest Income
Three Months Ended September 30, 2021 Compared to Three Months Ended
September 30, 2020
The following table presents the components of noninterest income for the
periods indicated:
Three Months Ended September 30,
($ in thousands) 2021 2020 Amount Change Percentage Change
Service charges and fees on deposits $ 292 $ 280 $ 12 4.3 %
Loan servicing income 655 856 (201) (23.5) %
Gain on sale of loans 4,269 821 3,448 420.0 %
Other income 372 315 57 18.1 %
Total noninterest income $ 5,588 $ 2,272 $ 3,316 146.0 %
Service charges and fees on deposits increased primarily due to an increase in
fee-based transactions.
Loan servicing income decreased primarily due to an increase in servicing asset
amortization from an increase in loan payoffs. Servicing asset amortization was
$525 thousand and $388 thousand , respectively, for the three months ended
September 30, 2021 and 2020.
Gain on sale of loans increased primarily due to a higher level of premiums on
SBA loans in the secondary market and an increase in sale volume of SBA loans.
The Company sold SBA loans of $45.0 million with a gain of $4.3 million ,
residential property loans of $301 thousand with a gain of $2 thousand , and
certain commercial property loans of $3.5 million with a gain of $4 thousand
during the three months ended September 30, 2021 . During the three months ended
September 30, 2020 , the Company sold SBA loans of $8.6 million with a gain of
$689 thousand and residential property loans of $16.6 million with a gain of
$132 thousand .
Other income primarily included wire transfer fees of $159 thousand and $137
thousand , respectively, and debit card interchange fees of $86 thousand and $67
thousand , respectively, for the three months ended September 30, 2021 and 2020.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020
The following table presents the components of noninterest income for the
periods indicated:
Nine Months Ended September 30,
($ in thousands) 2021 2020 Amount Change Percentage Change
Service charges and fees on deposits $ 887 $ 945 $ (58) (6.1) %
Loan servicing income 2,082 2,312 (230) (9.9) %
Gain on sale of loans 9,558 3,044 6,514 214.0 %
Other income 1,069 915 154 16.8 %
Total noninterest income $ 13,596 $ 7,216 $ 6,380 88.4 %
Service charges and fees on deposits decreased primarily due to a decrease in
fee-based transactions.
Loan servicing income decreased primarily due to a decrease in servicing fee
income and an increase in servicing asset amortization. Servicing asset
amortization was $1.5 million and $1.4 million , respectively, for the nine
months ended September 30, 2021 and 2020.
Gain on sale of loans increased primarily due to a higher level of premiums on
SBA loans in the secondary market and an increase in sale volume of SBA loans.
The Company sold SBA loans of $90.1 million with a gain of $9.4 million ,
residential property loans of $9.8 million with a gain of $142 thousand , and
certain commercial property loans of $5.2 million with a gain of $4 thousand
during the nine months ended September 30, 2021 . During the nine months ended
September 30, 2020 , the Company sold SBA loans of $47.4 million with a gain of
$2.8 million and residential property loans of $24.8 million with a gain of $203
thousand .
Other income primarily included wire transfer fees of $435 thousand and $391
thousand , respectively, and debit card interchange fees of $222 thousand and
$185 thousand , respectively, for the nine months ended September 30, 2021 and
2020. For the nine months end September 30, 2021 , other income also included
gain on sale of other real estate owned of $74 thousand .
49
--------------------------------------------------------------------------------
Noninterest Expense
Three Months Ended September 30, 2021 Compared to Three Months Ended
September 30, 2020
The following table presents the components of noninterest expense for the
periods indicated:
Three Months Ended September 30,
($ in thousands) 2021 2020 Amount Change Percentage Change
Salaries and employee benefits $ 7,606 $ 6,438 $ 1,168 18.1 %
Occupancy and equipment 1,399 1,416 (17) (1.2) %
Professional fees 422 325 97 29.8 %
Marketing and business promotion 416 193 223 115.5 %
Data processing 391 373 18 4.8 %
Director fees and expenses 144 125 19 15.2 %
Regulatory assessments 12 267 (255) (95.5) %
Other expenses 842 749 93 12.4 %
Total noninterest expense $ 11,232 $ 9,886 $ 1,346 13.6 %
Salaries and employee benefits increased primarily due to increases in salaries,
bonus accrual, and the incentive tied to the sales of Loan Production Offices
("LPO") originated SBA loans and the incentive for SBA PPP loan production paid
during the three months ended September 30, 2021 , partially offset by decreases
in vacation accrual and stock compensation expense. The number of full-time
equivalent employees was 249 at September 30, 2021 compared to 252 at
September 30, 2020 .
Marketing and business promotion expense increased primarily due to an increase
in advertisement.
Regulatory assessment expense decreased primarily due to an adjustment made for
the assessment rate decrease, partially offset by an increase in balance sheet
growth.
Other expenses primarily included $42 thousand and $111 thousand in loan related
expenses, $378 thousand and $345 thousand in office expense, and $144 thousand
and $125 thousand in armed guard expense for the three months ended
September 30, 2021 and 2020, respectively.
50
--------------------------------------------------------------------------------
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30,
2020
The following table presents the components of noninterest expense for the
periods indicated:
Nine Months Ended September 30,
($ in thousands) 2021 2020 Amount Change Percentage Change Salaries and employee benefits$ 20,913 $ 18,750 $ 2,163 11.5 % Occupancy and equipment 4,158 4,196 (38) (0.9) % Professional fees 1,574 1,631 (57) (3.5) % Marketing and business promotion 1,070 920 150 16.3 % Data processing 1,164 1,097 67 6.1 % Director fees and expenses 433 453 (20) (4.4) % Regulatory assessments 399 728 (329) (45.2) % Other expenses 2,329 2,374 (45) (1.9) % Total noninterest expense$ 32,040 $ 30,149 $ 1,891 6.3 % Salaries and employee benefits increased primarily due to increases in salaries, bonus accrual, and the incentive tied to the incentives for LPO originated SBA loan sales and SBA PPP loan production, partially offset by decreases in vacation accrual and stock compensation expense. Direct loan origination cost related to SBA PPP loan production totaled$812 thousand and$1.1 million for nine months endedSeptember 30, 2021 and 2020, respectively. The number of full-time equivalent employees was 249 atSeptember 30, 2021 compared to 252 atSeptember 30, 2020 . Professional fees decreased primarily due to decreases in expenses related to decreases in expenses related to the Bank's Bank Secrecy Act and Anti-Money Laundering ("BSA/AML") compliance enhancements. Marketing and business promotion expense increased primarily due to an increase in advertisement. Regulatory assessment expense decreased primarily due to to an adjustment made for the assessment rate decrease, partially offset by an increase in balance sheet growth. Other expenses primarily included$263 thousand and$328 thousand in loan related expenses,$1.0 million and$1.1 million in office expense, and$388 thousand and$379 thousand in armed guard expense for the nine months endedSeptember 30, 2021 and 2020, respectively. Income Tax Expense Income tax expense was$4.6 million and$1.5 million , respectively, and the effective tax rate was 29.5% and 29.8%, respectively, for the three months endedSeptember 30, 2021 and 2020. For the nine months endedSeptember 30, 2021 and 2020, income tax expense was$12.3 million and$4.4 million , respectively, and the effective tax rate was 29.5% and 29.7%, respectively. 51 -------------------------------------------------------------------------------- Financial ConditionInvestment Securities The Company's investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on current and projected liquidity and interest rate sensitivity positions. 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 liquidity position. Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and the Company's ability to assert that it has the intent and ability to hold to maturity debt securities will be limited for up to two years from the date of transfer. The Company transferred all securities held-to-maturity of$18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of$787 thousand . The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated: September 30, 2021 December 31, 2020 Unrealized Gain Unrealized Gain ($ in thousands) Amortized Cost Fair Value (Loss) Amortized Cost Fair Value (Loss) Securities available-for-sale:U.S. government agency andU.S. government sponsored enterprise securities: Residential mortgage-backed securities$ 91,446 $ 91,485 $ 39$ 74,622 $ 76,154 $ 1,532 Residential collateralized mortgage obligations 21,079 21,198 119 26,216 26,467 251 SBA loan pool securities 9,406 9,667 261 11,753 12,080 327 Municipal bonds 5,339 5,708 369 5,370 5,826 456 Corporate bonds 5,000 5,044 44 - - - Total securities available-for-sale$ 132,270 $ 133,102 $ 832$ 117,961 $ 120,527 $ 2,566 Total investment securities were$133.1 million atSeptember 30, 2021 , an increase of$12.6 million , or 10.4%, from$120.5 million atDecember 31, 2020 . The increase was primarily due to purchases of$47.3 million , partially offset by principal paydowns of$32.2 million , a decrease in fair value of securities available-for-sale of$1.7 million , and net premium amortization of$811 thousand . The Company performs an OTTI assessment at least on a quarterly basis. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security. All individual securities in a continuous unrealized loss position for 12 months or more as ofSeptember 30, 2021 andDecember 31, 2020 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as ofSeptember 30, 2021 andDecember 31, 2020 . These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the three and nine months endedSeptember 30, 2021 and 2020. 52 --------------------------------------------------------------------------------
The following table presents the contractual maturity schedule for securities,
at amortized cost, and their weighted-average yields as of
Within One Year More than One Year through Five Years More than Five Years through Ten Years More than Ten Years Total
Amortized
($ in thousands) Amortized Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield
Cost Weighted-Average Yield Amortized Cost Weighted-Average Yield
Securities available-for-sale:
U.S. government agency and U.S. government
sponsored enterprise securities:
Residential mortgage-backed securities $ - - % $ 604 1.53 % $ 8,709 1.53 % $ 82,133 1.32 % $ 91,446 1.35 %
Residential collateralized mortgage obligations - - % - - % 10,717 0.70 % 10,362 1.46 % 21,079 1.07 %
SBA loan pool securities - - % 519 2.58 % 1,509 0.67 % 7,378 2.01 % 9,406 1.82 %
Municipal bonds 307 1.72 % 1,858 2.07 % 834 2.27 % 2,340 3.53 % 5,339 2.72 %
Corporate bonds - - % - - % 5,000 3.75 % - - % 5,000 3.75 %
Total securities available-for-sale $ 307 1.72 % $ 2,981 2.05 % $ 26,769 1.59 % $ 102,213 1.44 % $ 132,270 1.48 %
53-------------------------------------------------------------------------------- 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 a composition of loans held-for-sale as of the dates indicated: ($ in thousands) September 30, 2021 December 31, 2020 Real estate loans: Residential property $ - $ 300 SBA property 28,036 1,411
Commercial and industrial loans:
SBA commercial term 984 268 Total $ 29,020 $ 1,979 Loans held-for-sale were$29.0 million atSeptember 30, 2021 , an increase of$27.0 million , or 1,366.4%, from$2.0 million atDecember 31, 2020 . The increase was primarily due to new funding of$126.8 million and a loan transferred from loans held-for-investment of$5.4 million , partially offset by sales of$105.1 million . Loans Held-For-Investment and Allowance for Loan Losses The following table presents the composition of the Company's loans held-for-investment as of the dates indicated: September 30, 2021 December 31, 2020 ($ in thousands) Amount Percentage to Total Amount Percentage to Total Real estate loans: Commercial property$ 1,054,351 61.6 % $ 880,736 55.5 % Residential property 201,635 11.8 % 198,431 12.5 % SBA property 127,845 7.5 % 126,570 8.0 % Construction 6,572 0.4 % 15,199 1.0 % Total real estate loans 1,390,403 81.3 % 1,220,936 77.0 % Commercial and industrial loans: Commercial term 74,390 4.4 % 87,250 5.5 % Commercial lines of credit 101,456 5.9 % 96,087 6.1 % SBA commercial term 18,338 1.1 % 21,878 1.4 % SBA PPP 101,901 6.0 % 135,654 8.6 % Total commercial and industrial loans 296,085 17.4 % 340,869 21.6 % Other consumer loans 21,390 1.3 % 21,773 1.4 % Loans held-for-investment 1,707,878 100.0 % 1,583,578 100.0 % Allowance for loan losses (23,807) (26,510) Net loans held-for-investment$ 1,684,071 $ 1,557,068 Loans held-for-investment, net of deferred loan costs (fees) were$1.71 billion atSeptember 30, 2021 , an increase of$124.3 million , or 7.8%, from$1.58 billion atDecember 31, 2020 . The increase was primarily due to new funding of$498.9 million and advances of$88.9 million , partially offset by paydowns and payoffs of$457.9 million . During the nine months endedSeptember 30, 2021 , SBA PPP loans of$144.9 million were paid off and related unamortized net deferred fees were recognized through interest income. Commercial property loan production contributed significantly to the Company's loan growth for the nine months endedSeptember 30, 2021 . 54 -------------------------------------------------------------------------------- Loan Modifications Related to the COVID-19 PandemicThe Company provided modifications, including payment deferments and interest only payments, to customers that were adversely affected by the COVID-19 pandemic. As ofSeptember 30, 2021 , all loans under modified terms related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs. The following table presents a summary of loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as ofSeptember 30, 2021 : ($ in thousands) Carrying Value
Accrued Interest Receivable
Real estate loans: Commercial property$ 328,847 $ 992 Residential property 28,566 615 SBA property 4,173 8 Commercial and industrial loans: Commercial term 39,629 121 SBA commercial term 1,795 6 Other consumer loans 797 2 Total$ 403,807 $ 1,744
The following table presents activity in loans under modified terms related to
the COVID-19 pandemic for the nine months ended
Real Estate Loans Commercial and Industrial Loans
Commercial Residential SBA Commercial
($ in thousands) Property Property SBA Property Commercial Term Term Total
Balance at January 1, 2021 $ 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 September 30, 2021 $ - $ - $ - $ - $ - $ -
(1) Termination of modifications at the request of the borrower.
SBA Paycheck Protection Program
The following table presents a summary of SBA PPP loans as of
Contractual
($ in thousands) Number of Loans Carrying Value Balance
Loan amount:
$50,000 or less 436 $ 8,913 $ 9,469
Over $50,000 and less than $350,000 286 39,689 40,955
Over $350,000 and less than $2,000,000 77 50,116 51,121
$2,000,000 or more 1 3,183 3,187
Total 800 $ 101,901 $ 104,732
55-------------------------------------------------------------------------------- Allowance for loan losses The Company's methodology for assessing the appropriateness of the allowance for loan losses 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 any loan held for investment, a specific allowance may be assigned based on an impairment analysis. Loans are considered impaired when it is probable that the Company 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. Individual loans considered to be uncollectible are charged off against the allowance for loan losses. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is confirmed. Recoveries on loans previously charged off are added to the allowance for loan losses. The decrease in allowance for loan losses to loans held-for-investment was primarily due to a decrease in historical loss and qualitative adjustment factor allocations as a result of improving economic conditions, partially offset by an increase in commercial property loans. The Company analyzes the loan portfolio, including delinquencies, concentrations, and risk characteristics, at least quarterly in order to assess the overall level of the allowance for loan losses. The Company also relies 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, the Company considers three principal elements: (i) valuation allowances based upon probable incurred losses identified during the review of impaired commercial and industrial, commercial property and construction loans, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and (iii) qualitative factors. Provisions for loan losses are charged to operations to record changes to the allowance for loan losses to a level deemed appropriate. 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 atSeptember 30, 2021 andDecember 31, 2020 . 56 -------------------------------------------------------------------------------- The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs as of the dates or for the periods indicated: As of or For the Three Months Ended As of or For the Nine Months Ended September 30, September 30, ($ in thousands) 2021 2020 2021 2020 Allowance for loan losses: Balance at beginning of period$ 24,889 $ 20,248 $ 26,510 $ 14,380 Charge-offs: Real estate - - 18 138 Commercial and industrial 84 - 100 916 Other consumer 43 102 87 241 Total charge-offs 127 102 205 1,295 Recoveries on loans previously charged off Real estate - - 47 56 Commercial and industrial 94 18 553 223 Other consumer 4 56 36 105 Total recoveries 98 74 636 384 Net charge-offs (recoveries) 29 28 (431) 911 Provision (reversal) for loan losses (1,053) 4,326 (3,134) 11,077 Balance at end of period$ 23,807 $ 24,546 $ 23,807 24,546 Loans held-for-investment: Balance at end of period$ 1,707,878 $ 1,578,804 $ 1,707,878 $ 1,578,804 Average balance 1,688,468 1,546,900 1,539,161 1,509,963
Ratios:
Annualized net charge-offs (recoveries) to average loans held-for-investment 0.01 % 0.01 % (0.04) % 0.08 % Allowance for loan losses to loans held-for-investment 1.39 % 1.55 % 1.39 % 1.55 % Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (1) 1.48 % 1.70 % 1.48 % 1.70 %
(1) Non-GAAP measure. See "Non-GAAP Measures" for a reconciliation to its most comparable GAAP measure.
57
--------------------------------------------------------------------------------
Nonperforming Loans and Nonperforming Assets
The following table presents a summary of total non-performing assets as of the
dates indicated:
September 30,
($ in thousands) 2021 December 31, 2020 Amount Change Percentage Change
Nonaccrual loans
Real estate loans:
Commercial property $ - $ 524 $ (524) (100.0) %
Residential property - 189 (189) (100.0) %
SBA property 766 885 (119) (13.4) %
Total real estate loans 766 1,598 (832) (52.1) %Commercial and industrial loans:
Commercial lines of credit - 904 (904) (100.0) % SBA commercial term 314 595 (281) (47.2) % Total commercial and industrial loans 314 1,499 (1,185) (79.1) % Other consumer loans 33 66 (33) (50.0) % Total nonaccrual loans 1,113 3,163 (2,050) (64.8) % Loans past due 90 days or more still on accrual 3 - 3 - % Total nonperforming loans 1,116 3,163 (2,047) (64.7) % Other real estate owned - 1,401 (1,401) (100.0) % Total nonperforming assets$ 1,116 $ 4,564$ (3,448) (75.5) % Nonperforming loans to loans held-for-investment 0.07 % 0.20 % Nonperforming assets to total assets 0.05 % 0.24 % The decrease in total nonaccrual loans was primarily due to paydowns and payoffs of$2.0 million and a loan transferred to OREO of$905 thousand , partially offset by loans placed on nonaccrual status of$949 thousand during the nine months endedSeptember 30, 2021 . 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. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful. 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 believes the borrower will eventually overcome those circumstances and repay the loan in full. Additional income of approximately$15 thousand and$44 thousand would have been recorded during the three and nine months endedSeptember 30, 2021 , respectively, had these loans been paid in accordance with their original terms throughout the periods indicated. Troubled Debt Restructurings Loans that the Bank modifies or restructures where the debtor is experiencing financial difficulties and makes a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, reductions in the outstanding loan balances are classified as TDRs. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower's financial condition. A workout plan between a borrower and the Bank is designed to provide a bridge for the cash flow shortfalls in the near term. If the borrower works through the near term issues, in most cases, the original contractual terms of the loan will be reinstated. The following table presents the composition of loans that were modified as TDRs by portfolio segment as of the dates indicated: September 30, 2021 December 31, 2020 ($ in thousands) Accruing Nonaccrual Total Accruing Nonaccrual Total Real estate loans: Commercial property$ 328 $ -$ 328 $ 333 $ -$ 333 SBA property 250 26 276 270 5 275 Commercial and industrial loans: Commercial term 5 - 5 18 - 18 SBA commercial term 6 - 6 13 - 13 Total$ 589 $ 26 $ 615 $ 634 $ 5$ 639 58
--------------------------------------------------------------------------------
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 a summary of the Company's deposits as of the dates indicated:
September 30, December 31,
($ in thousands) 2021 2020 Amount Change Percentage Change
Noninterest-bearing demand deposits $ 832,240 $ 538,009 $ 294,231 54.7 %
Interest-bearing deposits:
Savings 13,294 10,481 2,813 26.8 %
NOW 20,461 21,604 (1,143) (5.3) %
Retail money market accounts 376,333 351,739 24,594 7.0 %
Brokered money market accounts 4 25,002 (24,998) (100.0) %
Retail time deposits of:
$250,000 or less 262,207 299,431 (37,224) (12.4) %
More than $250,000 163,127 168,683 (5,556) (3.3) %
Time deposits from internet rate service
providers - 24,902 (24,902) - %
Brokered time deposits 65,000 55,000 10,000 18.2 %
Time deposits from California State Treasurer 100,000 100,000 - - %
Total interest-bearing deposits 1,000,426 1,056,842 (56,416) (5.3) %
Total deposits $ 1,832,666 $ 1,594,851 $ 237,815 14.9 %
The increase in noninterest-bearing demand deposits was primarily due to the
overall liquid deposit market, as well as the deposit increases from customers
with SBA PPP loans, SBA Revitalization Funds and SBA Economic Injury Disaster
Loans. 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 $138.2
million of SBA Revitalization Funds and SBA Economic Injury Disaster Loans
during the nine months ended September 30, 2021 .
The decrease in retail time deposits was primarily due to matured and closed
accounts of $457.6 million , partially offset by new accounts of $76.4 million
and renewals of the matured accounts of $328.5 million .
As of September 30, 2021 and December 31, 2020 , total deposits were comprised of
45.4% and 33.7%, respectively, of noninterest-bearing demand accounts, 22.4% and
25.7%, respectively, of savings, NOW and money market accounts, and 32.2% and
40.6%, respectively, of time deposits.
Deposits from certain officers, directors and their related interests with which
they are associated held by the Company were $5.6 million and $2.7 million ,
respectively, at September 30, 2021 and December 31, 2020 .
The following table presents the maturity of time deposits as of the dates
indicated:
Three Months Three to Six Six Months to One to Three Over Three
($ in thousands) or Less Months One Year Years Years Total
September 30, 2021
Time deposits less than
$100,000 $ 31,309 $ 74,233 $ 32,399 $ 5,627 $ 597 $ 144,165
Time deposits of $100,000
through $250,000 47,758 68,019 67,147 118 - 183,042
Time deposits of more than
$250,000 142,938 57,823 60,053 2,313 - 263,127
Total $ 222,005 $ 200,075 $ 159,599 $ 8,058 $ 597 $ 590,334
December 31, 2020
Time deposits less than
$100,000 $ 83,751 $ 18,482
91,727 57,715 81,622 4,421 - 235,485
Time deposits of more than
$250,000 156,507 35,000 72,553 4,623 - 268,683
Total $ 331,985 $ 111,197 $ 186,287 $ 17,019 $ 1,528 $ 648,016
59--------------------------------------------------------------------------------Shareholders' Equity and Regulatory Capital Capital Resources Shareholders' 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 caused primarily by fluctuations in unrealized gains or losses, net of taxes, on securities available-for-sale. Shareholders' equity was$247.6 million atSeptember 30, 2021 , an increase of$13.8 million , or 5.9%, from$233.8 million atDecember 31, 2020 . The increase was primarily due to net income of$29.4 million and cash proceeds from exercise of stock options of$1.0 million , partially offset by repurchases of common stock of$10.9 million , dividends declared on common stock of$4.9 million and a decrease in accumulated other comprehensive income of$1.2 million . Regulatory Capital Requirements The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators. The Company is not currently subject to separate minimum capital measurements under the definition of a "Small Bank Holding Company ." At such time as the Company reaches the$3 billion asset level, it will again be subject to capital measurements independent of the Bank. Federal banking agencies also require a capital conservation buffer of 2.50% in addition to the ratios required to generally be considered "adequately capitalized" under the prompt corrective action ("PCA") regulations. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for the PCA, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. The following table presents a summary of the capital requirements applicable to the Bank in order to be considered "well-capitalized" from a regulatory perspective, as well as the Bank's capital ratios as ofSeptember 30, 2021 andDecember 31, 2020 . For comparison purpose, the Company's ratios are included as well, all of which would have exceeded the "well-capitalized" level had the Company been subject to separate capital minimums. Minimum Regulatory Well Capitalized PCB Bancorp Pacific City Bank Requirements Requirements (Bank)September 30, 2021 Common tier 1 capital (to risk-weighted assets) 15.07 % 14.76 % 4.5 % 6.5 % Total capital (to risk-weighted assets) 16.32 % 16.01 % 8.0 % 10.0 % Tier 1 capital (to risk-weighted assets) 15.07 % 14.76 % 6.0 % 8.0 % Tier 1 capital (to average assets) 11.91 % 11.66 % 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 Company and the Bank's capital conservation buffer was 8.32% and 8.01%,
respectively, as of
60
--------------------------------------------------------------------------------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 cash flow and capital and strategic cash flow needs, all at a reasonable cost. The Company continuously monitors its liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of the Company's shareholders. The Company's liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. 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 non-core 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 atSeptember 30, 2021 andDecember 31, 2020 , respectively. Based on the values of loans pledged as collateral, the Company had$505.0 million and$425.3 million of additional borrowing capacity with FHLB as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. The Company also had$65.0 million and$65.0 million , respectively, of available unused unsecured federal funds lines atSeptember 30, 2021 andDecember 31, 2020 . In addition, available unused secured borrowing capacity fromFederal Reserve Discount Window atSeptember 30, 2021 andDecember 31, 2020 was$36.9 million and$35.8 million , respectively. Federal Reserve Discount Window was collateralized by loans totaling$45.1 million and$44.1 million as ofSeptember 30, 2021 andDecember 31, 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 time deposits and money market accounts. As ofSeptember 30, 2021 andDecember 31, 2020 , total cash and cash equivalents represented 10.2% 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. As ofSeptember 30, 2021 , management was able to maintain strong on-and off-balance sheet liquidity as a result of proactive liquidity management in response to the COVID-19 pandemic.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. 61 -------------------------------------------------------------------------------- Off-Balance Sheet Activities and Contractual Obligations Off-Balance Sheet Arrangements The Company has limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on 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 loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the consolidated 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: September 30, 2021 December 31, 2020 ($ in thousands) Fixed Rate Variable Rate Fixed Rate Variable Rate Unused lines of credit$ 5,852 $ 150,559 $ 6,623 $ 150,247 Unfunded loan commitments 130 33,798 1,752 34,874 Standby letters of credit 3,037 1,431 2,971 1,814 Commercial letters of credit 353 - - - Total$ 9,372 $ 185,788 $ 11,346 $ 186,935
Contractual Obligations The following table presents supplemental information regarding 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
September 30, 2021
Time deposits $ 581,679 $ 8,058 $ 597 $ - $ 590,334
FHLB advances 10,000 - - - 10,000
Operating leases 2,728 3,500 1,341 796 8,365
Total $ 594,407 $ 11,558 $ 1,938 $ 796 $ 608,699
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.
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