BayCom Corp (BCML) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from BayCom Corp's 10-K for fiscal year 2021. Filing date: 2022-03-31. Report date: 2021-12-31. Accession: 0001730984-22-000026.

This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.

Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high.

Company profile: BCML · All MD&A years: index · Next year: FY 2022

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis reviews our consolidated financial statements and other relevant statistical data and is intended to enhance your understanding of our financial condition and results of operations. The information in this section has been derived from the Consolidated Financial Statements and footnotes thereto that appear in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. The information contained in this section should be read in conjunction with these Consolidated Financial Statements and footnotes and the business and financial information provided in this Form 10-K. Unless otherwise indicated, the financial information presented in this section reflects the consolidated financial condition and results of operations of BayCom Corp and its subsidiary, United Business Bank. Because we conduct all of our material business operations through the Bank, the entire discussion relates to activities primarily conducted by the Bank.

History and Overview

BayCom is a bank holding company headquartered in Walnut Creek, California. The Company’s wholly owned banking subsidiary, United Business Bank, provides a broad range of financial services primarily to businesses and business owners, as well as individuals, through its network of 33 full-service branches at December 31, 2021, with 15 locations in California, two in Washington, five in New Mexico and 11 in Colorado.

Our principal objective is to continue to increase shareholder value and generate consistent earnings growth by expanding our commercial banking franchise through both strategic acquisitions and organic growth. Since 2010, we have expanded our geographic footprint through ten strategic acquisitions, which includes our most recent acquisition of PEB which closed in February 2022. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. We expect to continue to pursue strategic acquisitions and believe our targeted market areas present us with many and varied acquisition opportunities. We are also focused on organic growth, expense management and believe the markets in which we operate currently provide meaningful opportunities to expand our commercial client base and increase our current market share. We believe our geographic footprint, which includes the San Francisco Bay Area and the metropolitan markets of Los Angeles, California, Seattle, Washington, Denver, and Colorado and community markets including Albuquerque, New Mexico, and Custer, Delta and Grand counties, Colorado, provides us with access to low cost, stable core deposits in community markets that we can use to fund commercial loan growth. We strive to provide an enhanced banking experience for our clients by providing them with a comprehensive suite of sophisticated banking products and services tailored to meet their needs, while delivering the high-quality, relationship-based client service of a community bank. At December 31, 2021, the Company, on a consolidated basis, had assets of $2.4 billion, deposits of $2.0 billion and shareholders’ equity of $262.6 million.

We continue to focus on growing our commercial loan portfolios through acquisitions as well as organic growth. At December 31, 2021, we had $1.6 billion in total loans. Of this amount $414.0 million, or 25.1%, consisted of loans we acquired (all of which were recorded to their estimated fair values at the time of acquisition), and $1.2 billion, or 74.9%, consisted of loans we originated.

The profitability of our operations depends primarily on our net interest income after provision for loan losses, which is the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities less the provision for loan losses. The significant 150 basis point reduction in the targeted federal funds rate during the quarter ended March 31, 2020, resulted in a larger impact to our interest earning assets than to our interest bearing liabilities, thereby decreasing our net interest margin to 3.34% for the year ended December 31, 2021, as compared to 3.84% for the year ended December 31, 2020. The decrease in net interest margin during 2021 primarily reflects lower yields on average interest earning assets, partially offset by decreases in the average cost of interest bearing liabilities. The lower yields on average interest earning assets compared to a year earlier was largely due to the impact of the continuing low targeted Fed Funds Rate resulting in lower yields on new loan originations and further declines on floating rate loan yields as well as excess liquidity being invested in low yielding short term investments and interest bearing deposits. Loan

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yields in 2021 were, however, impacted favorably as a result of recognition of unamortized deferred fee income on PPP loans forgiven and repaid by the SBA. If market interest rates remain near historic lows, the Company expects continued downward pressure on loan yields. Further, because the length of the COVID-19 pandemic and the efficacy of the extraordinary measures put in place to address its economic consequences are unknown, until the pandemic subsides, the Company’s net interest income and net interest margin may be adversely affected in 2022 and possibly longer.

The provision for loan losses is dependent on changes in our loan portfolio and management’s assessment of the collectability of our loan portfolio, as well as prevailing economic and market conditions. We recorded a $466,000 provision for loan losses in the year ended December 31, 2021, primarily reflecting a decrease in the probable loan losses due to an improvement in the forecasted economic indicators used to calculate the allowance for loan losses since December 31, 2020 and new loan production, compared to a $10.3 million provision for loan losses recorded in 2020.

Our net income is also affected by noninterest income and noninterest expenses. Noninterest income consists of, among other things: (i) service charges on loans and deposits; (ii) gain on sale of loans; and (iii) other noninterest income. Our noninterest income increased $2.5 million during the year ended December 31, 2021, as compared to 2020, primarily attributable to a $3.0 million increase in gain on sale of loans. Noninterest expense includes, among other things: (i) salaries and related benefits; (ii) occupancy and equipment expense; (iii) data processing; (iv) FDIC and state assessments; (v) outside and professional services; (vi) amortization of intangibles; and (vii) other general and administrative expenses. Our noninterest expenses decreased $3.4 million during the year ended December 31, 2021, as compared to 2020. The decrease was primarily attributable to a $2.7 million decrease in data processing expense related to reversing over accrued merger data processing expense related to our GMB acquisition as actual expenses were lower than original estimates. Noninterest income and noninterest expenses are impacted by the growth of our banking operations and growth in the number of loan and deposit accounts both organically and through strategic acquisitions.

Business Strategy

Our strategy is to continue to make strategic acquisitions of financial institutions within the Western United States, grow organically and preserve our strong asset quality through disciplined lending practices. We seek to achieve these results by focusing on the following:

Column 1	Column 2	Column 3
	●	Strategic Consolidation of Community Banks. We believe our strategy of selectively acquiring and integrating community banks has provided us with economies of scale and improved our overall franchise efficiency. We expect to continue to pursue strategic acquisitions of financial institutions and believe our target market areas present us with numerous acquisition opportunities as many of these financial institutions will continue to be burdened and challenged by new and more complex banking regulations, resource constraints, competitive limitations, rising technological and other business costs, management succession issues and liquidity concerns. In addition, we believe that the breadth of our operating experience and successful track record of integrating prior acquisitions increases the potential acquisition opportunities available to us. We will continue to employ a disciplined approach to our acquisition strategy and only seek to identify and partner with financial institutions that possess attractive market share, low-cost deposit funding and compelling noninterest income generating businesses. Our disciplined approach to acquisitions, consolidations and integrations, includes the following: (i) selectively acquiring community banking franchises only at appropriate valuations, after taking into account risks that we perceive with respect to the targeted bank; (ii) completing comprehensive due diligence and developing an appropriate plan to address any non-acquired credit problems of the targeted institution; (iii) identifying an achievable cost savings estimate; (iv) executing definitive acquisition agreements that we believe provide adequate protections to us; (v) installing our credit procedures, audit and risk management policies and procedures, and compliance standards upon consummation of the acquisition; (vi) collaborating with the target’s management team to execute on synergies and cost saving opportunities related to the acquisition; and (vii) involving a broader management team across multiple departments in order to help ensure the successful integration of all business functions. We believe this approach allows us to realize the benefits of our acquisition and consolidation strategy. We also expect to continue to manage our branch network in order to ensure effective coverage for clients while minimizing any geographic overlap and driving corporate efficiency.

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Column 1	Column 2	Column 3
	●	Enhance the Performance of the Banks We Acquire. We strive to successfully integrate the banks we acquire into our existing operational platform and enhance shareholder value through the creation of efficiencies within the combined operations. We seek to realize operating efficiencies from our recently completed acquisitions by utilizing technology to streamline our operations. We continue to centralize the back-office functions of our acquired banks, as well as realize cost savings through the use of third party vendors and technology, in order to take advantage of economies of scale as we continue to grow. We intend to focus on initiatives that we believe will provide opportunities to enhance earnings, including the continued rationalization of our retail banking footprint through the evaluation of possible branch consolidations or opportunities to sell branches.

Column 1	Column 2	Column 3
	●	Focus on Lending Growth in Our Metropolitan Markets While Increasing Deposits in Our Community Markets. Our banking footprint has given us experience operating in small communities and large cities. We believe that our presence in smaller communities gives us a relatively stable source of low cost core deposits, while our more metropolitan markets represent strong long term growth opportunities to expand our commercial client base and increase our current market share through organic growth. In acquiring United Business Bank, FSB in 2017, we acquired a large deposit base from the local and regional unionized labor community. As of December 31, 2021, our top ten depositors, which included six labor unions accounted for roughly 5.9% of our total deposits. At that date, nearly 35.8% of our deposit base was comprised of noninterest bearing demand deposit accounts, significantly lowering our aggregate cost of funds.

Column 1	Column 2	Column 3
	●	Our Team of Seasoned Bankers Represents an Important Driver of our Organic Growth by Expanding Banking Relationships with Current and Potential Clients. We expect to continue to make opportunistic hires of talented and entrepreneurial bankers, to further augment our growth. Our bankers are incentivized to increase the size of their loan and deposit portfolios and generate fee income while maintaining strong credit quality. We also seek to cross sell our various banking products, including our deposit products, to our commercial loan clients, which provides a basis for expanding our banking relationships as well as a stable, low-cost deposit base. We believe we have built a scalable platform that will support our recent growth as well as efficiently and effectively manage our anticipated growth in the future, both organically and through acquisitions. In July 2020, we implemented a new core processing system that strengthened our control environment, improved the efficiency of our financial systems and enhanced our capabilities with regards to future acquisitions.

Column 1	Column 2	Column 3
	●	Preserve Our Asset Quality Through Disciplined Lending Practices. Our approach to credit management uses well defined policies and procedures, disciplined underwriting criteria and ongoing risk management. We believe we are a competitive and effective commercial lender, supplementing ongoing and active loan servicing with early stage credit review provided by our bankers. This approach has allowed us to maintain loan growth with a diversified portfolio of assets. We believe our credit culture supports accountability amongst our bankers, who maintain an ability to expand our client base as well as make sound decisions for our Company. As of December 31, 2021, our ratio of nonperforming assets to total assets was 0.29% and our ratio of nonperforming loans to total loans was 0.41%. In the 18 years since our inception, which timeframe includes the recent recession in the U.S. and a global pandemic, we have cumulative net charge-offs of $7.1 million. We believe our success in managing asset quality is illustrated by our aggregate net charge-off history.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with GAAP. The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this annual report on Form 10-K, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. The following represent our critical accounting policies:

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Allowance for loan losses. The allowance for loan losses is evaluated on a regular basis by management. Periodically, we charge current earnings with provisions for estimated probable losses of loans receivable. The provision or adjustment takes into consideration the adequacy of the total allowance for loan losses giving due consideration to specifically identified problem loans, the financial condition of the borrowers, fair value of the underlying collateral, recourse provisions, prevailing economic conditions, and other factors. Additional consideration is given to our historical loan loss experience relative to our loan portfolio concentrations related to industry, collateral and geography. Additional analysis was also completed on the allowance for loan losses during 2021 based on the significance of loan modifications in accordance with the CARES Act and regulatory guidance, loan risk rating downgrades as well as additional risk factors related to COVID-19. Our evaluation of the allowance for loan losses is inherently subjective and requires estimates that are susceptible to significant change as additional or new information becomes available. In addition, regulatory examiners may require additional allowances based on their judgments of the information regarding problem loans and credit risk available to them at the time of their examinations.

Generally, the allowance for loan losses consists of various components including a component for specifically identified weaknesses as a result of individual loans being impaired, a component for general non- specific weakness related to historical experience, economic conditions and other factors that indicate probable loss in the loan portfolio. Loans determined to be impaired are individually evaluated by management for specific risk of loss.

In situations where, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession to the borrower that we would not otherwise consider, the related loan is classified as a troubled debt restructuring, or TDR. We measure any loss on the TDR in accordance with the guidance concerning impaired loans set forth above. Additionally, TDRs are generally placed on non-accrual status at the time of restructuring and included in impaired loans. These loans are returned to accrual status after the borrower demonstrates performance with the modified terms for a sustained period of time (generally six months) and has the capacity to continue to perform in accordance with the modified terms of the restructured debt.

Estimated expected cash flows related to purchased credit impaired loans (“PCI”). Loans purchased with evidence of credit deterioration since origination for which it is probable that all contractually required payments will not be collected are accounted for under Accounting Standards Codification (“ASC”) 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. In situations where such PCI loans have similar risk characteristics, loans may be aggregated into pools to estimate cash flows. A pool is accounted for as a single asset with a single interest rate, cumulative loss rate and cash flow expectation.

The cash flows expected over the life of the PCI loan or pool are estimated using an internal cash flow model that projects cash flows and calculates the carrying values of the pools, book yields, effective interest income and impairment, if any, based on pool level events. Assumptions as to default rates, loss severity and prepayment speeds are utilized to calculate the expected cash flows.

Expected cash flows at the acquisition date in excess of the fair value of loans are considered to be accretable yield, which is recognized as interest income over the life of the loan or pool using a level yield method if the timing and amounts of the future cash flows of the pool are reasonably estimable. Subsequent to the acquisition date, any increase in cash flow over those expected at purchase date in excess of fair value is recorded as interest income prospectively. Any subsequent decreases in cash flow over those expected at purchase date are recognized by recording an allowance for loan losses. Any disposals of loans, including sales of loans, payments in full or foreclosures result in the removal of the loan from the loan pool at the carrying amount.

Business combinations. We apply the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes all of the identifiable assets acquired and liabilities assumed at their acquisition date fair values. Management utilizes prevailing valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition related costs are expensed as incurred unless they are directly attributable to the issuance of the Company’s common stock in a business combination.

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Loan sales and servicing of financial assets. Periodically, we sell loans and retain the servicing rights. The gain or loss on sale of loans depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer. All servicing assets and liabilities are initially measured at fair value. In addition, we amortize servicing rights in proportion to and over the period of the estimated net servicing income or loss and assess the rights for impairment.

Income taxes. Deferred income taxes are computed using the asset and liability method, which recognizes a liability or asset representing the tax effects, based on current tax law, of future deductible or taxable amounts attributable to events that have been recognized in the financial statements. A valuation allowance is established to reduce the deferred tax asset to the level at which it is “more likely than not” that the tax asset or benefits will be realized. Realization of tax benefits of deductible temporary differences and operating loss carry forwards depends on having sufficient taxable income of an appropriate character within the carry forward periods.

We recognize that the tax effects from an uncertain tax position can be recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.

Goodwill. Goodwill, which has resulted from a number of our acquisitions, is reviewed for impairment annually, or between annual assessments if a triggering event occurs or circumstances change that would more likely than not result in the fair value of a reporting unit below its carrying amount. We make a qualitative assessment whether it is more likely than not that the fair value of a reporting unit where goodwill is assigned is less than its carrying amount. Such indicators may include, among others: a significant adverse change in legal factors or in the general business climate; significant decline in the Company’s stock price and market capitalization; unanticipated competition; and an adverse action or assessment by a regulator. Any adverse changes in these factors could have a significant impact on the recoverability of goodwill and could have a material impact on our financial condition and results of operations.

As of December 31, 2021, the Company concluded that the goodwill of the Company’s reporting unit, the Bank, is not more likely than not to be impaired.

BayCom’s Response to COVID-19

The Company maintains its commitment to supporting its community and clients during the COVID-19 pandemic and remains focused on keeping its employees safe and the Bank running effectively to serve its clients. As of December 31, 2021, all Bank branches were open with normal hours and substantially all employees had returned to their normal working environments. The Bank will continue to monitor branch access and occupancy levels in relation to cases and close contact scenarios and follow governmental restrictions and public health authority guidelines.

Comparison of Financial Condition at December 31, 2021 and 2020

Total assets. Total assets increased $155.0 million, or 7.1%, to $2.4 billion at December 31, 2021 from $2.2 billion at December 31, 2020. The increase was primarily due to an $80.4 million, or 26.8%, increase in cash and cash equivalents, a $58.8 million, or 50.9%, increase in total investment available for sale securities and a $21.4 million, or 1.3%, increase in loans, net of allowance for loan losses. These increases in total assets were primarily funded by deposit growth.

Cash and cash equivalents. Cash and cash equivalents increased $80.4 million, or 26.8%, to $379.7 million at December 31, 2021 from $299.3 million at December 31, 2020. The increase was primarily a result of loan repayments and an increase in total deposits, which exceeded the funds required for loan originations and used for purchases of investment securities. We intend to invest our excess cash in loans and marketable securities until such funds are needed to support acquisitions or other growth oriented operating or strategic initiatives.

Securities. Our investment policy is established by the Board of Directors and monitored by the board’s risk committee. It is designed primarily to provide and maintain liquidity, generate a favorable return on investments without incurring undue interest rate and credit risk, and complements our lending activities. The policy dictates the criteria for

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classifying securities as either available for sale or held to maturity. The policy permits investment in various types of liquid assets permissible under applicable regulations, which include U.S. Treasury obligations, U.S. Government agency obligations, some certificates of deposit of insured banks, mortgage backed and mortgage related securities, corporate notes and municipal bonds. Investment in non-investment grade bonds and stripped mortgage-backed securities is not permitted under the policy.

Investment securities, all of which are classified as available-for-sale, increased $58.8 million, or 50.9%, to $174.4 million at December 31, 2021 from $115.6 million at December 31, 2020.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our available for sale investment securities as of December 31, 2021. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. The weighted average yields were calculated by multiplying each carrying value by its yield and dividing the sum of these results by the total carrying values. Yields on tax-exempt investments are not calculated on a fully tax equivalent basis.


	Amount Due or Repricing Within:
	One Year		Over One		Over Five		Over
	or Less		to Five Years		to Ten Years		Ten Years	Total
				Weighted				Weighted					Weighted				Weighted				Weighted
	Amortized		Average		Amortized		Average	Amortized		Average		Amortized		Average		Amortized	Average
	Cost		Yield		Cost		Yield	Cost		Yield		Cost		Yield		Cost	Yield
	(Dollars in thousands)
Preferred equity securities	$	—		—	%	$	18,331	4.48	%	$	—		—	%	$	—	—	%	$	18,331	4.48	%
U.S. Government Agencies		—		—			1,510	0.16			—		—			—	—			1,510	0.16
Municipal securities		844		1.80			8,987	1.41			12,045		1.42			1,769	10.63			23,645	2.12
Mortgage-backed securities		18		2.64			5,574	2.98			6,524		1.72			21,454	2.09			33,570	2.16
Collateralized mortgage obligations		—		—			7,119	2.72			4,168		2.21			16,345	1.74			27,632	2.07
SBA securities		—		—			329	3.03			479		1.33			5,247	1.92			6,055	1.94
Corporate bonds		—		—			—	—			55,900		4.31			4,750	3.80			60,650	4.27
Total	$	862		1.81	%	$	41,850	2.43	%	$	79,116		3.57	%	$	49,565	2.25	%	$	171,393	2.95	%

See “Note 3 – Investment Securities” in the Notes to Consolidated Financial Statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K for additional information on our investment securities.

Loans, net. We originate a wide variety of loans with a focus on commercial real estate loans and commercial and industrial loans. Loans receivable, net of allowance for loan losses, increased $21.4 million, or 1.3%, to $1.7 billion at December 31, 2021, from $1.6 billion at December 31, 2020. The increase was primarily due to loan originations totaling $532.7 million including $98.7 million in PPP loans partially offset by loan repayments totaling $467.5 million, including $164.8 million in PPP loan forgiveness repayments from the SBA. We also sold $45.8 million of the guaranteed portion of SBA loans during 2021. Loan originations in 2021 were concentrated in California markets, primarily Los Angeles, San Francisco Bay Area and Sacramento/Northern California with commercial and multifamily real estate secured loans accounting for the majority of the originations.

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The following table provides information about our loan portfolio by type of loan, with PCI loans presented as a separate balance, at the dates presented.


	As of December 31,
	2021		2020
				Percent				Percent
				of				of
	Amount		Total		Amount		Total
	(Dollars in thousands)
Commercial and industrial (1)	$	229,871		13.8	%	$	309,339	18.8	%
Real estate:
Residential		116,656		7.0			162,203	9.8
Multifamily residential		206,960		12.4			238,179	14.5
Owner occupied CRE		393,978		23.6			404,213	24.5
Non-owner occupied CRE		688,600		41.3			489,752	29.7
Construction and land		13,371		0.9			22,645	1.4
Total real estate		1,419,565		85.2			1,316,992	80.0
Consumer		5,138		0.3			5,218	0.3
PCI loans		12,219		0.7			15,610	0.9
Total Loans		1,666,793		100.0	%		1,647,159	100.0	%
Net deferred loan fees		(1,903)					(3,847)
Allowance for loan losses		(17,700)					(17,500)
Loans, net	$	1,647,190				$	1,625,812

(1) Includes $69.6 million and $135.6 million of PPP loans as of December 31, 2021 and 2020, respectively.

The following table shows at December 31, 2021, the geographic distribution of our loan portfolio in dollar amounts and percentages.


	San Francisco Bay							Total in State of
	Area(1)		Other California		California		All Other States(2)		Total
				% of					% of					% of				% of				% of
				Total in					Total in					Total in				Total in				Total in
	Amount		Category		Amount		Category		Amount		Category		Amount		Category		Amount	Category
	(Dollars in thousands)
Commercial and industrial	$	80,457		13.6	%	$	68,586		11.8	%	$	149,043		12.7	%	$	81,134	16.3	%	$	230,177	13.8	%
Real estate:
Residential	$	23,135		3.9	%	$	42,218		7.3	%	$	65,353		5.6	%	$	53,070	10.7	%	$	118,423	7.1	%
Multifamily residential		66,425		11.3			80,328		13.8			146,753		12.5			60,207	12.1			206,960	12.4
Owner occupied CRE		185,046		31.4			143,122		24.6			328,168		28.0			65,810	13.3			393,978	23.6
Non-owner occupied CRE		233,587		39.6			243,358		41.9			476,945		40.8			221,801	44.7			698,746	41.9
Construction and land		889		0.2			1,310		0.2			2,199		0.2			11,172	2.2			13,371	0.8
Total real estate	$	509,082				$	510,336				$	1,019,418				$	412,060			$	1,431,478
Consumer		13		0.0	%		1,703		0.3	%		1,716		0.1	%		3,422	0.7	%		5,138	0.3	%
Total loans	$	589,552				$	580,625				$	1,170,177				$	496,616			$	1,666,793

(1) Includes Alameda, Contra Costa, Solano, Sonoma, Marin, San Francisco, San Joaquin, San Mateo and Santa Clara counties.

(2) Includes loans located in the states of Colorado, New Mexico, Washington and other states. At December 31, 2021, loans in Colorado, New Mexico and Washington totaled $123.2 million, $69.5 million and $86.6 million, respectively.

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The following table provides information about our loan portfolio segregated by legacy and acquired loans, net of their discounts at the dates presented.


	As of December 31,
	2021		2020
	Non-							Non-
	Acquired		Acquired		Total	Acquired		Acquired		Total
	(Dollars in thousands)
Commercial and industrial	$	226,499		$	3,372	$	229,871		$	301,575	$	7,764	$	309,339
Real estate:
Residential		98,707			17,949		116,656			103,471		58,732		162,203
Multifamily residential		203,599			333		203,932			234,110		4,069		238,179
Owner-occupied CRE		384,778			4,087		388,865			363,963		40,250		404,213
Non-owner occupied CRE		683,997			12,744		696,741			457,634		32,118		489,752
Construction and land		12,809			562		13,371			17,233		5,412		22,645
Total real estate		1,383,890			35,675		1,419,565			1,176,411		140,581		1,316,992
Consumer		5,118			20		5,138			5,144		74		5,218
PCI loans		—			12,219		12,219			—		15,610		15,610
Total Loans		1,615,507			51,286		1,666,793			1,483,130		164,029		1,647,159
Deferred loan fees and costs, net		(1,907)			4		(1,903)			(3,857)		10		(3,847)
Allowance for loan losses		(17,700)			—		(17,700)			(17,500)		—		(17,500)
Loans, net	$	1,595,900		$	51,290	$	1,647,190		$	1,461,773	$	164,039	$	1,625,812

The following table schedules illustrate the contractual maturity and repricing information for our loan portfolio at December 31, 2021. Loans which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. Purchased credit impaired loans are reported at their contractual interest rate. The schedule does not reflect the effects of possible prepayments or enforcement of due on sale clauses.


				Maturing		Maturing
	Maturing		After One		After Five		Maturing
	Within		to Five		to Fifteen		After Fifteen
	One Year		Years		Years		Years		Total
	(Dollars in thousands)
Commercial and industrial	$	39,807		$	109,154		$	79,763		$	1,147	$	229,871
Real estate:
Residential		3,281			32,038			37,171			44,166		116,656
Multifamily residential		724			25,739			80,905			96,564		203,932
Owner-occupied CRE		10,022			123,399			196,187			59,257		388,865
Non-owner occupied CRE		36,573			123,546			516,927			19,695		696,741
Construction and land		8,254			2,549			2,568			—		13,371
Total real estate		58,854			307,271			833,758			219,682		1,419,565
Consumer and other		1,570			1,770			1,798			—		5,138
PCI loans		1,815			3,199			6,170			1,035		12,219
Total loans	$	102,046		$	421,394		$	921,489		$	221,864	$	1,666,793

The following table sets forth the amounts of loans due after December 31, 2022 with fixed or adjustable rates:



	Fixed		Adjustable
	Rate		Rate		Total
	(Dollars in thousands)
Commercial and industrial	$	145,673		$	44,391	$	190,064
Real estate:
Residential		35,390			77,985		113,375
Commercial Real Estate		464,132			778,085		1,242,217
Construction and land		2,216			2,902		5,118
Total real estate		501,738			858,972		1,360,710
Consumer and other		541			3,026		3,567
PCI loans		3,250			7,156		10,406
Total loans	$	651,202		$	913,545	$	1,564,747

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The following table sets forth the originations, purchases, sales and repayments of loans as of the dates indicated.


	Years ended December 31,
	2021		2020

	(Dollars in thousands)
Loans originated
Commercial and industrial	$	108,275		$	157,997
Real estate:
Residential		6,855			7,040
Multifamily residential		30,795			14,623
Owner occupied CRE		82,457			53,167
Non-owner occupied CRE		288,096			92,352
Construction and land		4,309			6,277
Total real estate		412,512			173,459
Consumer		24			97
Total loans originated		520,811			331,553
Loans purchased
Net loans purchased in acquisitions		—			98,410
Other loans purchased		11,950			67,636
Loans sold
Commercial and Industrial		(12,471)			(9,918)
Owner occupied CRE		(32,880)			(14,035)
Non-owner occupied CRE		(495)
Other
Principal repayments		(467,531)			(281,020)
Transfer to real estate owned		—			(505)
(Increase)/decrease in allowance for loan losses and other items, net		(200)			(10,100)
Net increase in loans receivable and loans held for sale	$	19,184		$	182,021

Nonperforming assets and nonaccrual loans. Nonperforming assets consist of nonaccrual loans, accruing loans more than 90 days delinquent and other real estate owned. Nonperforming assets decreased $2.2 million to $6.9 million at December 31, 2021 from $9.1 million at December 31, 2020, primarily due to a decrease in nonaccrual loans. The Company had nonaccrual loans totaling $6.9 million or 0.41% of total loans, of which $822,000 are guaranteed by governmental agencies at December 31, 2021, compared to $8.4 million or 0.51% of total loans at December 31, 2020. Included in nonaccrual loans at December 31, 2021 and December 31, 2020, are $1.6 million and $567,000, respectively, of TDRs. This decrease in nonaccrual loans during 2021 was primarily driven by an $830,000 decline in nonaccrual commercial real estate loans and a $608,000 decline in nonaccrual consumer loans. There were no loans that were 90 days or more past due and still accruing at December 31, 2021, compared to one loan totaling $233,000 at December 31, 2020. At December 31, 2021, accruing loans past due 30 to 89 days totaled $2.6 million, compared to $734,000 at December 31, 2020. The increase in past due 30 to 89 days at December 31, 2021 primarily related to five loans totaling $1.4 million that were less than 60 days past due and have since been brought current. At December 31, 2021, there were no loans which were past due 90 days or more and still accruing interest, compared to $233,000 at December 31, 2020. Other real estate owned totaled $21,000 and $429,000 at December 31, 2021, and December 31, 2020, respectively.

In general, loans are placed on nonaccrual status after being contractually delinquent for more than 90 days, or earlier, if management believes full collection of future principal and interest on a timely basis is unlikely. When a loan is placed on nonaccrual status, all interest accrued but not received is charged against interest income. When the ability to fully collect nonaccrual loan principal is in doubt, cash payments received are applied against the principal balance of the loan until such time as full collection of the remaining recorded balance is expected. Generally, loans with temporarily impaired values and loans to borrowers experiencing financial difficulties are placed on nonaccrual status even though the borrowers continue to repay the loans as scheduled. Such loans are categorized as performing nonaccrual loans and are reflected in nonperforming assets. Interest received on such loans is recognized as interest income when received. A nonaccrual loan is restored to an accrual basis when principal and interest payments are paid current, and full payment of principal and interest is probable. Loans that are well secured and in the process of collection will remain on accrual status.

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Purchased loans acquired in a business combination are recorded at estimated fair value on their purchase date, without a carryover of the related allowance for loan and lease losses. These acquired loans are segregated into three types: pass rated loans with no discount attributable to credit quality, non-impaired loans with a discount attributable at least in part to credit quality, and impaired loans with evidence of significant credit deterioration.

Column 1	Column 2	Column 3
	●	Pass rated loans (typically performing loans) are accounted for in accordance with ASC Topic 310-20 “Nonrefundable Fees and Other Costs” as these loans do not have evidence of credit deterioration since origination.

Column 1	Column 2	Column 3
	●	Non-impaired loans (typically performing substandard loans) are accounted for in accordance with ASC Topic 310-30, if they display at least some level of credit deterioration since origination.

Column 1	Column 2	Column 3
	●	Impaired loans (typically substandard loans on non-accrual status) are accounted for in accordance with ASC Topic 310-30, as they display significant credit deterioration since origination.

For pass rated loans (non-purchased credit impaired loans), the difference between the estimated fair value of the loans and the principal outstanding is accreted over the remaining life of the loans.

In accordance with ASC Topic 310-30, for both purchased non-impaired loans (performing substandard loans) and purchased credit-impaired loans, the loans are pooled by loan type and the difference between contractually required payments at acquisition and the cash flows expected to be collected is referred to as the non-accretable difference. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan pools when there is a reasonable expectation about the amount and timing of such cash flows.

Troubled debt restructured loans. Troubled debt restructurings, or TDRs, which are accounted for under ASC Topic 310-40, are loans which have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans. Such modifications to loan terms may include a below market interest rate, a reduction in principal, or a longer term to maturity. TDR loans of December 31, 2021 totaled $2.4 million, of which $805,000 were accruing and performing according to their restructured terms. TDR loans of December 31, 2020 totaled $1.4 million, of which $798,000 were accruing and performing according to their restructured terms. The accruing TDR loans are not considered nonperforming assets as they continue to accrue interest despite being considered impaired due to the restructured status. There was a related allowance for loan losses on the TDR loans of none and $35,000 at December 31, 2021 and December 31, 2020, respectively.

The Company provided payment and financial relief programs for borrowers impacted by COVID-19. All loans modified due to COVID-19 were separately monitored and any request for continuation of relief beyond the initial modification was reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating was appropriate. As December 31, 2021, the Company had two commercial real estate loans totaling $2.7 million operating under forbearance agreements due to COVID-19, compared to 43 loans totaling $66.7 million at December 31, 2020. Since these loans were performing loans that were current on their payments prior to COVID-19 pandemic, these modifications are not considered to be troubled debt restructurings at December 31, 2021, pursuant to applicable accounting and regulatory guidance.

All loans modified due to COVID-19 are separately monitored and any request for continuation of relief beyond the initial modification will be reassessed at that time to determine if a further modification should be granted and if a downgrade in risk rating is appropriate. Loan modifications in accordance with the CARES Act and related banking agency guidance are still subject to an evaluation in regard to determining whether or not a loan is deemed to be impaired.

Past due loans totaled $7.0 million at December 31, 2021, as compared to $5.3 million at December 31, 2020.

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The following table sets forth the nonperforming loans, nonperforming assets and troubled debt restructured loans as of the dates indicated:


	December 31,		December 31,
	2021		2020
	(Dollars in thousands)
Loans accounted for on a nonaccrual basis:
Commercial and industrial	$	753		$	848
Real estate:
Residential		1,587			2,195
Multifamily residential		200			254
Owner occupied CRE		3,990			4,651
Non-owner occupied CRE		322			437
Construction and land		36			36
Total real estate		6,135			7,573
Consumer		—			—
Total nonaccrual loans		6,888			8,421
Accruing loans 90 days or more past due		—			233
Total nonperforming loans		6,888			8,654
Real estate owned		21			429
Total nonperforming assets (1)	$	6,909		$	9,083
Troubled debt restructurings – performing		805			798
PCI loans	$	12,219		$	15,610
Nonperforming assets to total assets (1)		0.29	%		0.41	%
Nonperforming loans to total loans (1)		0.41	%		0.53	%

Column 1	Column 2
(1)	Performing TDRs are neither included in nonperforming loans above nor are they included in the numerators used to calculate this ratio.

Loans under ASC Topic 310-30 are considered performing and are not included in nonperforming assets in the table above. At both December 31, 2021, and December 31, 2020, we had no credit impaired loans under ASC Topic 310-30 that were 90 days past due and still accruing.

Allowance for loan losses. The allowance for loan losses is maintained to cover losses that are estimated in accordance with GAAP. It is our estimate of loan losses inherent in our loan portfolio at each balance sheet date. Our methodology for analyzing the allowance for loan losses consists of general and specific components. For the general component, we stratify the loan portfolio into homogeneous groups of loans that possess similar loss potential characteristics and apply a loss ratio to these groups of loans to estimate the credit losses in the loan portfolio. We use both historical loss ratios and qualitative loss factors assigned to major loan collateral types to establish general component loss allocations. Qualitative loss factors are based on management’s judgment of company, market, industry or business specific data and external economic indicators, which may not yet be reflected in the historical loss ratios, and that could impact our specific loan portfolios. Management and the Board of Directors sets and adjusts qualitative loss factors by regularly reviewing changes in underlying loan composition and the seasonality of specific portfolios. Management and the Board of Directors also considers credit quality and trends relating to delinquency, nonperforming and classified loans within our loan portfolio when evaluating qualitative loss factors. Additionally, management and the Board of Directors adjusts qualitative factors to account for the potential impact of external economic factors, including the unemployment rate, vacancy, capitalization rates, commodity prices and other pertinent economic data specific to our primary market area and lending portfolios.

For the specific component, the allowance for loan losses is established for impaired loans. Management evaluates current information and events regarding a borrower’s ability to repay its obligations and considers a loan to be impaired when the ultimate collectability of amounts due, according to the contractual terms of the loan agreement, is in doubt. If an impaired loan is collateral-dependent, the fair value of the collateral, less the estimated cost to sell, is used to determine the amount of impairment. If an impaired loan is not collateral-dependent, the impairment amount is determined using the

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negative difference, if any, between the estimated discounted cash flows and the loan amount due. For impaired loans, the amount of the impairment can be adjusted, based on current data, until such time as the actual basis is established by acquisition of the collateral or until the basis is collected. Impairment losses are reflected in the allowance for loan losses through a charge to the provision for credit losses. Subsequent recoveries are credited to the allowance for loan losses. Cash receipts for accruing loans are applied to principal and interest under the contractual terms of the loan agreement. Cash receipts on impaired loans for which the accrual of interest has been discontinued are applied first to principal.

In accordance with acquisition accounting, loans acquired in our acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts, of which a portion reflects a discount for possible credit losses. Credit discounts are included in the determination of fair value and as a result no allowance for loan losses is recorded for acquired loans at the acquisition date. Although the discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios, we believe it should be considered when comparing the current ratios to similar ratios in periods prior to the acquisition. As of December 31, 2021, acquired loans, net of their discounts, totaled $51.3 million compared to $164.0 million at December 31, 2020, due to regular amortization, repayments, renewals of loans, coupled with the migration of acquired loans out of the discounted acquired loan portfolio. The remaining net discount on these acquired loans was $2.1 million and $3.3 million at December 31, 2021 and 2020, respectively. The $69.6 million balance of PPP loans was omitted from the calculation for the allowance for loan losses at December 31, 2021 as these loans are fully guaranteed by the SBA.

The following table shows certain credit ratios at and for the periods indicated and each component of the ratio’s calculations.


	Years ended December 31,
	2021		2020
	(Dollars in thousands)
Allowance for loan losses as a percentage of total loans outstanding at period end		1.06	%		1.06	%
Allowance for loan losses	$	1,666,793		$	1,647,159
Total loans outstanding	$	17,700		$	17,500

Non-accrual loans as a percentage of total loans outstanding at period end		0.41	%		0.53	%
Total non-accrual loans	$	6,888		$	8,654
Total loans outstanding	$	1,666,793		$	1,647,159

Allowance for loan losses as a percentage of non-accrual loans at period end		257.0	%		202.2	%
Allowance for loan losses	$	17,700		$	17,500
Total non-accrual loans	$	6,888		$	8,654

Net charge-offs/(recoveries) during period to average loans outstanding:
Commercial and industrial:		0.08	%		0.06	%
Net charge-offs	$	219		$	187
Average loans outstanding	$	260,000		$	328,015
Construction and land:		(0.02)	%		0.08	%
Net (recoveries)/charge-offs	$	(4)		$	20
Average loans outstanding	$	17,728		$	23,990
Commercial estate:		0.00	%		0.00	%
Net charge-offs/(recoveries)	$	43		$	(4)
Average loans outstanding	$	1,254,627		$	1,151,649
Residential:		—	%		—	%
Net charge-offs	$	—		$	1
Average loans outstanding	$	115,639		$	175,932
Residential:		—	%		—	%
Net charge-offs	$	—		$	—
Average loans outstanding	$	115,639		$	175,932
Consumer:		0.34	%		0.32	%
Net charge-offs	$	8		$	17
Average loans outstanding	$	2,371		$	5,310
Total loans:		0.02	%		0.01	%
Total net charge-offs	$	266		$	220
Total average loans outstanding	$	1,650,365		$	1,684,896

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The following table shows the allocation of the allowance for loan losses at the indicated dates.


	As of December 31,
	2021		2020
							Percent of							Percent of
							Loans in							Loans in
				Allowance		Category					Allowance		Category
	Loan		by Loan		to Total		Loan		by Loan		to Total
	Balance		Category		Loans		Balance		Category		Loans
	(Dollars in thousands)
Commercial and industrial	$	229,871		$	3,262		13.8	%	$	309,339		$	4,042	18.8	%
Real estate:
Residential		116,656			1,536		7.0			162,203			1,859	9.8
Multifamily residential		206,960			1,197		12.4			238,179			1,634	14.5
Owner-occupied CRE		393,978			4,024		23.6			404,213			4,041	24.5
Non-owner occupied CRE		688,600			7,489		41.3			489,752			5,535	29.7
Construction and land		13,371			173		0.8			22,645			379	1.4
Total real estate		1,419,565			14,419		85.2			1,316,992			13,448	80.0
Consumer		5,138			19		0.3			5,218			10	0.3
PCI loans		12,219			—		0.7			15,610			—	0.9
Total Loans	$	1,666,793		$	17,700		100.0	%	$	1,647,159		$	17,500	100.0	%

Column 1	Column 2	Column 3	Column 4	Column 5	Column 6	Column 7	Column 8	Column 9	Column 10	Column 11	Column 12	Column 13	Column 14	Column 15	Column 16	Column 17	Column 18

The allowance for loan losses increased $200,000, or 1.1%, to $17.7 million at December 31, 2021, from $17.5 million at December 31, 2020. The increase in the allowance for loan losses at December 31, 2021 was primarily due to the increase in total loans, partially offset by the continued improvement since December 31, 2020 in the national and local economy associated with the recovery from the COVID-19 pandemic, which reduced the loss rates utilized to calculate the allowance for loan losses at December 31, 2021 as compared to the uncertain economic outlook and loss rates utilized at December 31, 2020, as well as net charge offs of $226,000 during 2021. PPP loans were omitted from the calculation of the required allowance for loan losses at December 31, 2021 and December 31, 2020 as these loans are fully guaranteed by the SBA and management expects that a majority of SBA PPP borrowers will seek full or partial forgiveness of their loan obligations from the SBA, which in turn, the SBA will reimburse the Bank for the amount forgiven. Included in the carrying value of loans are net discounts on acquired loans which may reduce the need for an allowance for loan losses on these loans because they are carried at their estimated fair value on the date on which they were acquired.

As of December 31, 2021, we identified $7.7 million in impaired loans, inclusive of $6.9 million of nonperforming loans and $765,000 of accruing TDR loans. Of these impaired loans, only $1.1 million had a specific allowance of $931,000 recorded as of December 31, 2021. As of December 31, 2020, we identified $9.2 million in impaired loans, inclusive of $8.4 million of nonperforming loans and $798,000 of accruing TDR loans. Of these impaired loans, only $ 1.3 million had a specific allowance of $521,000 recorded as of December 31, 2020.

Management considers the allowance for loan losses at December 31, 2021 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. Uncertainties relating to our allowance for loan losses are heightened as a result of the risks surrounding the COVID-19 pandemic, including whether government programs will provide adequate relief to borrowers. The ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

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Right-of-use assets and lease liabilities. On January 1, 2019, the Company adopted the new accounting standards that require lessees to recognize operating leases on the Consolidated Balance Sheet as right-of-use assets and lease liabilities based on the value of the discounted future lease payments. Lessor accounting is largely unchanged. Expanded disclosures about the nature and terms of lease agreements are required prospectively and are included in Note 7 — Leases in the Notes to the Condensed Consolidated Financial Statements included in “Item 8 — Financial Statements” within this report. The Company elected to retain prior determinations of whether an existing contract contains a lease and how the lease should be classified. The recognition of leases existing on January 1, 2019 did not require an adjustment to beginning retained earnings. Upon adoption of the accounting standards, the Company recognized right-of-use assets and lease liabilities of $7.8 million and $8.2 million respectively. Adoption of these accounting standards did not have a significant effect on the Company’s regulatory capital measures.

Right-of-use assets increased $78,000, or 0.6%, to $12.1 million at December 31, 2021 from $12.1 million at December 31, 2020. Lease liabilities increased $329,000, or 2.7%, to $12.7 million at December 31, 2021 from $12.3 million at December 31, 2020.

Premises and Equipment. Premises and equipment decreased $769,000, or 5.1%, to $14.4 million at December 31, 2021 from $15.1 million at December 31, 2020. This decrease in premises and equipment was driven by an increase in amortization and depreciation expenses associated with these assets.

Deposits. Deposits are our primary source of funding and consists of core deposits from the communities served by our branch and office locations. We offer a variety of deposit accounts with a competitive range of interest rates and terms to both consumers and businesses. Deposits include interest bearing and noninterest bearing demand accounts, savings, money market, certificates of deposit and individual retirement accounts. These accounts earn interest at rates established by management based on competitive market factors, management’s desire to increase certain product types or maturities, and in keeping with our asset/liability, liquidity and profitability objectives. Competitive products, competitive pricing and high touch client service are important to attracting and retaining these deposits.

Total deposits increased $146.8 million, or 8.0%, to $2.0 billion at December 31, 2021 from $1.8 billion at December 31, 2020, primarily due to organic growth in client relationships, proceeds from PPP loans and government stimulus checks deposited directly into client accounts, and reduced withdrawals from deposit accounts due to a change in spending habits as a result of COVID-19. Noninterest bearing deposits totaled $710.1 million, or 35.8% of total deposits, at December 31, 2021 compared to $678.4 million, or 36.9% of total deposits, at December 31, 2020.

The following table sets forth the dollar amount of deposits in the various types of deposit programs offered at the dates indicated.


	December 31,
	2021		2020
				Percent							Percent
				of Total		Increase/				of Total		Increase/
	Amount		Deposits		(Decrease)		Amount	Deposits		(Decrease)

	(Dollars in thousands)
Noninterest bearing demand	$	710,137		35.8	%	$	31,771	$	678,365		36.9	%	$	280,320
NOW accounts and savings		484,847		24.4			85,076		399,772		21.7			153,484
Money market		568,094		28.6			51,534		516,560		28.1			118,479
Time deposits		222,161		11.2			(21,539)		243,700		13.3			28,346
Total	$	1,985,239		100.0	%	$	146,842	$	1,838,397		100.0	%	$	580,629

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The following table shows time deposits by maturity and rate as of December 31, 2021.


				After One		After Two
	One Year		Year Through		Years Through		After Three
	or Less		Two Years		Three Years		Years		Total

	(Dollars in thousands)
0.00 – 0.99%	$	130,686		$	27,860		$	7,303		$	8,352	$	174,201
1.00 – 1.99%		670			1,594			1,453			12,358		16,075
2.00% and above		246			375			505			30,759		31,885
Total	$	131,602		$	29,829		$	9,261		$	51,469	$	222,161

As of December 31, 2021 and 2020, approximately $1.0 billion and $843.0 million, respectively, of our total deposit portfolio was uninsured. The uninsured amounts are estimates based on the methodologies and assumptions used for United Business Bank’s regulatory reporting requirements. The following table sets forth the portion of our time deposits that are in excess of the FDIC insurance limit, by remaining time until maturity, as of December 31, 2021.


3 months or less	$	6,950
Over 3 through 6 months	12,621
Over 6 through 12 months	45,324
Over 12 months	4,468
	$	69,363

For additional information regarding our deposits, see “Note 11 – Deposits” of the Notes to Consolidated Financial Statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” of this report on Form 10-K.

Borrowings. Although deposits are our primary source of funds, we may from time to time utilize borrowings as a cost effective source of funds when they can be invested at a positive interest rate spread, for additional capacity to fund loan demand, or to meet our asset/liability management goals. We are a member of and may obtain advances from the FHLB of San Francisco, which is part of the Federal Home Loan Bank System. The eleven regional Federal Home Loan Banks provide a central credit facility for their member institutions. These advances are provided upon the security of certain of our mortgage loans and mortgage-backed securities. These advances may be made pursuant to several different credit programs, each of which has its own interest rate, range of maturities and call features. At December 31, 2021, the Company had no FHLB advances outstanding, compared to $5.0 million of FHLB advances outstanding at December 31, 2020. At December 31, 2021 and December 31, 2020, we had the ability to borrow from the FHLB up to $483.1 million and $421.2 million, respectively. In addition to the availability of liquidity from the FHLB of San Francisco, the Bank maintained a short-term borrowing line of credit with the FRB of San Francisco, with available credit capacity of $69.6 million and $135.6 million as of December 31, 2021 and December 31, 2020, respectively, based on loans that qualify as collateral for the FRB line of credit. At both December 31, 2021 and December 31, 2020, there were no FRB borrowings outstanding.

On August 6, 2020, the Company issued and sold the Notes in an underwritten offering, resulting in net proceeds, after underwriting discounts and offering expenses, $63.4 million. For additional information, see “Item 1–Business – Sources of Funds”, contained in this report.

If needed, we may also utilize Fed Funds purchased from correspondent banks as a source of short-term funding. At December 31, 2021 and December 31, 2020, we had a total of $65.0 million and $75.0 million, respectively, in federal funds line available from third-party financial institutions, and no balances outstanding at these dates.

We are required to provide collateral for certain local agency deposits. As of December 31, 2021 and December 31, 2020, the FHLB had issued a letter of credit on behalf of the Bank totaling $42.0 million and $30.1 million, respectively as collateral for local agency deposits.

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At December 31, 2021, we had $8.4 million in aggregate principal (net of mark-to-market adjustments) of junior subordinated debentures issued in connection with the sale of trust preferred securities by two statutory business trusts, which we assumed in our acquisitions. The trust preferred securities accrue and pay distributions periodically at specified annual rates as provided in each trust agreement. The trusts used the net proceeds from each of the offerings to purchase a like amount of junior subordinated debentures (the “Debentures”) of the Company. The Debentures are the sole assets of the trusts. The Company’s obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the obligations of the trusts. The trust preferred securities are mandatorily redeemable upon maturity of the Debentures or upon earlier redemption as provided in the indentures. The Company has the right to redeem the Debentures in whole or in part on or after specific dates, at a redemption price specified in the indentures governing the Debentures, plus any accrued but unpaid interest to the redemption date. The Company also has the right to defer the payment of interest on each of the Debentures for a period not to exceed 20 consecutive quarters, provided that the deferral period does not extend beyond the stated maturity. During such deferral period, distributions on the corresponding trust preferred securities will also be deferred and the Company may not pay cash dividends to the holders of shares of the Company’s common stock. The common securities issued by the grantor trusts are held by the Company, and the Company’s investment in the common securities was $484,000 at December 31, 2021, which is included under “Interest receivable and other assets” in the Consolidated Balance Sheets included in our Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. Also, see Note 13 — Junior Subordinated Deferrable Interest Debentures in the Notes to the Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.

Shareholders’ equity. Shareholders’ equity increased $10.0 million, or 4.0%, to $262.6 million at December 31, 2021 from $252.6 million at December 31, 2020. The increase in shareholders’ equity was primarily due to $20.7 million of net income, partially offset by the repurchase of $11.6 million of our common stock during 2021. During the year ended December 31, 2021, the Company repurchased a total of 648,734 shares of its common stock at a total cost of $11.6 million, or $17.81 per share. At December 31, 2021, 742,532 shares remain available for future purchases under the current stock repurchase plan. See “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Stock Repurchases” contained in this report.

Comparison of Operating Results for the Years Ended December 31, 2021 and 2020

Earnings summary. We reported net income of $20.7 million for the year ended December 31, 2021, compared to $13.7 million for the year ended December 31, 2020, an increase of $7.0 million, or 50.7%. Net income for the year ended December 31, 2021 primarily reflects a $9.9 million, or 95.5%, decrease in the provision for loan losses, a $3.4 million, or 6.0%, decrease in noninterest expense and a $2.5 million, or 28.4%, increase in noninterest income, partially offset by a $5.6 million, or 7.0%, decrease in interest income and a $3.3 million, or 73.0%, increase in the provision for income taxes. The $9.9 million decrease in the provision for loan losses was primarily due to continued improvements in the economic forecasts during 2021, as compared to last year when the uncertainty surrounding the COVID-19 pandemic significantly impacted economic conditions. The increase in noninterest income was related to increases in gain on sale of loans of $3.0 million, and increased income from an investment in a Small Business Investment Company (“SBIC”) fund of $399,000, partially offset by a decrease in loan servicing and other fees of $145,000. Noninterest expense during the year ended December 31, 2020, included $3.0 million of acquisition-related expenses for the acquisition of GMB and its wholly owned subsidiary Grand Mountain Bank. Diluted earnings per share were $1.90 for the year ended December 31, 2021, an increase of $0.75 from diluted earnings per share of $1.15 for the year ended December 31, 2020.

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses plus noninterest income, was 65.57% for the year ended December 31, 2021, compared to 67.21% for the year ended December 31, 2020. The improvement in the efficiency ratio during the year ended December 31, 2021 was primarily due the reduced noninterest expense during 2021.

Interest income. Interest income for the year ended December 31, 2021 was $81.6 million, compared to $87.2 million for the year ended December 31, 2020, a decrease of $5.6 million, or 6.4%. The decrease in interest income primarily was due to a decrease in both the average balance and yield for interest earning assets, principally loans. Interest income on loans decreased $6.1 million as a result of a $39.6 million decrease in the average balance of loans outstanding and a 25 basis point decrease in the average loan yield during the year ended December 31, 2021 as compared to 2020.

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The average yield earned on loans for the year ended December 31, 2021 was 4.69%, compared to 4.94% for the year ended December 31, 2020. Interest income included $5.4 million in fees earned related to PPP loans during the year ended December 31, 2021, compared to $1.7 million in same period a year ago. As of December 31, 2021, total unrecognized fees on PPP loans were $2.1 million. For the year ended December 31, 2021, the average balance of PPP loans was $78.4 million and the average yield was 7.83%. The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, and will cease completely after the maturity of these loans. Approximately two-thirds of the PPP loans are set to mature by the end of 2022, while the remaining loans have a five-year maturity date. Interest income on loans for the year ended December 31, 2021 included $2.7 million in accretion of purchase accounting fair value adjustments on acquired loans, compared to $5.1 million for the year ended December 31, 2020. The remaining net discount on these acquired loans was $2.1 million and $3.3 million at December 31, 2021 and 2020, respectively.

Interest income on investment securities increased $930,000 as a result of a $9.7 million, increase in the average balance of investment securities and 46 basis point increase in the yield on such securities to 3.02% for the year ended December 31, 2021 from 2.56% for the year ended December 31, 2020. Interest income on interest bearing deposits in banks decreased $585,000 due to a 35 basis point decline in the yield on interest bearing deposits to 0.16% for the year ended December 31, 2021 from 0.51% for the year ended December 31, 2020, partially offset by a $9.7 million increase in the average balance of interest bearing deposits in banks during 2021 compared to 2020.

Interest expense. Interest expense decreased by $97,000, or 1.1%, to $8.8 million for the year ended December 31, 2021 from $8.9 million for the year ended December 31, 2020. The decrease was driven by a $2.1 million decrease in interest expense on deposits, primarily time deposits and money market accounts, and to a lesser extent a $196,000 decrease in interest expense paid on junior subordinated debentures, net and other borrowings. These decreases were partially offset by a $2.2 million increase in interest expense on subordinated debt, net. The average rate paid on interest bearing liabilities decreased six basis points to 0.67% during the year ended December 31, 2021 from 0.73% during the same period in 2020. The total average balance of interest bearing liabilities increased by $91.7 million, or 7.5%, to $1.3 billion for the year ended December 31, 2021, from $1.2 billion for the year ended December 31, 2020, primarily due to the issuance of our Notes.

Interest expense on deposits decreased $2.1 million, or 29.9%, to $4.9 million during the year ended December 31, 2021 from $7.0 million in 2020, primarily due to decreases in the average rate paid on interest bearing deposits and a $46.0 million, or 16.7%, decrease in the average balance of higher costing time deposits. The average rate paid on interest bearing deposits decreased to 0.39% for the year ended December 31, 2021, from 0.59% for the year ended December 31, 2020. The overall average cost of deposits for the year ended December 31, 2021 declined to 0.25%, compared to 0.38% for the prior period of 2020 due to an increase in noninterest bearing deposits and a reduction in market interest rates over the last year. The average balance of noninterest bearing deposits increased $55.3 million, or 8.25%, to $725.4 million for the year ended December 31, 2021 compared to $670.1 million during the comparable period during 2020. The decrease in the cost of interest-bearing deposits between the years was driven by market and competitive factors following decreases in the target Fed Funds Rate during the first quarter of 2020 as well as a higher percentage of our interest-bearing deposits being lower costing non-time deposits. Interest expense on borrowings increased $2.0 million, or 101.9%, to $3.9 million for the year ended December 31, 2021, from $1.9 million for the year ended December 31, 2020, as a result of the issuance of the Notes which were outstanding for the entire year in 2021 compared to five months during 2020. The average balance of borrowings outstanding increased $35.1 million to $73.6 million during the year ended December 31, 2021, compared to $38.5 million during 2020 for the same reason. The average cost of borrowings increased to 5.34% for the year ended December 31, 2021, from 5.06% for the year ended December 31, 2020.

Net interest income. Net interest income decreased $5.5 million, or 7.0%, to $72.8 million for the year ended December 31, 2021 compared to $78.3 million for the year ended December 31, 2020. Net interest margin for the year ended December 31, 2021 decreased 50 basis point to 3.34% from 3.84% for 2020. During the year ended December 31, 2021, the net interest margin was impacted by lower yielding loans, including PPP loans and resetting adjustable rate instruments as well as reduced interest rates on new fixed-rate real estate loan and adjustable-rate commercial loan originations and the increase in low yielding overnight cash balances causing a decrease in the average yield on interest-earning assets that outweighed the contribution to net interest margin from the decrease in the average cost of interest-bearing liabilities. The decrease in net interest margin was offset partially by an increase in deferred PPP loan fees

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recognized due to the volume of forgiven SBA PPP loans during 2021, which benefited net interest margin compared to a reduction in net interest margin from the Company’s origination of low yielding PPP loans during the same period in 2020. PPP loans are originated at an interest rate of 1%, although the effective yield is higher as a result of the origination fees paid to us by the SBA. The average yield on PPP loans was 4.52%, including the recognition of deferred fees, resulting in a positive impact to the net interest margin of 20 basis points during the year ended December 31, 2021, compared to an average yield of 2.71% and positive impact of 11 basis points during 2020. The impact of PPP loans on net interest margin will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are net, but will cease completely after the maturity of the loans. Accretion of acquisition accounting discounts on loans and the recognition of revenue from purchase credit impaired loans in excess of discounts increased our net interest margin by 17 basis points and 31 basis points during years ended December 31, 2021 and 2020, respectively.

Average Balances, Interest and Average Yields/Cost. The following table presents, for the periods indicated, information about (i) average balances, the total dollar amount of interest income from interest earning assets and the resultant average yields; (ii) average balances, the total dollar amount of interest expense on interest bearing liabilities and the resultant average yields; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin. Yields have been calculated on a pre-tax basis. The loan yields include the effect of amortization or accretion of deferred loan fees/costs and purchase accounting premiums/ discounts to interest and fees on loans.


	Year ended December 31,
	2021		2020		2019
							Annualized							Annualized						Annualized
	Average					Average		Average					Average	Average				Average
	Balance (1)		Interest		Yield		Balance(1)		Interest		Yield		Balance	Interest		Yield
	(Dollars in thousands)
Interest earning assets
Interest bearing deposits in banks	$	413,583		$	666		0.16	%	$	246,474		$	1,251	0.51	%	$	336,931	$	7,464	2.22	%
Investments securities available-for-sale		128,689			3,892		3.02			119,015			2,962	2.56			104,795		2,828	2.70
FHLB Stock		8,198			494		6.02			7,579			340	4.49			6,413		495	7.72
FRB Stock		7,629			458		6.00			7,446			453	6.09			4,694		295	6.28
Total loans		1,623,068			76,099		4.69			1,662,660			82,186	4.94			1,153,390		65,462	5.68
Total interest earning assets		2,181,167			81,609		3.74	%		2,043,174			87,192	4.27	%		1,606,223		76,544	4.77	%
Noninterest earning assets		140,632								145,342							108,631
Total average assets	$	2,321,799							$	2,188,516						$	1,714,854
Interest bearing liabilities
Savings	$	119,778		$	165		0.14	%	$	107,098		$	167	0.16	%	$	62,918		98	0.16	%
NOW accounts		320,568			287		0.09			270,318			250	0.09			202,041		154	0.08
Money market		569,122			2,266		0.40			529,402			2,721	0.51			408,328		2,911	0.71
Time deposits		230,103			2,158		0.94			276,098			3,816	1.38			283,776		5,002	1.76
Total deposit accounts		1,239,571			4,876		0.39			1,182,916			6,954	0.59			957,063		8,165	0.85
Subordinated debt, net		63,453			3,582		5.65			24,938			1,405	5.64			—		—	—
Junior subordinated debentures, net		8,361			344		4.12			8,280			390	4.71			9,485		567	5.98
Other borrowings		1,737			—		—			5,272			150	2.84			—		—	—
Total interest bearing liabilities		1,313,122			8,802		0.67	%		1,221,406			8,899	0.73	%		966,548		8,732	0.90	%
Noninterest bearing deposits		725,443								670,136							498,787
Other noninterest bearing liabilities		26,652								41,104							19,401
Noninterest bearing liabilities		752,095								711,240							518,188
Total average liabilities		2,065,217								1,932,646							1,484,736
Average equity		256,582								255,869							230,118
Total average liabilities and equity	$	2,321,799							$	2,188,516						$	1,714,854
Net interest income				$	72,807							$	78,293					$	67,812

Interest rate spread (2)							3.07	%						3.54	%					3.87	%
Net interest margin (3)							3.34	%						3.84	%					4.22	%
Ratio of average interest earning assets to average interest bearing liabilities							166.11	%						167.00	%					166.18	%

Column 1	Column 2
(1)	Average balances are average daily balances.

Column 1	Column 2
(2)	Interest rate spread is calculated as the average rate earned on interest earning assets minus the average rate paid on interest bearing liabilities.

Column 1	Column 2
(3)	Net interest margin is calculated as net interest income divided by total average earning assets.

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Rate/Volume Analysis. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest earning assets and interest bearing liabilities, as well as changes in weighted average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the periods shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Changes applicable to both volume and rate have been allocated to volume. Yields have been calculated on a pre-tax basis.


	Year ended December 31,			Year ended December 31,
	2021 compared to 2020			2020 compared to 2019
	Increase/(Decrease)			Increase/(Decrease)
	Attributable to			Attributable to
	Rate		Volume		Total		Rate	Volume		Total
	(Dollars in thousands)			(Dollars in thousands)
Interest earning assets
Interest bearing deposits in banks	$	(1,433)		$	848	$	(585)		$	(4,209)	$	(2,004)	$	(6,213)
Investments available-for-sale		689			241		930			(250)		384		134
FHLB stock and FRB stock		117			42		159			(276)		279		3
Total loans		(4,081)			(2,006)		(6,087)			(12,253)		28,977		16,724
Total interest income		(4,708)			(875)		(5,583)			(16,988)		27,636		10,648

Interest bearing liabilities
Savings		(22)			20		(2)			—		69		69
NOW accounts		(9)			46		37			44		52		96
Money market accounts		(659)			204		(455)			(1,053)		863		(190)
Time deposits		(1,022)			(636)		(1,658)			(1,051)		(135)		(1,186)
Total deposit accounts		(1,712)			(366)		(2,078)			(2,060)		849		(1,211)
Subordinated debt, net		(1,405)			3,582		2,177			—		1,405		1,405
Junior subordinated debentures, net		(50)			4		(46)			(105)		(72)		(177)
Other borrowings		(150)			—		(150)			—		150		150
Total interest expense		(3,317)			3,220		(97)			(2,165)		2,332		167
Net interest income	$	(1,391)		$	(4,095)	$	(5,486)		$	(14,823)	$	25,304	$	10,481

Provision for loan losses. We establish an allowance for loan losses by charging amounts to the loan provision at a level required to reflect probable loan losses in the loan portfolio. In evaluating the level of the allowance for loan losses, management considers, among other factors, historical loss experience, the types of loans and the amount of loans in the loan portfolio, adverse situations that may affect borrowers’ ability to repay, estimated value of any underlying collateral, prevailing economic conditions and current risk factors specifically related to each loan type. See “Critical Accounting Policies and Estimates — Allowance for loan losses” above for a description of the manner in which the provision for loan losses is established.

Based on management’s evaluation of the foregoing factors, we recorded a provision for loan losses of $466,000 for the year ended December 31, 2021, compared to a provision for loan losses of $10.3 million for the year ended December 31, 2020, a decrease of $9.9 million. The decrease in the provision for loan losses was primarily due to an adjustment to the qualitative factors utilized to calculate the allowance for loan losses resulting from improvements in the economic forecast since December 31, 2020. Our allowance for loan losses specific reserves was $930,000 at December 31, 2021, compared to $521,000 at December 31, 2020. We recorded no provision for loan losses for acquired loans related to the acquired non-purchased credit impaired loans as accounted for in accordance with ASC Topic 310-20, for both the years ended December 31, 2021 and 2020. We recorded $107,000 of reversal provisions on the purchase credit impaired loans accounted for in accordance with ASC Topic 310-30 during the year ended December 31, 2021, compared to none during 2020.

We had a net charge-offs of $226,000 for the year ended December 31, 2021 compared to net charge-offs of $220,000 for the year ended December 31, 2020. In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts. Credit discounts are included in the determination of fair value and as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. However, the allowance for loan loss includes an estimate for credit deterioration of

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acquired loans that occurs after the date of acquisition, which is included in the loan loss provision in the period that the deterioration occurred. The discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios. The allowance for loan losses to total loans was 1.06% at both December 31, 2021 and 2020.

Management considers the allowance for loan losses at December 31, 2021 to be adequate to cover losses inherent in the loan portfolio based on the assessment of the above-mentioned factors affecting the loan portfolio. While management believes the estimates and assumptions used in its determination of the adequacy of the allowance are reasonable, there can be no assurance that such estimates and assumptions will not be proven incorrect in the future, or that the actual amount of future losses will not exceed the amount of the established allowance for loan losses or that any increased allowance for loan losses that may be required will not adversely impact our financial condition and results of operations. A further decline in national and local economic conditions, as a result of the COVID-19 pandemic or other factors, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of operations. In addition, the determination of the amount of our allowance for loan losses is subject to review by bank regulators, as part of the routine examination process, which may result in additions to our provision for loan losses based upon their judgment of information available to them at the time of their examination.

Noninterest income. Noninterest income increased $2.5 million, or 28.2%, to $11.3 million for the year ended December 31, 2021 compared to $8.8 million for the year ended December 31, 2020. The increase in noninterest income was primarily due to a $3.0 increase in gain on sale of loans and a $399,000 increase in income from our investment in the SBIC fund, partially offset by a $632,000 decrease in loan servicing and other loan fees and a $45,000 decrease in service charges and other fees. During the year ended December 31, 2021, the Company sold $45.8 million of SBA loans (the guaranteed portion), which generated a gain on sale of $4.8 million, compared to the sale of $24.0 million of SBA loans and a gain of $1.8 million during the year ended December 31, 2020. SBIC income increased due to improved operating results throughout 2021 after sustaining COVID-19 related losses in 2020. Loan servicing and other loan fees, and service charges and other fees decreased primarily due to lower transaction volume.

The following table presents the key components of noninterest income for the years ended December 31, 2021 and 2020.


	December 31,		Increase		Increase
	2021		2020		(Decrease)	(Decrease)
	(Dollars in thousands)
Gain on sale of loans	$	4,795		$	1,835	$	2,960	161.3	%
Service charges and other fees		2,403			2,548		(145)	(5.7)
Loan servicing and other loan fees		1,833			2,465		(632)	(25.6)
Gain (loss) on sale of premises		12			40		(28)	(70.0)
Income on investment in SBIC fund		1,274			875		399	45.6
Gain on sale of OREO		15			86		(71)	(82.6)
Other income and fees		921			926		(5)	(0.5)
Total noninterest income	$	11,253		$	8,775	$	2,478	28.2	%

Noninterest expense. Noninterest expense decreased $3.4 million, or 5.8%, to $55.1 million for the year ended December 31, 2021 compared to $58.5 million for the year ended December 31, 2020. . The decrease was primarily attributable to a $2.7 million or 32.3% decrease in data processing expense related to reversing over accrued merger data processing expense related to our GMB acquisition as actual expenses were lower than original estimates. In addition, other non-interest expense decreased slightly for the year ended December 31, 2021 compared to last year reflecting decreased fees paid for employee recruiting and internal auditing and compliance related expenses, and an increase in FDIC insurance premiums as the application of $369,000 in FDIC small bank assessment credits reduced expenses in 2020. Salaries and employee benefits decreased slightly during the year ended December 31, 2021 compared to 2020, primarily due to a decrease in staffing levels. Partially offsetting these decreases was a $296,000 or 4.2% increase in occupancy and equipment expense primarily as a result of normal increases in rent. Noninterest expense for the year ended December 31, 2020 included $3.0 million of GMB acquisition-related expenses, comprised of $266,000 in salaries and benefits, $2.0 million in data processing expenses, $369,000 in professional fees and $383,000 in all other expenses.

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The following table presents the key components of noninterest expense for the periods indicated:


	Year ended December 31,
	2021		2020		$ Change	% Change
	(Dollars in thousands)
Salaries and employee benefits	$	33,761		$	33,942	$	(181)	(0.5)	%
Occupancy and equipment		7,384			7,088		296	4.2
Data processing		5,565			8,221		(2,656)	(32.3)
Other		8,419			9,268		(849)	(9.2)
Total noninterest expense	$	55,129		$	58,519	$	(3,390)	(5.8)	%

Income taxes. Income tax expense increased $3.3 million, or 73.0%, to $7.8 million for the year ended December 31, 2021 from $4.5 million for the year ended December 31, 2020, reflecting an increase in pre-tax income for the period ended December 31, 2021 and an increase in our effective tax rate. The Company’s effective tax rate was 27.3% for the year ended December 31, 2021 compared to 24.7% for 2020. The increase in the effective tax rate during the year ended December 31, 2020 was primarily due to reduction in favorable permanent adjustments as compared to the prior year.

Comparison of Operating Results for the Years Ended December 31, 2020 and 2019

Earnings summary. We reported net income of $13.7 million for the year ended December 31, 2020, compared to $17.3 million for the year ended December 31, 2019, a decrease of $3.6 million, or 20.7%. Net income for the year ended December 31, 2020 was significantly impacted by the higher provision for loan losses primarily related to the consideration of probable loan losses as a result of the COVID-19 pandemic. Diluted earnings per share were $1.15 for the year ended December 31, 2020, a decrease of $0.32 from diluted earnings per share of $1.47 for the year ended December 31, 2019.

Our efficiency ratio, which is calculated by dividing noninterest expense by the sum of net interest income before provision for loan losses plus noninterest income, was 67.21% for the year ended December 31, 2020, compared to 66.51% for the year ended December 31, 2019. Increases in noninterest expenses, primarily reflecting growth in our operations from recent acquisitions, outpaced net interest income and noninterest income which were negatively impacted by the effects of the COVID-19 pandemic. Noninterest income decreased during the year ended December 31, 2020, primarily due to lower gains on sale of loans as SBA loans originated for sale and sold have declined because of the pandemic.

Interest income. Interest income for the year ended December 31, 2020 was $87.2 million, compared to $76.5 million for the year ended December 31, 2019, an increase of $10.7 million, or 13.9%. The increase in interest income primarily was due to an increase in average interest earning assets, principally loans, which was driven primarily by our recent acquisitions and PPP lending. Interest income on loans increased $16.7 million as a result of a $509.3 million increase in the average total loan balance, partially offset by a 74 basis point decrease in the average loan yield during the year ended December 31, 2020 as compared to this same period in 2019. The average yield earned on loans for the year ended December 31, 2020 was 4.94%, compared to 5.68% for the year ended December 31, 2019. Interest income included $1.7 million in fees earned related to PPP loans during the year ended December 31, 2020, compared to none in same period a year ago. As of December 31, 2020, total unrecognized fees on PPP loans were $3.5 million. For the year ended December 31, 2020, the average balance of PPP loans was $129.5 million and the average yield was 2.33%. Although the average balance of loans increased, the average yield on net loans decreased compared to the same period in the prior year due primarily to decreases in interest rates on adjustable rate instruments following decreases to short-term rates over the last year, including the emergency 150 basis point reduction in the targeted federal funds rate in March 2020 due to the COVID-19 pandemic, and secondarily due to the impact of PPP loans. The impact of PPP loans on loan yields will change during any period based on the volume of prepayments or amounts forgiven by the SBA as certain criteria are met, and will cease completely after the maturity of these loans. Approximately two-thirds of the PPP loans are set to mature by the end of 2022, while the remaining loans have a five-year maturity date. Interest income on loans for the year ended December 31, 2020 included $5.1 million in accretion of purchase accounting fair value adjustments on acquired loans, compared to $4.8 million for the year ended December 31, 2019. The remaining net discount on these acquired loans was $3.3 million and $8.0 million at December 31, 2020 and 2019, respectively.

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Interest income on interest bearing deposits decreased $6.2 million as a result of a $90.5 million decrease in the average balance of interest earning deposits and a 171 basis point decrease in the yield on interest earning deposits to 0.51% for the year ended December 31, 2020 from 2.22% for the year ended December 31, 2019. Interest income on investment securities increased slightly by $134,000 as a result of a $10.8 million increase in the average balance of investment securities, partially offset by a 14 basis point decrease in the yield on investment securities to 2.56% for the year ended December 31, 2020 from 2.70% for the year ended December 31, 2019. Like yields on loans, yields on investments were significantly impacted by declines in short-term rates over the last year.

Interest expense. Interest expense increased by $167,000, or 1.9%, to $8.9 million for the year ended December 31, 2020 from $8.7 million for the year ended December 31, 2019. The increase was primarily driven by the issuance of the $65.0 million of Notes during 2020, partially offset by a decrease in deposit interest expense. Total average interest bearing liabilities increased by $254.9 million, or 26.4%, to $1.2 billion for the year ended December 31, 2020, from $966.5 million for the year ended December 31, 2019. Interest expense on deposits decreased $1.2 million, or 14.8%, to $7.0 million during the year ended December 31, 2020 from $8.2 million in 2019, primarily due to decreases in the targeted federal funds rate, earlier in the year, and despite an increase in the average balance of deposits. The average rate paid on interest bearing deposits decreased to 0.59% for the year ended December 31, 2020, from 0.85% for the year ended December 31, 2019. The overall average cost of deposits for the year ended December 31, 2020 declined to 0.38%, compared to 0.85% for the prior period of 2019 due to an increase in noninterest bearing deposits and a reduction in market interest rates over the last year. The average balance of noninterest bearing deposits increased $171.3 million, or 34.4%, to $670.1 million for the year ended December 31, 2020 compared to $498.8 million during the comparable period during 2019. The market’s response to lowering deposit pricing to reflect the targeted federal funds rate decreases over the past year typically lags declines in the yield on interest earning assets. The average rate paid on interest bearing liabilities decreased 17 basis points to 0.73% during the year ended December 31, 2020 from 0.90% during the same period in 2019.

Interest expense on borrowings increased $1.3 million, or 243.1%, to $1.9 million for the year ended December 31, 2020, from $567,000 for the year ended December 31, 2019, as a result of the issuance of the Notes on August 10, 2020, which currently have a 5.25% interest rate. The average balance of borrowing outstanding increased $29.0 million to $38.5 million during the year ended December 31, 2020, compared to $9.5 million during the comparable period in 2019. The increase in the average balance of borrowings outstanding was partially offset by a decline in the average cost of borrowing to 5.06% for the year ended December 31, 2020, from 5.98% for the year ended December 31, 2019.

Net interest income. Net interest income increased $10.5 million, or 15.5%, to $78.3 million for the year ended December 31, 2020 compared to $67.8 million for the year ended December 31, 2019. Net interest margin for the year ended December 31, 2020 decreased 38 basis point to 3.84% from 4.22% for 2019. During the year, the combination of low interest rate environment putting downward pressure on adjustable rate instruments and the impact of the low loan yields of the PPP loan portfolio, adversely affected net interest margin. Accretion of acquisition accounting discounts on loans and the recognition of revenue from purchase credit impaired loans in excess of discounts increased our net interest margin by 31 basis points and 42 basis points during years ended December 31, 2020 and 2019, respectively. The average yield on interest earning assets for the year ended December 31, 2020 was 4.27%, a 50 basis point decrease from 4.77% for the year ended December 31, 2019. The average cost of interest bearing liabilities for the year ended December 31, 2020 was 0.73%, down 17 basis points from 0.90% the year ended December 31, 2019, due primarily to lower market interest rates during most of the year.

Provision for loan losses. We recorded a provision for loan losses of $10.3 million for the year ended December 31, 2020, compared to a provision for loan losses of $2.2 million for the year ended December 31, 2019, an increase of $8.1 million. The provision for loan losses includes a provision related to the migration of acquired loans out of the discounted acquired loan portfolio and gives consideration of probable loan losses due to changes in economic conditions driven by the impact of COVID-19 on the U.S. and global economies. In addition, the provision for loan losses also reflects risk rating downgrades on loans that are considered at risk due to the COVID-19 pandemic. Our allowance for loan losses specific reserves increased to $521,000 at December 31, 2020, from $171,000 at December 31, 2019. We recorded no provision for loan losses for acquired loans related to the acquired non-purchased credit impaired loans as accounted for in accordance with ASC Topic 310-20, for both the years ended December 31, 2020 and 2019. We recorded

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$107,000 of additional provisions on the purchase credit impaired loans accounted for in accordance with ASC Topic 310-30 during the year ended December 31, 2020, compared to none during 2019.

We had a net charge-offs of $220,000 for the year ended December 31, 2020 compared to net recoveries of $36,000 for the year ended December 31, 2019. For the year ended December 31, 2020, charge-offs increased due primarily to $184,000 of charge-offs related to a single commercial and industrial loan. In accordance with acquisition accounting, loans acquired from acquisitions were recorded at their estimated fair value, which resulted in a net discount to the loans contractual amounts. Credit discounts are included in the determination of fair value and as a result, no allowance for loan losses is recorded for acquired loans at the acquisition date. However, the allowance for loan loss includes an estimate for credit deterioration of acquired loans that occurs after the date of acquisition, which is included in the loan loss provision in the period that the deterioration occurred. The discount recorded on the acquired loans is not reflected in the allowance for loan losses, or related allowance coverage ratios. The allowance for loan losses to total loans was 1.06% at December 31, 2020 compared to 0.51% at December 31, 2019.

Noninterest income. Noninterest income decreased $794,000, or 8.3%, to $8.8 million for the year ended December 31, 2020 compared to $9.6 million for the year ended December 31, 2019. The decrease in noninterest income was primarily due to a $1.2 million decrease in gain on sale of loans as our SBA loans originated for sale and sold have declined because of the COVID-19 pandemic, partially offset by increases in loan servicing and other loan fees and increases in income from our investment in a Small Business Investment Company (“SBIC”) fund. During the year ended December 31, 2020, the Company sold $24.0 million of SBA loans (the guaranteed portion), which generated a gain on sale of $1.8 million, compared to the sale of $38.4 million of SBA loans and a gain of $3.0 million during the year ended December 31, 2019. Loan servicing and other loan fees increased $520,000, or 26.7%, to $2.4 million for the year ended December 31, 2020, compared to $1.9 million for the year ended December 31, 2019, primarily due to an increase in deposit accounts acquired in our recent acquisitions. SBIC income increased $206,000, or 30.8%, to $875,000 for the year ended December 31, 2020, compared to $669,000 for the year ended December 31, 2019, showing continued improved operating results throughout the year after sustaining COVID-19 related losses earlier in 2020.

The following table presents the key components of noninterest income for the years ended December 31, 2020 and 2019.


	Years ended December 31,
	2020		2019		$ Change	% Change
	(Dollars in thousands)
Gain on sale of loans	$	1,835		$	2,999	$	(1,164)	(38.8)	%
Service charges and other fees		2,548			2,678		(130)	(4.9)
Loan servicing and other loan fees		2,465			1,945		520	26.7
Gain on sale of premises		40			187		(147)	100.0
Income on investment in SBIC fund		875			669		206	30.8
Other income and fees		926			793		133	16.8
Total noninterest income	$	8,775		$	9,569	$	(794)	(8.3)	%

Noninterest expense. Noninterest expense increased $7.0 million, or 13.7%, to $58.5 million for the year ended December 31, 2020 compared to $51.5 million for the year ended December 31, 2019. The increase was primarily due to a $5.1 million, or 17.8%, increase in salary and benefits as a result of an increase in the number of full-time equivalent employees and severance benefits paid in connection with the GMB merger and to a lesser extent normal salary increase. Occupancy and equipment expense increased $1.9 million, or 37.7%, due to our recent acquisitions. Data processing expense was slightly down for the year ended December 31, 2020 compared to the same period in 2019 due to lower acquisition-related expenses compared to the same period in 2019, partially offset by higher transaction volumes from the increase in the number of deposit accounts. Other non-interest expense increased slightly for the year ended December 31, 2020 compared to last year reflecting increased fees paid for employee recruiting and internal auditing and compliance related expenses, an increase in FDIC insurance premiums) as the application of $369,000 in FDIC small bank assessment credits reduced expenses in 2019 and the Bank utilized all of its remaining small bank assessment credits in 2020, and increased office expenses due to COVID-19 pandemic related expenses. These increases were partially offset by lower marketing and travel expenses due to a reduction in direct mail and marketing campaigns, sponsored events and other

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meeting limitations imposed in response to the COVID-19 pandemic. Noninterest expense for the year ended December 31, 2020 included $3.0 million of GMB acquisition-related expenses, comprised of $266,000 in salaries and benefits, $2.0 million in data processing expenses, $369,000 in professional fees and $383,000 in all other expenses; compared to $6.6 million of UFC and TIG acquisition-related expenses for the year ended December 31, 2019, comprised of $835,000 in salaries and benefits, $4.4 million in data processing expenses, $938,000 in professional fees and $480,000 in all other expenses. Excluding all acquisition-related expenses, noninterest expenses increased $10.7 million, or 23.8%, from the same period of 2019, comprised of increases of $5.7 million in salary and benefits, $1.9 million in occupancy and equipment, $2.2 million in data processing, $610,000 in professional fees and $177,000 in other noninterest expenses.

The following table presents the key components of noninterest expense for the periods indicated:


	Years ended December 31,
	2020		2019		$ Change	% Change
	(Dollars in thousands)
Salaries and related benefits	$	33,942		$	28,807	$	5,135	17.8	%
Occupancy and equipment		7,088			5,148		1,940	37.7
Data processing		8,221			8,364		(143)	(1.7)
Other		9,268			9,147		121	1.3
Total noninterest expense	$	58,519		$	51,466	$	7,053	13.7	%

Income taxes. Income tax expense decreased $1.9 million, or 29.3%, to $4.5 million for the year ended December 31, 2020 from $6.4 million for the year ended December 31, 2019, reflecting a decrease in pre-tax income for the period ended December 31, 2020 and a decrease in our effective tax rate. The Company’s effective tax rate was 24.7% for the year ended December 31, 2020 compared to 26.8% for 2019. The decrease in the effective tax rate during the year ended December 31, 2020 was primarily due to higher proportion of favorable permanent adjustments relative to taxable income.

Liquidity and Capital Resources

Planning for our normal business liquidity needs, both expected and unexpected, is done on a daily and short term basis through the cash management function. On a longer term basis, it is accomplished through the budget and strategic planning functions, with support from internal asset/liability management software model projections.

Management maintains a liquidity position that it believes will adequately provide funding for loan demand and deposit run off that may occur in the normal course of business. We rely on a number of different sources in order to meet our potential liquidity demands. Our primary sources of funds are deposits, escrow and custodial deposits, principal and interest payments on loans and proceeds from sale of loans. During the years ended December 31, 2021, 2020 and 2019, the Bank sold $45.8 million, $24.0 million and $38.4 million in loans and loan participation interests, respectively. During the years ended December 31, 2021, 2020 and 2019, the Bank received $490.3 million, $284.4 million and $191.7 million in principal repayments, respectively.

While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions, and competition.

Recently, the Bank’s liquidity has been positively impacted by increases in deposit levels. During the years ended December 31, 2021 and 2020, deposits increased by $146.8 million, and $137.2 million, respectively. As a result, our liquid assets in the form of cash and cash equivalents, interest bearing deposits in banks and investment securities available for sale increased to $135.1 million at December 31, 2021 from $5.6 million at December 31, 2020. Management believes that our security portfolio is of high quality and the securities would therefore be marketable. Securities purchased during the years ended December 31, 2021, and 2020 totaled $86.2 million, and $28.4 million, respectively, and securities repayments, maturities and sales in those periods were $15.9 million, and $10.9 million, respectively. Certificates of deposit scheduled to mature in one year or less at December 31, 2021, totaled $131.6 million. It is management’s policy to manage deposit rates that are competitive with other local financial institutions. Based on this management strategy, we believe that most of our maturing certificates of deposit will remain with us.

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In addition to these primary sources of funds, management has several secondary sources available to meet potential funding requirements. As of December 31, 2021, the Bank had an available borrowing capacity of $483.1 million with the FHLB of San Francisco and $69.6 million with the FRB of San Francisco. Federal Funds lines with available commitments totaling $65.0 million with three correspondent banks. There were no amounts outstanding under these facilities at December 31, 2021 and December 31, 2020. Subject to market conditions, we expect to utilize these borrowing facilities from time to time in the future to fund loan originations and deposit withdrawals, to satisfy other financial commitments, repay maturing debt and to take advantage of investment opportunities to the extent feasible.

Liquidity management is both a daily and long-term function of the Company’s management. Excess liquidity is generally invested in short-term investments, such as overnight deposits and federal funds. On a longer-term basis, a strategy is maintained of investing in various lending products and investment securities, including U.S. Government obligations and U.S. agency securities. We use our sources of funds primarily to meet our ongoing commitments, pay maturing deposits and fund withdrawals, and to fund loan commitments. Loan commitments and letters of credit were $104.1 million and $110.7 million, including $3.2 million and $13.0 million of undisbursed construction and development loan commitments, at December 31, 2021 and 2020, respectively. For information regarding our commitments, see “Note 16 - Commitments and Contingencies” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10 K.

Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $10.4 million and $10.0 million for the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, net cash used in investing activities, which consisted primarily of net change in loans receivable and purchases, sales and maturities of investment securities, was $60.4 million, compared to $73.7 million of cash used in investing activities for the year ended December 31, 2020. Net cash provided by financing activities, which is comprised primarily of net change in deposits, proceeds from the issuance of the Notes and other borrowings, was $130.3 million for the year ended December 31, 2021, compared to $67.6 million for the year ended December 31, 2020.

We incur capital expenditures on an ongoing basis to expand and improve our product offerings, enhance and modernize our technology infrastructure, and to introduce new technology-based products to compete effectively in our markets. We evaluate capital expenditure projects based on a variety of factors, including expected strategic impacts (such as forecasted impact on revenue growth, productivity, expenses, service levels and customer retention) and our expected return on investment. The amount of capital investment is influenced by, among other things, current and projected demand for our services and products, cash flow generated by operating activities, cash required for other purposes and regulatory considerations. Based on current capital allocation objectives, there are no projects scheduled for capital investments in premises and equipment during the year ending December 31, 2022 that would materially impact liquidity. We also have purchase obligations, generally with remaining terms of less than three years and contracts with various vendors to provide services, including information processing, for periods generally ranging from one to five years, for which our financial obligations are dependent upon acceptable performance by the vendor.

In addition, at December 31, 2021, we had other future obligations and accrued expenses of $26.5 million. For the year ending December 31, 2022, we project that our commitments will include $12.7 million of operating lease payments. There are $3.7 million of scheduled interest payments due on Notes and junior subordinate debentures in 2022 (excluding any other borrowings that may be made after December 31, 2021). In addition, at December 31, 2021, there were other future obligations and accrued expenses of $12.9 million. For information regarding our operating leases, see “Note 7, Leases” of the Notes to Consolidated Financial Statements included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K. We believe that our liquid assets combined with the available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months.

BayCom Corp is a separate legal entity from the Bank and must provide for its own liquidity. At December 31, 2021, the Company, on an unconsolidated basis, had liquid assets of $15.9 million. In addition to its operating expenses, the Company is responsible for paying any dividends declared to its shareholders, funds paid out for Company stock repurchases, and payments on trust-preferred securities and the Notes held at the Company level. The Company has the ability to receive dividends or capital distributions from the Bank, although there are regulatory restrictions on the ability of the Bank to pay dividends.

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As of December 31, 2021, the Company had not paid any cash dividends on its common stock. Subsequent to year end, however, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.05 per share on the Company’s outstanding common stock, payable on April 15, 2022 to shareholders of record as of the close of business on March 11, 2022. The Company expects to continue to pay quarterly cash dividends on its common stock subject to the Board of Director’s discretion to modify or terminate this practice at any time and for any reason without prior notice. Assuming continued payment during 2022 at this rate of $0.05 per share, our average total dividend paid each quarter would be approximately $686,000 based on the number of our current outstanding shares (which assumes no increases or decreases in the number of shares, except in connection with the anticipated vesting of currently outstanding equity awards). The dividends, if any, we may pay may be limited as more fully discussed under “Business – Supervision and Regulation – BayCom Corp – Dividends” and “– Regulatory Capital Requirements” contained in “Part I. Item 1. Business” of this Form 10-K.

From time to time, our Board of Directors has authorized stock repurchase plans. In general, stock repurchase plans allow us to proactively manage our capital position and return excess capital to shareholders. Shares purchased under such plans may also provide us with shares of common stock necessary to satisfy obligations related to stock compensation awards. In December 2021, the Company’s board of directors approved its fifth stock repurchase program pursuant to which the Company may repurchase up to seven percent of the Company’s common stock, or approximately 747,000 shares, of which 742,532 shares remain available for repurchase at December 31, 2021. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. The repurchase program does not obligate the Company to purchase any particular number of shares. See "Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” contained in Item 5, Part II of this Form 10-K for additional information relating to stock.

Regulatory capital. The Bank, as a state-chartered, federally insured commercial bank, and member of the Federal Reserve is subject to the capital requirements established by the Federal Reserve. The Federal Reserve requires the Bank to maintain capital adequacy that generally parallels the FDIC requirements. The capital adequacy requirements are quantitative measures established by regulation that require the Bank to maintain minimum amounts and ratios of capital. The FDIC requires the Bank to maintain minimum ratios of Total Capital, Tier 1 Capital, and Common Equity Tier 1 Capital to risk-weighted assets as well as Tier 1 Leverage Capital to average assets. Consistent with our goal to operate a sound and profitable organization, our policy is for the Bank to maintain “Well Capitalized” status under the Federal Reserve regulations. Based on capital levels at December 31, 2021 and 2020, the Bank was considered to be Well Capitalized.

The table below shows the capital ratios under the Basel III capital framework as of the dates indicated:


							Minimum
						Minimum		Regulatory
						Regulatory		Requirement for
	Actual		Requirement		“Well Capitalized”
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
BayCom Corp
As of December 31, 2021
Tier 1 leverage ratio	$	207,678		9.39	%	$	88,461		4.00	%	$	110,577	5.00	%
Common equity tier 1 capital		207,678		12.51			74,701		4.50			107,901	6.50
Tier 1 capital to risk-weighted assets		217,163		13.08			99,601		6.00			132,801	8.00
Total capital to risk-weighted assets		299,878		18.06			132,801		8.00			166,002	10.00
United Business Bank
As of December 31, 2021
Tier 1 leverage ratio	$	243,806		10.63	%	$	91,785		4.00	%	$	114,732	5.00	%
Common equity tier 1 capital		243,806		14.83			73,977		4.50			106,856	6.50
Tier 1 capital to risk-weighted assets		243,806		14.83			98,636		6.00			131,515	8.00
Total capital to risk-weighted assets		261,521		15.91			131,515		8.00			164,394	10.00

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In addition to the minimum capital ratios, the Bank has to maintain a capital conservation buffer consisting of additional Common Equity Tier 1 capital greater than 2.5% above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. At December 31, 2020, the Bank’s Common Equity Tier 1 capital exceeded the required capital conservation buffer.

For a bank holding company with less than $3.0 billion in assets, the capital guidelines apply on a bank only basis and the Federal Reserve expects the holding company’s subsidiary banks to be Well Capitalized under the prompt corrective action regulations. If the Company was subject to regulatory guidelines for bank holding companies with $3.0 billion or more in assets, at December 31, 2021, the Company would have exceeded all regulatory capital requirements.

For additional information see “Item 1. Business — Supervision and Regulation — United Business Bank — Capital Requirements” and Note 19, “Regulatory Matters” in the Notes to the Consolidated Financial Statements, included in “Item 8. Financial Statements and Supplementary Data”, within this report.

Quantitative and Qualitative Disclosures About Market and Interest Rate Risk

Market Risk. Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified two primary sources of market risk: interest rate risk and price risk.

Interest Rate Risk. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricing and maturities of interest earning assets and interest bearing liabilities (reprice risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

The Asset Liability Committee of our Board of Directors (“ALCO”), establishes broad policy limits with respect to interest rate risk. ALCO establishes specific operating guidelines within the parameters of the Board of Directors’ policies. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the Board of Directors’ approved risk limits.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest earning assets would reprice upward more quickly than rates paid on our interest bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest bearing liabilities would reprice upward more quickly than rates earned on our interest earning assets, thus compressing our net interest margin.

Income simulation analysis. Interest rate risk measurement is calculated and reported to the ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

Our primary approach to model interest rate risk is Net Interest Income at Risk (“NII at Risk”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives.

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We report NII at Risk to isolate the change in income related solely to interest earning assets and interest bearing liabilities. The NII at Risk results reflect the analysis used quarterly by management. It models gradual parallel shifts in market interest rates based on the indicated interest rate environments implied by the forward yield curve over a two-year period. No rates in the model are allowed to go below zero. Given that the current targeted federal funds rate is between 0.00% and 0.25%, a decline by 200 and 300 basis points is not reported.

The following table sets forth the estimated changes in the Company’s annual net interest income that would result from the designated instantaneous parallel shift in interest rates noted, as of the dates indicated. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.


	Net Interest Income Sensitivity Immediate Changes in Rates (1)
	-100		+100		+200		+300

	(Dollars in thousands)
December 31, 2021
Dollar change	$	(3,375)		$	7,451		$	15,939		$	24,226
Percent change		2	%		5	%		10	%		15	%
December 31, 2020
Dollar change	$	(1,546)		$	9,123		$	19,237		$	29,885
Percent change		(1)	%		7	%		14	%		21	%

Column 1	Column 2
(1)	This data does not reflect any actions that we may undertake in response to changes in interest rates such as changes in rates paid on certain deposit accounts based on local competitive factors, which could reduce the actual impact on net interest income, if any.

As with any method of gauging interest rate risk, there are certain shortcomings inherent to the methodology noted above. The model assumes interest rate changes are instantaneous parallel shifts in the yield curve. In reality, rate changes are rarely instantaneous. The use of the simplifying assumption that short-term and long-term rates change by the same degree may also misstate historic rate patterns, which rarely show parallel yield curve shifts. Further, the model assumes that certain assets and liabilities of similar maturity or period to repricing will react in the same way to changes in rates. In reality, certain types of financial instruments may react in advance of changes in market rates, while the reaction of other types of financial instruments may lag behind the change in general market rates. Additionally, the methodology noted above does not reflect the full impact of annual and lifetime restrictions on changes in rates for certain assets, such as adjustable-rate loans. When interest rates change, actual loan prepayments and actual early withdrawals from certificates may deviate significantly from the assumptions used in the model. Finally, this methodology does not measure or reflect the impact that higher rates may have on adjustable-rate loan borrowers’ ability to service their debt. All of these factors are considered in monitoring the Company’s exposure to interest rate risk.

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