MetroCity Bankshares, Inc. (MCBS) FY 2021 MD&A

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and, assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors,” and elsewhere in this Annual Report on Form 10-K, may cause actual results to differ materially from those projected in the forward looking statements. We assume no obligation to update any of these forward-looking statements.

COVID-19 Pandemic

The Company continues to closely monitor the effects of the ongoing coronavirus (COVID-19) pandemic on our loan and deposit customers, and is assessing the risks in our loan portfolio and working with our customers to reduce the pandemic’s impact on them while minimizing losses for the Company. Meanwhile, the Company remains focused on improving shareholder value, managing credit exposure, monitoring expenses, enhancing the customer experience and supporting the communities it serves.

We have implemented loan programs to allow customers who are experiencing hardships from the COVID-19 pandemic to defer loan principal and interest payments for up to eighteen months. As of December 31, 2021, we had two non-SBA commercial customers with outstanding loan balances totaling $8.1 million that were under approved payment deferrals. This is a significant decline from the active payment deferrals as of December 31, 2020 that were granted to 14 non-SBA commercial customers with outstanding balances totaling $42.0 million. As of December 31, 2021, we had four SBA loans with outstanding gross loan balances totaling $6.5 million ($1.6 million unguaranteed book balance) that were under approved payment deferrals.

As of December 31, 2021, our residential real estate loan portfolio made up 74.8% of our total loan portfolio and had a weighted average amortized loan-to-collateral value ratio (“LTV”) of approximately 54.7%. As of December 31, 2021, we had no residential mortgages on hardship payment deferrals. As of December 31, 2020, 1.0% of our residential mortgages were on hardship payment deferral covering principal and interest payments for three to six months.

As a preferred SBA lender, we participated in the Paycheck Protection Program (“PPP”) created under the CARES Act and implemented by the SBA to help provide loans to our business customers in need. During the first round of PPP funding in the second and third quarters of 2020, the Company approved and funded over 1,800 PPP loans totaling $97.0 million. These PPP loans were funded with our current cash balances and all PPP loans are fully guaranteed by the SBA. As of March 4, 2022, the SBA had granted forgiveness for these PPP loans totaling $95.1 million, or 98.0% of PPP loans funded.

The Economic Aid Act, signed into law on December 27, 2020, authorized an additional $284.5 billion in new PPP funding and extended the authority of lenders to make PPP loans through May 31, 2021. We participated in this new round of PPP loan funding by offering first and second draw loans. As of December 31, 2021, the Company had approved and funded over 1,000 PPP loans totaling $62.0 million under this new round of PPP loan funding. As of March 4, 2022, the SBA had granted forgiveness for these PPP loans totaling $39.7 million, or 64.0% of PPP loans funded.

Despite the progress and while the overall outlook has improved based on the availability of the vaccine to all adults and older children, the emergence and spread of variants (including the Omicron variant, a rapidly spreading strain of coronavirus) remains as a risk to containing and ending the pandemic, as well as to full economic recovery in our footprint.  Even with improvements in certain economic indicators, significant uncertainty remains over the timing and scope of additional government stimulus packages, and the speed of the recovery from the downturn on our business, customers, and the economy as a whole remains uncertain.

40

Table of Contents

Overview

We are MetroCity Bankshares, Inc., a bank holding company headquartered in the Atlanta, Georgia metropolitan area. We operate through our wholly-owned banking subsidiary, Metro City Bank, a Georgia state-chartered commercial bank that was founded in 2006. We currently operate 19 full-service branch locations in multi-ethnic communities in Alabama, Florida, Georgia, New York, New Jersey, Texas and Virginia. We are focused on delivering full-service banking services in markets, predominantly Asian-American communities in growing metropolitan markets in the Eastern U.S. and Texas.

Prior to December 2014, we operated without a holding company, and in December 2014, the Bank formed MetroCity Bankshares, Inc. as its holding company. On December 31, 2014, MetroCity Bankshares, Inc. acquired all of the outstanding common stock of Metro City Bank as a part of the holding company formation transaction.

We are a bank holding company and we conduct all of our material business operations through the Bank. As a result, the discussion and analysis relates to activities primarily conducted at the Bank level.

Critical Accounting Policies and Estimates

Our accounting  and reporting policies conform to accounting  principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions  and judgments reflected in the financial statement. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements.

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in Note 1 of our consolidated financial statements as of December 31, 2021, included elsewhere in this Annual Report on Form 10-K.

Allowance for Loan Losses

The ALL is a valuation  allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature  and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The ALL is maintained at a level that management believes is appropriate to provide for known and inherent incurred loan losses as of the date of the consolidated balance sheet and we have established methodologies for the determination of its adequacy. The methodologies are set forth in a formal policy and take into consideration the need for an overall general valuation allowance as well as specific allowances that are determined on an individual loan basis.

This evaluation is inherently subjective as it requires material estimates that are susceptible to significant change including the amounts and timing of future cash flows expected to be received on impaired loans.

Servicing Assets

Servicing assets are recognized separately when loans are sold and the rights to service loans are retained. When loans are sold, servicing assets are recorded at fair value in accordance with ASC Topic 860, Transfers and Servicing (“ASC 860”). Fair value is based on market prices for comparable servicing contracts, when available, or alternatively, is based on a valuation  model that calculates the present value of estimated future net servicing income. The fair value of servicing

41

Table of Contents

rights is highly sensitive to changes in underlying assumptions. Changes in the prepayment speed and discount rate assumptions have the most significant impact on the fair value of servicing assets.

Servicing fee income, which is reported on the income statement as mortgage servicing income and SBA servicing income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of servicing assets is netted against loan servicing fee income. Late fees and ancillary fees related to loan servicing are not material.

Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurement (“ASC 820”), defines fair value as the price that would be received to sell a financial asset, or paid to transfer a financial liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial instruments that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not available, management judgment is necessary to estimate fair value. In addition, changes in market conditions  may reduce the availability of quoted prices or observable date. See Note 16 of our consolidated financial statements as of December 31, 2021, included elsewhere in this Annual Report on Form 10-K, for a complete discussion of fair value of financial assets and liabilities and their related measurement  practices.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement  carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may be established. See Note 11 of our consolidated financial statements as of December 31, 2021, included elsewhere in this Annual Report on Form 10-K, for additional information.

The JOBS Act contains provisions that, among other things, reduce certain reporting and other regulatory  requirements  for qualifying public companies. As an “emerging growth company” we have elected under the JOBS Act to retain the ability to delay the adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. In the event we choose in the future to delay adoption of future accounting pronouncements applicable to public companies, our consolidated financial statements as of a particular date and for a particular period in the future may not be comparable to the financial statements as of such date and for such period of a public company situated similarly to us that is neither an emerging growth company nor an emerging growth company that has opted out of the extended transition period. Such financial statements of the other company may be prepared in conformity with new or revised accounting standards then applicable to public companies, but not to private companies, while, if we are then in the extended transition period, our consolidated financial standards would not be prepared in conformity with such new or revised accounting  standards. Additionally, we are in the process of evaluating the benefits of relying on the other reduced reporting requirements provided by the JOBS Act.

Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act, (ii) comply with any requirement  that may be adopted  by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), (iii) provide more extensive disclosures regarding our executive compensation arrangements, including a “compensation discussion and analysis” section and all of the disclosures required under the Dodd-Frank Act, (iv) hold nonbinding advisory votes on executive compensation or golden parachute arrangements. These exemptions will apply for a period of five years from our initial public offering date on October 7, 2019 or until we are no longer an “emerging growth company,” whichever is earlier

42

Table of Contents

Stock Split

On August 30, 2019, we effected a two-for-one split of our common stock in the form of a stock dividend, whereby each holder of our common stock received one additional share of common stock for each share owned as of the record date of August 15, 2019. The effect of the stock dividend on outstanding shares and per share figures has been retroactively applied to all periods presented in this Annual Report on Form 10-K.

Public Company Costs

We completed our initial public offering in October 2019. There are additional costs associated with operating as a public company, hiring additional personnel, enhancing technology and expanding our capabilities. We expect that these costs will include legal, regulatory, accounting, investor relations and other expenses that we did not incur as a private company. Sarbanes-Oxley, as well as rules adopted by the U.S. Securities and Exchange Commission, or SEC, the FDIC and national securities exchanges also requires public companies to implement specified corporate governance practices. In addition, due to regulatory changes in the banking industry and the implementation of new laws, rules and regulations, we are now subject to higher regulatory compliance costs. These additional rules and regulations also increase our legal, regulatory, accounting and financial compliance costs and make some activities more time-consuming.

Results of Operations

Net Income

Year ended December 31, 2021 compared to year ended December 31, 2020

We recorded net income of $61.7 million for the year ended December 31, 2021 compared to $36.4 million for the same period in 2020, an increase of $25.3 million, or 69.5%. The increase was due to a $38.1 million increase in net interest income and a $6.6 million increase in noninterest income, offset by a $3.5 million increase in provision for loan losses, a $7.3 million increase in noninterest expense and a $8.6 million increase in provision for income taxes.

Basic and diluted earnings per common share for the year ended December 31, 2021 was $2.41 and $2.39, respectively, compared to $1.42 and $1.41 for the basic and diluted earnings per common share for the same period in 2020.

Year ended December 31, 2020 compared to year ended December 31, 2019

We recorded net income of $36.4 million for the year ended December 31, 2020 compared to $44.7 million for the same period in 2019, a decrease of $8.3 million, or 18.6%. The decrease was due to a $12.7 million decrease in noninterest income, a $1.1 million increase in noninterest expense, and a $3.5 million increase in provision for loan losses, partially offset by a $5.1 million increase in net interest income.

Basic and diluted earnings per common share for the year ended December 31, 2020 was $1.42 and $1.41, respectively, compared to $1.82 and $1.81 for the basic and diluted earnings per common share for the same period in 2019.

Net Interest Income

The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of the Company’s total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing the Company  to an excessive level of interest rate risk through  our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity  and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

43

Table of Contents

Year ended December 31, 2021 compared to year ended December 31, 2020

Net interest income for the year ended December 31, 2021 was $104.2 million compared to $66.1 million for the year ended December 31, 2020, an increase of $38.1 million, or 57.5%. Interest income totaled $108.7 million for the year ended December 31, 2021, an increase of $31.1 million, or 40.1%, from the year ended December 31, 2020, primarily due to a $722.7 million increase in average loans while the yield on average loans decreased by 36 basis points. We also recognized PPP loan fee income of $5.4 million during 2021 compared to PPP loan fee income of $1.7 million during 2020. Average earning assets increased by $756.9 million, primarily due to an increase of $722.7 million in average loans and $60.3 million in average fed funds sold and interest-bearing cash accounts. The increase in average loans included increases of $674.2 million in average residential real estate loans, $25.5 million in average commercial real estate loans,  $16.4 million in average construction and development loans, and $7.3 million in average commercial and industrial loans, which includes $77.0 million in average PPP loans.

Interest expense for the year ended December 31, 2021 decreased $6.9 million to $4.6 million compared to interest expense of $11.5 million for the year ended December 31, 2020. This decrease is primarily attributable to a 91 basis points decrease in deposit costs, which includes a 47 basis points decrease in the average yield on money market deposits and a 110 basis points decrease in the average yield on time deposits. Average borrowings outstanding for the year ended December 31, 2021 increased by $140.1 million with a decrease in rate of 41 basis points compared to the year ended December 31, 2020.

The net interest margin for the year ended December 31, 2021 was 4.45% compared to 4.18% for the year ended December 31, 2020, an increase of 27 basis points. The cost of interest-bearing liabilities decreased by 86 basis points to 0.29% from 1.15%, while the yield on interest-earning assets decreased by 26 basis points to 4.65% from 4.91% for the previous year. Average earning assets increased by $756.9 million, primarily due to an increase of $722.7 million in average loans and an increase of $34.2 million in average total investments. Average interest-bearing liabilities increased by $565.6 million as average interest-bearing deposits increased by $425.5 million and average borrowings increased by $140.1 million. The inclusion of PPP loan average balances, interest and fees had an 11 basis points impact on the yield on average loans and a 12 basis point impact on the net interest margin for 2021.

Year ended December 31, 2020 compared to year ended December 31, 2019

Net interest income for the year ended December 31, 2020 was $66.1 million compared to $61.0 million for the year ended December 31, 2019, an increase of $5.1 million, or 8.4%. Interest income totaled $77.6 million for the year ended December 31, 2020, a decrease of $5.6 million, or 6.7%, from the year ended December 31, 2019, primarily due to a 67 basis points decrease in the yield on average loans and a 129 basis points decrease in the yield on total investments. We also recognized PPP loan fee income of $1.7 million during 2020. Average earning assets increased by $111.9 million, primarily due to an increase of $94.2 million in average loans and $14.9 million in securities purchased under agreements to resell. The increase in average loans included increases of $20.2 million in average commercial real estate loans, $69.3 million in average commercial and industrial loans, which includes $61.0 million in average PPP loans, and $7.9 million in average residential real estate loans.

Interest expense for the year ended December 31, 2020 decreased $10.7 million to $11.5 million compared to interest expense of $22.2 million for the year ended December 31, 2019. This decrease is primarily attributable to a 99 basis points decrease in deposit costs, which includes a 135 basis points decrease in the average yield on money market deposits and an 82 basis points decrease in the average yield on time deposits. Average borrowings outstanding for the year ended December 31, 2020 increased by $51.1 million with a decrease in rate of 21 basis points compared to the year ended December 31, 2019.

The net interest margin for the year ended December 31, 2020 was 4.18% compared to 4.15% for the year ended December 31, 2019, an increase of three basis points. The cost of interest-bearing liabilities decreased by 100 basis points to 1.15% from 2.15%, while the yield on interest-earning assets decreased by 75 basis points to 4.91% from 5.66% for the previous year. Average earning assets increased by $111.9 million, primarily due to an increase of $94.2 million in average loans and an increase of $17.7 million in average total investments. Average interest-bearing liabilities decreased by $36.8 million as average interest-bearing deposits decreased by $87.9 million and average borrowings increased by $51.1

44

Table of Contents

million. The inclusion of PPP loan average balances, interest and fees had an eight basis points impact on the yield on average loans and only a one basis point impact on the net interest margin for 2020.

Average Balances, Interest and Yields

The following tables present, for the years ended December 31, 2021, 2020 and 2019, information about: (i) weighted 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 rates; (iii) net interest income; (iv) the interest rate spread; and (v) the net interest margin.

​

45

Table of Contents

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 average interest rates. The following table sets forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volumes and rate have been allocated to volume.

​

Provision for Loan Losses

Credit risk is inherent in the business of making loans. We establish an ALL through charges to earnings, which are shown in the statements of operations as the provision for loan losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance for loan losses. The provision for loan losses is determined by conducting a quarterly evaluation of the adequacy of our ALL and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for loan losses and level of ALL for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market areas. The determination of the amount is complex and involves a high degree of judgment and subjectivity.

Year ended December 31, 2021 compared to year ended December 31, 2020

We recorded provision for loan losses of $6.9 million during the year ended December 31, 2021 compared to $3.5 million provision for loan losses recorded during the year ended December 31, 2020. The increase in our provision for

46

Table of Contents

loan losses during the year ended December 31, 2021 was partially due to the continued uncertainty surrounding the COVID-19 pandemic, as well as the significant growth in our loan portfolio. Our allowance for loan losses as a percentage of gross loans for the periods ended December 31, 2021 and 2020 was 0.67% and 0.62%, respectively. Excluding outstanding PPP loans of $31.0 million and $92.4 million as of December 31, 2021 and 2020, the ALL as a percentage of total loans was 0.68% and 0.66%, respectively. None of the ALL balance was allocated to our PPP loan portfolio at December 31, 2021 and 2020. Our ALL as a percent of gross loans is relatively lower than our peers due to our high percentage of residential mortgage loans, which tend to have lower allowance for loan loss ratios compared to other commercial or consumer loans.

Year ended December 31, 2020 compared to year ended December 31, 2019

We recorded provision for loan losses of $3.5 million during the year ended December 31, 2020 compared to no provision for loan losses recorded during the year ended December 31, 2019. The increase in our provision for loan losses during the year ended December 31, 2020 was largely due to the unprecedented economic disruptions and uncertainty surrounding the COVID-19 pandemic, as well as the growth in our loan portfolio. Our allowance for loan losses as a percentage of gross loans for the periods ended December 31, 2020 and 2019 was 0.62% and 0.59%, respectively. Excluding outstanding PPP loans of $92.4 million as of December 31, 2020, the ALL as a percentage of total loans was 0.66%. None of the ALL balance was allocated to our PPP loan portfolio at December 31, 2020. Our ALL as a percent of gross loans is relatively lower than our peers due to our high percentage of residential mortgage loans, which tend to have lower allowance for loan loss ratios compared to other commercial or consumer loans.

Noninterest Income

Noninterest income is an important component of our total revenues. A significant portion of our noninterest  income is associated with SBA and residential mortgage lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing rights retained. Other sources of noninterest  income include service charges on deposit accounts and other service charges, commissions and fees.

The following table sets forth the major components of our noninterest income for the years ended December 31, 2021, 2020 and 2019:

​

​

Year ended December 31, 2021 compared to year ended December 31, 2020

Service charges on deposit accounts were $1.7 million for the year ended December 31, 2021 compared to $1.3 million for the year ended December 31, 2020, an increase of $384,000, or 29.3%. The increase was primarily attributable to increased analysis fees and wire transfer fees.

Other service charges, commissions and fees increased $5.9 million, or 69.0%, to $14.4 million for year ended December 31, 2021 compared to $8.5 million for the year ended December 31, 2020. The increase is mainly attributable to higher underwriting, processing and origination fees earned from our origination of residential mortgage loans as mortgage volume significantly increased during the year ended December 31, 2021 compared to the year ended December 31, 2020. Mortgage loan originations totaled $1.20 billion during the year ended December 31, 2021 compared to $484.2 million during the year ended December 31, 2020.

47

Table of Contents

Total gain on sale of loans was $11.0 million for the year ended December 31, 2021 compared to $9.0 million for the year ended December 31, 2020, an increase of $2.0 million, or 21.7%.

We recorded no gain on sale of residential mortgage loans for the year ended December 31, 2021 as no mortgage loans were sold during the period compared to $2.5 million for the year ended December 31, 2020. We sold $92.7 million in residential mortgage loans with an average premium of 2.78% during the year ended December 31, 2020.

Gain on sale of SBA loans totaled $11.0 million for the year ended December 31, 2021 compared to $6.5 million for the year ended December 31, 2020. We sold $124.7 million in SBA loans during the year ended December 31, 2021 with average premiums of 10.67% compared to the sale of $128.6 million in SBA loans with an average premium of 7.58% in the same period in 2020.

Mortgage loan servicing income had an expense balance of $564,000 for the year ended December 31, 2021 compared to income of $1.3 million for the year ended December 31, 2020, a decrease of $1.9 million, or 143.1%. The decrease in mortgage loan servicing income was due to the decrease in capitalized mortgage servicing assets and mortgage servicing fees and increased servicing asset amortization. Included in mortgage loan servicing income for the year ended December 31, 2021 was $4.7 million in mortgage servicing fees compared to $6.4 million for 2020, and capitalized mortgage servicing assets of $0 for the year ended December 31, 2021 compared to $1.0 million for 2020. These amounts were offset by mortgage loan servicing asset amortization of $5.7 million for the year ended December 31, 2021 compared to $5.4 million for the year ended December 31, 2020. During the year ended December 31, 2021, we recorded fair value impairment recovery of $478,000 on our mortgage servicing assets compared to a fair value impairment of $641,000 recorded during the year ended December 31, 2020. Our total residential mortgage loan servicing portfolio was $608.2 million at December 31, 2021 compared to $961.7 million at December 31, 2020.

SBA servicing income was $5.9 million for the year ended December 31, 2021 compared to $6.1 million for the year ended December 31, 2020, a decrease of $246,000, or 4.0%. Our total SBA loan servicing portfolio was $543.0 million as of December 31, 2021 compared to $507.4 million as of December 31, 2020. Our SBA servicing rights are carried at fair value. While our servicing portfolio grew, the inputs used to calculate fair value also changed, which resulted in a $619,000 increase to our SBA servicing rights during the year ended December 31, 2021. During the year ended December 31, 2020, we recorded an increase of $1.5 million to our SBA servicing rights.

Other noninterest income was $1.4 million for the year ended December 31, 2021 compared to $920,000 for the year ended December 31, 2020, an increase of $478,000, or 52.0%. The largest component of other noninterest income is the income on bank owned life insurance which totaled $1.1 million and $587,000, respectively, for the years ended December 31, 2021 and 2020.

Year ended December 31, 2020 compared to year ended December 31, 2019

Service charges on deposit accounts were $1.3 million for the year ended December 31, 2020 compared to $1.5 million for the year ended December 31, 2019, a decrease of $150,000, or 10.3%. The slight decrease was partially attributable to lower insufficient funds and overdraft fee due to a general decline in customer spending activity driven by offset by increased analysis fees.

Other service charges, commissions and fees decreased $1.6 million, or 15.6%, to $8.5 million for year ended December 31, 2020 compared to $10.1 million for the year ended December 31, 2019. The decrease is mainly attributable to lower underwriting, processing and origination fees earned from our origination of residential mortgage loans as mortgage volume significantly declined during the year ended December 31, 2020 compared to the year ended December 31, 2019. Mortgage loan originations totaled $484.2 million during the year ended December 31, 2020 compared to $644.5 million during the year ended December 31, 2019.

Total gain on sale of loans was $9.0 million for the year ended December 31, 2020 compared to $14.6 million for the year ended December 31, 2019, a decrease of $5.6 million, or 38.3%.

48

Table of Contents

Gain on sale of residential mortgage loans totaled $2.5 million for the year ended December 31, 2020 compared to $9.1 million for the year ended December 31, 2019. We sold $92.7 million in residential mortgage loans with an average premium of 2.78% during the year ended December 31, 2020 compared to the sale of $520.1 million in residential mortgages with an average premium of 1.79% during the year ended December 31, 2019. We originated $484.2 million of residential mortgage in 2020 compared to $644.5 million in 2019.

Gain on sale of SBA loans totaled $6.5 million for the year ended December 31, 2020 compared to $5.4 million for the year ended December 31, 2019. We sold $128.6 million in SBA loans during the year ended December 31, 2020 with average premiums of 7.58% compared to the sale of $118.4 million in SBA loans with an average premium of 7.08% in the same period in 2019.

Mortgage loan servicing income was $1.3 million for the year ended December 31, 2020 compared to $9.3 million for the year ended December 31, 2019, a decrease of $8.0 million, or 85.9%. The decrease in mortgage loan servicing income was due to the decrease in capitalized mortgage servicing assets and increased servicing asset amortization. Included in mortgage loan servicing income for the year ended December 31, 2020 was $6.4 million in mortgage servicing fees compared to $6.2 million for 2019, and capitalized mortgage servicing assets of $1.0 million for the year ended December 31, 2020 compared to $6.9 million for 2019. These amounts were offset by mortgage loan servicing asset amortization of $5.4 million for the year ended December 31, 2020 compared to $3.8 million for the year ended December 31, 2019. During the year ended December 31, 2020, we recorded fair value impairment of $641,000 on our mortgage servicing assets. No fair value impairment charges were recorded during the year ended December 31, 2019. Our total residential mortgage loan servicing portfolio was $961.7 million at December 31, 2020 compared to $1.17 billion at December 31, 2019.

SBA servicing income was $6.1 million for the year ended December 31, 2020 compared to $3.7 million for the year ended December 31, 2019, an increase of $2.4 million, or 63.7%. Our total SBA loan servicing portfolio was $507.4 million as of December 31, 2020 compared to $441.6 million as of December 31, 2019. Our SBA servicing rights are carried at fair value. While our servicing portfolio grew, the inputs used to calculate fair value also changed, which resulted in a $1.5 million increase to our SBA servicing rights during the year ended December 31, 2020. During the year ended December 31, 2019, we recorded a charge of $238,000 to our SBA servicing rights.

Other noninterest income was $920,000 for the year ended December 31, 2020 compared to $689,000 for the year ended December 31, 2019, an increase of $231,000, or 33.5%. The largest component of other noninterest income is the income on bank owned life insurance which totaled $587,000 and $470,000, respectively, for the years ended December 31, 2020 and 2019.

Noninterest Expense

The following table sets forth the major components of our noninterest expense for the years ended December 31, 2021, 2020 and 2019:

​

Year ended December 31, 2021 compared to year ended December 31, 2020

Salaries and employee benefits expense for the year ended December 31, 2021 was $30.1 million compared to $25.5 million for the year ended December 31, 2020, an increase of $4.6 million, or 18.1%. This increase was mainly attributable

49

Table of Contents

higher commissions paid to our loan officers as loan volume significantly increased during the year ended December 31, 2021, as well as the increase in the overall number of employees necessary to support our continued growth and annual salary adjustments. The average number of full-time equivalent employees was 213 for the year ended December 31, 2021 compared to 209 for the year ended December 31, 2020.

Occupancy expense for the year ended December 31, 2021 was $5.0 million compared to $5.1 million for the same period during 2020, a slight decrease of $55,000, or 1.1%. This decrease was partially due to lower maintenance and repairs expense and rent expense.

Data  processing expense for the years ended December 31, 2021 and 2020 remained flat at $1.1 million.

Advertising expense for the year ended December 31, 2021 was $541,000 compared to $566,000 for 2020, a decrease of $25,000, or 4.4%. The decrease was due to management’s ongoing efforts to reduce costs.

Other expenses for the year ended December 31, 2021 were $11.6 million compared to $8.9 million for the year ended December 31, 2020, an increase of $2.8 million, or 31.2%. The increase was primarily due to higher mortgage and other real estate owned expenses and FDIC insurance premiums, as well as increased operating and customer service expenses. Included in other expenses were directors’ fees of $455,000 and $383,000 for the years ended December 31, 2021 and 2020, respectively.

Year ended December 31, 2020 compared to year ended December 31, 2019

Salaries and employee benefits expense for the year ended December 31, 2020 was $25.5 million compared to $24.9 million for the year ended December 31, 2019, an increase of $577,000, or 2.3%. This increase was attributable to an increase in the overall number of employees necessary to support our continued growth and annual salary adjustments, offset by lower benefit costs and lower commission paid to our loan officers as loan volume declined in 2020. The average number of full-time equivalent employees was 209 for the year ended December 31, 2020 compared to 203 for the year ended December 31, 2019.

Occupancy expense for the year ended December 31, 2020 was $5.1 million compared to $4.7 million for the same period during 2019, an increase of $334,000, or 7.0%. This increase was partially due to increased property taxes, maintenance and depreciation on our existing branch locations.

Data  processing expense for the year ended December 31, 2020 was $1.1 million compared to $1.0 million for the year ended December 31, 2019, an increase of $49,000, or 4.8%. This increase was primarily due to continued growth in our loans and deposits.

Advertising expense for the year ended December 31, 2020 was $566,000 compared to $649,000 for 2019, a decrease of $83,000, or 12.8%. The decrease was due to management’s ongoing efforts to reduce costs.

Other expenses for the year ended December 31, 2020 were $8.9 million compared to $8.7 million for the year ended December 31, 2019, an increase of $220,000, or 2.5%. The increase was partially due to higher accounting and SEC-related expenses due to 2020 being the Company’s first full year as a public company, offset by lower mortgage related expenses. Included in other expenses were directors’ fees of $383,000 and $366,000 for the years ended December 31, 2020 and 2019, respectively.

Income Tax Expense

Income tax expense for the years ended December 31, 2021, 2020 and 2019 was $20.9 million, $12.4 million and $16.2 million, respectively. The Company’s effective tax rates for the years ended December 31, 2021, 2020 and 2019 were 25.3%, 25.4% and 26.5%, respectively.

We had net deferred tax assets of $2.2 million at December 31, 2021 and net deferred tax liabilities of $1.0 million and $2.9 million at December 31, 2020 and 2019, respectively.

50

Table of Contents

Return on Equity and Assets

The following table sets forth our return on average assets, return on average equity, dividend payout ratio and average shareholders’ equity to average assets ratio for the periods indicated:

​

Financial Condition

Total assets increased $1.21 billion, or 63.7%, to $3.11 billion at December 31, 2021 as compared to $1.90 billion at December 31, 2020. The increase in total assets was primarily attributable to increases in loans held for investment of $874.7 million, cash and due from banks of $291.8 and bank owned life insurance of $23.6 million, partially offset by an increase in the allowance for loan losses of $6.8 million and decrease in the mortgage servicing asset of $5.2 million.

Loans

Our loans represent the largest portion  of our earning assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition.

Our gross loans increased $876.6 million, or 53.6%, to $2.51 billion as of December 31, 2021 compared to $1.63 billion as of December 31, 2020. Our loan growth during the year ended December 31, 2021 was comprised of a decrease of $6.8 million, or 14.9%, in construction and development loans, an increase of $43.1 million, or 9.0%, in commercial real estate loans, a decrease of $64.2 million, or 46.8 %, in commercial and industrial loans, an increase of $904.6 million, or 92.8%, in residential real estate loans and a decrease of $104,000, or 56.8%, in consumer and other loans. Included in commercial and industrial loans were PPP loans with outstanding balances totaling $31.0 million and $92.4 million as of December 31, 2021 and 2020, respectively.

The following table presents the ending balance of each major category in our loan portfolio at the dates indicated.

​

​

51

Table of Contents

The following table presents the maturity distribution of our loans as of December 31, 2021. The table also shows the distribution of such loans between those loans with predetermined (fixed) interest rates and those with variable (floating) interest rates.

​

​

Our loan portfolio is concentrated in commercial real estate (primarily the unguaranteed portion of SBA loans) and residential mortgage loans with the remaining balance in construction and development, commercial and industrial, and consumer loans. 97.1% of our gross loans was secured by real property as of December 31, 2021, compared  to 91.6% as of December 31, 2020 and 95.3% as of December 31, 2019.

We have established concentration limits in the loan portfolio for commercial real estate loans, commercial and industrial loans, and unsecured lending, among others. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending agreements to allow us to react to a borrower’s deteriorating financial condition, should that occur. For more information, see “Item 1 – Business – Lending Activities.”

The principal categories of our loan portfolios  are discussed below:

Construction and development loans. Our construction and development loans are comprised of commercial construction and land acquisition and development construction. Interest reserves are generally established on real estate construction loans. These loans carry a fixed interest rate and have maturities of less than 18 months. Our LTV policy limits are 65% for construction and development loans. Additionally, we impose limits on the total dollar amount of this category of our portfolio. The risks inherent in construction lending may affect adversely our results of operations. Such risks include, among other things, the possibility that contractors may fail to complete, or complete on a timely basis, construction of the relevant properties; substantial cost overruns in excess of original estimates and financing; market deterioration during construction; and lack of permanent take-out financing. Loans secured by such properties also involve additional risk because they have no operating history. Advances on construction loans are made relative to the overall percentage of completion on the project in an effort to remain adequately secured. Such properties may not be sold or leased so as to generate the cash flow anticipated by the borrower.

As of December 31, 2021, our construction and development loans comprised $38.9 million, or 1.6%, of total loans, compared to $45.7 million, or 2.8%, of total loans as of December 31, 2020. This compares to $31.7 million, or 2.7%, of total loans as of December 31, 2019.

Commercial real estate loans. Commercial real estate loans include owner-occupied and non-owner occupied commercial real estate. We require our commercial real estate loans to be secured by what we believe to be well-managed property with adequate margins and we generally obtain  a personal guarantee from responsible parties. We originate both

52

Table of Contents

fixed-rate and adjustable-rate loans with terms up to 25 years. At December 31, 2021, approximately 87.6% of our commercial real estate loans were owner-occupied.

As of December 31, 2021, our loans secured by commercial real estate were $520.5 million, or 20.7%, of total loans compared to $477.4 million, or 29.2%, as of December 31, 2020. This increase was due to consistent loan production and market demand for these types of loans. Commercial real estate loans were $425.0 million, or 36.5%, of our portfolio as of December 31, 2019. Our non-owner occupied commercial real estate loans make up a small percentage of our overall commercial real estate loan portfolio. Non-owner occupied commercial real estate loans were 12.4%, 13.6%, and 17.9%, as a percentage of commercial real estate loans for the years ending December 31, 2021, 2020, and 2019, respectively.

We originate both fixed and adjustable rate loans. Adjustable rate loans are based on LIBOR, prime rate or constant  maturity treasury (“CMT”). At December 31, 2021 and 2020, approximately 20.9% and 31.7% of the commercial real estate portfolio consisted of fixed-rate loans, respectively. Our policy maximum LTV is 85% for commercial real estate loans. However, our weighted average LTV is well below this policy maximum. Newly originated and renewed non-SBA commercial real estate loans for the years ending December 31, 2021 and 2020 carried a weighted average LTV of 59.5% for both periods.

Commercial and industrial loans. We provide a mix of variable and fixed rate commercial and industrial loans. The loans are typically made to small and medium-sized businesses for working capital needs, business expansions and for trade financing. We extend commercial business loans on an unsecured and secured basis for working capital, accounts receivable and inventory financing, machinery and equipment purchases, and other business purposes. Generally, short-term loans have maturities ranging from six months to one year, and “term loans” have maturities ranging from five to ten years. Loans are generally intended to finance current transactions and typically provide for periodic principal payments, with interest payable monthly. Term loans generally provide for floating interest rates, with monthly payments of both principal and interest.

As of December 31, 2021, our commercial and industrial loans comprised $73.1 million, or 2.9%, of total loans, compared to $137.2 million, or 8.4% of total loans as of December 31, 2020. This compares to $53.1 million, or 4.6%, of total loans as of December 31, 2019. This decrease was mainly due to the forgiveness of PPP loans that were originated in 2020 and 2021.

A significant portion of both our commercial real estate and commercial and industrial loans are SBA loans. We are designated an SBA Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We generally sell the guaranteed portion (75%-90%) of the SBA loans that we originate. Our SBA loans are typically made to small-sized retail, hotel/motel, service and distribution businesses for working capital needs or business expansions. SBA loans have maturities up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral  may also include inventory, accounts receivable and equipment, and may include personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and included in our CRE Concentration Guidance. As of December 31, 2021, our SBA portfolio totaled $269.8 million compared  to $285.1 million as of December 31, 2020. This decrease was primarily a result of the forgiveness and payoff of PPP loans originated in 2020, as well as the amortization of our existing SBA portfolio. We originated and sold $285.8 million and $124.7 million during the year ended December 31, 2021 compared to originations and sales of $245.7 million and $128.6 million for the year ended December 31, 2020. We originated and sold $155.0 million and $118.4 million of SBA loans during the year ended December 31, 2019.

From our total SBA loan portfolio of $269.8 million at December 31, 2021, $214.3 million is secured by real estate and $55.5 million (including PPP loans of $31.0 million) is unsecured or secured by business assets, which we classify as commercial and industrial loans.

As a preferred SBA lender, we participated in the Paycheck Protection Program (“PPP”) created under the CARES Act and implemented by the SBA to help provide loans to our business customers in need. During the first round of PPP funding in the second and third quarters of 2020, the Company approved and funded over 1,800 PPP loans totaling $97.0 million. These PPP loans were funded with our current cash balances and all PPP loans are fully guaranteed by the SBA.

53

Table of Contents

As of March 4, 2022, the SBA had granted forgiveness for these PPP loans totaling $95.1 million, or 98.0% of PPP loans funded

The Economic Aid Act, signed into law on December 27, 2020, authorized an additional $284.5 billion in new PPP funding and extended the authority of lenders to make PPP loans through May 31, 2021. We participated in this new round of PPP loan funding by offering first and second draw loans. As of December 31, 2021, the Company had approved and funded over 1,000 PPP loans totaling $62.0 million under this new round of PPP loan funding. As of March 4, 2022, the SBA had granted forgiveness for these PPP loans totaling $39.7 million, or 64.0% of PPP loans funded.

​

Residential real estate loans. We originate mainly non-conforming single-family residential mortgage loans through  our branch network, without the use of any third party originator. During 2021, our primary loan products were a 15-year fixed rate product, a 30-year fixed rate product and a five-year hybrid adjustable rate mortgage which reprices after five years to the one-year CMT plus certain spreads. We originate the residential mortgage loans to hold for investment and also sell on the secondary market.

As of December 31, 2021, our residential real estate loans comprised $1.88 billion, or 74.8%, of total loans, compared  to $974.4 million, or 59.6%, of total loans as of December 31, 2020. This compares to $651.6 million, or 56.0%, of total loans as of December 31, 2019. The increase in 2021 was due to management’s decision to hold all of our production for investment rather than sell our residential loans on the secondary market. During the years ended December 31, 2021 and 2020, we originated $1.20 billion and $484.2 million and sold $0 and $92.7 million, respectively, in residential mortgage loans. During the year ended December 31, 2019, we originated $644.5 million and sold $520.1 million in residential mortgage loans.

Consumer and other loans. These loans represent a small portion of our overall portfolio and primarily consists of purchased auto loan pools, overdrafts, and consumer lines of credit. Consumer loans carry a greater amount of risk and collections are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws may limit the amount which can be recovered on such loans.

As of December 31, 2021, our consumer and other loans totaled $79,000 compared to $183,000 as of December 31, 2020. This compares to $1.8 million as of December 31, 2019. Our consumer loans have steadily decreased since December 31, 2017 due to our decision to discontinue the purchase of auto loan pools in 2016.

Nonperforming Assets

Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal and interest payments are past due 90 days or more or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold, and is carried at the balance of the loan at the time of foreclosure or at estimated fair value less estimated costs to sell, whichever is less.

Nonperforming loans include loans 90 days or more past due and still accruing, loans accounted for on a nonaccrual basis and accruing restructured loans. Nonperforming assets consist of nonperforming loans plus OREO.

Nonperforming loans were $11.8 million at December 31, 2021 compared to $13.1 million at December 31, 2020 and $14.7 million at December 31, 2019. The decrease from December 31, 2020 to December 31, 2021 was primarily

54

Table of Contents

attributable to a $2.4 million decrease in nonaccrual residential real estate loans, offset by a $857,000 increase in nonaccrual commercial real estate loans and $342,000 increase in loans past due ninety days or more and still accruing. The decrease from December 31, 2019 to December 31, 2020 was primarily attributable to a $1.4 million decrease in nonaccrual construction and development loans and $627,000 decrease in nonaccrual residential real estate loans. The increase in the year ended December 31, 2019 was primarily attributable to a $1.4 million increase in nonaccrual construction and development loans and a $6.2 million increase in nonaccrual residential real estate loans. We did not recognize any interest income on nonaccrual loans during the years ended December 31, 2021, 2020 and 2019. We recognized interest income on loans modified under troubled debt restructurings of $131,000, $143,000 and $301,000 for the years ended December 31, 2021, 2020 and 2019, respectively.

The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings. At December 31, 2021, included in nonaccrual loans were $3.7 million of commercial real estate loans, $152,000 in commercial and industrial loans and $4.9 million in residential real estate loans. Nonaccrual loans at December 31, 2020 comprised of $2.9 million of commercial real estate loans, $34,000 in commercial and industrial loans and $7.3 million in residential real estate loans. The weighted average LTV of nonaccrual residential real estate loans was approximately 55% at December 31, 2021.

​

​

At December 31, 2021, 11.1% of the Company’s loan portfolio, or $279.3 million, is in sectors that have been the most sensitive to the COVID-19 (and the variants thereof) pandemic. Within this group, the hotel industry and the restaurant industry, which are two industries heavily impacted by the COVID-19 pandemic, represented $165.9 million and $39.5 million, respectively. While our entire loan portfolio is being continuously assessed, enhanced monitoring for these sectors is ongoing. We are continuously working with these customers to evaluate how the current economic conditions are impacting, and will continue to impact, their business operations.

In March 2020, regulatory agencies issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID–19. The agencies confirmed with the staff of the FASB that short–term modifications made on a good faith basis in response to the COVID–19 pandemic to borrowers who were current prior to any relief, are not to be considered troubled debt restructurings. As of December 31, 2021, we had non-SBA commercial loans and residential mortgages with outstanding balances of $8.1 million and $0, respectively, who were under approved payment deferrals. As of December 31, 2020, we had non-SBA commercial loans and residential mortgages with outstanding balances of $42.0 million and $9.8 million, respectively, who were under approved payment deferrals. As of December 31, 2021, we had four SBA loans under approved payment deferrals with outstanding gross loan balances totaling $6.5 million ($1.6 million unguaranteed book balance). As of December 31, 2020, we had approved payment deferrals for 18 SBA loans with outstanding gross loan balances totaling $25.5 million ($6.4 million unguaranteed book balance). See Notes 1 and 3 of our consolidated financial statements as of December 31, 2020, included elsewhere in this Annual Report on Form 10-K, for more information regarding accounting treatment of loan modifications as a response to COVID-19.

55

Table of Contents

Allowance for loan losses

The allowance for loan losses is an estimate of probable incurred losses in the loan portfolio. Loans are charged-off  against the allowance when management believes a loan balance is uncollectible. Subsequent recoveries, if any, are credited to the allowance for loan losses. Management’s methodology for estimating the allowance balance consists of several key elements, which include specific allowances on individual impaired loans and the formula driven allowances on pools of loans with similar risk characteristics. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

The ALL is determined on a quarterly basis and reflects management’s estimate of probable incurred credit losses inherent in the loan portfolio. We also rely on internal and external loan review procedures to further assess individual loans and loan pools, and economic data for overall industry and geographic trends. The computation includes element of judgment and high levels of subjectivity.

A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing restructured loans. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market value for the collateral. The impairment amount on a collateral-dependent loan is charged-off  to the allowance if deemed not collectible and the impairment amount  on a loan that is not collateral-dependent is set up as a specific reserve.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring. These concessions may include a reduction  of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential  losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms. A restructured loan is considered impaired despite its accrual status and a specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. Interest income on impaired loans is accrued as earned, unless the loan is placed on non-accrual status.

The allowance for loan losses was $16.9 million at December 31, 2021 compared to $10.1 million at December 31, 2020, an increase of $6.8 million, or 67.3%. The increase in the allowance for loan losses balance was partially due to the significant increase in our loan portfolio during 2021. We also continued to include qualitative factors in our allowance for loan losses calculation during 2021 for the economic uncertainties caused by the ongoing COVID-19 pandemic, partially resulting in the increased provision expense of $6.9 million recorded during the year ended December 31, 2021. The Company is not required to implement the provisions of the CECL accounting standard issued by the FASB in the ASU No. 2016-13 until January 1, 2023, and is continuing to account for the allowance for loan losses under the incurred loss model.

In determining the allowance and the related provision for loan losses, we consider three principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired commercial and industrial,  commercial real estate, construction and land development  loans, (ii) allocations, by loan classes, on loan portfolios  based on historical loan loss experience and qualitative factors and (iii) review of the credit discounts in relationship to the valuation  allowance calculated for purchased  loans. Provisions for loan losses are charged to operations to record changes to the total allowance to a level deemed appropriate by us.

56

Table of Contents

It is the policy of management to maintain the allowance for loan losses at a level adequate for risks inherent in the loan portfolio. The FDIC and GA DBF also review the allowance for loan losses as an integral part of their examination process. Based on information currently available, management believes that our allowance for loan losses is adequate. However, the loan portfolio can be adversely affected if economic conditions and the real estate market in our market areas were to weaken. The effect of such events, although uncertain at this time, could result in an increase in the level of nonperforming loans and increased loan losses, which could adversely affect our future growth and profitability. No assurance of the ultimate level of credit losses can be given with any certainty.

Analysis of the Allowance for Loan Losses. The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs for the periods presented below:

​

Management believes the allowance for loan losses is adequate to provide for losses inherent in the loan portfolio as of December 31, 2021.

57

Table of Contents

The following table presents a summary of the allocation of the allowance for loan losses by loan portfolio segment for the periods indicated:

​

​

Investment Securities

Our securities portfolio is the third largest component of our interest earning assets. The portfolio serves the following purposes: (i) to optimize the Bank’s income consistent with the investment portfolio’s liquidity and risk objectives; (ii) to balance market and credit risks of other assets and the Bank’s liability structure; (iii) to profitably  deploy funds which are not needed to fulfill loan demand, deposit redemptions or other liquidity purposes; (iv) provide collateral which the Bank is required to pledge against public funds.

We classify our debt securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting  guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect changes in the fair value of our available-for-sale securities.

All of the debt securities in our investment portfolio were classified as available-for-sale as of December 31, 2021. All available-for-sale securities are carried at fair value. Securities available-for-sale consist primarily of U.S. government-sponsored agency securities, home mortgage-backed securities and state and municipal bonds. No issuer of the available-for-sale securities comprised more than ten percent of our shareholders’ equity as of December 31, 2021, 2020 or 2019.

The following table presents the amortized cost and fair value of our available-for-sale securities portfolio as of the dates presented.

​

​

58

Table of Contents

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. At December 31, 2021, we evaluated the securities which had an unrealized loss for other than temporary impairment (OTTI) and determined all declines in value to be temporary. We anticipate full recovery of amortized cost with respect to these securities by maturity, or sooner in the event of a more favorable market interest rate environment. We do not intend to sell these securities and it is not more likely than not that we will be required to sell them before recovery of the amortized  cost basis, which may be at maturity.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities available for sale as of the dates presented. Expected maturities may differ from contractual maturities if borrowers  have the right to call or prepay obligations with or without call or prepayment penalties.

​

​

We have not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities to otherwise mitigate our interest rate risk.

Equity Securities

​

As of December 31, 2021 and December 31, 2020, the Company had equity securities with carrying values totaling $11.4 million and $0, respectively. The equity securities consist of our investment in a market-rate bond mutual fund that invests in high quality fixed income bonds, mainly government agency securities whose proceeds are designed to positively impact community development throughout the United States. The mutual fund focuses exclusively on providing affordable housing to low- and moderate-income borrowers and renters, including those in Majority Minority Census Tracts.

During the year ended December 31, 2021, we recognized an unrealized loss of $114,000 in net income on our equity securities. No unrealized gains or losses on equity securities were recognized in net income during the years ended December 31, 2020 and 2019.

Deposits

Deposits represent the Bank’s primary source of funds, and we gather deposits primarily through our branch locations. We offer a variety of deposit products including demand deposit accounts, interest-bearing products, savings accounts and

59

Table of Contents

certificate of deposits. We put continued effort into gathering noninterest-bearing demand deposits accounts through marketing to our existing and new loan customers, customer referrals, and expansion into new markets.

Total deposits increased $783.1 million, or 52.9%, to $2.26 billion at December 31, 2021 compared to $1.48 billion at December 31, 2020. As of December 31, 2021, 26.2% of total deposits were comprised of noninterest-bearing demand accounts and 73.8% of interest-bearing deposit accounts compared to 31.3% and 68.7% as of December 31, 2020, respectively. Total deposits increased $172.5 million, or 13.2%, at December 31, 2020 from $1.31 billion as of December 31, 2019. Our noninterest-bearing demand accounts were 22.3% of total deposits and our interest-bearing deposits accounted for the remaining 77.7% of our deposits as of December 31, 2019.

We had brokered deposits of $425.1 million, or 18.8% of total deposits, at December 31, 2021 compared to $164.3 million, or 11.1% of total deposits at December 31, 2020. We had no brokered deposits at December 31, 2019. We use brokered deposits, subject to certain limitations and requirements, as a source of funding to support  our asset growth and augment the deposits generated from our branch network, which are our principal source of funding. Our level of brokered deposits varies from time to time depending on competitive interest rate conditions and other factors and tends to increase as a percentage of total deposits when the brokered deposits are less costly than issuing internet certificates of deposit or borrowing from the Federal Home Loan Bank.

The following table summarizes our average deposit balances and weighted average rates for the years ended December 31, 2021, 2020 and 2019:

​

​

The following table sets forth the scheduled maturities of time deposits of $250,000 or greater as of December 31, 2021:

​

​

Borrowed Funds

Other than deposits, the Company utilizes FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential real estate loans. At December 31, 2021 and 2020, we had $500.0 million and $110.0 million, respectively, of outstanding advances from the FHLB.

60

Table of Contents

The following table provides information related to our FHLB Advances for the periods indicated:

​

​

In addition  to our advances with the FHLB, we maintain federal funds agreements with our correspondent banks. Our available borrowings under these agreements were $47.5 million at December 31, 2021 and 2020. We did not have any advances outstanding under these agreements for any of the periods presented. We also have access to the Federal Reserve’s discount window in the amount of $10.0 million with no borrowings outstanding as of December 31, 2021 and  2020. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

Liquidity

Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously  monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Our liquidity position is supported by management of liquid assets and access to alternative sources of funds. Our liquid assets include cash, interest-bearing deposits in correspondent banks, federal funds sold, and fair value of unpledged investment securities. Other available sources of liquidity include wholesale deposits, and additional borrowings from correspondent banks, FHLB  advances, and the Federal Reserve discount window.

Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

As part of our liquidity management strategy, we open federal funds lines with our correspondent banks. As of December 31, 2021 and 2020, we had $47.5 million of unsecured federal funds lines with no amounts advanced. In addition, we have access to the Federal Reserve’s discount window in the amount of $10.0 million with no borrowings outstanding as of December 31, 2021 and 2020. The Federal Reserve discount window line is collateralized by a pool of commercial real estate loans and commercial and industrial loans.

At December 31, 2021 and 2020 we had $500.0 million and $110.0 million, respectively, of outstanding advances from the FHLB. Based on the values of residential mortgage loans pledged as collateral, we had $326.9 million and $412.8 million of additional borrowing availability with the FHLB as of December 31, 2021 and 2020, respectively. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

Capital Requirements

The Company and the Bank are required under federal law to maintain certain minimum capital levels based on ratios of capital to total assets and capital to risk-weighted assets. The required capital ratios are minimums, and the federal banking agencies may determine that a banking organization, based on its size, complexity or risk profile, must maintain  a higher level of capital in order to operate in a safe and sound manner. Risks such as concentration of credit risks and the

61

Table of Contents

risk arising from non-traditional activities, as well as the institution’s exposure to a decline in the economic value of its capital due to changes in interest rates, and an institution’s ability to manage those risks are important factors that are to be taken into account by the federal banking agencies in assessing an institution’s overall capital adequacy. For more information, see “Item 1. Business – Regulation and Supervision – Regulation of the Company – Capital Requirements.”

The table below summarizes the capital requirements applicable to the Company and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Company’s and the Bank’s capital ratios as of December 31, 2021 and 2020. The Bank exceeded all regulatory capital requirements and was considered to be “well-capitalized” as of December 31, 2021 and 2020. As of December 31, 2021, the FDIC categorized the Bank as well-capitalized under the prompt corrective action framework. There have been no conditions or events since December 31, 2021 that management believes would change this classification. While the Company believes that it has sufficient capital to withstand an extended economic recession, its reported and regulatory capital ratios could be adversely impacted in future periods.

​

​

62

Table of Contents

Contractual Obligations

The following table presents supplemental information regarding total contractual obligations as of December 31, 2021:

​

​

We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain  adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Off-Balance Sheet Arrangements

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount  recognized in our consolidated balance sheet. The contractual or notional amounts of those instruments reflect the extent of involvement we have in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition  established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem collateral is necessary upon extension of credit, is based on management’s credit evaluation  of the counterparty.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. They are intended to be disbursed, subject to certain condition, upon request of the borrower.

The following table presents outstanding financial commitments whose contractual amount represents credit risks as of the dates indicated:

​

​

​