pcb-20200630

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38621

PCB BANCORP

(Exact name of registrant as specified in its charter)


California			20-8856755
(State or other jurisdiction of incorporation or organization)			(IRS Employer Identification No.)

3701 Wilshire Boulevard, Suite 900, Los Angeles, California 90010

(Address of principal executive offices) (Zip Code)

(213) 210-2000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, no par value	PCB	Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

(Do not check if a smaller reporting company)

Smaller reporting company

☒

Emerging growth company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒

As of August 1, 2020, the registrant had outstanding 15,378,247 shares of common stock.

PCB Bancorp and Subsidiary

Quarterly Report on Form 10-Q

June 30, 2020

Table of Contents

Part I - Financial Information

Item 1.

Consolidated Financial Statements

Consolidated Balance Sheets - June 3 0 , 2020 (Unaudited) and December 31, 2019

Consolidated Statements of Income (Unaudited) - Three and Six Months Ended June 3 0 , 2020 and 2019

Consolidated Statements of Comprehensive Income (Unaudited) - Three and Six Months Ended June 30, 2020 and 2019

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three and Six Months Ended June 30, 2020 and 2019

Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2020 and 2019

Notes to Consolidated Financial Statements (Unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Part II - Other Information

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

Item 5.

Other Information

Item 6.

Exhibits

Signatures

Forward-looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements which reflect current views of PCB Bancorp, formerly known as Pacific City Financial Corporation, (collectively, with its consolidated subsidiary, the “Company,” “we,” “us” or “our”) with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “aim,” “would,” and “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, but are not limited to, the following:

•business and economic conditions, particularly those affecting the financial services industry and our primary market areas and arising from current COVID-19 pandemic and governmental and societal responses thereto;

•our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss;

•factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance;

•governmental monetary and fiscal policies, and changes in market interest rates;

•compliance with governmental and regulatory requirements, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Economic Growth, Regulatory Relief and Consumer Protection Act and others relating to banking, consumer protection, securities and tax matters;

•compliance with the regulatory consent order related to Bank Secrecy Act and Anti-Money Laundering (“BSA/AML”) matters to which Pacific City Bank (the “Bank”), our wholly owned subsidiary, is subject;

•the significant portion of our loan portfolio that is comprised of real estate loans;

•our ability to attract and retain Korean-American customers;

•our ability to identify and address cyber-security risks, fraud and systems errors;

•our ability to effectively execute our strategic plan and manage our growth;

•changes in our senior management team and our ability to attract, motivate and retain qualified personnel;

•liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;

•costs and obligations associated with operating as a public company;

•effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

•the effects of severe weather, natural disasters, acts of war or terrorism, health epidemics or pandemics (or expectations about them) and other external events on our business;

•the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; and

•changes in federal tax law or policy.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements and the risks described under “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, “Part II. Item 1A. Risk Factors” on this Quarterly Report on Form 10-Q and for the quarter ended March 31, 2020, and our other documents filed with the United States (“U.S.”) Securities Exchange Commission (“SEC”). Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this report. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is initially made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Part I - Financial Information

Item 1 - Consolidated Financial Statements

PCB Bancorp and Subsidiary

Consolidated Balance Sheets

($ in thousands, except share data)


	June 30, 2020		December 31, 2019
	(Unaudited)
Assets
Cash and due from banks	$	18,255	$	17,808
Interest-bearing deposits in other financial institutions	289,348		128,420
Total cash and cash equivalents	307,603		146,228
Securities available-for-sale, at fair value	128,049		97,566
Securities held-to-maturity, at amortized cost (fair value of $20,480 at December 31, 2019)	—		20,154
Total investment securities	128,049		117,720
Loans held-for-sale	4,102		1,975
Loans held-for-investment, net of deferred loan costs (fees)	1,553,589		1,450,831
Allowance for loan losses	(20,248)		(14,380)
Net loans held-for-investment	1,533,341		1,436,451
Premises and equipment, net	4,542		3,760
Federal Home Loan Bank and other restricted stock, at cost	8,447		8,345
Other real estate owned, net	376		—
Deferred tax assets, net	6,347		5,288
Servicing assets	6,399		6,798
Operating lease assets	7,843		8,991
Accrued interest receivable	9,498		5,136
Other assets	4,230		5,636
Total assets	$	2,020,777	$	1,746,328
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	551,415	$	360,039
Savings, NOW and money market accounts	368,885		362,179
Time deposits of $250,000 or less	466,450		467,363
Time deposits of more than $250,000	260,180		289,726
Total deposits	1,646,930		1,479,307
Federal Home Loan Bank advances	130,000		20,000
Operating lease liabilities	8,758		9,990
Accrued interest payable and other liabilities	7,856		10,197
Total liabilities	1,793,544		1,519,494
Commitments and contingencies
Preferred stock, 10,000,000 shares authorized, no par value, no issued and outstanding shares	—		—
Common stock, 60,000,000 shares authorized, no par value; 15,377,935 and 15,707,016 shares issued and outstanding, respectively, and included 38,400 and 37,400 shares of unvested restricted stock, respectively, at June 30, 2020 and December 31, 2019	163,759		169,221
Retained earnings	61,532		57,670
Accumulated other comprehensive income (loss), net	1,942		(57)
Total shareholders’ equity	227,233		226,834
Total liabilities and shareholders’ equity	$	2,020,777	$	1,746,328

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Income (Unaudited)

($ in thousands, except share and per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Interest income:
Interest and fees on loans	$	18,273	$	21,969	$	38,679	$	42,903
Interest on tax-exempt investment securities	38		38		76		77
Interest on investment securities	501		1,024		1,107		2,078
Interest and dividends on other interest-earning assets	161		999		771		1,924
Total interest income	18,973		24,030		40,633		46,982
Interest expense:
Interest on deposits	3,409		6,200		8,401		11,865
Interest on borrowings	201		138		303		272
Total interest expense	3,610		6,338		8,704		12,137
Net interest income	15,363		17,692		31,929		34,845
Provision for loan losses	3,855		394		6,751		309
Net interest income after provision for loan losses	11,508		17,298		25,178		34,536
Noninterest income:
Service charges and fees on deposits	275		368		665		732
Loan servicing income	902		492		1,456		1,123
Gain on sale of loans	1,498		1,891		2,223		3,011

Other income	243		303		600		597
Total noninterest income	2,918		3,054		4,944		5,463
Noninterest expense:
Salaries and employee benefits	5,761		6,600		12,312		13,222
Occupancy and equipment	1,400		1,407		2,780		2,720
Professional fees	509		686		1,306		1,444
Marketing and business promotion	548		529		727		757
Data processing	366		338		724		656
Director fees and expenses	107		185		328		374

Regulatory assessments	242		309		461		425

Other expenses	763		930		1,625		1,675
Total noninterest expense	9,696		10,984		20,263		21,273
Income before income taxes	4,730		9,368		9,859		18,726
Income tax expense	1,363		2,767		2,920		5,561
Net income	$	3,367	$	6,601	$	6,939	$	13,165

Earnings per common share, basic	$	0.22	$	0.41	$	0.45	$	0.82
Earnings per common share, diluted	$	0.22	$	0.40	$	0.45	$	0.81

Weighted-average common shares outstanding, basic	15,337,405		16,017,089		15,421,552		16,008,325
Weighted-average common shares outstanding, diluted	15,373,655		16,330,039		15,522,626		16,303,274

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

($ in thousands)


	Three Months Ended June 30,						Six Months Ended June 30,
	2020		2019		2020		2019
Net income	$	3,367	$	6,601	$	6,939	$	13,165
Other comprehensive income:
Unrealized gain on securities available-for-sale arising during the period	712		1,638		2,054		2,810
Unrealized gain arising from the reclassification of securities held-to-maturity to securities available-for-sale	787		—		787		—
Income tax benefit related to items of other comprehensive income	(448)		(480)		(842)		(825)
Total other comprehensive income, net of tax	1,051		1,158		1,999		1,985
Total comprehensive income	$	4,418	$	7,759	$	8,938	$	15,150

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

($ in thousands, except share and per share data)



		Shareholders’ Equity
	Common Stock Outstanding Shares	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at April 1, 2019	16,011,151	$	174,743	$	43,288	$	(820)	$	217,211


Comprehensive income
Net income	—	—		6,601		—		6,601
Other comprehensive income, net of tax	—	—		—		1,158		1,158

Repurchase of common stock	(57,551)	(974)		—		—		(974)
Share-based compensation expense	—	162		—		—		162
Stock options exercised	27,055	204		—		—		204
Cash dividends declared on common stock ($0.06 per share)	—	—		(962)		—		(962)
Balance at June 30, 2019	15,980,655	$	174,135	$	48,927	$	338	$	223,400

Balance at April 1, 2020	15,370,086	$	163,532	$	59,702	$	891	$	224,125
Comprehensive income
Net income	—	—		3,367		—		3,367
Other comprehensive income, net of tax	—	—		—		1,051		1,051



Share-based compensation expense	—	198		—		—		198
Stock options exercised	7,849	29		—		—		29
Cash dividends declared on common stock ($0.10 per share)	—	—		(1,537)		—		(1,537)
Balance at June 30, 2020	15,377,935	$	163,759	$	61,532	$	1,942	$	227,233

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity, Continued (Unaudited)

($ in thousands, except share and per share data)



	Common Stock Outstanding Shares	Shareholders’ Equity
				Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
Balance at January 1, 2019	15,977,754	$	174,366		$	37,577		$	(1,647)		$	210,296
Cumulative effect adjustment upon adoption of new lease accounting standard	—	—			(53)			—			(53)
Adjusted balance at January 1, 2019	15,977,754	174,366			37,524			(1,647)			210,243
Comprehensive income
Net income	—	—			13,165			—			13,165
Other comprehensive income, net of tax	—	—			—			1,985			1,985

Repurchase of common stock	(57,551)	(974)			—			—			(974)
Share-based compensation expense	—	323			—			—			323
Stock options exercised	60,452	420			—			—			420
Cash dividends declared on common stock ($0.11 per share)	—	—			(1,762)			—			(1,762)
Balance at June 30, 2019	15,980,655	$	174,135		$	48,927		$	338		$	223,400

Balance at January 1, 2020	15,707,016	$	169,221		$	57,670		$	(57)		$	226,834
Comprehensive income
Net income	—	—			6,939			—			6,939
Other comprehensive income, net of tax	—	—			—			1,999			1,999

Issuance of restricted stock	1,000	—			—			—			—
Repurchase of common stock	(428,474)	(6,487)			—			—			(6,487)
Share-based compensation expense	—	392			—			—			392
Stock options exercised	98,393	633			—			—			633
Cash dividends declared on common stock ($0.20 per share)	—	—			(3,077)			—			(3,077)
Balance at June 30, 2020	15,377,935	$	163,759		$	61,532		$	1,942		$	227,233

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

($ in thousands)


	Six Months Ended June 30,
	2020		2019
Cash flows from operating activities
Net income	$	6,939	$	13,165
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment	745		763
Net amortization of premiums on securities	413		406
Net accretion of discounts on loans	(1,558)		(2,041)
Net accretion of deferred loan costs (fees)	(770)		(209)
Amortization of servicing assets	996		1,213
Provision for loan losses	6,751		309
Deferred tax benefit	(1,901)		(689)
Stock-based compensation	392		323

Gain on sale of loans	(2,223)		(3,011)



Originations of loans held-for-sale	(48,559)		(47,532)
Proceeds from sales of and principal collected on loans held-for-sale	49,247		56,693
Change in accrued interest receivable and other assets	(3,039)		(12)
Change in accrued interest payable and other liabilities	(2,623)		(1,920)
Net cash provided by operating activities	4,810		17,458
Cash flows from investing activities
Purchase of securities available-for-sale	(24,394)		(6,247)
Proceeds from maturities, calls, and paydowns of securities available-for-sale	15,184		13,179
Purchase of securities held-to-maturity	—		(2,150)
Proceeds from maturities and paydowns of securities held-to-maturity	1,309		1,149
Proceeds from sale of loans held-for-sale previously classified as held-for-investment	664		303
Net change in loans held-for-investment	(103,260)		(56,712)

Purchase of Federal Home Loan Bank stock	(102)		(912)

Purchases of premises and equipment	(1,528)		(513)
Net cash used in investing activities	(112,127)		(51,903)
Cash flows from financing activities
Net increase in deposits	167,623		2,773
Net change in short-term Federal Home Loan Bank advances	—		15,000
Proceeds from long-term Federal Home Loan Bank advances	140,000		—
Repayment of long-term Federal Home Loan Bank advances	(30,000)		(10,000)
Stock options exercised	633		420

Repurchase of common stock	(6,487)		(974)
Cash dividends paid on common stock	(3,077)		(1,762)
Net cash provided by financing activities	268,692		5,457
Net increase (decrease) in cash and cash equivalents	161,375		(28,988)
Cash and cash equivalents at beginning of period	146,228		162,273
Cash and cash equivalents at end of period	$	307,603	$	133,285

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows, Continued (Unaudited)

(in thousands)


	Six Months Ended June 30,
	2020		2019
Supplemental disclosures of cash flow information:
Interest paid	$	10,822	$	13,017
Income taxes paid	4,131		7,322
Supplemental disclosures of non-cash investment activities:
Loans transferred to loans held-for-sale	$	1,355	$	303
Loans transferred to other real estate owned	54		50
Reclassification of securities held-to-maturity to securities available-for-sale	18,777		—
Right of use assets obtained in exchange for lease obligations	54		1,588

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation and Significant Accounting Policies

Nature of Operations

PCB Bancorp (collectively, with its consolidated subsidiary, the “Company,” “we,” “us” or “our”) is a bank holding company whose subsidiary is Pacific City Bank (the “Bank”). The Company changed its corporate name from “Pacific City Financial Corporation” to “PCB Bancorp” in July 2019. The Bank is a single operating segment that operates 11 full-service branches in Los Angeles and Orange counties, California, one full-service branch in each of Englewood Cliffs, New Jersey and Bayside, New York, and 10 loan production offices (“LPOs”) in Irvine, Artesia and Los Angeles, California; Annandale, Virginia; Chicago, Illinois; Atlanta, Georgia; Bellevue, Washington; Aurora, Colorado; Carrollton, Texas; and New York, New York. The Bank offers a broad range of loans, deposits, and other products and services predominantly to small and middle market businesses and individuals.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to Article 10 of SEC Regulation S-X and other SEC rules and regulations for reporting on the Quarterly Report on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles (“GAAP”) are not included herein. These interim statements should be read in conjunction with the audited consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2019 filed by the Company with the SEC. The December 31, 2019 balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC, but does not include all of the disclosures required by GAAP for complete financial statements.

In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations as of the dates and for the periods presented. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation. The results of operations for the six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020.

Principles of Consolidation

The consolidated financial statements include the accounts of PCB Bancorp and its wholly owned subsidiary as of June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 2020 and 2019. Significant inter-company accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiary.

Significant Accounting Policies

The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the banking industry. The Company has not made any significant changes in its critical accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC.

Use of Estimates in the Preparation of Financial Statements

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are subject to change and such change could have a material effect on the consolidated financial statements. Actual results may differ from those estimates.

Reclassification of Securities Held-To-Maturity to Securities Available-For-Sale

During the three months ended June 30, 2020, the Company transferred securities held-to-maturity to securities available-for-sale as a part of the Company’s liquidity management plan in response to the COVID-19 pandemic. Management determined that its securities held-to-maturity no longer adhere to the Company’s current liquidity management plan and could be sold to potentially improve liquidity position. Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and the Company’s ability to assert that it has the intent and ability to hold to maturity debt securities will be limited for up to two years. The Company transferred all securities held-to-maturity of $18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of $787 thousand.

Loan Modifications Related to the COVID-19 Pandemic

On March 27, 2020, the CARES Act was enacted and provided financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings (“TDRs”) for a limited period of time to account for the effect of the COVID-19 pandemic. Under the CARES Act, modifications made from March 1, 2020 through the earlier of December 31, 2020 and 60 days after the end of the national emergency on a good faith basis in response to the COVID-19 pandemic to borrowers whose loan status were current as of December 31, 2019.

The banking agencies also issued an Interagency-Statement to encourage banks to work prudently with borrowers and describe the agencies’ interpretation of how accounting rules for TDR apply to certain modifications related to the COVID-19 pandemic.

During the three months ended June 30, 2020, the Company provided modifications, including payment deferments and interest only payments, to customers for the aggregated carrying value of $484.0 million that were adversely affected by the COVID-19 pandemic. As of June 30, 2020, all loans with modifications related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs nor reported past due. These loans had modification terms of 6-month or less and were on accrual status and classified as pass as of June 30, 2020.

Small Business Administration Paycheck Protection Program

Small Business Administration (“SBA”) launched the Paycheck Protection Program (“PPP”) to provide a direct incentive for small businesses to keep their workers on the payroll in respond to the COVID-19 pandemic. SBA will forgive loans if all employee retention criteria are met and the funds are used for eligible expenses. Since the launch of PPP, the Company has extended 1,551 SBA PPP loans totaling $133.7 million, net of unamortized deferred fees and costs, as of June 30, 2020. The Company deferred loan origination fees of $5.6 million and direct origination costs of $1.1 million on SBA PPP loans. The Company amortizes these deferred fees and costs without prepayment assumption using the contractual lives of SBA PPP loans.

The SBA guarantee on PPP loans cannot be separated from the loan and therefore is not a separate unit of account. The Company considered the SBA guarantee in the allowance for loan evaluation and determined that it is not required to reserve additional allowance for loan losses on SBA PPP loans at June 30, 2020.

Adopted Accounting Pronouncements

During the six months ended June 30, 2020, there were no significant accounting pronouncements applicable to the Company that became effective.

Recent Accounting Pronouncements Not Yet Adopted

The following is recently issued accounting pronouncements applicable to the Company that has not yet been adopted:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses (Topic 326).” The amendments in this ASU require that entities change the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model. Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument. It includes financial assets such as loan receivables, held-to-maturity debt securities, net investment in leases that are not accounted for at fair value through net income, and certain off-balance sheet credit exposures. This ASU is effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In 2019, the FASB amended this ASU, which delays the effective date to 2023 for certain SEC filers that are Smaller Reporting Companies, which would apply to the Company. The Company plans to adopt this ASU at the delayed effective date of January 1, 2023.

Note 2 - Fair Value Measurements

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (i.e. an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows:

•Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

•Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

•Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

Fair value is measured on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate certain assets or liabilities for impairment or for disclosure purposes. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company records securities available-for-sale at fair value on a recurring basis. Certain other assets, such as loans held-for-sale, impaired loans, servicing assets and other real estate owned (“OREO”) are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Investment securities: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management reviews the valuation techniques and assumptions used by the provider and determines that the provider uses widely accepted valuation techniques based on observable market inputs appropriate for the type of security being measured. Securities held-to-maturity are not measured at fair value on a recurring basis.

Loans held-for-sale: The Company records SBA loans held-for-sale, residential property loans held-for-sale and certain non-residential real estate loans held-for-sale at the lower of cost or fair value, on an aggregate basis. The Company obtains fair values from a third party independent valuation service provider. Loans held-for-sale accounted for at the lower of cost or fair value are considered to be recognized at fair value when they are recorded at below cost, on an aggregate basis, and are classified as Level 2.

Impaired loans: The Company records fair value adjustments on certain loans that reflect (i) partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (ii) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants, and are classified as Level 3.

Other real estate owned: The Company initially records OREO at fair value at the time of foreclosure. Thereafter, OREO is recorded at the lower of cost or fair value based on their subsequent changes in fair value. The fair value of OREO is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and result in a Level 3 classification due to the unobservable inputs used for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value.

Servicing Assets: Servicing assets represent the value associated with servicing loans that have been sold. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates and prepayment speed assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. The fair market valuation is performed on a quarterly basis for servicing assets. Servicing assets are accounted for at the lower of cost or market value and considered to be recognized at fair value when they are recorded at below cost and are classified as Level 3.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of dates indicated:


	Fair Value Measurement Level
($ in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
June 30, 2020
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	73,158	$	—	$	73,158
Residential collateralized mortgage obligations	—		35,646		—		35,646
SBA loan pool securities	—		13,121		—		13,121
Municipal bonds	—		6,124		—		6,124
Total securities available-for-sale	—		128,049		—		128,049
Total assets measured at fair value on a recurring basis	$	—	$	128,049	$	—	$	128,049
Total liabilities measured at fair value on a recurring basis	$	—	$	—	$	—	$	—
December 31, 2019
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	38,738	$	—	$	38,738
Residential collateralized mortgage obligations	—		43,894		—		43,894
SBA loan pool securities	—		14,152		—		14,152
Municipal bonds	—		782		—		782
Total securities available-for-sale	—		97,566		—		97,566
Total assets measured at fair value on a recurring basis	$	—	$	97,566	$	—	$	97,566
Total liabilities measured at fair value on a recurring basis	$	—	$	—	$	—	$	—

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis as of dates indicated:


	Fair Value Measurement Level
($ in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
June 30, 2020
Impaired loans:
SBA property	$	—	$	—	$	261	$	261
Commercial lines of credit	—		—		1,642		1,642
SBA commercial term	—		—		11		11
Total impaired loans	—		—		1,914		1,914


Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	1,914	$	1,914
Total liabilities measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—
December 31, 2019
Impaired loans:
SBA property	$	—	$	—	$	116	$	116
Commercial lines of credit	—		—		1,562		1,562
Total impaired loans	—		—		1,678		1,678
Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	1,678	$	1,678
Total liabilities measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—

The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a non-recurring basis as of the dates indicated:

($ in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range (Weighted-Average)

June 30, 2020

Impaired loans:

SBA property

261

Fair value of collateral

Commercial lines of credit

1,642

Sales comparison approach

Adjustment for differences between the comparable estate sales

-14% to 48% (10.2%)

Income approach

Adjustment for differences in net operating income expectations

11% to 38% (13.8%)

Capitalization rate

5.0%

SBA commercial term

Fair value of collateral

December 31, 2019

Impaired loans:

SBA property

116

Fair value of collateral

Commercial lines of credit

1,562

Sales comparison approach

Adjustment for differences between the comparable estate sales

-4% to 26% (0.86%)

Income approach

Adjustment for differences in net operating income expectations

-4% to -11% (-6.20%)

Capitalization rate

5.0%

For assets measured at fair value, the following table presents the total net losses, which include charge-offs, recoveries, and specific reserves recorded for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2020		2019		2020		2019
Collateral dependent impaired loans:

SBA property	$	(111)	$	(18)	$	(138)	$	(20)
Commercial lines of credit	(214)		—		(720)		—
SBA commercial term	—		—		(164)		—



Net losses recognized	$	(325)	$	(18)	$	(1,022)	$	(20)

Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on financial instruments both on and off the consolidated balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments.

Financial assets: The carrying amounts of interest-bearing deposits with other financial institutions and accrued interest receivable are considered to approximate fair value. The fair values of investment securities are generally based on matrix pricing (Level 2). The fair value of loans is estimated based on a discounted cash flow approach under an exit price notion. The fair value reflects the estimated yield that would be negotiated with a willing market participant. Because sale transactions of such loans are not readily observable, as many of the loans have unique risk characteristics, the valuation is based on significant unobservable inputs (Level 3). It is not practical to determine the fair value of Federal Home Loan Bank (“FHLB”) and other restricted stock due to restrictions placed on its transferability.

Financial liabilities: The carrying amounts of accrued interest payable are considered to approximate fair value. The fair value of deposits is estimated based on discounted cash flows. The discount rate is derived from the interest rates currently being offered for similar remaining maturities. Non-maturity deposits are estimated based on their historical decaying experiences (Level 3). The fair value of FHLB advances is estimated based on discounted cash flows. The discount rate is derived from the current market rates for borrowings with similar remaining maturities (Level 2).

Off-balance-sheet financial instruments: The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material and is excluded from the table below.

The following table presents the carrying value and estimated fair values of financial assets and liabilities as of the dates indicated:


	Carrying Value		Fair Value		Fair Value Measurements
($ in thousands)							Level 1		Level 2		Level 3
June 30, 2020
Financial assets:
Interest-bearing deposits in other financial institutions	$	289,348	$	289,348	$	289,348	$	—	$	—
Securities available-for-sale	128,049		128,049		—		128,049		—

Loans held-for-sale	4,102		4,188		—		4,188		—
Net loans held-for-investment	1,533,341		1,543,212		—		—		1,543,212
FHLB and other restricted stock	8,447		N/A		N/A		N/A		N/A
Accrued interest receivable	9,498		9,498		10		359		9,129
Financial liabilities:
Deposits	$	1,646,930	$	1,673,664	$	—	$	—	$	1,673,664
FHLB advances	130,000		130,442		—		130,442		—
Accrued interest payable	3,886		3,886		—		2		3,884
December 31, 2019
Financial assets:
Interest-bearing deposits in other financial institutions	$	128,420	$	128,420	$	128,420	$	—	$	—
Securities available-for-sale	97,566		97,566		—		97,566		—
Securities held-to-maturity	20,154		20,480		—		20,480		—
Loans held-for-sale	1,975		2,102		—		2,102		—
Net loans held-for-investment	1,436,451		1,449,383		—		—		1,449,383
FHLB and other restricted stock	8,345		N/A		N/A		N/A		N/A
Accrued interest receivable	5,136		5,136		78		375		4,683
Financial liabilities:
Deposits	$	1,479,307	$	1,468,540	$	—	$	—	$	1,468,540
FHLB advances	20,000		20,092		—		20,092		—
Accrued interest payable	6,004		6,004		—		1		6,003

Note 3 - Investment Securities

Debt securities have been classified as available-for-sale or held-to-maturity in the consolidated balance sheets according to management’s intent. During the three months ended June 30, 2020, the Company transferred securities held-to-maturity to securities available-for-sale as a part of the Company’s liquidity management plan in response to the COVID-19 pandemic. Management determined that its securities held-to-maturity no longer adhere to the Company’s current liquidity management plan and could be sold to potentially improve liquidity position. Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and the Company’s ability to assert that it has the intent and ability to hold to maturity debt securities will be limited for up to two years. The Company transferred all securities held-to-maturity of $18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of $787 thousand.

The following table presents the amortized cost and fair value of the investment securities as of the dates indicated:


($ in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
June 30, 2020
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	71,680	$	1,515	$	(37)	$	73,158
Residential collateralized mortgage obligations	35,367		382		(103)		35,646
SBA loan pool securities	12,769		375		(23)		13,121
Municipal bonds	5,677		447		—		6,124
Total securities available-for-sale	$	125,493	$	2,719	$	(163)	$	128,049




December 31, 2019
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	38,793	$	96	$	(151)	$	38,738
Residential collateralized mortgage obligations	44,115		36		(257)		43,894
SBA loan pool securities	14,179		34		(61)		14,152
Municipal bonds	764		18		—		782
Total securities available-for-sale	$	97,851	$	184	$	(469)	$	97,566
Securities held-to-maturity:
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities	$	15,215	$	70	$	(81)	$	15,204
Municipal bonds	4,939		337		—		5,276
Total securities held-to-maturity	$	20,154	$	407	$	(81)	$	20,480

As of June 30, 2020 and December 31, 2019, pledged securities were $111.2 million and $99.3 million, respectively. These securities were pledged for the State Deposit from the California State Treasurer.

The following table presents the amortized cost and fair value of the investment securities by contractual maturity as of June 30, 2020. Expected maturities may differ from contractual maturities, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


	Securities Available-For-Sale
($ in thousands)	Amortized Cost		Fair Value
Within one year	$	101	$	101
One to five years	2,209		2,308
Five to ten years	1,038		1,076
Greater than ten years	2,329		2,639
Residential mortgage-backed securities, residential collateralized mortgage obligations and SBA loan pool securities	119,816		121,925
Total	$	125,493	$	128,049

The Company had no proceeds from sales and calls of securities available-for-sale during the three and six months ended June 30, 2020 and 2019.

The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous unrealized loss position as of the dates indicated:


	Length of Time that Individual Securities Have Been In a Continuous Unrealized Loss Position
	Less Than 12 Months									12 Months or Longer						Total
($ in thousands)	Fair Value		Gross Unrealized Losses		Number of Securities	Fair Value		Gross Unrealized Losses		Number of Securities	Fair Value		Gross Unrealized Losses		Number of Securities
June 30, 2020
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	4,742	$	(37)	3	$	—	$	—	—	$	4,742	$	(37)	3
Residential collateralized mortgage obligations	2,088		(6)		4	13,985		(97)		10	16,073		(103)		14
SBA loan pool securities	2,164		(5)		3	1,750		(18)		3	3,914		(23)		6

Total securities available-for-sale	$	8,994	$	(48)	10	$	15,735	$	(115)	13	$	24,729	$	(163)	23




December 31, 2019
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	5,401	$	(28)	5	$	15,772	$	(123)	23	$	21,173	$	(151)	28
Residential collateralized mortgage obligations	15,392		(52)		13	19,834		(205)		23	35,226		(257)		36
SBA loan pool securities	4,787		(38)		5	2,308		(23)		4	7,095		(61)		9

Total securities available-for-sale	$	25,580	$	(118)	23	$	37,914	$	(351)	50	$	63,494	$	(469)	73
Securities held-to-maturity:
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities	$	—	$	—	—	$	6,842	$	(81)	7	$	6,842	$	(81)	7

Total securities held-to-maturity	$	—	$	—	—	$	6,842	$	(81)	7	$	6,842	$	(81)	7

The Company performs an other-than-temporary impairment (“OTTI”) assessment at least on a quarterly basis. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security.

All individual securities in a continuous unrealized loss position for 12 months or more as of June 30, 2020 and December 31, 2019 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of June 30, 2020 and December 31, 2019. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the six months ended June 30, 2020 and 2019.

Note 4 - Loans and Allowance for Loan Losses

Loans Held-For-Investment

The following table presents, by recorded investment, the composition of the Company’s loans held-for-investment (net of deferred fees and costs) as of the dates indicated:


($ in thousands)	June 30, 2020		December 31, 2019
Real estate loans:
Commercial property	$	813,409	$	803,014
Residential property	223,923		235,046
SBA property	122,675		129,837
Construction	20,432		19,164
Total real estate loans	1,180,439		1,187,061
Commercial and industrial loans:
Commercial term	98,936		103,380
Commercial lines of credit	96,339		111,768
SBA commercial term	22,650		25,332
SBA PPP	133,675		—
Total commercial and industrial loans	351,600		240,480
Other consumer loans	21,550		23,290
Loans held-for-investment	1,553,589		1,450,831
Allowance for loan losses	(20,248)		(14,380)
Net loans held-for-investment	$	1,533,341	$	1,436,451

In the ordinary course of business, the Company may grant loans to certain officers and directors, and the companies with which they are associated. As of June 30, 2020 and December 31, 2019, the Company had $3.9 million and $3.8 million, respectively, of such loans outstanding.

Loan Modifications Related to the COVID-19 Pandemic

The Company provided modifications, including payment deferments and interest only payments, to customers that are adversely affected by the COVID-19. The loan modifications met all criteria under the CARES Act. Therefore, the modified loans were not considered TDRs or reported as past due as of June 30, 2020. The following table presents a summary of loans with modifications related to the COVID-19 pandemic by portfolio segment as of June 30, 2020:


	Modification Type
($ in thousands)	Payment Deferment		Interest Only Payment		Total
June 30, 2020
Real estate loans:
Commercial property	$	369,716	$	9,850	$	379,566
Residential property	44,804		—		44,804


Commercial and industrial loans:
Commercial term	53,277		4,882		58,159


Other consumer loans	1,507		—		1,507
Total	$	469,304	$	14,732	$	484,036

Allowance for Loan Losses

The increase in risks associated with economic and business conditions as a result from the COVID-19 pandemic resulted an increase in allowance for loan losses of $4.2 million and $6.8 million for the three and six months ended June 30, 2020.

The following table presents the activities in allowance for loan losses by portfolio segment, which is consistent with the Company’s methodology for determining allowance for loan losses, for the three months ended June 30, 2020 and 2019:



($ in thousands)	Real Estate		Commercial and Industrial		Other Consumer		Total
Balance at April 1, 2020	$	11,948	$	4,549	$	177	$	16,674
Charge-offs	(111)		(241)		(63)		(415)
Recoveries on loans previously charged off	—		114		20		134
Provision (reversal) for loan losses	3,708		(85)		232		3,855
Balance at June 30, 2020	$	15,545	$	4,337	$	366	$	20,248

Balance at April 1, 2019	$	9,324	$	3,608	$	205	$	13,137
Charge-offs	(17)		(168)		(67)		(252)
Recoveries on loans previously charged off	—		33		16		49
Provision (reversal) for loan losses	404		(47)		37		394
Balance at June 30, 2019	$	9,711	$	3,426	$	191	$	13,328



($ in thousands)	Real Estate		Commercial and Industrial		Other Consumer		Total
Balance at January 1, 2020	$	9,854	$	4,354	$	172	$	14,380
Charge-offs	(138)		(916)		(139)		(1,193)
Recoveries on loans previously charged off	56		205		49		310
Provision for loan losses	5,773		694		284		6,751
Balance at June 30, 2020	$	15,545	$	4,337	$	366	$	20,248

Balance at January 1, 2019	$	9,104	$	3,877	$	186	$	13,167
Charge-offs	(19)		(168)		(111)		(298)
Recoveries on loans previously charged off	4		74		72		150
Provision (reversal) for loan losses	622		(357)		44		309
Balance at June 30, 2019	$	9,711	$	3,426	$	191	$	13,328

The following tables present the information on allowance for loan losses and recorded investments by portfolio segment and impairment methodology as of the dates indicated:


($ in thousands)	Real Estate		Commercial and Industrial		Other Consumer		Total
June 30, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	1	$	—	$	—	$	1
Collectively evaluated for impairment	15,544		4,337		366		20,247
Total	$	15,545	$	4,337	$	366	$	20,248
Loans receivable:
Individually evaluated for impairment	$	1,971	$	2,398	$	—	$	4,369
Collectively evaluated for impairment	1,178,468		349,202		21,550		1,549,220
Total	$	1,180,439	$	351,600	$	21,550	$	1,553,589
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	4	$	15	$	—	$	19
Collectively evaluated for impairment	9,850		4,339		172		14,361
Total	$	9,854	$	4,354	$	172	$	14,380
Loans receivable:
Individually evaluated for impairment	$	2,158	$	2,401	$	—	$	4,559
Collectively evaluated for impairment	1,184,903		238,079		23,290		1,446,272
Total	$	1,187,061	$	240,480	$	23,290	$	1,450,831

Credit Quality Indicators

The Company classifies loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans in regards to credit risk. This analysis typically includes non-homogeneous loans, such as commercial property and commercial and industrial loans, and is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

Pass - Loans classified as pass include non-homogeneous loans not meeting the risk ratings defined below and smaller, homogeneous loans not assessed on an individual basis.

Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following table presents the risk categories for the recorded investment in loans by portfolio segment as of dates indicated:


($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2020
Real estate loans:
Commercial property	$	813,072	$	—	$	337	$	—	$	813,409
Residential property	223,923		—		—		—		223,923
SBA property	119,566		71		3,038		—		122,675
Construction	20,432		—		—		—		20,432
Commercial and industrial loans:
Commercial term	98,936		—		—		—		98,936
Commercial lines of credit	94,371		—		1,968		—		96,339
SBA commercial term	22,254		—		396		—		22,650
SBA PPP	133,675		—		—		—		133,675
Other consumer loans	21,480		—		70		—		21,550
Total	$	1,547,709	$	71	$	5,809	$	—	$	1,553,589
December 31, 2019
Real estate loans:
Commercial property	$	802,373	$	—	$	641	$	—	$	803,014
Residential property	235,046		—		—		—		235,046
SBA property	124,135		72		5,630		—		129,837
Construction	17,453		1,711		—		—		19,164
Commercial and industrial loans:
Commercial term	103,380		—		—		—		103,380
Commercial lines of credit	109,880		—		1,888		—		111,768
SBA commercial term	24,677		—		655		—		25,332
Other consumer loans	23,242		—		48		—		23,290
Total	$	1,440,186	$	1,783	$	8,862	$	—	$	1,450,831

Substandard SBA property loans included $115 thousand and $2.4 million of guaranteed portion by the U.S. government agency at June 30, 2020 and December 31, 2019, respectively.

All loans with modifications related to the COVID-19 pandemic were classified as pass at June 30, 2020.

Past Due and Nonaccrual Loans

The following table presents the aging of past due recorded investment in accruing loans and nonaccrual loans by portfolio segment as of dates indicated:


	Still Accruing
($ in thousands)	30 to 59 Days Past Due		60 to 89 Days Past Due		90 or More Days Past Due		Nonaccrual		Total Past Due and Nonaccrual
June 30, 2020
Real estate loans:

Residential property	$	262	$	—	$	696	$	—	$	958
SBA property	—		—		—		1,351		1,351

Commercial and industrial loans:

Commercial lines of credit	—		—		—		1,968		1,968
SBA commercial term	—		—		—		381		381
Other consumer loans	49		113		—		70		232
Total	$	311	$	113	$	696	$	3,770	$	4,890
December 31, 2019
Real estate loans:

Residential property	$	—	$	697	$	—	$	—	$	697
SBA property	794		—		—		442		1,236

Commercial and industrial loans:

Commercial lines of credit	—		—		—		1,888		1,888
SBA commercial term	—		189		287		159		635
Other consumer loans	99		39		—		48		186
Total	$	893	$	925	$	287	$	2,537	$	4,642

There were no nonaccrual loans guaranteed by a U.S. government agency at June 30, 2020 and December 31, 2019.

All loans with modifications related to the COVID-19 pandemic were on accrual status at June 30, 2020.

The Company had a residential property loan past due 90 days or more and still accruing at June 30, 2020, which management believes that the loan is well secured and the Bank is in the process of collection.

Impaired Loans

Loans are considered impaired in the following cases: (i) the loan is on nonaccrual, (ii) when principal or interest payments on the loan have been contractually past due for 90 days or more, unless the loan is both well-collateralized and in the process of collection, (iii) the loan is classified as a troubled debt restructuring (“TDR”) where terms not typically granted by the Company were offered to the borrower, (iv) when current information or events make it unlikely to collect the loan balance in full according to the contractual terms of the loan agreement, (v) there is a deterioration in the borrower’s financial condition that raises uncertainty as to timely collection of either principal or interest, or (vi) full payment of both principal and interest of the loan according to the original contractual terms is in doubt.

The following table presents loans individually evaluated for impairment by portfolio segment as of the dates indicated. The recorded investment presents customer balances net of any partial charge-offs recognized on the loans and net of any deferred fees and costs.


	With No Allowance Recorded						With an Allowance Recorded
($ in thousands)	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance
June 30, 2020
Real estate loans:
Commercial property	$	337	$	335	$	—	$	—	$	—

SBA property	1,458		1,596		176		176		1

Commercial and industrial loans:
Commercial term	26		26		—		—		—
Commercial lines of credit	1,968		1,968		—		—		—
SBA commercial term	404		446		—		—		—

Total	$	4,193	$	4,371	$	176	$	176	$	1
December 31, 2019
Real estate loans:
Commercial property	$	339	$	338	$	—	$	—	$	—

SBA property	1,699		1,828		120		154		4

Commercial and industrial loans:
Commercial term	28		28		—		—		—
Commercial lines of credit	1,888		1,888		—		—		—
SBA commercial term	457		495		28		28		15

Total	$	4,411	$	4,577	$	148	$	182	$	19

The following table presents information on the recorded investment in impaired loans by portfolio segment for the three months ended June 30, 2020 and 2019:


	Three Months Ended June 30,
	2020						2019
($ in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Real estate loans:
Commercial property	$	337	$	6	$	—	$	—

SBA property	1,692		4		1,666		6

Commercial and industrial loans:
Commercial term	26		1		52		1
Commercial lines of credit	2,074		—		—		—
SBA commercial term	418		—		59		1

Total	$	4,547	$	11	$	1,777	$	8

The following table presents information on the recorded investment in impaired loans by portfolio segment for the six months ended June 30, 2020 and 2019:


	Six Months Ended June 30,
	2020						2019
($ in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Real estate loans:
Commercial property	$	338	$	11	$	—	$	—
Residential property	—		—		76		—
SBA property	1,728		9		1,507		12

Commercial and industrial loans:
Commercial term	26		1		57		2
Commercial lines of credit	2,254		—		—		—
SBA commercial term	480		1		150		2

Total	$	4,826	$	22	$	1,790	$	16

The following presents a summary of interest foregone on impaired loans for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2020		2019		2020		2019
Interest income that would have been recognized had impaired loans performed in accordance with their original terms	$	67	$	32	$	146	$	64
Less: interest income recognized on impaired loans on a cash basis	(11)		(8)		(22)		(16)
Interest income foregone on impaired loans	$	56	$	24	$	124	$	48

Troubled Debt Restructurings

The following table presents the composition of loans that were modified as TDRs by portfolio segment as of the dates indicated:


	June 30, 2020										December 31, 2019
($ in thousands)	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
Real estate loans:
Commercial property	$	337	$	—	$	337	$	339	$	—	$	339

SBA property	282		40		322		294		121		415

Commercial and industrial loans:
Commercial term	26		—		26		28		—		28

SBA commercial term	24		—		24		39		—		39

Total	$	669	$	40	$	709	$	700	$	121	$	821

The following table presents information on new loans that were modified as TDRs for the three months ended June 30, 2020 and 2019:


	Three Months Ended June 30,
	2020								2019
($ in thousands)	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans:


SBA property ⁽¹⁾	—	—		—		1	131		131






Total	—	$	—	$	—	1	$	131	$	131

(1) Modified by deferral of principal payment.

The following table presents information on new loans that were modified as TDRs for the six months ended June 30, 2020 and 2019:


	Six Months Ended June 30,
	2020								2019
($ in thousands)	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real estate loans:


SBA property ⁽¹⁾	—	—		—		1	131		131

Commercial and industrial loans:


SBA commercial term ⁽¹⁾	2	$	37	$	37	—	$	—	$	—

Total	2	$	37	$	37	1	$	131	$	131

(1) Modified by deferral of principal payment.

The Company had no commitments to lend to customers with outstanding loans that were classified as TDRs as of June 30, 2020 and December 31, 2019.

The determination of the allowance for loan losses related to TDRs depends on the collectability of principal and interest, according to the modified repayment terms. Loans that were modified as TDRs were individually evaluated for impairment and the Company allocated none and $4 thousand of allowance for loan losses as of June 30, 2020 and December 31, 2019, respectively.

There were no loans that were modified as TDRs for which there was a payment default within twelve months following the modification for the three months ended June 30, 2020 and 2019. The following table presents information on loans that were modified as TDRs for which there was a payment default within twelve months following the modification for the six months ended June 30, 2020 and 2019:


	Six Months Ended June 30,
	2020				2019
($ in thousands)	Number of Loans	Recorded Investment at Date of Default		Number of Loans	Recorded Investment at Date of Default





Commercial and industrial loans:


SBA commercial term	1	$	26	—	$	—

Total	1	$	26	—	$	—

Purchases, Sales, and Transfers

The following table presents a summary of loans held-for-investment transferred to loans held-for-sale for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2020		2019		2020		2019
Real estate loans:

Residential property	$	—	$	—	$	1,125	$	303


Commercial and industrial loans:


SBA commercial term	—		—		230		—

Total	$	—	$	—	$	1,355	$	303

The following table presents a summary of loans held-for-sale transferred to loans held-for-investment for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2020		2019		2020		2019
Real estate loans:

Residential property	$	697	$	—	$	697	$	—







Total	$	697	$	—	$	697	$	—

The Company had no purchases of loans held-for-investment during the three months ended June 30, 2020 and 2019.

The Company had no sales of loans held-for-investment during the three months ended June 30, 2020 and 2019. When the Company changes its intent to hold loans for investment, the loans are transferred to held-for-sale.

Loans Held-For-Sale

The following table presents a composition of loans held-for-sale as of the dates indicated:


($ in thousands)	June 30, 2020		December 31, 2019
Real estate loans:

Residential property	$	3,267	$	760
SBA property	835		150

Commercial and industrial loans:


SBA commercial term	—		1,065

Total	$	4,102	$	1,975

Loans held-for-sale are carried at the lower of cost or fair value. When a determination is made at the time of commitment to originate as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s management evaluation processes, including asset/liability management and credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred to held-for-sale at the lower of cost or fair value. Certain loans are transferred to held-for-sale with write-downs to allowance for loan losses.

Note 5 - Servicing Assets

At June 30, 2020 and December 31, 2019, total servicing assets were $6.4 million and $6.8 million, respectively. The Company sold loans of $27.1 million and $29.2 million, respectively, with the servicing rights retained and recognized a net gain on sale of $1.4 million and $1.9 million, respectively, during the three months ended June 30, 2020 and 2019. During the six months ended June 30, 2020 and 2019, the Company sold loans of $38.6 million and $50.4 million, respectively, with the servicing rights retained and recognized a net gain on sale of $2.1 million and $3.0 million, respectively. Loan servicing income was $902 thousand and $492 thousand, respectively, for the three months ended June 30, 2020 and 2019, and $1.5 million and $1.1 million, respectively, for the six months ended June 30, 2020 and 2019.

The following table presents the composition of servicing assets with key assumptions used to estimate the fair value as of the dates indicated:


	June 30, 2020															December 31, 2019
($ in thousands)	Residential Property			SBA Property			SBA Commercial Term			Residential Property			SBA Property			SBA Commercial Term
Carrying amount	$	125		$	5,554		$	720		$	171		$	5,805		$	822
Fair value	$	160		$	7,136		$	927		$	200		$	6,693		$	976
Discount rate	11.25		%	13.25		%	12.75		%	11.25		%	13.25		%	12.75		%
Prepayment speed	25.10		%	14.08		%	13.44		%	26.60		%	16.28		%	16.03		%
Weighted average remaining life	31.3 years			21.1 years			6.8 years			24.2 years			21.3 years			7.0 years
Underlying loans being serviced	$	25,005		$	390,178		$	78,817		$	32,428		$	384,007		$	82,181

The following table presents activity in servicing assets for the three months ended June 30, 2020 and 2019:


	Three Months Ended June 30,
	2020										2019
($ in thousands)	Residential Property		SBA Property		SBA Commercial Term		Residential Property		SBA Property		SBA Commercial Term
Balance at beginning of period	$	153	$	5,448	$	757	$	221	$	6,277	$	987
Additions	—		391		42		—		386		56
Amortization	(28)		(285)		(79)		(17)		(569)		(111)

Balance at end of period	$	125	$	5,554	$	720	$	204	$	6,094	$	932

The following table presents activity in servicing assets for the six months ended June 30, 2020 and 2019:


	Six Months Ended June 30,
	2020										2019
($ in thousands)	Residential Property		SBA Property		SBA Commercial Term		Residential Property		SBA Property		SBA Commercial Term
Balance at beginning of period	$	171	$	5,805	$	822	$	244	$	6,349	$	1,073
Additions	—		513		84		—		670		107
Amortization	(46)		(764)		(186)		(40)		(925)		(248)

Balance at end of period	$	125	$	5,554	$	720	$	204	$	6,094	$	932

Note 6 - Operating Leases

On January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842),” and all subsequent ASUs that are related to Topic 842. The Company adopted this ASU using the optional transition method with a cumulative effect adjustment to retained earnings without restating prior financial statements for comparable amounts. As a result, the Company recognized right-of-use assets and liabilities of $9.6 million and $10.6 million, respectively, with a cumulative effect adjustment of $53 thousand to retained earnings at the date of adoption. The Company made an election to include both the lease and non-lease components as a single component and account for it as a lease.

The Company’s operating leases are for its headquarters office spaces, and retail branch and LPO locations. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years. The exercise of lease renewal option is at the Company’s sole discretion. Certain leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expenses for these leases are recognized on a straight-line basis over the lease term. None of the Company’s lease agreements contain any material residual value guarantees or material restrictive covenants. The Company also leases certain equipment, such as copy machines and scanners, but they are determined to be immaterial.

The following table presents operating lease cost and supplemental cash flow information related to leases for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2020		2019		2020		2019
Operating lease cost⁽¹⁾	$	576	$	649	$	1,267	$	1,273
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	694	$	669	1,427		1,319
Right of use assets obtained in exchange for lease obligations	$	17	$	1,523	54		1,588

(1) Included in Occupancy and Equipment on the Consolidated Statements of Income.

The Company used the incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. The following table presents supplemental balance sheet information related to leases as of the dates indicated:


($ in thousands)	June 30, 2020			December 31, 2019
Operating leases:
Operating lease assets	$	7,843		$	8,991
Operating lease liabilities	$	8,758		$	9,990
Weighted-average remaining lease term	4.6 years			5.0 years
Weighted-average discount rate	2.72		%	2.81		%

The following table presets maturities of operating lease liabilities as of June 30, 2020:


($ in thousands)	June 30, 2020
Maturities:
2020	$	1,293
2021	2,303
2022	2,171
2023	1,828
2024	547
After 2024	1,351
Total lease payment	9,493
Imputed Interest	(735)
Present value of operating lease liabilities	$	8,758

Note 7 - Federal Home Loan Bank Advances and Other Borrowings

FHLB Advances

The Company had outstanding FHLB advances of $130.0 million and $20.0 million at June 30, 2020 and December 31, 2019, respectively. FHLB advances consisted of fixed interest rate term borrowings of $130.0 million with original maturity terms ranging from 6 months to 5 years and weighted-average interest rate of 0.51% at June 30, 2020. At December 31, 2019, FHLB advances consisted of fixed interest rate term borrowings with original maturity terms ranging from 3 to 5 years and weighted-average interest rate of 1.92%. Each borrowing is payable at its maturity date. Borrowings paid early are subject to a prepayment penalty.

At June 30, 2020 and December 31, 2019, loans pledged to secure borrowings from the FHLB were $580.6 million and $621.7 million, respectively. The Company’s investment in capital stock of the FHLB of San Francisco totaled $8.3 million and $8.2 million, respectively, at June 30, 2020 and December 31, 2019. The Company had additional borrowing capacity of $320.0 million and $404.8 million, respectively, from the FHLB as of June 30, 2020 and December 31, 2019.

Other Borrowing Arrangements

At June 30, 2020, the Company had $40.3 million of unused borrowing capacity from the Federal Reserve Discount Window, to which the Company pledged loans with a carrying value of $48.9 million with no outstanding borrowings. In addition, the Company may borrow up to approximately $65.0 million overnight federal funds lines with correspondent financial institutions at June 30, 2020.

Note 8 - Shareholders’ Equity

Stock Repurchase

On January 23, 2020, the Company announced that on November 22, 2019, its Board of Directors approved a $6.5 million stock repurchase program to commence upon the opening of the Company’s trading window for the first quarter of 2020 and continue through November 20, 2021. The Company completed the repurchase program in March 2020. The Company repurchased and retired 428,474 shares of common stock at a weighted-average price of $15.14 per share, totaling $6.5 million under this repurchase program.

Note 9 - Share-Based Compensation

On July 25, 2013, the Company adopted 2013 Equity Based Stock Compensation Plan (“2013 EBSC Plan”) approved by its shareholders to replace the 2003 Stock Option Plan. The 2013 EBSC Plan provides 1,114,446 shares of common stock for equity based compensation awards including incentive and non-qualified stock options and restricted stock awards. As of June 30, 2020, there were 543,354 shares available for future grants.

Share-Based Compensation Expense

The following table presents share-based compensation expense and the related tax benefits for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2020		2019		2020		2019
Share-based compensation expense related to:
Stock options	$	160	$	162	$	316	$	323
Restricted stock awards	38		—		76		—
Total share-based compensation expense	$	198	$	162	$	392	$	323
Related tax benefits	$	32	$	11	$	40	$	22

The following table presents unrecognized share-based compensation expense as of June 30, 2020:

($ in thousands)

Unrecognized Expense

Weighted-Average Remaining Expected Recognition Period

Unrecognized share-based compensation expense related to:

Stock options

646

2.1 years

Restricted stock awards

504

3.6 years

Total unrecognized share-based compensation expense

1,150

2.7 years

Stock Options

The Company has issued stock options to certain employees, officers and directors. Stock options are issued with exercise prices of the closing market price of the Company’s stock on the grant date, and generally have a three-to five-year vesting period with contractual terms of ten years.

The following table represents stock option activity for the three months ended June 30, 2020:


	Three Months Ended June 30, 2020
($ in thousands except per share data)	Number of Shares	Weighted-Average Exercise Price Per Share		Weighted-Average Contractual Term	Aggregated Intrinsic Value
Outstanding at beginning of period	733,992	$	10.76	5.77 years	$	(722)

Exercised	(7,849)	$	6.68	3.83 years

Outstanding at end of period	726,143	$	10.84	5.56 years	$	(393)
Exercisable at end of period	501,966	$	9.75	5.00 years	$	277

The following table represents stock option activity for the six months ended June 30, 2020:


	Six Months Ended June 30, 2020
($ in thousands except per share data)	Number of Shares	Weighted-Average Exercise Price Per Share		Weighted-Average Contractual Term	Aggregated Intrinsic Value
Outstanding at beginning of period	829,376	$	10.32	5.80 years	$	5,776

Exercised	(98,393)	$	6.43	3.42 years
Forfeited	(4,840)	$	10.33	5.58 years
Outstanding at end of period	726,143	$	10.84	5.56 years	$	(393)
Exercisable at end of period	501,966	$	9.75	5.00 years	$	277

The following table represents information regarding unvested stock options for the three and six months ended June 30, 2020:


	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
	Number of Shares	Weighted-Average Exercise Price Per Share		Number of Shares	Weighted-Average Exercise Price Per Share
Outstanding at beginning of period	224,177	$	13.29	246,317	$	13.31

Exercised	—	$	—	(17,300)	$	14.47
Forfeited	—	$	—	(4,840)	$	10.33
Outstanding at end of period	224,177	$	13.29	224,177	$	13.29

Restricted Stock Awards

The Company also has granted restricted stock awards (“RSAs”) to certain employees and officers. The RSAs are valued at the closing market price of the Company’s stock on the grant date and generally have a three-to five-year vesting period. The following table represents RSAs activity for the three and six months ended June 30, 2020:


	Three Months Ended June 30, 2020				Six Months Ended June 30, 2020
	Number of Shares	Weighted-Average Grant Date Fair Value Per Share		Number of Shares	Weighted-Average Grant Date Fair Value Per Share
Outstanding at beginning of period	38,400	$	16.53	37,400	$	16.60
Granted	—	$	—	1,000	$	13.72


Outstanding at end of period	38,400	$	16.53	38,400	$	16.53

Note 10 - Income Taxes

Income tax expense was $1.4 million and $2.8 million, respectively, and the effective tax rate was 28.8% and 29.5%, respectively, for the three months ended June 30, 2020 and 2019. For the six months ended June 30, 2020 and 2019, income tax expense was $2.9 million and $5.6 million, respectively, and the effective tax rate was 29.6% and 29.7%, respectively.

At June 30, 2020 and December 31, 2019, the Company had no unrecognized tax benefits, or accrued interest or penalties.

The Company and its subsidiaries are subject to U.S. federal and various state jurisdictions income tax examinations. As of June 30, 2020, the Company is no longer subject to examination by taxing authorities for tax years before 2016 for federal taxes and before 2015 for various state jurisdictions. The statute of limitations vary by state, and state taxes other than California have been minimal and immaterial to the Company’s financial results.

Note 11 - Earnings Per Share

The following table presents the computations of basic and diluted EPS for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands, except per share)	2020		2019		2020		2019
Basic earnings per share:
Net income	$	3,367	$	6,601	$	6,939	$	13,165
Less: income allocated to unvested restricted stock	(8)		—		(17)		—
Net income allocated to common stock	$	3,359	$	6,601	$	6,922	$	13,165
Weighted-average total common shares outstanding	15,375,805		16,017,089		15,459,639		16,008,325
Less: weighted-average unvested restricted stock	(38,400)		—		(38,087)		—
Weighted-average common shares outstanding, basic	15,337,405		16,017,089		15,421,552		16,008,325
Basic earnings per share	$	0.22	$	0.41	$	0.45	$	0.82
Diluted earnings per share:
Net income allocated to common stock	$	3,359	$	6,601	$	6,922	$	13,165
Weighted-average common shares outstanding, basic	15,337,405		16,017,089		15,421,552		16,008,325
Diluted effect of stock options	36,250		312,950		101,074		294,949
Weighted-average common shares outstanding, diluted	15,373,655		16,330,039		15,522,626		16,303,274
Diluted earnings per share	$	0.22	$	0.40	$	0.45	$	0.81

There were 660,859 and 163,000 stock options were excluded in computing diluted EPS because they were anti-dilutive for three and six months ended June 30, 2020, respectively. For three and six months ended June 30, 2019, there were 15,000 and 15,000 stock options excluded in computing diluted EPS because they were anti-dilutive, respectively.

Note 12 - Commitments and Contingencies

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and letters of credit. Those instruments involve to varying degrees, elements of credit, and interest rate risk not recognized in the Company’s consolidated financial statements.

As of June 30, 2020 and December 31, 2019, the Company had the following outstanding financial commitments whose contractual amount represents credit risk:


($ in thousands)	June 30, 2020		December 31, 2019
Commitments to extend credit	$	194,431	$	171,608
Standby letters of credit	4,300		3,300
Commercial letters of credit	416		292
Total	$	199,147	$	175,200

The Company’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for the loans reflected in the consolidated financial statements. The Company maintained reserve for off-balance sheet items of $270 thousand and $301 thousand, respectively, at June 30, 2020 and December 31, 2019, in Accrued Interest Payable and Other Liabilities in the Consolidated Balance Sheets.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer.

Litigation

The Company is involved in various matters of litigation, which have arisen in the ordinary course of business. In the opinion of management, the disposition of pending matters of litigation will not have a material effect on the Company’s consolidated financial statements.

COVID-19 Pandemic

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on global economic and market conditions, including significant disruption of, and volatility in, financial markets; global supply chain disruptions; and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment throughout the U.S., but also specifically in California, where most of the Company’s operations and a large majority of its customers are located. These conditions have impacted and are expected in the future to impact its business, results of operations, and financial condition negatively.

Note 13 - Regulatory Matters

Under the final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”), the Bank must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios. Management believes as of June 30, 2020 and December 31, 2019, the Bank met all capital adequacy requirements to which they are subject to. Based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets in August 2018, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. The Company and the Bank’s capital conservation buffer was 9.09% and 8.83%, respectively, as of June 30, 2020, and 8.90% and 8.71%, respectively, as of December 31, 2019. Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital. The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:


	Actual						Minimum Capital Requirement						To Be Well Capitalized Under Prompt Corrective Provisions
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
June 30, 2020
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	$	224,570	15.83	%	$	63,828	4.5	%	N/A		N/A
Total capital (to risk-weighted assets)	242,335		17.09	%	113,472		8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	224,570		15.83	%	85,104		6.0	%	N/A		N/A
Tier 1 capital (to average assets)	224,570		11.49	%	78,175		4.0	%	N/A		N/A
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	$	220,907	15.58	%	$	63,825	4.5	%	$	92,192	6.5	%
Total capital (to risk-weighted assets)	238,670		16.83	%	113,467		8.0	%	141,834		10.0	%
Tier 1 capital (to risk-weighted assets)	220,907		15.58	%	85,100		6.0	%	113,467		8.0	%
Tier 1 capital (to average assets)	220,907		11.30	%	78,172		4.0	%	97,715		5.0	%
December 31, 2019
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	$	226,069	15.87	%	$	64,087	4.5	%	N/A		N/A
Total capital (to risk-weighted assets)	240,750		16.90	%	113,933		8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	226,069		15.87	%	85,450		6.0	%	N/A		N/A
Tier 1 capital (to average assets)	226,069		13.23	%	68,355		4.0	%	N/A		N/A
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	$	223,241	15.68	%	$	64,084	4.5	%	$	92,566	6.5	%
Total capital (to risk-weighted assets)	237,922		16.71	%	113,928		8.0	%	142,410		10.0	%
Tier 1 capital (to risk-weighted assets)	223,241		15.68	%	85,446		6.0	%	113,928		8.0	%
Tier 1 capital (to average assets)	223,241		13.06	%	68,354		4.0	%	85,442		5.0	%

The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of the bank’s undivided profits or the bank’s net income for its last three fiscal years less the amount of any distribution made to the bank’s shareholder during the same period. As a California corporation, the Company is subject to the limitations of California law, which allows a corporation to distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the corporation meets either a retained earnings test or a “balance sheet” test. Under the retained earnings test, the Company may make a distribution from retained earnings to the extent that its retained earnings exceed the sum of (a) the amount of the distribution plus (b) the amount, if any, of dividends in arrears on shares with preferential dividend rights. The Company may also make a distribution if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution. Indebtedness is not considered a liability if the terms of such indebtedness provide that payment of principal and interest thereon are to be made only if, and to the extent that, a distribution to shareholders could be made under the balance sheet test.

The Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”) and the California Department of Business Oversight (the “CDBO”) periodically examine the Company’s business, including compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that the Company’s financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of the Company’s operations had become unsatisfactory, or that the Company was in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in Company’s capital, to restrict growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Company’s deposit insurance and place the Company into receivership or conservatorship.

On April 30, 2019, the FDIC, the CDBO and the Bank entered into a stipulation consenting to the issuance of a consent order (the “Order”) relating to the Bank’s BSA/AML. The Order requires, among other things, that the Bank correct all violations found in the prior examination and to improve its process to better identify and monitor accounts and transactions that pose a greater than normal risk for compliance with BSA/AML. The Order also requires the Board of Directors of the Bank to increase its oversight of the Bank’s compliance with BSA/AML rules and regulations. In addition, the Bank is to ensure that the BSA/AML compliance program is managed by a qualified officer with sufficient experience and resources necessary to administer an effective BSA/AML compliance program, and to seek prior FDIC and CDBO non-objection to a change in such officer or the officer in charge of Office of Foreign Assets Control compliance matters, or material changes to their responsibilities. Further, the Order requires that the Bank develop and maintain an effective BSA/AML compliance program, monitoring mechanisms, validation of risk rating and suspicious activity monitoring, and training programs for staff. Further, the Bank must review and enhance its BSA/AML risk assessment and customer due diligence, complete a BSA/AML staffing assessment and conduct a “look back” to more highly scrutinize certain transactions that occurred during a six-month period in 2018 to determine if any suspicious activity requiring reporting went undetected. Finally, the Bank must provide periodic reports of progress to the FDIC and CDBO and provide for independent testing of the overall compliance program to ensure continued compliance, and seek prior FDIC and CDBO non-objection to the establishment of any new branches or other offices, or introduction of new delivery channels, products, services, or lines of business.

Subsequent to the Order, the Bank implemented many actions it believes fully respond to the requirements of the Order and submitted all required reports to the FDIC and CDBO. Even though the Company believes that the Bank has addressed the items under the Order, it will take some time to address, to the satisfaction of the regulators, all of the specific issues unique to the Bank’s operation. While management is confident that all provisions of the Order will be complied with over time, compliance with and satisfaction of the Order will be determined in the sole discretion of the FDIC and CDBO.

Note 14 - Revenue Recognition

Topic 606, “Revenue from Contracts with Customers,” does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as gain or loss associated with mortgage servicing assets and financial guarantees are also not within the scope. Topic 606 is applicable to noninterest income such as deposit related fees, interchange fees, and merchant related income. Noninterest income considered to be within the scope of Topic 606 is discussed below.

Service charges and fees on deposits: Deposit account service charges consist of monthly service fees, account analysis fees, non-sufficient funds (“NSF”) charges and other deposit related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. NSF charges, and other deposit account service charges are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time as incurred.

Debit card fees: When customers use their debit cards to pay merchants for goods or services, the Company retains a fee from the funds collected from the related deposit account and transfers the remaining funds to the payment network for remittance to the merchant. The performance obligation to the merchant is satisfied and the fee is recognized at the point in time when the funds are collected and transferred to the payment network.

Gain (loss) on sale of other real estate owned: The Company’s performance obligation for sale of OREO is the transfer of title and ownership rights of the OREO to the buyer, which occurs at the settlement date when the sale proceeds are received and income is recognized.

Wire transfer fees and other service charges: Wire transfer fees and other service charges are transaction based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time as incurred.

The following table presents revenue from contracts with customers within the scope of ASC 606 for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
($ in thousands)	2020		2019		2020		2019
Noninterest income in-scope of Topic 606
Service charges and fees on deposits:
Monthly service fees	$	21	$	29	$	49	$	57
Account analysis fees	193		242		428		469
Non-sufficient funds charges	42		73		142		159
Other deposit related fees	19		24		46		47
Total service charges and fees on deposits	275		368		665		732
Debit card fees	49		68		118		133

Wire transfer fees	126		126		254		235
Other service charges	40		58		92		108
Total	$	490	$	620	$	1,129	$	1,208

Note 15 - Subsequent Events

Dividend Declared on Common Stock. On July 23, 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per common share. The dividend will be paid on or about September 15, 2020, to shareholders of record as of the close of business on August 31, 2020.

The Company has evaluated the effects of events that have occurred subsequent to June 30, 2020 through the issuance date of these consolidated financial statements (unaudited). Other than the event described above, there have been no material events that would require disclosure in the consolidated financial statements or in the notes to the consolidated financial statements.

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of the major factors that influenced the Company’s results of operations and financial condition as of and for the three and six months ended June 30, 2020. This analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 and with the unaudited consolidated financial statements and notes (unaudited) thereto set forth in this Quarterly Report on Form 10-Q.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with GAAP and general practices within the banking industry. Within these financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the consolidated statements of financial condition dates and the Company’s results of operations for the reporting periods. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, the Company has established critical accounting policies to facilitate making the judgment necessary to prepare financial statements. The Company’s critical accounting policies are described in Note 1 to Consolidated Financial Statements and in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the year ended December 31, 2019 and in Note 1 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.

Selected Financial Data

The following table presents certain selected financial data as of the dates or for the periods indicated:


	As of or For the Three Months Ended June 30,						As of or For the Six Months Ended June 30,
($ in thousands, except per share data)	2020		2019		2020		2019
Selected balance sheet data:
Cash and cash equivalents	$	307,603	$	133,285	$	307,603	$	133,285
Securities available-for-sale	128,049		142,539		128,049		142,539
Securities held-to-maturity	—		22,685		—		22,685
Loans held-for-sale	4,102		440		4,102		440
Loans held-for-investment, net of deferred loan costs (fees)	1,553,589		1,395,557		1,553,589		1,395,557
Allowance for loan losses	(20,248)		(13,328)		(20,248)		(13,328)
Total assets	2,020,777		1,726,486		2,020,777		1,726,486
Total deposits	1,646,930		1,446,526		1,646,930		1,446,526
Shareholders’ equity	227,233		223,400		227,233		223,400
Selected income statement data:
Interest income	$	18,973	$	24,030	$	40,633	$	46,982
Interest expense	3,610		6,338		8,704		12,137
Net interest income	15,363		17,692		31,929		34,845
Provision for loan losses	3,855		394		6,751		309
Noninterest income	2,918		3,054		4,944		5,463
Noninterest expense	9,696		10,984		20,263		21,273
Income before income taxes	4,730		9,368		9,859		18,726
Income tax expense	1,363		2,767		2,920		5,561
Net income	3,367		6,601		6,939		13,165
Per share data:
Earnings per common share, basic	$	0.22	$	0.41	$	0.45	$	0.82
Earnings per common share, diluted	0.22		0.40		0.45		0.81
Book value per common share ⁽¹⁾	14.78		13.98		14.78		13.98
Cash dividends declared per common share	0.10		0.06		0.20		0.11


	As of or For the Three Months Ended June 30,									As of or For the Six Months Ended June 30,
($ in thousands, except per share data)	2020			2019			2020			2019
Outstanding share data:
Number of common shares outstanding	15,377,935			15,980,655			15,377,935			15,980,655
Weighted-average common shares outstanding, basic	15,337,405			16,017,089			15,421,552			16,008,325
Weighted-average common shares outstanding, diluted	15,373,655			16,330,039			15,522,626			16,303,274
Selected performance ratios:
Return on average assets ⁽²⁾	0.69		%	1.52		%	0.75		%	1.55		%
Return on average shareholders' equity ⁽²⁾	5.98		%	12.01		%	6.15		%	12.22		%
Dividend payout ratio ⁽³⁾	45.45		%	14.63		%	44.44		%	13.41		%
Efficiency ratio ⁽⁴⁾	53.04		%	52.95		%	54.95		%	52.78		%
Yield on average interest-earning assets ⁽²⁾	3.97		%	5.66		%	4.48		%	5.65		%
Cost of average interest-bearing liabilities ⁽²⁾	1.17		%	2.17		%	1.46		%	2.11		%
Net interest spread ⁽²⁾	2.80		%	3.49		%	3.02		%	3.54		%
Net interest margin ^{(2), (5)}	3.22		%	4.17		%	3.52		%	4.19		%
Total loans to total deposits ratio ⁽⁶⁾	94.58		%	96.51		%	94.58		%	96.51		%
Asset quality:
Loans 30 to 89 days past due and still accruing	$	424		$	809		$	424		$	809

Nonperforming loans ⁽⁷⁾	4,466			1,429			4,466			1,429
Nonperforming assets ⁽⁸⁾	4,842			1,824			4,842			1,824
Net charge-offs	281			203			883			148
Loans 30 to 89 days past due and still accruing to loans held-for-investment	0.03		%	0.06		%	0.03		%	0.06		%


Nonperforming loans to loans held-for-investment	0.29		%	0.10		%	0.29		%	0.10		%
Nonperforming loans to allowance for loan losses	22.06		%	10.72		%	22.06		%	10.72		%
Nonperforming assets to total assets	0.24		%	0.11		%	0.24		%	0.11		%
Allowance for loan losses to loans held-for-investment	1.30		%	0.96		%	1.30		%	0.96		%

Allowance for loan losses to nonperforming loans	453.38		%	932.68		%	453.38		%	932.68		%
Net charge-offs to average loans held-for-investment ⁽²⁾	0.07		%	0.06		%	0.12		%	0.02		%
Capital ratios:
Shareholders’ equity to total assets	11.24		%	12.94		%	11.24		%	12.94		%
Average equity to average assets	11.57		%	12.65		%	12.14		%	12.66		%
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	15.83		%	16.20		%	15.83		%	16.20		%
Total capital (to risk-weighted assets)	17.09		%	17.18		%	17.09		%	17.18		%
Tier 1 capital (to risk-weighted assets)	15.83		%	16.20		%	15.83		%	16.20		%
Tier 1 capital (to average assets)	11.49		%	12.74		%	11.49		%	12.74		%
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	15.58		%	16.07		%	15.58		%	16.07		%
Total capital (to risk-weighted assets)	16.83		%	17.05		%	16.83		%	17.05		%
Tier 1 capital (to risk-weighted assets)	15.58		%	16.07		%	15.58		%	16.07		%
Tier 1 capital (to average assets)	11.30		%	12.64		%	11.30		%	12.64		%

(1) Shareholders’ equity divided by common shares outstanding.

(2) Annualized.

(3) Dividends declared per common share divided by basic earnings per common share.

(4) Noninterest expenses divided by the sum of net interest income and noninterest income.

(5) Net interest income divided by average total interest-earning assets.

(6) Total loans include both loans held-for-sale and loans held-for-investment, net of unearned loan costs (fees).

(7) Nonperforming loans include nonaccrual loans and loans past due 90 days or more and still accruing.

(8) Nonperforming assets include nonperforming loans and other real estate owned.

Executive Summary

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on recent global economic and market conditions, including significant disruption of, and volatility in, financial markets; global supply chain disruptions; and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment throughout the U.S., but also specifically in California, where most of the Company’s operations and a large majority of its customers are located.

Since the beginning of the crisis, the Company has taken a number of steps to protect the safety of its employees and to support its customers. The Company has enabled its staff to work remotely and established safety measures within its bank premises and branches for both employees and customers.

In order to support its customers, the Company has been in close contact with its customers, assessing the level of impact on their businesses, and putting a process in place to evaluate each client’s specific situation and provide relief programs where appropriate. Since the launch of PPP, the Company has extended 1,551 PPP loans totaling $133.7 million as of June 30, 2020. The Company also provided modifications, including interest only payments or payment deferrals, to 467 loan customers for the aggregated carrying value of $484.0 million as of June 30, 2020 that are adversely affected by the COVID-19 pandemic. The CARES Act provided for relief on existing and new SBA loans disbursed prior to September 27, 2020 with the SBA paying six months of principal, interest, and any associated fees on these loans. As of June 30, 2020, the Company had 938 SBA loans for the aggregated carrying value of $140.9 million that are qualified for this relief program.

In addition, the Company has been monitoring its liquidity and capital closely. As of June 30, 2020, the Company maintained $307.6 million, or 15.2% of total assets, of cash and cash equivalents and $425.3 million, or 21.0% of total assets, of available borrowing capacity. All regulatory capital ratios were also well above the regulatory well capitalized requirements as of June 30, 2020.

At this time, the Company cannot estimate the long term impact of the COVID-19 pandemic, but these conditions impacted and are expected to impact its business, results of operations, and financial condition negatively.

Q2 2020 Financial Highlights

•Net income was $3.4 million for the three months ended June 30, 2020, a decrease of $3.2 million, or 49.0%, from $6.6 million for the three months ended June 30, 2019;

◦The Company recorded a provision for loan losses of $3.9 million primarily related to an increase in economic uncertainty due to the COVID-19 pandemic.

◦Allowance for loan losses to total loans held-for-investment ratio was 1.30% at June 30, 2020 compared with 0.99% at December 31, 2019. Excluding SBA PPP loans, allowance for loan losses to total loans held-for-investment ratio was 1.43% at June 30, 2020.

◦Net interest margin was 3.22% for the three months ended June 30, 2020 compared with 4.17% for the three months ended June 30, 2019.

•Total assets were $2.02 billion at June 30, 2020, an increase of $274.4 million, or 15.7%, from $1.75 billion at December 31, 2019;

•Loans held-for-investment, net of deferred costs (fees), were $1.55 billion at June 30, 2020, an increase of $102.8 million, or 7.1%, from $1.45 billion at December 31, 2019;

◦SBA PPP loans totaled $133.7 million at June 30, 2020.

•Total deposits were $1.65 billion at June 30, 2020, an increase of $167.6 million, or 11.3%, from $1.48 billion at December 31, 2019; and

•The Company declared and paid cash dividends of $0.10 per common share during the three months ended June 30, 2020.

Results of Operations

Net Interest Income

A principal component of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest earning assets is referred to as the net interest margin. The net interest spread is the yield on average interest earning assets less the cost of average interest bearing liabilities. Net interest income is affected by changes in the balances of interest earning assets and interest bearing liabilities and changes in the yields earned on interest earning assets and the rates paid on interest bearing liabilities.

The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their correspondent yields and costs expressed both in dollars and rates, on a consolidated operations basis, for the three months ended June 30, 2020 and 2019:


	Three Months Ended June 30,
	2020										2019
($ in thousands)	Average Balance		Interest		Yield/ Cost ⁽⁶⁾		Average Balance		Interest		Yield/ Cost ⁽⁶⁾
Interest-earning assets:
Total loans ⁽¹⁾	$	1,554,011	$	18,273	4.73	%	$	1,378,910	$	21,969	6.39	%
Mortgage backed securities	63,692		317		2.00	%	87,787		559		2.55	%
Collateralized mortgage obligation	37,745		122		1.30	%	53,027		325		2.46	%
SBA loan pool securities	13,189		62		1.89	%	21,297		140		2.64	%
Municipal securities - tax exempt ⁽²⁾	5,710		38		2.68	%	5,880		38		2.59	%
Interest-bearing deposits in other financial institutions	237,023		60		0.10	%	146,527		874		2.39	%
FHLB and other bank stock	8,424		101		4.82	%	8,134		125		6.16	%
Total interest-earning assets	1,919,794		18,973		3.97	%	1,701,562		24,030		5.66	%
Noninterest-earning assets:
Cash and cash equivalents	16,031						18,342
Allowances for loan losses	(17,320)						(13,163)
Other assets	37,959						35,843
Total noninterest earning assets	36,670						41,022
Total assets	$	1,956,464					$	1,742,584
Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	371,992	548		0.59	%	$	323,285	1,339		1.66	%
Savings	6,966		3		0.17	%	9,146		14		0.61	%
Time deposits	730,349		2,858		1.57	%	811,247		4,847		2.40	%
Borrowings	130,330		201		0.62	%	30,166		138		1.83	%
Total interest-bearing liabilities	1,239,637		3,610		1.17	%	1,173,844		6,338		2.17	%
Noninterest-bearing liabilities:
Demand deposits	474,175						326,813
Other liabilities	16,198						21,441
Total noninterest-bearing liabilities	490,373						348,254
Total liabilities	1,730,010						1,522,098
Shareholders’ equity	226,454						220,486
Total liabilities and shareholders’ equity	$	1,956,464					$	1,742,584
Net interest income			$	15,363					$	17,692
Net interest spread ⁽³⁾					2.80	%					3.49	%
Net interest margin ⁽⁴⁾					3.22	%					4.17	%
Cost of funds ⁽⁵⁾					0.85	%					1.69	%

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees (cost) of $649 thousand and $131 thousand, respectively, and net accretion of discount on loans of $530 thousand and $1.2 million, respectively, are included in the interest income for the three months ended June 30, 2020 and 2019.

(2) The yield on municipal bonds has not been computed on a tax-equivalent basis.

(3) Net interest spread is calculated by subtracting average rate on interest-bearing liabilities from average yield on interest-earning assets.

(4) Net interest margin is calculated by dividing net interest income by average interest-earning assets.

(5) Cost of funds is calculated by dividing annualized interest expense on total interest-bearing liabilities by the sum of average total interest-bearing liabilities and noninterest-bearing demand deposits.

(6) Annualized.


	Six Months Ended June 30,
	2020										2019
($ in thousands)	Average Balance		Interest		Yield/ Cost ⁽⁶⁾		Average Balance		Interest		Yield/ Cost ⁽⁶⁾
Interest-earning assets:
Total loans ⁽¹⁾	$	1,504,369	$	38,679	5.17	%	$	1,360,641	$	42,903	6.36	%
Mortgage backed securities	60,597		646		2.14	%	86,164		1,108		2.59	%
Collateralized mortgage obligation	39,577		320		1.63	%	53,962		683		2.55	%
SBA loan pool securities	13,531		141		2.10	%	21,717		287		2.66	%
Municipal securities - tax exempt ⁽²⁾	5,714		76		2.67	%	5,884		77		2.64	%
Interest-bearing deposits in other financial institutions	193,735		521		0.54	%	139,816		1,666		2.40	%
FHLB and other bank stock	8,385		250		6.00	%	7,785		258		6.68	%
Total interest-earning assets	1,825,908		40,633		4.48	%	1,675,969		46,982		5.65	%
Noninterest-earning assets:
Cash and cash equivalents	17,441						18,509
Allowances for loan losses	(15,860)						(13,141)
Other assets	36,136						35,215
Total noninterest earning assets	37,717						40,583
Total assets	$	1,863,625					$	1,716,552
Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	368,298	1,667		0.91	%	$	308,348	2,471		1.62	%
Savings	6,790		6		0.18	%	8,810		22		0.50	%
Time deposits	744,415		6,728		1.82	%	812,583		9,372		2.33	%
Borrowings	77,723		303		0.78	%	30,120		272		1.82	%
Total interest-bearing liabilities	1,197,226		8,704		1.46	%	1,159,861		12,137		2.11	%
Noninterest-bearing liabilities:
Demand deposits	421,847						317,493
Other liabilities	18,281						21,880
Total noninterest-bearing liabilities	440,128						339,373
Total liabilities	1,637,354						1,499,234
Shareholders’ equity	226,271						217,318
Total liabilities and shareholders’ equity	$	1,863,625					$	1,716,552
Net interest income			$	31,929					$	34,845
Net interest spread ⁽³⁾					3.02	%					3.54	%
Net interest margin ⁽⁴⁾					3.52	%					4.19	%
Cost of funds ⁽⁵⁾					1.08	%					1.66	%

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees (cost) of $770 thousand and $209 thousand, respectively, and net accretion of discount on loans of $1.6 million and $2.0 million, respectively, are included in the interest income for the six months ended June 30, 2020 and 2019.

(2) The yield on municipal bonds has not been computed on a tax-equivalent basis.

(3) Net interest spread is calculated by subtracting average rate on interest-bearing liabilities from average yield on interest-earning assets.

(4) Net interest margin is calculated by dividing net interest income by average interest-earning assets.

(6) Annualized.

The following table presents the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. Information is provided on changes attributable to: (i) changes in volume multiplied by the prior rate; and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.


	Three Months Ended June 30,												Six Months Ended June 30,
	2020 vs. 2019												2020 vs. 2019
	Increase (Decrease) Due to						Net Increase (Decrease)			Increase (Decrease) Due to					Net Increase (Decrease)
($ in thousands)	Volume		Rate						Volume			Rate
Interest earned on:
Total loans	$	2,790	$	(6,486)	$	(3,696)	$	4,532		$	(8,756)		$	(4,224)
Investment securities	(301)		(222)		(523)		(621)			(351)			(972)
Other interest-earning assets	586		(1,424)		(838)		711			(1,864)			(1,153)
Total interest income	3,075		(8,132)		(5,057)		4,622			(10,971)			(6,349)
Interest incurred on:
Savings, NOW, and money market deposits	189		(991)		(802)		455			(1,275)			(820)
Time deposits	(483)		(1,506)		(1,989)		(786)			(1,858)			(2,644)
Borrowings	458		(395)		63		430			(399)			31
Total interest expense	164		(2,892)		(2,728)		99			(3,532)			(3,433)
Change in net interest income	$	2,911	$	(5,240)	$	(2,329)	$	4,523		$	(7,439)		$	(2,916)

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

The following table presents the components of net interest income for the periods indicated:


	Three Months Ended June 30,						Amount Change		Percentage Change
($ in thousands)	2020		2019
Interest income:
Interest and fees on loans	$	18,273	$	21,969	$	(3,696)	(16.8)	%
Interest on tax-exempt investment securities	38		38		—		—	%
Interest on investment securities	501		1,024		(523)		(51.1)	%
Interest and dividends on other interest-earning assets	161		999		(838)		(83.9)	%
Total interest income	18,973		24,030		(5,057)		(21.0)	%
Interest expense:
Interest on deposits	3,409		6,200		(2,791)		(45.0)	%
Interest on borrowings	201		138		63		45.7	%
Total interest expense	3,610		6,338		(2,728)		(43.0)	%
Net interest income	$	15,363	$	17,692	$	(2,329)	(13.2)	%

Net interest income decreased primarily due to a 169 basis point decrease in average yield on interest-earning assets and a 5.6% increase in average balance of interest-bearing liabilities, partially offset by a 100 basis point decrease in average cost on interest-bearing liabilities and a 12.8% increase in average balance of interest-earning assets.

Interest and fees on loans decreased primarily due to a 166 basis point decrease in average yield, partially offset by a 12.7% increase in average balance. The decrease in average yield was primarily due to the lower market rates, 1% contractual rate on SBA PPP loans, reset of interest rates on SBA loans, and a decrease in net accretion of discount during the three months ended June 30, 2020. The Wall Street Journal prime rate was 3.25% during the three months ended June 30, 2020 compared to 4.75% at December 31, 2019 and 5.50% at June 30, 2019. On SBA PPP loans, the Company expects to earn an annualized yield of approximately 2.7% assuming the expected term of 24 months and no prepayments. SBA loans, excluding PPP loans, had a weighted-average contractual rate of 4.69% and 6.17%, respectively, at June 30, 2020 and March 31, 2020. The decrease in net accretion of discount was primarily due to a decrease in prepayment speed on SBA loans.

Interest on investment securities decreased primarily due to a 28.4% decrease in average balance and 74 basis point decrease in average yield. The decrease in average balance was primarily due to a sale of investment securities of $32.8 million in December 2019, partially offset by new investment securities of $30.1 million purchased during the past 12-month period. The decrease in average yield was primarily due to new investment securities purchased under the lower market rates during the past 12-month period and the sale of securities available-for-sale with a weighted-average book yield of 3.02%. For the three months ended June 30, 2020 and 2019, yield on total investment securities was 1.80% and 2.54%, respectively.

Interest income on other interest-earning assets decreased primarily due to a 233 basis point decrease in average yield, partially offset by a 58.7% increase in average balance. The decrease in average yield was primarily due to the lower market rates. The increase in average balance was primarily due to placing higher balances into the interest-bearing account at the Federal Reserve Bank as a part of the Company’s strategic decision to increase its liquidity level by increasing FHLB advances to proactively manage its liquidity position in response to the COVID-19 pandemic as well as the increase in deposits. For the three months ended June 30, 2020 and 2019, yield on total other interest-earning assets was 0.26% and 2.59%, respectively.

Interest expense on deposits decreased primarily due to a 93 basis point decrease in average cost of interest-bearing deposits and a 10.1% decrease in average balance of savings and time deposits, partially offset by a 15.1% increase in NOW and money market accounts. The decrease in average cost was primarily due to the lower market rates. The decrease in average balance of time deposits was primarily due to a lower level of renewals of matured time deposits due to the lower market rates. For the three months ended June 30, 2020 and 2019, average cost on total interest-bearing deposits was 1.24% and 2.17%, respectively, and average cost on total deposits were 0.87% and 1.69%, respectively.

Interest expense on borrowings increased as the Company maintained a higher balance of FHLB advances as a part of the Company’s liquidity management.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

The following table presents the components of net interest income for the periods indicated:


	Six Months Ended June 30,						Amount Change		Percentage Change
($ in thousands)	2020		2019
Interest income:
Interest and fees on loans	$	38,679	$	42,903	$	(4,224)	(9.8)	%
Interest on tax-exempt investment securities	76		77		(1)		(1.3)	%
Interest on investment securities	1,107		2,078		(971)		(46.7)	%
Interest and dividends on other interest-earning assets	771		1,924		(1,153)		(59.9)	%
Total interest income	40,633		46,982		(6,349)		(13.5)	%
Interest expense:
Interest on deposits	8,401		11,865		(3,464)		(29.2)	%
Interest on borrowings	303		272		31		11.4	%
Total interest expense	8,704		12,137		(3,433)		(28.3)	%
Net interest income	$	31,929	$	34,845	$	(2,916)	(8.4)	%

Net interest income decreased primarily due to a 117 basis point decrease in average yield on interest-earning assets and 3.2% increase in interest-bearing liabilities, partially offset by a 65 basis point decrease in average cost on interest-bearing liabilities and a 8.9% increase in average balance of interest-earning assets.

Interest and fees on loans decreased primarily due to a 119 basis point decrease in average yield, partially offset by a 10.6% increase in average balance. The decrease in average yield was primarily due to the lower market rates, 1% contractual rate on SBA PPP loans, reset of interest rates on SBA loans, and a decrease in net accretion of discount during the six months ended June 30, 2020. The Wall Street Journal prime rate was 3.25% during the three months ended June 30, 2020 compared to 4.75% at December 31, 2019 and 5.50% at June 30, 2019. On SBA PPP loans, the Company expects to earn an annualized yield of approximately 2.7% assuming the expected term of 24 months and no prepayments. SBA loans, excluding PPP loans, had a weighted-average contractual rate of 4.69% and 6.17%, respectively, at June 30, 2020 and March 31, 2020. The decrease in net accretion of discount was primarily due to a decrease in prepayment speed on SBA loans.

Interest on investment securities decreased primarily due to a 28.8% decrease in average balance and 60 basis point decrease in average yield. The decrease in average balance was primarily due to a sale of investment securities of $32.8 million in December 2019, partially offset by new investment securities of $30.1 million purchased during the past 12-month period. The decrease in average yield was primarily due to new investment securities purchased under the lower market rates during the past 12-month period and the sale of securities available-for-sale with a weighted-average book yield of 3.02%. For the three months ended June 30, 2020 and 2019, yield on total investment securities was 1.99% and 2.59%, respectively.

Interest income on other interest-earning assets decreased primarily due to a 186 basis point decrease in average yield, partially offset by a 36.9% increase in average balance. The decrease in average yield was primarily due to the lower market rates. The increase in average balance was primarily due to placing higher balances into the interest-bearing account at the Federal Reserve Bank as a part of the Company’s strategic decision to increase its liquidity level by increasing FHLB advances to proactively manage its liquidity position in response to the COVID-19 pandemic as well as the increase in deposits. For the six months ended June 30, 2020 and 2019, yield on total other interest-earning assets was 0.77% and 2.63%, respectively.

Interest expense on deposits decreased primarily due to a 61 basis point decrease in average cost of interest-bearing deposits and an 8.5% decrease in average balance of savings and time deposits, partially offset by a 19.4% increase in NOW and money market accounts. The decrease in average cost was primarily due to the lower market rates. The decrease in average balance of time deposits was primarily due to a lower level of renewals of matured time deposits due to the lower market rates. For the six months ended June 30, 2020 and 2019, average cost on total interest-bearing deposits was 1.51% and 2.12%, respectively, and average cost on total deposits were 1.10% and 1.65%, respectively.

Interest expense on borrowings increased as the Company maintained a higher balance of FHLB advances as a part of the Company’s liquidity management.

Provision for Loan Losses

Provision for loan losses was $3.9 million and $394 thousand, respectively, for the three months ended June 30, 2020 and 2019. For the six months ended June 30, 2020 and 2019, provision for loan losses was $6.8 million and $309 thousand, respectively. Additional provisions for loan losses for the three and six months ended June 30, 2020 were primarily due to the increase in risks associated with economic and business conditions as a result of the COVID-19 pandemic.

See further discussion in “Allowance for Loan Losses.”

Noninterest Income

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

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


	Three Months Ended June 30,						Amount Change		Percentage Change
($ in thousands)	2020		2019
Service charges and fees on deposits	$	275	$	368	$	(93)	(25.3)	%
Loan servicing income	902		492		410		83.3	%
Gain on sale of loans	1,498		1,891		(393)		(20.8)	%

Other income	243		303		(60)		(19.8)	%
Total noninterest income	$	2,918	$	3,054	$	(136)	(4.5)	%

Service charges and fees on deposits decreased primarily due to a decrease in fee-based transactions.

Loan servicing income increased primarily due to a decrease in servicing asset amortization from a lower prepayment speed. Serving asset amortization was $392 thousand and $698 thousand, respectively, for the three months ended June 30, 2020 and 2019.

Gain on sale of loans decreased primarily due to a decrease in sales volume of SBA loans and a lower level of premium on SBA loans in the secondary market, partially offset by an increase in sale volume of residential property loans. The Company sold SBA loans of $27.1 million with a gain of $1.4 million and residential property loans of $6.1 million with a gain of $50 thousand during the three months ended June 30, 2020. During the three months ended June 30, 2019, the Company sold SBA loans of $29.2 million with a gain of $1.9 million and residential property loans of $375 thousand with a gain of $7 thousand.

Other income primarily includes wire transfer fees of $126 thousand and $126 thousand, respectively, and debit card interchange fees of $49 thousand and $68 thousand, respectively, for the three months ended June 30, 2020 and 2019.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

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


	Six Months Ended June 30,						Amount Change		Percentage Change
($ in thousands)	2020		2019
Service charges and fees on deposits	$	665	$	732	$	(67)	(9.2)	%
Loan servicing income	1,456		1,123		333		29.7	%
Gain on sale of loans	2,223		3,011		(788)		(26.2)	%

Other income	600		597		3		0.5	%
Total noninterest income	$	4,944	$	5,463	$	(519)	(9.5)	%

Service charges and fees on deposits decreased primarily due to a decrease in fee based transactions.

Loan servicing income increased primarily due to a decrease in servicing asset amortization from a lower prepayment speed. Serving asset amortization was $996 thousand and $1.2 million, respectively, for the six months ended June 30, 2020 and 2019.

Gain on sale of loans decreased primarily due to a decrease in sales volume of SBA loans and a lower level of premium on SBA loans in the secondary market, partially offset by an increase in sale volume of residential property loans. The Company sold SBA loans of $38.8 million with a gain of $2.2 million and residential property loans of $8.2 million with a gain of $71 thousand during the six months ended June 30, 2020. During the six months ended June 30, 2019, the Company sold SBA loans of $50.4 million with a gain of $3.0 million and residential property loans of $2.8 million with a gain of $23 thousand.

Other income primarily includes wire transfer fees of $254 thousand and $235 thousand, respectively, and debit card interchange fees of $118 thousand and $133 thousand, respectively, for the six months ended June 30, 2020 and 2019.

Noninterest Expense

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

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


	Three Months Ended June 30,						Amount Change		Percentage Change
($ in thousands)	2020		2019
Salaries and employee benefits	$	5,761	$	6,600	$	(839)	(12.7)	%
Occupancy and equipment	1,400		1,407		(7)		(0.5)	%
Professional fees	509		686		(177)		(25.8)	%
Marketing and business promotion	548		529		19		3.6	%
Data processing	366		338		28		8.3	%
Director fees and expenses	107		185		(78)		(42.2)	%

Regulatory assessments	242		309		(67)		(21.7)	%

Other expenses	763		930		(167)		(18.0)	%
Total noninterest expense	$	9,696	$	10,984	$	(1,288)	(11.7)	%

Salaries and employee benefits decreased primarily due to an increase in direct loan origination cost, which defers the recognition of salaries and benefits expenses, and a decrease in bonus accrual for the three months ended June 30, 2020, partially offset by overall increases in salaries and other employee benefits from the hiring of new experienced employees with higher salaries in order to enhance the controls and processes on BSA/AML compliance. SBA PPP loan production incurred direct loan origination cost of approximately $1.1 million. The number of full-time equivalent employees was 251 at June 30, 2020 compared to 248 at June 30, 2019.

Professional fees decreased primarily due to decreases in expenses related to the BSA/AML compliance enhancements.

Data processing expense increased primarily due to the increased processing costs for a greater number of accounts.

Director fees and expenses decreased primarily due to the Company's Board of Directors decision to temporarily decrease director fees during the three months ended June 30, 2020.

Regulatory assessment expense decreased primarily due to an adjustment made during the three months ended June 30, 2019 for the assessment rate increase, partially offset by an increase in balance sheet.

Other expenses primarily included $91 thousand and $160 thousand in loan related legal expenses, $339 thousand and $447 thousand in office expense, and $107 thousand and $136 thousand in armed guard expense for the three months ended June 30, 2020 and 2019, respectively.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

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


	Six Months Ended June 30,						Amount Change		Percentage Change
($ in thousands)	2020		2019
Salaries and employee benefits	$	12,312	$	13,222	$	(910)	(6.9)	%
Occupancy and equipment	2,780		2,720		60		2.2	%
Professional fees	1,306		1,444		(138)		(9.6)	%
Marketing and business promotion	727		757		(30)		(4.0)	%
Data processing	724		656		68		10.4	%
Director fees and expenses	328		374		(46)		(12.3)	%

Regulatory assessments	461		425		36		8.5	%

Other expenses	1,625		1,675		(50)		(3.0)	%
Total noninterest expense	$	20,263	$	21,273	$	(1,010)	(4.7)	%

Salaries and employee benefits decreased primarily due to an increase in direct loan origination cost, which defers the recognition of salaries and benefits expenses, and a decrease in bonus accrual for the six months ended June 30, 2020, partially offset by overall increases in salaries and other employee benefits from the hiring of new experienced employees with higher salaries in order to enhance the controls and processes on BSA/AML compliance. SBA PPP loan production incurred direct loan origination cost of approximately $1.1 million. The number of full-time equivalent employees was 251 at June 30, 2020 compared to 248 at June 30, 2019.

Professional fees decreased primarily due to decreases in expenses related to the BSA/AML compliance enhancements.

Data processing expense increased primarily due to the increased processing costs for a greater number of accounts.

Director fees and expenses decreased primarily due to the Company's Board of Directors decision to temporarily decrease director fees during the three months ended June 30, 2020, partially offset by a severance payment of $45 thousand for a former director during the three months end March 31, 2020.

Regulatory assessment expense increased primarily due to an increase in balance sheet.

Other expenses primarily included $217 thousand and $217 thousand in loan related legal expenses, $719 thousand and $807 thousand in office expense, and $254 thousand and $269 thousand in armed guard expense for the three months ended June 30, 2020 and 2019, respectively.

Income Tax Expense

Financial Condition

Investment Securities

The Company’s investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on current and projected liquidity and interest rate sensitivity positions. Investment securities are classified as held-to-maturity or available-for-sale in accordance with GAAP. Investment securities that the Company has the ability and the intent to hold to maturity are classified as held-to-maturity. All other securities are classified as available-for-sale. Investment securities classified as held-to-maturity are carried at amortized cost. Investment securities classified as available-for-sale are carried at their estimated fair values with the changes in fair values recorded in accumulated other comprehensive income, net of tax, as a component of shareholders’ equity.

The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:


	June 30, 2020										December 31, 2019
($ in thousands)	Amortized Cost		Fair Value		Unrealized Gain (Loss)		Amortized Cost		Fair Value		Unrealized Gain (Loss)
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	71,680	$	73,158	$	1,478	$	38,793	$	38,738	$	(55)
Residential collateralized mortgage obligations	35,367		35,646		279		44,115		43,894		(221)
SBA loan pool securities	12,769		13,121		352		14,179		14,152		(27)
Municipal bonds	5,677		6,124		447		764		782		18
Total securities available-for-sale	$	125,493	$	128,049	$	2,556	$	97,851	$	97,566	$	(285)
Securities held-to-maturity:
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities	—		—		—		15,215		15,204		(11)
Municipal bonds	—		—		—		4,939		5,276		337
Total securities held-to-maturity	$	—	$	—	$	—	$	20,154	$	20,480	$	326

Total investment securities were $128.0 million at June 30, 2020, an increase of $10.3 million, or 8.8%, from $117.7 million at December 31, 2019. The increase was primarily due to purchases of $24.4 million and an increase in fair value of securities available-for-sale of $2.8 million, partially offset by principal paydowns of $16.5 million and net premium amortization of $413 thousand.

The Company performs an OTTI assessment at least on a quarterly basis. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security. All individual securities in a continuous unrealized loss position for 12 months or more as of June 30, 2020 and December 31, 2019 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of June 30, 2020 and December 31, 2019. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the three and six months ended June 30, 2020 and 2019.

The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of June 30, 2020:


	Within One Year						More than One Year through Five Years						More than Five Years through Ten Years						More than Ten Years		Total
($ in thousands)	Amortized Cost		Weighted-Average Yield		Amortized Cost		Weighted-Average Yield		Amortized Cost		Weighted-Average Yield		Amortized Cost		Weighted-Average Yield		Amortized Cost		Weighted-Average Yield
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	—	%	$	689	1.42	%	$	10,827	1.52	%	$	60,164	1.85	%	$	71,680	1.80	%
Residential collateralized mortgage obligations	—		—	%	—		—	%	12,095		0.82	%	23,272		1.41	%	35,367		1.21	%
SBA loan pool securities	—		—	%	—		—	%	3,360		1.32	%	9,409		2.02	%	12,769		1.84	%
Municipal bonds	101		1.39	%	2,209		2.02	%	1,038		2.23	%	2,329		3.53	%	5,677		2.67	%
Total securities available-for-sale	$	101	1.39	%	$	2,898	1.88	%	$	27,320	1.21	%	$	95,174	1.80	%	$	125,493	1.68	%

Loans Held-For-Sale

Loans held-for-sale are carried at the lower of cost or fair value. When a determination is made at the time of commitment to originate as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the foreseeable future, subject to periodic reviews under the Company’s management evaluation processes, including asset/liability management and credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred to held-for-sale at the lower of cost or fair value. Certain loans are transferred to held-for-sale with write-downs to allowance for loan losses.

The following table presents a composition of loans held-for-sale as of the dates indicated:


($ in thousands)	June 30, 2020		December 31, 2019
Real estate loans:

Residential property	$	3,267	$	760
SBA property	835		150

Commercial and industrial loans:


SBA commercial term	—		1,065

Total	$	4,102	$	1,975

Loans held-for-sale were $4.1 million at June 30, 2020, an increase of $2.1 million, or 107.7%, from $2.0 million at December 31, 2019. The increase was primarily due to new funding of $48.6 million and a loan transferred from loans held-for-investment of $1.4 million, partially offset by sales of $47.0 million.

Loans Held-For-Investment and Allowance for Loan Losses

The following table presents the composition of the Company’s loans held-for-investment as of the dates indicated:


	June 30, 2020						December 31, 2019
($ in thousands)	Amount		Percentage to Total		Amount		Percentage to Total
Real estate loans:
Commercial property	$	813,409	52.3	%	$	803,014	55.4	%
Residential property	223,923		14.4	%	235,046		16.3	%
SBA property	122,675		7.9	%	129,837		8.9	%
Construction	20,432		1.3	%	19,164		1.3	%
Total real estate loans	1,180,439		75.9	%	1,187,061		81.9	%
Commercial and industrial loans:
Commercial term	98,936		6.4	%	103,380		7.1	%
Commercial lines of credit	96,339		6.2	%	111,768		7.7	%
SBA commercial term	22,650		1.5	%	25,332		1.7	%
SBA PPP	133,675		8.6	%	—		—	%
Total commercial and industrial loans	351,600		22.7	%	240,480		16.5	%
Other consumer loans	21,550		1.4	%	23,290		1.6	%
Loans held-for-investment	1,553,589		100.0	%	1,450,831		100.0	%
Allowance for loan losses	(20,248)				(14,380)
Net loans held-for-investment	$	1,533,341			$	1,436,451

Loans held-for-investment, net of deferred loan costs (fees) were $1.55 billion at June 30, 2020, an increase of $102.8 million, or 7.1%, from $1.45 billion at December 31, 2019. The increase was primarily due to new funding of $234.3 million and advances of $56.5 million, partially offset by paydowns and payoffs of $186.2 million. SBA PPP loans represented $133.7 million of new funding, and contributed significantly to the Company’s loan growth for the six months ended June 30, 2020.

Loan Modifications Related to the COVID-19 Pandemic

The Company provided modifications, including payment deferments and interest only payments, to customers that were adversely affected by the COVID-19 pandemic. As of June 30, 2020, all loans with modifications related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs nor reported past due. These loans had modification terms of 6-month or less and were on accrual status and classified as pass as of June 30, 2020.

The following table presents a summary of loans with modifications related to the COVID-19 pandemic as of June 30, 2020:


	Modification Type								Weighted-Average Contractual Rate		Loan-to-Value ⁽¹⁾		Accrued Interest Receivable
($ in thousands)	Payment Deferment		Interest Only		Total
Real estate loans:
Commercial property	$	369,716	$	9,850	$	379,566	4.60	%	48.4	%	$	5,123
Residential property	44,804		—		44,804		5.02	%	57.4	%	664
Commercial and industrial loans:					—
Commercial term	53,277		4,882		58,159		4.77	%			786
Other consumer loans	1,507		—		1,507		7.28	%			24
Total	$	469,304	$	14,732	$	484,036	4.66	%			$	6,597

(1) Collateral value at origination

SBA Paycheck Protection Program

Since the launch of PPP, the Company has extended 1,551 SBA PPP loans totaling $133.7 million, net of unamortized deferred fees and costs, as of June 30, 2020. The Company deferred loan origination fees of $5.6 million and direct origination costs of $1.1 million. The Company amortizes these deferred fees and costs without prepayment assumption using the contractual lives of PPP loans. The following table presents a summary of SBA PPP loans as of June 30, 2020:


($ in thousands)	Number of Loans	Carrying Value		Contractual Balance
Loan amount:
$350,000 or less	1,480	$	80,300	$	83,099
Over $350,000 and less than $2,000,000	68	45,021		46,232
$2,000,000 or more	3	8,354		8,427
Total	1,551	$	133,675	$	137,758

Allowance for loan losses

The Company’s methodology for assessing the appropriateness of the allowance for loan losses includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans or loans considered by management to be in a high-risk category. General allowances are established based on a number of factors, including historical loss rates, an assessment of portfolio trends and conditions, accrual status and economic conditions.

For any loan held for investment, a specific allowance may be assigned based on an impairment analysis. Loans are considered impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is based on an analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the estimated market value or the fair value of the underlying collateral. Interest income on impaired loans is accrued as earned, unless the loan is placed on nonaccrual status.

Individual loans considered to be uncollectible are charged off against the allowance for loan losses. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged off are added to the allowance for loan losses. Annualized net charge-offs to average loans held-for-investment were 0.07% and 0.06%, respectively, for the three months ended June 30, 2020 and 2019, and 0.12% and 0.02%, respectively, for the six months ended June 30, 2020 and 2019.

The allowance for loan losses totaled $20.2 million and $14.4 million, respectively, and represented 1.30% and 0.99%, respectively, to loans held-for-investment at June 30, 2020 and December 31, 2019.

The increases in allowance for loan losses to loans held-for-investment was primarily due to risks associated with economic and business conditions as a result of the COVID-19 pandemic, which resulted in an additional provision for loan losses of $4.2 million and $6.8 million, respectively, for the three and six months ended June 30, 2020.

The Company analyzes the loan portfolio, including delinquencies, concentrations, and risk characteristics, at least quarterly in order to assess the overall level of the allowance for loan losses. The Company also relies on internal and external loan review procedures to further assess individual loans and loan pools, and economic data for overall industry and geographic trends.

In determining the allowance and the related provision for loan losses, the Company considers three principal elements: (i) valuation allowances based upon probable incurred losses identified during the review of impaired commercial and industrial, commercial property and construction loans, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and (iii) qualitative factors. Provisions for loan losses are charged to operations to record changes to the allowance for loan losses to a level deemed appropriate.

The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs as of the dates or for the periods indicated:


	As of or For the Three Months Ended June 30,									As of or For the Six Months Ended June 30,
($ in thousands)	2020			2019			2020			2019
Allowance for loan losses:
Balance at beginning of period	$	16,674		$	13,137		$	14,380		$	13,167
Charge-offs:
Real estate	111			17			138			19
Commercial and industrial	241			168			916			168
Other consumer	63			67			139			111
Total charge-offs	415			252			1,193			298
Recoveries on loans previously charged off
Real estate	—			—			56			4
Commercial and industrial	114			33			205			74
Other consumer	20			16			49			72
Total recoveries	134			49			310			150
Net charge-offs	281			203			883			148
Provision (reversal) for loan losses	3,855			394			6,751			309
Balance at end of period	$	20,248		$	13,328		20,248			13,328
Loans held-for-investment:
Balance at end of period	$	1,553,589		$	1,395,557		$	1,553,589		$	1,395,557
Average balance	1,537,414			1,375,537			1,491,274			1,354,946
Ratios:
Annualized net charge-offs to average loans held-for-investment	0.07		%	0.06		%	0.12		%	0.02		%
Allowance for loan losses to loans held-for-investment	1.30		%	0.96		%	1.30		%	0.96		%

Nonperforming Loans and Nonperforming Assets

The following table presents a summary of total non-performing assets as of the dates indicated:


($ in thousands)	June 30, 2020			December 31, 2019			Amount Change		Percentage Change
Nonaccrual loans
Real estate loans:


SBA property	$	1,351		$	442		$	909	205.7	%

Total real estate loans	1,351			442			909		205.7	%
Commercial and industrial loans:

Commercial lines of credit	1,968			1,888			80		4.2	%
SBA commercial term	381			159			222		139.6	%
Total commercial and industrial loans	2,349			2,047			302		14.8	%
Other consumer loans	70			48			22		45.8	%
Total nonaccrual loans	3,770			2,537			1,233		48.6	%
Loans past due 90 days or more still on accrual	696			287			409		142.5	%
Total nonperforming loans	4,466			2,824			1,642		58.1	%
Other real estate owned	376			—			376		—	%
Total nonperforming assets	$	4,842		$	2,824		$	2,018	71.5	%

Nonperforming loans to loans held-for-investment	0.29		%	0.19		%
Nonperforming assets to total assets	0.24		%	0.16		%

The increase in total nonaccrual loans was primarily due to loans placed on nonaccrual status of $1.8 million, partially offset by paydowns and payoffs of $409 thousand and charge-offs of $146 thousand during the six months ended June 30, 2020. Loans are generally placed on nonaccrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection. Past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower experiences changes to their financial condition, causing an inability to meet the original repayment terms, and where management believe the borrower will eventually overcome those circumstances and repay the loan in full. Additional income of approximately $40 thousand and $91 thousand, respectively, would have been recorded during the three and six months ended June 30, 2020, had these loans been paid in accordance with their original terms throughout the periods indicated.

Troubled Debt Restructurings

Loans that the Bank modifies or restructures where the debtor is experiencing financial difficulties and makes a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, reductions in the outstanding loan balances are classified as TDRs. TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition. A workout plan between a borrower and the Bank is designed to provide a bridge for the cash flow shortfalls in the near term. If the borrower works through the near term issues, in most cases, the original contractual terms of the loan will be reinstated. The following table presents the composition of loans that were modified as TDRs by portfolio segment as of the dates indicated:


	June 30, 2020										December 31, 2019
($ in thousands)	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
Real estate loans:
Commercial property	$	337	$	—	$	337	$	339	$	—	$	339

SBA property	282		40		322		294		121		415

Commercial and industrial loans:
Commercial term	26		—		26		28		—		28

SBA commercial term	24		—		24		39		—		39

Total	$	669	$	40	$	709	$	700	$	121	$	821

Deposits

The Bank gathers deposits primarily through its branch locations. The Bank offers a variety of deposit products including demand deposits accounts, NOW and money market accounts, savings accounts and time deposits. The following table presents summary of the Company’s deposit as of the dates indicated:


($ in thousands)	June 30, 2020		December 31, 2019		Amount Change		Percentage Change
Noninterest-bearing demand deposits	$	551,415	$	360,039	$	191,376	53.2	%
Interest-bearing deposits:
Savings	8,258		6,492		1,766		27.2	%
NOW	21,173		17,673		3,500		19.8	%
Retail money market accounts	339,444		307,980		31,464		10.2	%
Brokered money market accounts	10		30,034		(30,024)		(100.0)	%
Retail time deposits of:
$250,000 or less	347,382		405,004		(57,622)		(14.2)	%
More than $250,000	170,180		199,726		(29,546)		(14.8)	%
Time deposits from internet rate service providers	37,068		—		37,068		—	%
Brokered time deposits	82,000		62,359		19,641		31.5	%
Time deposits from California State Treasurer	90,000		90,000		—		—	%
Total interest-bearing deposits	1,095,515		1,119,268		(23,753)		(2.1)	%
Total deposits	$	1,646,930	$	1,479,307	$	167,623	11.3	%

The increase in noninterest-bearing demand deposits was primarily due to the deposit increases from customers with SBA PPP loans as well as the overall liquid deposit market. Deposits held with customers with SBA PPP loans increased $120.0 million to $270.1 million at June 30, 2020 compared with $150.5 million at March 31, 2020. The Company’s deposit customers also received the SBA Economic Injury Disaster Loans of $80.3 million during the three months ended June 30, 2020.

The decrease in retail time deposits was primarily due to matured and closed accounts of $353.1 million, partially offset by new accounts of $49.6 million and renewals of the matured accounts of $208.5 million.

As of June 30, 2020 and December 31, 2019, total deposits were comprised of 33.5% and 24.3%, respectively, of noninterest-bearing demand accounts, 22.4% and 24.5%, respectively, of savings, NOW and money market accounts, and 44.1% and 51.2%, respectively, of time deposits.

Deposits from certain officers, directors and their related interests with which they are associated held by the Company were $4.1 million and $5.4 million, respectively, at June 30, 2020 and December 31, 2019.

The following table presents the maturity of time deposits as of the dates indicated:


($ in thousands)	Three Months or Less		Three to Six Months		Six Months to One Year		One to Three Years		Over Three Years		Total
June 30, 2020
Time deposits less than $100,000	$	46,023	$	66,804	$	60,291	$	7,972	$	1,631	$	182,721
Time deposits of $100,000 through $250,000	78,535		55,224		148,039		1,931		—		283,729
Time deposits of more than $250,000	135,400		33,142		84,333		7,305		—		260,180
Total	$	259,958	$	155,170	$	292,663	$	17,208	$	1,631	$	726,630
December 31, 2019
Time deposits less than $100,000	$	41,456	$	29,899	$	92,695	$	10,165	$	1,557	$	175,772
Time deposits of $100,000 through $250,000	111,182		53,198		121,674		5,537		—		291,591
Time deposits of more than $250,000	167,825		38,740		77,334		5,827		—		289,726
Total	$	320,463	$	121,837	$	291,703	$	21,529	$	1,557	$	757,089

Shareholders’ Equity and Regulatory Capital

Capital Resources

Shareholders’ equity is influenced primarily by earnings, dividends paid on common stock and preferred stock, sales and redemptions of common stock and preferred stock, and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on securities available-for-sale.

Shareholders’ equity was $227.2 million at June 30, 2020, an increase of $399 thousand, or 0.2%, from $226.8 million at December 31, 2019. The increase was primarily due to net income of $6.9 million, a positive fair value change in securities available-for-sale of $2.0 million and cash proceeds from exercise of stock options of $633 thousand, partially offset by repurchase of common stock of $6.5 million and dividends declared on common stock of $3.1 million.

Regulatory Capital Requirements

The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators. The Company is not currently subject to separate minimum capital measurements under the definition of a “Small Bank Holding Company.” At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank.

Federal banking agencies also require a capital conservation buffer of 2.50% in addition to the ratios required to generally be considered “adequately capitalized” under the prompt corrective action (“PCA”) regulations. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for the PCA, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

The following table presents a summary of the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of June 30, 2020 and December 31, 2019. For comparison purpose, the Company’s ratios are included as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.


	PCB Bancorp		Pacific City Bank		Minimum Regulatory Requirements		Well Capitalized Requirements (Bank)
June 30, 2020
Common tier 1 capital (to risk-weighted assets)	15.83	%	15.58	%	4.5	%	6.5	%
Total capital (to risk-weighted assets)	17.09	%	16.83	%	8.0	%	10.0	%
Tier 1 capital (to risk-weighted assets)	15.83	%	15.58	%	6.0	%	8.0	%
Tier 1 capital (to average assets)	11.49	%	11.30	%	4.0	%	5.0	%
December 31, 2019
Common tier 1 capital (to risk-weighted assets)	15.87	%	15.68	%	4.5	%	6.5	%
Total capital (to risk-weighted assets)	16.90	%	16.71	%	8.0	%	10.0	%
Tier 1 capital (to risk-weighted assets)	15.87	%	15.68	%	6.0	%	8.0	%
Tier 1 capital (to average assets)	13.23	%	13.06	%	4.0	%	5.0	%

The Company and the Bank’s capital conservation buffer was 9.09% and 8.83%, respectively, as of June 30, 2020, and 8.90% and 8.71%, respectively, as of December 31, 2019.

Liquidity

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

The Company’s liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in financial institutions, federal funds sold, and unpledged securities available-for-sale. Liquid liabilities may include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market non-core deposits, additional collateralized borrowings such as FHLB advances and Federal Reserve Discount Window, and the issuance of debt securities and preferred or common securities.

The Company’s short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in loan and investment securities portfolios, increases in debt financing and other borrowings, and increases in customer deposits.

Integral to the Company’s liquidity management is the administration of borrowings. To the extent the Company is unable to obtain sufficient liquidity through core deposits, the Company seeks to meet its liquidity needs through wholesale funding or other borrowings on either a short or long-term basis.

The Company had $130.0 million and $20.0 million of outstanding FHLB advances at June 30, 2020 and December 31, 2019, respectively. Based on the values of loans pledged as collateral, the Company had $320.0 million and $404.8 million of additional borrowing capacity with FHLB as of June 30, 2020 and December 31, 2019, respectively. The Company also had $65.0 million and $35.0 million, respectively, of available unused unsecured federal funds lines at June 30, 2020 and December 31, 2019.

In addition, available unused secured borrowing capacity from Federal Reserve Discount Window at June 30, 2020 and December 31, 2019 was $40.3 million and $37.9 million, respectively. Federal Reserve Discount Window was collateralized by loans totaling $48.9 million and $46.1 million as of June 30, 2020 and December 31, 2019, respectively. The Company’s borrowing capacity from the Federal Reserve Discount Window is limited by eligible collateral. The Company also maintains relationships in the capital markets with brokers and dealers to issue time deposits and money market accounts. As of June 30, 2020 and December 31, 2019, total cash and cash equivalents represented 15.2% and 8.4% of total assets, respectively.

During the three months ended June 30, 2020, the Company also transferred securities held-to-maturity of $18.8 million to securities available-for-sale in order to secure additional liquidity on balance sheet. As of June 30, 2020, management was able to maintain strong on-and off-balance sheet liquidity as a result of proactive liquidity management in response to the COVID-19 pandemic.

PCB Bancorp, on a stand-alone holding company basis, must provide for its own liquidity and its main source of funding is dividends from the Bank. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to the holding company. Management believes that these limitations will not impact the Company’s ability to meet its ongoing short- and long-term cash obligations.

Off-Balance Sheet Activities and Contractual Obligations

Off-Balance Sheet Arrangements

The Company has limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on financial condition, results of operations, liquidity, capital expenditures or capital resources.

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company’s financial statements.

The Company’s exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the consolidated financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary is based on management’s credit evaluation of the customer. The following table presents outstanding financial commitments whose contractual amount represents credit risk as of the dates indicated:


($ in thousands)	June 30, 2020		December 31, 2019
Commitments to extend credit	$	194,431	$	171,608
Standby letters of credit	4,300		3,300
Commercial letters of credit	416		292
Total	$	199,147	$	175,200

Contractual Obligations

The following table presents supplemental information regarding total contractual obligations as of the dates indicated:


($ in thousands)	Within One Year		One to Three Years		Three to Five Years		Over Five Years		Total
June 30, 2020
Time deposits	$	707,791	$	17,208	$	1,631	$	—	$	726,630
FHLB advances	120,000		10,000		—		—		130,000
Operating leases	2,517		4,361		1,530		1,085		9,493
Total	$	830,308	$	31,569	$	3,161	$	1,085	$	866,123
December 31, 2019
Time deposits	$	734,003	$	21,529	$	1,557	$	—	$	757,089
FHLB advances	10,000		10,000		—		—		20,000
Operating leases	2,686		4,454		2,375		1,352		10,867
Total	$	746,689	$	35,983	$	3,932	$	1,352	$	787,956

Management believes that the Company will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels. Management expects to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. The Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Market risk represents the risk of loss due to changes in market values of assets and liabilities. Market risk occurs in the normal course of business through exposures to market interest rates, equity prices, and credit spreads.

Overview

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 repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing 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 Company’s Board asset liability committee (“Board ALCO”) establishes broad policy limits with respect to interest rate risk. Board ALCO establishes specific operating guidelines within the parameters of the Board of Directors’ policies. In general, The Company seeks to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Board ALCO meets quarterly to monitor the level of interest rate risk sensitivity to ensure compliance with the Board of Directors’ approved risk limits. As discussed earlier, the Company also has a Management ALCO, which is comprised of the senior management team and Chief Executive Officer, to proactively monitor investment activities.

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 interest-earning assets would reprice upward more quickly than rates paid on interest-bearing liabilities, thus expanding 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 interest-bearing liabilities would reprice upward more quickly than rates earned on interest-earning assets, thus compressing net interest margin.

Measurement

Interest rate risk measurement is calculated and reported to the Board 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.

The Company uses two approaches to model interest rate risk: Net Interest Income at Risk (“NII at Risk”), and Economic Value of Equity (“EVE”). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

The following table presents the projected changes in NII at Risk and EVE that would occur upon an immediate change in interest rates based on independent analysis, but without giving effect to any steps that management might take to counteract that change as of the dates indicated:


	June 30, 2020						December 31, 2019
Simulated Rate Changes	Net Interest Income Sensitivity		Economic Value of Equity Sensitivity		Net Interest Income Sensitivity		Economic Value of Equity Sensitivity
+200	26.4	%	21.4	%	20.3	%	7.7	%
+100	13.3	%	12.0	%	10.4	%	4.7	%
-100	(2.2)	%	(9.1)	%	(11.7)	%	(6.1)	%

Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), as of June 30, 2020 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1 - Legal Proceedings

In the normal course of business, the Company is involved in various legal claims. Management has reviewed all legal claims against the Company with counsel and have taken into consideration the views of such counsel as to the potential outcome of the claims in determining the accrued loss contingency. The Company did not have any accrued loss contingencies for legal claims at June 30, 2020. It is reasonably possible the Company may incur losses in addition to the amounts currently accrued. However, at this time, the Company is unable to estimate the range of additional losses that are reasonably possible because of a number of factors, including the fact that certain of these litigation matters are still in their early stages and involve claims for which, at this point, the Company believes have little to no merit. Management has considered these and other possible loss contingencies and does not expect the amounts to be material to the consolidated financial statements.

Item 1A - Risk Factors

The following risk factors supplement the risks described in the Company’s Form 10-K under Item 1A, “Risk Factors” for its year ended December 31, 2019 filed with the SEC pursuant to the Securities Exchange Act of 1934, as amended. The ongoing COVID-19 pandemic may also have the effect of heightening many of the other risks described in the section entitled “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent filings with the SEC.

Our business, results of operations, and financial condition have been, and will likely continue to be, adversely affected by the ongoing COVID-19 pandemic.

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on recent global economic and market conditions, including significant disruption of, and volatility in, financial markets; global supply chain disruptions; and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment throughout the United States, but also specifically in California, where all of our operations and a large majority of our customers are located.

These conditions have impacted and are expected in the future to impact-our business, results of operations, and financial condition negatively, including through lower revenue from certain of our fee-based businesses; lower net interest income resulting from lower interest rates and increased loan delinquencies; increased provisions for loan losses and unfunded loan commitments; impairments on the securities we hold; and decreased demand for certain of our products and services. Additionally, our liquidity and regulatory capital could be adversely impacted by volatility and disruptions in the capital and credit markets; deposit flows; and continued client draws on lines of credit as well as our participation in the Small Business Administration Paycheck Protection Program. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. Negative impacts from these conditions also may include:

•Collateral securing our loans may decline in value, which could increase credit losses in our loan portfolio and increase the allowance for loan losses.

•Demand for our products and services may decline, and deposit balances may decrease making it difficult to grow assets and income.

•The decline in the target federal funds rate could decrease yields on our assets that exceed the decline in our cost of interest-bearing liabilities, which may reduce our net interest margin.

•The impact of the adoption of the CECL standard, which is highly dependent on unemployment rate forecasts over the life of our loans, could significantly increase the allowance for credit losses and decrease net income.

While governmental authorities have taken unprecedented measures to provide economic assistance to individual households and businesses, stabilize the markets, and support economic growth, the success of these measures is unknown and they may not be sufficient to mitigate fully the negative impact of the ongoing pandemic. Further, some measures, such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on our business, while our participation in other measures could result in reputational harm, litigation, or regulatory and government actions, proceedings, or penalties.

The extent to which the COVID-19 pandemic impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume, particularly in California.

Our Traditional Service Delivery Channels may be Impacted by the COVID-19 Pandemic

In light of the external COVID-19 threat, the Board of Directors and senior management are continuously monitoring the situation, providing frequent communications, and making adjustments and accommodations for both external clients and our employees. For the most part, all branches remain open to serve our customers and local communities, with modified hours and strict social distancing protocols in place as well as limiting our branches to walk-up or drive-up visits. Our customers have been encouraged to utilize branch alternatives such as using our ATMs, online banking, and mobile banking application in lieu of in-branch transactions. In addition, many employees are working remotely and travel as well as face-to-face meeting restrictions are in effect. Further, given the increase of the risk of cyber-security incidents during the pandemic, we have enhanced our cyber-security protocols. If the pandemic worsens, resurges or lasts for an extended period of time, to protect the health of the Company’s workforce and our customers, we may need to enact further precautionary measures to help minimize the risks to our employees and customers, thus potentially altering our service delivery channels and operations over a prolonged period. These changes to our traditional service delivery channels may negatively impact our customers’ experience of banking with us, result in loss of service fees, and increase costs through equipment and services needed to support a remote workforce, and therefore negatively impact our financial condition and results of operation.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities during the three months ended June 30, 2020.

The following table presents share repurchase activities during the three months ended June 30, 2020:

($ in thousands, except per share data)

Total Number of Shares Purchased

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Program

Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program

From April 1, 2020 to April 30, 2020

—

From May 1, 2020 to May 31, 2020

—

From June 1, 2020 to June 30, 2020

—

Total

—

As previously announced, the Board of Directors approved a $6.5 million stock repurchase program to commence upon the opening of the Company’s trading window for the first quarter of 2020 and continue through November 20, 2021. The Company completed the repurchase program in March 2020. The Company repurchased and retired 428,474 shares of common stock at weighted-average repurchase price of $15.14 per share, totaling $6.5 million under this repurchase program.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

As previously disclosed by 8-K filed on May 3, 2019, on April 30, 2019, the FDIC, the CDBO and the Bank entered into a stipulation consenting to the issuance of the Order relating to the Bank’s BSA/AML.

The Order requires, among other things, that the Bank correct all violations found in the prior examination and to improve its process to better identify and monitor accounts and transactions that pose a greater than normal risk for compliance with BSA/AML. The Order also requires the Board of Directors of the Bank to increase its oversight of the Bank’s compliance with BSA/AML rules and regulations. In addition, the Bank is to ensure that the BSA/AML compliance program is managed by a qualified officer with sufficient experience and resources necessary to administer an effective BSA/AML compliance program, and to seek prior FDIC and CDBO non-objection to a change in such officer or the officer in charge of Office of Foreign Assets Control compliance matters, or material changes to their responsibilities. Further, the Order requires that the Bank develop and maintain an effective BSA/AML compliance program, monitoring mechanisms, validation of risk rating and suspicious activity monitoring, and training programs for staff. Further, the Bank must review and enhance its BSA/AML risk assessment and customer due diligence, complete a BSA/AML staffing assessment and conduct a “look back” to more highly scrutinize certain transactions that occurred during a six-month period in 2018 to determine if any suspicious activity requiring reporting went undetected. Finally, the Bank must provide periodic reports of progress to the FDIC and CDBO and provide for independent testing of the overall compliance program to ensure continued compliance, and seek prior FDIC and CDBO non-objection to the establishment of any new branches or other offices, or introduction of new delivery channels, products, services, or lines of business.

The Order will remain in effect until terminated, modified or suspended by the FDIC and CDBO. The Bank’s Management and Board of Directors have expressed their full intention and ability to comply with all parts of the Order. The Bank began taking corrective actions prior to entry of the Order after communicating with the regulators and expects that it will be able to undertake and implement all required actions within the time periods specified in the Order. Subsequent to the Order, the Bank implemented many actions to respond to the requirements of the Order, and submitted all required reports to the FDIC and CDBO. Even though the Company believes that the Bank has addressed the items under the Order, it will take some time to address, to the satisfaction of the regulators, all of the specific issues unique to the Bank’s operation. While management is confident that all provisions of the Order will be complied with over time, compliance with and satisfaction of the Order will be determined in the sole discretion of the FDIC and CDBO.

The Bank will incur additional non-interest expenses associated with the implementation of the required corrective actions; however, both these expenses and the Order are not expected to have a material impact on the results of operations or financial position of the Bank or the Company.

Item 6 - Exhibits

Exhibit Number

Description

Form

File No.

Exhibit

Filing Date

3.1

Articles of Incorporation of PCB Bancorp, as amended

10-Q

001-38621

3.1

August 8, 2019

3.2

Bylaws of PCB Bancorp

8-K

001-38621

3.2

July 2, 2019

4.1

Specimen common stock certificate of PCB Bancorp

10-Q

001-38621

4.1

August 8, 2019

4.2

Description of Capital Stock

10-K

001-38621

4.2

March 9, 2020

10.1

Employment Agreement, dated January 1, 2018, between Pacific City Financial Corporation and Henry Kim

S-1

333-226208

10.1

July 17, 2018

10.2

2013 Equity Based Compensation Plan, as amended

S-1

333-226208

10.2

July 17, 2018

10.3

Form of Stock Option Award Agreement under 2013 Equity Based Compensation Plan

S-1

333-226208

10.3

July 17, 2018

10.4

Form of Restricted Stock Award Agreement under 2013 Equity Based Compensation Plan

S-1

333-226208

10.4

July 17, 2018

10.5

2003 Pacific City Bank Stock Option Plan, as amended

S-1

333-226208

10.5

July 17, 2018

10.6

Form of Stock Option Award Agreement under the 2003 Pacific City Bank Stock Option Plan

S-1

333-226208

10.6

July 17, 2018

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101.INS

XBRL Instance Document*

101.SCH

XBRL Taxonomy Extension Schema Document*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

* Filed herewith

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PCB Bancorp

Date:	August 10, 2020	/s/ Henry Kim
		Henry Kim
		President and Chief Executive Officer (Principal Executive Officer)

Date:	August 10, 2020	/s/ Timothy Chang
		Timothy Chang
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)