pcb-20200930

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 September 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 October 30, 2020, the registrant had outstanding 15,379,538 shares of common stock.

PCB Bancorp and Subsidiary

Quarterly Report on Form 10-Q

September 30, 2020

Table of Contents


Part I - Financial Information

Item 1.	Consolidated Financial Statements	4

	Consolidated Balance Sheets - Septem ber 30, 2020 (Unaudited) and December 31 , 2019	4
	Consolidated Statements of Income (Unaudited) - Three and Nine Months Ended September 30, 2020 and 2019	5
	Consolidated Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended September 3 0, 2020 and 2019	6
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three and Nine Months Ended September 3 0, 2020 and 2019	7
	Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2020 and 2019	9
	Notes to Consolidated Financial Statements (Unaudited)	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	42

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	64

Item 4.	Controls and Procedures	65

Part II - Other Information

Item 1.	Legal Proceedings	66

Item 1A.	Risk Factors	66

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67

Item 3.	Defaults Upon Senior Securities	67

Item 4.	Mine Safety Disclosures	67

Item 5.	Other Information	67

Item 6.	Exhibits	68

Signatures		69

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 and our borrowers' actual payment performance as loan deferrals related to the COVID-19 pandemic expire;

•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 including, but not limited to the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance;

•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 quarters ended March 31, 2020 and June 30, 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)


	September 30, 2020		December 31, 2019
	(Unaudited)
Assets
Cash and due from banks	$	13,572	$	17,808
Interest-bearing deposits in other financial institutions	243,810		128,420
Total cash and cash equivalents	257,382		146,228
Securities available-for-sale, at fair value	128,982		97,566
Securities held-to-maturity, at amortized cost (fair value of $20,480 at December 31, 2019)	—		20,154
Total investment securities	128,982		117,720
Loans held-for-sale	30,878		1,975
Loans held-for-investment, net of deferred loan costs (fees)	1,578,804		1,450,831
Allowance for loan losses	(24,546)		(14,380)
Net loans held-for-investment	1,554,258		1,436,451
Premises and equipment, net	4,355		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	7,454		5,288
Servicing assets	6,166		6,798
Operating lease assets	7,329		8,991
Accrued interest receivable	11,246		5,136
Other assets	4,314		5,636
Total assets	$	2,021,187	$	1,746,328
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	576,086	$	360,039
Savings, NOW and money market accounts	407,790		362,179
Time deposits of $250,000 or less	406,023		467,363
Time deposits of more than $250,000	257,208		289,726
Total deposits	1,647,107		1,479,307
Federal Home Loan Bank advances	130,000		20,000
Operating lease liabilities	8,204		9,990
Accrued interest payable and other liabilities	6,537		10,197
Total liabilities	1,791,848		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; 15,379,538 and 15,707,016 shares issued and outstanding, respectively, and included 30,300 and 37,400 shares of unvested restricted stock, respectively, at September 30, 2020 and December 31, 2019	163,960		169,221
Retained earnings	63,443		57,670
Accumulated other comprehensive income (loss), net	1,936		(57)
Total shareholders’ equity	229,339		226,834
Total liabilities and shareholders’ equity	$	2,021,187	$	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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Interest income:
Interest and fees on loans	$	18,938	$	21,876	$	57,617	$	64,779
Interest on tax-exempt investment securities	37		38		113		115
Interest on investment securities	478		940		1,585		3,018
Interest and dividends on other interest-earning assets	167		833		938		2,757
Total interest income	19,620		23,687		60,253		70,669
Interest expense:
Interest on deposits	2,599		6,060		11,000		17,925
Interest on borrowings	168		98		471		370
Total interest expense	2,767		6,158		11,471		18,295
Net interest income	16,853		17,529		48,782		52,374
Provision (reversal) for loan losses	4,326		(102)		11,077		207
Net interest income after provision for loan losses	12,527		17,631		37,705		52,167
Noninterest income:
Service charges and fees on deposits	280		405		945		1,137
Loan servicing income	856		534		2,312		1,657
Gain on sale of loans	821		1,540		3,044		4,551

Other income	315		323		915		920
Total noninterest income	2,272		2,802		7,216		8,265
Noninterest expense:
Salaries and employee benefits	6,438		6,901		18,750		20,123
Occupancy and equipment	1,416		1,408		4,196		4,128
Professional fees	325		664		1,631		2,108
Marketing and business promotion	193		292		920		1,049
Data processing	373		348		1,097		1,004
Director fees and expenses	125		188		453		562

Regulatory assessments	267		—		728		425

Other expenses	749		976		2,374		2,651
Total noninterest expense	9,886		10,777		30,149		32,050
Income before income taxes	4,913		9,656		14,772		28,382
Income tax expense	1,464		2,871		4,384		8,432
Net income	$	3,449	$	6,785	$	10,388	$	19,950

Earnings per common share, basic	$	0.22	$	0.43	$	0.67	$	1.25
Earnings per common share, diluted	$	0.22	$	0.42	$	0.67	$	1.23

Weighted-average common shares outstanding, basic	15,343,888		15,816,269		15,395,475		15,943,603
Weighted-average common shares outstanding, diluted	15,377,531		16,099,598		15,466,207		16,231,848

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

($ in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Net income	$	3,449	$	6,785	$	10,388	$	19,950
Other comprehensive income (loss):
Unrealized gain (loss) on securities available-for-sale arising during the period	(9)		443		2,045		3,253
Unrealized gain arising from the reclassification of securities held-to-maturity to securities available-for-sale	—		—		787		—
Income tax benefit (expense) related to items of other comprehensive income (loss)	3		(130)		(839)		(955)
Total other comprehensive income (loss), net of tax	(6)		313		1,993		2,298
Total comprehensive income	$	3,443	$	7,098	$	12,381	$	22,248

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 July 1, 2019	15,980,655	$	174,135	$	48,927	$	338	$	223,400


Comprehensive income
Net income	—	—		6,785		—		6,785
Other comprehensive income, net of tax	—	—		—		313		313

Issuance of restricted stock	37,700	—		—		—		—
Repurchase of common stock	(316,518)	(5,130)		—		—		(5,130)
Share-based compensation expense	—	180		—		—		180
Stock options exercised	8,450	39		—		—		39
Cash dividends declared on common stock ($0.06 per share)	—	—		(944)		—		(944)
Balance at September 30, 2019	15,710,287	$	169,224	$	54,768	$	651	$	224,643

Balance at July 1, 2020	15,377,935	$	163,759	$	61,532	$	1,942	$	227,233
Comprehensive income
Net income	—	—		3,449		—		3,449
Other comprehensive loss, net of tax	—	—		—		(6)		(6)

Issuance of restricted stock	900	—		—		—		—
Restricted stock surrendered due to employee tax liability	(165)	(2)		—		—		(2)

Share-based compensation expense	—	200		—		—		200
Stock options exercised	868	3		—		—		3
Cash dividends declared on common stock ($0.10 per share)	—	—		(1,538)		—		(1,538)
Balance at September 30, 2020	15,379,538	$	163,960	$	63,443	$	1,936	$	229,339

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)



		Shareholders’ Equity
	Common Stock Outstanding Shares	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	—	—		19,950		—		19,950
Other comprehensive income, net of tax	—	—		—		2,298		2,298

Issuance of restricted stock	37,700	—		—		—		—
Repurchase of common stock	(374,069)	(6,104)		—		—		(6,104)
Share-based compensation expense	—	503		—		—		503
Stock options exercised	68,902	459		—		—		459
Cash dividends declared on common stock ($0.17 per share)	—	—		(2,706)		—		(2,706)
Balance at September 30, 2019	15,710,287	$	169,224	$	54,768	$	651	$	224,643

Balance at January 1, 2020	15,707,016	$	169,221	$	57,670	$	(57)	$	226,834
Comprehensive income
Net income	—	—		10,388		—		10,388
Other comprehensive income, net of tax	—	—		—		1,993		1,993

Issuance of restricted stock	1,900	—		—		—		—
Restricted stock surrendered due to employee tax liability	(165)	(2)		—		—		(2)
Repurchase of common stock	(428,474)	(6,487)		—		—		(6,487)
Share-based compensation expense	—	592		—		—		592
Stock options exercised	99,261	636		—		—		636
Cash dividends declared on common stock $0.30 per share)	—	—		(4,615)		—		(4,615)
Balance at September 30, 2020	15,379,538	$	163,960	$	63,443	$	1,936	$	229,339

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

($ in thousands)


	Nine Months Ended September 30,
	2020		2019
Cash flows from operating activities
Net income	$	10,388	$	19,950
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of premises and equipment	1,118		1,152
Net amortization of premiums on securities	656		641
Net accretion of discounts on loans	(2,301)		(3,083)
Net accretion of deferred loan costs (fees)	(1,988)		(327)
Amortization of servicing assets	1,385		1,875
Provision for loan losses	11,077		207
Deferred tax benefit	(3,005)		(967)
Stock-based compensation	592		503

Gain on sale of loans	(3,044)		(4,551)



Originations of loans held-for-sale	(100,507)		(75,023)
Proceeds from sales of and principal collected on loans held-for-sale	75,389		84,943
Change in accrued interest receivable and other assets	(4,911)		840
Change in accrued interest payable and other liabilities	(3,944)		(326)
Net cash provided by (used in) operating activities	(19,095)		25,834
Cash flows from investing activities
Purchase of securities available-for-sale	(36,640)		(6,247)
Proceeds from maturities, calls, and paydowns of securities available-for-sale	26,245		21,365
Purchase of securities held-to-maturity	—		(2,150)
Proceeds from maturities and paydowns of securities held-to-maturity	1,309		2,192
Proceeds from sale of loans held-for-sale previously classified as held-for-investment	664		826
Net change in loans held-for-investment	(129,337)		(50,280)
Purchase of loans held-for-investment	—		(893)
Purchase of Federal Home Loan Bank stock	(102)		(912)
Proceeds from sale of other real estate owned	2,490		321
Purchases of premises and equipment	(1,714)		(575)
Net cash used in investing activities	(137,085)		(36,353)
Cash flows from financing activities
Net change in deposits	167,800		(11,491)

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	636		459

Repurchase of common stock	(6,487)		(6,104)
Cash dividends paid on common stock	(4,615)		(2,706)
Net cash provided by (used in) financing activities	267,334		(29,842)
Net increase (decrease) in cash and cash equivalents	111,154		(40,361)
Cash and cash equivalents at beginning of period	146,228		162,273
Cash and cash equivalents at end of period	$	257,382	$	121,912

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows, Continued (Unaudited)

(in thousands)


	Nine Months Ended September 30,
	2020		2019
Supplemental disclosures of cash flow information:
Interest paid	$	14,849	$	19,018
Income taxes paid	6,621		9,410
Supplemental disclosures of non-cash investment activities:
Loans transferred to loans held-for-sale	$	1,355	$	824
Loans transferred to other real estate owned	2,544		50
Reclassification of securities held-to-maturity to securities available-for-sale	18,777		—
Right of use assets obtained in exchange for lease obligations	105		1,616

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 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 9 loan production offices (“LPOs”) in Irvine, Artesia and Los Angeles, California; Annandale, Virginia; Chicago, Illinois; 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 nine months ended September 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 September 30, 2020 and December 31, 2019 and for the three and nine months ended September 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 or 60 days after the end of the national emergency, may be subject to temporary suspension if the modifications were made in good faith in response to the COVID-19 pandemic to borrowers whose loan status were no more than 30 days past due as of December 31, 2019, and the modifications were related to arrangements that defer or delay the payments of principal or interest, or change the interest rate on the loan.

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.

As of September 30, 2020, the Company’s loans under modified terms related to the COVID-19 pandemic, including payment deferments and interest only payments, totaled $171.6 million. All of these loans under modified terms related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs. All types of modifications have initial modification terms of 6-months or less.

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 response to the COVID-19 pandemic. SBA will forgive loans if all employee retention criteria are met and the funds are used for eligible expenses. As of September 30, 2020, the Company had 1,614 SBA PPP loans totaling $136.4 million, net of unamortized deferred fees and costs. The Company deferred loan origination fees of $5.7 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 losses evaluation and determined that it is not required to reserve an allowance on SBA PPP loans at September 30, 2020.

Adopted Accounting Pronouncements

During the nine months ended September 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
September 30, 2020
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	79,771	$	—	$	79,771
Residential collateralized mortgage obligations	—		30,673		—		30,673
SBA loan pool securities	—		12,707		—		12,707
Municipal bonds	—		5,831		—		5,831
Total securities available-for-sale	—		128,982		—		128,982
Total assets measured at fair value on a recurring basis	$	—	$	128,982	$	—	$	128,982
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
September 30, 2020
Impaired loans:
SBA property	$	—	$	—	$	251	$	251
Commercial lines of credit	—		—		1,120		1,120
SBA commercial term	—		—		12		12
Total impaired loans	—		—		1,383		1,383


Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	1,383	$	1,383
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)

September 30, 2020

Impaired loans:

SBA property

251

Fair value of collateral

Commercial lines of credit

1,120

Sales comparison approach

Adjustment for differences between the comparable estate sales

-10% to 13% (2.1%)

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 September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Collateral dependent impaired loans:

SBA property	$	(9)	$	—	$	(147)	$	(20)
Commercial lines of credit	(79)		—		(799)		—
SBA commercial term	—		—		(164)		—


Other real estate owned	—		(18)		—		(18)
Net losses recognized	$	(88)	$	(18)	$	(1,110)	$	(38)

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
September 30, 2020
Financial assets:
Interest-bearing deposits in other financial institutions	$	243,810	$	243,810	$	243,810	$	—	$	—
Securities available-for-sale	128,982		128,982		—		128,982		—

Loans held-for-sale	30,878		33,770		—		33,770		—
Net loans held-for-investment	1,554,258		1,568,235		—		—		1,568,235
FHLB and other restricted stock	8,447		N/A		N/A		N/A		N/A
Accrued interest receivable	11,246		11,246		4		314		10,928
Financial liabilities:
Deposits	$	1,647,107	$	1,653,614	$	—	$	—	$	1,653,614
FHLB advances	130,000		130,406		—		130,406		—
Accrued interest payable	2,626		2,626		—		2		2,624
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
September 30, 2020
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	78,289	$	1,504	$	(22)	$	79,771
Residential collateralized mortgage obligations	30,430		312		(69)		30,673
SBA loan pool securities	12,335		395		(23)		12,707
Municipal bonds	5,381		450		—		5,831
Total securities available-for-sale	$	126,435	$	2,661	$	(114)	$	128,982




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 September 30, 2020 and December 31, 2019, pledged securities were $100.3 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 September 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	$	—	$	—
One to five years	2,200		2,303
Five to ten years	849		887
Greater than ten years	2,332		2,641
Residential mortgage-backed securities, residential collateralized mortgage obligations and SBA loan pool securities	121,054		123,151
Total	$	126,435	$	128,982

The following table presents proceeds from sales and calls of securities available-for-sale and the associated gross gains and

losses realized through earnings upon the sales and calls of securities available-for-sale for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Gross realized gains on sales and calls of securities available-for-sale	$	—	$	—	$	—	$	—
Gross realized losses on sales and calls of securities available-for-sale	—		—		—		—
Net realized gains (losses) on sales and calls of securities available-for-sale	$	—	$	—	$	—	$	—
Proceeds from sales and calls of securities available-for-sale	$	185	$	—	$	185	$	—
Tax expense on sales and calls of securities available-for-sale	$	—	$	—	$	—	$	—

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
September 30, 2020
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	9,610	$	(22)	4	$	—	$	—	—	$	9,610	$	(22)	4
Residential collateralized mortgage obligations	5,100		(7)		5	7,691		(62)		7	12,791		(69)		12
SBA loan pool securities	2,107		(6)		3	1,718		(17)		3	3,825		(23)		6

Total securities available-for-sale	$	16,817	$	(35)	12	$	9,409	$	(79)	10	$	26,226	$	(114)	22




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 September 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 September 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 nine months ended September 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)	September 30, 2020		December 31, 2019
Real estate loans:
Commercial property	$	853,708	$	803,014
Residential property	212,804		235,046
SBA property	128,038		129,837
Construction	19,803		19,164
Total real estate loans	1,214,353		1,187,061
Commercial and industrial loans:
Commercial term	90,867		103,380
Commercial lines of credit	92,222		111,768
SBA commercial term	23,011		25,332
SBA PPP	136,418		—
Total commercial and industrial loans	342,518		240,480
Other consumer loans	21,933		23,290
Loans held-for-investment	1,578,804		1,450,831
Allowance for loan losses	(24,546)		(14,380)
Net loans held-for-investment	$	1,554,258	$	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 September 30, 2020 and December 31, 2019, the Company had $3.9 million and $3.8 million, respectively, of such loans outstanding.

SBA PPP loans

The following table presents a summary of SBA PPP loans as of September 30, 2020:


($ in thousands)	Number of Loans	Amount
Loan amount:
$50,000 or less	1,043	$	21,551
Over $50,000 and less than $350,000	499	60,679
Over $350,000 and less than $2,000,000	69	45,813
$2,000,000 or more	3	8,375
Total	1,614	$	136,418

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 were accounted for under section 4013 of the CARES Act and, therefore, the modified loans were not considered TDRs as of September 30, 2020. All types of modifications have initial modification terms of 6-months or less. At September 30, 2020, all loans under modified terms related to the COVID-19 had remaining modification terms of 4-months or less. The following table presents a summary of loans under modified terms related to the COVID-19 pandemic by portfolio segment as of September 30, 2020:


	Modification Type
($ in thousands)	Payment Deferment		Interest Only Payment		Total
September 30, 2020
Real estate loans:
Commercial property	$	135,165	$	2,397	$	137,562
Residential property	19,233		—		19,233


Commercial and industrial loans:
Commercial term	11,797		2,960		14,757

SBA commercial term	—		72		72

Total	$	166,195	$	5,429	$	171,624

The Company had loans under modified terms related to the COVID-19 pandemic of $171.6 million and $484.0 million at September 30, 2020 and June 30, 2020, respectively. The decrease was primarily due to expirations of modifications of $220.5 million, early terminations of modifications of $106.7 million, partially offset by subsequent modifications of $19.8 million and new modifications of $1.9 million during the three months ended September 30, 2020.

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 $4.3 million and $11.1 million for the three and nine months ended September 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 September 30, 2020 and 2019:



($ in thousands)	Real Estate		Commercial and Industrial		Other Consumer		Total
Balance at July 1, 2020	$	15,545	$	4,337	$	366	$	20,248
Charge-offs	—		—		(102)		(102)
Recoveries on loans previously charged off	—		18		56		74
Provision (reversal) for loan losses	2,556		1,686		84		4,326
Balance at September 30, 2020	$	18,101	$	6,041	$	404	$	24,546

Balance at July 1, 2019	$	9,711	$	3,426	$	191	$	13,328
Charge-offs	—		(179)		(47)		(226)
Recoveries on loans previously charged off	—		38		56		94
Provision (reversal) for loan losses	(33)		(6)		(63)		(102)
Balance at September 30, 2019	$	9,678	$	3,279	$	137	$	13,094



($ 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)		(241)		(1,295)
Recoveries on loans previously charged off	56		223		105		384
Provision for loan losses	8,329		2,380		368		11,077
Balance at September 30, 2020	$	18,101	$	6,041	$	404	$	24,546

Balance at January 1, 2019	$	9,104	$	3,877	$	186	$	13,167
Charge-offs	(19)		(347)		(158)		(524)
Recoveries on loans previously charged off	4		112		128		244
Provision (reversal) for loan losses	589		(363)		(19)		207
Balance at September 30, 2019	$	9,678	$	3,279	$	137	$	13,094

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
September 30, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	9	$	79	$	—	$	88
Collectively evaluated for impairment	18,092		5,962		404		24,458
Total	$	18,101	$	6,041	$	404	$	24,546
Loans receivable:
Individually evaluated for impairment	$	1,535	$	1,940	$	—	$	3,475
Collectively evaluated for impairment	1,212,818		340,578		21,933		1,575,329
Total	$	1,214,353	$	342,518	$	21,933	$	1,578,804
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
September 30, 2020
Real estate loans:
Commercial property	$	852,325	$	1,048	$	335	$	—	$	853,708
Residential property	212,804		—		—		—		212,804
SBA property	125,497		—		2,541		—		128,038
Construction	19,803		—		—		—		19,803
Commercial and industrial loans:
Commercial term	87,241		3,626		—		—		90,867
Commercial lines of credit	90,697		—		1,525		—		92,222
SBA commercial term	22,547		72		392		—		23,011
SBA PPP	136,418		—		—		—		136,418
Other consumer loans	21,866		—		67		—		21,933
Total	$	1,569,198	$	4,746	$	4,860	$	—	$	1,578,804
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 $114 thousand and $2.4 million of guaranteed portion by the U.S. government agency at September 30, 2020 and December 31, 2019, respectively.

The following table presents the risk categories for the recorded investment in loans under modified terms related to the COVID-19 pandemic by portfolio segment as of the date indicated:


($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2020
Real estate loans:
Commercial property	$	137,219	$	343	$	—	$	—	$	137,562
Residential property	19,233		—		—		—		19,233


Commercial and industrial loans:
Commercial term	11,131		3,626		—		—		14,757

SBA commercial term	—		72		—		—		72


Total	$	167,583	$	4,041	$	—	$	—	$	171,624

Loans that are granted modifications related to the COVID-19 pandemic in excess of 6 months, on a cumulative basis, are classified as special mention.

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
September 30, 2020
Real estate loans:

Residential property	$	189	$	—	$	699	$	—	$	888
SBA property	—		—		—		923		923

Commercial and industrial loans:

Commercial lines of credit	—		—		—		1,525		1,525
SBA commercial term	—		—		—		378		378
Other consumer loans	108		3		—		67		178
Total	$	298	$	3	$	699	$	2,893	$	3,893
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 September 30, 2020 and December 31, 2019.

All loans under modified terms related to the COVID-19 pandemic were on accrual status and current at September 30, 2020.

The Company had a residential property loan past due 90 days or more and still accruing at September 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 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
September 30, 2020
Real estate loans:
Commercial property	$	335	$	334	$	—	$	—	$	—

SBA property	977		1,071		223		221		9

Commercial and industrial loans:
Commercial term	22		22		—		—		—
Commercial lines of credit	1,231		1,231		294		294		79
SBA commercial term	393		417		—		—		—

Total	$	2,958	$	3,075	$	517	$	515	$	88
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 September 30, 2020 and 2019:


	Three Months Ended September 30,
	2020				2019
($ in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Real estate loans:
Commercial property	$	336	$	6	$	341	$	6

SBA property	1,203		4		1,896		5

Commercial and industrial loans:
Commercial term	24		—		43		1
Commercial lines of credit	1,747		—		327		—
SBA commercial term	395		—		105		1

Total	$	3,705	$	10	$	2,712	$	13

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


	Nine Months Ended September 30,
	2020				2019
($ in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Real estate loans:
Commercial property	$	337	$	17	$	114	$	6
Residential property	—		—		50		—
SBA property	1,554		13		1,637		17

Commercial and industrial loans:
Commercial term	25		1		52		3
Commercial lines of credit	2,085		—		109		—
SBA commercial term	451		1		135		3

Total	$	4,452	$	32	$	2,097	$	29

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


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Interest income that would have been recognized had impaired loans performed in accordance with their original terms	$	53	$	49	$	198	$	113
Less: interest income recognized on impaired loans on a cash basis	(10)		(13)		(32)		(29)
Interest income foregone on impaired loans	$	43	$	36	$	166	$	84

Troubled Debt Restructurings

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


	September 30, 2020						December 31, 2019
($ in thousands)	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
Real estate loans:
Commercial property	$	335	$	—	$	335	$	339	$	—	$	339

SBA property	277		38		315		294		121		415

Commercial and industrial loans:
Commercial term	22		—		22		28		—		28

SBA commercial term	15		—		15		39		—		39

Total	$	649	$	38	$	687	$	700	$	121	$	821

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


	Three Months Ended September 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:
Commercial property	—	$	—	$	—	1	$	341	$	341

SBA property (1)	—	—		—		1	123		123






Total	—	$	—	$	—	2	$	464	$	464

(1) Modified by deferral of principal payment.

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


	Nine Months Ended September 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:
Commercial property	—	$	—	$	—	1	$	341	$	341

SBA property (1)	—	—		—		2	254		254

Commercial and industrial loans:


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

Total	2	$	37	$	37	3	$	595	$	595

(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 September 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 September 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 September 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 nine months ended September 30, 2020 and 2019:


	Nine Months Ended September 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 September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Real estate loans:

Residential property	$	—	$	522	$	1,125	$	824


Commercial and industrial loans:


SBA commercial term	—		—		230		—

Total	$	—	$	522	$	1,355	$	824

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


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

Residential property	$	—	$	—	$	697	$	—







Total	$	—	$	—	$	697	$	—

The Company had no purchases of loans held-for-investment during the three and nine months ended September 30, 2020. The Company purchased residential property loans of $893 thousand during the three and nine months ended September 30, 2019.

The Company had no sales of loans held-for-investment during the three and nine months ended September 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)	September 30, 2020		December 31, 2019
Real estate loans:

Residential property	$	4,047	$	760
SBA property	24,197		150

Commercial and industrial loans:


SBA commercial term	2,634		1,065

Total	$	30,878	$	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 September 30, 2020 and December 31, 2019, total servicing assets were $6.2 million and $6.8 million, respectively. The Company sold loans of $8.6 million and $22.2 million, respectively, with the servicing rights retained and recognized a net gain on sale of $689 thousand and $1.5 million, respectively, during the three months ended September 30, 2020 and 2019. During the nine months ended September 30, 2020 and 2019, the Company sold loans of $47.1 million and $72.5 million, respectively, with the servicing rights retained and recognized a net gain on sale of $2.8 million and $4.5 million, respectively. Loan servicing income was $856 thousand and $534 thousand, respectively, for the three months ended September 30, 2020 and 2019, and $2.3 million and $1.7 million, respectively, for the nine months ended September 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:


	September 30, 2020									December 31, 2019
($ in thousands)	Residential Property			SBA Property			SBA Commercial Term			Residential Property			SBA Property			SBA Commercial Term
Carrying amount	$	117		$	5,374		$	675		$	171		$	5,805		$	822
Fair value	$	140		$	7,890		$	942		$	200		$	6,693		$	976
Discount rate	11.25		%	13.25		%	12.75		%	11.25		%	13.25		%	12.75		%
Prepayment speed	27.60		%	10.78		%	10.70		%	26.60		%	16.28		%	16.03		%
Weighted average remaining life	23.4 years			21.1 years			6.8 years			24.2 years			21.3 years			7.0 years
Underlying loans being serviced	$	23,618		$	384,356		$	76,677		$	32,428		$	384,007		$	82,181

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


	Three Months Ended September 30,
	2020						2019
($ in thousands)	Residential Property		SBA Property		SBA Commercial Term		Residential Property		SBA Property		SBA Commercial Term
Balance at beginning of period	$	125	$	5,554	$	720	$	204	$	6,094	$	932
Additions	—		140		16		—		292		39
Amortization	(8)		(320)		(61)		(15)		(538)		(109)

Balance at end of period	$	117	$	5,374	$	675	$	189	$	5,848	$	862

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


	Nine Months Ended September 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	—		653		100		—		962		146
Amortization	(54)		(1,084)		(247)		(55)		(1,463)		(357)

Balance at end of period	$	117	$	5,374	$	675	$	189	$	5,848	$	862

Note 6 - Other Real Estate Owned

The following table presents activity in OREO for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Balance at beginning of period	$	376	$	395	$	—	$	—
Additions	2,490		—		2,866		395
Sales	(2,490)		(329)		(2,490)		(329)
Net change in valuation allowance	—		(66)		—		(66)
Balance at end of period	$	376	$	—	$	376	$	—

The following table presents activity in OREO valuation allowance for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Balance at beginning of period	$	—	$	—	$	—	$	—
Additions	—		66		—		66
Net direct write-downs and removal from sale	—		(66)		—		(66)
Balance at end of period	$	—	$	—	$	—	$	—

The following table presents expenses related to OREOs for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Net (gain) loss on sales	$	—	$	—	$	—	$	1
Operating expenses, net of rental income	2		—		2		—
Total	$	2	$	—	$	2	$	1

The Company provided a loan of $1.5 million to finance the sale of its OREO property during the three and nine months ended September 30, 2020. The Company did not provide loans to finance the sale of its OREO property during the three and nine months ended September 30, 2019.

Note 7 - 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 September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Operating lease cost (1)	$	669	$	680	$	1,985	$	1,953
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	680	$	693	2,107		2,012
Right of use assets obtained in exchange for lease obligations	$	51	$	28	105		1,616

(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)	September 30, 2020			December 31, 2019
Operating leases:
Operating lease assets	$	7,329		$	8,991
Operating lease liabilities	$	8,204		$	9,990
Weighted-average remaining lease term	4.4 years			5.0 years
Weighted-average discount rate	2.80		%	2.81		%

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


($ in thousands)	September 30, 2020
Maturities:
2020	$	641
2021	2,330
2022	2,171
2023	1,828
2024	547
After 2024	1,352
Total lease payment	8,869
Imputed Interest	(665)
Present value of operating lease liabilities	$	8,204

Note 8 - 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 September 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 September 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 September 30, 2020 and December 31, 2019, loans pledged to secure borrowings from the FHLB were $609.4 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 September 30, 2020 and December 31, 2019. The Company had additional borrowing capacity of $321.1 million and $404.8 million, respectively, from the FHLB as of September 30, 2020 and December 31, 2019.

Other Borrowing Arrangements

At September 30, 2020, the Company had $33.8 million of unused borrowing capacity from the Federal Reserve Discount Window, to which the Company pledged loans with a carrying value of $41.8 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 September 30, 2020.

Note 9 - 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 10 - 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 September 30, 2020, there were 542,454 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 September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Share-based compensation expense related to:
Stock options	$	162	$	158	$	478	$	481
Restricted stock awards	38		22		114		22
Total share-based compensation expense	$	200	$	180	$	592	$	503
Related tax benefits	$	21	$	11	$	61	$	33

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

($ in thousands)

Unrecognized Expense

Weighted-Average Remaining Expected Recognition Period

Unrecognized share-based compensation expense related to:

Stock options

485

2.2 years

Restricted stock awards

475

3.3 years

Total unrecognized share-based compensation expense

960

2.8 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 September 30, 2020:


	Three Months Ended September 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	726,143	$	10.84	5.6 years	$	—

Exercised	(868)	$	3.38	3.8 years

Outstanding at end of period	725,275	$	10.85	5.3 years	$	—
Exercisable at end of period	505,098	$	9.79	4.8 years	$	—

The following table represents stock option activity for the nine months ended September 30, 2020:


	Nine Months Ended September 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	5.8 years	$	5,776

Exercised	(99,261)	$	6.41	3.2 years
Forfeited	(4,840)	$	10.33	5.6 years
Outstanding at end of period	725,275	$	10.85	5.3 years	$	—
Exercisable at end of period	505,098	$	9.79	4.8 years	$	—

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


	Three Months Ended September 30, 2020			Nine Months Ended September 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

Vested	(4,000)	$	14.00	(21,300)	$	14.38
Forfeited	—	$	—	(4,840)	$	10.33
Outstanding at end of period	220,177	$	13.27	220,177	$	13.27

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 nine months ended September 30, 2020:


	Three Months Ended September 30, 2020			Nine Months Ended September 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	900	$	9.33	1,900	$	11.64
Vested	(9,000)	$	16.69	(9,000)	$	16.69

Outstanding at end of period	30,300	$	16.27	30,300	$	16.27

Note 11 - Income Taxes

Income tax expense was $1.5 million and $2.9 million, respectively, and the effective tax rate was 29.8% and 29.7%, respectively, for the three months ended September 30, 2020 and 2019. For the nine months ended September 30, 2020 and 2019, income tax expense was $4.4 million and $8.4 million, respectively, and the effective tax rate was 29.7% and 29.7%, respectively.

At September 30, 2020 and December 31, 2019, the Company had no unrecognized tax benefits or accrued interest. At September 30, 2020, the Company had penalties of $4 thousand due to underpayments of estimated state taxes for 2019. The Company had no penalties at December 31, 2019.

The Company and its subsidiaries are subject to U.S. federal and various state jurisdictions income tax examinations. As of September 30, 2020, the Company is no longer subject to examination by taxing authorities for tax years before 2017 for federal taxes and before 2016 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 12 - Earnings Per Share

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


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands, except per share)	2020		2019		2020		2019
Basic earnings per share:
Net income	$	3,449	$	6,785	$	10,388	$	19,950
Less: income allocated to unvested restricted stock	(8)		(8)		(25)		(8)
Net income allocated to common stock	$	3,441	$	6,777	$	10,363	$	19,942
Weighted-average total common shares outstanding	15,378,374		15,835,139		15,432,353		15,949,962
Less: weighted-average unvested restricted stock	(34,486)		(18,870)		(36,878)		(6,359)
Weighted-average common shares outstanding, basic	15,343,888		15,816,269		15,395,475		15,943,603
Basic earnings per share	$	0.22	$	0.43	$	0.67	$	1.25
Diluted earnings per share:
Net income allocated to common stock	$	3,441	$	6,777	$	10,363	$	19,942
Weighted-average common shares outstanding, basic	15,343,888		15,816,269		15,395,475		15,943,603
Diluted effect of stock options	33,643		283,329		70,732		288,245
Weighted-average common shares outstanding, diluted	15,377,531		16,099,598		15,466,207		16,231,848
Diluted earnings per share	$	0.22	$	0.42	$	0.67	$	1.23

There were 660,859 and 163,000 stock options were excluded in computing diluted EPS because they were anti-dilutive for three and nine months ended September 30, 2020, respectively. For three and nine months ended September 30, 2019, there were 155,000 and 163,000 stock options excluded in computing diluted EPS because they were anti-dilutive, respectively.

Note 13 - 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 September 30, 2020 and December 31, 2019, the Company had the following outstanding financial commitments whose contractual amount represents credit risk:


($ in thousands)	September 30, 2020		December 31, 2019
Commitments to extend credit	$	207,142	$	171,608
Standby letters of credit	4,584		3,300
Commercial letters of credit	309		292
Total	$	212,035	$	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 $267 thousand and $301 thousand, respectively, at September 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 14 - 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 September 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 8.86% and 8.60%, respectively, as of September 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
September 30, 2020
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	$	226,728	15.60	%	$	65,404	4.5	%	N/A		N/A
Total capital (to risk-weighted assets)	244,978		16.86	%	116,274		8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	226,728		15.60	%	87,206		6.0	%	N/A		N/A
Tier 1 capital (to average assets)	226,728		11.40	%	79,532		4.0	%	N/A		N/A
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	$	222,960	15.34	%	$	65,401	4.5	%	$	94,468	6.5	%
Total capital (to risk-weighted assets)	241,209		16.60	%	116,269		8.0	%	145,336		10.0	%
Tier 1 capital (to risk-weighted assets)	222,960		15.34	%	87,202		6.0	%	116,269		8.0	%
Tier 1 capital (to average assets)	222,960		11.21	%	79,529		4.0	%	99,412		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 Financial Protection and Innovation (the “CDFPI”) 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 CDFPI and the Bank entered into a stipulation consenting to the issuance of a consent order (the “Order”) relating to the Bank’s BSA/AML. 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 CDFPI. On September 30, 2020, the FDIC and CDFPI terminated the Order upon the Bank’s satisfaction of the terms and requirements of the Order to their satisfaction.

Note 15 - 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 September 30,				Nine Months Ended September 30,
($ in thousands)	2020		2019		2020		2019
Noninterest income in-scope of Topic 606
Service charges and fees on deposits:
Monthly service fees	$	19	$	27	$	68	$	84
Account analysis fees	206		252		634		721
Non-sufficient funds charges	39		102		181		261
Other deposit related fees	16		24		62		71
Total service charges and fees on deposits	280		405		945		1,137
Debit card fees	67		70		185		203
Loss on sale of other real estate owned	—		(1)		—		(1)
Wire transfer fees	137		135		391		370
Other service charges	47		58		139		166
Total	$	531	$	667	$	1,660	$	1,875

Note 16 - Subsequent Events

Dividend Declared on Common Stock. On October 22, 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 November 13, 2020, to shareholders of record as of the close of business on November 4, 2020.

The Company has evaluated the effects of events that have occurred subsequent to September 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 nine months ended September 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 September 30,				As of or For the Nine Months Ended September 30,
($ in thousands, except per share data)	2020		2019		2020		2019
Selected balance sheet data:
Cash and cash equivalents	$	257,382	$	121,912	$	257,382	$	121,912
Securities available-for-sale	128,982		134,602		128,982		134,602
Securities held-to-maturity	—		21,601		—		21,601
Loans held-for-sale	30,878		1,583		30,878		1,583
Loans held-for-investment, net of deferred loan costs (fees)	1,578,804		1,389,830		1,578,804		1,389,830
Allowance for loan losses	(24,546)		(13,094)		(24,546)		(13,094)
Total assets	2,021,187		1,699,446		2,021,187		1,699,446
Total deposits	1,647,107		1,432,262		1,647,107		1,432,262
Shareholders’ equity	229,339		224,643		229,339		224,643
Selected income statement data:
Interest income	$	19,620	$	23,687	$	60,253	$	70,669
Interest expense	2,767		6,158		11,471		18,295
Net interest income	16,853		17,529		48,782		52,374
Provision for loan losses	4,326		(102)		11,077		207
Noninterest income	2,272		2,802		7,216		8,265
Noninterest expense	9,886		10,777		30,149		32,050
Income before income taxes	4,913		9,656		14,772		28,382
Income tax expense	1,464		2,871		4,384		8,432
Net income	3,449		6,785		10,388		19,950
Per share data:
Earnings per common share, basic	$	0.22	$	0.43	$	0.67	$	1.25
Earnings per common share, diluted	0.22		0.42		0.67		1.23
Book value per common share (1)	14.91		14.30		14.91		14.30
Cash dividends declared per common share	0.10		0.06		0.30		0.17


	As of or For the Three Months Ended September 30,						As of or For the Nine Months Ended September 30,
($ in thousands, except per share data)	2020			2019			2020			2019
Outstanding share data:
Number of common shares outstanding	15,379,538			15,710,287			15,379,538			15,710,287
Weighted-average common shares outstanding, basic	15,343,888			15,816,269			15,395,475			15,943,603
Weighted-average common shares outstanding, diluted	15,377,531			16,099,598			15,466,207			16,231,848
Selected performance ratios:
Return on average assets (2)	0.69		%	1.55		%	0.73		%	1.55		%
Return on average shareholders' equity (2)	5.98		%	12.02		%	6.10		%	12.15		%
Dividend payout ratio (3)	45.45		%	13.95		%	44.78		%	13.60		%
Efficiency ratio (4)	51.69		%	53.01		%	53.84		%	52.85		%
Yield on average interest-earning assets (2)	4.00		%	5.55		%	4.31		%	5.62		%
Cost of average interest-bearing liabilities (2)	0.92		%	2.13		%	1.28		%	2.12		%
Net interest spread (2)	3.08		%	3.42		%	3.03		%	3.50		%
Net interest margin (2), (5)	3.43		%	4.11		%	3.49		%	4.16		%
Total loans to total deposits ratio (6)	97.73		%	97.15		%	97.73		%	97.15		%
Asset quality:
Loans 30 to 89 days past due and still accruing	$	301		$	723		$	301		$	723

Nonperforming loans (7)	3,592			1,843			3,592			1,843
Nonperforming assets (8)	3,968			1,843			3,968			1,843
Net charge-offs	28			132			911			280
Loans 30 to 89 days past due and still accruing to loans held-for-investment	0.02		%	0.05		%	0.02		%	0.05		%


Nonperforming loans to loans held-for-investment	0.23		%	0.13		%	0.23		%	0.13		%
Nonperforming loans to allowance for loan losses	14.63		%	14.08		%	14.63		%	14.08		%
Nonperforming assets to total assets	0.20		%	0.11		%	0.20		%	0.11		%
Allowance for loan losses to loans held-for-investment	1.55		%	0.94		%	1.55		%	0.94		%

Allowance for loan losses to nonperforming loans	683.35		%	710.47		%	683.35		%	710.47		%
Net charge-offs to average loans held-for-investment (2)	0.01		%	0.04		%	0.08		%	0.03		%
Capital ratios:
Shareholders’ equity to total assets	11.35		%	13.22		%	11.35		%	13.22		%
Average equity to average assets	11.52		%	12.91		%	11.92		%	12.75		%
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	15.60		%	16.30		%	15.60		%	16.30		%
Total capital (to risk-weighted assets)	16.86		%	17.27		%	16.86		%	17.27		%
Tier 1 capital (to risk-weighted assets)	15.60		%	16.30		%	15.60		%	16.30		%
Tier 1 capital (to average assets)	11.40		%	12.87		%	11.40		%	12.87		%
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	15.34		%	16.11		%	15.34		%	16.11		%
Total capital (to risk-weighted assets)	16.60		%	17.08		%	16.60		%	17.08		%
Tier 1 capital (to risk-weighted assets)	15.34		%	16.11		%	15.34		%	16.11		%
Tier 1 capital (to average assets)	11.21		%	12.72		%	11.21		%	12.72		%

(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. SBA PPP loans totaled $136.4 million (1,614 loans) and loans under modified terms related to the COVID-19 pandemic totaled $171.6 million (154 loan customers) as of September 30, 2020.

In addition, the Company has been monitoring its liquidity and capital closely. As of September 30, 2020, the Company maintained $257.4 million, or 12.7% of total assets, of cash and cash equivalents and $419.9 million, or 20.8% of total assets, of available borrowing capacity. All regulatory capital ratios were also well above the regulatory well capitalized requirements as of September 30, 2020, while establishing additional allowance for loan losses of $4.3 million and $11.1 million, respectively, for the three and nine months ended September 30, 2020 for the increase in risks associated with economic and business conditions as a result of the COVID-19 pandemic.

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.

Q3 2020 Financial Highlights

•Net income was $3.4 million for the three months ended September 30, 2020, a decrease of $3.3 million, or 49.2%, from $6.8 million for the three months ended September 30, 2019;

◦The Company recorded a provision for loan losses of $4.3 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 1.55% at September 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 1.70% at September 30, 2020. See further discussion in “Allowance for Loan Losses.”

◦Net interest margin was 3.43% for the three months ended September 30, 2020 compared with 4.11% for the three months ended September 30, 2019.

•Total assets were $2.02 billion at September 30, 2020, an increase of $274.9 million, or 15.7%, from $1.75 billion at December 31, 2019;

•Loans held-for-investment, net of deferred costs (fees), were $1.58 billion at September 30, 2020, an increase of $128.0 million, or 8.8%, from $1.45 billion at December 31, 2019;

◦SBA PPP loans totaled $136.4 million at September 30, 2020.

•Total deposits were $1.65 billion at September 30, 2020, an increase of $167.8 million, or 11.3%, from $1.48 billion at December 31, 2019;

•The consent order related to the Bank's BSA/AML compliance was terminated; and

•The Company declared and paid cash dividends of $0.10 per common share during the three months ended September 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 September 30, 2020 and 2019:


	Three Months Ended September 30,
	2020						2019
($ in thousands)	Average Balance		Interest		Yield/ Cost (6)		Average Balance		Interest		Yield/ Cost (6)
Interest-earning assets:
Total loans (1)	$	1,564,704	$	18,938	4.81	%	$	1,396,437	$	21,876	6.22	%
Mortgage backed securities	75,832		339		1.78	%	84,052		521		2.46	%
Collateralized mortgage obligation	33,393		82		0.98	%	50,891		286		2.23	%
SBA loan pool securities	12,996		57		1.74	%	20,751		133		2.54	%
Municipal securities - tax exempt (2)	5,991		37		2.46	%	5,834		38		2.58	%
Interest-bearing deposits in other financial institutions	251,979		64		0.10	%	127,429		694		2.16	%
FHLB and other bank stock	8,447		103		4.85	%	8,345		139		6.61	%
Total interest-earning assets	1,953,342		19,620		4.00	%	1,693,739		23,687		5.55	%
Noninterest-earning assets:
Cash and cash equivalents	17,094						18,927
Allowance for loan losses	(21,268)						(13,273)
Other assets	42,446						35,564
Total noninterest earning assets	38,272						41,218
Total assets	$	1,991,614					$	1,734,957
Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	365,093	391		0.43	%	$	351,581	1,432		1.62	%
Savings	9,517		2		0.08	%	7,043		6		0.34	%
Time deposits	689,352		2,206		1.27	%	767,752		4,622		2.39	%
Borrowings	130,000		168		0.51	%	20,326		98		1.91	%
Total interest-bearing liabilities	1,193,962		2,767		0.92	%	1,146,702		6,158		2.13	%
Noninterest-bearing liabilities:
Demand deposits	552,255						341,858
Other liabilities	15,934						22,465
Total noninterest-bearing liabilities	568,189						364,323
Total liabilities	1,762,151						1,511,025
Shareholders’ equity	229,463						223,932
Total liabilities and shareholders’ equity	$	1,991,614					$	1,734,957
Net interest income			$	16,853					$	17,529
Net interest spread (3)					3.08	%					3.42	%
Net interest margin (4)					3.43	%					4.11	%
Cost of funds (5)					0.63	%					1.64	%

(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 $1.2 million and $118 thousand, respectively, and net accretion of discount on loans of $743 thousand and $1.0 million, respectively, are included in the interest income for the three months ended September 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.


	Nine Months Ended September 30,
	2020						2019
($ in thousands)	Average Balance		Interest		Yield/ Cost (6)		Average Balance		Interest		Yield/ Cost (6)
Interest-earning assets:
Total loans (1)	$	1,524,628	$	57,617	5.05	%	$	1,372,704	$	64,779	6.31	%
Mortgage backed securities	65,713		985		2.00	%	85,452		1,629		2.55	%
Collateralized mortgage obligation	37,500		402		1.43	%	52,927		969		2.45	%
SBA loan pool securities	13,351		198		1.98	%	21,392		420		2.62	%
Municipal securities - tax exempt (2)	5,807		113		2.60	%	5,867		115		2.62	%
Interest-bearing deposits in other financial institutions	213,292		585		0.37	%	135,642		2,360		2.33	%
FHLB and other bank stock	8,406		353		5.61	%	7,974		397		6.66	%
Total interest-earning assets	1,868,697		60,253		4.31	%	1,681,958		70,669		5.62	%
Noninterest-earning assets:
Cash and cash equivalents	17,324						18,650
Allowance for loan losses	(17,676)						(13,185)
Other assets	38,255						35,370
Total noninterest earning assets	37,903						40,835
Total assets	$	1,906,600					$	1,722,793
Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	367,222	2,058		0.75	%	$	322,917	3,903		1.62	%
Savings	7,706		8		0.14	%	8,214		28		0.46	%
Time deposits	725,927		8,934		1.64	%	797,475		13,994		2.35	%
Borrowings	95,276		471		0.66	%	26,820		370		1.84	%
Total interest-bearing liabilities	1,196,131		11,471		1.28	%	1,155,426		18,295		2.12	%
Noninterest-bearing liabilities:
Demand deposits	465,634						325,704
Other liabilities	17,493						22,077
Total noninterest-bearing liabilities	483,127						347,781
Total liabilities	1,679,258						1,503,207
Shareholders’ equity	227,342						219,586
Total liabilities and shareholders’ equity	$	1,906,600					$	1,722,793
Net interest income			$	48,782					$	52,374
Net interest spread (3)					3.03	%					3.50	%
Net interest margin (4)					3.49	%					4.16	%
Cost of funds (5)					0.92	%					1.65	%

(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 $2.0 million and $327 thousand, respectively, and net accretion of discount on loans of $2.3 million and $3.1 million, respectively, are included in the interest income for the nine months ended September 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 September 30,						Nine Months Ended September 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	$	2,636	$	(5,574)	$	(2,938)	$	7,169	$	(14,331)	$	(7,162)
Investment securities	(202)		(261)		(463)		(818)		(617)		(1,435)
Other interest-earning assets	765		(1,431)		(666)		1,499		(3,318)		(1,819)
Total interest income	3,199		(7,266)		(4,067)		7,850		(18,266)		(10,416)
Interest incurred on:
Savings, NOW, and money market deposits	64		(1,109)		(1,045)		520		(2,385)		(1,865)
Time deposits	(472)		(1,944)		(2,416)		(1,256)		(3,804)		(5,060)
Borrowings	529		(459)		70		944		(843)		101
Total interest expense	121		(3,512)		(3,391)		208		(7,032)		(6,824)
Change in net interest income	$	3,078	$	(3,754)	$	(676)	$	7,642	$	(11,234)	$	(3,592)

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

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


	Three Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2020		2019
Interest income:
Interest and fees on loans	$	18,938	$	21,876	$	(2,938)	(13.4)	%
Interest on tax-exempt investment securities	37		38		(1)		(2.6)	%
Interest on investment securities	478		940		(462)		(49.1)	%
Interest and dividends on other interest-earning assets	167		833		(666)		(80.0)	%
Total interest income	19,620		23,687		(4,067)		(17.2)	%
Interest expense:
Interest on deposits	2,599		6,060		(3,461)		(57.1)	%
Interest on borrowings	168		98		70		71.4	%
Total interest expense	2,767		6,158		(3,391)		(55.1)	%
Net interest income	$	16,853	$	17,529	$	(676)	(3.9)	%

Net interest income decreased primarily due to a 155 basis point decrease in average yield on interest-earning assets and a 4.1% increase in average balance of interest-bearing liabilities, partially offset by a 121 basis point decrease in average cost on interest-bearing liabilities and a 15.3% increase in average balance of interest-earning assets.

Interest and fees on loans decreased primarily due to a 141 basis point decrease in average yield, partially offset by a 12.0% increase in average balance. The decrease in average yield was primarily due to the lower market rates, 1% contractual rate on SBA PPP loans, and a decrease in net accretion of discount, partially offset by an increase in amortization of net deferred fees. The Wall Street Journal prime rate was 3.25% during the three months ended September 30, 2020 compared to 4.75% at December 31, 2019 and 5.00% at September 30, 2019. The decrease in net accretion of discount was primarily due to a decrease in loan payoffs on SBA loans. The increase in amortization of net deferred fees was primarily due to additional amortization of net deferred fees on SBA PPP loans.

Interest on investment securities decreased primarily due to a 20.6% decrease in average balance and an 80 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 and principal paydowns, partially offset by new investment securities of $42.4 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 September 30, 2020 and 2019, yield on total investment securities was 1.60% and 2.40%, respectively.

Interest income on other interest-earning assets decreased primarily due to a 217 basis point decrease in average yield, partially offset by a 91.8% increase in average balance. The decrease in average yield was primarily due to the lower rates on the account with Federal Reserve Bank. 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 September 30, 2020 and 2019, yield on total other interest-earning assets was 0.26% and 2.43%, respectively.

Interest expense on deposits decreased primarily due to a 116 basis point decrease in average cost of interest-bearing deposits and a 10.2% decrease in average balance of time deposits, partially offset by a 4.5% increase in savings, NOW and money market accounts. The decrease in average cost was primarily due to the lower market rates. The decrease in average balance of time deposits was primarily due to a lower level of renewals of matured time deposits. For the three months ended September 30, 2020 and 2019, average cost on total interest-bearing deposits was 0.97% and 2.13%, respectively, and average cost on total deposits were 0.64% and 1.64%, 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.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

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


	Nine Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2020		2019
Interest income:
Interest and fees on loans	$	57,617	$	64,779	$	(7,162)	(11.1)	%
Interest on tax-exempt investment securities	113		115		(2)		(1.7)	%
Interest on investment securities	1,585		3,018		(1,433)		(47.5)	%
Interest and dividends on other interest-earning assets	938		2,757		(1,819)		(66.0)	%
Total interest income	60,253		70,669		(10,416)		(14.7)	%
Interest expense:
Interest on deposits	11,000		17,925		(6,925)		(38.6)	%
Interest on borrowings	471		370		101		27.3	%
Total interest expense	11,471		18,295		(6,824)		(37.3)	%
Net interest income	$	48,782	$	52,374	$	(3,592)	(6.9)	%

Net interest income decreased primarily due to a 131 basis point decrease in average yield on interest-earning assets and 3.5% increase in interest-bearing liabilities, partially offset by an 84 basis point decrease in average cost on interest-bearing liabilities and an 11.1% increase in average balance of interest-earning assets.

Interest and fees on loans decreased primarily due to a 126 basis point decrease in average yield, partially offset by a 11.1% increase in average balance. The decrease in average yield was primarily due to the lower market rates, 1% contractual rate on SBA PPP loans, and a decrease in net accretion of discount, partially offset by an increase in amortization of net deferred fees. The Wall Street Journal prime rate was 3.25% during the three months ended September 30, 2020 compared to 4.75% at December 31, 2019 and 5.00% at September 30, 2019. The decrease in net accretion of discount was primarily due to a decrease in loan payoffs on SBA loans. The increase in amortization of net deferred fees was primarily due to additional amortization of net deferred fees on SBA PPP loans.

Interest on investment securities decreased primarily due to a 26.1% decrease in average balance and a 68 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 and principal paydowns, partially offset by new investment securities of $42.4 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 nine months ended September 30, 2020 and 2019, yield on total investment securities was 1.85% and 2.53%, respectively.

Interest income on other interest-earning assets decreased primarily due to a 200 basis point decrease in average yield, partially offset by a 54.4% increase in average balance. The decrease in average yield was primarily due to the lower rates on the account with Federal Reserve Bank. 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 nine months ended September 30, 2020 and 2019, yield on total other interest-earning assets was 0.57% and 2.57%, respectively.

Interest expense on deposits decreased primarily due to a 79 basis point decrease in average cost of interest-bearing deposits and an 8.9% decrease in average balance of savings and time deposits, partially offset by a 13.7% 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. For the nine months ended September 30, 2020 and 2019, average cost on total interest-bearing deposits was 1.33% and 2.12%, respectively, and average cost on total deposits were 0.94% 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 (reversal) for Loan Losses

Provision (reversal) for loan losses was $4.3 million and $(102) thousand, respectively, for the three months ended September 30, 2020 and 2019. For the nine months ended September 30, 2020 and 2019, provision for loan losses was $11.1 million and $207 thousand, respectively. Additional provisions for loan losses for the three and nine months ended September 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 September 30, 2020 Compared to Three Months Ended September 30, 2019

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


	Three Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2020		2019
Service charges and fees on deposits	$	280	$	405	$	(125)	(30.9)	%
Loan servicing income	856		534		322		60.3	%
Gain on sale of loans	821		1,540		(719)		(46.7)	%

Other income	315		323		(8)		(2.5)	%
Total noninterest income	$	2,272	$	2,802	$	(530)	(18.9)	%

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 decrease in loan payoffs. Servicing asset amortization was $388 thousand and $661 thousand, respectively, for the three months ended September 30, 2020 and 2019.

Gain on sale of loans decreased primarily due to a decrease in sales volume of SBA loans, partially offset by a higher level of premium on SBA loans in the secondary market and an increase in sale volume of residential property loans. The Company sold SBA loans of $8.6 million with a gain of $689 thousand and residential property loans of $16.6 million with a gain of $132 thousand during the three months ended September 30, 2020. During the three months ended September 30, 2019, the Company sold SBA loans of $22.2 million with a gain of $1.5 million and residential property loans of $4.7 million with a gain of $42 thousand.

Other income primarily includes wire transfer fees of $137 thousand and $135 thousand, respectively, and debit card interchange fees of $67 thousand and $70 thousand, respectively, for the three months ended September 30, 2020 and 2019.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

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


	Nine Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2020		2019
Service charges and fees on deposits	$	945	$	1,137	$	(192)	(16.9)	%
Loan servicing income	2,312		1,657		655		39.5	%
Gain on sale of loans	3,044		4,551		(1,507)		(33.1)	%

Other income	915		920		(5)		(0.5)	%
Total noninterest income	$	7,216	$	8,265	$	(1,049)	(12.7)	%

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 decrease in loan payoffs. Servicing asset amortization was $1.4 million and $1.9 million, respectively, for the nine months ended September 30, 2020 and 2019.

Gain on sale of loans decreased primarily due to a decrease in sales volume of SBA loans, partially offset by an increase in sale volume of residential property loans. The Company sold SBA loans of $47.4 million with a gain of $2.8 million and residential property loans of $24.8 million with a gain of $203 thousand during the nine months ended September 30, 2020. During the nine months ended September 30, 2019, the Company sold SBA loans of $72.5 million with a gain of $4.5 million and residential property loans of $7.4 million with a gain of $64 thousand.

Other income primarily includes wire transfer fees of $391 thousand and $370 thousand, respectively, and debit card interchange fees of $185 thousand and $203 thousand, respectively, for the nine months ended September 30, 2020 and 2019.

Noninterest Expense

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

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


	Three Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2020		2019
Salaries and employee benefits	$	6,438	$	6,901	$	(463)	(6.7)	%
Occupancy and equipment	1,416		1,408		8		0.6	%
Professional fees	325		664		(339)		(51.1)	%
Marketing and business promotion	193		292		(99)		(33.9)	%
Data processing	373		348		25		7.2	%
Director fees and expenses	125		188		(63)		(33.5)	%

Regulatory assessments	267		—		267		—	%

Other expenses	749		976		(227)		(23.3)	%
Total noninterest expense	$	9,886	$	10,777	$	(891)	(8.3)	%

Salaries and employee benefits decreased primarily due to a decrease in bonus accrual for the three months ended September 30, 2020, partially offset by overall increases in salaries and other employee benefits. The number of full-time equivalent employees was 252 at September 30, 2020 compared to 249 at September 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 and transactions.

Director fees and expenses decreased primarily due to the Company's Board of Directors decision to temporarily decreased director fees from the second quarter of 2020.

Regulatory assessment expense increased primarily due to a small bank credit received from the FDIC during the three months ended September 30, 2019, as well as an increase in balance sheet. The Company would have recognized regulatory assessment expense of $228 thousand without the small bank credit for the three months ended September 30, 2019.

Other expenses primarily included $111 thousand and $164 thousand in loan related legal expenses, $345 thousand and $449 thousand in office expense, and $125 thousand and $143 thousand in armed guard expense for the three months ended September 30, 2020 and 2019, respectively.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

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


	Nine Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2020		2019
Salaries and employee benefits	$	18,750	$	20,123	$	(1,373)	(6.8)	%
Occupancy and equipment	4,196		4,128		68		1.6	%
Professional fees	1,631		2,108		(477)		(22.6)	%
Marketing and business promotion	920		1,049		(129)		(12.3)	%
Data processing	1,097		1,004		93		9.3	%
Director fees and expenses	453		562		(109)		(19.4)	%

Regulatory assessments	728		425		303		71.3	%

Other expenses	2,374		2,651		(277)		(10.4)	%
Total noninterest expense	$	30,149	$	32,050	$	(1,901)	(5.9)	%

Salaries and employee benefits decreased primarily due to an increase in direct loan origination cost, which offsets the salaries and benefits expenses, and a decrease in bonus accrual for the nine months ended September 30, 2020, partially offset by overall increases in salaries and other employee benefits. SBA PPP loan production incurred direct loan origination cost of approximately $1.1 million. The number of full-time equivalent employees was 252 at September 30, 2020 compared to 249 at September 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 and transactions.

Director fees and expenses decreased primarily due to the Company's Board of Directors decision to temporarily decreased director fees from the second quarter of 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 a small bank credit received from the FDIC during the three months ended September 30, 2019, as well as an increase in balance sheet.

Other expenses primarily included $328 thousand and $381 thousand in loan related legal expenses, $1.1 million and $1.3 million in office expense, and $379 thousand and $412 thousand in armed guard expense for the nine months ended September 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:


	September 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	$	78,289	$	79,771	$	1,482	$	38,793	$	38,738	$	(55)
Residential collateralized mortgage obligations	30,430		30,673		243		44,115		43,894		(221)
SBA loan pool securities	12,335		12,707		372		14,179		14,152		(27)
Municipal bonds	5,381		5,831		450		764		782		18
Total securities available-for-sale	$	126,435	$	128,982	$	2,547	$	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 $129.0 million at September 30, 2020, an increase of $11.3 million, or 9.6%, from $117.7 million at December 31, 2019. The increase was primarily due to purchases of $36.6 million and an increase in fair value of securities available-for-sale of $2.8 million, partially offset by principal paydowns of $27.6 million and net premium amortization of $656 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 September 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 September 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 nine months ended September 30, 2020 and 2019.

The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of September 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	$	—	—	%	$	580	1.41	%	$	11,609	1.49	%	$	66,100	1.47	%	$	78,289	1.47	%
Residential collateralized mortgage obligations	—		—	%	—		—	%	11,850		0.77	%	18,580		1.21	%	30,430		1.04	%
SBA loan pool securities	—		—	%	1,007		2.57	%	2,145		0.67	%	9,183		2.02	%	12,335		1.83	%
Municipal bonds	—		—	%	2,200		2.02	%	849		2.26	%	2,332		3.53	%	5,381		2.71	%
Total securities available-for-sale	$	—	—	%	$	3,787	2.07	%	$	26,453	1.13	%	$	96,195	1.52	%	$	126,435	1.46	%

Loans Held-For-Sale

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

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


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

Residential property	$	4,047	$	760
SBA property	24,197		150

Commercial and industrial loans:


SBA commercial term	2,634		1,065

Total	$	30,878	$	1,975

Loans held-for-sale were $30.9 million at September 30, 2020, an increase of $28.9 million, or 1,463.4%, from $2.0 million at December 31, 2019. The increase was primarily due to new funding of $100.5 million and a loan transferred from loans held-for-investment of $1.4 million, partially offset by sales of $72.1 million. All of loans held-for-sale outstanding at September 30, 2020 were sold subsequent to the balance sheet date.

Loans Held-For-Investment and Allowance for Loan Losses

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


	September 30, 2020				December 31, 2019
($ in thousands)	Amount		Percentage to Total		Amount		Percentage to Total
Real estate loans:
Commercial property	$	853,708	54.0	%	$	803,014	55.4	%
Residential property	212,804		13.5	%	235,046		16.3	%
SBA property	128,038		8.1	%	129,837		8.9	%
Construction	19,803		1.3	%	19,164		1.3	%
Total real estate loans	1,214,353		76.9	%	1,187,061		81.9	%
Commercial and industrial loans:
Commercial term	90,867		5.8	%	103,380		7.1	%
Commercial lines of credit	92,222		5.8	%	111,768		7.7	%
SBA commercial term	23,011		1.5	%	25,332		1.7	%
SBA PPP	136,418		8.6	%	—		—	%
Total commercial and industrial loans	342,518		21.7	%	240,480		16.5	%
Other consumer loans	21,933		1.4	%	23,290		1.6	%
Loans held-for-investment	1,578,804		100.0	%	1,450,831		100.0	%
Allowance for loan losses	(24,546)				(14,380)
Net loans held-for-investment	$	1,554,258			$	1,436,451

Loans held-for-investment, net of deferred loan costs (fees) were $1.58 billion at September 30, 2020, an increase of $128.0 million, or 8.8%, from $1.45 billion at December 31, 2019. The increase was primarily due to new funding of $295.3 million and advances of $77.0 million, partially offset by paydowns and payoffs of $242.3 million. SBA PPP loan production contributed significantly to the Company’s loan growth for the nine months ended September 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 September 30, 2020, all loans under modified terms related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs. All types of modifications have initial modification terms of 6-months or less. The following table presents a summary of loans under modified terms related to the COVID-19 pandemic as of September 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	$	135,165	$	2,397	$	137,562		4.49	%	48.5	%	$	3,048
Residential property	19,233		—		19,233			4.91	%	54.6	%	519
Commercial and industrial loans:
Commercial term	11,797		2,960		14,757			4.29	%			309
SBA commercial term	—		72		72			5.25	%			1
Total	$	166,195	$	5,429	$	171,624		4.52	%			$	3,877
Loans held-for-investment					$	1,578,804
SBA PPP loans					136,418
Loans held-for-investment, excluding SBA PPP loans					$	1,442,386
Total loans under modified terms related to the COVID-19 pandemic to loans held-for-investment, excluding SBA PPP loans					11.9		%

(1) Collateral value at origination

The following table presents a summary of remaining modifications terms of loans under modified terms related to the COVID-19 pandemic as of September 30, 2020:


	Remaining Terms of
($ in thousands)	Three Months or Less		Three to Six Months		Total
Real estate loans:
Commercial property	$	137,562	$	—	$	137,562
Residential property	19,233		—		19,233
Commercial and industrial loans:					—
Commercial term	13,592		1,165		14,757
SBA commercial term	—		72		72
Total	$	170,387	$	1,237	$	171,624

The following table presents a summary of loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as of September 30, 2020:


($ in thousands)	Carrying Value		Accrued Interest Receivable
Real estate loans:
Commercial property	$	240,472	$	3,485
Residential property	25,231		361
Commercial and industrial loans:	—
Commercial term	40,259		387
Other consumer loans	1,442		6
Total	$	307,404	$	4,239

The following table presents activity in loans under modified terms related to the COVID-19 pandemic for the three months ended September 30, 2020.


	Real Estate Loans				Commercial and Industrial Loans
($ in thousands)	Commercial Property		Residential Property		Commercial Term		SBA Commercial Term		Other Consumer Loans		Total
Balance at July 1, 2020	$	379,566	$	44,804	$	58,159	$	—	$	1,507	$	484,036
Modification early terminated(1)	(78,077)		(2,958)		(25,620)		—		(5)		(106,660)
Modification expired	(162,737)		(40,534)		(15,803)		—		(1,436)		(220,510)
Subsequent modification	343		18,262		1,165		—		—		19,770
New modification	1,112		668		—		72		7		1,859
Amortization	(2,645)		(1,009)		(3,144)		—		(73)		(6,871)
Balance at September 30, 2020	$	137,562	$	19,233	$	14,757	$	72	$	—	$	171,624

(1) Termination of modifications at the request of the borrower.

SBA Paycheck Protection Program

Since the launch of PPP, the Company has extended 1,614 SBA PPP loans totaling $136.4 million, net of unamortized deferred fees and costs, as of September 30, 2020. The Company deferred loan origination fees of $5.7 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 September 30, 2020:


($ in thousands)	Number of Loans	Carrying Value		Contractual Balance
Loan amount:
$50,000 or less	1,043	$	21,551	$	21,751
Over $50,000 and less than $350,000	499	60,679		62,506
Over $350,000 and less than $2,000,000	69	45,813		46,718
$2,000,000 or more	3	8,375		8,427
Total	1,614	$	136,418	$	139,402

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 0.01% and 0.04%, respectively, for the three months ended September 30, 2020 and 2019, and 0.08% and 0.03%, respectively, for the nine months ended September 30, 2020 and 2019.

The following table presents allowance for loan losses to loans held-for-investment as of the dates indicated:


($ in thousands)	September 30, 2020			December 31, 2019
Loans held-for-investment	$	1,578,804		$	1,450,831
Less: SBA PPP loans	136,418			—
Loans held-for-investment, excluding SBA PPP loans	$	1,442,386		$	1,450,831
Allowance for loan losses	$	24,546		$	14,380
Allowance for loan losses to loans held-for-investment	1.55		%	0.99		%
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans	1.70		%	0.99		%

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 $4.3 million and $11.1 million, respectively, for the three and nine months ended September 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 September 30,						As of or For the Nine Months Ended September 30,
($ in thousands)	2020			2019			2020			2019
Allowance for loan losses:
Balance at beginning of period	$	20,248		$	13,328		$	14,380		$	13,167
Charge-offs:
Real estate	—			—			138			19
Commercial and industrial	—			179			916			347
Other consumer	102			47			241			158
Total charge-offs	102			226			1,295			524
Recoveries on loans previously charged off
Real estate	—			—			56			4
Commercial and industrial	18			38			223			112
Other consumer	56			56			105			128
Total recoveries	74			94			384			244
Net charge-offs	28			132			911			280
Provision (reversal) for loan losses	4,326			(102)			11,077			207
Balance at end of period	$	24,546		$	13,094		24,546			13,094
Loans held-for-investment:
Balance at end of period	$	1,578,804		$	1,389,830		$	1,578,804		$	1,389,830
Average balance	1,546,900			1,391,042			1,509,963			1,367,109
Ratios:
Annualized net charge-offs to average loans held-for-investment	0.01		%	0.04		%	0.08		%	0.03		%
Allowance for loan losses to loans held-for-investment	1.55		%	0.94		%	1.55		%	0.94		%

Nonperforming Loans and Nonperforming Assets

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


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


SBA property	$	923		$	442		$	481	108.8	%

Total real estate loans	923			442			481		108.8	%
Commercial and industrial loans:

Commercial lines of credit	1,525			1,888			(363)		(19.2)	%
SBA commercial term	378			159			219		137.7	%
Total commercial and industrial loans	1,903			2,047			(144)		(7.0)	%
Other consumer loans	67			48			19		39.6	%
Total nonaccrual loans	2,893			2,537			356		14.0	%
Loans past due 90 days or more still on accrual	699			287			412		143.6	%
Total nonperforming loans	3,592			2,824			768		27.2	%
Other real estate owned	376			—			376		—	%
Total nonperforming assets	$	3,968		$	2,824		$	1,144	40.5	%

Nonperforming loans to loans held-for-investment	0.23		%	0.19		%
Nonperforming assets to total assets	0.20		%	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 $440 thousand and charge-offs of $1.0 million during the nine months ended September 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. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful. Past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower experiences changes to their financial condition, causing an inability to meet the original repayment terms, and where management believe the borrower will eventually overcome those circumstances and repay the loan in full. Additional income of approximately $43 thousand and $146 thousand, respectively, would have been recorded during the three and nine months ended September 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:


	September 30, 2020						December 31, 2019
($ in thousands)	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
Real estate loans:
Commercial property	$	335	$	—	$	335	$	339	$	—	$	339

SBA property	277		38		315		294		121		415

Commercial and industrial loans:
Commercial term	22		—		22		28		—		28

SBA commercial term	15		—		15		39		—		39

Total	$	649	$	38	$	687	$	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)	September 30, 2020		December 31, 2019		Amount Change		Percentage Change
Noninterest-bearing demand deposits	$	576,086	$	360,039	$	216,047	60.0	%
Interest-bearing deposits:
Savings	11,124		6,492		4,632		71.3	%
NOW	21,726		17,673		4,053		22.9	%
Retail money market accounts	344,939		307,980		36,959		12.0	%
Brokered money market accounts	30,001		30,034		(33)		(0.1)	%
Retail time deposits of:
$250,000 or less	312,171		405,004		(92,833)		(22.9)	%
More than $250,000	167,208		199,726		(32,518)		(16.3)	%
Time deposits from internet rate service providers	31,852		—		31,852		—	%
Brokered time deposits	62,000		62,359		(359)		(0.6)	%
Time deposits from California State Treasurer	90,000		90,000		—		—	%
Total interest-bearing deposits	1,071,021		1,119,268		(48,247)		(4.3)	%
Total deposits	$	1,647,107	$	1,479,307	$	167,800	11.3	%

The increase in noninterest-bearing demand deposits was primarily due to the deposit increases from customers with SBA PPP loans and SBA Economic Injury Disaster Loans, as well as the overall liquid deposit market. A total of $117.3 million of SBA PPP loans were funded through the Bank's noninterest-bearing demand deposits and deposit customers also received $93.5 million of SBA Economic Injury Disaster Loans of during the past 6-month period.

The decrease in retail time deposits was primarily due to matured and closed accounts of $515.5 million, partially offset by new accounts of $73.8 million and renewals of the matured accounts of $305.1 million.

As of September 30, 2020 and December 31, 2019, total deposits were comprised of 35.0% and 24.3%, respectively, of noninterest-bearing demand accounts, 24.8% and 24.5%, respectively, of savings, NOW and money market accounts, and 40.2% 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 $3.5 million and $5.4 million, respectively, at September 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
September 30, 2020
Time deposits less than $100,000	$	67,716	$	43,728	$	36,258	$	6,859	$	1,453	$	156,014
Time deposits of $100,000 through $250,000	57,043		93,186		98,575		1,205		—		250,009
Time deposits of more than $250,000	126,619		55,565		68,734		6,290		—		257,208
Total	$	251,378	$	192,479	$	203,567	$	14,354	$	1,453	$	663,231
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 $229.3 million at September 30, 2020, an increase of $2.5 million, or 1.1%, from $226.8 million at December 31, 2019. The increase was primarily due to net income of $10.4 million, a positive fair value change in securities available-for-sale of $2.0 million and cash proceeds from exercise of stock options of $636 thousand, partially offset by repurchase of common stock of $6.5 million and dividends declared on common stock of $4.6 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 September 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)
September 30, 2020
Common tier 1 capital (to risk-weighted assets)	15.60	%	15.34	%	4.5	%	6.5	%
Total capital (to risk-weighted assets)	16.86	%	16.60	%	8.0	%	10.0	%
Tier 1 capital (to risk-weighted assets)	15.60	%	15.34	%	6.0	%	8.0	%
Tier 1 capital (to average assets)	11.40	%	11.21	%	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 8.86% and 8.60%, respectively, as of September 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 September 30, 2020 and December 31, 2019, respectively. Based on the values of loans pledged as collateral, the Company had $321.1 million and $404.8 million of additional borrowing capacity with FHLB as of September 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 September 30, 2020 and December 31, 2019.

In addition, available unused secured borrowing capacity from Federal Reserve Discount Window at September 30, 2020 and December 31, 2019 was $33.8 million and $37.9 million, respectively. Federal Reserve Discount Window was collateralized by loans totaling $41.8 million and $46.1 million as of September 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 September 30, 2020 and December 31, 2019, total cash and cash equivalents represented 12.7% 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 September 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)	September 30, 2020		December 31, 2019
Commitments to extend credit	$	207,142	$	171,608
Standby letters of credit	4,584		3,300
Commercial letters of credit	309		292
Total	$	212,035	$	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
September 30, 2020
Time deposits	$	647,424	$	14,354	$	1,453	$	—	$	663,231
FHLB advances	120,000		10,000		—		—		130,000
Operating leases	2,434		4,351		1,133		951		8,869
Total	$	769,858	$	28,705	$	2,586	$	951	$	802,100
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:


	September 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	21.3	%	16.2	%	20.3	%	7.7	%
+100	10.8	%	9.1	%	10.4	%	4.7	%
-100	(0.9)	%	(9.4)	%	(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 September 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 September 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 September 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 September 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.

•Our borrowers’ actual payment performance may be worse than anticipated as loan deferrals related to the COVID-19 pandemic expire, and we may experience potential adverse impact from loan modifications and payment deferrals despite their implementation consistent with recent regulatory guidance.

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 September 30, 2020.

The following table presents share repurchase activities during the three months ended September 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 July 1, 2020 to July 31, 2020

—

From August 1, 2020 to August 31, 2020

—

From September 1, 2020 to September 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

None

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:	November 6, 2020	/s/ Henry Kim
		Henry Kim
		President and Chief Executive Officer (Principal Executive Officer)

Date:	November 6, 2020	/s/ Timothy Chang
		Timothy Chang
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)