pcb-20210930

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, 2021

☐ 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 29, 2021, the registrant had outstanding 14,841,626 shares of common stock.

PCB Bancorp and Subsidiary

Quarterly Report on Form 10-Q

September 30, 2021

Table of Contents


Part I - Financial Information

Item 1.	Consolidated Financial Statements	5

	Consolidated Balance Sheets - September 30, 2021 (Unaudited) and December 31, 2020	5
	Consolidated Statements of Income (Unaudited) - Three and Nine Months Ended September 30, 2021 and 2020	6
	Consolidated Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended S eptember 30, 2021 and 2020	7
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three and Nine Months Ended September 30, 2021 and 2020	8
	Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2021 and 2020	10
	Notes to Consolidated Financial Statements (Unaudited)	12

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63

Item 4.	Controls and Procedures	64

Part II - Other Information

Item 1.	Legal Proceedings	65

Item 1A.	Risk Factors	65

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66

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 Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act of 2020 (the “Economic Aid Act”), the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Economic Growth 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;

•cyber-attacks, ransomware attacks, computer viruses or other malware that may breach the security of our websites or other systems to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage our systems;

•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;

•the 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, 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, 2021		December 31, 2020
	(Unaudited)
Assets
Cash and due from banks	$	19,688	$	19,605
Interest-bearing deposits in other financial institutions	195,285		174,493
Total cash and cash equivalents	214,973		194,098
Securities available-for-sale, at fair value	133,102		120,527


Loans held-for-sale	29,020		1,979
Loans held-for-investment, net of deferred loan costs (fees)	1,707,878		1,583,578
Allowance for loan losses	(23,807)		(26,510)
Net loans held-for-investment	1,684,071		1,557,068
Premises and equipment, net	3,306		4,048
Federal Home Loan Bank and other restricted stock, at cost	8,577		8,447
Other real estate owned, net	—		1,401
Deferred tax assets, net	7,519		8,120
Servicing assets	7,009		6,400
Operating lease assets	7,164		7,616
Accrued interest receivable	5,494		9,334
Other assets	4,464		3,815
Total assets	$	2,104,699	$	1,922,853
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	832,240	$	538,009
Savings, NOW and money market accounts	410,092		408,826
Time deposits of $250,000 or less	327,207		379,333
Time deposits of more than $250,000	263,127		268,683
Total deposits	1,832,666		1,594,851
Federal Home Loan Bank advances	10,000		80,000
Operating lease liabilities	7,862		8,455
Accrued interest payable and other liabilities	6,573		5,759
Total liabilities	1,857,101		1,689,065
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; 14,841,626 and 15,385,878 shares issued and outstanding, respectively, and included 55,284 and 30,300 shares of unvested restricted stock, respectively, at September 30, 2021 and December 31, 2020	154,618		164,140
Retained earnings	92,248		67,692
Accumulated other comprehensive income, net	732		1,956
Total shareholders’ equity	247,598		233,788
Total liabilities and shareholders’ equity	$	2,104,699	$	1,922,853

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,
	2021		2020		2021		2020
Interest and dividend income:
Loans, including fees	$	20,537	$	18,938	$	58,792	$	57,617
Tax-exempt investment securities	36		37		109		113
Taxable investment securities	401		478		1,063		1,585
Other interest-earning assets	194		167		513		938
Total interest income	21,168		19,620		60,477		60,253
Interest expense:
Deposits	885		2,599		3,196		11,000
Other borrowings	56		168		239		471
Total interest expense	941		2,767		3,435		11,471
Net interest income	20,227		16,853		57,042		48,782
Provision (reversal) for loan losses	(1,053)		4,326		(3,134)		11,077
Net interest income after provision (reversal) for loan losses	21,280		12,527		60,176		37,705
Noninterest income:
Service charges and fees on deposits	292		280		887		945
Loan servicing income	655		856		2,082		2,312
Gain on sale of loans	4,269		821		9,558		3,044

Other income	372		315		1,069		915
Total noninterest income	5,588		2,272		13,596		7,216
Noninterest expense:
Salaries and employee benefits	7,606		6,438		20,913		18,750
Occupancy and equipment	1,399		1,416		4,158		4,196
Professional fees	422		325		1,574		1,631
Marketing and business promotion	416		193		1,070		920
Data processing	391		373		1,164		1,097
Director fees and expenses	144		125		433		453
Regulatory assessments	12		267		399		728
Other expenses	842		749		2,329		2,374
Total noninterest expense	11,232		9,886		32,040		30,149
Income before income taxes	15,636		4,913		41,732		14,772
Income tax expense	4,613		1,464		12,305		4,384
Net income	$	11,023	$	3,449	$	29,427	$	10,388

Earnings per common share, basic	$	0.74	$	0.22	$	1.94	$	0.67
Earnings per common share, diluted	$	0.73	$	0.22	$	1.92	$	0.67

Weighted-average common shares outstanding, basic	14,779,707		15,343,888		15,090,989		15,395,475
Weighted-average common shares outstanding, diluted	15,031,558		15,377,531		15,298,065		15,466,207

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,
	2021		2020		2021		2020
Net income	$	11,023	$	3,449	$	29,427	$	10,388
Other comprehensive income (loss):
Unrealized gain (loss) on securities available-for-sale arising during the period	(581)		(9)		(1,734)		2,045
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)	170		3		510		(839)
Total other comprehensive income (loss), net of tax	(411)		(6)		(1,224)		1,993
Total comprehensive income	$	10,612	$	3,443	$	28,203	$	12,381

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, 2020	15,377,935	$	163,759	$	61,532	$	1,942	$	227,233
Comprehensive income (loss)
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

Balance at July 1, 2021	14,854,315	$	154,796	$	83,002	$	1,143	$	238,941
Comprehensive income (loss)
Net income	—	—		11,023		—		11,023
Other comprehensive loss, net of tax	—	—		—		(411)		(411)

Issuance of restricted stock	1,800	—		—		—		—
Forfeiture of restricted stock	(300)	—		—		—		—
Restricted stock surrendered due to employee tax liability	(231)	(4)		—		—		(4)
Repurchase of common stock	(33,935)	(543)		—		—		(543)
Share-based compensation expense	—	116		—		—		116
Stock options exercised	19,977	253		—		—		253
Cash dividends declared on common stock ($0.12 per share)	—	—		(1,777)		—		(1,777)
Balance at September 30, 2021	14,841,626	$	154,618	$	92,248	$	732	$	247,598

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 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

Balance at January 1, 2021	15,385,878	$	164,140	$	67,692	$	1,956	$	233,788
Comprehensive income (loss)
Net income	—	—		29,427		—		29,427
Other comprehensive loss, net of tax	—	—		—		(1,224)		(1,224)

Issuance of restricted stock	35,584	—		—		—		—
Forfeiture of restricted stock	(1,300)	—		—		—		—
Restricted stock surrendered due to employee tax liability	(231)	(4)		—		—		(4)
Repurchase of common stock	(680,269)	(10,876)		—		—		(10,876)
Share-based compensation expense	—	323		—		—		323
Stock options exercised	101,964	1,035		—		—		1,035
Cash dividends declared on common stock ($0.32 per share)	—	—		(4,871)		—		(4,871)
Balance at September 30, 2021	14,841,626	$	154,618	$	92,248	$	732	$	247,598

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,
	2021		2020
Cash flows from operating activities
Net income	$	29,427	$	10,388
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation of premises and equipment	1,053		1,118
Net amortization of premiums on securities	811		656
Net accretion of discounts on loans	(2,689)		(2,301)
Net accretion of deferred loan fees	(4,662)		(1,988)
Amortization of servicing assets	1,496		1,385
Provision (reversal) for loan losses	(3,134)		11,077
Deferred tax expense (benefit)	1,111		(3,005)
Stock-based compensation	323		592

Gain on sale of loans	(9,558)		(3,044)
Originations of loans held-for-sale	(126,774)		(100,507)
Proceeds from sales of and principal collected on loans held-for-sale	109,409		75,389
Change in accrued interest receivable and other assets	3,191		(4,911)
Change in accrued interest payable and other liabilities	(319)		(3,944)
Net cash used in operating activities	(315)		(19,095)
Cash flows from investing activities
Purchase of securities available-for-sale	(47,306)		(36,640)
Proceeds from maturities and paydowns of securities available-for-sale	32,186		26,245

Proceeds from maturities and paydowns of securities held-to-maturity	—		1,309
Proceeds from sale of loans held-for-sale previously classified as held-for-investment	5,355		664
Net change in loans held-for-investment	(123,698)		(129,337)
Purchase of loans held-for-investment	(1,439)		—
Purchase of Federal Home Loan Bank stock	(130)		(102)
Proceeds from sale of other real estate owned	3,434		2,490
Purchases of premises and equipment	(315)		(1,714)
Net cash used in investing activities	(131,913)		(137,085)
Cash flows from financing activities
Net change in deposits	237,815		167,800

Proceeds from long-term Federal Home Loan Bank advances	—		140,000
Repayment of long-term Federal Home Loan Bank advances	(70,000)		(30,000)
Stock options exercised	1,035		636

Repurchase of common stock	(10,876)		(6,487)
Cash dividends paid on common stock	(4,871)		(4,615)
Net cash provided by financing activities	153,103		267,334
Net increase (decrease) in cash and cash equivalents	20,875		111,154
Cash and cash equivalents at beginning of period	194,098		146,228
Cash and cash equivalents at end of period	$	214,973	$	257,382

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,
	2021		2020
Supplemental disclosures of cash flow information:
Interest paid	$	4,916	$	14,849
Income taxes paid	9,027		6,621
Supplemental disclosures of non-cash investment activities:
Loans transferred to loans held-for-sale	$	5,351	$	1,355
Loans transferred to other real estate owned	905		2,544
Reclassification of securities held-to-maturity to securities available-for-sale	—		18,777
Right of use assets obtained in exchange for lease obligations	1,247		105

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 Bank is a single operating segment that operates 11 full-service branches in Los Angeles and Orange counties, California, one full-service branch in each of Englewood Cliffs, New Jersey and Bayside, New York, and 10 loan production offices (“LPOs”) in Irvine, Artesia and Los Angeles, California; Annandale, Virginia; Atlanta, Georgia; 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, 2020 filed by the Company with the SEC. The December 31, 2020 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, 2020 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 three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021.

Principles of Consolidation

The consolidated financial statements include the accounts of PCB Bancorp and its wholly owned subsidiary as of September 30, 2021 and December 31, 2020, and for the three and nine months ended September 30, 2021 and 2020. 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, 2020 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

On 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 the Company’s liquidity position. Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and the Company’s ability to assert that it has the intent and ability to hold to maturity debt securities will be limited for up to two years from the date of transfer. The Company transferred all securities held-to-maturity of $18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of $787 thousand.

Loan Modifications Related to the COVID-19 Pandemic

As a part of the CARES Act, the temporary relief from troubled debt restructurings (“TDRs”) provided an option for financial institutions to suspend the GAAP requirements and regulatory determinations for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR from March 1, 2020, through the earlier of 60 days after the date of the COVID-19 National Emergency comes to an end or December 31, 2020, if the loan was not more than 30 days past due as of December 31, 2019.

On April 7, 2020, the federal banking regulators also issued the Interagency Statement to encourage banks to work prudently with borrowers and describe the banking regulators’ interpretation of how accounting rules for TDR apply to certain modifications related to the COVID-19 pandemic.

On December 27, 2020, the Economic Aid Act was signed into law, which extended the applicable period of the temporary relief from TDRs under the CARES Act to the earlier of 60 days after the date of the COVID-19 National Emergency comes to an end or January 1, 2022.

As of September 30, 2021 and December 31, 2020, total loans under modified terms related to the COVID-19 pandemic were none and $36.1 million, respectively. 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 had initial modification terms of 6-months or less and loans that were granted modifications related to the COVID-19 pandemic in excess of 6 months, on a cumulative basis, were classified as special mention or substandard. In addition, all loans under modified terms related to the COVID-19 pandemic were current and on accrual status as of December 31, 2020; however, all of these loans were monitored on an ongoing basis in accordance with each loan’s covenants and conditions for potential downgrade or change in accrual status.

Small Business Administration Paycheck Protection Program

The 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. The SBA guarantees 100% of the PPP loans made to eligible borrowers, and the loans are eligible to be forgiven if certain conditions are met, at which point the SBA will make payments to the Bank for the forgiven amounts. These loans are included in the commercial and industrial loans portfolio and have an interest rate of 1%. The substantial majority of the SBA PPP loans funded in 2020 in the Company’s portfolio have a maturity of two years. On January 13, 2021, the SBA began accepting applications for second draw PPP loans. During the nine months ended September 30, 2021, the Company had funded 1,153 SBA PPP loans totaling $107.0 million, net of unamortized deferred fees and costs. SBA PPP loans funded in 2021 have a maturity of five years.

As of September 30, 2021, the Company had 800 SBA PPP loans totaling $101.9 million, net of unamortized deferred fees and costs, and recognized $145.4 million in forgiveness for 1,992 SBA PPP loans. The Company defers loan origination fees on SBA PPP loans and 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, 2021 and December 31, 2020.

Adopted Accounting Pronouncements

During the nine months ended September 30, 2021, 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 was 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: Certain collateral-dependent impaired loans are recognized at fair value when they reflect 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. 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, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	91,485	$	—	$	91,485
Residential collateralized mortgage obligations	—		21,198		—		21,198
SBA loan pool securities	—		9,667		—		9,667
Municipal bonds	—		5,708		—		5,708
Corporate bonds	—		5,044		—		5,044
Total securities available-for-sale	—		133,102		—		133,102
Total assets measured at fair value on a recurring basis	$	—	$	133,102	$	—	$	133,102
Total liabilities measured at fair value on a recurring basis	$	—	$	—	$	—	$	—
December 31, 2020
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	76,154	$	—	$	76,154
Residential collateralized mortgage obligations	—		26,467		—		26,467
SBA loan pool securities	—		12,080		—		12,080
Municipal bonds	—		5,826		—		5,826
Total securities available-for-sale	—		120,527		—		120,527
Total assets measured at fair value on a recurring basis	$	—	$	120,527	$	—	$	120,527
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, 2021







Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—
Total liabilities measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—
December 31, 2020
Impaired loans:
SBA property	$	—	$	—	$	218	$	218
Commercial lines of credit	—		—		904		904
SBA commercial term	—		—		255		255
Total impaired loans	—		—		1,377		1,377
Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	1,377	$	1,377
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)

December 31, 2020

Impaired loans:

SBA property

218

Fair value of collateral

Commercial lines of credit

904

Sales comparison approach

Adjustment for differences between the comparable estate sales

5% to 9% (7.6%)

SBA commercial term

255

Fair value of collateral

For assets measured at fair value, the following table presents the total net gains (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)	2021		2020		2021		2020
Collateral dependent impaired loans:

SBA property	$	—	$	(9)	$	32	$	(147)
Commercial lines of credit	—		(79)		(136)		(799)
SBA commercial term	—		—		(30)		(164)


Other real estate owned	—		—		74		—
Net gains (losses) recognized	$	—	$	(88)	$	(60)	$	(1,110)

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, 2021
Financial assets:
Interest-bearing deposits in other financial institutions	$	195,285	$	195,285	$	195,285	$	—	$	—
Securities available-for-sale	133,102		133,102		—		133,102		—

Loans held-for-sale	29,020		32,003		—		32,003		—
Net loans held-for-investment	1,684,071		1,698,852		—		—		1,698,852
FHLB and other restricted stock	8,577		N/A		N/A		N/A		N/A
Accrued interest receivable	5,515		5,515		7		280		5,228
Financial liabilities:
Deposits	$	1,832,666	$	1,753,463	$	—	$	—	$	1,753,463
FHLB advances	10,000		10,142		—		10,142		—
Accrued interest payable	745		745		—		1		744
December 31, 2020
Financial assets:
Interest-bearing deposits in other financial institutions	$	174,493	$	174,493	$	174,493	$	—	$	—
Securities available-for-sale	120,527		120,527		—		120,527		—

Loans held-for-sale	1,979		2,112		—		2,112		—
Net loans held-for-investment	1,557,068		1,574,063		—		—		1,574,063
FHLB and other restricted stock	8,447		N/A		N/A		N/A		N/A
Accrued interest receivable	9,334		9,334		1		322		9,011
Financial liabilities:
Deposits	$	1,594,851	$	1,594,112	$	—	$	—	$	1,594,112
FHLB advances	80,000		80,321		—		80,321		—
Accrued interest payable	2,226		2,226		—		2		2,224

Note 3 - Investment Securities

The following table presents the amortized cost and fair value of the securities available-for-sale as of the dates indicated:


($ in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
September 30, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	91,446	$	976	$	(937)	$	91,485
Residential collateralized mortgage obligations	21,079		172		(53)		21,198
SBA loan pool securities	9,406		266		(5)		9,667
Municipal bonds	5,339		369		—		5,708
Corporate bonds	5,000		44		—		5,044
Total securities available-for-sale	$	132,270	$	1,827	$	(995)	$	133,102




December 31, 2020
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	74,622	$	1,558	$	(26)	$	76,154
Residential collateralized mortgage obligations	26,216		294		(43)		26,467
SBA loan pool securities	11,753		349		(22)		12,080
Municipal bonds	5,370		456		—		5,826
Total securities available-for-sale	$	117,961	$	2,657	$	(91)	$	120,527

As of September 30, 2021 and December 31, 2020, pledged securities were $110.8 million and $117.8 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, 2021. Expected maturities may differ from contractual maturities, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


	Securities Available-For-Sale
($ in thousands)	Amortized Cost		Fair Value
Within one year	$	307	$	311
One to five years	1,858		1,917
Five to ten years	5,834		5,898
Greater than ten years	2,340		2,626
Residential mortgage-backed securities, residential collateralized mortgage obligations and SBA loan pool securities	121,931		122,350
Total	$	132,270	$	133,102

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)	2021		2020		2021		2020
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, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	51,552	$	(868)	28	$	1,904	$	(69)	1	$	53,456	$	(937)	29
Residential collateralized mortgage obligations	2,794		(53)		1	—		—		—	2,794		(53)		1
SBA loan pool securities	—		—		—	158		(5)		1	158		(5)		1


Total securities available-for-sale	$	54,346	$	(921)	29	$	2,062	$	(74)	2	$	56,408	$	(995)	31




December 31, 2020
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	5,773	$	(26)	4	$	—	$	—	—	$	5,773	$	(26)	4
Residential collateralized mortgage obligations	2,424		(4)		3	5,127		(39)		6	7,551		(43)		9
SBA loan pool securities	1,677		(4)		2	1,869		(18)		4	3,546		(22)		6

Total securities available-for-sale	$	9,874	$	(34)	9	$	6,996	$	(57)	10	$	16,870	$	(91)	19

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, 2021 and December 31, 2020 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of September 30, 2021 and December 31, 2020. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the three and nine months ended September 30, 2021 and 2020.

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, 2021		December 31, 2020
Real estate loans:
Commercial property	$	1,054,351	$	880,736
Residential property	201,635		198,431
SBA property	127,845		126,570
Construction	6,572		15,199
Total real estate loans	1,390,403		1,220,936
Commercial and industrial loans:
Commercial term	74,390		87,250
Commercial lines of credit	101,456		96,087
SBA commercial term	18,338		21,878
SBA PPP	101,901		135,654
Total commercial and industrial loans	296,085		340,869
Other consumer loans	21,390		21,773
Loans held-for-investment	1,707,878		1,583,578
Allowance for loan losses	(23,807)		(26,510)
Net loans held-for-investment	$	1,684,071	$	1,557,068

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, 2021 and December 31, 2020, the Company had $398 thousand and $3.9 million, respectively, of such loans outstanding.

SBA PPP loans

The following table presents a summary of SBA PPP loans as of September 30, 2021:


($ in thousands)	Number of Loans	Amount
Loan amount:
$50,000 or less	436	$	8,913
Over $50,000 and less than $350,000	286	39,689
Over $350,000 and less than $2,000,000	77	50,116
$2,000,000 or more	1	3,183
Total	800	$	101,901

Allowance for Loan Losses

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, 2021 and 2020:



($ in thousands)	Real Estate		Commercial and Industrial		Other Consumer		Total
Balance at July 1, 2021	$	18,672	$	5,866	$	351	$	24,889
Charge-offs	—		(84)		(43)		(127)
Recoveries on loans previously charged off	—		94		4		98
Provision (reversal) for loan losses	(733)		(336)		16		(1,053)
Balance at September 30, 2021	$	17,939	$	5,540	$	328	$	23,807

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



($ in thousands)	Real Estate		Commercial and Industrial		Other Consumer		Total
Balance at January 1, 2021	$	18,894	$	7,222	$	394	$	26,510
Charge-offs	(18)		(100)		(87)		(205)
Recoveries on loans previously charged off	47		553		36		636
Provision (reversal) for loan losses	(984)		(2,135)		(15)		(3,134)
Balance at September 30, 2021	$	17,939	$	5,540	$	328	$	23,807

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 (reversal) for loan losses	8,329		2,380		368		11,077
Balance at September 30, 2020	$	18,101	$	6,041	$	404	$	24,546

The following table presents 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, 2021
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	—	$	—	$	—
Collectively evaluated for impairment	17,939		5,540		328		23,807
Total	$	17,939	$	5,540	$	328	$	23,807
Loans receivable:
Individually evaluated for impairment	$	1,344	$	325	$	—	$	1,669
Collectively evaluated for impairment	1,389,059		295,760		21,390		1,706,209
Total	$	1,390,403	$	296,085	$	21,390	$	1,707,878
December 31, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	3	$	2	$	—	$	5
Collectively evaluated for impairment	18,891		7,220		394		26,505
Total	$	18,894	$	7,222	$	394	$	26,510
Loans receivable:
Individually evaluated for impairment	$	2,200	$	1,531	$	—	$	3,731
Collectively evaluated for impairment	1,218,736		339,338		21,773		1,579,847
Total	$	1,220,936	$	340,869	$	21,773	$	1,583,578

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, 2021
Real estate loans:
Commercial property	$	1,040,685	$	11,801	$	1,865	$	—	$	1,054,351
Residential property	201,635		—		—		—		201,635
SBA property	125,672		254		1,919		—		127,845
Construction	6,572		—		—		—		6,572
Commercial and industrial loans:
Commercial term	69,694		3,550		1,146		—		74,390
Commercial lines of credit	100,007		1,449		—		—		101,456
SBA commercial term	17,695		261		382		—		18,338
SBA PPP	101,901		—		—		—		101,901
Other consumer loans	21,357		—		33		—		21,390
Total	$	1,685,218	$	17,315	$	5,345	$	—	$	1,707,878
December 31, 2020
Real estate loans:
Commercial property	$	866,508	$	10,268	$	3,960	$	—	$	880,736
Residential property	198,242		—		189		—		198,431
SBA property	123,147		251		3,172		—		126,570
Construction	15,199		—		—		—		15,199
Commercial and industrial loans:
Commercial term	81,724		4,362		1,164		—		87,250
Commercial lines of credit	93,883		1,299		905		—		96,087
SBA commercial term	20,923		281		674		—		21,878
SBA PPP	135,654		—		—		—		135,654
Other consumer loans	21,707		—		66		—		21,773
Total	$	1,556,987	$	16,461	$	10,130	$	—	$	1,583,578

The Company had no loans under modified terms related to the COVID-19 pandemic as of September 30, 2021. 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 December 31, 2020:


($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total













December 31, 2020
Real estate loans:
Commercial property	$	13,158	$	10,268	$	706	$	—	$	24,132
Residential property	425		—		—		—		425
SBA property	3,941		251		—		—		4,192

Commercial and industrial loans:
Commercial term	—		4,362		1,165		—		5,527

SBA commercial term	1,769		—		72		—		1,841

Total	$	19,293	$	14,881	$	1,943	$	—	$	36,117

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

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, 2021
Real estate loans:

Residential property	$	189	$	—	$	—	$	—	$	189
SBA property	—		—		—		766		766

Commercial and industrial loans:
Commercial term	—		—		3		—		3

SBA commercial term	—		—		—		314		314
SBA PPP	62		—		—		—		62
Other consumer loans	41		—		—		33		74
Total	$	292	$	—	$	3	$	1,113	$	1,408
December 31, 2020
Real estate loans:
Commercial property	$	—	$	—	$	—	$	524	$	524
Residential property	182		—		—		189		371
SBA property	—		—		—		885		885

Commercial and industrial loans:

Commercial lines of credit	—		—		—		904		904
SBA commercial term	—		—		—		595		595
Other consumer loans	120		36		—		66		222
Total	$	302	$	36	$	—	$	3,163	$	3,501

There were no nonaccrual loans guaranteed by a U.S. government agency at September 30, 2021 and December 31, 2020.

All loans under modified terms related to the COVID-19 pandemic were on accrual status and current at December 31, 2020.

Impaired Loans

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, 2021
Real estate loans:
Commercial property	$	328	$	327	$	—	$	—	$	—

SBA property	1,016		1,062		—		—		—

Commercial and industrial loans:
Commercial term	5		5		—		—		—

SBA commercial term	320		332		—		—		—

Total	$	1,669	$	1,726	$	—	$	—	$	—
December 31, 2020
Real estate loans:
Commercial property	$	856	$	855	$	—	$	—	$	—
Residential property	189		189		—		—		—
SBA property	1,108		1,198		47		45		3

Commercial and industrial loans:
Commercial term	18		18		—		—		—
Commercial lines of credit	905		905		—		—		—
SBA commercial term	592		632		16		18		2

Total	$	3,668	$	3,797	$	63	$	63	$	5

The following table presents information on the recorded investment in impaired loans by portfolio segment for the three months ended September 30, 2021 and 2020:


	Three Months Ended September 30,
	2021				2020
($ in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Real estate loans:
Commercial property	$	329	$	6	$	336	$	6

SBA property	1,026		3		1,203		4

Commercial and industrial loans:
Commercial term	8		—		24		—
Commercial lines of credit	—		—		1,747		—
SBA commercial term	327		—		395		—

Total	$	1,690	$	9	$	3,705	$	10

The following table presents information on the recorded investment in impaired loans by portfolio segment for the nine months ended September 30, 2021 and 2020:


	Nine Months Ended September 30,
	2021				2020
($ in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Real estate loans:
Commercial property	$	330	$	17	$	337	$	17

SBA property	1,140		13		1,554		13

Commercial and industrial loans:
Commercial term	12		—		25		1
Commercial lines of credit	—		—		2,085		—
SBA commercial term	410		1		451		1

Total	$	1,892	$	31	$	4,452	$	32

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)	2021		2020		2021		2020
Interest income that would have been recognized had impaired loans performed in accordance with their original terms	$	23	$	53	$	78	$	198
Less: interest income recognized on impaired loans on a cash basis	(9)		(10)		(31)		(32)
Interest income foregone on impaired loans	$	14	$	43	$	47	$	166

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, 2021						December 31, 2020
($ in thousands)	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
Real estate loans:
Commercial property	$	328	$	—	$	328	$	333	$	—	$	333

SBA property	250		26		276		270		5		275

Commercial and industrial loans:
Commercial term	5		—		5		18		—		18

SBA commercial term	6		—		6		13		—		13

Total	$	589	$	26	$	615	$	634	$	5	$	639

There were no new loans that were modified as TDRs for the three months ended September 30, 2021 or 2020. The following table presents information on new loans that were modified as TDRs for the nine months ended September 30, 2021 and 2020:


	Nine Months Ended September 30,
	2021					2020
($ 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





Commercial and industrial loans:


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

Total	—	$	—	$	—	2	$	37	$	37

(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, 2021 and December 31, 2020.

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 no allowance for loan losses as of September 30, 2021 and December 31, 2020.

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, 2021 or 2020. 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, 2021 and 2020:


	Nine Months Ended September 30,
	2021			2020
($ 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)	2021		2020		2021		2020
Real estate loans:
Commercial property	$	3,452	$	—	$	5,162	$	—
Residential property	—		—		189		1,125


Commercial and industrial loans:


SBA commercial term	—		—		—		230

Total	$	3,452	$	—	$	5,351	$	1,355

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)	2021		2020		2021		2020
Real estate loans:

Residential property	$	—	$	—	$	—	$	697







Total	$	—	$	—	$	—	$	697

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


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021		2020
Real estate loans:

Residential property	$	803	$	—	$	1,439	$	—







Total	$	803	$	—	$	1,439	$	—

Loans Held-For-Sale

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


($ in thousands)	September 30, 2021		December 31, 2020
Real estate loans:

Residential property	$	—	$	300
SBA property	28,036		1,411

Commercial and industrial loans:


SBA commercial term	984		268

Total	$	29,020	$	1,979

Loans held-for-sale 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, 2021 and December 31, 2020, total servicing assets were $7.0 million and $6.4 million, respectively. The Company sells SBA loans and certain residential property loans with servicing retained. The Company sold loans of $45.0 million and $8.6 million, respectively, with the servicing rights retained and recognized a net gain on sale of $4.3 million and $689 thousand, respectively, during the three months ended September 30, 2021 and 2020. During the nine months ended September 30, 2021 and 2020, the Company sold $90.1 million and $47.1 million, respectively, with the servicing rights retained and recognized a net gain on sale of $9.4 million and $2.8 million, respectively. Loan servicing income was $655 thousand and $856 thousand for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, loan servicing income was $2.1 million and $2.3 million, respectively,

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, 2021									December 31, 2020
($ in thousands)	Residential Property			SBA Property			SBA Commercial Term			Residential Property			SBA Property			SBA Commercial Term
Carrying amount	$	87		$	6,398		$	524		$	109		$	5,642		$	649
Fair value	$	119		$	11,286		$	787		$	133		$	8,498		$	888
Discount rate	6.33		%	8.75		%	9.64		%	11.25		%	13.25		%	12.75		%
Prepayment speed	26.40		%	8.82		%	12.31		%	27.20		%	9.99		%	11.01		%
Weighted average remaining life	22.1 years			21.3 years			6.3 years			23.1 years			21.1 years			6.6 years
Underlying loans being serviced	$	17,604		$	430,084		$	64,241		$	22,299		$	400,982		$	75,514

The following table presents activity in servicing assets for the three months ended September 30, 2021 and 2020:


	Three Months Ended September 30,
	2021						2020
($ in thousands)	Residential Property		SBA Property		SBA Commercial Term		Residential Property		SBA Property		SBA Commercial Term
Balance at beginning of period	$	96	$	5,800	$	586	$	125	$	5,554	$	720
Additions	—		1,040		13		—		140		16
Amortization	(9)		(442)		(75)		(8)		(320)		(61)

Balance at end of period	$	87	$	6,398	$	524	$	117	$	5,374	$	675

The following table presents activity in servicing assets for the nine months ended September 30, 2021 and 2020:


	Nine Months Ended September 30,
	2021						2020
($ in thousands)	Residential Property		SBA Property		SBA Commercial Term		Residential Property		SBA Property		SBA Commercial Term
Balance at beginning of period	$	109	$	5,642	$	649	$	171	$	5,805	$	822
Additions	—		2,021		84		—		653		100
Amortization	(22)		(1,265)		(209)		(54)		(1,084)		(247)

Balance at end of period	$	87	$	6,398	$	524	$	117	$	5,374	$	675

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)	2021		2020		2021		2020
Balance at beginning of period	$	—	$	376	$	1,401	$	—
Additions	—		2,490		1,960		2,866
Sales	—		(2,490)		(3,361)		(2,490)
Net change in valuation allowance	—		—		—		—
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)	2021		2020		2021		2020
Balance at beginning of period	$	—	$	—	$	—	$	—
Additions	—		—		—		—
Net direct write-downs and removal from sale	—		—		—		—
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)	2021		2020		2021		2020
Net gain (loss) on sales	$	—	$	—	$	74	$	—
Operating expenses, net of rental income	—		(2)		(81)		(2)
Total	$	—	$	(2)	$	(7)	$	(2)

The Company did not provide loans to finance the sale of its OREO property during the nine months ended September 30, 2021. During the three and nine months ended September 30, 2020, the Company provided a loan of $1.5 million to finance the sale of its OREO property.

Note 7 - Operating Leases

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)	2021		2020		2021		2020
Operating lease cost (1)	$	611	$	669	$	1,913	$	1,985
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	654	$	680	$	2,051	$	2,107
Right of use assets obtained in exchange for lease obligations	$	1,111	$	51	$	1,247	$	105

(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, 2021			December 31, 2020
Operating leases:
Operating lease assets	$	7,164		$	7,616
Operating lease liabilities	$	7,862		$	8,455
Weighted-average remaining lease term	4.1 years			4.3 years
Weighted-average discount rate	2.36		%	2.60		%

The following table presets maturities of operating lease liabilities as of September 30, 2021:


($ in thousands)	September 30, 2021
Maturities:
2021	$	684
2022	2,712
2023	2,230
2024	793
2025	753
After 2025	1,193
Total lease payment	8,365
Imputed Interest	(503)
Present value of operating lease liabilities	$	7,862

Note 8 - Federal Home Loan Bank Advances and Other Borrowings

FHLB Advances

The Company had outstanding FHLB advances of $10.0 million and $80.0 million at September 30, 2021 and December 31, 2020, respectively. FHLB advances consisted of a fixed interest rate term borrowing with a maturity date of June 29, 2022 (original maturity term of five years) and an interest rate of 2.07% at September 30, 2021. At December 31, 2020, FHLB advances consisted of fixed interest rate term borrowings with original maturity terms ranging from one to five years and weighted-average interest rate of 0.67%. Each borrowing is payable at its maturity date. Borrowings paid early are subject to a prepayment penalty.

At September 30, 2021 and December 31, 2020, loans pledged to secure borrowings from the FHLB were $885.1 million and $834.4 million, respectively. The Company’s investment in capital stock of the FHLB of San Francisco totaled $8.4 million and $8.3 million at September 30, 2021 and December 31, 2020, respectively. The Company had additional borrowing capacity of $505.0 million and $425.3 million from the FHLB as of September 30, 2021 and December 31, 2020, respectively.

Other Borrowing Arrangements

At September 30, 2021, the Company had $36.9 million of unused borrowing capacity from the Federal Reserve Discount Window, to which the Company pledged loans with a carrying value of $45.1 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, 2021.

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.

On April 8, 2021, the Company’s Board of Directors approved a repurchase program authorizing the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 775,000 shares, through September 7, 2021. As of September 30, 2021, the Company repurchased and retired 680,269 shares of common stock at a weighted-average price of $15.99 per share, totaling $10.9 million under this repurchase program.

Note 10 - Share-Based Compensation

On July 25, 2013, the Company adopted the 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, 2021, there were 483,170 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)	2021		2020		2021		2020
Share-based compensation expense related to:
Stock options	$	52	$	162	$	130	$	478
Restricted stock awards	64		38		193		114
Total share-based compensation expense	$	116	$	200	$	323	$	592
Related tax benefits	$	21	$	21	$	62	$	61

The following table presents unrecognized share-based compensation expense as of September 30, 2021:

($ in thousands)

Unrecognized Expense

Weighted-Average Remaining Expected Recognition Period

Unrecognized share-based compensation expense related to:

Stock options

322

2.3 years

Restricted stock awards

607

2.4 years

Total unrecognized share-based compensation expense

929

2.3 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, 2021:


	Three Months Ended September 30, 2021
($ 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	646,948	$	10.98	4.8 years	$	3,310
Granted	15,000	$	20.28	10.0 years
Exercised	(19,977)	$	12.69	5.3 years

Outstanding at end of period	641,971	$	11.15	4.6 years	$	5,625
Exercisable at end of period	537,872	$	10.23	4.0 years	$	5,205

The following table represents stock option activity for the nine months ended September 30, 2021:


	Nine Months Ended September 30, 2021
($ 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	718,935	$	10.87	5.1 years	$	—
Granted	35,000	$	15.84	10.0 years
Exercised	(101,964)	$	10.15	3.8 years
Forfeited	(10,000)	$	17.47	8.0 years
Outstanding at end of period	641,971	$	11.15	4.6 years	$	5,625
Exercisable at end of period	537,872	$	10.23	4.0 years	$	5,205

The following table represents information regarding unvested stock options for the three and nine months ended September 30, 2021:


	Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021
	Number of Shares	Weighted-Average Exercise Price Per Share		Number of Shares	Weighted-Average Exercise Price Per Share
Outstanding at beginning of period	93,099	$	15.09	121,199	$	15.68
Granted	15,000	$	20.28	35,000	$	15.84
Vested	(4,000)	$	14.00	(42,100)	$	14.89
Forfeited	—	$	—	(10,000)	$	17.47
Outstanding at end of period	104,099	$	15.88	104,099	$	15.88

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, 2021:


	Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021
	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	62,884	$	13.13	30,300	$	16.27
Granted	1,800	$	19.12	35,584	$	10.80
Vested	(9,100)	$	16.52	(9,300)	$	16.46
Forfeited	(300)	$	9.33	(1,300)	$	13.23
Outstanding at end of period	55,284	$	12.79	55,284	$	12.79

Note 11 - Income Taxes

Income tax expense was $4.6 million and $1.5 million, respectively, and the effective tax rate was 29.5% and 29.8%, respectively, for the three months ended September 30, 2021 and 2020. For the nine months ended September 30, 2021 and 2020, income tax expense was $12.3 million and $4.4 million, respectively, and the effective tax rate was 29.5% and 29.7%, respectively.

At September 30, 2021 and December 31, 2020, the Company had no unrecognized tax benefits or related accrued interest.

The Company and its subsidiaries are subject to U.S. federal and various state jurisdictions income tax examinations. As of September 30, 2021, 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)	2021		2020		2021		2020
Basic earnings per share:
Net income	$	11,023	$	3,449	$	29,427	$	10,388
Less: income allocated to unvested restricted stock	(43)		(8)		(116)		(25)
Net income allocated to common stock	$	10,980	$	3,441	$	29,311	$	10,363
Weighted-average total common shares outstanding	14,837,000		15,378,374		15,150,635		15,432,353
Less: weighted-average unvested restricted stock	(57,293)		(34,486)		(59,646)		(36,878)
Weighted-average common shares outstanding, basic	14,779,707		15,343,888		15,090,989		15,395,475
Basic earnings per share	$	0.74	$	0.22	$	1.94	$	0.67
Diluted earnings per share:
Net income allocated to common stock	$	10,980	$	3,441	$	29,311	$	10,363
Weighted-average common shares outstanding, basic	14,779,707		15,343,888		15,090,989		15,395,475
Diluted effect of stock options	251,851		33,643		207,076		70,732
Weighted-average common shares outstanding, diluted	15,031,558		15,377,531		15,298,065		15,466,207
Diluted earnings per share	$	0.73	$	0.22	$	1.92	$	0.67

There were 50,000 and 660,859 stock options excluded in computing diluted EPS because they were anti-dilutive for three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, there were 104,000 and 163,000 stock options excluded in computing diluted EPS because they were anti-dilutive.

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, 2021 and December 31, 2020, the Company had the following outstanding financial commitments whose contractual amount represents credit risk:


	September 30, 2021				December 31, 2020
($ in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	5,852	$	150,559	$	6,623	$	150,247
Unfunded loan commitments	130		33,798		1,752		34,874
Standby letters of credit	3,037		1,431		2,971		1,814
Commercial letters of credit	353		—		—		—
Total	$	9,372	$	185,788	$	11,346	$	186,935

Unfunded loan commitments are generally made for periods of 90 days or less, except for SBA loans that are generally made for periods of 180 days or less.

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 a reserve for off-balance sheet items of $191 thousand and $238 thousand, respectively, at September 30, 2021 and December 31, 2020, 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 may in the future impact its business, results of operations, and financial condition negatively.

Network and Data Incident

On August 30, 2021, the Bank identified unusual activity on its network, responded promptly to disable the activity, investigate its source and monitor the Bank’s network. The Bank subsequently became aware of claims that it had been the target of a ransomware attack, and on September 7, 2021, determined that an external actor had accessed or acquired certain data on its network. The Bank has been working with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and what clients were impacted. The investigation revealed that this incident impacted files containing certain Bank customer information, including in some cases personal information of customers and customers’ employees. The Bank has notified or will notify all individuals identified to date, consistent with applicable laws, whose information may have been impacted. All impacted individuals will be offered free Equifax Complete Premier credit monitoring and identity theft protection services. The Bank has notified law enforcement and appropriate authorities of the incident.

The Company continues to monitor and evaluate the data incident for its magnitude and concomitant financial, legal or reputational consequences. To date, such consequences are not material, however the data incident is still recent and notices to affected individuals only recently began. During the three months ended September 30, 2021, expenses associated with the data incident, all of which are included in Other Expense in Consolidated Statements of Income (Unaudited), totaled $100 thousand, which represents the retention amount on its insurance claims. The Company anticipates additional expenses will be incurred in future periods; however, the Company does have a cyber-liability insurance policy that should provide insurance coverage for this incident. To date, no litigation has resulted from the data incident.

During its most recent review of disclosure controls and procedures, the Company considered the data incident and concluded that its disclosure controls and procedures were effective. Nevertheless, the Company continues to enhance and update its disclosure controls and procedures, including as part of its efforts to enhance its cybersecurity safeguards and measures. With respect to the data incident, upon discovery the Bank engaged experienced outside counsel and continues to work with its experienced third-party forensics firm to investigate and remediate the matter. The Board of Directors was kept apprised of, and a director with experience in data security participated in, the investigation and remediation efforts. As a result of this incident and based on information known at this date, the Company determined that its disclosure controls and procedures were effective and the data incident did not materially affect, nor was it reasonably likely to affect, the Company’s internal control over financial reporting.

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, 2021 and December 31, 2020, 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 the 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 8.32% and 8.01%, respectively, as of September 30, 2021, and 9.22% and 8.95%, respectively, as of December 31, 2020. 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, 2021
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	$	246,341	15.07	%	$	73,553	4.5	%	N/A		N/A
Total capital (to risk-weighted assets)	266,817		16.32	%	130,762		8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	246,341		15.07	%	98,071		6.0	%	N/A		N/A
Tier 1 capital (to average assets)	246,341		11.91	%	82,728		4.0	%	N/A		N/A
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	$	241,177	14.76	%	$	73,550	4.5	%	$	106,239	6.5	%
Total capital (to risk-weighted assets)	261,652		16.01	%	130,756		8.0	%	163,445		10.0	%
Tier 1 capital (to risk-weighted assets)	241,177		14.76	%	98,067		6.0	%	130,756		8.0	%
Tier 1 capital (to average assets)	241,177		11.66	%	82,725		4.0	%	103,407		5.0	%
December 31, 2020
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	$	231,183	15.97	%	$	65,162	4.5	%	N/A		N/A
Total capital (to risk-weighted assets)	249,391		17.22	%	115,843		8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	231,183		15.97	%	86,882		6.0	%	N/A		N/A
Tier 1 capital (to average assets)	231,183		11.94	%	77,452		4.0	%	N/A		N/A
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	$	227,268	15.70	%	$	65,160	4.5	%	$	94,120	6.5	%
Total capital (to risk-weighted assets)	245,474		16.95	%	115,840		8.0	%	144,800		10.0	%
Tier 1 capital (to risk-weighted assets)	227,268		15.70	%	86,880		6.0	%	115,840		8.0	%
Tier 1 capital (to average assets)	227,268		11.74	%	77,450		4.0	%	96,813		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. Under the balance sheet test, 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.

Note 15 - Revenue Recognition

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


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2021		2020		2021		2020
Noninterest income in-scope of Topic 606
Service charges and fees on deposits:
Monthly service fees	$	21	$	19	$	60	$	68
Account analysis fees	220		206		649		634
Non-sufficient funds charges	35		39		130		181
Other deposit related fees	16		16		48		62
Total service charges and fees on deposits	292		280		887		945
Debit card fees	86		67		222		185
Gain (loss) on sale of other real estate owned	—		—		74		—
Wire transfer fees	159		137		435		391
Other service charges	50		47		150		139
Total	$	587	$	531	$	1,768	$	1,660

Note 16 - Subsequent Events

Dividend Declared on Common Stock. On October 28, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.12 per common share. The dividend will be paid on or about November 19, 2021, to shareholders of record as of the close of business on November 12, 2021.

Appointment of New Director. On October 28, 2021, the Company’s Board of Directors appointed Janice Chung to the Board of Directors of the Company and the Bank effective November 1, 2021.

The Company has evaluated the effects of events that have occurred subsequent to September 30, 2021 through the issuance date of these consolidated financial statements (unaudited). Other than the events 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, 2021. This analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and with the unaudited consolidated financial statements and notes (unaudited) thereto set forth in this Quarterly Report on Form 10-Q.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with GAAP and general practices within the banking industry. Within these financial statements, certain financial information contains approximate measurements of financial effects of transactions and impacts at the consolidated statements of financial condition dates and the Company’s results of operations for the reporting periods. As certain accounting policies require significant estimates and assumptions that have a material impact on the carrying value of assets and liabilities, the Company has established critical accounting policies to facilitate making the judgment necessary to prepare financial statements. The Company’s critical accounting policies are described in Note 1 to Consolidated Financial Statements and in the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the year ended December 31, 2020 and in Note 1 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.

Non-GAAP Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated, and presented in accordance with GAAP. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures and may not be comparable to non-GAAP financial measures that may be presented by other companies.

The following table presents reconciliation of allowance for loan losses to loans held-for-investment, excluding SBA PPP loans to its most comparable GAAP measure. The Company believes that this non-GAAP measure enhance comparability to prior periods and provide supplemental information regarding the Company’s credit quality trend.


($ in thousands)	September 30, 2021			December 31, 2020			September 30, 2020
Loans held-for-investment	$	1,707,878		$	1,583,578		$	1,578,804
Less: SBA PPP loans	101,901			135,654			136,418
Loans held-for-investment, excluding SBA PPP loans	$	1,605,977		$	1,447,924		$	1,442,386
Allowance for loan losses	$	23,807		$	26,510		$	24,546
Allowance for loan losses to loans held-for-investment	1.39		%	1.67		%	1.55		%
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans	1.48		%	1.83		%	1.70		%

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)	2021			2020			2021			2020
Selected balance sheet data:
Cash and cash equivalents	$	214,973		$	257,382		$	214,973		$	257,382
Securities available-for-sale	133,102			128,982			133,102			128,982

Loans held-for-sale	29,020			30,878			29,020			30,878
Loans held-for-investment, net of deferred loan costs (fees)	1,707,878			1,578,804			1,707,878			1,578,804
Allowance for loan losses	(23,807)			(24,546)			(23,807)			(24,546)
Total assets	2,104,699			2,021,187			2,104,699			2,021,187
Total deposits	1,832,666			1,647,107			1,832,666			1,647,107
Shareholders’ equity	247,598			229,339			247,598			229,339
Selected income statement data:
Interest income	$	21,168		$	19,620		$	60,477		$	60,253
Interest expense	941			2,767			3,435			11,471
Net interest income	20,227			16,853			57,042			48,782
Provision (reversal) for loan losses	(1,053)			4,326			(3,134)			11,077
Noninterest income	5,588			2,272			13,596			7,216
Noninterest expense	11,232			9,886			32,040			30,149
Income before income taxes	15,636			4,913			41,732			14,772
Income tax expense	4,613			1,464			12,305			4,384
Net income	11,023			3,449			29,427			10,388
Per share data:
Earnings per common share, basic	$	0.74		$	0.22		$	1.94		$	0.67
Earnings per common share, diluted	0.73			0.22			1.92			0.67
Book value per common share (1)	16.68			14.91			16.68			14.91
Cash dividends declared per common share	0.12			0.10			0.32			0.30
Outstanding share data:
Number of common shares outstanding	14,841,626			15,379,538			14,841,626			15,379,538
Weighted-average common shares outstanding, basic	14,779,707			15,343,888			15,090,989			15,395,475
Weighted-average common shares outstanding, diluted	15,031,558			15,377,531			15,298,065			15,466,207
Selected performance ratios:
Return on average assets (2)	2.11		%	0.69		%	1.94		%	0.73		%
Return on average shareholders’ equity (2)	17.98		%	5.98		%	16.40		%	6.10		%
Dividend payout ratio (3)	16.22		%	45.45		%	16.49		%	44.78		%
Efficiency ratio (4)	43.51		%	51.69		%	45.36		%	53.84		%
Yield on average interest-earning assets (2)	4.12		%	4.00		%	4.05		%	4.31		%
Cost of funds (2)	0.21		%	0.63		%	0.26		%	0.92		%
Net interest spread (2)	3.75		%	3.08		%	3.62		%	3.03		%
Net interest margin (2), (5)	3.93		%	3.43		%	3.82		%	3.49		%
Total loans to total deposits ratio (6)	94.77		%	97.73		%	94.77		%	97.73		%


	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)	2021			2020			2021			2020














Asset quality:
Loans 30 to 89 days past due and still accruing	$	292		$	301		$	292		$	301

Nonperforming loans (7)	1,116			3,592			1,116			3,592
Nonperforming assets (8)	1,116			3,968			1,116			3,968
Net charge-offs (recoveries)	29			28			(431)			911
Loans 30 to 89 days past due and still accruing to loans held-for-investment	0.02		%	0.02		%	0.02		%	0.02		%


Nonperforming loans to loans held-for-investment	0.07		%	0.23		%	0.07		%	0.23		%
Nonperforming loans to allowance for loan losses	4.69		%	14.63		%	4.69		%	14.63		%
Nonperforming assets to total assets	0.05		%	0.20		%	0.05		%	0.20		%
Allowance for loan losses to loans held-for-investment	1.39		%	1.55		%	1.39		%	1.55		%
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (9)	1.48		%	1.70		%	1.48		%	1.70		%
Allowance for loan losses to nonaccrual loans	2,138.99		%	848.46		%	2,138.99		%	848.46		%
Allowance for loan losses to nonperforming loans	2,133.24		%	683.35		%	2,133.24		%	683.35		%
Net charge-offs (recoveries) to average loans held-for-investment (2)	0.01		%	0.01		%	(0.04)		%	0.08		%
Capital ratios:
Shareholders’ equity to total assets	11.76		%	11.35		%	11.76		%	11.35		%
Average equity to average assets	11.75		%	11.52		%	11.84		%	11.92		%
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	15.07		%	15.60		%	15.07		%	15.60		%
Total capital (to risk-weighted assets)	16.32		%	16.86		%	16.32		%	16.86		%
Tier 1 capital (to risk-weighted assets)	15.07		%	15.60		%	15.07		%	15.60		%
Tier 1 capital (to average assets)	11.91		%	11.40		%	11.91		%	11.40		%
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	14.76		%	15.34		%	14.76		%	15.34		%
Total capital (to risk-weighted assets)	16.01		%	16.60		%	16.01		%	16.60		%
Tier 1 capital (to risk-weighted assets)	14.76		%	15.34		%	14.76		%	15.34		%
Tier 1 capital (to average assets)	11.66		%	11.21		%	11.66		%	11.21		%

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

(2) Annualized.

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

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

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

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

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

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

(9) Non-GAAP measure. See "Non-GAAP Measures" for a reconciliation to its most comparable GAAP measure.

Executive Summary

Q3 2021 Financial Highlights

•Net income was $11.0 million for the three months ended September 30, 2021, an increase of $7.6 million, or 219.6%, from $3.4 million for the three months ended September 30, 2020;

◦The Company recorded a provision (reversal) for loan losses of $(1.1) million for the three months ended September 30, 2021 compared with $4.3 million for the three months ended September 30, 2020.

◦Net interest income was $20.2 million for the three months ended September 30, 2021 compared with $16.9 million for the three months ended September 30, 2020. Net interest margin was 3.93% for the three months ended September 30, 2021 compared with 3.43% for the three months ended September 30, 2020.

◦Gain on sale of loans was $4.3 million for the three months ended September 30, 2021 compared with $821 thousand for the three months ended September 30, 2020.

•Total assets were $2.10 billion at September 30, 2021, an increase of $181.8 million, or 9.5%, from $1.92 billion at December 31, 2020;

•Loans held-for-investment, net of deferred costs (fees), were $1.71 billion at September 30, 2021, an increase of $124.3 million, or 7.8%, from $1.58 billion at December 31, 2020; and

◦SBA PPP loans totaled $101.9 million and $135.7 million at September 30, 2021 and December 31, 2020, respectively. During the nine months ended September 30, 2021, the Company funded SBA PPP loans of $107.3 million and recognized $144.9 million in forgiveness and payoffs.

◦Loans under modified terms related to COVID-19 pandemic totaled none and $36.1 million at September 30, 2021 and December 31, 2020, respectively.

◦Allowance for loan losses to total loans held-for-investment ratio was 1.39% at September 30, 2021 compared with 1.67% at December 31, 2020.

•Total deposits were $1.83 billion at September 30, 2021, an increase of $237.8 million, or 14.9%, from $1.59 billion at December 31, 2020.

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on recent global economic and market conditions, including significant disruption of, and volatility in, financial markets; global supply chain disruptions; and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment throughout the U.S., but also specifically in California, where most of the Company’s operations and a large majority of its customers are located. While California’s and New York’s shelter-at-home limits were largely lifted in June, the local economies in the Company’s primary markets have not yet fully recovered. Since the beginning of the crisis, the Company has taken a number of steps to protect the safety of its employees and to support its customers. The Company has enabled its staff to work remotely and established safety measures within its bank premises and branches for both employees and customers.

In order to support its customers, the Company has been in close contact with its customers, assessing the level of impact on their businesses, and putting a process in place to evaluate each client’s specific situation and provide relief programs where appropriate.

In addition, the Company has been monitoring its liquidity and capital closely. As of September 30, 2021, the Company maintained $215.0 million, or 10.2% of total assets, of cash and cash equivalents and $606.9 million, or 28.8% of total assets, of available borrowing capacity. All regulatory capital ratios were also well above the regulatory well capitalized requirements as of September 30, 2021. At this time, the Company cannot estimate the long term impact of the COVID-19 pandemic, but these conditions impacted and are expected to impact its business, results of operations, and financial condition negatively.

Results of Operations

Net Interest Income

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

The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs expressed both in dollars and rates, on a consolidated operations basis, for the periods indicated:


	Three Months Ended September 30,
	2021						2020
($ in thousands)	Average Balance		Interest		Yield/ Cost (6)		Average Balance		Interest		Yield/ Cost (6)
Interest-earning assets:
Total loans (1)	$	1,715,106	$	20,537	4.75	%	$	1,564,704	$	18,938	4.81	%
Mortgage backed securities	95,908		278		1.15	%	75,832		339		1.78	%
Collateralized mortgage obligation	22,534		57		1.00	%	33,393		82		0.98	%
SBA loan pool securities	10,390		45		1.72	%	12,996		57		1.74	%
Municipal bonds - tax exempt (2)	5,759		36		2.48	%	5,991		37		2.46	%
Corporate bonds	2,283		21		3.65	%	—		—		—	%
Interest-bearing deposits in other financial institutions	179,560		69		0.15	%	251,979		64		0.10	%
FHLB and other bank stock	8,577		125		5.78	%	8,447		103		4.85	%
Total interest-earning assets	2,040,117		21,168		4.12	%	1,953,342		19,620		4.00	%
Noninterest-earning assets:
Cash and cash equivalents	19,915						17,094
Allowance for loan losses	(24,854)						(21,268)
Other assets	35,187						42,446
Total noninterest earning assets	30,248						38,272
Total assets	$	2,070,365					$	1,991,614
Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	387,661	291		0.30	%	$	365,093	391		0.43	%
Savings	12,806		2		0.06	%	9,517		2		0.08	%
Time deposits	599,865		592		0.39	%	689,352		2,206		1.27	%
Borrowings	18,152		56		1.22	%	130,000		168		0.51	%
Total interest-bearing liabilities	1,018,484		941		0.37	%	1,193,962		2,767		0.92	%
Noninterest-bearing liabilities:
Demand deposits	794,165						552,255
Other liabilities	14,531						15,934
Total noninterest-bearing liabilities	808,696						568,189
Total liabilities	1,827,180						1,762,151
Shareholders’ equity	243,185						229,463
Total liabilities and shareholders’ equity	$	2,070,365					$	1,991,614
Net interest income			$	20,227					$	16,853
Net interest spread (3)					3.75	%					3.08	%
Net interest margin (4)					3.93	%					3.43	%
Cost of funds (5)					0.21	%					0.63	%

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees (cost) of $3.4 million and $1.2 million, respectively, and net accretion of discount on loans of $1.9 million and $743 thousand, respectively, are included in the interest income for the three months ended September 30, 2021 and 2020.

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

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

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

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

(6) Annualized.


	Nine Months Ended September 30,
	2021						2020
($ in thousands)	Average Balance		Interest		Yield/ Cost (6)		Average Balance		Interest		Yield/ Cost (6)
Interest-earning assets:
Total loans (1)	$	1,683,084	$	58,792	4.67	%	$	1,524,628	$	57,617	5.05	%
Mortgage backed securities	90,095		726		1.08	%	65,713		985		2.00	%
Collateralized mortgage obligation	23,442		168		0.96	%	37,500		402		1.43	%
SBA loan pool securities	10,959		148		1.81	%	13,351		198		1.98	%
Municipal bonds - tax exempt (2)	5,774		109		2.52	%	5,807		113		2.60	%
Corporate bonds	769		21		3.65	%	—		—		—	%
Interest-bearing deposits in other financial institutions	172,136		156		0.12	%	213,292		585		0.37	%
FHLB and other bank stock	8,527		357		5.60	%	8,406		353		5.61	%
Total interest-earning assets	1,994,786		60,477		4.05	%	1,868,697		60,253		4.31	%
Noninterest-earning assets:
Cash and cash equivalents	19,359						17,324
Allowance for loan losses	(25,753)						(17,676)
Other assets	37,371						38,255
Total noninterest earning assets	30,977						37,903
Total assets	$	2,025,763					$	1,906,600
Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	398,459	941		0.32	%	$	367,222	2,058		0.75	%
Savings	11,676		4		0.05	%	7,706		8		0.14	%
Time deposits	616,707		2,251		0.49	%	725,927		8,934		1.64	%
Borrowings	37,363		239		0.86	%	95,276		471		0.66	%
Total interest-bearing liabilities	1,064,205		3,435		0.43	%	1,196,131		11,471		1.28	%
Noninterest-bearing liabilities:
Demand deposits	707,800						465,634
Other liabilities	13,925						17,493
Total noninterest-bearing liabilities	721,725						483,127
Total liabilities	1,785,930						1,679,258
Shareholders’ equity	239,833						227,342
Total liabilities and shareholders’ equity	$	2,025,763					$	1,906,600
Net interest income			$	57,042					$	48,782
Net interest spread (3)					3.62	%					3.03	%
Net interest margin (4)					3.82	%					3.49	%
Cost of funds (5)					0.26	%					0.92	%

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees (cost) of $4.7 million and $2.0 million, respectively, and net accretion of discount on loans of $2.7 million and $2.3 million, respectively, are included in the interest income for the nine months ended September 30, 2021 and 2020.

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

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

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

(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,
	2021 vs. 2020						2021 vs. 2020
	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	$	1,820	$	(221)	$	1,599	$	5,988	$	(4,813)	$	1,175
Investment securities	35		(113)		(78)		120		(646)		(526)
Other interest-earning assets	(46)		73		27		(174)		(251)		(425)
Total interest income	1,809		(261)		1,548		5,934		(5,710)		224
Interest incurred on:
Savings, NOW, and money market deposits	27		(127)		(100)		194		(1,315)		(1,121)
Time deposits	(286)		(1,328)		(1,614)		(1,344)		(5,339)		(6,683)
Borrowings	(145)		33		(112)		(286)		54		(232)
Total interest expense	(404)		(1,422)		(1,826)		(1,436)		(6,600)		(8,036)
Change in net interest income	$	2,213	$	1,161	$	3,374	$	7,370	$	890	$	8,260

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

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)	2021		2020
Interest income:
Interest and fees on loans	$	20,537	$	18,938	$	1,599	8.4	%
Interest on investment securities	437		515		(78)		(15.1)	%
Interest and dividends on other interest-earning assets	194		167		27		16.2	%
Total interest income	21,168		19,620		1,548		7.9	%
Interest expense:
Interest on deposits	885		2,599		(1,714)		(65.9)	%
Interest on borrowings	56		168		(112)		(66.7)	%
Total interest expense	941		2,767		(1,826)		(66.0)	%
Net interest income	$	20,227	$	16,853	$	3,374	20.0	%

Net interest income increased primarily due to a 55 basis point decrease in average cost on interest-bearing liabilities, a 12 basis point increase in average yield on interest-earning assets, a 4.4% increase in average balance of interest-earning assets, and a 14.7% decrease in average balance of interest-bearing liabilities.

Interest and fees on loans increased primarily due to a 9.6% increase in average balance, partially offset by a 6 basis point decrease in average yield. The decrease in average yield was primarily due to the lower market rates, partially offset by increases in amortization of net deferred fees and net accretion of discount. The increase in net accretion of discount was primarily due to an increase in loan payoffs on SBA loans. The increase in amortization of net deferred fees was primarily due to the payoffs and forgiveness of SBA PPP loans.

Interest on investment securities decreased primarily due to a 33 basis point decrease in average yield, partially offset by a 6.8% increase in average balance. The decrease in average yield and the increase in average balance were primarily due to new investment securities purchased under low market rates during the past 12-month period. The Company purchased new investment securities of $50.0 million during the past 12-month period. For the three months ended September 30, 2021 and 2020, yield on total investment securities was 1.27% and 1.60%, respectively.

Interest income on other interest-earning assets increased primarily due to a 15 basis point increase in average yield, partially offset by a 27.8% decrease in average balance. The increase in average yield was primarily due to an increase in dividend income on Federal Home Loan Bank stock. The decrease in average balance was primarily due to an increase in loans, partially offset by an increase in deposits. For the three months ended September 30, 2021 and 2020, yield on total other interest-earning assets was 0.41% and 0.26%, respectively.

Interest expense on deposits decreased primarily due to a 62 basis point decrease in average cost of interest-bearing deposits and a 13.0% decrease in average balance of time deposits, partially offset by a 6.9% increase in savings, NOW and money market accounts. The decrease in average cost was primarily due to the lower market rates. The decrease in average balance of time deposits was primarily due to a lower level of new time deposits. For the three months ended September 30, 2021 and 2020, average cost on total interest-bearing deposits was 0.35% and 0.97%, respectively, and average cost on total deposits were 0.20% and 0.64%, respectively.

Interest expense on borrowings decreased primarily due to a decrease in average balance, partially offset by an increase in average cost of FHLB advances. The Company maintained a lower balance of other borrowings primarily due to the increase in deposits.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

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


	Nine Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2021		2020
Interest income:
Interest and fees on loans	$	58,792	$	57,617	$	1,175	2.0	%
Interest on investment securities	1,172		1,698		(526)		(31.0)	%
Interest and dividends on other interest-earning assets	513		938		(425)		(45.3)	%
Total interest income	60,477		60,253		224		0.4	%
Interest expense:
Interest on deposits	3,196		11,000		(7,804)		(70.9)	%
Interest on borrowings	239		471		(232)		(49.3)	%
Total interest expense	3,435		11,471		(8,036)		(70.1)	%
Net interest income	$	57,042	$	48,782	$	8,260	16.9	%

Net interest income increased primarily due to an 85 basis point decrease in average cost on interest-bearing liabilities, a 6.7% increase in average balance of interest-earning assets, and an 11.0% decrease in average balance of interest-bearing liabilities, partially offset by a 26 basis point decrease in average yield on interest-earning assets.

Interest and fees on loans increased primarily due to a 10.4% increase in average balance, partially offset by a 38 basis point decrease in average yield. The decrease in average yield was primarily due to the lower market rates, partially offset by increases in amortization of net deferred fees and net accretion of discount. The increase in net accretion of discount was primarily due to an increase in loan payoffs on SBA loans. The increase in amortization of net deferred fees was primarily due to the payoffs and forgiveness of SBA PPP loans.

Interest on investment securities decreased primarily due to a 65 basis point decrease in average yield, partially offset by a 7.1% increase in average balance. The decrease in average yield and the increase in average balance were primarily due to new investment securities purchased under low market rates during the past 12-month period. The Company purchased new investment securities of $50.0 million during the past 12-month period. For the nine months ended September 30, 2021 and 2020, yield on total investment securities was 1.20% and 1.85%, respectively.

Interest income on other interest-earning assets decreased primarily due to a 19 basis point decrease in average yield and an 18.5% decrease in average balance. The decrease in average yield was primarily due to the lower rates on the account with Federal Reserve Bank. The decrease in average balance was primarily due to an increase in loans, partially offset by an increase in deposits. For the nine months ended September 30, 2021 and 2020, yield on total other interest-earning assets was 0.38% and 0.57%, respectively.

Interest expense on deposits decreased primarily due to a 91 basis point decrease in average cost of interest-bearing deposits and a 15.0% decrease in average balance of time deposits, partially offset by a 9.4% increase in savings, NOW and money market accounts. The decrease in average cost was primarily due to the lower market rates. The decrease in average balance of time deposits was primarily due to a lower level of new time deposits. For the nine months ended September 30, 2021 and 2020, average cost on total interest-bearing deposits was 0.42% and 1.33%, respectively, and average cost on total deposits were 0.25% and 0.94%, respectively.

Provision (reversal) for Loan Losses

Provision (reversal) for loan losses was $(1.1) million and $4.3 million for the three months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, provision (reversal) for loan losses was $(3.1) million and $11.1 million, respectively. The reversal for loan losses for the three and nine months ended September 30, 2021 was primarily due to a decrease in historical loss and qualitative adjustment factor allocations as a result of improving economic conditions, partially offset by an increase in commercial property loans.

See further discussion in “Allowance for Loan Losses.”

Noninterest Income

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

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


	Three Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2021		2020
Service charges and fees on deposits	$	292	$	280	$	12	4.3	%
Loan servicing income	655		856		(201)		(23.5)	%
Gain on sale of loans	4,269		821		3,448		420.0	%

Other income	372		315		57		18.1	%
Total noninterest income	$	5,588	$	2,272	$	3,316	146.0	%

Service charges and fees on deposits increased primarily due to an increase in fee-based transactions.

Loan servicing income decreased primarily due to an increase in servicing asset amortization from an increase in loan payoffs. Servicing asset amortization was $525 thousand and $388 thousand, respectively, for the three months ended September 30, 2021 and 2020.

Gain on sale of loans increased primarily due to a higher level of premiums on SBA loans in the secondary market and an increase in sale volume of SBA loans. The Company sold SBA loans of $45.0 million with a gain of $4.3 million, residential property loans of $301 thousand with a gain of $2 thousand, and certain commercial property loans of $3.5 million with a gain of $4 thousand during the three months ended September 30, 2021. During the three months ended September 30, 2020, the Company sold SBA loans of $8.6 million with a gain of $689 thousand and residential property loans of $16.6 million with a gain of $132 thousand.

Other income primarily included wire transfer fees of $159 thousand and $137 thousand, respectively, and debit card interchange fees of $86 thousand and $67 thousand, respectively, for the three months ended September 30, 2021 and 2020.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

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


	Nine Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2021		2020
Service charges and fees on deposits	$	887	$	945	$	(58)	(6.1)	%
Loan servicing income	2,082		2,312		(230)		(9.9)	%
Gain on sale of loans	9,558		3,044		6,514		214.0	%

Other income	1,069		915		154		16.8	%
Total noninterest income	$	13,596	$	7,216	$	6,380	88.4	%

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

Loan servicing income decreased primarily due to a decrease in servicing fee income and an increase in servicing asset amortization. Servicing asset amortization was $1.5 million and $1.4 million, respectively, for the nine months ended September 30, 2021 and 2020.

Gain on sale of loans increased primarily due to a higher level of premiums on SBA loans in the secondary market and an increase in sale volume of SBA loans. The Company sold SBA loans of $90.1 million with a gain of $9.4 million, residential property loans of $9.8 million with a gain of $142 thousand, and certain commercial property loans of $5.2 million with a gain of $4 thousand during the nine months ended September 30, 2021. During the nine months ended September 30, 2020, the Company sold SBA loans of $47.4 million with a gain of $2.8 million and residential property loans of $24.8 million with a gain of $203 thousand.

Other income primarily included wire transfer fees of $435 thousand and $391 thousand, respectively, and debit card interchange fees of $222 thousand and $185 thousand, respectively, for the nine months ended September 30, 2021 and 2020. For the nine months end September 30, 2021, other income also included gain on sale of other real estate owned of $74 thousand.

Noninterest Expense

Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020

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


	Three Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2021		2020
Salaries and employee benefits	$	7,606	$	6,438	$	1,168	18.1	%
Occupancy and equipment	1,399		1,416		(17)		(1.2)	%
Professional fees	422		325		97		29.8	%
Marketing and business promotion	416		193		223		115.5	%
Data processing	391		373		18		4.8	%
Director fees and expenses	144		125		19		15.2	%

Regulatory assessments	12		267		(255)		(95.5)	%

Other expenses	842		749		93		12.4	%
Total noninterest expense	$	11,232	$	9,886	$	1,346	13.6	%

Salaries and employee benefits increased primarily due to increases in salaries, bonus accrual, and the incentive tied to the sales of Loan Production Offices (“LPO”) originated SBA loans and the incentive for SBA PPP loan production paid during the three months ended September 30, 2021, partially offset by decreases in vacation accrual and stock compensation expense. The number of full-time equivalent employees was 249 at September 30, 2021 compared to 252 at September 30, 2020.

Marketing and business promotion expense increased primarily due to an increase in advertisement.

Regulatory assessment expense decreased primarily due to an adjustment made for the assessment rate decrease, partially offset by an increase in balance sheet growth.

Other expenses primarily included $42 thousand and $111 thousand in loan related expenses, $378 thousand and $345 thousand in office expense, and $144 thousand and $125 thousand in armed guard expense for the three months ended September 30, 2021 and 2020, respectively.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

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


	Nine Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2021		2020
Salaries and employee benefits	$	20,913	$	18,750	$	2,163	11.5	%
Occupancy and equipment	4,158		4,196		(38)		(0.9)	%
Professional fees	1,574		1,631		(57)		(3.5)	%
Marketing and business promotion	1,070		920		150		16.3	%
Data processing	1,164		1,097		67		6.1	%
Director fees and expenses	433		453		(20)		(4.4)	%
Regulatory assessments	399		728		(329)		(45.2)	%
Other expenses	2,329		2,374		(45)		(1.9)	%
Total noninterest expense	$	32,040	$	30,149	$	1,891	6.3	%

Salaries and employee benefits increased primarily due to increases in salaries, bonus accrual, and the incentive tied to the incentives for LPO originated SBA loan sales and SBA PPP loan production, partially offset by decreases in vacation accrual and stock compensation expense. Direct loan origination cost related to SBA PPP loan production totaled $812 thousand and $1.1 million for nine months ended September 30, 2021 and 2020, respectively. The number of full-time equivalent employees was 249 at September 30, 2021 compared to 252 at September 30, 2020.

Professional fees decreased primarily due to decreases in expenses related to decreases in expenses related to the Bank’s Bank Secrecy Act and Anti-Money Laundering (“BSA/AML”) compliance enhancements.

Marketing and business promotion expense increased primarily due to an increase in advertisement.

Regulatory assessment expense decreased primarily due to to an adjustment made for the assessment rate decrease, partially offset by an increase in balance sheet growth.

Other expenses primarily included $263 thousand and $328 thousand in loan related expenses, $1.0 million and $1.1 million in office expense, and $388 thousand and $379 thousand in armed guard expense for the nine months ended September 30, 2021 and 2020, 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.

On 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 from the date of transfer. The Company transferred all securities held-to-maturity of $18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of $787 thousand.

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


	September 30, 2021						December 31, 2020
($ 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	$	91,446	$	91,485	$	39	$	74,622	$	76,154	$	1,532
Residential collateralized mortgage obligations	21,079		21,198		119		26,216		26,467		251
SBA loan pool securities	9,406		9,667		261		11,753		12,080		327
Municipal bonds	5,339		5,708		369		5,370		5,826		456
Corporate bonds	5,000		5,044		44		—		—		—
Total securities available-for-sale	$	132,270	$	133,102	$	832	$	117,961	$	120,527	$	2,566

Total investment securities were $133.1 million at September 30, 2021, an increase of $12.6 million, or 10.4%, from $120.5 million at December 31, 2020. The increase was primarily due to purchases of $47.3 million, partially offset by principal paydowns of $32.2 million, a decrease in fair value of securities available-for-sale of $1.7 million, and net premium amortization of $811 thousand.

The Company performs an OTTI assessment at least on a quarterly basis. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security. All individual securities in a continuous unrealized loss position for 12 months or more as of September 30, 2021 and December 31, 2020 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of September 30, 2021 and December 31, 2020. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the three and nine months ended September 30, 2021 and 2020.

The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of September 30, 2021:


	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	$	—	—	%	$	604	1.53	%	$	8,709	1.53	%	$	82,133	1.32	%	$	91,446	1.35	%
Residential collateralized mortgage obligations	—		—	%	—		—	%	10,717		0.70	%	10,362		1.46	%	21,079		1.07	%
SBA loan pool securities	—		—	%	519		2.58	%	1,509		0.67	%	7,378		2.01	%	9,406		1.82	%
Municipal bonds	307		1.72	%	1,858		2.07	%	834		2.27	%	2,340		3.53	%	5,339		2.72	%
Corporate bonds	—		—	%	—		—	%	5,000		3.75	%	—		—	%	5,000		3.75	%
Total securities available-for-sale	$	307	1.72	%	$	2,981	2.05	%	$	26,769	1.59	%	$	102,213	1.44	%	$	132,270	1.48	%

Loans Held-For-Sale

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


($ in thousands)	September 30, 2021		December 31, 2020
Real estate loans:

Residential property	$	—	$	300
SBA property	28,036		1,411

Commercial and industrial loans:


SBA commercial term	984		268

Total	$	29,020	$	1,979

Loans held-for-sale were $29.0 million at September 30, 2021, an increase of $27.0 million, or 1,366.4%, from $2.0 million at December 31, 2020. The increase was primarily due to new funding of $126.8 million and a loan transferred from loans held-for-investment of $5.4 million, partially offset by sales of $105.1 million.

Loans Held-For-Investment and Allowance for Loan Losses

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


	September 30, 2021				December 31, 2020
($ in thousands)	Amount		Percentage to Total		Amount		Percentage to Total
Real estate loans:
Commercial property	$	1,054,351	61.6	%	$	880,736	55.5	%
Residential property	201,635		11.8	%	198,431		12.5	%
SBA property	127,845		7.5	%	126,570		8.0	%
Construction	6,572		0.4	%	15,199		1.0	%
Total real estate loans	1,390,403		81.3	%	1,220,936		77.0	%
Commercial and industrial loans:
Commercial term	74,390		4.4	%	87,250		5.5	%
Commercial lines of credit	101,456		5.9	%	96,087		6.1	%
SBA commercial term	18,338		1.1	%	21,878		1.4	%
SBA PPP	101,901		6.0	%	135,654		8.6	%
Total commercial and industrial loans	296,085		17.4	%	340,869		21.6	%
Other consumer loans	21,390		1.3	%	21,773		1.4	%
Loans held-for-investment	1,707,878		100.0	%	1,583,578		100.0	%
Allowance for loan losses	(23,807)				(26,510)
Net loans held-for-investment	$	1,684,071			$	1,557,068

Loans held-for-investment, net of deferred loan costs (fees) were $1.71 billion at September 30, 2021, an increase of $124.3 million, or 7.8%, from $1.58 billion at December 31, 2020. The increase was primarily due to new funding of $498.9 million and advances of $88.9 million, partially offset by paydowns and payoffs of $457.9 million. During the nine months ended September 30, 2021, SBA PPP loans of $144.9 million were paid off and related unamortized net deferred fees were recognized through interest income. Commercial property loan production contributed significantly to the Company’s loan growth for the nine months ended September 30, 2021.

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, 2021, all loans under modified terms related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs.

The following table presents a summary of loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as of September 30, 2021:


($ in thousands)	Carrying Value		Accrued Interest Receivable
Real estate loans:
Commercial property	$	328,847	$	992
Residential property	28,566		615
SBA property	4,173		8
Commercial and industrial loans:
Commercial term	39,629		121
SBA commercial term	1,795		6
Other consumer loans	797		2
Total	$	403,807	$	1,744

The following table presents activity in loans under modified terms related to the COVID-19 pandemic for the nine months ended September 30, 2021.


	Real Estate Loans						Commercial and Industrial Loans
($ in thousands)	Commercial Property		Residential Property		SBA Property		Commercial Term		SBA Commercial Term		Total
Balance at January 1, 2021	$	24,132	$	425	$	4,192	$	5,527	$	1,841	$	36,117
Modification early terminated (1)	—		—		(2,576)		—		(1,338)		(3,914)
Modification expired	(33,943)		(1,100)		(1,627)		(8,330)		(513)		(45,513)
Subsequent modification	11,829		328		—		2,878		—		15,035
New modification	—		349		—		—		—		349
Amortization	(2,018)		(2)		11		(75)		10		(2,074)
Balance at September 30, 2021	$	—	$	—	$	—	$	—	$	—	$	—

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

SBA Paycheck Protection Program

The following table presents a summary of SBA PPP loans as of September 30, 2021:


($ in thousands)	Number of Loans	Carrying Value		Contractual Balance
Loan amount:
$50,000 or less	436	$	8,913	$	9,469
Over $50,000 and less than $350,000	286	39,689		40,955
Over $350,000 and less than $2,000,000	77	50,116		51,121
$2,000,000 or more	1	3,183		3,187
Total	800	$	101,901	$	104,732

Allowance for loan losses

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

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

Individual loans considered to be uncollectible are charged off against the allowance for loan losses. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is confirmed. Recoveries on loans previously charged off are added to the allowance for loan losses.

The decrease in allowance for loan losses to loans held-for-investment was primarily due to a decrease in historical loss and qualitative adjustment factor allocations as a result of improving economic conditions, partially offset by an increase in commercial property loans.

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

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

The 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)	2021			2020			2021			2020
Allowance for loan losses:
Balance at beginning of period	$	24,889		$	20,248		$	26,510		$	14,380
Charge-offs:
Real estate	—			—			18			138
Commercial and industrial	84			—			100			916
Other consumer	43			102			87			241
Total charge-offs	127			102			205			1,295
Recoveries on loans previously charged off
Real estate	—			—			47			56
Commercial and industrial	94			18			553			223
Other consumer	4			56			36			105
Total recoveries	98			74			636			384
Net charge-offs (recoveries)	29			28			(431)			911
Provision (reversal) for loan losses	(1,053)			4,326			(3,134)			11,077
Balance at end of period	$	23,807		$	24,546		$	23,807		24,546
Loans held-for-investment:
Balance at end of period	$	1,707,878		$	1,578,804		$	1,707,878		$	1,578,804
Average balance	1,688,468			1,546,900			1,539,161			1,509,963
Ratios:
Annualized net charge-offs (recoveries) to average loans held-for-investment	0.01		%	0.01		%	(0.04)		%	0.08		%
Allowance for loan losses to loans held-for-investment	1.39		%	1.55		%	1.39		%	1.55		%
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (1)	1.48		%	1.70		%	1.48		%	1.70		%

(1) Non-GAAP measure. See "Non-GAAP Measures" for a reconciliation to its most comparable GAAP measure.

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, 2021			December 31, 2020			Amount Change		Percentage Change
Nonaccrual loans
Real estate loans:
Commercial property	$	—		$	524		$	(524)	(100.0)	%
Residential property	—			189			(189)		(100.0)	%
SBA property	766			885			(119)		(13.4)	%

Total real estate loans	766			1,598			(832)		(52.1)	%
Commercial and industrial loans:

Commercial lines of credit	—			904			(904)		(100.0)	%
SBA commercial term	314			595			(281)		(47.2)	%
Total commercial and industrial loans	314			1,499			(1,185)		(79.1)	%
Other consumer loans	33			66			(33)		(50.0)	%
Total nonaccrual loans	1,113			3,163			(2,050)		(64.8)	%
Loans past due 90 days or more still on accrual	3			—			3		—	%
Total nonperforming loans	1,116			3,163			(2,047)		(64.7)	%
Other real estate owned	—			1,401			(1,401)		(100.0)	%
Total nonperforming assets	$	1,116		$	4,564		$	(3,448)	(75.5)	%

Nonperforming loans to loans held-for-investment	0.07		%	0.20		%
Nonperforming assets to total assets	0.05		%	0.24		%

The decrease in total nonaccrual loans was primarily due to paydowns and payoffs of $2.0 million and a loan transferred to OREO of $905 thousand, partially offset by loans placed on nonaccrual status of $949 thousand during the nine months ended September 30, 2021. Loans are generally placed on nonaccrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful. Past due loans may or may not be adequately collateralized, but collection efforts are continuously pursued. Loans may be restructured by management when a borrower experiences changes to their financial condition, causing an inability to meet the original repayment terms, and where management believes the borrower will eventually overcome those circumstances and repay the loan in full. Additional income of approximately $15 thousand and $44 thousand would have been recorded during the three and nine months ended September 30, 2021, respectively, had these loans been paid in accordance with their original terms throughout the periods indicated.

Troubled Debt Restructurings

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


	September 30, 2021						December 31, 2020
($ in thousands)	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
Real estate loans:
Commercial property	$	328	$	—	$	328	$	333	$	—	$	333

SBA property	250		26		276		270		5		275

Commercial and industrial loans:
Commercial term	5		—		5		18		—		18

SBA commercial term	6		—		6		13		—		13

Total	$	589	$	26	$	615	$	634	$	5	$	639

Deposits

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


($ in thousands)	September 30, 2021		December 31, 2020		Amount Change		Percentage Change
Noninterest-bearing demand deposits	$	832,240	$	538,009	$	294,231	54.7	%
Interest-bearing deposits:
Savings	13,294		10,481		2,813		26.8	%
NOW	20,461		21,604		(1,143)		(5.3)	%
Retail money market accounts	376,333		351,739		24,594		7.0	%
Brokered money market accounts	4		25,002		(24,998)		(100.0)	%
Retail time deposits of:
$250,000 or less	262,207		299,431		(37,224)		(12.4)	%
More than $250,000	163,127		168,683		(5,556)		(3.3)	%
Time deposits from internet rate service providers	—		24,902		(24,902)		—	%
Brokered time deposits	65,000		55,000		10,000		18.2	%
Time deposits from California State Treasurer	100,000		100,000		—		—	%
Total interest-bearing deposits	1,000,426		1,056,842		(56,416)		(5.3)	%
Total deposits	$	1,832,666	$	1,594,851	$	237,815	14.9	%

The increase in noninterest-bearing demand deposits was primarily due to the overall liquid deposit market, as well as the deposit increases from customers with SBA PPP loans, SBA Revitalization Funds and SBA Economic Injury Disaster Loans. A total of $93.9 million of SBA PPP loans were funded through the Bank's noninterest-bearing demand deposits and deposit customers also received $138.2 million of SBA Revitalization Funds and SBA Economic Injury Disaster Loans during the nine months ended September 30, 2021.

The decrease in retail time deposits was primarily due to matured and closed accounts of $457.6 million, partially offset by new accounts of $76.4 million and renewals of the matured accounts of $328.5 million.

As of September 30, 2021 and December 31, 2020, total deposits were comprised of 45.4% and 33.7%, respectively, of noninterest-bearing demand accounts, 22.4% and 25.7%, respectively, of savings, NOW and money market accounts, and 32.2% and 40.6%, respectively, of time deposits.

Deposits from certain officers, directors and their related interests with which they are associated held by the Company were $5.6 million and $2.7 million, respectively, at September 30, 2021 and December 31, 2020.

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


($ 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, 2021
Time deposits less than $100,000	$	31,309	$	74,233	$	32,399	$	5,627	$	597	$	144,165
Time deposits of $100,000 through $250,000	47,758		68,019		67,147		118		—		183,042
Time deposits of more than $250,000	142,938		57,823		60,053		2,313		—		263,127
Total	$	222,005	$	200,075	$	159,599	$	8,058	$	597	$	590,334
December 31, 2020
Time deposits less than $100,000	$	83,751	$	18,482	$	32,112	$	7,975	$	1,528	$	143,848
Time deposits of $100,000 through $250,000	91,727		57,715		81,622		4,421		—		235,485
Time deposits of more than $250,000	156,507		35,000		72,553		4,623		—		268,683
Total	$	331,985	$	111,197	$	186,287	$	17,019	$	1,528	$	648,016

Shareholders’ Equity and Regulatory Capital

Capital Resources

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

Shareholders’ equity was $247.6 million at September 30, 2021, an increase of $13.8 million, or 5.9%, from $233.8 million at December 31, 2020. The increase was primarily due to net income of $29.4 million and cash proceeds from exercise of stock options of $1.0 million, partially offset by repurchases of common stock of $10.9 million, dividends declared on common stock of $4.9 million and a decrease in accumulated other comprehensive income of $1.2 million.

Regulatory Capital Requirements

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

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

The following table presents a summary of the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of September 30, 2021 and December 31, 2020. For comparison purpose, the Company’s ratios are included as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.


	PCB Bancorp		Pacific City Bank		Minimum Regulatory Requirements		Well Capitalized Requirements (Bank)
September 30, 2021
Common tier 1 capital (to risk-weighted assets)	15.07	%	14.76	%	4.5	%	6.5	%
Total capital (to risk-weighted assets)	16.32	%	16.01	%	8.0	%	10.0	%
Tier 1 capital (to risk-weighted assets)	15.07	%	14.76	%	6.0	%	8.0	%
Tier 1 capital (to average assets)	11.91	%	11.66	%	4.0	%	5.0	%
December 31, 2020
Common tier 1 capital (to risk-weighted assets)	15.97	%	15.70	%	4.5	%	6.5	%
Total capital (to risk-weighted assets)	17.22	%	16.95	%	8.0	%	10.0	%
Tier 1 capital (to risk-weighted assets)	15.97	%	15.70	%	6.0	%	8.0	%
Tier 1 capital (to average assets)	11.94	%	11.74	%	4.0	%	5.0	%

The Company and the Bank’s capital conservation buffer was 8.32% and 8.01%, respectively, as of September 30, 2021, and 9.22% and 8.95%, respectively, as of December 31, 2020.

Liquidity

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

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

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

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

The Company had $10.0 million and $80.0 million of outstanding FHLB advances at September 30, 2021 and December 31, 2020, respectively. Based on the values of loans pledged as collateral, the Company had $505.0 million and $425.3 million of additional borrowing capacity with FHLB as of September 30, 2021 and December 31, 2020, respectively. The Company also had $65.0 million and $65.0 million, respectively, of available unused unsecured federal funds lines at September 30, 2021 and December 31, 2020.

In addition, available unused secured borrowing capacity from Federal Reserve Discount Window at September 30, 2021 and December 31, 2020 was $36.9 million and $35.8 million, respectively. Federal Reserve Discount Window was collateralized by loans totaling $45.1 million and $44.1 million as of September 30, 2021 and December 31, 2020, respectively. The Company’s borrowing capacity from the Federal Reserve Discount Window is limited by eligible collateral. The Company also maintains relationships in the capital markets with brokers and dealers to issue time deposits and money market accounts. As of September 30, 2021 and December 31, 2020, total cash and cash equivalents represented 10.2% and 10.1% of total assets, respectively.

On 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, 2021, management was able to maintain strong on-and off-balance sheet liquidity as a result of proactive liquidity management in response to the COVID-19 pandemic.

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

Off-Balance Sheet Activities and Contractual Obligations

Off-Balance Sheet Arrangements

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

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

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

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


	September 30, 2021				December 31, 2020
($ in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	5,852	$	150,559	$	6,623	$	150,247
Unfunded loan commitments	130		33,798		1,752		34,874
Standby letters of credit	3,037		1,431		2,971		1,814
Commercial letters of credit	353		—		—		—
Total	$	9,372	$	185,788	$	11,346	$	186,935

Contractual Obligations

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


($ in thousands)	Within One Year		One to Three Years		Three to Five Years		Over Five Years		Total
September 30, 2021
Time deposits	$	581,679	$	8,058	$	597	$	—	$	590,334
FHLB advances	10,000		—		—		—		10,000
Operating leases	2,728		3,500		1,341		796		8,365
Total	$	594,407	$	11,558	$	1,938	$	796	$	608,699
December 31, 2020
Time deposits	$	629,469	$	17,019	$	1,528	$	—	$	648,016
FHLB advances	70,000		10,000		—		—		80,000
Operating leases	2,494		4,342		1,413		818		9,067
Total	$	701,963	$	31,361	$	2,941	$	818	$	737,083

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

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 its market risk.

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”). The Company uses a static balance sheet to perform these analysis. 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 and provides a comparatively broader scope than NII at Risk since it captures all anticipated cash flows.

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, 2021				December 31, 2020
Simulated Rate Changes	Net Interest Income Sensitivity		Economic Value of Equity Sensitivity		Net Interest Income Sensitivity		Economic Value of Equity Sensitivity
+300	30.1	%	21.5	%	28.9	%	17.4	%
+200	20.1	%	15.6	%	19.4	%	13.3	%
+100	10.4	%	8.6	%	9.8	%	7.6	%

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, 2021 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, 2021, 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, 2021 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, 2021. 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

System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.

The computer systems and network infrastructure we use could be vulnerable to hardware and cyber-security issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of employees or other internal or external sources, including our third-party vendors. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our internet banking activities, against damage from physical break-ins, cyber-security breaches and other disruptive problems caused by the internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability, damage our reputation and inhibit the use of our internet banking services by current and potential customers.

We rely heavily on communications, information systems (both internal and provided by third-parties) and the internet to conduct our business. Our business is dependent on our ability to process and monitor large numbers of daily transactions in compliance with legal, regulatory and internal standards and specifications. In addition, a significant portion of our operations relies heavily on the secure processing, storage and transmission of personal and confidential information, such as the personal information of our customers and clients. In recent periods, several governmental agencies and large corporations, including financial service organizations and retail companies, have suffered major data breaches, in some cases exposing not only their confidential and proprietary corporate information, but also sensitive financial and other personal information of their clients or clients and their employees or other third-parties, and subjecting those agencies and corporations to potential fraudulent activity and their clients, clients and other third-parties to identity theft and fraudulent activity in their credit card and banking accounts. Therefore, security breaches and cyber-attacks can cause significant increases in operating costs, including the costs of compensating clients and customers for any resulting losses they may incur and the costs and capital expenditures required to correct the deficiencies in and strengthen the security of data processing and storage systems. These risks may increase in the future as we continue to increase mobile payments and other internet-based product offerings and expand our internal usage of web-based products and applications.

Other potential attacks have attempted to obtain unauthorized access to confidential information, steal money, or manipulate or destroy data, often through the introduction of computer viruses or malware, cyber-attacks and other means. Other threats of this type may include fraudulent or unauthorized access to data processing or data storage systems used by us or by our clients, electronic identity theft, “phishing,” account takeover, and malware or other cyber-attacks. To date, none of these types of attacks have had a material effect on our business or operations. Such security attacks can originate from a wide variety of sources, including persons who are involved with organized crime or who may be linked to terrorist organizations or hostile foreign governments. Those same parties may also attempt to fraudulently induce employees, customers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. We are also subject to the risk that our employees may intercept and transmit unauthorized confidential or proprietary information. An interception, misuse or mishandling of personal, confidential or proprietary information being sent to or received from a customer or third-party could result in legal liabilities, remediation costs, regulatory actions and reputational harm.

As cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.

Furthermore, the public perception that a cyber-attack on our systems has been successful, whether or not this perception is correct, may damage our reputation with customers and third-parties with whom we do business.

Management is not aware of any material changes, other than the noted above, to the risk factors that appeared under “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2020, which could materially and adversely affect the Company’s business, financial condition, results of operations and stock price. The risks described in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management presently believes not to be material may also result in material and adverse effects on the Company’s business, financial condition, and results of operations.

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, 2021.

The following table presents share repurchase activities during the three months ended September 30, 2021:


($ 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	Number of Shares That May Yet Be Purchased Under the Program
From July 1, 2021 to July 31, 2021	33,935	$	15.99	33,935	—
From August 1, 2021 to August 31, 2021	—	—		—	—
From September 1, 2021 to September 30, 2021	—	—		—	—
Total	33,935	$	15.99	33,935

On April 8, 2021, the Company’s Board of Directors approved a repurchase program authorizing the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 775,000 shares, through September 7, 2021. The Company repurchased and retired 680,269 shares of common stock at a weighted-average price of $15.99 per share 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

10.1A

First Amendment to Employ ment Agreement, dated August 26, 2021, among PCB Bancorp, Pacific City Bank and Henry Kim*

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

The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCH

Inline XBRL Taxonomy Extension Schema Document*

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document*

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

104

Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)*

* Filed herewith

** Furnished 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 8, 2021	/s/ Henry Kim
		Henry Kim
		President and Chief Executive Officer (Principal Executive Officer)

Date:	November 8, 2021	/s/ Timothy Chang
		Timothy Chang
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)