PCB BANCORP - Quarter Report: 2021 March (Form 10-Q)

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 March 31, 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 April 30, 2021, the registrant had outstanding 15,497,649 shares of common stock.

PCB Bancorp and Subsidiary

Quarterly Report on Form 10-Q

March 31, 2021

Table of Contents


Part I - Financial Information

Item 1.	Consolidated Financial Statements	4

	Consolidated Balance Sheets - March 3 1 , 202 1 (Unaudited) and December 31, 20 20	4
	Consolidated Statements of Income (Unaudited) - Three Months Ended March 31, 2021 and 20 20	5
	Consolidated Statements of Comprehensive Income (Unaudited) - Three Months Ended March 31, 2021 and 2020	6
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three Months Ended March 31, 2021 and 2020	7
	Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 31, 2021 and 2020	8
	Notes to Consolidated Financial Statements (Unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

Item 4.	Controls and Procedures	55

Part II - Other Information

Item 1.	Legal Proceedings	56

Item 1A.	Risk Factors	56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3.	Defaults Upon Senior Securities	56

Item 4.	Mine Safety Disclosures	56

Item 5.	Other Information	56

Item 6.	Exhibits	57

Signatures		58

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;

•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)


	March 31, 2021		December 31, 2020
	(Unaudited)
Assets
Cash and due from banks	$	16,764	$	19,605
Interest-bearing deposits in other financial institutions	195,016		174,493
Total cash and cash equivalents	211,780		194,098
Securities available-for-sale, at fair value	127,114		120,527


Loans held-for-sale	3,569		1,979
Loans held-for-investment, net of deferred loan costs (fees)	1,685,916		1,583,578
Allowance for loan losses	(25,514)		(26,510)
Net loans held-for-investment	1,660,402		1,557,068
Premises and equipment, net	3,774		4,048
Federal Home Loan Bank and other restricted stock, at cost	8,447		8,447
Other real estate owned, net	2,336		1,401
Deferred tax assets, net	8,170		8,120
Servicing assets	6,253		6,400
Operating lease assets	7,145		7,616
Accrued interest receivable	7,523		9,334
Other assets	4,159		3,815
Total assets	$	2,050,672	$	1,922,853
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	715,719	$	538,009
Savings, NOW and money market accounts	412,359		408,826
Time deposits of $250,000 or less	358,848		379,333
Time deposits of more than $250,000	266,845		268,683
Total deposits	1,753,771		1,594,851
Federal Home Loan Bank advances	40,000		80,000
Operating lease liabilities	7,935		8,455
Accrued interest payable and other liabilities	8,703		5,759
Total liabilities	1,810,409		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; 15,468,242 and 15,385,878 shares issued and outstanding, respectively, and included 62,884 and 30,300 shares of unvested restricted stock, respectively, at March 31, 2021 and December 31, 2020	164,698		164,140
Retained earnings	74,707		67,692
Accumulated other comprehensive income, net	858		1,956
Total shareholders’ equity	240,263		233,788
Total liabilities and shareholders’ equity	$	2,050,672	$	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 March 31,
	2021		2020
Interest and dividend income:
Loans, including fees	$	18,744	$	20,406
Tax-exempt investment securities	36		38
Taxable investment securities	324		606
Other interest-earning assets	154		610
Total interest income	19,258		21,660
Interest expense:
Deposits	1,311		4,992
Other borrowings	128		102
Total interest expense	1,439		5,094
Net interest income	17,819		16,566
Provision (reversal) for loan losses	(1,147)		2,896
Net interest income after provision for loan losses	18,966		13,670
Noninterest income:
Service charges and fees on deposits	293		390
Loan servicing income	882		554
Gain on sale of loans	1,322		725

Other income	360		357
Total noninterest income	2,857		2,026
Noninterest expense:
Salaries and employee benefits	6,182		6,551
Occupancy and equipment	1,371		1,380
Professional fees	494		797
Marketing and business promotion	138		179
Data processing	377		358
Director fees and expenses	138		221
Regulatory assessments	208		219
Other expenses	761		862
Total noninterest expense	9,669		10,567
Income before income taxes	12,154		5,129
Income tax expense	3,594		1,557
Net income	$	8,560	$	3,572

Earnings per common share, basic	$	0.55	$	0.23
Earnings per common share, diluted	$	0.55	$	0.23

Weighted-average common shares outstanding, basic	15,384,343		15,505,699
Weighted-average common shares outstanding, diluted	15,533,608		15,700,144

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

($ in thousands)


	Three Months Ended March 31,
	2021		2020
Net income	$	8,560	$	3,572
Other comprehensive income (loss):
Unrealized gain (loss) on securities available-for-sale arising during the period	(1,556)		1,342

Income tax benefit (expense) related to items of other comprehensive income (loss)	458		(394)
Total other comprehensive income (loss), net of tax	(1,098)		948
Total comprehensive income	$	7,462	$	4,520

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	—	—		3,572		—		3,572
Other comprehensive income, net of tax	—	—		—		948		948

Issuance of restricted stock	1,000	—		—		—		—
Repurchase of common stock	(428,474)	(6,487)		—		—		(6,487)
Share-based compensation expense	—	194		—		—		194
Stock options exercised	90,544	604		—		—		604
Cash dividends declared on common stock ($0.10 per share)	—	—		(1,540)		—		(1,540)
Balance at March 31, 2020	15,370,086	$	163,532	$	59,702	$	891	$	224,125

Balance at January 1, 2021	15,385,878	$	164,140	$	67,692	$	1,956	$	233,788
Comprehensive income (loss)
Net income	—	—		8,560		—		8,560
Other comprehensive loss, net of tax	—	—		—		(1,098)		(1,098)

Issuance of restricted stock	33,784	—		—		—		—
Forfeiture of restricted stock	(1,000)	—		—		—		—


Share-based compensation expense	—	90		—		—		90
Stock options exercised	49,580	468		—		—		468
Cash dividends declared on common stock ($0.10 per share)	—	—		(1,545)		—		(1,545)
Balance at March 31, 2021	15,468,242	$	164,698	$	74,707	$	858	$	240,263

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

($ in thousands)


	Three Months Ended March 31,
	2021		2020
Cash flows from operating activities
Net income	$	8,560	$	3,572
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation of premises and equipment	368		367
Net amortization of premiums on securities	310		189
Net accretion of discounts on loans	(745)		(1,028)
Net accretion of deferred loan costs (fees)	(1,220)		(121)
Amortization of servicing assets	391		604
Provision (reversal) for loan losses	(1,147)		2,896
Deferred tax expense (benefit)	408		(246)
Stock-based compensation	90		194

Gain on sale of loans	(1,322)		(725)
Originations of loans held-for-sale	(20,425)		(26,686)
Proceeds from sales of and principal collected on loans held-for-sale	20,150		14,110
Change in accrued interest receivable and other assets	1,467		1,954
Change in accrued interest payable and other liabilities	1,905		(1,458)
Net cash provided by (used in) operating activities	8,790		(6,378)
Cash flows from investing activities
Purchase of securities available-for-sale	(20,223)		(7,526)
Proceeds from maturities and paydowns of securities available-for-sale	11,770		7,703

Proceeds from maturities and paydowns of securities held-to-maturity	—		417
Proceeds from sale of loans held-for-sale previously classified as held-for-investment	—		664
Net change in loans held-for-investment	(101,500)		(1,497)


Proceeds from sale of other real estate owned	1,100		—
Purchases of premises and equipment	(98)		(1,404)
Net cash used in investing activities	(108,951)		(1,643)
Cash flows from financing activities
Net change in deposits	158,920		(1,865)

Proceeds from long-term Federal Home Loan Bank advances	—		60,000
Repayment of long-term Federal Home Loan Bank advances	(40,000)		—
Stock options exercised	468		604

Repurchase of common stock	—		(6,487)
Cash dividends paid on common stock	(1,545)		(1,540)
Net cash provided by financing activities	117,843		50,712
Net increase in cash and cash equivalents	17,682		42,691
Cash and cash equivalents at beginning of period	194,098		146,228
Cash and cash equivalents at end of period	$	211,780	$	188,919

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows, Continued (Unaudited)

(in thousands)


	Three Months Ended March 31,
	2021		2020
Supplemental disclosures of cash flow information:
Interest paid	$	2,678	$	6,874
Income taxes paid	24		18
Supplemental disclosures of non-cash investment activities:
Loans transferred to loans held-for-sale	$	—	$	1,355
Loans transferred to other real estate owned	905		54

Right of use assets obtained in exchange for lease obligations	105		38

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 9 loan production offices (“LPOs”) in Irvine, Artesia and Los Angeles, California; Annandale, Virginia; Chicago, Illinois; Bellevue, Washington; Aurora, Colorado; Carrollton, Texas; and New York, New York. The Bank offers a broad range of loans, deposits, and other products and services predominantly to small and middle market businesses and individuals.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to Article 10 of SEC Regulation S-X and other SEC rules and regulations for reporting on the Quarterly Report on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles (“GAAP”) are not included herein. These interim statements should be read in conjunction with the audited consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 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 months ended March 31, 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 March 31, 2021 and December 31, 2020 and for the three months ended March 31, 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 March 31, 2021, the Company’s loans under modified terms related to the COVID-19 pandemic, including payment deferments and interest only payments, totaled $19.8 million. All of these loans under modified terms related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs. All types of modifications have initial modification terms of 6-months or less and loans that are granted modifications related to the COVID-19 pandemic in excess of 6 months, on a cumulative basis, are classified as special mention or substandard. In addition, all loans under modified terms related to the COVID-19 pandemic were current and accrual status as of March 31, 2021; however, all of these loans are 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 C&I 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 three months ended March 31, 2021, the Company had funded 1,072 SBA PPP loans totaling $104.3 million, net of unamortized deferred fees and costs. SBA PPP loans funded in 2021 in the Company’s portfolio have a maturity of 5 years.

As of March 31, 2021, the Company had 2,249 SBA PPP loans totaling $218.7 million, net of unamortized deferred fees and costs. 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 March 31, 2021 and December 31, 2020.

Adopted Accounting Pronouncements

During the three months ended March 31, 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: The Company records fair value adjustments on certain loans that reflect (i) partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (ii) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants, and are classified as Level 3.

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


	Fair Value Measurement Level
($ in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
March 31, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	87,220	$	—	$	87,220
Residential collateralized mortgage obligations	—		23,097		—		23,097
SBA loan pool securities	—		11,050		—		11,050
Municipal bonds	—		5,747		—		5,747
Total securities available-for-sale	—		127,114		—		127,114
Total assets measured at fair value on a recurring basis	$	—	$	127,114	$	—	$	127,114
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
March 31, 2021
Impaired loans:
SBA property	$	—	$	—	$	228	$	—


Total impaired loans	—		—		228		—


Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	228	$	—
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)

March 31, 2021

Impaired loans:

SBA property

228

Fair value of collateral

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 losses, which include charge-offs, recoveries, and specific reserves recorded for the periods indicated:


	Three Months Ended March 31,
($ in thousands)	2021		2020
Collateral dependent impaired loans:

SBA property	$	17	$	(27)
Commercial lines of credit	(136)		(506)
SBA commercial term	(30)		(164)


Other real estate owned	75		—
Net losses recognized	$	(74)	$	(697)

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
March 31, 2021
Financial assets:
Interest-bearing deposits in other financial institutions	$	195,016	$	195,016	$	195,016	$	—	$	—
Securities available-for-sale	127,114		127,114		—		127,114		—

Loans held-for-sale	3,569		3,989		—		3,989		—
Net loans held-for-investment	1,660,402		1,678,008		—		—		1,678,008
FHLB and other restricted stock	8,447		N/A		N/A		N/A		—
Accrued interest receivable	7,523		7,523		4		281		7,238
Financial liabilities:
Deposits	$	1,753,771	$	1,718,124	$	—	$	—	$	1,718,124
FHLB advances	40,000		40,232		—		40,232		—
Accrued interest payable	987		987		—		3		984
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
March 31, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	86,999	$	1,115	$	(894)	$	87,220
Residential collateralized mortgage obligations	22,825		303		(31)		23,097
SBA loan pool securities	10,920		158		(28)		11,050
Municipal bonds	5,360		387		—		5,747
Total securities available-for-sale	$	126,104	$	1,963	$	(953)	$	127,114




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 March 31, 2021 and December 31, 2020, pledged securities were $112.3 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 March 31, 2021. Expected maturities may differ from contractual maturities, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.


	Securities Available-For-Sale
($ in thousands)	Amortized Cost		Fair Value
Within one year	$	—	$	—
One to five years	2,183		2,262
Five to ten years	841		868
Greater than ten years	2,336		2,617
Residential mortgage-backed securities, residential collateralized mortgage obligations and SBA loan pool securities	120,744		121,367
Total	$	126,104	$	127,114

The Company had no proceeds from sales and calls of securities available-for-sale during the three months ended March 31, 2021 and 2020.

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
March 31, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	45,263	$	(894)	22	$	—	$	—	—	$	45,263	$	(894)	22
Residential collateralized mortgage obligations	988		(7)		2	2,221		(24)		2	3,209		(31)		4
SBA loan pool securities	1,172		(7)		1	3,360		(21)		6	4,532		(28)		7

Total securities available-for-sale	$	47,423	$	(908)	25	$	5,581	$	(45)	8	$	53,004	$	(953)	33




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 March 31, 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 March 31, 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 months ended March 31, 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)	March 31, 2021		December 31, 2020
Real estate loans:
Commercial property	$	922,536	$	880,736
Residential property	190,990		198,431
SBA property	125,989		126,570
Construction	13,151		15,199
Total real estate loans	1,252,666		1,220,936
Commercial and industrial loans:
Commercial term	80,361		87,250
Commercial lines of credit	91,970		96,087
SBA commercial term	21,078		21,878
SBA PPP	218,709		135,654
Total commercial and industrial loans	412,118		340,869
Other consumer loans	21,132		21,773
Loans held-for-investment	1,685,916		1,583,578
Allowance for loan losses	(25,514)		(26,510)
Net loans held-for-investment	$	1,660,402	$	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 March 31, 2021 and December 31, 2020, the Company had $791 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 March 31, 2021:


($ in thousands)	Number of Loans	Amount
Loan amount:
$50,000 or less	1,354	$	26,998
Over $50,000 and less than $350,000	755	94,612
Over $350,000 and less than $2,000,000	136	86,755
$2,000,000 or more	4	10,344
Total	2,249	$	218,709

Loan Modifications Related to the COVID-19 Pandemic

The following table presents a summary of loans under modified terms related to the COVID-19 pandemic by portfolio segment as of March 31, 2021:


	Modification Type
($ in thousands)	Payment Deferment		Interest Only Payment		Total

Real estate loans:
Commercial property	$	—	$	11,830	$	11,830
Residential property	349		—		349
SBA property	—		1,627		1,627

Commercial and industrial loans:
Commercial term	—		5,506		5,506

SBA commercial term	—		513		513

Total	$	349	$	19,476	$	19,825

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 periods indicated:



($ 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)		(5)		(22)		(45)
Recoveries on loans previously charged off	30		149		17		196
Provision (reversal) for loan losses	(213)		(898)		(36)		(1,147)
Balance at March 31, 2021	$	18,693	$	6,468	$	353	$	25,514

Balance at January 1, 2020	$	9,854	$	4,354	$	172	$	14,380
Charge-offs	(27)		(675)		(76)		(778)
Recoveries on loans previously charged off	56		91		29		176
Provision (reversal) for loan losses	2,065		779		52		2,896
Balance at March 31, 2020	$	11,948	$	4,549	$	177	$	16,674

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


($ in thousands)	Real Estate		Commercial and Industrial		Other Consumer		Total
March 31, 2021
Allowance for loan losses:
Individually evaluated for impairment	$	3	$	—	$	—	$	3
Collectively evaluated for impairment	18,690		6,468		353		25,511
Total	$	18,693	$	6,468	$	353	$	25,514
Loans receivable:
Individually evaluated for impairment	$	1,435	$	593	$	—	$	2,028
Collectively evaluated for impairment	1,251,231		411,525		21,132		1,683,888
Total	$	1,252,666	$	412,118	$	21,132	$	1,685,916
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
March 31, 2021
Real estate loans:
Commercial property	$	907,989	$	11,829	$	2,718	$	—	$	922,536
Residential property	190,990		—		—		—		190,990
SBA property	123,229		252		2,508		—		125,989
Construction	13,151		—		—		—		13,151
Commercial and industrial loans:
Commercial term	74,854		4,342		1,165		—		80,361
Commercial lines of credit	90,671		1,299		—		—		91,970
SBA commercial term	20,156		275		647		—		21,078
SBA PPP	218,709		—		—		—		218,709
Other consumer loans	21,080		—		52		—		21,132
Total	$	1,660,829	$	17,997	$	7,090	$	—	$	1,685,916
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
Other consumer loans	21,707		—		66		—		21,773
Total	$	1,556,987	$	16,461	$	10,130	$	—	$	1,583,578

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


($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2021
Real estate loans:
Commercial property	$	—	$	11,830	$	—	$	—	$	11,830
Residential property	349		—		—		—		349
SBA property	1,375		252		—		—		1,627

Commercial and industrial loans:
Commercial term	—		4,341		1,165		—		5,506

SBA commercial term	513		—		—		—		513


Total	$	2,237	$	16,423	$	1,165	$	—	$	19,825
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 are granted modifications related to the COVID-19 pandemic in excess of 6 months, on a cumulative basis, are 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
March 31, 2021
Real estate loans:


SBA property	$	—	$	—	$	—	$	841	$	841

Commercial and industrial loans:


SBA commercial term	—		—		—		568		568
Other consumer loans	56		52		—		52		160
Total	$	56	$	52	$	—	$	1,461	$	1,569
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 March 31, 2021 and December 31, 2020.

All loans under modified terms related to the COVID-19 pandemic were on accrual status and current at March 31, 2021 and 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
March 31, 2021
Real estate loans:
Commercial property	$	331	$	330	$	—	$	—	$	—

SBA property	1,057		1,109		47		45		3

Commercial and industrial loans:
Commercial term	14		14		—		—		—

SBA commercial term	579		613		—		—		—

Total	$	1,981	$	2,066	$	47	$	45	$	3
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 periods indicated:


	Three Months Ended March 31,
	2021				2020
($ in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Real estate loans:
Commercial property	$	332	$	6	$	339	$	5

SBA property	1,342		7		1,765		5

Commercial and industrial loans:
Commercial term	16		—		27		—
Commercial lines of credit	—		—		2,433		—
SBA commercial term	288		—		541		1

Total	$	1,978	$	13	$	5,105	$	11

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


	Three Months Ended March 31,
($ in thousands)	2021		2020
Interest income that would have been recognized had impaired loans performed in accordance with their original terms	$	28	$	79
Less: interest income recognized on impaired loans on a cash basis	(13)		(11)
Interest income foregone on impaired loans	$	15	$	68

Troubled Debt Restructurings

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


	March 31, 2021						December 31, 2020
($ in thousands)	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
Real estate loans:
Commercial property	$	331	$	—	$	331	$	333	$	—	$	333

SBA property	264		33		297		270		5		275

Commercial and industrial loans:
Commercial term	14		—		14		18		—		18

SBA commercial term	11		—		11		13		—		13

Total	$	620	$	33	$	653	$	634	$	5	$	639

The following table presents information on new loans that were modified as TDRs for the periods indicated:


	Three Months Ended March 31,
	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 March 31, 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 none of allowance for loan losses as of March 31, 2021 and December 31, 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 periods indicated:


	Three Months Ended March 31,
	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 March 31,
($ in thousands)	2021		2020
Real estate loans:

Residential property	$	—	$	1,125


Commercial and industrial loans:


SBA commercial term	—		230

Total	$	—	$	1,355

The Company had no transfers of loans held-for-sale to held-for-investment during the three months ended March 31, 2021 and 2020.

The Company had no purchases of loans held-for-investment during the three months ended March 31, 2021 and 2020.

The Company had no sales of loans held-for-investment during the three months ended March 31, 2021 and 2020. When the Company changes its intent to hold loans for investment, the loans are transferred to held-for-sale.

Loans Held-For-Sale

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


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

Residential property	$	—	$	300
SBA property	3,569		1,411

Commercial and industrial loans:


SBA commercial term	—		268

Total	$	3,569	$	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 March 31, 2021 and December 31, 2020, total servicing assets were $6.3 million and $6.4 million, respectively. The Company sells SBA loans and certain residential property loans with servicing retained. The Company sold loans of $10.9 million and $11.5 million, respectively, with the servicing rights retained and recognized a net gain on sale of $1.2 million and $699 thousand, respectively, during the three months ended March 31, 2021 and 2020. Loan servicing income was $882 thousand and $554 thousand for the three months ended March 31, 2021 and 2020, respectively.

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


	March 31, 2021									December 31, 2020
($ in thousands)	Residential Property			SBA Property			SBA Commercial Term			Residential Property			SBA Property			SBA Commercial Term
Carrying amount	$	105		$	5,519		$	629		$	109		$	5,642		$	649
Fair value	$	152		$	10,836		$	946		$	133		$	8,498		$	888
Discount rate	6.33		%	8.75		%	9.64		%	11.25		%	13.25		%	12.75		%
Prepayment speed	25.10		%	7.98		%	10.46		%	27.20		%	9.99		%	11.01		%
Weighted average remaining life	22.8 years			21.1 years			6.8 years			23.1 years			21.1 years			6.6 years
Underlying loans being serviced	$	21,356		$	397,415		$	74,210		$	22,299		$	400,982		$	75,514

The following table presents activity in servicing assets for the periods indicated:


	Three Months Ended March 31,
	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	—		207		37		—		122		42
Amortization	(4)		(330)		(57)		(18)		(479)		(107)

Balance at end of period	$	105	$	5,519	$	629	$	153	$	5,448	$	757

Note 6 - Other Real Estate Owned

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


	Three Months Ended March 31,
($ in thousands)	2021		2020
Balance at beginning of period	$	1,401	$	—
Additions	1,960		376
Sales	(1,025)		—
Net change in valuation allowance	—		—
Balance at end of period	$	2,336	$	376

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


	Three Months Ended March 31,
($ in thousands)	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 March 31,
($ in thousands)	2021		2020
Net gain (loss) on sales	$	75	$	—
Operating expenses, net of rental income	(63)		—
Total	$	12	$	—

The Company did not provide loans to finance the sale of its OREO property during the three months ended March 31, 2021.

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 March 31,
($ in thousands)	2021		2020
Operating lease cost (1)	$	651	$	691
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	699	$	733
Right of use assets obtained in exchange for lease obligations	$	105	$	38

(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)	March 31, 2021			December 31, 2020
Operating leases:
Operating lease assets	$	7,145		$	7,616
Operating lease liabilities	$	7,935		$	8,455
Weighted-average remaining lease term	4.1 years			4.3 years
Weighted-average discount rate	2.57		%	2.60		%

The following table presets maturities of operating lease liabilities as of March 31, 2021:


($ in thousands)	March 31, 2021
Maturities:
2021	$	1,872
2022	2,385
2023	2,002
2024	726
2025	687
After 2025	818
Total lease payment	8,490
Imputed Interest	(555)
Present value of operating lease liabilities	$	7,935

Note 8 - Federal Home Loan Bank Advances and Other Borrowings

FHLB Advances

The Company had outstanding FHLB advances of $40.0 million and $80.0 million at March 31, 2021 and December 31, 2020, respectively. 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 0.76% at March 31, 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 March 31, 2021 and December 31, 2020, loans pledged to secure borrowings from the FHLB were $816.5 million and $834.4 million, respectively. The Company’s investment in capital stock of the FHLB of San Francisco totaled $8.3 million and $8.3 million at March 31, 2021 and December 31, 2020, respectively. The Company had additional borrowing capacity of $440.7 million and $425.3 million from the FHLB as of March 31, 2021 and December 31, 2020, respectively.

Other Borrowing Arrangements

At March 31, 2021, the Company had $34.4 million of unused borrowing capacity from the Federal Reserve Discount Window, to which the Company pledged loans with a carrying value of $42.1 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 March 31, 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.

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 March 31, 2021, there were 499,670 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 March 31,
($ in thousands)	2021		2020
Share-based compensation expense related to:
Stock options	$	28	$	157
Restricted stock awards	62		37
Total share-based compensation expense	$	90	$	194
Related tax benefits	$	20	$	8

The following table presents unrecognized share-based compensation expense as of March 31, 2021:

($ in thousands)

Unrecognized Expense

Weighted-Average Remaining Expected Recognition Period

Unrecognized share-based compensation expense related to:

Stock options

350

2.1 years

Restricted stock awards

646

2.8 years

Total unrecognized share-based compensation expense

996

2.6 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 March 31, 2021:


	Three Months Ended March 31, 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	20,000	$	12.51	10.0 years
Exercised	(49,580)	$	9.43	3.9 years
Forfeited	(10,000)	$	17.47	8.0 years
Outstanding at end of period	679,355	$	10.92	5.0 years	$	2,770
Exercisable at end of period	565,256	$	10.08	4.4 years	$	2,781

The following table represents information regarding unvested stock options for the three months ended March 31, 2021:


	Three Months Ended March 31, 2021
	Number of Shares	Weighted-Average Exercise Price Per Share
Outstanding at beginning of period	121,199	$	15.68
Granted	20,000	$	12.51
Vested	(17,100)	$	14.79
Forfeited	(10,000)	$	17.47
Outstanding at end of period	114,099	$	15.10

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 months ended March 31, 2021:


	Three Months Ended March 31, 2021
	Number of Shares	Weighted-Average Grant Date Fair Value Per Share
Outstanding at beginning of period	30,300	$	16.27
Granted	33,784	$	10.36
Vested	(200)	$	13.93
Forfeited	(1,000)	$	15.53
Outstanding at end of period	62,884	$	13.13

Note 11 - Income Taxes

Income tax expense was $3.6 million and $1.6 million, respectively, and the effective tax rate was 29.6% and 30.4%, respectively, for the three months ended March 31, 2021 and 2020.

At March 31, 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 March 31, 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 March 31,
($ in thousands, except per share)	2021		2020
Basic earnings per share:
Net income	$	8,560	$	3,572
Less: income allocated to unvested restricted stock	(33)		(9)
Net income allocated to common stock	$	8,527	$	3,563
Weighted-average total common shares outstanding	15,443,120		15,543,473
Less: weighted-average unvested restricted stock	(58,777)		(37,774)
Weighted-average common shares outstanding, basic	15,384,343		15,505,699
Basic earnings per share	$	0.55	$	0.23
Diluted earnings per share:
Net income allocated to common stock	$	8,527	$	3,563
Weighted-average common shares outstanding, basic	15,384,343		15,505,699
Diluted effect of stock options	149,265		194,445
Weighted-average common shares outstanding, diluted	15,533,608		15,700,144
Diluted earnings per share	$	0.55	$	0.23

There were 173,000 and 163,000 stock options excluded in computing diluted EPS because they were anti-dilutive for three months ended March 31, 2021 and 2020, respectively.

Note 13 - Commitments and Contingencies

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

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


	March 31, 2021				December 31, 2020
($ in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	3,280	$	165,101	$	6,623	$	150,247
Unfunded loan commitments	1,466		36,898		1,752		34,874
Standby letters of credit	2,971		1,814		2,971		1,814
Commercial letters of credit	219		—		—		—
Total	$	7,936	$	203,813	$	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 $235 thousand and $238 thousand, respectively, at March 31, 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.

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 March 31, 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 9.17% and 8.88%, respectively, as of March 31, 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
March 31, 2021
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	$	238,776	15.92	%	$	67,500	4.5	%	N/A		N/A
Total capital (to risk-weighted assets)	257,612		17.17	%	120,000		8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	238,776		15.92	%	90,000		6.0	%	N/A		N/A
Tier 1 capital (to average assets)	238,776		12.03	%	79,371		4.0	%	N/A		N/A
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	$	234,302	15.62	%	$	67,497	4.5	%	$	97,496	6.5	%
Total capital (to risk-weighted assets)	253,137		16.88	%	119,995		8.0	%	149,994		10.0	%
Tier 1 capital (to risk-weighted assets)	234,302		15.62	%	89,996		6.0	%	119,995		8.0	%
Tier 1 capital (to average assets)	234,302		11.81	%	79,370		4.0	%	99,212		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.

On April 30, 2019, the FDIC, the CDFPI and the Bank entered into a stipulation consenting to the issuance of a consent order (the “Order”) relating to the Bank’s BSA/AML. Subsequent to the Order, the Bank implemented many actions to respond to the requirements of the Order and submitted all required reports to the FDIC and CDFPI. On September 30, 2020, the FDIC and CDFPI terminated the Order upon the Bank’s satisfaction of the terms and requirements of the Order to their satisfaction.

Note 15 - Revenue Recognition

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


	Three Months Ended March 31,
($ in thousands)	2021		2020
Noninterest income in-scope of Topic 606
Service charges and fees on deposits:
Monthly service fees	$	20	$	28
Account analysis fees	210		235
Non-sufficient funds charges	49		100
Other deposit related fees	14		27
Total service charges and fees on deposits	293		390
Debit card fees	59		69
Gain on sale of other real estate owned	75		—
Wire transfer fees	135		128
Other service charges	52		52
Total	$	614	$	639

Note 16 - Subsequent Events

Announcement of Stock Repurchase Plan. 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.

Dividend Declared on Common Stock. On April 22, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per common share. The dividend will be paid on or about May 14, 2021, to shareholders of record as of the close of business on May 7, 2021.

The Company has evaluated the effects of events that have occurred subsequent to March 31, 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 months ended March 31, 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.

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 March 31,
($ in thousands, except per share data)	2021		2020
Selected balance sheet data:
Cash and cash equivalents	$	211,780	$	188,919
Securities available-for-sale	127,114		98,568
Securities held-to-maturity	—		19,711
Loans held-for-sale	3,569		16,191
Loans held-for-investment, net of deferred loan costs (fees)	1,685,916		1,451,038
Allowance for loan losses	(25,514)		(16,674)
Total assets	2,050,672		1,799,937
Total deposits	1,753,771		1,477,442
Shareholders’ equity	240,263		224,125
Selected income statement data:
Interest income	$	19,258	$	21,660
Interest expense	1,439		5,094
Net interest income	17,819		16,566
Provision (reversal) for loan losses	(1,147)		2,896
Noninterest income	2,857		2,026
Noninterest expense	9,669		10,567
Income before income taxes	12,154		5,129
Income tax expense	3,594		1,557
Net income	8,560		3,572
Per share data:
Earnings per common share, basic	$	0.55	$	0.23
Earnings per common share, diluted	0.55		0.23
Book value per common share (1)	15.53		14.58
Cash dividends declared per common share	0.10		0.10


	As of or For the Three Months Ended March 31,
($ in thousands, except per share data)	2021			2020
Outstanding share data:
Number of common shares outstanding	15,468,242			15,370,086
Weighted-average common shares outstanding, basic	15,384,343			15,505,699
Weighted-average common shares outstanding, diluted	15,533,608			15,700,144
Selected performance ratios:
Return on average assets (2)	1.75		%	0.81		%
Return on average shareholders' equity (2)	14.66		%	6.35		%
Dividend payout ratio (3)	18.18		%	43.48		%
Efficiency ratio (4)	46.76		%	56.84		%
Yield on average interest-earning assets (2)	4.00		%	5.03		%
Cost of average interest-bearing liabilities (2)	0.52		%	1.77		%
Net interest spread (2)	3.48		%	3.26		%
Net interest margin (2), (5)	3.70		%	3.85		%
Total loans to total deposits ratio (6)	96.33		%	99.31		%
Asset quality:
Loans 30 to 89 days past due and still accruing	$	108		$	1,630

Nonperforming loans (7)	1,461			4,083
Nonperforming assets (8)	3,797			4,459
Net charge-offs (recoveries)	(151)			602
Loans 30 to 89 days past due and still accruing to loans held-for-investment	0.01		%	0.11		%


Nonperforming loans to loans held-for-investment	0.09		%	0.28		%
Nonperforming loans to allowance for loan losses	5.73		%	24.49		%
Nonperforming assets to total assets	0.19		%	0.25		%
Allowance for loan losses to loans held-for-investment	1.51		%	1.15		%

Allowance for loan losses to nonperforming loans	1,746.34		%	408.38		%
Net charge-offs (recoveries) to average loans held-for-investment (2)	(0.04)		%	0.17		%
Capital ratios:
Shareholders’ equity to total assets	11.72		%	12.45		%
Average equity to average assets	11.92		%	12.77		%
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	15.92		%	15.53		%
Total capital (to risk-weighted assets)	17.17		%	16.71		%
Tier 1 capital (to risk-weighted assets)	15.92		%	15.53		%
Tier 1 capital (to average assets)	12.03		%	12.57		%
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	15.62		%	15.28		%
Total capital (to risk-weighted assets)	16.88		%	16.47		%
Tier 1 capital (to risk-weighted assets)	15.62		%	15.28		%
Tier 1 capital (to average assets)	11.81		%	12.37		%

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

(2) Annualized.

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

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

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

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

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

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

Executive Summary

Q1 2021 Financial Highlights

•Net income was $8.6 million for the three months ended March 31, 2021, an increase of $5.0 million, or 139.6%, from $3.6 million for the three months ended March 31, 2020;

◦The Company recorded a provision (reversal) for loan losses of $(1.1) million for the three months ended March 31, 2021 compared with $2.9 million for the three months ended March 31, 2020.

◦Net interest margin was 3.70% for the three months ended March 31, 2021 compared with 3.85% for the three months ended March 31, 2020.

•Total assets were $2.05 billion at March 31, 2021, an increase of $127.8 million, or 6.6%, from $1.92 billion at December 31, 2020;

•Loans held-for-investment, net of deferred costs (fees), were $1.69 billion at March 31, 2021, an increase of $102.3 million, or 6.5%, from $1.58 billion at December 31, 2020; and

◦SBA PPP loans totaled $218.7 million and $135.7 million at March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021, the Company funded $104.3 million of SBA PPP loans.

◦Loans under modified terms related to COVID-19 pandemic totaled $19.8 million and $36.1 million at March 31, 2021 and December 31, 2020, respectively.

◦Allowance for loan losses to total loans held-for-investment ratio was 1.51% at March 31, 2021 compared with 1.67% at December 31, 2020.

•Total deposits were $1.75 billion at March 31, 2021, an increase of $158.9 million, or 10.0%, 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.

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

In order to support its customers, the Company has been in close contact with its customers, assessing the level of impact on their businesses, and putting a process in place to evaluate each client’s specific situation and provide relief programs where appropriate. SBA PPP loans totaled $218.7 million and loans under modified terms related to the COVID-19 pandemic totaled $19.8 million as of March 31, 2021. The Company had received SBA PPP forgiveness of $23.7 million as of March 31, 2021. On January 13, 2021, SBA began accepting applications for second draw PPP loans. The Company had funded SBA PPP loans of $104.3 million during the three months ended March 31, 2021. The Company is accepting applications and will continue to receive applications as long as funding remains available

In addition, the Company has been monitoring its liquidity and capital closely. As of March 31, 2021, the Company maintained $211.8 million, or 10.3% of total assets, of cash and cash equivalents and $540.1 million, or 26.3% of total assets, of available borrowing capacity. All regulatory capital ratios were also well above the regulatory well capitalized requirements as of March 31, 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 correspondent yields and costs expressed both in dollars and rates, on a consolidated operations basis, for the periods indicated:


	Three Months Ended March 31,
	2021						2020
($ in thousands)	Average Balance		Interest		Yield/ Cost (6)		Average Balance		Interest		Yield/ Cost (6)
Interest-earning assets:
Total loans (1)	$	1,641,634	$	18,744	4.63	%	$	1,454,727	$	20,406	5.64	%
Mortgage backed securities	81,486		215		1.07	%	57,503		329		2.30	%
Collateralized mortgage obligation	24,888		57		0.93	%	41,408		198		1.92	%
SBA loan pool securities	11,673		52		1.81	%	13,872		79		2.29	%
Municipal securities - tax exempt (2)	5,804		36		2.52	%	5,719		38		2.67	%
Interest-bearing deposits in other financial institutions	180,706		45		0.10	%	150,448		461		1.23	%
FHLB and other bank stock	8,447		109		5.23	%	8,345		149		7.18	%
Total interest-earning assets	1,954,638		19,258		4.00	%	1,732,022		21,660		5.03	%
Noninterest-earning assets:
Cash and cash equivalents	19,072						18,850
Allowance for loan losses	(26,870)						(14,399)
Other assets	40,377						34,312
Total noninterest earning assets	32,579						38,763
Total assets	$	1,987,217					$	1,770,785
Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	407,623	333		0.33	%	$	364,604	1,119		1.23	%
Savings	10,609		1		0.04	%	6,614		3		0.18	%
Time deposits	635,613		977		0.62	%	758,481		3,870		2.05	%
Borrowings	75,556		128		0.69	%	25,117		102		1.63	%
Total interest-bearing liabilities	1,129,401		1,439		0.52	%	1,154,816		5,094		1.77	%
Noninterest-bearing liabilities:
Demand deposits	607,076						369,518
Other liabilities	13,950						20,365
Total noninterest-bearing liabilities	621,026						389,883
Total liabilities	1,750,427						1,544,699
Shareholders’ equity	236,790						226,086
Total liabilities and shareholders’ equity	$	1,987,217					$	1,770,785
Net interest income			$	17,819					$	16,566
Net interest spread (3)					3.48	%					3.26	%
Net interest margin (4)					3.70	%					3.85	%
Cost of funds (5)					0.34	%					1.34	%

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees (cost) of $1.2 million and $121 thousand, respectively, and net accretion of discount on loans of $745 thousand and $1.0 million, respectively, are included in the interest income for the three months ended March 31, 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.

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 March 31,
	2021 vs. 2020
	Increase (Decrease) Due to				Net Increase (Decrease)
($ in thousands)	Volume		Rate
Interest earned on:
Total loans	$	2,622	$	(4,284)	$	(1,662)
Investment securities	29		(313)		(284)
Other interest-earning assets	117		(573)		(456)
Total interest income	2,768		(5,170)		(2,402)
Interest incurred on:
Savings, NOW, and money market deposits	142		(930)		(788)
Time deposits	(627)		(2,266)		(2,893)
Borrowings	205		(179)		26
Total interest expense	(280)		(3,375)		(3,655)
Change in net interest income	$	3,048	$	(1,795)	$	1,253

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

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


	Three Months Ended March 31,				Amount Change		Percentage Change
($ in thousands)	2021		2020
Interest income:
Interest and fees on loans	$	18,744	$	20,406	$	(1,662)	(8.1)	%
Interest on tax-exempt investment securities	36		38		(2)		(5.3)	%
Interest on investment securities	324		606		(282)		(46.5)	%
Interest and dividends on other interest-earning assets	154		610		(456)		(74.8)	%
Total interest income	19,258		21,660		(2,402)		(11.1)	%
Interest expense:
Interest on deposits	1,311		4,992		(3,681)		(73.7)	%
Interest on borrowings	128		102		26		25.5	%
Total interest expense	1,439		5,094		(3,655)		(71.8)	%
Net interest income	$	17,819	$	16,566	$	1,253	7.6	%

Net interest income increased primarily due to a 125 basis point decrease in average cost on interest-bearing liabilities, a 12.9% increase in average balance of interest-earning assets, and a 2.2% decrease in average balance of interest-bearing liabilities, partially offset by a 103 basis point decrease in average yield on interest-earning assets.

Interest and fees on loans decreased primarily due to a 101 basis point decrease in average yield, partially offset by a 12.8% increase in average balance. The decrease in average yield was primarily due to the lower market rates, 1% contractual rate on SBA PPP loans, and a decrease in net accretion of discount, partially offset by an increase in amortization of net deferred fees. The decrease in net accretion of discount was primarily due to a decrease in loan payoffs on SBA loans. The increase in amortization of net deferred fees was primarily due to additional amortization of net deferred fees on SBA PPP loans.

Interest on investment securities decreased primarily due to a 101 basis point decrease in average yield, partially offset by a 4.5% 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 $52.1 million during the past 12-month period. For the three months ended March 31, 2021 and 2020, yield on total investment securities was 1.18% and 2.19%, respectively.

Interest income on other interest-earning assets decreased primarily due to a 122 basis point decrease in average yield, partially offset by a 19.1% increase in average balance. The decrease in average yield was primarily due to the lower rates on the account with Federal Reserve Bank. The increase in average balance was primarily due to placing higher balances into the interest-bearing account at the Federal Reserve Bank as a part of the Company’s strategic decision to increase its liquidity level by the increase in deposits and borrowings. For the three months ended March 31, 2021 and 2020, yield on total other interest-earning assets was 0.33% and 1.55%, respectively.

Interest expense on deposits decreased primarily due to a 128 basis point decrease in average cost of interest-bearing deposits and a 16.2% decrease in average balance of time deposits, partially offset by a 12.7% increase in savings, NOW and money market accounts. The decrease in average cost was primarily due to the lower market rates. The decrease in average balance of time deposits was primarily due to a lower level of renewals of matured time deposits. For the three months ended March 31, 2021 and 2020, average cost on total interest-bearing deposits was 0.50% and 1.78%, respectively, and average cost on total deposits were 0.32% and 1.34%, respectively.

Interest expense on borrowings increased primarily due to increases in average balance and average cost of FHLB advances during the three months ended March 31, 2021. The Company maintained a higher balance of FHLB advances since the outbreak of the COVID-19 pandemic in March 2020 as a part of the Company’s liquidity management.

Provision (reversal) for Loan Losses

Provision (reversal) for loan losses was $(1.1) million and $2.9 million, respectively, for the three months ended March 31, 2021 and 2020. The reversal for loan losses for the three months ended March 31, 2021 was primarily due to the improvement in historical loss factors and qualitative adjustment factors reflecting general economic conditions.

See further discussion in “Allowance for Loan Losses.”

Noninterest Income

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

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


	Three Months Ended March 31,				Amount Change		Percentage Change
($ in thousands)	2021		2020
Service charges and fees on deposits	$	293	$	390	$	(97)	(24.9)	%
Loan servicing income	882		554		328		59.2	%
Gain on sale of loans	1,322		725		597		82.3	%

Other income	360		357		3		0.8	%
Total noninterest income	$	2,857	$	2,026	$	831	41.0	%

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

Loan servicing income increased primarily due to a decrease in servicing asset amortization from a decrease in loan payoffs. Servicing asset amortization was $391 thousand and $604 thousand, respectively, for the three months ended March 31, 2021 and 2020.

Gain on sale of loans increased primarily due to a higher level of premium on SBA loans in the secondary market and an increase in sale volume of residential property loans. The Company sold SBA loans of $10.9 million with a gain of $1.2 million and residential property loans of $7.9 million with a gain of $127 thousand during the three months ended March 31, 2021. During the three months ended March 31, 2020, the Company sold SBA loans of $11.7 million with a gain of $704 thousand and residential property loans of $2.1 million with a gain of $21 thousand.

Other income primarily includes wire transfer fees of $135 thousand and $128 thousand, respectively, and debit card interchange fees of $59 thousand and $69 thousand, respectively, for the three months ended March 31, 2021 and 2020.

Noninterest Expense

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

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


	Three Months Ended March 31,				Amount Change		Percentage Change
($ in thousands)	2021		2020
Salaries and employee benefits	$	6,182	$	6,551	$	(369)	(5.6)	%
Occupancy and equipment	1,371		1,380		(9)		(0.7)	%
Professional fees	494		797		(303)		(38.0)	%
Marketing and business promotion	138		179		(41)		(22.9)	%
Data processing	377		358		19		5.3	%
Director fees and expenses	138		221		(83)		(37.6)	%

Regulatory assessments	208		219		(11)		(5.0)	%

Other expenses	761		862		(101)		(11.7)	%
Total noninterest expense	$	9,669	$	10,567	$	(898)	(8.5)	%

Salaries and employee benefits decreased primarily due to direct loan origination costs of $750 thousand related to SBA PPP loan production, which offsets the recognition of salaries expense, and a decrease in other employee benefits, partially offset by an increase in bonus accrual. The number of full-time equivalent employees was 246 at March 31, 2021 compared to 259 at March 31, 2020.

Professional fees decreased primarily due to decreases in expenses related to the Bank Secrecy Act and Anti-Money Laundering (“BSA/AML”) compliance enhancements. The consent order related to the BSA/AML compliance was terminated on September 30, 2020.

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

Director fees and expenses decreased primarily due to a decrease in number of directors and a severance payment of $45 thousand for a former director who passed away during the three months ended March 31, 2020.

Regulatory assessment expense decreased primarily due to a decrease in the assessment base as SBA PPP loans are excluded from the assessment base.

Other expenses primarily included $157 thousand and $126 thousand in loan related expenses, $307 thousand and $380 thousand in office expense, and $114 thousand and $147 thousand in armed guard expense for the three months ended March 31, 2021 and 2020, respectively.

Income Tax Expense

Income tax expense was $3.6 million and $1.6 million, respectively, and the effective tax rate was 29.6% and 30.4%, respectively, for the three months ended March 31, 2021 and 2020.

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:


	March 31, 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	$	86,999	$	87,220	$	221	$	74,622	$	76,154	$	1,532
Residential collateralized mortgage obligations	22,825		23,097		272		26,216		26,467		251
SBA loan pool securities	10,920		11,050		130		11,753		12,080		327
Municipal bonds	5,360		5,747		387		5,370		5,826		456
Total securities available-for-sale	$	126,104	$	127,114	$	1,010	$	117,961	$	120,527	$	2,566

Total investment securities were $127.1 million at March 31, 2021, an increase of $6.6 million, or 5.5%, from $120.5 million at December 31, 2020. The increase was primarily due to purchases of $20.2 million, partially offset by principal paydowns of $11.8 million, a decrease in fair value of securities available-for-sale of $1.6 million, and net premium amortization of $310 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 March 31, 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 March 31, 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 months ended March 31, 2021 and 2020.

The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of March 31, 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	$	—	—	%	$	673	1.54	%	$	9,328	1.56	%	$	76,998	1.58	%	$	86,999	1.58	%
Residential collateralized mortgage obligations	—		—	%	—		—	%	11,252		0.72	%	11,573		1.79	%	22,825		1.26	%
SBA loan pool securities	—		—	%	803		2.58	%	1,722		0.67	%	8,395		2.01	%	10,920		1.84	%
Municipal bonds	—		—	%	2,183		2.02	%	841		2.27	%	2,336		3.53	%	5,360		2.72	%
Total securities available-for-sale	$	—	—	%	$	3,659	2.06	%	$	23,143	1.11	%	$	99,302	1.69	%	$	126,104	1.59	%

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)	March 31, 2021		December 31, 2020
Real estate loans:

Residential property	$	—	$	300
SBA property	3,569		1,411

Commercial and industrial loans:


SBA commercial term	—		268

Total	$	3,569	$	1,979

Loans held-for-sale were $3.6 million at March 31, 2021, an increase of $1.6 million, or 80.3%, from $2.0 million at December 31, 2020. The increase was primarily due to new funding of $20.4 million and a loan transferred from loans held-for-investment of $378 thousand, partially offset by sales of $19.2 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:


	March 31, 2021				December 31, 2020
($ in thousands)	Amount		Percentage to Total		Amount		Percentage to Total
Real estate loans:
Commercial property	$	922,536	54.6	%	$	880,736	55.5	%
Residential property	190,990		11.2	%	198,431		12.5	%
SBA property	125,989		7.5	%	126,570		8.0	%
Construction	13,151		0.8	%	15,199		1.0	%
Total real estate loans	1,252,666		74.1	%	1,220,936		77.0	%
Commercial and industrial loans:
Commercial term	80,361		4.8	%	87,250		5.5	%
Commercial lines of credit	91,970		5.5	%	96,087		6.1	%
SBA commercial term	21,078		1.3	%	21,878		1.4	%
SBA PPP	218,709		13.0	%	135,654		8.6	%
Total commercial and industrial loans	412,118		24.6	%	340,869		21.6	%
Other consumer loans	21,132		1.3	%	21,773		1.4	%
Loans held-for-investment	1,685,916		100.0	%	1,583,578		100.0	%
Allowance for loan losses	(25,514)				(26,510)
Net loans held-for-investment	$	1,660,402			$	1,557,068

Loans held-for-investment, net of deferred loan costs (fees) were $1.69 billion at March 31, 2021, an increase of $102.3 million, or 6.5%, from $1.58 billion at December 31, 2020. The increase was primarily due to new funding of $190.4 million and advances of $27.8 million, partially offset by paydowns and payoffs of $115.4 million. SBA PPP loan production contributed significantly to the Company’s loan growth for the three months ended March 31, 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 March 31, 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 under modified terms related to the COVID-19 pandemic as of March 31, 2021:


	Modification Type							Weighted-Average Contractual Rate		Loan-to-Value (1)		Accrued Interest Receivable
($ in thousands)	Payment Deferment		Interest Only		Total
Real estate loans:
Commercial property	$	—	$	11,830	$	11,830		3.59	%	45.6	%	$	77
Residential property	349		—		349			3.25	%	51.4	%	5
SBA property	—		1,627		1,627			4.94		73.8	%	27
Commercial and industrial loans:
Commercial term	—		5,506		5,506			3.88	%			92
SBA commercial term	—		513		513			5.50	%			3
Total	$	349	$	19,476	$	19,825		3.82	%			$	204
Loans held-for-investment					$	1,685,916
SBA PPP loans					218,709
Loans held-for-investment, excluding SBA PPP loans					$	1,467,207
Total loans under modified terms related to the COVID-19 pandemic to loans held-for-investment, excluding SBA PPP loans					1.4		%

(1) Collateral value at origination

The following table presents a summary of remaining modifications terms of loans under modified terms related to the COVID-19 pandemic as of March 31, 2021:


	Remaining Terms of
($ in thousands)	Three Months or Less		Three to Six Months		Total
Real estate loans:
Commercial property	$	—	$	11,830	$	11,830
Residential property	349		—		349
SBA property	1,627		—		1,627
Commercial and industrial loans:
Commercial term	1,880		3,626		5,506
SBA commercial term	513		—		513
Total	$	4,369	$	15,456	$	19,825

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 March 31, 2021:


($ in thousands)	Carrying Value		Accrued Interest Receivable
Real estate loans:
Commercial property	$	356,265	$	2,510
Residential property	37,070		760
SBA property	2,576		29
Commercial and industrial loans:
Commercial term	41,379		100
SBA commercial term	1,413		7
Other consumer loans	1,116		3
Total	$	439,819	$	3,409

The following table presents activity in loans under modified terms related to the COVID-19 pandemic for the three months ended March 31, 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	(22,112)		(423)		—		(2,461)		—		(24,996)
Subsequent modification	11,829		—		—		2,461		—		14,290
New modification	—		349		—		—		—		349
Amortization	(2,019)		(2)		11		(21)		10		(2,021)
Balance at March 31, 2021	$	11,830	$	349	$	1,627	$	5,506	$	513	$	19,825

(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 March 31, 2021:


($ in thousands)	Number of Loans	Carrying Value		Contractual Balance
Loan amount:
$50,000 or less	1,354	$	26,998	$	28,032
Over $50,000 and less than $350,000	755	94,612		97,341
Over $350,000 and less than $2,000,000	136	86,755		88,430
$2,000,000 or more	4	10,344		10,427
Total	2,249	$	218,709	$	224,230

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. Annualized net charge-offs (recoveries) to average loans held-for-investment were (0.04)% and 0.17% for the three months ended March 31, 2021 and 2020, respectively.

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


($ in thousands)	March 31, 2021			December 31, 2020
Loans held-for-investment	$	1,685,916		$	1,583,578
Less: SBA PPP loans	218,709			135,654
Loans held-for-investment, excluding SBA PPP loans	$	1,467,207		$	1,447,924
Allowance for loan losses	$	25,514		$	26,510
Allowance for loan losses to loans held-for-investment	1.51		%	1.67		%
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans	1.74		%	1.83		%

The decrease in allowance for loan losses to loans held-for-investment was primarily due to improvement in historical loss factors and qualitative adjustment factors reflecting general economic conditions.

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 March 31,
($ in thousands)	2021			2020
Allowance for loan losses:
Balance at beginning of period	$	26,510		$	14,380
Charge-offs:
Real estate	18			27
Commercial and industrial	5			675
Other consumer	22			76
Total charge-offs	45			778
Recoveries on loans previously charged off
Real estate	30			56
Commercial and industrial	149			91
Other consumer	17			29
Total recoveries	196			176
Net charge-offs (recoveries)	(151)			602
Provision (reversal) for loan losses	(1,147)			2,896
Balance at end of period	$	25,514		$	16,674
Loans held-for-investment:
Balance at end of period	$	1,685,916		$	1,451,038
Average balance	1,638,112			1,445,134
Ratios:
Annualized net charge-offs (recoveries) to average loans held-for-investment	(0.04)		%	0.17		%
Allowance for loan losses to loans held-for-investment	1.51		%	1.15		%

Nonperforming Loans and Nonperforming Assets

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


($ in thousands)	March 31, 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	841			885			(44)		(5.0)	%

Total real estate loans	841			1,598			(757)		(47.4)	%
Commercial and industrial loans:

Commercial lines of credit	—			904			(904)		(100.0)	%
SBA commercial term	568			595			(27)		(4.5)	%
Total commercial and industrial loans	568			1,499			(931)		(62.1)	%
Other consumer loans	52			66			(14)		(21.2)	%
Total nonaccrual loans	1,461			3,163			(1,702)		(53.8)	%
Loans past due 90 days or more still on accrual	—			—			—		—	%
Total nonperforming loans	1,461			3,163			(1,702)		(53.8)	%
Other real estate owned	2,336			1,401			935		66.7	%
Total nonperforming assets	$	3,797		$	4,564		$	(767)	(16.8)	%

Nonperforming loans to loans held-for-investment	0.09		%	0.20		%
Nonperforming assets to total assets	0.19		%	0.24		%

The decrease in total nonaccrual loans was primarily due to paydowns and payoffs of $1.6 million and a loan transferred to OREO of $905 thousand, partially offset by loans placed on nonaccrual status of $863 thousand during the three months ended March 31, 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 $19 thousand would have been recorded during the three months ended March 31, 2021, 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:


	March 31, 2021						December 31, 2020
($ in thousands)	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
Real estate loans:
Commercial property	$	331	$	—	$	331	$	333	$	—	$	333

SBA property	264		33		297		270		5		275

Commercial and industrial loans:
Commercial term	14		—		14		18		—		18

SBA commercial term	11		—		11		13		—		13

Total	$	620	$	33	$	653	$	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)	March 31, 2021		December 31, 2020		Amount Change		Percentage Change
Noninterest-bearing demand deposits	$	715,719	$	538,009	$	177,710	33.0	%
Interest-bearing deposits:
Savings	11,271		10,481		790		7.5	%
NOW	19,380		21,604		(2,224)		(10.3)	%
Retail money market accounts	381,704		351,739		29,965		8.5	%
Brokered money market accounts	4		25,002		(24,998)		(100.0)	%
Retail time deposits of:
$250,000 or less	276,232		299,431		(23,199)		(7.7)	%
More than $250,000	166,845		168,683		(1,838)		(1.1)	%
Time deposits from internet rate service providers	17,616		24,902		(7,286)		—	%
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	1,038,052		1,056,842		(18,790)		(1.8)	%
Total deposits	$	1,753,771	$	1,594,851	$	158,920	10.0	%

The increase in noninterest-bearing demand deposits was primarily due to the deposit increases from customers with SBA PPP loans and SBA Economic Injury Disaster Loans, as well as the overall liquid deposit market. A total of $91.4 million of SBA PPP loans were funded through the Bank's noninterest-bearing demand deposits and deposit customers also received $10.1 million of SBA Economic Injury Disaster Loans of during the three months ended March 31, 2021.

The decrease in retail time deposits was primarily due to matured and closed accounts of $195.6 million, partially offset by new accounts of $31.6 million and renewals of the matured accounts of $136.2 million.

As of March 31, 2021 and December 31, 2020, total deposits were comprised of 40.8% and 33.7%, respectively, of noninterest-bearing demand accounts, 23.5% and 25.7%, respectively, of savings, NOW and money market accounts, and 35.7% 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 $2.8 million and $2.7 million, respectively, at March 31, 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
March 31, 2021
Time deposits less than $100,000	$	19,598	$	19,490	$	101,522	$	6,510	$	1,276	$	148,396
Time deposits of $100,000 through $250,000	61,029		45,552		102,544		1,327		—		210,452
Time deposits of more than $250,000	140,497		40,771		82,952		2,625		—		266,845
Total	$	221,124	$	105,813	$	287,018	$	10,462	$	1,276	$	625,693
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 $240.3 million at March 31, 2021, an increase of $6.5 million, or 2.8%, from $233.8 million at December 31, 2020. The increase was primarily due to net income of $8.6 million and cash proceeds from exercise of stock options of $468 thousand, partially offset by a negative fair value change in securities available-for-sale of $1.1 million and dividends declared on common stock of $1.5 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 March 31, 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)
March 31, 2021
Common tier 1 capital (to risk-weighted assets)	15.92	%	15.62	%	4.5	%	6.5	%
Total capital (to risk-weighted assets)	17.17	%	16.88	%	8.0	%	10.0	%
Tier 1 capital (to risk-weighted assets)	15.92	%	15.62	%	6.0	%	8.0	%
Tier 1 capital (to average assets)	12.03	%	11.81	%	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 9.17% and 8.88%, respectively, as of March 31, 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 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 $40.0 million and $80.0 million of outstanding FHLB advances at March 31, 2021 and December 31, 2020, respectively. Based on the values of loans pledged as collateral, the Company had $440.7 million and $425.3 million of additional borrowing capacity with FHLB as of March 31, 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 March 31, 2021 and December 31, 2020.

In addition, available unused secured borrowing capacity from Federal Reserve Discount Window at March 31, 2021 and December 31, 2020 was $34.4 million and $35.8 million, respectively. Federal Reserve Discount Window was collateralized by loans totaling $42.1 million and $44.1 million as of March 31, 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 March 31, 2021 and December 31, 2020, total cash and cash equivalents represented 10.3% 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 March 31, 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:


	March 31, 2021				December 31, 2020
($ in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	3,280	$	165,101	$	6,623	$	150,247
Unfunded loan commitments	1,466		36,898		1,752		34,874
Standby letters of credit	2,971		1,814		2,971		1,814
Commercial letters of credit	219		—		—		—
Total	$	7,936	$	203,813	$	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
March 31, 2021
Time deposits	$	613,955	$	10,462	$	1,276	$	—	$	625,693
FHLB advances	30,000		10,000		—		—		40,000
Operating leases	1,872		4,387		1,413		818		8,490
Total	$	645,827	$	24,849	$	2,689	$	818	$	674,183
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 investment activities.

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

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

Measurement

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

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

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


	March 31, 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	35.7	%	19.0	%	28.9	%	17.4	%
+200	23.7	%	14.2	%	19.4	%	13.3	%
+100	11.8	%	7.9	%	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 March 31, 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 March 31, 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 March 31, 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 March 31, 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

Management is not aware of any material changes 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 March 31, 2021.

The following table presents share repurchase activities during the three months ended March 31, 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

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

From January 1, 2021 to January 31, 2021

—

From February 1, 2021 to February 28, 2021

—

From March 1, 2021 to March 31, 2021

—

Total

—

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.

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

None

Item 6 - Exhibits

Exhibit Number

Description

Form

File No.

Exhibit

Filing Date

3.1

Articles of Incorporation of PCB Bancorp, as amended

10-Q

001-38621

3.1

August 8, 2019

3.2

Bylaws of PCB Bancorp

8-K

001-38621

3.2

July 2, 2019

4.1

Specimen common stock certificate of PCB Bancorp

10-Q

001-38621

4.1

August 8, 2019

4.2

Description of Capital Stock

10-K

001-38621

4.2

March 9, 2020

10.1

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

S-1

333-226208

10.1

July 17, 2018

10.2

2013 Equity Based Compensation Plan, as amended

S-1

333-226208

10.2

July 17, 2018

10.3

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

S-1

333-226208

10.3

July 17, 2018

10.4

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

S-1

333-226208

10.4

July 17, 2018

10.5

2003 Pacific City Bank Stock Option Plan, as amended

S-1

333-226208

10.5

July 17, 2018

10.6

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

S-1

333-226208

10.6

July 17, 2018

31.1

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

31.2

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

32.1

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

32.2

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

101.INS

XBRL Instance Document*

101.SCH

XBRL Taxonomy Extension Schema Document*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document*

* Filed herewith

Signatures

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


		PCB Bancorp

Date:	May 6, 2021	/s/ Henry Kim
		Henry Kim
		President and Chief Executive Officer (Principal Executive Officer)

Date:	May 6, 2021	/s/ Timothy Chang
		Timothy Chang
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)