PCB BANCORP - Quarter Report: 2023 September (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 September 30, 2023

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

For the transition period from to

Commission file number 001-38621

PCB BANCORP

(Exact name of registrant as specified in its charter)


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

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

(Address of principal executive offices) (Zip Code)

(213) 210-2000

(Registrant’s telephone number, including area code)

Not Applicable

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

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


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

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

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

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

Large accelerated filer

☐

Accelerated filer

☒

Non-accelerated filer

☐

(Do not check if a smaller reporting company)

Smaller reporting company

☒

Emerging growth company

☒

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

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

As of October 31, 2023, the registrant had outstanding 14,259,340 shares of common stock.

PCB Bancorp and Subsidiary

Quarterly Report on Form 10-Q

September 30, 2023

Table of Contents


Part I - Financial Information

Item 1.	Consolidated Financial Statements	4

	Consolidated Balance Sheets - September 30, 2023 (Unaudited) and December 31, 2022	4
	Consolidated Statements of Income (Unaudited) - Three and Nine Months Ended Se ptember 30, 2023 and 2022	5
	Consolidated Statements of Comprehensive Income (Unaudited) - Three and N ine Months Ended September 30, 2023 and 2022	6
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) - Three and Nine Months Ended September 30, 2023 and 2022	7
	Consolidated Statements of Cash Flows (Unaudited) - N i ne Months Ended Sept ember 30, 2023 and 2022	9
	Notes to Consolidated Financial Statements (Unaudited)	11

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	67

Item 4.	Controls and Procedures	68

Part II - Other Information

Item 1.	Legal Proceedings	69

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 3.	Defaults Upon Senior Securities	71

Item 4.	Mine Safety Disclosures	71

Item 5.	Other Information	71

Item 6.	Exhibits	72

Signatures		73

Forward-looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements which reflect current views of PCB Bancorp (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 business and 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 recent inflationary pressures and governmental and societal responses thereto;

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

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

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

•the current inflationary environment and government and regulatory responses thereto;

•adverse developments at other banks, including bank failures, that impact general sentiment regarding the stability and liquidity of banks and may affect our customers’ behavior and our stock price;

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

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

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

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

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

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

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

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

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

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

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

•changes in federal tax laws or policies.

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, 2022 and our other documents that we file with the United States (“U.S.”) Securities Exchange Commission (“SEC”). Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this report. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is initially made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Part I - Financial Information

Item 1 - Consolidated Financial Statements

PCB Bancorp and Subsidiary

Consolidated Balance Sheets

($ in thousands, except share data)


	September 30, 2023		December 31, 2022
	(Unaudited)
Assets
Cash and due from banks	$	22,691	$	23,202
Interest-bearing deposits in other financial institutions	169,659		123,829
Total cash and cash equivalents	192,350		147,031
Securities available-for-sale, at fair value (amortized cost of $158,472 and $156,978 at September 30, 2023 and December 31, 2022, respectively, and allowance for credit losses of $0 at September 30, 2023)	139,218		141,863
Loans held-for-sale, at lower of cost or fair value	6,693		22,811
Loans held-for-investment, net of deferred fees and costs	2,167,605		2,046,063
Allowance for credit losses on loans (1)	(25,599)		(24,942)
Net loans held-for-investment	2,142,006		2,021,121
Premises and equipment, net	6,229		6,916
Federal Home Loan Bank and other restricted stock, at cost	12,716		10,183

Bank-owned life insurance	30,615		30,064
Deferred tax assets, net	4,486		3,115
Servicing assets	6,920		7,347
Operating lease assets	5,626		6,358
Accrued interest receivable	8,731		7,472
Other assets	12,384		15,755
Total assets	$	2,567,974	$	2,420,036
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	611,021	$	734,989
Savings, NOW and money market accounts	459,038		514,741
Time deposits of $250,000 or less	607,664		382,377
Time deposits of more than $250,000	514,406		413,876
Total deposits	2,192,129		2,045,983
Federal Home Loan Bank advances	—		20,000
Operating lease liabilities	5,852		6,809
Accrued interest payable and other liabilities	28,141		11,802
Total liabilities	2,226,122		2,084,594
Commitments and contingencies
Preferred stock, 10,000,000 shares authorized, no par value:
Series C, senior non-cumulative perpetual, $1,000 per share liquidation preference, 69,141 and 69,141 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively.	69,141		69,141
Common stock, 60,000,000 shares authorized, no par value; 14,319,014 and 14,625,474 shares issued and outstanding, respectively, and included 42,161 and 62,022 shares of unvested restricted stock, respectively, at September 30, 2023 and December 31, 2022	143,401		149,631
Retained earnings	142,750		127,181
Accumulated other comprehensive loss, net	(13,440)		(10,511)
Total shareholders’ equity	341,852		335,442
Total liabilities and shareholders’ equity	$	2,567,974	$	2,420,036

(1) Allowance for credit losses on loans at September 30, 2023 is presented under ASC 326, while prior period comparison continues to be presented under legacy ASC 450 and ASC 310.

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Income (Unaudited)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Interest and dividend income:
Loans, including fees	$	34,651	$	24,835	$	98,840	$	66,268
Tax-exempt investment securities	30		34		97		107
Taxable investment securities	1,140		772		3,311		1,843
Other interest-earning assets	3,031		1,194		7,978		1,957
Total interest income	38,852		26,835		110,226		70,175
Interest expense:
Deposits	16,403		2,798		43,437		4,689
Other borrowings	—		14		209		119
Total interest expense	16,403		2,812		43,646		4,808
Net interest income	22,449		24,023		66,580		65,367
Provision (reversal) for credit losses (1)	751		3,753		(1,830)		2,453
Net interest income after provision (reversal) for credit losses	21,698		20,270		68,410		62,914
Noninterest income:
Service charges and fees on deposits	371		341		1,084		974
Loan servicing income	851		780		2,579		2,235
Bank-owned life insurance income	187		178		551		525
Gain on sale of loans	689		1,415		2,767		7,231

Other income	404		462		1,199		1,145
Total noninterest income	2,502		3,176		8,180		12,110
Noninterest expense:
Salaries and employee benefits	8,572		8,457		26,175		25,177
Occupancy and equipment	1,964		1,650		5,779		4,584
Professional fees	685		587		2,189		1,632
Marketing and business promotion	980		909		1,555		1,426
Data processing	367		427		1,159		1,272
Director fees and expenses	152		179		549		530
Regulatory assessments	281		150		818		438
Other expense	1,206		1,336		3,364		2,952
Total noninterest expense	14,207		13,695		41,588		38,011
Income before income taxes	9,993		9,751		35,002		37,013
Income tax expense	2,970		2,798		10,205		10,728
Net income	$	7,023	$	6,953	$	24,797	$	26,285

Earnings per common share, basic	$	0.49	$	0.47	$	1.73	$	1.76
Earnings per common share, diluted	$	0.49	$	0.46	$	1.71	$	1.73

Weighted-average common shares outstanding, basic	14,294,802		14,877,879		14,327,930		14,869,997
Weighted-average common shares outstanding, diluted	14,396,216		15,088,089		14,441,960		15,126,863

(1) Provision (reversal) for credit losses for the three and nine months ended September 30, 2023 is presented under ASC 326, while prior period comparison continues to be presented under legacy ASC 450 and ASC 310.

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

($ in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	7,023	$	6,953	$	24,797	$	26,285
Other comprehensive loss:
Unrealized loss on securities available-for-sale arising during the period	(3,827)		(6,255)		(4,137)		(15,839)
Income tax benefit related to items of other comprehensive loss	1,118		1,844		1,208		4,674
Total other comprehensive loss, net of tax	(2,709)		(4,411)		(2,929)		(11,165)
Total comprehensive income	$	4,314	$	2,542	$	21,868	$	15,120

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)


	Three Months Ended
	Shares Outstanding		Shareholders’ Equity
	Preferred Stock	Common Stock	Preferred Stock		Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at July 1, 2022	69,141	14,956,760	$	69,141	$	155,842	$	115,992	$	(6,600)	$	334,375
Comprehensive income (loss)
Net income	—	—	—		—		6,953		—		6,953
Other comprehensive loss, net of tax	—	—	—		—		—		(4,411)		(4,411)


Issuance of restricted stock	—	2,700	—		—		—		—		—

Restricted stock surrendered due to employee tax liability	—	(429)	—		(8)		—		—		(8)
Repurchase of common stock	—	(119,941)	—		(2,249)		—		—		(2,249)
Share-based compensation expense	—	—	—		135		—		—		135
Stock options exercised	—	14,050	—		170		—		—		170
Cash dividends declared on common stock ($0.15 per share)	—	—	—		—		(2,246)		—		(2,246)
Balance at September 30, 2022	69,141	14,853,140	$	69,141	$	153,890	$	120,699	$	(11,011)	$	332,719

Balance at July 1, 2023	69,141	14,318,890	$	69,141	$	143,686	$	138,315	$	(10,731)	$	340,411


Comprehensive income (loss)
Net income	—	—	—		—		7,023		—		7,023
Other comprehensive loss, net of tax	—	—	—		—		—		(2,709)		(2,709)


Issuance of restricted stock	—	3,300	—		—		—		—		—

Restricted stock surrendered due to employee tax liability	—	(99)	—		(2)		—		—		(2)
Repurchase of common stock	—	(67,202)	—		(1,058)		—		—		(1,058)
Share-based compensation expense	—	—	—		113		—		—		113
Stock options exercised	—	64,125	—		662		—		—		662
Cash dividends declared on common stock ($0.18 per share)	—	—	—		—		(2,588)		—		(2,588)
Balance at September 30, 2023	69,141	14,319,014	$	69,141	$	143,401	$	142,750	$	(13,440)	$	341,852

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

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

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


	Nine Months Ended
	Shares Outstanding		Shareholders’ Equity
	Preferred Stock	Common Stock	Preferred Stock		Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at January 1, 2022	—	14,865,825	$	—	$	154,992	$	101,140	$	154	$	256,286
Comprehensive income (loss)
Net income	—	—	—		—		26,285		—		26,285
Other comprehensive loss, net of tax	—	—	—		—		—		(11,165)		(11,165)
Issuance of preferred stock	69,141	—	69,141								69,141

Issuance of restricted stock	—	27,700	—		—		—		—		—
Forfeiture of restricted stock	—	(200)	—		—		—		—		—
Restricted stock surrendered due to employee tax liability	—	(429)	—		(8)		—		—		(8)
Repurchase of common stock	—	(119,941)	—		(2,249)		—		—		(2,249)
Share-based compensation expense	—	—	—		418		—		—		418
Stock options exercised	—	80,185	—		737		—		—		737
Cash dividends declared on common stock ($0.45 per share)	—	—	—		—		(6,726)		—		(6,726)
Balance at September 30, 2022	69,141	14,853,140	$	69,141	$	153,890	$	120,699	$	(11,011)	$	332,719

Balance at January 1, 2023	69,141	14,625,474	$	69,141	$	149,631	$	127,181	$	(10,511)	$	335,442
Cumulative effect adjustment upon adoption of ASC 326	—	—	—		—		(1,886)		—		(1,886)
Adjusted balance at January 1, 2023	69,141	14,625,474	69,141		149,631		125,295		(10,511)		333,556
Comprehensive income (loss)
Net income	—	—	—		—		24,797		—		24,797
Other comprehensive loss, net of tax	—	—	—		—		—		(2,929)		(2,929)


Issuance of restricted stock	—	3,300	—		—		—		—		—

Restricted stock surrendered due to employee tax liability	—	(99)	—		(2)		—		—		(2)
Repurchase of common stock	—	(452,583)	—		(7,903)		—		—		(7,903)
Share-based compensation expense	—	—	—		346		—		—		346
Stock options exercised	—	142,922	—		1,329		—		—		1,329
Cash dividends declared on common stock ($0.51 per share)	—	—	—		—		(7,342)		—		(7,342)
Balance at September 30, 2023	69,141	14,319,014	$	69,141	$	143,401	$	142,750	$	(13,440)	$	341,852

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

($ in thousands)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net income	$	24,797	$	26,285
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment	1,699		1,072
Net amortization of premiums on securities	169		307
Net accretion of discounts on loans	(2,197)		(2,682)
Net accretion of deferred loan fees	(648)		(2,014)
Amortization of servicing assets	1,344		1,584
Provision (reversal) for credit losses (1)	(1,830)		2,453
Bank-owned life insurance income	(551)		(525)
Deferred tax expense	625		3,363
Stock-based compensation	346		418

Gain on sale of loans	(2,767)		(7,231)
Originations of loans held-for-sale	(49,753)		(88,236)
Proceeds from sales of and principal collected on loans held-for-sale	65,550		114,400
Change in accrued interest receivable and other assets	2,100		(7,261)
Change in accrued interest payable and other liabilities	14,566		(1,194)
Net cash provided by operating activities	53,450		40,739
Cash flows from investing activities
Purchase of securities available-for-sale	(15,959)		(41,099)

Proceeds from maturities and paydowns of securities available-for-sale	14,298		18,750
Proceeds from principal collected on loans held-for-sale previously classified as held-for-investment	5,074		458
Net change in loans held-for-investment	(104,439)		(226,849)
Purchase of loans held-for-investment	(15,741)		—
Purchase of Federal Home Loan Bank stock	(2,533)		(1,606)
Proceeds from sale of other real estate owned	—		1,191
Purchases of premises and equipment	(1,059)		(2,690)

Net cash used in investing activities	(120,359)		(251,845)
Cash flows from financing activities
Net change in deposits	146,146		110,964
Net change in short-term Federal Home Loan Bank advances	(20,000)		—

Repayment of long-term Federal Home Loan Bank advances	—		(10,000)
Stock options exercised	1,329		737
Restricted stock surrendered due to employee tax liability	(2)		(8)
Issuance of preferred stock	—		69,141

Repurchase of common stock	(7,903)		(2,249)
Cash dividends paid on common stock	(7,342)		(6,726)
Net cash provided by financing activities	112,228		161,859
Net increase (decrease) in cash and cash equivalents	45,319		(49,247)
Cash and cash equivalents at beginning of period	147,031		203,285
Cash and cash equivalents at end of period	$	192,350	$	154,038

(1) Provision for credit losses for the nine months ended September 30, 2023 is presented under ASC 326, while prior period comparison continue to be presented under legacy ASC 450 and ASC 310.

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows, Continued (Unaudited)

($ in thousands)


	Nine Months Ended September 30,
	2023		2022
Supplemental disclosures of cash flow information:
Interest paid	$	28,008	$	4,559
Income taxes paid	4,023		12,625
Supplemental disclosures of non-cash investment activities:
Loans transferred to loans held-for-sale	$	—	$	458
Loans transferred to other real estate owned	—		151
Right of use assets obtained in exchange for lease obligations	1,360		2,007

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 PCB Bank (the “Bank”), which is a single operating segment. The Company changed its subsidiary name from Pacific City Bank to PCB Bank on August 25, 2022. As of September 30, 2023, the Bank operated 11 full-service branches in Los Angeles and Orange counties, California, three full-service branches on the East Coast (Bayside, New York; and Englewood Cliffs and Palisades Park, New Jersey), and two full-service branches in Texas (Carrollton and Dallas), and seven loan production offices (“LPOs”) in Los Angeles and Orange Counties, California; Annandale, Virginia; Atlanta, Georgia; Aurora, Colorado; Bellevue, Washington; and Carrollton, Texas. 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, 2022 filed by the Company with the SEC. The December 31, 2022 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, 2022 filed with the SEC, but does not include all of the disclosures required by GAAP for complete financial statements.

In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations as of the dates and for the periods presented. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

Principles of Consolidation

The consolidated financial statements include the accounts of PCB Bancorp and its wholly owned subsidiary as of September 30, 2023 and December 31, 2022, and for the three and nine months ended September 30, 2023 and 2022. 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. Other than the adoption of ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326)” discussed below, 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, 2022 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.

Adopted Accounting Pronouncements

During the nine months ended September 30, 2023, the Company adopted following accounting pronouncements.

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 delayed the effective date to 2023 for certain SEC filers that are Smaller Reporting Companies, such as the Company.

On January 1, 2023, the Company adopted the provisions of ASC 326 through the application of the modified retrospective transition approach, and recorded a net decrease of $1.9 million to the beginning balance of retained earnings as of January 1, 2023 for the cumulative effect adjustment, reflecting an initial adjustment to the allowance for credit losses (“ACL”) on loans of $1.1 million and the ACL on off-balance sheet credit exposures of $1.6 million, net of related deferred tax assets arising from temporary differences of $788 thousand. The initial adjustment to the ACL is reflective of expected lifetime credit losses associated with the composition of financial assets within the scope of ASC 326 as of January 1, 2023, as well as management’s current expectation of future economic conditions.

The following table summarizes the initial adjustment to the ACL as of January 1, 2023:


($ in thousands)	Pre-ASC 326 Adoption		Impact of ASC 326 Adoption		As Reported Under ASC 326
Assets

ACL on loans




Commercial real estate	$	15,536	$	(610)	$	14,926
Commercial and industrial	5,502		4,344		9,846


Consumer	3,904		(2,667)		1,237
Total ACL on loans	24,942		1,067		26,009
Deferred tax assets	3,115		788		3,903
Liabilities
ACL on off-balance sheet credit exposures	$	299	$	1,607	1,906
Shareholders’ equity
Retained earnings	$	127,181	$	(1,886)	125,295

In conjunction with the adoption of ASC 326, the Company made an accounting policy election not to measure an ACL on accrued interest receivables for the loans collectively evaluated. For the loans individually evaluated, the Company considers accrued interest receivables as a part of the amortized cost and measures an ACL.

When accrued interest receivable is deemed to be uncollectable, the Company promptly reverses such balances through current period interest income in the period they are deemed uncollectable. Additionally, the Company has also elected not to include the balance of accrued interest receivable in the amortized cost basis of financial assets within the scope of ASC 326. Accrued interest receivable will continue to be presented separately in the Consolidated Balance Sheets.

ACL on securities available-for-sale

The Company reviewed securities available-for-sale that were in an unrealized loss position as of January 1, 2023 and determined the decline in fair value for those securities was not related to credit, but rather related to changes in interest rates and general market conditions. Additionally, there were no investment securities with previously recorded other-than-temporary impairment (“OTTI”) as of January 1, 2023. As such, no ACL was recorded for securities available-for-sale as of January 1, 2023.

ACL on loans

The measurement of the ACL on loans is performed by collectively evaluating loans with similar risk characteristics using a discounted cash flow approach. The discounted cash flow methodology incorporates a probability of default (“PD”) and loss given default (“LGD”) model, as well as reasonable and supportable forecasts, and generates an estimate of the contractual cash flows that are not expected to be collected over the life of the loan. The Company leverages its peer group information to estimate PD and LGD. Peer group is selected from institutions in California with total assets between $1 billion and $5 billion. The Company analyzes and compares each loan segment’s volume as a percentage of total loans, recent charge-off rates, and charge-off rate during recession of the peer group against those of the Bank for inclusion in the peer group population.

PD and LGD are forecasted over a one-year time horizon using economic forecast scenarios, which the Company believes is a reasonable and supportable period. Beyond the one-year forecast time horizon, the Company’s ACL model reverts to historical long-term average loss rates over a one-year period. The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios, as well as determining the appropriate length of the forecast horizon. Management utilizes the economic forecasts provided by the Federal Open Market Committee (“FOMC”) to forecast the first 4 quarters of the credit loss estimate. The FOMC projects national unemployment rate and the projected change in the year-over-year national gross domestic product (“GDP”) growth rates over the forward-looking 4 quarters are used in determining the PD rates over the forecasted periods.

A portion of the collectively-evaluated ACL on loans also includes qualitative adjustments for risk factors not reflected or captured by the quantitative modeled ACL but are relevant in estimating future expected credit losses. Qualitative adjustments may be related to and include, but not limited to factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization-specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of ACL model data inputs.

Problem loans are typically substandard or have a worse internal risk grade, and may consist of loans on nonaccrual status where the likelihood of foreclosure on underlying collateral has increased, collateral dependent loans and other loans where concern or doubt over the ultimate collectability of all contractual amounts due has become elevated. These problem loans, in the opinion of management, no longer possess risk characteristics similar to other loans in the loan segment, and as such may require individual evaluation for appropriate ACL for the loan. Performing loans individually evaluated, the Company measures the expected credit loss for the loan based on a discounted cash flow approach or fair value of collateral, less costs to sell. Collateral dependent loans are loans to borrowers with financial difficulty where the repayment of the loan is expected from the operation of and/or eventual liquidation of the underlying collateral.

As a part of the adoption of ASC 326, the Company reviewed and revised certain loan segments for the Company’s ACL model. Before the adoption of ASC 326, commercial property and SBA property loans were separately presented and represented 63.0% and 6.6% of loans held-for-investment at December 31, 2022, respectively. The Company re-divided these loan segments into commercial property, business property and multifamily loans, as described below, as these new loan segments are determined to share similar characteristics under the Company’s ACL model. In addition, four loan segments before the adoption of ASC 326 (commercial term loans, commercial lines of credit, SBA term loans and SBA PPP loans), which represented 12.2% of loans held-for-investment at December 31, 2022, are combined into a single loan segment, commercial and industrial (“C&I”) loans, as these loans are determined to share similar risk characteristics under the Company’s ACL model. However, loan related disclosures for prior periods continue to be presented under the legacy loan segments in this Quarterly Report on Form 10-Q.

Each loan segment bears varying degrees of risk based on, among other things, the type of loan and collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions and interest rate changes. The loan segments are as following:

Commercial Real Estate (“CRE”) Loans:

•Commercial property loans – Commercial property loans include loans for which the Company holds real property as collateral, but where the borrower does not occupy the underlying property. The primary risks associated with investor property loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, significant increases in interest rates, changes in market rents, and vacancy and conditions of the underlying property, any of which may make the real estate property unprofitable to the borrower. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

•Business property loans – Business property loans include loans for which the Company holds real property as collateral and where the underlying property is occupied by the borrower, such as with a place of business. These loans are primarily underwritten based on the cash flows of the business and secondarily on the real estate. The primary risks associated with business property loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which reduce the cash flows of the underlying business. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

•Multifamily loans: Multifamily loans are secured by multi-tenant (5 or more units) residential real properties. Payments on multifamily loans are dependent on the successful operation or management of the properties, and repayment of these loans may be subject to adverse conditions in the real estate market or the economy.

•Construction loans: Construction loans are considered to have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, government regulation of real property, and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project. The fair value of the underlying collateral may fluctuate as market conditions change. The primary risks include the borrower’s inability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.

Commercial and Industrial Loans:

•Commercial and industrial loans – The C&I loan category includes commercial term loans and commercial lines of credit. Commercial term loans are typically extended to finance business acquisitions, permanent working capital needs, and/or equipment purchases. Commercial lines of credit are generally provided to finance short-term working capital needs and mortgage warehouse lending credit facilities. Mortgage warehouse lending is a line of credit given to a loan originator, the funds from which are used to finance a mortgage that a borrower uses to purchase single-family residential property or refinance an existing mortgage. The primary risk associated with C&I loans is the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans, and occasionally upon other borrower assets and guarantor assets.

Consumer Loans

•Residential mortgage loans – The primary risks of residential mortgage loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may reduce the borrower’s capacity to pay.

•Other consumer loans – Other consumer loans primarily include automobile loans, as well as unsecured lines of credit and term loans to high net worth individuals. Automobile loans have relatively lower LTV ratios on average and carry higher interest rates to offset for the inherently higher default risks. Unsecured lines of credit and term consumer loans are underwritten primarily based on the individual borrower’s income, current debt level, and past credit history. Repayment of these loans is dependent on the borrower’s ability to pay, and the fair value of the underlying collateral for automobile loans.

The following table presents a summary of reclassification of loans held-for-investment as the date indicated:



($ in thousands)	December 31, 2022		Reclassification		January 1, 2023
Commercial property (1)	$	1,288,392	$	(1,288,392)	$	—
SBA property	134,892		(134,892)		—
Commercial property	N/A		772,020		772,020
Business property	N/A		526,513		526,513
Multifamily	N/A		124,751		124,751
Total Reclassed:	1,423,284		—		1,423,284
Construction	17,054		—		17,054
Commercial and industrial	249,250		—		249,250
Residential property	333,726		—		333,726
Other consumer	22,749		—		22,749
Total loans held-for-investment	$	2,046,063	$	—	$	2,046,063

(1) Commercial property loans under the legacy loan segments included all commercial property, business property and multifamily loans under the new loan segments.

The following table presents a summary of reclassification of ACL on loans as the date indicated as well as the initial adjustment to the ACL as of January 1, 2023:


($ in thousands)	December 31, 2022		Reclassification		January 1, 2023		Impact of ASC 326 Adoption		As Reported Under ASC 326
Commercial property (1)	$	14,059	$	(14,059)	$	—	$	—	$	—
SBA property	1,326		(1,326)		—		—		—
Commercial property	N/A		8,502		8,502		(1,762)		6,740
Business property	N/A		5,749		5,749		896		6,645
Multifamily	N/A		1,134		1,134		256		1,390
Total Reclassed:	15,385		—		15,385		(610)		14,775
Construction	151		—		151		—		151
Commercial and industrial	5,502		—		5,502		4,344		9,846
Residential property	3,691		—		3,691		(2,534)		1,157
Other consumer	213		—		213		(133)		80
Total ACL	$	24,942	$	—	$	24,942	$	1,067	$	26,009

(1) Commercial property loans under the legacy loan segments included all commercial property, business property and multifamily loans under the new loan segments.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

The Company applies an expected credit loss estimation methodology applied to each respective loan segment for determining the ACL on off-balance sheet credit exposures. These assumptions are based on the Company’s own historical internal loan data.

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326) - Troubled Debt Restructuring and Vintage Disclosures.” The amendments in this ASU eliminate the accounting guidance for TDRs by creditors in ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors,” while enhancing disclosure requirements for restructurings involving borrowers that are experiencing financial difficulty. This ASU also requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. The Company adopted this ASU as of January 1, 2023, in conjunction with the adoption of ASU 2016-13. The Company did not have a material impact on its consolidated financial statements upon adoption of this ASU.

Recent Accounting Pronouncements Not Yet Adopted

There were no significant accounting pronouncements applicable to the Company that have not yet been adopted.

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.

Loans individually evaluated: Certain collateral-dependent loans individually evaluated are recognized at fair value when they reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent loans individually evaluated are obtained from real estate brokers or other third-party consultants, and are classified as Level 3.

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


	Fair Value Measurement Level
($ in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
September 30, 2023
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	100,271	$	—	$	100,271
Residential collateralized mortgage obligations	—		24,196		—		24,196
SBA loan pool securities	—		7,578		—		7,578
Municipal bonds	—		3,076		—		3,076
Corporate bonds	—		4,097		—		4,097
Total securities available-for-sale	—		139,218		—		139,218
Total assets measured at fair value on a recurring basis	$	—	$	139,218	$	—	$	139,218
Total liabilities measured at fair value on a recurring basis	$	—	$	—	$	—	$	—
December 31, 2022
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	96,900	$	—	$	96,900
Residential collateralized mortgage obligations	—		26,956		—		26,956
SBA loan pool securities	—		9,298		—		9,298
Municipal bonds	—		4,186		—		4,186
Corporate bonds	—		4,523		—		4,523
Total securities available-for-sale	—		141,863		—		141,863
Total assets measured at fair value on a recurring basis	$	—	$	141,863	$	—	$	141,863
Total liabilities measured at fair value on a recurring basis	$	—	$	—	$	—	$	—

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

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


	Fair Value Measurement Level
($ in thousands)	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
September 30, 2023
Loans individually evaluated:
Business property	$	—	$	—	$	120	$	120


Total loans individually evaluated	—		—		120		120


Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	120	$	120
Total liabilities measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—
December 31, 2022
Impaired loans:

Commercial lines of credit (1)	$	—	$	—	$	4,000	$	4,000

Total impaired loans	—		—		4,000		4,000
Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	4,000	$	4,000
Total liabilities measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—

(1) Included in loans held-for-sale

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 date indicated:

($ in thousands)

Fair Value

Valuation Technique(s)

Unobservable Input(s)

Range (Weighted-Average)

September 30, 2023

Loans individually evaluated:

Business property

120

Fair value of collateral

December 31, 2022

Impaired loans:

Commercial lines of credit (1)

4,000

Pending Sales Agreement

(1) Included in loans held-for-sale.

The following table presents gains or losses, including charge-offs, recoveries, and specific reserves recorded, for assets measured at fair value for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2023		2022		2023		2022
Loans individually evaluated:

Business property	$	(15)	$	—	$	(47)	$	—
Commercial and industrial	—		—		1,074		—



Other real estate owned	—		152		—		152
Net gains recognized	$	(15)	$	152	$	1,027	$	152

Fair Value of Financial Instruments

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


	Carrying Value		Fair Value		Fair Value Measurements
($ in thousands)					Level 1		Level 2		Level 3
September 30, 2023
Financial assets:
Interest-bearing deposits in other financial institutions	$	169,659	$	169,659	$	169,659	$	—	$	—
Securities available-for-sale	139,218		139,218		—		139,218		—
Loans held-for-sale	6,693		7,111		—		7,111		—
Net loans held-for-investment	2,142,006		2,057,783		—		—		2,057,783
Federal Home Loan Bank (“FHLB”) and other restricted stock	12,716		N/A		N/A		N/A		N/A
Accrued interest receivable	8,731		8,731		318		462		7,951
Financial liabilities:
Deposits	$	2,192,129	$	2,191,128	$	—	$	—	$	2,191,128

Accrued interest payable	18,797		18,797		—		—		18,797
December 31, 2022
Financial assets:
Interest-bearing deposits in other financial institutions	$	123,829	$	123,829	$	123,829	$	—	$	—
Securities available-for-sale	141,863		141,863		—		141,863		—
Loans held-for-sale	22,811		23,992		—		23,992		—
Net loans held-for-investment	2,021,121		1,970,235		—		—		1,970,235
FHLB and other restricted stock	10,183		N/A		N/A		N/A		N/A
Accrued interest receivable	7,472		7,472		49		475		6,948
Financial liabilities:
Deposits	$	2,045,983	$	2,041,667	$	—	$	—	$	2,041,667
FHLB advances	20,000		20,001		—		20,001		—
Accrued interest payable	3,159		3,159		—		5		3,154

Note 3 - Investment Securities

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


($ in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
September 30, 2023
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	115,837	$	—	$	(15,566)	$	100,271
Residential collateralized mortgage obligations	26,303		—		(2,107)		24,196
SBA loan pool securities	8,027		3		(452)		7,578
Municipal bonds	3,305		1		(230)		3,076
Corporate bonds	5,000		—		(903)		4,097
Total securities available-for-sale	$	158,472	$	4	$	(19,258)	$	139,218
December 31, 2022
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	109,497	$	1	$	(12,598)	$	96,900
Residential collateralized mortgage obligations	28,515		107		(1,666)		26,956
SBA loan pool securities	9,704		8		(414)		9,298
Municipal bonds	4,262		2		(78)		4,186
Corporate bonds	5,000		—		(477)		4,523
Total securities available-for-sale	$	156,978	$	118	$	(15,233)	$	141,863

As of September 30, 2023 and December 31, 2022, pledged securities were $70.0 million and $69.0 million, respectively. These securities were pledged for the State Deposit from the California State Treasurer.

The Company elected to exclude accrued interest receivable from the amortized cost of its securities available-for-sale. Accrued interest receivable on securities available-for-sale totaled $462 thousand and $475 thousand at September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023 and December 31, 2022, there were no holdings of securities available-for-sale of any one issuer, other than the U.S. government agency and U.S. government sponsored enterprise, in an amount greater than 10% of shareholder’s equity.

The following table presents the amortized cost and fair value of the securities available-for-sale by contractual maturity as of the date indicated. 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.


	September 30, 2023
($ in thousands)	Amortized Cost		Fair Value
Within one year	$	865	$	861
One to five years	81		76
Five to ten years	5,725		4,761
Greater than ten years	1,634		1,475
Residential mortgage-backed securities, residential collateralized mortgage obligations and SBA loan pool securities	150,167		132,045
Total	$	158,472	$	139,218

The Company had no proceeds from sales and calls of securities available-for-sale for the three and nine months ended September 30, 2023. For the three and nine months ended September 30, 2022, the Company had proceeds of $1.0 million from calls of securities available-for-sale.

The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous unrealized loss position for which an ACL has not been recorded as of the dates indicated:


	Length of Time that Individual Securities Have Been In a Continuous Unrealized Loss Position
	Less Than 12 Months					12 Months or Longer					Total
($ in thousands)	Fair Value		Gross Unrealized Losses		Number of Securities	Fair Value		Gross Unrealized Losses		Number of Securities	Fair Value		Gross Unrealized Losses		Number of Securities
September 30, 2023
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	25,453	$	(859)	16	$	74,818	$	(14,707)	110	$	100,271	$	(15,566)	126
Residential collateralized mortgage obligations	11,300		(226)		7	12,896		(1,881)		35	24,196		(2,107)		42
SBA loan pool securities	1,505		(2)		2	5,228		(450)		12	6,733		(452)		14
Municipal bonds	2,215		(225)		7	361		(5)		1	2,576		(230)		8
Corporate bonds	—		—		—	4,097		(903)		1	4,097		(903)		1
Total securities available-for-sale	$	40,473	$	(1,312)	32	$	97,400	$	(17,946)	159	$	137,873	$	(19,258)	191
December 31, 2022
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	55,171	$	(3,721)	83	$	41,697	$	(8,877)	36	$	96,868	$	(12,598)	119
Residential collateralized mortgage obligations	12,600		(1,191)		29	2,262		(475)		7	14,862		(1,666)		36
SBA loan pool securities	7,161		(325)		12	821		(89)		2	7,982		(414)		14
Municipal bonds	3,314		(78)		11	—		—		—	3,314		(78)		11
Corporate bonds	4,523		(477)		1	—		—		—	4,523		(477)		1
Total securities available-for-sale	$	82,769	$	(5,792)	136	$	44,780	$	(9,441)	45	$	127,549	$	(15,233)	181

As of September 30, 2023, 94.8%, at amortized cost basis, of the Company's securities available-for-sale were issued by U.S. government agency and U.S. government sponsored enterprise. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell these securities before their anticipated recovery, the Company determined that these securities with unrealized losses did not warrant an ACL.

Municipal and corporate bonds had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of September 30, 2023. 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 therefore determined that the investment securities with unrealized losses did not warrant an ACL as of September 30, 2023.

As of September 30, 2023, the Company recorded no ACL on securities available-for-sale.

Note 4 - Loans and Allowance for Credit Losses on Loans

On January 1, 2023, the Company adopted ASU 2016-13 using the modified retrospective method through a cumulative-effect adjustment to retained earnings. Balance sheet information and results for reporting periods beginning with January 1, 2023 are presented under ASC 326, while prior period comparisons continue to be presented under legacy ASC 450 and ASC 310.

Loans Held-For-Investment

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


($ in thousands)	September 30, 2023		January 1, 2023
Commercial real estate:
Commercial property	$	814,547	$	772,020
Business property	537,351		526,513
Multifamily	132,558		124,751
Construction	19,246		17,054
Total commercial real estate	1,503,702		1,440,338
Commercial and industrial	279,608		249,250
Consumer:
Residential mortgage	363,369		333,726
Other consumer	20,926		22,749
Total consumer	384,295		356,475
Loans held-for-investment	2,167,605		2,046,063
Allowance for credit losses on loans	(25,599)		(26,009)
Net loans held-for-investment	$	2,142,006	$	2,020,054

In the ordinary course of business, the Company may grant loans to certain officers and directors, and the companies with which they are associated. As of September 30, 2023, the Company had $111 thousand of such loans outstanding.

Allowance for Credit Losses on Loans

The following table presents a composition of provision (reversal) for credit losses for the periods indicated:



($ in thousands)	Three Months Ended September 30, 2023		Nine Months Ended September 30, 2023
Provision (reversal) for credit losses on loans	$	822	$	(1,438)
Reversal for credit losses on off-balance sheet credit exposures	(71)		(392)
Total provision (reversal) for credit losses	$	751	$	(1,830)

The following table presents the activities in ACL on loans for the periods indicated:


($ in thousands)	Commercial Property		Business Property		Multifamily		Construction		Commercial and Industrial		Residential Mortgage		Other Consumer		Total
Balance at July 1, 2023	$	9,601	$	6,077	$	1,259	$	125	$	6,513	$	1,216	$	76	$	24,867
Charge-offs	—		—		—		—		(45)		—		(67)		(112)
Recoveries	—		2		—		—		8		—		12		22
Provision (reversal) for credit losses on loans	1,747		(1,922)		554		(30)		(468)		877		64		822
Balance at September 30, 2023	$	11,348	$	4,157	$	1,813	$	95	$	6,008	$	2,093	$	85	$	25,599

Balance at January 1, 2023	$	8,502	$	5,749	$	1,134	$	151	$	5,502	$	3,691	$	213	$	24,942
Impact of ASC 326 adoption	(1,762)		896		256		—		4,344		(2,534)		(133)		1,067
Charge-offs	—		(4)		—		—		(45)		—		(70)		(119)
Recoveries	—		8		—		—		1,100		—		39		1,147
Provision (reversal) for credit losses on loans	4,608		(2,492)		423		(56)		(4,893)		936		36		(1,438)
Balance at September 30, 2023	$	11,348	$	4,157	$	1,813	$	95	$	6,008	$	2,093	$	85	$	25,599

The increase in overall ACL for the three months ended September 30, 2023 was primarily due to an increase in loans held-for-investment and the update of prepayment and principal curtailment rate assumptions applied in determining the maximum threshold for qualitative adjustment factors that resulted in increases in the high watermarks for each loan segment’s qualitative adjustment factors, partially offset by decreases in quantitative reserves from improvements in the economic forecasts and update of the historical losses of peer groups. The Company updates prepayment and principal curtailment rates on semiannual basis and the historical losses of peer groups, including the maximum loss scenario used for qualitative factor adjustments, on annual basis.

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 summarize the Company’s loans held-for-investment by loan segment, internal risk ratings and vintage year as of September 30, 2023 and gross write offs for the nine months ended September 30, 2023. The vintage year is the year of origination, renewal or major modification. Revolving loans that are converted to term loans presented in the table below are excluded from term loans by vintage year columns.


	Term Loans by Origination Year												Revolving Loans		Revolving Loans Converted to Term
($ in thousands)	2023		2022		2021		2020		2019		Prior						Total
September 30, 2023
Commercial Real Estate:
Commercial property
Pass	$	95,320	$	271,938	$	157,359	$	85,631	$	70,950	$	116,624	$	10,731	$	—	$	808,553
Special mention	—		—		486		—		—		2,966		—		—		3,452
Substandard	—		—		—		—		313		2,229		—		—		2,542
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	95,320	$	271,938	$	157,845	$	85,631	$	71,263	$	121,819	$	10,731	$	—	$	814,547
Current period gross write offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Business property
Pass	$	56,612	$	109,820	$	171,944	$	51,462	$	70,621	$	66,757	$	2,559	$	4,355	$	534,130
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		193		—		2,321		707		—		—		3,221
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	56,612	$	109,820	$	172,137	$	51,462	$	72,942	$	67,464	$	2,559	$	4,355	$	537,351
Current period gross write offs	$	—	$	—	$	—	$	—	$	—	$	4	$	—	$	—	$	4
Multifamily
Pass	$	12,908	$	40,797	$	43,456	$	26,651	$	2,432	$	6,314	$	—	$	—	$	132,558
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	12,908	$	40,797	$	43,456	$	26,651	$	2,432	$	6,314	$	—	$	—	$	132,558
Current period gross write offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Construction
Pass	$	1,279	$	8,614	$	—	$	6,503	$	2,850	$	—	$	—	$	—	$	19,246
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	1,279	$	8,614	$	—	$	6,503	$	2,850	$	—	$	—	$	—	$	19,246
Current period gross write offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—


	Term Loans by Origination Year												Revolving Loans		Revolving Loans Converted to Term
($ in thousands)	2023		2022		2021		2020		2019		Prior						Total
September 30, 2023 (Continued)
Commercial and Industrial
Pass	$	37,031	$	29,884	$	12,732	$	4,703	$	6,755	$	11,049	$	171,713	$	2,941	$	276,808
Special mention	—		—		—		380		343		106		1,000		—		1,829
Substandard	—		—		—		—		151		820		—		—		971
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	37,031	$	29,884	$	12,732	$	5,083	$	7,249	$	11,975	$	172,713	$	2,941	$	279,608
Current period gross write offs	$	—	$	—	$	—	$	—	$	—	$	45	$	—	$	—	$	45
Consumer
Residential mortgage
Pass	$	48,201	$	166,279	$	79,297	$	11,740	$	10,948	$	46,904	$	—	$	—	$	363,369
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	48,201	$	166,279	$	79,297	$	11,740	$	10,948	$	46,904	$	—	$	—	$	363,369
Current period gross write offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Other consumer
Pass	$	5,200	$	8,400	$	3,686	$	1,615	$	657	$	20	$	1,340	$	—	$	20,918
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		8		—		—		—		—		8
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	5,200	$	8,400	$	3,686	$	1,623	$	657	$	20	$	1,340	$	—	$	20,926
Current period gross write offs	$	—	$	58	$	—	$	12	$	—	$	—	$	—	$	—	$	70
Total loans held-for-investment
Pass	$	256,551	$	635,732	$	468,474	$	188,305	$	165,213	$	247,668	$	186,343	$	7,296	$	2,155,582
Special mention	—		—		486		380		343		3,072		1,000		—		5,281
Substandard	—		—		193		8		2,785		3,756		—		—		6,742
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	256,551	$	635,732	$	469,153	$	188,693	$	168,341	$	254,496	$	187,343	$	7,296	$	2,167,605
Current period gross write offs	$	—	$	58	$	—	$	12	$	—	$	49	$	—	$	—	$	119

Nonaccrual Loans

The following table presents the loans on nonaccrual status by loan segments as of the date indicated:


($ in thousands)	Total Nonaccrual Loans		Nonaccrual Loans with ACL		ACL on Nonaccrual Loans		Collateral Dependent Nonaccrual Loans		ACL on Collateral Dependent Nonaccrual Loans
September 30, 2023
Commercial real estate:
Commercial property	$	686	$	—	$	—	$	686	$	—
Business property	2,964		167		47		2,964		47


Total commercial real estate	3,650		167		47		3,650		47
Commercial and industrial	72		—		—		72		—
Consumer:

Other consumer	8		8		1		—		—
Total consumer	8		8		1		—		—
Total	$	3,730	$	175	$	48	$	3,722	$	47

There were no nonaccrual loans guaranteed by a U.S. government agency at September 30, 2023.

Collateral Dependent Loans

Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral. Collateral dependent loans are evaluated individually for purposes of determining the ACL, which is determined based on the estimated fair value of the collateral. Estimates for costs to sell are included in the determination of the ACL when liquidation of the collateral is anticipated. In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACL is recorded. The following table presents the collateral dependent loans by loan segments as of the date indicated:


($ in thousands)	Hotel / Motel		Warehouse		Retail		Single Family Residential		Total
September 30, 2023
Commercial real estate:
Commercial property	$	686	$	—	$	—	$	—	$	686
Business property	—		2,205		759		—		2,964


Total commercial real estate	686		2,205		759		—		3,650
Commercial and industrial	14		—		—		58		72




Total	$	700	$	2,205	$	759	$	58	$	3,722

Past Due Loans

The following table presents the aging of past due in accruing loans and nonaccrual loans by loan segments as of date indicated:


	Still Accruing								Nonaccrual
($ in thousands)	30 to 59 Days Past Due		60 to 89 Days Past Due		90 or More Days Past Due		Total		30 to 59 Days Past Due		60 to 89 Days Past Due		90 or More Days Past Due		Total		Total Loans Past Due
September 30, 2023
Commercial real estate:
Commercial property	$	358	$	—	$	—	$	358	$	686	$	—	$	—	$	686	$	1,044
Business property	204		—		—		204		—		—		759		759		963


Total commercial real estate	562		—		—		562		686		—		759		1,445		2,007

Consumer:

Other consumer	92		54		—		146		—		—		—		—		146
Total consumer	92		54		—		146		—		—		—		—		146
Total	$	654	$	54	$	—	$	708	$	686	$	—	$	759	$	1,445	$	2,153

Loan Modification

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, an other-than-insignificant payment delay, interest rate reduction or combination of at above mentioned modifications. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.

There were no loans that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2023.

Purchases, Sales, and Transfers

The Company had no loans that were transferred from loans held-for-investment to loans held-for-sale the three and nine months ended September 30, 2023.

The Company had no loans that were transferred from loans held-for-sale to loans held-for investment during the three and nine months ended September 30, 2023.

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



($ in thousands)	Three Months Ended September 30, 2023		Nine Months Ended September 30, 2023







Consumer:
Residential mortgage	$	—	$	15,741

Total consumer	—		15,741
Total	$	—	$	15,741

Loans Held-For-Sale

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


($ in thousands)	September 30, 2023
Commercial real estate:

Business property	$	5,355


Total commercial real estate	5,355
Commercial and industrial	1,338




Total	$	6,693

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 ACL on loans.

Prior to Adoption of ASC 326

Loans Held-For-Investment

The following table presents the composition of the Company’s loans held-for-investment by legacy loan segments as of the date indicated:



($ in thousands)	December 31, 2022
Real estate loans:
Commercial property	$	1,288,392
Residential property	333,726
SBA property	134,892
Construction	17,054
Total real estate loans	1,774,064
Commercial and industrial loans:
Commercial term	77,700
Commercial lines of credit	154,142
SBA commercial term	16,211
SBA PPP	1,197
Total commercial and industrial loans	249,250
Other consumer loans	22,749
Loans held-for-investment	2,046,063


Allowance for loan losses	(24,942)
Net loans held-for-investment	$	2,021,121

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 December 31, 2022, the Company had $113 thousand of such loans outstanding.

Allowance for Loan Losses

The following table presents the activities in allowance for loan losses by legacy loan segments for the periods indicated:



($ in thousands)	Real Estate		Commercial and Industrial		Other Consumer		Total
Balance at July 1, 2022	$	16,591	$	4,275	$	205	$	21,071
Charge-offs	—		(1,078)		(34)		(1,112)
Recoveries on loans previously charged off	—		21		28		49
Provision for loan losses	1,758		1,966		29		3,753
Balance at September 30, 2022	$	18,349	$	5,184	$	228	$	23,761

Balance at January 1, 2022	$	16,797	$	5,310	$	274	$	22,381
Charge-offs	—		(1,095)		(76)		(1,171)
Recoveries on loans previously charged off	—		44		54		98
Provision (reversal) for loan losses	1,552		925		(24)		2,453
Balance at September 30, 2022	$	18,349	$	5,184	$	228	$	23,761

The following tables present the information on allowance for loan losses and recorded investments by legacy loan segments and impairment methodology as of the date indicated:


($ in thousands)	Real Estate		Commercial and Industrial		Consumer		Total
December 31, 2022
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	—	$	—	$	—
Collectively evaluated for impairment	19,227		5,502		213		24,942
Total	$	19,227	$	5,502	$	213	$	24,942
Loans receivable:
Individually evaluated for impairment	$	3,889	$	—	$	—	$	3,889
Collectively evaluated for impairment	1,770,175		249,250		22,749		2,042,174
Total	$	1,774,064	$	249,250	$	22,749	$	2,046,063

Impaired Loans

The following table presents loans individually evaluated for impairment by legacy loan segments as of the date 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
December 31, 2022
Real estate loans:
Commercial property	$	2,721	$	2,727	$	—	$	—	$	—
Residential property	372		372		—		—		—
SBA property	798		840		—		—		—







Total	$	3,891	$	3,939	$	—	$	—	$	—

The following table presents information on the recorded investment in impaired loans by legacy loan segments for the periods indicated:


	Three Months Ended September 30, 2022				Nine Months Ended September 30, 2022
($ in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Real estate loans:
Commercial property	$	2,772	$	5	$	1,140	$	16
Residential property	225		—		381		—
SBA property	783		4		881		10

Commercial and industrial loans:

Commercial lines of credit	4,537		—		1,512		—
SBA commercial term	95		—		168		—

Total	$	8,412	$	9	$	4,082	$	26

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


($ in thousands)	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Interest income that would have been recognized had impaired loans performed in accordance with their original terms	$	109	$	159
Less: interest income recognized on impaired loans on a cash basis	(9)		(26)
Interest income foregone on impaired loans	$	100	$	133

Credit Quality Indicators

The following table presents the risk categories for loans held-for-investment by legacy loan segments as of the date indicated:


($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2022
Real estate loans:
Commercial property	$	1,282,044	$	3,264	$	3,084	$	—	$	1,288,392
Residential property	333,354		—		372		—		333,726
SBA property	132,910		245		1,737		—		134,892
Construction	17,054		—		—		—		17,054
Commercial and industrial loans:
Commercial term	75,473		1,248		979		—		77,700
Commercial lines of credit	152,042		2,100		—		—		154,142
SBA commercial term	16,175		—		36		—		16,211
SBA PPP	1,197		—		—		—		1,197
Other consumer loans	22,746		—		3		—		22,749
Total	$	2,032,995	$	6,857	$	6,211	$	—	$	2,046,063

Past Due and Nonaccrual Loans

The following table presents the aging of past due recorded investment in accruing loans and nonaccrual loans by legacy loan segments as of the date 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
December 31, 2022
Real estate loans:
Commercial property	$	—	$	—	$	—	$	2,400	$	2,400
Residential property	—		—		—		372		372
SBA property	—		—		—		585		585






Other consumer loans	47		87		—		3		137
Total	$	47	$	87	$	—	$	3,360	$	3,494

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:


($ in thousands)	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Real estate loans:
Residential property	$	458	$	458
Total	$	458	$	458

The Company had no loans that were transferred from loans held-for-sale to loans held-for investment and no purchases of loans held-for-investment during the three and nine months ended September 30, 2022.

Loans Held-For-Sale

The following table presents a composition of loans held-for-sale by legacy loan segments as of the date indicated:


($ in thousands)	December 31, 2022
Real estate loans:


SBA property	$	16,473

Commercial and industrial loans:

Commercial lines of credit	4,000
SBA commercial term	2,338


Total	$	22,811

Note 5 - Servicing Assets

The Company sells SBA and certain residential mortgage loans with servicing retained. SBA loans are included in commercial real estate loans (“CRE SBA”) and commercial and industrial loans (“C&I SBA”). The Company sold loans of $17.7 million and $27.3 million, respectively, with the servicing rights retained and recognized a net gain on sale of $689 thousand and $1.4 million, respectively, during the three months ended September 30, 2023 and 2022. During the nine months ended September 30, 2023 and 2022, the Company sold loans of $61.6 million and $105.4 million, respectively, with the servicing retained and recognized a net gain on sale of $2.8 million and $7.2 million, respectively. Loan servicing income was $851 thousand and $780 thousand for the three months ended September 30, 2023 and 2022, respectively, and $2.6 million and $2.2 million for the nine months ended September 30, 2023 and 2022, respectively.

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


	September 30, 2023											December 31, 2022
($ in thousands)	Residential Mortgage			CRE SBA			C&I SBA			Total		Residential Mortgage			CRE SBA			C&I SBA			Total
Carrying amount	$	51		$	6,434		$	435		$	6,920	$	64		$	6,831		$	452		$	7,347
Fair value	$	100		$	8,575		$	631		$	9,306	$	118		$	9,090		$	620		$	9,828
Discount rate	9.93		%	12.30		%	15.46		%			7.73		%	11.47		%	12.55		%
Prepayment speed	15.15		%	16.12		%	15.26		%			17.10		%	14.82		%	18.93		%
Weighted-average remaining life	20.0 years			21.1 years			6.9 years					20.8 years			21.4 years			6.7 years
Underlying loans being serviced	$	10,942		$	469,727		$	55,755		$	536,424	$	13,058		$	461,738		$	56,299		$	531,095

The following tables present activity in servicing assets for the periods indicated:


	Three Months Ended September 30,
	2023								2022
($ in thousands)	Residential Mortgage		CRE SBA		C&I SBA		Total		Residential Mortgage		CRE SBA		C&I SBA		Total
Balance at beginning of period	$	55	$	6,655	$	432	$	7,142	$	72	$	7,193	$	451	$	7,716
Additions	—		199		50		249		—		370		64		434
Amortization	(4)		(420)		(47)		(471)		(6)		(457)		(60)		(523)

Balance at end of period	$	51	$	6,434	$	435	$	6,920	$	66	$	7,106	$	455	$	7,627


	Nine Months Ended September 30,
	2023								2022
($ in thousands)	Residential Mortgage		CRE SBA		C&I SBA		Total		Residential Mortgage		CRE SBA		C&I SBA		Total
Balance at beginning of period	$	64	$	6,831	$	452	$	7,347	$	86	$	6,701	$	482	$	7,269
Additions	—		787		130		917		—		1,784		158		1,942
Amortization	(13)		(1,184)		(147)		(1,344)		(20)		(1,379)		(185)		(1,584)

Balance at end of period	$	51	$	6,434	$	435	$	6,920	$	66	$	7,106	$	455	$	7,627

Note 6 - Operating Leases

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


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2023		2022		2023		2022
Operating lease cost (1)	$	744	$	705	$	2,237	$	2,029
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	809	$	755	$	2,440	$	2,182
Right of use assets obtained in exchange for lease obligations	$	1,134	$	1,043	$	1,360	$	2,007

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

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


($ in thousands)	September 30, 2023			December 31, 2022
Operating leases:
Operating lease assets	$	5,626		$	6,358
Operating lease liabilities	$	5,852		$	6,809
Weighted-average remaining lease term	4.5 years			4.3 years
Weighted-average discount rate	3.12		%	2.66		%

The following table presents maturities of operating lease liabilities as of the date indicated:


($ in thousands)	September 30, 2023
Maturities:
2023	$	465
2024	1,684
2025	1,509
2026	1,088
2027	644
After 2027	996
Total lease payment	6,386
Imputed Interest	(534)
Present value of operating lease liabilities	$	5,852

Note 7 - Federal Home Loan Bank Advances and Other Borrowings

FHLB Advances

The Company had no outstanding FHLB advance of September 30, 2023. At December 31, 2022, the Company had an overnight FHLB advance of $20.0 million with an interest rate of 4.65%. The Bank repaid the advance upon maturity.

At September 30, 2023 and December 31, 2022, loans pledged to secure borrowings from the FHLB were $1.02 billion and $1.16 billion, respectively. The Company’s investment in capital stock of the FHLB of San Francisco totaled $12.5 million and $10.0 million at September 30, 2023 and December 31, 2022, respectively. The Company had additional borrowing capacity of $639.1 million and $561.7 million from the FHLB as of September 30, 2023 and December 31, 2022, respectively.

Other Borrowing Arrangements

At September 30, 2023, the Company had $490.6 million of unused borrowing capacity from the Federal Reserve Discount Window, to which the Company pledged loans with a carrying value of $632.2 million with no outstanding borrowings. In addition, the Company may borrow up to approximately $65.0 million overnight federal funds lines with correspondent financial institutions at September 30, 2023.

Note 8 - Shareholders’ Equity

Series C, Senior Non-Cumulative Perpetual Preferred Stock

On May 24, 2022, the Company issued 69,141 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C, liquidation preference of $1,000 per share (“Series C Preferred Stock”) for the capital investment of $69.1 million from the U.S. Treasury under the Emergency Capital Investment Program (“ECIP”). The ECIP investment qualifies as tier 1 capital for purposes of the bank regulatory capital requirements.

The Series C Preferred Stock bears no dividend for the first 24 months following the investment date. Thereafter, the dividend rate will be adjusted based on the lending growth criteria listed in the terms of the ECIP investment with the annual dividend rate up to 2%. After the tenth anniversary of the investment date, the dividend rate will be fixed based on average annual amount of lending in years 2 through 10. Dividends will be payable quarterly in arrears on March 15, June 15, September 15, and December 15.

The Series C Preferred Stock may be redeemed at the option of the Company on or after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator and in accordance with the federal banking agencies’ regulatory capital regulations.

Stock Repurchases

On July 28, 2022, the Company’s Board of Directors approved a repurchase program authorizing the repurchase of up to 5% of the Company’s outstanding common stock, which represented 747,938 shares, through February 1, 2023. On January 26, 2023, the Company announced the amendment of the repurchase program, which extended the program expiration from February 1, 2023 to February 1, 2024. The Company completed the repurchase of all shares under this program during the three months ended March 31, 2023. The Company repurchased and retired 747,938 shares of common stock at a weighted-average price of $18.15 per share, totaling $13.6 million under this repurchase program.

On August 2, 2023, the Company’s Board of Directors approved a new repurchase program authorizing the repurchase of up to 5% of the Company’s outstanding common stock, which represented 720,000 shares, through August 2, 2024. The Company repurchased and retired 67,202 shares of common stock at a weighted-average price of $15.75 per share, totaling $1.1 million under this repurchase program through September 30, 2023.

Note 9 - Share-Based Compensation

On May 25, 2023, the Company adopted the 2023 Equity Based Compensation Plan (“2023 EBC Plan”) approved by its shareholders to replace the 2013 Equity Based Stock Compensation Plan. The 2023 EBC Plan provides 700,000 shares of common stock for equity based compensation awards including incentive and non-qualified stock options, and restricted stock awards. As of September 30, 2023, there were 696,700 shares available for future grants.

Share-Based Compensation Expense

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


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2023		2022		2023		2022
Share-based compensation expense related to:
Stock options	$	27	$	40	$	90	$	130
Restricted stock awards	86		95		256		288
Total share-based compensation expense	$	113	$	135	$	346	$	418
Related tax benefits	$	25	$	29	$	75	$	89

The following table presents unrecognized share-based compensation expense as of the date indicated:

September 30, 2023

($ in thousands)

Unrecognized Expense

Weighted-Average Remaining Expected Recognition Period

Unrecognized share-based compensation expense related to:

Stock options

224

2.9 years

Restricted stock awards

559

2.6 years

Total unrecognized share-based compensation expense

783

2.7 years

Stock Options

The following tables represent stock option activity for the periods indicated:


	Three Months Ended September 30, 2023
($ 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	487,840	$	13.14	3.9 years	$	765

Exercised	(64,125)	$	10.33	1.0 years

Outstanding at end of period	423,715	$	13.57	3.9 years	$	798
Exercisable at end of period	345,715	$	12.32	3.1 years	$	1,082


	Nine Months Ended September 30, 2023
($ 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	566,637	$	12.49	4.1 years	$	2,946

Exercised	(142,922)	$	9.30	1.6 years

Outstanding at end of period	423,715	$	13.57	3.9 years	$	798
Exercisable at end of period	345,715	$	12.32	3.1 years	$	1,082

The following table represents information regarding unvested stock options for the periods indicated:


	Three Months Ended September 30, 2023			Nine Months Ended September 30, 2023
	Number of Shares	Weighted-Average Exercise Price Per Share		Number of Shares	Weighted-Average Exercise Price Per Share
Outstanding at beginning of period	81,000	$	19.01	94,000	$	18.95

Vested	(3,000)	$	16.58	(16,000)	$	18.22

Outstanding at end of period	78,000	$	19.10	78,000	$	19.10

Restricted Stock Awards

The following table represents restricted stock award activity for the periods indicated:


	Three Months Ended September 30, 2023			Nine Months Ended September 30, 2023
	Number of Shares	Weighted-Average Grant Date Fair Value Per Share		Number of Shares	Weighted-Average Grant Date Fair Value Per Share
Outstanding at beginning of period	45,761	$	17.53	62,022	$	16.59
Granted	3,300	$	15.80	3,300	$	15.80
Vested	(6,900)	$	16.76	(23,161)	$	14.77

Outstanding at end of period	42,161	$	17.52	42,161	$	17.52

Note 10 - Income Taxes

Income tax expense was $3.0 million and $2.8 million, respectively, and the effective tax rate was 29.7% and 28.7%, respectively, for the three months ended September 30, 2023 and 2022. For the nine months ended September 30, 2023 and 2022, income tax expense was $10.2 million and $10.7 million, respectively, and the effective tax rate was 29.2% and 29.0%, respectively.

At September 30, 2023 and December 31, 2022, the Company had no unrecognized tax benefits or related accrued interest.

The Company and its subsidiaries are subject to U.S. federal and various state jurisdictions income tax examinations. As of September 30, 2023, the Company is no longer subject to examination by taxing authorities for tax years before 2020 for federal taxes and before 2019 for various state jurisdictions. The statute of limitations vary by state, and state taxes other than California have been minimal and immaterial to the Company’s financial results.

Note 11 - Earnings Per Share

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


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands, except per share)	2023		2022		2023		2022
Basic earnings per share:
Net income	$	7,023	$	6,953	$	24,797	$	26,285
Less: income allocated to unvested restricted stock	(21)		(30)		(78)		(120)
Net income allocated to common stock	$	7,002	$	6,923	$	24,719	$	26,165
Weighted-average total common shares outstanding	14,337,341		14,943,027		14,372,908		14,938,160
Less: weighted-average unvested restricted stock	(42,539)		(65,148)		(44,978)		(68,163)
Weighted-average common shares outstanding, basic	14,294,802		14,877,879		14,327,930		14,869,997
Basic earnings per share	$	0.49	$	0.47	$	1.73	$	1.76
Diluted earnings per share:
Net income allocated to common stock	$	7,002	$	6,923	$	24,719	$	26,165
Weighted-average common shares outstanding, basic	14,294,802		14,877,879		14,327,930		14,869,997
Diluted effect of stock options	101,414		210,210		114,030		256,866
Weighted-average common shares outstanding, diluted	14,396,216		15,088,089		14,441,960		15,126,863
Diluted earnings per share	$	0.49	$	0.46	$	1.71	$	1.73

There were 93,700 and 65,000 stock options excluded in computing diluted EPS because they were anti-dilutive for three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, there were 93,700 and 65,000 stock options excluded in computing diluted EPS because they were anti-dilutive, respectively.

Note 12 - Off-Balance Sheet Credit Exposures, Commitments and Other 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.

The Company had the following outstanding financial commitments whose contractual amount represents credit risk as of the dates indicated:


	September 30, 2023				December 31, 2022
($ in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	2,219	$	280,122	$	3,117	$	251,178
Unfunded loan commitments	762		49,595		692		38,486
Standby letters of credit	4,138		1,786		2,989		1,901
Commercial letters of credit	—		160		—		502
Total	$	7,119	$	331,663	$	6,798	$	292,067

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 applies an expected credit loss estimation methodology applied to each respective loan segment for determining the ACL on off-balance sheet credit exposures. The loss estimation process includes assumptions for utilization at default. These assumptions are based on the Company’s own historical internal loan data. As a part of adoption of ASC 326, the Company recorded an initial adjustment to the ACL on off-balance sheet credit exposures of $1.6 million. As of September 30, 2023 and December 31, 2022, the Company maintained an ACL on off-balance sheet credit exposures of $1.5 million and $299 thousand in Accrued Interest Payable and Other Liabilities in the Consolidated Balance Sheets, respectively.

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.

Network and Data Incident

On August 30, 2021, the Bank identified unusual activity on its network. The Bank responded promptly to disable the activity, investigate its source and monitor the Bank’s network. The Bank subsequently became aware of claims that it had been the target of a ransomware attack. On September 7, 2021, the Bank determined that an external actor had illegally accessed and/or acquired certain data on its network. The Bank worked with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/or acquired and who may have been impacted. The investigation revealed that this incident impacted certain files containing certain Bank customer information. Some of these files contained documents related to loan applications, such as tax returns, Form W-2 information of their employees, and payroll records. The Bank has notified all individuals identified as impacted, consistent with applicable laws. All impacted individuals were offered free Equifax Complete Premier credit monitoring and identify theft protection services. The Bank has notified law enforcement and appropriate authorities of the incident.

On December 16, 2021, a complaint based on the incident was filed in the Los Angeles County Superior Court seeking damages, injunctive relief, and equitable relief. During the three months ended September 30, 2023, the Bank agreed to settle this matter in exchange for $700 thousand to the putative class members, including costs of settlement administration, and attorneys’ fees and costs. The Bank received preliminary court approval of the settlement and notice was provided to members of the proposed class during the three months ended September 30, 2023. The settlement remains subject to a final approval hearing, which has been scheduled in the Superior Court for February, 2024.

The Company expects that the full amount of the final settlement will be covered under the Company’s applicable insurance policies.

Note 13 - Regulatory Matters

Under the final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”), the Bank must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios to avoid restrictions on dividends, stock repurchase, discretionary bonuses and other payments. Management believes as of September 30, 2023 and December 31, 2022, the Bank met all capital adequacy requirements to which it is subject to. Under the Federal Reserve’s “Small Bank Holding Company” policy, the Company is not currently subject to separate minimum capital requirements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in the following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. The Company and the Bank’s capital conservation buffer was 8.57% and 9.11%, respectively, as of September 30, 2023, and 8.79% and 9.52%, respectively, as of December 31, 2022. Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital. The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:


	Actual				Minimum Capital Requirement				To Be Well Capitalized Under Prompt Corrective Provisions
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2023
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	$	285,717	13.07	%	$	98,341	4.5	%	N/A		N/A
Total capital (to risk-weighted assets)	381,972		17.48	%	174,828		8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	354,858		16.24	%	131,121		6.0	%	N/A		N/A
Tier 1 capital (to average assets)	354,858		13.76	%	103,153		4.0	%	N/A		N/A
PCB Bank
Common tier 1 capital (to risk-weighted assets)	$	346,705	15.87	%	$	98,338	4.5	%	$	142,043	6.5	%
Total capital (to risk-weighted assets)	373,819		17.11	%	174,822		8.0	%	218,528		10.0	%
Tier 1 capital (to risk-weighted assets)	346,705		15.87	%	131,117		6.0	%	174,822		8.0	%
Tier 1 capital (to average assets)	346,705		13.44	%	103,150		4.0	%	128,937		5.0	%
December 31, 2022
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	$	276,360	13.29	%	$	93,554	4.5	%	N/A		N/A
Total capital (to risk-weighted assets)	370,742		17.83	%	166,319		8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	345,501		16.62	%	124,739		6.0	%	N/A		N/A
Tier 1 capital (to average assets)	345,501		14.33	%	96,472		4.0	%	N/A		N/A
PCB Bank
Common tier 1 capital (to risk-weighted assets)	$	338,891	16.30	%	$	93,553	4.5	%	$	135,131	6.5	%
Total capital (to risk-weighted assets)	364,132		17.52	%	166,316		8.0	%	207,895		10.0	%
Tier 1 capital (to risk-weighted assets)	338,891		16.30	%	124,737		6.0	%	166,316		8.0	%
Tier 1 capital (to average assets)	338,891		14.05	%	96,469		4.0	%	120,586		5.0	%

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

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

Note 14 - Revenue Recognition

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


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2023		2022		2023		2022
Noninterest income in-scope of Topic 606
Service charges and fees on deposits:
Monthly service fees	$	27	$	24	$	79	$	67
Account analysis fees	239		243		699		690
Non-sufficient funds charges	81		53		241		157
Other deposit related fees	24		21		65		60
Total service charges and fees on deposits	371		341		1,084		974
Debit card fees	103		87		254		256
Gain (loss) on sale of other real estate owned	—		152		—		152
Wire transfer fees	162		159		467		484
Other service charges	54		48		157		140
Total	$	690	$	787	$	1,962	$	2,006

Note 15 - Subsequent Events

Dividend Declared on Common Stock

On October 25, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.18 per common share. The dividend will be paid on or about November 17, 2023, to shareholders of record as of the close of business on November 9, 2023.

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

The following is management’s discussion and analysis of the major factors that influenced the Company’s results of operations and financial condition as of and for the three and nine months ended September 30, 2023. This analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and with the unaudited consolidated financial statements and notes (unaudited) thereto set forth in this Quarterly Report on Form 10-Q.

Critical Accounting Estimates

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 Estimates” 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, 2022 and in Note 1 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.

Adoption of Current Expected Credit Losses Accounting Standard

On January 1, 2023, the Company adopted the provisions of ASC 326, “Financial Instruments - Credit Losses (Topic 326)” Instruments. The adoption of ASC 326 changes the way the Company estimates the ACL on certain financial assets. The adoption of ASC 326 requires the Company to measure and record current expected credit losses for financial assets within the scope of ASC 326, which the Company currently consist substantially of loans, off-balance sheet credit exposures and securities available-for-sale. Measuring credit losses under the current expected credit losses (“CECL”) framework requires a significant amount of judgment, including the incorporation of reasonable and supportable forecasts about future conditions that may ultimately impact the level of credit losses the Company may recognize. Under the CECL framework, current expected credit losses are recorded on financial assets within the scope of ASC 326 at the time of their origination or acquisition. Please also see Note 1 to the Consolidated Financial Statements (Unaudited) included in Item 1 of this Quarterly Report on Form 10-Q for addition discussion.

The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination or acquisition. The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated statements of financial condition. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. The Company’s discounted cash flow methodology incorporates a PD and LGD model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios, as well as determining the appropriate length of the forecast horizon. Management leverages economic projections from a reputable and independent third party to inform and provide its reasonable and supportable economic forecasts. Other internal and external indicators of economic forecasts may also be considered by management when developing the forecast metrics. The Company’s ACL model reverts to long-term average loss rates for purposes of estimating expected cash flows beyond a period deemed reasonable and supportable. The Company forecasts economic conditions and expected credit losses over a one-year time horizon. Beyond the one-year forecast time horizon, the Company’s ACL model reverts to historical long-term average loss rates over one-year period. The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios, as well as determining the appropriate length of the forecast horizon. Changes in economic forecasts, in conjunction with changes in loan specific attributes, impact a loan’s PD and LGD, which can drive changes in the determination of the ACL.

Non-GAAP Measures

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

The following tables present reconciliation of return on average tangible common equity, tangible common equity per common share and tangible common equity to tangible assets ratios to their most comparable GAAP measures as of the dates or for the periods indicated. These non-GAAP measures, which are presented in this Quarterly Report on Form 10-Q, are used by management in its analysis of the Company's performance.


	Three Months Ended September 30,						Nine Months Ended September 30,
($ in thousands)	2023			2022			2023			2022
Average total shareholders' equity	$	343,144		$	338,248		$	339,423		$	296,871
Less: average preferred stock	69,141			69,141			69,141			32,924
Average tangible common equity	$	274,003		$	269,107		$	270,282		$	263,947
Net income	$	7,023		$	6,953		$	24,797		$	26,285
Annualized return on average shareholders’ equity	8.12		%	8.16		%	9.77		%	11.84		%
Annualized return on average tangible common equity	10.17		%	10.25		%	12.27		%	13.31		%


($ in thousands, except per share data)	September 30, 2023			December 31, 2022			September 30, 2022
Total shareholders' equity	$	341,852		$	335,442		$	332,719
Less: preferred stock	69,141			69,141			69,141
Tangible common equity	$	272,711		$	266,301		$	263,578
Outstanding common shares	14,319,014			14,625,474			14,853,140
Book value per common share	$	23.87		$	22.94		$	22.40
Tangible common equity per common share	$	19.05		$	18.21		$	17.75
Total assets	$	2,567,974		$	2,420,036		$	2,327,051
Total shareholders' equity to total assets	13.31		%	13.86		%	14.30		%
Tangible common equity to total assets	10.62		%	11.00		%	11.33		%

Selected Financial Data

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


	As of or For the Three Months Ended September 30,						As of or For the Nine Months Ended September 30,
($ in thousands, except per share data)	2023			2022			2023			2022
Selected balance sheet data:
Cash and cash equivalents	$	192,350		$	154,038		$	192,350		$	154,038
Securities available-for-sale	139,218			129,401			139,218			129,401
Loans held-for-sale	6,693			18,982			6,693			18,982
Loans held-for-investment	2,167,605			1,959,237			2,167,605			1,959,237
ACL on loans (1)	(25,599)			(23,761)			(25,599)			(23,761)
Total assets	2,567,974			2,327,051			2,567,974			2,327,051
Total deposits	2,192,129			1,978,098			2,192,129			1,978,098
Shareholders’ equity	341,852			332,719			341,852			332,719
Selected income statement data:
Interest income	$	38,852		$	26,835		$	110,226		$	70,175
Interest expense	16,403			2,812			43,646			4,808
Net interest income	22,449			24,023			66,580			65,367
Provision (reversal) for credit losses (1)	751			3,753			(1,830)			2,453
Noninterest income	2,502			3,176			8,180			12,110
Noninterest expense	14,207			13,695			41,588			38,011
Income before income taxes	9,993			9,751			35,002			37,013
Income tax expense	2,970			2,798			10,205			10,728
Net income	7,023			6,953			24,797			26,285
Per share data:
Earnings per common share, basic	$	0.49		$	0.47		$	1.73		$	1.76
Earnings per common share, diluted	0.49			0.46			1.71			1.73
Book value per common share (2)	23.87			22.40			23.87			22.40
Tangible common equity per common share (10)	19.05			17.75			19.05			17.75
Cash dividends declared per common share	0.18			0.15			0.51			0.45
Outstanding share data:
Number of common shares outstanding	14,319,014			14,853,140			14,319,014			14,853,140
Weighted-average common shares outstanding, basic	14,294,802			14,877,879			14,327,930			14,869,997
Weighted-average common shares outstanding, diluted	14,396,216			15,088,089			14,441,960			15,126,863
Selected performance ratios:
Return on average assets (3)	1.09		%	1.19		%	1.32		%	1.58		%
Return on average shareholders’ equity (3)	8.12		%	8.16		%	9.77		%	11.84		%
Dividend payout ratio (4)	36.73		%	31.91		%	29.48		%	25.57		%
Efficiency ratio (5)	56.94		%	50.35		%	55.63		%	49.06		%
Yield on average interest-earning assets (3)	6.18		%	4.75		%	6.01		%	4.35		%
Cost of average interest-bearing liabilities (3)	4.17		%	0.98		%	3.88		%	0.60		%
Net interest spread (3)	2.01		%	3.77		%	2.13		%	3.75		%
Net interest margin (3), (6)	3.57		%	4.25		%	3.63		%	4.05		%
Total loans to total deposits ratio (7)	99.19		%	100.01		%	99.19		%	100.01		%


	As of or For the Three Months Ended September 30,						As of or For the Nine Months Ended September 30,
($ in thousands, except per share data)	2023			2022			2023			2022















Asset quality:
Loans 30 to 89 days past due and still accruing	$	708		$	410		$	708		$	410

Nonperforming loans (8)	3,730			7,396			3,730			7,396
Nonperforming assets (9)	3,730			7,396			3,730			7,396
Net charge-offs (recoveries)	90			1,063			(1,028)			1,073
Loans 30 to 89 days past due and still accruing to loans held-for-investment	0.03		%	0.02		%	0.03		%	0.02		%


Nonperforming loans to loans held-for-investment	0.17		%	0.38		%	0.17		%	0.38		%
Nonperforming loans to ACL on loans	14.57		%	31.13		%	14.57		%	31.13		%
Nonperforming assets to total assets	0.15		%	0.32		%	0.15		%	0.32		%
ACL on loans to loans held-for-investment	1.18		%	1.21		%	1.18		%	1.21		%


ACL on loans to nonperforming loans	686.30		%	321.27		%	686.30		%	321.27		%
Net charge-offs (recoveries) to average loans held-for-investment (3)	0.01		%	0.23		%	(0.07)		%	0.08		%
Capital ratios:
Shareholders’ equity to total assets	13.31		%	14.30		%	13.31		%	14.30		%
Tangible common equity to total assets (10)	10.62		%	11.33		%	10.62		%	11.33		%
Average shareholders’ equity to average total assets	13.39		%	14.58		%	13.48		%	13.31		%
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	13.07		%	13.69		%	13.07		%	13.69		%
Total capital (to risk-weighted assets)	17.48		%	18.34		%	17.48		%	18.34		%
Tier 1 capital (to risk-weighted assets)	16.24		%	17.14		%	16.24		%	17.14		%
Tier 1 capital (to average assets)	13.76		%	14.74		%	13.76		%	14.74		%
PCB Bank
Common tier 1 capital (to risk-weighted assets)	15.87		%	16.82		%	15.87		%	16.82		%
Total capital (to risk-weighted assets)	17.11		%	18.02		%	17.11		%	18.02		%
Tier 1 capital (to risk-weighted assets)	15.87		%	16.82		%	15.87		%	16.82		%
Tier 1 capital (to average assets)	13.44		%	14.47		%	13.44		%	14.47		%

(1) ACL and reversal for credit losses for reporting periods beginning with January 1, 2023 are presented under ASC 326, while prior period comparisons continue to be presented under legacy ASC 450 and ASC 310. Provisions (reversal) for credit losses on off-balance sheet credit exposures of $(10) thousand and $28 thousand, respectively, for the three and nine months ended September 30, 2022 were recorded in Other Expense on the Consolidated Income Statement (Unaudited).

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

(3) Annualized.

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

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

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

(7) Total loans include both loans held-for-sale and loans held-for-investment.

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

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

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

Executive Summary

Q3 2023 Financial Highlights

•Net income was $7.0 million for the three months ended September 30, 2023, an increase of $70 thousand, or 1.0%, from $7.0 million for the three months ended September 30, 2022;

▪Recorded a provision for credit losses of $751 thousand for the three months ended September 30, 2023 compared with $3.8 million for the three months ended September 30, 2022.

▪ACL on loan to loans held-for-investment ratio was 1.18% at September 30, 2023 compared with 1.22% at December 31, 2022.

•Net interest income was $22.4 million for the three months ended September 30, 2023 compared with $24.0 million for the three months ended September 30, 2022. Net interest margin was 3.57% for the three months ended September 30, 2023 compared with 4.25% for the three months ended September 30, 2022.

•Gain on sale of loans was $689 thousand for the three months ended September 30, 2023 compared with $1.4 million for the three months ended September 30, 2022.

•Total assets were $2.57 billion at September 30, 2023, an increase of $147.9 million, or 6.1%, from $2.42 billion at December 31, 2022;

•Loans held-for-investment were $2.17 billion at September 30, 2023, an increase of $121.5 million, or 5.9%, from $2.05 billion at December 31, 2022;

•Total deposits were $2.19 billion at September 30, 2023, an increase of $146.1 million, or 7.1%, from $2.05 billion at December 31, 2022; and

•Announced a stock repurchase program on August 2, 2023 for the repurchase of up to 720,000 shares of the Company’s outstanding common stock through August 2, 2024. During the three months ended September 30, 2023, the Company repurchased and retired 67,202 shares of common stock.

Results of Operations

Net Interest Income

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

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


	Three Months Ended September 30,
	2023						2022
($ in thousands)	Average Balance		Interest		Yield/ Cost (6)		Average Balance		Interest		Yield/ Cost (6)
Interest-earning assets:
Total loans (1)	$	2,137,184	$	34,651	6.43	%	$	1,905,366	$	24,835	5.17	%
Mortgage backed securities	98,534		750		3.02	%	93,546		518		2.20	%
Collateralized mortgage obligation	24,959		262		4.16	%	24,090		151		2.49	%
SBA loan pool securities	7,842		81		4.10	%	10,435		56		2.13	%
Municipal bonds - tax exempt (2)	3,602		30		3.30	%	4,491		34		3.00	%
Corporate bonds	4,056		47		4.60	%	4,801		47		3.88	%
Interest-bearing deposits in other financial institutions	206,399		2,798		5.38	%	190,184		1,049		2.19	%
FHLB and other bank stock	12,716		233		7.27	%	10,183		145		5.65	%
Total interest-earning assets	2,495,292		38,852		6.18	%	2,243,096		26,835		4.75	%
Noninterest-earning assets:
Cash and due from banks	21,298						20,609
Allowance for credit losses on loans	(24,869)						(21,117)
Other assets	71,512						76,851
Total noninterest earning assets	67,941						76,343
Total assets	$	2,563,233					$	2,319,439
Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	481,341	4,398		3.62	%	$	577,975	1,375		0.94	%
Savings	7,197		4		0.22	%	14,990		2		0.05	%
Time deposits	1,073,044		12,001		4.44	%	544,774		1,421		1.03	%
Borrowings	—		—		—	%	2,033		14		2.73	%
Total interest-bearing liabilities	1,561,582		16,403		4.17	%	1,139,772		2,812		0.98	%
Noninterest-bearing liabilities:
Demand deposits	626,738						825,362
Other liabilities	31,769						16,057
Total noninterest-bearing liabilities	658,507						841,419
Total liabilities	2,220,089						1,981,191
Shareholders’ equity	343,144						338,248
Total liabilities and shareholders’ equity	$	2,563,233					$	2,319,439
Net interest income			$	22,449					$	24,023
Net interest spread (3)					2.01	%					3.77	%
Net interest margin (4)					3.57	%					4.25	%
Cost of funds (5)					2.97	%					0.57	%

(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 $226 thousand and $243 thousand, respectively, and net accretion of discount on loans of $775 thousand and $867 thousand, respectively, are included in the interest income for the three months ended September 30, 2023 and 2022.

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

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

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

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

(6) Annualized.


	Nine Months Ended September 30,
	2023						2022
($ in thousands)	Average Balance		Interest		Yield/ Cost (6)		Average Balance		Interest		Yield/ Cost (6)
Interest-earning assets:
Total loans (1)	$	2,102,600	$	98,840	6.29	%	$	1,828,187	$	66,268	4.85	%
Mortgage backed securities	98,364		2,146		2.92	%	88,634		1,241		1.87	%
Collateralized mortgage obligation	25,970		780		4.02	%	22,775		324		1.90	%
SBA loan pool securities	8,406		244		3.88	%	10,566		137		1.73	%
Municipal bonds - tax exempt (2)	4,017		97		3.23	%	5,152		107		2.78	%
Corporate bonds	4,300		141		4.38	%	4,896		141		3.85	%
Interest-bearing deposits in other financial institutions	195,016		7,391		5.07	%	188,770		1,555		1.10	%
FHLB and other bank stock	11,704		587		6.71	%	9,541		402		5.63	%
Total interest-earning assets	2,450,377		110,226		6.01	%	2,158,521		70,175		4.35	%
Noninterest-earning assets:
Cash and due from banks	21,069						20,599
Allowance for credit losses on loans	(25,438)						(21,561)
Other assets	72,616						72,563
Total noninterest earning assets	68,247						71,601
Total assets	$	2,518,624					$	2,230,122
Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	477,605	11,772		3.30	%	$	492,130	2,118		0.58	%
Savings	7,684		14		0.24	%	15,205		6		0.05	%
Time deposits	1,015,234		31,651		4.17	%	550,770		2,565		0.62	%
Borrowings	5,212		209		5.36	%	7,824		119		2.03	%
Total interest-bearing liabilities	1,505,735		43,646		3.88	%	1,065,929		4,808		0.60	%
Noninterest-bearing liabilities:
Demand deposits	647,258						851,837
Other liabilities	26,208						15,485
Total noninterest-bearing liabilities	673,466						867,322
Total liabilities	2,179,201						1,933,251
Shareholders’ equity	339,423						296,871
Total liabilities and shareholders’ equity	$	2,518,624					$	2,230,122
Net interest income			$	66,580					$	65,367
Net interest spread (3)					2.13	%					3.75	%
Net interest margin (4)					3.63	%					4.05	%
Cost of funds (5)					2.71	%					0.34	%

(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 $648 thousand and $2.0 million, respectively, and net accretion of discount on loans of $2.2 million and $2.7 million, respectively, are included in the interest income for the nine months ended September 30, 2023 and 2022.

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

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

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

(6) Annualized.

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023 vs. 2022						2023 vs. 2022
	Increase (Decrease) Due to				Net Increase (Decrease)		Increase (Decrease) Due to				Net Increase (Decrease)
($ in thousands)	Volume		Rate				Volume		Rate
Interest earned on:
Total loans	$	3,022	$	6,794	$	9,816	$	9,947	$	22,625	$	32,572
Investment securities	10		354		364		133		1,325		1,458
Other interest-earning assets	112		1,725		1,837		83		5,938		6,021
Total interest income	3,144		8,873		12,017		10,163		29,888		40,051
Interest incurred on:
Savings, NOW, and money market deposits	(243)		3,268		3,025		(92)		9,754		9,662
Time deposits	1,378		9,202		10,580		2,163		26,923		29,086
Borrowings	(14)		—		(14)		(40)		130		90
Total interest expense	1,121		12,470		13,591		2,031		36,807		38,838
Change in net interest income	$	2,023	$	(3,597)	$	(1,574)	$	8,132	$	(6,919)	$	1,213

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

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


	Three Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2023		2022
Interest and dividend income:
Loans, including fees	$	34,651	$	24,835	$	9,816	39.5	%
Investment securities	1,170		806		364		45.2	%
Other interest-earning assets	3,031		1,194		1,837		153.9	%
Total interest income	38,852		26,835		12,017		44.8	%
Interest expense:
Deposits	16,403		2,798		13,605		486.2	%
Borrowings	—		14		(14)		(100.0)	%
Total interest expense	16,403		2,812		13,591		483.3	%
Net interest income	$	22,449	$	24,023	$	(1,574)	(6.6)	%

Net interest income decreased primarily due to a 37.0% increase in average balance of interest-bearing liabilities and a 319 basis point increase in average cost, partially offset by a 11.2% increase in average balance of interest-earning assets and a 143 basis point increase in average yield.

Interest and fees on loans increased primarily due to a 12.2% increase in average balance and a 126 basis point increase in average yield. The increase in average yield was primarily due to an increase in overall interest rates on loans from the rising interest rate environment, partially offset by decreases in net amortization of deferred loan fees and net accretion of discount on loans. The decrease in net amortization of deferred loan fees was primarily due to the decreased amount of SBA PPP loan payoffs.

Interest on investment securities increased primarily due to a 1.2% increase in average balance and a 101 basis point increase in average yield. The increase in average yield was primarily due to a decrease in net amortization of premiums on securities and a higher yield on newly purchased investment securities. For the three months ended September 30, 2023 and 2022, average yield on total investment securities was 3.34% and 2.33%, respectively.

Interest income on other interest-earning assets increased primarily due to a 9.4% increase in average balance and a 313 basis point increase in average yield. The increase in average yield was primarily due to an increase in interest rate on cash held at the Federal Reserve Bank (“FRB”). For the three months ended September 30, 2023 and 2022, average yield on total other interest-earning assets was 5.49% and 2.36%, respectively.

Interest expense on deposits increased primarily due to a 37.3% increase in average balance of interest-bearing deposits and a 319 basis point increase in average cost of interest-bearing deposits. The increase in average balance was primarily due to the migration of noninterest-bearing deposits to money market accounts and time deposits attributable to the rising market rates. The increase in average cost was primarily due to an increase in market rates. For the three months ended September 30, 2023 and 2022, average cost on total interest-bearing deposits was 4.17% and 0.98%, respectively, and average cost on total deposits were 2.97% and 0.57%, respectively.

The Company had no borrowings during the three months ended September 30, 2023.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

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


	Nine Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2023		2022
Interest and dividend income:
Loans, including fees	$	98,840	$	66,268	$	32,572	49.2	%
Investment securities	3,408		1,950		1,458		74.8	%
Other interest-earning assets	7,978		1,957		6,021		307.7	%
Total interest income	110,226		70,175		40,051		57.1	%
Interest expense:
Deposits	43,437		4,689		38,748		826.4	%
Borrowings	209		119		90		75.6	%
Total interest expense	43,646		4,808		38,838		807.8	%
Net interest income	$	66,580	$	65,367	$	1,213	1.9	%

Net interest income increased primarily due to a 13.5% increase in average balance of interest-earning assets and a 166 basis point increase in average yield, partially offset by a 41.3% increase in average balance of interest-bearing liabilities and a 328 basis point increase in average cost.

Interest and fees on loans increased primarily due to a 15.0% increase in average balance and a 144 basis point increase in average yield. The increase in average yield was primarily due to an increase in overall interest rates on loans from the rising interest rate environment, partially offset by decreases in net amortization of deferred loan fees and net accretion of discount on loans. The decrease in net amortization of deferred loan fees was primarily due to the decreased amount of SBA PPP loan payoffs.

Interest on investment securities increased primarily due to a 6.8% increase in average balance and a 126 basis point increase in average yield. The increase in average yield was primarily due to a decrease in net amortization of premiums on securities and a higher yield on newly purchased investment securities. For the nine months ended September 30, 2023 and 2022, average yield on total investment securities was 3.23% and 1.97%, respectively.

Interest income on other interest-earning assets increased primarily due to a 4.2% decrease in average balance and a 384 basis point increase in average yield. The increase in average yield was primarily due to an increase in interest rate on cash held at the FRB. For the nine months ended September 30, 2023 and 2022, average yield on total other interest-earning assets was 5.16% and 1.32%, respectively.

Interest expense on deposits increased primarily due to a 41.8% increase in average balance of interest-bearing deposits and a 328 basis point increase in average cost of interest-bearing deposits. The increase in average balance was primarily due to the migration of noninterest-bearing deposits to money market accounts and time deposits attributable to the rising market rates. The increase in average cost was primarily due to an increase in market rates. For the nine months ended September 30, 2023 and 2022, average cost on total interest-bearing deposits was 3.87% and 0.59%, respectively, and average cost on total deposits were 2.70% and 0.33%, respectively.

Interest expense on borrowings increased primarily due to increases in average cost. The Company had no borrowings during the three months ended September 30, 2023.

Provision (reversal) for Credit Losses

The following table presents a composition of provision (reversal) for credit losses for the periods indicated:


	Three Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2023		2022
Provision for credit losses on loans	$	822	$	3,753	$	(2,931)	(78.1)	%
Reversal for credit losses on off-balance sheet credit exposure (1)	(71)		(10)		(61)		610.0	%
Total provision for credit losses	$	751	$	3,743	$	(2,992)	(79.9)	%


	Nine Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2023		2022
Provision (reversal) for credit losses on loans	$	(1,438)	$	2,453	$	(3,891)	NM
Provision (reversal) for credit losses on off-balance sheet credit exposure (1)	(392)		28		(420)		NM
Total provision (reversal) for credit losses	$	(1,830)	$	2,481	$	(4,311)	NM

(1)Provision for credit losses on off-balance sheet credit exposures for the three and nine months ended September 30, 2022 was recorded in Other Expense on the Consolidated Income Statement (Unaudited).

Provision (reversal) for credit losses and ACL for reporting periods beginning with January 1, 2023 are presented under ASC 326, while prior period comparisons continue to be presented under legacy ASC 450 and ASC 310.

The reversal for credit losses for the nine months ended September 30, 2023 was primarily due to the increase in the net recoveries combined with overall improvements in credit quality and the improved economic forecasts by the FOMC. The FOMC’s economic forecasts improved progressively since December 2022. The projected 2023 year-end national unemployment rate improved from 4.6% in December 2022 FOMC meeting to 3.8% in September 2023 meeting. The projected year-over-year change in real GDP improved from 0.50% in the December 2022 FOMC meeting to 2.1% in the September 2023 meeting. These improved macroeconomic projections resulted in the decrease of PD and LGD rates across majority of the loan segments leading to lower overall expected loss measurements.

The provision for credit losses for the three months ended September 30, 2023 was primarily due to an increase in loans held-for-investment and the update of prepayment and principal curtailment rate assumptions in measuring the maximum loss scenario. Such change resulted in higher overall expected loss requirement related to qualitative factors.

See further discussion in “Allowance for Credit Losses.”

Noninterest Income

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

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


	Three Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2023		2022
Service charges and fees on deposits	$	371	$	341	$	30	8.8	%
Loan servicing income	851		780		71		9.1	%
Bank-owned life insurance income	187		178		9		5.1	%
Gain on sale of loans	689		1,415		(726)		(51.3)	%

Other income	404		462		(58)		(12.6)	%
Total noninterest income	$	2,502	$	3,176	$	(674)	(21.2)	%

Loan servicing income increased primarily due to a decrease in servicing asset amortization. Servicing asset amortization was $470 thousand and $522 thousand, respectively, for the three months ended September 30, 2023 and 2022.

Gain on sale of loans decreased primarily due to a lower level of premium on SBA loans in the secondary market and a decrease in sales volume. The Company sold SBA loans of $17.7 million with a gain of $689 thousand during the three months ended September 30, 2023. During the three months ended September 30, 2022, the Company sold SBA loans of $27.3 million with a gain of $1.4 million and residential mortgage loans of $858 thousand with a gain of $8 thousand.

Other income primarily included wire transfer fees of $162 thousand and $159 thousand, respectively, and debit card interchange fees of $103 thousand and $87 thousand, respectively, for the three months ended September 30, 2023 and 2022.

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

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


	Nine Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2023		2022
Service charges and fees on deposits	$	1,084	$	974	$	110	11.3	%
Loan servicing income	2,579		2,235		344		15.4	%
Bank-owned life insurance income	551		525		26		5.0	%
Gain on sale of loans	2,767		7,231		(4,464)		(61.7)	%

Other income	1,199		1,145		54		4.7	%
Total noninterest income	$	8,180	$	12,110	$	(3,930)	(32.5)	%

Loan servicing income increased primarily due to a decrease in servicing asset amortization. Servicing asset amortization was $1.3 million and $1.6 million, respectively, for the nine months ended September 30, 2023 and 2022.

Gain on sale of loans decreased primarily due to a lower level of premium on SBA loans in the secondary market and a decrease in sales volume. The Company sold SBA loans of $61.6 million with a gain of $2.8 million during the nine months ended September 30, 2023. During the nine months ended September 30, 2022, the Company sold SBA loans of $105.4 million with a gain of $7.2 million and residential mortgage loans of $858 thousand with a gain of $8 thousand.

Other income primarily included wire transfer fees of $467 thousand and $484 thousand, respectively, and debit card interchange fees of $254 thousand and $256 thousand, respectively, for the nine months ended September 30, 2023 and 2022.

Noninterest Expense

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

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


	Three Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2023		2022
Salaries and employee benefits	$	8,572	$	8,457	$	115	1.4	%
Occupancy and equipment	1,964		1,650		314		19.0	%
Professional fees	685		587		98		16.7	%
Marketing and business promotion	980		909		71		7.8	%
Data processing	367		427		(60)		(14.1)	%
Director fees and expenses	152		179		(27)		(15.1)	%

Regulatory assessments	281		150		131		87.3	%

Other expenses	1,206		1,336		(130)		(9.7)	%
Total noninterest expense	$	14,207	$	13,695	$	512	3.7	%

Salaries and employee benefits increased primarily due to an increase in salaries, partially offset by decreases in bonus accruals, and incentives tied to the sales of SBA loans originated at LPOs. The number of full-time equivalent employees was 270 at September 30, 2023 compared to 274 at September 30, 2022.

Occupancy and equipment increased primarily due to new branches openings during the second half of 2022. The Company opened three new full-service branches in Dallas and Carrollton, Texas and Palisades Park, New Jersey.

Professional fees increased primarily due to increases in internal audit and consulting fees.

Marketing and business promotion expense increased primarily due to an increase in advertisements and the Company’s 20th anniversary celebration.

Regulatory assessments increased primarily due to an increase in FDIC assessment rates. The FDIC increased the initial base deposit insurance assessment rate schedules by two basis points beginning in the first quarterly assessment period of 2023.

Other expenses primarily included $114 thousand and $174 thousand in loan related expenses, $565 thousand and $544 thousand in office expense, and $206 thousand and $171 thousand in armed guard expense for the three months ended September 30, 2023 and 2022, respectively. For the three months ended September 30, 2022, reversal for off-balance sheet credit exposures of $10 thousand was recorded in other expenses; however, reversal for off-balance sheet credit exposures of $71 thousand for the three months ended September 30, 2023 was recorded in Provision (Reversal) for Credit Losses on the Consolidated Statements of Income (Unaudited).

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

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


	Nine Months Ended September 30,				Amount Change		Percentage Change
($ in thousands)	2023		2022
Salaries and employee benefits	$	26,175	$	25,177	$	998	4.0	%
Occupancy and equipment	5,779		4,584		1,195		26.1	%
Professional fees	2,189		1,632		557		34.1	%
Marketing and business promotion	1,555		1,426		129		9.0	%
Data processing	1,159		1,272		(113)		(8.9)	%
Director fees and expenses	549		530		19		3.6	%
Regulatory assessments	818		438		380		86.8	%
Other expenses	3,364		2,952		412		14.0	%
Total noninterest expense	$	41,588	$	38,011	$	3,577	9.4	%

Professional fees increased primarily due to increases in internal audit and consulting fees.

Marketing and business promotion expense increased primarily due to an increase in advertisements and the Company’s 20th anniversary celebration.

Other expenses primarily included $311 thousand and $275 thousand in loan related expenses, $1.6 million and $1.2 million in office expense, and $588 thousand and $461 thousand in armed guard expense for the nine months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2022, provision for credit losses on off-balance sheet credit exposures of $28 thousand was recorded in other expenses; however, reversal for credit losses on off-balance sheet credit exposures of $392 thousand for the nine months ended September 30, 2023 was recorded in Provision (Reversal) for Credit Losses on the Consolidated Statements of Income (Unaudited).

Income Tax Expense

Financial Condition

Investment Securities

The Company’s investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on current and projected liquidity and interest rate sensitivity positions.

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


	September 30, 2023						December 31, 2022
($ 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	$	115,837	$	100,271	$	(15,566)	$	109,497	$	96,900	$	(12,597)
Residential collateralized mortgage obligations	26,303		24,196		(2,107)		28,515		26,956		(1,559)
SBA loan pool securities	8,027		7,578		(449)		9,704		9,298		(406)
Municipal bonds	3,305		3,076		(229)		4,262		4,186		(76)
Corporate bonds	5,000		4,097		(903)		5,000		4,523		(477)
Total securities available-for-sale	$	158,472	$	139,218	$	(19,254)	$	156,978	$	141,863	$	(15,115)

Total investment securities were $139.2 million at September 30, 2023, a decrease of $2.6 million, or 1.9%, from $141.9 million at December 31, 2022. The decrease was primarily due to principal paydowns of $14.3 million, net premium amortization of $169 thousand and a decrease in fair value of securities available-for-sale of $4.1 million, partially offset by purchases of $16.0 million.

Municipal and corporate bonds had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of September 30, 2023. 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 did not warrant an ACL as of September 30, 2023.

As of September 30, 2023, the Company recorded no ACL on securities available-for-sale.

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


	September 30, 2023
	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	$	11	1.57	%	$	2,045	1.69	%	$	6,289	2.01	%	$	107,492	2.96	%	$	115,837	2.89	%
Residential collateralized mortgage obligations	—		—	%	1,965		4.14	%	5,543		5.98	%	18,795		3.38	%	26,303		3.98	%
SBA loan pool securities	—		—	%	544		4.39	%	3,202		3.61	%	4,281		3.92	%	8,027		3.83	%
Municipal bonds	865		3.26	%	81		3.01	%	724		3.50	%	1,635		3.54	%	3,305		3.44	%
Corporate bonds	—		—	%	—		—	%	5,000		3.75	%	—		—	%	5,000		3.75	%
Total securities available-for-sale	$	876	3.24	%	$	4,635	3.07	%	$	20,758	3.79	%	$	132,203	3.06	%	$	158,472	3.16	%

Weighted-average yields are based upon the amortized cost of securities and are calculated using the interest method which takes into consideration of premium amortization and discount accretion. Weighted-average yields on tax-exempt debt securities exclude the federal income tax benefit.

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 credit losses on loans.

Loans held-for-sale were $6.7 million at September 30, 2023, a decrease of $16.1 million, or 70.7%, from $22.8 million at December 31, 2022. The decrease was primarily due to sales of $61.6 million and pay-offs of nonaccrual commercial and industrial loans of $4.0 million, partially offset by new funding of $49.8 million.

Loans Held-For-Investment and Allowance for Credit Losses

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


	September 30, 2023					January 1, 2023
($ in thousands)	Amount			Percentage to Total		Amount			Percentage to Total
Commercial real estate:
Commercial property	$	814,547		37.6	%	$	772,020		37.8	%
Business property	537,351			24.8	%	526,513			25.7	%
Multifamily	132,558			6.1	%	124,751			6.1	%
Construction	19,246			0.9	%	17,054			0.8	%
Total commercial real estate	1,503,702			69.4	%	1,440,338			70.4	%
Commercial and industrial	279,608			12.9	%	249,250			12.2	%
Consumer:
Residential mortgage	363,369			16.8	%	333,726			16.3	%
Other consumer	20,926			1.0	%	22,749			1.1	%
Total consumer	384,295			17.8	%	356,475			17.4	%
Loans held-for-investment	$	2,167,605		100.1	%	$	2,046,063		100.0	%
Allowance for credit losses on loans	(25,599)					(26,009)
Net loans held-for-investment	$	2,142,006				$	2,020,054

ACL on loans to loans held-for-investment	1.18		%			1.27		%

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


	December 31, 2022
($ in thousands)	Amount			Percentage to Total
Real estate loans:
Commercial property	$	1,288,392		63.0	%
Residential property	333,726			16.3	%
SBA property	134,892			6.6	%
Construction	17,054			0.8	%
Total real estate loans	1,774,064			86.7	%
Commercial and industrial loans:
Commercial term	77,700			3.8	%
Commercial lines of credit	154,142			7.5	%
SBA commercial term	16,211			0.8	%
SBA PPP	1,197			0.1	%
Total commercial and industrial loans	249,250			12.2	%
Other consumer loans	22,749			1.1	%
Loans held-for-investment	$	2,046,063		100.0	%
Allowance for loan losses	(24,942)
Net loans held-for-investment	$	2,021,121

Allowance for loan losses to loans held-for-investment	1.22		%

Loans held-for-investment were $2.17 billion at September 30, 2023, an increase of $121.5 million, or 5.9%, from $2.05 billion at December 31, 2022. The increase was primarily due to new funding and advances of $717.0 million and purchases of residential mortgage loans of $15.7 million, partially offset by paydowns and payoffs of $611.2 million.

Allowance for Credit Losses

On January 1, 2023, the Company adopted the provisions of ASC 326 through the application of the modified retrospective transition approach, and recorded a net decrease of $1.9 million to the beginning balance of retained earnings as of January 1, 2023 for the cumulative effect adjustment, reflecting an initial adjustment to the ACL on loans of $1.1 million and the ACL on off-balance sheet credit exposures of $1.6 million, net of related deferred tax assets arising from temporary differences of $788 thousand. The initial adjustment to the ACL is reflective of expected lifetime credit losses associated with the composition of financial assets within in the scope of ASC 326 as of January 1, 2023, as well as management’s current expectation of future economic conditions.

ACL on loans

PD and LGD are forecasted over a one-year time horizon using economic forecast scenarios, which the Company believes is a reasonable and supportable period. Beyond the one-year forecast time horizon, the Company’s ACL model reverts to historical long-term average loss rates over one-year period. The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios, as well as determining the appropriate length of the forecast horizon. Management utilizes the economic forecasts provided by the Federal Open Market Committee (“FOMC”) to forecast the first 4 quarters of the credit loss estimate. The FOMC projected national unemployment rate and the projected change in the year-over-year national GDP growth rates over the forward-looking 4 quarters are used in determining the PD rates over the forecasted periods.

ACL on Off-Balance Sheet Credit Exposures

The following table presents activities in ACL for the periods indicated:


	Three Months Ended September 30,				Nine Months Ended September 30,
($ in thousands)	2023		2022		2023		2022
ACL on loans
Balance at beginning of period	$	24,867	$	21,071	$	24,942	$	22,381
Impact of ASC 326 adoption	—		—		1,067		—
Charge-offs	(112)		(1,112)		(119)		(1,171)
Recoveries	22		49		1,147		98
Provision (reversal) for credit losses on loans	822		3,753		(1,438)		2,453
Balance at end of period	$	25,599	$	23,761	$	25,599	$	23,761
ACL on off-balance sheet credit exposures
Balance at beginning of period	$	1,585	$	252	$	299	$	214
Impact of ASC 326 adoption	—		—		1,607		—
Provision (reversal) for credit losses on off-balance sheet credit exposure	(71)		(10)		(392)		28
Balance at end of period	$	1,514	$	242	$	1,514	$	242

ASC 326 adoption required additional ACL on both loans and off-balance sheet credit exposures primarily due to an increase in the quantitatively measured ACL under ASC 326 because the incurred loss model under the legacy ASC 450 and ASC 310 measures inherent losses in the loan portfolio on a 1-year loss horizon basis, while CECL measures losses on "prepayment adjusted life of the loans" basis. In addition, historical loss rates used in legacy incurred loss model were low due to the Company's low loss rates in recent years, while the Company leverages peer group loss information under CECL.

The increase in ACL for the three months ended September 30, 2023 was primarily due to an increase in loans held-for-investment and the update of prepayment and principal curtailment rate assumptions. The decrease in ACL for the nine months ended September 30, 2023 was primarily due to the decrease in the quantitative adjustment factors from improvements in the economic forecasts.

The following tables present net charge-offs (recoveries) as a percentage to the average loan held-for-investment balances in each of the loan segments for the periods indicated:


	Three Months Ended September 30, 2023						Nine Months Ended September 30, 2023

($ in thousands)	Average Balance		Net Charge-Offs (Recoveries)		Percentage		Average Balance		Net Charge-Offs (Recoveries)		Percentage
Commercial real estate:
Commercial property	$	797,245	$	—	—	%	$	782,088	$	—	—	%
Business property	538,583		(2)		0.01	%	530,820		(4)		(0.01)	%
Multifamily	129,193		—		—	%	125,909		—		—	%
Construction	17,993		—		—	%	17,428		—		—	%
Total commercial real estate	1,483,013		(2)		0.01	%	1,456,246		(4)		(0.01)	%
Commercial and industrial	256,553		37		0.06	%	252,795		(1,055)		(0.56)	%
Consumer:
Residential mortgage	359,156		—		—	%	351,988		—		—	%
Other consumer	21,676		55		1.01	%	22,154		31		0.19	%
Total consumer	380,832		55		0.06	%	374,142		31		0.01	%
Total	$	2,120,398	$	90	0.01	%	$	2,083,183	$	(1,028)	(0.07)	%


	Three Months Ended September 30, 2022						Nine Months Ended September 30, 2022

($ in thousands)	Average Balance		Net Charge-Offs (Recoveries)		Percentage		Average Balance		Net Charge-Offs (Recoveries)		Percentage
Real estate loans:
Commercial property	$	1,224,725	$	—	—	%	$	1,177,792	$	—	—	%
Residential property	278,009		—		—	%	241,906		—		—	%
SBA property	117,844		—		—	%	116,063		—		—	%
Construction	13,340		—		—	%	10,928		—		—	%
Total real estate loans	1,633,918		—		—	%	1,546,689		—		—	%
Commercial and industrial loans:
Commercial term	75,548		(2)		(0.01)	%	73,171		(6)		(0.01)	%
Commercial lines of credit	120,934		1,074		3.55	%	110,338		1,074		1.30	%
SBA commercial term	16,516		(15)		(0.36)	%	16,480		(17)		(0.14)	%
SBA PPP	1,409		—		—	%	17,916		—		—	%
Total commercial and industrial loans	214,407		1,057		1.97	%	217,905		1,051		0.64	%
Other consumer loans	22,557		6		0.11	%	21,829		22		0.13	%
Total	$	1,870,882	$	1,063	0.23	%	$	1,786,423	$	1,073	0.08	%

Nonperforming Loans and Nonperforming Assets

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


($ in thousands)	September 30, 2023			December 31, 2022			Amount Change		Percentage Change
Nonaccrual loans held-for-investment
Commercial real estate:
Commercial property (1)	$	—		$	2,400		N/A		N/A
SBA property (1)	—			585			N/A		N/A
Commercial property	686			N/A			N/A		N/A
Business property	2,964			N/A			N/A		N/A


Total commercial real estate	3,650			2,985			665		22.3	%
Commercial and industrial	72			—			72		—	%
Consumer:
Residential mortgage	—			372			(372)		(100.0)	%
Other consumer	8			3			5		166.7	%
Total consumer	8			375			(367)		(97.9)	%
Total nonaccrual loans held-for-investment	3,730			3,360			370		11.0	%
Loans past due 90 days or more still on accrual	—			—			—		—	%
Nonperforming loans held-for-investment	3,730			3,360			370		11.0	%
Nonperforming loans held-for-sale	—			4,000			(4,000)		(100.0)	%
Total nonperforming loans	3,730			7,360			(3,630)		(49.3)	%
Other real estate owned	—			—			—		—	%
Nonperforming assets	$	3,730		$	7,360		$	(3,630)	(49.3)	%

Nonaccrual loans held-for-investment to loans held-for-investment	0.17		%	0.16		%
Nonperforming assets to total assets	0.15		%	0.30		%
ACL on loans to nonaccrual loans held-for-investment	686.30		%	742.32		%

(1) Under the legacy loan segments and these loans are business property loans under the new loan segments.

The increase in nonaccrual loans held-for-investment was primarily due to loans placed on nonaccrual status of $1.6 million partially offset by paydowns and payoffs of $1.2 million during the nine months ended September 30, 2023. Nonperforming loans held-for-sale of $4.0 million at December 31, 2022 were paid off during the three months ended March 31, 2023.

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 $91 thousand and $253 thousand would have been recorded during the three and nine months ended September 30, 2023, respectively, had these loans been paid in accordance with their original terms throughout the periods indicated.

Deposits

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


($ in thousands)	September 30, 2023		December 31, 2022		Amount Change		Percentage Change
Noninterest-bearing demand deposits	$	611,021	$	734,989	$	(123,968)	(16.9)	%
Interest-bearing deposits:
Savings	6,846		8,579		(1,733)		(20.2)	%
NOW	16,076		11,405		4,671		41.0	%
Retail money market accounts	436,115		494,749		(58,634)		(11.9)	%
Brokered money market accounts	1		8		(7)		(87.5)	%
Retail time deposits of:
$250,000 or less	406,407		295,354		111,053		37.6	%
More than $250,000	454,406		353,876		100,530		28.4	%

Brokered time deposits	201,257		87,023		114,234		131.3	%
Time deposits from California State Treasurer	60,000		60,000		—		—	%
Total interest-bearing deposits	1,581,108		1,310,994		270,114		20.6	%
Total deposits	$	2,192,129	$	2,045,983	$	146,146	7.1	%

Total deposits not covered by deposit insurance	$	983,851	$	1,062,111	(78,260)		(7.4)	%
Time deposits not covered by deposit insurance	$	359,188	$	293,951	65,237		22.2	%

The decrease in noninterest-bearing demand deposits was primarily due to strong deposit market competition and the migration of noninterest-bearing demand deposits to interest-bearing deposits attributable to the rising market rates. To retain existing and attract new customers, the Bank offers competitive rates on deposit products in the rising interest rate environment.

The increase in retail time deposits was primarily due to new accounts of $469.0 million and renewals of the matured accounts of $291.3 million, partially offset by matured and closed accounts of $565.8 million.

As of September 30, 2023 and December 31, 2022, total deposits were comprised of 27.9% and 35.9%, respectively, of noninterest-bearing demand accounts, 20.9% and 25.2%, respectively, of savings, NOW and money market accounts, and 51.2% and 38.9%, respectively, of time deposits.

Deposits from certain officers, directors and their related interests with which they are associated held by the Company were $3.4 million and $2.8 million, respectively, at September 30, 2023 and December 31, 2022.

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		Over One Year		Total
September 30, 2023
Time deposits of $250,000 or less	$	235,285	$	192,030	$	177,798	$	2,551	$	607,664
Time deposits of more than $250,000	214,171		205,773		91,922		2,540		514,406
Total	$	449,456	$	397,803	$	269,720	$	5,091	$	1,122,070
Not covered by deposit insurance	$	158,260	$	141,304	$	57,779	$	1,845	$	359,188
December 31, 2022
Time deposits of $250,000 or less	$	71,740	$	71,808	$	229,127	$	9,702	$	382,377
Time deposits of more than $250,000	137,312		35,812		239,257		1,495		413,876
Total	$	209,052	$	107,620	$	468,384	$	11,197	$	796,253
Not covered by deposit insurance	$	112,437	$	26,749	$	153,209	$	1,556	$	293,951

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 $341.9 million at September 30, 2023, an increase of $6.4 million, or 1.9%, from $335.4 million at December 31, 2022. The increase was primarily due to net income of $24.8 million and cash proceeds from exercise of stock options of $1.3 million, partially offset by dividends declared on common stock of $7.3 million, stock repurchase of $7.9 million, a cumulative effect adjustment upon adoption of ASC 326 of $1.9 million, and an increase in accumulated other comprehensive loss of $2.9 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 requirements under the Federal Reserve’s “Small Bank Holding Company” policy. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital requirements 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 the dates indicated. 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		PCB Bank		Minimum Regulatory Requirements		Well Capitalized Requirements (Bank)
September 30, 2023
Common tier 1 capital (to risk-weighted assets)	13.07	%	15.87	%	4.5	%	6.5	%
Total capital (to risk-weighted assets)	17.48	%	17.11	%	8.0	%	10.0	%
Tier 1 capital (to risk-weighted assets)	16.24	%	15.87	%	6.0	%	8.0	%
Tier 1 capital (to average assets)	13.76	%	13.44	%	4.0	%	5.0	%
December 31, 2022
Common tier 1 capital (to risk-weighted assets)	13.29	%	16.30	%	4.5	%	6.5	%
Total capital (to risk-weighted assets)	17.83	%	17.52	%	8.0	%	10.0	%
Tier 1 capital (to risk-weighted assets)	16.62	%	16.30	%	6.0	%	8.0	%
Tier 1 capital (to average assets)	14.33	%	14.05	%	4.0	%	5.0	%

The Company and the Bank’s capital conservation buffer was 8.57% and 9.11%, respectively, as of September 30, 2023, and 8.79% and 9.52%, respectively, as of December 31, 2022.

Emergency Capital Investment Program

On May 24, 2022, the Company issued 69,141 shares of Series C Preferred Stock for the capital investment of $69.1 million from the U.S. Treasury under the ECIP. The ECIP investment qualifies as tier 1 capital for purposes of the bank regulatory capital requirements.

Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions and minority depository institutions to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially low-income and underserved communities, including persistent poverty counties, that may be disproportionately impacted by the economic effect of the COVID-19 pandemic by providing direct and indirect capital investments in low- and moderate-income community financial institutions.

Stock Repurchases

Liquidity

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

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

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

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

The following table presents a summary of the Company’s liquidity position as of the dates indicated:


($ in thousands)	September 30, 2023			December 31, 2022			Amount Change		Percentage Change
Cash and cash equivalents	$	192,350		$	147,031		$	45,319	30.8	%
Cash and cash equivalents to total assets	7.5		%	6.1		%

Available borrowing capacity:
FHLB advances	$	639,072		$	561,745		77,327		13.8	%
Federal Reserve Discount Window	490,633			23,902			466,731		1,952.7	%
Overnight federal funds lines	65,000			65,000			—		—	%
Total	$	1,194,705		$	650,647		$	544,058	83.6	%
Total available borrowing capacity to total assets	46.5		%	26.9		%

During the nine months ended September 30, 2023, the Company increased cash and cash equivalents by $45.3 million, or 30.8%, to $192.4 million and available borrowing capacity by $544.1 million, or 83.6%, to $1.19 billion. As of September 30, 2023, the Company's cash and cash equivalents and available borrowing capacity cover approximately 141.0% of deposits not covered by deposit insurance compared to 75.1% at December 31, 2022. During the three months ended September 30, 2023, the Company began participating in the Borrower-in Custody Program with Federal Reserve that provides additional borrowing capacity.

The Company also maintains relationships in the capital markets with brokers and dealers to issue time deposits and money market accounts.

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 Credit Exposures and Contractual Obligations

Off-Balance Sheet Credit Exposures

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

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

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

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


	September 30, 2023				December 31, 2022
($ in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	2,219	$	280,122	$	3,117	$	251,178
Unfunded loan commitments	762		49,595		692		38,486
Standby letters of credit	4,138		1,786		2,989		1,901
Commercial letters of credit	—		160		—		502
Total	$	7,119	$	331,663	$	6,798	$	292,067

Contractual Obligations

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


($ in thousands)	Within One Year		One to Three Years		Three to Five Years		Over Five Years		Total
September 30, 2023
Time deposits	$	1,116,979	$	4,878	$	213	$	—	$	1,122,070

Operating leases	1,732		2,795		1,243		616		6,386
Total	$	1,118,711	$	7,673	$	1,456	$	616	$	1,128,456
December 31, 2022
Time deposits	$	785,056	$	11,046	$	151	$	—	$	796,253
FHLB advances	20,000		—		—		—		20,000
Operating leases	2,718		2,484		1,282		845		7,329
Total	$	807,774	$	13,530	$	1,433	$	845	$	823,582

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 Secured Overnight Financing Rate (“SOFR”) (basis risk).

The Company’s Board Asset Liability Committee (“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. The Company also has a Management ALCO, which is comprised of the senior management team and the Chief Executive Officer, to proactively monitor interest rate risk.

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

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

Measurement

Interest rate risk exposure is measured and monitored through various risk management tools, which include a simulation model that performs interest rate sensitivity analyses under multiple interest rate scenarios. 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. The Company uses a static balance sheet to perform these analyses. 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 simulation reflects the effect of interest rate shifts on the value of the Company. In contrast to NII simulation, EVE simulation identifies risks arising from repricing or maturity gaps over the life of the balance sheet. The EVE approach provides a comparatively broader scope than the NII at Risk approach since it captures all anticipated cash flows.

Simulation results are highly dependent on input assumptions. To the extent the actual behavior is different from the assumption used in the models, there could be material changes in results. The assumptions applied in the model are documented, supported, and periodically back-tested to assess the reasonableness and effectiveness. The Company makes appropriate changes to the model as needed and these changes are reviewed by ALCO. The Company also continuously validates the model, methodology and results. Scenario results do not reflect strategies that the management could employ to limit the impact of changing interest rate expectations.

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 as of the dates indicated, but without giving effect to any steps that management might take to counteract that change:


	September 30, 2023				December 31, 2022
Simulated Rate Changes	Net Interest Income Sensitivity		Economic Value of Equity Sensitivity		Net Interest Income Sensitivity		Economic Value of Equity Sensitivity

+200	3.0	%	(7.8)	%	6.9	%	(0.5)	%
+100	1.6	%	(3.6)	%	3.6	%	0.3	%
-100	(2.5)	%	2.9	%	(4.6)	%	(1.5)	%

On July 26, 2023, the Federal Reserve raised the upper range of the Fed Funds Target Rate to 5.50%. On September 20, 2023, the Federal Reserve decided to maintain the upper range of the Fed Funds Target Rate at 5.50%. Holding the target range steady at the September meeting allows the Committee to assess additional information and its implications for monetary policy. The Federal Reserve noted that it remains highly attentive to inflation risk. The FOMC dot plot released alongside the September 20 release showed that 12 member sees one more rate increase by the end of 2023 while 7 members wanted to keep rates at current level through end of 2023. For 2024, the updated dot plot suggest a rate of approximately 5%, which is an increase from the June dot for 2024 of approximately 4.5%, suggesting that FOMC members are sticking with their “higher for longer” view.

As of September 30, 2023, the Company’s net interest income sensitivity results exhibit an asset sensitive profile. Net interest income is expected to increase when interest rates rise, as the Company has a large proportion of variable rate loans in its loan portfolio, primarily linked to Prime indices, that are sensitive to changes in short-term interest rates. The Company’s deposit portfolio is also sensitive to changes in short-term interest rates, even though a large portion of its deposit mix is composed of non-maturity deposits that are not directly tied to short-term interest rate indices. The modeled results are highly sensitive to reinvestment yield and deposit beta assumptions. Actual results in net interest income during a period of rising interest rates may vary from the Company’s net interest income sensitivity results, as the actual result reflects earnings asset growth and deposit mix changes based on customer preferences relative to the interest rate environment.

The Company’s EVE sensitivity reflects a slightly liability sensitive profile due to the continuing deposit mix shift from non-maturity deposits to time deposits. Due to the uncertainty of the current economic forecast, and timing and direction of future interest rate movements, actual result may vary from the Company’s EVE sensitivity results.

Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), as of September 30, 2023 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, 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

As of January 1, 2023, the Company adopted the CECL model under ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326).” The Company made changes to the loan loss reserve policies, processes and controls and incorporated new policies, process and controls over the estimation of ACL as a result. New controls were established over the review of PD and LGD model to calculate cash flows, economic forecasting projections and historical loss rate model provided by an independent third party. There has been no other changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II - Other Information

Item 1 - Legal Proceedings

In the normal course of business, the Company is involved in various legal claims. Management has reviewed all legal claims against the Company with counsel and have taken into consideration the views of such counsel as to the potential outcome of the claims in determining the accrued loss contingency. The Company did not have any accrued loss contingencies for legal claims at September 30, 2023. 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.

Network and Data Incident

On December 16, 2021, Plaintiff Min Woo Bae, individually and on behalf of all others similarly situated, filed in the Los Angeles County Superior Court a complaint based on the incident for damages, injunctive relief, and equitable relief, styled Min Woo Bae v. Pacific City Bank, Case Number 21STCV45922 (“the Matter”). During the three months ended September 30, 2023, the Bank agreed to settle this matter in exchange for $700 thousand to the putative class members, including costs of settlement administration, and attorneys’ fees and costs. The Bank received preliminary court approval of the settlement and notice was provided to members of the proposed class during the three months ended September 30, 2023. The settlement remains subject to a final approval hearing, which has been scheduled in the Superior Court for February, 2024.

The Company expects that the full amount of the final settlement will be covered under the Company’s applicable insurance policies.

Item 1A - Risk Factors

Management is not aware of any material changes, other than the noted above and included below, 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, 2022. 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, 2022, 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.

Recent negative developments affecting the banking industry, and resulting media coverage, have eroded customer and investor confidence in the banking system.

The recent high-profile bank failures involving Silicon Valley Bank, Signature Bank and First Republic Bank have generated significant market volatility among publicly traded bank holding companies and, in particular, regional and community banks like the Company. These market developments have negatively impacted customer confidence in the safety and soundness of regional and community banks. As a result, customers may choose to maintain deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact the Company’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements ensuring that depositors of these recently failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional and community banks and the banking system more broadly. Additionally, these recent events have, and could continue to, adversely impact the market price and volatility of the Company’s common stock independent from the Company’s actual underlying financial performance.

Any regulatory examination scrutiny or new regulatory requirements arising from the recent events in the banking industry could increase the Company’s expenses and affect the Company’s operations.

The Company also anticipates increased regulatory scrutiny – in the course of routine examinations and otherwise – and new regulations directed towards banks of similar size to the Bank, designed to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. Among other things, there may be an increased focus by both regulators and investors on deposit composition and the level of uninsured deposits. As primarily a commercial bank, the Bank has a high degree of uninsured deposits compared to larger national banks or smaller community banks with a stronger focus on retail deposits. As a result, the Bank could face increased scrutiny or be viewed as higher risk by regulators and the investor community.

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

There were no unregistered sales of equity securities during the three months ended September 30, 2023.

The following table presents share repurchase activities during the periods indicated:


($ in thousands, except per share data)	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Number of Shares That May Yet Be Purchased Under the Program
From July 1, 2023 to July 31, 2023	—	$	—	—	—
From August 1, 2023 to August 31, 2023	34,812	15.72		34,812	685,188
From September 1, 2023 to September 30, 2023	32,390	15.78		32,390	652,798
Total	67,202	$	15.75	67,202

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

On November 6, 2023, the Company notified The Nasdaq Stock Market (“Nasdaq”) of its inadvertent noncompliance with Nasdaq’s audit committee composition requirements set forth in Nasdaq Rule 5605(c), which requires, among other things, an audit committee to consist of at least three members, each of whom is independent under the standards applicable to audit committee members. On October 12, 2023, the Company’s management determined that Haeyoung Cho, a director of the Company who was then a member of the Audit Committee of the Board of Directors, did not satisfy the independence requirements for audit committee membership under Rule 10A-3(b)(1) under the Securities Exchange Act of 1934 and Nasdaq Rule 5605(c) because she receives consulting fees from the Company. Under Rule 10A-3(b)(1), a director may not be deemed independent for purposes of serving on a company’s audit committee if the director receives any consulting fees. Ms. Cho earns consulting fees of $60,000 per year pursuant to a consulting agreement with the Bank. To address this matter, on October 25, 2023, Ms. Cho resigned from the Audit Committee, leaving the committee with three independent members and satisfying the requirements of Nasdaq Rule 5605(c). Accordingly, the Company now complies with Rule 10A-3(b)(1) under the Securities Exchange Act and Nasdaq Rule 5605(c). At all times that Ms. Cho served on the Audit Committee, the decisions of the Audit Committee were approved by all of the members who met the heightened audit committee independence standards.

The notification to Nasdaq was made in accordance with Nasdaq Rule 5625, which requires a company with common stock listed on Nasdaq to report any noncompliance with Nasdaq’s Rule 5600 Series. This disclosure does not constitute an admission that the inadvertent noncompliance is material.

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

3.3

Certificate of Determination for Senior Non-Cumulative Perpetual Preferred Stock, Series C

8-K

001-38621

3.1

May 24, 2022

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-Q

001-38621

4.2

August 4, 2022

4.3

Form of Certificate for Senior Non-Cumulative Perpetual Preferred Stock, Series C

8-K

001-38621

4.1

May 24, 2022

10.1

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

S-1

333-226208

10.1

July 17, 2018

10.1A

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

10-Q

001-38621

10.1A

November 8, 2021

10.1B

Second Amendment to Employee Agreement, dated December 28, 2021, among PCB Bancorp, Pacific City Bank and Henry Kim

10-K

001-38621

10.1B

March 4, 2022

10.2

2023 Equity Based Compensation Plan

S-8

333-272874

4.1

June 23, 2023

10.3

Form of Stock Option Award Agreement under 2023 Equity Based Compensation Plan

8-K

001-38621

10.1

July 27, 2023

10.4

Form of Restricted Stock Award Agreement under 2023 Equity Based Compensation Plan

8-K

001-38621

10.2

July 27, 2023

10.5

2013 Equity Based Compensation Plan, as amended

S-1

333-226208

10.2

July 17, 2018

10.6

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

S-1

333-226208

10.3

July 17, 2018

10.7

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

S-1

333-226208

10.4

July 17, 2018

10.8

Letter Agreement, dated May 24, 2022, between PCB Bancorp and the U.S. Department of Treasury, with respect to the issuance of Senior Non-Cumulative Perpetual Preferred Stock, Series C

8-K

001-38621

10.1

May 24, 2022

31.1

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

31.2

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

32.1

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

32.2

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

101.INS

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

101.SCH

Inline XBRL Taxonomy Extension Schema Document*

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document*

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document*

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document*

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document*

104

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

* Filed herewith

** Furnished herewith

Signatures

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


		PCB Bancorp

Date:	November 8, 2023	/s/ Henry Kim
		Henry Kim
		President and Chief Executive Officer (Principal Executive Officer)

Date:	November 8, 2023	/s/ Timothy Chang
		Timothy Chang
		Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)