10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2022

or

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

For the transition period from                   to

Commission file number 001-38621

PCB BANCORP

(Exact name of registrant as specified in its charter)

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

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

(Address of principal executive offices) (Zip Code)

(213) 210-2000

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

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

Large accelerated filer	☐		Accelerated filer	☒
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☒
			Emerging growth company	☒

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

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

As of April 28, 2022, the registrant had outstanding 14,951,760 shares of common stock.

PCB Bancorp and Subsidiary

Quarterly Report on Form 10-Q

March 31, 2022

Table of Contents

Part I - Financial Information
Item 1.	Consolidated Financial Statements	5
	Consolidated Balance Sheets -March31, 2021 (Unaudited) and December 31, 2021	5
	Consolidated Statements of Income (Unaudited) - ThreeMonths EndedMarch31, 2022 and 2021	6
	Consolidated Statements of Comprehensive Income (Unaudited) -Three Months Ended March31, 2022 and 2021	7
	Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) -Three Months Ended March31, 2022 and 2021	8
	Consolidated Statements of Cash Flows (Unaudited) -Three Months Ended March31, 2022 and 2021	9
	Notes to Consolidated Financial Statements (Unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	55
Part II - Other Information
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	58
Signatures		59

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 industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

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

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

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

•factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance and our borrowers' actual payment performance as loan deferrals related to the COVID-19 pandemic expire;

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

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

•compliance with governmental and regulatory requirements, including the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act of 2020, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Economic Growth, Regulatory Relief and Consumer Protection Act and others relating to banking, consumer protection, securities and tax matters including, but not limited to the potential adverse impact of loan modifications and payment deferrals implemented consistent with recent regulatory guidance;

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

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

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

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

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

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

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

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

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

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

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

•changes in federal tax law or policy.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements and the risks described under “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and our other documents filed with the United States (“U.S.”) Securities Exchange Commission (“SEC”). Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this report. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is initially made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Item 1 - Consolidated Financial Statements

PCB Bancorp and Subsidiary

Consolidated Balance Sheets

($ in thousands, except share data)

	March 31, 2022		December 31, 2021
	(Unaudited)
Assets
Cash and due from banks	$	19,693	$	15,222
Interest-bearing deposits in other financial institutions	230,519		188,063
Total cash and cash equivalents	250,212		203,285
Securities available-for-sale, at fair value	131,345		123,198
Loans held-for-sale	18,340		37,026
Loans held-for-investment, net of deferred loan costs (fees)	1,742,955		1,732,205
Allowance for loan losses	(21,198)		(22,381)
Net loans held-for-investment	1,721,757		1,709,824
Premises and equipment, net	3,106		3,098
Federal Home Loan Bank and other restricted stock, at cost	8,577		8,577
Bank-owned life insurance	29,530		29,358
Deferred tax assets, net	11,895		10,824
Servicing assets	7,533		7,269
Operating lease assets	6,511		6,786
Accrued interest receivable	5,050		5,368
Other assets	5,886		5,122
Total assets	$	2,199,742	$	2,149,735
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	891,797	$	830,383
Savings, NOW and money market accounts	463,638		422,526
Time deposits of $250,000 or less	281,100		341,956
Time deposits of more than $250,000	273,844		272,269
Total deposits	1,910,379		1,867,134
Federal Home Loan Bank advances	10,000		10,000
Operating lease liabilities	7,176		7,444
Accrued interest payable and other liabilities	11,129		8,871
Total liabilities	1,938,684		1,893,449
Commitments and contingencies
Preferred stock, 10,000,000 shares authorized, no par value, no issued and outstanding shares	—		—
Common stock, 60,000,000 shares authorized, no par value; 14,944,663 and 14,865,825 shares issued and outstanding, respectively, and included 68,822 and 55,284 shares of unvested restricted stock, respectively, at March 31, 2022 and December 31, 2021	155,614		154,992
Retained earnings	109,142		101,140
Accumulated other comprehensive income (loss), net	(3,698)		154
Total shareholders’ equity	261,058		256,286
Total liabilities and shareholders’ equity	$	2,199,742	$	2,149,735

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Income (Unaudited)

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

	Three Months Ended March 31,
	2022		2021
Interest and dividend income:
Loans, including fees	$	20,190	$	18,744
Tax-exempt investment securities	36		36
Taxable investment securities	440		324
Other interest-earning assets	228		154
Total interest income	20,894		19,258
Interest expense:
Deposits	850		1,311
Other borrowings	51		128
Total interest expense	901		1,439
Net interest income	19,993		17,819
Reversal for loan losses	(1,191)		(1,147)
Net interest income after reversal for loan losses	21,184		18,966
Noninterest income:
Service charges and fees on deposits	303		293
Loan servicing income	700		882
Bank-owned life insurance income	172		—
Gain on sale of loans	3,777		1,322
Other income	334		360
Total noninterest income	5,286		2,857
Noninterest expense:
Salaries and employee benefits	8,595		6,182
Occupancy and equipment	1,397		1,371
Professional fees	403		494
Marketing and business promotion	207		138
Data processing	404		377
Director fees and expenses	169		138
Regulatory assessments	141		208
Other expenses	755		761
Total noninterest expense	12,071		9,669
Income before income taxes	14,399		12,154
Income tax expense	4,159		3,594
Net income	$	10,240	$	8,560
Earnings per common share, basic	$	0.69	$	0.55
Earnings per common share, diluted	$	0.67	$	0.55
Weighted-average common shares outstanding, basic	14,848,014		15,384,343
Weighted-average common shares outstanding, diluted	15,141,693		15,533,608

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

($ in thousands)

	Three Months Ended March 31,
	2022		2021
Net income	$	10,240	$	8,560
Other comprehensive loss:
Unrealized loss on securities available-for-sale arising during the period	(5,467)		(1,556)
Income tax benefit related to items of other comprehensive loss	1,615		458
Total other comprehensive loss, net of tax	(3,852)		(1,098)
Total comprehensive income	$	6,388	$	7,462

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

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

		Shareholders’ Equity
	Common Stock<br>Outstanding Shares	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
Balance at January 1, 2021	15,385,878	$	164,140	$	67,692	$	1,956	$	233,788
Comprehensive income (loss)
Net income	—	—		8,560		—		8,560
Other comprehensive loss, net of tax	—	—		—		(1,098)		(1,098)
Issuance of restricted stock	33,784	—		—		—		—
Forfeiture of restricted stock	(1,000)	—		—		—		—
Share-based compensation expense	—	90		—		—		90
Stock options exercised	49,580	468		—		—		468
Cash dividends declared on common stock ($0.10 per share)	—	—		(1,545)		—		(1,545)
Balance at March 31, 2021	15,468,242	$	164,698	$	74,707	$	858	$	240,263
Balance at January 1, 2022	14,865,825	$	154,992	$	101,140	$	154	$	256,286
Comprehensive income (loss)
Net income	—	—		10,240		—		10,240
Other comprehensive loss, net of tax	—	—		—		(3,852)		(3,852)
Issuance of restricted stock	25,000	—		—		—		—
Forfeiture of restricted stock	(200)	—		—		—		—
Share-based compensation expense	—	141		—		—		141
Stock options exercised	54,038	481		—		—		481
Cash dividends declared on common stock ($0.15 per share)	—	—		(2,238)		—		(2,238)
Balance at March 31, 2022	14,944,663	$	155,614	$	109,142	$	(3,698)	$	261,058

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

($ in thousands)

	Three Months Ended March 31,
	2022		2021
Cash flows from operating activities
Net income	$	10,240	$	8,560
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of premises and equipment	309		368
Net amortization of premiums on securities	135		310
Net accretion of discounts on loans	(908)		(745)
Net accretion of deferred loan fees	(1,165)		(1,220)
Amortization of servicing assets	531		391
Reversal for loan losses	(1,191)		(1,147)
Bank-owned life insurance income	(172)		—
Deferred tax expense	544		408
Stock-based compensation	141		90
Gain on sale of loans	(3,777)		(1,322)
Originations of loans held-for-sale	(21,240)		(20,425)
Proceeds from sales of and principal collected on loans held-for-sale	43,894		20,150
Change in accrued interest receivable and other assets	(780)		1,467
Change in accrued interest payable and other liabilities	2,601		1,905
Net cash provided by operating activities	29,162		8,790
Cash flows from investing activities
Purchase of securities available-for-sale	(19,915)		(20,223)
Proceeds from maturities and paydowns of securities available-for-sale	6,166		11,770
Net change in loans held-for-investment	(9,655)		(101,500)
Proceeds from sale of other real estate owned	—		1,100
Purchases of premises and equipment	(319)		(98)
Net cash used in investing activities	(23,723)		(108,951)
Cash flows from financing activities
Net change in deposits	43,245		158,920
Repayment of long-term Federal Home Loan Bank advances	—		(40,000)
Stock options exercised	481		468
Cash dividends paid on common stock	(2,238)		(1,545)
Net cash provided by financing activities	41,488		117,843
Net increase in cash and cash equivalents	46,927		17,682
Cash and cash equivalents at beginning of period	203,285		194,098
Cash and cash equivalents at end of period	$	250,212	$	211,780

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Consolidated Statements of Cash Flows, Continued (Unaudited)

(in thousands)

	Three Months Ended March 31,
	2022		2021
Supplemental disclosures of cash flow information:
Interest paid	$	1,102	$	2,678
Income taxes paid	36		24
Supplemental disclosures of non-cash investment activities:
Loans transferred to other real estate owned	—		905
Right of use assets obtained in exchange for lease obligations	335		105

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

PCB Bancorp and Subsidiary

Notes to Consolidated Financial Statements (Unaudited)

Note 1 - Basis of Presentation and Significant Accounting Policies

Nature of Operations

PCB Bancorp is a bank holding company whose subsidiary is Pacific City Bank (the “Bank”), which is a single operating segment. As of March 31, 2022, the Bank operated 11 full-service branches and two regional offices in Los Angeles and Orange counties, California, one full-service branch in each of Englewood Cliffs, New Jersey and Bayside, New York, and 7 out-of-state loan production offices (“LPOs”) in Annandale, Virginia; Atlanta, Georgia; Chicago, Illinois; Bellevue, Washington; Aurora, Colorado; 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, 2021 filed by the Company with the SEC. The December 31, 2021 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, 2021 filed with the SEC, but does not include all of the disclosures required by GAAP for complete financial statements.

In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations as of the dates and for the periods presented. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation. The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.

Principles of Consolidation

The consolidated financial statements include the accounts of PCB Bancorp and its wholly owned subsidiary as of March 31, 2022 and December 31, 2021, and for the three months ended March 31, 2022 and 2021. Significant inter-company accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiary.

Significant Accounting Policies

The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the banking industry. The Company has not made any significant changes in its critical accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2021 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.

Loan Modifications Related to the COVID-19 Pandemic

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

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

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

As of March 31, 2022 and December 31, 2021, the Company had no loans under modified terms related to the COVID-19 pandemic. All loans under modified terms related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs. All types of modifications had initial modification terms of 6-months or less and loans that were granted modifications related to the COVID-19 pandemic in excess of 6 months, on a cumulative basis, were classified as special mention or substandard. All of these loans were monitored on an ongoing basis in accordance with each loan’s covenants and conditions for potential changes in risk rating or accrual status.

Small Business Administration Paycheck Protection Program

The Small Business Administration (“SBA”) launched the Paycheck Protection Program (“PPP”) to provide a direct incentive for small businesses to keep their workers on the payroll in response to the COVID-19 pandemic. The SBA guarantees 100% of the PPP loans made to eligible borrowers, and the loans are eligible to be forgiven if certain conditions are met, at which point the SBA will make payments to the Bank for the forgiven amounts. These loans are included in the commercial and industrial loans portfolio and have an interest rate of 1%. The substantial majority of the SBA PPP loans funded in 2020 in the Company’s portfolio have a maturity of two years. On January 13, 2021, the SBA began accepting applications for second draw PPP loans. SBA PPP loans funded in 2021 have a maturity of five years. The Company defers loan origination fees on SBA PPP loans and amortizes these deferred fees and costs without prepayment assumption using the contractual lives of SBA PPP loans. As of March 31, 2022 and December 31, 2021, the Company had SBA PPP loans of $22.9 million and $65.3 million, respectively.

The SBA guarantee on PPP loans cannot be separated from the loan and therefore is not a separate unit of account. The Company considered the SBA guarantee in the allowance for loan losses evaluation and determined that it is not required to reserve an allowance on SBA PPP loans at March 31, 2022 and December 31, 2021.

Adopted Accounting Pronouncements

During the three months ended March 31, 2022, there were no significant accounting pronouncements applicable to the Company that became effective.

Recent Accounting Pronouncements Not Yet Adopted

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

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

The Company has formed a committee, developed an implementation plan, and engaged a software vendor to assist the Company to build a model. The Company is in the process of completing a readiness assessment and is engaged in the implementation phase of the project. The Company is working on: (i) developing a new expected loss model with supportable assumptions; (ii) identifying data, reporting, and disclosure gaps; (iii) assessing updates to accounting and credit risk policies; and (iv) documenting new processes and controls. Based on the Company’s initial assessment of this ASU, the Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses which could potentially have a material impact on its consolidated financial statements as of the beginning of the first reporting period in which this ASU is effective.

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 eliminates 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 Update 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 will adopt this ASU at January 1, 2023, the effective date of ASU 2016-13.

Note 2 - Fair Value Measurements

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

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

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

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

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

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

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

	Fair Value Measurement Level
($ in thousands)	Quoted Prices in Active Markets for Identical Assets<br><br>(Level 1)		Significant Other Observable Inputs<br>(Level 2)		Significant Unobservable Inputs<br>(Level 3)		Total
March 31, 2022
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	82,232	$	—	$	82,232
Residential collateralized mortgage obligations	—		27,097		—		27,097
SBA loan pool securities	—		11,627		—		11,627
Municipal bonds	—		5,471		—		5,471
Corporate bonds	—		4,918		—		4,918
Total securities available-for-sale	—		131,345		—		131,345
Total assets measured at fair value on a recurring basis	$	—	$	131,345	$	—	$	131,345
Total liabilities measured at fair value on a recurring basis	$	—	$	—	$	—	$	—
December 31, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	—	$	84,713	$	—	$	84,713
Residential collateralized mortgage obligations	—		19,056		—		19,056
SBA loan pool securities	—		8,672		—		8,672
Municipal bonds	—		5,686		—		5,686
Corporate bonds	—		5,071		—		5,071
Total securities available-for-sale	—		123,198		—		123,198
Total assets measured at fair value on a recurring basis	$	—	$	123,198	$	—	$	123,198
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<br><br>(Level 1)		Significant Other Observable Inputs<br>(Level 2)		Significant Unobservable Inputs<br>(Level 3)		Total
March 31, 2022
Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—
Total liabilities measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—
December 31, 2021
Impaired loans:
SBA property	$	—	$	—	$	17	$	17
Total impaired loans	—		—		17		17
Total assets measured at fair value on a non-recurring basis	$	—	$	—	$	17	$	17
Total liabilities measured at fair value on a non-recurring basis	$	—	$	—	$	—	$	—

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

($ in thousands)	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted-Average)
December 31, 2021
Impaired loans:
SBA property	$	17	Fair value of collateral	NM	NM

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

	Three Months Ended March 31,
($ in thousands)	2022		2021
Collateral dependent impaired loans:
SBA property	$	—	$	(17)
Commercial lines of credit	—		136
SBA commercial term	—		(5)
Other real estate owned	—		75
Net gains (losses) recognized	$	—	$	189

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:

		Fair Value			Fair Value Measurements
( in thousands)				Level 1			Level 2			Level 3
March 31, 2022
Financial assets:
Interest-bearing deposits in other financial institutions	230,519	$	230,519		$	230,519		$	—		$	—
Securities available-for-sale		131,345			—			131,345			—
Loans held-for-sale		20,286			—			20,286			—
Net loans held-for-investment		1,726,579			—			—			1,726,579
Federal Home Loan Bank (“FHLB”) and other restricted stock		N/A			N/A			N/A			N/A
Accrued interest receivable		5,050			21			281			4,748
Financial liabilities:
Deposits	1,910,379	$	1,908,619		$	—		$	—		$	1,908,619
FHLB advances		10,027			—			10,027			—
Accrued interest payable		571			—			1			570
December 31, 2021
Financial assets:
Interest-bearing deposits in other financial institutions	188,063	$	188,063		$	188,063		$	—		$	—
Securities available-for-sale		123,198			—			123,198			—
Loans held-for-sale		41,079			—			41,079			—
Net loans held-for-investment		1,725,022			—			—			1,725,022
FHLB and other restricted stock		N/A			N/A			N/A			N/A
Accrued interest receivable		5,368			1			337			5,030
Financial liabilities:
Deposits	1,867,134	$	1,867,635		$	—		$	—		$	1,867,635
FHLB advances		10,087			—			10,087			—
Accrued interest payable		771			—			1			770

All values are in US Dollars.

Note 3 - Investment Securities

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

($ in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value
March 31, 2022
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	87,288	$	3	$	(5,059)	$	82,232
Residential collateralized mortgage obligations	27,419		22		(344)		27,097
SBA loan pool securities	11,774		33		(180)		11,627
Municipal bonds	5,318		154		(1)		5,471
Corporate bonds	5,000		—		(82)		4,918
Total securities available-for-sale	$	136,799	$	212	$	(5,666)	$	131,345
December 31, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	85,346	$	625	$	(1,258)	$	84,713
Residential collateralized mortgage obligations	18,990		113		(47)		19,056
SBA loan pool securities	8,520		156		(4)		8,672
Municipal bonds	5,329		357		—		5,686
Corporate bonds	5,000		71		—		5,071
Total securities available-for-sale	$	123,185	$	1,322	$	(1,309)	$	123,198

As of March 31, 2022 and December 31, 2021, pledged securities were $110.7 million and $110.9 million, respectively. These securities were pledged for the State Deposit from the California State Treasurer.

The following table presents the amortized cost and fair value of the 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.

	March 31, 2022
($ in thousands)	Amortized Cost		Fair Value
Within one year	$	302	$	303
One to five years	1,845		1,852
Five to ten years	5,826		5,747
Greater than ten years	2,345		2,487
Residential mortgage-backed securities, residential collateralized mortgage obligations and SBA loan pool securities	126,481		120,956
Total	$	136,799	$	131,345

The Company had no proceeds from sales and calls of securities available-for-sale during the three months ended March 31, 2022 and 2021.

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

	Length of Time that Individual Securities Have Been In a Continuous Unrealized Loss Position
	Less Than 12 Months					12 Months or Longer					Total
($ in thousands)	Fair Value		Gross Unrealized Losses		Number of Securities	Fair Value		Gross Unrealized Losses		Number of Securities	Fair Value		Gross Unrealized Losses		Number of Securities
March 31, 2022
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	59,115	$	(2,806)	87	$	22,661	$	(2,253)	14	$	81,776	$	(5,059)	101
Residential collateralized mortgage obligations	7,706		(344)		28	—		—		—	7,706		(344)		28
SBA loan pool securities	7,302		(178)		11	85		(2)		1	7,387		(180)		12
Municipal bonds	261		(1)		1	—		—		—	261		(1)		1
Corporate bonds	4,918		(82)		1	—		—		—	4,918		(82)		1
Total securities available-for-sale	$	79,302	$	(3,411)	128	$	22,746	$	(2,255)	15	$	102,048	$	(5,666)	143
December 31, 2021
Securities available-for-sale:
U.S. government agency and U.S. government sponsored enterprise securities:
Residential mortgage-backed securities	$	46,945	$	(931)	32	$	8,885	$	(327)	5	$	55,830	$	(1,258)	37
Residential collateralized mortgage obligations	2,897		(47)		4	—		—		—	2,897		(47)		4
SBA loan pool securities	—		—		—	156		(4)		1	156		(4)		1
Total securities available-for-sale	$	49,842	$	(978)	36	$	9,041	$	(331)	6	$	58,883	$	(1,309)	42

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

All individual securities in a continuous unrealized loss position for 12 months or more as of March 31, 2022 and December 31, 2021 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of March 31, 2022 and December 31, 2021. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the three months ended March 31, 2022 and 2021.

Note 4 - Loans and Allowance for Loan Losses

Loans Held-For-Investment

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

($ in thousands)	March 31, 2022		December 31, 2021
Real estate loans:
Commercial property	$	1,150,101	$	1,105,843
Residential property	215,132		209,485
SBA property	129,400		129,661
Construction	9,522		8,252
Total real estate loans	1,504,155		1,453,241
Commercial and industrial loans:
Commercial term	69,836		73,438
Commercial lines of credit	107,406		100,936
SBA commercial term	16,880		17,640
SBA PPP	22,926		65,329
Total commercial and industrial loans	217,048		257,343
Other consumer loans	21,752		21,621
Loans held-for-investment	1,742,955		1,732,205
Allowance for loan losses	(21,198)		(22,381)
Net loans held-for-investment	$	1,721,757	$	1,709,824

The Company had no loans under modified terms related to the COVID-19 pandemic as of March 31, 2022 and December 31, 2021.

In the ordinary course of business, the Company may grant loans to certain officers and directors, and the companies with which they are associated. As of March 31, 2022 and December 31, 2021, the Company had $138 thousand and $398 thousand, respectively, of such loans outstanding.

Allowance for Loan Losses

The following table presents the activities in allowance for loan losses by portfolio segment, which is consistent with the Company’s methodology for determining allowance for loan losses, for the periods indicated:

($ in thousands)	Real Estate		Commercial and Industrial		Other Consumer		Total
Balance at January 1, 2022	$	16,797	$	5,310	$	274	$	22,381
Charge-offs	—		—		(12)		(12)
Recoveries on loans previously charged off	—		5		15		20
Reversal for loan losses	(195)		(959)		(37)		(1,191)
Balance at March 31, 2022	$	16,602	$	4,356	$	240	$	21,198
Balance at January 1, 2021	$	18,894	$	7,222	$	394	$	26,510
Charge-offs	(18)		(5)		(22)		(45)
Recoveries on loans previously charged off	30		149		17		196
Reversal for loan losses	(213)		(898)		(36)		(1,147)
Balance at March 31, 2021	$	18,693	$	6,468	$	353	$	25,514

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

($ in thousands)	Real Estate		Commercial and Industrial		Other Consumer		Total
March 31, 2022
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	—	$	—	$	—
Collectively evaluated for impairment	16,602		4,356		240		21,198
Total	$	16,602	$	4,356	$	240	$	21,198
Loans receivable:
Individually evaluated for impairment	$	1,754	$	204	$	—	$	1,958
Collectively evaluated for impairment	1,502,401		216,844		21,752		1,740,997
Total	$	1,504,155	$	217,048	$	21,752	$	1,742,955
December 31, 2021
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	—	$	—	$	—
Collectively evaluated for impairment	16,797		5,310		274		22,381
Total	$	16,797	$	5,310	$	274	$	22,381
Loans receivable:
Individually evaluated for impairment	$	1,314	$	221	$	—	$	1,535
Collectively evaluated for impairment	1,451,927		257,122		21,621		1,730,670
Total	$	1,453,241	$	257,343	$	21,621	$	1,732,205

Credit Quality Indicators

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

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

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

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

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

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

($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2022
Real estate loans:
Commercial property	$	1,145,433	$	2,822	$	1,846	$	—	$	1,150,101
Residential property	214,671		—		461		—		215,132
SBA property	127,442		250		1,708		—		129,400
Construction	9,522		—		—		—		9,522
Commercial and industrial loans:
Commercial term	67,567		1,188		1,081		—		69,836
Commercial lines of credit	106,305		1,101		—		—		107,406
SBA commercial term	16,423		201		256		—		16,880
SBA PPP	22,926		—		—		—		22,926
Other consumer loans	21,727		—		25		—		21,752
Total	$	1,732,016	$	5,562	$	5,377	$	—	$	1,742,955
December 31, 2021
Real estate loans:
Commercial property	$	1,092,253	$	11,739	$	1,851	$	—	$	1,105,843
Residential property	209,485		—		—		—		209,485
SBA property	127,518		251		1,892		—		129,661
Construction	8,252		—		—		—		8,252
Commercial and industrial loans:
Commercial term	68,626		3,698		1,114		—		73,438
Commercial lines of credit	98,785		2,151		—		—		100,936
SBA commercial term	17,111		253		276		—		17,640
SBA PPP	65,329		—		—		—		65,329
Other consumer loans	21,586		—		35		—		21,621
Total	$	1,708,945	$	18,092	$	5,168	$	—	$	1,732,205

Past Due and Nonaccrual Loans

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

	Still Accruing
($ in thousands)	30 to 59 Days Past Due		60 to 89 Days Past Due		90 or More Days Past Due		Nonaccrual		Total Past Due and Nonaccrual
March 31, 2022
Real estate loans:
Residential property	$	—	$	—	$	—	$	461	$	461
SBA property	—		—		—		733		733
Commercial and industrial loans:
SBA commercial term	—		—		—		199		199
Other consumer loans	119		1		—		25		145
Total	$	119	$	1	$	—	$	1,418	$	1,538
December 31, 2021
Real estate loans:
Residential property	$	461	$	—	$	—	$	—	$	461
SBA property	—		—		—		746		746
Commercial and industrial loans:
SBA commercial term	—		—		—		213		213
Other consumer loans	88		5		—		35		128
Total	$	549	$	5	$	—	$	994	$	1,548

There were no nonaccrual loans guaranteed by a U.S. government agency at March 31, 2022 and December 31, 2021.

Impaired Loans

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

	With No Allowance Recorded				With an Allowance Recorded
($ in thousands)	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance		Related Allowance
March 31, 2022
Real estate loans:
Commercial property	$	324	$	323	$	—	$	—	$	—
Residential property	461		461		—		—		—
SBA property	969		1,011		—		—		—
Commercial and industrial loans:
SBA commercial term	204		212		—		—		—
Total	$	1,958	$	2,007	$	—	$	—	$	—
December 31, 2021
Real estate loans:
Commercial property	$	326	$	325	$	—	$	—	$	—
SBA property	988		1,033		—		—		—
Commercial and industrial loans:
Commercial term	2		2		—		—		—
SBA commercial term	219		227		—		—		—
Total	$	1,535	$	1,587	$	—	$	—	$	—

The following table presents information on the recorded investment in impaired loans by portfolio segment for the periods indicated:

	Three Months Ended March 31,
	2022				2021
($ in thousands)	Average Recorded Investment		Interest Income		Average Recorded Investment		Interest Income
Real estate loans:
Commercial property	$	325	$	5	$	332	$	6
Residential property	461		—		—		—
SBA property	979		3		1,342		7
Commercial and industrial loans:
Commercial term	1		—		16		—
SBA commercial term	211		—		288		—
Total	$	1,977	$	8	$	1,978	$	13

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

	Three Months Ended March 31,
($ in thousands)	2022		2021
Interest income that would have been recognized had impaired loans performed in accordance with their original terms	$	26	$	28
Less: interest income recognized on impaired loans on a cash basis	(8)		(13)
Interest income foregone on impaired loans	$	18	$	15

Troubled Debt Restructurings

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

	March 31, 2022						December 31, 2021
($ in thousands)	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
Real estate loans:
Commercial property	$	324	$	—	$	324	$	326	$	—	$	326
SBA property	236		15		251		242		17		259
Commercial and industrial loans:
Commercial term	—		—		—		2		—		2
SBA commercial term	5		—		5		6		—		6
Total	$	565	$	15	$	580	$	576	$	17	$	593

There were no new loans that were modified as TDRs for the three months ended March 31, 2022 and 2021.

The Company had no commitments to lend to customers with outstanding loans that were classified as TDRs as of March 31, 2022 and December 31, 2021.

The determination of the allowance for loan losses related to TDRs depends on the collectability of principal and interest, according to the modified repayment terms. Loans that were modified as TDRs were individually evaluated for impairment and the Company allocated no allowance for loan losses as of March 31, 2022 and December 31, 2021.

There were no loans that were modified as TDRs for which there was a payment default within twelve months following the modification for the three months ended March 31, 2022 and 2021.

Purchases, Sales, and Transfers

The Company had no loans that were transferred between loans held-for investment and loans held-for-sale, and no purchases of loans held-for-investment during the three months ended March 31, 2022 and 2021.

Loans Held-For-Sale

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

($ in thousands)	March 31, 2022		December 31, 2021
Real estate loans:
SBA property	$	16,892	$	33,603
Commercial and industrial loans:
SBA commercial term	1,448		3,423
Total	$	18,340	$	37,026

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

Note 5 - Servicing Assets

At March 31, 2022 and December 31, 2021, total servicing assets were $7.5 million and $7.3 million, respectively. The Company sells SBA loans and certain residential property loans with servicing retained. The Company sold loans of $39.7 million and $10.9 million, respectively, with the servicing rights retained and recognized a net gain on sale of $3.8 million and $1.2 million, respectively, during the three months ended March 31, 2022 and 2021. Loan servicing income was $700 thousand and $882 thousand for the three months ended March 31, 2022 and 2021, respectively.

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

	March 31, 2022									December 31, 2021
($ in thousands)	Residential Property			SBA Property			SBA Commercial Term			Residential Property			SBA Property			SBA Commercial Term
Carrying amount	$	76		$	6,984		$	473		$	86		$	6,701		$	482
Fair value	$	125		$	10,623		$	625		$	126		$	11,196		$	734
Discount rate	4.89		%	8.31		%	10.64		%	6.33		%	8.75		%	9.64		%
Prepayment speed	22.60		%	12.22		%	19.28		%	24.40		%	9.80		%	12.77		%
Weighted average remaining life	21.7 years			21.5 years			6.3 years			21.9 years			21.4 years			6.2 years
Underlying loans being serviced	$	15,708		$	456,355		$	59,120		$	17,443		$	442,424		$	59,839

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

	Three Months Ended March 31,
	2022						2021
($ in thousands)	Residential Property		SBA Property		SBA Commercial Term		Residential Property		SBA Property		SBA Commercial Term
Balance at beginning of period	$	86	$	6,701	$	482	$	109	$	5,642	$	649
Additions	—		745		50		—		207		37
Amortization	(10)		(462)		(59)		(4)		(330)		(57)
Balance at end of period	$	76	$	6,984	$	473	$	105	$	5,519	$	629

Note 6 - Other Real Estate Owned

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

	Three Months Ended March 31,
($ in thousands)	2022		2021
Balance at beginning of period	$	—	$	1,401
Additions	—		1,960
Sales	—		(1,025)
Net change in valuation allowance	—		—
Balance at end of period	$	—	$	2,336

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

	Three Months Ended March 31,
($ in thousands)	2022		2021
Balance at beginning of period	$	—	$	—
Additions	—		—
Net direct write-downs and removal from sale	—		—
Balance at end of period	$	—	$	—

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

	Three Months Ended March 31,
($ in thousands)	2022		2021
Net (gain) loss on sales	$	—	$	(75)
Operating expenses, net of rental income	—		63
Total	$	—	$	(12)

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

Note 7 - Operating Leases

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

	Three Months Ended March 31,
($ in thousands)	2022		2021
Operating lease cost (1)	$	665	$	651
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	719	$	699
Right of use assets obtained in exchange for lease obligations	$	335	$	105

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

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

($ in thousands)	March 31, 2022			December 31, 2021
Operating leases:
Operating lease assets	$	6,511		$	6,786
Operating lease liabilities	$	7,176		$	7,444
Weighted-average remaining lease term	3.9 years			4.0 years
Weighted-average discount rate	2.34		%	2.36		%

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

($ in thousands)	March 31, 2022
Maturities:
2022	$	2,141
2023	2,376
2024	940
2025	842
2026	575
After 2026	732
Total lease payment	7,606
Imputed Interest	(430)
Present value of operating lease liabilities	$	7,176

Note 8 - Federal Home Loan Bank Advances and Other Borrowings

FHLB Advances

The Company had an outstanding FHLB advance of $10.0 million at March 31, 2022 and December 31, 2021. The FHLB advance was a fixed interest rate term borrowing with a maturity date of June 29, 2022 (original maturity term of five years) and an interest rate of 2.07%. Each borrowing is payable at its maturity date. Borrowings paid early are subject to a prepayment penalty.

At March 31, 2022 and December 31, 2021, loans pledged to secure borrowings from the FHLB were $1.01 billion and $982.7 million, respectively. The Company’s investment in capital stock of the FHLB of San Francisco totaled $8.4 million and $8.4 million at March 31, 2022 and December 31, 2021, respectively. The Company had additional borrowing capacity of $527.4 million and $516.2 million from the FHLB as of March 31, 2022 and December 31, 2021, respectively.

Other Borrowing Arrangements

At March 31, 2022, the Company had $26.5 million of unused borrowing capacity from the Federal Reserve Discount Window, to which the Company pledged loans with a carrying value of $33.5 million with no outstanding borrowings. In addition, the Company may borrow up to approximately $65.0 million overnight federal funds lines with correspondent financial institutions at March 31, 2022.

Note 9 - Shareholders’ Equity

Stock Repurchase

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

Note 10 - Share-Based Compensation

On July 25, 2013, the Company adopted the 2013 Equity Based Stock Compensation Plan (“2013 EBSC Plan”) approved by its shareholders to replace the 2003 Stock Option Plan. The 2013 EBSC Plan provides 1,090,926 shares of common stock for equity based compensation awards including incentive and non-qualified stock options and restricted stock awards. As of March 31, 2022, there were 413,370 shares available for future grants.

Share-Based Compensation Expense

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

	Three Months Ended March 31,
($ in thousands)	2022		2021
Share-based compensation expense related to:
Stock options	$	47	$	28
Restricted stock awards	94		62
Total share-based compensation expense	$	141	$	90
Related tax benefits	$	29	$	20

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

	March 31, 2022
($ in thousands)	Unrecognized Expense		Weighted-Average Remaining Expected Recognition Period
Unrecognized share-based compensation expense related to:
Stock options	$	446	3.5 years
Restricted stock awards	993		3.4 years
Total unrecognized share-based compensation expense	$	1,439	3.4 years

Stock Options

The following table represents stock option activity for the period indicated:

	Three Months Ended March 31, 2022
($ 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	632,772	$	11.47	4.5 years	$	6,641
Granted	30,000	$	22.61	10.0 years
Exercised	(54,038)	$	8.91	2.9 years
Outstanding at end of period	608,734	$	12.24	4.7 years	$	6,519
Exercisable at end of period	486,734	$	10.70	3.8 years	$	5,964

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

	Three Months Ended March 31, 2022
	Number of Shares	Weighted-Average Exercise Price Per Share
Outstanding at beginning of period	107,099	$	16.70
Granted	30,000	$	22.61
Vested	(15,099)	$	14.69
Outstanding at end of period	122,000	$	18.40

Restricted Stock Awards

The following table represents RSAs activity for the period indicated:

	Three Months Ended March 31, 2022
	Number of Shares	Weighted-Average Grant Date Fair Value Per Share
Outstanding at beginning of period	55,284	$	12.79
Granted	25,000	$	21.96
Vested	(11,262)	$	10.36
Forfeited	(200)	$	17.09
Outstanding at end of period	68,822	$	16.51

Note 11 - Income Taxes

Income tax expense was $4.2 million and $3.6 million, respectively, and the effective tax rate was 28.9% and 29.6%, respectively, for the three months ended March 31, 2022 and 2021.

At March 31, 2022 and December 31, 2021, the Company had no unrecognized tax benefits or related accrued interest.

The Company and its subsidiaries are subject to U.S. federal and various state jurisdictions income tax examinations. As of March 31, 2022, the Company is no longer subject to examination by taxing authorities for tax years before 2018 for federal taxes and before 2017 for various state jurisdictions. The statute of limitations vary by state, and state taxes other than California have been minimal and immaterial to the Company’s financial results.

Note 12 - Earnings Per Share

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

	Three Months Ended March 31,
($ in thousands, except per share)	2022		2021
Basic earnings per share:
Net income	$	10,240	$	8,560
Less: income allocated to unvested restricted stock	(48)		(33)
Net income allocated to common stock	$	10,192	$	8,527
Weighted-average total common shares outstanding	14,918,594		15,443,120
Less: weighted-average unvested restricted stock	(70,580)		(58,777)
Weighted-average common shares outstanding, basic	14,848,014		15,384,343
Basic earnings per share	$	0.69	$	0.55
Diluted earnings per share:
Net income allocated to common stock	$	10,192	$	8,527
Weighted-average common shares outstanding, basic	14,848,014		15,384,343
Diluted effect of stock options	293,679		149,265
Weighted-average common shares outstanding, diluted	15,141,693		15,533,608
Diluted earnings per share	$	0.67	$	0.55

There were 60,000 and 173,000 stock options excluded in computing diluted EPS because they were anti-dilutive for three months ended March 31, 2022 and 2021, respectively.

Note 13 - Commitments and Contingencies

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

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

	March 31, 2022				December 31, 2021
($ in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	5,621	$	170,121	$	8,261	$	160,739
Unfunded loan commitments	1,080		34,489		595		29,688
Standby letters of credit	3,343		1,431		3,078		1,431
Commercial letters of credit	10		721		91		524
Total	$	10,054	$	206,762	$	12,025	$	192,382

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

The Company’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for the loans reflected in the consolidated financial statements. The Company maintained a reserve for off-balance sheet items of $216 thousand and $214 thousand, respectively, at March 31, 2022 and December 31, 2021, in Accrued Interest Payable and Other Liabilities in the Consolidated Balance Sheets.

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

Litigation

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

COVID-19 Pandemic

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

Network and Data Incident

On August 30, 2021, the Bank identified unusual activity on its network. 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 has been working with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/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. The Bank expresses no opinion on the merits of the Matter and intends to answer, respond, and/or otherwise vigorously defend itself from the claims and causes of action asserted in the complaint to the fullest extent permitted by applicable law. Those defenses will be based in part on the fact that the Bank has implemented security procedures, practices, and a robust information security program pursuant to guidance from financial regulators.

The Company continues to monitor and evaluate the data incident for its magnitude and concomitant financial, legal or reputational consequences. During the year ended December 31, 2021, expenses associated with the data incident totaled $100 thousand, which represents the retention amount on its insurance claims. There were no additional expenses associated with the data incident during the three months ended March 31, 2022.

Note 14 - Regulatory Matters

Under the final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”), the Bank must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios. Management believes as of March 31, 2022 and December 31, 2021, the Bank met all capital adequacy requirements to which they are subject to. Based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” that increased the threshold to $3 billion in assets in August 2018, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in the following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. The Company and the Bank’s capital conservation buffer was 7.97% and 7.63%, respectively, as of March 31, 2022, and 8.04% and 7.73%, respectively, as of December 31, 2021. Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital. The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:

	Actual				Minimum Capital Requirement				To Be Well Capitalized Under Prompt Corrective Provisions
($ in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2022
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	$	264,283	14.77	%	$	80,523	4.5	%	N/A		N/A
Total capital (to risk-weighted assets)	285,697		15.97	%	143,152		8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	264,283		14.77	%	107,364		6.0	%	N/A		N/A
Tier 1 capital (to average assets)	264,283		12.22	%	86,487		4.0	%	N/A		N/A
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	$	258,207	14.43	%	$	80,520	4.5	%	$	116,307	6.5	%
Total capital (to risk-weighted assets)	279,621		15.63	%	143,147		8.0	%	178,934		10.0	%
Tier 1 capital (to risk-weighted assets)	258,207		14.43	%	107,360		6.0	%	143,147		8.0	%
Tier 1 capital (to average assets)	258,207		11.94	%	86,485		4.0	%	108,106		5.0	%
December 31, 2021
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	$	255,650	14.79	%	$	77,762	4.5	%	N/A		N/A
Total capital (to risk-weighted assets)	277,263		16.04	%	138,244		8.0	%	N/A		N/A
Tier 1 capital (to risk-weighted assets)	255,650		14.79	%	103,683		6.0	%	N/A		N/A
Tier 1 capital (to average assets)	255,650		12.11	%	84,445		4.0	%	N/A		N/A
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	$	250,145	14.48	%	$	77,761	4.5	%	$	112,321	6.5	%
Total capital (to risk-weighted assets)	271,757		15.73	%	138,241		8.0	%	172,801		10.0	%
Tier 1 capital (to risk-weighted assets)	250,145		14.48	%	103,681		6.0	%	138,241		8.0	%
Tier 1 capital (to average assets)	250,145		11.85	%	84,443		4.0	%	105,554		5.0	%

On December 16, 2021, the Treasury informed the Company, that the Treasury has reviewed the Company’s application to receive a capital investment from the Treasury under the ECIP, and that the Company would be eligible to receive an ECIP investment in an amount up to approximately $69.1 million in the form of non-dilutive Tier 1 senior perpetual preferred capital. The Company determined to accept the offer to receive the ECIP investment for the full amount and it expects to close in the second quarter of 2022.

Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions and minority depository institutions such as the Bank to augment their efforts to support small businesses and consumers in their communities.

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

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

Note 15 - Revenue Recognition

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

	Three Months Ended March 31,
($ in thousands)	2022		2021
Noninterest income in-scope of Topic 606
Service charges and fees on deposits:
Monthly service fees	$	21	$	20
Account analysis fees	215		210
Non-sufficient funds charges	47		49
Other deposit related fees	20		14
Total service charges and fees on deposits	303		293
Debit card fees	84		59
Gain (loss) on sale of other real estate owned	—		75
Wire transfer fees	159		135
Other service charges	45		52
Total	$	591	$	614

Note 16 - Subsequent Events

Dividend Declared on Common Stock. On April 28, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.15 per common share. The dividend will be paid on or about May 13, 2022, to shareholders of record as of the close of business on May 20, 2022.

The Company has evaluated the effects of events that have occurred subsequent to March 31, 2022 through the issuance date of these consolidated financial statements (unaudited). Other than the event described above, there have been no material events that would require disclosure in the consolidated financial statements or in the notes to the consolidated financial statements.

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

The following is management’s discussion and analysis of the major factors that influenced the Company’s results of operations and financial condition as of and for the three months ended March 31, 2022. This analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 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, 2021 and in Note 1 to Consolidated Financial Statements (unaudited) included in Part I of this Quarterly Report on Form 10-Q.

Non-GAAP Measures

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

The following table presents reconciliation of allowance for loan losses to loans held-for-investment, excluding SBA PPP loans to its most comparable GAAP measure. The Company believes that this non-GAAP measure enhances comparability to prior periods in which there were no SBA PPP loans and provides supplemental information regarding the Company’s credit quality trend.

($ in thousands)	March 31, 2022			December 31, 2021			March 31, 2021
Loans held-for-investment	$	1,742,955		$	1,732,205		$	1,685,916
Less: SBA PPP loans	22,926			65,329			218,709
Loans held-for-investment, excluding SBA PPP loans	$	1,720,029		$	1,666,876		$	1,467,207
Allowance for loan losses	$	21,198		$	22,381		$	25,514
Allowance for loan losses to loans held-for-investment	1.22		%	1.29		%	1.51		%
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans	1.23		%	1.34		%	1.74		%

Selected Financial Data

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

	As of or For the Three Months Ended March, 31
($ in thousands, except per share data)	2022			2021
Selected balance sheet data:
Cash and cash equivalents	$	250,212		$	211,780
Securities available-for-sale	131,345			127,114
Loans held-for-sale	18,340			3,569
Loans held-for-investment, net of deferred loan costs (fees)	1,742,955			1,685,916
Allowance for loan losses	(21,198)			(25,514)
Total assets	2,199,742			2,050,672
Total deposits	1,910,379			1,753,771
Shareholders’ equity	261,058			240,263
Selected income statement data:
Interest income	$	20,894		$	19,258
Interest expense	901			1,439
Net interest income	19,993			17,819
Reversal for loan losses	(1,191)			(1,147)
Noninterest income	5,286			2,857
Noninterest expense	12,071			9,669
Income before income taxes	14,399			12,154
Income tax expense	4,159			3,594
Net income	10,240			8,560
Per share data:
Earnings per common share, basic	$	0.69		$	0.55
Earnings per common share, diluted	0.67			0.55
Book value per common share (1)	17.47			15.53
Cash dividends declared per common share	0.15			0.10
Outstanding share data:
Number of common shares outstanding	14,944,663			15,468,242
Weighted-average common shares outstanding, basic	14,848,014			15,384,343
Weighted-average common shares outstanding, diluted	15,141,693			15,533,608
Selected performance ratios:
Return on average assets (2)	1.92		%	1.75		%
Return on average shareholders’ equity (2)	16.01		%	14.66		%
Dividend payout ratio (3)	21.74		%	18.18		%
Efficiency ratio (4)	47.75		%	46.76		%
Yield on average interest-earning assets (2)	4.04		%	4.00		%
Cost of average interest-bearing liabilities (2)	0.35		%	0.52		%
Net interest spread (2)	3.69		%	3.48		%
Net interest margin (2), (5)	3.87		%	3.70		%
Total loans to total deposits ratio (6)	92.20		%	96.33		%
	As of or For the Three Months Ended March 31,
---	---	---	---	---	---	---
($ in thousands, except per share data)	2022			2021
Asset quality:
Loans 30 to 89 days past due and still accruing	$	120		$	108
Nonaccrual loans	1,418			1,461
Nonperforming loans (7)	1,418			1,461
Nonperforming assets (8)	1,418			3,797
Net recoveries	(8)			(151)
Loans 30 to 89 days past due and still accruing to loans held-for-investment	0.01		%	0.01		%
Nonperforming loans to loans held-for-investment	0.08		%	0.09		%
Nonperforming loans to allowance for loan losses	6.69		%	5.73		%
Nonperforming assets to total assets	0.06		%	0.19		%
Allowance for loan losses to loans held-for-investment	1.22		%	1.51		%
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (9)	1.23		%	1.74		%
Allowance for loan losses to nonaccrual loans	1,494.92		%	1,746.34		%
Allowance for loan losses to nonperforming loans	1,494.92		%	1,746.34		%
Net recoveries to average loans held-for-investment (2)	(0.01)		%	(0.04)		%
Capital ratios:
Shareholders’ equity to total assets	11.87		%	11.72		%
Average equity to average assets	12.00		%	11.92		%
PCB Bancorp
Common tier 1 capital (to risk-weighted assets)	14.77		%	15.92		%
Total capital (to risk-weighted assets)	15.97		%	17.17		%
Tier 1 capital (to risk-weighted assets)	14.77		%	15.92		%
Tier 1 capital (to average assets)	12.22		%	12.03		%
Pacific City Bank
Common tier 1 capital (to risk-weighted assets)	14.43		%	15.62		%
Total capital (to risk-weighted assets)	15.63		%	16.88		%
Tier 1 capital (to risk-weighted assets)	14.43		%	15.62		%
Tier 1 capital (to average assets)	11.94		%	11.81		%

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

(2)    Annualized.

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

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

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

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

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

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

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

Executive Summary

Q1 2022 Financial Highlights

•Net income was $10.2 million for the three months ended March 31, 2022, an increase of $1.7 million, or 19.6%, from $8.6 million for the three months ended March 31, 2021;

◦The Company recorded a reversal for loan losses of $1.2 million for the three months ended March 31, 2022 compared with $1.1 million for the three months ended March 31, 2021.

◦Net interest income was $20.0 million for the three months ended March 31, 2022 compared with $17.8 million for the three months ended March 31, 2021. Net interest margin was 3.87% for the three months ended March 31, 2022 compared with 3.70% for the three months ended March 31, 2021.

◦Gain on sale of loans was $3.8 million for the three months ended March 31, 2022 compared with $1.3 million for the three months ended March 31, 2021.

•Total assets were $2.20 billion at March 31, 2022, an increase of $50.0 million, or 2.3%, from $2.15 billion at December 31, 2021;

•Loans held-for-investment, net of deferred costs (fees), were $1.74 billion at March 31, 2022, an increase of $10.8 million, or 0.6%, from $1.73 billion at December 31, 2021; and

◦SBA PPP loans totaled $22.9 million and $65.3 million at March 31, 2022 and December 31, 2021, respectively.

◦There were no loans under modified terms related to COVID-19 pandemic at March 31, 2022 and December 31, 2021, respectively.

◦Allowance for loan losses to total loans held-for-investment ratio was 1.22% at March 31, 2022 compared with 1.29% at December 31, 2021.

•Total deposits were $1.91 billion at March 31, 2022, an increase of $43.2 million, or 2.3%, from $1.87 billion at December 31, 2021.

COVID-19 Pandemic

The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on global economic and market conditions. The U.S. government has enacted a number of monetary and fiscal policies to provide fiscal stimulus and relief in order to mitigate the impact of the COVID-19 pandemic. However, the COVID-19 pandemic continues to be a challenge to public health, including the emergence of new variants, and impact global economic and market conditions, including global supply chain disruptions and high inflation.

Since the beginning of the crisis, the Company has taken a number of steps to protect the safety of its employees and to support its customers. The Company has enabled its staff to work remotely and established safety measures within its bank premises and branches for both employees and customers. In order to support its customers, the Company has been in close contact with them, assessing the level of impact on their businesses, and putting a process in place to evaluate each client’s specific situation and provide relief programs where appropriate, including SBA PPP loans and loan modifications related to the COVID-19 pandemic.

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

Network and Data Incident

On August 30, 2021, the Bank identified unusual activity on its network. 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 has been working with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/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. The Bank expresses no opinion on the merits of the Matter and intends to answer, respond, and/or otherwise vigorously defend itself from the claims and causes of action asserted in the complaint to the fullest extent permitted by applicable law. Those defenses will be based in part on the fact that the Bank has implemented security procedures, practices, and a robust information security program pursuant to guidance from financial regulators. Please see Part II Item 1 for more information about the litigation.

The Company continues to monitor and evaluate the data incident for its magnitude and concomitant financial, legal or reputational consequences. To date, such consequences are not material, however the data incident is still recent and notices to affected individuals only recently began and the lawsuit mentioned above is in its very early stages. During the year ended December 31, 2021, expenses associated with the data incident totaled $100 thousand, which represents the retention amount on its insurance claims. There were no additional expenses associated with the data incident during the three months ended March 31, 2022. The Company anticipates additional expenses will be incurred in future periods; however, the Company does have a cyber-liability insurance policy that should provide insurance coverage for this incident.

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

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 March 31,
	2022						2021
($ in thousands)	Average Balance		Interest		Yield/ Cost (6)		Average Balance		Interest		Yield/ Cost (6)
Interest-earning assets:
Total loans (1)	$	1,773,376	$	20,190	4.62	%	$	1,641,634	$	18,744	4.63	%
Mortgage backed securities	84,223		307		1.48	%	81,486		215		1.07	%
Collateralized mortgage obligation	18,242		48		1.07	%	24,888		57		0.93	%
SBA loan pool securities	10,095		38		1.53	%	11,673		52		1.81	%
Municipal bonds - tax exempt (2)	5,632		36		2.59	%	5,804		36		2.52	%
Corporate bonds	5,038		47		3.78	%	—		—		—	%
Interest-bearing deposits in other financial institutions	190,341		96		0.20	%	180,706		45		0.10	%
FHLB and other bank stock	8,577		132		6.24	%	8,447		109		5.23	%
Total interest-earning assets	2,095,524		20,894		4.04	%	1,954,638		19,258		4.00	%
Noninterest-earning assets:
Cash and due from banks	20,385						19,072
Allowance for loan losses	(22,377)						(26,870)
Other assets	67,600						40,377
Total noninterest earning assets	65,608						32,579
Total assets	$	2,161,132					$	1,987,217
Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	431,981	313		0.29	%	$	407,623	333		0.33	%
Savings	15,644		2		0.05	%	10,609		1		0.04	%
Time deposits	586,387		535		0.37	%	635,613		977		0.62	%
Borrowings	10,400		51		1.99	%	75,556		128		0.69	%
Total interest-bearing liabilities	1,044,412		901		0.35	%	1,129,401		1,439		0.52	%
Noninterest-bearing liabilities:
Demand deposits	840,626						607,076
Other liabilities	16,727						13,950
Total noninterest-bearing liabilities	857,353						621,026
Total liabilities	1,901,765						1,750,427
Shareholders’ equity	259,367						236,790
Total liabilities and shareholders’ equity	$	2,161,132					$	1,987,217
Net interest income			$	19,993					$	17,819
Net interest spread (3)					3.69	%					3.48	%
Net interest margin (4)					3.87	%					3.70	%
Cost of funds (5)					0.19	%					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 $1.2 million and $1.2 million, respectively, and net accretion of discount on loans of $908 thousand and $745 thousand, respectively, are included in the interest income for the three months ended March 31, 2022 and 2021.

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

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

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

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

(6)    Annualized.

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

	Three Months Ended March 31,
	2022 vs. 2021
	Increase (Decrease) Due to				Net Increase (Decrease)
($ in thousands)	Volume		Rate
Interest earned on:
Total loans	$	1,504	$	(58)	$	1,446
Investment securities	(2)		118		116
Other interest-earning assets	8		66		74
Total interest income	1,510		126		1,636
Interest incurred on:
Savings, NOW, and money market deposits	24		(43)		(19)
Time deposits	(76)		(366)		(442)
Borrowings	(111)		34		(77)
Total interest expense	(163)		(375)		(538)
Change in net interest income	$	1,673	$	501	$	2,174

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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

	Three Months Ended March 31,				Amount Change		Percentage Change
($ in thousands)	2022		2021
Interest and dividend income:
Loans, including fees	$	20,190	$	18,744	$	1,446	7.7	%
Investment securities	476		360		116		32.2	%
Other interest-earning assets	228		154		74		48.1	%
Total interest income	20,894		19,258		1,636		8.5	%
Interest expense:
Deposits	850		1,311		(461)		(35.2)	%
Borrowings	51		128		(77)		(60.2)	%
Total interest expense	901		1,439		(538)		(37.4)	%
Net interest income	$	19,993	$	17,819	$	2,174	12.2	%

Net interest income increased primarily due to a 7.2% increase in average balance of interest-earning assets, 4 basis point increase in average yield, a 17 basis point decrease in average cost and a 7.5% decrease in average balance of interest-bearing liabilities.

Interest and fees on loans increased primarily due to an 8.0% increase in average balance, partially offset by a 1 basis point decrease in average yield. The decrease in average yield was primarily due to a decrease in overall interest rates on loans from lower market rates throughout 2021, partially offset by an increase in net accretion of discount on loans. The increase in net accretion of discount was primarily due to an increase in loan payoffs on SBA loans.

Interest on investment securities increased primarily due to a 39 basis point increase in average yield, partially offset by a 0.5% decrease in average balance. The increase in average yield was primarily due to a decrease in net amortization of premiums on mortgage-backed securities and collateralized mortgage obligations. For the three months ended March 31, 2022 and 2021, yield on total investment securities was 1.57% and 1.18%, respectively.

Interest income on other interest-earning assets increased primarily due to a 13 basis point increase in average yield and a 5.2% increase in average balance. The increase in average yield was primarily due to increases in dividend income on Federal Home Loan Bank stock and interest rate on cash held at the Federal Reserve Bank (“FRB”) account. The increase in average balance was primarily due to an increase in deposits, partially offset by an increase in loans. The Company maintains most of its cash at the FRB account. For the three months ended March 31, 2022 and 2021, yield on total other interest-earning assets was 0.46% and 0.33%, respectively.

Interest expense on deposits decreased primarily due to a 17 basis point decrease in average cost of interest-bearing deposits and a 7.7% decrease in average balance of time deposits, partially offset by a 7.0% increase in savings, NOW and money market accounts. The decrease in average cost was primarily due to the lower market rates. The decrease in average balance of time deposits was primarily due to a lower level of new time deposits. For the three months ended March 31, 2022 and 2021, average cost on total interest-bearing deposits was 0.33% and 0.50%, respectively, and average cost on total deposits were 0.18% and 0.32%, respectively.

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

Reversal for Loan Losses

Reversal for loan losses was $1.2 million and $1.1 million for the three months ended March 31, 2022 and 2021, respectively. The reversal for loan losses for the three months ended March 31, 2022 was primarily due to a decrease in historical loss and qualitative adjustment factor allocations as a result of improving economic conditions, partially offset by an increase in commercial property loans.

See further discussion in “Allowance for Loan Losses.”

Noninterest Income

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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

	Three Months Ended March 31,				Amount Change		Percentage Change
($ in thousands)	2022		2021
Service charges and fees on deposits	$	303	$	293	$	10	3.4	%
Loan servicing income	700		882		(182)		(20.6)	%
Bank-owned life insurance income	172		—		172		NM
Gain on sale of loans	3,777		1,322		2,455		185.7	%
Other income	334		360		(26)		(7.2)	%
Total noninterest income	$	5,286	$	2,857	$	2,429	85.0	%

Loan servicing income decreased primarily due to an increase in servicing asset amortization from an increase in loan payoffs. Servicing asset amortization was $531 thousand and $391 thousand, respectively, for the three months ended March 31, 2022 and 2021.

The Company purchased a bank-owned life insurance during November 2021. Bank-owned life insurance income represents the increase in cash surrender value of the insurance policy.

Gain on sale of loans increased primarily due to an increase in sale volume of SBA loans. The Company sold SBA loans of $39.7 million with a gain of $3.8 million during the three months ended March 31, 2022. During the three months ended March 31, 2021, the Company sold SBA loans of $10.9 million with a gain of $1.2 million and residential property loans of $7.9 million with a gain of $127 thousand.

Other income primarily included wire transfer fees of $159 thousand and $135 thousand, respectively, debit card interchange fees of $84 thousand and $59 thousand, respectively, and gain on sale of OREO of none and $75 thousand, respectively, for the three months ended March 31, 2022 and 2021.

Noninterest Expense

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

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

	Three Months Ended March 31,				Amount Change		Percentage Change
($ in thousands)	2022		2021
Salaries and employee benefits	$	8,595	$	6,182	$	2,413	39.0	%
Occupancy and equipment	1,397		1,371		26		1.9	%
Professional fees	403		494		(91)		(18.4)	%
Marketing and business promotion	207		138		69		50.0	%
Data processing	404		377		27		7.2	%
Director fees and expenses	169		138		31		22.5	%
Regulatory assessments	141		208		(67)		(32.2)	%
Other expenses	755		761		(6)		(0.8)	%
Total noninterest expense	$	12,071	$	9,669	$	2,402	24.8	%

Salaries and employee benefits increased primarily due to increases in salaries from the annual merit increase and increased number of employees, incentives tied to the sales of LPO originated SBA loans, vacation accrual, and a decrease in loan origination cost, which offsets the recognition of salaries and employee benefits. For the three months ended March 31, 2021, the Company recognized a higher loan origination cost primarily due to the SBA PPP loan production. The number of full-time equivalent employees was 256 at March 31, 2022 compared to 246 at March 31, 2021.

Professional fees decreased primarily due to a decrease in internal audit fees.

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

Director fees and expenses increased primarily due to a new director appointed during the fourth quarter of 2021.

Regulatory assessment expense decreased primarily due to a decrease in assessment rate, partially offset by an increase in balance sheet.

Other expenses primarily included $46 thousand and $157 thousand in loan related expenses, $326 thousand and $307 thousand in office expense, and $140 thousand and $114 thousand in armed guard expense for the three months ended March 31, 2022 and 2021, respectively.

Income Tax Expense

Income tax expense was $4.2 million and $3.6 million, respectively, and the effective tax rate was 28.9% and 29.6%, respectively, for the three months ended March 31, 2022 and 2021.

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:

	March 31, 2022						December 31, 2021
($ 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	$	87,288	$	82,232	$	(5,056)	$	85,346	$	84,713	$	(633)
Residential collateralized mortgage obligations	27,419		27,097		(322)		18,990		19,056		66
SBA loan pool securities	11,774		11,627		(147)		8,520		8,672		152
Municipal bonds	5,318		5,471		153		5,329		5,686		357
Corporate bonds	5,000		4,918		(82)		5,000		5,071		71
Total securities available-for-sale	$	136,799	$	131,345	$	(5,454)	$	123,185	$	123,198	$	13

Total investment securities were $131.3 million at March 31, 2022, an increase of $8.1 million, or 6.6%, from $123.2 million at December 31, 2021. The increase was primarily due to purchases of $19.9 million, partially offset by principal paydowns of $6.2 million, a decrease in fair value of securities available-for-sale of $5.5 million, and net premium amortization of $135 thousand.

The Company performs an OTTI assessment at least on a quarterly basis. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security. All individual securities in a continuous unrealized loss position for 12 months or more as of March 31, 2022 and December 31, 2021 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of March 31, 2022 and December 31, 2021. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized during the three months ended March 31, 2022 and 2021.

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

	March 31, 2022
	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	$	—	—	%	$	980	1.57	%	$	9,612	1.81	%	$	76,696	1.58	%	$	87,288	1.60	%
Residential collateralized mortgage obligations	—		—	%	241		2.06	%	9,175		0.96	%	18,003		2.19	%	27,419		1.78	%
SBA loan pool securities	—		—	%	401		2.59	%	3,246		0.50	%	8,127		1.64	%	11,774		1.36	%
Municipal bonds	302		1.72	%	1,845		2.07	%	826		2.27	%	2,345		3.53	%	5,318		2.72	%
Corporate bonds	—		—	%	—		—	%	5,000		3.75	%	—		—	%	5,000		3.75	%
Total securities available-for-sale	$	302	1.72	%	$	3,467	1.99	%	$	27,859	1.74	%	$	105,171	1.73	%	$	136,799	1.74	%

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

($ in thousands)	March 31, 2022		December 31, 2021
Real estate loans:
SBA property	$	16,892	$	33,603
Commercial and industrial loans:
SBA commercial term	1,448		3,423
Total	$	18,340	$	37,026

Loans held-for-sale were $18.3 million at March 31, 2022, a decrease of $18.7 million, or 50.5%, from $37.0 million at December 31, 2021. The decrease was primarily due to sales of $39.7 million, partially offset by new funding of $21.2 million.

Loans Held-For-Investment and Allowance for Loan Losses

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

	March 31, 2022					December 31, 2021
($ in thousands)	Amount			Percentage to Total		Amount			Percentage to Total
Real estate loans:
Commercial property	$	1,150,101		66.1	%	$	1,105,843		63.9	%
Residential property	215,132			12.3	%	209,485			12.1	%
SBA property	129,400			7.4	%	129,661			7.5	%
Construction	9,522			0.5	%	8,252			0.5	%
Total real estate loans	1,504,155			86.3	%	1,453,241			84.0	%
Commercial and industrial loans:
Commercial term	69,836			4.0	%	73,438			4.2	%
Commercial lines of credit	107,406			6.2	%	100,936			5.8	%
SBA commercial term	16,880			1.0	%	17,640			1.0	%
SBA PPP	22,926			1.3	%	65,329			3.8	%
Total commercial and industrial loans	217,048			12.5	%	257,343			14.8	%
Other consumer loans	21,752			1.2	%	21,621			1.2	%
Loans held-for-investment	1,742,955			100.0	%	1,732,205			100.0	%
Allowance for loan losses	(21,198)					(22,381)
Net loans held-for-investment	$	1,721,757				$	1,709,824
Allowance for loan losses to loans held-for-investment	1.22		%			1.29		%
Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (1)	1.23		%			1.34		%

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

Loans held-for-investment, net of deferred loan costs (fees) were $1.74 billion at March 31, 2022, an increase of $10.8 million, or 0.6%, from $1.73 billion at December 31, 2021. The increase was primarily due to new funding of $117.9 million and advances of $29.2 million, partially offset by paydowns and payoffs of $136.4 million. During the three months ended March 31, 2022, SBA PPP loans of $42.4 million were paid off and related unamortized net deferred fees were recognized through interest income. Commercial property loan production contributed significantly to the Company’s loan growth for the three months ended March 31, 2022.

SBA Paycheck Protection Program

The following table presents a summary of SBA PPP loans as of the dates indicated:

	March 31, 2022					December 31, 2021
($ in thousands)	Number of Loans	Carrying Value		Contractual Balance		Number of Loans	Carrying Value		Contractual Balance
Loan amount:
$50,000 or less	36	$	741	$	777	145	$	2,915	$	3,074
Over $50,000 and less than $350,000	42	7,455		7,672		156	25,417		26,146
Over $350,000 and less than $2,000,000	20	14,730		14,970		52	33,812		34,432
$2,000,000 or more	—	—		—		1	3,185		3,187
Total	98	$	22,926	$	23,419	354	$	65,329	$	66,839

Loan Modifications Related to the COVID-19 Pandemic

The Company had provided modifications related to the COVID-19 pandemic during the years ended December 31, 2021 and 2020. The Company had no outstanding modification since September 30, 2021.

The following table presents the risk categories and accrued interest receivable for loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as of the dates indicated:

	Carrying Value Per Risk Category										Accrued Interest Receivable
($ in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2022
Real estate loans:
Commercial property	$	291,109	$	2,822	$	1,522	$	—	$	295,453	$	679
Residential property	22,278		—		—		—		22,278		507
SBA property	3,663		250		—		—		3,913		16
Commercial and industrial loans:
Commercial term	26,500		1,059		1,081		—		28,640		73
SBA commercial term	1,579		—		52		—		1,631		7
Other consumer loans	628		—		—		—		628		2
Total	$	345,757	$	4,131	$	2,655	$	—	$	352,543	$	1,284
December 31, 2021
Real estate loans:
Commercial property	$	291,759	$	11,739	$	1,525	$	—	$	305,023	$	730
Residential property	25,620		—		—		—		25,620		537
SBA property	3,683		251		—		—		3,934		15
Commercial and industrial loans:
Commercial term	29,744		3,563		1,114		—		34,421		84
SBA commercial term	1,663		—		57		—		1,720		6
Other consumer loans	699		—		—		—		699		2
Total	$	353,168	$	15,553	$	2,696	$	—	$	371,417	$	1,374

The decrease in special mention loans for the three months ended March 31, 2022 was primarily due to improvements of 2 loans with an aggregated carrying value of $11.3 million.

Allowance for loan losses

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

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

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

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

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

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

The SBA guarantee on PPP loans cannot be separated from the loan and therefore is not a separate unit of account. The Company considered the SBA guarantee in the allowance for loan losses evaluation and determined that it is not required to reserve an allowance on SBA PPP loans at March 31, 2022 and December 31, 2021.

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

	Three Months Ended March 31,
	2022						2021
($ in thousands)	Average Balance		Net Charge-Offs (Recoveries)		Percentage		Average Balance		Net Charge-Offs (Recoveries)		Percentage
Real estate loans:
Commercial property	$	1,130,889	$	—	—	%	$	900,912	$	—	—	%
Residential property	208,969		—		—	%	195,020		—		—	%
SBA property	117,242		—		—	%	124,405		(12)		(0.04)	%
Construction	9,050		—		—	%	14,513		—		—	%
Total real estate loans	1,466,150		—		—	%	1,234,850		(12)		(0.01)	%
Commercial and industrial loans:
Commercial term	72,378		(2)		(0.01)	%	84,423		(3)		(0.01)	%
Commercial lines of credit	99,758		—		—	%	96,916		(136)		(0.56)	%
SBA commercial term	15,465		(3)		(0.08)	%	22,080		(5)		(0.09)	%
SBA PPP	42,244		—		—	%	178,747		—		—	%
Total commercial and industrial loans	229,845		(5)		(0.01)	%	382,166		(144)		(0.15)	%
Other consumer loans	21,302		(3)		(0.06)	%	21,096		5		0.09	%
Total	1,717,297		(8)		(0.01)	%	1,638,112		(151)		(0.04)	%

Nonperforming Loans and Nonperforming Assets

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

($ in thousands)	March 31, 2022			December 31, 2021			Amount Change		Percentage Change
Nonaccrual loans
Real estate loans:
Residential property	$	461		$	—		$	461	—	%
SBA property	733			746			(13)		(1.7)	%
Total real estate loans	1,194			746			448		60.1	%
Commercial and industrial loans:
SBA commercial term	199			213			(14)		(6.6)	%
Total commercial and industrial loans	199			213			(14)		(6.6)	%
Other consumer loans	25			35			(10)		(28.6)	%
Total nonaccrual loans	1,418			994			424		42.7	%
Loans past due 90 days or more still on accrual	—			—			—		—	%
Total nonperforming loans	1,418			994			424		42.7	%
Other real estate owned	—			—			—		—	%
Total nonperforming assets	$	1,418		$	994		$	424	42.7	%
Nonaccrual loans to loans held-for-investment	0.08		%	0.06		%
Allowance for loan losses to nonaccrual loans	1,494.92		%	2,251.61		%
Nonperforming assets to total assets	0.06		%	0.05		%

The increase in total nonaccrual loans was primarily due to loans placed on nonaccrual status of $470 thousand during the three months ended March 31, 2022, partially offset by paydowns and payoffs of $40 thousand, and charge-offs of $6 thousand. 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 $18 thousand would have been recorded during the three months ended March 31, 2022, respectively, had these loans been paid in accordance with their original terms throughout the periods indicated.

Troubled Debt Restructurings

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

	March 31, 2022						December 31, 2021
($ in thousands)	Accruing		Nonaccrual		Total		Accruing		Nonaccrual		Total
Real estate loans:
Commercial property	$	324	$	—	$	324	$	326	$	—	$	326
SBA property	236		15		251		242		17		259
Commercial and industrial loans:
Commercial term	—		—		—		2		—		2
SBA commercial term	5		—		5		6		—		6
Total	$	565	$	15	$	580	$	576	$	17	$	593

Deposits

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

($ in thousands)	March 31, 2021		December 31, 2021		Amount Change		Percentage Change
Noninterest-bearing demand deposits	$	891,797	$	830,383	$	61,414	7.4	%
Interest-bearing deposits:
Savings	15,037		16,299		(1,262)		(7.7)	%
NOW	17,543		20,185		(2,642)		(13.1)	%
Retail money market accounts	431,057		386,041		45,016		11.7	%
Brokered money market accounts	1		1		—		—	%
Retail time deposits of:
$250,000 or less	246,100		256,956		(10,856)		(4.2)	%
More than $250,000	173,844		172,269		1,575		0.9	%
Brokered time deposits	35,000		85,000		(50,000)		(58.8)	%
Time deposits from California State Treasurer	100,000		100,000		—		—	%
Total interest-bearing deposits	1,018,582		1,036,751		(18,169)		(1.8)	%
Total deposits	$	1,910,379	$	1,867,134	$	43,245	2.3	%
Total deposits not covered by deposit insurance	$	1,015,255	$	919,584	95,671		10.4	%
Time deposits not covered by deposit insurance	$	216,055	$	216,269	(214)		(0.1)	%

The increases in noninterest-bearing demand deposits and retail money market accounts were primarily due to the overall liquid deposit market.

The decrease in retail time deposits was primarily due to matured and closed accounts of $188.5 million, partially offset by new accounts of $30.6 million and renewals of the matured accounts of $143.6 million.

As of March 31, 2022 and December 31, 2021, total deposits were comprised of 46.7% and 44.5%, respectively, of noninterest-bearing demand accounts, 24.3% and 22.6%, respectively, of savings, NOW and money market accounts, and 29.0% and 32.9%, respectively, of time deposits.

Deposits from certain officers, directors and their related interests with which they are associated held by the Company were $3.1 million and $3.9 million, respectively, at March 31, 2022 and December 31, 2021.

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
March 31, 2022
Time deposits of $250,000 or less	$	79,766	$	81,664	$	114,174	$	5,496	$	281,100
Time deposits of more than $250,000	170,293		49,925		53,336		290		273,844
Total	$	250,059	$	131,589	$	167,510	$	5,786	$	554,944
Not covered by deposit insurance	$	140,585	$	39,908	$	35,349	$	213	$	216,055
December 31, 2021
Time deposits of $250,000 or less	$	143,594	$	60,686	$	129,627	$	8,049	$	341,956
Time deposits of more than $250,000	156,502		57,301		55,304		3,162		272,269
Total	$	300,096	$	117,987	$	184,931	$	11,211	$	614,225
Not covered by deposit insurance	$	136,219	$	38,229	$	38,780	$	3,041	$	216,269

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 $261.1 million at March 31, 2022, an increase of $4.8 million, or 1.9%, from $256.3 million at December 31, 2021. The increase was primarily due to net income of $10.2 million and cash proceeds from exercise of stock options of $481 thousand, partially offset by dividends declared on common stock of $2.2 million and a decrease in accumulated other comprehensive income of $3.9 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 measurements under the definition of a “Small Bank Holding Company.” At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank.

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

The following table presents a summary of the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as the Bank’s capital ratios as of 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		Pacific City Bank		Minimum Regulatory Requirements		Well Capitalized Requirements (Bank)
March 31, 2022
Common tier 1 capital (to risk-weighted assets)	14.77	%	14.43	%	4.5	%	6.5	%
Total capital (to risk-weighted assets)	15.97	%	15.63	%	8.0	%	10.0	%
Tier 1 capital (to risk-weighted assets)	14.77	%	14.43	%	6.0	%	8.0	%
Tier 1 capital (to average assets)	12.22	%	11.94	%	4.0	%	5.0	%
December 31, 2021
Common tier 1 capital (to risk-weighted assets)	14.79	%	14.48	%	4.5	%	6.5	%
Total capital (to risk-weighted assets)	16.04	%	15.73	%	8.0	%	10.0	%
Tier 1 capital (to risk-weighted assets)	14.79	%	14.48	%	6.0	%	8.0	%
Tier 1 capital (to average assets)	12.11	%	11.85	%	4.0	%	5.0	%

The Company and the Bank’s capital conservation buffer was 7.97% and 7.63%, respectively, as of March 31, 2022, and 8.04% and 7.73%, respectively, as of December 31, 2021.

Emergency Capital Investment Program

On December 14, 2021, the U.S. Treasury informed the Company that the U.S Treasury has reviewed the Company’s application to receive a capital investment from the U.S Treasury under the Emergency Capital Investment Program (“ECIP”), and that the Company would be eligible to receive an ECIP investment in an amount up to $69,141,000 in the form of non-dilutive Tier 1 senior perpetual preferred capital. The Company determined to accept the offer to receive the ECIP investment for the full amount. The Company expects to close the investment in the second quarter of 2022.

Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions and minority depository institutions such as the Bank to augment their efforts to support small businesses and consumers in their communities.

Liquidity

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

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

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

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

The Company had $10.0 million and $10.0 million of outstanding FHLB advances at March 31, 2022 and December 31, 2021, respectively. Based on the values of loans pledged as collateral, the Company had $527.4 million and $516.2 million of additional borrowing capacity with FHLB as of March 31, 2022 and December 31, 2021, respectively. The Company also had $65.0 million and $65.0 million, respectively, of available unused unsecured federal funds lines at March 31, 2022 and December 31, 2021.

In addition, available unused secured borrowing capacity from Federal Reserve Discount Window at March 31, 2022 and December 31, 2021 was $26.5 million and $29.2 million, respectively. Federal Reserve Discount Window was collateralized by loans totaling $33.5 million and $36.6 million as of March 31, 2022 and December 31, 2021, respectively. The Company’s borrowing capacity from the Federal Reserve Discount Window is limited by eligible collateral. The Company also maintains relationships in the capital markets with brokers and dealers to issue time deposits and money market accounts. As of March 31, 2022 and December 31, 2021, total cash and cash equivalents represented 11.4% and 9.5% of total assets, respectively.

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

Off-Balance Sheet Activities and Contractual Obligations

Off-Balance Sheet Arrangements

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

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

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

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

	March 31, 2022				December 31, 2021
($ in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Unused lines of credit	$	5,621	$	170,121	$	8,261	$	160,739
Unfunded loan commitments	1,080		34,489		595		29,688
Standby letters of credit	3,343		1,431		3,078		1,431
Commercial letters of credit	10		721		91		524
Total	$	10,054	$	206,762	$	12,025	$	192,382

Contractual Obligations

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

($ in thousands)	Within One Year		One to Three Years		Three to Five Years		Over Five Years		Total
March 31, 2022
Time deposits	$	549,158	$	5,539	$	247	$	—	$	554,944
FHLB advances	10,000		—		—		—		10,000
Operating leases	2,854		2,821		1,297		634		7,606
Total	$	562,012	$	8,360	$	1,544	$	634	$	572,550
December 31, 2021
Time deposits	$	603,014	$	10,850	$	361	$	—	$	614,225
FHLB advances	10,000		—		—		—		10,000
Operating leases	2,022		3,515		1,341		796		7,674
Total	$	615,036	$	14,365	$	1,702	$	796	$	631,899

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

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

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

Overview

Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and LIBOR (basis risk).

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

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

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

Measurement

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

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

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

	March 31, 2022				December 31, 2021
Simulated Rate Changes	Net Interest Income Sensitivity		Economic Value of Equity Sensitivity		Net Interest Income Sensitivity		Economic Value of Equity Sensitivity
+300	26.2	%	10.2	%	26.2	%	14.0	%
+200	17.7	%	7.9	%	17.5	%	10.6	%
+100	8.8	%	4.5	%	8.7	%	6.2	%

Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

An evaluation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Act”), as of March 31, 2022 was carried out under the supervision and with the participation of the Company’s Chief Executive Officer, Chief Financial Officer and other members of the Company’s senior management. The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2022, the Company’s disclosure controls and procedures were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure; and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Act) that occurred during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 1 - Legal Proceedings

In the normal course of business, the Company is involved in various legal claims. Management has reviewed all legal claims against the Company with counsel and have taken into consideration the views of such counsel as to the potential outcome of the claims in determining the accrued loss contingency. The Company did not have any accrued loss contingencies for legal claims at March 31, 2022. 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 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 has been working with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/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, 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”). In the Matter, Plaintiff seeks to form a class action and alleges causes of action for: (1) negligence; (2) unjust enrichment; (3) violations of California’s Consumer Privacy Act, Civil Code § 1798.150(a); and (4) violations of California’s unfair competition law (Cal. Bus. & Prof. Code § 17200, et seq.). The summons and complaint have been served on the Bank as of the date of this submission. The Bank expresses no opinion on the merits of the Matter and intends to answer, respond, and/or otherwise defend itself from the claims and causes of action asserted in the complaint to the fullest extent permitted by applicable law. Those defenses will be based in part on the fact that the Bank has implemented security procedures, practices, and a robust information security program pursuant to guidance from the applicable financial regulators.

The Company continues to monitor and evaluate the data incident for its magnitude and concomitant financial, legal or reputational consequences. To date, such consequences are not material, however the data incident is still recent and notices to affected individuals only recently began and the lawsuit mentioned above is in its very early stages. During the year ended December 31, 2021, expenses associated with the data incident totaled $100 thousand, which represents the retention amount on its insurance claims. There were no additional expenses associated with the data incident during the three months ended March 31, 2022. The Company anticipates additional expenses will be incurred in future periods; however, the Company does have a cyber-liability insurance policy that should provide insurance coverage for this incident.

Item 1A - Risk Factors

Management is not aware of any material changes, other than the noted above, to the risk factors that appeared under “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. 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, 2021, which could materially and adversely affect the Company’s business, financial condition, results of operations and stock price. The risks described in this Quarterly Report on Form 10-Q and in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not presently known to management or that management presently believes not to be material may also result in material and adverse effects on the Company’s business, financial condition, and results of operations.

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

There were no unregistered sales of equity securities during the three months ended March 31, 2022.

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 January 1, 2022 to January 31, 2022	—	$	—	—	—
From February 1, 2022 to February 28, 2022	—	—		—	—
From March 1, 2022 to March 31, 2022	—	—		—	—
Total	—	$	—	—

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

Item 3 - Defaults Upon Senior Securities

None.

Item 4 - Mine Safety Disclosures

Not applicable.

Item 5 - Other Information

None

Item 6 - Exhibits

Exhibit Number	Description	Form	File No.	Exhibit	Filing Date
3.1	Articles of Incorporation of PCB Bancorp, as amended	10-Q	001-38621	3.1	August 8, 2019
3.2	Bylaws of PCB Bancorp	8-K	001-38621	3.2	July 2, 2019
4.1	Specimen common stock certificate of PCB Bancorp	10-Q	001-38621	4.1	August 8, 2019
4.2	Description of Capital Stock	10-K	001-38621	4.2	March 9, 2020
10.1	Employment Agreement, dated January 1, 2018, between Pacific City Financial Corporation and Henry Kim	S-1	333-226208	10.1	July 17, 2018
10.1A	First Amendment to Employment Agreement, dated Augusthttp://www.sec.gov/Archives/edgar/data/1423869/000142386921000046/pcb10q20210930ex101a.htm26, 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 Decemberhttp://www.sec.gov/Archives/edgar/data/1423869/000142386922000006/pcb10kex101b20211231.htm28, 2021, among PCB Bancorp, Pacific City Bank and Henry Kim	10-K	001-38621	10.1B	March 4, 2022
10.2	2013 Equity Based Compensation Plan, as amended	S-1	333-226208	10.2	July 17, 2018
10.3	Form of Stock Option Award Agreement under 2013 Equity Based Compensation Plan	S-1	333-226208	10.3	July 17, 2018
10.4	Form of Restricted Stock Award Agreement under 2013 Equity Based Compensation Plan	S-1	333-226208	10.4	July 17, 2018
10.5	2003 Pacific City Bank Stock Option Plan, as amended	S-1	333-226208	10.5	July 17, 2018
10.6	Form of Stock Option Award Agreement under the 2003 Pacific City Bank Stock Option Plan	S-1	333-226208	10.6	July 17, 2018
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
101.INS	The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH	Inline XBRL Taxonomy Extension Schema Document*
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document*
104	Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)*

* Filed herewith

** Furnished herewith

Signatures

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

		PCB Bancorp
Date:	May 5, 2022	/s/ Henry Kim
		Henry Kim
		President and Chief Executive Officer<br><br>(Principal Executive Officer)
Date:	May 5, 2022	/s/ Timothy Chang
		Timothy Chang
		Executive Vice President and Chief Financial Officer<br><br>(Principal Financial and Accounting Officer)

59

Document

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Henry Kim, certify that:

1.I have reviewed this periodic report on Form 10-Q of PCB Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this reports;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(d)disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:	May 5, 2022	/s/ Henry Kim
		Henry Kim
		President and Chief Executive Officer<br><br>(Principal Executive Officer)

Document

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Timothy Chang, certify that:

1.I have reviewed this periodic report on Form 10-Q of PCB Bancorp;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this reports;

4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:

(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is being prepared;

(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this Report based on such evaluation; and

(d)disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors (or persons performing the equivalent functions):

(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date:	May 5, 2022	/s/ Timothy Chang
		Timothy Chang
		Executive Vice President and Chief Financial Officer<br><br>(Principal Financial and Accounting Officer)

Document

Exhibit 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

In connection with the periodic report of PCB Bancorp (the “Company”) on Form 10-Q for the period ended March 31, 2022, as filed with the Securities and Exchange Commission (the “Report”), I, Henry Kim, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that:

(1)the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date:	May 5, 2022	/s/ Henry Kim
		Henry Kim
		President and Chief Executive Officer<br><br>(Principal Executive Officer)

Document

Exhibit 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

In connection with the periodic report of PCB Bancorp (the “Company”) on Form 10-Q for the period ended March 31, 2022, as filed with the Securities and Exchange Commission (the “Report”), I, Timothy Chang, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that:

(1)the Report fully complies with the requirements of section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission.

Date:	May 5, 2022	/s/ Timothy Chang
		Timothy Chang
		Executive Vice President and Chief Financial Officer<br><br>(Principal Financial and Accounting Officer)