Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation and Significant Accounting Policies
Nature of Operations
PCB Bancorp is a bank holding company whose subsidiary is PCB Bank (the “Bank”), which is a single operating segment. The Company changed its subsidiary name from Pacific City Bank to PCB Bank on August 25, 2022. As of September 30, 2022, the Bank operated 11 full-service branches in Los Angeles and Orange counties, California, two full-service branches in Bergen County, New Jersey, and one full-service branch in each of Dallas, Texas and Bayside, New York, and loan production offices (“LPOs”) in Artesia, California; Annandale, Virginia; Atlanta, Georgia; 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 and nine months ended September 30, 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 September 30, 2022 and December 31, 2021, and for the three and nine months ended September 30, 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.
Adopted Accounting Pronouncements
During the nine months ended September 30, 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 completed its parallel-run during the three months ended September 30, 2022. During the fourth quarter of 2022, the Company will continue to analyze model results, review qualitative factors, update the allowance documentation, and address any gaps arising from internal reviews, model validation, and implementation testing. Based on the Company’s current 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:
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| | Fair Value Measurement Level | | |
($ in thousands) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
September 30, 2022 | | | | | | | | |
Securities available-for-sale: | | | | | | | | |
U.S. government agency and U.S. government sponsored enterprise securities: | | | | | | | | |
Residential mortgage-backed securities | | $ | — | | | $ | 88,302 | | | $ | — | | | $ | 88,302 | |
Residential collateralized mortgage obligations | | — | | | 22,701 | | | — | | | 22,701 | |
SBA loan pool securities | | — | | | 9,816 | | | — | | | 9,816 | |
Municipal bonds | | — | | | 4,020 | | | — | | | 4,020 | |
Corporate bonds | | — | | | 4,562 | | | — | | | 4,562 | |
Total securities available-for-sale | | — | | | 129,401 | | | — | | | 129,401 | |
Total assets measured at fair value on a recurring basis | | $ | — | | | $ | 129,401 | | | $ | — | | | $ | 129,401 | |
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 | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
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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:
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| | Fair Value Measurement Level | | |
($ in thousands) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
September 30, 2022 | | | | | | | | |
Impaired loans: | | | | | | | | |
| | | | | | | | |
Commercial lines of credit | | $ | — | | | $ | — | | | $ | 4,000 | | | $ | 4,000 | |
| | | | | | | | |
Total impaired loans | | — | | | — | | | 4,000 | | | 4,000 | |
| | | | | | | | |
| | | | | | | | |
Total assets measured at fair value on a non-recurring basis | | $ | — | | | $ | — | | | $ | 4,000 | | | $ | 4,000 | |
Total liabilities measured at fair value on a non-recurring basis | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
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 | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
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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:
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($ in thousands) | | Fair Value | | Valuation Technique(s) | | Unobservable Input(s) | | Range (Weighted-Average) |
September 30, 2022 | | | | | | | | |
Impaired loans: | | | | | | | | |
| | | | | | | | |
Commercial lines of credit | | $ | 4,000 | | | Pending Sales Agreement | | NM | | NM |
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| | | | | | | | |
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December 31, 2021 | | | | | | | | |
Impaired loans: | | | | | | | | |
SBA property | | $ | 17 | | | Fair value of collateral | | NM | | NM |
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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:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Collateral dependent impaired loans: | | | | | | | | |
| | | | | | | | |
SBA property | | $ | — | | | $ | — | | | $ | — | | | $ | (2) | |
Commercial lines of credit | | — | | | — | | | — | | | 136 | |
SBA commercial term | | — | | | — | | | — | | | (5) | |
| | | | | | | | |
| | | | | | | | |
Other real estate owned | | 152 | | | — | | | 152 | | | 74 | |
Net gains (losses) recognized | | $ | 152 | | | $ | — | | | $ | 152 | | | $ | 203 | |
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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:
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| | Carrying Value | | Fair Value | | Fair Value Measurements |
($ in thousands) | | | | Level 1 | | Level 2 | | Level 3 |
September 30, 2022 | | | | | | | | | | |
Financial assets: | | | | | | | | | | |
Interest-bearing deposits in other financial institutions | | $ | 131,786 | | | $ | 131,786 | | | $ | 131,786 | | | $ | — | | | $ | — | |
Securities available-for-sale | | 129,401 | | | 129,401 | | | — | | | 129,401 | | | — | |
Loans held-for-sale | | 18,982 | | | 20,396 | | | — | | | 20,396 | | | — | |
Net loans held-for-investment | | 1,935,476 | | | 1,895,488 | | | — | | | — | | | 1,895,488 | |
Federal Home Loan Bank (“FHLB”) and other restricted stock | | 10,183 | | | N/A | | N/A | | N/A | | N/A |
Accrued interest receivable | | 6,070 | | | 6,070 | | | 90 | | | 334 | | | 5,646 | |
Financial liabilities: | | | | | | | | | | |
Deposits | | $ | 1,978,098 | | | $ | 1,971,950 | | | $ | — | | | $ | — | | | $ | 1,971,950 | |
| | | | | | | | | | |
Accrued interest payable | | 1,020 | | | 1,020 | | | — | | | — | | | 1,020 | |
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 | | | — | | | 123,198 | | | — | |
Loans held-for-sale | | 37,026 | | | 41,079 | | | — | | | 41,079 | | | — | |
Net loans held-for-investment | | 1,709,824 | | | 1,725,022 | | | — | | | — | | | 1,725,022 | |
FHLB and other restricted stock | | 8,577 | | | N/A | | N/A | | N/A | | N/A |
Accrued interest receivable | | 5,368 | | | 5,368 | | | 1 | | | 337 | | | 5,030 | |
Financial liabilities: | | | | | | | | | | |
Deposits | | $ | 1,867,134 | | | $ | 1,867,635 | | | $ | — | | | $ | — | | | $ | 1,867,635 | |
FHLB advances | | 10,000 | | | 10,087 | | | — | | | 10,087 | | | — | |
Accrued interest payable | | 771 | | | 771 | | | — | | | 1 | | | 770 | |
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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:
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($ in thousands) | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
September 30, 2022 | | | | | | | | |
Securities available-for-sale: | | | | | | | | |
U.S. government agency and U.S. government sponsored enterprise securities: | | | | | | | | |
Residential mortgage-backed securities | | $ | 101,233 | | | $ | 1 | | | $ | (12,932) | | | $ | 88,302 | |
Residential collateralized mortgage obligations | | 24,486 | | | 8 | | | (1,793) | | | 22,701 | |
SBA loan pool securities | | 10,244 | | | 14 | | | (442) | | | 9,816 | |
Municipal bonds | | 4,264 | | | 1 | | | (245) | | | 4,020 | |
Corporate bonds | | 5,000 | | | — | | | (438) | | | 4,562 | |
Total securities available-for-sale | | $ | 145,227 | | | $ | 24 | | | $ | (15,850) | | | $ | 129,401 | |
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 | |
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As of September 30, 2022 and December 31, 2021, pledged securities were $66.4 million and $110.9 million, respectively. These securities were pledged for the State Deposit from the California State Treasurer.
The following table presents the amortized cost and fair value of the securities available-for-sale by contractual maturity as of the date indicated. Expected maturities may differ from contractual maturities, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.
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| | September 30, 2022 |
($ in thousands) | | Amortized Cost | | Fair Value |
Within one year | | $ | 963 | | | $ | 952 | |
One to five years | | 871 | | | 865 | |
Five to ten years | | 5,081 | | | 4,637 | |
Greater than ten years | | 2,349 | | | 2,128 | |
Residential mortgage-backed securities, residential collateralized mortgage obligations and SBA loan pool securities | | 135,963 | | | 120,819 | |
Total | | $ | 145,227 | | | $ | 129,401 | |
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The following table presents proceeds from sales and calls of securities available-for-sale and the associated gross gains and losses realized through earnings upon the sales and calls of securities available-for-sale for the periods indicated:
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Gross realized gains on sales and calls of securities available-for-sale | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Gross realized losses on sales and calls of securities available-for-sale | | — | | | — | | | — | | | — | |
Net realized gains (losses) on sales and calls of securities available-for-sale | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Proceeds from sales and calls of securities available-for-sale | | $ | 1,040 | | | $ | — | | | $ | 1,040 | | | $ | — | |
Tax expense on sales and calls of securities available-for-sale | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
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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:
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| | Length of Time that Individual Securities Have Been In a Continuous Unrealized Loss Position |
| | Less Than 12 Months | | 12 Months or Longer | | Total |
($ in thousands) | | Fair Value | | Gross Unrealized Losses | | Number of Securities | | Fair Value | | Gross Unrealized Losses | | Number of Securities | | Fair Value | | Gross Unrealized Losses | | Number of Securities |
September 30, 2022 | | | | | | | | | | | | | | | | | | |
Securities available-for-sale: | | | | | | | | | | | | | | | | | | |
U.S. government agency and U.S. government sponsored enterprise securities: | | | | | | | | | | | | | | | | | | |
Residential mortgage-backed securities | | $ | 45,595 | | | $ | (4,591) | | | 82 | | | $ | 42,667 | | | $ | (8,341) | | | 32 | | | $ | 88,262 | | | $ | (12,932) | | | 114 | |
Residential collateralized mortgage obligations | | 14,956 | | | (1,348) | | | 35 | | | 1,701 | | | (445) | | | 2 | | | 16,657 | | | (1,793) | | | 37 | |
SBA loan pool securities | | 6,233 | | | (441) | | | 11 | | | 83 | | | (1) | | | 1 | | | 6,316 | | | (442) | | | 12 | |
Municipal bonds | | 3,520 | | | (245) | | | 12 | | | — | | | — | | | — | | | 3,520 | | | (245) | | | 12 | |
Corporate bonds | | 4,562 | | | (438) | | | 1 | | | — | | | — | | | — | | | 4,562 | | | (438) | | | 1 | |
Total securities available-for-sale | | $ | 74,866 | | | $ | (7,063) | | | 141 | | | $ | 44,451 | | | $ | (8,787) | | | 35 | | | $ | 119,317 | | | $ | (15,850) | | | 176 | |
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 | |
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Total securities available-for-sale | | $ | 49,842 | | | $ | (978) | | | 36 | | | $ | 9,041 | | | $ | (331) | | | 6 | | | $ | 58,883 | | | $ | (1,309) | | | 42 | |
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The Company performs an other-than-temporary impairment (“OTTI”) assessment at least on a quarterly basis. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security.
All individual securities in a continuous unrealized loss position for 12 months or more as of September 30, 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 September 30, 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 and nine months ended September 30, 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:
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($ in thousands) | | September 30, 2022 | | December 31, 2021 |
Real estate loans: | | | | |
Commercial property | | $ | 1,271,781 | | | $ | 1,105,843 | |
Residential property | | 297,506 | | | 209,485 | |
SBA property | | 136,088 | | | 129,661 | |
Construction | | 14,592 | | | 8,252 | |
Total real estate loans | | 1,719,967 | | | 1,453,241 | |
Commercial and industrial loans: | | | | |
Commercial term | | 80,225 | | | 73,438 | |
Commercial lines of credit | | 117,960 | | | 100,936 | |
SBA commercial term | | 16,542 | | | 17,640 | |
SBA PPP | | 1,309 | | | 65,329 | |
Total commercial and industrial loans | | 216,036 | | | 257,343 | |
Other consumer loans | | 23,234 | | | 21,621 | |
Loans held-for-investment | | 1,959,237 | | | 1,732,205 | |
Allowance for loan losses | | (23,761) | | | (22,381) | |
Net loans held-for-investment | | $ | 1,935,476 | | | $ | 1,709,824 | |
| | | | |
The Company had no loans under modified terms related to the COVID-19 pandemic as of September 30, 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 September 30, 2022 and December 31, 2021, the Company had $114 thousand and $398 thousand, respectively, of such loans outstanding.
Allowance for Loan Losses
The following tables present the activities in allowance for loan losses by portfolio segment, which is consistent with the Company’s methodology for determining allowance for loan losses, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
($ in thousands) | | Real Estate | | Commercial and Industrial | | Other Consumer | | Total |
Balance at July 1, 2022 | | $ | 16,591 | | | $ | 4,275 | | | $ | 205 | | | $ | 21,071 | |
Charge-offs | | — | | | (1,078) | | | (34) | | | (1,112) | |
Recoveries on loans previously charged off | | — | | | 21 | | | 28 | | | 49 | |
Provision for loan losses | | 1,758 | | | 1,966 | | | 29 | | | 3,753 | |
Balance at September 30, 2022 | | $ | 18,349 | | | $ | 5,184 | | | $ | 228 | | | $ | 23,761 | |
| | | | | | | | |
Balance at July 1, 2021 | | $ | 18,672 | | | $ | 5,866 | | | $ | 351 | | | $ | 24,889 | |
Charge-offs | | — | | | (84) | | | (43) | | | (127) | |
Recoveries on loans previously charged off | | — | | | 94 | | | 4 | | | 98 | |
Provision (reversal) for loan losses | | (733) | | | (336) | | | 16 | | | (1,053) | |
Balance at September 30, 2021 | | $ | 17,939 | | | $ | 5,540 | | | $ | 328 | | | $ | 23,807 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
($ in thousands) | | Real Estate | | Commercial and Industrial | | Other Consumer | | Total |
Balance at January 1, 2022 | | $ | 16,797 | | | $ | 5,310 | | | $ | 274 | | | $ | 22,381 | |
Charge-offs | | — | | | (1,095) | | | (76) | | | (1,171) | |
Recoveries on loans previously charged off | | — | | | 44 | | | 54 | | | 98 | |
Provision (reversal) for loan losses | | 1,552 | | | 925 | | | (24) | | | 2,453 | |
Balance at September 30, 2022 | | $ | 18,349 | | | $ | 5,184 | | | $ | 228 | | | $ | 23,761 | |
| | | | | | | | |
Balance at January 1, 2021 | | $ | 18,894 | | | $ | 7,222 | | | $ | 394 | | | $ | 26,510 | |
Charge-offs | | (18) | | | (100) | | | (87) | | | (205) | |
Recoveries on loans previously charged off | | 47 | | | 553 | | | 36 | | | 636 | |
Reversal for loan losses | | (984) | | | (2,135) | | | (15) | | | (3,134) | |
Balance at September 30, 2021 | | $ | 17,939 | | | $ | 5,540 | | | $ | 328 | | | $ | 23,807 | |
| | | | | | | | |
The following table presents the information on allowance for loan losses and recorded investments by portfolio segment and impairment methodology as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
($ in thousands) | | Real Estate | | Commercial and Industrial | | Other Consumer | | Total |
September 30, 2022 | | | | | | | | |
Allowance for loan losses: | | | | | | | | |
Individually evaluated for impairment | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Collectively evaluated for impairment | | 18,349 | | | 5,184 | | | 228 | | | 23,761 | |
Total | | $ | 18,349 | | | $ | 5,184 | | | $ | 228 | | | $ | 23,761 | |
Loans receivable: | | | | | | | | |
Individually evaluated for impairment | | $ | 3,910 | | | $ | 4,003 | | | $ | — | | | $ | 7,913 | |
Collectively evaluated for impairment | | 1,716,057 | | | 212,033 | | | 23,234 | | | 1,951,324 | |
Total | | $ | 1,719,967 | | | $ | 216,036 | | | $ | 23,234 | | | $ | 1,959,237 | |
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 |
September 30, 2022 | | | | | | | | | | |
Real estate loans: | | | | | | | | | | |
Commercial property | | $ | 1,265,366 | | | $ | 3,283 | | | $ | 3,132 | | | $ | — | | | $ | 1,271,781 | |
Residential property | | 297,134 | | | — | | | 372 | | | — | | | 297,506 | |
SBA property | | 134,133 | | | 248 | | | 1,707 | | | — | | | 136,088 | |
Construction | | 14,592 | | | — | | | — | | | — | | | 14,592 | |
Commercial and industrial loans: | | | | | | | | | | |
Commercial term | | 77,855 | | | 1,355 | | | 1,015 | | | — | | | 80,225 | |
Commercial lines of credit | | 112,859 | | | 1,100 | | | 4,001 | | | — | | | 117,960 | |
SBA commercial term | | 16,501 | | | — | | | 41 | | | — | | | 16,542 | |
SBA PPP | | 1,309 | | | — | | | — | | | — | | | 1,309 | |
Other consumer loans | | 23,209 | | | — | | | 25 | | | — | | | 23,234 | |
Total | | $ | 1,942,958 | | | $ | 5,986 | | | $ | 10,293 | | | $ | — | | | $ | 1,959,237 | |
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 |
September 30, 2022 | | | | | | | | | | |
Real estate loans: | | | | | | | | | | |
Commercial property | | $ | — | | | $ | — | | | $ | — | | | $ | 2,444 | | | $ | 2,444 | |
Residential property | | — | | | — | | | — | | | 372 | | | 372 | |
SBA property | | 50 | | | 192 | | | — | | | 552 | | | 794 | |
| | | | | | | | | | |
Commercial and industrial loans: | | | | | | | | | | |
Commercial term | | — | | | — | | | — | | | 3 | | | 3 | |
Commercial lines of credit | | — | | | — | | | — | | | 4,000 | | | 4,000 | |
SBA commercial term | | 3 | | | — | | | — | | | — | | | 3 | |
| | | | | | | | | | |
Other consumer loans | | 162 | | | 3 | | | — | | | 25 | | | 190 | |
Total | | $ | 215 | | | $ | 195 | | | $ | — | | | $ | 7,396 | | | $ | 7,806 | |
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 September 30, 2022 and December 31, 2021. The increase in nonaccrual loans was primarily due to single credit relationship.
Impaired Loans
The following table presents loans individually evaluated for impairment by portfolio segment as of the dates indicated. The recorded investment presents customer balances net of any partial charge-offs recognized on the loans and net of any deferred fees and costs.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | With No Allowance Recorded | | With an Allowance Recorded |
($ in thousands) | | Recorded Investment | | Unpaid Principal Balance | | Recorded Investment | | Unpaid Principal Balance | | Related Allowance |
September 30, 2022 | | | | | | | | | | |
Real estate loans: | | | | | | | | | | |
Commercial property | | $ | 2,776 | | | $ | 2,772 | | | $ | — | | | $ | — | | | $ | — | |
Residential property | | 387 | | | 372 | | | — | | | — | | | — | |
SBA property | | 778 | | | 812 | | | — | | | — | | | — | |
| | | | | | | | | | |
Commercial and industrial loans: | | | | | | | | | | |
Commercial term | | 3 | | | 3 | | | — | | | — | | | — | |
Commercial lines of credit | | 4,034 | | | 5,074 | | | — | | | — | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | $ | 7,978 | | | $ | 7,959 | | | $ | — | | | $ | — | | | $ | — | |
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 tables present information on the recorded investment in impaired loans by portfolio segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
($ in thousands) | | Average Recorded Investment | | Interest Income | | Average Recorded Investment | | Interest Income |
Real estate loans: | | | | | | | | |
Commercial property | | $ | 2,772 | | | $ | 5 | | | $ | 329 | | | $ | 6 | |
Residential property | | 225 | | | — | | | — | | | — | |
SBA property | | 783 | | | 4 | | | 1,026 | | | 3 | |
| | | | | | | | |
Commercial and industrial loans: | | | | | | | | |
Commercial term | | — | | | — | | | 8 | | | — | |
Commercial lines of credit | | 4,537 | | | — | | | — | | | — | |
SBA commercial term | | 95 | | | — | | | 327 | | | — | |
| | | | | | | | |
Total | | $ | 8,412 | | | $ | 9 | | | $ | 1,690 | | | $ | 9 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2022 | | 2021 |
($ in thousands) | | Average Recorded Investment | | Interest Income | | Average Recorded Investment | | Interest Income |
Real estate loans: | | | | | | | | |
Commercial property | | $ | 1,140 | | | $ | 16 | | | $ | 330 | | | $ | 17 | |
Residential property | | 381 | | | — | | | — | | | — | |
SBA property | | 881 | | | 10 | | | 1,140 | | | 13 | |
| | | | | | | | |
Commercial and industrial loans: | | | | | | | | |
Commercial term | | — | | | — | | | 12 | | | — | |
Commercial lines of credit | | 1,512 | | | — | | | — | | | — | |
SBA commercial term | | 168 | | | — | | | 410 | | | 1 | |
| | | | | | | | |
Total | | $ | 4,082 | | | $ | 26 | | | $ | 1,892 | | | $ | 31 | |
| | | | | | | | |
The following presents a summary of interest foregone on impaired loans for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Interest income that would have been recognized had impaired loans performed in accordance with their original terms | | $ | 109 | | | $ | 23 | | | $ | 159 | | | $ | 78 | |
Less: interest income recognized on impaired loans on a cash basis | | (9) | | | (9) | | | (26) | | | (31) | |
Interest income foregone on impaired loans | | $ | 100 | | | $ | 14 | | | $ | 133 | | | $ | 47 | |
| | | | | | | | |
Troubled Debt Restructurings
The following table presents the composition of loans that were modified as TDRs by portfolio segment as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
($ in thousands) | | Accruing | | Nonaccrual | | Total | | Accruing | | Nonaccrual | | Total |
Real estate loans: | | | | | | | | | | | | |
Commercial property | | $ | 320 | | | $ | — | | | $ | 320 | | | $ | 326 | | | $ | — | | | $ | 326 | |
| | | | | | | | | | | | |
SBA property | | 222 | | | 7 | | | 229 | | | 242 | | | 17 | | | 259 | |
| | | | | | | | | | | | |
Commercial and industrial loans: | | | | | | | | | | | | |
Commercial term | | — | | | — | | | — | | | 2 | | | — | | | 2 | |
| | | | | | | | | | | | |
SBA commercial term | | — | | | — | | | — | | | 6 | | | — | | | 6 | |
| | | | | | | | | | | | |
Total | | $ | 542 | | | $ | 7 | | | $ | 549 | | | $ | 576 | | | $ | 17 | | | $ | 593 | |
| | | | | | | | | | | | |
There were no new loans that were modified as TDRs for the three and nine months ended September 30, 2022 and 2021.
The Company had no commitments to lend to customers with outstanding loans that were classified as TDRs as of September 30, 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 September 30, 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 during the three and nine months ended September 30, 2022 and 2021.
Purchases, Sales, and Transfers
The following table presents a summary of loans held-for-investment transferred to loans held-for-sale for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Real estate loans: | | | | | | | | |
Commercial property | | $ | — | | | $ | 3,452 | | | $ | — | | | $ | 5,162 | |
Residential property | | 458 | | | — | | | 458 | | | 189 | |
Total | | $ | 458 | | | $ | 3,452 | | | $ | 458 | | | $ | 5,351 | |
| | | | | | | | |
The Company had no loans that were transferred from loans held-for-sale to loans held-for investment during the three and nine months ended September 30, 2022 and 2021.
The following table presents a summary of purchases of loans held-for-investment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Real estate loans: | | | | | | | | |
| | | | | | | | |
Residential property | | $ | — | | | $ | 803 | | | $ | — | | | $ | 1,439 | |
Total | | $ | — | | | $ | 803 | | | $ | — | | | $ | 1,439 | |
| | | | | | | | |
Loans Held-For-Sale
The following table presents a composition of loans held-for-sale as of the dates indicated:
| | | | | | | | | | | | | | |
($ in thousands) | | September 30, 2022 | | December 31, 2021 |
Real estate loans: | | | | |
| | | | |
| | | | |
SBA property | | $ | 15,981 | | | $ | 33,603 | |
| | | | |
Commercial and industrial loans: | | | | |
| | | | |
| | | | |
SBA commercial term | | 3,001 | | | 3,423 | |
| | | | |
Total | | $ | 18,982 | | | $ | 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 September 30, 2022 and December 31, 2021, total servicing assets were $7.6 million and $7.3 million, respectively. The Company sells SBA loans and certain residential property loans with servicing retained. The Company sold loans of $27.3 million and $45.0 million, respectively, with the servicing rights retained and recognized a net gain on sale of $1.4 million and $4.3 million, respectively, during the three months ended September 30, 2022 and 2021. During the nine months ended September 30, 2022 and 2021, the Company sold loans of $105.4 million and $90.1 million, respectively, with the servicing rights retained and recognized a net gain on sale of $7.2 million and $9.4 million, respectively. Loan servicing income was $780 thousand and $655 thousand for the three months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022 and 2021, loan servicing income was $2.2 million and $2.1 million, respectively.
The following table presents the composition of servicing assets with key assumptions used to estimate the fair value as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
($ in thousands) | | Residential Property | | SBA Property | | SBA Commercial Term | | Residential Property | | SBA Property | | SBA Commercial Term |
Carrying amount | | $ | 66 | | | $ | 7,106 | | | $ | 455 | | | $ | 86 | | | $ | 6,701 | | | $ | 482 | |
Fair value | | $ | 106 | | | $ | 9,144 | | | $ | 634 | | | $ | 126 | | | $ | 11,196 | | | $ | 734 | |
Discount rate | | 7.73 | % | | 11.47 | % | | 12.55 | % | | 6.33 | % | | 8.75 | % | | 9.64 | % |
Prepayment speed | | 20.90 | % | | 14.89 | % | | 16.68 | % | | 24.40 | % | | 9.80 | % | | 12.77 | % |
Weighted average remaining life | | 21.0 years | | 21.5 years | | 6.6 years | | 21.9 years | | 21.4 years | | 6.2 years |
Underlying loans being serviced | | $ | 13,497 | | | $ | 469,507 | | | $ | 55,900 | | | $ | 17,443 | | | $ | 442,424 | | | $ | 59,839 | |
| | | | | | | | | | | | |
The following tables present activity in servicing assets for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2022 | | 2021 |
($ in thousands) | | Residential Property | | SBA Property | | SBA Commercial Term | | Residential Property | | SBA Property | | SBA Commercial Term |
Balance at beginning of period | | $ | 72 | | | $ | 7,193 | | | $ | 451 | | | $ | 96 | | | $ | 5,800 | | | $ | 586 | |
Additions | | — | | | 370 | | | 64 | | | — | | | 1,040 | | | 13 | |
Amortization | | (6) | | | (457) | | | (60) | | | (9) | | | (442) | | | (75) | |
| | | | | | | | | | | | |
Balance at end of period | | $ | 66 | | | $ | 7,106 | | | $ | 455 | | | $ | 87 | | | $ | 6,398 | | | $ | 524 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 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 | | — | | | 1,784 | | | 158 | | | — | | | 2,021 | | | 84 | |
Amortization | | (20) | | | (1,379) | | | (185) | | | (22) | | | (1,265) | | | (209) | |
| | | | | | | | | | | | |
Balance at end of period | | $ | 66 | | | $ | 7,106 | | | $ | 455 | | | $ | 87 | | | $ | 6,398 | | | $ | 524 | |
| | | | | | | | | | | | |
Note 6 - Other Real Estate Owned
The following table presents activity in OREO for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Balance at beginning of period | | $ | 808 | | | $ | — | | | $ | — | | | $ | 1,401 | |
Additions | | — | | | — | | | 808 | | | 1,960 | |
Sales | | (808) | | | — | | | (808) | | | (3,361) | |
Net change in valuation allowance | | — | | | — | | | — | | | — | |
Balance at end of period | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | |
The following table presents activity in OREO valuation allowance for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 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 September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Net gain on sales | | $ | (152) | | | $ | — | | | $ | (152) | | | $ | (73) | |
Operating expenses, net of rental income | | 10 | | | — | | | 13 | | | 81 | |
Total | | $ | (142) | | | $ | — | | | $ | (139) | | | $ | 8 | |
| | | | | | | | |
The Company did not provide loans to finance the sale of its OREO property during the three and nine months ended September 30, 2022 or 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 September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Operating lease cost (1) | | $ | 705 | | | $ | 611 | | | $ | 2,029 | | | $ | 1,913 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from operating leases | | $ | 755 | | | $ | 654 | | | $ | 2,182 | | | $ | 2,051 | |
Right of use assets obtained in exchange for lease obligations | | $ | 1,043 | | | $ | 1,111 | | | $ | 2,007 | | | $ | 1,247 | |
| | | | | | | | |
(1) Included in Occupancy and Equipment on the Consolidated Statements of Income (Unaudited).
The Company used the incremental borrowing rate based on the information available at lease commencement in determining the present value of lease payments. The following table presents supplemental balance sheet information related to leases as of the dates indicated:
| | | | | | | | | | | | | | |
($ in thousands) | | September 30, 2022 | | December 31, 2021 |
Operating leases: | | | | |
Operating lease assets | | $ | 6,897 | | | $ | 6,786 | |
Operating lease liabilities | | $ | 7,402 | | | $ | 7,444 | |
Weighted-average remaining lease term | | 4.4 years | | 4.0 years |
Weighted-average discount rate | | 2.60 | % | | 2.36 | % |
| | | | |
The following table presents maturities of operating lease liabilities as of the date indicated:
| | | | | | | | |
($ in thousands) | | September 30, 2022 |
Maturities: | | |
2022 | | $ | 787 | |
2023 | | 2,668 | |
2024 | | 1,237 | |
2025 | | 1,146 | |
2026 | | 860 | |
After 2026 | | 1,267 | |
Total lease payment | | 7,965 | |
Imputed Interest | | (563) | |
Present value of operating lease liabilities | | $ | 7,402 | |
| | |
Note 8 - Federal Home Loan Bank Advances and Other Borrowings
FHLB Advances
The Company had no outstanding FHLB advance of September 30, 2022. At December 31, 2021, the Company had a fixed interest rate FHLB advance of $10.0 million with a maturity date of June 29, 2022 (original maturity term of five years) and an interest rate of 2.07%. The Bank repaid the advance upon maturity.
At September 30, 2022 and December 31, 2021, loans pledged to secure borrowings from the FHLB were $1.08 billion and $982.7 million, respectively. The Company’s investment in capital stock of the FHLB of San Francisco totaled $10.0 million and $8.4 million at September 30, 2022 and December 31, 2021, respectively. The Company had additional borrowing capacity of $586.1 million and $516.2 million from the FHLB as of September 30, 2022 and December 31, 2021, respectively.
Other Borrowing Arrangements
At September 30, 2022, the Company had $29.1 million of unused borrowing capacity from the Federal Reserve Discount Window, to which the Company pledged loans with a carrying value of $37.4 million with no outstanding borrowings. In addition, the Company may borrow up to approximately $65.0 million overnight federal funds lines with correspondent financial institutions at September 30, 2022.
Note 9 - Shareholders’ Equity
Series C, Senior Non-Cumulative Perpetual Preferred Stock
On May 24, 2022, the Company issued 69,141 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C, liquidation preference of $1,000 per share (“Series C Preferred Stock”) for the capital investment of $69.1 million from the U.S. Treasury under the Emergency Capital Investment Program (“ECIP”). ECIP investment is treated as tier 1 capital for the regulatory capital treatment.
The Series C Preferred Stock bears no dividend for the first 24 months following the investment date. Thereafter, the dividend rate will be adjusted based on the lending growth criteria listed in the terms of the ECIP investment with the annual dividend rate up to 2%. After the tenth anniversary of the investment date, the dividend rate will be fixed based on average annual amount of lending in years 2 through 10. Dividends will be payable quarterly in arrears on March 15, June 15, September 15, and December 15.
The Series C Preferred Stock may be redeemed at the option of the Company on or after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator and in accordance with the federal banking agencies’ regulatory capital regulations.
Stock 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.
On July 28, 2022, the Company’s Board of Directors approved a repurchase program authorizing for the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 747,938 shares, through February 1, 2023. The Company repurchased and retired 119,941 shares of common stock at a weighted-average price of $18.75 per share, totaling $2.2 million under this repurchase program through September 30, 2022.
Note 10 - Share-Based Compensation
On July 25, 2013, the Company adopted the 2013 Equity Based Stock Compensation Plan (“2013 EBSC Plan”) approved by its shareholders to replace the 2003 Stock Option Plan. The 2013 EBSC Plan provides 1,114,446 shares of common stock for equity based compensation awards including incentive and non-qualified stock options and restricted stock awards. As of September 30, 2022, there were 411,670 shares available for future grants.
Share-Based Compensation Expense
The following table presents share-based compensation expense and the related tax benefits for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Share-based compensation expense related to: | | | | | | | | |
Stock options | | $ | 40 | | | $ | 52 | | | $ | 130 | | | $ | 130 | |
Restricted stock awards | | 95 | | | 64 | | | 288 | | | 193 | |
Total share-based compensation expense | | $ | 135 | | | $ | 116 | | | $ | 418 | | | $ | 323 | |
Related tax benefits | | $ | 29 | | | $ | 21 | | | $ | 89 | | | $ | 62 | |
| | | | | | | | |
The following table presents unrecognized share-based compensation expense as of the date indicated:
| | | | | | | | | | | | | | |
| | September 30, 2022 |
($ in thousands) | | Unrecognized Expense | | Weighted-Average Remaining Expected Recognition Period |
Unrecognized share-based compensation expense related to: | | | | |
Stock options | | $ | 357 | | | 3.2 years |
Restricted stock awards | | 846 | | | 3.0 years |
Total unrecognized share-based compensation expense | | $ | 1,203 | | | 3.0 years |
| | | | |
Stock Options
The following tables represent stock option activity for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 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 | | 595,637 | | | $ | 12.34 | | | 4.5 years | | $ | 3,776 | |
| | | | | | | | |
Exercised | | (14,050) | | | $ | 12.11 | | | 3.87 years | | |
| | | | | | | | |
Outstanding at end of period | | 581,587 | | | $ | 12.35 | | | 4.26 years | | $ | 3,469 | |
Exercisable at end of period | | 480,587 | | | $ | 10.95 | | | 3.39 years | | $ | 3,422 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 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 | | | 4.54 years | | $ | 6,641 | |
Granted | | 30,000 | | | $ | 22.61 | | | 10.00 years | | |
Exercised | | (80,185) | | | $ | 9.19 | | | 2.47 years | | |
Forfeited | | (1,000) | | | $ | 15.50 | | | 5.53 years | | |
Outstanding at end of period | | 581,587 | | | $ | 12.35 | | | 4.26 years | | $ | 3,469 | |
Exercisable at end of period | | 480,587 | | | $ | 10.95 | | | 3.39 years | | $ | 3,422 | |
| | | | | | | | |
The following table represents information regarding unvested stock options for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| | Number of Shares | | Weighted-Average Exercise Price Per Share | | Number of Shares | | Weighted-Average Exercise Price Per Share |
Outstanding at beginning of period | | 114,000 | | | $ | 18.63 | | | 107,099 | | | $ | 16.70 | |
Granted | | — | | | $ | — | | | 30,000 | | | $ | 22.61 | |
Vested | | (13,000) | | | $ | 15.79 | | | (35,099) | | | $ | 15.19 | |
Forfeited | | — | | | $ | — | | | (1,000) | | | $ | 15.50 | |
Outstanding at end of period | | 101,000 | | | $ | 18.99 | | | 101,000 | | | $ | 18.99 | |
| | | | | | | | |
Restricted Stock Awards
The following table represents RSA activity for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share | | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share |
Outstanding at beginning of period | | 68,822 | | | $ | 16.51 | | | 55,284 | | | $ | 12.79 | |
Granted | | 2,700 | | | $ | 18.95 | | | 27,700 | | | $ | 21.67 | |
Vested | | (9,500) | | | $ | 16.67 | | | (20,762) | | | $ | 13.25 | |
Forfeited | | — | | | $ | — | | | (200) | | | $ | 17.09 | |
Outstanding at end of period | | 62,022 | | | $ | 16.59 | | | 62,022 | | | $ | 16.59 | |
| | | | | | | | |
Note 11 - Income Taxes
Income tax expense was $2.8 million and $4.6 million, respectively, and the effective tax rate was 28.7% and 29.5%, respectively, for the three months ended September 30, 2022 and 2021. For the nine months ended September 30, 2022 and 2021, income tax expense was $10.7 million and $12.3 million, respectively, and the effective tax rate was 29.0% and 29.5%, respectively.
At September 30, 2022 and December 31, 2021, the Company had no unrecognized tax benefits or related accrued interest.
The Company and its subsidiaries are subject to U.S. federal and various state jurisdictions income tax examinations. As of September 30, 2022, the Company is no longer subject to examination by taxing authorities for tax years before 2018 for federal taxes and before 2017 for various state jurisdictions. The statute of limitations vary by state, and state taxes other than California have been minimal and immaterial to the Company’s financial results.
Note 12 - Earnings Per Share
The following table presents the computations of basic and diluted EPS for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands, except per share) | | 2022 | | 2021 | | 2022 | | 2021 |
Basic earnings per share: | | | | | | | | |
Net income | | $ | 6,953 | | | $ | 11,023 | | | $ | 26,285 | | | $ | 29,427 | |
Less: income allocated to unvested restricted stock | | (30) | | | (43) | | | (120) | | | (116) | |
Net income allocated to common stock | | $ | 6,923 | | | $ | 10,980 | | | $ | 26,165 | | | $ | 29,311 | |
Weighted-average total common shares outstanding | | 14,943,027 | | | 14,837,000 | | | 14,938,160 | | | 15,150,635 | |
Less: weighted-average unvested restricted stock | | (65,148) | | | (57,293) | | | (68,163) | | | (59,646) | |
Weighted-average common shares outstanding, basic | | 14,877,879 | | | 14,779,707 | | | 14,869,997 | | | 15,090,989 | |
Basic earnings per share | | $ | 0.47 | | | $ | 0.74 | | | $ | 1.76 | | | $ | 1.94 | |
Diluted earnings per share: | | | | | | | | |
Net income allocated to common stock | | $ | 6,923 | | | $ | 10,980 | | | $ | 26,165 | | | $ | 29,311 | |
Weighted-average common shares outstanding, basic | | 14,877,879 | | | 14,779,707 | | | 14,869,997 | | | 15,090,989 | |
Diluted effect of stock options | | 210,210 | | | 251,851 | | | 256,866 | | | 207,076 | |
Weighted-average common shares outstanding, diluted | | 15,088,089 | | | 15,031,558 | | | 15,126,863 | | | 15,298,065 | |
Diluted earnings per share | | $ | 0.46 | | | $ | 0.73 | | | $ | 1.73 | | | $ | 1.92 | |
| | | | | | | | |
There were 65,000 and 50,000 stock options excluded in computing diluted EPS because they were anti-dilutive for three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, there were 65,000 and 104,000 stock options excluded in computing diluted EPS because they were anti-dilutive.
Note 13 - Commitments and Contingencies
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and letters of credit. Those instruments involve to varying degrees, elements of credit, and interest rate risk not recognized in the Company’s consolidated financial statements.
The Company had the following outstanding financial commitments whose contractual amount represents credit risk as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
($ in thousands) | | Fixed Rate | | Variable Rate | | Fixed Rate | | Variable Rate |
Unused lines of credit | | $ | 55,173 | | | $ | 199,565 | | | $ | 8,261 | | | $ | 160,739 | |
Unfunded loan commitments | | 847 | | | 35,822 | | | 595 | | | 29,688 | |
Standby letters of credit | | 3,093 | | | 1,701 | | | 3,078 | | | 1,431 | |
Commercial letters of credit | | 112 | | | 190 | | | 91 | | | 524 | |
Total | | $ | 59,225 | | | $ | 237,278 | | | $ | 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 $242 thousand and $214 thousand, respectively, at September 30, 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.
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 and nine months ended September 30, 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 September 30, 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 $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in the following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. The Company and the Bank’s capital conservation buffer was 9.19% and 10.02%, respectively, as of September 30, 2022, and 8.04% and 7.73%, respectively, as of December 31, 2021. Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital. The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital Requirement | | To Be Well Capitalized Under Prompt Corrective Provisions |
($ in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
September 30, 2022 | | | | | | | | | | | | |
PCB Bancorp | | | | | | | | | | | | |
Common tier 1 capital (to risk-weighted assets) | | $ | 274,134 | | | 13.69 | % | | $ | 90,114 | | | 4.5 | % | | N/A | | N/A |
Total capital (to risk-weighted assets) | | 367,278 | | | 18.34 | % | | 160,202 | | | 8.0 | % | | N/A | | N/A |
Tier 1 capital (to risk-weighted assets) | | 343,275 | | | 17.14 | % | | 120,152 | | | 6.0 | % | | N/A | | N/A |
Tier 1 capital (to average assets) | | 343,275 | | | 14.74 | % | | 93,152 | | | 4.0 | % | | N/A | | N/A |
PCB Bank | | | | | | | | | | | | |
Common tier 1 capital (to risk-weighted assets) | | $ | 336,853 | | | 16.82 | % | | $ | 90,111 | | | 4.5 | % | | $ | 130,160 | | | 6.5 | % |
Total capital (to risk-weighted assets) | | 360,856 | | | 18.02 | % | | 160,196 | | | 8.0 | % | | 200,246 | | | 10.0 | % |
Tier 1 capital (to risk-weighted assets) | | 336,853 | | | 16.82 | % | | 120,147 | | | 6.0 | % | | 160,196 | | | 8.0 | % |
Tier 1 capital (to average assets) | | 336,853 | | | 14.47 | % | | 93,149 | | | 4.0 | % | | 116,436 | | | 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 |
PCB 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 | % |
| | | | | | | | | | | | |
The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of the bank’s undivided profits or the bank’s net income for its last three fiscal years less the amount of any distribution made to the bank’s shareholder during the same period. As a California corporation, the Company is subject to the limitations of California law, which allows a corporation to distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the corporation meets either a retained earnings test or a balance sheet test. Under the retained earnings test, the Company may make a distribution from retained earnings to the extent that its retained earnings exceed the sum of (a) the amount of the distribution plus (b) the amount, if any, of dividends in arrears on shares with preferential dividend rights. Under the balance sheet test, the Company may also make a distribution if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution. Indebtedness is not considered a liability if the terms of such indebtedness provide that payment of principal and interest thereon are to be made only if, and to the extent that, a distribution to shareholders could be made under the balance sheet test.
The Federal Reserve, the Federal Deposit Insurance Corporation (the “FDIC”) and the California Department of Financial Protection and Innovation (the “CDFPI”) periodically examine the Company’s business, including compliance with laws and regulations. If, as a result of an examination, a banking agency were to determine that the Company’s financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of the Company’s operations had become unsatisfactory, or that the Company was in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in Company’s capital, to restrict growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Company’s deposit insurance and place the Company into receivership or conservatorship.
Note 15 - Revenue Recognition
The following table presents revenue from contracts with customers within the scope of ASC 606, Revenue from Contracts with Customers, for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
($ in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Noninterest income in-scope of Topic 606 | | | | | | | | |
Service charges and fees on deposits: | | | | | | | | |
Monthly service fees | | $ | 24 | | | $ | 21 | | | $ | 67 | | | $ | 60 | |
Account analysis fees | | 243 | | | 220 | | | 690 | | | 649 | |
Non-sufficient funds charges | | 53 | | | 35 | | | 157 | | | 130 | |
Other deposit related fees | | 21 | | | 16 | | | 60 | | | 48 | |
Total service charges and fees on deposits | | 341 | | | 292 | | | 974 | | | 887 | |
Debit card fees | | 87 | | | 86 | | | 256 | | | 222 | |
Gain (loss) on sale of other real estate owned | | 152 | | | — | | | 152 | | | 74 | |
Wire transfer fees | | 159 | | | 159 | | | 484 | | | 435 | |
Other service charges | | 48 | | | 50 | | | 140 | | | 150 | |
Total | | $ | 787 | | | $ | 587 | | | $ | 2,006 | | | $ | 1,768 | |
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Note 16 - Subsequent Events
Dividend Declared on Common Stock. On October 27, 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 November 18, 2022, to shareholders of record as of the close of business on November 10, 2022.
The Company has evaluated the effects of events that have occurred subsequent to September 30, 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.