PCB BANCORP 10-K

Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis of financial condition and results of operations together with the Consolidated Financial Statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A “Risk Factors” and “Forward Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K. Critical Accounting Policies The Company follows accounting and reporting policies and procedures that conform, in all material respects, to GAAP and to practices generally applicable to the financial services industry, the most significant of which are described in Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make judgments and accounting estimates that affect the amounts reported for assets, liabilities, revenues and expenses on the Consolidated Financial Statements and accompanying notes, and amounts disclosed as contingent assets and liabilities. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. Accounting estimates are necessary in the application of certain accounting policies and procedures that are particularly susceptible to significant change. Critical accounting policies are defined as those that require the most complex or subjective judgment and are reflective of significant uncertainties, and could potentially result in materially different results under different assumptions and conditions The following is a summary of the more subjective and complex accounting estimates and principles affecting the financial condition and results reported in financial statements. In each area, the Company has identified the variables that management believes to be the most important in the estimation process. The Company uses the best information available to make the estimations necessary to value the related assets and liabilities in each of these areas. Allowance for Loan Losses Allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance for loan losses when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. The Company estimates the allowance for loan losses required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each segment. The Company determines a separate allowance for loan losses for each portfolio segment. The allowance for loan losses consists of specific and general reserves. Specific reserves relate to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due. Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral. The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans. Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired with measurement of impairment as described above. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. General reserves cover non-impaired loans and are based on the Company’s historical loss rates for each portfolio segment, adjusted for the effects of qualitative factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. 45 Qualitative factors include consideration of the following: changes in lending policies and procedures; changes in economic conditions, changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements. Executive Summary Net income was $16.2 million for the year ended December 31, 2020, a decrease of $7.9 million, or 32.9%, from $24.1 million for the year ended December 31, 2019. The decrease was primarily due to an increase in provision for loan losses and a decrease in net interest income. Provision for loan losses increased primarily due to the increase in risks associated with economic and business conditions, as well an increases in special mention and substandard loans, as a result of the COVID-19 pandemic, and net interest income decreased primarily due to the lower market rates during the year ended December 31, 2020. For the year ended December 31, 2019, net income was $24.1 million, a decrease of $193 thousand, or 0.8%, from $24.3 million for the year ended December 31, 2018. The decrease was primarily due to increases in provision for loan losses and noninterest expense, partially offset by increases in net interest income and noninterest income. Provision for loan losses increased primarily due to increased charge-offs and noninterest expense increased primarily due to expansion of the Company's infrastructure for being a public company and enhancement of the controls and processes on BSA/AML compliance during the year ended December 31, 2019. Net interest income increased primarily due to the loan growth and higher average market rates and noninterest income increased primarily due to higher sales of loans and securities available-for-sale during the year ended December 31, 2019 Total assets were $1.92 billion at December 31, 2020, an increase of $176.5 million, or 10.1%, from $1.75 billion at December 31, 2019. The increase was primarily due to an increase in loans held-for-investment and cash and cash equivalents. Loans held-for-investment increased primarily due to the SBA PPP loan production and cash and cash equivalents increased primarily due to increases in deposits and borrowings as the Company maintains most of its cash at the Federal Reserve Bank account. The ongoing COVID-19 pandemic, and governmental and societal responses thereto, have had a severe impact on recent global economic and market conditions, including significant disruption of, and volatility in, financial markets; global supply chain disruptions; and the institution of social distancing and shelter-in-place requirements that have resulted in temporary closures of many businesses, lost revenues, and increased unemployment throughout the U.S., but also specifically in California, where most of the Company’s operations and a large majority of its customers are located. Since the beginning of the crisis, the Company has taken a number of steps to protect the safety of its employees and to support its customers. The Company has enabled its staff to work remotely and established safety measures within its bank premises and branches for both employees and customers. In order to support its customers, the Company has been in close contact with its customers, assessing the level of impact on their businesses, and putting a process in place to evaluate each client’s specific situation and provide relief programs where appropriate. SBA PPP loans totaled $135.7 million (1,585 loans) and loans with modifications related to the COVID-19 pandemic totaled $36.1 million (39 loan customers) as of December 31, 2020. In December 2020, the Company received SBA PPP forgiveness of $1.8 million for 57 SBA PPP loans. On January 13, 2021, SBA began accepting applications for (i) first draw PPP loans for businesses that did not seek a PPP loan under the original CARES Act, and (ii) second draw PPP loans for businesses that were extended a PPP loan previously. The Company had funded 819 loans totaling $88.1 million by February 28, 2021 and will continue to receive applications as long as funding remains available. In addition, the Company has been monitoring its liquidity and capital closely. As of December 31, 2020, the Company maintained $194.1 million, or 10.1% of total assets, of cash and cash equivalents and $526.1 million, or 27.4% of total assets, of available borrowing capacity. All regulatory capital ratios were also well above the regulatory well capitalized requirements as of December 31, 2020, while establishing additional provision for loan losses of $13.2 million for the year ended December 31, 2020. At this time, the Company cannot estimate the long-term impact of the COVID-19 pandemic, but these conditions impacted and are expected to impact its business, results of operations, and financial condition negatively. 46 Financial Highlights • Net income was $16.2 million for the year ended December 31, 2020, a decrease of $7.9 million, or 32.9%, from $24.1 million for the year ended December 31, 2019; ◦ The Company recorded a provision for loan losses of $13.2 million primarily due to an increase in the economic uncertainty, as well as increases in special mention and substandard loans, as a result of the COVID-19 pandemic for the year ended December 31, 2020. ◦ Diluted earnings per common share was $1.04, $1.49 and $1.65 for the years ended December 31, 2020, 2019 and 2018, respectively. ◦ Net interest margin was 3.53%, 4.11% and 4.23% for the years ended December 31, 2020, 2019 and 2018, respectively. • Total assets were $1.92 billion at December 31, 2020, an increase of $176.5 million, or 10.1%, from $1.75 billion at December 31, 2019; • Loans held-for-investment, net of deferred costs (fees), were $1.58 billion at December 31, 2020, an increase of $132.7 million, or 9.1%, from $1.45 billion at December 31, 2019; ◦ SBA PPP loans totaled $135.7 million at December 31, 2020. ◦ Loans with modifications related to COVID-19 totaled $36.1 million at December 31, 2020 compared with $484.0 million at June 30, 2020. ◦ Allowance for loan losses to total loans held-for-investment ratio was 1.67% at December 31, 2020 compared with 0.99% at December 31, 2019. • Total deposits were $1.59 billion at December 31, 2020, an increase of $115.5 million, or 7.8%, from $1.48 billion at December 31, 2019; • The consent order related to the Bank’s BSA/AML compliance was terminated on September 30, 2020; and • The Company declared and paid cash dividends of $0.40, $0.25, and $0.12 per common share for the years ended December 31, 2020, 2019 and 2018, respectively. Result of Operations Net Interest Income A principal component of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest-earning assets is referred to as the net interest margin. The net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities. Net interest income is affected by changes in the balances of interest-earning assets and interest-bearing liabilities and changes in the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities. 47 The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their correspondent yields and costs expressed both in dollars and rates for the periods indicated: Year Ended December 31, 2020 2019 2018 ($ in thousands) Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost Interest-earning assets: Total loans (1) $ 1,541,740 $ 76,546 4.96 % $ 1,383,562 $ 85,667 6.19 % $ 1,264,166 $ 76,837 6.08 % Mortgage-backed securities 68,496 1,260 1.84 % 82,848 2,081 2.51 % 70,971 1,717 2.42 % Collateralized mortgage obligation 35,299 462 1.31 % 51,441 1,185 2.30 % 53,312 1,272 2.39 % SBA loan pool securities 13,120 255 1.94 % 20,681 536 2.59 % 23,671 576 2.43 % Municipal securities - tax exempt (2) 5,811 150 2.58 % 5,833 154 2.64 % 6,312 159 2.52 % Interest-bearing deposits in other financial institutions 204,708 631 0.31 % 126,803 2,781 2.19 % 130,453 2,539 1.95 % FHLB and other bank stock 8,416 457 5.43 % 8,067 541 6.71 % 7,174 599 8.35 % Total interest-earning assets 1,877,590 79,761 4.25 % 1,679,235 92,945 5.53 % 1,556,059 83,699 5.38 % Noninterest-earning assets: Cash and cash equivalents 17,542 18,614 19,079 Allowances for loan losses (19,693) (13,197) (12,632) Other assets 39,385 35,010 26,827 Total noninterest-earning assets 37,234 40,427 33,274 Total assets $ 1,914,824 $ 1,719,662 $ 1,589,333 Interest-bearing liabilities: Deposits: NOW and money market accounts $ 371,315 2,385 0.64 % $ 329,562 5,162 1.57 % $ 287,131 3,477 1.21 % Savings 8,543 9 0.11 % 7,965 32 0.40 % 8,613 26 0.30 % Time deposits 708,306 10,564 1.49 % 783,353 18,245 2.33 % 758,029 13,837 1.83 % Borrowings 94,319 614 0.65 % 25,388 472 1.86 % 34,904 611 1.75 % Total interest-bearing liabilities 1,182,483 13,572 1.15 % 1,146,268 23,911 2.09 % 1,088,677 17,951 1.65 % Noninterest-bearing liabilities: Demand deposits 486,820 329,731 319,832 Other liabilities 16,968 22,087 10,395 Total noninterest-bearing liabilities 503,788 351,818 330,227 Total liabilities 1,686,271 1,498,086 1,418,904 Shareholders’ equity 228,553 221,576 170,429 Total liabilities and shareholders’ equity $ 1,914,824 $ 1,719,662 $ 1,589,333 Net interest income $ 66,189 $ 69,034 $ 65,748 Net interest spread (3) 3.10 % 3.44 % 3.73 % Net interest margin (4) 3.53 % 4.11 % 4.23 % Cost of funds (5) 0.81 % 1.62 % 1.27 % (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 $2.9 million, $452 thousand and $515 thousand, respectively, and net accretion of discount on loans of $3.3 million, $4.0 million and $4.4 million, respectively, are included in the interest income for the years ended December 31, 2020, 2019 and 2018, respectively. (2) The yield on municipal bonds has not been computed on a tax-equivalent basis. (3) Net interest spread is calculated by subtracting average rate on interest-bearing liabilities from average yield on interest-earning assets. (4) Net interest margin is calculated by dividing net interest income by average interest-earning assets. (5) Cost of funds is calculated by dividing interest expense on deposits by the sum of interest-bearing and noninterest-bearing demand deposits. 48 The following table presents the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. Information is provided on changes attributable to: (i) changes in volume multiplied by the prior rate; and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate. Year Ended December 31, 2020 vs. 2019 Year Ended December 31, 2019 vs. 2018 Increase (Decrease) Due to Net Increase (Decrease) Increase (Decrease) Due to Net Increase (Decrease) ($ in thousands) Volume Rate Volume Rate Interest earned on: Total loans $ 9,794 $ (18,915) $ (9,121) $ 7,257 $ 1,573 $ 8,830 Investment securities (937) (892) (1,829) 158 74 232 Other interest-earning assets 1,927 (4,161) (2,234) (63) 247 184 Total interest income 10,784 (23,968) (13,184) 7,352 1,894 9,246 Interest paid on: Savings, NOW, and money market deposits 651 (3,451) (2,800) 495 1,196 1,691 Time deposits (1,748) (5,933) (7,681) 462 3,946 4,408 Other borrowings 1,282 (1,140) 142 (167) 28 (139) Total interest expense 185 (10,524) (10,339) 790 5,170 5,960 Change in net interest income $ 10,599 $ (13,444) $ (2,845) $ 6,562 $ (3,276) $ 3,286 Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 The following table presents the components of net interest income for the periods indicated: Year Ended December 31, Amount Change Percentage Change ($ in thousands) 2020 2019 Interest income: Interest and fees on loans $ 76,546 $ 85,667 $ (9,121) (10.6) % Interest on investment securities 2,127 3,956 (1,829) (46.2) % Interest and dividends on other interest-earning assets 1,088 3,322 (2,234) (67.2) % Total interest income 79,761 92,945 (13,184) (14.2) % Interest expense: Interest on deposits 12,958 23,439 (10,481) (44.7) % Interest on borrowings 614 472 142 30.1 % Total interest expense 13,572 23,911 (10,339) (43.2) % Net interest income $ 66,189 $ 69,034 $ (2,845) (4.1) % Net interest income decreased primarily due to a 128 basis point decrease in average yield on interest-earning assets and a 3.2% increase in average balance of interest-bearing liabilities, partially offset by a 11.8% increase in average balance of interest-earning assets and a 94 basis point decrease in average cost of interest-bearing liabilities. The increase in average balance of interest-earning assets was primarily due to growth in the loan and other interest-earning assets, supported by deposit growth. The decreases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the lower market rates in 2020. Interest and fees on loans decreased primarily due to a 123 basis point decrease in average yield, partially offset by a 11.4% increase in average balance. The decrease in average yield was primarily due to the lower market rates, the 1% interest rate on SBA PPP loans, and a decrease in net accretion of discount, partially offset by an increase in net amortization of deferred fees on SBA PPP loans. The increase in average balance was primarily due to the SBA PPP loan production as well as an increase in commercial property loans. Interest on investment securities decreased primarily due to a 23.7% decrease in average balance and a 73 basis point decrease in average yield. The decrease in average balance was primarily due to a sale of investment securities of $32.8 million in December 2019, which lead to a lower average balance in 2020, partially offset by new investment securities purchased in 2020. The decrease in average yield was primarily due to new investment securities purchased at lower market rates, as well as the sales of securities available-for-sale in December 2019 with a weighted-average book yield of 3.02%. The Company purchased $39.4 million and $14.1 million, respectively, of investment securities during the years ended December 31, 2020 and 2019. For the years ended December 31, 2020 and 2019, average yield on total investment securities was 1.73% and 2.46%, respectively. 49 Interest income on other interest-earning assets decreased primarily due to a 195 basis point decrease in average yield, partially offset by a 58.0% increase in average balance. The decrease in average yield was primarily due to the lower market rates. The increase in average balance was primarily due to increases in deposits and other borrowings as the Company maintains most of its cash at the Federal Reserve Bank account. For the years ended December 31, 2020 and 2019, yield on total other interest-earning assets was 0.51% and 2.46%, respectively. Interest expense on deposits decreased primarily due to a 2.9% decrease in average balance of interest-bearing deposits and a 90 basis point decrease in average cost of interest-bearing deposits. The decrease in average balance was primarily due to a decrease in time deposits, partially offset by increases in savings, NOW and money market accounts. The decrease in average cost was primarily due to the lower market rates. For the years ended December 31, 2020 and 2019, average cost on total interest-bearing deposits was 1.19% and 2.09%, respectively. Interest expense on other borrowings increased primarily due to a 271.5% increase in average balance, partially offset by a 121 basis point decrease in average cost. The decrease in average cost was primarily due to the lower market rates. The increase in average balance was primarily due to the Company’s liquidity management plan in response to the COVID-19 pandemic. Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 The following table presents the components of net interest income for the periods indicated: Year Ended December 31, Amount Change Percentage Change ($ in thousands) 2019 2018 Interest income: Interest and fees on loans $ 85,667 $ 76,837 $ 8,830 11.5 % Interest on investment securities 3,956 3,724 232 6.2 % Interest and dividends on other interest-earning assets 3,322 3,138 184 5.9 % Total interest income 92,945 83,699 9,246 11.0 % Interest expense: Interest on deposits 23,439 17,340 6,099 35.2 % Interest on borrowings 472 611 (139) (22.7) % Total interest expense 23,911 17,951 5,960 33.2 % Net interest income $ 69,034 $ 65,748 $ 3,286 5.0 % Net interest income increased primarily due to a 7.9% increase in average balance of interest-earning assets and a 15 basis point increase in average yield on interest-earning assets, partially offset by a 5.3% increase in average balance of interest-bearing liabilities and a 44 basis point increase in average cost of interest-bearing liabilities. The increase in average balance of interest-earning assets was primarily due to growth in the loan and investment security portfolios, supported by deposit growth. The increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to higher average market rates in 2019. Interest and fees on loans increased primarily due to a 9.4% increase in average balance and a 11 basis point increase in average yield. The increase in average balance was primarily due to organic loan growth primarily in commercial property loans and commercial lines of credit. The increase in average yield was primarily due to the rising interest rate environment in 2018 and higher average market rates in 2019. The Company had benefited from its high proportion of variable rate loans that had repriced along with such interest rate environment; however, the Company strategically had increased the proportion of fixed rate loans to 43.4% at December 31, 2019 from 34.4% at December 31, 2018 in order to improve its asset composition to align with the current and potential future interest rate environment. Interest on investment securities increased primarily due to a 4.2% increase in average balance and a 5 basis point increase in average yield. The increase in average balance was primarily due to a steep increase in investment securities throughout 2018, which lead to a higher average balance in 2019, partially offset by a sale of investment securities of $32.8 million in December 2019. The increase in average yield was primarily due to additional purchases of investment securities along with the rising interest rate environment in 2018 and higher average market rates in 2019. The Company purchased $14.1 million and $44.0 million, respectively, of investment securities during the years ended December 31, 2019 and 2018. For the years ended December 31, 2019 and 2018, average yield on total investment securities was 2.46% and 2.41%, respectively. 50 Interest income on other interest-earning assets increased primarily due to an 18 basis point increase in average yield, partially offset by a 2.0% decrease in average balance. The increase in average yield was primarily due to a higher average federal funds rate in 2019, partially offset by a decrease in dividend on FHLB stock. The decrease in average balance was primarily due to cash deployed to support the loan growth. For the years ended December 31, 2019 and 2018, yield on total other interest-earning assets was 2.46% and 2.28%, respectively. Interest expense on deposits increased primarily due to a 6.4% increase in average balance and a 44 basis point increase in average cost. The increase in average balance was primarily due to increases in time deposits, and NOW and money market accounts. The increase in average cost was primarily due to the impact of higher average market rates on deposits and competition in the Company’s deposit target markets. For the years ended December 31, 2019 and 2018, average cost on total interest-bearing deposits was 2.09% and 1.65%, respectively. Interest expense on other borrowings decreased primarily due to less utilization of FHLB advances. During the year ended December 31, 2019, the Bank did not renew the maturing borrowings of $10.0 million as the Bank maintained a sufficient level of on-balance sheet liquidity. Provision for Loan Losses Provision for loan losses was $13.2 million, $4.2 million and $1.2 million for the years ended December 31, 2020, 2019 and 2018. The increase in provision for loan losses was primarily due to the increase in risks associated with economic and business conditions and uncertainty, as well as the increases in special mention and classified loans, as a result of the COVID-19 pandemic for the year ended December 31, 2020. See further discussion in “Loans Held-For-Investment and Allowance for Loan Losses.” 51 Noninterest Income Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 The following table presents the components of noninterest income for the periods indicated: Year Ended December 31, Amount Change Percentage Change ($ in thousands) 2020 2019 Service charges and fees on deposits $ 1,256 $ 1,544 $ (288) (18.7) % Loan servicing income 2,710 2,309 401 17.4 % Gain on sale of loans 6,527 5,996 531 8.9 % Gain on sale of securities — 786 (786) (100.0) % Other income 1,247 1,234 13 1.1 % Total noninterest income $ 11,740 $ 11,869 $ (129) (1.1) % Service charges and fees on deposits decreased primarily due to a decrease in fee-based transactions. Loan servicing income represents fees received on loans that the Company services, net of amortization of servicing assets. The increase was primarily due to a decrease in amortization of servicing assets from decreased prepayments of loans being serviced. Gain on sale of loans increased primarily due to increases in sales volume and premium. The increase in premium on SBA loans was primarily due to the market condition and the increase in sale volume of residential property loans was primarily due to increased refinancing activities during the year ended December 31, 2020. The Company sold SBA loans of $89.8 million with a gain of $6.0 million and residential property loans of $51.9 million with a gain of $489 thousand during the year ended December 31, 2020. During the year ended December 31, 2019, the Company sold SBA loans of $99.6 million with a gain of $5.9 million and residential property loans of $10.1 million with a gain of $81 thousand. The Company sold securities available-for-sale of $32.8 million during the year ended December 31, 2019, while the Company did not sell any securities for the year ended December 31, 2020. Other income included wire and remittance fees of $529 thousand and $515 thousand, respectively, and debit card interchange fees of $252 thousand and $272 thousand, respectively, for the years ended December 31, 2020 and 2019. Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 The following table presents the components of noninterest income for the periods indicated: Year Ended December 31, Amount Change Percentage Change ($ in thousands) 2019 2018 Service charges and fees on deposits $ 1,544 $ 1,500 $ 44 2.9 % Loan servicing income 2,309 2,160 149 6.9 % Gain on sale of loans 5,996 5,560 436 7.8 % Gain on sale of securities available-for-sale 786 — 786 — % Other income 1,234 1,234 — — % Total noninterest income $ 11,869 $ 10,454 $ 1,415 13.5 % Service charges and fees on deposits increased primarily due to an increase in the level of transactional based deposit accounts. Loan servicing income increased primarily due to a decreased amortization of servicing assets from decreased prepayments of loans being serviced, partially offset by a decrease in servicing income. Servicing income decreased due to a decrease in the average balance of servicing portfolio. Gain on sale of loans increased primarily due to an increase in sales volume. The Company sold SBA loans of $99.6 million with a gain of $5.9 million and residential property loans of $10.1 million with a gain of $81 thousand during the year ended December 31, 2019. During the year ended December 31, 2018, the Company sold SBA loans of $91.7 million with a gain of $5.3 million, residential property loans of $11.6 million with a gain of $220 thousand, and other loans of $1.9 million with a gain of $62 thousand. The Company sold securities available-for-sale of $32.8 million during the year ended December 31, 2019, while the Company did not sell any securities for the year ended December 31, 2018. Other income included wire and remittance fees of $515 thousand and $472 thousand, respectively, and debit card interchange fees of $272 thousand and $221 thousand, respectively, for the years ended December 31, 2019 and 2018. 52 Noninterest Expense Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 The following table presents the components of noninterest expense for the periods indicated: Year Ended December 31, Amount Change Percentage Change ($ in thousands) 2020 2019 Salaries and employee benefits $ 26,147 $ 26,139 $ 8 — % Occupancy and equipment 5,620 5,545 75 1.4 % Professional fees 2,256 2,730 (474) (17.4) % Marketing and business promotion 1,360 1,550 (190) (12.3) % Data processing 1,472 1,365 107 7.8 % Director fees and expenses 599 751 (152) (20.2) % Regulatory assessments 978 551 427 77.5 % Other expenses 3,267 3,684 (417) (11.3) % Total noninterest expense $ 41,699 $ 42,315 $ (616) (1.5) % Salaries and employee benefits increased primarily due to increases in wages, other employee benefits and vacation accrual, partially offset by a direct loan origination cost of $1.1 million related to SBA PPP loan production and a decrease in bonus accrual. The number of full-time equivalent employees averaged 251.8 for the year ended December 31, 2020 compared to 250.2 for the year ended December 31, 2019. Occupancy and equipment expense increased primarily due to increases in rent and equipment maintenance expenses. Professional fees decreased primarily due to a decrease in expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs. The consent order with the FDIC and CDFPI related to the BSA/AML compliance was terminated on September 30, 2020. Marketing and business promotion expense decreased primarily due to fewer marketing activities related to the COVID-19 pandemic for the year ended December 31, 2020. Data processing expense increased primarily due to an increase in processing costs from a greater number of accounts and transactions. Director fees and expenses decreased primarily due to the Company's Board of Directors decision to temporarily decrease director fees from the second quarter of 2020, partially offset by a severance payment of $45 thousand for a former director during the three months end March 31, 2020. Regulatory assessment expense increased primarily due to a small bank credit of $345 thousand received from the FDIC during the year ended December 31, 2019, as well as an increase in balance sheet. Other expense decreased primarily due to decreases in office expenses, provision for unfunded loan commitments, other loan related legal expenses, and armed guard expenses. Other expenses included office expenses of $1.4 million and $1.7 million, respectively, provision (reversal) for unfunded loan commitments was $(63) thousand and $162 thousand, respectively, Other loan related legal expenses were $426 thousand and $486 thousand, respectively, and armed guard expense of $506 thousand and $555 thousand, respectively, for the years ended December 31, 2020 and 2019, respectively. 53 Year Ended December 31, 2019 Compared to Year Ended December 31, 2018 The following table presents the components of noninterest expense for the periods indicated: Year Ended December 31, Amount Change Percentage Change ($ in thousands) 2019 2018 Salaries and employee benefits $ 26,139 $ 24,473 $ 1,666 6.8 % Occupancy and equipment 5,545 4,992 553 11.1 % Professional fees 2,730 2,176 554 25.5 % Marketing and business promotion 1,550 2,010 (460) (22.9) % Data processing 1,365 1,220 145 11.9 % Director fees and expenses 751 942 (191) (20.3) % Regulatory assessments 551 544 7 1.3 % Other expenses 3,684 3,869 (185) (4.8) % Total noninterest expense $ 42,315 $ 40,226 $ 2,089 5.2 % Salaries and employee benefits increased primarily due to the hiring of new experienced employees with higher salaries in order to support the expansion of the Company's infrastructure for being a public company and to enhance the controls and processes on BSA/AML compliance, partially offset by a decrease in bonus accrual. The number of full-time equivalent employees averaged 250.2 for the year ended December 31, 2019 compared to 235.0 for the year ended December 31, 2018. Occupancy and equipment expense increased primarily due to an establishment of new loan production office in Artesia, California in December 2018 and an increase in equipment maintenance expense. Professional fees increased primarily due to increases in audit and other professional fees for being a public company and expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs, partially offset by decreases in legal and professional fees attributed to the portion of expenses related the Company's initial public offering in 2018 that were not capitalized. Marketing and business promotion expense decreased primarily due to a less advertisement activities for the year ended December 31, 2019. Data processing expense increased primarily due to an increase in processing costs from a greater number of accounts and transactions. Director fees and expenses decreased primarily due to a fewer number of directors for the year ended December 31, 2019. Regulatory assessment expense increased primarily due to an increase in assessment rate from the consent order relating to the Bank’s compliance with BSA/AML, partially offset by a small bank assessment credit of $345 thousand from the FDIC during the year ended December 31, 2019. Other expense decreased primarily due to a write-off related to a $577 thousand reimbursement paid to SBA in 2018, partially offset by increases in other loan related legal expenses as well as the increase in provision for unfunded loan commitments. Other loan related legal expenses were $486 thousand and $353 thousand, respectively, and provision for unfunded loan commitments was $162 thousand and $18 thousand, respectively, for the years ended December 31, 2019 and 2018. Other expenses also included office expense of $1.7 million and $1.6 million, respectively, and armed guard expense of $555 thousand and $504 thousand, respectively, for the years ended December 31, 2019 and 2018, respectively. Income Tax Expense Income tax expense was $6.8 million, $10.2 million and $10.4 million, respectively, and the effective tax rate was 29.7%, 29.8% and 30.1%, respectively, for the years ended December 31, 2020, 2019 and 2018. 54 Financial Condition Investment Securities The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated: December 31, 2020 2019 ($ 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: Mortgage-backed securities $ 74,622 $ 76,154 $ 1,532 $ 38,793 $ 38,738 $ (55) Collateralized mortgage obligations 26,216 26,467 251 44,115 43,894 (221) SBA loan pool securities 11,753 12,080 327 14,179 14,152 (27) Municipal bonds 5,370 5,826 456 764 782 18 Total securities available-for-sale $ 117,961 $ 120,527 $ 2,566 $ 97,851 $ 97,566 $ (285) Securities held-to-maturity: U.S. government agency and U.S. government sponsored enterprise mortgage-backed securities $ — $ — $ — $ 15,215 $ 15,204 $ (11) Municipal bonds — — — 4,939 5,276 337 Total securities held-to-maturity $ — $ — $ — $ 20,154 $ 20,480 $ 326 On June 30, 2020, the Company transferred securities held-to-maturity to securities available-for-sale as a part of the Company’s liquidity management plan in response to the COVID-19 pandemic. Management determined that its securities held-to-maturity no longer adhere to the Company’s current liquidity management plan and could be sold to potentially improve the Company’s liquidity position. Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and the Company’s ability to assert that it has the intent and ability to hold to maturity debt securities will be limited for up to two years from the date of transfer. The Company transferred all securities held-to-maturity of $18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of $787 thousand. Total carrying value of investment securities were $120.5 million at December 31, 2020, an increase of $2.8 million, or 2.4%, from $117.7 million at December 31, 2019. The increase was primarily due to purchases of $39.4 million and an increase in fair value of securities available-for-sale of $2.9 million, partially offset by principal paydowns and calls of $38.5 million and net premium amortization of $938 thousand. All individual securities in a continuous unrealized loss position for 12 months or more as of December 31, 2020 and December 31, 2019 had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of December 31, 2020 and 2019. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized at December 31, 2020 and 2019. 55 The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of December 31, 2020: December 31, 2020 Within One Year More than One Year through Five Years More than Five Years through Ten Years More than Ten Years Total ($ 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: Mortgage-backed securities $ — — % $ 494 1.40 % $ 10,658 1.48 % $ 63,470 1.48 % $ 74,622 1.48 % Collateralized mortgage obligations — — % — — % 11,605 0.76 % 14,611 1.26 % 26,216 1.04 % SBA loan pool securities — — % 1,006 2.56 % 1,887 0.67 % 8,860 2.02 % 11,753 1.85 % Municipal bonds — — % 2,191 2.02 % 845 2.27 % 2,334 3.53 % 5,370 2.71 % Total securities available-for-sale $ — — % $ 3,691 2.09 % $ 24,995 1.11 % $ 89,275 1.55 % $ 117,961 1.47 % 56 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: December 31, 2020 2019 2018 2017 2016 ($ in thousands) Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total Real estate loans: Commercial property 880,736 55.5 % 803,014 55.4 % 709,409 53.1 % 662,031 55.5 % 596,392 57.8 % Residential property 198,431 12.5 % 235,046 16.3 % 233,816 17.5 % 168,560 14.2 % 140,419 13.6 % SBA property 126,570 8.0 % 129,837 8.9 % 120,939 9.0 % 131,740 11.1 % 105,221 10.2 % Construction 15,199 1.0 % 19,164 1.3 % 27,323 2.0 % 23,117 1.9 % 14,973 1.5 % Total real estate loans 1,220,936 77.0 % 1,187,061 81.9 % 1,091,487 81.6 % 985,448 82.7 % 857,005 83.1 % Commercial and industrial loans: Commercial term 87,250 5.5 % 103,380 7.1 % 102,133 7.6 % 77,402 6.5 % 64,898 6.3 % Commercial lines of credit 96,087 6.1 % 111,768 7.7 % 91,994 6.9 % 62,751 5.3 % 48,694 4.7 % SBA commercial term 21,878 1.4 % 25,332 1.7 % 27,147 2.0 % 30,376 2.6 % 26,643 2.6 % SBA PPP 135,654 8.6 % — — % — — % — — % — — % Total commercial and industrial loans 340,869 21.6 % 240,480 16.5 % 221,274 16.5 % 170,529 14.4 % 140,235 13.6 % Other consumer loans 21,773 1.4 % 23,290 1.6 % 25,921 1.9 % 34,022 2.9 % 33,872 3.3 % Loans held-for-investment 1,583,578 100.0 % 1,450,831 100.0 % 1,338,682 100.0 % 1,189,999 100.0 % 1,031,112 100.0 % Allowance for loan losses (26,510) (14,380) (13,167) (12,224) (11,320) Net loans held-for-investment $ 1,557,068 $ 1,436,451 $ 1,325,515 $ 1,177,775 $ 1,019,792 Loans held-for-investment were $1.58 billion at December 31, 2020, an increase of $132.7 million, or 9.1%, from $1.45 billion at December 31, 2019. The increase was primarily due to new funding of $345.9 million, advances of $100.5 million, and transfers from loan held-for-sale of $697 thousand, partially offset by paydowns and payoffs of $311.5 million, transfers to loans held-for-sale of $1.4 million and charge-offs of $1.5 million. SBA PPP loan production contributed significantly to the Company’s loan growth for the year ended December 31, 2020. 57 The following table shows the contractual maturities of loans held-for-investment and the distribution between fixed and floating interest rate loans at December 31, 2020: December 31, 2020 ($ in thousands) Within One Year Due After One Year to Five Years Due After Five Years Total Real estate loans: Commercial property $ 95,350 $ 595,018 $ 190,368 $ 880,736 Residential property — — 198,431 198,431 SBA property — 53 126,517 126,570 Construction 15,199 — — 15,199 Total real estate loans 110,549 595,071 515,316 1,220,936 Commercial and industrial loans: Commercial term 2,963 $ 57,797 $ 26,490 87,250 Commercial lines of credit 96,084 3 — 96,087 SBA commercial term 51 4,373 17,454 21,878 SBA PPP — 135,654 — 135,654 Total commercial and industrial loans 99,098 197,827 43,944 340,869 Other consumer loans 2,435 18,487 851 21,773 Loans held-for-investment $ 212,082 $ 811,385 $ 560,111 $ 1,583,578 Loans with variable (floating) interest rates $ 186,476 $ 323,127 $ 242,310 $ 751,913 Loans with adjustable (fixed to floating) interest rates — 35,006 294,087 329,093 Loans with predetermined (fixed) interest rates 25,606 453,252 23,714 502,572 Total $ 212,082 $ 811,385 $ 560,111 $ 1,583,578 SBA Paycheck Protection Program The following table presents a summary of SBA PPP loans as of December 31, 2020: December 31, 2020 ($ in thousands) Number of Loans Carrying Value Contractual Balance Loan amount: $50,000 or less 1,017 $ 20,518 $ 20,632 Over $50,000 and less than $350,000 496 60,692 62,011 Over $350,000 and less than $2,000,000 69 46,054 46,718 $2,000,000 or more 3 8,390 8,427 Total 1,585 $ 135,654 $ 137,788 58 Loan Modifications Related to the COVID-19 Pandemic The following table presents a summary of loans under modified terms related to the COVID-19 pandemic as of December 31, 2020: December 31, 2020 Modification Type ($ in thousands) Payment Deferment Interest Only Payment Total Weighted-Average Contractual Rate Loan-to-Value (1) Accrued Interest Receivable Real estate loans: Commercial property $ 9,688 $ 14,444 $ 24,132 4.10 % 44.2 % $ 151 Residential property 425 — 425 4.75 % 65.5 % 12 SBA property — 4,192 4,192 4.79 65.5 % 26 Commercial and industrial loans: Commercial term 2,462 3,065 5,527 3.88 % 98 SBA commercial term — 1,841 1,841 5.41 % 7 Total $ 12,575 $ 23,542 $ 36,117 4.22 % $ 294 Loans held-for-investment $ 1,583,578 SBA PPP loans 135,654 Loans held-for-investment, excluding SBA PPP loans $ 1,447,924 Total loans under modified terms related to the COVID-19 pandemic to loans held-for-investment, excluding SBA PPP loans 2.5 % (1) Collateral value at origination All of these loans under modified terms related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs. The following table presents a summary of remaining modifications terms of loans under modified terms related to the COVID-19 pandemic as of December 31, 2020: December 31, 2020 Remaining Terms of ($ in thousands) Three Months or Less Three to Six Months Seven Months Total Real estate loans: Commercial property $ 15,150 $ 8,982 $ — $ 24,132 Residential property 425 — — 425 SBS property — 4,192 — 4,192 Commercial and industrial loans: Commercial term 2,462 1,900 1,165 5,527 SBA commercial term — 1,550 291 1,841 Total $ 18,037 $ 16,624 $ 1,456 $ 36,117 59 The following table presents a summary of loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as of December 31, 2020: December 31, 2020 ($ in thousands) Carrying Value Accrued Interest Receivable Real estate loans: Commercial property $ 349,006 $ 4,308 Residential property 40,647 792 Commercial and industrial loans: Commercial term 46,956 134 Other consumer loans 1,256 5 Total $ 437,865 $ 5,239 The Company started providing modifications related to the COVID-19 pandemic during the three months ended June 30, 2020. The following table presents activity in loans under modified terms related to the COVID-19 pandemic for the six months ended December 31, 2020. Real Estate Loans Commercial and Industrial Loans ($ in thousands) Commercial Property Residential Property SBA Property Commercial Term SBA Commercial Term Other Consumer Loans Total Balance at July 1, 2020 $ 379,566 $ 44,804 $ — $ 58,159 $ — $ 1,507 $ 484,036 Modification early terminated (1) (67,996) (1,019) — (24,734) — (4) (93,753) Modification expired (291,983) (40,053) — (27,748) (72) (1,252) (361,108) Subsequent modification 10,973 425 — 5,527 72 — 16,997 New modification 14,269 260 4,192 — 1,841 6 20,568 Amortization (20,697) (3,992) — (5,677) — (257) (30,623) Balance at December 31, 2020 $ 24,132 $ 425 $ 4,192 $ 5,527 $ 1,841 $ — $ 36,117 (1) Termination of modifications at the request of the borrower. 60 Allowance for loan losses The following table reflects allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated: December 31, 2020 2019 2018 2017 2016 ($ in thousands) Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Real estate loans: Commercial property $ 13,810 55.5 % $ 6,942 55.4 % $ 6,216 53.1 % $ 6,366 55.5 % $ 5,904 57.8 % Residential property 2,680 12.5 % 1,167 16.3 % 1,152 17.5 % 833 14.2 % 674 13.6 % SBA property 2,179 8.0 % 1,446 8.9 % 1,225 9.0 % 1,124 11.1 % 801 10.2 % Construction 225 1.0 % 299 1.3 % 511 2.0 % 184 1.9 % 118 1.5 % Total real estate loans 18,894 77.0 % 9,854 81.9 % 9,104 81.6 % 8,507 82.7 % 7,497 83.1 % Commercial and industrial loans: Commercial term 4,090 5.5 % 1,848 7.1 % 1,525 7.6 % 1,513 6.5 % 1,828 6.3 % Commercial lines of credit 2,359 6.1 % 1,805 7.7 % 1,443 6.9 % 1,126 5.3 % 839 4.7 % SBA commercial term 773 1.4 % 701 1.7 % 909 2.0 % 909 2.6 % 990 2.6 % SBA PPP — 8.6 % — — % — — % — — % — — % Total commercial and industrial loans 7,222 21.6 % 4,354 16.5 % 3,877 16.5 % 3,548 14.4 % 3,657 13.6 % Other consumer loans 394 1.4 % 172 1.6 % 186 1.9 % 169 2.9 % 166 3.3 % Total $ 26,510 100.0 % $ 14,380 100.0 % $ 13,167 100.0 % $ 12,224 100.0 % $ 11,320 100.0 % 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 December 31, 2020. The increase in allowance for loan losses was primarily due to increased risks associated with economic and business conditions, as well as increases in special mention and substandard loans, as a result of the COVID-19 pandemic for the year ended December 31, 2020. 61 The following table provides an analysis of the allowance for loan losses, provision for loan losses and net charge-offs as of the dates or for the periods indicated: As of or For the Year Ended December 31, ($ in thousands) 2020 2019 2018 2017 2016 Allowance for loan losses: Balance at beginning of year $ 14,380 $ 13,167 $ 12,224 $ 11,320 $ 9,345 Charge-offs: Real estate 175 31 381 168 — Commercial and industrial 1,104 3,350 272 1,320 729 Other consumer 250 198 356 88 38 Total charge-offs 1,529 3,579 1,009 1,576 767 Recoveries on loans previously charged off Real estate 58 6 213 1 1 Commercial and industrial 236 378 356 580 406 Other consumer 146 171 152 72 52 Total recoveries 440 555 721 653 459 Net charge-offs 1,089 3,024 288 923 308 Provision for loan losses 13,219 4,237 1,231 1,827 2,283 Balance at end of year $ 26,510 $ 14,380 $ 13,167 $ 12,224 $ 11,320 Loans held-for-investment: Balance at end of year $ 1,583,578 $ 1,450,831 $ 1,338,682 $ 1,189,999 $ 1,031,112 Average balance 1,528,985 1,378,073 1,254,512 1,099,725 942,037 Ratios: Net charge-offs to average loans held-for-investment 0.07 % 0.22 % 0.02 % 0.08 % 0.03 % Allowance for loan losses to loans held-for-investment 1.67 % 0.99 % 0.98 % 1.03 % 1.10 % Loans 30 to 89 Days Past Due and Still Accruing The following table presents a summary of loans 30 to 89 days past due and still accruing as of the dates indicated: December 31, ($ in thousands) 2020 2019 2018 2017 2016 Real estate loans: Residential property $ 182 $ 697 $ 95 $ 1,045 $ — SBA property — 794 183 — — Total real estate loans 182 1,491 278 1,045 — Commercial and industrial loans: Commercial term — — — — 442 Commercial lines of credit — — — — 1,500 SBA commercial term — 189 — 2 37 Total commercial and industrial loans — 189 — 2 1,979 Other consumer loans 156 138 99 294 115 Total $ 338 $ 1,818 $ 377 $ 1,341 $ 2,094 62 Nonperforming Loans and Nonperforming Assets The following table presents a summary of total NPLs and NPAs as of the dates indicated: December 31, ($ in thousands) 2020 2019 2018 2017 2016 Nonaccrual loans: Real estate loans: Commercial property $ 524 $ — $ — $ 318 $ 57 Residential property 189 — 302 730 — SBA property 885 442 540 1,810 602 Total real estate loans 1,598 442 842 2,858 659 Commercial and industrial loans: Commercial term — — — 4 169 Commercial lines of credit 904 1,888 — 10 115 SBA commercial term 595 159 203 338 866 Total commercial and industrial loans 1,499 2,047 203 352 1,150 Other consumer loans 66 48 16 24 39 Total nonaccrual loans 3,163 2,537 1,061 3,234 1,848 Loans past due 90 days or more still on accrual — 287 — — — Total nonperforming loans 3,163 2,824 1,061 3,234 1,848 Other real estate owned 1,401 — — 99 506 Total nonperforming assets $ 4,564 $ 2,824 $ 1,061 $ 3,333 $ 2,354 Nonperforming loans to loans held-for-investment 0.20 % 0.19 % 0.08 % 0.27 % 0.18 % Nonperforming assets to total assets 0.24 % 0.16 % 0.06 % 0.23 % 0.19 % Total nonaccrual loans were $3.2 million at December 31, 2020, an increase of $626 thousand, or 24.7%, from $2.5 million at December 31, 2019. The increase was primarily due to loans placed on nonaccrual status during the year ended December 31, 2020 of $2.8 million, partially offset by payoffs and paydowns of $915 thousand and charge-offs of $1.3 million. Loans are generally placed on non-accrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection. 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 believe the borrower will eventually overcome those circumstances and repay the loan in full. Additional income of approximately $164 thousand would have been recorded during the year ended December 31, 2020, had these loans been paid in accordance with their original terms throughout the periods indicated. CRE Concentration The Bank has policies and procedures in place to monitor compliance with the CRE Concentration Guidance. The Bank has set targets for CRE concentration limits as a percentage of total capital in accordance with interagency guidelines and actively manages the Bank’s exposure to CRE lending. The Bank’s construction and land development loans remain a small portion of the loan portfolio and as a percentage of total capital (as defined by the federal bank regulators) were 9.5% and 10.9%, respectively, at December 31, 2020 and 2019. As of December 31, 2020, using regulatory definitions in the CRE Concentration Guidance, CRE loans represented 256.1% of total risk-based capital, as compared to 243.6%, 253.6%, 355.1% and 352.1% as of December 31, 2019, 2018, 2017 and 2016, respectively. The reduction in CRE concentration ratio in 2018 was primarily due to the additional capital from the Company’s IPO during the year ended December 31, 2018. The management believes that the Bank has a robust risk management framework in place for CRE concentration issues including board approved CRE concentration contingency plans. The CRE concentration contingency plan contains overview of the Bank’s strategies to mitigate and manage the concentration risks including the plans to maintain stable capital levels, having access to additional capital, maintaining adequate amount of allowance for loan losses, potentially implementing more conservative growth/lending strategies if necessary, maintaining liquidity within the CRE portfolio, and strengthening the loan workout infrastructure. 63 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: December 31, ($ in thousands) 2020 2019 2018 2017 2016 Real estate loans: Commercial property $ 333 $ 339 $ — $ 318 $ 435 SBA property 275 415 315 1,373 1,540 Total real estate loans 608 754 315 1,691 1,975 Commercial and industrial loans: Commercial term 18 28 68 199 458 Commercial lines of credit — — — 10 115 SBA commercial term 13 39 180 367 311 Total commercial and industrial loans 31 67 248 576 884 Total TDRs $ 639 $ 821 $ 563 $ 2,267 $ 2,859 Total nonaccrual TDRs, included above $ 5 $ 121 $ 131 $ 1,675 $ 663 Total TDRs were $639 thousand at December 31, 2020, a decrease of $182 thousand, or 22.2%, from $821 thousand at December 31, 2019. The decrease was primarily due to payoffs and paydowns of $86 thousand and charge-offs of $133 thousand, partially offset by new TDRs of $37 thousand. Loans Held-For-Sale Loans held-for-sale are carried at the lower of cost or fair value. When a determination is made at the time of commitment to originate as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s management evaluation processes, including asset/liability management and credit risk management. When the Company subsequently changes its intent to hold certain loans, the loans are transferred to held-for-sale at the lower of cost or fair value. Certain loans are transferred to held-for-sale with write-downs to allowance for loan losses. The following table presents the composition of the Company’s loans held-for-sale as of the dates indicated: December 31, ($ in thousands) 2020 2019 2018 2017 2016 Real estate loans: Residential property $ 300 760 $ — $ 270 — SBA property 1,411 150 5,481 3,857 — Commercial and industrial loans: SBA commercial term 268 1,065 300 1,170 2,150 Loans held-for-sale $ 1,979 1,975 $ 5,781 $ 5,297 2,150 Loans held-for-sale were $2.0 million at December 31, 2020, an increase of $4 thousand, or 0.2%, from $2.0 million at December 31, 2019. The increase was primarily due to originations of $141.2 million and transfers from loans held-for-investment of $1.4 million, partially offset by sales of $141.7 million and a transfer to loans held-for-investment of $697 thousand. 64 Deposits The Bank gathers deposits primarily through its branch locations. The Bank offers a variety of deposit products including demand deposits accounts, NOW and money market accounts, savings accounts and time deposits. The following table presents summary of the Company’s deposit as of the dates indicated: December 31, Amount Change Percentage Change ($ in thousands) 2020 2019 Noninterest-bearing demand deposits $ 538,009 $ 360,039 $ 177,970 49.4 % Interest-bearing deposits: Savings 10,481 6,492 3,989 61.4 % NOW 21,604 17,673 3,931 22.2 % Retail money market accounts 351,739 307,980 43,759 14.2 % Brokered money market accounts 25,002 30,034 (5,032) (16.8) % Retail time deposits of: $250,000 or less 299,431 405,004 (105,573) (26.1) % More than $250,000 168,683 199,726 (31,043) (15.5) % Time deposits from internet rate service providers 24,902 — 24,902 — % Brokered time deposits 55,000 62,359 (7,359) (11.8) % Time deposits from California State Treasurer 100,000 90,000 10,000 11.1 % Total interest-bearing deposits 1,056,842 1,119,268 (62,426) (5.6) % Total deposits $ 1,594,851 $ 1,479,307 $ 115,544 7.8 % The increase in noninterest-bearing demand deposits was primarily due to the overall liquid deposit market. A total of $117.9 million of SBA PPP loans were funded through the Bank's noninterest-bearing demand deposits and deposit customers also received $93.5 million of SBA Economic Injury Disaster Loans during the past 9-month period. The decrease in retail time deposits was primarily due to matured and closed accounts of $639.5 million, partially offset by new accounts of $97.0 million and renewals of the matured accounts of $391.7 million. As of December 31, 2020 and 2019, total deposits were comprised of 33.7% and 24.3%, respectively, of noninterest-bearing demand accounts, 25.7% and 24.5%, respectively, of savings, NOW and money market accounts and 40.6% and 51.2%, respectively, of time deposits. The following table presents the maturity of time deposits as of the dates indicated: ($ in thousands) Three Months or Less Three to Six Months Six Months to One Year One to Three Years Over Three Years Total December 31, 2020 Time deposits less than $100,000 $ 83,751 $ 18,482 $ 32,112 $ 7,975 $ 1,528 $ 143,848 Time deposits of $100,000 through $250,000 91,727 57,715 81,622 4,421 — 235,485 Time deposits of more than $250,000 156,507 35,000 72,553 4,623 — 268,683 Total $ 331,985 $ 111,197 $ 186,287 $ 17,019 $ 1,528 $ 648,016 December 31, 2019 Time deposits less than $100,000 $ 41,456 $ 29,899 $ 92,695 $ 10,165 $ 1,557 $ 175,772 Time deposits of $100,000 through $250,000 111,182 53,198 121,674 5,537 — 291,591 Time deposits of more than $250,000 167,825 38,740 77,334 5,827 — 289,726 Total $ 320,463 $ 121,837 $ 291,703 $ 21,529 $ 1,557 $ 757,089 65 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 $233.8 million at December 31, 2020, an increase of $7.0 million, or 3.1%, from $226.8 million at December 31, 2019. The increase was primarily due to the net income of $16.2 million and other comprehensive income from the fair value change in securities available-for-sale of $2.0 million, partially offset by repurchase of common stock of $6.5 million and cash dividends declared on common stock of $6.2 million. Regulatory Capital Requirements The Bank is subject to various regulatory capital requirements administered by the federal and state banking regulators. The Company is not currently subject to separate minimum capital measurements under the definition of a “Small Bank Holding Company.” At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. Federal banking agencies also require a capital conservation buffer of 2.50% in addition to the ratios required to generally be considered “adequately capitalized” under the 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 December 31, 2020 and 2019. 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) December 31, 2020 Common tier 1 capital (to risk-weighted assets) 15.97 % 15.70 % 4.5 % 6.5 % Total capital (to risk-weighted assets) 17.22 % 16.95 % 8.0 % 10.0 % Tier 1 capital (to risk-weighted assets) 15.97 % 15.70 % 6.0 % 8.0 % Tier 1 capital (to average assets) 11.94 % 11.74 % 4.0 % 5.0 % December 31, 2019 Common tier 1 capital (to risk-weighted assets) 15.87 % 15.68 % 4.5 % 6.5 % Total capital (to risk-weighted assets) 16.90 % 16.71 % 8.0 % 10.0 % Tier 1 capital (to risk-weighted assets) 15.87 % 15.68 % 6.0 % 8.0 % Tier 1 capital (to average assets) 13.23 % 13.06 % 4.0 % 5.0 % The Company and the Bank’s capital conservation buffer was 9.22% and 8.95%, respectively, as of December 31, 2020, and 8.90% and 8.71%, respectively, as of December 31, 2019. 66 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, capital and strategic cash flow needs, all at a reasonable cost. The Company continuously monitors liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of the Company’s shareholders. The Company’s liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in financial institutions, federal funds sold, and unpledged securities available-for-sale. Liquid liabilities may include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market noncore 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 $80.0 million and $20.0 million of outstanding FHLB advances at December 31, 2020 and 2019, respectively. Based on the values of loans pledged as collateral, the Company had $425.3 million and $404.8 million of additional borrowing capacity with FHLB as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the Company had $65.0 million and $35.0 million of available unused unsecured federal funds lines, respectively. In addition, available unused secured borrowing capacity from Federal Reserve Discount Window at December 31, 2020 and 2019 was $35.8 million and $37.9 million, respectively. Federal Reserve Discount Window was collateralized by loans totaling $44.1 million and $46.1 million as of December 31, 2020 and 2019, 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 certificates of deposit. As of December 31, 2020 and 2019, total cash and cash equivalents represented 10.1% and 8.4% of total assets, respectively. On June 30, 2020, the Company also transferred securities held-to-maturity of $18.8 million to securities available-for-sale in order to secure additional liquidity on balance sheet. As of December 31, 2020, management was able to maintain strong on-and off-balance sheet liquidity as a result of proactive liquidity management in response to the COVID-19 pandemic evidenced by the fact that as of December 31, 2020, the Company maintained $194.1 million, or 10.1% of total assets, of cash and cash equivalents and $526.1 million, or 27.4% of total assets, of available borrowing capacity. 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. 67 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 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: December 31, ($ in thousands) 2020 2019 Commitments to extend credit $ 193,496 $ 171,608 Standby letters of credit 4,785 3,300 Commercial letters of credit — 292 Total $ 198,281 $ 175,200 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 reserve for off-balance sheet items of $238 thousand and $301 thousand, respectively, at December 31, 2020 and 2019. Contractual Obligations The following table presents supplemental information regarding total contractual obligations as of the dates indicated: ($ in thousands) Within One Year One to Three Years Three to Five Years Over Five Years Total December 31, 2020 Time deposits $ 629,469 $ 17,019 $ 1,528 $ — $ 648,016 FHLB advances 70,000 10,000 — — 80,000 Operating leases 2,494 4,342 1,413 818 9,067 Total $ 701,963 $ 31,361 $ 2,941 $ 818 $ 737,083 December 31, 2019 Time deposits $ 734,003 $ 21,529 $ 1,557 $ — $ 757,089 FHLB advances 10,000 10,000 — — 20,000 Operating leases 2,686 4,454 2,375 1,352 10,867 Total $ 746,689 $ 35,983 $ 3,932 $ 1,352 $ 787,956 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. 68 Item 7A. - 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 London Interbank Offered Rate (“LIBOR”) (basis risk). The Company’s 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 senior management team and Chief Executive Officer, to proactively monitor interest rate risk. Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints. An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on interest-earning assets would reprice upward more quickly than rates paid on interest-bearing liabilities, thus expanding net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on interest-bearing liabilities would reprice upward more quickly than rates earned on interest-earning assets, thus compressing net interest margin. Measurement Interest rate risk 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: December 31, 2020 2019 Simulated Rate Changes Net Interest Income Sensitivity Economic Value of Equity Sensitivity Net Interest Income Sensitivity Economic Value of Equity Sensitivity +300 28.9 % 17.4 % 29.9 % 9.2 % +200 19.4 % 13.3 % 20.3 % 7.7 % +100 9.8 % 7.6 % 10.4 % 4.7 % 69