PCB BANCORP 10-K

Item 8. Financial Statements PCB Bancorp and Subsidiary Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID 173 ) 74 Consolidated Balance Sheets as of December 31, 2022 and 2021 75 Consolidated Statements of Income for the Years Ended December 31, 202 2 , 202 1 and 20 20 76 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021 and 2020 77 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2022, 2021 and 2020 78 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021 and 2020 79 Notes to Consolidated Financial Statements 81 73 Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of PCB Bancorp Los Angeles, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of PCB Bancorp and Subsidiary (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Crowe LLP We have served as the Company’s auditor since 2016. Los Angeles, California March 9, 2023 74 PCB Bancorp and Subsidiary Consolidated Balance Sheets (in thousands, except share data) December 31, 2022 2021 Assets Cash and due from banks $ 23,202 $ 15,222 Interest-bearing deposits in other financial institutions 123,829 188,063 Total cash and cash equivalents 147,031 203,285 Securities available-for-sale, at fair value 141,863 123,198 Loans held-for-sale 22,811 37,026 Loans held-for-investment, net of deferred loan costs (fees) 2,046,063 1,732,205 Allowance for loan losses ( 24,942 ) ( 22,381 ) Net loans held-for-investment 2,021,121 1,709,824 Premises and equipment, net 6,916 3,098 Federal Home Loan Bank and other restricted stock, at cost 10,183 8,577 Bank-owned life insurance 30,064 29,358 Deferred tax assets, net 3,115 10,824 Servicing assets 7,347 7,269 Operating lease assets 6,358 6,786 Accrued interest receivable 7,472 5,368 Other assets 15,755 5,122 Total assets $ 2,420,036 $ 2,149,735 Liabilities and Shareholders’ Equity Deposits: Noninterest-bearing demand $ 734,989 $ 830,383 Savings, NOW and money market accounts 514,741 422,526 Time deposits of $250,000 or less 382,377 341,956 Time deposits of more than $250,000 413,876 272,269 Total deposits 2,045,983 1,867,134 Federal Home Loan Bank advances 20,000 10,000 Operating lease liabilities 6,809 7,444 Accrued interest payable and other liabilities 11,802 8,871 Total liabilities 2,084,594 1,893,449 Commitments and contingent liabilities Preferred stock, 10,000,000 shares authorized, no par value: Series C, senior non-cumulative perpetual, $ 1,000 per share liquidation preference, 69,141 and 0 shares issued and outstanding at December 31, 2022 and 2021, respectively. 69,141 — Common stock, 60,000,000 shares authorized, no par value; issued and outstanding 14,625,474 and 14,865,825 shares, respectively, and included 62,022 and 55,284 shares of unvested restricted stock, respectively, at December 31, 2022 and 2021 149,631 154,992 Retained earnings 127,181 101,140 Accumulated other comprehensive income (loss), net ( 10,511 ) 154 Total shareholders’ equity 335,442 256,286 Total liabilities and shareholders’ equity $ 2,420,036 $ 2,149,735 See Accompanying Notes to Consolidated Financial Statements 75 PCB Bancorp and Subsidiary Consolidated Statements of Income (in thousands, except share and per share data) Year Ended December 31, 2022 2021 2020 Interest and dividend income: Loans, including fees $ 95,054 $ 79,155 $ 76,546 Tax-exempt investment securities 140 146 150 Taxable investment securities 2,767 1,467 1,977 Other interest-earning assets 3,790 704 1,088 Total interest income 101,751 81,472 79,761 Interest expense: Deposits 11,984 4,043 12,958 Other borrowings 135 292 614 Total interest expense 12,119 4,335 13,572 Net interest income 89,632 77,137 66,189 Provision (reversal) for loan losses 3,602 ( 4,596 ) 13,219 Net interest income after provision (reversal) for loan losses 86,030 81,733 52,970 Noninterest income: Service charges and fees on deposits 1,326 1,195 1,256 Loan servicing income 2,969 2,770 2,710 Bank-owned life insurance income 706 108 — Gain on sale of loans 7,990 12,932 6,527 Other income 1,508 1,429 1,247 Total noninterest income 14,499 18,434 11,740 Noninterest expense: Salaries and employee benefits 33,056 27,974 26,147 Occupancy and equipment 6,481 5,575 5,620 Professional fees 2,239 2,159 2,256 Marketing and business promotion 2,150 1,656 1,360 Data processing 1,706 1,572 1,472 Director fees and expenses 706 594 599 Regulatory assessments 597 537 978 Other expenses 4,191 3,141 3,267 Total noninterest expense 51,126 43,208 41,699 Income before income taxes 49,403 56,959 23,011 Income tax expense 14,416 16,856 6,836 Net income $ 34,987 $ 40,103 $ 16,175 Earnings per common share, basic $ 2.35 $ 2.66 $ 1.05 Earnings per common share, diluted $ 2.31 $ 2.62 $ 1.04 Weighted-average common shares outstanding, basic 14,822,018 15,017,637 15,384,231 Weighted-average common shares outstanding, diluted 15,065,175 15,253,820 15,448,892 See Accompanying Notes to Consolidated Financial Statements 76 PCB Bancorp and Subsidiary Consolidated Statements of Comprehensive Income (in thousands) Year Ended December 31, 2022 2021 2020 Net income $ 34,987 $ 40,103 $ 16,175 Other comprehensive income (loss): Unrealized gain (loss) on securities available-for-sale arising during the year ( 15,128 ) ( 2,553 ) 2,064 Unrealized gain arising from the reclassification of securities held-to-maturity to securities available-for-sale — — 787 Income tax benefit (expense) related to items of other comprehensive income (loss) 4,463 751 ( 838 ) Total other comprehensive income (loss), net of tax ( 10,665 ) ( 1,802 ) 2,013 Total comprehensive income $ 24,322 $ 38,301 $ 18,188 See Accompanying Notes to Consolidated Financial Statements 77 PCB Bancorp and Subsidiary Consolidated Statements of Changes in Shareholders’ Equity (in thousands, except share data) Shares Outstanding Shareholders’ Equity Preferred Stock Common Stock Preferred Stock Common stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance at January 1, 2020 — 15,707,016 $ — $ 169,221 $ 57,670 $ ( 57 ) $ 226,834 Comprehensive income Net income — — — — 16,175 — 16,175 Other comprehensive income, net of tax — — — — — 2,013 2,013 Issuance of restricted stock — 1,900 — — — — — Restricted stock surrendered due to employee tax liability — ( 165 ) — ( 2 ) — — ( 2 ) Repurchase of common stock — ( 428,474 ) — ( 6,487 ) — — ( 6,487 ) Share-based compensation expense — — — 715 — — 715 Stock options exercised — 105,601 — 693 — — 693 Cash dividends declared on common stock ($ 0.40 per share) — — — — ( 6,153 ) — ( 6,153 ) Balance at December 31, 2020 — 15,385,878 — 164,140 67,692 1,956 233,788 Comprehensive income (loss) Net income — — — — 40,103 — 40,103 Other comprehensive loss, net of tax — — — — — ( 1,802 ) ( 1,802 ) Issuance of restricted stock — 35,584 — — — — — Forfeiture of restricted stock — ( 1,300 ) — — — — — Restricted stock surrendered due to employee tax liability — ( 231 ) — ( 4 ) — — ( 4 ) Repurchase of common stock — ( 680,269 ) — ( 10,876 ) — — ( 10,876 ) Share-based compensation expense — — — 453 — — 453 Stock options exercised — 126,163 — 1,279 — — 1,279 Cash dividends declared on common stock ($ 0.44 per share) — — — — ( 6,655 ) — ( 6,655 ) Balance at December 31, 2021 — 14,865,825 — 154,992 101,140 154 256,286 Comprehensive income (loss) Net income — — — — 34,987 — 34,987 Other comprehensive loss, net of tax — — — — — ( 10,665 ) ( 10,665 ) Issuance of preferred stock 69,141 — 69,141 69,141 Issuance of restricted stock — 27,700 — — — — — Forfeiture of restricted stock — ( 200 ) — — — — — Restricted stock surrendered due to employee tax liability — ( 429 ) — ( 8 ) — — ( 8 ) Repurchase of common stock — ( 362,557 ) — ( 6,732 ) — — ( 6,732 ) Share-based compensation expense — — — 539 — — 539 Stock options exercised — 95,135 — 840 — — 840 Cash dividends declared on common stock ($ 0.60 per share) — — — — ( 8,946 ) — ( 8,946 ) Balance at December 31, 2022 69,141 14,625,474 $ 69,141 $ 149,631 $ 127,181 $ ( 10,511 ) $ 335,442 See Accompanying Notes to Consolidated Financial Statements 78 PCB Bancorp and Subsidiary Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2022 2021 2020 Cash flows from operating activities Net income $ 34,987 $ 40,103 $ 16,175 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation of premises and equipment 1,597 1,375 1,487 Net amortization of premiums on securities 367 1,004 938 Net accretion of discounts on loans ( 3,551 ) ( 3,504 ) ( 3,292 ) Net accretion of deferred loan fees ( 2,181 ) ( 6,096 ) ( 2,901 ) Amortization of servicing assets 2,135 2,009 1,948 Provision (reversal) for loan losses 3,602 ( 4,596 ) 13,219 Bank-owned life insurance income ( 706 ) ( 108 ) — Deferred tax expense (benefit) 12,172 ( 1,953 ) ( 3,670 ) Share-based compensation 539 453 715 Gain on sale of loans ( 7,990 ) ( 12,932 ) ( 6,527 ) Originations of loans held-for-sale ( 105,570 ) ( 172,211 ) ( 141,215 ) Proceeds from sales of and principal collected on loans held-for-sale 132,881 150,236 149,388 Change in accrued interest receivable and other assets ( 12,738 ) 2,660 ( 2,338 ) Change in accrued interest payable and other liabilities 1,723 1,943 ( 6,834 ) Net cash provided by (used in) operating activities 57,267 ( 1,617 ) 17,093 Cash flows from investing activities: Purchase of securities available-for-sale ( 57,360 ) ( 47,306 ) ( 39,385 ) Proceeds from maturities, calls, and paydowns of securities available-for-sale 23,200 41,078 37,182 Proceeds from maturities, calls, and paydowns of securities held-to-maturity — — 1,309 Proceeds from sale of loans held-for-sale previously classified as held-for-investment 458 8,757 664 Net increase in loans held-for-investment ( 317,095 ) ( 149,237 ) ( 134,626 ) Purchase of loans held-for-investment — ( 2,139 ) — Purchase of Federal Home Loan Bank and other restricted stock ( 1,606 ) ( 130 ) ( 102 ) Proceeds from sale of other real estate owned 1,191 3,434 3,924 Purchases of premises and equipment ( 5,453 ) ( 430 ) ( 1,784 ) Purchase of bank-owned life insurance — ( 29,250 ) — Net cash used in investing activities ( 356,665 ) ( 175,223 ) ( 132,818 ) Cash flows from financing activities: Net increase in deposits 178,849 272,283 115,544 Net change in short-term Federal Home Loan Bank advances 20,000 — — Proceeds from long-term Federal Home Loan Bank advances — — 140,000 Repayment of long-term Federal Home Loan Bank advances ( 10,000 ) ( 70,000 ) ( 80,000 ) Stock options exercised 840 1,279 693 Restricted stock surrendered due to employee tax liability ( 8 ) ( 4 ) ( 2 ) Issuance of preferred stock 69,141 — — Repurchase of common stock ( 6,732 ) ( 10,876 ) ( 6,487 ) Cash dividends paid on common stock ( 8,946 ) ( 6,655 ) ( 6,153 ) Net cash provided by financing activities 243,144 186,027 163,595 Net increase (decrease) in cash and cash equivalents ( 56,254 ) 9,187 47,870 Cash and cash equivalents at beginning of year 203,285 194,098 146,228 Cash and cash equivalents at end of year $ 147,031 $ 203,285 $ 194,098 See Accompanying Notes to Consolidated Financial Statements 79 PCB Bancorp and Subsidiary Consolidated Statements of Cash Flows (Continued) (in thousands) Year Ended December 31, 2022 2021 2020 Supplemental disclosures of cash flow information: Interest paid $ 9,731 $ 5,790 $ 17,350 Income taxes paid 13,977 14,982 10,051 Supplemental disclosures of non-cash investment activities: Loans transferred to loans held-for-sale $ 4,458 $ 8,752 $ 1,355 Loans transferred to other real estate owned 151 905 3,079 Right-of-use assets obtained in exchange for lease obligations 2,150 1,459 950 Reclassification of securities held-to-maturity to securities available-for-sale — — 18,777 See Accompanying Notes to Consolidated Financial Statements 80 PCB Bancorp and Subsidiary Notes to Consolidated Financial Statements 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. The Bank is a single operating segment that operates 11 full-service branches in Los Angeles and Orange Counties, California, three full-service branches on the East Coast (Bayside, New York; and Englewood Cliffs and Palisades Park, New Jersey), and two full-service branches in Texas (Carrollton and Dallas), and seven LPOs in Los Angeles and Orange Counties, California; Annandale, Virginia; Atlanta, Georgia; Aurora, Colorado; Bellevue, Washington; and Carrollton, Texas. The Bank offers a broad range of loans, deposits, and other products and services predominantly to small and middle market businesses and individuals. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020. Significant inter-company accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiaries. The accounting and reporting polices of the Company are based upon GAAP and conform to predominant practices within the financial services industry. Significant accounting policies followed by the Company are presented below. Certain prior period amounts have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on the Company’s consolidated statements of financial condition or operations. 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. Significant Accounting Policies Cash and Cash Equivalents Cash and cash equivalents include cash on hand, cash items in transit, cash due from the Federal Reserve Bank and other financial institutions, and federal funds sold with original maturities less than 90 days. In response to the COVID-19 pandemic, on March 26, 2020, the Federal Reserve reduced reserve requirement ratios to 0%, eliminating the reserve requirement for all depository institutions, an action that provides liquidity in the banking system to support lending to households and businesses. There was no reserve and clearing requirement balance at December 31, 2022 and 2021. Investment Securities Investment securities are classified as held-to-maturity or available-for-sale at the time of purchase based upon the intent of management, liquidity and capital requirements, regulatory limitations and other relevant factors. Debt securities are classified as held-to-maturity when management has the positive intent and ability to hold to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. Securities held-to-maturity are carried at amortized cost and securities available-for-sale are carried at fair value with unrealized gains and losses, net of taxes, recorded in other comprehensive income. 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 its 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. 81 Gains and losses on sales of securities are determined using the specific identification method. Net realized gains or losses on available-for-sale securities are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Amortization of premiums and accretion of discounts are included in interest income using the effective interest method. Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: OTTI related to credit loss, which is recognized as a charge against earnings, and OTTI related to other factors, which is recognized in other comprehensive income, net of tax. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Loans Held-For-Sale The Company originates SBA loans, and certain residential property and commercial property loans with the intention for sale in the secondary market. The Company records the guaranteed portion of SBA loans and these residential property and commercial property loans held-for-sale at the lower of cost or fair value on an aggregate basis. Fair value is based on commitments on hand from investors or prevailing market prices. A valuation allowance is established if the fair value of such loans is lower than their cost, with a corresponding charge to noninterest income. When the Company changes its intent to hold loans for investment, the loans are transferred to held-for-sale at lower of cost or fair value at the time of transfer, as determined on an individual loan level with charges made to allowance for loan losses when the fair value is lower than the cost. Deferred fees and cost on transferred loans are included in the determination of gains or losses on sale of the related loans. Subsequent decreases in fair value, if any, are recognized through a valuation allowance with charges made to noninterest income. If a determination is made that a loan held-for-sale cannot be sold in the foreseeable future, it is transferred to loans held-for-investment at lower of cost or fair value on the transfer date with a charge made to noninterest income when the fair value is lower than the cost. Realized gains and losses from sales of loans are included in noninterest income. For sales of guaranteed portion of SBA and certain residential property loans, the loan servicing rights are retained. Loans Held-For-Investment Loans held-for-investment that management has the intent and ability to hold for the foreseeable future are reported at their outstanding unpaid principal balances, net of any charge-offs, deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are deferred and recognized in interest income using the effective interest method over the life of the loan. Interest is accrued and credited to income as earned only if deemed collectible. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued when principal or interest payment is 90 days past due based on the contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collectability. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Past-due status is based on the contractual terms of the loan. Interest payments that are subsequently received are applied as a reduction to the remaining principal balance as long as concern exists as to the collectability of the principal. Interest accruals are resumed on such loans only when the loans are brought current with respect to interest and principal and when, in the judgment of management, all principal and interest on the loans are expected to be fully collectable. Loan portfolio segments identified by the Company include: real estate (commercial property, residential property, SBA property and construction), commercial and industrial (commercial term, commercial lines of credit, and SBA commercial term), and other consumer loans. 82 Risks associated with the Company’s real estate loans include a decline in the economy and a reduction in real estate values in the Company’s primary markets, an increase in market interest rates, increased competition in pricing and loan structure, and environmental risks. Risks associated with the Company’s commercial and industrial loans include a decline in the economy in the primary markets, an increase in market interest rates, and deterioration of a borrower’s or guarantor’s financial capabilities. Risk associated with the Company’s other consumer loans include the same risks associated with the commercial and industrial loans, but also includes risks related to consumer bankruptcy laws which allow consumers to discharge certain debts. 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. Allowance for Loan Losses Allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the loan is uncollectible. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance 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 may be made for specific loans, but the entire allowance 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. Generally, loans are charged off immediately when it is determined that advances to the borrower are in excess of the calculated current fair value of the collateral and if a borrower is deemed incapable of repayment of unsecured debt, there is little or no prospect for near term improvement and no realized strengthening action of significance pending. Other consumer loans are charged off based on delinquency, typically 120 days for closed loans and 180 days for open-end loans, or earlier when it is determined that the loan is uncollectible due to a triggering event, such as bankruptcy, fraud, or death. This methodology for determining charge-offs is consistently applied to each segment. The allowance consists of general reserves (collectively evaluated for impairment) and specific reserves (individually evaluated for impairment). General reserves cover non-impaired loans and are based on historical loss rates over the most recent 11 years for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience. The Company utilizes a migration analysis to measure actual historical loss experience, with the resulting historical loss rate adjusted for any applicable loss emergence period factors serving as the base loss rate to estimate the amount of appropriate loss reserve. 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. 83 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, with the exception of collateral-dependent loans for which the most viable source of repayment is the continued operation of the collateral or liquidation of the collateral. The impairment for these loans are measured at the fair value of the collateral, less estimated selling cost. If a loan is impaired, the loan is reported, net of the allocated allowance, at the present value of estimated future cash flows using the loan’s effective interest rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments received on impaired loans are first applied to principal, then recognized as income based on existing methods to recognize 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. Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to seven years for furniture and equipment. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as part of occupancy and equipment expense as incurred. Operating Leases The Company’s operating leases are for its headquarters office spaces, and retail branch and LPO locations. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years . The exercise of a lease renewal option is at the Company’s sole discretion. Certain leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expenses for these leases are recognized on a straight-line basis over the lease term. None of the Company’s lease agreements contain any material residual value guarantees or material restrictive covenants. The Company also leases certain equipment, such as copy machines and scanners, but they are determined to be immaterial. Federal Home Loan Bank and Other Restricted Stock The Bank is a member of the FHLB and Pacific Coast Bankers’ Bancshares (“PCBB”) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB and PCBB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income. Other Real Estate Owned OREO represents properties acquired through foreclosure or other proceedings. 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. Any write-down to fair value at the time of transfer to OREO is charged to allowance for loan losses. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances to reduce the carrying amounts to fair value less estimated costs to dispose are recorded as necessary. Additions to or reductions from valuation allowances are recorded in noninterest expense. 84 Servicing Assets Servicing assets are recognized when servicing rights are retained from the sale of loans, such as sales of the guaranteed portion of SBA and certain residential property loans, and are initially recorded at fair value. Fair value is calculated as the present value of estimated future cash flows from the servicing rights based on current market sources, such as the cost to service, discount rates, and prepayment speeds. Servicing assets are amortized into noninterest income over the expected life of the underlying loans. Servicing assets are evaluated for impairment based on the fair value of the servicing rights as compared to the carrying amount. Impairment is determined by stratifying servicing rights into groupings based on predominant risk characteristics, such as collateral type. For purposes of measuring impairment, the Company has identified each servicing asset with the underlying loan being serviced. A valuation allowance is recorded when the fair value is below the carrying amount of the asset. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the valuation allowance may be recorded as an increase to income. The fair values of servicing assets are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and changes in discount rates. Servicing income as reported on the income statement consists of fees earned for servicing loans, net of the amortization of servicing assets and changes in the valuation allowance. The servicing fees are based on a contractual percentage of the outstanding principal and recorded as income when earned. Investment in Qualified Affordable Housing Projects The Company has invested in a limited partnership that operates qualified affordable housing projects for lower income tenants in California. The Company accounts for this investment under the proportional amortization method and the amortization expense is presented as a component of current tax expense. Return of this investment is generated primarily through allocated federal tax credits and other tax benefits. The recorded investment amount was $ 4.3 million and $ 1.6 million, respectively, and unfunded commitments were $ 2.9 million and $ 51 thousand, respectively, at December 31, 2022 and 2021. The recorded investment amount is included in Other Assets and unfunded commitment is included in Accrued Interest Payable and Other Liabilities on the Consolidated Statements of Financial Condition. As components of income tax expense, the Company recognized $ 343 thousand, $ 247 thousand and $ 240 thousand in amortization expense, respectively, partially offset by federal tax credits and other benefits of $ 336 thousand, $ 299 thousand and $ 300 thousand, respectively, for the years ended December 31, 2022, 2021 and 2020. The Company determined that there were no events or changes in circumstances indicating that it is more likely than not that the carrying amount of the investment will not be realized. Therefore, no impairment was recorded for the years ended December 31, 2022 and 2021. Bank-owned Life Insurance The Company purchases life insurance policies on certain officers and directors. The Bank and named beneficiaries of various current covered officers are the beneficiaries under each policy. In the event of the death of a covered officer, the Bank and named beneficiaries of the covered officer will receive the specified insurance benefit from the insurance carrier. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due, if any, that are probable at settlement. Earnings Per Share Earnings per share (“EPS”) is computed under the two-class method. Net income allocated to common stock is computed by subtracting income allocated to unvested restricted stock from net income. Income allocated to unvested restricted stock includes cash dividend paid and undistributed income available to holders of unvested restricted stock, if any. Basic EPS is computed by dividing net income allocated to common stock by the weighted-average common shares outstanding excluding the weighted-average unvested restricted stock. Diluted EPS is computed by dividing net income allocated to common stock by the weighted-average common stock outstanding, excluding the weighted-average unvested restricted stock, adjusted for the dilutive effect of the stock options. Diluted EPS reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock that then shared in the earnings of the entity. Transfer of Financial Assets Transfers of financial assets are accounted for sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. 85 Share-Based Compensation The Company recognizes the cost of employee services received in exchange for stock options and restricted stock awards (“RSAs”), based on the grant date fair value of those awards. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used for RSAs. This cost is recognized in income over the period which an employee is required to provide services in exchange for the award, generally the vesting period. See Note 12 for additional information on the Company’s stock option plan. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Interest and penalties related to unrecognized tax benefits are recorded as part of income tax expense. A valuation allowance is established to reduce the deferred tax asset to the level at which it is more likely than not that the tax benefits will be realized. Realization of tax benefits of deductible temporary differences and carryforwards depends on having sufficient taxable income of an appropriate character and in the appropriate periods. Commitments and Contingencies In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit as described in Note 16. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. Revenue Recognition Topic 606, “Revenue from Contracts with Customers,” does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as gain or loss associated with mortgage servicing assets and financial guarantees are also not within the scope. Topic 606 is applicable to noninterest income such as deposit related fees, interchange fees, and merchant related income. Noninterest income considered to be within the scope of Topic 606 is discussed below. Service charges and fees on deposits : Deposit account service charges consist of monthly service fees, account analysis fees, non-sufficient funds (“NSF”) charges and other deposit related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. NSF charges, and other deposit account service charges are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time as incurred. Debit card fees : When customers use their debit cards to pay merchants for goods or services, the Company retains a fee from the funds collected from the related deposit account and transfers the remaining funds to the payment network for remittance to the merchant. The performance obligation to the merchant is satisfied and the fee is recognized at the point in time when the funds are collected and transferred to the payment network. Gain (loss) on sale of other real estate owned : The Company’s performance obligation for sale of OREO is the transfer of title and ownership rights of the OREO to the buyer, which occurs at the settlement date when the sale proceeds are received and income is recognized. Wire transfer fees and other service charges : Wire transfer fees and other service charges are transaction based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time as incurred. 86 Fair Value Measurement 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. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value: • 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. See Note 2 for more information and disclosures relating to the Company’s fair value measurements. Adopted Accounting Pronouncements During the year ended December 31, 2022, there were no significant accounting pronouncements applicable to the Company that became effective. Recent Accounting Pronouncements Not Yet Adopted The following are recently issued accounting pronouncements applicable to the Company that have not yet been adopted: In June 2016, the FASB issued 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 will adopt this ASU during the three months ended March 31, 2023. The Company is currently in its final stage of CECL implementation. The Company is testing its designed models with an independent third party and is completing development of its methodologies, and data/input gathering and validation. In addition, the Company is devising risk documentation, policies and procedures associated with CECL to support the ongoing estimation activities and the continuous assessment of risks related to the model, its methodologies, and data governance. The Company has completed its parallel-runs during the year ended December 31, 2022. Based on the Company’s current assessment of this ASU, the Company expects to recognize coverage ratio of allowance for credit losses (“ACL”) on loans from 1.12 % to 1.32 % of loans held-for-investment. In addition, the Company expects to recognize additional reserve for ACL on off-balance sheet items ranging from $ 1.1 million to $ 1.4 million. The Company expects to recognize no ACL on securities available-for-sale. The adjustment recorded upon adoption of CECL may differ from management’s estimated change based on material changes in the economic forecast and conditions, and composition of the loan portfolio used in calculating the ACL upon adoption. This impact will be recorded as a cumulative-effect adjustment to retained earnings as of January 1, 2023. In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326) - Troubled Debt Restructuring and Vintage Disclosures.” The amendments in this ASU eliminate the accounting guidance for TDRs by creditors in ASC 310-40, “ Receivables - Troubled Debt Restructurings by Creditors, ” while enhancing disclosure requirements for restructurings involving borrowers that are experiencing financial difficulty. This 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 with ASU 2016-13. The Company does not expect to have a material impact on its consolidated financial statements upon adoption of this ASU. 87 Note 2. Fair Value Measurements 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 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. Loans held-for-sale : The Company records SBA loans held-for-sale, residential property loans held-for-sale and certain non-residential real estate loans held-for-sale at the lower of cost or fair value, on an aggregate basis. The Company obtains fair values from a third-party independent valuation service provider. Loans held-for-sale accounted for at the lower of cost or fair value are considered to be recognized at fair value when they are recorded at below cost, on an aggregate basis, and are classified as Level 2. Impaired loans : The Company records fair value adjustments on certain loans that reflect (i) partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (ii) the full charge-off of the loan carrying value. In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable. Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants, and are classified as Level 3. Other real estate owned : The Company initially records OREO at fair value at the time of foreclosure. Thereafter, OREO is recorded at the lower of cost or fair value based on their subsequent changes in fair value. The fair value of OREO is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and result in a Level 3 classification due to the unobservable inputs used for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value. Servicing Assets: Servicing assets represent the value of servicing rights 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. 88 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 the dates indicated: Fair Value Measurement Level ($ in thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total December 31, 2022 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ — $ 96,900 $ — $ 96,900 Collateralized mortgage obligations — 26,956 — 26,956 SBA loan pool securities — 9,298 — 9,298 Municipal bonds — 4,186 — 4,186 Corporate bonds — 4,523 — 4,523 Total securities available-for-sale — 141,863 — 141,863 Total assets measured at fair value on a recurring basis $ — $ 141,863 $ — $ 141,863 Total liabilities measured at fair value on a recurring basis $ — $ — $ — $ — December 31, 2021 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ — $ 84,713 $ — $ 84,713 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 $ — $ — $ — $ — 89 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 the dates indicated: Fair Value Measurement Level ($ in thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total December 31, 2022 Impaired loans: Commercial lines of credit (1) — — 4,000 4,000 Total impaired loans — — 4,000 4,000 Total assets measured at fair value on a non-recurring basis $ — $ — $ 4,000 $ 4,000 Total liabilities measured at fair value on a non-recurring basis $ — $ — $ — $ — 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 $ — $ — $ — $ — (1) Included in loans held-for-sale The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a non-recurring basis as of the dates indicated: ($ in thousands) Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted-Average) December 31, 2022 Impaired loans: Commercial lines of credit $ 4,000 Pending sales agreement NM NM December 31, 2021 Impaired loans: SBA property $ 17 Fair value of collateral NM NM For assets measured at fair value, the following table presents the total net losses, which include charge-offs, recoveries, specific reserves, impairment on servicing assets, gain (loss) on sale of OREO, and OREO valuation write-downs recorded for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 2020 Collateral dependent impaired loans: SBA property $ — $ ( 8 ) $ ( 138 ) Commercial lines of credit ( 1,074 ) 136 ( 720 ) SBA commercial property — ( 5 ) ( 221 ) Other real estate owned 152 73 9 Net gain (losses) recognized $ ( 922 ) $ 196 $ ( 1,070 ) 90 Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on financial instruments both on and off the consolidated balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments. Financial assets : The carrying amounts of interest-bearing deposits with other financial institutions and accrued interest receivable are considered to approximate fair value. The fair values of investment securities are generally based on matrix pricing (Level 2). The fair value of loans is estimated based on a discounted cash flow approach under an exit price notion. The fair value reflects the estimated yield that would be negotiated with a willing market participant. Because sale transactions of such loans are not readily observable, as many of the loans have unique risk characteristics, the valuation is based on significant unobservable inputs (Level 3). It is not practical to determine the fair value of FHLB and other restricted stock due to restrictions placed on its transferability. Financial liabilities : The carrying amounts of accrued interest payable are considered to approximate fair value. The fair value of deposits is estimated based on discounted cash flows. The discount rate is derived from the interest rates currently being offered for similar remaining maturities. Non-maturity deposits are estimated based on their historical decaying experiences (Level 3). The fair value of FHLB advances is estimated based on discounted cash flows. The discount rate is derived from the current market rates for borrowings with similar remaining maturities (Level 2). Off-balance-sheet financial instruments : The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material and is excluded from the table below. 91 The following table presents the carrying value and estimated fair values of financial assets and liabilities as of the dates indicated: Carrying Value Fair Value Fair Value Measurements ($ in thousands) Level 1 Level 2 Level 3 December 31, 2022 Financial assets: Interest-bearing deposits in other financial institutions $ 123,829 $ 123,829 $ 123,829 $ — $ — Securities available-for-sale 141,863 141,863 — 141,863 — Loans held-for-sale 22,811 23,992 — 23,992 — Net loans held-for-investment 2,021,121 1,970,235 — — 1,970,235 FHLB and other restricted stock 10,183 N/A N/A N/A N/A Accrued interest receivable 7,472 7,472 49 475 6,948 Financial liabilities: Deposits $ 2,045,983 $ 2,041,667 $ — $ — $ 2,041,667 FHLB advances 20,000 20,001 — 20,001 — Accrued interest payable 3,159 3,159 — 5 3,154 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 92 Note 3. Investment Securities Debt securities have been classified as available-for-sale or held-to-maturity in the consolidated balance sheets according to management’s intent. 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 its liquidity position. Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and the Company’s ability to assert that it has the intent and ability to hold to maturity debt securities will be limited for up to two years from the date of transfer. The Company transferred all securities held-to-maturity of $ 18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of $ 787 thousand. The following table presents the amortized cost and fair value of the investment securities as of the dates indicated: ($ in thousands) Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value December 31, 2022 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ 109,497 $ 1 $ ( 12,598 ) $ 96,900 Collateralized mortgage obligations 28,515 107 ( 1,666 ) 26,956 SBA loan pool securities 9,704 8 ( 414 ) 9,298 Municipal bonds 4,262 2 ( 78 ) 4,186 Corporate bonds 5,000 — ( 477 ) 4,523 Total securities available-for-sale $ 156,978 $ 118 $ ( 15,233 ) $ 141,863 December 31, 2021 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ 85,346 $ 625 $ ( 1,258 ) $ 84,713 Collateralized mortgage obligations 18,990 113 ( 47 ) 19,056 SBA loan pool securities 8,520 156 ( 4 ) 8,672 Municipal bonds 5,329 357 — 5,686 Corporate bonds 5,000 71 — 5,071 Total securities available-for-sale $ 123,185 $ 1,322 $ ( 1,309 ) $ 123,198 As of December 31, 2022 and 2021, pledged securities were $ 69.0 million and $ 110.9 million, respectively. These securities were pledged for the State Deposit from the California State Treasurer. 93 The following table presents the amortized cost and fair value of the investment securities by contractual maturity as of December 31, 2022. Expected maturities may differ from contractual maturities, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. Securities Available-For-Sale ($ in thousands) Amortized Cost Fair Value Within one year $ 960 $ 954 One to five years 870 867 Five to ten years 5,081 4,602 Greater than ten years 2,351 2,286 Mortgage-backed securities, collateralized mortgage obligations and SBA loan pool securities 147,716 133,154 Total $ 156,978 $ 141,863 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: Year Ended December 31, ($ in thousands) 2022 2021 2020 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 on sales and calls of securities available-for-sale $ — $ — $ — Proceeds from sales and calls of securities available-for-sale $ 1,040 $ — $ 185 Tax expense on sales and calls of securities available-for-sale $ — $ — $ — 94 The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous unrealized loss position as of the dates indicated: Length of Time That Individual Securities Have Been In a Continuous Unrealized Loss Position Less Than 12 Months 12 Months or Longer Total ($ in thousands) Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses Number of Securities December 31, 2022 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ 55,171 $ ( 3,721 ) 83 $ 41,697 $ ( 8,877 ) 36 $ 96,868 $ ( 12,598 ) 119 Collateralized mortgage obligations 12,600 ( 1,191 ) 29 2,262 ( 475 ) 7 14,862 ( 1,666 ) 36 SBA loan pool securities 7,161 ( 325 ) 12 821 ( 89 ) 2 7,982 ( 414 ) 14 Municipal bonds 3,314 ( 78 ) 11 — — — 3,314 ( 78 ) 11 Corporate bonds 4,523 ( 477 ) 1 — — — 4,523 ( 477 ) 1 Total securities available-for-sale $ 82,769 $ ( 5,792 ) 136 $ 44,780 $ ( 9,441 ) 45 $ 127,549 $ ( 15,233 ) 181 December 31, 2021 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ 46,945 $ ( 931 ) 32 $ 8,885 $ ( 327 ) 5 $ 55,830 $ ( 1,258 ) 37 Collateralized mortgage obligations 2,897 ( 47 ) 4 — — — 2,897 ( 47 ) 4 SBA loan pool securities — — — 156 ( 4 ) 1 156 ( 4 ) 1 Total securities available-for-sale $ 49,842 $ ( 978 ) 36 $ 9,041 $ ( 331 ) 6 $ 58,883 $ ( 1,309 ) 42 In accordance with FASB ASC 320, Investments - Debt and Equity Securities , the Company performs an OTTI assessment at least on a quarterly basis. OTTI is recognized when fair value is below the amortized cost where: (i) an entity has the intent to sell the security; (ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (iii) an entity does not expect to recover the entire amortized cost basis of the security. All individual securities in a continuous unrealized loss position for 12 months or more as of December 31, 2022 and 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 December 31, 2022 and 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 years ended December 31, 2022, 2021 and 2020. 95 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: December 31, ($ in thousands) 2022 2021 Real estate loans: Commercial property $ 1,288,392 $ 1,105,843 Residential property 333,726 209,485 SBA property 134,892 129,661 Construction 17,054 8,252 Total real estate loans 1,774,064 1,453,241 Commercial and industrial loans: Commercial term 77,700 73,438 Commercial lines of credit 154,142 100,936 SBA commercial term 16,211 17,640 SBA PPP 1,197 65,329 Total commercial and industrial loans 249,250 257,343 Other consumer loans 22,749 21,621 Loans held-for-investment 2,046,063 1,732,205 Allowance for loan losses ( 24,942 ) ( 22,381 ) Net loans held-for-investment $ 2,021,121 $ 1,709,824 In the ordinary course of business, the Company may grant loans to certain officers and directors, and the companies with which they are associated. As of December 31, 2022 and 2021, the Company had $ 113 thousand and $ 398 thousand, respectively, of such loans outstanding. 96 Allowance for Loan Losses The following table presents the activities in allowance for loan losses by portfolio segment, which is consistent with the Company’s methodology for determining allowance for loan losses, for the periods indicated: ($ in thousands) Real Estate Commercial and Industrial Consumer Total Balance at January 1, 2020 $ 9,854 $ 4,354 $ 172 $ 14,380 Charge-offs ( 175 ) ( 1,104 ) ( 250 ) ( 1,529 ) Recoveries on loans previously charged off 58 236 146 440 Provision for loan losses 9,157 3,736 326 13,219 Balance at December 31, 2020 18,894 7,222 394 26,510 Charge-offs ( 24 ) ( 115 ) ( 88 ) ( 227 ) Recoveries on loans previously charged off 63 565 66 694 Reversal for loan losses ( 2,136 ) ( 2,362 ) ( 98 ) ( 4,596 ) Balance at December 31, 2021 16,797 5,310 274 22,381 Charge-offs — ( 1,095 ) ( 104 ) ( 1,199 ) Recoveries on loans previously charged off — 61 97 158 Provision (reversal) for loan losses 2,430 1,226 ( 54 ) 3,602 Balance at December 31, 2022 $ 19,227 $ 5,502 $ 213 $ 24,942 The following tables present the information on allowance for loan losses and recorded investments by portfolio segment and impairment methodology as of the dates indicated: ($ in thousands) Real Estate Commercial and Industrial Consumer Total December 31, 2022 Allowance for loan losses: Individually evaluated for impairment $ — $ — $ — $ — Collectively evaluated for impairment 19,227 5,502 213 24,942 Total $ 19,227 $ 5,502 $ 213 $ 24,942 Loans receivable: Individually evaluated for impairment $ 3,889 $ — $ — $ 3,889 Collectively evaluated for impairment 1,770,175 249,250 22,749 2,042,174 Total $ 1,774,064 $ 249,250 $ 22,749 $ 2,046,063 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 97 Credit Quality Indicators The following table presents the risk categories for the recorded investment in loans by portfolio segment as of the dates indicated: ($ in thousands) Pass Special Mention Substandard Doubtful Total December 31, 2022 Real estate loans: Commercial property $ 1,282,044 $ 3,264 $ 3,084 $ — $ 1,288,392 Residential property 333,354 — 372 — 333,726 SBA property 132,910 245 1,737 — 134,892 Construction 17,054 — — — 17,054 Commercial and industrial loans: Commercial term 75,473 1,248 979 — 77,700 Commercial lines of credit 152,042 2,100 — — 154,142 SBA commercial term 16,175 — 36 — 16,211 SBA PPP 1,197 — — — 1,197 Other consumer loans 22,746 — 3 — 22,749 Total $ 2,032,995 $ 6,857 $ 6,211 $ — $ 2,046,063 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 Substandard SBA property loans included none and $ 109 thousand of guaranteed portion by the U.S. government agency at December 31, 2022 and 2021, respectively. 98 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 the 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 December 31, 2022 Real estate loans: Commercial property $ — $ — $ — $ 2,400 $ 2,400 Residential property $ — $ — $ — $ 372 $ 372 SBA property — — — 585 585 Other consumer loans 47 87 — 3 137 Total $ 47 $ 87 $ — $ 3,360 $ 3,494 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 the U.S. government agency at December 31, 2022 and 2021. 99 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 December 31, 2022 Real estate loans: Commercial property $ 2,721 $ 2,727 $ — $ — $ — Residential property 372 372 — — — SBA property 798 840 — — — Total $ 3,891 $ 3,939 $ — $ — $ — December 31, 2021 Real estate loans: Commercial property $ 326 $ 325 $ — $ — $ — SBA property 988 1,033 — — — Commercial and industrial loans: Commercial term 2 2 — — — SBA commercial term 219 227 — — — Total $ 1,535 $ 1,587 $ — $ — $ — The following table presents information on the recorded investment in impaired loans by portfolio segment for the periods indicated: Year Ended December 31, 2022 2021 2020 ($ in thousands) Average Recorded Investment Interest Income Average Recorded Investment Interest Income Average Recorded Investment Interest Income Real estate loans: Commercial property $ 1,540 $ 21 $ 329 $ 22 $ 467 $ 23 Residential property 379 — — — 47 — SBA property 862 15 1,105 16 1,459 17 Commercial and industrial loans: Commercial term — — 10 — 24 1 Commercial lines of credit 1,635 — — — 1,869 — SBA commercial term 126 — 364 1 499 1 Total $ 4,542 $ 36 $ 1,808 $ 39 $ 4,365 $ 42 The following presents a summary of interest foregone on impaired loans for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 2020 Interest income that would have been recognized had impaired loans performed in accordance with their original terms $ 297 $ 99 $ 256 Less: interest income recognized on impaired loans on a cash basis ( 36 ) ( 39 ) ( 42 ) Interest income foregone on impaired loans $ 261 $ 60 $ 214 100 Troubled Debt Restructurings A TDR is a restructuring in which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. The restructuring of a loan includes, but is not limited to: (i) the transfer from the borrower to the Company of real estate, receivables from third parties, other assets, or an equity interest in full or partial satisfaction of the loan, (ii) a modification of the loan terms, such as a reduction of the stated interest rate, principal, or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, or (iii) a combination of the above. A loan extended or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not to be reported as a restructured loan. The following table presents the composition of loans that were modified as TDRs by portfolio segment as of the dates indicated: December 31, 2022 2021 ($ in thousands) Accruing Nonaccrual Total Accruing Nonaccrual Total Real estate loans: Commercial property $ 319 $ — $ 319 $ 326 $ — $ 326 SBA property 215 — 215 242 17 259 Commercial and industrial loans: Commercial term — — — 2 — 2 SBA commercial term — — — 6 — 6 Total $ 534 $ — $ 534 $ 576 $ 17 $ 593 The Company had no commitments to lend to customers with outstanding loans that were classified as TDRs as of December 31, 2022 and 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 $ 0 and $ 0 of allowance for loan losses as of December 31, 2022 and 2021, respectively. There were no new TDRs for the year ended December 31, 2022 or 2021. The following table presents new loans that were modified as TDRs by portfolio segment for the periods indicated: Year Ended December 31, 2020 ($ in thousands) Number of Loans Pre-Modification Recorded Investment Post-Modification Recorded Investment Commercial and industrial loans: SBA commercial term (1) 2 37 37 Total 2 $ 37 $ 37 (1) Includes loans modified with forbearance payments, term extensions and principal deferments that modify the terms of the loan from principal and interest payment to interest only payment. There were no loans that were modified as TDRs for which there was a payment default within twelve months following the modification for the years ended December 31, 2022 and 2021. There was one SBA commercial term loan of $ 26 thousand that was modified as a TDR for which there was a payment default within twelve months following the modification for the year ended December 31, 2020. 101 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: Year Ended December 31, ($ in thousands) 2022 2021 2020 Real estate loans: Commercial property $ — $ 8,563 $ — Residential property 458 189 1,125 Commercial and industrial loans: Commercial lines of credit 4,000 — — SBA commercial term — — 230 Total $ 4,458 $ 8,752 $ 1,355 The following table presents a summary of loans held-for-sale transferred to loans held-for-investment for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 2020 Real estate loans: Residential property $ — $ — $ 697 Total $ — $ — $ 697 The following table presents a summary of purchases of loans held-for-investment for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 2020 Real estate loans: Residential property $ — $ 2,139 $ — Total $ — $ 2,139 $ — The Company had no sales of loans held-for-investment during the years ended December 31, 2022, 2021 and 2020. When the Company changes its intent to hold loans for investment, the loans are transferred to held-for-sale. Loans Held-For-Sale The following table presents a composition of loans held-for-sale as of the dates indicated: December 31, ($ in thousands) 2022 2021 Real estate loans: SBA property $ 16,473 $ 33,603 Commercial and industrial loans: Commercial lines of credit 4,000 — SBA commercial term 2,338 3,423 Total $ 22,811 $ 37,026 102 Note 5. Premises and Equipment The following table presents a composition of premises and equipment as of the dates indicated: December 31, ($ in thousands) 2022 2021 Leasehold improvements $ 10,269 $ 7,552 Furniture, fixtures and equipment 4,501 3,770 Computer equipment 3,304 2,466 Computer software 1,995 1,484 Total premises and equipment 20,069 15,272 Less: accumulated depreciation ( 13,153 ) ( 12,174 ) Premises and equipment, net $ 6,916 $ 3,098 The Company recognized depreciation expense of $ 1.6 million, $ 1.4 million and $ 1.5 million for the years ended December 31, 2022, 2021 and 2020, respectively. Note 6. Operating Leases The following table presents operating lease cost and supplemental cash flow information related to leases for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 2020 Operating lease cost (1) $ 2,752 $ 2,580 $ 2,617 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases 2,960 2,760 2,776 Right-of-use assets obtained in exchange for lease obligations 2,150 1,459 950 (1) Included in Occupancy and Equipment on the Consolidated Statements of Income. The Company used the incremental borrowing rate based on the information available in determining the present value of lease payment. The following table presents supplemental balance sheet information related to leases as of the dates indicated: December 31, ($ in thousands) 2022 2021 Operating leases: Operating lease assets $ 6,358 $ 6,786 Operating lease liabilities 6,809 7,444 Weighted-average remaining lease term 4.3 years 4.0 years Weighted-average discount rate 2.66 % 2.36 % The following table presents maturities of operating lease liabilities as of the date indicated: ($ in thousands) December 31, 2022 Maturities: 2023 $ 2,718 2024 1,289 2025 1,195 2026 860 2027 422 After 2027 845 Total lease payment 7,329 Imputed interest ( 520 ) Present value of operating lease liabilities $ 6,809 103 Note 7. Servicing Assets At December 31, 2022 and 2021, total servicing assets were $ 7.3 million and $ 7.3 million, respectively. The Company sells SBA loans and certain residential property loans with servicing retained. The Company sold loans of $ 122.9 million, $ 126.8 million and $ 89.5 million, respectively, with the servicing rights retained and recognized a net gain on sale of $ 8.0 million, $ 12.8 million and $ 6.0 million, respectively, during the years ended December 31, 2022, 2021 and 2020. Loan servicing income was $ 3.0 million, $ 2.8 million and $ 2.7 million for the years ended December 31, 2022, 2021 and 2020, respectively. The following table presents the composition of servicing assets with key assumptions used to estimate the fair value as of the dates indicated: December 31, 2022 2021 ($ in thousands) Residential Property SBA Property SBA Commercial Term Residential Property SBA Property SBA Commercial Term Carrying amount $ 64 $ 6,831 $ 452 $ 86 $ 6,701 $ 482 Fair value $ 118 $ 9,090 $ 620 $ 126 $ 11,196 $ 734 Discount rates 7.73 % 11.47 % 12.55 % 6.33 % 8.75 % 9.64 % Prepayment speeds 17.10 % 14.82 % 18.93 % 24.40 % 9.80 % 12.77 % Weighted average remaining life 20.8 years 21.4 years 6.7 years 21.9 years 21.4 years 6.2 years Underlying loans being serviced $ 13,058 $ 461,738 $ 56,299 $ 17,443 $ 442,424 $ 59,839 The following table presents activity in servicing assets for the periods indicated: ($ in thousands) Residential Property SBA Property SBA Commercial Term Total Balance at January 1, 2020 $ 171 $ 5,805 $ 822 $ 6,798 Additions — 1,408 142 1,550 Amortization ( 62 ) ( 1,571 ) ( 315 ) ( 1,948 ) Balance at December 31, 2020 109 5,642 649 6,400 Additions — 2,769 109 2,878 Amortization ( 23 ) ( 1,710 ) ( 276 ) ( 2,009 ) Balance at December 31, 2021 86 6,701 482 7,269 Additions — 2,011 202 2,213 Amortization ( 22 ) ( 1,881 ) ( 232 ) ( 2,135 ) Balance at December 31, 2022 $ 64 $ 6,831 $ 452 $ 7,347 104 Note 8. Other Real Estate Owned The following table presents activity in OREO for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 2020 Balance at beginning of year $ — $ 1,401 $ — Additions 808 1,960 5,316 Sales ( 808 ) ( 3,361 ) ( 3,915 ) Net change in valuation allowance — — — Balance at end of year $ — $ — $ 1,401 The following table presents activity in OREO valuation allowance for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 2020 Balance at beginning of year $ — $ — $ — Additions — — — Net direct write-downs and removal from sale — — — Balance at end of year $ — $ — $ — The following table presents expenses related to OREO for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 2020 Net (gain) loss on sales $ 152 $ ( 73 ) $ ( 9 ) Operating expenses, net of rental income ( 13 ) 81 60 Total $ 139 $ 8 $ 51 The Company did no t provide loans to finance the sale of its OREO properties during the year ended December 31, 2022. The Company provided a loan of $ 250 thousand and $ 1.5 million to finance the sale of its OREO properties during the year ended December 31, 2021 and 2020, respectively. Note 9. Deposits At December 31, 2022 and 2021, total deposits were $ 2.05 billion and $ 1.87 billion, respectively, and total interest-bearing deposits were $ 1.31 billion and $ 1.04 billion, respectively. The aggregate amount of deposits reclassified as loans, such as overdrafts, was $ 81 thousand and $ 39 thousand at December 31, 2022 and 2021, respectively. Total deposits not covered by deposit insurance were $ 1.06 billion and $ 919.6 million, respectively, and total time deposits not covered by deposit insurance were $ 294.0 million and $ 216.3 million, respectively, at December 31, 2022 and 2021. The Company had California State Treasurer’s deposits of $ 60.0 million and $ 100.0 million in time deposits of more than $250,000 at December 31, 2022 and 2021, respectively. The California State Treasurer’s deposits are subject to withdrawal based on the State’s periodic evaluations. At December 31, 2022 and 2021, the Company pledged securities with amortized cost of $ 69.0 million and $ 110.9 million, respectively, for the California State Treasurer’s deposits. At December 31, 2022 and 2021, the Company had brokered deposits of $ 87.0 million and $ 85.0 million, respectively. Deposits from certain officers, directors and their related interests with which they are associated held by the Company were $ 2.8 million and $ 3.9 million at December 31, 2022 and 2021, respectively. The following table presents scheduled maturities of time deposits as of the date indicated: December 31, 2022 ($ in thousands) 2023 2024 2025 2026 2027 Thereafter Total Time deposits of $250,000 or less $ 372,675 $ 9,046 $ 505 $ 127 $ 24 $ — $ 382,377 Time deposits of more than $250,000 412,381 1,495 — — — — 413,876 Total time deposits $ 785,056 $ 10,541 $ 505 $ 127 $ 24 $ — $ 796,253 105 Note 10. Federal Home Loan Bank Advances and Other Borrowings FHLB Advances The Company had $ 20.0 million and $ 10.0 million in FHLB advances at December 31, 2022 and 2021, respectively. FHLB advances as of December 31, 2022 consisted of an overnight borrowing with a maturity date of January 3, 2023. The following table presents scheduled maturities of FHLB advances as of the date indicated: December 31, 2022 ($ in thousands) 2023 2024 2025 2026 Thereafter Total Fixed Rate $ 20,000 $ — $ — $ — $ — $ 20,000 Variable Rate — — — — — — Total $ 20,000 $ — $ — $ — $ — $ 20,000 The following table presents financial data of FHLB advances as of the dates or for the periods indicated: As of or For the Year Ended December 31, ($ in thousands) 2022 2021 2020 Weighted-average interest rate at end of year 4.65 % 2.07 % 0.67 % Average interest rate during the year 2.18 % 0.97 % 0.65 % Average balance $ 5,556 $ 30,096 $ 94,303 Maximum amount outstanding at any month-end $ 20,000 $ 80,000 $ 170,000 Balance at end of year $ 20,000 $ 10,000 $ 80,000 Advances paid early are subject to a prepayment penalty. At December 31, 2022 and 2021, loans pledged to secure from FHLB advances were $ 1.16 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, respectively, at December 31, 2022 and 2021. The Company had additional borrowing capacity of $ 561.7 million and $ 516.2 million, respectively, from the FHLB as of December 31, 2022 and 2021. Other Borrowing Arrangements At December 31, 2022, the Company had $ 23.9 million of unused borrowing capacity from the Federal Reserve Discount Window, to which the Company pledged loans with a carrying value of $ 32.2 million with no outstanding borrowings. In addition, the Company may borrow up to approximately $ 65.0 million overnight federal funds lines on an unsecured basis with correspondent banks at December 31, 2022. 106 Note 11. Shareholders’ Equity Preferred Stock 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 the 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. Common Stock Stock Repurchases On January 23, 2020, the Company announced that on November 22, 2019, its Board of Directors approved a $ 6.5 million stock repurchase program to commence upon the opening of the Company’s trading window for the first quarter of 2020 and continue through November 20, 2021. The Company completed the repurchase program in March 2020. The Company repurchased and retired 428,474 shares of common stock at a weighted-average price of $ 15.14 per share. 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 362,557 shares of common stock at a weighted-average price of $ 18.57 per share, totaling $ 6.7 million under this repurchase program as of December 31, 2022. 107 Note 12. Share-Based Compensation On July 25, 2013, the Company adopted the Equity Based Stock Compensation Plan (“2013 EBSC Plan”) approved by its shareholders to replace the 2003 Stock Option Plan. The 2013 EBSC Plan provided for options to purchase 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 December 31, 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: Year Ended December 31, ($ in thousands) 2022 2021 2020 Share-based compensation expense related to: Stock options $ 168 $ 187 $ 562 Restricted stock awards 371 266 153 Total share-based compensation expense $ 539 $ 453 $ 715 Related tax benefits $ 113 $ 84 $ 76 The following table presents unrecognized share-based compensation expense as of the date indicated: December 31, 2022 ($ in thousands) Unrecognized Expense Weighted-Average Remaining Expected Recognition Period Unrecognized share-based compensation expense related to: Stock options $ 319 3.3 years Restricted stock awards 763 3.0 years Total unrecognized share-based compensation expense $ 1,082 3.1 years Stock Options The Company has issued stock options to certain employees, officers and directors. Stock options are issued at the closing market price on the grant date, and generally have a three -to five-year vesting period and contractual terms of ten years . The Company recognizes an income tax deduction upon exercise of the non-qualified stock option by the option holder in an amount equal to the taxable income reported by the option holders. The option holder of non-qualified stock option recognizes taxable income based on the closing market price immediately before the exercise date less the exercise price stated in the grant agreement. The following table presents the weighted-average assumptions used to determine the fair value of options granted for the periods indicated: Year Ended December 31, 2022 2021 2020 Risk-free interest rate 1.55 % 1.13 % — % Expected term 6.50 years 6.71 years N/A Expected stock price volatility 27.66 % 27.54 % — % Dividend yield 2.30 % 2.64 % — % The following table presents information related to the stock option plan for the periods indicated: Year Ended December 31, ($ in thousands, except per share data) 2022 2021 2020 Intrinsic value of options exercised $ 1,225 $ 794 $ 789 Cash received from options exercised $ 840 $ 1,279 $ 693 Tax benefit from options exercised $ 46 $ 60 $ 70 Weighted-average estimated fair value per share of options granted $ 5.03 $ 3.76 $ — 108 The following table represents stock option activity as of and for the period indicated: Year Ended December 31, 2022 ($ in thousands except per share data) Number of Shares Weighted-Average Exercise Price Per Share Weighted-Average Contractual Term Aggregated Intrinsic Value Outstanding at beginning of year 632,772 $ 11.47 4.54 years $ 6,641 Granted 30,000 $ 22.61 10.00 years Exercised ( 95,135 ) $ 8.83 2.07 years Forfeited ( 1,000 ) $ 15.50 5.53 years Balance at end of year 566,637 $ 12.49 4.08 years $ 2,946 Exercisable at end of year 472,637 $ 11.21 3.26 years $ 3,064 The following table represents information regarding unvested stock options for the period indicated: Year Ended December 31, 2022 Number of Shares Weighted-Average Exercise Price Per Share Outstanding at beginning of year 107,099 $ 16.70 Granted 30,000 $ 22.61 Vested ( 42,099 ) $ 15.93 Forfeited ( 1,000 ) $ 15.50 Balance at end of year 94,000 $ 18.95 Restricted Stock Awards The Company also has granted RSAs to certain employees and officers. The RSAs are valued at the closing market price of the Company's stock on the grant date and generally have a three -to five-year vesting period. The Company recognizes an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted stock, when vested. The following table represents RSAs activity for the year ended December 31, 2022: Year Ended December 31, 2022 Number of Shares Weighted-Average Grant Date Fair Value Per Share Outstanding at beginning of period 55,284 $ 12.79 Granted 27,700 $ 21.67 Vested ( 20,762 ) $ 13.25 Forfeited ( 200 ) $ 17.09 Outstanding at end of period 62,022 $ 16.59 Note 13. Employee Benefit Plans The Company has adopted a defined contribution 401(k) plan for the benefit of its employees. The Company matches 75 % of an employee’s contribution up to 8 % of the employee’s salary each year. The Board of Directors may make a discretionary contribution to the plan annually. The Company’s contribution to the plan was $ 1.1 million, $ 901 thousand and $ 807 thousand for the years ended December 31, 2022, 2021 and 2020, respectively. 109 Note 14. Income Taxes The following table presents the components of income tax expense for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 2020 Current: Federal $ 769 $ 12,117 $ 6,596 State 1,475 6,692 3,910 Total current income tax expense 2,244 18,809 10,506 Deferred: Federal 8,434 ( 1,428 ) ( 2,223 ) State 3,738 ( 525 ) ( 1,447 ) Total deferred income tax expense (benefit) 12,172 ( 1,953 ) ( 3,670 ) Total $ 14,416 $ 16,856 $ 6,836 The following table presents a reconciliation of the recorded income tax expense to the amount of taxes computed by applying the applicable statutory Federal income tax rate for the periods indicated: Year Ended December 31, 2022 2021 2020 Statutory federal tax rate 21.00 % 21.00 % 21.00 % State and local income taxes, net of federal tax benefit 8.34 % 8.55 % 8.45 % Share-based compensation 0.07 % 0.05 % 0.39 % Bank-owned life insurance ( 0.30 ) % ( 0.04 ) % — % Other items, net 0.07 % 0.03 % ( 0.13 ) % Effective income tax rate 29.18 % 29.59 % 29.71 % The following table presents the components of the net deferred tax assets recognized in the accompanying consolidated balance sheets as of the dates indicated: December 31, ($ in thousands) 2022 2021 Deferred tax assets: Allowance for loan losses $ 7,359 $ 6,609 Share-based compensation 298 303 Unrealized loss on investment securities 4,459 — Loans held-for-sale market adjustment — 2,445 Operating lease liabilities 2,009 2,198 State tax benefit 322 1,365 Other 511 360 Total deferred tax assets 14,958 13,280 Deferred tax liabilities: Depreciation on premises and equipment 1,051 208 Unrealized gain on investment securities — 4 Loans held-for-sale market adjustment 8,745 — Deferred loan origination costs 98 177 Operating lease assets 1,876 2,004 Other 73 63 Total deferred tax liabilities 11,843 2,456 Deferred tax assets, net $ 3,115 $ 10,824 The Company had no valuation allowance for deferred tax assets as of December 31, 2022 and 2021. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences become deductible, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets, and a valuation allowance was not necessary as of December 31, 2022 and 2021. 110 At December 31, 2022 and 2021, the Company had no unrecognized tax benefits or related accrued interest. In the event the Company is assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified in the consolidated financial statements as income taxes. The Company does not expect the total amount of unrecognized tax benefit to significantly increase or decrease in the next twelve months. The Company and the Bank are subject to U.S. federal and various state jurisdictions income tax examinations. As of December 31, 2022, the Company is no longer subject to examination by taxing authorities for tax years before 2019 for federal taxes and before 2018 for various state jurisdictions. The statute of limitations vary by state, and state taxes other than California have been immaterial to the Company’s financial results. N o te 15. Earnings Per Share The following is a reconciliation of net income and shares outstanding to the income and number of share used to compute earnings per share for the periods indicated: Year Ended December 31, ($ in thousands, except per share) 2022 2021 2020 Basic earnings per share: Net income $ 34,987 $ 40,103 $ 16,175 Less: income allocated to unvested restricted stock ( 157 ) ( 156 ) ( 37 ) Net income allocated to common stock $ 34,830 $ 39,947 $ 16,138 Weighted-average total common shares outstanding 14,888,633 15,076,183 15,419,455 Less: weighted-average unvested restricted stock ( 66,615 ) ( 58,546 ) ( 35,224 ) Weighted-average common shares outstanding, basic 14,822,018 15,017,637 15,384,231 Basic earnings per share $ 2.35 $ 2.66 $ 1.05 Diluted earnings per share: Net income allocated to common stock $ 34,830 $ 39,947 $ 16,138 Weighted-average commons shares outstanding 14,822,018 15,017,637 15,384,231 Diluted effect of stock options 243,157 236,183 64,661 Diluted weighted-average common shares outstanding 15,065,175 15,253,820 15,448,892 Diluted earnings per share $ 2.31 $ 2.62 $ 1.04 There were 65,000 , 65,000 , and 601,019 stock options excluded in computing diluted earnings per share because they were anti-dilutive for years ended December 31, 2022, 2021, and 2020, respectively. Note 16. 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 following table presents outstanding financial commitments whose contractual amount represents credit risk as of the dates indicated: December 31, 2022 2021 ($ in thousands) Fixed Rate Variable Rate Fixed Rate Variable Rate Unused lines of credit $ 3,117 $ 251,178 $ 8,261 $ 160,739 Unfunded loan commitments 692 38,486 595 29,688 Standby letters of credit 2,989 1,901 3,078 1,431 Commercial letters of credit — 502 91 524 Total $ 6,798 $ 292,067 $ 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 reserve for off-balance sheet items of $ 299 thousand and $ 214 thousand, respectively, at December 31, 2022 and 2021. 111 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. The Bank had answered, responded, and will continue to 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, all of which are included in Other Expense in Consolidated Statements of Income, totaled $ 100 thousand, which represents the retention amount on its insurance claims. During the year ended December 31, 2022, the Company incurred additional legal expenses of $ 220 thousand associated with the on-going legal matters related to the data incident, all of which are included in Professional Fees in Consolidated Statement of Income. The Company anticipates additional expenses will be incurred in future periods; however, the Company does have a cyber-liability insurance policy that should provide insurance coverage for this incident. 112 Note 17. Regulatory Matters Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was fully phased in from 0.0% in 2015 to 2.50% by 2019. Management believes as of December 31, 2022 and 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” in 2018, which increased the threshold to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements. At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank. For comparison purposes, the Company’s ratios are included in following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. The Company and the Bank’s capital conservation buffer was 8.79 % and 9.52 %, respectively, as of December 31, 2022, and 8.04 % and 7.73 %, respectively, as of December 31, 2021. Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital. The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of the dates indicated: Actual Minimum Capital Requirement To Be Well Capitalized Under Prompt Corrective Provisions ($ in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2022 PCB Bancorp Common tier 1 capital (to risk-weighted assets) $ 276,360 13.29 % $ 93,554 4.5 % N/A N/A Total capital (to risk-weighted assets) 370,742 17.83 % 166,319 8.0 % N/A N/A Tier 1 capital (to risk-weighted assets) 345,501 16.62 % 124,739 6.0 % N/A N/A Tier 1 capital (to average assets) 345,501 14.33 % 96,472 4.0 % N/A N/A PCB Bank Common tier 1 capital (to risk-weighted assets) $ 338,891 16.30 % $ 93,553 4.5 % $ 135,131 6.5 % Total capital (to risk-weighted assets) 364,132 17.52 % 166,316 8.0 % 207,895 10.0 % Tier 1 capital (to risk-weighted assets) 338,891 16.30 % 124,737 6.0 % 166,316 8.0 % Tier 1 capital (to average assets) 338,891 14.05 % 96,469 4.0 % 120,586 5.0 % 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. 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. 113 The Federal Reserve, the FDIC and 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 18. Revenue Recognition The following table presents revenue from contracts with customers within the scope of ASC 606 for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 2020 Noninterest income in-scope of Topic 606 Service charges and fees on deposits: Monthly service fees $ 90 $ 81 $ 91 Account analysis fees 936 885 860 Non-sufficient funds charges 221 165 228 Other deposit related fees 79 64 77 Total service charges and fees on deposits 1,326 1,195 1,256 Debit card fees 335 306 252 Gain (loss) on sale of other real estate owned 152 74 9 Wire transfer fees 643 596 530 Other service charges 186 198 184 Total $ 2,642 $ 2,369 $ 2,231 114 Note 19. Condensed Financial Statements for Parent Company The parent company’s condensed statements of financial condition as of December 31, 2022 and 2021, and the related condensed statements of income and comprehensive income, and condensed statements of cash flows for the years ended December 31, 2022, 2021, and 2020 are presented below: Condensed Balance Sheets December 31, ($ in thousands) 2022 2021 Assets Cash $ 6,549 $ 5,451 Investment in subsidiary 328,832 250,780 Other assets 61 55 Total assets $ 335,442 $ 256,286 Liabilities and Shareholders’ Equity Total liabilities $ — $ — Total shareholders’ equity 335,442 256,286 Total liabilities and shareholders’ equity $ 335,442 $ 256,286 Condensed Statements of Income and Comprehensive Income Year Ended December 31, ($ in thousands) 2022 2021 2020 Income: Dividends from subsidiary $ 16,597 $ 18,375 $ 13,600 Other income — — — Total income 16,597 18,375 13,600 Expense: Other expense 912 753 798 Total expense 912 753 798 Income before taxes and equity in undistributed subsidiary income 15,685 17,622 12,802 Income tax benefit ( 265 ) ( 223 ) ( 234 ) Income before equity in undistributed subsidiary income 15,950 17,845 13,036 Equity in undistributed subsidiary income 19,037 22,258 3,139 Net income 34,987 40,103 16,175 Other comprehensive income (loss), net of tax ( 10,665 ) ( 1,802 ) 2,013 Comprehensive income $ 24,322 $ 38,301 $ 18,188 115 Condensed Statements of Cash Flows Year Ended December 31, ($ in thousands) 2022 2021 2020 Cash flows from operating activities Net income $ 34,987 $ 40,103 $ 16,175 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed subsidiary income ( 19,037 ) ( 22,258 ) ( 3,139 ) Change in other assets ( 6 ) ( 11 ) 47 Net cash provided by operating activities 15,944 17,834 13,083 Cash flows from investing activities: Capital contribution to subsidiary ( 69,141 ) — — Net cash used in investing activities ( 69,141 ) — — Cash flows from financing activities: Issuance of preferred stock 69,141 — — Restricted stock surrendered due to employee tax liability ( 8 ) ( 4 ) ( 2 ) Repurchase of common stock ( 6,732 ) ( 10,876 ) ( 6,487 ) Stock options exercised 840 1,279 693 Cash dividends paid on common stock ( 8,946 ) ( 6,655 ) ( 6,153 ) Net cash used in financing activities 54,295 ( 16,256 ) ( 11,949 ) Net increase in cash and cash equivalents 1,098 1,578 1,134 Cash and cash equivalents at beginning of year 5,451 3,873 2,739 Cash and cash equivalents at end of year $ 6,549 $ 5,451 $ 3,873 Note 20. Subsequent Events Dividend Declared on Common Stock. On January 26, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $ 0.15 per common share for the first quarter of 2023. The dividend was paid on February 17, 2023, to shareholders of record as of the close of business on February 10, 2023. Amendment to the Stock Repurchase Plan. On January 26, 2023, the Company’s Board of Directors approved an amendment to its current repurchase program that was approved and announced on July 28, 2022, which extends the expiration date from February 1, 2023 to February 1, 2024. 116 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.