PCB BANCORP

Previous wording

The following is management’s discussion and analysis of the major factors that influenced the Company’s results of operations and financial condition as of and for the three and six months ended June 30, 2024. This analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and with the unaudited consolidated financial statements and notes (unaudited) thereto set forth in this Quarterly Report on Form 10-Q.

Current wording

The following is management’s discussion and analysis of the major factors that influenced the Company’s results of operations and financial condition as of and for the three and nine months ended September 30, 2024. This analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and with the unaudited consolidated financial statements and notes (unaudited) thereto set forth in this Quarterly Report on Form 10-Q.

Previous wording

Within the various economic scenarios considered as of June 30, 2024, the quantitative estimate of the ACL would increase by approximately $11.0 million under sole consideration of a more adverse downside scenario. The quoted sensitivity calculation reflects the sensitivity of the modeled ACL estimate to macroeconomic forecast data, but is absent of qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily reflect the nature and extent of future changes in the ACL for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

Current wording

Within the various economic scenarios considered as of September 30, 2024, the quantitative estimate of the ACL would increase by approximately $8.4 million under sole consideration of a more adverse downside scenario. The quoted sensitivity calculation reflects the sensitivity of the modeled ACL estimate to macroeconomic forecast data, but is absent of qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily reflect the nature and extent of future changes in the ACL for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

Previous wording

▪Recorded a provision for credit losses of $259 thousand for the three months ended June 30, 2024 compared with $197 thousand for the three months ended June 30, 2023.

Current wording

▪Recorded a provision for credit losses of $50 thousand for the three months ended September 30, 2024 compared with $751 thousand for the three months ended September 30, 2023.

Previous wording

•Net interest income was $21.7 million for the three months ended June 30, 2024 compared with $21.7 million for the three months ended June 30, 2023. Net interest margin was 3.16% for the three months ended June 30, 2024 compared with 3.55% for the three months ended June 30, 2023.

Current wording

•Net interest income was $22.7 million for the three months ended September 30, 2024 compared with $22.4 million for the three months ended September 30, 2023. Net interest margin was 3.25% for the three months ended September 30, 2024 compared with 3.57% for the three months ended September 30, 2023.

Previous wording

•Total assets were $2.85 billion at June 30, 2024, an increase of $63.5 million, or 2.3%, from $2.79 billion at December 31, 2023;

Current wording

•Total assets were $2.89 billion at September 30, 2024, an increase of $100.3 million, or 3.6%, from $2.79 billion at December 31, 2023;

Previous wording

•Loans held-for-investment were $2.45 billion at June 30, 2024, an increase of $125.6 million, or 5.4%, from $2.32 billion at December 31, 2023; and

Current wording

•Loans held-for-investment were $2.47 billion at September 30, 2024, an increase of $142.7 million, or 6.1%, from $2.32 billion at December 31, 2023; and

Previous wording

•Total deposits were $2.41 billion at June 30, 2024, an increase of $54.6 million, or 2.3%, from $2.35 billion at December 31, 2023.

Current wording

•Total deposits were $2.46 billion at September 30, 2024, an increase of $108.1 million, or 4.6%, from $2.35 billion at December 31, 2023.

Previous wording

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees of $339 thousand and $247 thousand, respectively, and net accretion of discount on loans of $791 thousand and $751 thousand, respectively, are included in the interest income for the three months ended June 30, 2024 and 2023.

Current wording

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees of $246 thousand and $226 thousand, respectively, and net accretion of discount on loans of $773 thousand and $775 thousand, respectively, are included in the interest income for the three months ended September 30, 2024 and 2023.

Previous wording

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees of $673 thousand and $422 thousand, respectively, and net accretion of discount on loans of $1.4 million and $1.4 million, respectively, are included in the interest income for the six months ended June 30, 2024 and 2023.

Current wording

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees of $919 thousand and $648 thousand, respectively, and net accretion of discount on loans of $2.1 million and $2.2 million, respectively, are included in the interest income for the nine months ended September 30, 2024 and 2023.

Previous wording

Net interest income increased primarily due to a 12.9% increase in average balance of interest-earning assets and a 51 basis point increase in average yield, partially offset by a 25.2% increase in average balance of interest-bearing liabilities and a 91 basis point increase in average cost.

Current wording

Net interest income increased primarily due to an 11.4% increase in average balance of interest-earning assets and a 40 basis point increase in average yield, partially offset by a 22.2% increase in average balance of interest-bearing liabilities and a 68 basis point increase in average cost.

Previous wording

Interest and fees on loans increased primarily due to a 15.1% increase in average balance and a 47 basis point increase in average yield. The increase in average yield was primarily due to increases in overall interest rates on loans and net amortization of deferred loan fees.

Current wording

Interest and fees on loans increased primarily due to a 14.9% increase in average balance and a 39 basis point increase in average yield. The increase in average yield was primarily due to increases in overall interest rates on loans and net amortization of deferred loan fees.

Previous wording

Interest on investment securities increased primarily due to a 46 basis point increase in average yield, partially offset by a 0.7% decrease in average balance. The increase in average yield was primarily due to a decrease in net amortization of premiums on securities and a higher yield on newly purchased investment securities. For the six months ended June 30, 2024 and 2023, the average yield on total investment securities was 3.64% and 3.18%, respectively.

Current wording

Interest on investment securities increased primarily due to a 39 basis point increase in average yield and a 6.1% increase in average balance. The increase in average yield was primarily due to a higher yield on newly purchased investment securities. For the three months ended September 30, 2024 and 2023, the average yield on total investment securities was 3.73% and 3.34%, respectively.

Previous wording

Interest income on other interest-earning assets increased primarily due to a 7.4% increase in average balance and a 69 basis point increase in average yield. The increase in average yield was primarily due to an increase in interest rate on cash held at the Federal Reserve Bank and dividends received on FHLB stock. For the six months ended June 30, 2024 and 2023, the average yield on total other interest-earning assets was 5.67% and 4.98%, respectively.

Current wording

Interest income on other interest-earning assets increased primarily due to a 17 basis point increase in average yield, partially offset by a 19.8% decrease in average balance. The increase in average yield was primarily due to an increase in dividends received on FHLB stock. For the three months ended September 30, 2024 and 2023, the average yield on total other interest-earning assets was 5.66% and 5.49%, respectively.

Previous wording

Interest expense on deposits increased primarily due to a 22.0% increase in average balance of interest-bearing deposits and an 89 basis point increase in average cost of interest-bearing deposits. The increase in average balance was primarily due to the migration of noninterest-bearing deposits to money market accounts and time deposits attributable to the rising market rates. The increase in average cost was primarily due to an increase in market rates. For the three months ended June 30, 2024 and 2023, average cost on total interest-bearing deposits was 4.86% and 3.97%, respectively, and average cost on total deposits were 3.78% and 2.81%, respectively.

Current wording

Interest expense on deposits increased primarily due to a 21.2% increase in average balance of interest-bearing deposits and an 68 basis point increase in average cost of interest-bearing deposits. The increase in average balance was primarily due to the migration of noninterest-bearing deposits to money market accounts and time deposits attributable to the rising market rates. The increase in average cost was primarily due to an increase in market rates. For the three months ended September 30, 2024 and 2023, average cost on total interest-bearing deposits was 4.85% and 4.17%, respectively, and average cost on total deposits were 3.78% and 2.97%, respectively.

Previous wording

Net interest income decreased primarily due to a 28.0% increase in average balance of interest-bearing liabilities and a 115 basis point increase in average cost, partially offset by a 13.2% increase in average balance of interest-earning assets and a 54 basis point increase in average yield.

Current wording

Net interest income decreased primarily due to a 26.0% increase in average balance of interest-bearing liabilities and a 98 basis point increase in average cost, partially offset by a 12.6% increase in average balance of interest-earning assets and a 50 basis point increase in average yield.

Previous wording

Interest and fees on loans increased primarily due to a 14.7% increase in average balance and a 50 basis point increase in average yield. The increase in average yield was primarily due to increases in overall interest rates on loans and net amortization of deferred loan fees, partially offset by a decrease in net accretion of discount on loans.

Current wording

Interest and fees on loans increased primarily due to a 14.8% increase in average balance and a 46 basis point increase in average yield. The increase in average yield was primarily due to increases in overall interest rates on loans and net amortization of deferred loan fees.

Previous wording

Interest on investment securities increased primarily due to a 51 basis point increase in average yield, partially offset by a 0.2% decrease in average balance. The increase in average yield was primarily due to a decrease in net amortization of premiums on securities and a higher yield on newly purchased investment securities. For the three months ended June 30, 2024 and 2023, the average yield on total investment securities was 3.72% and 3.21%, respectively.

Current wording

Interest on investment securities increased primarily due to a 44 basis point increase in average yield and a 1.6% increase in average balance. The increase in average yield was primarily due to a decrease in net amortization of premiums on securities and a higher yield on newly purchased investment securities. For the nine months ended September 30, 2024 and 2023, the average yield on total investment securities was 3.67% and 3.23%, respectively.

Previous wording

Interest income on other interest-earning assets increased primarily due to a 53 basis point increase in average yield, partially offset by a 0.2% decrease in average balance. The increase in average yield was primarily due to an increase in interest rate on cash held at the Federal Reserve Bank and dividends received on FHLB stock. For the three months ended June 30, 2024 and 2023, the average yield on total other interest-earning assets was 5.67% and 5.14%, respectively.

Current wording

Interest income on other interest-earning assets increased primarily due to a 51 basis point increase in average yield, partially offset by a 2.3% decrease in average balance. The increase in average yield was primarily due to an increase in interest rate on cash held at the Federal Reserve Bank and dividends received on FHLB stock. For the nine months ended September 30, 2024 and 2023, the average yield on total other interest-earning assets was 5.67% and 5.16%, respectively.

Previous wording

Interest expense on deposits increased primarily due to a 25.6% increase in average balance of interest-bearing deposits and a 114 basis point increase in average cost of interest-bearing deposits. The increase in average balance was primarily due to the migration of noninterest-bearing deposits to money market accounts and time deposits attributable to the rising market rates. The increase in average cost was primarily due to an increase in market rates. For the six months ended June 30, 2024 and 2023, average cost on total interest-bearing deposits was 4.85% and 3.71%, respectively, and average cost on total deposits were 3.75% and 2.56%, respectively.

Current wording

Interest expense on deposits increased primarily due to a 24.0% increase in average balance of interest-bearing deposits and a 98 basis point increase in average cost of interest-bearing deposits. The increase in average balance was primarily due to the migration of noninterest-bearing deposits to money market accounts and time deposits attributable to the rising market rates. The increase in average cost was primarily due to an increase in market rates. For the nine months ended September 30, 2024 and 2023, average cost on total interest-bearing deposits was 4.85% and 3.87%, respectively, and average cost on total deposits were 3.76% and 2.70%, respectively.

Previous wording

Interest expense on borrowings increased primarily due to a 476.5% increase in average balance and a 24 basis point increase in average cost of interest-bearing deposits. The increase in average cost was primarily due to an increase in market rates.

Current wording

Interest expense on borrowings increased primarily due to a 579.7% increase in average balance and a 24 basis point increase in average cost of interest-bearing deposits. The increase in average cost was primarily due to an increase in market rates.

Previous wording

The provision for credit losses for the three months ended June 30, 2024 was primarily due to an increase in loans held-for-investment and quantitatively measured loss reserve requirement, partially offset by a decrease in reserve related to qualitative adjustment factors. See further discussion in “Allowance for Credit Losses.”

Current wording

The provision for credit losses for the three and nine months ended September 30, 2024 was primarily due to increases in loans held-for-investment and quantitatively measured loss reserve requirement, partially offset by a decrease in reserve related to qualitative adjustment factors. See further discussion in “Allowance for Credit Losses.”

Previous wording

Loan servicing income decreased primarily due to an increase in servicing asset amortization. Servicing asset amortization was $519 thousand and $449 thousand, respectively, for the three months ended June 30, 2024 and 2023.

Current wording

Loan servicing income decreased primarily due to a decrease in servicing fee income and an increase in servicing asset amortization. Servicing asset amortization was $478 thousand and $470 thousand, respectively, for the three months ended September 30, 2024 and 2023.

Previous wording

Gain on sale of loans decreased primarily due to a decrease in sales volume, partially offset by an increase in level of premium on SBA loans in the secondary market. The Company sold SBA loans of $13.6 million with a gain of $763 thousand during the three months ended June 30, 2024. During the three months ended June 30, 2023, the Company sold SBA loans of $16.8 million with a gain of $769 thousand.

Current wording

Gain on sale of loans increased primarily due to an increase in level of premium on SBA loans in the secondary market, partially offset by a decrease in sales volume. The Company sold SBA loans of $13.5 million with a gain of $750 thousand and a residential mortgage loan of $676 thousand at par during the three months ended September 30, 2024. During the three months ended September 30, 2023, the Company sold SBA loans of $17.7 million with a gain of $689 thousand.

Previous wording

Other income primarily included wire transfer fees of $165 thousand and $161 thousand, respectively, and debit card interchange fees of $18 thousand and $78 thousand, respectively, for the three months ended June 30, 2024 and 2023.

Current wording

Other income primarily included wire transfer fees of $156 thousand and $162 thousand, respectively, and debit card interchange fees of $154 thousand and $103 thousand, respectively, for the three months ended September 30, 2024 and 2023.

Previous wording

Loan servicing income decreased primarily due to an increase in servicing asset amortization. Servicing asset amortization was $893 thousand and $873 thousand, respectively, for the six months ended June 30, 2024 and 2023.

Current wording

Loan servicing income decreased primarily due to a decrease in servicing fee income and an increase in servicing asset amortization. Servicing asset amortization was $1.4 million and $1.3 million, respectively, for the nine months ended September 30, 2024 and 2023.

Previous wording

Gain on sale of loans decreased primarily due to a decrease in sales volume, partially offset by an increase in level of premium on SBA loans in the secondary market. The Company sold SBA loans of $33.0 million with a gain of $1.8 million during the six months ended June 30, 2024. During the six months ended June 30, 2023, the Company sold SBA loans of $43.9 million with a gain of $2.1 million.

Current wording

Gain on sale of loans decreased primarily due to an increase in level of premium on SBA loans in the secondary market, partially offset by a decrease in sales volume. The Company sold SBA loans of $46.5 million with a gain of $2.6 million and a residential mortgage loan of $676 thousand at par during the nine months ended September 30, 2024. During the nine months ended September 30, 2023, the Company sold SBA loans of $61.6 million with a gain of $2.8 million.

Previous wording

Other income primarily included wire transfer fees of $306 thousand and $305 thousand, respectively, and debit card interchange fees of $99 thousand and $151 thousand, respectively, for the six months ended June 30, 2024 and 2023.

Current wording

Other income primarily included wire transfer fees of $462 thousand and $467 thousand, respectively, and debit card interchange fees of $253 thousand and $254 thousand, respectively, for the nine months ended September 30, 2024 and 2023.

Previous wording

Salaries and employee benefits increased primarily due to increases in salaries and incentives tied to the sales of SBA loans originated at LPOs, partially offset by decreases in bonus and vacation accruals. The number of full-time equivalent employees was 265 at June 30, 2024 compared to 272 at June 30, 2023.

Current wording

Salaries and employee benefits increased primarily due to increases in salaries, bonus accrual, incentives tied to sales of SBA loans originated at LPOs, and other employee benefits, partially offset by a decrease in vacation accrual. The number of full-time equivalent employees was 264 at September 30, 2024 compared to 270 at September 30, 2023.

Previous wording

Occupancy and equipment increased primarily due to an expansion of headquarters location in the second half of 2023, the relocation of a regional office and the consolidation of two branches into one location in Orange County, California starting from the three months ended June 30, 2024.

Current wording

Occupancy and equipment increased primarily due to an expansion of headquarters location in the second half of 2023, the relocation of a regional office and the consolidation of two branches into a new location in Orange County, California starting from the three months ended June 30, 2024.

Previous wording

Professional fees increased primarily due to higher professional fees related to a core system conversion that was completed in April 2024.

Current wording

Professional fees decreased primarily due to the completion a core system conversion that was completed in April 2024, resulting in high professional fees during the three months ended September 30, 2024.

Previous wording

Other expenses included $124 thousand and $73 thousand in loan related expenses, $543 thousand and $548 thousand in office expense, and $210 thousand and $203 thousand in armed guard expense for the three months ended June 30, 2024 and 2023, respectively.

Current wording

Other expenses included $97 thousand and $114 thousand in loan related expenses, $625 thousand and $565 thousand in office expense, and $221 thousand and $206 thousand in armed guard expense for the three months ended September 30, 2024 and 2023, respectively.

Previous wording

Salaries and employee benefits increased primarily due to increases in salaries, and bonus and vacation accruals. The number of full-time equivalent employees was 265 at June 30, 2024 compared to 272 at June 30, 2023.

Current wording

Salaries and employee benefits increased primarily due to salaries, bonus accrual, incentives tied to sales of SBA loans originated at LPOs, and other employee benefits, partially offset by a decrease in vacation accrual. The number of full-time equivalent employees was 264 at September 30, 2024 compared to 270 at September 30, 2023.

Previous wording

Occupancy and equipment increased primarily due to an expansion of headquarters location in the second half of 2023, and the relocation of a regional office and the consolidation of two branches into one location in Orange County, California starting from the three months ended June 30, 2024.

Current wording

Occupancy and equipment increased primarily due to an expansion of headquarters location in the second half of 2023, and the relocation of a regional office and the consolidation of two branches into a new location in Orange County, California starting from the three months ended June 30, 2024.

Previous wording

Professional fees increased primarily due to higher professional fees related to a core system conversion that was completed in April 2024.

Current wording

Professional fees decreased primarily due to the completion a core system conversion that was completed in April 2024, resulting in high professional fees during the nine months ended September 30, 2024.

Previous wording

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

Current wording

Marketing and business promotion expense decreased primarily due to a decrease in advertisements.

Previous wording

Other expenses included $218 thousand and $197 thousand in loan related expenses, $1.1 million and $1.1 million in office expense, and $414 thousand and $382 thousand in armed guard expense for the six months ended June 30, 2024 and 2023, respectively. In addition, the Company recognized a termination charge for the legacy core system of $508 thousand and an expense of $815 thousand for a reimbursement for an SBA loan guarantee previously paid by the SBA on a loan originated in 2014 that subsequently defaulted and was ultimately determined to be ineligible for the SBA guaranty during the six months ended June 30, 2024.

Current wording

Other expenses included $315 thousand and $311 thousand in loan related expenses, $1.7 million and $1.6 million in office expense, and $635 thousand and $588 thousand in armed guard expense for the nine months ended September 30, 2024 and 2023, respectively. In addition, the Company recognized a termination charge for the legacy core system of $508 thousand and an expense of $815 thousand for a reimbursement for an SBA loan guarantee previously paid by the SBA on a loan originated in 2014 that subsequently defaulted and was ultimately determined to be ineligible for the SBA guaranty during the nine months ended September 30, 2024.

Previous wording

Income tax expense was $2.5 million and $3.1 million, respectively, and the effective tax rate was 28.5% and 29.1%, respectively, for the three months ended June 30, 2024 and 2023. For six months ended June 30, 2024 and 2023, income tax expense was $4.3 million and $7.2 million, respectively, and the effective tax rate was 28.3% and 28.9%, respectively.

Current wording

Income tax expense was $2.9 million and $3.0 million, respectively, and the effective tax rate was 26.9% and 29.7%, respectively, for the three months ended September 30, 2024 and 2023. For nine months ended September 30, 2024 and 2023, income tax expense was $7.2 million and $10.2 million, respectively, and the effective tax rate was 27.7% and 29.2%, respectively.

Previous wording

Total investment securities were $148.0 million at June 30, 2024, an increase of $4.7 million, or 3.3%, from $143.3 million at December 31, 2023. The increase was primarily due to purchases of $14.8 million, partially offset by principal paydowns of $8.3 million, net premium amortization of $82 thousand and a decrease in fair value of securities available-for-sale of $1.7 million.

Current wording

Total investment securities were $147.6 million at September 30, 2024, an increase of $4.3 million, or 3.0%, from $143.3 million at December 31, 2023. The increase was primarily due to purchases of $14.8 million and an increase in fair value of securities available-for-sale of $3.5 million, partially offset by principal paydowns of $13.9 million and net premium amortization of $123 thousand.

Previous wording

As of June 30, 2024, 94.9%, at amortized cost basis, of the Company's securities available-for-sale were issued by U.S. government agency and U.S. government sponsored enterprise. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell these securities before their anticipated recovery, the Company determined that these securities with unrealized losses did not warrant an ACL.

Current wording

As of September 30, 2024, 95.3%, at amortized cost basis, of the Company's securities available-for-sale were issued by U.S. government agency and U.S. government sponsored enterprise. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell these securities before their anticipated recovery, the Company determined that these securities with unrealized losses did not warrant an ACL.

Previous wording

Municipal and corporate bonds had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of June 30, 2024. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses did not warrant an ACL as of June 30, 2024.

Current wording

Municipal and corporate bonds had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of September 30, 2024. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. Additionally, the Company continues to receive contractual principal and interest payments in a timely manner. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company determined that the investment securities with unrealized losses did not warrant an ACL as of September 30, 2024.