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Section 1: 10-Q (10-Q)

Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                  
Commission file number 001-38621
PCB Bancorp
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
20-8856755
(IRS Employer Identification No.)
 
 
3701 Wilshire Boulevard, Suite 900
Los Angeles, California
(Address of principal executive offices)
90010
(Zip Code)
 
 
(213) 210-2000
(Registrant’s telephone number, including area code)
 
Pacific City Financial Corporation
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, no par value
PCB
Nasdaq Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
¨
 
Accelerated filer
x
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
x
 
 
 
Emerging growth company
x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ¨ No x
As of July 31, 2019, the registrant had outstanding 15,934,059 shares of common stock.




PCB Bancorp and Subsidiary
Quarterly Report on Form 10-Q
June 30, 2019
Table of Contents
Part I - Financial Information
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II - Other Information
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 



2



Forward-looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements which reflect current views of PCB Bancorp, formerly known as Pacific City Financial Corporation, (collectively, with its consolidated subsidiary, the “Company,” “we,” “us” or “our”) with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “goal,” “target,” “aim,” “would,” and “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, but are not limited to, the following:
business and economic conditions, particularly those affecting the financial services industry and our primary market areas;
our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss;
factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance;
governmental monetary and fiscal policies, and changes in market interest rates;
compliance with governmental and regulatory requirements, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Economic Growth, Regulatory Relief and Consumer Protection Act and others relating to banking, consumer protection, securities and tax matters;
compliance with the regulatory consent order related to Bank Secrecy Act and Anti-Money Laundering (“BSA/AML”) matters to which Pacific City Bank, our wholly owned subsidiary, is subject;
the significant portion of our loan portfolio that is comprised of real estate loans;
our ability to attract and retain Korean-American customers;
our ability to identify and address cyber-security risks, breaches, fraud and systems errors;
our ability to effectively execute our strategic plan and manage our growth;
changes in our senior management team and our ability to attract, motivate and retain qualified personnel;
liquidity issues, including fluctuations in the fair value and liquidity of the securities we hold for sale and our ability to raise additional capital, if necessary;
costs and obligations associated with operating as a public company;
effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;
the impact of any claims or legal actions to which we may be subject, including any effect on our reputation; and
changes in federal tax law or policy.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements and the risks described under “Part I. Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and our other documents filed with the United States (“U.S.”) Securities Exchange Commission (“SEC”). Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward looking statements in this report. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is initially made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.


3



Part I - Financial Information
Item 1 - Consolidated Financial Statements

PCB Bancorp and Subsidiary
Consolidated Balance Sheets
(in thousands, except share data)
 
 
(Unaudited)
 
 
 
 
June 30, 2019
 
December 31, 2018
Assets
 
 
 
 
Cash and due from banks
 
$
19,080

 
$
24,121

Interest-bearing deposits in other financial institutions
 
114,205

 
138,152

Total cash and cash equivalents
 
133,285

 
162,273

Securities available-for-sale, at fair value
 
142,539

 
146,991

Securities held-to-maturity, at amortized cost (fair value of $22,813 at June 30, 2019 and $21,152 at December 31, 2018)
 
22,685

 
21,760

Total investment securities
 
165,224

 
168,751

Loans held-for-sale
 
440

 
5,781

Loans held-for-investment, net of deferred loan costs (fees)
 
1,395,557

 
1,338,682

Allowance for loan losses
 
(13,328
)
 
(13,167
)
Net loans held-for-investment
 
1,382,229

 
1,325,515

Premises and equipment, net
 
4,334

 
4,588

Federal Home Loan Bank and other restricted stock, at cost
 
8,345

 
7,433

Other real estate owned, net
 
395

 

Deferred tax assets, net
 
3,241

 
3,377

Servicing assets
 
7,230

 
7,666

Operating lease assets
 
10,105

 

Accrued interest receivable and other assets
 
11,658

 
11,644

Total assets
 
$
1,726,486

 
$
1,697,028

Liabilities and Shareholders’ Equity
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing demand
 
$
339,603

 
$
329,270

Savings, NOW and money market accounts
 
331,357

 
313,610

Time deposits of $250,000 or less
 
480,786

 
519,634

Time deposits of more than $250,000
 
294,780

 
281,239

Total deposits
 
1,446,526

 
1,443,753

Federal Home Loan Bank advances
 
35,000

 
30,000

Operating lease liabilities
 
11,131

 

Accrued interest payable and other liabilities
 
10,429

 
12,979

Total liabilities
 
1,503,086

 
1,486,732

Commitments and contingent liabilities
 

 

Preferred stock, 10,000,000 shares authorized, no par value, 0 issued and outstanding shares
 

 

Common stock, 60,000,000 shares authorized, no par value; 15,980,655 and 15,977,754 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively
 
170,769

 
171,067

Additional paid-in capital
 
3,366

 
3,299

Retained earnings
 
48,927

 
37,577

Accumulated other comprehensive income (loss), net
 
338

 
(1,647
)
Total shareholders’ equity
 
223,400

 
210,296

Total liabilities and shareholders’ equity
 
$
1,726,486

 
$
1,697,028

 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

4



PCB Bancorp and Subsidiary
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share data)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
21,969

 
$
18,610

 
$
42,903

 
$
36,050

Interest on tax-exempt investment securities
 
38

 
41

 
77

 
81

Interest on investment securities
 
1,024

 
828

 
2,078

 
1,636

Interest and dividends on other interest-earning assets
 
999

 
865

 
1,924

 
1,205

Total interest income
 
24,030

 
20,344

 
46,982

 
38,972

Interest expense:
 
 
 
 
 
 
 
 
Interest on deposits
 
6,200

 
4,292

 
11,865

 
7,458

Interest on borrowings
 
138

 
170

 
272

 
338

Total interest expense
 
6,338

 
4,462

 
12,137

 
7,796

Net interest income
 
17,692

 
15,882

 
34,845

 
31,176

Provision for loan losses
 
394

 
425

 
309

 
520

Net interest income after provision for loan losses
 
17,298

 
15,457

 
34,536

 
30,656

Noninterest income:
 
 
 
 
 
 
 
 
Service charges and fees on deposits
 
368

 
376

 
732

 
725

Loan servicing income
 
492

 
585

 
1,123

 
1,211

Gain on sale of loans
 
1,891

 
1,033

 
3,011

 
3,149

Other income
 
303

 
279

 
597

 
550

Total noninterest income
 
3,054

 
2,273

 
5,463

 
5,635

Noninterest expense:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
6,600

 
6,153

 
13,222

 
12,399

Occupancy and equipment
 
1,407

 
1,246

 
2,720

 
2,390

Professional fees
 
686

 
988

 
1,444

 
1,511

Marketing and business promotion
 
529

 
541

 
757

 
929

Data processing
 
338

 
295

 
656

 
597

Director fees and expenses
 
185

 
211

 
374

 
441

Regulatory assessments
 
309

 
145

 
425

 
277

Other expenses
 
930

 
1,361

 
1,675

 
2,027

Total noninterest expense
 
10,984

 
10,940

 
21,273

 
20,571

Income before income taxes
 
9,368

 
6,790

 
18,726

 
15,720

Income tax expense
 
2,767

 
2,028

 
5,561

 
4,694

Net income
 
$
6,601

 
$
4,762

 
$
13,165

 
$
11,026

 
 
 
 
 
 
 
 
 
Earnings per common share, basic
 
$
0.41

 
$
0.35

 
$
0.82

 
$
0.82

Earnings per common share, diluted
 
$
0.40

 
$
0.35

 
$
0.81

 
$
0.81

 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding, basic
 
16,017,089

 
13,432,775

 
16,008,325

 
13,425,557

Weighted-average common shares outstanding, diluted
 
16,330,039

 
13,628,677

 
16,303,274

 
13,607,834

 
 
 
 
 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

5



PCB Bancorp and Subsidiary
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Net income
 
$
6,601

 
$
4,762

 
$
13,165

 
$
11,026

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Unrealized gain (loss) on securities available-for-sale arising during the period
 
1,638

 
(515
)
 
2,810

 
(1,960
)
Income tax benefit (expense) related to items of other comprehensive income
 
(480
)
 
151

 
(825
)
 
571

Total other comprehensive income (loss), net of tax
 
1,158

 
(364
)
 
1,985

 
(1,389
)
Total comprehensive income
 
$
7,759

 
$
4,398

 
$
15,150

 
$
9,637

 
 
 
 
 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

6



PCB Bancorp and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(in thousands, except share data)
 
 
Three Months Ended
 
 
 
 
Shareholders Equity
 
 
Common Stock Outstanding Shares
 
Common stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance at April 1, 2018
 
13,424,777

 
$
125,511

 
$
3,072

 
$
20,898

 
$
(2,248
)
 
$
147,233

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
4,762

 

 
4,762

Other comprehensive loss, net of tax
 

 

 

 

 
(364
)
 
(364
)
Share-based compensation expense
 

 

 
157

 

 

 
157

Stock options exercised
 
10,437

 
68

 
(23
)
 

 

 
45

Cash dividends declared on common stock
 

 

 

 
(402
)
 

 
(402
)
Balance at June 30, 2018
 
13,435,214

 
$
125,579

 
$
3,206

 
$
25,258

 
$
(2,612
)
 
$
151,431

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 1, 2019
 
16,011,151

 
$
171,407

 
$
3,336

 
$
43,288

 
$
(820
)
 
$
217,211

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
6,601

 

 
6,601

Other comprehensive income, net of tax
 

 

 

 

 
1,158

 
1,158

Repurchase of common stock
 
(57,551
)
 
(974
)
 

 

 

 
(974
)
Share-based compensation expense
 

 

 
162

 

 

 
162

Stock options exercised
 
27,055

 
336

 
(132
)
 

 

 
204

Cash dividends declared on common stock
 

 

 

 
(962
)
 

 
(962
)
Balance at June 30, 2019
 
15,980,655

 
$
170,769

 
$
3,366

 
$
48,927

 
$
338

 
$
223,400

 
 
 
 
 
 
 
 
 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

7



PCB Bancorp and Subsidiary
Consolidated Statements of Changes in Shareholders’ Equity, Continued (Unaudited)
(in thousands, except share data)
 
 
Six Months Ended
 
 
 
 
Shareholders Equity
 
 
Common Stock Outstanding Shares
 
Common stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
Balance at January 1, 2018
 
13,417,899

 
$
125,430

 
$
2,941

 
$
15,036

 
$
(1,223
)
 
$
142,184

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
11,026

 

 
11,026

Other comprehensive loss, net of tax
 

 

 

 

 
(1,389
)
 
(1,389
)
Share-based compensation expense
 

 

 
339

 

 

 
339

Stock options exercised
 
17,315

 
149

 
(74
)
 

 

 
75

Cash dividends declared on common stock
 

 

 

 
(804
)
 

 
(804
)
Balance at June 30, 2018
 
13,435,214

 
$
125,579

 
$
3,206

 
$
25,258

 
$
(2,612
)
 
$
151,431

 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
 
15,977,754

 
$
171,067

 
$
3,299

 
$
37,577

 
$
(1,647
)
 
$
210,296

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
13,165

 

 
13,165

Other comprehensive income, net of tax
 

 

 

 

 
1,985

 
1,985

Repurchase of common stock
 
(57,551
)
 
(974
)
 

 

 

 
(974
)
Share-based compensation expense
 

 

 
323

 

 

 
323

Stock options exercised
 
60,452

 
676

 
(256
)
 

 

 
420

Cash dividends declared on common stock
 

 

 

 
(1,762
)
 

 
(1,762
)
Cumulative effect adjustment upon adoption of new lease accounting standard
 

 

 

 
(53
)
 

 
(53
)
Balance at June 30, 2019
 
15,980,655

 
$
170,769

 
$
3,366

 
$
48,927

 
$
338

 
$
223,400

 
 
 
 
 
 
 
 
 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)


8



PCB Bancorp and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
 
 
Six Months Ended June 30,
 
 
2019
 
2018
Cash flows from operating activities
 
 
 
 
Net income
 
$
13,165

 
$
11,026

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation of premises and equipment
 
763

 
612

Net amortization of premiums (discounts) on securities
 
406

 
406

Accretion of discounts on loans
 
(2,041
)
 
(1,967
)
Net accretion of deferred loan costs (fees)
 
(209
)
 
(262
)
Amortization of servicing assets
 
1,213

 
1,244

Provision for loan losses
 
309

 
520

Deferred tax expense (benefit)
 
(689
)
 
57

Stock-based compensation
 
323

 
339

Gain on sale of loans
 
(3,011
)
 
(3,149
)
Originations of loans held-for-sale
 
(47,532
)
 
(60,399
)
Proceeds from sales of and principal collected on loans held-for-sale
 
56,693

 
49,135

Change in accrued interest receivable and other assets
 
(12
)
 
(41
)
Change in accrued interest payable and other liabilities
 
(1,920
)
 
1,968

Net cash provided by operating activities
 
17,458

 
(511
)
Cash flows from investing activities
 
 
 
 
Purchase of securities available-for-sale
 
(6,247
)
 
(16,060
)
Proceeds from maturities, calls, and paydowns of securities available-for-sale
 
13,179

 
11,329

Purchase of securities held-to-maturity
 
(2,150
)
 

Proceeds from maturities and paydowns of securities held-to-maturity
 
1,149

 
629

Proceeds from sale of loans held-for-sale previously classified as held-for-investment
 
303

 
7,208

Net change in loans receivable
 
(56,712
)
 
(71,304
)
Purchase of Federal Home Loan Bank stock
 
(912
)
 
(844
)
Proceeds from sale of other real estate owned
 

 
102

Purchases of premises and equipment
 
(513
)
 
(787
)
Net cash used in investing activities
 
(51,903
)
 
(69,727
)
Cash flows from financing activities
 
 
 
 
Net increase in deposits
 
2,773

 
175,955

Net change in short-term Federal Home Loan Bank advances
 
15,000

 

Repayment of long-term Federal Home Loan Bank advances
 
(10,000
)
 
(10,000
)
Stock options exercised
 
420

 
75

Repurchase of common stock
 
(974
)
 

Cash dividends paid on common stock
 
(1,762
)
 
(804
)
Net cash provided by financing activities
 
5,457

 
165,226

Net increase (decrease) in cash and cash equivalents
 
(28,988
)
 
94,988

Cash and cash equivalents at beginning of year
 
162,273

 
73,658

Cash and cash equivalents at end of year
 
$
133,285

 
$
168,646

 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)

9



PCB Bancorp and Subsidiary
Consolidated Statements of Cash Flows, Continued (Unaudited)
(in thousands)
 
 
Six Months Ended June 30,
 
 
2019
 
2018
Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
13,017

 
$
7,438

Income taxes paid
 
7,322

 
4,194

Supplemental disclosures of non-cash investment activities:
 
 
 
 
Loans transferred to loans held-for-sale
 
$
303

 
$
7,034

Loans transferred to other real estate owned
 
50

 

Right of use assets obtained in exchange for lease obligations
 
1,588

 

 
 
 
 
 
See Accompanying Notes to Consolidated Financial Statements (Unaudited)


10



PCB Bancorp and Subsidiary
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation and Significant Accounting Policies
Nature of Operations
PCB Bancorp (collectively, with its consolidated subsidiary, the “Company,” “we,” “us” or “our”) is a bank holding company whose subsidiary is Pacific City Bank (the “Bank”). The Company changed its corporate name from “Pacific City Financial Corporation” to “PCB Bancorp” in July 2019. The Bank is a single operating segment that operates 11 full-service branches in Los Angeles and Orange counties, California, one full-service branch in each of Fort Lee, New Jersey and Bayside, New York, and 10 loan production offices (“LPOs”) in Irvine, Artesia and Los Angeles, California; Annandale, Virginia; Chicago, Illinois; Atlanta, Georgia; Bellevue, Washington; Aurora, Colorado; Carrollton, Texas; and New York, New York. The Bank offers a broad range of loans, deposits, and other products and services predominantly to small and middle market businesses and individuals.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements have been prepared pursuant to Article 10 of SEC Regulation S-X and other SEC rules and regulations for reporting on the Quarterly Report on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles (“GAAP”) are not included herein. These interim statements should be read in conjunction with the audited consolidated financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2018 filed by the Company with the SEC. The December 31, 2018 balance sheet presented herein has been derived from the audited financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC, but does not include all of the disclosures required by GAAP for complete financial statements.
In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations as of the dates and for the periods presented. Certain reclassifications have been made in the prior period financial statements to conform to the current period presentation. The results of operations for the six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.
Principles of Consolidation
The consolidated financial statements include the accounts of PCB Bancorp and its wholly owned subsidiary as of June 30, 2019 and December 31, 2018 and for the three and six months ended June 30, 2019 and 2018. Significant inter-company accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiary.
Significant Accounting Policies
The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the banking industry. The Company has not made any significant changes in its critical accounting policies from those disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC. Refer to Adopted Accounting Pronouncements below for discussion of accounting pronouncements adopted during the six months ended June 30, 2019.
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.

11



Adopted Accounting Pronouncements
During the six months ended June 30, 2019, the following accounting pronouncements applicable to the Company were adopted:
In February 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-02, “Leases (Topic 842).” In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU 2018-11, “Leases Topic 842, Targeted Improvements,” to provide additional clarification, implantation, and transition guidance on certain aspects of ASU 2016-02. The amendments in ASU 2016-02 require lessees to recognize lease assets and lease liabilities for both leases classified as operating leases and finance leases, except leases with a term of 12 months or less where lessees are permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. For leases with a term of greater than 12 months, lessees are required to recognize a liability to make lease payments and a right-of-use assets representing its right to use the underlying asset for the lease term measured at the present value of the lease payments. ASU 2016-02 and ASU 2018-10 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years for a public business entity. Under ASU 2018-11, an additional transition option was provided that would allow entities to not apply the new guidance in the comparative periods they present in their financial statements in the year of adoption. Under this optional transition method, entities will be allowed to continue using and presenting leases under Accounting Standard Codification (“ASC”) 840 for prior years comparative periods and then prospectively adopt ASC 842 on January 1, 2019, recognizing a cumulative-effect adjustment to the opening balance of retained earnings.
The Company adopted this guidance in the first quarter of 2019 using the optional transition method with a cumulative effect adjustment to retained earnings without restating prior period financial statements for comparable amounts. The Company elected the package of practical expedients permitted under the transition guidance within this ASU, which allowed the Company to carry forward the historical lease classification. The Company completed its review of its existing lease contracts and service contracts that may include embedded leases, and updated processes and internal controls for leasing activities. The Company recognized right-of-use lease assets and liabilities of $9.6 million and $10.6 million, respectively, with a cumulative effect adjustment of $53 thousand to retained earnings at the date of adoption. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements other than the recognition of right-of-use lease assets and liabilities. See Note 6 for additional information.
In March 2017, the FASB issued ASU 2017-08, “Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities acquired at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount, which continue to be amortized to maturity. Public business entities must prospectively apply the amendments in this ASU to annual periods beginning after December 15, 2018, including interim periods. Adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
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 is 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 July 2019, the FASB voted to tentatively delay the effective date of this ASU to 2023 for certain SEC filers that are Smaller Reporting Companies, which would apply to the Company. The FASB plans to issue two proposed ASUs in the near future related to the proposed delay in the effectiveness of this ASU.
The Company has formed a committee, developed an implementation plan, and engaged a software vendor to assist the Company to build a model. The Company is in the process of completing a readiness assessment and is engaged in the implementation phase of the project. The Company is working on: (i) developing a new expected loss model with supportable assumptions; (ii) identifying data, reporting, and disclosure gaps; (iii) assessing updates to accounting and credit risk policies; and (iv) documenting new processes and controls. Based on the Company’s initial assessment of this ASU, the Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses which could potentially have a material impact on its consolidated financial statements as of the beginning of the first reporting period in which this ASU is effective.

12



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 other real estate owned (“OREO”) are recorded at fair value on a non-recurring basis. Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Investment securities: The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management reviews the valuation techniques and assumptions used by the provider and determines that the provider uses widely accepted valuation techniques based on observable market inputs appropriate for the type of security being measured. Securities held-to-maturity are not measured at fair value on a recurring basis.
Loans held-for-sale: The Company records SBA loans held-for-sale, residential property loans held-for-sale and certain non-residential real estate loans held-for-sale at the lower of cost or fair value, on an aggregate basis. The Company obtains fair values from a third party independent valuation service provider. Loans held-for-sale accounted for at the lower of cost or fair value are considered to be recognized at fair value when they are recorded at below cost, on an aggregate basis, and are classified as Level 2.
Impaired loans: 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 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.

13



Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of dates indicated:
 
 
Fair Value Measurement Level
 
 
($ in thousands)
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
June 30, 2019
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. government agency and U.S. government sponsored enterprise securities:
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
 
$

 
$
68,497

 
$

 
$
68,497

Residential collateralized mortgage obligations
 

 
52,121

 

 
52,121

SBA loan pool securities
 

 
21,131

 

 
21,131

Municipal bonds
 

 
790

 

 
790

Total securities available-for-sale
 

 
142,539

 

 
142,539

Total assets measured at fair value on a recurring basis
 
$

 
$
142,539

 
$

 
$
142,539

Total liabilities measured at fair value on a recurring basis
 
$

 
$

 
$

 
$

December 31, 2018
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. government agency and U.S. government sponsored enterprise securities:
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
 
$

 
$
67,921

 
$

 
$
67,921

Residential collateralized mortgage obligations
 

 
55,649

 

 
55,649

SBA loan pool securities
 

 
22,632

 

 
22,632

Municipal bonds
 

 
789

 

 
789

Total securities available-for-sale
 

 
146,991

 

 
146,991

Total assets measured at fair value on a recurring basis
 
$

 
$
146,991

 
$

 
$
146,991

Total liabilities measured at fair value on a recurring basis
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 

14



Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis as of dates indicated:
 
 
Fair Value Measurement Level
 
 
($ in thousands)
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
Total
June 30, 2019
 
 
 
 
 
 
 
 
Total assets measured at fair value on a non-recurring basis
 
$

 
$

 
$

 
$

Total liabilities measured at fair value on a non-recurring basis
 
$

 
$

 
$

 
$

December 31, 2018
 
 
 
 
 
 
 
 
Impaired loans:
 
 
 
 
 
 
 
 
SBA property
 
$

 
$

 
$
51

 
$
51

Total impaired loans
 

 

 
51

 
51

Total assets measured at fair value on a non-recurring basis
 
$

 
$

 
$
51

 
$
51

Total liabilities measured at fair value on a non-recurring basis
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
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:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in thousands)
 
2019
 
2018
 
2019
 
2018
Collateral dependent impaired loans:
 
 
 
 
 
 
 
 
Commercial property
 
$

 
$
(53
)
 
$

 
$
(53
)
SBA property
 
(18
)
 
(25
)
 
(20
)
 
(151
)
Servicing assets - SBA property loans
 

 
(63
)
 

 
(63
)
Other real estate owned
 

 

 

 
3

Net losses recognized
 
$
(18
)
 
$
(141
)
 
$
(20
)
 
$
(264
)
 
 
 
 
 
 
 
 
 
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.

15



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 Federal Home Loan Bank (“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.
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
June 30, 2019
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in other financial institutions
 
$
114,205

 
$
114,205

 
$
114,205

 
$

 
$

Securities available-for-sale
 
142,539

 
142,539

 

 
142,539

 

Securities held-to-maturity
 
22,685

 
22,813

 

 
22,813

 

Loans held-for-sale
 
440

 
449

 

 
449

 

Net loans held-for-investment
 
1,382,229

 
1,391,534

 

 

 
1,391,534

FHLB and other restricted stock
 
8,345

 
 N/A

 
 N/A

 
 N/A

 
 N/A

Accrued interest receivable
 
5,314

 
5,314

 
83

 
551

 
4,680

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
1,446,526

 
$
1,451,505

 
$

 
$

 
$
1,451,505

FHLB advances
 
35,000

 
35,075

 

 
35,075

 

Accrued interest payable
 
5,343

 
5,343

 

 
36

 
5,307

December 31, 2018
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits in other financial institutions
 
$
138,152

 
$
138,152

 
$
138,152

 
$

 
$

Securities available-for-sale
 
146,991

 
146,991

 

 
146,991

 

Securities held-to-maturity
 
21,760

 
21,152

 

 
21,152

 

Loans held-for-sale
 
5,781

 
6,175

 

 
6,175

 

Net loans held-for-investment
 
1,325,515

 
1,337,299

 

 

 
1,337,299

FHLB and other restricted stock
 
7,433

 
 N/A

 
 N/A

 
 N/A

 
 N/A

Accrued interest receivable
 
5,178

 
5,178

 
112

 
568

 
4,498

Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Deposits
 
$
1,443,753

 
$
1,425,023

 
$

 
$

 
$
1,425,023

FHLB advances
 
30,000

 
29,641

 

 
29,641

 

Accrued interest payable
 
6,223

 
6,223

 

 
1

 
6,222

 
 
 
 
 
 
 
 
 
 
 


16



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. 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
June 30, 2019
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. government agency and U.S. government sponsored enterprise securities:
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
 
$
68,067

 
$
755

 
$
(325
)
 
$
68,497

Residential collateralized mortgage obligations
 
52,406

 
132

 
(417
)
 
52,121

SBA loan pool securities
 
21,019

 
164

 
(52
)
 
21,131

Municipal bonds
 
774

 
16

 

 
790

Total securities available-for-sale
 
$
142,266

 
$
1,067

 
$
(794
)
 
$
142,539

Securities held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities
 
$
17,601

 
$
20

 
$
(172
)
 
$
17,449

Municipal bonds
 
5,084

 
281

 
(1
)
 
5,364

Total securities held-to-maturity
 
$
22,685

 
$
301

 
$
(173
)
 
$
22,813

December 31, 2018
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
U.S. government agency and U.S. government sponsored enterprise securities:
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
 
$
68,975

 
$
177

 
$
(1,231
)
 
$
67,921

Residential collateralized mortgage obligations
 
56,625

 
55

 
(1,031
)
 
55,649

SBA loan pool securities
 
23,144

 

 
(512
)
 
22,632

Municipal bonds
 
784

 
5

 

 
789

Total securities available-for-sale
 
$
149,528

 
$
237

 
$
(2,774
)
 
$
146,991

Securities held-to-maturity:
 
 
 
 
 
 
 
 
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities
 
$
16,659

 
$

 
$
(602
)
 
$
16,057

Municipal bonds
 
5,101

 
37

 
(43
)
 
5,095

Total securities held-to-maturity
 
$
21,760

 
$
37

 
$
(645
)
 
$
21,152

 
 
 
 
 
 
 
 
 
As of June 30, 2019 and December 31, 2018, pledged securities were $101.0 million and $112.2 million, respectively. These securities were pledged for the State Deposit from the California State Treasurer.


17



The following table presents the amortized cost and fair value of the investment securities by contractual maturity as of June 30, 2019. 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
 
Securities Held-To-Maturity
($ in thousands)
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Within one year
 
$

 
$

 
$
131

 
$
131

One to five years
 

 

 
1,424

 
1,464

Five to ten years
 
774

 
790

 
1,208

 
1,244

Greater than ten years
 

 

 
2,321

 
2,525

Residential mortgage-backed securities, residential collateralized mortgage obligations and SBA loan pool securities
 
141,492

 
141,749

 
17,601

 
17,449

Total
 
$
142,266

 
$
142,539

 
$
22,685

 
$
22,813

 
 
 
 
 
 
 
 
 
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:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
($ in thousands)
 
2019
 
2018
 
2019
 
2018
Gross realized gains on sales and calls of securities available-for-sale
 
$

 
$

 
$

 
$

Gross realized losses on sales and calls of securities available-for-sale
 

 

 

 

Net realized gains (losses) on sales and calls of securities available-for-sale
 
$

 
$

 
$

 
$

Proceeds from sales and calls of securities available-for-sale
 
$

 
$

 
$

 
$
1,060

Tax expense on sales and calls of securities available-for-sale
 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 



18



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
June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency and U.S. government sponsored enterprise securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
 
$

 
$

 

 
$
30,778

 
$
(325
)
 
37

 
$
30,778

 
$
(325
)
 
37

Residential collateralized mortgage obligations
 
10,175

 
(87
)
 
6

 
34,408

 
(330
)
 
33

 
44,583

 
(417
)
 
39

SBA loan pool securities
 

 

 

 
5,113

 
(52
)
 
6

 
5,113

 
(52
)
 
6

Total securities available-for-sale
 
$
10,175

 
$
(87
)
 
6

 
$
70,299

 
$
(707
)
 
76

 
$
80,474

 
$
(794
)
 
82

Securities held-to-maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency and U.S. government sponsored enterprise residential mortgage-backed securities
 
$

 
$

 

 
$
11,803

 
$
(172
)
 
12

 
$
11,803

 
$
(172
)
 
12

Municipal bonds
 

 

 

 
131

 
(1
)
 
1

 
131

 
(1
)
 
1

Total securities held-to-maturity
 
$

 
$

 

 
$
11,934

 
$
(173
)
 
13

 
$
11,934

 
$
(173
)
 
13

December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agency and U.S. government sponsored enterprise securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed securities
 
$
1,868

 
$
(6
)
 
2

 
$
41,845

 
$
(1,225
)
 
48

 
$
43,713