CATHAY GENERAL BANCORP 10-K

Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information and Holders Bancorp’s common stock is listed on the NASDAQ Global Select Market under the symbol “CATY.” As of February 15, 2024, Bancorp had outstanding approximately 72,669,738 shares of common stock with approximately 1,480 holders of record. Bancorp believes, however, that the actual number of beneficial holders of its common stock may be substantially greater than the stated number of holders of record because a substantial portion of the common stock is held in street name. Dividends For information on Bancorp’s dividend policy and the statutory and regulatory limitations on the ability of Bancorp to pay dividends to its shareholders and on the Bank to pay dividends to Bancorp, see “Item 1. Business-Regulation and Supervision — Dividends” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources – Dividend Policy.”. Securities Authorized for Issuance under Equity Compensation Plans The information required by this item regarding equity compensation plans is incorporated by reference to the information set forth in Part III, Item 12 in this report. Performance Graph The graph and accompanying information furnished below shows the cumulative total shareholder return over a five-year period through December 31, 2023, assuming an investment of $100 was made and that all dividends were reinvested, in each of our common stock, the Standard & Poor’s (S&P) 500 Index, and the S&P U.S. BMI Banks–Western Region Index. The S&P U.S. BMI Banks–Western Region Index is a market-weighted index comprised of publicly traded banks and bank holding companies (including the Company) most of which are based in California and the remainder of which are based in eight other western states, including Oregon, Washington, and Nevada. We will furnish, without charge, on the written request of any person who is a stockholder of record as of the record date for the 2024 annual meeting of stockholders, a list of the companies included in the S&P U.S. BMI Banks–Western Region Index. Requests for this information should be addressed to May Chan, Corporate Secretary, Cathay General Bancorp, 777 North Broadway, Los Angeles, California 90012. 52 Table of Contents The comparisons in the graph below are based upon historical data and are not indicative of, or intended to forecast, the future performance of, or returns on, our common stock. Such information furnished herewith shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, and shall not be deemed to be “soliciting material” or to be “filed” under the Securities Act or the Securities Exchange Act with the Securities and Exchange Commission except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into a filing under the Securities Act or the Securities Exchange Act. Period Ending Index 12/31/2018 12/31/2019 12/31/2020 12/31/2021 12/31/2022 12/31/2023 Cathay General Bancorp 100.00 117.48 103.80 142.98 139.97 158.85 S&P 500 Index 100.00 131.49 155.68 200.37 164.08 207.21 S&P U.S. BMI Banks - Western Region Index 100.00 121.94 91.26 140.71 109.19 108.54 Source: S&P Global Market Intelligence © 2024 This information shall not be deemed to be ‘‘soliciting material’’ or to be ‘‘filed’’ with the SEC or subject to Regulation 14A (17 CFR 240.14a-1-240.14a-104), other than as provided in Item 201(e) of Regulation S-K, or to the liabilities of section 18 of the Exchange Act (15 U.S.C. 78r). Unregistered Sales of Equity Securities There were no sales of any equity securities by the Company during the period covered by this Annual Report on Form 10-K that were not registered under the Securities Act. 53 Table of Contents Issuer Purchases of Equity Securities On May 26th, 2022, the Board of Directors approved a stock repurchase program to buyback up to $125.0 million of the Company’s common stock. Through December 31, 2022, the Company repurchased 2,522,538 shares of common stock for a total of $108.4 million, at an average cost of $42.98 per share under the May 2022 buyback program. The Company completed its May 2022 stock buyback program by repurchasing 375,090 shares at an average cost of $44.20 for a total of $16.6 million during the first quarter of 2023. Item 6. Reserved Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations General The following discussion is intended to provide information to facilitate the understanding and assessment of the consolidated financial condition and results of operations of the Bancorp and its subsidiaries. It should be read in conjunction with this Annual Report and the audited Consolidated Financial Statements and Notes appearing elsewhere in this Annual Report. The following discussion and analysis of our financial condition and results of operations contains forward-looking statements. These statements are based on current expectations and assumptions, which are subject to risks and uncertainties. See “Forward-Looking Statements” and “Risk Factors Summary.” Actual results could differ materially because of various factors, including but not limited to those discussed in “Risk Factors,” under Part I, Item 1A of this Annual Report. The Bank offers a wide range of financial services. As of the filing date of this report, the Bank operates 24 branches in Southern California, 19 branches in Northern California, 9 branches in New York State, four branches in Washington State, two branches in Illinois, two branches in Texas, one branch in each of Maryland, Massachusetts, Nevada, and New Jersey, one branch in Hong Kong, and a representative office in Beijing, in Shanghai, and in Taipei. The Bank is a commercial bank, servicing primarily individuals, professionals, and small to medium-sized businesses in the local markets in which its branches are located. The financial information presented herein includes the accounts of the Bancorp, its subsidiaries, including the Bank, and the Bank’s consolidated subsidiaries. All material transactions between these entities are eliminated. 54 Table of Contents Critical Accounting Policies The discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of the Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our Consolidated Financial Statements. Actual results may differ from these estimates under different assumptions or conditions. Certain accounting policies that are fundamental to understanding our financial condition and results of operations involve significant judgments and assumptions by management that have a material impact on the carrying value of certain assets and liabilities. Management considers such accounting policies to be critical accounting policies. The judgments and assumptions used by management are based on historical experience and other factors that are believed to be reasonable under the circumstances. Management believes the following are critical accounting policies that require the most significant judgments and estimates used in the preparation of the Consolidated Financial Statements: Allowance for Credit Losses ( “ ACL ” ) on Loans Held for Investment The Bank maintains the allowance for credit losses at a level that the Bank considers appropriate to absorb the estimated and known risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of the allowance for loan losses and the reserve for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank’s management has an established monitoring system that it believes is designed to identify individually evaluated and potential problem loans, and to permit periodic evaluation of impairment and the appropriate level of the allowance for credit losses in a timely manner. In addition, the Company’s Board of Directors has established a written credit policy that includes a credit review and control system that the Board of Directors believes should be effective in ensuring that the Bank maintains an appropriate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is appropriate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses are based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions to the allowance for credit losses are made by charges to the provision for credit losses. While management utilizes its business judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors, many of which are beyond the Bank’s control, including but not limited to the performance of the Bank’s loan portfolio, the economy and market conditions, macroeconomic forecasts, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality could result in an increase in the number of delinquencies, bankruptcies, or defaults, and a higher level of non-performing assets, net charge-offs, and provision for credit losses in future periods. The allowance for loan losses was $154.6 million and the allowance for off-balance sheet unfunded credit commitments was $9.1 million at December 31, 2023, which represented the amount believed by management to be appropriate to absorb lifetime credit losses in the loan portfolio, including unfunded credit commitments. The allowance for loan losses represented 0.79% of period-end gross loans and 209.33% of non-performing loans at December 31, 2023. The comparable ratios were 0.80% of period-end gross loans and 182.12% of non-performing loans at December 31, 2022. The allowance for credit losses is discussed in more detail in “Risk Elements of the Loan Portfolio — Allowance for Credit Losses ” below. Management has reviewed the foregoing critical accounting policies and related disclosures with the Audit Committee of the Company’s Board of Directors. 55 Table of Contents Results of Operations Overview For the year ended December 31, 2023, we reported net income of $354.1 million, or $4.86 per diluted share, compared to net income of $360.6 million, or $4.83 per diluted share, in 2022, and net income of $298.3 million, or $3.80 per diluted share, in 2021. The $6.5 million decrease in net income from 2022 to 2023 was primarily the result of increases in non-interest expense, and provision for credit losses, partially offset by increases in net interest income and non-interest income. The return on average assets in 2023 was 1.56%, compared to 1.69% in 2022, and to 1.52% in 2021. The return on average stockholders’ equity was 13.56% in 2023, compared to 14.70% in 2022, and to 12.11% in 2021. Highlights ● Diluted earnings per share for the year increased to $4.86. ● Total loans increased $1.3 billion, or 7.1%, to $19.55 billion in 2023. ● Total deposits increased $820.2 million, or 4.4%, to $19.33 billion in 2023. Net income available to common stockholders and key financial performance ratios are presented below for the three years indicated: Year Ended December 31, 2023 2022 2021 (In thousands, except per share data) Net income $ 354,124 $ 360,642 $ 298,304 Basic earnings per common share $ 4.88 $ 4.85 $ 3.81 Diluted earnings per common share $ 4.86 $ 4.83 $ 3.80 Return on average assets 1.56 % 1.69 % 1.52 % Return on average stockholders' equity 13.56 % 14.70 % 12.11 % Total average assets $ 22,705,192 $ 21,383,526 $ 19,591,537 Total average equity $ 2,610,582 $ 2,453,391 $ 2,463,021 Efficiency ratio 46.97 % 38.38 % 43.92 % Effective income tax rate 12.25 % 23.68 % 21.88 % Net Interest Income Comparison of 2023 with 2022 Net interest income increased $8.0 million, or 1.1%, from $733.7 million in 2022 to $741.7 million in 2023. The increase in net interest income was due primarily to the increase in interest income from loans offset by an increase in interest expense from time deposits. Average loans for 2023 were $18.76 billion, a $1.13 billion, or a 6.4% increase from $17.63 billion in 2022. Compared with 2022, average commercial real estate loans increased $715.6 million, or 8.4%, average residential mortgage loans increased $597.3 million, or 12.1%, average equity lines decreased $97.9 million, or 26.1% and average construction loans decreased $84.1 million, or 13.9%. Average investment securities were $1.56 billion in 2023, an increase of $237.5 million, or 18.0%, from 2022. Average interest-bearing cash on deposits with financial institutions decreased $120.2 million, or 9.5%, to $1.14 billion in 2023 from $1.26 billion in 2022. 56 Table of Contents Average interest-bearing deposits were $15.47 billion in 2023, an increase of $1.58 billion, or 11.4%, from $13.89 billion in 2022, primarily due to an increase of $3.45 billion, or 63.9%, in time deposits offset by decreases of $1.74 billion, or 35.4% in money market accounts, $83.2 million, or 3.4%, in interest bearing demand deposits, and $48.6 million, or 4.3%, in savings accounts. Interest income increased $390.9 million, or 45.9%, from $851.3 million in 2022 to $1.24 billion in 2023 primarily due to increases in loan rates: ● Changes in volume: Average interest-earning assets increased $1.25 billion, or 6.2%, to $21.48 billion in 2023, compared with average interest-earning assets of $20.23 billion in 2022. Average loans increased $1.13 billion and average investment securities increased $237.5 million in 2023. Offsetting the above increases was a decrease of $120.2 million in average interest-bearing deposits with other financial institutions. The changes in volume contributed to interest income increase of $58.0 million. ● Changes in rate: The average yield of interest-bearing assets increased to 5.78% in 2023 from 4.21% in 2022. The increase in rate on loans resulted in an increase of $274.0 million in interest income, the increase in rate on investment securities resulted in an increase of $17.7 million in interest income, and the increase in rate on deposits with other financial institutions resulted in an increase of $41.0 million in interest income. The changes in rate contributed to an interest income increase of $333.0 million. ● Change in the mix of interest-earning assets: Average gross loans, which generally have a higher yield than other types of investments, comprised 87.3% of total average interest-earning assets in 2023, an increase from 87.2% in 2022. Average investment securities comprised 7.3% of total average interest-bearing assets in 2023, an increase from 6.5% in 2022. Interest expense increased by $382.9 million, or 325.6%, to $500.5 million in 2023, compared with $117.6 million in 2022, primarily due to increased average interest-bearing deposits, and FHLB advances. The overall increase in interest expense was primarily due to increases in rates on interest bearing deposits, and volume and rate increases in other borrowings as discussed below: ● Changes in volume: Average interest-bearing deposits increased $1.58 billion, or 11.4%, and average FHLB advances and other borrowings increased $257.9 million, or 104.3%. The changes in volume caused an increase in interest expense of $46.1 million. ● Changes in rate: The average costs of interest-bearing deposits, FHLB advances and other borrowings, increased to 3.02% and 5.15% in 2023 from 0.76%, and 2.73% in 2022, respectively. The changes in rate caused interest expense to increase by $336.8 million. ● Change in the mix of interest-bearing liabilities: Average interest-bearing deposits of $15.47 billion decreased to 96.1% of total interest-bearing liabilities in 2023 compared to 97.4% in 2022. Average FHLB advances and other borrowings of $505.2 million increased to 3.1% of total interest-bearing liabilities. Average long-term debt of $119.1 million decreased to 0.7% of total interest-bearing liabilities in 2023 compared to 0.8% in 2022. Net interest margin, defined as net interest income to average interest-earning assets, was 3.45% in 2023 compared to 3.63% in 2022. Comparison of 2022 with 2021 Net interest income increased $135.9 million, or 22.7%, from $597.8 million in 2021 to $733.7 million in 2022. The increase in net interest income was due primarily to the increase in interest income from loans offset by an increase in interest expense from time deposits. 57 Table of Contents Average loans for 2022 were $17.6 billion, a $1.8 billion, or an 11.4% increase from $15.8 billion in 2021. Compared with 2021, average residential mortgage loans increased $825.8 million, or 20.1%, average commercial real estate loans increased $786.9 million, or 10.2%, and average commercial loans increased $307.3 million, or 10.6%. Average investment securities were $1.3 billion in 2022, an increase of $275.2 million, or 26.3%, from 2021. Average interest-bearing cash on deposits with financial institutions decreased $387.7 million, or 23.5%, to $1.3 billion in 2022 from $1.6 billion in 2021. Average interest-bearing deposits were $13.9 billion in 2022, an increase of $933.1 million, or 7.2%, from $13.0 billion in 2021, primarily due to increases of $868.1 million, or 21.5%, in money market accounts, $424.1 million, or 20.7%, in interest bearing demand deposits, and $221.3 million, or 24.7%, in savings accounts, offset by decreases of $580.4 million, or 9.7%, in time deposits. Interest income increased $184.8 million, or 27.7%, from $666.5 million in 2021 to $851.3 million in 2022 primarily due to increases in loan rates: ● Changes in volume: Average interest-earning assets increased $1.7 billion, or 9.1%, to $20.2 billion in 2022, compared with average interest-earning assets of $18.5 billion in 2021. Average loans increased $1.8 billion and average investment securities increased $275.2 million in 2022. Offsetting the above increases was a decrease of $387.7 million in average interest-bearing deposits with other financial institutions. The changes in volume contributed to interest income increase of $81.9 million. ● Changes in rate: The average yield of interest-bearing assets increased to 4.21% in 2022 from 3.59% in 2021. The increase in rate on loans resulted from an increase of $74.6 million in interest income, the increase in rate on investment securities resulted from an increase of $9.7 million in interest income, and the increase in rate on deposits with other financial institutions resulted from an increase of $18.4 million in interest income. The changes in rate contributed to an interest income increase of $102.8 million. ● Change in the mix of interest-earning assets: Average gross loans, which generally have a higher yield than other types of investments, comprised 87.2% of total average interest-earning assets in 2022, an increase from 85.4% in 2021. Average investment securities comprised 6.5% of total average interest-bearing assets in 2022, an increase from 5.6% in 2021. Interest expense increased by $48.8 million, or 71.0%, to $117.6 million in 2022, compared with $68.8 million in 2021, primarily due to increased average interest-bearing deposits, and FHLB advances. The overall increase in interest expense was primarily due to increases in rates on interest bearing deposits, and volume and rate increases in other borrowings as discussed below: ● Changes in volume: Average interest-bearing deposits increased $933.1 million, or 7.2%, and average FHLB advances and other borrowings increased $171.8 million, or 227.5%. The changes in volume caused an increase in interest expense of $5.3 million. ● Changes in rate: The average costs of interest-bearing deposits, FHLB advances and other borrowings, increased to 0.76% and 2.73% in 2022 from 0.48%, and 1.57% in 2021, respectively. The changes in rate caused interest expense to increase by $43.6 million. ● Change in the mix of interest-bearing liabilities: Average interest-bearing deposits of $13.9 billion decreased to 97.4% of total interest-bearing liabilities in 2022 compared to 98.5% in 2021. Average FHLB advances and other borrowings of $247.3 million increased to 1.7% of total interest-bearing liabilities. Average long-term debt of $119.1 million decreased to 0.8% of total interest-bearing liabilities in 2022 compared to 0.9% in 2021. Net interest margin, defined as net interest income to average interest-earning assets, was 3.63% in 2022 compared to 3.22% in 2021. 58 Table of Contents The following table sets forth information concerning average interest-earning assets, average interest-bearing liabilities, and the average yields and rates paid on those assets and liabilities in 2023, 2022 and 2021. Average outstanding amounts included in the table are daily averages. Interest-Earning Assets and Interest-Bearing Liabilities Average Average Average 2023 Interest Yield/ 2022 Interest Yield/ 2021 Interest Yield/ Average Income/ Rate Average Income/ Rate Average Income/ Rate Balance Expense (1) (2) Balance Expense (1)(2) Balance Expense (1)(2) ($ In thousands) Interest-earning assets: Total loans (1) $ 18,763,271 $ 1,130,242 6.02 % $ 17,631,943 $ 801,981 4.55 % $ 15,827,550 $ 649,224 4.10 % Taxable investment securities 1,558,877 51,717 3.32 % 1,321,346 28,240 2.14 % 1,046,187 14,151 1.35 % Federal Home Loan Bank stock 18,620 1,349 7.25 % 17,630 1,103 6.26 % 17,250 991 5.74 % Interest-bearing deposits 1,141,720 58,914 5.16 % 1,261,878 19,957 1.58 % 1,649,564 2,145 0.13 % Total interest-earning assets $ 21,482,488 $ 1,242,222 5.78 % $ 20,232,797 $ 851,281 4.21 % $ 18,540,551 $ 666,511 3.59 % Non-interest earning assets: Cash and due from banks $ 196,819 $ 173,825 $ 157,952 Other non-earning assets 1,184,318 1,128,038 1,041,667 Total non-interest earning assets $ 1,381,137 $ 1,301,863 $ 1,199,619 Less: Allowance for loan losses (150,110 ) (145,433 ) (142,969 ) Deferred loan fees (8,323 ) (5,701 ) (5,664 ) Total assets $ 22,705,192 $ 21,383,526 $ 19,591,537 Interest-bearing liabilities: Interest-bearing demand deposits $ 2,388,080 $ 40,952 1.71 % $ 2,471,256 $ 8,176 0.33 % $ 2,047,177 $ 2,249 0.11 % Money market deposits 3,164,739 86,097 2.72 % 4,902,357 39,913 0.81 % 4,034,246 18,241 0.45 % Savings deposits 1,070,405 8,916 0.83 % 1,118,967 853 0.08 % 897,663 769 0.09 % Time deposits 8,849,293 331,997 3.75 % 5,398,808 56,354 1.04 % 5,979,191 40,542 0.68 % Total interest-bearing deposits $ 15,472,517 $ 467,962 3.02 % $ 13,891,388 $ 105,296 0.76 % $ 12,958,277 $ 61,801 0.48 % Other borrowings 505,218 26,034 5.15 % 247,276 6,742 2.73 % 75,516 1,182 1.57 % Long-term debt 119,136 6,480 5.44 % 119,136 5,546 4.66 % 119,136 5,773 4.85 % Total interest-bearing liabilities $ 16,096,871 $ 500,476 3.11 % $ 14,257,800 $ 117,584 0.82 % $ 13,152,929 $ 68,756 0.52 % Non-interest bearing liabilities: Demand deposits 3,705,788 4,386,526 3,751,626 Other liabilities 291,951 285,809 223,961 Today equity 2,610,582 2,453,391 2,463,021 Total liabilities and equity $ 22,705,192 $ 21,383,526 $ 19,591,537 Net interest spread 2.67 % 3.38 % 3.07 % Net interest income $ 741,746 $ 733,697 $ 597,755 Net interest margin 3.45 % 3.63 % 3.22 % (1) Yields and amounts of interest earned include loan fees. Non-accrual loans are included in the average balance. (2) Calculated by dividing net interest income by average outstanding interest-earning assets 59 Table of Contents Taxable-Equivalent Net Interest Income — Changes Due to Volume and Rate(1) 2023 - 2022 2022 - 2021 Increase/(Decrease) in Increase/(Decrease) in Net Interest Income Due to: Net Interest Income Due to: Change in Change in Total Change in Change in Total Volume Rate Change Volume Rate Change (In thousands) Interest-earning assets Loans $ 54,214 $ 274,047 $ 328,261 $ 78,136 $ 74,621 $ 152,757 Investment securities 5,765 17,712 23,477 4,395 9,694 14,089 Federal Home loan Bank stock 64 182 246 22 90 112 Deposits with other banks (2,074 ) 41,031 38,957 (620 ) 18,432 17,812 Total changes in interest income 57,969 332,972 390,941 81,933 102,837 184,770 Interest-Bearing Liabilities Interest-bearing demand deposits (284 ) 33,060 32,776 553 5,374 5,927 Money market deposits (18,502 ) 64,686 46,184 4,591 17,081 21,672 Savings deposits (39 ) 8,102 8,063 175 (91 ) 84 Time deposits 54,486 221,157 275,643 (4,259 ) 20,071 15,812 Other borrowings 10,410 8,882 19,292 4,192 1,368 5,560 Long-term debt — 934 934 — (227 ) (227 ) Total changes in interest expense 46,071 336,821 382,892 5,252 43,576 48,828 Change in net interest income $ 11,898 $ (3,849 ) $ 8,049 $ 76,681 $ 59,261 $ 135,942 (1) Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated proportionately to changes due to volume and changes due to rate. Provision for Credit Losses The provision for credit losses represents the charge against current earnings that is determined by management, through a credit review process, as the amount needed to maintain an allowance for loan losses and an allowance for off-balance sheet unfunded credit commitments that management believes to be sufficient to absorb credit losses inherent in the Bank’s loan portfolio and credit commitments. The Bank recorded a provision for credit losses of $26.0 million in 2023 compared with a provision for credit losses of $14.5 million in 2022, and a reversal for credit losses of $16.0 million in 2021. Net charge-offs for 2023 were $17.6 million, or 0.09% of average loans, compared to net charge-offs of $2.6 million for 2022, or 0.01% of average loans, and net charge-offs of $17.6 million for 2021, or 0.11% of average loans. Non-interest Income Non-interest income increased $11.5 million, or 20.2%, to $68.3 million for 2023, from $56.8 million in 2022, compared to $54.6 million in 2021. Non-interest income includes depository service fees, letters of credit commissions, securities gains (losses), gains (losses) from loan sales, gains from sale of premises and equipment, gains on acquisition, and other sources of fee income. These other fee-based services include wire transfer fees, safe deposit fees, fees on loan-related activities, fee income from our Wealth Management division, and foreign exchange fees. Comparison of 2023 with 2022 The increase in non-interest income from 2022 to 2023 was primarily due to a $17.9 million increase in unrealized gain on equity securities, and a $1.1 million increase in wealth management fees, offset, in part, by a $3.0 million increase in securities losses, a $3.2 million decrease in derivative fees and a $1.7 million decrease in BOLI death benefit. 60 Table of Contents Comparison of 2022 with 2021 The increase in non-interest income from 2021 to 2022 was primarily due to a $1.4 million increase in wealth management fees, and a $1.8 million decrease in loss on equity securities. Non-interest Expense Non-interest expense includes expenses related to salaries and benefits of employees, occupancy expenses, marketing expenses, computer and equipment expenses, amortization of core deposit intangibles, amortization of investment is affordable housing and alternative energy partnerships, and other operating expenses. Comparison of 2023 with 2022 Non-interest expense totaled $380.5 million in 2023 compared to $303.4 million in 2022. The increase of $77.1 million, or 25.4%, in non-interest expense in 2023 compared to 2022 was primarily due to a combination of the following: ● Salaries and employee benefits increased $11.6 million, or 8.1%. ● FDIC and State assessments increased $15.6 million, or 193.5%. ● Computer/equipment increased $3.9 million, or 28.5%. ● Professional services increased $4.3 million, or 15.1%. ● Amortization of investments in affordable housing and alternative energy partnerships increased $44.6 million, or 105.9%. The efficiency ratio, defined as non-interest expense divided by the sum of net interest income before provision for loan losses plus non-interest income, increased to 46.97% in 2023 compared to 38.38% in 2022 due primarily to higher net interest income offset by an increase in non-interest expense as explained above. Comparison of 2022 with 2021 Non-interest expense totaled $303.4 million in 2022 compared to $286.5 million in 2021. The increase of $16.9 million, or 5.9%, in non-interest expense in 2022 compared to 2021 was primarily due to a combination of the following: ● Salaries and employee benefits increased $9.8 million, or 7.3%. ● Professional Service increased $4.6 million, or 19.4%. ● Occupancy expenses increased $2.5 million, or 12.3%. ● Amortization of core deposit intangibles increased $1.2 million, or 175.4%. ● Amortization of investments in affordable housing and alternative energy partnerships decreased $3.4 million, or 7.4%. The efficiency ratio, defined as non-interest expense divided by the sum of net interest income before provision for loan losses plus non-interest income, decreased to 38.38% in 2022 compared to 43.92% in 2021 due primarily to higher net interest income offset by an increase in non-interest expense as explained above. Income Tax Expense Income tax expense was $49.5 million in 2023, compared to $111.9 million in 2022, and $83.5 million in 2021. The effective tax rate was 12.3% for 2023, 23.7% for 2022, and 21.9% for 2021. The effective tax rate includes the impact of low-income housing and alternative energy investments. Our tax returns are open for audits by the Internal Revenue Service back to 2020 and by the California Franchise Tax Board back to 2019. From time to time, there may be differences of opinion with respect to the tax treatment accorded transactions. When, and if, such differences occur, and the related tax effects become probable and estimable, such amounts will be recognized. 61 Table of Contents Financial Condition Total assets were $23.08 billion at December 31, 2023, an increase of $1.13 billion, or 5.1%, from $21.95 billion at December 31, 2022, primarily due to an increase of $1.28 billion in net loans, an increase of $131.2 million in investment securities offset by a decrease of $312.1 million in short-term investments and interest-bearing deposits. Investment Securities Investment securities were $1.60 billion and represented 7.0% of total assets at December 31, 2023, compared with $1.47 billion and 6.8% of total assets at December 31, 2022. The following table summarizes the carrying value of our portfolio of securities for each of the past two years: As of December 31, 2023 2022 (In thousands) Securities Available-for-Sale: U.S. treasury securities $ 495,300 $ 240,500 U.S. government agency entities 48,169 63,610 U.S. government sponsored entities — 30,000 Mortgage-backed securities 786,723 867,094 Collateralized mortgage obligations 28,044 31,061 Corporate debt securities 246,334 241,083 Total $ 1,604,570 $ 1,473,348 Equity Securities Mutual funds 5,585 5,509 Preferred stock of government sponsored entities 1,821 1,289 Other equity securities 33,000 15,360 Total $ 40,406 $ 22,158 Effective January 1, 2021, upon the adoption of ASU 2016-13, Financial Instruments - Credit Losses, debt securities available-for-sale are measured at fair value and subject to impairment testing. When an available-for-sale debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit losses by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value change. If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security. For available-for-sale (“AFS”) debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value with the credit component of the unrealized loss of the impaired AFS debt security recognized as an allowance for credit losses, and a corresponding provision for credit losses on the consolidated statement of income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. 62 Table of Contents In making this assessment, management considers the extent to which fair value is less than amortized cost, the payment structure of the security, failure of the issuer of the security to make scheduled interest or principal payments, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. Any fair value changes that have not been recorded through an allowance for credit losses is recognized in other comprehensive income. In the current period, management evaluated the securities in an unrealized loss position and determined that their unrealized losses were a result of the level of market interest rates relative to the types of securities and pricing changes caused by shifting supply and demand dynamics and not a result of downgraded credit ratings or other indicators of deterioration of the underlying issuers' ability to repay. Accordingly, we determined the unrealized losses were not credit-related and recognized the unrealized losses in "other comprehensive income/(loss)" in stockholders' equity. Although we periodically sell securities for portfolio for management purposes, we do not foresee having to sell any impaired securities strictly for liquidity needs and believe that it is more likely than not we would not be required to sell any impaired securities before recovery of their amortized cost. The tables below show the related fair value and the gross unrealized losses of the Company’s investment portfolio, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position, as of December 31, 2023, and December 31, 2022: As of December 31, 2023 Less than 12 months 12 months or longer Total Fair Gross Unrealized Fair Gross Unrealized Fair Gross Unrealized Value Losses Value Losses Value Losses (In thousands) Securities Available-for-Sale U.S. treasury securities $ 49,831 $ 20 $ — $ — $ 49,831 $ 20 U.S. government agency entities 18,301 108 1,313 122 19,614 230 Mortgage-backed securities — — 768,274 106,442 768,274 106,442 Collateralized mortgage obligations — — 28,044 3,194 28,044 3,194 Corporate debt securities 64,448 552 166,864 11,587 231,312 12,139 Total $ 132,580 $ 680 $ 964,495 $ 121,345 $ 1,097,075 $ 122,025 As of December 31, 2022 Less than 12 months 12 months or longer Total Fair Gross Unrealized Fair Gross Unrealized Fair Gross Unrealized Value Losses Value Losses Value Losses (In thousands) Securities Available-for-Sale U.S. treasury securities $ 240,500 $ 1,111 $ — $ — $ 240,500 $ 1,111 U.S. government agency entities — — 1,806 121 1,806 121 Mortgage-backed securities 394,123 33,042 452,739 93,941 846,862 126,983 Collateralized mortgage obligations 24,427 1,614 6,634 1,877 31,061 3,491 Corporate debt securities 109,995 3,256 100,977 14,553 210,972 17,809 Total $ 769,045 $ 39,023 $ 562,156 $ 110,492 $ 1,331,201 $ 149,515 63 Table of Contents The scheduled maturities and taxable-equivalent yields by security type are presented in the following table: Securities Portfolio Maturity Distribution and Yield Analysis: As of December 31, 2023 After One After Five One Year Year to Years to Over Ten or Less Five Years Ten Years Years Total (In thousands) Maturity Distribution: Securities Available-for-Sale: U.S. treasury securities $ 495,300 $ — $ — $ — $ 495,300 U.S. government agency entities — 1,052 14,774 32,343 48,169 Mortgage-backed securities (1) — 877 123,460 662,386 786,723 Collateralized mortgage obligations (1) — — 30 28,014 28,044 Corporate debt securities 29,648 213,906 2,780 — 246,334 Total $ 524,948 $ 215,835 $ 141,044 $ 722,743 $ 1,604,570 Weighted-Average Yield: Securities Available-for-Sale: U.S. treasury securities 5.42 % — % — % — % 5.42 % U.S. government agency entities — 5.46 5.50 5.76 5.67 Mortgage-backed securities (1) — 2.85 2.64 2.54 2.55 Collateralized mortgage obligations (1) — — 3.65 3.37 3.37 Corporate debt securities 1.79 3.63 4.71 — 3.42 Total 5.22 % 3.64 % 2.98 % 2.71 % 3.68 % (1) Securities reflect stated maturities and do not reflect the impact of anticipated prepayments. Equity Securities For the year ended December 31, 2023, the Company recognized a net gain of $18.2 million due to the increase in fair value of equity investments with readily determinable fair values during the year, compared to a net gain of $392 thousand in 2022. Equity securities were $40.4 million as of December 31, 2023, compared to $22.2 million as of December 31, 2022. Loans Loans represented 91.0% of average interest-earning assets during 2023, compared with 90.2% during 2022. Gross loans increased by $1.30 billion, or 7.1%, to $19.55 billion at December 31, 2023, compared with $18.25 billion at December 31, 2022. The increase in gross loans was primarily attributable to the following: ● Total residential mortgage loans increased by $585.8 million, or 11.2%, to $5.84 billion at December 31, 2023, compared to $5.25 billion at December 31, 2022. ● Commercial real estate loans increased $935.9 million, or 10.6%, to $9.73 billion at December 31, 2023, compared to $8.79 billion at December 31, 2022. Total commercial real estate loans accounted for 49.8% of gross loans at December 31, 2023, compared to 48.2% at December 31, 2022. Commercial real estate loans consist primarily of commercial retail properties, shopping centers, owner-occupied industrial facilities, office buildings, multiple-unit apartments, hotels, and multi-tenanted industrial properties, and are typically secured by first deeds of trust on such commercial properties. 64 Table of Contents ● Commercial loans decreased $13.7 million, or 0.4%, to $3.31 billion at December 31, 2023, compared to $3.32 billion at December 31, 2022. Commercial loans consist primarily of short-term loans (typically with a maturity of one year or less) to support general business purposes, or to provide working capital to businesses in the form of lines of credit, trade-finance loans, loans for commercial purposes secured by cash, and SBA loans. ● Real estate construction loans decreased $136.8 million, or 24.5%, to $442.6 million at December 31, 2023, compared to $559.4 million at December 31, 2022. Our lending relates predominantly to activities in the states of California, New York, Texas, Washington, Massachusetts, Illinois, New Jersey, Maryland, and Nevada. We also lend to domestic clients who are engaged in international trade. Loans outstanding in our branch in Hong Kong were $341.9 million as of December 31, 2023, compared to $324.3 million as of December 31, 2022. The classification of loans by type and amount outstanding as of December 31 for each of the past five years is presented below: Loan Type and Mix As of December 31, 2023 2022 2021 2020 2019 (In thousands) Commercial loans $ 3,305,048 $ 3,318,778 $ 2,982,399 $ 2,836,833 $ 2,778,744 Residential mortgage loans and equity lines 6,084,666 5,577,500 4,601,493 4,569,944 4,436,561 Commercial real estate loans 9,729,581 8,793,685 8,143,272 7,555,027 7,275,262 Construction loans 422,647 559,372 611,031 679,492 579,864 Installment and other loans 6,198 4,689 4,284 3,100 5,050 Gross loans 19,548,140 18,254,024 16,342,479 15,644,396 15,075,481 Less: Allowance for loan losses (154,562 ) (146,485 ) (136,157 ) (166,538 ) (123,224 ) Unamortized deferred loan fees (10,720 ) (6,641 ) (4,321 ) (2,494 ) (626 ) Total loans, net $ 19,382,858 $ 18,100,898 $ 16,202,001 $ 15,475,364 $ 14,951,631 Loans held for sale $ — $ — $ — $ — $ — The loan maturities in the table below are based on contractual maturities as of December 31, 2023. As is customary in the banking industry, loans that meet underwriting criteria can be renewed by mutual agreement between us and the borrower. Because we are unable to estimate the extent to which our borrowers will renew their loans, the table is based on contractual maturities. As a result, the data shown below should not be viewed as an indication of future cash flows. Contractual Maturity of Loan Portfolio As of December 31, 2023 Within One Year One to Five Years Over Five Years Total (In thousands) Commercial loans Floating rate $ 2,596,362 $ 295,725 $ 116,529 $ 3,008,616 Fixed rate 179,543 32,863 84,026 296,432 Residential mortgage loans and equity lines Floating rate 15 2,031 4,188,435 4,190,481 Fixed rate 1,427 37,470 1,855,288 1,894,185 Commercial real estate loans Floating rate 480,943 1,818,422 3,774,019 6,073,384 Fixed rate 398,109 2,648,543 609,545 3,656,197 Construction loans Floating rate 334,802 80,108 — 414,910 Fixed rate 7,737 — — 7,737 Installment and other loans Floating rate 5,927 170 101 6,198 Fixed rate — — — — Gross loans $ 4,004,865 $ 4,915,332 $ 10,627,943 $ 19,548,140 Floating rate 3,418,049 2,196,456 8,079,084 13,693,589 Fixed rate 586,816 2,718,876 2,548,859 5,854,551 Gross loans $ 4,004,865 $ 4,915,332 $ 10,627,943 $ 19,548,140 Allowance for loan losses (154,562 ) Unamortized deferred loan fees (10,720 ) Total loans, net $ 19,382,858 65 Table of Contents Deposits The Bank primarily uses client deposits to fund its operations, and to a lesser extent advances from the Federal Home Loan Bank (“FHLB”), and other borrowings. The Bank’s deposits are generally obtained from the Bank’s geographic market area. The Bank utilizes traditional marketing methods to attract new clients and deposits, by offering a wide variety of products and services and utilizing various forms of advertising media. Although the vast majority of the Bank’s deposits are retail in nature, the Bank does engage in certain wholesale activities, primarily accepting deposits generated by brokers. The Bank considers wholesale deposits to be an alternative borrowing source rather than a client relationship and, as such, their levels are determined by management’s decisions as to the most economic funding sources. Brokered-deposits totaled $1.52 billion, or 7.9%, of total deposits, at December 31, 2023, compared to $1.15 billion, or 6.2%, at December 31, 2022. The Bank’s total deposits increased $820.2 million, or 4.4%, to $19.33 billion at December 31, 2023, from $18.51 billion at December 31, 2022, primarily due to a $2.32 billion, or 33.1%, increase in time deposits offset, in part, by a $763.0 million, or 20.0% decrease in money market deposits, and a $640.0 million, or 15.4%, decrease in Non-interest-bearing demand deposits. The following table displays the deposit mix balances as of the end of the past three years: Deposit Mix Year Ended December 31, 2023 2022 2021 Amount % Amount % Amount % (In thousands) Deposits Non-interest-bearing demand deposits $ 3,529,018 18.3 % $ 4,168,989 22.5 % $ 4,492,054 24.9 % Interest bearing demand deposits 2,370,685 12.3 2,509,736 13.6 2,522,442 14.0 Money market deposits 3,049,754 15.8 3,812,724 20.6 4,611,579 25.5 Savings deposits 1,039,203 5.4 1,000,460 5.4 915,515 5.1 Time deposits 9,336,787 48.3 7,013,370 37.9 5,517,252 30.5 Total deposits $ 19,325,447 100.0 % $ 18,505,279 100.0 % $ 18,058,842 100.0 % Average total deposits increased $900.4 million, or 4.9%, to $19.18 billion in 2023, compared with average total deposits of $18.28 billion in 2022. The following table displays average deposits and rates for the past five years: Average Deposits and Average Rates Year Ended December 31, 2023 2022 2021 2020 2019 Amount % Amount % Amount % Amount % Amount % (In thousands) Deposits Non-interest-bearing demand deposits $ 3,705,788 — % $ 4,386,526 — % $ 3,751,626 — % $ 3,158,828 — % $ 2,837,946 — % Interest bearing demand deposits 2,388,080 1.71 2,471,256 0.33 2,047,177 0.11 1,591,924 0.18 1,290,752 0.18 Money market deposits 3,164,739 2.72 4,902,357 0.81 4,034,246 0.45 2,903,837 0.74 2,012,306 1.07 Savings deposits 1,070,405 0.83 1,118,967 0.08 897,663 0.09 759,581 0.13 731,027 0.20 Time deposits 8,849,293 3.75 5,398,808 1.04 5,979,191 0.68 7,268,738 1.54 7,459,800 2.05 Total deposits $ 19,178,305 2.44 % $ 18,277,914 0.58 % $ 16,709,903 0.37 % $ 15,682,908 0.87 % $ 14,331,831 1.24 % Management considers the Bank’s time deposits of $250 thousand or more, which totaled $5.48 billion at December 31, 2023, to be generally less volatile than other wholesale funding sources primarily because approximately 83.5% of the Bank’s CDs of $250 thousand or more have been on deposit with the Bank for two years or more. Management monitors the CDs of $250 thousand or more portfolio to help identify any changes in the deposit behavior in the market and of the Bank’s clients. As of December 31, 2023 and 2022, the Company had $8.71 billion and $9.21 billion, respectively, of uninsured deposits outstanding. 66 Table of Contents Approximately 99.7% of the Bank’s CDs mature within one year as of December 31, 2023. The following tables display time deposits by maturity: Time Deposits by Maturity At December 31, 2023 Time Deposits -under $250,000 Time Deposits -$250,000 and over Total Time Deposits (In thousands) Less than three months $ 1,712,890 $ 2,371,057 $ 4,083,947 Over three to six months 941,893 1,076,373 2,018,266 Over six to twelve months 1,189,018 2,021,646 3,210,664 Over twelve months 14,564 9,346 23,910 Total $ 3,858,365 $ 5,478,422 $ 9,336,787 Percent of total deposits 20.0 % 28.3 % 48.3 % The following table displays time deposits with a remaining term of more than one year at December 31, 2023: Maturities of Time Deposits with a Remaining Term of More Than One Year for Each of the Five Years Following December 31, 2023 (In thousands) 2025 $ 18,429 2026 $ 3,203 2027 $ 2,230 2028 $ 23 2029 $ 25 67 Table of Contents FDIC Special Assessment and Uninsured Deposits In 2023, the FDIC Board of Directors approved a final rule to implement a special assessment to recover the loss to the Deposit Insurance Fund (DIF) associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. The Federal Deposit Insurance Act (FDI Act) requires the FDIC to take this action in connection with the systemic risk determination announced on March 12, 2023. ● Under the final rule, the banks that benefited most from the assistance provided under the systemic risk determination will be charged a special assessment to recover losses to the DIF resulting from the protection of uninsured depositors. In general, large banks and regional banks, and particularly those with large amounts of uninsured deposits, were the banks most vulnerable to uninsured deposit runs and benefited most from the stability provided under the systemic risk determination. ● The FDIC estimates that 114 banking organizations will be subject to the special assessment, including 48 banking organizations with total assets over $50 billion and 66 banking organizations with total assets between $5 and $50 billion. No banking organizations with total assets under $5 billion will pay a special assessment, based on data for the December 31, 2022 reporting period. ● Currently, the FDIC estimates that of the total cost of the failures of Silicon Valley Bank and Signature Bank, approximately $16.3 billion was attributable to the protection of uninsured depositors. These loss estimates will be periodically adjusted as assets are sold, liabilities are satisfied, and receivership expenses are incurred. ● The special assessment will be collected at an annual rate of approximately 13.4 basis points for an anticipated total of eight quarterly assessment periods. Because the estimated loss pursuant to the systemic risk determination will be periodically adjusted, the FDIC retains the ability to cease collection early, impose an extended special assessment collection period after the initial eight-quarter collection period to collect the difference between losses and the amounts collected, and impose a one-time final shortfall special assessment after both receiverships terminate. ● The special assessment will be collected beginning with the first quarterly assessment period of 2024 (i.e., January 1 through March 31, 2024) with an invoice payment date of June 28, 2024. Each institution should account for the special assessment in accordance with U.S. generally accepted accounting principles (GAAP). In accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 450, Contingencies (FASB ASC Topic 450), an estimated loss from a loss contingency shall be accrued by a charge to income if information indicates that it is probable that a liability has been incurred and the amount of loss is reasonably estimable. Therefore, an institution will recognize in the Call Report and other financial statements the accrual of a liability and estimated loss (i.e., expense) from a loss contingency for the special assessment when the institution determines that the conditions for accrual under GAAP have been met. In addition, the General Instructions to the Call Report provide guidance on ASC Topic 855, Subsequent Events, which may be applicable. Similarly, each institution should account for any shortfall special assessment in accordance with FASB ASC Topic 450 when the conditions for accrual under GAAP have been met. As a result, the Company recorded an $11.3 million special assessment fee in the fourth quarter of 2023. Long-term Debt We established three special purpose trusts in 2003 and two in 2007 for the purpose of issuing Guaranteed Preferred Beneficial Interests in their Subordinated Debentures to outside investors (“Capital Securities”). The proceeds from the issuance of the Capital Securities as well as our purchase of the common stock of the special purpose trusts were invested in Junior Subordinated Notes of the Company (“Junior Subordinated Notes”). The trusts exist for the purpose of issuing the Capital Securities and investing in Junior Subordinated Notes. Subject to some limitations, payment of distributions out of the monies held by the trusts and payments on liquidation of the trusts, or the redemption of the Capital Securities, are guaranteed by the Company to the extent the trusts have funds on hand at such time. The obligations of the Company under the guarantees and the Junior Subordinated Notes are subordinate and junior in right of payment to all indebtedness of the Company and will be structurally subordinated to all liabilities and obligations of the Company’s subsidiaries. The Company has the right to defer payments of interest on the Junior Subordinated Notes at any time or from time to time for a period of up to twenty consecutive quarterly periods with respect to each deferral period. Under the terms of the Junior Subordinated Notes, the Company may not, with certain exceptions, declare or pay any dividends or distributions on its capital stock or purchase or acquire any of its capital stock if it has deferred payment of interest on any Junior Subordinated Notes. As of December 31, 2023, Junior Subordinated Notes totaled $119.1 million with a weighted average interest rate of 7.54%, compared to $119.1 million with a weighted average rate of 4.01% as of December 31, 2022. The Junior Subordinated Notes have a stated maturity term of 30 years and qualify as Total Capital for these periods. Off-Balance-Sheet Arrangements, Commitments, Guarantees, and Contractual Obligations In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in the Consolidated Balance Sheets. We enter into these transactions to meet the financing needs of our clients. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the Consolidated Balance Sheets. Loan Commitments. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon clients maintaining specific credit standards at the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses. Standby Letters of Credit. Standby letters of credit are written conditional commitments issued by us to secure the obligations of a client to a third party. In the event the client does not perform in accordance with the terms of an agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek reimbursement from the client. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements. 68 Table of Contents Capital Resources Capital Adequacy Management seeks to retain our capital at a level sufficient to support future growth, protect depositors and stockholders, and comply with various regulatory requirements. The primary measure of capital adequacy is based on the ratio of risk-based capital to risk-weighted assets. At December 31, 2023, the Company’s Tier 1 risk-based capital ratio of 12.84%, total risk-based capital ratio of 14.31%, and Tier 1 leverage capital ratio of 10.55%, calculated under the Basel III Capital Rules, continue to place the Company in the “well capitalized” category for regulatory purposes, which is defined as institutions with a Tier 1 risk-based capital ratio equal to or greater than 8%, a total risk-based capital ratio equal to or greater than 10%, and a Tier 1 leverage capital ratio equal to or greater than 5%. At December 31, 2022, the Company’s Tier 1 risk-based capital ratio was 12.21%, total risk-based capital ratio was 13.73%, and Tier 1 leverage capital ratio was 10.08%. A table displaying the Bancorp’s and the Bank’s capital and leverage ratios at December 31, 2023, and 2022, is included in Note 23 to the Consolidated Financial Statements. Dividend Policy Holders of common stock are entitled to dividends as and when declared by our Board of Directors out of funds legally available for the payment of dividends. Although we have historically paid cash dividends on our common stock, we are not required to do so. We increased the common stock dividend from $0.24 per share in the fourth quarter of 2017, to $0.31 per share in the fourth quarter of 2018, to $0.34 per share in the fourth quarter of 2021. The amount of future dividends will depend on our earnings, financial condition, capital requirements and other factors, and will be determined by our Board of Directors. The terms of our Junior Subordinated Notes also limit our ability to pay dividends. If we are not current in our payment of dividends on our Junior Subordinated Notes, we may not pay dividends on our common stock. Substantially all of the revenues of the Company available for payment of dividends derive from amounts paid to it by the Bank. The Bank paid dividends to the Bancorp totaling $134.0 million during 2023, $232.8 million during 2022, and $230.0 million during 2021. 69 Table of Contents The Federal Reserve Board issued Federal Reserve Supervision and Regulation Letter SR-09-4 that states that bank holding companies are expected to inform and consult with the Federal Reserve supervisory staff prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid. Under California State banking law, the Bank may not without regulatory approval pay a cash dividend which exceeds the lesser of the Bank’s retained earnings or its net income for the last three fiscal years, less any cash distributions made during that period. Under this regulation, the amount of retained earnings available for cash dividends to the Company immediately after December 31, 2023, was restricted to approximately $420.4 million. For additional information on statutory and regulatory limitations on the ability of Bancorp to pay dividends to its shareholders and on the Bank to pay dividends to Bancorp, see “Item 1. Business-Regulation and Supervision — Dividends.” Risk Elements of the Loan Portfolio Non-performing Assets Non-performing assets include loans past due 90 days or more and still accruing interest, non-accrual loans, and OREO. Our policy is to place loans on non-accrual status if interest and principal or either interest or principal is past due 90 days or more, or in cases where management deems the full collection of principal and interest unlikely. After a loan is placed on non-accrual status, any previously accrued but unpaid interest is reversed and charged against current income and subsequent payments received are generally first applied towards the outstanding principal balance of the loan. Depending on the circumstances, management may elect to continue the accrual of interest on certain past due loans if partial payment is received and/or the loan is well collateralized and in the process of collection. The loan is generally returned to accrual status when the borrower has brought the past due principal and interest payments current and, in the opinion of management, the borrower has demonstrated the ability to make future payments of principal and interest as scheduled. Management reviews the loan portfolio regularly to identify problem loans. During the ordinary course of business, management may become aware of borrowers that may not be able to meet the contractual requirements of their loan agreements. Such loans are placed under closer supervision with consideration given to placing the loan on non-accrual status, the need for an additional allowance for loan losses, and (if appropriate) partial or full charge-off. Total non-performing portfolio assets increased $8.8 million, or 10.4%, to $93.3 million at December 31, 2023, compared to $84.5 million at December 31, 2022, primarily due to an increase of $15.4 million in Other real estate owned, offset by decrease of $6.6 million in total non-performing loans. 70 Table of Contents As a percentage of gross loans, excluding loans held for sale, plus OREO, our non-performing assets increased to 0.48% at December 31, 2023, from 0.46% at December 31, 2022. The non-performing portfolio loan, excluding loans held for sale, coverage ratio, defined as the allowance for credit losses to non-performing loans, excluding loans held for sale, increased to 221.6% at December 31, 2023, from 193.0% at December 31, 2022. The following table presents the breakdown of total non-accrual, past due, and restructured loans for the past five years: Non-accrual, Past Due and Restructured Loans As of December 31, 2023 2022 2021 2020 2019 (In thousands) Accruing loans past due 90 days or more $ 7,157 $ 11,580 $ 1,439 $ 4,982 $ 6,409 Non-accrual loans 66,681 68,854 65,846 67,684 40,523 Total non-performing loans 73,838 80,434 67,285 72,666 46,932 Other real estate owned 19,441 4,067 4,368 4,918 10,244 Total non-performing assets $ 93,279 $ 84,501 $ 71,653 $ 77,584 $ 57,176 Accruing loan modifications to borrowers experiencing financial difficulties (1) $ 2,872 $ — $ — $ — $ — Accruing troubled debt restructurings (TDRs) $ — $ 15,145 $ 12,837 $ 27,721 $ 35,336 Non-accrual TDRs (included in non-accrual loans) $ — $ 6,348 $ 8,175 $ 8,985 $ 18,048 Non-accrual loans held for sale $ — $ — $ — $ — $ — Non-performing assets as a percentage of gross loans and OREO at year-end 0.48 % 0.46 % 0.44 % 0.50 % 0.38 % Allowance for credit losses as a percentage of gross loans 0.84 % 0.85 % 0.88 % 1.10 % 0.84 % Allowance for credit losses as a percentage of non-performing loans 221.58 % 192.97 % 212.91 % 237.27 % 270.77 % (1) Current period modifications to borrowers experiencing financial difficulties are reported in accordance with the new guidance under ASU 2022-02. The effect of non-accrual loans on interest income for the past five years is presented below: Year Ended December 31, 2023 2022 2021 2020 2019 (In thousands) Non-accrual Loans Contractual interest due $ 6,270 $ 4,620 $ 4,032 $ 3,093 $ 1,775 Interest recognized 321 435 1,074 1,008 85 Net interest foregone $ 5,949 $ 4,185 $ 2,958 $ 2,085 $ 1,690 As of December 31, 2023, there were no commitments to lend additional funds to those borrowers whose loans had been restructured, were considered impaired, or were on non-accrual status. Non-accrual Loans Total non-accrual portfolio loans were $66.7 million at December 31, 2023, decreased $2.2 million, or 3.2%, from $68.9 million at December 31, 2022. The allowance for the collateral-dependent loans is calculated based on the difference between the outstanding loan balance and the value of the collateral as determined by recent appraisals, sales contracts, or other available market price information, less cost to sell. The allowance for collateral-dependent loans varies from loan to loan based on the collateral coverage of the loan at the time of designation as non-performing. We continue to monitor the collateral coverage of these loans, based on recent appraisals, on a quarterly basis and adjust the allowance accordingly. 71 Table of Contents The following tables present the type of properties securing the non-accrual portfolio loans and the type of businesses the borrowers engaged in as of the dates indicated: December 31, 2023 December 31, 2022 Real Real Estate (1) Commercial Estate (1) Commercial (In thousands) Type of Collateral Single/multi-family residence $ 16,400 $ 3,363 $ 9,215 $ 1,998 Commercial real estate 35,877 — 33,859 — Land — — — 2,518 Personal property (UCC) — 11,041 8 21,256 Total $ 52,277 $ 14,404 $ 43,082 $ 25,772 (1) Real estate includes commercial real estate loans, real estate construction loans, and residential mortgage loans, equity lines and installment & other loans. December 31, 2023 December 31, 2022 Real Real Estate (1) Commercial Estate (1) Commercial (In thousands) Type of Business Real estate development $ 25,429 $ — $ 32,206 $ 50 Wholesale/Retail 14,350 13,215 1,907 11,628 Food/Restaurant 71 361 85 479 Import/Export — 828 — 13,382 Other 12,427 — 8,884 233 Total $ 52,277 $ 14,404 $ 43,082 $ 25,772 (1) Real estate includes commercial real estate loans, real estate construction loans, and residential mortgage loans, equity lines and installment & other loans. As of December 31, 2023, recorded investment in non-accrual loans was $66.7 million compared to $68.9 million as of December 31, 2022. For non-accrual loans, the amounts previously charged off represent 15.8% of the contractual balances for non-accrual loans as of December 31, 2023. As of December 31, 2023, $52.3 million, or 78.4%, of the $66.7 million of non-accrual loans were secured by real estate compared to $43.1 million, or 62.6% of the $68.9 million of non-accrual loans that were secured by real estate as of December 31, 2022. The Bank generally seeks to obtain current appraisals, sales contracts, or other available market price information intended to provide updated factors in evaluating potential loss. 72 Table of Contents The allowance for loan losses to non-performing loans was 209.3% at December 31, 2023, compared to 182.1% at December 31, 2022, primarily due to a decrease in non-performing loans. Non-accrual loans also include those modifications to borrowers experiencing financial difficulties (TDR's in 2022) that do not qualify for accrual status. The following table presents non-accrual loans and the related allowance as of December 31, 2023 and 2022: As of December 31, 2023 Unpaid Principal Balance Recorded Investment Allowance (In thousands) With no allocated allowance: Commercial loans $ 26,310 $ 14,404 $ — Construction loans 7,736 7,736 — Commercial real estate loans 41,725 32,030 — Residential mortgage and equity lines 12,957 12,511 — Installment and other loans — — — Subtotal $ 88,728 $ 66,681 $ — With allocated allowance: Commercial loans $ — $ — $ — Commercial real estate loans — — — Residential mortgage and equity lines — — — Subtotal $ — $ — $ — Total non-accrual loans $ 88,728 $ 66,681 $ — As of December 31, 2022 Unpaid Principal Balance Recorded Investment Allowance (In thousands) With no allocated allowance: Commercial loans $ 27,341 $ 12,949 $ — Commercial real estate loans 37,697 32,205 — Residential mortgage and equity lines 9,626 8,978 Installment and other loans 9 8 — Subtotal $ 74,673 $ 54,140 $ — With allocated allowance: Commercial loans $ 14,643 $ 12,823 $ 3,734 Commercial real estate loans 1,896 1,891 207 Subtotal $ 16,539 $ 14,714 $ 3,941 Total non-accrual loans $ 91,212 $ 68,854 $ 3,941 73 Table of Contents Loan Interest Reserves In accordance with customary banking practice, construction loans and land development loans generally are originated where interest on the loan is disbursed from pre-established interest reserves included in the total original loan commitment. Our construction and land development loans generally include optional renewal terms after the maturity of the initial loan term. New appraisals are obtained prior to extension or renewal of these loans in part to determine the appropriate interest reserve to be established for the new loan term. Loans with interest reserves are generally underwritten to the same criteria, including loan to value and, if applicable, pro forma debt service coverage ratios, as loans without interest reserves. Construction loans with interest reserves are monitored on a periodic basis to gauge progress towards completion. Interest reserves are frozen if it is determined that additional draws would result in a loan to value ratio that exceeds policy maximums based on collateral property type. Our policy limits in this regard are consistent with supervisory limits and range from 50% in the case of land to 85% in the case of one to four family residential construction projects. As of December 31, 2023, construction loans of $220.6 million were disbursed with pre-established interest reserves of $41.3 million compared to $443.9 million of such loans disbursed with pre-established interest reserves of $54.5 million at December 31, 2022. The balance for construction loans with interest reserves which have been extended was $6.4 million with pre-established interest reserves of $0.5 million at December 31, 2023, compared to $34.4 million with pre-established interest reserves of $1.0 million at December 31, 2022. Land loans of $12.9 million were disbursed with pre-established interest reserves of $0.4 million at December 31, 2023, compared to $48.6 million of land loans disbursed with pre-established interest reserves of $1.6 million at December 31, 2022. There were no land loans with interest reserves which have been extended at December 31, 2023, compared to $0.9 million with pre-established interest reserves of $58 thousand at December 31, 2022. At December 31, 2023 and December 31, 2022, the Bank had no loans on non-accrual status with available interest reserves. At December 31, 2023 and 2022, there were no non-accrual residential loans, non-accrual non-residential construction loans and non-accrual land loans that were originated with pre-established interest reserves, respectively. While we typically expect loans with interest reserves to be repaid in full according to the original contractual terms, some loans may require one or more extensions beyond the original maturity before full repayment. Typically, these extensions are required due to construction delays, delays in the sale or lease of property, or some combination of these two factors. Loan Concentration Most of the Company’s business activities are with clients located in the high-density Asian-populated areas of Southern and Northern California; New York City; New York; Dallas and Houston, Texas; Seattle, Washington; Boston, Massachusetts; Chicago, Illinois; Nevada; New Jersey; Rockville, Maryland and Las Vegas, Nevada. The Company also has loan clients in Hong Kong. The Company has no specific industry concentration, and generally our loans are collateralized with real property or other pledged collateral of the borrowers. The Company generally expects our loans to be paid off from the operating profits of the borrowers, refinancing by another lender, or through sale by the borrowers of the collateral. There are no loan concentrations to multiple borrowers in similar activities that exceeded 10% of total loans as of December 31, 2023 or as of December 31, 2022. 74 Table of Contents The Federal banking regulatory agencies issued final guidance on December 6, 2006, regarding risk management practices for financial institutions with high or increasing concentrations of commercial real estate ("CRE") loans on their balance sheets. The regulatory guidance reiterates the need for sound internal risk management practices for those institutions that have experienced rapid growth in CRE lending, have notable exposure to specific types of CRE, or are approaching or exceeding the supervisory criteria used to evaluate the CRE concentration risk, but the guidance is not to be construed as a limit for CRE exposure. The supervisory criteria are: (1) total reported loans for construction, land development, and other land represent 100% of the institution's total risk-based capital, and (2) both total CRE loans represent 300% or more of the institution's total risk-based capital and the institution's CRE loan portfolio has increased 50% or more within the last thirty-six months. The Bank’s loans for construction, land development, and other land represented 19% of total risk-based capital as of December 31, 2023, and 27% as of December 31, 2022. Total CRE loans represented 292% of total risk-based capital as of December 31, 2023, and 287% as of December 31, 2022, which were within the Bank’s internal limit of 400% of total capital. See Part I — Item 1A — “Risk Factors” for a discussion of some of the factors that may affect us. CRE and Construction Loans ("CREC") The Company’s total CREC loan portfolio is diversified by property type with an average CREC loan size of $1.8 million and $1.7 million as of December 31, 2023 and 2022, respectively. The following table summarizes the Company’s total CREC loans by property type as of December 31, 2023 and 2021: As of December 31, 2023 As of December 31, 2022 ($ In thousands) Amount % Amount % Property type: Retail $ 2,279,677 22 % $ 1,963,871 21 % Multifamily 2,602,430 26 % 1,979,340 21 % Office 1,538,701 15 % 1,627,642 17 % Warehouse 1,185,121 12 % 1,118,335 12 % Industrial 557,630 5 % 533,159 6 % Hospitality 317,111 3 % 325,416 3 % Construction & Land 494,495 5 % 667,088 7 % Other 1,177,063 12 % 1,138,206 12 % Total CRE loans $ 10,152,228 100 % $ 9,353,057 100 % The weighted-average loan-to-value (“LTV”) ratio of the total CREC loan portfolio was 50% and 51% as of December 31, 2023 and 2022, respectively. Most of our CREC loan property types had a low weighted-average LTV ratio. Approximately 83% of total CREC loans had an LTV ratio of 60% or lower as of December 31, 2023 and 2022, respectively. The following tables provide a summary of the Company’s CREC, multifamily residential, and construction and land loans by geography as of December 31, 2023 and 2022. The distribution of the total CREC loan portfolio reflects the Company’s geographical footprint, which is primarily concentrated in California: As of December 31, 2023 ($ in thousands) CRE % Multifamily Residential % Construction and Land % Total % Geographic markets: Southern California $ 2,415,516 $ 931,886 $ 304,268 $ 3,651,670 Northern California 1,060,242 169,060 30,014 1,259,316 California 3,475,758 49 % 1,100,946 42 % 334,282 68 % 4,910,986 48 % New York 2,134,507 30 % 1,113,554 43 % 119,849 24 % 3,367,910 33 % Texas 352,005 5 % 108,120 4 % — 0 % 460,125 5 % Illinois 235,440 3 % 45,822 2 % 250 0 % 281,512 3 % New Jersey 125,324 2 % 16,496 1 % 7,423 2 % 149,243 1 % Nevada 156,199 2 % 31,463 1 % 22,183 4 % 209,845 2 % Washington 89,016 1 % 146,909 6 % 2,603 1 % 238,528 2 % Other markets 487,053 7 % 39,120 2 % 7,906 2 % 534,079 5 % Total loans $ 7,055,302 100 % $ 2,602,430 100 % $ 494,496 100 % $ 10,152,228 100 % As of December 31, 2022 ($ in thousands) CRE % Multifamily Residential % Construction and Land % Total % Geographic markets: Southern California $ 2,315,666 $ 638,694 $ 376,679 $ 3,331,039 Northern California 1,070,422 183,665 53,739 1,307,826 California 3,386,088 50 % 822,359 42 % 430,418 65 % 4,638,865 50 % New York 2,015,945 30 % 882,471 45 % 209,112 31 % 3,107,528 33 % Texas 323,984 5 % 53,055 3 % — 0 % 377,039 4 % Illinois 201,414 3 % 46,176 2 % 250 0 % 247,840 3 % New Jersey 125,956 2 % 16,046 1 % 3,655 1 % 145,657 2 % Nevada 136,374 2 % 35,748 2 % 15,384 2 % 187,506 2 % Washington 82,271 1 % 85,530 4 % 3,693 1 % 171,494 2 % Other markets 434,598 6 % 37,954 2 % 4,576 1 % 477,128 5 % Total loans $ 6,706,630 100 % $ 1,979,339 100 % $ 667,088 100 % $ 9,353,057 100 % As 48% and 50% of total CREC loans were concentrated in California as of December 31, 2023 and December 31, 2022, respectively, changes in California’s economy and real estate values could have a significant impact on the collectability of these loans and the required level of allowance for loan losses. For additional information related to the higher degree of risk from a downturn in the California real estate markets. Commercial — Commercial Real Estate Loans . The Company focuses on providing financing to experienced real estate investors and developers who have moderate levels of leverage, many of whom are long-time customers of the Bank. CRE loans totaled $7.06 billion as of December 31, 2023, compared with $6.71 billion as of December 31, 2022, and accounted for 36% and 37% of total loans held-for-investment as of December 31, 2023 and 2022, respectively. Interest rates on CRE loans may be fixed, variable or hybrid. As of December 31, 2023, 63% of our CRE portfolio was variable rate. In comparison, as of December 31, 2022, 68% of our CRE portfolio was variable rate. Loans are underwritten with conservative standards for cash flows, debt service coverage and LTV. Owner-occupied properties comprised 23% of the CRE loans as of December 31, 2023 and 2022, respectively. The remainder were non-owner-occupied properties, where 50% or more of the debt service for the loan is typically provided by rental income from an unaffiliated third party. Commercial — Multifamily Residential Loans . The multifamily residential loan portfolio is largely comprised of loans secured by residential properties with five or more units. Multifamily residential loans totaled $2.60 billion as of December 31, 2023, compared with $1.98 billion as of December 31, 2022, and accounted for 13% and 11% of total loans held-for investment as of December 31, 2023 and 2022, respectively. The Company offers a variety of first lien mortgages, including fixed- and variable-rate loans. As of December 31, 2023, 60% of our multifamily residential loan portfolio was variable rate. In comparison, as of December 31, 2022, 74% of our multifamily residential loan portfolio was variable rate. Commercial — Construction and Land Loans . Construction and land loans provide financing for diversified projects by real estate property type. Construction and land loans totaled $494.5 million as of December 31, 2023, compared with $667.1 million as of December 31, 2022, and accounted for 3% and 4% of total loans held-for-investment as of December 31, 2023 and 2022, respectively. Construction loan exposure was made up of $422.6 million in loans outstanding, plus $280.5 million in unfunded commitments as of December 31, 2023, compared with $559.4 million in loans outstanding, plus $449.9 million in unfunded commitments as of December 31, 2022. Land loans totaled $71.8 million as of December 31, 2023, compared with $107.7 million as of December 31, 2022. Allowance for Credit Losses The Company maintains the allowance for credit losses at a level that the Bank’s management considers appropriate to cover the estimated and known inherent risks in the loan portfolio and off-balance sheet unfunded credit commitments. Allowance for credit losses is comprised of allowances for loan losses and for off-balance sheet unfunded credit commitments. With this risk management objective, the Bank’s management has an established monitoring system that is designed to identify individually evaluated and potential problem loans, and to permit periodic evaluation of impairment and the appropriate level of the allowance for credit losses in a timely manner. In addition, the Company’s Board of Directors has established a written credit policy that includes a credit review and control system that it believes should be effective in ensuring that the Bank maintains an appropriate allowance for credit losses. The Board of Directors provides oversight for the allowance evaluation process, including quarterly evaluations, and determines whether the allowance is appropriate to absorb losses in the credit portfolio. The determination of the amount of the allowance for credit losses and the provision for credit losses is based on management’s current judgment about the credit quality of the loan portfolio and takes into consideration known relevant internal and external factors that affect collectability when determining the appropriate level for the allowance for credit losses. The nature of the process by which the Bank determines the appropriate allowance for credit losses requires the exercise of considerable judgment. Additions or reductions to the allowance for credit losses are made by charges or credits to the provision for credit losses. While management utilizes its business judgment based on the information available, the ultimate appropriateness of the allowance is dependent upon a variety of factors, many of which are beyond the Bank’s control, including but not limited to the performance of the Bank’s loan portfolio, the economy and market conditions, macroeconomic factors, and the view of the regulatory authorities toward loan classifications. Identified credit exposures that are determined to be uncollectible are charged against the allowance for credit losses. Recoveries of previously charged-off amounts, if any, are credited to the allowance for credit losses. A weakening of the economy or other factors that adversely affect asset quality can result in an increase in the number of delinquencies, bankruptcies, and defaults, and a higher level of non-performing assets, net charge-offs, and provision for loan losses. See Part I — Item 1A — “Risk Factors” for additional factors that could cause actual results to differ materially from forward-looking statements or historical performance. The allowance for loan losses was $154.6 million and the allowance for off-balance sheet unfunded credit commitments was $9.1 million at December 31, 2023, which represented the amount believed by management to be appropriate to absorb credit losses inherent in the loan portfolio, including unfunded credit commitments. The allowance for credit losses, which is the sum of the allowances for loan losses and for off-balance sheet unfunded credit commitments, was $163.7 million at December 31, 2023, compared to $155.2 million at December 31, 2022. The allowance for credit losses represented 0.84% of period-end gross loans and 221.6% of non-performing loans at December 31, 2023. The comparable ratios were 0.85% of period-end gross loans and 193.0% of non-performing loans at December 31, 2022. 75 Table of Contents Critical Accounting Policies and Estimates Our accounting policies are fundamental to understanding management’s discussion and analysis of results of operations and financial condition. We identify critical policies and estimates as those that require management to make particularly difficult, subjective, and/or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts would be reported under different conditions or using different assumptions. We have identified the policy and estimate related to the allowance for credit losses on loans as a critical accounting policy. Our critical accounting policies and estimates are described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report Form 10-K. For more information, please also see Note 1, Summary of Significant Accounting Policies contained in Item 8, Financial Statements and Supplementary Data. Expected Credit Losses Estimate for Loans The allowance for credit losses is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "Other liabilities" on the Consolidated Balance Sheets. The amortized cost basis of loans does not include interest receivable shown separately on the Consolidated Balance Sheets. The "Provision for credit losses" on the Consolidated Statement of Operations and Comprehensive Income is a combination of the provision for loan losses and the provision for unfunded loan commitments. Under the CECL methodology, expected credit losses reflect losses over the remaining contractual life of an asset, considering the effect of prepayments and available information about the collectability of cash flows, including information about relevant historical experience, current conditions, and reasonable and supportable forecasts of future events and circumstances. Thus, the CECL methodology incorporates a broad range of information in developing credit loss estimates. For further information regarding the calculation of the allowance for credit losses on loans held for investment using the CECL methodology effective January 1, 2021, see Notes 1 and 5 to the Consolidated Financial Statements contained in “Item 8. Financial Statements and Supplementary Data.” In calculating our allowance for credit losses for the year ended 2023, the change in Moody’s forecast of future GDP, unemployment rates, CRE and home price indexes, did not result in a significant impact to the allowance for credit losses. Our methodology and framework along with the 8-quarter reasonable and supportable forecast period and the 4-quarter reversion period have remained consistent since the implementation of CECL on January 1, 2021. Certain management assumptions are reassessed every quarter based on current expectations for credit losses, while other assumptions are assessed and updated on at least an annual basis. The use of different economic forecasts, whether based on different scenarios, the use of multiple or single scenarios, or updated economic forecasts and scenarios, can change the outcome of the calculations. In addition to the economic forecasts, there are numerous components and assumptions that are integral to the overall estimation of allowance for credit losses. The determination of the allowance for credit losses is complex and dependent on numerous models, assumptions, and judgments made by management. Management's current expectation for credit losses as quantified in the allowance for credit losses, considers the impact of assumptions and is reflective of historical credit experience, economic forecasts viewed to be reasonable and supportable, current loan composition, and relative credit risks known as of the balance sheet date. 76 Table of Contents Under the Company’s CECL methodology, nine portfolio segments with similar risk characteristics are evaluated for expected loss. Six portfolios are modeled using econometric models and three smaller portfolios are evaluated using a simplified loss-rate method that calculates lifetime expected credit losses for the respective pools (simplified approach). The six portfolios subject to econometric modeling include residential mortgages; commercial and industrial loans (“C&I”); construction loans; commercial real estate (“CRE”) for multifamily loans; CRE for owner-occupied loans; and other CRE loans. We estimate the probability of default during the reasonable and supportable forecast period using separate econometric regression models developed to correlate macroeconomic variables, (GDP, unemployment, CRE prices and residential mortgage prices) to historical credit performance for each of the six loan portfolios from the fourth quarter of 2007 to the fourth quarter of 2022. Loss given default rates are computed based on the net charge-offs recognized divided by the exposure at default of defaulted loans starting with the fourth quarter of 2007 through the fourth quarter of 2022. The probability of default and the loss given default rates are applied to the expected amount at default at the loan level based on contractual scheduled payments and estimated prepayments. The amounts so calculated comprise the quantitative portion of the allowance for credit losses. The Company’s CECL methodology utilizes an eight-quarter reasonable and supportable (“R&S”) forecast period, and a four-quarter reversion period. Management relies on multiple forecasts, blending them into a single loss estimate. Generally speaking, the blended scenario approach would include the Baseline, the Alternative Scenario 1 – Upside – 10th Percentile and the Alternative Scenario 3 – Downside – 90th Percentile forecasts. After the R&S period, the Company reverts linearly for the four-quarter reversion period to the long-term loss rates for each of the six portfolios of loans. The contractual term excludes renewals and modifications but includes pre-approved extensions and prepayment assumptions where applicable. Our allowance for credit losses is sensitive to a number of inputs, including macroeconomic forecast assumptions and credit rating migrations during the period. Our macroeconomic forecasts used in determining the December 31, 2023, allowance for credit losses consisted of three scenarios as provided by an outside forecaster. As of December 31, 2022, since the baseline scenario did not forecast a recession in the R&S period, we increased the weighting of the downside scenario to mirror the consensus among economists and reflect our expectations that a recession in the forecast period was more likely than not. During the fourth quarter of 2023, in light of the continued strength of the economy, we maintained the weighting established in the third quarter of 2023 which slightly reduced the weight given to the most severe scenario. The baseline scenario reflects modest ongoing GDP growth and a modest increase in the unemployment rate peaking at 4.1% in the first quarter of 2025. Relative to the baseline scenario, the upside scenario reflects higher GDP growth and lower unemployment rates with the stronger economy resulting in slightly higher inflation, though the Federal Reserve is projected to cut the Fed funds rate starting in the third quarter of 2024. The downside scenario contemplates a recession due to the weakening economy as concerns about inflation keep the Fed funds rate elevated, decreasing to 4.7% in the second quarter of 2024, resulting in negative GDP growth for three quarters peaking at -3.5% in the second quarter of 2024, rising unemployment that peaks at 7.7% in the first quarter of 2025, and a decline in CRE prices of 20.8% and decline in residential home prices of 14.8% during the forecast period. As of December 31, 2023, we placed the same weight on our downside and base scenario, with a small weighting on the upside scenario. Keeping all other factors constant, we estimate that if we had applied 100% weighting to the downside scenario, the allowance for credit losses as of December 31, 2023, would have been approximately $36.1 million higher. This estimate is intended to reflect the sensitivity of the allowance for credit losses to changes in our scenario weights and is not intended to be indicative of future changes in the allowance for credit losses. Management believes the allowance for credit losses is appropriate for the current expected credit losses in our loan portfolio and associated unfunded commitments, and the credit risk ratings and loss rates currently assigned are reasonable and appropriate as of the reporting date. It is possible that others, given the same information, may at any point in time reach different conclusions that could result in a significant impact to the Company's financial statements. 77 Table of Contents The following table sets forth the information relating to the allowance for loan losses, charge-offs, recoveries, and the reserve for off-balance sheet credit commitments for the past five years: Allowance for Credit Losses Amount Outstanding as of December 31, 2023 2022 2021 2020 2019 (In thousands) Allowance for loan losses Balance at beginning of year $ 146,485 $ 136,157 $ 166,538 $ 123,224 $ 122,391 Impact of ASU 2016-13 adoption — — (1,560 ) — — Adjusted beginning balance $ 146,485 $ 136,157 $ 164,978 $ 123,224 $ 122,391 Provision/(reversal) for credit losses 25,655 12,913 (11,210 ) 57,500 (7,000 ) Charge-offs : Commercial loans (13,909 ) (3,222 ) (20,051 ) (21,996 ) (6,997 ) Construction loans (4,221 ) — — — — Commercial real estate loans and residential mortgage loans (5,341 ) (2,152 ) (3 ) — — Installment loans and other loans (15 ) (116 ) — — — Total charge-offs (23,486 ) (5,490 ) (20,054 ) (21,996 ) (6,997 ) Recoveries: Commercial loans 2,990 2,465 1,706 7,267 4,155 Construction loans — 6 76 — 4,612 Commercial real estate loans and residential mortgage loans 2,918 432 661 543 6,063 Installment loans and other loans — 2 — — — Total recoveries 5,908 2,905 2,443 7,810 14,830 Balance at end of period $ 154,562 $ 146,485 $ 136,157 $ 166,538 $ 123,224 Reserve for off-balance sheet credit commitments Balance at beginning of year $ 8,730 $ 7,100 $ 5,880 $ 3,855 $ 2,250 Impact of ASU 2016-13 adoption — — 6,018 — — Adjusted beginning balance $ 8,730 $ 7,100 $ 11,898 $ 3,855 $ 2,250 Provision/(reversal) for credit losses 323 1,630 (4,798 ) 2,025 1,605 Balance at the end of period $ 9,053 $ 8,730 $ 7,100 $ 5,880 $ 3,855 Average loans outstanding during the year (1) $ 18,763,271 $ 17,631,943 $ 15,827,550 $ 15,500,910 $ 14,510,678 Ratio of net charge-offs/(recoveries) to average loans outstanding during the year (1) 0.09 % 0.01 % 0.11 % 0.09 % (0.05 )% Provision/(reversal) for credit losses to average loans outstanding during the year (1) 0.14 % 0.07 % (0.07 )% 0.37 % (0.05 )% Allowance for credit losses to non-performing portfolio loans at year-end (2) 221.58 % 192.97 % 212.91 % 237.27 % 270.77 % Allowance for credit losses to gross loans at year-end (1) 0.84 % 0.85 % 0.88 % 1.10 % 0.84 % (1) Excluding loans held for sale (2) Excluding non-accrual loans held for sale 78 Table of Contents The table set forth below reflects management’s allocation of the allowance for loan losses by loan category and the ratio of each loan category to the total loans as of the dates indicated: Allocation of Allowance for Loan Losses As of December 31, 2023 2022 2021 2020 2019 Percentage Percentage Percentage Percentage Percentage of Loans in of Loans in of Loans in of Loans in of Loans in Each Each Each Each Each Category Category Category Category Category to Average to Average to Average to Average to Average Amount Gross Loans Amount Gross Loans Amount Gross Loans Amount Gross Loans Amount Gross Loans (In thousands) Type of Loans: Commercial loans $ 53,791 17.1 % $ 49,435 18.2 % $ 43,394 18.4 % $ 68,742 18.8 % $ 57,021 18.9 % Residential mortgage loans and equity lines 18,140 31.0 18,232 30.2 25,379 28.7 17,737 29.4 13,108 29.1 Commercial real estate loans 74,428 49.1 68,366 48.2 61,081 48.7 49,205 47.8 33,602 48.0 Construction loans 8,180 2.8 10,417 3.4 6,302 4.2 30,854 4.0 19,474 4.0 Installment and other loans 23 — 35 — 1 — — — 19 — Total $ 154,562 100.0 % $ 146,485 100.0 % $ 136,157 100.0 % $ 166,538 100.0 % $ 123,224 100.0 % The allowance allocated to commercial loans was $53.8 million at December 31, 2023, compared to $49.4 million at December 31, 2022. The increase was primarily due to a reserve for a borrower in the health care industry. The allowance allocated to residential mortgage loans and equity lines was $18.1 million at December 31, 2023, compared to $18.2 million at December 31, 2022. The allowance allocated to commercial real estate loans was $74.4 million at December 31, 2023, compared to $68.4 million at December 31, 2022. The increase is due primarily to an increase in commercial real estate loans. The allowance allocated for construction loans decreased to $8.2 million at December 31, 2023, from $10.4 million at December 31, 2022. The decrease is due primarily to a decrease in construction loans and a decrease in non-accrual construction loans. Please also see Part I — Item 1A — “Risk Factors” for additional factors that could cause actual results to differ materially from forward-looking statements or historical performance. 79 Table of Contents Liquidity Liquidity is our ability to maintain sufficient cash flow to meet maturing financial obligations and client credit needs, and to take advantage of investment opportunities as they are presented in the marketplace. Our principal sources of liquidity are growth in deposits, proceeds from the maturity or sale of securities and other financial instruments, repayments from securities and loans, Federal funds purchased, securities sold under agreements to repurchase, and advances from the FHLB. As of December 2023, our average monthly liquidity ratio (defined as net cash plus short-term and marketable securities to net deposits and short-term liabilities) was 13.6% compared to 13.7% for December 2022. The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. At December 31, 2023, the Bank had an approved credit line with the FHLB of San Francisco totaling $7.99 billion. Total advances from the FHLB of San Francisco were $540.0 million and standby letter of credits issued by FHLB on the Company’s behalf were $851.0 million as of December 31, 2023. These borrowings bear fixed rates and are secured by loans. See Note 10 to the Consolidated Financial Statements. At December 31, 2023, the Bank pledged $387.6 thousand of its commercial loans to the Federal Reserve Bank’s Discount Window under the Borrower-in-Custody program. The Bank had borrowing capacity of $1.42 million from the Federal Reserve Bank Discount Window at December 31, 2023. Liquidity can also be provided through the sale of liquid assets, which consist of federal funds sold, securities purchased under agreements to resell, securities available-for-sale. At December 31, 2023, investment securities totaled $1.60 billion, with $134.2 million pledged as collateral for borrowings and other commitments. The remaining balance was available as additional liquidity or to be pledged as collateral for additional borrowings. At December 31, 2023, $1.33 billion of unpledged treasury securities, US agency securities, U.S. agency mortgage-backed securities, or CMO based on current cost are available for pledging to the Federal Reserve Bank’s Bank Term Funding Program. Approximately 99.7% of our time deposits mature within one year or less as of December 31, 2023. Management anticipates that these deposits will reprice higher as a result of the increases in the target Fed funds rate that started in early 2022. Management anticipates that there may be some outflow of these deposits upon maturity due to the keen competition in the Bank’s marketplace. However, based on our historical runoff experience, we expect the outflow will not be significant and can be replenished through our normal growth in deposits. As of December 31, 2023, management believes all the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs. The business activities of the Bancorp consist primarily of the operation of the Bank and limited activities in other investments. The Bancorp obtains funding for its activities primarily through dividend income contributed by the Bank, proceeds from the issuance of the Bancorp common stock through our Dividend Reinvestment Plan and the exercise of stock options. Dividends paid to the Bancorp by the Bank are subject to regulatory limitations. Management believes the Bancorp’s liquidity generated from its prevailing sources is sufficient to meet its operational needs. Please also see Note 14 to the Consolidated Financial Statements regarding commitments and contingencies. Recent Accounting Pronouncements Please see Note 1 to the Consolidated Financial Statements for details of other recent accounting pronouncements and their expected impact, if any, on the Consolidated Financial Statements. 80 Table of Contents