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Item 7. Management’s Discussion and Analysis

2024-03-12 compared with 2023-03-09 · 320 added, 281 removed, 616 unchanged (49% of the section changed)

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The Company uses the best information available to make the estimations necessary to value the related assets and liabilities in each of these areas.

Allowance for Loan Losses

Allowance for loan losses is a valuation allowance for probable incurred credit losses.

Loan losses are charged against the allowance for loan losses when management believes the uncollectability of a loan balance is confirmed.

Subsequent recoveries, if any, are credited to the allowance for loan losses.

The Company estimates the allowance for loan losses required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Allocations of the allowance for loan losses may be made for specific loans, but the entire allowance for loan losses is available for any loan that, in management’s judgment, should be charged-off.

Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible.

This methodology for determining charge-offs is consistently applied to each loan segment.

The Company determines a separate allowance for loan losses for each portfolio segment.

The allowance for loan losses consists of specific and general reserves.

Specific reserves relate to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement.

Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due.

Measurement of impairment is based on the expected future cash flows of an impaired loan, which are to be discounted at the loan’s effective interest rate, or measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan.

The Company selects the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the fair value of the collateral.

The Company recognizes interest income on impaired loans based on its existing methods of recognizing interest income on nonaccrual loans.

Loans, for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired with measurement of impairment as described above.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

General reserves cover non-impaired loans and are based on the Company’s historical loss rates for each portfolio segment, adjusted for the effects of qualitative factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience.

Qualitative factors include consideration of the following:

changes in lending policies and procedures;

changes in economic conditions, changes in the nature and volume of the portfolio;

changes in the experience, ability and depth of lending management and other relevant staff;

changes in the volume and severity of past due, nonaccrual and other adversely graded loans;

changes in the loan review system;

changes in the value of the underlying collateral for collateral-dependent loans;

concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326).” The amendments in this ASU require that entities change the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model (referred to as “CECL” here in).

Under this model, entities will estimate credit losses over the entire contractual term of the instrument from the date of initial recognition of that instrument.

It includes financial assets such as loan receivables, held-to-maturity debt securities, net investment in leases that are not accounted for at fair value through net income, and certain off-balance sheet credit exposures.

This ASU was effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

In 2019, the FASB amended this ASU, which delays the effective date to 2023 for certain SEC filers that are Smaller Reporting Companies, which would apply to the Company.

The Company plans to adopt this ASU, as well as any subsequent ASUs related to this ASU, at the delayed effective date of January 1, 2023.

The Company will adopt this ASU during the three months ended March 31, 2023.

The Company is currently in its final stage of CECL implementation.

The Company is testing its designed models with an independent third party and completing development of its methodologies, and data/input gathering and validation.

In addition, the Company is devising risk documentation, policies and procedures associated with CECL to support the ongoing estimation activities and the continuous assessment of risks related to the model, its methodologies, and data governance.

The Company completed its parallel-runs during the year ended December 31, 2022.

Based on the Company’s current assessment of this ASU, the Company expects to recognize coverage ratio of allowance for credit losses (“ACL”) on loans from 1.12% to 1.32% of loans held-for-investment.

In addition, the Company expects to recognize additional reserve for ACL on off-balance sheet items ranging from $1.1 million to $1.4 million.

The Company expects to recognize no ACL on securities available-for-sale.

The adjustment recorded upon adoption of CECL may differ from management’s estimated change based on material changes in the economic forecast and conditions, and composition of the loan portfolio used in calculating the ACL upon adoption.

This impact will be recorded as a cumulative-effect adjustment to retained earnings as of January 1, 2023.

In March 2022, the FASB issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326) - Troubled Debt Restructuring and Vintage Disclosures.” The amendments in this ASU eliminates the accounting guidance for TDRs by creditors in ASC 310-40, “ Receivables - Troubled Debt Restructurings by Creditors, ” while enhancing disclosure requirements for restructurings involving borrowers that are experiencing financial difficulty.

This Update also requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases.

The Company will adopt this ASU with ASU 2016-13, discussed above.

The Company does not expect to have a material impact on its consolidated financial statements upon adoption of this ASU.

Allowance for Credit Losses

On January 1, 2023, the Company adopted the provisions of ASC 326, “Financial Instruments - Credit Losses (Topic 326)” Instruments .

The adoption of ASC 326 changes the way the Company estimates the ACL on certain financial assets.

The adoption of ASC 326 requires the Company to measure and record current expected credit losses for financial assets within the scope of ASC 326, which the Company currently consist substantially of loans, off-balance sheet credit exposures and securities available-for-sale.

Measuring credit losses under the current expected credit losses (“CECL”) framework requires a significant amount of judgment, including the incorporation of reasonable and supportable forecasts about future conditions that may ultimately impact the level of credit losses the Company may recognize.

Under the CECL framework, current expected credit losses are recorded on financial assets within the scope of ASC 326 at the time of their origination or acquisition.

Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts.

The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics.

The Company’s discounted cash flow methodology incorporates a probability of default (“PD”) and loss given default (“LGD”) model, as well as expectations of future economic conditions, using reasonable and supportable forecasts.

The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios, as well as determining the appropriate length of the forecast horizon.

Management leverages economic projections from a reputable and independent third party to inform and provide its reasonable and supportable economic forecasts.

Although no one economic variable can fully demonstrate the sensitivity of the ACL estimate to changes in economic variables used in the ACL model, the Company utilized changes in U.S.

unemployment rate and year-over-year change in real gross domestic product (“GDP”) growth rate as its key economic variables.

Other internal and external indicators of economic forecasts may also be considered by management when developing the forecast metrics.

The Company’s ACL model reverts to long-term average loss rates for purposes of estimating expected cash flows beyond a period deemed reasonable and supportable.

The Company forecasts economic conditions and expected credit losses over a one-year time horizon.

Beyond the one-year forecast time horizon, the Company’s ACL model reverts to historical long-term average loss rates over one-year period.

Within the various economic scenarios considered as of December 31, 2023, the quantitative estimate of the ACL would increase by approximately $7.7 million under sole consideration of the more adverse downside scenario.

The quoted sensitivity calculation reflects the sensitivity of the modeled ACL estimate to macroeconomic forecast data, but is absent of qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily reflect the nature and extent of future changes in the ACL for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

A portion of the collectively evaluated ACL on loans also includes qualitative adjustments for risk factors not reflected or captured by the quantitative modeled ACL but are relevant in estimating future expected credit losses.

Qualitative adjustments may be related to and include, but not limited to factors such as:

(i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization-specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of ACL model data inputs.

Although management uses the best information reasonably available to derive estimates and assumptions necessary to measure an appropriate level of the ACL, these estimates and assumptions are subject to change in future periods, which may have a material impact on the level of the ACL and the Company’s results of operations.

As a part of the adoption of ASC 326, the Company reviewed and revised certain loan segments for the Company’s ACL model.

Before the adoption of ASC 326, commercial property and SBA property loans were separately presented and represented 63.0% and 6.6% of loans held-for-investment at December 31, 2022, respectively.

The Company re-divided these loan segments into commercial property, business property and multifamily loans, as described below, as these new loan segments are determined to share similar characteristics under the Company’s ACL model.

In addition, four loan segments before the adoption of ASC 326 (commercial term loans, commercial lines of credit, SBA term loans and SBA PPP loans), which represented 12.2% of loans held-for-investment at December 31, 2022, are combined into a single loan segment, commercial and industrial loans, as these loans are determined to share similar risk characteristics under the Company’s ACL model.

However, loan related disclosures for prior periods continue to be presented under the legacy loan segments in this Annual Report on Form 10-K.

Loan portfolio segments identified by the Company include:

commercial real estate (commercial property, business property, multifamily and construction), commercial and industrial, and consumer loans (residential mortgage and other consumer).

Each loan segment bears varying degrees of risk based on, among other things, the type of loan and collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions and interest rate changes.

The loan segments are as following:

Commercial Real Estate Loans:

• Commercial property loans – Commercial property loans include loans for which the Company holds real property as collateral, but where the borrower does not occupy the underlying property.

The primary risks associated with investor property loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, significant increases in interest rates, changes in market rents, and vacancy and conditions of the underlying property, any of which may make the real estate property unprofitable to the borrower.

Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

• Business property loans – Business property loans include loans for which the Company holds real property as collateral and where the underlying property is occupied by the borrower, such as with a place of business.

These loans are primarily underwritten based on the cash flows of the business and secondarily on the real estate.

The primary risks associated with business property loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which reduce the cash flows of the underlying business.

Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

• Multifamily loans:

Multifamily loans are secured by multi-tenant (5 or more units) residential real properties.

Payments on multifamily loans are dependent on the successful operation or management of the properties, and repayment of these loans may be subject to adverse conditions in the real estate market or the economy.

• Construction loans:

Construction loans are considered to have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, government regulation of real property, and the availability of long-term financing.

Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project.

The fair value of the underlying collateral may fluctuate as market conditions change.

The primary risks include the borrower’s inability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.

Commercial and Industrial Loans:

• Commercial and industrial loans – The C&I loan category includes commercial term loans and commercial lines of credit.

Commercial term loans are typically extended to finance business acquisitions, permanent working capital needs, and/or equipment purchases.

Commercial lines of credit are generally provided to finance short-term working capital needs and mortgage warehouse lending credit facilities.

Mortgage warehouse lending is a line of credit given to a loan originator, the funds from which are used to finance a mortgage that a borrower uses to purchase single-family residential property or refinance an existing mortgage.

The primary risk associated with C&I loans is the difference between expected and actual cash flows of the borrowers.

In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans, and occasionally upon other borrower assets and guarantor assets.

Consumer Loans

• Residential mortgage loans – The primary risks of residential mortgage loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may reduce the borrower’s capacity to pay.

• Other consumer loans – Other consumer loans primarily include automobile loans, as well as unsecured lines of credit and term loans to high net worth individuals.

Automobile loans have relatively higher LTV ratios on average and carry higher interest rates to offset for the inherently higher default risks.

Unsecured lines of credit and term consumer loans are underwritten primarily based on the individual borrower’s income, current debt level, and past credit history.

Repayment of these loans is dependent on the borrower’s ability to pay, and the fair value of the underlying collateral for automobile loans.

ACL and provision (reversal) for credit losses for reporting periods beginning with January 1, 2023 are presented under ASC 326, while prior period amounts, comparisons and related ratios continue to be presented under legacy ASC 450 and ASC 310 in this Annual Report on Form 10-K .

Please also see Note 1 to the Consolidated Financial Statements included in Item 1 of this Annual Report on Form 10-K for additional discussion.

Non-GAAP Measures

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($ in thousands) 2023

2022 2021 2020 2019

Average total shareholders' equity $ 340,508 $ 306,440 $ 242,766 $ 228,553 $ 221,576

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($ in thousands, except per share data) 2023

2022 2021 2020 2019

Total shareholders' equity $ 348,872 $ 335,442 $ 256,286 $ 233,788 $ 226,834

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Tangible common equity to total assets 10.03 % 11.00 % 11.92 % 12.16 % 12.99 %

The following table presents reconciliation of allowance for loan losses to loans held-for-investment, excluding SBA PPP loans to its most comparable GAAP measure.

The Company believes that this non-GAAP measure enhances comparability to prior periods in which there were no SBA PPP loans and provides supplemental information regarding the Company’s credit quality trend.

($ in thousands) 2022 2021 2020 2019 2018

Loans held-for-investment $ 2,046,063 $ 1,732,205 $ 1,583,578 $ 1,450,831 $ 1,338,682

SBA PPP loans 1,197 65,329 135,654 — —

Loans held-for-investment, excluding SBA PPP loans $ 2,044,866 $ 1,666,876 $ 1,447,924 $ 1,450,831 $ 1,338,682

Allowance for loan losses $ 24,942 $ 22,381 $ 26,510 $ 14,380 $ 13,167

Allowance for loan losses to loans held-for-investment 1.22 % 1.29 % 1.67 % 0.99 % 0.98 %

Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans 1.22 % 1.34 % 1.83 % 0.99 % 0.98 %

Five-Year Summary of Selected Financial Data

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Loans held-for-investment 2,323,452 2,046,063 1,732,205 1,583,578 1,450,831

Allowance for loan losses (24,942) (22,381) (26,510) (14,380) (13,167)

ACL on loans (1)

(27,533) (24,942) (22,381) (26,510) (14,380)

Total assets 2,789,506 2,420,036 2,149,735 1,922,853 1,746,328

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Net interest income 88,504 89,632 77,137 66,189 69,034

Provision for loan losses 3,602 (4,596) 13,219 4,237 1,231

Provision (reversal) for credit losses (1)

(132) 3,602 (4,596) 13,219 4,237

Noninterest income 10,683 14,499 18,434 11,740 11,869

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Nonaccrual loans held-for-investment to loans held-for-investment 0.17 % 0.16 % 0.06 % 0.20 % 0.17 %

Nonaccrual loans held-for-investment to allowance for loan losses 13.47 % 4.44 % 11.93 % 17.64 % 8.06 %

Nonaccrual loans held-for-investment to ACL on loans (1)

14.22 % 13.47 % 4.44 % 11.93 % 17.64 %

NPLs held-for-investment to loans held-for-investment 0.17 % 0.16 % 0.06 % 0.20 % 0.19 %

NPLs held-for-investment to allowance for loan losses 13.47 % 4.44 % 11.93 % 19.64 % 8.06 %

NPLs held-for-investment to ACL on loans (1)

14.22 % 13.47 % 4.44 % 11.93 % 19.64 %

NPAs to total assets 0.23 % 0.30 % 0.05 % 0.24 % 0.16 %

Allowance for loan losses to loans held-for-investment

ACL on loans (1) to loans held-for-investment

1.19 % 1.22 % 1.29 % 1.67 % 0.99 %

Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (7)

ACL on loans (1) to nonaccrual loans held-for-investment

703.09 % 742.32 % 2,251.61 % 838.13 % 566.81 %

Allowance for loan losses to nonaccrual loans held-for-investment 742.32 % 2,251.61 % 838.13 % 566.81 % 1,241.00 %

Allowance for loan losses to NPLs held-for-investment 742.32 % 2,251.61 % 838.13 % 509.21 % 1,241.00 %

ACL on loans (1) to NPLs held-for-investment

703.09 % 742.32 % 2,251.61 % 838.13 % 509.21 %

Net charge-offs (recoveries) to average loans held-for-investment (0.05) % 0.06 % (0.03) % 0.07 % 0.22 %

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13.16 % 14.05 % 11.85 % 11.74 % 13.06 %

(1) ACL and provision (reversal) for credit losses for the year ended December 31, 2023 are presented under ASC 326, while prior period comparisons continue to be presented under legacy ASC 450 and ASC 310.

Provision (reversal) for credit losses on off-balance sheet credit exposures of $85 thousand, $(24) thousand, $(63) thousand and $162 thousand, respectively, for the years ended December 31, 2022, 2021, 2020 and 2019 were recorded in Other Expense on the Consolidated Income Statement.

(2) Shareholders' equity divided by common shares outstanding.

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(5) Net interest income divided by average total interest-earning assets.

(5) Total loans include both loans held-for-sale and loans held-for-investment, net of unearned loan costs (fees).

(6) Total loans include both loans held-for-sale and loans held-for-investment.

(7) NPAs include total NPLs (nonaccrual loans plus loans past due 90 days or more and still accruing) and other real estate owned.

(7) This ratio is not presented in accordance with GAAP.

See "Non-GAAP measure" for reconciliation of this measure to its most comparable GAAP measure.

(8) Non-GAAP measure.

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Financial Highlights

• Net income was $35.0 million for the year ended December 31, 2022, a decrease of $5.1 million, or 12.8%, from $40.1 million for the year ended December 31, 2021, but an increase of $18.8 million, or 116.3%, from $16.2 million for the year ended December 31, 2020;

◦ Provision (reversal) for loan losses was $3.6 million, $(4.6) million and $13.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

• Net income was $30.7 million for the year ended December 31, 2023, a decrease of $4.3 million, or 12.2%, from $35.0 million for the year ended December 31, 2022 and a decrease of $9.4 million, or 23.4%, from $40.1 million for the year ended December 31, 2021;

◦ Provision (reversal) for credit losses (1) was $(132) thousand, $3.6 million and $(4.6) million for the years ended December 31, 2023, 2022 and 2021, respectively.

◦ Diluted earnings per common share was $2.12, $2.31 and $2.62 for the years ended December 31, 2023, 2022 and 2021, respectively.

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• Loans held-for-investment were $2.32 billion at December 31, 2023, an increase of $277.4 million, or 13.6%, from $2.05 billion at December 31, 2022;

Excluding SBA PPP loans, loans held-for-investment were $2.04 billion at December 31, 2022, an increase of $378.0 million, or 22.7%, from $1.67 billion at December 31, 2021;

• Total deposits were $2.35 billion at December 31, 2023, an increase of $305.6 million, or 14.9%, from $2.05 billion at December 31, 2022;

• The Company declared and paid cash dividends of $0.69, $0.60, and $0.44 per common share for the years ended December 31, 2023, 2022 and 2021, respectively;

• The Company purchased and retired 512,657, 362,557 and 680,269 shares of common stock for the years ended December 31, 2023, 2022 and 2021, respectively.

(1) Provision (reversal) for credit losses for the year ended December 31, 2023 is presented under ASC 326, while prior period comparisons continue to be presented under legacy ASC 450 and ASC 310.

Provision (reversal) for credit losses on off-balance sheet credit exposures of $85 thousand and $(24) thousand, respectively, for the years ended December 31, 2022 and 2021 was recorded in Other Expense on the Consolidated Income Statement.

The decrease in net income for the year ended December 31, 2023 compared with the year ended December 31, 2022 was primarily due to an increase in noninterest expense, decreases in noninterest income and net interest income, partially offset by reversal for credit losses of $132 thousand for the year ended December 31, 2023 compared with provision for credit losses of $3.6 million for the year ended December 31, 2022.

The decrease in net income for the year ended December 31, 2022 compared with the year ended December 31, 2021 was primarily due to an increase in noninterest expense, a decrease in noninterest income and additional provision for loan losses, partially offset by an increase in net interest income.

Noninterest income decreased primarily due to a decrease in gain on sale of SBA loans.

Additional provision for loan losses was primarily due to an increase in gross loan balance and changes in qualitative adjustment factors related to current economic conditions.

The increase in net income for the year ended December 31, 2021 compared with the year ended December 31, 2020 was primarily due to increases in net interest income and noninterest income and the reversal for loan losses.

Net interest income increased primarily due to a decrease in cost of interest-bearing liabilities and an increase in average earning assets.

Noninterest income increased primarily due to an increase in gain on sale of SBA loans.

Reversal for loan losses was primarily due to a decrease in qualitative adjustment factor allocations related to economic implications of the COVID-19 pandemic during the year ended December 31, 2020.

The increase in total assets for the year ended December 31, 2022 was primarily due to an increase in loans held-for-investment.

Loans held-for-investment increased primarily due to the increased commercial property and residential property loan production.

The increase in total assets for the year ended December 31, 2023 was primarily due to increases in cash and cash equivalents, loans held-for-investment and operating lease assets.

The increase in operating lease assets was primarily due to renewal and expansion of the Company’s headquarters and a new location for relocation of a regional office and branches.

The Company plans to relocate and consolidate a regional office and two branches into one location in Orange County, California in 2024.

The Company is committed to making corporate decisions that directly benefit its shareholders, and during the year ended December 31, 2023, increased its dividend per common share by $0.09, or 15.0%, to $0.69 from $0.60 for the year ended December 31, 2022.

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Noninterest-earning assets:

Cash and cash equivalents 20,735 19,676 17,542

Allowances for loan losses (22,125) (25,270) (19,693)

Cash and due from banks

21,565 20,735 19,676

(25,495) (22,125) (25,270)

Other assets 76,444 73,951 41,187

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2.88 % 0.62 % 0.24 %

Cost of deposits

2.87 % 0.62 % 0.23 %

(1) Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans.

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(4) Net interest margin is calculated by dividing net interest income by average interest-earning assets.

(5) Cost of funds is calculated by dividing interest expense on deposits by the sum of interest-bearing and noninterest-bearing demand deposits.

(5) Cost of funds is calculated by dividing total interest expense by the sum of total interest-bearing liabilities and noninterest-bearing demand deposits.

The following table presents the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities.

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Net interest income $ 88,504 $ 89,632 $ (1,128) (1.3) %

Net interest income increased primarily due to a 9.3% increase in average balance of interest-earning assets and a 58 basis point increase in average yield on interest-earning assets, partially offset by a 6.1% increase in average balance of interest-bearing liabilities and a 67 basis point increase in average cost of interest-bearing liabilities.

Net interest income decreased primarily due to a 38.4% increase in average balance of interest-bearing liabilities and a 297 basis point increase in average cost of interest-bearing liabilities, partially offset by a 12.6% increase in average balance of interest-earning assets and a 147 basis point increase in average yield on interest-earning assets.

The increase in average balance of interest-earning assets was primarily due to growth in loans and investment securities, supported by deposit growth.

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Interest and fees on loans increased primarily due to a 14.2% increase in average balance and a 128 basis point increase in average yield.

The increase in average balance was primarily due to an increase in commercial and residential property loans, and commercial lines of credit, partially offset by a decrease in commercial term loans.

The increase in average balance was primarily due to an increase in commercial real estate, commercial and industrial, and residential mortgage loans, partially offset by a decrease in other consumer loans.

The increase in average yield was primarily due to the rising market rates, partially offset by a decrease in net amortization of deferred fees on SBA PPP loans.

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For the years ended December 31, 2023 and 2022, average yield on total investment securities was 3.33% and 2.19%, respectively.

Interest income on other interest-earning assets increased primarily due to a 156 basis point increase in average yield and an 8.3% increase in average balance.

The increase in average yield was primarily due to the rising market rates.

The increase in average balance was primarily due to an increase in average balance of deposits and the Emergency Capital Investment Program (“ECIP”) capital investment, partially offset by an increase in loans.

Interest income on other interest-earning assets increased primarily due to a 332 basis point increase in average yield and a 2.4% increase in average balance.

The increase in average yield was primarily due to the rising market rates and an increase in dividend on Federal Home Loan Bank stock.

The increase in average balance was primarily due to an increase in average balance of deposits, partially offset by an increase in loans.

For the years ended December 31, 2023 and 2022, yield on total other interest-earning assets was 5.27% and 1.95%, respectively.

Interest expense on deposits increased primarily due to an 8.7% increase in average balance of interest-bearing deposits and a 68 basis point increase in average cost of interest-bearing deposits.

The increase in average balance was primarily due to increases in savings, NOW and money market accounts, partially offset by a decrease in time deposits.

Interest expense on deposits increased primarily due to a 38.4% increase in average balance of interest-bearing deposits and a 296 basis point increase in average cost of interest-bearing deposits.

The increase in average balance was primarily due to an increase in time deposits, partially offset by decreases in savings, NOW and money market accounts.

The increase in average cost was primarily due to the rising market rates.

For the years ended December 31, 2023 and 2022, average cost on total interest-bearing deposits was 4.04% and 1.08%, respectively.

Interest expense on other borrowings increased primarily due to a 122 basis point increase in average cost, partially offset by a 79.9% decrease in average balance.

Interest expense on other borrowings increased primarily due to a 46.1% increase in average balance and a 338 basis point increase in average cost.

The increase in average cost was primarily due to the rising market rates.

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Net interest income $ 89,632 $ 77,137 $ 12,495 16.2 %

Net interest income increased primarily due to a 7.2% increase in average balance of interest-earning assets and a 74 basis point decrease in average cost of interest-bearing liabilities, partially offset by a 20 basis point decrease in average yield on interest-earning assets and a 10.9% decrease in average balance of interest-bearing liabilities.

The increase in average balance of interest-earning assets was primarily due to growth in the loan and investment securities, supported by deposit growth.

The decreases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the lower market rates during the year ended December 31, 2021.

Interest and fees on loans increased primarily due to a 10.4% increase in average balance, partially offset by a 31 basis point decrease in average yield.

The increase in average balance was primarily due to an increase in commercial property loans, partially offset by decreases in commercial term and SBA PPP loans.

The decrease in average yield was primarily due to the lower market rates, partially offset by increases in net amortization of deferred fees on SBA PPP loans and net accretion of discount.

Interest on investment securities decreased primarily due to a 49 basis point decrease in average yield, partially offset by a 6.3% increase in average balance.

The decrease in average yield was primarily due to new investment securities purchased at lower market rates.

The increase in average balance of interest-earning assets was primarily due to growth in loans and investment securities, supported by deposit growth.

The increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the rising market rates during the year ended December 31, 2022.

Interest and fees on loans increased primarily due to a 10.0% increase in average balance and a 43 basis point increase in average yield.

The increase in average balance was primarily due to an increase in commercial real estate and residential mortgage loans, and commercial lines of credit, partially offset by a decrease in commercial term loans.

The increase in average yield was primarily due to the rising market rates, partially offset by a decrease in net amortization of deferred fees on SBA PPP loans.

Interest on investment securities increased primarily due to a 95 basis point increase in average yield and a 1.6% increase in average balance.

The increase in average yield was primarily due to new investment securities purchased at higher market rates and a decrease in net amortization.

The Company purchased $57.4 million and $47.3 million, respectively, of investment securities during the years ended December 31, 2022 and 2021.

For the years ended December 31, 2022 and 2021, average yield on total investment securities was 2.19% and 1.24%, respectively.

Interest income on other interest-earning assets decreased primarily due to a 12 basis point decrease in average yield and a 15.8% decrease in average balance.

The decrease in average yield was primarily due to the lower market rates.

The decrease in average balance was primarily due to increases in loans and investment securities.

Interest income on other interest-earning assets increased primarily due to a 156 basis point increase in average yield and an 8.3% increase in average balance.

The increase in average yield was primarily due to the rising market rates.

For the years ended December 31, 2022 and 2021, yield on total other interest-earning assets was 1.95% and 0.39%, respectively.

Interest expense on deposits decreased primarily due to a 6.1% decrease in average balance of interest-bearing deposits and a 79 basis point decrease in average cost of interest-bearing deposits.

The decrease in average balance was primarily due to a decrease in time deposits, partially offset by increases in savings, NOW and money market accounts.

The decrease in average cost was primarily due to the lower market rates.

Interest expense on deposits increased primarily due to an 8.7% increase in average balance of interest-bearing deposits and a 68 basis point increase in average cost of interest-bearing deposits.

The increase in average balance was primarily due to increases in savings, NOW and money market accounts, partially offset by a decrease in time deposits.

The increase in average cost was primarily due to the rising market rates.

For the years ended December 31, 2022 and 2021, average cost on total interest-bearing deposits was 1.08% and 0.40%, respectively.

Interest expense on other borrowings decreased primarily due to a 66.8% decrease in average balance, partially offset by a 28 basis point increase in average cost.

The increase in average cost was primarily due to matured borrowings with lower interest rates during the year ended December 31, 2021.

Matured FHLB advances totaled $70.0 million with a weighted-average rate of 0.47% for the year ended December 31, 2021.

Provision (reversal) for Loan Losses

Provision (reversal) for loan losses was $3.6 million, $(4.6) million and $13.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The additional provision for loan losses for the year ended December 31, 2022 was primarily due to an increase in gross loan balance and changes in qualitative adjustment factors related to current economic conditions.

The reversal for loan losses for the year ended December 31, 2021 was primarily due to a decrease in qualitative adjustment factor allocations related to economic implications of the COVID-19 pandemic.

The additional provision for loan losses for the year ended December 31, 2020 was primarily due to the increase in risks associated with economic and business conditions and uncertainty, as well as the increases in special mention and classified loans, as a result of the COVID-19 pandemic.

See further discussion in “Loans Held-For-Investment and Allowance for Loan Losses.”

Interest expense on other borrowings increased primarily due to a 122 basis point increase in average cost, partially offset by a 79.9% decrease in average balance.

The increase in average cost was primarily due to the rising market rates.

Provision (reversal) for Credit Losses

The following table presents a composition of provision (reversal) for credit losses for the periods indicated:

Year Ended December 31,

($ in thousands) 2023 2022 2021

Provision (reversal) for credit losses on loans

$ 497 $ 3,602 $ (4,596)

Provision (reversal) for credit losses on off-balance sheet credit exposure (1)

(629) 85 (24)

Total provision (reversal) for credit losses

$ (132) $ 3,687 $ (4,620)

(1) Provision (reversal) for credit losses on off-balance sheet credit exposures for the years ended December, 2022 and 2021 was recorded in Other Expense on the Consolidated Income Statement.

Provision for credit losses on loans for the year ended December 31, 2023 was primarily due to increases in loans held-for-investment and reserve related to qualitative adjustment factors, partially offset by a decrease in quantitatively measured loss reserve requirement.

See further discussion in “Allowance for Credit Losses.”

Noninterest Income

11 unchanged sentences

Loan servicing income represents fees received on loans that the Company services, net of amortization of servicing assets.

The increase was primarily due to an increase in servicing income received, partially offset by an increase in amortization of servicing assets from increased prepayments of loans being serviced.

The Company purchased bank-owned life insurance of $29.3 million in November 2021.

The increase was primarily due to an increase in servicing income received and a decrease in amortization of servicing assets from lower prepayments of loans being serviced.

Bank-owned life insurance income represents the increase in cash surrender value of the insurance policy.

Gain on sale of loans decreased primarily due to decreases in sales volume and gain margin.

During the year ended December 31, 2021, SBA guaranteed portion was temporarily increased until September 30, 2021 under the Economic Aid Act, which resulted in a higher gain margin on sold SBA loans.

The Company sold SBA loans of $122.9 million with a gain of $8.0 million and residential property loans of $858 thousand with a gain of $8 thousand during the year ended December 31, 2022.

During the year ended December 31, 2021, the Company sold SBA loans of $126.8 million with a gain of $12.8 million and residential property loans of $10.4 million with a gain of $151 thousand and certain commercial property loans of $8.6 million with a gain of $6 thousand.

The Company sold SBA loans of $82.3 million with a gain of $3.6 million during the year ended December 31, 2023.

During the year ended December 31, 2022, SBA loans of $122.9 million with a gain of $8.0 million and residential mortgage loans of $858 thousand with a gain of $8 thousand.

Other income included wire and remittance fees of $625 thousand and $643 thousand, respectively, and debit card interchange fees of $339 thousand and $335 thousand, respectively, for the years ended December 31, 2023 and 2022.

9 unchanged sentences

Total noninterest income $ 14,499 $ 18,434 $ (3,935) (21.3) %

Service charges and fees on deposits decreased primarily due to a decrease in fee-based transactions.

Service charges and fees on deposits increased primarily due to an increase in fee-based transactions.

Loan servicing income represents fees received on loans that the Company services, net of amortization of servicing assets.

2 unchanged sentences

Bank-owned life insurance income represents the increase in cash surrender value of the insurance policy.

Gain on sale of loans increased primarily due to increases in sales volume and gain margin.

The increase in gain margin on SBA loans was primarily due to the temporary increase of SBA guaranteed portion until September 30, 2021 under the Economic Aid Act.

The Company sold SBA loans of $126.8 million with a gain of $12.8 million, residential property loans of $10.4 million with a gain of $151 thousand and certain commercial property loans of $8.6 million with a gain of $6 thousand during the year ended December 31, 2021.

During the year ended December 31, 2020, the Company sold SBA loans of $89.8 million with a gain of $6.0 million and residential property loans of $51.9 million with a gain of $489 thousand.

Gain on sale of loans decreased primarily due to decreases in sales volume and gain margin.

The Company sold SBA loans of $122.9 million with a gain of $8.0 million and residential mortgage loans of $858 thousand with a gain of $8 thousand during the year ended December 31, 2022.

During the year ended December 31, 2021, the Company sold SBA loans of $126.8 million with a gain of $12.8 million and residential mortgage loans of $10.4 million with a gain of $151 thousand and certain commercial property loans of $8.6 million with a gain of $6 thousand.

Other income included wire and remittance fees of $643 thousand and $596 thousand, respectively, and debit card interchange fees of $335 thousand and $306 thousand, respectively, for the years ended December 31, 2022 and 2021.

13 unchanged sentences

Total noninterest expense $ 56,057 $ 51,126 $ 4,931 9.6 %

Salaries and employee benefits increased primarily due to increases in wages, vacation accrual, and other employee benefits, partially offset by decreases in incentives tied to LPO originated SBA loan sales and loan origination cost, which offsets the recognition of salaries.

Salaries and employee benefits increased primarily due to increases in wages and other employee benefits, partially offset by decreases in bonus and vacation accruals, and incentives tied to LPO originated SBA loan sales and loan origination cost, which offsets the recognition of salaries.

The number of full-time equivalent employees averaged 272.5 for the year ended December 31, 2023 compared to 268.3 for the year ended December 31, 2022.

Occupancy and equipment expense increased primarily due to new branch openings.

The Company opened 3 new branches in Dallas and Carrollton, Texas, and Palisades Park, New Jersey during the year ended December 31, 2022.

Professional fees increased primarily due to the additional legal expenses associated with the on-going legal matters related to the 2021 Network and Data Incident, partially offset by a decrease in internal audit fees.

Marketing and business promotion expense increased primarily due to increased marketing activities and advertisement.

Data processing expense increased primarily due to an increase in processing costs from a greater number of accounts and transactions.

Director fees and expenses increased primarily due to a new director appointed during the fourth quarter of 2021.

Regulatory assessment expense increased primarily due to an increase in balance sheet.

Other expense included other loan related legal expenses of $389 thousand and $302 thousand, respectively, armed guard expense of $656 thousand and $546 thousand, respectively, office expenses of $1.9 million and $1.4 million, respectively, and provision (reversal) for unfunded loan commitments was $85 thousand and $(24) thousand, respectively, for the years ended December 31, 2022 and 2021.

Occupancy and equipment expense increased primarily due to an expansion of headquarters location and relocations of a regional office and branches, as well as three new branch openings during the second half of 2022.

The Company plans to relocate a regional office and consolidate two branches into one location in Orange County, California in 2024.

The Company opened three new branches in Dallas and Carrollton, Texas, and Palisades Park, New Jersey during the second half of 2022.

Professional fees increased primarily due to increases in consulting and internal audit fees for enhancing internal controls and process, and professional fees related to a planned core system conversion.

Marketing and business promotion expense increased primarily due to increased marketing activities and advertisement, as well as the Company’s 20 th anniversary celebration during the year ended December 31, 2023.

Data processing expense decreased primarily due to a decrease in processing costs from a decrease in transaction accounts.

Director fees and expenses increased primarily due to additional expenses related to stock options issued to directors during the year ended December 31, 2023.

Regulatory assessment expense increased primarily due to increases in FDIC assessment rates and balance sheet.

The FDIC increased the initial base deposit insurance assessment rate schedules by two basis points beginning in the first quarterly assessment period of 2023.

Other expense included other loan related legal expenses of $534 thousand and $389 thousand, respectively, armed guard expense of $798 thousand and $656 thousand, respectively, office expenses of $2.2 million and $1.9 million, respectively, and provision for off-balance sheet credit exposures was $85 thousand for the year ended December 31, 2022.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

11 unchanged sentences

Total noninterest expense $ 51,126 $ 43,208 $ 7,918 18.3 %

Salaries and employee benefits increased primarily due to increases in wages, bonus accrual, and incentives tied to LPO originated SBA loan sales, partially offset by decreases in vacation and stock compensation expense.

The number of full-time equivalent employees averaged 268.3 for the year ended December 31, 2022 compared to 247.9 for the year ended December 31, 2021.

Occupancy and equipment expense decreased primarily due to a decrease in depreciation, partially offset by an increase in equipment maintenance expense.

Professional fees decreased primarily due to a decrease in expense related to enhancement of the Bank's controls and processes on BSA/AML compliance programs, partially offset by an increase in audit fees.

Occupancy and equipment expense increased primarily due to new branch openings.

The Company opened three new branches in Dallas and Carrollton, Texas, and Palisades Park, New Jersey during the year ended December 31, 2022.

Marketing and business promotion expense increased primarily due to increased marketing activities and advertisement.

Data processing expense increased primarily due to an increase in processing costs from a greater number of accounts and transactions.

Director fees and expenses decreased primarily due to a severance payment of $45 thousand for a former director during the year ended December 31, 2020.

Regulatory assessment expense decreased primarily due to a decrease in assessment rate, partially offset by an increase in balance sheet.

Other expense decreased primarily due to a decrease in other loan related legal expense, partially offset by an increase in armed guard expenses.

Other loan related legal expenses were $302 thousand and $426 thousand, respectively, and armed guard expense of $546 thousand and $506 thousand, respectively, for the years ended December 31, 2021 and 2020, respectively.

Other expenses also included office expenses of $1.4 million and $1.4 million, respectively, and reversal for unfunded loan commitments was $24 thousand and $63 thousand, respectively for the years ended December 31, 2021 and 2020, respectively.

Director fees and expenses increased primarily due to a new director appointed during the fourth quarter of 2021.

Regulatory assessment expense increased primarily due to an increase in balance sheet.

Other expense included other loan related legal expenses of $389 thousand and $302 thousand, respectively, armed guard expense of $656 thousand and $546 thousand, respectively, office expenses of $1.9 million and $1.4 million, respectively, and provision (reversal) for off-balance sheet credit exposures was $85 thousand and $(24) thousand, respectively, for the years ended December 31, 2022 and 2021.

Income Tax Expense

2 unchanged sentences

Investment Securities

On June 30, 2020, the Company transferred securities held-to-maturity to securities available-for-sale as a part of the Company’s liquidity management plan in response to the COVID-19 pandemic.

Management determined that its securities held-to-maturity no longer adhere to the Company’s current liquidity management plan and could be sold to potentially improve the Company’s liquidity position.

Accordingly, the Company was no longer able to assert that it had the intent to hold these securities until maturity and the Company’s ability to assert that it has the intent and ability to hold to maturity debt securities will be limited for up to two years from the date of transfer.

The Company transferred all securities held-to-maturity of $18.8 million to securities available-for-sale, which resulted in a pre-tax increase to accumulated other comprehensive income of $787 thousand.

The Company’s investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk.

The types and maturities of securities purchased are primarily based on current and projected liquidity and interest rate sensitivity positions.

The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:

12 unchanged sentences

Total carrying value of investment securities were $143.3 million at December 31, 2023, an increase of $1.5 million, or 1.0%, from $141.9 million at December 31, 2022.

The increase was primarily due to purchases of $57.4 million, partially offset by principal paydowns and calls of $23.2 million, a decrease in fair value of securities available-for-sale of $15.1 million and net premium amortization of $367 thousand.

All individual securities in a continuous unrealized loss position for 12 months or more as of December 31, 2022 and December 31, 2021 had an investment grade rating upon purchase.

The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of December 31, 2022 and 2021.

The increase was primarily due to purchases of $17.3 million and an increase in fair value of securities available-for-sale of $2.3 million, partially offset by principal paydowns and calls of $17.9 million, and net premium amortization of $209 thousand.

As of December 31, 2023, 94.7%, at amortized cost basis, of the Company's securities available-for-sale were issued by U.S.

government agency and U.S.

government sponsored enterprise.

Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell these securities before their anticipated recovery, the Company determined that these securities with unrealized losses did not warrant an ACL.

Municipal and corporate bonds had an investment grade rating upon purchase.

These securities have fluctuated in value since their purchase dates as market interest rates fluctuated.

The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis.

The Company determined that the investment securities with unrealized losses for twelve months or more are not other-than-temporary impaired, and, therefore, no impairment was recognized at December 31, 2022 and 2021.

The Company therefore determined that the investment securities with unrealized losses did not warrant an ACL as of December 31, 2023.

As of December 31, 2023, the Company recorded no ACL on securities available-for-sale.

The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of the date indicated.

13 unchanged sentences

Total securities available-for-sale $ 870 3.25 % $ 4,529 3.12 % $ 19,969 3.83 % $ 130,807 3.09 % $ 156,175 3.19 %

Loans Held-For-Investment and Allowance for Loan Losses

Loans Held-For-Investment and Allowance for Credit Losses

On January 1, 2023, the Company adopted ASU 2016-13 using the modified retrospective method through a cumulative-effect adjustment to retained earnings.

Balance sheet information and results for reporting periods beginning with January 1, 2023 are presented under ASC 326, while prior period comparisons continue to be presented under legacy ASC 450 and ASC 310.

The following table presents the composition of the Company’s loans held-for-investment as of the dates indicated:

December 31, 2023 January 1, 2023

($ in thousands) Amount Percentage to Total Amount Percentage to Total

Commercial real estate:

Commercial property

$ 855,270 36.8 % $ 772,020 37.8 %

($ in thousands) Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total

Business property 558,772 24.0 % 526,513 25.7 %

Multifamily 132,500 5.7 % 124,751 6.1 %

24,843 1.1 % 17,054 0.8 %

Total commercial real estate 1,571,385 67.6 % 1,440,338 70.4 %

Commercial and industrial 342,002 14.7 % 249,250 12.2 %

Residential mortgage 389,420 16.8 % 333,726 16.3 %

Other consumer 20,645 0.9 % 22,749 1.1 %

Total consumer 410,065 17.7 % 356,475 17.4 %

Loans held-for-investment

$ 2,323,452 100.0 % $ 2,046,063 100.0 %

ACL on loans (27,533) (26,009)

Net loans held-for-investment

$ 2,295,919 $ 2,020,054

The following table presents the composition of the Company’s loans held-for-investment by legacy loan segments as of the dates indicated:

2022 2021 2020 2019

($ in thousands) Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total Amount Percentage to Total

Real estate loans:

19 unchanged sentences

Loans held-for-investment were $2.32 billion at December 31, 2023, an increase of $277.4 million, or 13.6%, from $2.05 billion at December 31, 2022.

The increase was primarily due to new funding of $631.9 million and advances of $162.4 million, partially offset by paydowns and payoffs of $474.8 million, transfers to loans held-for-sale of $4.5 million and charge-offs of $1.2 million.

The increase for the year ended December 31, 2022 was primarily due to increases in commercial and residential property loans, and commercial lines of credit, partially offset by a decrease in SBA PPP loans.

The increase was primarily due to new funding and advances of $1.19 billion and purchases of residential mortgage loans of $15.7 million, partially offset by paydowns and payoffs of $923.0 million, a loan transferred to OREO of $593 thousand and charge-offs of $132 thousand.

The following table shows the contractual maturities of loans held-for-investment and the distribution between fixed and floating interest rate loans at the date indicated:

2 unchanged sentences

Due After One Year to Five Years Due After Five Years to 15 Years Due After 15 Years

Real estate loans:

Commercial real estate:

Commercial property

Residential property — — — 333,726 333,726

SBA property — 10 9,386 125,496 134,892

Construction 17,054 — — — 17,054

Total real estate loans 150,593 701,295 461,213 460,963 1,774,064

Commercial and industrial loans:

Commercial term 5,341 44,289 28,070 — 77,700

Commercial lines of credit 137,137 17,005 — — 154,142

SBA commercial term 101 4,200 11,910 — 16,211

SBA PPP — 1,197 — — 1,197

Total commercial and industrial loans 142,579 66,691 39,980 — 249,250

Other consumer loans 1,999 19,955 795 — 22,749

$ 147,146 $ 470,578 $ 212,093 $ 25,453 $ 855,270

Business property 52,785 268,077 143,643 94,267 558,772

Multifamily 6,076 93,312 33,112 — 132,500

24,843 — — — 24,843

Total commercial real estate 230,850 831,967 388,848 119,720 1,571,385

Commercial and industrial 206,366 79,488 56,148 — 342,002

Residential mortgage — — — 389,420 389,420

Other consumer 3,906 16,093 646 — 20,645

Total consumer 3,906 16,093 646 389,420 410,065

Loans held-for-investment

$ 441,122 $ 927,548 $ 445,642 $ 509,140 $ 2,323,452

Loans with variable (floating) interest rates

3 unchanged sentences

Total $ 441,122 $ 927,548 $ 445,642 $ 509,140 $ 2,323,452

Loan Modifications Related to the COVID-19 Pandemic

Loan Modifications Related to the COVID-19 Pandemic:

As a part of the CARES Act, the temporal relief from TDRs provided an option for financial institutions to suspend the GAAP requirements and regulatory determinations for loan modifications related to the COVID-19 pandemic that would otherwise be categorized as a TDR from March 1, 2020, through the earlier of 60 days after the date of the COVID-19 National Emergency comes to an end or December 31, 2020.

On April 7, 2020, the federal banking regulators also issued the Interagency Statement to encourage banks to work prudently with borrowers and describe the banking regulators’ interpretation of how accounting rules for TDR apply to certain modifications related to the COVID-19 pandemic.

On December 27, 2020, the Economic Aid Act was signed into law, which extended the applicable period of the temporary relief from TDRs under the CARES Act to the earlier of 60 days after the date of the COVID-19 National Emergency comes to an end or January 1, 2022.

As of December 31, 2021, there were no loans under modified terms related to the COIVD-19 pandemic.

The following table presents the risk categories and accrued interest receivable for loans previously modified in response to the COVID-19 pandemic, but that have reverted back to previous contractual payment terms as of the dates indicated:

Carrying Value Per Risk Category Accrued Interest Receivable

($ in thousands) Pass Special Mention Substandard Doubtful Total

December 31, 2022

Real estate loans:

Commercial property $ 217,447 $ 2,767 $ 366 $ — $ 220,580 $ 702

Residential property 18,128 — 372 — 18,500 410

SBA property 3,024 245 — — 3,269 19

Commercial and industrial loans:

Commercial term 16,391 760 979 — 18,130 85

SBA commercial term 1,222 — 36 — 1,258 4

Other consumer loans 365 — — — 365 1

Total $ 256,577 $ 3,772 $ 1,753 $ — $ 262,102 $ 1,221

December 31, 2021

Real estate loans:

The following table reflects the allocation of the ACL on loans by loan category and the ratio of each loan category to total loans as of the dates indicated:

December 31, 2023 January 1, 2023

($ in thousands) ACL on Loans Percentage of Loans to Total Loans ACL on Loans Percentage of Loans to Total Loans

Commercial real estate:

Commercial property

Residential property 25,620 — — — 25,620 537

SBA property 3,683 251 — — 3,934 15

Commercial and industrial loans:

Commercial term 29,744 3,563 1,114 — 34,421 84

SBA commercial term 1,663 — 57 — 1,720 6

Other consumer loans 699 — — — 699 2

$ 12,665 36.8 % $ 6,740 37.8 %

Business property 4,739 24.0 % 6,645 25.7 %

Multifamily 1,441 5.7 % 1,390 6.1 %

135 1.1 % 151 0.8 %

Total commercial real estate 18,980 67.6 % 14,926 70.4 %

Commercial and industrial 6,245 14.7 % 9,846 12.2 %

Residential mortgage 2,226 16.8 % 1,157 16.3 %

Other consumer 82 0.9 % 80 1.1 %

Total consumer 2,308 17.7 % 1,237 17.4 %

Total $ 27,533 100.0 % $ 26,009 100.0 %

All of these loans under modified terms related to the COVID-19 pandemic were accounted for under section 4013 of the CARES Act and not considered TDRs.

All types of modifications have initial modification terms of 6-months or less and loans that were granted modifications related to the COVID-19 pandemic in excess of 6 months, on a cumulative basis, were classified as special mention or substandard.

There were a nonaccrual residential property loan of $372 thousand and a 30 to 59 past due but still accruing other consumer loan of $15 thousand as of December 31, 2022.

All of these loans were current as of December 31, 2021.

Allowance for loan losses

The following table reflects allocation of the allowance for loan losses by loan category and the ratio of each loan category to total loans as of the dates indicated:

ACL on loans to loans held-for-investment

1.19 % 1.27 %

($ in thousands) Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans Allowance for Loan Losses Percentage of Loans to Total Loans

The following table reflects the allocation of the allowance for loan losses by legacy loan segments and the ratio of each legacy loan category to total loans as of the dates indicated:

2022 2021 2020 2019

Real estate loans:

13 unchanged sentences

Allowance for loan losses to loans held-for-investment 1.22 % 1.29 % 1.67 % 0.99 %

Allowance for loan losses to loans held-for-investment, excluding SBA PPP loans (1)

The following table presents activities in ACL for the periods indicated:

Year Ended December 31,

($ in thousands) 2023 2022 2021 2020 2019

Balance at beginning of period $ 24,942 $ 22,381 $ 26,510 $ 14,380 $ 13,167

Impact of ASC 326 adoption 1,067 — — — —

Charge-offs (132) (1,199) (227) (1,529) (3,579)

Recoveries 1,159 158 694 440 555

Provision (reversal) for credit losses on loans 497 3,602 (4,596) 13,219 4,237

Balance at end of period $ 27,533 $ 24,942 $ 22,381 $ 26,510 $ 14,380

ACL on off-balance sheet credit exposures

Balance at beginning of period $ 299 $ 214 $ 238 $ 301 $ 139

Impact of ASC 326 adoption 1,607 — — —

Provision (reversal) for credit losses on off-balance sheet credit exposure (1)

(629) 85 (24) (63) 162

(1) This ratio is not presented in accordance with GAAP.

See "Non-GAAP measure" for reconciliation of this measure to its most comparable GAAP measure.

The SBA guarantee on PPP loans cannot be separated from the loan and therefore is not a separate unit of account.

The Company considered the SBA guarantee in the allowance for loan losses evaluation and determined that it is not required to reserve an allowance on SBA PPP loans.

The increase in allowance for loan losses for the year ended December 31, 2022 was primarily due to an increase in gross loan balance and changes in qualitative adjustment factors related to current economic conditions.

The decrease for the year ended December 31, 2021 was primarily due to a decrease in qualitative adjustment factor allocations related to economic implications of the COVID-19 pandemic.

The increase for the year ended December 31, 2020 was primarily due to increased risks associated with economic and business conditions, as well as increases in special mention and substandard loans, as a result of the COVID-19 pandemic.

The following tables present net charge-offs as a percentage to the average loan held for investment balances in each of the loan categories for the periods indicated:

For the Year Ended December 31,

Balance at end of period $ 1,277 $ 299 $ 214 $ 238 $ 301

(1) Provision (reversal) for credit losses on off-balance sheet credit exposures for the years ended December 31, 2022, 2021, 2020 and 2019 was recorded in Other Expense on the Consolidated Income Statement.

ASC 326 adoption required additional ACL on both loans and off-balance sheet credit exposures primarily due to an increase in the quantitatively measured ACL under ASC 326 because the incurred loss model under the legacy ASC 450 and ASC 310 measures inherent losses in the loan portfolio on a 1-year loss horizon basis, while ASC 326 measures losses on “prepayment adjusted life of the loans” basis.

In addition, historical loss rates used in legacy incurred loss model were low due to the Company’s low loss rates in recent years, while the Company also leverages peer group loss information under ASC 326.

The increase in ACL for the year ended December 31, 2023 was primarily due to increases in loans held-for-investment and reserve related to qualitative adjustment factors, partially offset by a decrease in quantitatively measured loss reserve requirement.

The decrease in the quantitatively measured loss reserve requirement was primarily due to the improved economic forecasts by the FOMC.

The projected 2023 year-end national unemployment rate improved from 4.6% in the December 2022 FOMC meeting to 4.1% in the December 2023 meeting.

The projected year-over-year change in real GDP improved from 0.5% in the December 2022 meeting to 1.4% in the December 2023 meeting.

These improved macroeconomic projections resulted in the decreases of PD and LGD rates across majority of the loan segments leading to lower overall expected loss measurements.

Management believes that the projections used are reasonable and aligns with the Company’s expectation of the economic environment over the next 4 quarters.

The following table present net charge-offs as a percentage to the average loan held for investment balances in each of the loan categories for the period indicated:

Year Ended December 31, 2023

($ in thousands) Average Balance Net Charge-offs (Recoveries) Percentage

Commercial real estate:

Commercial property

$ 794,642 $ — — %

($ in thousands) Average Balance Net Charge-offs (Recoveries) Percentage Average Balance Net Charge-offs (Recoveries) Percentage Average Balance Net Charge-offs (Recoveries) Percentage

Business property 537,044 (5) -0.01 %

Multifamily 127,338 — — %

Total commercial real estate 1,477,589 (5) -0.01 %

Commercial and industrial 263,447 (1,062) -0.40 %

Residential mortgage 358,303 — — %

Other consumer 21,602 40 0.19 %

Total consumer 379,905 40 0.01 %

Total loans held-for-investment $ 2,120,941 $ (1,027) -0.05 %

The following tables present net charge-offs as a percentage to the average loan held for investment balances in each of the legacy loan categories for the periods indicated:

For the Year Ended December 31,

($ in thousands) Average Balance Net Charge-offs (Recoveries) Percentage Average Balance Net Charge-offs (Recoveries) Percentage

Real estate loans:

24 unchanged sentences

SBA commercial term 23,868 255 1.07 % 25,911 196 0.76 %

SBA PPP 92,818 — — % — — — %

Total commercial and industrial loans 314,087 868 0.28 % 223,682 2,972 1.33 %

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($ in thousands) 2023 2022 2021 2020 2019

Real estate loans:

Residential property $ — $ 461 $ 182 $ 697 $ 95

Commercial real estate:

SBA property (1)

Total real estate loans — 461 182 1,491 278

Commercial and industrial loans:

SBA commercial term — — — 189 —

Total commercial and industrial loans — — — 189 —

Other consumer loans 134 93 156 138 99

$ — $ — $ — $ — $ 794

Business property 560 N/A

Total commercial real estate 560 — — — 794

Commercial and industrial 217 — — — 189

Residential mortgage 604 — 461 182 697

Other consumer 47 134 93 156 138

Total consumer 651 134 554 338 835

Total $ 1,428 $ 134 $ 554 $ 338 $ 1,818

(1) Under the legacy loan segments.

Nonperforming Loans and Nonperforming Assets

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Nonaccrual loans held-for-investment:

Real estate loans:

Commercial real estate:

Commercial property (1)

Residential property 372 — 189 — 302

$ 2,400 $ — $ 524 $ —

SBA property (1)

Total real estate loans 3,357 746 1,598 442 842

Commercial and industrial loans:

Commercial lines of credit — — 904 1,888 —

SBA commercial term — 213 595 159 203

Total commercial and industrial loans — 213 1,499 2,047 203

Other consumer loans 3 35 66 48 16

585 746 885 442

Commercial property

Business property

Total commercial real estate 3,823 2,985 746 1,409 442

Commercial and industrial 68 — 213 1,499 2,047

Residential property

— 372 — 189 —

Other consumer

25 3 35 66 48

Total consumer

25 375 35 255 48

Total nonaccrual loans held-for-investment 3,916 3,360 994 3,163 2,537

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NPLs held-for-investment to loans held-for-investment 0.17 % 0.16 % 0.06 % 0.20 % 0.19 %

Allowance for loan losses to:

NPAs to total assets 0.23 % 0.30 % 0.05 % 0.24 % 0.16 %

ACL on loans to:

Nonaccrual loans held-for-investment 703.09 % 742.32 % 2,251.61 % 838.13 % 566.81 %

NPLs held-for-investment 703.09 % 742.32 % 2,251.61 % 838.13 % 509.21 %

NPAs to total assets 0.30 % 0.05 % 0.24 % 0.16 % 0.06 %

Total nonaccrual loans held-for-investment were $3.4 million at December 31, 2022, an increase of $2.4 million, or 238.0%, from $994 thousand at December 31, 2021.

The increase was primarily due to loans placed on nonaccrual status during the year ended December 31, 2022 of $7.4 million, partially offset by payoffs and paydowns of $966 thousand, loans transferred to loans held-for-sale of $4.0 million and charge-offs of $35 thousand.

(1) Under the legacy loan segments

Total nonaccrual loans held-for-investment were $3.9 million at December 31, 2023, an increase of $556 thousand, or 16.5%, from $3.4 million at December 31, 2022.

The increase was primarily due to loans placed on nonaccrual status during the year ended December 31, 2023 of $2.5 million, partially offset by payoffs and paydowns of $1.3 million, a loan transferred to OREO of $593 thousand and charge-offs of $45 thousand.

Loans are generally placed on nonaccrual status when they become 90 days past due, unless management believes the loan is well secured and in the process of collection.

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The management believes that the Bank has a robust risk management framework in place for CRE concentration issues including board approved CRE concentration contingency plans.

The CRE concentration contingency plan contains overview of the Bank’s strategies to mitigate and manage the concentration risks including the plans to maintain stable capital levels, having access to additional capital, maintaining adequate amount of allowance for loan losses, potentially implementing more conservative growth/lending strategies if necessary, maintaining liquidity within the CRE portfolio, and strengthening the loan workout infrastructure.

Troubled Debt Restructurings

Loans that the Bank modifies or restructures where the debtor is experiencing financial difficulties and makes a concession to the borrower in the form of changes in the amortization terms, reductions in the interest rates, the acceptance of interest only payments and, in limited cases, reductions in the outstanding loan balances are classified as TDRs.

TDRs are loans modified for the purpose of alleviating temporary impairments to the borrower’s financial condition.

A workout plan between a borrower and the Bank is designed to provide a bridge for the cash flow shortfalls in the near term.

If the borrower works through the near term issues, in most cases, the original contractual terms of the loan will be reinstated.

The following table presents the composition of loans that were modified as TDRs by portfolio segment as of the dates indicated:

($ in thousands) 2022 2021 2020 2019 2018

Real estate loans:

Commercial property $ 319 $ 326 $ 333 $ 339 $ —

SBA property 215 259 275 415 315

Total real estate loans 534 585 608 754 315

Commercial and industrial loans:

Commercial term — 2 18 28 68

SBA commercial term — 6 13 39 180

Total commercial and industrial loans — 8 31 67 248

$ 534 $ 593 $ 639 $ 821 $ 563

Total nonaccrual TDRs, included above

$ — $ 17 $ 5 $ 121 $ 131

Total TDRs were $534 thousand at December 31, 2022, a decrease of $59 thousand, or 9.9%, from $593 thousand at December 31, 2021.

The decrease was primarily due to payoffs and paydowns of $54 thousand and charge-offs of $5 thousand.

There were no new TDRs for the year ended December 31, 2022.

The CRE concentration contingency plan contains overview of the Bank’s strategies to mitigate and manage the concentration risks including the plans to maintain stable capital levels, having access to additional capital, maintaining adequate amount of ACL, potentially implementing more conservative growth/lending strategies if necessary, maintaining liquidity within the CRE portfolio, and strengthening the loan workout infrastructure.

Loans Held-For-Sale

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When the Company subsequently changes its intent to hold certain loans, the loans are transferred to held-for-sale at the lower of cost or fair value.

Certain loans are transferred to held-for-sale with write-downs to allowance for loan losses.

Certain loans are transferred to held-for-sale with write-downs to ACL on loans.

The following table presents the composition of the Company’s loans held-for-sale as of the dates indicated:

($ in thousands) 2023 2022 2021 2020 2019

Real estate loans:

Residential property $ — — $ 300 $ 760 $ —

Commercial real estate:

SBA property (1)

Commercial and industrial loans:

Commercial lines of credit

$ 16,473 $ 33,603 $ 1,411 $ 150

SBA commercial term 2,338 3,423 268 1,065 300

Business property $ 2,802 N/A

Total commercial real estate 2,802 16,473 33,603 1,411 150

Commercial and industrial 2,353 6,338 3,423 268 1,065

Residential mortgage — — — 300 760

Total consumer — — — 300 760

Loans held-for-sale

$ 5,155 $ 22,811 $ 37,026 $ 1,979 $ 1,975

(1) Under the legacy loan segments

Loans held-for-sale were $5.2 million at December 31, 2023, a decrease of $17.7 million, or 77.4%, from $22.8 million at December 31, 2022.

The decrease was primarily due to sales of $123.7 million, partially offset by originations of $105.6 million and transfers from loans held-for-investment of $4.5 million.

The decrease was primarily due to sales of $82.3 million and pay-downs and pay-offs of $4.4 million, partially offset by originations of $69.0 million.

The Bank gathers deposits primarily through its branch locations.

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Time deposits not covered by deposit insurance $ 408,637 $ 293,951 $ 114,686 39.0 %

The decrease in noninterest-bearing demand deposits was primarily due to strong deposit market competition and the migration of noninterest-bearing demand deposits to money market accounts and time deposits attributable to the rising market rates.

The decrease in noninterest-bearing demand deposits was primarily due to strong deposit market competition and the migration of noninterest-bearing demand deposits to interest-bearing deposits attributable to the rising market rates.

To remain competitive in this rising interest rate environment, the Bank started to offer higher rates on deposit products to retain and attract new customers.

The increase in retail time deposits was primarily due to new accounts of $636.7 million, renewals of the matured accounts of $602.9 million, and balance increases of $23.4 million, partially offset by matured and closed accounts of $1.04 billion.

The increase in retail time deposits was primarily due to new accounts of $657.0 million, renewals of the matured accounts of $555.3 million and balance increases of $26.7 million, partially offset by matured and closed accounts of $916.2 million.

As of December 31, 2023 and 2022, total deposits were comprised of 25.3% and 35.9%, respectively, of noninterest-bearing demand accounts, 17.9% and 25.2%, respectively, of savings, NOW and money market accounts and 56.8% and 38.9%, respectively, of time deposits.

The following table presents the maturity of time deposits as of the dates indicated:

($ in thousands) Three Months or Less Three to Six Months Six Months to One Year One to Three Years Total

($ in thousands) Three Months or Less Three to Six Months Six Months to One Year Over One Year

December 31, 2023

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Shareholders’ equity was $348.9 million at December 31, 2023, an increase of $13.4 million, or 4.0%, from $335.4 million at December 31, 2022.

The increase was primarily due to the net income of $35.0 million, issuance of preferred stock of $69.1 million and stock options exercised of $840 thousand, partially offset by repurchase of common stock of $6.7 million, cash dividends declared on common stock of $8.9 million and an increase in other comprehensive loss from the fair value change in securities available-for-sale of $10.7 million.

The increase was primarily due to the net income of $30.7 million, a decrease in other comprehensive loss from the fair value change in securities available-for-sale of $1.6 million and stock options exercised of $488 thousand, partially offset by repurchase of common stock of $8.8 million, cash dividends declared on common stock of $9.9 million, and cumulative effect adjustment upon adoption of ASC 326 of $1.9 million.

Regulatory Capital Requirements

The following table presents a summary of the capital requirements applicable to the Bank in order to be considered “well-capitalized” from a regulatory perspective as of the dates indicated.

For comparison purpose, the Company’s ratios are included as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums.

For comparison purpose, the Company’s ratios are included as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital consolidated minimums.

PCB Bancorp PCB Bank Minimum Regulatory Requirements Well Capitalized Requirements (Bank)

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Emergency Capital Investment Program

On May 24, 2022, the Company issued 69,141 shares of Series C Preferred Stock for the capital investment of $69.1 million from the U.S.

On May 24, 2022, the Company issued 69,141 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C, liquidation preference of $1,000 per share (“Series C Preferred Stock”) for the capital investment of $69.1 million from the U.S.

Treasury under the ECIP.

ECIP investment is treated as tier 1 capital for the regulatory capital treatment.

The ECIP investment is treated as tier 1 capital for regulatory capital purposes.

The Series C Preferred Stock bears no dividend for the first 24 months following the investment date.

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Established by the Consolidated Appropriations Act, 2021, the ECIP was created to encourage low- and moderate-income community financial institutions and minority depository institutions to provide loans, grants, and forbearance for small businesses, minority-owned businesses, and consumers, especially low-income and underserved communities, including persistent poverty counties, that may be disproportionately impacted by the economic effect of the COVID-19 pandemic by providing direct and indirect capital investments in low- and moderate-income community financial institutions.

Stock Repurchase

On March 28, 2019, the Company’s Board of Directors approved the repurchase of up to $6.5 million of the Company’s common stock through March 27, 2020.

During the year ended December 31, 2019, the Company completed the repurchase program, and repurchased and retired 396,715 shares of common stock at a weighted-average price of $16.33 per share.

On January 23, 2020, the Company announced that on November 22, 2019, its Board of Directors approved a $6.5 million stock repurchase program to commence upon the opening of the Company’s trading window for the first quarter of 2020 and continue through November 20, 2021.

The Company completed the repurchase program in March 2020.

The Company repurchased and retired 428,474 shares of common stock at a weighted-average price of $15.14 per share.

On April 8, 2021, the Company’s Board of Directors approved a repurchase program authorizing the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 775,000 shares, through September 7, 2021.

The Company repurchased and retired 680,269 shares of common stock at a weighted-average price of $15.99 per share, totaling $10.9 million under this repurchase program.

On July 28, 2022, the Company’s Board of Directors approved a repurchase program authorizing for the repurchase of up to 5% of the Company’s outstanding common stock as of the date of the board meeting, which represented 747,938 shares, through February 1, 2023.

The Company repurchased and retired 362,557 shares of common stock at a weighted-average price of $18.57 per share, totaling $6.7 million under this repurchase program as of December 31, 2022.

On January 26, 2023, the Company announced an amendment to the repurchase program, which extended the program expiration from February 1, 2023 to February 1, 2024.

Stock Repurchases

During the year ended December 31, 2023, the Company repurchased and retired 512,657 shares of common stock at a weighted-average price of $17.22 per share under a stock repurchase program approved by the Board of Directors on August 2, 2023 and a legacy stock repurchase program approved on July 28, 2022.

As of December 31, 2023, the Company is authorized to purchase 592,724 additional shares under the 2023 stock repurchase program, which expires on August 2, 2024.

For information regarding shares purchased during the three months ended December 31, 2023, please see “Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.”

During the year ended December 31, 2022, the Company repurchased and retired 362,557 shares of common stock at a weighted-average price of $18.57 per share.

From January 1, 2019 through December 31, 2023, the Company has repurchased and retired at total of 2,380,672 shares of common stock at a weighted-average price of $16.55 per share under several stock repurchase programs.

Liquidity refers to the measure of ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting operating, capital and strategic cash flow needs, all at a reasonable cost.

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Total available borrowing capacity to total assets 42.9 % 26.9 %

During the year ended December 31, 2023, the Company increased cash and cash equivalents by $95.3 million, or 64.8%, to $242.3 million and available borrowing capacity by $546.2 million, or 84.0%, to $1.20 billion.

As of December 31, 2023, the Company's cash and cash equivalents and available borrowing capacity cover approximately 151.9% of deposits not covered by deposit insurance compared to 75.1% at December 31, 2022.

During the year ended December 31, 2023, the Company updated its application in the Borrower-in Custody Program with Federal Reserve that provides additional borrowing capacity.

The Company also maintains relationships in the capital markets with brokers and dealers to issue time deposits and money market accounts.

On June 30, 2020, the Company also transferred securities held-to-maturity of $18.8 million to securities available-for-sale in order to secure additional liquidity on balance sheet.

Since the beginning of the COVID-19 pandemic, management has been able to maintain strong on-and off-balance sheet liquidity as a result of proactive liquidity management in response to the COVID-19 pandemic evidenced by the fact that the Company maintained strong liquidity, well within its policy for liquidity management.

PCB Bancorp, on a stand-alone holding company basis, must provide for its own liquidity and its main source of funding is dividends from the Bank.

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Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company’s financial statements.

The Company’s exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments.

The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

10 unchanged sentences

Total $ 11,466 $ 396,636 $ 6,798 $ 292,067

The Company’s exposure to loan loss in the event of nonperformance on commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

The Company uses the same credit policies in making commitments as it does for the loans reflected in the consolidated financial statements.

The Company maintained reserve for off-balance sheet items of $299 thousand and $214 thousand, respectively, at December 31, 2022 and 2021.

The Company applies an expected credit loss estimation methodology applied to each respective loan segment for determining the ACL on off-balance sheet credit exposures.

The loss estimation process includes assumptions for utilization at default.

These assumptions are based on the Company’s own historical internal loan data.

As a part of adoption of ASC 326, the Company recorded an initial adjustment to the ACL on off-balance sheet credit exposures of $1.6 million.

As of December 31, 2023 and 2022, the Company maintained an ACL on off-balance sheet credit exposures of $1.3 million and $299 thousand in Accrued Interest Payable and Other Liabilities in the Consolidated Balance Sheets, respectively.

Contractual Obligations

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis