What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-12 compared with 2023-03-09 · 560 added, 275 removed, 1158 unchanged (42% of the section changed)

12 unchanged sentences

Los Angeles, California

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of PCB Bancorp and Subsidiary (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2022, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of PCB Bancorp and Subsidiary (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”).

We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework:

(2013) issued by COSO.

Change in Accounting Principle

As discussed in Notes 1 and 4 to the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codifications No.

326, Financial Instruments – Credit Losses (ASC 326).

The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles.

The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

Basis for Opinions

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.

Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

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We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audits also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance and Provision for Credit Losses – Loans Carried at Amortized Cost

As described in Notes 1 and 4 to the financial statements and the explanatory paragraph above, on January 1, 2023 (“adoption date”), the Company adopted ASU 2016-13, Financial instruments – Credit Losses (Topic 326), under a modified retrospective approach, which required the Company to estimate expected credit losses for its financial assets carried at amortized cost utilizing the current expected credit loss (“CECL”) methodology.

As of the adoption date, the Company reported a $26.0 million allowance for credit losses (“ACL”) under the CECL methodology on its loans carried at amortized cost.

Upon adoption, the Company recorded a $2.7 million increase to the ACL, of which $1.1 million related to the ACL on loans.

After adjusting for the net tax impact, a $1.9 million decrease was recorded in retained earnings through a cumulative-effect adjustment, of which approximately $0.8 million related to the ACL on loans.

The ACL on loans under the CECL methodology was a significant estimate recorded within the Company’s financial statements with a reported balance of $26.0 million and $27.5 million as of the adoption date and December 31, 2023, respectively, on amortized loans of $2.0 billion and $2.3 billion, respectively.

The Company’s discounted cash flow (“DCF”) methodology incorporates a probability of default (“PD”) and loss given default (“LGD”) modeling approach.

PD and LGD assumptions are adjusted using economic forecast scenarios to calculate expected future credit losses over a one-year time horizon before reverting over one year to historical long-term average loss rates.

Management utilizes past loan loss experience from peers with similar portfolio sizes and geographic locations to the Company to estimate the PD and LGD assumptions.

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.

The Company utilizes the forecasted national unemployment and year-over-year change in national gross domestic product rates provided by the Federal Open Market Committee.

The Company adjusts the modeled ACL with internal and external qualitative factors not inherently considered in the quantitative component of the methodology.

For each segment of loans collectively evaluated, a hypothetical worst-case scenario loss rate is calculated which is then used as the high watermark for the qualitative factors.

The net difference between the worst-case scenario loss rate and the current period’s quantitative reserve rate is the maximum available qualitative reserve for a given segment.

The required reserve for each segment is then determined based on the weighting of the qualitative category and the assignment of risk status rating for each qualitative category.

The audit procedures over the modeling techniques and assumptions selected by management and the qualitative factor methodology have been identified as a critical audit matter due to the high degree of auditor judgment and use of more experienced audit personnel and valuation specialists in procedures over the modeling techniques and assumptions.

The development of the Company’s qualitative factor methodology involved significant management judgment and assumptions, which in turn involved a high degree of auditor judgment and significant audit effort, including the need to involve more experienced audit personnel.

The primary procedures we performed to address this critical audit matter included:

• Testing the design and operating effectiveness of controls over the estimate of the allowance for credit losses on loans, including controls addressing:

◦ The appropriate application of management’s established methodology in accordance with generally accepted accounting principles;

◦ The reasonableness of establishment of management’s qualitative factor methodology;

◦ The reasonableness of management's judgments over qualitative factors;

◦ Management's model validation, including an evaluation of the conceptual soundness of the ACL framework and significant management judgments and assumptions;

◦ Management's review of the reasonableness and sensitivity of significant judgments and assumptions;

◦ Management's review of the directional consistency of judgments and assumptions with modeled or estimate results.

• Substantively testing management's process, including evaluating their judgments and assumptions, for developing the estimate of the allowance of credit losses on loans which included:

◦ Evaluating and testing of management’s methodology and conceptual soundness of the DCF model, including the use of valuation specialists to assist with evaluating the model used in forecasting future economic conditions and testing of inputs into the model;

◦ Evaluating the reasonableness of management’s significant judgments over the application of reasonable and supportable forecasts;

◦ Evaluating the subjective assumptions within the quantitative discounted cash flow model;

◦ Evaluating the reasonableness of management’s judgments over selection of qualitative factors;

◦ Evaluating the procedures and results of the Company’s third-party model validation, as well as management’s responses to results;

◦ Evaluating of directional consistency of judgments and assumptions with modeled or estimate results.

/s/ Crowe LLP

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Total cash and cash equivalents 242,342 147,031

Securities available-for-sale, at fair value 141,863 123,198

Securities available-for-sale, at fair value (amortized cost of $ 156,175 and $ 156,978 at December 31, 2023 and 2022, respectively, and allowance for credit losses of $ 0 at December 31, 2023)

143,323 141,863

Loans held-for-sale 5,155 22,811

Loans held-for-investment, net of deferred loan costs (fees) 2,323,452 2,046,063

Allowance for loan losses ( 24,942 ) ( 22,381 )

Allowance for credit losses on loans (1)

( 27,533 ) ( 24,942 )

Net loans held-for-investment 2,295,919 2,021,121

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Federal Home Loan Bank and other restricted stock, at cost 12,716 10,183

Other real estate owned, net 2,558 —

Bank-owned life insurance 30,817 30,064

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Federal Home Loan Bank advances 39,000 20,000

Deferred tax liabilities, net

Operating lease liabilities 20,137 6,809

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Series C, senior non-cumulative perpetual, $ 1,000 per share liquidation preference, 69,141 and 69,141 shares issued and outstanding at December 31, 2023 and 2022, respectively

69,141 69,141

Common stock, 60,000,000 shares authorized, no par value;

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Retained earnings 146,092 127,181

Accumulated other comprehensive income (loss), net ( 10,511 ) 154

Accumulated other comprehensive loss, net ( 8,924 ) ( 10,511 )

Total shareholders’ equity 348,872 335,442

Total liabilities and shareholders’ equity $ 2,789,506 $ 2,420,036

(1) Allowance for credit losses on loans at December 31, 2023 is presented under ASC 326, while prior period comparison continues to be presented under legacy ASC 450 and ASC 310.

See Accompanying Notes to Consolidated Financial Statements

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Net interest income 88,504 89,632 77,137

Provision (reversal) for loan losses 3,602 ( 4,596 ) 13,219

Provision (reversal) for credit losses (1)

( 132 ) 3,602 ( 4,596 )

Net interest income after provision (reversal) for loan losses 88,636 86,030 81,733

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Weighted-average common shares outstanding, diluted 14,417,938 15,065,175 15,253,820

(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.

See Accompanying Notes to Consolidated Financial Statements

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Unrealized gain (loss) on securities available-for-sale arising during the year 2,263 ( 15,128 ) ( 2,553 )

Unrealized gain arising from the reclassification of securities held-to-maturity to securities available-for-sale — — 787

Income tax benefit (expense) related to items of other comprehensive income (loss) ( 676 ) 4,463 751

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Balance at January 1, 2021 — 15,385,878 — 164,140 67,692 1,956 233,788

Comprehensive income

Comprehensive income (loss)

Net income — — — — 40,103 — 40,103

Other comprehensive income, net of tax — — — — — 2,013 2,013

Other comprehensive loss, net of tax — — — — — ( 1,802 ) ( 1,802 )

Issuance of restricted stock — 35,584 — — — — —

Forfeiture of restricted stock — ( 1,300 ) — — — — —

Restricted stock surrendered due to employee tax liability — ( 231 ) — ( 4 ) — — ( 4 )

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Other comprehensive loss, net of tax — — — — — ( 10,665 ) ( 10,665 )

Issuance of preferred stock 69,141 — 69,141 69,141

Issuance of restricted stock — 27,700 — — — — —

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Balance at December 31, 2022 69,141 14,625,474 69,141 149,631 127,181 ( 10,511 ) 335,442

Comprehensive income (loss)

Cumulative effect adjustment upon adoption of ASC 326

— — — — ( 1,886 ) — ( 1,886 )

Adjusted balance at January 1, 2023

69,141 14,625,474 69,141 149,631 125,295 ( 10,511 ) 333,556

Comprehensive income

Net income — — — — 30,705 — 30,705

Other comprehensive loss, net of tax — — — — — ( 10,665 ) ( 10,665 )

Issuance of preferred stock 69,141 — 69,141 69,141

Other comprehensive income, net of tax

— — — — — 1,587 1,587

Issuance of restricted stock — 3,300 — — — — —

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Repurchase of common stock — ( 512,657 ) — ( 8,828 ) — — ( 8,828 )

Stock repurchase excise tax

— — — ( 76 ) — — ( 76 )

Share-based compensation expense — — — 488 — — 488

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Amortization of servicing assets 1,883 2,135 2,009

Provision (reversal) for loan losses 3,602 ( 4,596 ) 13,219

Provision (reversal) for credit losses (1)

( 132 ) 3,602 ( 4,596 )

Bank-owned life insurance income ( 753 ) ( 706 ) ( 108 )

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Proceeds from maturities, calls, and paydowns of securities available-for-sale 17,865 23,200 41,078

Proceeds from maturities, calls, and paydowns of securities held-to-maturity — — 1,309

Proceeds from sale of loans held-for-sale previously classified as held-for-investment 458 8,757 664

Proceeds from sales of and principal collected on loans held-for-sale previously classified as held-for-investment 5,074 458 8,757

Net increase in loans held-for-investment ( 261,352 ) ( 317,095 ) ( 149,237 )

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Cash and cash equivalents at end of year $ 242,342 $ 147,031 $ 203,285

(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.

See Accompanying Notes to Consolidated Financial Statements

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Right-of-use assets obtained in exchange for lease obligations 15,317 2,150 1,459

Reclassification of securities held-to-maturity to securities available-for-sale — — 18,777

See Accompanying Notes to Consolidated Financial Statements

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Nature of Operations

PCB Bancorp is a bank holding company whose subsidiary is PCB Bank (the “Bank”), which is a single operating segment.

The Company changed its subsidiary name from “Pacific City Bank” to “PCB Bank” on August 25, 2022.

PCB Bancorp is a bank holding company whose subsidiary is PCB Bank, which is a single operating segment.

The Company changed the Bank’s name from “Pacific City Bank” to “PCB Bank” on August 25, 2022.

The Bank is a single operating segment that operates 11 full-service branches in Los Angeles and Orange Counties, California, three full-service branches on the East Coast (Bayside, New York;

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Cash and cash equivalents include cash on hand, cash items in transit, cash due from the Federal Reserve Bank and other financial institutions, and federal funds sold with original maturities less than 90 days.

In response to the COVID-19 pandemic, on March 26, 2020, the Federal Reserve reduced reserve requirement ratios to 0%, eliminating the reserve requirement for all depository institutions, an action that provides liquidity in the banking system to support lending to households and businesses.

On March 26, 2020, the Federal Reserve reduced reserve requirement ratios to 0%, eliminating the reserve requirement for all depository institutions.

There was no reserve and clearing requirement balance at December 31, 2023 and 2022.

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Securities held-to-maturity are carried at amortized cost and securities available-for-sale are carried at fair value with unrealized gains and losses, net of taxes, recorded in other comprehensive income.

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

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

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

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

As of December 31, 2023 and 2022, all of the investment securities held by the Company were securities available-for-sale.

Gains and losses on sales of securities are determined using the specific identification method.

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Amortization of premiums and accretion of discounts are included in interest income using the effective interest method.

Management evaluates securities for OTTI at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.

Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.

For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows:

OTTI related to credit loss, which is recognized as a charge against earnings, and OTTI related to other factors, which is recognized in other comprehensive income, net of tax.

The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Allowance for Credit Losses on Investment Securities.

Effective January 1, 2023, ACL on securities available-for-sale is determined in accordance with ASC 326.

The Company performs a quarterly evaluation for securities in an unrealized loss position to determine if, for those investments in an unrealized loss position, the decline in fair value is credit related or non-credit related.

In determining whether a security’s decline in fair value is credit related, the Company considers a number of factors including, but not limited to:

(i) the extent to which the fair value of the investment is less than its amortized cost;

(ii) the financial condition and near-term prospects of the issuer;

(iii) downgrades in credit ratings;

(iv) payment structure of the security, (v) the ability of the issuer of the security to make scheduled principal and interest payments, and (vi) general market conditions which reflect prospects for the economy as a whole, including interest rates and sector credit spreads.

If it is determined that the unrealized loss, or a portion thereof, is credit related, the Company records the amount of credit loss through a charge to provision for credit losses.

Unrealized losses deemed non-credit related are recorded, net of tax, through accumulated other comprehensive income.

The Company does not measure credit losses on an investment’s accrued interest receivable, but rather promptly reverses from current period earnings the amount of accrued interest that is no longer deemed collectable.

Accrued interest receivable for investment securities is included in accrued interest receivable in the consolidated statements of financial condition.

Loans Held-For-Sale

The Company originates SBA loans, and certain residential property and commercial property loans with the intention for sale in the secondary market.

The Company records the guaranteed portion of SBA loans and these residential property and commercial property loans held-for-sale at the lower of cost or fair value on an aggregate basis.

The Company originates SBA loans, and certain residential mortgage and CRE loans with the intention for sale in the secondary market.

The Company records the guaranteed portion of SBA loans and these residential mortgage and CRE loans held-for-sale at the lower of cost or fair value on an aggregate basis.

Fair value is based on commitments on hand from investors or prevailing market prices.

A valuation allowance is established if the fair value of such loans is lower than their cost, with a corresponding charge to noninterest income.

When the Company changes its intent to hold loans for investment, the loans are transferred to held-for-sale at lower of cost or fair value at the time of transfer, as determined on an individual loan level with charges made to allowance for loan losses when the fair value is lower than the cost.

When the Company changes its intent to hold loans for investment, the loans are transferred to held-for-sale at lower of cost or fair value at the time of transfer, as determined on an individual loan level with charges made to ACL on loans when the fair value is lower than the cost.

Deferred fees and cost on transferred loans are included in the determination of gains or losses on sale of the related loans.

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Realized gains and losses from sales of loans are included in noninterest income.

For sales of guaranteed portion of SBA and certain residential property loans, the loan servicing rights are retained.

For sales of guaranteed portion of SBA and certain residential mortgage loans, the loan servicing rights are retained.

Loans Held-For-Investment

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Loan portfolio segments identified by the Company include:

real estate (commercial property, residential property, SBA property and construction), commercial and industrial (commercial term, commercial lines of credit, and SBA commercial term), and other consumer loans.

Risks associated with the Company’s real estate loans include a decline in the economy and a reduction in real estate values in the Company’s primary markets, an increase in market interest rates, increased competition in pricing and loan structure, and environmental risks.

Risks associated with the Company’s commercial and industrial loans include a decline in the economy in the primary markets, an increase in market interest rates, and deterioration of a borrower’s or guarantor’s financial capabilities.

Risk associated with the Company’s other consumer loans include the same risks associated with the commercial and industrial loans, but also includes risks related to consumer bankruptcy laws which allow consumers to discharge certain debts.

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.

The Company classifies loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors.

The Company analyzes loans individually by classifying the loans in regards to credit risk.

This analysis typically includes non-homogeneous loans, such as commercial property and commercial and industrial loans, and is performed on an ongoing basis as new information is obtained.

This analysis typically includes non-homogeneous loans, such as commercial real estate and commercial and industrial loans, and is performed on an ongoing basis as new information is obtained.

The Company uses the following definitions for risk ratings:

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• Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Allowance for Loan Losses

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

Loan losses are charged against the allowance when management believes the loan is uncollectible.

Subsequent recoveries, if any, are credited to the allowance.

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

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

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

As of December 31, 2023, the Company’s loan portfolio was primarily collateralized by various forms of real estate and business assets located primarily in California.

The Company’s loan portfolio contains concentrations of credit in commercial real estate loans and commercial and industrial loans.

The Company maintains policies that address these concentrations, as well as residential mortgage loans, and diversifies its loan portfolio through loan originations, purchases, and sales to meet approved concentration levels.

Allowance for Credit Losses on Loans and Off-Balance Sheet Credit Exposures

Effective January 1, 2023, ACL on loans is determined in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination or acquisition.

The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated statements of financial condition.

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 PD and LGD model, as well as expectations of future economic conditions, using reasonable and supportable forecasts.

The Company leverages its peer group information to estimate PD and LGD.

Peer group is selected from institutions in California with total assets between $ 1 billion and $ 5 billion.

The Company analyzes and compares each loan segment’s volume as a percentage of total loans, recent charge-off rates, and charge-off rate during recession of the peer group against those of the Bank for inclusion in the peer group population.

PD and LGD are forecasted over a one-year time horizon using economic forecast scenarios, which the Company believes is a reasonable and supportable period.

Beyond the 1-year forecast time horizon, the Company’s ACL model reverts to historical long-term average loss rates over a 1-year period.

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.

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.

Management utilizes the economic forecasts provided by the FOMC to forecast the first 4 quarters of the credit loss estimate.

The FOMC projects national unemployment rate and the projected change in the year-over-year national GDP growth rates over the forward-looking 4 quarters are used in determining the PD rates over the forecasted periods.

Changes in economic forecasts, in conjunction with changes in loan specific attributes, impact a loan’s PD and LGD, which can drive changes in the determination of the ACL.

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.

For each segment of the collectively evaluated loans, a hypothetical worst case scenario loss rate is calculated which is then used as the high watermark for the qualitative adjustment factors.

The net difference between the worst case scenario loss rate and the current period’s quantitative reserve rate is the maximum available qualitative reserve for a given segment.

The required qualitative reserve for each segment is then determined based on the weighting of the qualitative category and the assignment of risk status rating (improvement, no risk, minor risk, moderate risk, and major risk) for each qualitative factor category.

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.

Problem loans are typically substandard or have a worse internal risk grade, and may consist of loans on nonaccrual status where the likelihood of foreclosure on underlying collateral has increased, collateral dependent loans and other loans where concern or doubt over the ultimate collectability of all contractual amounts due has become elevated.

These problem loans, in the opinion of management, no longer possess risk characteristics similar to other loans in the loan segment, and as such may require individual evaluation for appropriate ACL for the loan.

For performing loans individually evaluated, the Company measures the expected credit loss based on a discounted cash flow approach or fair value of collateral, less costs to sell.

Collateral dependent loans are loans to borrowers with financial difficulty where the repayment of the loan is expected from the operation of and/or eventual liquidation of the underlying collateral.

Although management uses the best information reasonably available to derive estimates necessary to measure an appropriate level of the ACL, future adjustments to the ACL may be necessary due to economic, operating, regulatory and other conditions that may extend beyond the Company’s control.

Generally, loans are charged off immediately when it is determined that advances to the borrower are in excess of the calculated current fair value of the collateral and if a borrower is deemed incapable of repayment of unsecured debt, there is little or no prospect for near term improvement and no realized strengthening action of significance pending.

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

The allowance consists of general reserves (collectively evaluated for impairment) and specific reserves (individually evaluated for impairment).

General reserves cover non-impaired loans and are based on historical loss rates over the most recent 11 years for each portfolio segment, adjusted for the effects of qualitative or environmental factors that are likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience.

The Company utilizes a migration analysis to measure actual historical loss experience, with the resulting historical loss rate adjusted for any applicable loss emergence period factors serving as the base loss rate to estimate the amount of appropriate loss reserve.

Qualitative factors include consideration of the following:

Charge-offs are recorded to the ACL.

Subsequent recoveries, if any, are credited to the ACL.

Prior to the Company’s adoption of ASC 326 on January 1, 2023

The Company maintained an allowance for loan losses in accordance with ASC 450, Contingencies and ASC 310, Receivables, which was a valuation allowance for probable incurred credit losses.

Management estimated the allowance for loan losses 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.

The allowance consisted of general reserves (collectively evaluated for impairment) and specific reserves (individually evaluated for impairment).

General reserves covered non-impaired loans and are based on historical loss rates over the most recent 11 years for each portfolio segment, as of December 31, 2022, adjusted for the effects of qualitative or environmental factors that were likely to cause estimated credit losses as of the evaluation date to differ from the portfolio segment’s historical loss experience.

The Company utilized a migration analysis to measure actual historical loss experience, with the resulting historical loss rate adjusted for any applicable loss emergence period factors serving as the base loss rate to estimate the amount of appropriate loss reserve.

Qualitative factors included consideration of the following:

changes in lending policies and procedures;

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

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

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

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

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

The Company selects the measurement method on a loan-by-loan basis, with the exception of collateral-dependent loans for which the most viable source of repayment is the continued operation of the collateral or liquidation of the collateral.

The impairment for these loans are measured at the fair value of the collateral, less estimated selling cost.

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

Interest payments received on impaired loans are first applied to principal, then recognized as income based on existing methods to recognize income on nonaccrual loans.

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

Specific reserves related to loans that were individually classified as impaired.

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

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

Measurement of impairment was based on the expected future cash flows of an impaired loan, which were 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 selected the measurement method on a loan-by-loan basis, with the exception of collateral-dependent loans for which the most viable source of repayment was the continued operation of the collateral or liquidation of the collateral.

The impairment for these loans was measured at the fair value of the collateral, less estimated selling cost.

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.

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

Premises and Equipment

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The fair value of OREO is generally based on recent real estate appraisals adjusted for estimated selling costs.

Any write-down to fair value at the time of transfer to OREO is charged to allowance for loan losses.

Any write-down to fair value at the time of transfer to OREO is charged to ACL on loans.

Property is evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances to reduce the carrying amounts to fair value less estimated costs to dispose are recorded as necessary.

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Servicing Assets

Servicing assets are recognized when servicing rights are retained from the sale of loans, such as sales of the guaranteed portion of SBA and certain residential property loans, and are initially recorded at fair value.

Servicing assets are recognized when servicing rights are retained from the sale of loans, such as sales of the guaranteed portion of SBA and certain residential mortgage loans, and are initially recorded at fair value.

Fair value is calculated as the present value of estimated future cash flows from the servicing rights based on current market sources, such as the cost to service, discount rates, and prepayment speeds.

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Return of this investment is generated primarily through allocated federal tax credits and other tax benefits.

The recorded investment amount was $ 4.3 million and $ 1.6 million, respectively, and unfunded commitments were $ 2.9 million and $ 51 thousand, respectively, at December 31, 2022 and 2021.

The recorded investment amount was $ 3.8 million and $ 4.3 million, respectively, and unfunded commitments were $ 2.9 million and $ 2.9 million, respectively, at December 31, 2023 and 2022.

The recorded investment amount is included in Other Assets and unfunded commitment is included in Accrued Interest Payable and Other Liabilities on the Consolidated Statements of Financial Condition.

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Realization of tax benefits of deductible temporary differences and carryforwards depends on having sufficient taxable income of an appropriate character and in the appropriate periods.

Comprehensive Income (Loss)

Comprehensive income consists of net income and other comprehensive income (loss).

Other comprehensive income (loss) includes the changes in unrealized gains and losses on securities available-for-sale, net of tax.

Commitments and Contingencies

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Adopted Accounting Pronouncements

During the year ended December 31, 2022, there were no significant accounting pronouncements applicable to the Company that became effective.

Recent Accounting Pronouncements Not Yet Adopted

The following are recently issued accounting pronouncements applicable to the Company that have not yet been adopted:

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

During the year ended December 31, 2023, the Company adopted following accounting pronouncements.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On January 1, 2023, the Company adopted the provisions of ASC 326 through the application of the modified retrospective transition approach, and recorded a net decrease of $ 1.9 million to the beginning balance of retained earnings as of January 1, 2023 for the cumulative effect adjustment, reflecting an initial adjustment to the ACL on loans of $ 1.1 million and the ACL on off-balance sheet credit exposures of $ 1.6 million, net of related deferred tax assets arising from temporary differences of $ 788 thousand.

The initial adjustment to the ACL reflects the expected lifetime credit losses associated with the composition of financial assets within the scope of ASC 326 as of January 1, 2023, as well as management’s current expectation of future economic conditions.

The following table summarizes the initial adjustment to the ACL as of January 1, 2023:

($ in thousands) Pre-ASC 326 Adoption Impact of ASC 326 Adoption As Reported Under ASC 326

Commercial real estate $ 15,536 $ ( 610 ) $ 14,926

Commercial and industrial 5,502 4,344 9,846

Consumer 3,904 ( 2,667 ) 1,237

Total ACL on loans 24,942 1,067 26,009

Deferred tax assets 3,115 788 3,903

ACL on off-balance sheet credit exposures $ 299 $ 1,607 1,906

Shareholders’ equity

Retained earnings $ 127,181 $ ( 1,886 ) 125,295

In conjunction with the adoption of ASC 326, the Company made an accounting policy election not to measure an ACL on accrued interest receivables for the loans collectively evaluated.

For the loans individually evaluated, the Company considers accrued interest receivables as a part of the amortized cost and measures an ACL.

When accrued interest receivable is deemed to be uncollectable, the Company promptly reverses such balances through current period interest income in the period they are deemed uncollectable.

Additionally, the Company has also elected not to include the balance of accrued interest receivable in the amortized cost basis of financial assets within the scope of ASC 326.

Accrued interest receivable will continue to be presented separately in the Consolidated Balance Sheets.

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 above, 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.

The following table presents a summary of reclassification of loans held-for-investment as the date indicated:

($ in thousands) December 31, 2022 Reclassification January 1, 2023

Commercial property (1)

$ 1,288,392 $ ( 1,288,392 ) $ —

SBA property 134,892 ( 134,892 ) —

Commercial property N/A 772,020 772,020

Business property N/A 526,513 526,513

Multifamily N/A 124,751 124,751

Total Reclassed:

1,423,284 — 1,423,284

Construction 17,054 — 17,054

Commercial and industrial 249,250 — 249,250

Residential property 333,726 — 333,726

Other consumer 22,749 — 22,749

Total loans held-for-investment $ 2,046,063 $ — $ 2,046,063

(1) Commercial property loans under the legacy loan segments included all commercial property, business property and multifamily loans under the new loan segments.

The following table presents a summary of reclassification of ACL on loans as the date indicated as well as the initial adjustment to the ACL as of January 1, 2023 :

($ in thousands) December 31, 2022 Reclassification January 1, 2023

Impact of ASC 326 Adoption As Reported Under ASC 326

Commercial property (1)

$ 14,059 $ ( 14,059 ) $ — $ — $ —

SBA property 1,326 ( 1,326 ) — — —

Commercial property N/A 8,502 8,502 ( 1,762 ) 6,740

Business property N/A 5,749 5,749 896 6,645

Multifamily N/A 1,134 1,134 256 1,390

Total Reclassed:

15,385 — 15,385 ( 610 ) 14,775

Construction 151 — 151 — 151

Commercial and industrial 5,502 — 5,502 4,344 9,846

Residential property 3,691 — 3,691 ( 2,534 ) 1,157

Other consumer 213 — 213 ( 133 ) 80

Total ACL $ 24,942 $ — $ 24,942 $ 1,067 $ 26,009

(1) Commercial property loans under the legacy loan segments included all commercial property, business property and multifamily loans under the new loan segments.

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

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

The Company will adopt this ASU with ASU 2016-13.

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

This ASU 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 adopted this ASU as of January 1, 2023, in conjunction with the adoption of ASU 2016-13.

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

Recent Accounting Pronouncements Not Yet Adopted

The following recently issued accounting pronouncement applicable to the Company has not yet been adopted:

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 780) - Improvements to Income Tax Disclosures.” The amendments in this ASU requires public entities to disclose in their rate reconciliation table additional categories of information about federal, state and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold.

This ASU also requires all entities to disclose income taxes paid, net of refunds, disaggregated by federal, state and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things.

This ASU is effective for the Company for fiscal years beginning after December 15, 2024 with early adoption permitted.

The Company will update it income tax disclosure upon adoption.

Fair Value Measurements

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The Company records securities available-for-sale at fair value on a recurring basis.

Certain other assets, such as loans held-for-sale, impaired loans, servicing assets and OREO are recorded at fair value on a non-recurring basis.

Certain other assets, such as loans held-for-sale, individually evaluated loans, servicing assets and OREO are recorded at fair value on a non-recurring basis.

Non-recurring fair value measurements typically involve assets that are periodically evaluated for impairment and for which any impairment is recorded in the period in which the re-measurement is performed.

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Loans held-for-sale :

The Company records SBA loans held-for-sale, residential property loans held-for-sale and certain non-residential real estate loans held-for-sale at the lower of cost or fair value, on an aggregate basis.

The Company records SBA loans held-for-sale, residential mortgage loans held-for-sale and certain non-residential real estate loans held-for-sale at the lower of cost or fair value, on an aggregate basis.

The Company obtains fair values from a third-party independent valuation service provider.

Loans held-for-sale accounted for at the lower of cost or fair value are considered to be recognized at fair value when they are recorded at below cost, on an aggregate basis, and are classified as Level 2.

Impaired loans :

The Company records fair value adjustments on certain loans that reflect (i) partial write-downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (ii) the full charge-off of the loan carrying value.

Individually evaluated loans :

The Company records fair value adjustments on certain loans that reflect (i) partial write-downs, through charge-offs or individual reserve allowances, that are based on the current appraised or market-quoted value of the underlying collateral or (ii) the full charge-off of the loan carrying value.

In some cases, the properties for which market quotes or appraised values have been obtained are located in areas where comparable sales data is limited, outdated, or unavailable.

Fair value estimates for collateral-dependent impaired loans are obtained from real estate brokers or other third-party consultants, and are classified as Level 3.

Fair value estimates for collateral-dependent individually evaluated loans are obtained from real estate brokers or other third-party consultants, and are classified as Level 3.

Other real estate owned :

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December 31, 2023

Impaired loans:

Commercial lines of credit (1)

— — 4,000 4,000

Total impaired loans — — 4,000 4,000

Loans individually evaluated:

Business property

Total loans individually evaluated

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

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Impaired loans:

SBA property $ — $ — $ 17 $ 17

Commercial lines of credit (1)

$ — $ — $ 4,000 $ 4,000

Total impaired loans — — 4,000 4,000

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$ — $ — $ — $ —

(1) Included in loans held-for-sale

(1) Under the legacy loan segments and included in loans held-for-sale

The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a non-recurring basis as of the dates indicated:

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December 31, 2023

Impaired loans:

Commercial lines of credit $ 4,000 Pending sales agreement NM NM

Loans individually evaluated:

Business property

$ 425 Pending sales agreement NM NM

December 31, 2022

Impaired loans:

SBA property $ 17 Fair value of collateral NM NM

For assets measured at fair value, the following table presents the total net losses, which include charge-offs, recoveries, specific reserves, impairment on servicing assets, gain (loss) on sale of OREO, and OREO valuation write-downs recorded for the periods indicated:

Commercial lines of credit $ 4,000 Pending sales agreement NM NM

For assets measured at fair value, the following table presents the total net losses, which include charge-offs, recoveries, individual reserves, impairment on servicing assets, gain (loss) on sale of OREO, and OREO valuation write-downs recorded for the periods indicated:

Year Ended December 31,

($ in thousands) 2023 2022 2021

Collateral dependent impaired loans:

Loans individually evaluated:

Commercial and industrial $ 1,074 $ ( 1,074 ) $ 131

Business property

( 264 ) N/A N/A

SBA property (1)

Commercial lines of credit ( 1,074 ) 136 ( 720 )

SBA commercial property — ( 5 ) ( 221 )

Other real estate owned

Net gain (losses) recognized $ 810 $ ( 922 ) $ 196

(1) Under the legacy loan segments

Fair Value of Financial Instruments

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Investment Securities

Debt securities have been classified as available-for-sale or held-to-maturity in the consolidated balance sheets according to management’s intent.

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

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

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

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These securities were pledged for the State Deposit from the California State Treasurer.

The Company elected to exclude accrued interest receivable from the amortized cost of its securities available-for-sale.

Accrued interest receivable on securities available-for-sale totaled $ 513 thousand and $ 475 thousand at December 31, 2023 and 2022, respectively.

As of December 31, 2023 and 2022, there were no holdings of securities available-for-sale of any one issuer, other than the U.S.

government agency and U.S.

government sponsored enterprise, in an amount greater than 10% of shareholder’s equity.

The following table presents the amortized cost and fair value of the investment securities by contractual maturity as of December 31, 2023.

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SBA loan pool securities 7,161 ( 325 ) 12 821 ( 89 ) 2 7,982 ( 414 ) 14

Municipal bonds 3,314 ( 78 ) 11 — — — 3,314 ( 78 ) 11

Corporate bonds 4,523 ( 477 ) 1 — — — 4,523 ( 477 ) 1

Total securities available-for-sale $ 82,769 $ ( 5,792 ) 136 $ 44,780 $ ( 9,441 ) 45 $ 127,549 $ ( 15,233 ) 181

In accordance with FASB ASC 320, Investments - Debt and Equity Securities , the Company performs an OTTI assessment at least on a quarterly basis.

OTTI is recognized when fair value is below the amortized cost where:

(i) an entity has the intent to sell the security;

(ii) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis;

or (iii) an entity does not expect to recover the entire amortized cost basis of the security.

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

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

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 during the years ended December 31, 2022, 2021 and 2020.

Loans and Allowance for Loan Losses

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.

Loans 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.

Loans Held-For-Investment

The following table presents, by recorded investment, the composition of the Company’s loans held-for-investment (net of deferred fees and costs) as of the dates indicated:

($ in thousands) 2022 2021

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

($ in thousands) December 31, 2023 January 1, 2023

Commercial real estate:

Commercial property

$ 855,270 $ 772,020

Business property 558,772 526,513

Multifamily 132,500 124,751

24,843 17,054

Total commercial real estate 1,571,385 1,440,338

Commercial and industrial 342,002 249,250

Residential mortgage 389,420 333,726

Other consumer 20,645 22,749

Total consumer 410,065 356,475

Loans held-for-investment

2,323,452 2,046,063

Allowance for credit losses on loans ( 27,533 ) ( 26,009 )

Net loans held-for-investment

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

In the ordinary course of business, the Company may grant loans to certain officers and directors, and the companies with which they are associated.

As of December 31, 2023, the Company had $ 111 thousand of such loans outstanding.

Allowance for Credit Losses on Loans

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

($ in thousands) Year Ended

December 31, 2023

Provision for credit losses on loans $ 497

Reversal for credit losses on off-balance sheet credit exposures ( 629 )

Total reversal for credit losses $ ( 132 )

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

($ in thousands) Commercial Property Business Property Multifamily Construction Commercial and Industrial Residential Mortgage Other Consumer Total

Balance at January 1, 2023 $ 8,502 $ 5,749 $ 1,134 $ 151 $ 5,502 $ 3,691 $ 213 $ 24,942

Impact of ASC 326 adoption ( 1,762 ) 896 256 — 4,344 ( 2,534 ) ( 133 ) 1,067

Charge-offs — ( 4 ) — — ( 45 ) — ( 83 ) ( 132 )

Recoveries — 9 — — 1,107 — 43 1,159

Provision (reversal) for credit losses on loans 5,925 ( 1,911 ) 51 ( 16 ) ( 4,663 ) 1,069 42 497

Balance at December 31, 2023

$ 12,665 $ 4,739 $ 1,441 $ 135 $ 6,245 $ 2,226 $ 82 $ 27,533

The increase in overall ACL for the year ended December 31, 2023 was primarily due to an increase in loans held-for-investment and the update of prepayment and principal curtailment rate assumptions applied in determining the maximum threshold for qualitative adjustment factors that resulted in increases in the high watermarks for each loan segment’s qualitative adjustment factors, partially offset by decreases in quantitative reserves from improvements in the economic forecasts and update of the historical losses of peer groups.

The Company updates prepayment and principal curtailment rates on a semiannual basis and the historical losses of peer groups, including the maximum loss scenario used for qualitative factor adjustments, on an annual basis.

Credit Quality Indicators

The Company analyzes loans individually by classifying the loans in regards to credit risk.

This analysis typically includes non-homogeneous loans, such as commercial real estate and commercial and industrial loans, and is performed on an ongoing basis as new information is obtained.

The Company uses the following definitions for risk ratings:

Pass - Loans classified as pass include non-homogeneous loans not meeting the risk ratings defined below and smaller, homogeneous loans not assessed on an individual basis.

Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention.

If left uncorrected, these potential weaknesses may result in the deterioration of repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any.

Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or repayment in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The following table summarize the Company’s loans held-for-investment by loan segment, internal risk ratings and vintage year as of December 31, 2023 and gross write offs for the year ended December 31, 2023.

The vintage year is the year of origination, renewal or major modification.

Revolving loans that are converted to term loans presented in the table below are excluded from term loans by vintage year columns.

Term Loans by Origination Year Revolving Loans Revolving Loans Converted to Term

($ in thousands) 2023 2022 2021 2020 2019 Prior Total

December 31, 2023

Commercial Real Estate:

Commercial property

Pass $ 154,563 $ 268,369 $ 155,817 $ 83,461 $ 70,425 $ 107,879 $ 8,807 $ — $ 849,321

Special mention — — 484 — — 2,952 — — 3,436

Substandard — — — — 311 2,202 — — 2,513

Doubtful — — — — — — — — —

Total $ 154,563 $ 268,369 $ 156,301 $ 83,461 $ 70,736 $ 113,033 $ 8,807 $ — $ 855,270

Current period gross write offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Business property

Pass $ 103,364 $ 103,549 $ 163,136 $ 50,362 $ 69,852 $ 59,765 $ 882 $ 4,327 $ 555,237

Special mention — — — — — — — — —

Substandard — 452 193 — 2,254 636 — — 3,535

Doubtful — — — — — — — — —

Total $ 103,364 $ 104,001 $ 163,329 $ 50,362 $ 72,106 $ 60,401 $ 882 $ 4,327 $ 558,772

Current period gross write offs $ — $ — $ — $ — $ — $ 4 $ — $ — $ 4

Pass $ 14,219 $ 40,618 $ 42,848 $ 26,472 $ 2,419 $ 5,924 $ — $ — $ 132,500

Special mention — — — — — — — — —

Substandard — — — — — — — — —

Doubtful — — — — — — — — —

Total $ 14,219 $ 40,618 $ 42,848 $ 26,472 $ 2,419 $ 5,924 $ — $ — $ 132,500

Current period gross write offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Pass $ 4,617 $ 9,120 $ — $ 7,500 $ 3,606 $ — $ — $ — $ 24,843

Special mention — — — — — — — — —

Substandard — — — — — — — — —

Doubtful — — — — — — — — —

Total $ 4,617 $ 9,120 $ — $ 7,500 $ 3,606 $ — $ — $ — $ 24,843

Current period gross write offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Term Loans by Origination Year Revolving Loans Revolving Loans Converted to Term

($ in thousands) 2023 2022 2021 2020 2019 Prior Total

December 31, 2023 (Continued)

Commercial and Industrial

Pass $ 77,957 $ 28,638 $ 11,950 $ 4,354 $ 6,323 $ 8,327 $ 198,010 $ 3,796 $ 339,355

Special mention — — — 379 314 27 1,000 — 1,720

Substandard — — — — 142 785 — — 927

Doubtful — — — — — — — — —

Total $ 77,957 $ 28,638 $ 11,950 $ 4,733 $ 6,779 $ 9,139 $ 199,010 $ 3,796 $ 342,002

Current period gross write offs $ — $ — $ — $ — $ — $ 45 $ — $ — $ 45

Residential mortgage

Pass $ 79,581 $ 163,734 $ 78,499 $ 11,363 $ 10,865 $ 45,378 $ — $ — $ 389,420

Special mention — — — — — — — — —

Substandard — — — — — — — — —

Doubtful — — — — — — — — —

Total $ 79,581 $ 163,734 $ 78,499 $ 11,363 $ 10,865 $ 45,378 $ — $ — $ 389,420

Current period gross write offs $ — $ — $ — $ — $ — $ — $ — $ — $ —

Other consumer

Pass $ 4,837 $ 7,527 $ 3,275 $ 1,326 $ 458 $ 7 $ 3,190 $ — $ 20,620

Special mention — — — — — — — — —

Substandard — 15 — 10 — — — — 25

Doubtful — — — — — — — — —

Total $ 4,837 $ 7,542 $ 3,275 $ 1,336 $ 458 $ 7 $ 3,190 $ — $ 20,645

Current period gross write offs $ 12 $ 57 $ — $ 14 $ — $ — $ — $ — $ 83

Total loans held-for-investment

Pass $ 439,138 $ 621,555 $ 455,525 $ 184,838 $ 163,948 $ 227,280 $ 210,889 $ 8,123 $ 2,311,296

Special mention — — 484 379 314 2,979 1,000 — 5,156

Substandard — 467 193 10 2,707 3,623 — — 7,000

Doubtful — — — — — — — — —

Total $ 439,138 $ 622,022 $ 456,202 $ 185,227 $ 166,969 $ 233,882 $ 211,889 $ 8,123 $ 2,323,452

Current period gross write offs $ 12 $ 57 $ — $ 14 $ — $ 49 $ — $ — $ 132

Nonaccrual Loans

The following table presents the loans on nonaccrual status by loan segments as of the date indicated:

($ in thousands) Total Nonaccrual Loans Nonaccrual Loans with ACL ACL on Nonaccrual Loans Collateral Dependent Nonaccrual Loans ACL on Collateral Dependent Nonaccrual Loans

December 31, 2023

Commercial real estate:

Commercial property

$ 958 $ — $ — $ 958 $ —

Business property 2,865 689 264 2,865 264

Total commercial real estate 3,823 689 264 3,823 264

Commercial and industrial 68 — — 68 —

Other consumer 25 25 — — —

Total consumer 25 25 — — —

$ 3,916 $ 714 $ 264 $ 3,891 $ 264

There were no nonaccrual loans guaranteed by a U.S.

government agency at December 31, 2023.

Collateral Dependent Loans

Loans that have been classified as collateral dependent are loans where substantially all repayment of the loan is expected to come from the operation of or eventual liquidation of the collateral.

Collateral dependent loans are evaluated individually for purposes of determining the ACL, which is determined based on the estimated fair value of the collateral.

Estimates for costs to sell are included in the determination of the ACL when liquidation of the collateral is anticipated.

In cases where the loan is well secured and the estimated value of the collateral exceeds the amortized cost of the loan, no ACL is recorded.

The following table presents the collateral dependent loans by loan segments as of the date indicated:

($ in thousands) Hotel / Motel Warehouse Retail Single Family Residential Other

December 31, 2023

Commercial real estate:

Commercial property $ 958 $ — $ — $ — $ — $ 958

Business property — 2,137 689 — 39 2,865

Total commercial real estate 958 2,137 689 — 39 3,823

Commercial and industrial 13 — — 55 — 68

Total $ 971 $ 2,137 $ 689 $ 55 $ 39 $ 3,891

Past Due Loans

The following table presents the aging of past due in accruing loans and nonaccrual loans by loan segments as of date indicated:

Still Accruing Nonaccrual

($ in thousands) 30 to 59 Days Past Due 60 to 89 Days Past Due 90 or More Days Past Due Total 30 to 59 Days Past Due 60 to 89 Days Past Due 90 or More Days Past Due Total Total Loans Past Due

December 31, 2023

Commercial real estate:

Commercial property $ — $ — $ — $ — $ — $ 296 $ — $ 296 $ 296

Business property 560 — — 560 — 39 168 207 767

Total commercial real estate 560 — — 560 — 335 168 503 1,063

Commercial and industrial 217 — — 217 — — — — 217

Residential mortgage 604 — — 604 — — — — 604

Other consumer 13 34 — 47 — 15 3 18 65

Total consumer 617 34 — 651 — 15 3 18 669

Total $ 1,394 $ 34 $ — $ 1,428 $ — $ 350 $ 171 $ 521 $ 1,949

Loan Modification

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, an other-than-insignificant payment delay, interest rate reduction or combination of the above mentioned modifications.

When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.

There were no loans that were both experiencing financial difficulty and modified during the year ended December 31, 2023.

Purchases, Sales, and Transfers

The Company had no loans that were transferred from loans held-for-investment to loans held-for-sale the year ended December 31, 2023.

The Company had no loans that were transferred from loans held-for-sale to loans held-for investment during the year ended December 31, 2023.

The following table presents a summary of purchases of loans held-for-investment for the periods indicated:

($ in thousands) Year Ended December 31, 2023

Residential mortgage $ 15,741

Total consumer 15,741

Total $ 15,741

The Company had no sales of loans held-for-investment during the year ended December 31, 2023.

When the Company changes its intent to hold loans for investment, the loans are transferred to held-for-sale.

Loans Held-For-Sale

The following table presents a composition of loans held-for-sale as of the date indicated:

($ in thousands) December 31, 2023

Commercial real estate:

Business property $ 2,802

Total commercial real estate 2,802

Commercial and industrial 2,353

Total $ 5,155

Loans held-for-sale are carried at the lower of cost or fair value.

When a determination is made at the time of commitment to originate as held-for-investment, it is the Company’s intent to hold these loans to maturity or for the “foreseeable future,” subject to periodic reviews under the Company’s management evaluation processes, including asset/liability management and credit risk management.

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 ACL on loans.

Prior to Adoption of ASC 326

Loans Held-For-Investment

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

($ in thousands) December 31, 2022

Real estate loans:

11 unchanged sentences

Other consumer loans

22,749 21,621

Loans held-for-investment

2,046,063 1,732,205

Allowance for loan losses

( 24,942 ) ( 22,381 )

Net loans held-for-investment

$ 2,021,121 $ 1,709,824

In the ordinary course of business, the Company may grant loans to certain officers and directors, and the companies with which they are associated.

As of December 31, 2022 and 2021, the Company had $ 113 thousand and $ 398 thousand, respectively, of such loans outstanding.

As of December 31, 2022, the Company had $ 113 thousand of such loans outstanding.

Allowance for Loan Losses

The following table presents the activities in allowance for loan losses by portfolio segment, which is consistent with the Company’s methodology for determining allowance for loan losses, for the periods indicated:

The following table presents the activities in allowance for loan losses by legacy loan segments for the periods indicated:

($ in thousands) Real Estate Commercial and Industrial Consumer Total

3 unchanged sentences

63 565 66 694

Provision for loan losses

9,157 3,736 326 13,219

Balance at December 31, 2020 18,894 7,222 394 26,510

( 24 ) ( 115 ) ( 88 ) ( 227 )

Recoveries on loans previously charged off

63 565 66 694

Reversal for loan losses ( 2,136 ) ( 2,362 ) ( 98 ) ( 4,596 )

4 unchanged sentences

Balance at December 31, 2022 $ 19,227 $ 5,502 $ 213 $ 24,942

The following tables present the information on allowance for loan losses and recorded investments by portfolio segment and impairment methodology as of the dates indicated:

The following tables present the information on allowance for loan losses and recorded investments by legacy loan segments and impairment methodology as of the date indicated:

($ in thousands) Real Estate Commercial and Industrial Consumer Total

8 unchanged sentences

Total $ 1,774,064 $ 249,250 $ 22,749 $ 2,046,063

December 31, 2021

Allowance for loan losses:

Individually evaluated for impairment $ — $ — $ — $ —

Collectively evaluated for impairment 16,797 5,310 274 22,381

Total $ 16,797 $ 5,310 $ 274 $ 22,381

Loans receivable:

Individually evaluated for impairment $ 1,314 $ 221 $ — $ 1,535

Collectively evaluated for impairment 1,451,927 257,122 21,621 1,730,670

Total $ 1,453,241 $ 257,343 $ 21,621 $ 1,732,205

Credit Quality Indicators

The following table presents the risk categories for the recorded investment in loans by portfolio segment as of the dates indicated:

The following table presents the risk categories for loans held-for-investment by legacy loan segments as of the date indicated:

($ in thousands) Pass Special Mention Substandard Doubtful Total

13 unchanged sentences

Total $ 2,032,995 $ 6,857 $ 6,211 $ — $ 2,046,063

December 31, 2021

Real estate loans:

Commercial property $ 1,092,253 $ 11,739 $ 1,851 $ — $ 1,105,843

Residential property 209,485 — — — 209,485

SBA property 127,518 251 1,892 — 129,661

Construction 8,252 — — — 8,252

Commercial and industrial loans:

Commercial term 68,626 3,698 1,114 — 73,438

Commercial lines of credit 98,785 2,151 — — 100,936

SBA commercial term 17,111 253 276 — 17,640

SBA PPP 65,329 — — — 65,329

Other consumer loans 21,586 — 35 — 21,621

Total $ 1,708,945 $ 18,092 $ 5,168 $ — $ 1,732,205

Substandard SBA property loans included none and $ 109 thousand of guaranteed portion by the U.S.

government agency at December 31, 2022 and 2021, respectively.

Substandard SBA property loans included $ 0 of guaranteed portion by the U.S.

government agency at December 31, 2022.

Past Due and Nonaccrual Loans

The following table presents the aging of past due recorded investment in accruing loans and nonaccrual loans by portfolio segment as of the dates indicated:

The following table presents the aging of past due recorded investment in accruing loans and nonaccrual loans by legacy loan segments as of the date indicated:

Still Accruing

7 unchanged sentences

Total $ 47 $ 87 $ — $ 3,360 $ 3,494

December 31, 2021

Real estate loans:

Residential property $ 461 $ — $ — $ — $ 461

SBA property — — — 746 746

Commercial and industrial loans:

SBA commercial term — — — 213 213

Other consumer loans 88 5 — 35 128

Total $ 549 $ 5 $ — $ 994 $ 1,548

There were no nonaccrual loans guaranteed by the U.S.

government agency at December 31, 2022 and 2021.

government agency at December 31, 2022.

Impaired Loans

The following table presents loans individually evaluated for impairment by portfolio segment as of the dates indicated.

The following table presents loans individually evaluated for impairment by legacy loan segments as of the date indicated.

The recorded investment presents customer balances net of any partial charge-offs recognized on the loans and net of any deferred fees and costs.

7 unchanged sentences

Total $ 3,891 $ 3,939 $ — $ — $ —

December 31, 2021

Real estate loans:

Commercial property $ 326 $ 325 $ — $ — $ —

SBA property 988 1,033 — — —

Commercial and industrial loans:

Commercial term 2 2 — — —

SBA commercial term 219 227 — — —

Total $ 1,535 $ 1,587 $ — $ — $ —

The following table presents information on the recorded investment in impaired loans by portfolio segment for the periods indicated:

The following table presents information on the recorded investment in impaired loans by legacy loan segments for the periods indicated:

Year Ended December 31,

2022 2021 2020

($ in thousands) Average Recorded Investment Interest Income Average Recorded Investment Interest Income Average Recorded Investment Interest Income

($ in thousands) Average Recorded Investment Interest Income Average Recorded Investment Interest Income

Real estate loans:

7 unchanged sentences

Total $ 4,542 $ 36 $ 1,808 $ 39

The following presents a summary of interest foregone on impaired loans for the periods indicated:

The following table presents a summary of interest foregone on impaired loans for the periods indicated:

Year Ended December 31,

1 unchanged sentence

Interest income that would have been recognized had impaired loans performed in accordance with their original terms

$ 297 $ 99 $ 256

interest income recognized on impaired loans on a cash basis

1 unchanged sentence

Interest income foregone on impaired loans $ 261 $ 60

Troubled Debt Restructurings

A TDR is a restructuring in which the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.

The restructuring of a loan includes, but is not limited to:

(i) the transfer from the borrower to the Company of real estate, receivables from third parties, other assets, or an equity interest in full or partial satisfaction of the loan, (ii) a modification of the loan terms, such as a reduction of the stated interest rate, principal, or accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk, or (iii) a combination of the above.

A loan extended or renewed at a stated interest rate equal to the current interest rate for new debt with similar risk is not to be reported as a restructured loan.

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

($ in thousands) Accruing Nonaccrual Total Accruing Nonaccrual Total

Real estate loans:

Commercial property $ 319 $ — $ 319 $ 326 $ — $ 326

SBA property 215 — 215 242 17 259

Commercial and industrial loans:

Commercial term — — — 2 — 2

SBA commercial term — — — 6 — 6

Total $ 534 $ — $ 534 $ 576 $ 17 $ 593

The Company had no commitments to lend to customers with outstanding loans that were classified as TDRs as of December 31, 2022 and 2021.

The determination of the allowance for loan losses related to TDRs depends on the collectability of principal and interest, according to the modified repayment terms.

Loans that were modified as TDRs were individually evaluated for impairment and the Company allocated $ 0 and $ 0 of allowance for loan losses as of December 31, 2022 and 2021, respectively.

There were no new TDRs for the year ended December 31, 2022 or 2021.

The following table presents new loans that were modified as TDRs by portfolio segment for the periods indicated:

Year Ended December 31,

($ in thousands) Number of Loans

Pre-Modification Recorded Investment Post-Modification Recorded Investment

Commercial and industrial loans:

SBA commercial term (1)

Total 2 $ 37 $ 37

(1) Includes loans modified with forbearance payments, term extensions and principal deferments that modify the terms of the loan from principal and interest payment to interest only payment.

There were no loans that were modified as TDRs for which there was a payment default within twelve months following the modification for the years ended December 31, 2022 and 2021.

There was one SBA commercial term loan of $ 26 thousand that was modified as a TDR for which there was a payment default within twelve months following the modification for the year ended December 31, 2020.

Purchases, Sales, and Transfers

7 unchanged sentences

Commercial lines of credit 4,000 —

SBA commercial term — — 230

Total $ 4,458 $ 8,752

The following table presents a summary of loans held-for-sale transferred to loans held-for-investment for the periods indicated:

Year Ended December 31,

($ in thousands) 2022 2021 2020

Real estate loans:

Residential property $ — $ — $ 697

Total $ — $ — $ 697

The Company had no loans that were transferred from loans held-for-sale to loans held-for investment during the years ended December 31, 2021 and 2021.

The following table presents a summary of purchases of loans held-for-investment for the periods indicated:

8 unchanged sentences

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

($ in thousands) 2022 2021

($ in thousands) December 31, 2022

Real estate loans:

38 unchanged sentences

($ in thousands) December 31, 2023

After 2027 845

Total lease payment

2 unchanged sentences

Servicing Assets

At December 31, 2022 and 2021, total servicing assets were $ 7.3 million and $ 7.3 million, respectively.

The Company sells SBA loans and certain residential property loans with servicing retained.

The Company sells SBA and certain residential mortgage loans with servicing retained.

SBA loans are included in commercial real estate loans and

commercial and industrial loans.

The Company sold loans of $ 82.3 million, $ 122.9 million and $ 126.8 million, respectively, with the servicing rights retained and recognized a net gain on sale of $ 3.6 million, $ 8.0 million and $ 12.8 million, respectively, during the years ended December 31, 2023, 2022 and 2021.

1 unchanged sentence

The following table presents the composition of servicing assets with key assumptions used to estimate the fair value as of the dates indicated:

($ in thousands) Residential Property SBA Property SBA Commercial Term Residential Property SBA Property SBA Commercial Term

($ in thousands) Residential Mortgage

Residential Mortgage

Carrying amount

10 unchanged sentences

The following table presents activity in servicing assets for the periods indicated:

($ in thousands) Residential Property SBA Property

SBA Commercial Term Total

($ in thousands) Residential Mortgage

Balance at January 1, 2021 $ 109 $ 5,642 $ 649 $ 6,400

18 unchanged sentences

Balance at end of year $ 2,558 $ — $ —

During the year ended December 31, 2023, the Company recognized an OREO of $ 2.6 million by transferring a SBA 7(a) loan of $ 593 thousand, of which its guaranteed portion was previously sold.

The Company’s exposure is 25 % of the OREO and 75 % will be submitted to the SBA upon the sale of property.

The following table presents activity in OREO valuation allowance for the periods indicated:

11 unchanged sentences

Total $ — $ 139 $ 8

The Company did no t provide loans to finance the sale of its OREO properties during the year ended December 31, 2022.

The Company provided a loan of $ 250 thousand and $ 1.5 million to finance the sale of its OREO properties during the year ended December 31, 2021 and 2020, respectively.

The Company did no t provide loans to finance the sale of its OREO properties during the year ended December 31, 2023 or 2022.

The Company provided a loan of $ 250 thousand to finance the sale of its OREO properties during the year ended December 31, 2021.

At December 31, 2023 and 2022, total deposits were $ 2.35 billion and $ 2.05 billion, respectively, and total interest-bearing deposits were $ 1.76 billion and $ 1.31 billion, respectively.

The aggregate amount of deposits reclassified as loans, such as overdrafts, was $ 126 thousand and $ 81 thousand at December 31, 2023 and 2022, respectively.

Total deposits not covered by deposit insurance were $ 1.06 billion and $ 919.6 million, respectively, and total time deposits not covered by deposit insurance were $ 294.0 million and $ 216.3 million, respectively, at December 31, 2022 and 2021.

Total deposits not covered by deposit insurance were $ 954.6 million and $ 1.06 billion, respectively, and total time deposits not covered by deposit insurance were $ 408.6 million and $ 294.0 million, respectively, at December 31, 2023 and 2022.

The Company had California State Treasurer’s deposits of $ 60.0 million and $ 60.0 million in time deposits of more than $250,000 at December 31, 2023 and 2022, respectively.

4 unchanged sentences

The following table presents scheduled maturities of time deposits as of the date indicated:

December 31, 2022

($ in thousands) 2024 2025 2026 2027 2028 Thereafter Total

7 unchanged sentences

The Company had $ 39.0 million and $ 20.0 million in FHLB advances at December 31, 2023 and 2022, respectively.

FHLB advances as of December 31, 2022 consisted of an overnight borrowing with a maturity date of January 3, 2023.

FHLB advances as of December 31, 2023 consisted of a term borrowing with a maturity date of February 21, 2024 (term of 92 days).

The following table presents scheduled maturities of FHLB advances as of the date indicated:

December 31, 2022

($ in thousands) 2024 2025 2026 2027 Thereafter Total

16 unchanged sentences

Advances paid early are subject to a prepayment penalty.

At December 31, 2022 and 2021, loans pledged to secure from FHLB advances were $ 1.16 billion and $ 982.7 million, respectively.

At December 31, 2023 and 2022, loans pledged to secure FHLB advances were $ 1.04 billion and $ 1.16 billion, respectively.

The Company’s investment in capital stock of the FHLB of San Francisco totaled $ 12.5 million and $ 10.0 million, respectively, at December 31, 2023 and 2022.

6 unchanged sentences

Series C, Senior Non-Cumulative Perpetual Preferred Stock

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

Treasury under the Emergency Capital Investment Program (“ECIP”).

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 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.

5 unchanged sentences

Stock Repurchases

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

The Company completed the repurchase program in March 2020.

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

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

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

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

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

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.

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.

During the year ended December 31, 2021, the Company repurchased and retired 680,269 shares of common stock at a weighted-average price of $ 15.99 per share.

Share-Based Compensation

On July 25, 2013, the Company adopted the Equity Based Stock Compensation Plan (“2013 EBSC Plan”) approved by its shareholders to replace the 2003 Stock Option Plan.

The 2013 EBSC Plan provided for options to purchase 1,114,446 shares of common stock for equity-based compensation awards including incentive and non-qualified stock options and restricted stock awards.

On May 25, 2023, the Company adopted the 2023 Equity Based Compensation Plan (“2023 EBC Plan”) approved by its shareholders to replace the 2013 Equity Based Stock Compensation Plan.

The 2023 EBC Plan provides 700,000 shares of common stock for equity-based compensation awards including incentive and non-qualified stock options and restricted stock awards.

As of December 31, 2023, there were 489,000 shares available for future grants.

17 unchanged sentences

The Company has issued stock options to certain employees, officers and directors.

Stock options are issued at the closing market price on the grant date, and generally have a three -to five-year vesting period and contractual terms of ten years .

Stock options are issued at the exercise price of the closing market price on the grant date, and generally have a three -to five-year vesting period and contractual terms of ten years .

The Company recognizes an income tax deduction upon exercise of the non-qualified stock option by the option holder in an amount equal to the taxable income reported by the option holders.

6 unchanged sentences

Expected term

6.50 years 6.71 years N/A

6.04 years 6.50 years 6.71 years

Expected stock price volatility

50 unchanged sentences

The Board of Directors may make a discretionary contribution to the plan annually.

The Company’s contribution to the plan was $ 1.1 million, $ 901 thousand and $ 807 thousand for the years ended December 31, 2022, 2021 and 2020, respectively.

The Company’s contribution to the plan was $ 1.2 million, $ 1.1 million and $ 901 thousand for the years ended December 31, 2023, 2022 and 2021, respectively.

The following table presents the components of income tax expense for the periods indicated:

24 unchanged sentences

Deferred tax assets:

Allowance for loan losses $ 7,359 $ 6,609

$ 8,105 $ 7,359

Share-based compensation 199 298

Unrealized loss on investment securities 3,783 4,459

Loans held-for-sale market adjustment — 2,445

Operating lease liabilities 5,928 2,009

3 unchanged sentences

Deferred tax liabilities:

Loans held-for-sale market adjustment

Depreciation on premises and equipment 843 1,051

Unrealized gain on investment securities — 4

Loans held-for-sale market adjustment 13,872 8,745

14 unchanged sentences

Earnings Per Share

The following is a reconciliation of net income and shares outstanding to the income and number of share used to compute earnings per share for the periods indicated:

The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute earnings per share for the periods indicated:

Year Ended December 31,

29 unchanged sentences

Unfunded loan commitments are generally made for periods of 90 days or less, except for SBA loans that are generally made for periods of 180 days or less.

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

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

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

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.

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.

9 unchanged sentences

On September 7, 2021, the Bank determined that an external actor had illegally accessed and/or acquired certain data on its network.

The Bank has been working with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/or acquired and who may have been impacted.

The Bank worked with third-party forensic investigators to understand the nature and scope of the incident and determine what information may have been accessed and/or acquired and who may have been impacted.

The investigation revealed that this incident impacted certain files containing certain Bank customer information.

4 unchanged sentences

On December 16, 2021, a complaint based on the incident was filed in the Los Angeles County Superior Court seeking damages, injunctive relief, and equitable relief.

The Bank expresses no opinion on the merits of the Matter.

The Bank had answered, responded, and will continue to defend itself from the claims and causes of action asserted in the complaint to the fullest extent permitted by applicable law.

Those defenses will be based in part on the fact that the Bank has implemented security procedures, practices, and a robust information security program pursuant to guidance from financial regulators.

The Company continues to monitor and evaluate the data incident for its magnitude and concomitant financial, legal or reputational consequences.

During the year ended December 31, 2021, expenses associated with the data incident, all of which are included in Other Expense in Consolidated Statements of Income, totaled $ 100 thousand, which represents the retention amount on its insurance claims.

During the year ended December 31, 2022, the Company incurred additional legal expenses of $ 220 thousand associated with the on-going legal matters related to the data incident, all of which are included in Professional Fees in Consolidated Statement of Income.

The Company anticipates additional expenses will be incurred in future periods;

however, the Company does have a cyber-liability insurance policy that should provide insurance coverage for this incident.

During the three months ended September 30, 2023, the Bank agreed to settle this matter in exchange for $ 700 thousand to the putative class members, including costs of settlement administration, and attorneys’ fees and costs.

The Bank received preliminary court approval of the settlement and notice was provided to members of the proposed class during the three months ended September 30, 2023.

However, due to the low claims rate by the members of the proposed class, Plaintiff had requested and the Court had agreed to extend the claims deadline for another 45 days.

March 21, 2024 is now the new claims deadline.

No new final approval hearing date has been set by the Court.

The Company expects that the full amount of the final settlement will be covered under the Company’s applicable insurance policies.

Regulatory Matters

Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios.

The capital conservation buffer was fully phased in from 0.0% in 2015 to 2.50% by 2019.

Management believes as of December 31, 2022 and 2021, the Bank met all capital adequacy requirements to which they are subject to.

Based on changes to the Federal Reserve’s definition of a “Small Bank Holding Company” in 2018, which increased the threshold to $3 billion in assets, the Company is not currently subject to separate minimum capital measurements.

At such time as the Company reaches the $3 billion asset level, it will again be subject to capital measurements independent of the Bank.

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

The Bank is subject to various regulatory capital requirements administered by federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional, discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements.

Under the Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios minimums in order to avoid restrictions on dividend payments and certain incentive compensation payments.

Management believes as of December 31, 2023 and 2022, the Bank met all capital adequacy requirements to which it is subject to.

Under the Federal Reserve’s “Small Bank Holding Company” policy statement, as a bank holding company with less than $3 billion in assets, the Company is not currently subject to separate consolidated capital requirements.

At such time as the Company reaches the $3 billion asset level, it will be subject to capital requirements independent of the Bank.

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

The Company and the Bank’s capital conservation buffer was 7.73 % and 8.07 %, respectively, as of December 31, 2023, and 8.79 % and 9.52 %, respectively, as of December 31, 2022.

28 unchanged sentences

If, as a result of an examination, a banking agency were to determine that the Company’s financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of the Company’s operations had become unsatisfactory, or that the Company was in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate.

These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in Company’s capital, to restrict growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Company’s deposit insurance and place the Company into receivership or conservatorship.

These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in the Company’s or the Bank’s capital, to restrict growth, to assess civil money penalties, to fine or remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate the Bank’s deposit insurance and place the Bank into receivership or conservatorship.

Revenue Recognition

22 unchanged sentences

Liabilities and Shareholders’ Equity

Other liabilities

Total liabilities 76 —

30 unchanged sentences

Issuance of preferred stock — 69,141 —

Stock options exercised 1,350 840 1,279

Restricted stock surrendered due to employee tax liability ( 2 ) ( 8 ) ( 4 )

Repurchase of common stock ( 8,828 ) ( 6,732 ) ( 10,876 )

Stock options exercised 840 1,279 693

Cash dividends paid on common stock ( 9,908 ) ( 8,946 ) ( 6,655 )

7 unchanged sentences

The dividend was paid on February 16, 2024, to shareholders of record as of the close of business on February 9, 2024.

Amendment to the Stock Repurchase Plan.

On January 26, 2023, the Company’s Board of Directors approved an amendment to its current repurchase program that was approved and announced on July 28, 2022, which extends the expiration date from February 1, 2023 to February 1, 2024.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data