PCB BANCORP 10-K

Item 8. Financial Statements PCB Bancorp and Subsidiary Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID 173 ) 68 Consolidated Balance Sheets as of December 31, 202 3 and 202 2 71 Consolidated Statements of Income for the Years Ended December 31, 202 3 , 202 2 and 202 1 72 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 202 3 , 202 2 and 202 1 73 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 202 3 , 202 2 and 202 1 74 Consolidated Statements of Cash Flows for the Years Ended December 31, 202 3 , 202 2 and 202 1 75 Notes to Consolidated Financial Statements 77 67 Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of PCB Bancorp Los Angeles, California 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. 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. 68 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. 69 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; and ◦ 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; and ◦ Evaluating of directional consistency of judgments and assumptions with modeled or estimate results. /s/ Crowe LLP We have served as the Company’s auditor since 2016. Los Angeles, California March 12, 2024 70 PCB Bancorp and Subsidiary Consolidated Balance Sheets (in thousands, except share data) December 31, 2023 2022 Assets Cash and due from banks $ 26,518 $ 23,202 Interest-bearing deposits in other financial institutions 215,824 123,829 Total cash and cash equivalents 242,342 147,031 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 credit losses on loans (1) ( 27,533 ) ( 24,942 ) Net loans held-for-investment 2,295,919 2,021,121 Premises and equipment, net 5,999 6,916 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 Deferred tax assets, net — 3,115 Servicing assets 6,666 7,347 Operating lease assets 18,913 6,358 Accrued interest receivable 9,468 7,472 Other assets 15,630 15,755 Total assets $ 2,789,506 $ 2,420,036 Liabilities and Shareholders’ Equity Deposits: Noninterest-bearing demand $ 594,673 $ 734,989 Savings, NOW and money market accounts 421,203 514,741 Time deposits of $250,000 or less 760,034 382,377 Time deposits of more than $250,000 575,702 413,876 Total deposits 2,351,612 2,045,983 Federal Home Loan Bank advances 39,000 20,000 Deferred tax liabilities, net 876 — Operating lease liabilities 20,137 6,809 Accrued interest payable and other liabilities 29,009 11,802 Total liabilities 2,440,634 2,084,594 Commitments and contingent liabilities Preferred stock, 10,000,000 shares authorized, no par value: 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; issued and outstanding 14,260,440 and 14,625,474 shares, respectively, and included 41,661 and 62,022 shares of unvested restricted stock, respectively, at December 31, 2023 and 2022 142,563 149,631 Retained earnings 146,092 127,181 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 71 PCB Bancorp and Subsidiary Consolidated Statements of Income (in thousands, except share and per share data) Year Ended December 31, 2023 2022 2021 Interest and dividend income: Loans, including fees $ 136,029 $ 95,054 $ 79,155 Tax-exempt investment securities 126 140 146 Taxable investment securities 4,553 2,767 1,467 Other interest-earning assets 10,469 3,790 704 Total interest income 151,177 101,751 81,472 Interest expense: Deposits 62,165 11,984 4,043 Other borrowings 508 135 292 Total interest expense 62,673 12,119 4,335 Net interest income 88,504 89,632 77,137 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 Noninterest income: Service charges and fees on deposits 1,475 1,326 1,195 Loan servicing income 3,330 2,969 2,770 Bank-owned life insurance income 753 706 108 Gain on sale of loans 3,570 7,990 12,932 Other income 1,555 1,508 1,429 Total noninterest income 10,683 14,499 18,434 Noninterest expense: Salaries and employee benefits 34,572 33,056 27,974 Occupancy and equipment 7,924 6,481 5,575 Professional fees 3,087 2,239 2,159 Marketing and business promotion 2,327 2,150 1,656 Data processing 1,552 1,706 1,572 Director fees and expenses 756 706 594 Regulatory assessments 1,103 597 537 Other expenses 4,736 4,191 3,141 Total noninterest expense 56,057 51,126 43,208 Income before income taxes 43,262 49,403 56,959 Income tax expense 12,557 14,416 16,856 Net income $ 30,705 $ 34,987 $ 40,103 Earnings per common share, basic $ 2.14 $ 2.35 $ 2.66 Earnings per common share, diluted $ 2.12 $ 2.31 $ 2.62 Weighted-average common shares outstanding, basic 14,301,691 14,822,018 15,017,637 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 72 PCB Bancorp and Subsidiary Consolidated Statements of Comprehensive Income (in thousands) Year Ended December 31, 2023 2022 2021 Net income $ 30,705 $ 34,987 $ 40,103 Other comprehensive income (loss): Unrealized gain (loss) on securities available-for-sale arising during the year 2,263 ( 15,128 ) ( 2,553 ) Income tax benefit (expense) related to items of other comprehensive income (loss) ( 676 ) 4,463 751 Total other comprehensive income (loss), net of tax 1,587 ( 10,665 ) ( 1,802 ) Total comprehensive income $ 32,292 $ 24,322 $ 38,301 See Accompanying Notes to Consolidated Financial Statements 73 PCB Bancorp and Subsidiary Consolidated Statements of Changes in Shareholders’ Equity (in thousands, except share data) Shares Outstanding Shareholders’ Equity Preferred Stock Common Stock Preferred Stock Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Balance at January 1, 2021 — 15,385,878 — 164,140 67,692 1,956 233,788 Comprehensive income (loss) Net income — — — — 40,103 — 40,103 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 ) Repurchase of common stock — ( 680,269 ) — ( 10,876 ) — — ( 10,876 ) Share-based compensation expense — — — 453 — — 453 Stock options exercised — 126,163 — 1,279 — — 1,279 Cash dividends declared on common stock ($ 0.44 per share) — — — — ( 6,655 ) — ( 6,655 ) Balance at December 31, 2021 — 14,865,825 — 154,992 101,140 154 256,286 Comprehensive income (loss) Net income — — — — 34,987 — 34,987 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 — — — — — Forfeiture of restricted stock — ( 200 ) — — — — — Restricted stock surrendered due to employee tax liability — ( 429 ) — ( 8 ) — — ( 8 ) Repurchase of common stock — ( 362,557 ) — ( 6,732 ) — — ( 6,732 ) Share-based compensation expense — — — 539 — — 539 Stock options exercised — 95,135 — 840 — — 840 Cash dividends declared on common stock ($ 0.60 per share) — — — — ( 8,946 ) — ( 8,946 ) Balance at December 31, 2022 69,141 14,625,474 69,141 149,631 127,181 ( 10,511 ) 335,442 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 income, net of tax — — — — — 1,587 1,587 Issuance of restricted stock — 3,300 — — — — — Forfeiture of restricted stock — ( 500 ) — — — — — Restricted stock surrendered due to employee tax liability — ( 99 ) — ( 2 ) — — ( 2 ) Repurchase of common stock — ( 512,657 ) — ( 8,828 ) — — ( 8,828 ) Stock repurchase excise tax — — — ( 76 ) — — ( 76 ) Share-based compensation expense — — — 488 — — 488 Stock options exercised — 144,922 — 1,350 — — 1,350 Cash dividends declared on common stock ($ 0.69 per share) — — — — ( 9,908 ) — ( 9,908 ) Balance at December 31, 2023 69,141 14,260,440 $ 69,141 $ 142,563 $ 146,092 $ ( 8,924 ) $ 348,872 See Accompanying Notes to Consolidated Financial Statements 74 PCB Bancorp and Subsidiary Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2023 2022 2021 Cash flows from operating activities Net income $ 30,705 $ 34,987 $ 40,103 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation of premises and equipment 2,184 1,597 1,375 Net amortization of premiums on securities 209 367 1,004 Net accretion of discounts on loans ( 2,197 ) ( 3,551 ) ( 3,504 ) Net accretion of deferred loan fees ( 1,097 ) ( 2,181 ) ( 6,096 ) Amortization of servicing assets 1,883 2,135 2,009 Provision (reversal) for credit losses (1) ( 132 ) 3,602 ( 4,596 ) Bank-owned life insurance income ( 753 ) ( 706 ) ( 108 ) Deferred tax expense (benefit) 4,103 12,172 ( 1,953 ) Share-based compensation 488 539 453 Gain on sale of loans ( 3,570 ) ( 7,990 ) ( 12,932 ) Originations of loans held-for-sale ( 69,040 ) ( 105,570 ) ( 172,211 ) Proceeds from sales of and principal collected on loans held-for-sale 87,422 132,881 150,236 Change in accrued interest receivable and other assets ( 934 ) ( 12,738 ) 2,660 Change in accrued interest payable and other liabilities 14,072 1,723 1,943 Net cash provided by (used in) operating activities 63,343 57,267 ( 1,617 ) Cash flows from investing activities: Purchase of securities available-for-sale ( 17,271 ) ( 57,360 ) ( 47,306 ) Proceeds from maturities, calls, and paydowns of securities available-for-sale 17,865 23,200 41,078 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 ) Purchase of loans held-for-investment ( 15,741 ) — ( 2,139 ) Purchase of Federal Home Loan Bank and other restricted stock ( 2,533 ) ( 1,606 ) ( 130 ) Proceeds from sale of other real estate owned — 1,191 3,434 Purchases of premises and equipment ( 1,315 ) ( 5,453 ) ( 430 ) Purchase of bank-owned life insurance — — ( 29,250 ) Net cash used in investing activities ( 275,273 ) ( 356,665 ) ( 175,223 ) Cash flows from financing activities: Net increase in deposits 305,629 178,849 272,283 Net change in short-term Federal Home Loan Bank advances ( 20,000 ) 20,000 — Proceeds from long-term Federal Home Loan Bank advances 39,000 — — Repayment of long-term Federal Home Loan Bank advances — ( 10,000 ) ( 70,000 ) Stock options exercised 1,350 840 1,279 Restricted stock surrendered due to employee tax liability ( 2 ) ( 8 ) ( 4 ) Issuance of preferred stock — 69,141 — Repurchase of common stock ( 8,828 ) ( 6,732 ) ( 10,876 ) Cash dividends paid on common stock ( 9,908 ) ( 8,946 ) ( 6,655 ) Net cash provided by financing activities 307,241 243,144 186,027 Net increase (decrease) in cash and cash equivalents 95,311 ( 56,254 ) 9,187 Cash and cash equivalents at beginning of year 147,031 203,285 194,098 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 75 PCB Bancorp and Subsidiary Consolidated Statements of Cash Flows (Continued) (in thousands) Year Ended December 31, 2023 2022 2021 Supplemental disclosures of cash flow information: Interest paid $ 47,780 $ 9,731 $ 5,790 Income taxes paid 4,284 13,977 14,982 Supplemental disclosures of non-cash investment activities: Loans transferred to loans held-for-sale $ — $ 4,458 $ 8,752 Loans transferred to other real estate owned 593 151 905 Right-of-use assets obtained in exchange for lease obligations 15,317 2,150 1,459 See Accompanying Notes to Consolidated Financial Statements 76 PCB Bancorp and Subsidiary Notes to Consolidated Financial Statements Note 1. Basis of Presentation and Significant Accounting Policies Nature of Operations 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; and Englewood Cliffs and Palisades Park, New Jersey), and two full-service branches in Texas (Carrollton and Dallas), and seven LPOs in Los Angeles and Orange Counties, California; Annandale, Virginia; Atlanta, Georgia; Aurora, Colorado; Bellevue, Washington; and Carrollton, Texas. The Bank offers a broad range of loans, deposits, and other products and services predominantly to small and middle market businesses and individuals. Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary as of December 31, 2023 and 2022 and for the years ended December 31, 2023, 2022 and 2021. Significant inter-company accounts and transactions have been eliminated in consolidation. Unless the context requires otherwise, all references to the Company include its wholly owned subsidiaries. The accounting and reporting polices of the Company are based upon GAAP and conform to predominant practices within the financial services industry. Significant accounting policies followed by the Company are presented below. Certain prior period amounts have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on the Company’s consolidated statements of financial condition or operations. Use of Estimates in the Preparation of Financial Statements The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates are subject to change and such change could have a material effect on the consolidated financial statements. Actual results may differ from those estimates. Significant Accounting Policies Cash and Cash Equivalents 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. 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. Investment Securities Investment securities are classified as held-to-maturity or available-for-sale at the time of purchase based upon the intent of management, liquidity and capital requirements, regulatory limitations and other relevant factors. Debt securities are classified as held-to-maturity when management has the positive intent and ability to hold to maturity. Debt securities are classified as available-for-sale when they might be sold before maturity. 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. 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. Net realized gains or losses on available-for-sale securities are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Amortization of premiums and accretion of discounts are included in interest income using the effective interest method. 77 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 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 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. Subsequent decreases in fair value, if any, are recognized through a valuation allowance with charges made to noninterest income. If a determination is made that a loan held-for-sale cannot be sold in the foreseeable future, it is transferred to loans held-for-investment at lower of cost or fair value on the transfer date with a charge made to noninterest income when the fair value is lower than the cost. Realized gains and losses from sales of loans are included in noninterest income. For sales of guaranteed portion of SBA and certain residential mortgage loans, the loan servicing rights are retained. Loans Held-For-Investment Loans held-for-investment that management has the intent and ability to hold for the foreseeable future are reported at their outstanding unpaid principal balances, net of any charge-offs, deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are deferred and recognized in interest income using the effective interest method over the life of the loan. Interest is accrued and credited to income as earned only if deemed collectible. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Accrual of interest on loans is discontinued when principal or interest payment is 90 days past due based on the contractual terms of the loan or when, in the opinion of management, there is reasonable doubt as to collectability. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Past-due status is based on the contractual terms of the loan. Interest payments that are subsequently received are applied as a reduction to the remaining principal balance as long as concern exists as to the collectability of the principal. Interest accruals are resumed on such loans only when the loans are brought current with respect to interest and principal and when, in the judgment of management, all principal and interest on the loans are expected to be fully collectable. Loan portfolio segments identified by the Company include: commercial real estate (commercial property, business property, multifamily and construction), commercial and industrial, and consumer loans (residential mortgage and other consumer). 78 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 real estate and commercial and industrial loans, and is performed on an ongoing basis as new information is obtained. 79 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. 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. 80 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. Other consumer loans are charged off based on delinquency, typically 120 days for closed loans and 180 days for open-end loans, or earlier when it is determined that the loan is uncollectible due to a triggering event, such as bankruptcy, fraud, or death. This methodology for determining charge-offs is consistently applied to each segment. 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; changes in economic conditions; changes in the nature and volume of the portfolio; changes in the experience, ability, and depth of lending management and other relevant staff; changes in the volume and severity of past due, nonaccrual, and other adversely graded loans; changes in the loan review system; changes in the value of the underlying collateral for collateral-dependent loans; concentrations of credit and the effect of other external factors such as competition and legal and regulatory requirements. 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. 81 Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which ranges from three to seven years for furniture and equipment. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as part of occupancy and equipment expense as incurred. Operating Leases The Company’s operating leases are for its headquarters’ office spaces, and retail branch and LPO locations. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one to five years . The exercise of a lease renewal option is at the Company’s sole discretion. Certain leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expenses for these leases are recognized on a straight-line basis over the lease term. None of the Company’s lease agreements contain any material residual value guarantees or material restrictive covenants. The Company also leases certain equipment, such as copy machines and scanners, but they are determined to be immaterial. Federal Home Loan Bank and Other Restricted Stock The Bank is a member of the FHLB and Pacific Coast Bankers’ Bancshares (“PCBB”) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB and PCBB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on the ultimate recovery of par value. Both cash and stock dividends are reported as income. Other Real Estate Owned OREO represents properties acquired through foreclosure or other proceedings. The Company initially records OREO at fair value at the time of foreclosure. Thereafter, OREO is recorded at the lower of cost or fair value based on their subsequent changes in fair value. The fair value of OREO is generally based on recent real estate appraisals adjusted for estimated selling costs. 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. Additions to or reductions from valuation allowances are recorded in noninterest expense. 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 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. Servicing assets are amortized into noninterest income over the expected life of the underlying loans. Servicing assets are evaluated for impairment based on the fair value of the servicing rights as compared to the carrying amount. Impairment is determined by stratifying servicing rights into groupings based on predominant risk characteristics, such as collateral type. For purposes of measuring impairment, the Company has identified each servicing asset with the underlying loan being serviced. A valuation allowance is recorded when the fair value is below the carrying amount of the asset. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the valuation allowance may be recorded as an increase to income. The fair values of servicing assets are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and changes in discount rates. Servicing income as reported on the income statement consists of fees earned for servicing loans, net of the amortization of servicing assets and changes in the valuation allowance. The servicing fees are based on a contractual percentage of the outstanding principal and recorded as income when earned. Investment in Qualified Affordable Housing Projects The Company has invested in a limited partnership that operates qualified affordable housing projects for lower income tenants in California. The Company accounts for this investment under the proportional amortization method and the amortization expense is presented as a component of current tax expense. Return of this investment is generated primarily through allocated federal tax credits and other tax benefits. 82 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. As components of income tax expense, the Company recognized $ 451 thousand, $ 343 thousand and $ 247 thousand in amortization expense, respectively, partially offset by federal tax credits and other benefits of $ 674 thousand, $ 336 thousand and $ 299 thousand, respectively, for the years ended December 31, 2023, 2022 and 2021. The Company determined that there were no events or changes in circumstances indicating that it is more likely than not that the carrying amount of the investment will not be realized. Therefore, no impairment was recorded for the years ended December 31, 2023 and 2022. Bank-owned Life Insurance The Company purchases life insurance policies on certain officers and directors. The Bank and named beneficiaries of various current covered officers are the beneficiaries under each policy. In the event of the death of a covered officer, the Bank and named beneficiaries of the covered officer will receive the specified insurance benefit from the insurance carrier. Bank-owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due, if any, that are probable at settlement. Earnings Per Share Earnings per share (“EPS”) is computed under the two-class method. Net income allocated to common stock is computed by subtracting income allocated to unvested restricted stock from net income. Income allocated to unvested restricted stock includes cash dividend paid and undistributed income available to holders of unvested restricted stock, if any. Basic EPS is computed by dividing net income allocated to common stock by the weighted-average common shares outstanding excluding the weighted-average unvested restricted stock. Diluted EPS is computed by dividing net income allocated to common stock by the weighted-average common stock outstanding, excluding the weighted-average unvested restricted stock, adjusted for the dilutive effect of the stock options. Diluted EPS reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock, or resulted in the issuance of common stock that then shared in the earnings of the entity. Transfer of Financial Assets Transfers of financial assets are accounted for sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Share-Based Compensation The Company recognizes the cost of employee services received in exchange for stock options and restricted stock awards (“RSAs”), based on the grant date fair value of those awards. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Company's common stock at the date of grant is used for RSAs. This cost is recognized in income over the period which an employee is required to provide services in exchange for the award, generally the vesting period. See Note 12 for additional information on the Company’s stock option plan. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Interest and penalties related to unrecognized tax benefits are recorded as part of income tax expense. A valuation allowance is established to reduce the deferred tax asset to the level at which it is more likely than not that the tax benefits will be realized. 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. 83 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 In the ordinary course of business, the Company enters into off-balance sheet financial instruments consisting of commitments to extend credit, commercial letters of credit, and standby letters of credit as described in Note 16. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. Revenue Recognition Topic 606, “Revenue from Contracts with Customers,” does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as gain or loss associated with mortgage servicing assets and financial guarantees are also not within the scope. Topic 606 is applicable to noninterest income such as deposit related fees, interchange fees, and merchant related income. Noninterest income considered to be within the scope of Topic 606 is discussed below. Service charges and fees on deposits : Deposit account service charges consist of monthly service fees, account analysis fees, non-sufficient funds (“NSF”) charges and other deposit related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. NSF charges, and other deposit account service charges are largely transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time as incurred. Debit card fees : When customers use their debit cards to pay merchants for goods or services, the Company retains a fee from the funds collected from the related deposit account and transfers the remaining funds to the payment network for remittance to the merchant. The performance obligation to the merchant is satisfied and the fee is recognized at the point in time when the funds are collected and transferred to the payment network. Gain (loss) on sale of other real estate owned : The Company’s performance obligation for sale of OREO is the transfer of title and ownership rights of the OREO to the buyer, which occurs at the settlement date when the sale proceeds are received and income is recognized. Wire transfer fees and other service charges : Wire transfer fees and other service charges are transaction based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time as incurred. Fair Value Measurement Fair value is the exchange price that would be received for an asset or paid to transfer a liability (i.e., an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value: • Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. • Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. • Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. See Note 2 for more information and disclosures relating to the Company’s fair value measurements. 84 Adopted Accounting Pronouncements 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. It includes financial assets such as loan receivables, held-to-maturity debt securities, net investment in leases that are not accounted for at fair value through net income, and certain off-balance sheet credit exposures. This ASU was effective for public business entities that are SEC filers for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In 2019, the FASB amended this ASU, which 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 Assets ACL on loans 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 Liabilities 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. 85 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 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. 86 Note 2. Fair Value Measurements ASC 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value including a three-level valuation hierarchy, and expands disclosures about fair value measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (i.e. an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The three-level fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs that may be used to measure fair value are defined as follows: • Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. • Level 2: Significant observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. • Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Fair value is measured on a recurring basis for certain assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate certain assets or liabilities for impairment or for disclosure purposes. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company records securities available-for-sale at fair value on a recurring basis. Certain other assets, such as loans held-for-sale, 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. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value: Investment securities : The fair values of securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Management reviews the valuation techniques and assumptions used by the provider and determines that the provider uses widely accepted valuation techniques based on observable market inputs appropriate for the type of security being measured. Loans held-for-sale : 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. 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 individually evaluated loans are obtained from real estate brokers or other third-party consultants, and are classified as Level 3. Other real estate owned : The Company initially records OREO at fair value at the time of foreclosure. Thereafter, OREO is recorded at the lower of cost or fair value based on their subsequent changes in fair value. The fair value of OREO is generally based on recent real estate appraisals adjusted for estimated selling costs. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments may be significant and result in a Level 3 classification due to the unobservable inputs used for determining fair value. Only OREO with a valuation allowance are considered to be carried at fair value. Servicing Assets: Servicing assets represent the value of servicing rights associated with servicing loans that have been sold. The fair value for servicing assets is determined through discounted cash flow analysis and utilizes discount rates and prepayment speed assumptions as inputs. All of these assumptions require a significant degree of management estimation and judgment. The fair market valuation is performed on a quarterly basis for servicing assets. Servicing assets are accounted for at the lower of cost or market value and considered to be recognized at fair value when they are recorded at below cost and are classified as Level 3. 87 Assets and Liabilities Measured at Fair Value on a Recurring Basis The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of the dates indicated: Fair Value Measurement Level ($ in thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total December 31, 2023 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ — $ 104,091 $ — $ 104,091 Collateralized mortgage obligations — 24,173 — 24,173 SBA loan pool securities — 7,450 — 7,450 Municipal bonds — 3,329 — 3,329 Corporate bonds — 4,280 — 4,280 Total securities available-for-sale — 143,323 — 143,323 Total assets measured at fair value on a recurring basis $ — $ 143,323 $ — $ 143,323 Total liabilities measured at fair value on a recurring basis $ — $ — $ — $ — December 31, 2022 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ — $ 96,900 $ — $ 96,900 Collateralized mortgage obligations — 26,956 — 26,956 SBA loan pool securities — 9,298 — 9,298 Municipal bonds — 4,186 — 4,186 Corporate bonds — 4,523 — 4,523 Total securities available-for-sale — 141,863 — 141,863 Total assets measured at fair value on a recurring basis $ — $ 141,863 $ — $ 141,863 Total liabilities measured at fair value on a recurring basis $ — $ — $ — $ — 88 Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis The following table presents the Company’s assets and liabilities measured at fair value on a non-recurring basis as of the dates indicated: Fair Value Measurement Level ($ in thousands) Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total December 31, 2023 Loans individually evaluated: Business property — — 425 425 Total loans individually evaluated — — 425 425 Total assets measured at fair value on a non-recurring basis $ — $ — $ 425 $ 425 Total liabilities measured at fair value on a non-recurring basis $ — $ — $ — $ — December 31, 2022 Impaired loans: Commercial lines of credit (1) $ — $ — $ 4,000 $ 4,000 Total impaired loans — — 4,000 4,000 Total assets measured at fair value on a non-recurring basis $ — $ — $ 4,000 $ 4,000 Total liabilities measured at fair value on a non-recurring basis $ — $ — $ — $ — (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: ($ in thousands) Fair Value Valuation Technique(s) Unobservable Input(s) Range (Weighted-Average) December 31, 2023 Loans individually evaluated: Business property $ 425 Pending sales agreement NM NM December 31, 2022 Impaired loans: 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 Loans individually evaluated: Commercial and industrial $ 1,074 $ ( 1,074 ) $ 131 Business property ( 264 ) N/A N/A SBA property (1) NA — ( 8 ) Other real estate owned — 152 73 Net gain (losses) recognized $ 810 $ ( 922 ) $ 196 (1) Under the legacy loan segments 89 Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on financial instruments both on and off the consolidated balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments. Financial assets : The carrying amounts of interest-bearing deposits with other financial institutions and accrued interest receivable are considered to approximate fair value. The fair values of investment securities are generally based on matrix pricing (Level 2). The fair value of loans is estimated based on a discounted cash flow approach under an exit price notion. The fair value reflects the estimated yield that would be negotiated with a willing market participant. Because sale transactions of such loans are not readily observable, as many of the loans have unique risk characteristics, the valuation is based on significant unobservable inputs (Level 3). It is not practical to determine the fair value of FHLB and other restricted stock due to restrictions placed on its transferability. Financial liabilities : The carrying amounts of accrued interest payable are considered to approximate fair value. The fair value of deposits is estimated based on discounted cash flows. The discount rate is derived from the interest rates currently being offered for similar remaining maturities. Non-maturity deposits are estimated based on their historical decaying experiences (Level 3). The fair value of FHLB advances is estimated based on discounted cash flows. The discount rate is derived from the current market rates for borrowings with similar remaining maturities (Level 2). Off-balance-sheet financial instruments : The fair value of commitments to extend credit and standby letters of credit is estimated using the fees currently charged to enter into similar agreements. The fair value of these financial instruments is not material and is excluded from the table below. 90 The following table presents the carrying value and estimated fair values of financial assets and liabilities as of the dates indicated: Carrying Value Fair Value Fair Value Measurements ($ in thousands) Level 1 Level 2 Level 3 December 31, 2023 Financial assets: Interest-bearing deposits in other financial institutions $ 215,824 $ 215,824 $ 215,824 $ — $ — Securities available-for-sale 143,323 143,323 — 143,323 — Loans held-for-sale 5,155 5,472 — 5,472 — Net loans held-for-investment 2,295,919 2,225,573 — — 2,225,573 FHLB and other restricted stock 12,716 N/A N/A N/A N/A Accrued interest receivable 9,468 9,468 128 513 8,827 Financial liabilities: Deposits $ 2,351,612 $ 2,353,465 $ — $ — $ 2,353,465 FHLB advances 39,000 39,013 — 39,013 — Accrued interest payable 18,052 18,052 — 192 17,860 December 31, 2022 Financial assets: Interest-bearing deposits in other financial institutions $ 123,829 $ 123,829 $ 123,829 $ — $ — Securities available-for-sale 141,863 141,863 — 141,863 — Loans held-for-sale 22,811 23,992 — 23,992 — Net loans held-for-investment 2,021,121 1,970,235 — — 1,970,235 FHLB and other restricted stock 10,183 N/A N/A N/A N/A Accrued interest receivable 7,472 7,472 49 475 6,948 Financial liabilities: Deposits $ 2,045,983 $ 2,041,667 $ — $ — $ 2,041,667 FHLB advances 20,000 20,001 — 20,001 — Accrued interest payable 3,159 3,159 — 5 3,154 91 Note 3. Investment Securities The following table presents the amortized cost and fair value of the investment securities as of the dates indicated: ($ in thousands) Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Fair Value December 31, 2023 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ 114,485 $ 199 $ ( 10,593 ) $ 104,091 Collateralized mortgage obligations 25,611 63 ( 1,501 ) 24,173 SBA loan pool securities 7,773 3 ( 326 ) 7,450 Municipal bonds 3,306 25 ( 2 ) 3,329 Corporate bonds 5,000 — ( 720 ) 4,280 Total securities available-for-sale $ 156,175 $ 290 $ ( 13,142 ) $ 143,323 December 31, 2022 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ 109,497 $ 1 $ ( 12,598 ) $ 96,900 Collateralized mortgage obligations 28,515 107 ( 1,666 ) 26,956 SBA loan pool securities 9,704 8 ( 414 ) 9,298 Municipal bonds 4,262 2 ( 78 ) 4,186 Corporate bonds 5,000 — ( 477 ) 4,523 Total securities available-for-sale $ 156,978 $ 118 $ ( 15,233 ) $ 141,863 As of December 31, 2023 and 2022, pledged securities were $ 70.9 million and $ 69.0 million, respectively. 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. 92 The following table presents the amortized cost and fair value of the investment securities by contractual maturity as of December 31, 2023. Expected maturities may differ from contractual maturities, if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately. Securities Available-For-Sale ($ in thousands) Amortized Cost Fair Value Within one year $ 864 $ 862 One to five years 82 81 Five to ten years 5,724 5,010 Greater than ten years 1,636 1,656 Mortgage-backed securities, collateralized mortgage obligations and SBA loan pool securities 147,869 135,714 Total $ 156,175 $ 143,323 The following table presents proceeds from sales and calls of securities available-for-sale and the associated gross gains and losses realized through earnings upon the sales and calls of securities available-for-sale for the periods indicated: Year Ended December 31, ($ in thousands) 2023 2022 2021 Gross realized gains on sales and calls of securities available-for-sale $ — $ — $ — Gross realized losses on sales and calls of securities available-for-sale — — — Net realized gains on sales and calls of securities available-for-sale $ — $ — $ — Proceeds from sales and calls of securities available-for-sale $ — $ 1,040 $ — Tax expense on sales and calls of securities available-for-sale $ — $ — $ — 93 The following table summarizes the investment securities with unrealized losses by security type and length of time in a continuous unrealized loss position as of the dates indicated: Length of Time That Individual Securities Have Been In a Continuous Unrealized Loss Position Less Than 12 Months 12 Months or Longer Total ($ in thousands) Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses Number of Securities Fair Value Gross Unrealized Losses Number of Securities December 31, 2023 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ 9,252 $ ( 41 ) 8 $ 78,958 $ ( 10,552 ) 110 $ 88,210 $ ( 10,593 ) 118 Collateralized mortgage obligations 5,660 ( 62 ) 4 13,919 ( 1,439 ) 35 19,579 ( 1,501 ) 39 SBA loan pool securities — — — 6,627 ( 326 ) 14 6,627 ( 326 ) 14 Municipal bonds 81 — 1 362 ( 2 ) 1 443 ( 2 ) 2 Corporate bonds — — — 4,280 ( 720 ) 1 4,280 ( 720 ) 1 Total securities available-for-sale $ 14,993 $ ( 103 ) 13 $ 104,146 $ ( 13,040 ) 161 $ 119,139 $ ( 13,142 ) 174 December 31, 2022 Securities available-for-sale: U.S. government agency and U.S. government sponsored enterprise securities: Mortgage-backed securities $ 55,171 $ ( 3,721 ) 83 $ 41,697 $ ( 8,877 ) 36 $ 96,868 $ ( 12,598 ) 119 Collateralized mortgage obligations 12,600 ( 1,191 ) 29 2,262 ( 475 ) 7 14,862 ( 1,666 ) 36 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 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. 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, 2023. 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 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. 94 Note 4. 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 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 Construction 24,843 17,054 Total commercial real estate 1,571,385 1,440,338 Commercial and industrial 342,002 249,250 Consumer: 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 ) 95 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 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 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. 96 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 Multifamily 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 $ — $ — $ — $ — $ — $ — $ — $ — $ — Construction 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 $ — $ — $ — $ — $ — $ — $ — $ — $ — 97 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 Consumer 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 98 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 — Consumer: Other consumer 25 25 — — — Total consumer 25 25 — — — Total $ 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 Total 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 99 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 Consumer: 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 $ 1,949 100 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 Consumer: 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. 101 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: Commercial property $ 1,288,392 Residential property 333,726 SBA property 134,892 Construction 17,054 Total real estate loans 1,774,064 Commercial and industrial loans: Commercial term 77,700 Commercial lines of credit 154,142 SBA commercial term 16,211 SBA PPP 1,197 Total commercial and industrial loans 249,250 Other consumer loans 22,749 Loans held-for-investment 2,046,063 Allowance for loan losses ( 24,942 ) Net loans held-for-investment $ 2,021,121 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, the Company had $ 113 thousand of such loans outstanding. 102 Allowance for Loan Losses 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 Balance at January 1, 2021 18,894 7,222 394 26,510 Charge-offs ( 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 ) Balance at December 31, 2021 16,797 5,310 274 22,381 Charge-offs — ( 1,095 ) ( 104 ) ( 1,199 ) Recoveries on loans previously charged off — 61 97 158 Provision (reversal) for loan losses 2,430 1,226 ( 54 ) 3,602 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 legacy loan segments and impairment methodology as of the date indicated: ($ in thousands) Real Estate Commercial and Industrial Consumer Total December 31, 2022 Allowance for loan losses: Individually evaluated for impairment $ — $ — $ — $ — Collectively evaluated for impairment 19,227 5,502 213 24,942 Total $ 19,227 $ 5,502 $ 213 $ 24,942 Loans receivable: Individually evaluated for impairment $ 3,889 $ — $ — $ 3,889 Collectively evaluated for impairment 1,770,175 249,250 22,749 2,042,174 Total $ 1,774,064 $ 249,250 $ 22,749 $ 2,046,063 103 Credit Quality Indicators 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 December 31, 2022 Real estate loans: Commercial property $ 1,282,044 $ 3,264 $ 3,084 $ — $ 1,288,392 Residential property 333,354 — 372 — 333,726 SBA property 132,910 245 1,737 — 134,892 Construction 17,054 — — — 17,054 Commercial and industrial loans: Commercial term 75,473 1,248 979 — 77,700 Commercial lines of credit 152,042 2,100 — — 154,142 SBA commercial term 16,175 — 36 — 16,211 SBA PPP 1,197 — — — 1,197 Other consumer loans 22,746 — 3 — 22,749 Total $ 2,032,995 $ 6,857 $ 6,211 $ — $ 2,046,063 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 legacy loan segments as of the date indicated: Still Accruing ($ in thousands) 30 to 59 Days Past Due 60 to 89 Days Past Due 90 or More Days Past Due Nonaccrual Total Past Due and Nonaccrual December 31, 2022 Real estate loans: Commercial property $ — $ — $ — $ 2,400 $ 2,400 Residential property $ — $ — $ — $ 372 $ 372 SBA property — — — 585 585 Other consumer loans 47 87 — 3 137 Total $ 47 $ 87 $ — $ 3,360 $ 3,494 There were no nonaccrual loans guaranteed by the U.S. government agency at December 31, 2022. 104 Impaired Loans 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. With No Allowance Recorded With an Allowance Recorded ($ in thousands) Recorded Investment Unpaid Principal Balance Recorded Investment Unpaid Principal Balance Related Allowance December 31, 2022 Real estate loans: Commercial property $ 2,721 $ 2,727 $ — $ — $ — Residential property 372 372 — — — SBA property 798 840 — — — Total $ 3,891 $ 3,939 $ — $ — $ — 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 ($ in thousands) Average Recorded Investment Interest Income Average Recorded Investment Interest Income Real estate loans: Commercial property $ 1,540 $ 21 $ 329 $ 22 Residential property 379 — — — SBA property 862 15 1,105 16 Commercial and industrial loans: Commercial term — — 10 — Commercial lines of credit 1,635 — — — SBA commercial term 126 — 364 1 Total $ 4,542 $ 36 $ 1,808 $ 39 The following table presents a summary of interest foregone on impaired loans for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 Interest income that would have been recognized had impaired loans performed in accordance with their original terms $ 297 $ 99 Less: interest income recognized on impaired loans on a cash basis ( 36 ) ( 39 ) Interest income foregone on impaired loans $ 261 $ 60 105 Purchases, Sales, and Transfers The following table presents a summary of loans held-for-investment transferred to loans held-for-sale for the periods indicated: Year Ended December 31, ($ in thousands) 2022 2021 Real estate loans: Commercial property $ — $ 8,563 Residential property 458 189 Commercial and industrial loans: Commercial lines of credit 4,000 — Total $ 4,458 $ 8,752 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: Year Ended December 31, ($ in thousands) 2022 2021 Real estate loans: Residential property $ — $ 2,139 Total $ — $ 2,139 The Company had no sales of loans held-for-investment during the years ended December 31, 2022 and 2021. 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 dates indicated: ($ in thousands) December 31, 2022 Real estate loans: SBA property $ 16,473 Commercial and industrial loans: Commercial lines of credit 4,000 SBA commercial term 2,338 Total $ 22,811 106 Note 5. Premises and Equipment The following table presents a composition of premises and equipment as of the dates indicated: December 31, ($ in thousands) 2023 2022 Leasehold improvements $ 10,424 $ 10,269 Furniture, fixtures and equipment 4,375 4,501 Computer equipment 3,359 3,304 Computer software 1,933 1,995 Total premises and equipment 20,091 20,069 Less: accumulated depreciation ( 14,092 ) ( 13,153 ) Premises and equipment, net $ 5,999 $ 6,916 The Company recognized depreciation expense of $ 2.2 million, $ 1.6 million and $ 1.4 million for the years ended December 31, 2023, 2022 and 2021, respectively. Note 6. Operating Leases The following table presents operating lease cost and supplemental cash flow information related to leases for the periods indicated: Year Ended December 31, ($ in thousands) 2023 2022 2021 Operating lease cost (1) $ 3,143 $ 2,752 $ 2,580 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases 3,297 2,960 2,760 Right-of-use assets obtained in exchange for lease obligations 15,317 2,150 1,459 (1) Included in Occupancy and Equipment on the Consolidated Statements of Income. The Company used the incremental borrowing rate based on the information available in determining the present value of lease payment. The following table presents supplemental balance sheet information related to leases as of the dates indicated: December 31, ($ in thousands) 2023 2022 Operating leases: Operating lease assets $ 18,913 $ 6,358 Operating lease liabilities 20,137 6,809 Weighted-average remaining lease term 8.3 years 4.3 years Weighted-average discount rate 4.63 % 2.66 % The following table presents maturities of operating lease liabilities as of the date indicated: ($ in thousands) December 31, 2023 Maturities: 2024 $ 3,385 2025 3,301 2026 2,932 2027 2,543 2028 2,416 After 2028 10,695 Total lease payment 25,272 Imputed interest ( 5,135 ) Present value of operating lease liabilities $ 20,137 107 Note 7. Servicing Assets 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. Loan servicing income was $ 3.3 million, $ 3.0 million and $ 2.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. The following table presents the composition of servicing assets with key assumptions used to estimate the fair value as of the dates indicated: December 31, 2023 2022 ($ in thousands) Residential Mortgage CRE SBA C&I SBA Total Residential Mortgage CRE SBA C&I SBA Total Carrying amount $ 49 $ 6,135 $ 482 $ 6,666 $ 64 $ 6,831 $ 452 $ 7,347 Fair value $ 104 $ 8,284 $ 728 $ 9,116 $ 118 $ 9,090 $ 620 $ 9,828 Discount rates 9.93 % 12.30 % 15.46 % 7.73 % 11.47 % 12.55 % Prepayment speeds 12.75 % 16.71 % 13.97 % 17.10 % 14.82 % 18.93 % Weighted average remaining life 19.8 years 21.0 years 7.1 years 20.8 years 21.4 years 6.7 years Underlying loans being serviced $ 10,666 $ 461,300 $ 60,265 $ 532,231 $ 13,058 $ 461,738 $ 56,299 $ 531,095 The following table presents activity in servicing assets for the periods indicated: ($ in thousands) Residential Mortgage CRE SBA C&I SBA Total Balance at January 1, 2021 $ 109 $ 5,642 $ 649 $ 6,400 Additions — 2,769 109 2,878 Amortization ( 23 ) ( 1,710 ) ( 276 ) ( 2,009 ) Balance at December 31, 2021 86 6,701 482 7,269 Additions — 2,011 202 2,213 Amortization ( 22 ) ( 1,881 ) ( 232 ) ( 2,135 ) Balance at December 31, 2022 64 6,831 452 7,347 Additions — 983 219 1,202 Amortization ( 15 ) ( 1,679 ) ( 189 ) ( 1,883 ) Balance at December 31, 2023 $ 49 $ 6,135 $ 482 $ 6,666 108 Note 8. Other Real Estate Owned The following table presents activity in OREO for the periods indicated: Year Ended December 31, ($ in thousands) 2023 2022 2021 Balance at beginning of year $ — $ — $ 1,401 Additions 2,558 808 1,960 Sales — ( 808 ) ( 3,361 ) Net change in valuation allowance — — — 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: Year Ended December 31, ($ in thousands) 2023 2022 2021 Balance at beginning of year $ — $ — $ — Additions — — — Net direct write-downs and removal from sale — — — Balance at end of year $ — $ — $ — The following table presents expenses related to OREO for the periods indicated: Year Ended December 31, ($ in thousands) 2023 2022 2021 Net (gain) loss on sales $ — $ 152 $ ( 73 ) Operating expenses, net of rental income — ( 13 ) 81 Total $ — $ 139 $ 8 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. 109 Note 9. Deposits 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 $ 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. The California State Treasurer’s deposits are subject to withdrawal based on the State’s periodic evaluations. At December 31, 2023 and 2022, the Company pledged securities with amortized cost of $ 70.9 million and $ 69.0 million, respectively, for the California State Treasurer’s deposits. At December 31, 2023 and 2022, the Company had brokered deposits of $ 303.7 million and $ 87.0 million, respectively. Deposits from certain officers, directors and their related interests with which they are associated held by the Company were $ 3.7 million and $ 2.8 million at December 31, 2023 and 2022, respectively. The following table presents scheduled maturities of time deposits as of the date indicated: December 31, ($ in thousands) 2024 2025 2026 2027 2028 Thereafter Total Time deposits of $250,000 or less $ 757,592 $ 1,923 $ 333 $ 115 $ 71 $ — $ 760,034 Time deposits of more than $250,000 572,679 3,023 — — — — 575,702 Total time deposits $ 1,330,271 $ 4,946 $ 333 $ 115 $ 71 $ — $ 1,335,736 Note 10. Federal Home Loan Bank Advances and Other Borrowings FHLB Advances 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, 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, ($ in thousands) 2024 2025 2026 2027 Thereafter Total Fixed Rate $ 39,000 $ — $ — $ — $ — $ 39,000 Variable Rate — — — — — — Total $ 39,000 $ — $ — $ — $ — $ 39,000 The following table presents financial data of FHLB advances as of the dates or for the periods indicated: As of or For the Year Ended December 31, ($ in thousands) 2023 2022 2021 Weighted-average interest rate at end of year 5.63 % 4.65 % 2.07 % Average interest rate during the year 5.51 % 2.18 % 0.97 % Average balance $ 8,189 $ 5,556 $ 30,096 Maximum amount outstanding at any month-end $ 39,000 $ 20,000 $ 80,000 Balance at end of year $ 39,000 $ 20,000 $ 10,000 Advances paid early are subject to a prepayment penalty. 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. The Company had additional borrowing capacity of $ 603.0 million and $ 561.7 million, respectively, from the FHLB as of December 31, 2023 and 2022. Other Borrowing Arrangements At December 31, 2023, the Company had $ 528.9 million of unused borrowing capacity from the Federal Reserve Discount Window, to which the Company pledged loans with a carrying value of $ 681.8 million with no outstanding borrowings. In addition, the Company may borrow up to approximately $ 65.0 million overnight federal funds lines on an unsecured basis with correspondent banks at December 31, 2023. 110 Note 11. Shareholders’ Equity Preferred Stock 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 for the capital investment of $ 69.1 million from the U.S. Treasury under the ECIP. ECIP investment is treated as tier 1 capital for the regulatory capital treatment. The Series C Preferred Stock bears no dividend for the first 24 months following the investment date. Thereafter, the dividend rate will be adjusted based on the lending growth criteria listed in the terms of the ECIP investment with the annual dividend rate up to 2 %. After the tenth anniversary of the investment date, the dividend rate will be fixed based on the average annual amount of lending in years 2 through 10. Dividends will be payable quarterly in arrears on March 15, June 15, September 15, and December 15. The Series C Preferred Stock may be redeemed at the option of the Company on or after the fifth anniversary of issuance (or earlier in the event of loss of regulatory capital treatment), subject to the approval of the appropriate federal banking regulator and in accordance with the federal banking agencies’ regulatory capital regulations. Common Stock Stock Repurchases During the year ended December 31, 2023, the Company repurchased and retired 512,657 shares of common stock at a weighted-average price of $ 17.22 per share under a stock repurchase program approved by the Board of Directors on August 2, 2023 and a legacy stock repurchase program approved on July 28, 2022. As of December 31, 2023, the Company is authorized to purchase 592,724 additional shares under the 2023 stock repurchase program, which expires on August 2, 2024. 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. 111 Note 12. Share-Based Compensation 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. Share-Based Compensation Expense The following table presents share-based compensation expense and the related tax benefits for the periods indicated: Year Ended December 31, ($ in thousands) 2023 2022 2021 Share-based compensation expense related to: Stock options $ 143 $ 168 $ 187 Restricted stock awards 345 371 266 Total share-based compensation expense $ 488 $ 539 $ 453 Related tax benefits $ 112 $ 113 $ 84 The following table presents unrecognized share-based compensation expense as of the date indicated: December 31, 2023 ($ in thousands) Unrecognized Expense Weighted-Average Remaining Expected Recognition Period Unrecognized share-based compensation expense related to: Stock options $ 784 2.9 years Restricted stock awards 461 2.6 years Total unrecognized share-based compensation expense $ 1,245 2.8 years Stock Options The Company has issued stock options to certain employees, officers and directors. 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. The option holder of non-qualified stock option recognizes taxable income based on the closing market price immediately before the exercise date less the exercise price stated in the grant agreement. The following table presents the weighted-average assumptions used to determine the fair value of options granted for the periods indicated: Year Ended December 31, 2023 2022 2021 Risk-free interest rate 4.92 % 1.55 % 1.13 % Expected term 6.04 years 6.50 years 6.71 years Expected stock price volatility 28.76 % 27.66 % 27.54 % Dividend yield 4.79 % 2.30 % 2.64 % The following table presents information related to the stock option plan for the periods indicated: Year Ended December 31, ($ in thousands, except per share data) 2023 2022 2021 Intrinsic value of options exercised $ 883 $ 1,225 $ 794 Cash received from options exercised $ 1,350 $ 840 $ 1,279 Tax benefit from options exercised $ 103 $ 46 $ 60 Weighted-average estimated fair value per share of options granted $ 3.14 $ 5.03 $ 3.76 112 The following table represents stock option activity as of and for the period indicated: Year Ended December 31, 2023 ($ in thousands except per share data) Number of Shares Weighted-Average Exercise Price Per Share Weighted-Average Contractual Term Aggregated Intrinsic Value Outstanding at beginning of year 566,637 $ 12.49 4.08 years $ 2,946 Granted 208,000 $ 15.04 10.00 years Exercised ( 144,922 ) $ 9.31 1.92 years Forfeited ( 15,000 ) $ 20.96 2.18 years Balance at end of year 614,715 $ 13.90 5.68 years $ 2,788 Exercisable at end of year 345,715 $ 12.36 2.83 years $ 2,087 The following table represents information regarding unvested stock options for the period indicated: Year Ended December 31, 2023 Number of Shares Weighted-Average Exercise Price Per Share Outstanding at beginning of year 94,000 $ 18.95 Granted 208,000 $ 15.04 Vested ( 23,000 ) $ 18.64 Forfeited ( 8,000 ) $ 23.24 Balance at end of year 271,000 $ 15.85 Restricted Stock Awards The Company also has granted RSAs to certain employees and officers. The RSAs are valued at the closing market price of the Company's stock on the grant date and generally have a three -to five-year vesting period. The Company recognizes an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted stock, when vested. The following table represents RSAs activity for the year ended December 31, 2023: Year Ended December 31, 2023 Number of Shares Weighted-Average Grant Date Fair Value Per Share Outstanding at beginning of period 62,022 $ 16.59 Granted 3,300 $ 15.80 Vested ( 23,161 ) $ 14.77 Forfeited ( 500 ) $ 17.06 Outstanding at end of period 41,661 $ 17.53 Note 13. Employee Benefit Plans The Company has adopted a defined contribution 401(k) plan for the benefit of its employees. The Company matches 75 % of an employee’s contribution up to 8 % of the employee’s salary each year. The Board of Directors may make a discretionary contribution to the plan annually. 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. 113 Note 14. Income Taxes The following table presents the components of income tax expense for the periods indicated: Year Ended December 31, ($ in thousands) 2023 2022 2021 Current: Federal $ 5,506 $ 769 $ 12,117 State 2,948 1,475 6,692 Total current income tax expense 8,454 2,244 18,809 Deferred: Federal 2,489 8,434 ( 1,428 ) State 1,614 3,738 ( 525 ) Total deferred income tax expense (benefit) 4,103 12,172 ( 1,953 ) Total $ 12,557 $ 14,416 $ 16,856 The following table presents a reconciliation of the recorded income tax expense to the amount of taxes computed by applying the applicable statutory Federal income tax rate for the periods indicated: Year Ended December 31, 2023 2022 2021 Statutory federal tax rate 21.00 % 21.00 % 21.00 % State and local income taxes, net of federal tax benefit 8.33 % 8.34 % 8.55 % Share-based compensation 0.05 % 0.07 % 0.05 % Bank-owned life insurance ( 0.36 ) % ( 0.30 ) % ( 0.04 ) % Other items, net 0.01 % 0.07 % 0.03 % Effective income tax rate 29.03 % 29.18 % 29.59 % The following table presents the components of the net deferred tax assets recognized in the accompanying consolidated balance sheets as of the dates indicated: December 31, ($ in thousands) 2023 2022 Deferred tax assets: ACL on loans $ 8,105 $ 7,359 Share-based compensation 199 298 Unrealized loss on investment securities 3,783 4,459 Operating lease liabilities 5,928 2,009 State tax benefit 617 322 Other 931 511 Total deferred tax assets 19,563 14,958 Deferred tax liabilities: Loans held-for-sale market adjustment Depreciation on premises and equipment 843 1,051 Loans held-for-sale market adjustment 13,872 8,745 Deferred loan origination costs 75 98 Operating lease assets 5,567 1,876 Other 82 73 Total deferred tax liabilities 20,439 11,843 Deferred tax assets, net $ ( 876 ) $ 3,115 The Company had no valuation allowance for deferred tax assets as of December 31, 2023 and 2022. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the temporary differences become deductible, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets, and a valuation allowance was not necessary as of December 31, 2023 and 2022. 114 At December 31, 2023 and 2022, the Company had no unrecognized tax benefits or related accrued interest. In the event the Company is assessed interest and/or penalties by federal or state tax authorities, such amounts will be classified in the consolidated financial statements as income taxes. The Company does not expect the total amount of unrecognized tax benefit to significantly increase or decrease in the next twelve months. The Company and the Bank are subject to U.S. federal and various state jurisdictions income tax examinations. As of December 31, 2023, the Company is no longer subject to examination by taxing authorities for tax years before 2020 for federal taxes and before 2019 for various state jurisdictions. The statute of limitations vary by state, and state taxes other than California have been immaterial to the Company’s financial results. N o te 15. Earnings Per Share 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, ($ in thousands, except per share) 2023 2022 2021 Basic earnings per share: Net income $ 30,705 $ 34,987 $ 40,103 Less: income allocated to unvested restricted stock ( 95 ) ( 157 ) ( 156 ) Net income allocated to common stock $ 30,610 $ 34,830 $ 39,947 Weighted-average total common shares outstanding 14,345,860 14,888,633 15,076,183 Less: weighted-average unvested restricted stock ( 44,169 ) ( 66,615 ) ( 58,546 ) Weighted-average common shares outstanding, basic 14,301,691 14,822,018 15,017,637 Basic earnings per share $ 2.14 $ 2.35 $ 2.66 Diluted earnings per share: Net income allocated to common stock $ 30,610 $ 34,830 $ 39,947 Weighted-average commons shares outstanding 14,301,691 14,822,018 15,017,637 Diluted effect of stock options 116,247 243,157 236,183 Diluted weighted-average common shares outstanding 14,417,938 15,065,175 15,253,820 Diluted earnings per share $ 2.12 $ 2.31 $ 2.62 There were 286,700 , 65,000 , and 65,000 stock options excluded in computing diluted earnings per share because they were anti-dilutive for years ended December 31, 2023, 2022, and 2021, respectively. 115 Note 16. Commitments and Contingencies In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit and letters of credit. Those instruments involve to varying degrees, elements of credit, and interest rate risk not recognized in the Company’s consolidated financial statements. The following table presents outstanding financial commitments whose contractual amount represents credit risk as of the dates indicated: December 31, 2023 2022 ($ in thousands) Fixed Rate Variable Rate Fixed Rate Variable Rate Unused lines of credit $ 2,808 $ 347,652 $ 3,117 $ 251,178 Unfunded loan commitments 4,020 47,038 692 38,486 Standby letters of credit 4,638 1,786 2,989 1,901 Commercial letters of credit — 160 — 502 Total $ 11,466 $ 396,636 $ 6,798 $ 292,067 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 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. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer. Litigation The Company is involved in various matters of litigation, which have arisen in the ordinary course of business. In the opinion of management, the disposition of pending matters of litigation will not have a material effect on the Company’s consolidated financial statements. Network and Data Incident On August 30, 2021, the Bank identified unusual activity on its network. The Bank responded promptly to disable the activity, investigate its source and monitor the Bank’s network. The Bank subsequently became aware of claims that it had been the target of a ransomware attack. On September 7, 2021, the Bank determined that an external actor had illegally accessed and/or acquired certain data on its network. 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. Some of these files contained documents related to loan applications, such as tax returns, Form W-2 information of their employees, and payroll records. The Bank has notified all individuals identified as impacted, consistent with applicable laws. All impacted individuals were offered free Equifax Complete Premier credit monitoring and identify theft protection services. The Bank has notified law enforcement and appropriate authorities of the incident. 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. 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. 116 Note 17. Regulatory Matters 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 $3 billion asset level, it will be subject to capital requirements independent of the Bank. For comparison purposes, the Company’s ratios are included in the following discussion as well, all of which would have exceeded the “well-capitalized” level had the Company been subject to separate capital minimums. The Company and the Bank’s capital conservation buffer was 7.73 % and 8.07 %, respectively, as of December 31, 2023, and 8.79 % and 9.52 %, respectively, as of December 31, 2022. Unrealized gain or loss on securities available-for-sale is not included in computing regulatory capital. The following table presents the regulatory capital amounts and ratios for the Company and the Bank as of the dates indicated: Actual Minimum Capital Requirement To Be Well Capitalized Under Prompt Corrective Provisions ($ in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2023 PCB Bancorp Common tier 1 capital (to risk-weighted assets) $ 288,174 12.23 % $ 106,043 4.5 % N/A N/A Total capital (to risk-weighted assets) 386,125 16.39 % 188,521 8.0 % N/A N/A Tier 1 capital (to risk-weighted assets) 357,315 15.16 % 141,391 6.0 % N/A N/A Tier 1 capital (to average assets) 357,315 13.43 % 106,423 4.0 % N/A N/A PCB Bank Common tier 1 capital (to risk-weighted assets) $ 350,038 14.85 % $ 106,081 4.5 % $ 153,228 6.5 % Total capital (to risk-weighted assets) 378,849 16.07 % 188,588 8.0 % 235,735 10.0 % Tier 1 capital (to risk-weighted assets) 350,038 14.85 % 141,441 6.0 % 188,588 8.0 % Tier 1 capital (to average assets) 350,038 13.16 % 106,421 4.0 % 133,026 5.0 % December 31, 2022 PCB Bancorp Common tier 1 capital (to risk-weighted assets) $ 276,360 13.29 % $ 93,554 4.5 % N/A N/A Total capital (to risk-weighted assets) 370,742 17.83 % 166,319 8.0 % N/A N/A Tier 1 capital (to risk-weighted assets) 345,501 16.62 % 124,739 6.0 % N/A N/A Tier 1 capital (to average assets) 345,501 14.33 % 96,472 4.0 % N/A N/A PCB Bank Common tier 1 capital (to risk-weighted assets) $ 338,891 16.30 % $ 93,553 4.5 % $ 135,131 6.5 % Total capital (to risk-weighted assets) 364,132 17.52 % 166,316 8.0 % 207,895 10.0 % Tier 1 capital (to risk-weighted assets) 338,891 16.30 % 124,737 6.0 % 166,316 8.0 % Tier 1 capital (to average assets) 338,891 14.05 % 96,469 4.0 % 120,586 5.0 % 117 The California Financial Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of the bank’s undivided profits or the bank’s net income for its last three fiscal years less the amount of any distribution made to the bank’s shareholder during the same period. As a California corporation, the Company is subject to the limitations of California law, which allows a corporation to distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the corporation meets either a retained earnings test or a “balance sheet” test. Under the retained earnings test, the Company may make a distribution from retained earnings to the extent that its retained earnings exceed the sum of (a) the amount of the distribution plus (b) the amount, if any, of dividends in arrears on shares with preferential dividend rights. The Company may also make a distribution if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution. Indebtedness is not considered a liability if the terms of such indebtedness provide that payment of principal and interest thereon are to be made only if, and to the extent that, a distribution to shareholders could be made under the balance sheet test. The Federal Reserve, the FDIC and CDFPI periodically examine the Company’s business, including compliance with laws and regulations. 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 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. Note 18. Revenue Recognition The following table presents revenue from contracts with customers within the scope of ASC 606 for the periods indicated: Year Ended December 31, ($ in thousands) 2023 2022 2021 Noninterest income in-scope of Topic 606 Service charges and fees on deposits: Monthly service fees $ 107 $ 90 $ 81 Account analysis fees 951 936 885 Non-sufficient funds charges 328 221 165 Other deposit related fees 89 79 64 Total service charges and fees on deposits 1,475 1,326 1,195 Debit card fees 339 335 306 Gain (loss) on sale of other real estate owned — 152 74 Wire transfer fees 625 643 596 Other service charges 211 186 198 Total $ 2,650 $ 2,642 $ 2,369 118 Note 19. Condensed Financial Statements for Parent Company The parent company’s condensed statements of financial condition as of December 31, 2023 and 2022, and the related condensed statements of income and comprehensive income, and condensed statements of cash flows for the years ended December 31, 2023, 2022, and 2021 are presented below: Condensed Balance Sheets December 31, ($ in thousands) 2023 2022 Assets Cash $ 7,297 $ 6,549 Investment in subsidiary 341,595 328,832 Other assets 56 61 Total assets $ 348,948 $ 335,442 Liabilities and Shareholders’ Equity Other liabilities $ 76 $ — Total liabilities 76 — Total shareholders’ equity 348,872 335,442 Total liabilities and shareholders’ equity $ 348,948 $ 335,442 Condensed Statements of Income and Comprehensive Income Year Ended December 31, ($ in thousands) 2023 2022 2021 Income: Dividends from subsidiary $ 18,846 $ 16,597 $ 18,375 Other income 6 — — Total income 18,852 16,597 18,375 Expense: Other expense 1,014 912 753 Total expense 1,014 912 753 Income before taxes and equity in undistributed subsidiary income 17,838 15,685 17,622 Income tax benefit ( 293 ) ( 265 ) ( 223 ) Income before equity in undistributed subsidiary income 18,131 15,950 17,845 Equity in undistributed subsidiary income 12,574 19,037 22,258 Net income 30,705 34,987 40,103 Other comprehensive income (loss), net of tax 1,587 ( 10,665 ) ( 1,802 ) Comprehensive income $ 32,292 $ 24,322 $ 38,301 119 Condensed Statements of Cash Flows Year Ended December 31, ($ in thousands) 2023 2022 2021 Cash flows from operating activities Net income $ 30,705 $ 34,987 $ 40,103 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed subsidiary income ( 12,574 ) ( 19,037 ) ( 22,258 ) Change in other assets 5 ( 6 ) ( 11 ) Net cash provided by operating activities 18,136 15,944 17,834 Cash flows from investing activities: Capital contribution to subsidiary — ( 69,141 ) — Net cash used in investing activities — ( 69,141 ) — Cash flows from financing activities: 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 ) Cash dividends paid on common stock ( 9,908 ) ( 8,946 ) ( 6,655 ) Net cash used in financing activities ( 17,388 ) 54,295 ( 16,256 ) Net increase in cash and cash equivalents 748 1,098 1,578 Cash and cash equivalents at beginning of year 6,549 5,451 3,873 Cash and cash equivalents at end of year $ 7,297 $ 6,549 $ 5,451 Note 20. Subsequent Events Dividend Declared on Common Stock. On January 25, 2024, the Company’s Board of Directors declared a quarterly cash dividend of $ 0.18 per common share for the first quarter of 2024. The dividend was paid on February 16, 2024, to shareholders of record as of the close of business on February 9, 2024. 120 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.