RBB Bancorp 10-K

Item 8. Financial Statements and Supplementary Data. CONTENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ( Crowe LLP Los Angeles, California PCAOB ID 173 ) 75 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Eide Bailly LLP Laguna Hills, California PCAOB ID 286) 78 CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheets 79 Consolidated Statements of Income 80 Consolidated Statements of Comprehensive Income 81 Consolidated Statement of Changes in Shareholders' Equity 82 Consolidated Statements of Cash Flows 83 Notes to Consolidated Financial Statements 84 74 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of RBB Bancorp Los Angeles, California Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of RBB Bancorp (the "Company") as of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years ended December 31, 2023 and 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements 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 the years ended December 31, 2023 and 2022, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), 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) and our report dated March 12, 2024 expressed an adverse opinion. Change in Accounting Principal As discussed in Note 2 to the financial statements, the Company changed its method for accounting for credit losses effective January 1, 2022, due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method provided in Accounting Standards Update No. 2016-13 such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the 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. We believe that our audits provide a reasonable basis for our opinion. 75 Table of Contents Critical Audit Matters 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 for Credit Losses on Loans As described in Notes 2 and 5 to the consolidated financial statements, the Company adopted ASU 2016-13 “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”, effective January 1, 2022, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination. Due to the adoption of Current Expected Credit Losses (CECL), the Company recorded a $2.10 million transition adjustment for the allowance for credit losses (ACL) through retained earnings on January 1, 2022. As of December 31, 2023, the Company had gross loan portfolio of $3.03 billion and a related allowance for credit losses on loans of $41.90 million. The Company’s discounted cash flow methodology incorporates a probability of default, loss given default and exposure at default model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. The Company uses both internal and external qualitative factors within the current expected credit losses (“CECL”) model: lending policies, procedures, and strategies; changes in nature and volume of the portfolio; credit and lending personnel experience; changes in volume and trends in classified loans, delinquencies, and nonaccrual; concentration risk; collateral values; regulatory and business environment; loan review results; and economic conditions. We identified auditing the Company’s estimate of Current Expected Credit Losses to be a critical audit matter, particularly as it pertains to auditing the application of qualitative factors, as the matter involved significant audit effort and especially subjective auditor judgment. The primary procedures performed to address the critical audit matter included: • Testing the design and operating effectiveness of controls over qualitative adjustments within the ACL model, including controls addressing: o Management’s review of the reasonableness of assumptions and judgments, including the qualitative risk factors. o Management’s evaluation of the relevance and reliability of data utilized in the calculation of the qualitative factors. • Testing the relevance and reliability of the data used in the determination of qualitative factor adjustments. • Evaluating the reasonableness of management’s assumptions and judgments used in the determination of the qualitative factor adjustments and the resulting qualitative allocation to the allowance for credit losses. /s/ Crowe LLP We have served as the Company's auditor since 2022. Los Angeles, California March 12, 2024 76 Table of Contents Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of RBB Bancorp Los Angeles, California Opinion on Internal Control over Financial Reporting We have audited RBB Bancorp’s (the “Company”) 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, because of the effects of the material weaknesses discussed in the following paragraph, the Company has not 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. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management's report. ● Material weakness in controls related to infrequent transactions such as the income recognition for the Community Development Financial Institution Equitable Recovery Program award. ● Material weakness in the Company’s control environment. Specifically, the Company failed to demonstrate a commitment to attract, develop, and retain competent individuals in the area of internal control over financial reporting. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of RBB Bancorp (the "Company") as of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years ended December 31, 2023 and 2022, and the related notes (collectively referred to as the "financial statements") and our report dated March 12, 2024 expressed an unqualified opinion. We considered the material weaknesses identified above in determining the nature, timing, and extent of audit procedures applied in our audit of the 2023 financial statements, and this report on Internal Control over Financial Reporting does not affect such report on the financial statements. Basis for Opinion The Company’s management is responsible 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 internal control over financial reporting based on our audit. We are a public accounting firm registered with the 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 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. /s/ Crowe LLP Los Angeles, California March 12, 2024 77 Table of Contents Report of Independent Registered Public Accounting Firm Board of Directors and Shareholders of RBB Bancorp and Subsidiaries Los Angeles, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows of RBB Bancorp and Subsidiaries (the Company) for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). In our opinion, these financial statements present fairly, in all material respects, the results of operations and cash flows of RBB Bancorp and Subsidiaries for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Note 2 and Note 14 to the financial statements, the Company has adopted the provisions of FASB Accounting Standards Codification Topic 842, Leases , as of January 1, 2021 using the modified retrospective approach with an adjustment at the beginning of the adoption period. Our opinion is not modified with respect to this matter. Basis for Opinion 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. Our responsibility is to express an opinion on the Company’s financial statements. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit 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 responds to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit 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 also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. We served as the Company’s auditor since 2019. Vavrinek, Trine, Day & Co., LLP, who joined Eide Bailly LLP in 2019, had served as the Company’s auditor since 2008. Laguna Hills, California March 12, 2024 78 Table of Contents RBB BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, (In thousands, except for share data) 2023 2022 Assets Cash and due from banks $ 431,373 $ 83,548 Interest-earning deposits in other financial institutions 600 600 Securities: Available for sale 318,961 256,830 Held to maturity (fair value of $ 5,097 and $ 5,563 at December 31, 2023 and December 31, 2022) 5,209 5,729 Mortgage loans held for sale 1,911 — Loans held for investment 3,031,319 3,336,970 Unaccreted discount on acquired loans ( 970 ) ( 1,238 ) Deferred loan costs, net 1,512 717 Total loans, net of deferred loan costs and unaccreted discounts on acquired loans 3,031,861 3,336,449 Allowance for loan losses ( 41,903 ) ( 41,076 ) Total loans held for investment, net 2,989,958 3,295,373 Premises and equipment, net 25,684 27,009 Federal Home Loan Bank (FHLB) stock 15,000 15,000 Net deferred tax assets 15,765 16,977 Cash surrender value of bank owned life insurance (BOLI) 58,719 57,310 Goodwill 71,498 71,498 Servicing assets 8,110 9,521 Core deposit intangibles 2,795 3,718 Right-of-use assets - operating leases 29,803 25,447 Accrued interest and other assets 50,639 50,498 Total assets $ 4,026,025 $ 3,919,058 Liabilities and Shareholders’ Equity Deposits: Noninterest-bearing demand $ 539,621 $ 798,741 Savings, NOW and money market accounts 632,729 615,339 Time deposits $250,000 and under 1,190,821 837,369 Time deposits over $250,000 811,589 726,234 Total deposits 3,174,760 2,977,683 Reserve for unfunded commitments 640 1,157 FHLB advances 150,000 220,000 Long-term debt, net of issuance costs 119,147 173,585 Subordinated debentures (net of unamortized valuation reserve of $ 2,589 and $ 2,807 at December 31, 2023 and December 31, 2022) 14,938 14,720 Lease liabilities - operating leases 31,191 26,523 Accrued interest and other liabilities 24,089 20,827 Total liabilities 3,514,765 3,434,495 Commitments and contingencies - Note 13 Shareholders' equity: Preferred Stock - 100,000,000 shares authorized, no par value; none outstanding — — Common Stock - 100,000,000 shares authorized, no par value; 18,609,179 shares issued and outstanding at December 31, 2023 and 18,965,776 shares issues and outstanding at December 31, 2022 271,925 276,912 Additional paid-in capital 3,623 3,361 Retained earnings 255,152 225,883 Non-controlling interest 72 72 Accumulated other comprehensive loss, net ( 19,512 ) ( 21,665 ) Total shareholders’ equity 511,260 484,563 Total liabilities and shareholders’ equity $ 4,026,025 $ 3,919,058 The accompanying notes are an integral part of these consolidated financial statements. 79 Table of Contents RBB BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED DECEMBER 31, (In thousands, except share and per share data) 2023 2022 2021 Interest and dividend income: Interest and fees on loans $ 194,264 $ 171,099 $ 141,569 Interest on interest-earning deposits 10,746 1,353 552 Interest on investment securities 14,028 6,084 3,379 Dividend income on FHLB stock 1,125 938 869 Interest on federal funds sold and other 985 1,496 694 Total interest and dividend income 221,148 180,970 147,063 Interest expense: Interest on savings deposits, NOW and money market accounts 12,205 5,561 2,786 Interest on time deposits 76,837 13,338 9,170 Interest on subordinated debentures and long-term debt 9,951 9,645 8,999 Interest on other borrowed funds 2,869 2,872 1,765 Total interest expense 101,862 31,416 22,720 Net interest income before provision for credit losses 119,286 149,554 124,343 Provision for credit losses 3,362 4,935 3,959 Net interest income after provision for credit losses 115,924 144,619 120,384 Noninterest income: Service charges and fees 4,172 4,145 4,524 Loan servicing fees, net of amortization 2,576 2,209 684 Increase in cash surrender value of BOLI 1,409 1,322 1,067 Gain on sale of loans 374 1,895 9,991 Gain on sale of fixed assets 32 757 — Other income 6,455 924 2,479 Total noninterest income 15,018 11,252 18,745 Noninterest expense: Salaries and employee benefits 37,795 35,488 33,568 Occupancy and equipment expenses 9,629 9,092 8,691 Data processing 5,326 5,060 4,474 Legal and professional 8,198 5,383 3,773 Office expenses 1,512 1,438 1,197 Marketing and business promotion 1,132 1,578 1,157 Insurance and regulatory assessments 3,165 1,850 1,561 Core deposit premium amortization 923 1,086 1,121 Other expenses 3,016 3,551 2,650 Total noninterest expense 70,696 64,526 58,192 Net income before income taxes 60,246 91,345 80,937 Income tax expense 17,781 27,018 24,031 Net income $ 42,465 $ 64,327 $ 56,906 Net income per share Basic $ 2.24 $ 3.37 $ 2.92 Diluted 2.24 3.33 2.86 Weighted-average common shares outstanding Basic 18,965,346 19,099,509 19,423,549 Diluted 18,985,233 19,332,639 19,834,306 The accompanying notes are an integral part of these consolidated financial statements. 80 Table of Contents RBB BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, (In thousands) 2023 2022 2021 Net income $ 42,465 $ 64,327 $ 56,906 Other comprehensive income/(loss): Unrealized gains/(losses) on securities available for sale 3,149 ( 28,905 ) ( 3,957 ) Related income tax effect ( 996 ) 8,896 1,172 Total other comprehensive income/(loss) 2,153 ( 20,009 ) ( 2,785 ) Total comprehensive income $ 44,618 $ 44,318 $ 54,121 The accompanying notes are an integral part of these consolidated financial statements. 81 Table of Contents RBB BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 (In thousands, except share data) Common Stock Accumulated Shares Amount Additional Paid-in Capital Retained Earnings Non- Controlling Interest Other Comprehensive Income (Loss) Total Balance at January 1, 2021 19,565,921 $ 284,261 $ 4,932 $ 138,094 $ 72 $ 1,129 $ 428,488 Net income — — — 56,906 — — 56,906 Stock-based compensation, net — — 1,086 — — — 1,086 Restricted stock granted 60,000 — — — — — — Restricted stock vested — 425 ( 425 ) — — — — Cash dividends on common stock ($ 0.51 per share) — — — ( 9,947 ) — — ( 9,947 ) Stock options exercised 302,745 4,465 ( 990 ) — — — 3,475 Repurchase of common stock ( 473,122 ) ( 6,816 ) — ( 3,724 ) — — ( 10,540 ) Other comprehensive loss, net of taxes — — — — — ( 2,785 ) ( 2,785 ) Balance at December 31, 2021 19,455,544 $ 282,335 $ 4,603 $ 181,329 $ 72 $ ( 1,656 ) $ 466,683 Cumulative effect of change in accounting principle related to ASC 326 (1) — — — ( 2,204 ) — — ( 2,204 ) Net income — — — 64,327 — — 64,327 Stock-based compensation, net — — 848 — — — 848 Restricted stock cancelled ( 40,000 ) — — — — — — Restricted stock vested — 355 ( 355 ) — — — — Restricted stock unit vested 7,450 202 ( 202 ) — — — — Cash dividends on common stock ($ 0.56 per share) — — — ( 10,736 ) — — ( 10,736 ) Stock options exercised 445,308 7,009 ( 1,533 ) — — — 5,476 Repurchase of common stock ( 902,526 ) ( 12,989 ) — ( 6,833 ) — — ( 19,822 ) Other comprehensive loss, net of taxes — — — — — ( 20,009 ) ( 20,009 ) Balance at December 31, 2022 18,965,776 $ 276,912 $ 3,361 $ 225,883 $ 72 $ ( 21,665 ) $ 484,563 Net income — — — 42,465 — — 42,465 Stock-based compensation, net — — 750 — — — 750 Restricted stock unit vested 20,374 391 ( 391 ) — — — — Cash dividends on common stock ($ 0.64 per share) — — — ( 12,163 ) — — ( 12,163 ) Stock options exercised 19,403 392 ( 97 ) — — — 295 Repurchase of common stock ( 396,374 ) ( 5,770 ) — ( 1,033 ) — — ( 6,803 ) Other comprehensive income, net of taxes — — — — — 2,153 2,153 Balance at December 31, 2023 18,609,179 $ 271,925 $ 3,623 $ 255,152 $ 72 $ ( 19,512 ) $ 511,260 (1) Represents the impact of the adoption of Accounting Standards Update ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2022. The accompanying notes are an integral part of these consolidated financial statements. 82 Table of Contents RBB BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021 (In thousands) 2023 2022 2021 Operating activities Net income $ 42,465 $ 64,327 $ 56,906 Adjustments to reconcile net income to net cash from Operating activities: Depreciation and amortization of premises and equipment 2,018 2,022 1,943 Net accretion of discount for securities, loans, deposits, and other ( 5,396 ) ( 432 ) ( 191 ) Unrealized (gain)/loss on equity securities ( 24 ) — 360 Amortization of investment in affordable housing tax credits 1,127 1,053 1,037 Amortization of intangible assets 2,568 3,853 6,347 Reversal of an impairment allowance on mortgage servicing rights — — ( 417 ) Amortization of right-of-use asset 5,042 5,145 5,245 Change in operating lease liabilities ( 4,730 ) ( 4,897 ) ( 5,058 ) Provision for credit losses 3,362 4,935 3,959 Stock-based compensation, net 750 848 1,086 Deferred tax expense/(benefit) 216 ( 2,249 ) ( 1,093 ) Gain on sale of loans ( 374 ) ( 1,895 ) ( 9,991 ) Gain on sale of OREO ( 134 ) — — Gain on sale of fixed assets ( 32 ) ( 757 ) — Increase in cash surrender value of BOLI ( 1,409 ) ( 1,322 ) ( 1,067 ) Loans originated and purchased for sale, net ( 15,058 ) ( 39,152 ) ( 161,972 ) Proceeds from loans sold 18,743 60,170 305,337 Other items 2,158 2,163 ( 256 ) Net cash provided by operating activities 51,292 93,812 202,175 Investing activities Securities available for sale: Purchases ( 694,210 ) ( 402,656 ) ( 603,836 ) Maturities, repayments and calls 640,993 485,796 442,056 Securities held to maturity: Maturities, repayments and calls 500 500 900 Redemption of Federal Home Loan Bank stock — — 641 Purchase of Federal Home Loan Bank stock and other equity securities, net ( 479 ) ( 2,608 ) ( 5,839 ) Net increase of investment in qualified affordable housing projects ( 279 ) ( 227 ) ( 763 ) Net decrease/(increase) in loans 296,693 ( 411,316 ) ( 315,551 ) Proceeds from sales of OREO 711 — — Purchase of bank owned life insurance — — ( 19,800 ) Net cash received in connection with acquisition — 71,352 — Proceeds from sale of fixed assets 32 1,053 — Purchases of premises and equipment ( 652 ) ( 2,065 ) ( 1,989 ) Net cash provided by/(used in) investing activities 243,309 ( 260,171 ) ( 504,181 ) Financing activities Net (decrease)/increase in demand deposits and savings accounts ( 241,730 ) ( 886,712 ) 870,803 Net increase/(decrease) in time deposits 438,625 397,329 ( 120,178 ) Advances from Federal Home Loan Bank 80,000 570,000 — Repayment of Federal Home Loan Bank borrowings ( 150,000 ) ( 500,000 ) — Cash dividends paid ( 12,163 ) ( 10,736 ) ( 9,947 ) Redemption of subordinated notes ( 55,000 ) — ( 50,000 ) Issuance of subordinated notes, net of issuance costs — — 118,111 Common stock repurchased, net of repurchased costs ( 6,803 ) ( 19,822 ) ( 10,540 ) Exercise of stock options 295 5,476 3,475 Net cash provided by/(used in) financing activities 53,224 ( 444,465 ) 801,724 Net increase/(decrease) in cash and cash equivalents 347,825 ( 610,824 ) 499,718 Cash and cash equivalents at beginning of period 83,548 694,372 194,654 Cash and cash equivalents at end of period $ 431,373 $ 83,548 $ 694,372 Supplemental disclosure of cash flow information Cash paid during the period: Interest paid $ 93,721 $ 29,734 $ 22,507 Taxes paid 21,389 24,019 25,786 Non-cash investing and financing activities: Transfer from loans to other real estate owned — 142 — Loans transfer to held for sale, net 5,254 13,166 89,368 Additions to servicing assets 234 771 2,361 Recognition of operating lease right-of-use assets ( 9,398 ) ( 8,138 ) ( 27,699 ) Recognition of operating lease liabilities 9,398 8,138 27,699 Acquisition: Assets acquired, net of cash received — 8,183 — Liabilities assumed — 81,790 — Cash receipts — ( 71,040 ) — Goodwill — 2,255 — The accompanying notes are an integral part of these consolidated financial statements. 83 Table of Contents RBB BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BUSINESS DESCRIPTION RBB Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. RBB Bancorp’s principal business is to serve as the holding company for its wholly owned banking subsidiaries, Royal Business Bank (“Bank”) and RBB Asset Management Company (“RAM”), collectively referred to herein as “the Company.” RBB Bancorp was formed in January 2011 as a bank holding company and RAM was formed in 2012 to hold and manage problem assets acquired in business combinations. When we refer to “we”, “us”, “our”, or the “Company”, we are referring to RBB Bancorp and its consolidated subsidiaries including the Bank, collectively. When we refer to the “parent company”, “Bancorp”, or the “holding company”, we are referring to RBB Bancorp, the parent company, on a stand-along basis. At December 31, 2023, the Company had total assets of $ 4.0 billion, gross consolidated loans (held for investment and held for sale) of $ 3.0 billion, total deposits of $ 3.2 billion and total shareholders' equity of $ 511.3 million. The Bank provides business-banking products and services predominantly to the Asian-American communities through full service branches located in Los Angeles County, Orange County and Ventura County in California, in the Las Vegas, Nevada and New York City metropolitan areas, Chicago (Illinois), Edison (New Jersey) and Honolulu (Hawaii). The products and services include commercial and investor real estate loans, business loans and lines of credit, Small Business Administration (“SBA”) 7A and 504 loans, mortgage loans, trade finance and a full range of depository accounts, including specialized services such as remote deposit, E-banking, and mobile banking. The Bank acquired the Honolulu, Hawaii branch (the “Hawaii Branch”) from Bank of the Orient (“BOTO”) on January 14, 2022. The Company operates full-service banking offices in Arcadia, Cerritos, Diamond Bar, Irvine, Los Angeles, Monterey Park, Oxnard, Rowland Heights, San Gabriel, Silver Lake, Torrance, and Westlake Village, California; Las Vegas, Nevada; Manhattan, Brooklyn, Flushing and Elmhurst, New York; the Chinatown and Bridgeport neighborhoods of Chicago, Illinois; Edison, New Jersey; and Honolulu, Hawaii. The Company's primary source of revenue is providing loans to customers, who are predominately small and middle-market businesses and individuals. The Company generates its revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities. The Company also derives income from noninterest sources, such as fees received in connection with various lending and deposit services, loan servicing, gain on sales of loans and wealth management services. The Company’s principle expenses include interest expense on deposits and other long-term debt, and operating expenses, such as salaries and employee benefits, occupancy and equipment, data processing, and income tax expense. The Company completed six whole bank acquisitions and one branch acquisition from July 2011 through January 2022. All of the Company’s acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. The Company previously disclosed that, on December 28, 2021, it entered into a definitive agreement to acquire Gateway Bank F.S.B. (“Gateway”) in an all cash transaction, subject to certain terms and conditions. On September 28, 2023, the Company announced that it and Gateway have mutually agreed to terminate the definitive agreement, effective as of September 28, 2023. Neither party has or will have any liability or pay any penalty to the other party as a result of the termination, and each party has released the other from any and all claims related to the definitive agreement or the transactions contemplated by the definitive agreement. NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10 -K and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for financial reporting. Principles of Consolidation and Nature of Operations The accompanying consolidated financial statements include the accounts of RBB Bancorp and its wholly-owned subsidiaries RBB and RAM. All significant intercompany transactions have been eliminated. 84 Table of Contents RBB Bancorp has no significant business activity other than its investments in the Bank and in RAM. However, through our whole bank acquisition activity, we have acquired three statutory business trusts: TFC Statutory Trust, FAIC Statutory Trust and PGB Capital Trust I. These trusts issued trust preferred securities representing undivided preferred beneficial interests in the assets of these trusts. The proceeds of these trust preferred securities were invested in certain securities issued by the entities we have acquired, with similar terms to the relevant series of securities issued by these trusts, which we refer to as subordinated debentures, and are included in Tier 2 capital. The parent company only condensed financial information on RBB Bancorp is provided in Note 22. In connection with the 2018 acquisition of First American International Corp (“FAIC”), the Company acquired FAIB Capital Corp. (“FAICC”), a real estate investment trust formed on August 28, 2013 as a New York State corporation, which operates as a wholly-owned subsidiary of the Bank. Use of Estimates in the Preparation of Financial Statements The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. It is reasonably possible that these estimates could change as actual results could differ from those estimates. The allowance for credit losses, realization of deferred tax assets, the valuation of goodwill and other intangible assets, other derivatives, and the fair value measurement of financial instruments are particularly subject to change and such change could have a material effect on the consolidated financial statements. Cash and Cash Equivalents Cash and cash equivalents include cash and due from banks, term federal funds sold and interest-bearing deposits in other financial institutions with original maturities of less than 90 days. Net cash flows are reported for customer loan and deposit transactions and interest-bearing deposits in other financial institutions. Cash and Due from Banks Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. There were no reserves required to be held as of December 31, 2023 and 2022. The Company maintains amounts in due from bank accounts, which may exceed federally insured limits. The Company has not experienced any losses in such accounts. Interest-Earning Deposits in Other Financial Institutions Interest-bearing deposits in other financial institutions not included in cash and cash equivalents are carried at cost and generally mature in one year or less. Investment Securities Investment securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax. Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are amortized on the level-yield method to the earlier of the maturity date or call date of the underlying securities. Gains and losses on sales are recorded on the trade date and determined using the specific identification method. 85 Table of Contents Prior to January 1, 2022, management evaluated debt securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considered the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assessed whether it intended to sell, or it was more likely than not that it would be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell was met, the entire difference between amortized cost and fair value was recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment was split into two components as follows; OTTI related to credit loss, which must be recognized in the income statement and; OTTI related to other factors, which was recognized in other comprehensive income. The credit loss was defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Effective January 1, 2022, upon the adoption of ASU 2016 - 13, Financial Instruments—Credit Losses (Topic 326 ), the Company accounts for credit losses on available for sale securities in accordance with ASC 326 - 30. Debt securities are measured at fair value and subject to impairment testing. When a debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, ( 1 ) recognize an allowance for credit loss by a charge to earnings for the credit-related component (if any) of the decline in fair value, and ( 2 ) recognize in other comprehensive income (loss) any non-credit related components of the fair value change. If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, then the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, then the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, then a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income (loss). Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on available-for-sale debt securities totaled $ 919,000 and $ 759,000 at December 31, 2023 and 2022, and is excluded from the estimate of credit losses. Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities totaled $ 43,000 and $ 51,000 at December 31, 2023 and 2022, and is excluded from the estimate of credit losses. Loans Held For Sale Mortgage loans originated or acquired and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans held for sale consist primarily of first trust deed mortgages on single-family residential properties located in California and New York. Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is determined by reducing the amount allocated to the servicing right, when applicable. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loans sold. Loans Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs and net of any 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 level-yield method without anticipating prepayments. Premiums and discounts on loans purchased are grouped by type and certain common risk characteristics and amortized or accreted as an adjustment of yield over the weighted-average remaining contractual lives of each group of loans, adjusted for prepayments when applicable, using methodologies which approximate the interest method. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due 90 days or when, in the opinion of management, there is reasonable doubt as to collectability based on contractual terms of the loan. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest. 86 Table of Contents Allowance for Credit Losses - Loans Effective January 1, 2022, upon the adoption of ASU 2016 - 13, Financial Instruments—Credit Losses (Topic 326 ), the Company accounts for credit losses on loans 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. The allowance for credit losses (“ACL”) is maintained at a level deemed appropriate by management to provide for expected credit losses in the loan portfolio as of the date of the consolidated balance sheet. 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 has elected to utilize a DCF approach for all segments except for consumer loans and loans to non-depository financial institutions, which use a remaining life approach. The Company’s DCF methodology incorporates a probability of default, loss given default and exposure at default model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. The Company uses both internal and external qualitative factors within the current expected credit losses (“CECL”) model including: lending policies, procedures, and strategies; changes in nature and volume of the portfolio; credit and lending personnel experience; changes in volume and trends in classified loans, delinquencies, and nonaccrual; concentration risk; collateral values; regulatory and business environment; loan review results; and economic conditions. The Company determines the weighting of the qualitative factors based on management’s ability to directly control or influence the level of risk exposure. The factors related to economic conditions, collateral values, and the regulatory and business environment were assigned a higher allocation, and the remaining factors related to internal conditions received a lower allocation. Management further estimates the allowance balance required using past loan loss experience from peers with similar portfolio sizes and geographic locations to the Company, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. The Company’s CECL methodology utilizes a four -quarter reasonable and supportable forecast period, and a four -quarter reversion period. The Company is using the Federal Open Market Committee to obtain forecasts for the unemployment rate, while reverting to a long-run average of each considered economic factor. The Company records a liability for lifetime expected credit losses on off-balance-sheet credit exposure that do not fit the definition of unconditionally cancelable in accordance with ASC 326. The Company uses the loss rate and exposure of default framework to estimate a reserve for unfunded commitments. Loss rates for the expected funded balances are determined based on the associated pooled loan analysis loss rate and the exposure at default is based on an estimated utilization given default. The Company assesses expected credit losses for individual instruments that have different risk characteristics than those that are evaluated on a collective (pooled) basis, in accordance with ASC 326. An individual analysis will provide a specific reserve for instruments involved with fair market value of collateral or present value of future cash flow. In such a manner, the Bank performs individual analysis on loans that are 90 or more days past due, on non-accrual status or modified loans. Credit losses are not estimated for accrued interest receivable as interest that is deemed uncollectible is written off through interest income. The Company adopted ASU 2022 - 02, Financial Instruments—Credit Losses (Topic 326 ), effective January 1, 2023. Upon adoption, the Company evaluates all receivable modifications under ASC 310 to determine whether a modification made to a borrower results in a new loan or a continuation of the existing loan. The Company no longer considers renewals, modifications, or extensions resulting from reasonably expected troubled debt restructurings (“TDRs”) when calculating the allowance for credit losses under ASC 326. The post-modification effective interest rate is used to calculate the allowance for credit losses when the DCF method is applied. Allowance for Loan Losses (prior to January 1, 2022) Prior to the Company's adoption of ASC 326, Financial Instruments—Credit Losses, on January 1, 2022, the Company maintained an allowance for loan losses (“ALL”) in accordance with ASC 450, Contingencies, and ASC 310, Receivables. The ALL was a valuation allowance for probable incurred credit losses. Loan losses were charged against the allowance when management believed the uncollectibility of a loan balance was confirmed. Subsequent recoveries, if any, were credited to the allowance. Management estimated the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions, and other factors. Allocations of the allowance may have been made for specific loans, but the entire allowance was available for any loan that, in management's judgment, should be charged-off. Amounts were charged-off when available information confirmed that specific loans or portions thereof, were uncollectible. This methodology for determining charge-offs was consistently applied to each segment. Servicing Rights Servicing rights are established as an intangible asset when mortgage loans and SBA loans are sold with servicing retained and they are initially recorded at fair value with the income statement effect recorded in the gain on sale of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Quarterly impairment is based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a charge to income to establish a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. The estimated fair value of the servicing rights is obtained through independent third party valuations based on an analysis of future cash flows, incorporating key assumptions including discount rates, prepayment speeds and interest rates. Servicing fee income, which is reported on the income statement as loan servicing fees, net of amortization , is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal. The amortization of the mortgage and SBA servicing rights is offset against loan servicing fee income and reported as a net amount in the consolidated income statement. Transfers of Financial Assets Transfers of financial assets are accounted for as 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. Gains on sale of mortgage loans totaled $ 112,000 , $ 1.2 million, and $ 7.9 million, and gains on sale of SBA loans totaled $ 262,000 , $ 696,000 , and $ 2.1 million in 2023, 2022, and 2021, respectively. 87 Table of Contents Premises and Equipment Land is carried at cost. Premises, leasehold improvements 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 is thirty years for premises and ranges from three to ten years for leasehold improvements 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 incurred. Operating Lease ROU Assets and Lease Liabilities Operating lease Right-of-Use (“ROU”) assets and lease liabilities are included in other assets and other liabilities, respectively, on the Company’s consolidated balance sheet. The ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The lease terms include periods covered by options to extend or terminate the lease depending on whether the Company is reasonably certain to exercise such options. The Company uses its incremental borrowing rate to determine the present value of its lease liabilities. The ROU asset, at adoption of ASU 2016 - 02, Leases (Topic 842 ), was recorded at the amount of the lease liability plus any prepaid rent and initial direct costs, less any lease incentives and accrued rent. Upon adoption of this Topic on January 1, 2021, the Company elected the package of practical expedients that permits the Company to not reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected all of the new standard’s available transition practical expedients, including the short-term lease recognition exemption that includes not recognizing ROU assets or lease liabilities for existing short-term leases, and the practical expedient to not separate lease and non-lease components for all of the Company’s leases. The Company determines if a contract arrangement is a lease at inception and primarily enters into operating lease contracts for its branch locations, office space, and certain equipment. As part of its property lease agreements, the Company may seek to include options to extend or terminate at lease when it is reasonably certain that the Company will exercise those options. The Company's measurement of the ROU assets and operating lease liabilities does not include payments associated with the option to extend or terminate the lease term unless the Company is reasonably certain to exercise such options then the period will cover the option to extend or terminate. The ROU lease asset also includes any lease payments made and lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company did not possess any leases that have variable lease payments or residual value guarantees as of December 31, 2023. Other Real Estate Owned Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for credit losses, if necessary. Other real estate owned is carried at the lower of the Company's carrying value of the property or its fair value, less estimated carrying costs and costs of disposition. Fair value is based on current appraisals less estimated selling costs. Any subsequent write-downs are charged against operating expenses and recognized as a valuation allowance. Operating expenses and related income of such properties and gains and losses on their disposition are included in other operating income and expenses. Goodwill and Other Intangible Assets Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill resulting from whole bank and branch acquisitions is not amortized, but tested for impairment at least annually. The Company has selected October 1 as the date to perform the annual impairment test. Goodwill amounted to $ 71.5 million as of December 31, 2023 and 2022, and is the only intangible asset with an indefinite life on the balance sheet. No impairment was recognized on goodwill during 2023 and 2022. Goodwill in the amount of $ 2.3 million was recognized in conjunction with the acquisition of the Hawaii Branch from BOTO. After evaluating the prolonged decrease in the Company’s market value, management performed a quantitative goodwill impairment analysis as of September 30, 2023. Management engaged a third -party valuation specialist to assist with the quantitative analysis. The evaluation used two methods to estimate the value of the Company: the market approach and the income approach. The market approach uses pricing information available on publicly traded companies that are similar to the subject company to determine the value of the subject company. Estimates used in the market approach included selecting a representative peer group of institutions, determining the price to tangible book value based on the results of the peer group institutions, and estimating a control premium based on the whole-bank acquisition prices for representative transactions. The income approach is based on the discounted free cash flows of the subject company using projections of future results, and considering future economic forecasts and management’s plans. Estimates used in the income approach include management’s projections of the Company’s income in future periods and an appropriate rate of return that would be required by a market participant. Based on this quantitative analysis, the fair value of the Company exceeds its carrying amount with a passing amount of 9.6 % at September 30, 2023. In addition, due to changes in the Company’s projections of income in future periods during the fourth quarter of 2023 resulting from the current economic environment, at December 31, 2023, management performed certain calculations and sensitivity analyses related to the quantitative goodwill impairment analysis performed at September 30, 2023 and the current information. Based on this most recent analysis, management concluded that goodwill was also not impaired at December 31, 2023. Other intangible assets consist of core deposit intangible (“CDI”) assets arising from acquisitions. CDI assets are amortized on an accelerated method over their estimated useful life of 8 to 10 years. CDI was recognized in the 2013 acquisition of Los Angeles National Bank, in the 2016 acquisition of TFC Holding Company, in the 2018 acquisition of FAIC and in the 2020 acquisition of PGBH. In January 2022, $ 729,000 of CDI was recognized in conjunction with the Hawaii Branch purchase from BOTO. The following table presents changes in the carrying amount of CDI for the periods indicated: Year ended December 31, (dollars in thousands) 2023 2022 2021 Core deposit intangibles Balance, beginning of year $ 10,459 $ 9,730 $ 9,730 Acquired from acquisitions — 729 — Balance, end of year $ 10,459 $ 10,459 $ 9,730 Accumulated amortization: Balance, beginning of year $ 6,741 $ 5,655 $ 4,534 Amortization 923 1,086 1,121 Balance, end of year $ 7,664 $ 6,741 $ 5,655 Core deposit intangibles, net $ 2,795 $ 3,718 $ 4,075 Estimated CDI amortization expense for the next 5 years is as follows: (dollars in thousands) Year ending December 31: 2024 $ 784 2025 672 2026 501 2027 417 2028 297 Thereafter 124 Total $ 2,795 Bank Owned Life Insurance The Company has purchased life insurance policies on a select group of employees and directors. Bank Owned Life Insurance (“BOLI”) 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 that are probable at settlement. Increases of the cash value of these policies, as well as insurance proceeds received, are recorded in the other noninterest income and are not subject to income tax for as long as they are held for the life of the covered employees and directors. FHLB Stock and Other Equity Securities The Company is a member of the Federal Home Loan Bank (“FHLB”) 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 stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income. The Company also owns an equity investment in Pacific Coast Banker’s Bank and Atlantic Community Bankers Bank stock. The Company adopted ASU 2016 - 01 on January 1, 2019, and elected the measurement alternative for measuring equity securities without readily determinable fair values at cost less impairment, plus or minus observable price changes in orderly transactions. As of December 31, 2023, the Company had several equity investments without readily determinable fair values in the amount of $ 22.3 million, and $ 22.2 million at December 31, 2022. There were no impairment charges in 2023 or 2022. There was a $ 360,000 impairment charge in 2021. 88 Table of Contents Stock-Based Compensation The Company currently recognizes stock-based compensation based on the grant date fair value of equity awards, including stock options, restricted stock units and restricted stock, which have been granted to employees. The expense related to equity-based awards granted to directors or other qualified non-employee awardees is recognized as other noninterest expense. Stock option compensation expense is calculated based on the fair value of the award at the grant date for those options expected to vest and is recognized as an expense over the vesting period of the grant using the straight-line method. The Company uses the Black-Scholes option-pricing model to estimate the value of granted stock options. This model takes into account the option exercise price, the expected life, the current price of the underlying stock, the expected volatility of the Company’s stock, expected dividends on the stock and a risk-free interest rate. The Company estimates the expected volatility based on the Company’s historical stock prices for the period corresponding to the expected life of the stock options. Restricted stock and restricted stock units are valued based on the closing price of the Company’s stock on the date of the grant. Stock-based compensation expense is recognized over the period which an employee is required to provide services in exchange for the award, generally defined as the vesting period. When the options are exercised, the Company’s policy is to issue new shares of stock. The Company’s accounting policy is to recognize forfeitures as they occur. Income Taxes Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense. Under ASC 740, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of the Company's deferred tax assets will not be realized. The Company's policy is to evaluate the deferred tax assets on a quarterly basis and record a valuation allowance for the Company's deferred tax assets if there is not sufficient positive evidence available to demonstrate utilization of the Company's deferred tax assets. Initial setup or an increase to deferred tax asset valuation allowance would be charged to income tax expense that would negatively impact our earnings. Retirement Plans The Company established a 401 (k) plan in 2010. The Company contributed $ 707,000 , $ 594,000 , and $ 532,000 in 2023, 2022 and 2021, respectively. Comprehensive Income Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of taxes. Financial Instruments 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, unused lines of credit, commercial and similar letters of credit and standby letters of credit as described in Note 13. Such financial instruments are recorded in the financial statements when they are funded. Derivatives Interest Rate Lock Commitments (“IRLCs”) are agreements under which the Company agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under the agreement, the Company commits to lend funds to a potential borrower (subject to the Company’s approval of the loan) on a fixed or adjustable rate basis, regardless of whether interest rates change in the market, or on a floating rate basis. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancelling or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. The Company uses best efforts commitments to substantially eliminate these risks. Historical commitment-to-closing ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs. ASC 815, Derivatives and Hedging, provides that IRLCs on mortgage loans that will be held for resale are derivatives and must be accounted for at fair value on the balance sheet. ASC 820, Fair Value Measurements and Disclosures, specifies how these derivatives are to be valued. Commitments to originate mortgage loans to be held for investment and other types of loans are generally not derivatives. The Company has elected to account for these obligations at fair value. Forward Mortgage Loan Sale Contracts (“FMLSC”) are utilized to avoid interest rate risk at the time an interest rate lock commitment is made to the buyer. The Company is subject to interest rate and price risk on its mortgage loans held for sale from the loan funding date until the date the loan is sold. Best efforts commitments which fix the forward sales price that will be realized in the secondary market are used to eliminate the interest rate and price risk to the Company. To avoid interest rate risk, the Company will enter into FMLSCs at the time they make an interest rate lock commitment to the buyer. The buyer can enter into mortgage loan sales commitments on a “mandatory” or “best efforts” basis. Mandatory commitments provide that the loan must be delivered or the commitment be “paired off.” In general, best efforts commitments provide that the loan be delivered if and when it closes. Forward commitments, also known as forward loan sales commitments, are considered derivatives under ASC Topic 815, Derivatives and Hedging, because they meet all of the following criteria: ● They have a specified underlying (the contractually specified price for the loans); ● They have a notional amount (the committed loan principal amount); ● They require little or no initial net investment; and ● They require or permit net settlement as the institution via a pair-off transaction or the payment of a pair-off fee. See Note 18 for more information and disclosures relating to the Company's derivatives. 89 Table of Contents Earnings Per Share ( “ EPS ” ) Basic and diluted EPS are calculated using the two -class method since the Company has issued share-based payment awards considered participating securities because they entitle holders the rights to dividends during the vesting term. The two -class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities 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. Fair Value Measurement Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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 and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair values: 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 other 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 the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability. See Note 18 for more information and disclosures relating to the Company's fair value measurements. Operating Segments Management has determined that since generally all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. 90 Table of Contents Recent Accounting Pronouncements Recently Adopted In June 2016, the FASB issued ASU 2016 - 13, Measurement of Credit Losses on Financial Instrument (Topic 326 ), including subsequent amendments to this ASU. This ASU changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced the “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model, applies to: ( 1 ) financial assets subject to credit losses and measured at amortized cost, and ( 2 ) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held to maturity securities, loan commitments, and financial guarantees. For available for sale (“AFS”) debt securities with unrealized losses, losses will be recognized as allowances rather than reductions in the amortized cost of the securities. ASU 2016 - 13 also expands the disclosure requirements regarding an entity's assumptions, models, and methods for estimating the allowance for credit losses. In addition, entities are required to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The Company retroactively adopted CECL to January 1, 2022 as the Company’s emerging growth company status expired as of December 31, 2022. A one -time cumulative adjustment of $ 2.1 million was made to the Company’s ACL, which was recorded through retained earnings upon adoption of ASU 2016 - 13 as of January 1, 2022. The following table sets forth the cumulative effect of the changes to the Company's consolidated balance sheets at January 1, 2022, for the adoption of ASU 2016 - 13: Adjustments due to Balance at Adoption of Balance at (dollars in thousands) December 31, 2021 ASC 326 January 1, 2022 Assets: Allowance for credit losses on loans $ 32,912 $ 2,135 $ 35,047 Deferred tax assets 4,855 977 5,832 Liabilities: Reserve for unfunded commitments $ 1,203 $ 1,045 $ 2,248 Stockholders' equity: Retained earnings, net of tax $ 181,329 $ ( 2,204 ) $ 179,125 In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a three -year period the day- one adverse regulatory capital effects of ASU 2016 - 13. Additionally, in March 2020, the U.S. federal bank regulatory agencies issued an interim final rule that provided banking organizations that adopted CECL in the 2020 an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the novel coronavirus disease 2019 (“COVID- 19” ) pandemic. As a result, entities that adopted CECL in 2020 had the option to gradually phase in the full effect of CECL on regulatory capital over a five -year transition period. For entities who adopted CECL after 2020, the three -year phase-in transition provision is available if any entity experiences a reduction in retained earnings due to CECL adoption as of the beginning of the fiscal year in which the institution adopts CECL and makes an election to use this phase-in option. Effective January 1, 2022, the Company adopted ASU 2016 - 13, reflected the full effect of CECL at December 31, 2022, and did not elect the three -year CECL phase-in option on regulatory capital. In January 2017, the FASB issued ASU 2017 - 04, Intangibles—Goodwill and Other (Topic 350 ). This Update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendments in this Update are required for public business entities and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. As a result, under this Update, “an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.” The Company adopted this ASU on December 31, 2022. Adoption of ASU 2017 - 04 did not have a significant impact on the Company’s consolidated financial statements. 91 Table of Contents In February 2020, the FASB issued ASU 2020 - 02, Financial Instruments—Credit Losses (Topic 326 ) and Leases (Topic 842 )—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016 - 02, Leases (Topic 842 ) (SEC Update). This is an amendment to add the SEC Staff guidance on CECL) to the FASB codification. It contains guidance on what the SEC would expect the Company to perform and document when measuring and recording its allowance for credit losses for financial assets recorded at amortized cost. The Company implemented CECL on January 1, 2022. Upon adoption of CECL, the Company recorded a $ 2.1 million transition adjustment for the allowance for credit losses through retained earnings. In March 2020, the FASB issued ASU 2020 - 04, Reference Rate Reform (Topic 848 ), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”). This pronouncement is applicable to all companies with contracts or hedging relationships that reference an interest rate that is expected to be discontinued. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time. The optional relief generally does not apply to contract modifications made, sales and transfers of HTM debt securities, and hedging relationships entered into or evaluated after December 31, 2022. The guidance was effective upon issuance and generally can be applied through December 31, 2022. In December 2022, the FASB issued 2022 - 06, Reference Rate Reform (Topic 848 ): Deferral of the Sunset Date of Topic 848, to defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The LIBOR termination date was June 30, 2023. The Company converted all loans indexed under LIBOR to CME Term SOFR with relevant spread adjustment as the alternative reference rate beginning on and after July 3, 2023. No LIBOR indexed loans are being originated. The Company has several issuances of LIBOR based long-term debt and subordinated debentures. Refer to Notes 9 and 10 of the Company’s consolidated financial statements included in this Annual Report. In October 2021, the FASB issued ASU 2021 - 08, Accounting for Contract Assets and Contract Liabilities, to require an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue recognition guidance as if the acquirer had originated the contract. That is, such acquired contracts will not be measured at fair value. The Update is effective for public companies in fiscal years starting after December 15, 2022. The Company adopted ASU 2021 - 08 on January 1, 2023 and the adoption did not have a material impact on the Company's consolidated financial statements. In March 2022, the FASB issued ASU 2022 - 02, Financial Instruments-Credit Losses (Topic 326 ). The standard addresses the following: 1 ) eliminates the accounting guidance for TDRs, and will require an entity to determine whether a modification results in a new loan or a continuation of an existing loan, 2 ) expands disclosures related to modifications, and 3 ) will require disclosure of current period gross write-offs of financing receivables within the vintage disclosures table. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and are applied prospectively, except with respect to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method. Early adoption of the amendments in this ASU is permitted. An entity may elect to early adopt the amendments regarding TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company adopted ASU 2022 - 02 on January 1, 2023 and see Note 5 for the disclosure impact. Recently Issued; Not Yet Effective In June 2022, the FASB issued ASU 2022 - 03 , Fair Value Measurement (Topic 820 )—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This pronouncement clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022 - 03 also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires certain new disclosures for equity securities subject to contractual sale restrictions. ASU 2022 - 03 will be effective for the Company on January 1, 2024 . Adoption of ASU 2022 - 03 is not expected to have a material impact on the Company’s consolidated financial statements. In March 2023, the FASB issued ASU 2023 - 02 , Investments - Equity Method and Joint Ventures (Topic 323 ). This Update permits reporting entities to elect to account for their tax equity investments using the proportional amortization method if certain conditions are met. It requires that a liability be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable. The reporting entity needs to disclose the nature of its tax equity investments and the effect of its tax equity investments on its financial position and results of operations. ASU 2023 - 02 will be effective for the Company in fiscal years beginning after December 15, 2023 , including interim periods within those fiscal years. Adoption of ASU 2023 - 02 is not expected to have a material impact on the Company's consolidated financial statements. In October 2023, the FASB issued ASU 2023 - 06 , Disclosure Improvements. This pronouncement amends the FASB Accounting Standards Codification to reflect updates and simplifications to certain disclosure requirements referred to the FASB by the SEC in 2018, including disclosures for the statement of cash flows, earnings per share, commitments, debt and equity instruments, and certain industry information, among other things. Each amendment is effective when the related disclosure is effectively removed from Regulations S- X or S-K; early adoption is prohibited. All amendments should be applied prospectively. If the SEC has not removed the applicable requirement from Regulation S- X or Regulation S-K by June 30, 2027, the pending amendments will be removed and will not become effective for any entity. In December 2023, the FASB issued ASU 2023 - 09, Income Taxes (Topic 740 ) - Improvements to Income Tax Disclosures. This Update enhances the transparency and decision usefulness of income tax disclosures. The amendments in this Update require the following: 1 ) consistent categories and greater disaggregation of information in the rate reconciliation, and 2 ) income taxes paid disaggregated by jurisdiction. The amendments in the ASU are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The amendments in this Update should be applied on a prospective basis. Retrospective application is permitted. Adoption of ASU 2023 - 09 is not expected to have a material impact on the Company's consolidated financial statements. 92 Table of Contents NOTE 3 – ACQUISITIONS Completion of Acquisition of Certain Assets and Liabilities of the Honolulu, Hawaii Branch Office of Bank of the Orient On January 14, 2022, the Company completed the acquisition of the Hawaii Branch from BOTO. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of January 14, 2022. The total fair value of assets acquired approximated $ 8.5 million, which included $ 312,000 in cash and cash equivalents, $ 7.4 million in selected performing loans, $ 729,000 in core deposit intangible assets and $ 64,000 in other assets. The total fair value of liabilities assumed was $ 81.8 million, which included $ 81.7 million in deposits, $ 27,000 in certificate of deposit premium, and $ 90,000 in other liabilities. The Bank received $ 71.0 million in cash in connection with the acquisition, which represented consideration for the deposits assumed by the Bank, partially offset by the purchase price of the assets acquired and the premium paid. The Company acquired Hawaii Branch from BOTO to strategically establish a presence in the Hawaiian Islands area. Goodwill in the amount of $ 2.3 million and core deposit intangible of $ 729,000 was recognized in connection with this acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill is not deductible for income tax purposes. The following table represents the assets acquired and liabilities assumed from the Hawaii Branch as of January 14, 2022 and the fair value adjustments and amounts recorded by the Company under the acquisition method of accounting: BOTO Fair Value Fair (dollars in thousands) Book Value Adjustments Value Assets acquired Cash and cash equivalents $ 312 $ — $ 312 Loans, gross 7,352 38 7,390 Bank premises and equipment 12 — 12 Core deposit intangible — 729 729 Other assets 412 ( 360 ) 52 Total assets acquired $ 8,088 $ 407 $ 8,495 Liabilities assumed Deposits $ 81,673 $ 27 $ 81,700 Escrow Payable 2 — 2 Other liabilities 460 ( 372 ) 88 Total liabilities assumed 82,135 ( 345 ) 81,790 Excess of assets acquired over liabilities assumed ( 74,047 ) 752 ( 73,295 ) $ 8,088 $ 407 Cash received 71,040 Goodwill recognized $ 2,255 93 Table of Contents The Company accounted for this transaction under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition. The loan portfolio of the Hawaii branch was recorded at fair value at the date of acquisition with the assistance of a third -party valuation. A valuation of the loan portfolio was performed as of the acquisition date to assess the fair value of the loan portfolio. The loan portfolio was segmented into two groups; loans with credit deterioration and loans without credit deterioration, and then split further by loan type. There were no loans acquired with credit deterioration. The fair value was calculated on an individual loan basis using a DCF analysis. The discount rate utilized was based on a weighted average cost of capital, considering the cost of equity and cost of debt. Also factored into the fair value estimates were loss rates, recovery period and prepayment rates based on industry standards. The Company also determined the fair value of the core deposit intangible, premises and equipment and deposits with the assistance of third -party valuations. The core deposit intangible on non-maturing deposits was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates, service charge income, overhead expense and costs of alternative funding. Since the fair value of intangible assets are calculated as if they were stand-alone assets, the presumption is that a hypothetical buyer of the intangible asset would be able to take advantage of potential tax benefits resulting from the asset purchase. The value of the benefit is the present value over the period of the tax benefit, using the discount rate applicable to the asset. In determining the fair value of certificates of deposit, a DCF analysis was used, which involved present valuing the contractual payments over the remaining life of the certificates of deposit at market-based interest rates. Third-party acquisition related expenses are recognized as incurred and continue until the acquired system is converted and operational functions become fully integrated. 94 Table of Contents NOTE 4 - INVESTMENT SECURITIES The following table summarizes the amortized cost and fair value of available for sale (“AFS”) securities and held to maturity (“HTM”) securities at December 31, 2023 and 2022, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss: Gross Gross (dollars in thousands) Amortized Unrealized Unrealized Fair December 31, 2023 Cost Gains Losses Value Available for sale Government agency securities $ 8,705 $ — $ ( 544 ) $ 8,161 SBA agency securities 13,289 144 ( 216 ) 13,217 Mortgage-backed securities: residential 40,507 — ( 5,855 ) 34,652 Collateralized mortgage obligations: residential 94,071 454 ( 12,198 ) 82,327 Collateralized mortgage obligations: commercial 69,941 22 ( 2,664 ) 67,299 Commercial paper 73,121 — ( 16 ) 73,105 Corporate debt securities 34,800 — ( 4,109 ) 30,691 Municipal securities 12,636 — ( 3,127 ) 9,509 Total $ 347,070 $ 620 $ ( 28,729 ) $ 318,961 Held to maturity Municipal taxable securities $ 501 $ 3 $ — $ 504 Municipal securities 4,708 — ( 115 ) 4,593 Total $ 5,209 $ 3 $ ( 115 ) $ 5,097 Gross Gross (dollars in thousands) Amortized Unrealized Unrealized Fair December 31, 2022 Cost Gains Losses Value Available for sale Government agency securities $ 5,012 $ — $ ( 517 ) $ 4,495 SBA agency securities 2,634 — ( 223 ) 2,411 Mortgage-backed securities: residential 44,809 — ( 6,752 ) 38,057 Mortgage-backed securities: commercial 4,887 — ( 16 ) 4,871 Collateralized mortgage obligations: residential 82,759 — ( 12,856 ) 69,903 Collateralized mortgage obligations: commercial 44,591 — ( 2,901 ) 41,690 Commercial paper 49,551 2 ( 16 ) 49,537 Corporate debt securities 41,176 1 ( 4,165 ) 37,012 Municipal securities 12,669 — ( 3,815 ) 8,854 Total $ 288,088 $ 3 $ ( 31,261 ) $ 256,830 Held to maturity Municipal taxable securities $ 1,003 $ 7 $ ( 3 ) $ 1,007 Municipal securities 4,726 — ( 170 ) 4,556 Total $ 5,729 $ 7 $ ( 173 ) $ 5,563 There was no sale of investment securities during the years ended December 31, 2023, 2022, and 2021. At December 31, 2023, we pledged investment securities with a fair value of $ 95.2 million for certificates of deposit from the state of California. One security with a fair value of $ 61,000 and $ 76,000 was pledged to secure a local agency deposit at December 31, 2023 and 2022. Accrued interest receivable for investment debt securities at December 31, 2023 and 2022 totaled $ 962,000 and $ 810,000 . 95 Table of Contents The amortized cost and fair value of the investment securities portfolio as of December 31, 2023 and 2022 are shown by expected maturity below. Mortgage-backed securities are classified in accordance with their estimated average life. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Less than One Year More than One Year to Five Years More than Five Years to Ten Years More than Ten Years Total Amortized Amortized Amortized Amortized Amortized (dollars in thousands) Cost Fair Value Cost Fair Value Cost Fair Value Cost Fair Value Cost Fair Value December 31, 2023 Government agency securities $ — $ — $ 8,705 $ 8,161 $ — $ — $ — $ — $ 8,705 $ 8,161 SBA securities — — 2,292 2,095 10,997 11,122 — — 13,289 13,217 Mortgage-backed securities: residential — — 11,023 9,986 19,762 16,965 9,722 7,701 40,507 34,652 Collateralized mortgage obligations: residential 18 17 36,876 35,758 57,177 46,552 — — 94,071 82,327 Collateralized mortgage obligations: commercial 3,014 3,018 20,296 18,481 46,631 45,800 — — 69,941 67,299 Commercial paper 73,121 73,105 — — — — — — 73,121 73,105 Corporate debt securities — — 12,912 12,491 19,249 16,232 2,639 1,968 34,800 30,691 Municipal securities — — — — — — 12,636 9,509 12,636 9,509 Total available for sale $ 76,153 $ 76,140 $ 92,104 $ 86,972 $ 153,816 $ 136,671 $ 24,997 $ 19,178 $ 347,070 $ 318,961 Municipal taxable securities $ — $ — $ 501 $ 504 $ — $ — $ — $ — $ 501 $ 504 Municipal securities — — — — 2,952 2,873 1,756 1,720 4,708 4,593 Total held to maturity $ — $ — $ 501 $ 504 $ 2,952 $ 2,873 $ 1,756 $ 1,720 $ 5,209 $ 5,097 (dollars in thousands) December 31, 2022 Government agency securities $ — $ — $ 5,012 $ 4,495 $ — $ — $ — $ — $ 5,012 $ 4,495 SBA securities — — 2,634 2,411 — — — — 2,634 2,411 Mortgage-backed securities: residential — — 13,013 11,598 29,114 24,361 2,682 2,098 44,809 38,057 Mortgage-backed securities: commercial — — 4,887 4,871 — — — — 4,887 4,871 Collateralized mortgage obligations: residential — — 20,687 19,646 62,072 50,257 — — 82,759 69,903 Collateralized mortgage obligations: commercial — — 16,382 14,644 28,209 27,046 — — 44,591 41,690 Commercial paper 49,551 49,537 — — — — — — 49,551 49,537 Corporate debt securities 3,705 3,706 11,355 10,806 23,454 20,662 2,662 1,838 41,176 37,012 Municipal securities — — — — — — 12,669 8,854 12,669 8,854 Total available for sale $ 53,256 $ 53,243 $ 73,970 $ 68,471 $ 142,849 $ 122,326 $ 18,013 $ 12,790 $ 288,088 $ 256,830 Municipal taxable securities $ 501 $ 498 $ 502 $ 509 $ — $ — $ — $ — $ 1,003 $ 1,007 Municipal securities — — — — 1,739 1,692 2,987 2,864 4,726 4,556 Total held to maturity $ 501 $ 498 $ 502 $ 509 $ 1,739 $ 1,692 $ 2,987 $ 2,864 $ 5,729 $ 5,563 The securities that were in an unrealized loss position at December 31, 2023, and December 31, 2022, were evaluated to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. For a discussion of the factors and criteria the Company uses in analyzing securities for impairment related to credit losses, see Note 2 Summary of Significant Accounting Policies - Allowance for Credit Losses on Available-for-Sale Securities and Held-to-Maturity Securities. At December 31, 2023 and 2022, there was no reserve of credit losses on the HTM securities portfolio. Based on the Company’s review of its debt securities in an unrealized loss position, the Company concluded the unrealized losses were due to non-credit factors primarily attributed to yield curve movement, together with widened liquidity spreads. The issuers have not, to the Company's knowledge, established any cause for default on these securities. All the securities that the Company owned were investment grade at December 31, 2023. At December 31, 2023, unrealized losses of $ 28.7 million comprised of $ 18.1 million, or 62.8 %, residential mortgage-backed securities and collateralized mortgage obligations, $ 4.1 million, or 14.3 %, corporate debt securities, $ 3.1 million, or 10.9 %, municipal securities, $ 2.7 million, or 9.3 %, commercial collateralized mortgage obligations, and $ 760,000 , or 2.6 %, government agency securities and SBA securities. The Company expects to recover the amortized cost basis of its securities and has no present intent to sell and will not be required to sell securities that have declined below their cost before their anticipated recovery based on the Company’s current financial condition. 96 Table of Contents The following tables show the related fair value and the gross unrealized losses of the Company's investment securities, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2023, and December 31, 2022: Less than Twelve Months Twelve Months or More Total (dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses December 31, 2023 Government agency securities $ 4,238 $ ( 72 ) $ 3,923 $ ( 472 ) $ 8,161 $ ( 544 ) SBA securities 5,102 ( 18 ) 2,094 ( 198 ) 7,196 ( 216 ) Mortgage-backed securities: residential — — 34,652 ( 5,855 ) 34,652 ( 5,855 ) Collateralized mortgage obligations: residential 2,597 ( 37 ) 60,275 ( 12,161 ) 62,872 ( 12,198 ) Collateralized mortgage obligations: commercial 18,463 ( 70 ) 35,077 ( 2,594 ) 53,540 ( 2,664 ) Commercial paper (1) 53,211 ( 16 ) — — 53,211 ( 16 ) Corporate debt securities — — 30,691 ( 4,109 ) 30,691 ( 4,109 ) Municipal securities — — 9,509 ( 3,127 ) 9,509 ( 3,127 ) Total available for sale $ 83,611 $ ( 213 ) $ 176,221 $ ( 28,516 ) $ 259,832 $ ( 28,729 ) Municipal securities $ 1,397 $ ( 19 ) $ 3,196 $ ( 96 ) $ 4,593 $ ( 115 ) Total held to maturity $ 1,397 $ ( 19 ) $ 3,196 $ ( 96 ) $ 4,593 $ ( 115 ) ( 1 ) The Company held $ 19.9 million of commercial paper where the recorded value and fair value are equal as of December 31, 2023. Less than Twelve Months Twelve Months or More Total (dollars in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses December 31, 2022 Government agency securities $ 354 $ ( 24 ) $ 4,141 $ ( 493 ) $ 4,495 $ ( 517 ) SBA securities 2,411 ( 223 ) — — 2,411 ( 223 ) Mortgage-backed securities: residential 5,535 ( 362 ) 32,522 ( 6,390 ) 38,057 ( 6,752 ) Mortgage-backed securities: commercial 4,871 ( 16 ) — — 4,871 ( 16 ) Collateralized mortgage obligations: residential 27,050 ( 1,842 ) 39,815 ( 11,014 ) 66,865 ( 12,856 ) Collateralized mortgage obligations: commercial 18,741 ( 790 ) 22,949 ( 2,111 ) 41,690 ( 2,901 ) Commercial paper (1) 39,624 ( 16 ) — — 39,624 ( 16 ) Corporate debt securities 22,977 ( 1,843 ) 10,330 ( 2,322 ) 33,307 ( 4,165 ) Municipal securities — — 8,854 ( 3,815 ) 8,854 ( 3,815 ) Total available for sale $ 121,563 $ ( 5,116 ) $ 118,611 $ ( 26,145 ) $ 240,174 $ ( 31,261 ) Municipal taxable securities $ 498 $ ( 3 ) $ — $ — $ 498 $ ( 3 ) Municipal securities 4,556 ( 170 ) — — 4,556 ( 170 ) Total held to maturity $ 5,054 $ ( 173 ) $ — $ — $ 5,054 $ ( 173 ) ( 1 ) The Company held $ 9.9 million of commercial paper where the recorded value and fair value are equal as of December 31, 2022. 97 Table of Contents NOTE 5 - LOANS AND ALLOWANCE FOR CREDIT LOSSES - LOANS The Company's loan portfolio consists primarily of loans to borrowers within the Los Angeles, California metropolitan area, the New York City metropolitan area, Chicago, Illinois metropolitan area and Las Vegas, Nevada. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company's market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries. The types of loans in the Company's consolidated balance sheets as of December 31, 2023, and December 31, 2022 were as follows: (dollars in thousands) 2023 2022 Loans: (1) Construction and land development $ 181,469 $ 276,876 Commercial real estate (2) 1,167,857 1,312,132 Single-family residential mortgages 1,487,796 1,464,108 Commercial and industrial 130,096 201,223 SBA 52,074 61,411 Other loans 12,569 20,699 Total loans (1) $ 3,031,861 $ 3,336,449 Allowance for loan losses ( 41,903 ) ( 41,076 ) Total loans, net $ 2,989,958 $ 3,295,373 ( 1 ) net of discounts on acquired loans and deferred fees and costs ( 2 ) includes non-farm & non-residential real estate loans, multifamily resident and 1 - 4 family single-family residential loan for a business purpose A summary of the changes in the ACL for the years indicated follows: (dollars in thousands) 2023 2022 2021 (1 ) Allowance for loan losses Reserve for unfunded loan commitments Allowance for credit losses Allowance for loan losses Reserve for unfunded loan commitments Allowance for credit losses Allowance for loan losses Reserve for unfunded loan commitments Allowance for credit losses Beginning balance $ 41,076 $ 1,156 $ 42,232 $ 32,912 $ 1,203 $ 34,115 $ 29,337 $ 1,383 $ 30,720 ASU 2016-13 transition adjustment — — — 2,135 1,045 3,180 — — — Adjusted beginning balance $ 41,076 $ 1,156 $ 42,232 $ 35,047 $ 2,248 $ 37,295 $ 29,337 $ 1,383 $ 30,720 Provision/(reversal) for credit losses 3,878 ( 516 ) 3,362 6,027 ( 1,092 ) 4,935 3,959 ( 180 ) 3,779 Less loans charged-off ( 3,194 ) — ( 3,194 ) ( 256 ) — ( 256 ) ( 627 ) — ( 627 ) Recoveries on loans charged-off 143 — 143 258 — 258 243 — 243 Ending balance $ 41,903 $ 640 $ 42,543 $ 41,076 $ 1,156 $ 42,232 $ 32,912 $ 1,203 $ 34,115 ( 1 ) Reserve was under the ALL method in accordance with ASC 450 and ASC 310. The following tables present the activity in the ALL by portfolio segment for the years ended December 31, 2023 and 2022: (dollars in thousands) December 31, 2023 Construction and land development Commercial real estate Single-family residential mortgages Commercial and industrial SBA Other Total Allowance for loan losses: Beginning of year $ 2,638 $ 17,657 $ 17,640 $ 1,804 $ 621 $ 716 $ 41,076 (Reversals)/provisions for credit losses ( 1,279 ) 2,626 2,570 ( 458 ) 636 ( 217 ) 3,878 Charge-offs ( 140 ) ( 2,537 ) ( 93 ) — ( 62 ) ( 362 ) ( 3,194 ) Recoveries — 80 — 2 1 60 143 Ending allowance balance $ 1,219 $ 17,826 $ 20,117 $ 1,348 $ 1,196 $ 197 $ 41,903 98 Table of Contents (dollars in thousands) December 31, 2022 Construction and land development Commercial real estate Single-family residential mortgages Commercial and industrial SBA Other Total Allowance for loan losses: Beginning of year $ 4,150 $ 16,603 $ 7,839 $ 2,813 $ 980 $ 527 $ 32,912 ASU 2016-13 Transition Adjustment 314 ( 2,662 ) 3,960 ( 188 ) ( 416 ) 1,127 2,135 Adjusted beginning balance $ 4,464 $ 13,941 $ 11,799 $ 2,625 $ 564 $ 1,654 $ 35,047 (Reversals)/provisions for credit losses ( 1,826 ) 3,716 5,841 ( 818 ) ( 156 ) ( 730 ) 6,027 Charge-offs — — — ( 5 ) ( 14 ) ( 237 ) ( 256 ) Recoveries — — — 2 227 29 258 Ending allowance balance $ 2,638 $ 17,657 $ 17,640 $ 1,804 $ 621 $ 716 $ 41,076 The following table presents the activity in the ALL by portfolio segment for the year ended December 31, 2021, prior to the adoption of ASU 2016 - 13: (dollars in thousands) December 31, 2021 Construction and land development Commercial real estate Single-family residential mortgages Commercial and industrial SBA Other Total Allowance for loan losses: Beginning of year $ 2,472 $ 13,719 $ 8,486 $ 3,690 $ 927 $ 43 $ 29,337 Provisions/(reversals) 1,678 2,951 ( 647 ) ( 533 ) 53 457 3,959 Charge-offs — ( 67 ) — ( 501 ) — ( 59 ) ( 627 ) Recoveries — — — 157 — 86 243 Ending allowance balance $ 4,150 $ 16,603 $ 7,839 $ 2,813 $ 980 $ 527 $ 32,912 The Company categorizes 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 as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis 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 loans not meeting the risk ratings defined below. 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 deterioration of the 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 so classified 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 liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. 99 Table of Contents The following tables summarize the Company's loan held for investment as of December 31, 2023 and 2022 by loan portfolio segments, risk ratings and vintage year. 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 the term loans by vintage year columns. (dollars in thousands) Term Loan by Vintage December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Revolving Converted to Term During the Period Total Real estate: Construction and land development Pass $ 127,602 $ 25,880 $ 12,168 $ 3,919 $ 192 $ 32 $ — $ — $ 169,793 Special mention — — 11,676 — — — — — 11,676 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total $ 127,602 $ 25,880 $ 23,844 $ 3,919 $ 192 $ 32 $ — $ — $ 181,469 YTD gross write-offs $ — $ — $ — $ — $ — $ 140 $ — $ — $ 140 Commercial real estate Pass $ 90,126 $ 423,564 $ 186,904 $ 175,650 $ 94,796 $ 152,847 $ — $ — $ 1,123,887 Special mention — — — — 7,719 4,880 — — 12,599 Substandard 301 — — 11,410 2,295 17,365 — — 31,371 Doubtful — — — — — — — — — Total $ 90,427 $ 423,564 $ 186,904 $ 187,060 $ 104,810 $ 175,092 $ — $ — $ 1,167,857 YTD gross write-offs $ — $ 2,078 $ — $ 459 $ — $ — $ — $ — $ 2,537 Single-family residential mortgages Pass $ 156,372 $ 593,539 $ 239,502 $ 125,346 $ 83,002 $ 265,050 $ 1,720 $ — $ 1,464,531 Special mention — — 619 — — 3,855 — — 4,474 Substandard — 719 758 4,985 545 11,740 44 — 18,791 Doubtful — — — — — — — — — Total $ 156,372 $ 594,258 $ 240,879 $ 130,331 $ 83,547 $ 280,645 $ 1,764 $ — $ 1,487,796 YTD gross write-offs $ — $ — $ — $ 93 $ — $ — $ — $ — $ 93 Commercial: Commercial and industrial Pass $ 1,305 $ 3,283 $ 6,281 $ 2,901 $ 2,049 $ 4,700 $ 99,339 $ — $ 119,858 Special mention — — — — — — 2,737 — 2,737 Substandard — 87 — 1,410 7 4,952 1,045 — 7,501 Doubtful — — — — — — — — — Total $ 1,305 $ 3,370 $ 6,281 $ 4,311 $ 2,056 $ 9,652 $ 103,121 $ — $ 130,096 YTD gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — SBA Pass $ 5,642 $ 11,023 $ 10,037 $ 2,324 $ 4,588 $ 13,783 $ — $ — $ 47,397 Special mention — — 331 — — 1,025 — — 1,356 Substandard — — — — 85 3,236 — — 3,321 Doubtful — — — — — — — — — Total $ 5,642 $ 11,023 $ 10,368 $ 2,324 $ 4,673 $ 18,044 $ — $ — $ 52,074 YTD gross write-offs $ — $ — $ — $ — $ — $ 62 $ — $ — $ 62 Other: Pass $ 193 $ 2,727 $ 8,813 $ 674 $ 29 $ — $ 18 $ — $ 12,454 Special mention — — — — — — — — — Substandard — 80 28 7 — — — — 115 Doubtful — — — — — — — — — Total $ 193 $ 2,807 $ 8,841 $ 681 $ 29 $ — $ 18 $ — $ 12,569 YTD gross write-offs $ — $ 79 $ 273 $ 10 $ — $ — $ — $ — $ 362 Total by risk rating: Pass $ 381,240 $ 1,060,016 $ 463,705 $ 310,814 $ 184,656 $ 436,412 $ 101,077 $ — $ 2,937,920 Special mention — — 12,626 — 7,719 9,760 2,737 — 32,842 Substandard 301 886 786 17,812 2,932 37,293 1,089 — 61,099 Doubtful — — — — — — — — — Total loans $ 381,541 $ 1,060,902 $ 477,117 $ 328,626 $ 195,307 $ 483,465 $ 104,903 $ — $ 3,031,861 Total YTD gross write-offs $ — $ 2,157 $ 273 $ 562 $ — $ 202 $ — $ — $ 3,194 100 Table of Contents (Dollars in thousands) Term Loan by Vintage December 31, 2022 2022 2021 2020 2019 2018 Prior Revolving Revolving Converted to Term During the Period Total Real estate: Construction and land development Pass $ 125,216 $ 52,262 $ 99,016 $ 201 $ — $ 40 $ — $ — $ 276,735 Special mention — — — — — — — — — Substandard — — — — — 141 — — 141 Doubtful — — — — — — — — — Total $ 125,216 $ 52,262 $ 99,016 $ 201 $ — $ 181 $ — $ — $ 276,876 YTD gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial real estate Pass $ 479,304 $ 293,058 $ 195,051 $ 110,442 $ 73,013 $ 117,068 $ — $ — $ 1,267,936 Special mention — — 9,280 — — — — — 9,280 Substandard 287 — 8,652 2,329 222 23,426 — — 34,916 Doubtful — — — — — — — — — Total $ 479,591 $ 293,058 $ 212,983 $ 112,771 $ 73,235 $ 140,494 $ — $ — $ 1,312,132 YTD gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Single-family residential mortgages Pass $ 637,893 $ 255,529 $ 137,964 $ 96,355 $ 134,415 $ 182,893 $ 2,992 $ — $ 1,448,041 Special mention — — — — 3,925 — — — 3,925 Substandard — — 3,954 — 7,631 452 105 — 12,142 Doubtful — — — — — — — — — Total $ 637,893 $ 255,529 $ 141,918 $ 96,355 $ 145,971 $ 183,345 $ 3,097 $ — $ 1,464,108 YTD gross write-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial: Commercial and industrial Pass $ 8,038 $ 7,513 $ 4,448 $ 3,470 $ 1,016 $ 8,827 $ 129,483 $ 86 $ 162,881 Special mention — 5,987 — — 1,638 17,805 3,577 — 29,007 Substandard — — 1,600 16 — 339 7,380 — 9,335 Doubtful — — — — — — — — — Total $ 8,038 $ 13,500 $ 6,048 $ 3,486 $ 2,654 $ 26,971 $ 140,440 $ 86 $ 201,223 YTD gross write-offs $ — $ — $ — $ 5 $ — $ — $ — $ — $ 5 SBA Pass $ 14,922 $ 10,664 $ 6,496 $ 4,688 $ 2,579 $ 16,793 $ — $ — $ 56,142 Special mention — — — — — — — — — Substandard — — — 91 1,017 4,161 — — 5,269 Doubtful — — — — — — — — — Total $ 14,922 $ 10,664 $ 6,496 $ 4,779 $ 3,596 $ 20,954 $ — $ — $ 61,411 YTD gross write-offs $ — $ — $ — $ — $ — $ 14 $ — $ — $ 14 Other: Pass $ 4,224 $ 14,684 $ 1,505 $ 90 $ 7 $ — $ 26 $ — $ 20,536 Special mention — — — — — — — — — Substandard 105 48 10 — — — — — 163 Doubtful — — — — — — — — — Total $ 4,329 $ 14,732 $ 1,515 $ 90 $ 7 $ — $ 26 $ — $ 20,699 YTD gross write-offs $ — $ 237 $ — $ — $ — $ — $ — $ — $ 237 Total by risk rating: Pass $ 1,269,597 $ 633,710 $ 444,480 $ 215,246 $ 211,030 $ 325,621 $ 132,501 $ 86 $ 3,232,271 Special mention — 5,987 9,280 — 5,563 17,805 3,577 — 42,212 Substandard 392 48 14,216 2,436 8,870 28,519 7,485 — 61,966 Doubtful — — — — — — — — — Total loans $ 1,269,989 $ 639,745 $ 467,976 $ 217,682 $ 225,463 $ 371,945 $ 143,563 $ 86 $ 3,336,449 Total YTD gross write-offs $ — $ 237 $ — $ 5 $ — $ 14 $ — $ — $ 256 101 Table of Contents The following tables present the aging of the recorded investment in past-due loans as of December 31, 2023 and 2022 by class of loans. Past due loans presented in tables below also include non-accrual loans. (dollars in thousands) 30 - 59 60 - 89 90 Days Total Loans Not Non-Accrual December 31, 2023 Days Days Or More Past Due Past Due Total Loans Loans (1) Real estate: Construction and land development $ — $ — $ — $ — $ 181,469 $ 181,469 $ — Commercial real estate 1,341 216 1,582 3,139 1,164,718 1,167,857 10,569 Single-family residential mortgages 9,050 5,795 15,134 29,979 1,457,817 1,487,796 18,103 Commercial: Commercial and industrial 1,544 — 854 2,398 127,698 130,096 854 SBA 356 — 2,085 2,441 49,633 52,074 2,085 Other: 160 20 8 188 12,381 12,569 8 $ 12,451 $ 6,031 $ 19,663 $ 38,145 $ 2,993,716 $ 3,031,861 $ 31,619 Real estate: Single-family residential mortgage loans held for sale $ — $ — $ — $ — $ 1,911 $ 1,911 $ — ________________ ( 1 ) Included in total loans (dollars in thousands) 30 - 59 60 - 89 90 Days Total Loans Not Non-Accrual December 31, 2022 Days Days Or More Past Due Past Due Total Loans Loans (1) Real estate: Construction and land development $ — $ — $ 141 $ 141 $ 276,735 $ 276,876 $ 141 Commercial real estate 558 240 1,191 1,989 1,310,143 1,312,132 13,189 Single-family residential mortgages 12,764 2,555 4,100 19,419 1,444,689 1,464,108 5,936 Commercial: Commercial and industrial — 545 7 552 200,671 201,223 713 SBA 150 1,017 1,228 2,395 59,016 61,411 2,245 Other: 154 76 99 329 20,370 20,699 99 $ 13,626 $ 4,433 $ 6,766 $ 24,825 $ 3,311,624 $ 3,336,449 $ 22,323 Real estate: Single-family residential mortgage loans held for sale $ — $ — $ — $ — $ — $ — $ — ( 1 ) Included in total loans The Company has no loans that are 90 days or more past due and still accruing at December 31, 2023 and December 31, 2022. 102 Table of Contents The following tables present the loans on nonaccrual status as of December 31, 2023 and 2022: Nonaccrual With No (dollars in thousands) Allowance December 31, 2023 for Credit Loss Nonaccrual Real estate: Commercial real estate 10,569 10,569 Single-family residential mortgages 18,103 18,103 Commercial: Commercial and industrial 610 854 SBA 937 2,085 Other: — 8 Total $ 30,219 $ 31,619 Nonaccrual With No (dollars in thousands) Allowance December 31, 2022 for Credit Loss Nonaccrual Real estate: Construction and land development $ 141 $ 141 Commercial real estate 1,191 13,189 Single-family residential mortgages 5,936 5,936 Commercial: Commercial and industrial 713 713 SBA 2,245 2,245 Other: 51 99 Total $ 10,277 $ 22,323 At December 31, 2023, nonaccrual commercial real estate loans comprised of $ 8.8 million collateralized by office, $ 1.4 million by warehouse, and $ 360,000 by other. No interest income was recognized on a cash basis during the years ended December 31, 2023 and 2022. We did not recognize any interest income on nonaccrual loans during the years ended December 31, 2023 and December 31, 2022 while the loans were in nonaccrual status. Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, or interest rate reduction. The Company may provide multiple types of concessions on one loan. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for loan losses. There were no loans that were both experiencing financial difficulty and modified during the year ended December 31, 2023 and 2022. There were no commitments to lend additional amounts at December 31, 2023 and 2022 to customers with outstanding modified loans. There were no nonaccrual loans that were modified during the past twelve months that had payment defaults during the periods. NOTE 6 - LOAN SERVICING The mortgage loans and SBA loans being serviced for others are not reported as assets in the Company’s consolidated balance sheet. The principal balances of the loans serviced for others are as follows for the dates indicated: At December 31, (dollars in thousands) 2023 2022 Loans serviced for others: Mortgage loans $ 1,014,017 $ 1,127,668 SBA loans 100,336 119,893 Commercial real estate loans 3,813 3,991 Construction loans 4,710 3,677 Loan servicing fees, net of amortization, totaled $ 2.6 million, $ 2.2 million and $ 684,000 for the years ended December 31, 2023, 2022 and 2021. Custodial balances maintained in connection with the foregoing loan servicing (including in non-interest bearing deposits) totaled $ 6.4 million and $ 7.0 million as of December 31, 2023 and 2022. 103 Table of Contents When mortgage and SBA loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sale of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. During the year ended December 31, 2021, the Company reversed an impairment allowance of $ 417,000 on mortgage servicing rights, which is included in other income. The following table presents the activity in serving assets for the years ended December 31, 2023, 2022, and 2021: 2023 2022 2021 Mortgage SBA Mortgage SBA Mortgage SBA (dollars in thousands) Loans Loans Loans Loans Loans Loans Servicing assets: Beginning of period $ 7,354 $ 2,167 $ 8,748 $ 2,769 $ 10,529 $ 3,436 Additions 176 58 532 239 1,920 441 Disposals ( 329 ) ( 344 ) ( 794 ) ( 478 ) ( 2,129 ) ( 646 ) Amortized to expense ( 692 ) ( 280 ) ( 1,132 ) ( 363 ) ( 1,989 ) ( 462 ) Impairment reversal — — — — 417 — End of period $ 6,509 $ 1,601 $ 7,354 $ 2,167 $ 8,748 $ 2,769 Estimates of the loan servicing asset fair value are derived through a DCF analysis. Portfolio characteristics include loan delinquency rates, age of loans, note rate and geography. The assumptions embedded in the valuation are obtained from a range of metrics utilized by active buyers in the market place. The analysis accounts for recent transactions, and supply and demand within the market. The fair value of servicing assets for mortgage loans was $ 12.1 million and $ 18.3 million as of December 31, 2023 and 2022, respectively. Fair value at December 31, 2023 was determined using a discount rate of 11.23 %, average prepayment speed of 7.91 %, depending on the stratification of the specific right, and a weighted-average default rate of 0.10 %. Fair value at December 31, 2022 was determined using a discount rate of 11.10 %, average prepayment speed of 7.73 %, depending on the stratification of the specific right, and a weighted-average default rate of 0.10 %. The fair value of servicing assets for SBA loans was $ 2.8 million and $ 3.5 million as of December 31, 2023 and 2022, respectively. Fair value at December 31, 2023 was determined using a discount rate of 8.5 %, average prepayment speed of 17.68 %, depending on the stratification of the specific right, and a weighted-average default rate of 0.73 %. Fair value at December 31, 2022 was determined using a discount rate of 8.5 % and average prepayment speed of 16.79 %, depending on the stratification of the specific right and a weighted-average default rate of 0.37 %. NOTE 7 - PREMISES AND EQUIPMENT A summary of premises and equipment as of December 31, 2023 and 2022 follows: (dollars in thousands) 2023 2022 Land $ 8,974 $ 8,974 Building and improvements 15,549 15,523 Furniture, fixtures, and equipment 8,411 8,339 Leasehold improvements 7,696 6,775 40,630 39,611 Less accumulated depreciation and amortization ( 14,949 ) ( 13,387 ) Construction in progress 3 785 $ 25,684 $ 27,009 Depreciation and leasehold amortization expense was $ 2.0 million, $ 2.0 million, and $ 1.9 million for 2023, 2022, and 2021, respectively. A $ 32,000 gain on sale of fixed assets was recorded from the sale of an automobile during 2023. A $ 757,000 gain on sale of fixed assets was recorded from the sale of a real estate asset during 2022, which was used to house staff while traveling. 104 Table of Contents NOTE 8 - DEPOSITS At December 31, 2023, the scheduled maturities of time deposits are as follows: (dollars in thousands) December 31, 2023 One year $ 1,994,517 Two to three years 6,689 Over three years 1,204 Total $ 2,002,410 Time deposits include deposits acquired through both retail and wholesale channels. Wholesale funding includes brokered deposits, collateralized deposits from the State of California, and deposits acquired through internet listing services totaled $ 405.6 million at December 31, 2023. Retail deposits include time deposits. Brokered time deposits were $ 254.9 million at December 31, 2023 and $ 255.0 million at December 31, 2022. Collateralized deposits from the State of California totaled $ 80.0 million at December 31, 2023 and none at December 31, 2022. Time deposits acquired through internet listing services totaled $ 61.4 million at December 31, 2023 and $ 10.7 million at December 31, 2022. In addition, we offer retail deposit products where customers are able to achieve FDIC insurance for balances on deposit in excess of the $250,000 FDIC limit through the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweeps (“ICS”) programs. Time deposits held through the CDARS program were $ 135.7 million at December 31, 2023 and $ 17.7 million at December 31, 2022. NOTE 9 - LONG-TERM DEBT In November 2018, the Company issued $ 55.0 million of 6.18 % fixed-to-floating rate subordinated notes, with a December 1, 2028 maturity date (the “2028 Subordinated Notes”). The interest rate was fixed through December 1, 2023 and was scheduled to float at three -month CME Term SOFR plus applicable tenor spread adjustment of 26 basis points plus 315 basis points thereafter. On December 1, 2023, the Company redeemed the 2028 Subordinated Notes at a redemption price equal to 100 % of the principal amount plus accrued and unpaid interest. In March 2021, the Company issued $ 120.0 million of 4.00 % fixed-to-floating rate subordinated notes, with an April 1, 2031 maturity date (the “2031 Subordinated Notes”). The interest rate is fixed through April 1, 2026 and is scheduled to float at three -month SOFR plus 329 basis points thereafter. The Company can redeem the 2031 Subordinated Notes beginning April 1, 2026. The 2031 Subordinated Notes are considered Tier 2 capital at the Company. Long-term debt and unamortized debt issuance costs were as follows as of the dates indicated: At December 31, 2023 At December 31, 2022 (dollars in thousands) Principal Unamortized debt issuance costs Principal Unamortized debt issuance costs 2028 Subordinated Notes $ — $ — $ 55,000 $ 180 2031 Subordinated Notes 120,000 853 120,000 1,235 Total $ 120,000 $ 853 $ 175,000 $ 1,415 105 Table of Contents The following table presents interest and amortization expense the Company incurred for the years ended December 31, 2023 and 2022: For the Year Ended December 31, (dollars in thousands) 2023 2022 Interest Expense: Interest $ 7,916 $ 8,199 Amortization 562 578 At December 31, 2023, the Company duly and punctually paid all payments and timely delivered both the annual reports and compliance certificate to the Trustee as agreed. The Company was in compliance with all covenants under the long-term debt at December 31, 2023. NOTE 10 - SUBORDINATED DEBENTURES Subordinated debentures consist of subordinated debentures issued in connection with three separate trust preferred securities and totaled $ 14.9 million and $ 14.7 million as of December 31, 2022 and 2023, respectively. Under the terms of our subordinated debentures issued in connection with the issuance of trust preferred securities, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the long-term debt. In addition, the Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The Company may redeem the subordinated debentures, subject to prior approval by the Board of Governors of the Federal Reserve System at 100% of the principal amount, plus accrued and unpaid interest. These subordinated debentures consist of the following and are described in detail after the table below: Issue Principal Unamortized Recorded Stated Rate December 31, 2023 Stated (dollars in thousands) Date Amount Valuation Reserve Value Description Effective Rate Maturity Subordinated debentures TFC Trust December 22, 2006 $ 5,155 $ 1,189 $ 3,966 Three-month CME Term SOFR plus 0.26% (a) plus 1.65%, 7.30 % March 15, 2037 FAIC Trust December 15, 2004 7,217 842 6,375 Three-month CME Term SOFR 0.26% (a) plus 2.25% 7.90 % December 15, 2034 PGBH Trust December 15, 2004 5,155 558 4,597 Three-month CME Term SOFR 0.26% (a) plus 2.10% 7.75 % December 15, 2034 Total $ 17,527 $ 2,589 $ 14,938 (a) Represents applicable tenor spread adjustment when the original Libor index was discontinued on June 30, 2023 In 2016, the Company, through the acquisition of TomatoBank and its holding company, TFC Holding Company (“TFC”), acquired TFC Statutory Trust (the “TFC Trust”). TFC Trust issued 5,000 fixed-to-floating rate capital securities with an aggregate liquidation amount of $ 5.0 million to an independent investor, and all of its common securities, with an aggregate liquidation amount of $ 155,000 . TFC issued $ 5 million of subordinated debentures to TFC Trust in exchange for ownership of all of the common securities of TFC Trust and the proceeds of the preferred securities sold by TFC Trust. The Company is not considered the primary beneficiary of TFC trust (variable interest entity), therefore TFC Trust is not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company also purchased an investment in the common stock of TFC Trust for $ 155,000 , which is included in other assets. At the close of this acquisition, a $ 1.9 million valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment and amortized over the life of the security. The unamortized valuation reserve was $ 1.2 million at December 31, 2023 and $ 1.3 million at December 31, 2022. The subordinated debentures have a variable rate of interest equal to three - month CME Term SOFR plus applicable tenor spread adjustment of 0.26 % plus 1.65 %, which was 7.30 % as of December 31, 2023, and three -month LIBOR plus 1.65 %, which was 6.42 % at December 31, 2022. In October 2018, the Company, through the acquisition of FAIC, acquired First American International Statutory Trust I (“FAIC Trust”). FAIC Trust issued 7,000 units of thirty -year fixed-to-floating rate capital securities with an aggregate liquidation amount of $ 7.0 million to an independent investor, and all of its common securities, with an aggregate liquidation amount of $ 217,000 . The Company is not considered the primary beneficiary of FAIC Trust (variable interest entity), therefore FAIC Trust is not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company purchased an investment in the common stock of FAIC Trust for $ 217,000 , which is included in other assets. At the close of this acquisition, a $ 1.2 million valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment and amortized over the life of the security. The unamortized valuation reserve was $ 842,000 at December 31, 2023 and $ 918,000 at December 31, 2022. The subordinated debentures have a variable rate of interest equal to three - month CME Term SOFR plus applicable tenor spread adjustment of 0.26 % plus 1.65 %, which was 7.90 % as of December 31, 2023, and three -month LIBOR plus 2.25 %, which was 7.02 % at December 31, 2022. In January 2020, the Company, through the acquisition of PGBH, acquired PGB Capital Trust I (“PGBH Trust”). PGBH Trust issued 5,000 units of fixed-to-floating rate capital securities with an aggregate liquidation amount of $ 5 million to an independent investor, and all of its common securities, with an aggregate liquidation amount of $ 155,000 . The Company is not considered the primary beneficiary of PGBH Trust (variable interest entity), therefore PGBH Trust is not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company purchased an investment in the common stock of PGBH Trust for $ 155,000 , which is included in other assets. At the close of this acquisition, a $ 763,000 valuation reserve recorded to arrive at it fair market value, which is treated as a yield adjustment and amortized over the life of the security. The unamortized valuation reserve was $ 559,000 at December 31, 2023 and $ 610,000 at December 31, 2022. The subordinated debentures have a variable rate of interest equal to three - month CME Term SOFR plus applicable tenor spread adjustment of 0.26 % plus 1.65 %, which was 7.75 % as of December 31, 2023, and three -month LIBOR plus 2.10 %, which was 6.87 % at December 31, 2022. The Company paid interest expense of $ 1.3 million in 2023, $ 650,000 in 2022 and $ 377,000 in 2021. The amount of aggregate amortization expense recognized was $ 218,000 in each of the years ended December 31, 2023, 2022 and 2021. 106 Table of Contents For regulatory reporting purposes, the Federal Reserve Board has indicated that the capital securities qualify as Tier 1 capital of the Company subject to previously specified limitations, until further notice. If regulators make a determination that the capital securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them. At December 31, 2023, the Company duly and punctually paid all payments, maintained 100% ownership of the common securities, and did not incur any additional indebtedness as agreed. The Company was in compliance with all covenants under all subordinated debentures at December 31, 2023. NOTE 11 - BORROWING ARRANGEMENTS The Company has established secured and unsecured lines of credit. The Company may borrow funds from time to time on a term or overnight basis from the Federal Home Loan Bank of San Francisco (“FHLB”), the Federal Reserve Bank of San Francisco (“FRB”) and other financial institutions as indicated below. Federal Funds Arrangements with Commercial Bank s. As of December 31, 2023, the Company may borrow on an unsecured basis, up to $ 92.0 million from other financial institutions. Letter of Credit Arrangements. As of December 31, 2023, the Company had an unsecured commercial letter of credit line with another financial institution for $ 2.0 million. FRB Secured Line of Credit. As of December 31, 2023, the Bank had a secured borrowing capacity with the FRB of $ 42.3 million at December 31, 2023 collateralized by pledged loans with a carrying value of $ 62.8 million. FHLB Secured Line of Credit and Advances. As of December 31, 2023, the Bank had a secured borrowing capacity with the FHLB of $ 1.0 billion collateralized by pledged residential and commercial loans with a carrying value of $ 1.5 billion. At December 31, 2023, the Company had no overnight advances and $ 150.0 million of long-term advances with an original term of 5 years at a weighted average rate of 1.18 %. The Company paid interest expenses of $ 2.9 million, $ 2.9 million and $ 1.8 million on such FHLB advances for the years ended December 31, 2023, 2022 and 2021, respectively. There were no amounts outstanding under any of the other borrowing arrangements above as of December 31, 2023 except FHLB advances maturing in 2025. NOTE 12 - INCOME TAXES The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income tax expense consists of the following: (dollars in thousands) 2023 2022 2021 Current: Federal $ 10,804 $ 18,315 $ 16,037 State 6,761 10,952 9,087 Total Current 17,565 29,267 25,124 Deferred: Federal ( 288 ) ( 1,756 ) ( 1,148 ) State 504 ( 493 ) 55 Total Deferred 216 ( 2,249 ) ( 1,093 ) Total income tax expense $ 17,781 $ 27,018 $ 24,031 107 Table of Contents A comparison of the federal statutory income tax rates to the Company's effective income tax rates for the years ended December 31 follows: 2023 2022 2021 (dollars in thousands) Amount Rate Amount Rate Amount Rate Statutory federal tax $ 12,652 21.0 % $ 19,182 21.0 % $ 16,997 21.0 % State tax, net of federal benefit 5,181 8.6 % 8,278 9.1 % 7,182 8.9 % Tax-exempt income ( 399 ) ( 0.7 )% ( 355 ) ( 0.4 )% ( 285 ) ( 0.4 )% Stock-based compensation 54 0.1 % ( 396 ) ( 0.4 )% ( 404 ) ( 0.5 )% Other items, net 293 0.5 % 309 0.3 % 541 0.7 % Total income tax expense $ 17,781 29.5 % $ 27,018 29.6 % $ 24,031 29.7 % Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying balance sheets as of December 31: (dollars in thousands) 2023 2022 Deferred tax assets: Allowance for credit losses $ 13,011 $ 12,834 Stock-based compensation 472 546 Operating loss carryforwards 32 154 Unrealized loss on AFS securities 8,597 9,614 Lease liability 9,539 8,149 State tax 1,444 2,426 Other 1,237 917 34,332 34,640 Deferred tax liabilities: Depreciation ( 1,389 ) ( 1,598 ) Deferred loan costs ( 3,123 ) ( 2,808 ) Acquisition accounting fair value adjustments ( 2,794 ) ( 3,052 ) Mortgage servicing rights ( 1,991 ) ( 2,259 ) Right of use asset ( 9,115 ) ( 7,818 ) Other ( 155 ) ( 128 ) ( 18,567 ) ( 17,663 ) Net deferred tax assets $ 15,765 $ 16,977 At December 31, 2023, the Company has usable net operating loss carryforwards from acquisitions of $ 21,104 for federal and $ 5,570 for California income tax purposes. Net operating loss carry forwards, to the extent not used, will begin to expire in 2028. The net operating loss carryforwards were generated through acquisitions, and as a result, are substantially limited by Section 382 of the Internal Revenue Code. Benefits not expected to be realized due to the limitation have been excluded from the deferred tax asset and net operating loss carryforward amounts noted above. Based on management's assessment, the Company concluded that no valuation allowance was necessary for the Company's deferred tax assets as of December 31, 2023. The Company files income tax returns in federal and various state jurisdictions. The Company is subject to examinations in federal jurisdiction for the years ended after December 31, 2019. The statutes of limitations for state income tax returns remain open for tax years in accordance with each state's statutes. The audit of the Company's New York State tax returns for the tax period from January 1, 2018 to December 31, 2020 was completed in August 2023. The Company paid additional tax and interest of $ 70,000 without penalties to settle the tax audit findings with New York State. The Company had no material uncertain tax positions at December 31, 2023 and 2022, and recognized no material interest or penalties as part of income taxes for the years ended December 31, 2023, 2022, and 2021. 108 Table of Contents NOTE 13 - 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, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company's financial statements. The Company's exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements. As of December 31, 2023 and 2022, the Company had the following financial commitments whose contractual amount represents credit risk: 2023 2022 Fixed Variable Fixed Variable (dollars in thousands) Rate Rate Rate Rate Commitments to make loans $ 614 $ 77,230 $ 1,141 $ 128,680 Unused lines of credit 10,629 95,686 13,730 197,314 Commercial and similar letters of credit 90 3,814 1,154 867 Standby letters of credit 1,626 1,061 1,577 1,061 Total $ 12,959 $ 177,791 $ 17,602 $ 327,922 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. The Company records a liability for lifetime expected losses on off-balance-sheet credit exposure that do not fit the definition of unconditionally cancelable in accordance with ASC 326. The Company uses the loss rate and exposure of default framework to estimate a reserve for unfunded commitments. Loss rates for the expected funded balances are determined based on the associated pooled loan analysis loss rate and the exposure at default is based on an estimated utilization given default. The off-balance sheet commitment allowance were $ 640,000 and $ 1.2 million as of December 31, 2023 and December 31, 2022, respectively. The (reversal of)/provision for off-balance sheet commitments totaled were ($ 516,000 ) and $ 1.1 million for the years ended December 31, 2023 and 2022. Additionally, we have commitments to invest in certain affordable housing partnerships and SBIC funds that call for capital contributions up to an amount specific in the partnership agreements. Such unfunded commitments totaled $ 3.3 million and $ 3.5 million as of December 31, 2023 and 2022. The Company is involved in various matters of litigation, which have arisen in the ordinary course of business, and accruals for estimates of potential losses have been provided when necessary and appropriate under generally accepted accounting principles. In the opinion of management, the disposition of such pending litigation will not have a material effect on the Company's financial statements. 109 Table of Contents NOTE 14 - LEASES The Company leases several of its operating facilities under various non-cancellable operating leases expiring at various dates through 2037. The Company is also responsible for common area maintenance, taxes, and insurance at the various branch locations. Future minimum rent payments on the Company’s leases were as follows at December 31, 2023: (dollars in thousands) For the year ended December 31,: 2024 $ 4,728 2025 5,109 2026 5,121 2027 4,998 2028 4,052 Thereafter 10,699 Total $ 34,707 Less amount of payment representing interest ( 3,516 ) Total present value of lease payments $ 31,191 The minimum rent payments shown above are given for the existing lease obligation and are not a forecast of future rental expense. Total rental expense, recognized on a straight-line basis, was $ 5.7 million, $ 5.4 million, and $ 5.3 million for the years ended December 31, 2023, 2022, and 2021, respectively. The Company received rental income of $ 570,000 , $ 548,000 , and $ 479,000 for the years ended December 31, 2023, 2022, and 2021, respectively. The following table presents the operating lease related assets and liabilities recorded on the consolidated balance sheets, and the weighted-average remaining lease terms and discount rates as of December 31, 2023 and December 31, 2022 : December 31, December 31, (dollars in thousands) 2023 2022 Operating Leases ROU assets $ 29,803 $ 25,447 Lease liabilities 31,191 26,523 Weighted-average remaining lease term (in years) 7.63 7.91 Weighted-average discount rate 1.72 % 2.19 % 110 Table of Contents NOTE 15 - RELATED PARTY TRANSACTIONS Loans to principal officers, directors, and their affiliates were as follows: For the year ended December 31, (dollars in thousands) 2023 2022 Beginning balance $ 6,869 $ 8,441 Repayments — ( 1,572 ) Balance re-categorized to non-related party ( 6,869 ) — Ending balance $ — $ 6,869 Outstanding loan commitments to executive officers, directors and their related interests with whom they are associated were none and $ 1.6 million as of December 31, 2023 and 2022, respectively. Deposits from principal officers, directors, and their affiliates at December 31, 2023 and 2022 were $ 25.7 million and $ 88.1 million, respectively. Certain directors and their affiliates own $ 6.0 million of RBB subordinated debentures as of December 31, 2023 and $ 8.1 million as of December 31, 2022. NOTE 16 - STOCK OPTION PLAN RBB Bancorp 2010 Stock Option Plan Under the RBB Bancorp 2010 Stock Option Plan (the “2010 Plan”), the Company was permitted to grant awards to eligible persons in the form of qualified and non-qualified stock options. The Company reserved up to 30 % of the issued and outstanding shares of common stock as of the date the Company adopted the 2010 Plan, or 3,494,478 shares, for issuance under the 2010 Plan. Following receipt of shareholder approval of the 2017 Omnibus Stock Incentive Plan (the “OSIP”) in May 2017 , no additional grants were made under the 2010 Plan. The 2010 Plan has been terminated and options that were granted under the 2010 Plan have become subject to the OSIP. Awards that were granted under the 2010 Plan will remain exercisable pursuant to the terms and conditions set forth in individual award agreements, but such awards will be assumed and administered under the OSIP. The 2010 Plan award agreements allow for acceleration of exercise privileges of grants upon occurrence of a change in control of the Company. If a participant’s job is terminated for cause, then all unvested awards expire at the date of termination. Amended and Restated RBB Bancorp 2017 Omnibus Stock Incentive Plan The Amended and Restated RBB Bancorp 2017 Omnibus Stock Incentive Plan (the “Amended OSIP”) was approved by the Company’s board of directors in January 2019 and approved by the Company’s shareholders in May 2022 . The Amended OSIP was designed to ensure continued availability of equity awards that will assist the Company in attracting and retaining competent managerial personnel and rewarding key employees, directors and other service providers for high levels of performance. Pursuant to the Amended OSIP, the Company’s board of directors are allowed to grant awards to eligible persons in the form of qualified and non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights and other incentive awards. The Company has reserved up to 30 % of issued and outstanding shares of common stock as of the date the Company adopted the Amended OSIP, or 3,848,341 shares. As of December 31, 2023, there were 1,032,173 shares of common stock available for issuance under the Amended OSIP. This represents 5.5 % of the issued and outstanding shares of the Company’s common stock as of December 31, 2023. Awards vest, become exercisable and contain such other terms and conditions as determined by the board of directors and set forth in individual agreements with the employees receiving the awards. The Amended OSIP enables the board of directors to set specific performance criteria that must be met before an award vests. The Amended OSIP allows for acceleration of vesting and exercise privileges of grants if a participant’s termination of employment is due to a change in control, death or total disability. If a participant’s job is terminated for cause, then all awards expire at the date of termination. 111 Table of Contents The Company recognized total stock-based compensation expense of $ 750,000 , $ 848,000 , and $ 1.1 million in 2023, 2022 and 2021. The total unrecognized stock-based expense totaled $ 517,000 , $ 581,000 , and $ 1.4 million as of December 31, 2023, 2022, and 2021. Stock Options The recorded compensation expense for stock option was $ 246,000 , $ 300,000 , and $ 485,000 and the Company recognized income tax expense/(benefit) of $ 3,000 , ($ 587,000 ), and ($ 873,000 ) for the years ended December 31, 2023, 2022, and 2021, respectively. Unrecognized stock-based compensation expense related to options was $ 179,000 , $ 400,000 , and $ 635,000 as of December 31, 2023, 2022, and 2021, respectively. Unrecognized stock-based compensation expense will be recognized over a weighted-average period of 1.2 years as of December 31, 2023. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions presented below for 2023, 2022 and 2021. March 2023 December 2022 May 2022 July 2021 January 2021 Expected volatility 28.4 % 28.9 % 29.5 % 31.6 % 30.8 % Expected term (years) 8.0 8.0 6.0 6.0 6.0 Expected dividends 2.92 % 2.55 % 2.52 % 1.98 % 1.86 % Risk free rate 4.27 % 4.00 % 2.71 % 0.48 % 0.26 % Grant date fair value $ 5.49 $ 6.16 $ 5.28 $ 5.69 $ 4.14 The expected volatility was based on the historical volatility of the Company stock trading history. The expected term represents the estimated average period of time that the options remain outstanding. The expected term represents the estimated average period of time that the options remain outstanding. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding. The risk free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasury bonds over the expected term of the options. A summary of the status of the Company's stock option plan as of December 31, 2023 and changes during the year ended is presented below: Weighted- Weighted- Average Average Remaining Aggregate Exercise Contractual Intrinsic (dollars in thousands, except for shares and per share data) Shares Price Term in years Value Outstanding at beginning of year 454,610 $ 16.97 Granted 30,000 19.87 Exercised ( 19,403 ) 15.18 Forfeited/cancelled ( 67,304 ) 15.04 Outstanding at end of period 397,903 $ 17.61 3.86 $ 703 Options exercisable 332,232 $ 17.26 3.05 $ 657 The total fair value of the shares vested was $ 1.1 million, $ 1.1 million, and $ 1.2 million in 2023, 2022, and 2021, respectively. The number of unvested stock options were 65,671 , 127,005 , and 237,500 with a weighted average grant date fair value of $ 4.99 , $ 4.69 , and $ 4.28 as of December 31, 2023, 2022 and 2021, respectively. The decrease of unvested stock options during 2023 was due to 56,334 stock options vested with a weighted average grant date stock price of $ 18.40 , 30,000 stock options forfeited with a weighted average grant date stock price of $ 19.87 , 5,000 stock options exercised with a weighted average grant date stock price of $ 17.74 , offset by 30,000 stock options granted with a weighted average grant date stock price of $ 19.87 . Cash received from the exercise of 19,403 share options was $ 295,000 for the period ended December 31, 2023. Cash received from the exercise of 445,308 share options was $ 5.5 million for the period ended December 31, 2022. Cash received from the exercise of 302,744 share options was $ 3.5 million for the period ended December 31, 2021. The intrinsic value of options exercised was $ 90,000 , $ 4.0 million, and $ 3.8 million in 2023, 2022, and 2021, respectively. 112 Table of Contents Restricted Stock Units The Company granted 32,248 restricted stock units at a closing price of $ 20.46 on January 18, 2023 to its directors and executive officers and 16,500 restricted stock units at a closing price of $ 13.93 on July 20, 2023 to its new president. These restricted stock units are scheduled to vest over a one year period for shares granted to directors and a three -year period for shares granted to executive officers from the grant date. As of December 31, 2023, there were 43,160 remaining unvested restricted stock units. The recorded compensation expense for restricted stock units was $ 504,000 and $ 453,000 for the years ended December 31, 2023 and 2022, respectively. The Company did not grant restricted stock units in 2021. Unrecognized stock-based compensation expense related to restricted stock units was $ 338,000 and $ 182,000 as of December 31, 2023 and 2022, respectively. As of December 31, 2023, unrecognized stock-based compensation expense related to restricted stock units is expected to be recognized over the next 1.5 years. The following table presents restricted stock unit activity during the twelve months ended December 31, 2023. Weighted-Average Grant Date Shares Fair Value Outstanding at beginning of year 14,786 $ 27.16 Granted 48,748 18.25 Vested ( 20,374 ) 23.35 Outstanding at end of period 43,160 $ 18.89 Restricted Stock Awards The Company granted restricted stock awards for 60,000 shares at a closing price of $ 17.74 in 2021 . These restricted stock awards were scheduled to vest over a three -year period from the January 21, 2021 grant date. Unvested restricted stock awards of 40,000 shares were forfeited and the expense related to the forfeited shares was reversed on April 8, 2022 , due to a former employee's resignation. As of December 31, 2023, there were no outstanding restricted stock awards. The Company did not grant restricted stock awards in 2023 or 2022 . The recorded compensation expense for restricted stock awards was zero , $ 95,000 , and $ 602,000 for the years ended December 31, 2023, 2022, and 2021, respectively. Unrecognized stock-based compensation expense related to restricted stock awards was zero , zero , and $ 729,000 as of December 31, 2023, 2022, and 2021, respectively. 113 Table of Contents NOTE 17 - REGULATORY MATTERS Update on Previously Disclosed Regulatory Matters As previously disclosed in the Company's Current Report on Form 8 -K filed with the Securities and Exchange Commission (“SEC”) on October 31, 2023 , effective on October 25, 2023 , the Bank entered into a Stipulation to the Issuance of a Consent Order (the “Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the California Department of Financial Protection and Innovation (the “DFPI”), consenting to the issuance of a consent order (the “Consent Order”) relating to the Bank’s Anti-Money Laundering/Countering the Financing of Terrorism (“AML/CFT”) compliance program. In connection to the issuance of the Consent Order, the Bank did not admit or deny any charges of violating Bank Secrecy Act (“BSA”) and its implementing regulations. Regulatory Capital Holding companies (with assets over $ 3 billion at the beginning of the year) and banks are subject to various regulatory capital requirements administered by the 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. In July 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. The new rules became effective on January 1, 2015, with certain of the requirements phased-in over a multi-year schedule. Under the rules, minimum requirements increased for both the quantity and quality of capital held by the Bank. The rules include a new common equity Tier 1 ( “CET1” ) capital to risk-weighted assets ratio with minimums for capital adequacy and prompt corrective action purposes of 4.5 % and 6.5 %, respectively. The minimum Tier 1 capital to risk-weighted assets ratio was raised from 4.0 % to 6.0 % under the capital adequacy framework and from 6.0 % to 8.0 % to be well capitalized under the prompt corrective action framework. In addition, the rules introduced the concept of a “conservation buffer” of 2.5 % applicable to the three capital adequacy risk-weighted asset ratios ( CET1, Tier 1, and Total). The implementation of the capital conservation buffer began on January 1, 2016 at 0.625 % and was phased in over a four -year period (increasing by that amount on each subsequent January 1, until it reached 2.5 % on January 1, 2019). If the capital adequacy minimum ratios plus the phased-in conservation buffer amount exceed actual risk-weighted capital ratios, then dividends, share buybacks, and discretionary bonuses to executives could be limited in amount. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. Management believes, at December 31, 2023 and December 31, 2022, that the Bank satisfied all capital adequacy requirements to which it is subject. In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a three -year period the day- one adverse regulatory capital effects of ASU 2016 - 13. Additionally, in March 2020, the U.S. federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the novel coronavirus disease 2019 (“COVID- 19” ) pandemic. As a result, entities that adopted CECL in 2020 had the option to gradually phase in the full effect of CECL on regulatory capital over a five -year transition period. Effective January 1, 2022, the Company adopted ASU 2016 - 13, reflected the full effect of CECL at December 31, 2022, and did not elect the three -year CECL phase-in options on regulatory capital. As of December 31, 2023 and 2022, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank’s category). To be categorized as well capitalized, the Bank must maintain minimum ratios as set forth in the table below. 114 Table of Contents The following table sets forth Bancorp’s consolidated and the Bank’s actual capital amounts and ratios and related regulatory requirements for the Bank as of December 31, 2023: Amount of Capital Required To Be Well Capitalized Minimum Required for Under Prompt Corrective Actual Capital Adequacy Purposes Provisions (dollars in thousands) Amount Ratio Amount Ratio (1) Amount Ratio As of December 31, 2023: Tier 1 Leverage Ratio Consolidated $ 472,152 11.99 % $ 157,526 4.0 % $ 196,907 5.0 % Bank 535,952 13.62 % 157,454 4.0 % 196,818 5.0 % Common Equity Tier 1 Risk-Based Capital Ratio Consolidated $ 457,214 19.07 % $ 107,886 4.5 % $ 155,836 6.5 % Bank 535,952 22.41 % 107,598 4.5 % 155,419 6.5 % Tier 1 Risk-Based Capital Ratio Consolidated $ 472,152 19.69 % $ 143,849 6.0 % $ 191,798 8.0 % Bank 535,952 22.41 % 143,464 6.0 % 191,285 8.0 % Total Risk-Based Capital Ratio Consolidated $ 621,423 25.92 % $ 191,798 8.0 % $ 239,748 10.0 % Bank 565,997 23.67 % 191,285 8.0 % 239,106 10.0 % ( 1 ) These ratios are exclusive of the capital conservation buffer. The following table sets forth Bancorp’s consolidated and the Bank’s actual capital amounts and ratios and related regulatory requirements for the Bank as of December 31, 2022: Amount of Capital Required To Be Well Capitalized Minimum Required for Under Prompt Corrective Actual Capital Adequacy Purposes Provisions (dollars in thousands) Amount Ratio Amount Ratio (1) Amount Ratio As of December 31, 2022: Tier 1 Leverage Ratio Consolidated $ 446,776 11.67 % $ 153,116 4.0 % $ 191,395 5.0 % Bank 569,071 14.89 % 152,900 4.0 % 191,124 5.0 % Common Equity Tier 1 Risk Based Capital Ratio Consolidated $ 432,056 16.03 % $ 121,291 4.5 % $ 175,199 6.5 % Bank 569,071 21.14 % 121,110 4.5 % 174,937 6.5 % Tier 1 Risk-Based Capital Ratio Consolidated $ 446,776 16.58 % $ 161,722 6.0 % $ 215,629 8.0 % Bank 569,071 21.14 % 161,481 6.0 % 215,307 8.0 % Total Risk-Based Capital Ratio Consolidated $ 654,159 24.27 % $ 215,629 8.0 % $ 269,537 10.0 % Bank 602,819 22.40 % 215,307 8.0 % 269,134 10.0 % ( 1 ) These ratios are exclusive of the capital conservation buffer. The California Financial Code generally acts to prohibit banks from making 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 by the bank’s shareholders during the same period. The California General Corporation Law generally acts to prohibit companies from paying dividends on common stock unless retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend. If a company fails this test, then it may still pay dividends if after giving effect to the dividend the company’s assets are at least 125 % of its liabilities. Additionally, the Federal Reserve has issued guidance, which requires that they be consulted before payment of a dividend if a bank holding company does not have earnings over the prior four quarters of at least equal to the dividend to be paid, plus other holding company obligations. 115 Table of Contents NOTE 18 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows: Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market. Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, DCF models, and similar techniques. The following is a description of valuation methodologies used for assets and liabilities recorded at fair value: 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 ). Other Real Estate Owned : Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect an expectation of the amount to be ultimately collected and selling costs (Level 3 ). Appraisals for other real estate owned are performed by state licensed appraisers (for commercial properties) or state certified appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. When a Notice of Default is recorded, an appraisal report is ordered. Once received, a member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison to independent data sources such as recent market data or industry wide-statistics for residential appraisals. Commercial appraisals are sent to an independent third party to review. The Company also compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustments, if any, should be made to the appraisal values on any remaining other real estate owned to arrive at fair value. If the existing appraisal is older than twelve months, a new appraisal report is ordered. No significant adjustments to appraised values have been made as a result of this comparison process as of December 31, 2023. Interest Rate Lock Contracts and Forward Mortgage Loan Sale Contracts: The fair values of interest rate lock contracts and forward mortgage loan sale contracts are determined by loan lock-in rate, loan funded rate, market interest rate, fees to be collected from the borrower, fees and costs associated with the origination of the loan, expiration timing, sale price, and the value of the retained servicing. The company classified these derivatives as level 3 due to management’s estimate of market rate, cost and expiration timing on these contracts. Collateral-dependent individually evaluated loans : Collateral-dependent individually evaluated loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable. 116 Table of Contents The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at December 31, 2023 and 2022: (dollars in thousands) Fair Value Measurements Using: December 31, 2023 Level 1 Level 2 Level 3 Total Assets measured at fair value: On a recurring basis: Securities available for sale Government agency securities $ — $ 8,161 $ — $ 8,161 SBA agency securities — 13,217 — 13,217 Mortgage-backed securities — 34,652 — 34,652 Collateralized mortgage obligations — 149,626 — 149,626 Commercial paper — 73,105 — 73,105 Corporate debt securities — 30,691 — 30,691 Municipal securities — 9,509 — 9,509 Interest Rate Lock Contracts — — 32 32 Forward Mortgage Loan Sale Contracts — — 14 14 $ — $ 318,961 $ 46 $ 319,007 On a non-recurring basis: Commercial real estate loans - collateral-dependent impaired loans $ — $ — $ 10,209 $ 10,209 SBA loans - collateral-dependent impaired loans — — 1,148 1,148 $ — $ — $ 11,357 $ 11,357 December 31, 2022 Level 1 Level 2 Level 3 Total Assets measured at fair value: On a recurring basis: Securities available for sale Government agency securities $ — $ 4,495 $ — $ 4,495 SBA agency securities — 2,411 — 2,411 Mortgage-backed securities — 42,928 — 42,928 Collateralized mortgage obligations — 111,593 — 111,593 Commercial paper — 49,537 — 49,537 Corporate debt securities — 37,012 — 37,012 Municipal securities — 8,854 — 8,854 Forward Mortgage Loan Sale Contracts — — 18 18 $ — $ 256,830 $ 18 $ 256,848 On a non-recurring basis: Other real estate owned $ — $ — $ 577 $ 577 There was a $ 521,000 write-down on collateral-dependent loans that were individually evaluated to the fair value of $ 11.4 million as of December 31, 2023 . There was no collateral-dependent loan that was individually evaluated and written down to the fair value as of December 31, 2022 . Collateral-dependent individually evaluated loans were evaluated by third party appraisals with unobservable input of management adjustment of 10 % to reflect selling costs. Quantitative information about the Company's OREO non-recurring Level 3 fair value measurements as of December 31, 2023 and 2022 is as follows: There was no OREO as of December 31, 2023 and there were two single-family residences with a fair value of $ 577,000 as of December 31, 2022. During 2023, the Company sold one of the properties with a book value of $ 293,000 for a gain of $ 190,000 and the other property with a book value of $ 284,000 was sold for a loss of $ 57,000 . OREO was evaluated by third party appraisals with unobservable input of management adjustment in the range of 5 %- 6 % to reflect current conditions and selling costs. No write-downs to OREO were recorded in 2023 or 2022. The fair value measurement of IRLCs and FMLSCs were primarily based on the buy price from borrowers ranging from 99.5 to 100.3 , the sale price to Fannie Mae ranging from 102 to 104 , and the significant unobservable inputs using margin cost rate of ranging from 0.50 % to 1.00 %. 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. 117 Table of Contents Fair value estimates are based on financial instruments both on and off the 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. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. The following methods and assumptions were used to estimate the fair value of significant financial instruments not previously presented: Cash and Due From Banks -- The carrying amounts of cash and short-term instruments approximate fair values, a Level 1 measurement. Time Deposits in Other Banks -- Fair values for time deposits with other banks are estimated using DCF analyses, using interest rates currently being offered with similar terms, a Level 1 measurement. Investment securities available for sale and held to maturity -- Fair values are measured by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. Mortgage Loans Held for Sale -- The Company records mortgage loans held for sale at fair value based on the net premium received on recent sales of mortgage loans for identical pools of loans, a Level 2 measurement. Loans -- For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for all other loans are estimated using DCF analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. In accordance with the prospective adoption of ASU 2016 - 01, the fair value of loans as of December 31, 2023, and 2022 was measured using an exit price notion, a Level 3 measurement. Equity Securities -- The fair values of the Company’s equity securities are measured based on unobservable inputs at the reporting date, a Level 3 measurement. Equity securities are comprised of affordable housing investment funds and other restricted stocks. Servicing Rights -- Mortgage and SBA servicing rights are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, a Level 3 measurement. Accrued Interest Receivable -- Accrued interest receivable includes accrued interest on investment securities (Level 2 ), accrued interest on loans (Level 3 ), accrued interest on due from banks (Level 1 ), and accrued interest on equity securities (Level 3 ). Off-Balance Sheet Financial Instruments -- The fair value of commitments to extend credit and standby letters of credit, interest rate lock commitments and forward mortgage loan sales contracts is estimated using the fees currently charged to enter into similar agreements. Unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability result in a Level 3 measurement. Deposits -- The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money market accounts are, by definition based on carrying value. Fair value for fixed-rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits, a Level 2 measurement. Early withdrawal of fixed-rate certificates of deposit is not expected to be significant. FHLB Advances -- The fair values of the Company’s FHLB Advances are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement. Long-Term Debt -- The fair values of the Company’s long-term borrowings are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement. Subordinated Debentures -- The fair values of the Company’s subordinated debentures are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement. Fair value is estimated in accordance with ASC Topic 825 . Fair value estimates are made at specific points 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 Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s 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 and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 118 Table of Contents The fair value hierarchy level and estimated fair value of significant financial instruments at December 31, 2023 and 2022 are summarized as follows: December 31, 2023 December 31, 2022 Fair Value Carrying Fair Carrying Fair (dollars in thousands) Hierarchy Value Value Value Value Financial Assets: Cash and due from banks Level 1 $ 431,373 $ 431,373 $ 83,548 $ 83,548 Interest-earning deposits in other financial institutions Level 1 600 600 600 600 Investment securities - AFS Level 2 318,961 318,961 256,830 256,830 Investment securities - HTM Level 2 5,209 5,097 5,729 5,563 Mortgage loans held for sale Level 2 1,911 1,845 — — Loans, net Level 3 2,989,958 2,918,296 3,295,373 3,251,464 Equity securities (1) Level 3 22,251 22,251 22,238 22,238 Servicing assets Level 3 8,110 14,883 9,521 21,712 Accrued interest receivable (1) Level 1/2/3 13,743 13,743 14,536 14,536 Notional Fair Notional Fair Derivative assets: Value Value Value Value Interest Rate Lock Contracts (1) Level 3 $ 1,255 $ 32 $ — $ — Forward Mortgage Loan Sale Contracts (1) Level 3 1,104 14 1,179 18 Carrying Fair Carrying Fair Financial Liabilities: Value Value Value Value Deposits Level 2 $ 3,174,760 $ 3,181,495 $ 2,977,683 $ 2,960,529 FHLB advances Level 3 150,000 144,891 220,000 210,470 Long-term debt Level 3 119,147 83,864 173,585 132,709 Subordinated debentures Level 3 14,938 14,566 14,720 14,195 Accrued interest payable Level 2/3 11,671 11,671 3,711 3,711 ( 1 ) Included in “Accrued interest and other assets” on the consolidated balance sheets. NOTE 19 - EARNINGS PER SHARE (“ EPS” ) The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS: 2023 2022 2021 (dollars in thousands except shares and per share data) Income Shares Income Shares Income Shares Net income as reported $ 42,465 $ 64,327 $ 56,906 Less: Earnings allocated to participating securities — ( 34 ) ( 192 ) Shares outstanding 18,609,179 18,965,776 19,455,544 Impact of weighting shares 356,167 133,733 ( 31,995 ) Used in basic EPS 42,465 18,965,346 64,293 19,099,509 56,714 19,423,549 Dilutive effect of outstanding Stock options 15,322 211,477 410,757 Restricted Stock Unit 4,565 21,653 — Used in dilutive EPS $ 42,465 18,985,233 $ 64,293 19,332,639 $ 56,714 19,834,306 Basic earnings per common share $ 2.24 $ 3.37 $ 2.92 Diluted earnings per common share 2.24 3.33 2.86 Stock options for 332,500 shares of common stock and restricted stock units for 6,012 shares were not considered in computing diluted earnings per common share for December 31, 2023 because they were anti-dilutive. Stock options for zero share of common stock and restricted stock units for zero share were not considered in computing diluted earnings per common share for December 31, 2022 and 2021, respectively, because they were anti-dilutive. 119 Table of Contents NOTE 20 – REVENUE FROM CONTRACTS WITH CUSTOMERS The following is a summary of revenue from contracts with customers that are in-scope and not in-scope under Topic 606: For the Year Ended December 31, (dollars in thousands) 2023 2022 2021 Non-interest income, in scope (1) Fees and service charges on deposit accounts $ 2,014 $ 2,051 $ 2,367 Other fees (2) 984 677 2,543 Other income (3) 2,158 2,094 2,157 Gain on sale of OREO and fixed assets 166 757 — Total in-scope non-interest income 5,322 5,579 7,067 Non-interest income, not in scope (4) 9,696 5,673 11,678 Total non-interest income $ 15,018 $ 11,252 $ 18,745 ( 1 ) There were no adjustments to the Company's financial statements recorded as a result of the adoption of ASC 606. ( 2 ) Other fees consist of wealth management fees, miscellaneous loan fees and postage/courier fees. ( 3 ) Other income consists of safe deposit box rental income, wire transfer fees, security brokerage fees, annuity sales, insurance activity, and OREO income. ( 4 ) The amounts primarily represent revenue from contracts with customers that are out of scope of ASC 606: Net loan servicing income, letter of credit commissions, import/export commissions, recoveries on purchased loans, BOLI income, gains (losses) on sales of mortgage loans, loans and investment securities, and CDFI ERP award. The major revenue streams by fee type that are within the scope of ASC 606 presented in the above tables are described in additional detail below: Fees and Services Charges on Deposit Accounts Fees and service charges on deposit accounts include charges for analysis, overdraft, cashier's check fees, ATM, and safe deposit activities executed by our deposit clients, as well as interchange income earned through card payment networks for the acceptance of card based transactions. Fees earned from our deposit clients are governed by contracts that provide for overall custody and access to deposited funds and other related services, and can be terminated at will by either party; this includes fees from money service businesses (MSBs). Fees received from deposit clients for the various deposit activities are recognized as revenue once the performance obligations are met. Periodic service charges are generally collected monthly directly from the customer’s deposit account, and at the end of a statement cycle, while transaction based service charges are typically collected at the time of or soon after the service is performed. The adoption of ASU 2014 - 09 had no impact to the recognition of fees and service charges on deposit accounts. Wealth Management Fees The Company employs financial consultants to provide investment planning services for customers including wealth management services, asset allocation strategies, portfolio analysis and monitoring, investment strategies, and risk management strategies. The commission fees the Company earns are variable and are generally received monthly. The Company recognizes revenue for the services performed at quarter-end based on actual transaction details received from the broker dealer the Company engages. In the Company’s wealth management division, revenue is primarily generated from ( 1 ) securities brokerage accounts, ( 2 ) investment advisor accounts, ( 3 ) full service brokerage implementation fees, and ( 4 ) life insurance and annuity products. 120 Table of Contents Gain (loss) on Sales of Other Real Estate Owned and Fixed Assets The Company records a gain or loss from the sale of OREO and fixed assets, when control of the property or asset transfers to the buyer, which generally occurs at the time of an executed deed or sales agreement. When the Company finances the sale of OREO to a buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present. NOTE 21 – QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS The Company began investing in qualified affordable housing projects in 2016. At December 31, 2023 and December 31, 2022, the balance of the investment for qualified affordable housing projects was $ 6.4 million and $ 7.6 million, respectively. This balance is reflected in the accrued interest and other assets line on the consolidated balance sheets. Total unfunded commitments related to the investments in qualified affordable housing projects totaled $ 2.3 million and $ 2.6 million at December 31, 2023 and December 31, 2022. The Company expects to fulfill these commitments between 2024 and 2038. During the years ended December 31, 2023, 2022 and 2021, the Company recognized amortization expense of $ 1.1 million, $ 1.1 million, and $ 1.0 million, respectively, which was included within income tax expense on the consolidated statements of income. During the years ended December 31, 2023, 2022 and 2021, the Company recognized tax credits from its investment in affordable housing tax credits of $ 1.0 million, $ 991,000 and $ 1.0 million, respectively. The Company had no impairment losses during the years ended December 31, 2023, 2022 and 2021. NOTE 22 - PARENT ONLY CONDENSED FINANCIAL INFORMATION The parent company only condensed balance sheet as of December 31, 2023 and 2022, and the related condensed statements of income and condensed statements of cash flows for the years ended December 31, 2023, 2022 and 2021 are presented below: Condensed Balance Sheet (dollars in thousands) 2023 2022 ASSETS Cash and cash equivalents $ 47,125 $ 43,718 Investment in Bank 589,998 621,580 Investment in RAM 3,244 3,049 Other assets 6,333 6,161 Total assets $ 646,700 $ 674,508 LIABILITIES AND SHAREHOLDERS' EQUITY Long term debt 119,147 173,585 Subordinated debentures 14,938 14,720 Other liabilities 1,355 1,640 Total liabilities 135,440 189,945 Shareholders' equity: Common stock 271,925 276,912 Additional paid-in capital 3,623 3,361 Retained earnings 255,152 225,883 Non-controlling interest 72 72 Accumulated other comprehensive loss ( 19,512 ) ( 21,665 ) Total shareholders' equity 511,260 484,563 Total liabilities and shareholders' equity $ 646,700 $ 674,508 121 Table of Contents Condensed Statements of Income (dollars in thousands) 2023 2022 2021 Dividend from subsidiaries $ 85,000 $ — $ 25,000 Interest (reversal)/income ( 41 ) 52 — Interest expense 9,951 9,645 8,999 Noninterest expense 1,897 2,056 1,452 Income/(loss) before equity in undistributed income of subsidiaries 73,111 ( 11,649 ) 14,549 (Distributed income in excess of earnings)/undistributed income of: Bank ( 34,477 ) 72,340 39,109 RAM 195 57 59 Income before income taxes 38,829 60,748 53,717 Income tax benefit 3,636 3,579 3,189 Net income 42,465 64,327 56,906 Other comprehensive income/(loss) 2,153 ( 20,009 ) ( 2,785 ) Total comprehensive income $ 44,618 $ 44,318 $ 54,121 Condensed Statements of Cash Flows (dollars in thousands) 2023 2022 2021 Cash flows from operating activities: Net income $ 42,465 $ 64,327 $ 56,906 Net amortization of other 780 796 724 Provision for deferred income taxes ( 72 ) ( 57 ) ( 337 ) Distributed income in excess of earnings/(undistributed income) of subsidiaries 34,282 ( 72,397 ) ( 39,168 ) Change in other assets and liabilities 113 216 1,645 Net cash provided by/(used in) operating activities 77,568 ( 7,115 ) 19,770 Cash flows from investment activities: Purchase of other equity securities, net ( 490 ) ( 1,663 ) ( 380 ) Net cash used in investing activities ( 490 ) ( 1,663 ) ( 380 ) Cash flows from financing activities: Issuance of subordinated debentures, net of issuance costs — — 118,111 Redemptions of subordinated debentures ( 55,000 ) — ( 50,000 ) Dividends paid ( 12,163 ) ( 10,736 ) ( 9,947 ) Common stock repurchased, net of repurchased costs ( 6,803 ) ( 19,822 ) ( 10,540 ) Stock options exercised 295 5,476 3,475 Net cash (used in)/provided by financing activities ( 73,671 ) ( 25,082 ) 51,099 Increase/(decrease) in cash and cash equivalents 3,407 ( 33,860 ) 70,489 Cash and cash equivalents beginning of year 43,718 77,578 7,089 Cash and cash equivalents end of year $ 47,125 $ 43,718 $ 77,578 NOTE 23 – REPURCHASE OF COMMON STOCK On April 22, 2021, March 16, 2022 and June 14, 2022, the Board of Directors approved a stock repurchase program to buy back up to an aggregate of 500,000 shares of Company common stock for each authorization date. In 2021, the Company repurchased 473,122 shares of common stock for a total of $ 10.5 million at a weighted average share price of $ 22.28 . In 2022, the Company repurchased 902,526 shares of common stock for a total of $ 19.8 million at a weighted average share price of $ 21.96 . In 2023, the Company repurchased 396,374 shares of common stock for a total of $ 6.8 million at a weighted average share price of $ 17.02 . As of December 31, 2023, the Company may repurchase up to 36,750 shares under the remaining authorized repurchase program. NOTE 24 – SUBSEQUENT EVENTS On January 18, 2024 , the Company announced the Board of Directors had declared a common stock cash dividend of $ 0.16 per share, payable on February 9, 2024 to common shareholders of record as of January 31, 2024 . On February 29, 2024, the Company announced the Board of Directors authorized a stock repurchase plan providing for the repurchase of up to 1 million shares of the Company’s outstanding common stock through March 31, 2026. 122 Table of Contents Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None.