FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2024
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
PREFERRED BANK
(Exact name of registrant as specified in its charter)
California
(State or other jurisdiction of
incorporation or organization)
33539
(FDIC Certificate Number)
95-4340199
(I.R.S. Employer
Identification No.)
601 S. Figueroa Street, 48th Floor, Los Angeles, California
(Address of principal executive offices)
90017
(Zip Code)
Registrant’s telephone number, including area code: (213) 891-1188
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, No Par Value
PFBC
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filed, non-accelerated filer, a smaller reporting company,
or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated filer
Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm
that prepared or issued its audit report.
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included
in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
ii
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the
price at which the common equity was last sold as of the last business day of the Registrant’s most recently completed second fiscal quarter (June 30,
2024) was $688,901,750
Number of shares of common stock of the Registrant outstanding as of March 13, 2025, was 13,243,310
The following documents are incorporated by reference herein:
Document Incorporated By Reference
Part of Form 10-K Into
Which Incorporated
Definitive Proxy Statement for the Annual Meeting of Shareholders which will be filed
within 120 days of the fiscal year ended December 31, 2024
Part III
TABLE OF CONTENTS
Page
-i-
PART I ........................................................................................................................................................ 2
ITEM 1.
BUSINESS ............................................................................................................................................. 3
ITEM 1A. RISK FACTORS .................................................................................................................................. 30
ITEM 1B. UNRESOLVED STAFF COMMENTS ............................................................................................... 41
ITEM 1C. CYBERSECURITY ............................................................................................................................. 41
ITEM 2. PROPERTIES ...................................................................................................................................... 43
ITEM 3.
LEGAL PROCEEDINGS .................................................................................................................... 43
ITEM 4.
MINE SAFETY DISCLOSURES ........................................................................................................ 44
PART II .................................................................................................................................................... 45
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.............................................. 45
ITEM 6.
RESERVED ......................................................................................................................................... 47
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................................................................................. 48
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..................... 73
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ..................................................... 73
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE ..................................................................................................... 73
ITEM 9A. CONTROLS AND PROCEDURES .................................................................................................... 73
ITEM 9B. OTHER INFORMATION................................................................................................................ 7777
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS ................................................................................................................................ 7777
PART III ............................................................................................................................................... 7777
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ......................... 7777
ITEM 11.
EXECUTIVE COMPENSATION ................................................................................................... 7777
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ............................................................................ 7777
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ........................................................................................................................... 7877
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES .................................................................. 7878
PART IV ............................................................................................................................................... 7878
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES ................................................................ 7878
ITEM 16.
FORM 10-K SUMMARY ............................................................................................................ 123121
SIGNATURES.................................................................................................................................. 124122
2
PART I
Forward-Looking Statements
Certain matters discussed in this Annual Report on Form 10-K (“Annual Report”) may constitute forward-
looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities
Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and as such, may
involve risks and uncertainties. We claim the protection of the safe harbor contained in the Private Securities
Litigation Reform Act of 1995. These forward-looking statements relate to, among other things, the Bank’s financial
condition, results of operations, plans, objectives, expectations of the environment in which we operate and
projections of future performance or business. Such statements can generally be identified by the use of forward-
looking language, such as “is expected to,” “will likely result,” “anticipated,” “projected”, “estimate,” “forecast,”
“intends to,” or may include other similar words, phrases, or future or conditional verbs such as “aims”, “believes,”
“plans,” “continue,” “remain,” “may,” “might,” “will,” “would,” “should,” “could,” “can,” or similar language.
Forward-looking statements by us are based on estimates, beliefs, projections and assumptions of management and
are not guarantees of future performance. Our actual results, performance, or achievements may differ significantly
from the results, performance, or achievements expected or implied in such forward-looking statements. When
considering these statements, you should not place undue reliance on these statements, as they are subject to certain
risks and uncertainties, as well as any cautionary statements made within this Annual Report, and should also note
that these statements are made as of the date of this Annual Report and based only on information known to us at
that time.
Factors causing risk and uncertainty, which could cause future results to be materially different from
forward-looking statements contained in this Annual Report as well as from historical performance, include but are
not limited to:
Regulatory decisions regarding the Bank, and impact of future regulatory and governmental agency
decisions including Basel III capital standards;
Adequacy of allowance for credit loss estimates in comparison to actual future losses;
Necessity of additional capital in the future, and possible unavailability of that capital on acceptable terms;
Economic and market conditions that may adversely affect the Bank and our industry;
Disruptions to the financial markets as a result of the current or anticipated impact of military conflict,
including escalating military tension between Russia and Ukraine, terrorism or other geopolitical events;
Possible loss of members of senior management or other key employees upon whom the Bank heavily
relies;
Changes in the interest rate environment, and levels of short- and long-term interest rates, may negatively
affect the Bank’s financial performance;
Changes in governmental or bank-established interest rates or monetary policies, including the replacement
of the LIBOR index on our loans which are tied to that index;
Strong competition from other financial service entities;
Possibility that the Bank’s underwriting practices may prove to be ineffective;
Changes in the commercial and residential real estate markets that could adversely affect the collateral
value supporting our loans and increase charge-offs;
Adverse economic conditions in Asia which could negatively impact the Bank’s business;
Catastrophic events, acts of war or terrorism, or natural disasters, such as earthquakes, drought, pandemic
diseases (such as the COVID-19 pandemic), climate change or extreme weather events, any of which may
affect services we use, may affect our customers, employees or third parties with which we conduct
business, or could negatively impact the Bank’s business;
Geographic concentration of our operations;
The economic impact of Federal budgetary policies;
Failure to attract deposits, inhibiting growth;
Interruption or break in the communication, information, operating, and financial control systems upon
which the Bank relies;
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Changes in federal and state laws or the regulatory environment including regulatory reform initiatives and
policies of the U.S. Department of Treasury, the Board of Governors of the Federal Reserve Board System,
the Federal Deposit Insurance Corporation, the Consumer Financial Protection Bureau and the California
Department of Financial Protection and Innovation;
Changes in accounting standards as may be required by the Financial Accounting Standards Board or other
regulatory agencies and their impact on critical accounting policies and assumptions;
Potential changes in the U.S. government’s monetary policies;
Environmental liability with respect to properties to which the Bank takes title;
Negative publicity;
Information technology and cyber security incidents, disruptions or attacks and the possible blocking, theft
or loss of Bank or customer access, functionality, data, funding or money
As a result of the rapid rise in interest rates in 2022 and 2023, resulting reductions in the value of investment
securities portfolios throughout the industry, and recent bank failures, our forward-looking statements are
subject to the following risks, uncertainties and assumptions specifically related to these circumstances:
Attraction and retention of uninsured deposits in the short-term may be challenged;
Deterioration in depositor confidence could result in deposit outflows and strains on our liquidity;
Failures of additional banks could further erode depositor confidence and deposit withdrawals that could
require us to borrow funds or sell securities, which could adversely affect our operating results;
Replacement of withdrawn deposits with funds borrowed from the Federal Home Loan Bank, Federal
Reserve Bank, or other sources likely will increase our marginal interest expense and could reduce our net
interest income and reduce our net income and the rate of our quarterly cash dividend;
Changes in regulations and examination standards in response to the recent bank failures could result in
increased compliance costs and possible restrictions on operations and strategic initiatives; and
FDIC premiums may increase if the Deposit Insurance Fund experiences additional costs in the resolution
of the recent and any future bank failures, which could reduce our net income.
These factors are further described in this Annual Report within Item 1A. We do not undertake, and we
specifically disclaim any obligation to update any forward-looking statements to reflect the occurrence of events or
circumstances after the date of such statements except as required by law.
ITEM 1.
BUSINESS
References in this Annual Report to “we,” “us,” or “our,” and the “Bank” mean Preferred Bank and its
wholly-owned subsidiary, PB Investment and Consulting, Inc., or PB Consulting, which has no current operations.
General
We are one of the larger independent commercial banks headquartered in California focusing primarily on
the diversified California market, with a historical niche in the Chinese-American market. We consider the Chinese-
American market to encompass individuals born in the United States of Chinese ancestry, ethnic Chinese who have
immigrated to the United States and ethnic Chinese who live abroad but conduct business in the United States.
Although founded as a Bank that primarily serves the Chinese-American community, the majority of our current
business activities come from non-Chinese American markets of Southern California, Northern California, New
York and Texas. We commenced operations in December 1991 as a California state-chartered bank in Los Angeles,
California. Our deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”). We are a member of
the Federal Home Loan Bank (“FHLB”) of San Francisco and of the FHLB of New York.
At December 31, 2024, our total assets were $6.92 billion, loans were $5.64 billion, deposits were $5.92
billion and shareholders’ equity was $763.2 million. These balances all saw increases from total assets of $6.66
billion, loans of $5.27 billion, deposits of $5.71 billion, and shareholders’ equity of $695.1 million, respectively, as
of December 31, 2023. We had net earnings per share on a diluted basis of $9.64 for the year ended December 31,
2024 as compared to net earnings of $10.52 per diluted share for the year ended December 31, 2023 and net
earnings per diluted share of $8.70 for the year ended December 31, 2022. Net interest income before provision for
credit losses increased to $272.6 million for the year ended December 31, 2024, up from $289.4 million for the year
ended December 31, 2023 and $247.4 million for the year ended December 31, 2022. We recorded a provision for
4
credit losses on loans of $12.1 million in 2024, up from $10.0 million recorded in 2023 and up from $7.4 million
recorded in 2022.
We provide personalized deposit products and services as well as real estate finance, commercial loans,
SBA loans and trade finance credit facilities to small and mid-sized businesses and their owners, entrepreneurs, real
estate developers and investors, professionals and high net worth individuals. In addition, as an accommodation to
many of our clients and as a way to gain new business, we offer single family residential mortgage loans.
Traditionally, we have been more focused on businesses as opposed to retail customers and have a relatively small
number of customer relationships for whom we provide a high level of service and personal attention.
We derive our income primarily from interest received on our loan and investment securities portfolios as
well as our cash and fee income we receive in connection with servicing our loan and deposit customers. Our major
operating expenses are the interest we pay on deposits and borrowings, and the salaries and related benefits we pay
our management and staff.
The Bank conducts its banking business through its main office in Los Angeles, California and twelve full-
service branch banking offices in California (Alhambra, Century City, City of Industry, Torrance, Arcadia, Irvine
(2), Diamond Bar, Pico Rivera, Tarzana and San Francisco (2)), one branch in Flushing, New York, a branch office
in the Houston, Texas suburb of Sugar Land and a loan production office in Sunnyvale, California. In addition, the
Bank also maintains a satellite office in New York City. We market our services and conduct our business primarily
in Los Angeles, Orange, Ventura, Riverside, San Bernardino, and San Francisco counties within California, the Tri-
State area of New York, New Jersey, Connecticut and the Houston, Texas metro area.
Our main office is located at 601 S. Figueroa Street, 47th Floor, Los Angeles, CA 90017 and our telephone
number is (213) 891-1188. Our website is www.preferredbank.com. Under the Investor Relations tab on our web site
(See “Company Filings”), which can be accessed through www.preferredbank.com, we post the following filings as
soon as reasonably practicable after they are filed with or furnished to the FDIC:
Our annual report on Form 10-K;
Our quarterly reports on Form 10-Q;
Our current reports on Form 8-K;
Any amendments to such reports filed with or furnished to the FDIC pursuant to Section 13(a) or
15(d) of the Exchange Act;
Our proxy statement related to our annual shareholders’ meeting and any amendments to those
reports or statements filed with or furnished to the FDIC pursuant to Section 13(a) or 15(d) of the
Exchange Act; and
Our Form 4 statements of holdings of our directors and executive officers.
All such filings are available on our website free of charge. The reference to our website address does not
constitute incorporation by reference of the information contained in the website and should not be considered part
of this Annual Report. A copy of our Code of Personal and Business Conduct, including any amendments thereto or
waivers thereof, and Board Committee Charters can also be accessed on our website. We will provide, at no cost, a
copy of our Code of Personal and Business Conduct and Board Committee Charters upon request by phone or in
writing at the above phone number or address, attention: Edward J. Czajka, Executive Vice President and Chief
Financial Officer.
Our Traditional Banking Business
We have historically provided a range of deposit and loan products and services to customers primarily
within the following categories:
Real Estate Finance—consisting of investors and developers within the real estate industry and of
owner-occupied properties in Southern California. We have traditionally provided construction loans and
mini-permanent (“mini-perm”) loans for residential, commercial, industrial and other income producing
properties, although construction lending is no longer a focus for new business. A portion of our real
estate loans are to borrowers who are also international trade finance customers.
5
Middle Market Business—consisting of manufacturing, service and distribution companies with annual
sales of approximately $5 million to $100 million and with borrowing requirements of up to
approximately $12 million. We offer a range of lending products to customers in this market, including
working capital loans, equipment financing and commercial real estate loans. Additionally, we provide a
full range of deposit products and related services including safe deposit boxes, account reconciliation,
courier service and cash management services.
Trade Finance—consisting of importers and exporters based in the U.S. requiring both borrowing and
operational products. We offer a full range of products to international trade finance customers, including
commercial and standby letters of credit, acceptance financing, documentary collections, foreign draft
collections, international wires and foreign exchange.
High-wealth Banking —consisting of wealthy individuals residing in the Pacific Rim area with
residences, real estate investments or businesses in Southern California. We offer all of our banking
products and services to this segment through our multi-lingual team of professionals knowledgeable in
the business environment and financial affairs of Pacific Rim countries. We believe our language
capabilities provide us with a competitive advantage.
Professionals—consisting generally of physicians, accountants, attorneys, business managers and other
professionals. We provide specialized personal banking services to customers in this segment including
courier service, several types of specialized deposit accounts and personal and business loans as well as
lines of credit.
Mortgage – we provide a wide array of financing options for the purchase and refinance of single family
residential homes and condominiums. Typically these loans are not ‘Qualifying Mortgages’ (“QM”) as
defined by the Consumer Financial Protection Bureau (“CFPB”).
We provide an internet banking website with bill pay and treasury management services as well as mobile
banking for phone and tablet applications for our clients. In 2019, we also began to offer online account opening for
certain deposit products. Our focus on technology and on providing the most relevant products and services to our
clients is of utmost importance.
Our Current Focus
The Bank’s focus from a lending perspective is on loan production and expansion of the loan portfolio.
Even more importantly, the Bank is keenly focused on growing deposits and new deposit relationships while
maintaining pricing discipline on both loans and deposits. Of course, credit quality is always a key focus irrespective
of the macro-economic environment. Management believes that the current economic environment is relatively
stable however the velocity of transactions has slowed. Traditionally the Bank has always placed a greater emphasis
on gathering deposits rather than loans, with the understanding that the deposit relationships are the primary drivers
of the franchise value of the Bank.
As acquisitions have never been a growth tactic for Preferred Bank, organic growth remains the primary
focus for us and generally has come from our business development personnel which includes loan officers, deposit
officers and relationship managers. Our historic success in our ability to grow organically has come from our ability
to attract and retain top level bankers in the markets we serve while providing an ultra-high-touch level of service.
Our continued success in organic growth will be somewhat dependent on our ability to continue to increase our
business development professionals.
Our Market
We conduct operations from our main office in downtown Los Angeles, California and through twelve full-
service branch offices in in the California counties of Los Angeles, Orange and San Francisco, one full-service
branch in Queens County, New York, one full-service branch in the Houston suburb of Sugar Land, Texas, a loan
production office in Sunnyvale in California, and a satellite office in New York City which is used only for meeting
and communications as no business is transacted there. We market our services and conduct our business primarily
in Los Angeles, Orange, Ventura, Riverside, San Bernardino, and San Francisco counties within California, the Tri-
State area of New York, New Jersey and Connecticut and the Houston, Texas metro area.
6
We believe we compete effectively with the Chinese-American community banks, the mainstream
community banks, larger commercial banks and major publicly listed and foreign-owned Chinese banks operating in
both California and in New York by offering the following:
Deposit and cash management services, internet, mobile and tablet banking to businesses and high net
worth depositors with a high degree of personal service and responsiveness;
An experienced, multi-lingual management team and staff who have an understanding of Asian markets
and cultures who we believe can provide sophisticated credit solutions faster, more efficiently and with a
higher degree of personal service than what is provided by our competition;
Credit decisioning and execution on a pace far exceeding that of larger banks and which our clients value
greatly; and
Loan products to customers requiring credit of a size in excess of what can be provided by our smaller
competitors.
Our Lending Activities
Our current loan portfolio is comprised primarily of the following five categories of loans:
Real estate mortgage loans;
Commercial and industrial loans;
Real estate construction loans;
Small Business Administration (“SBA”) loans; and
Trade finance.
We manage our loan portfolio to provide for an adequate return, but also provide for diversification of risk.
We also have also utilized our relationships within the banking industry to purchase and sell participations in loans
that meet our underwriting criteria. As of December 31, 2024, we had a total of $874.9 million in purchased
participation loans and $181.2 million in loan participations that we sold. Of the $874.9 million in purchased
participations, $235.6 million are loans made to our own relationship customers, which have outgrown our lending
limits, but who desire to continue their relationship with us. We believe this is a very important characteristic of the
purchased loan portfolio, as we have a deep understanding of these clients which we believe helps mitigate the risk
of defaults.
We have historically originated our loans from our banking offices in Los Angeles, Orange, and San
Francisco counties. During 2015, the acquisition of United International Bank, or UIB, resulted in an additional
office from which loans could be originated in the Northeast Tri-State Area (New York, New Jersey and
Connecticut). In 2021 we opened a Loan Production Office (“LPO”) in Sugar Land, Texas, which was elevated to a
full service branch in 2023 and the Bank now originates loans in the Houston area. In 2024, the Bank opened an
LPO in the Silicon Valley community of Sunnyvale. Bank-wide, for mini-perm and construction loans, we have
relied on referrals from existing clients who are real estate investors, owner/operators, and developers as well as
internal business development efforts. For our commercial and trade finance lending, we have sought referrals from
existing banking clients as well as referrals from professionals, such as certified public accountants, attorneys and
business consultants.
At December 31, 2024, 60% of our loans carried interest rates that adjust with changes in the Prime Rate,
which has the potential to re-price daily (floating rate loans), and 25% carried interest rates tied to the Secured
Overnight Financing Rate (“SOFR”) indices and other indices which re-price periodically (adjustable rate loans).
The remaining 15% of our loans were either fixed rate or had an interest rate tied to the certificate of deposit (“CD”)
by which it was collateralized. Approximately 96% of our floating rate loans and 47% of our adjustable rate loans
had an interest rate floor, which will provide us with some protection in the future if interest rates decrease from the
current levels. Approximately 13% of our loan portfolio had interest rate ceilings at various rates limiting the
amount of interest rate increases that can be passed on to the borrower.
7
The following table sets forth information regarding our seven major loan portfolios:
At December 31, 2024
(Dollars in thousands)
Real Estate Mini-Perm
Portfolio size
$ 3,040,330
Number of loans
641
Average loan size
$ 4,743
Average LTV(1)
56%
Average DCR(2)
1.63x
Weighted average rate
7.68%
Average years since origination
3.6 years
Residential Mortgage
Portfolio size
$ 589,968
Number of loans
879
Average loan size
$ 671
Average LTV(1)
66%
Weighted average rate
5.86%
Average years since origination
2.4 years
Real Estate Construction
Portfolio size
$ 583,765
Number of loans
88
Average loan size
$ 6,634
Average LTV(1)
53%
Weighted average rate
8.50%
Average years since origination
2.1 years
Commercial Loans
Portfolio size
$ 1,418,445
Number of loans
2,177
Average loan size
$ 652
Weighted average rate
7.58%
Average years since origination
3.7 years
Trade Finance
Portfolio size
$ 485
Number of loans
16
Average loan size
$ 30
Weighted average rate
8.65%
Average years since origination
0.2 years
SBA
Portfolio size
$ 6,833
Number of loans
61
Average loan size
$ 110
Weighted average rate
9.20%
Average years since origination
1.1 years
HELOC
Portfolio size
$ 542
Number of loans
2
Average loan size
$ 271
Average LTV(1)
28%
Weighted average rate
8.80%
Average years since origination
11.3 years
(1) Average loan-to-value at origination, or LTV, is calculated based upon a weighted average of outstanding principal loan
balances (for mini-perm loans) or commitment (for construction loans) divided by the original value.
(2) Average debt coverage ratio at origination, or DCR, is calculated based upon the net operating income of the property
divided by the debt service.
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As of December 31, 2024, we had 597 loans with outstanding principal balances between $1 million and $5
million, 139 loans with outstanding principal balances between $5 million and $10 million, and 119 loans with
outstanding principal balances over $10 million.
Real Estate Mortgage Loans
Our Real Estate Mortgage portfolio consists primarily of real estate mini-perm loans, as well as residential
mortgages. The real estate mini-perm loan is a term loan program to provide financing for the acquisition or
refinancing of commercial, industrial, apartment, or other real estate property. The mini-perm loan program also
includes financing to assist borrowers to term-out existing fully completed construction loans or re-stabilized
commercial real estate property. The Bank’s consideration on real estate mini-perm loan program follows a well-
defined lending standard consistent with safe and sound banking practices and regulatory requirements. The Bank
monitors the conditions of the real estate mini-perm loan program continuously to ensure lending policy and prudent
underwriting standards appropriately reflect current market conditions. The Bank strives to deliver a competitive
real estate mini-perm loan program to meet the demand of our borrowers.
Real estate loans are secured by retail, industrial, office, special purpose, and residential single and multi-
family properties and comprise 64% of our loan portfolio as of December 31, 2024. We seek diversification in our
loan portfolio by maintaining a broad base of borrowers and monitoring our exposure to various property types as
well as geographic and industry concentrations. Total real estate loans were $3.63 billion at December 31, 2024 as
compared to $3.45 billion as of December 31, 2023.
The following table sets forth the breakdown of our real estate portfolio by property type:
At December 31, 2024
Property Type
Amount
Percentage of
Loans in Each
Category in
Total Loan
Portfolio
(Dollars in thousands)
Commercial/Office
$ 441,657
7.83%
Retail (1)
710,995
12.60%
Industrial
406,645
7.21%
Residential 1-4
778,109
13.79%
Apartment 4+
538,981
9.56%
Land
46,271
0.82%
Special purpose (2)
708,182
12.56%
Total
$ 3,630,840
64.37%
(1)
Includes shopping centers, strip malls or stand-alone properties which house retailers.
(2)
Includes hospitality, hospital and self-storage.
The following table sets forth the maturity of our real estate loan portfolio:
More Than
Total
Outstanding
1 Year
2 Years
3 Years
4 Years
5 Years
5 Years
Balance
$ 850,591
$ 517,713
$ 642,940
$ 412,090
$ 516,954
$ 690,552
$ 3,630,840
At December 31, 2024
Less than
(In thousands)
Loan Origination: The loan origination process for mini-perm loans begins with a loan officer collecting
preliminary property information and financial data from a prospective borrower and guarantor(s). After a
preliminary deal sheet is prepared and approved by management, the loan officer collects the necessary third party
9
reports such as appraisals, credit reports, environmental assessments and preliminary title reports as well as detailed
financial information. We utilize third party appraisers from an appraiser list approved by our Board of Directors’
loan committee. From that list, appraisers are selected by our Credit Administration Department.
All appraisals for commercial real estate loans over $500,000 and for residential real estate loans over
$400,000 are reviewed by an additional outside appraiser. A credit memorandum is then prepared by the loan officer
summarizing all third party reports and preparing an analysis of the adequacy of primary and secondary repayment
sources; namely the property DCR and LTV as well as the outside financial strength and cash flow of the
borrower(s) or guarantor(s). This completed credit memorandum is then submitted to senior management or a
committee having the appropriate authority for approval. For further information on our different levels of authority,
see “—Loan Authorizations” below.
Once a loan is approved by the appropriate authority level, loan documents are drawn by our Centralized
Note Department, which also funds the loan when approval conditions are met. On larger, relatively complex
transactions, loan documents are prepared or reviewed by outside legal counsel.
Underwriting Standards: Our principal underwriting standards for real estate mini-perm loans are as
follows:
Maximum LTV of 50%-85%, depending on the property type. However, our practice is to lend at a
maximum LTV of 65%.
Minimum DCR of 1.10-1.25, depending on the property type.
Requirements of personal guarantees from the principals of any closely-held entity.
Monitoring: We monitor our mini-perm portfolio in different ways. First, for loans over $1.5 million, we
conduct site inspections and gather rent rolls and operating statements on the subject properties semi-annually.
Using this information, we evaluate a given property’s ability to service present payment requirements, and we
perform “stress-testing” to evaluate the property’s ability to service debt at higher debt levels or at lower cash flow
levels. Second, on an annual basis, we request updated financial information from our borrowers and/or guarantors
to monitor their financial capacity. In addition, to the extent any of our mini-perm loans become adversely classified
loans, we order new appraisals every twelve months.
The vast majority of our mini-perm loans carry a five year maturity. However, it has been our practice to
renew these loans based on a satisfactory payment record and an updated underwriting profile.
Real Estate Construction
Our construction loans are typically short-term loans of up to 24 months for the purpose of funding the
costs of constructing a building. There were no construction loan net charge-offs during 2024, 2023 and 2022. We
had 88 construction loans totaling $583.8 million as of December 31, 2024, and 77 construction loans totaling
$426.0 million as of December 31, 2023. Outstanding construction loans by property type are summarized as
follows:
10
At December 31, 2024
Property Type
Amount
Percentage of
Loans in Each
Category in
Total Loan
Portfolio
(Dollars in thousands)
Commercial/Office
$ 853
0.02%
Retail (1)
10,096
0.18%
Industrial
29,539
0.52%
For sale attached residential
163,761
2.90%
For sale detached residential
132,819
2.36%
Apartment 4+
209,313
3.71%
Land / Special Purpose (2)
37,384
0.66%
Total
$ 583,765
10.35%
(1)
Includes shopping centers, strip malls or stand-alone properties which house retailers.
(2)
Includes hospitality, hospital and self-storage.
Loan Origination: The origination process for construction loans is similar to our real estate mini-perm
origination process described above under “—Real Estate Mortgage Loans—Loan Origination,” but with one
additional step. For construction loans, we require a third party review of the developer’s proposed building costs for
large-scale projects, and for other building projects on a case-by-case basis.
Underwriting Standards: Our underwriting standards for construction loans are identical to those described
above under “—Real Estate Mini-Perm Loans—Underwriting Standards.” We require that the construction loan
applicant has proven experience in the type of project under consideration. Finally, notwithstanding the maximum
50-85% LTV discussed above under “—Real Estate Mini-Perm Loans—Underwriting Standards,” we generally
require a maximum 65% LTV for construction loans at origination.
Monitoring: The monitoring of construction loans is accomplished under the supervision of our Chief
Credit Officer and the Credit Administration Department. We engage third-party inspectors to report on the
percentage of project completion as well as to evaluate whether the project is proceeding at an acceptable pace as
compared to the original construction schedule. The third-party inspector also recommends whether we should
approve or disapprove disbursement request amounts based on their site inspection and their review of the project
budget. The third-party inspector produces a narrative report for each disbursement that contains an evaluation and
recommendation for each project. The Chief Credit Officer or Credit Administration Department reviews each
report and makes a final determination regarding the disbursement requests. All approved disbursements are funded
by our Centralized Note Department.
Commercial Loans
We offer a variety of commercial loan products including lines of credit for working capital, term loans for
capital expenditures and commercial and stand-by letters of credit. As a matter of practice, the Bank requires a
deposit relationship with commercial borrowers typically consisting of their operating account(s). As of December
31, 2024, we had $1.42 billion of commercial loans outstanding, which represented 25.1% of the overall loan
portfolio, compared to $1.39 billion outstanding as of December 31, 2023, which represented 26.4% of the overall
portfolio as of that time. Currently, the Bank is working to grow this line of business primarily because of the
additional deposit relationships as well as the risk diversity that this portfolio brings to our overall loan portfolio
which is typically more concentrated in real estate-related loans. Lines of credit typically have a one to two year
commitment and are secured by the borrower’s assets. In cases of larger commitments, an updated borrowing base
certificate from the borrower may be required to determine eligibility at the time of any given advance. Term loans
seldom exceed 60 months, but in no case exceed the depreciable life of the tangible asset being financed.
11
SBA Loans
We offer loans known as SBA 7(a) loans and SBA 504 loans that are partially guaranteed by SBA, an
independent agency of the federal government. SBA loans are offered for business purposes such as owner-occupied
commercial real estate, business acquisitions, start-ups, franchise financing, working capital, improvements and
renovations, inventory and equipment, and debt-refinancing. SBA loans offer lower down payments and longer-term
financing, which helps small business that are starting out, or about to expand. The guarantees on SBA loans are
generally 75 percent of the principal amount of the loan. The Bank typically requires that SBA loans be secured by
business assets and by a first or second deed of trust on any available real property. When the SBA loan is secured
by a first deed of trust on real property, the Bank obtains appraisals in accordance with applicable regulations. SBA
loans have terms ranging from five to 25 years depending on the use of the proceeds. To qualify for a SBA loan, a
borrower must demonstrate the capacity to service and repay the loan, without liquidating the collateral, based on
historical earnings or reliable projections. The Bank sells to unrelated third parties a substantial amount of the
guaranteed portion of the SBA loans that it originates. When the Bank sells a SBA loan, it has an option to
repurchase the loan if the loan defaults. If the Bank repurchases a defaulted loan, the Bank will make a demand for
the guaranteed portion to the SBA. Even after the sale of an SBA loan, the Bank retains the right to service the SBA
loan and to receive servicing fees. The unsold portions of the SBA loans that remain owned by the Bank are
included in loans receivable on the Balance Sheet.
As of December 31, 2024, we had SBA loans of $6.8 million or 0.1% of our total loan portfolio, which
consisted of $6.8 million of SBA 7(a) loans, and $50,000 of PPP loans made pursuant to The Coronavirus Aid,
Relief, and Economic Security Act (“CARES Act”), compared to $3.5 million consisting of $3.4 million of SBA
7(a) loans, and $97,000 of PPP loans as of December 31, 2023.
Trade Finance Credits
Our trade finance portfolio totaled $0.5 million, or 0.01% of our total loan portfolio as of December 31,
2024, compared to $1.0 million, or 0.02%, as of December 31, 2023. Of this amount, virtually all loans were made
to U.S.-based importers who are also our current borrowers or depositors. Trade finance loans are essentially
commercial loans but are typically made to importers or exporters. This portfolio has, similar to commercial loans,
performed relatively well. During 2024, 2023 and 2022, there were no charge-offs or recoveries on trade finance
loans. We also provide standby letters of credit and foreign exchange services to our clients. Our new trade finance
credit relationships result from contacts and relationships with existing clients, certified public accountants and trade
facilitators such as customs brokers.
We offer the following services to importers:
Commercial letters of credit;
Import lines of credit;
Documentary collections;
International wire transfers; and
Acceptances/trust receipt financing.
We offer the following services to exporters:
Export letters of credit;
Export finance;
Documentary collections;
Bills purchase program; and
International wire transfers.
Loan Origination: A commercial or trade finance loan begins with a loan officer obtaining preliminary
financial information from the borrower and guarantor(s) and summarizing the loan request in a deal sheet. The deal
sheet is then reviewed by senior management and/or those who have the loan authority to approve the credit.
Following preliminary approval, the loan officer undertakes a formal underwriting analysis, including third party
credit reports and asset verifications. From this information and analysis, a credit memorandum is prepared by the
12
loan officer and submitted to senior management or the loan committee having the appropriate approval authority
for review. After approval, the Centralized Note Department prepares loan documentation reflecting the conditions
of approval and funds the loan when those conditions are met.
Underwriting Standards: Our underwriting standards for commercial and trade finance loans are designed
to identify, measure, and quantify the risk inherent in these types of credits. Our underwriting process and standards
help us identify the primary and secondary repayment sources. The following are our major underwriting guidelines:
Cash flow is our primary underwriting criterion. We require a minimum 1.50:1 DCR for our commercial
and trade finance loans. We also review trends in the borrower’s sales levels, gross profit and expenses.
We evaluate the borrower’s financial statements to determine whether the given borrower’s balance sheet
provides for appropriate levels of equity and working capital.
Since most of our borrowers are closely held companies, we require the principals to guarantee their
company’s debt. Our underwriting process, therefore, includes an evaluation of the guarantor’s net worth,
income and credit history. Where circumstances warrant, we may require guarantees be secured by
collateral (generally real estate).
Where there is a reliance on the accounts receivable and inventory of a company, we evaluate their
condition, which may include third party onsite audits.
Monitoring: For those borrowers whose credit availability is tied to a formula based on advances as a
percentage of accounts receivable and inventory (typically ranging from 40%-80% and from 0%-50%, respectively),
we review monthly borrowing base certificates for both availability and turnover trends. Periodically, we also
conduct third party onsite audits, the frequency of which is dependent on the individual borrower. On a quarterly
basis, we monitor the financial performance of a borrower by analyzing the borrower’s financial statements for
compliance with financial covenants.
Loan Concentrations
Financial instruments that potentially subject the Bank to concentrations of credit risk consist primarily of
loans and investments. These concentrations may be impacted by changes in economics, industry or political factors.
The Bank monitors its exposure to these financial instruments and obtains collateral as appropriate to mitigate such
risk.
As of both December 31, 2024 and 2023, the percentage of loans secured by real estate in our total loan
portfolio was approximately 75% and 73%, respectively.
Our combined construction and real estate loans by type of collateral are as follows:
At December 31, 2024
Property Type
Amount
Percentage of
Loans in Each
Category in
Total Loan
Portfolio
(Dollars in thousands)
Commercial/Office
$ 442,510
7.85%
Retail (1)
721,091
12.78%
Industrial
436,184
7.73%
Residential 1-4
1,074,689
19.05%
Apartment 4+
748,294
13.27%
Land
46,271
0.82%
Special purpose (2)
745,566
13.22%
Total
$ 4,214,605
74.72%
(1)
Includes shopping centers, strip malls or stand-alone properties which house retailers.
(2)
Includes hospitality, hospital and self-storage.
13
To manage the risks inherent in concentrations in our loan portfolio, we have adopted a number of policies
and procedures. Below is a list of the maximum loan-to-values used that must be met at loan origination, however,
in practice, we rarely originate loans with loan-to-value ratios that are as high as the maximum loan-to-values listed
below.
Collateral Type
LTV Maximum
Occupied 1-4
85%
Unimproved land
50%
Land development
60%
Improved properties
80%
Commercial construction
75%
1-4 SFR construction
80%
At December 31, 2024, the weighted average LTV of our construction and commercial real estate portfolio
based on LTVs at the time of origination was 53% and 56%, respectively. Our practice is to require minimum DCRs
on commercial real estate loans of 1.10x to 1.20x, depending on the property type. We also underwrite and stress our
commercial real estate loans using a rate that is greater than the proposed interest rate on the loan. This is because a
majority of our loans are floating rate.
Except as described above, no individual or single group of related accounts is considered material in
relation to our assets or deposits or in relation to our overall business. Approximately 75% of our loan portfolio at
December 31, 2024 consisted of real estate secured loans. At December 31, 2024, we had 855 loans in excess of
$1.0 million, totaling $4.92 billion. These loans comprise approximately 22% of our loan portfolio based on number
of loans and 87% based on the total outstanding balance. The average loan size of loans in excess of $1.0 million
was $5.8 million.
Loan Maturities
In addition to measuring and monitoring concentrations in our loan portfolio, we also monitor the
maturities and interest rate structure of our loan portfolio. The following table shows the amounts of loans
outstanding as of December 31, 2024 which, based on remaining scheduled repayments of principal, were due in
one year or less, more than one year through five years, more than five years through fifteen years and more than
fifteen years. Demand or other loans having no stated maturity and no stated schedule of repayments are reported as
due in one year or less.
The table also presents, for loans with maturities over one year, an analysis with respect to fixed interest
rate loans and floating interest rate loans.
Rate Structure for
At December 31, 2024
Loans Maturing
Maturity
Over One Year
One Year
or Less
One through
Five Years
Over Five
Years through
Fifteen Years
Over
Fifteen Years
Total
Fixed
Rate
Floating
Rate
(In thousands)
Real estate mortgage
850,591
$
2,089,697
$
95,149
$
595,403
$
3,630,840
$
635,594
$
2,144,655
$
Real estate construction
473,328
110,437
-
-
583,765
-
110,437
Commercial
435,569
785,404
197,472
-
1,418,445
90,350
892,526
SBA
7
44
2,084
4,698
6,833
44
6,782
Trade finance
485
-
-
-
485
-
-
Consumer & other
247
-
-
-
247
-
-
Total
1,760,227
$
2,985,582
$
294,705
$
600,101
$
5,640,615
$
725,988
$
3,154,400
$
As reflected in this data, the maturity of our portfolio is divided generally between loans maturing within
one year or less and loans maturing between one and five years. Most of our shorter maturity loans are commercial,
construction and real estate mini-perm loans. Most of the loans that have maturities between one and five years are
real estate mini-perm loans and commercial loans. Regardless of maturity, most of our loans have interest rates that
adjust with changes in the Prime Rate.
14
Loan Authorizations
To ensure strength and diversity of the credit portfolio, the authorizations and approvals required to
originate various loan types are detailed as follows:
Executive Authorities. Our Chief Executive Officer, Chief Operating Officer, Chief Credit Officer and
Deputy Chief Operating Officer have combined approval authority up to $15.0 million for real estate
secured loans and up to $11.0 million for unsecured credits. Loans in excess of these two limits are
submitted to our Board of Directors Loan Committee for approval. The Bank does not grant individual
loan authority.
Board of Directors Loan Committee. Our Board of Directors Loan Committee consists of three members
of the Board of Directors and our Chief Executive Officer. It has approval authority up to our legal
lending limit, which was approximately $252.5 million for real estate secured loans and $151.5 million
for unsecured loans at December 31, 2024. The Board of Directors Loan Committee also reviews all loan
commitments granted in excess of $1.0 million on a quarterly basis for the preceding quarter.
If a credit falls outside of the guidelines set forth in our lending policies, the loan is not approved until it is
reviewed by a higher level of credit approval authority. Credit approval authority has two levels, as listed above
from lowest to highest level. Policy exceptions for cash flow, waiver of guarantee, excessive LTV or poor credit
require approval of our Chief Executive Officer, Chief Operating Officer, Chief Credit Officer or Deputy Chief
Operating Officer, regardless of size.
We believe that the current authority levels contribute to prudent risk management within the Bank through
well-defined authorization levels and secondary approvals. Any conditions placed on loans in the approval process
must be satisfied before our Chief Credit Officer will release loan documentation for execution.
Loan Grading and Loan Review
We seek to quantify the risk in our lending portfolio by maintaining a loan grading system consisting of
eight different categories (Grades 1-8). The grading system is used to determine, in part, the allowance for credit
losses. The first four grades in the system are considered acceptable risk; whereas the fifth grade is a short-term
transition grade. Loans in this category are subjected to enhanced analysis and either demonstrate their
acceptableness and are returned to an acceptable grade or are moved to a “substandard” category should the loan’s
underlying credit elements so dictate. The other three grades range from a “substandard” category to a “loss”
category. These three grades are further discussed below under the section subtitled “classified assets.”
The originating loan officer initially assigns a grade to each credit as part of the loan approval process.
Such grade may be changed as a loan application moves through the approval process.
Prior to funding, all new loans over $1.0 million are reviewed by the Credit Administration Officer who
may assign a different grade to the credit. The grade on each individual loan is reviewed at least annually by the loan
officer responsible for monitoring the credit. The Board of Directors reviews monthly the aggregate amount of all
loans graded as special mention (grade 5), substandard (6) or doubtful (7), and each individual loan that has a grade
within such range. Additionally, changes in the grade for a loan may occur through any of the following means:
Quarterly covenant tracking of commercial loans over $1 million;
Semi-annual stress testing of real estate loans over $1.5 million;
Semi-annual third party loan reviews;
Bank regulatory examinations; and
Monthly action plans submitted to the Chief Credit Officer by the responsible lending officers for each
credit graded 5-8.
Loan Delinquencies: When a borrower fails to make a committed payment, we attempt to cure the
deficiency by contacting the borrower to seek payment. Habitual delinquencies and loans delinquent 30 days or
more are reviewed for possible changes in grading.
15
Classified Assets: Federal regulations require that each insured bank classify its assets on a regular basis. In
addition, in connection with examinations of insured institutions, examiners have authority to identify problem
assets, and, if appropriate, classify them. We use grades 6-8 of our loan grading system to identify potential problem
assets.
Purchased Loan Participations
As of December 31, 2024, we had a total of $874.9 million in purchased participation loans and $181.2 million in
loan participations that we sold. Of the $874.9 million in purchased participations, $235.6 million are loans made to
our own relationship customers, or former relationship customers, which we believe helps mitigate the risk of
default. These loans include commercial real estate, construction and commercial loans. There were no charge-offs
of loan participations during 2024, 2023 and 2022. These loans are underwritten using the same criteria as loans
that the Bank originates directly.
Deposit Products and Other Sources of Funds
Our primary sources of funds for use in our lending and investment activities consist of:
Deposits and related services;
Maturities and principal and interest payments on loans and securities; and
Borrowings.
The following table shows the balance of each major category of deposits at December 31, 2024 and 2023:
% of Total
% of Total
Amount
Deposits
Amount
Deposits
Noninterest-bearing deposits
$ 704,859
11.91%
$ 786,995
13.78%
Interest-bearing deposits:
Interest-bearing demand
2,026,965
34.26%
2,075,156
36.35%
Savings
30,150
0.51%
29,167
0.51%
Time certificates of $250,000 or more
1,477,931
24.98%
1,317,862
23.08%
Other time certificates
1,676,943
28.34%
1,500,162
26.28%
Total deposits
$ 5,916,848
100.00%
$ 5,709,342
100.00%
December 31, 2024
December 31, 2023
(Dollars in thousands)
Total deposits were $5.92 billion as of December 31, 2024, of which 11.9% were demand deposits, 34.8%
were in savings and interest-bearing checking, 25.0% were in CD’s greater than $250,000 and 28.3% were in other
CD’s. We closely monitor rates and terms of competing sources of funds and utilize those sources we believe to be
the most cost effective, consistent with our asset and liability management policies.
Deposits and Related Services: We have historically relied primarily upon, and expect to continue to rely
primarily upon, deposits to satisfy our needs for sources of funds. An important balance sheet component impacting
our net interest margin is the composition and cost of our deposit base. We try to constantly improve our net interest
margin by growing our non-interest bearing deposits. CD’s, although more costly from an interest standpoint, are
very inexpensive deposits from an administrative cost standpoint. Our level of CD funding helps to keep our non-
interest costs down.
We provide a wide array of deposit products. We offer regular checking, savings and money market deposit
accounts; fixed-rate, fixed maturity retail certificates of deposit ranging in terms from one month to three years; and
individual retirement accounts and non-retail certificates of deposit consisting of Jumbo CDs. We attempt to price
our deposit products in order to promote deposit growth, maintain cost effectiveness and satisfy our liquidity
requirements. We provide remote deposit capture both through online and mobile banking or courier service to pick
up non-cash deposits, and for those customers that use large amounts of cash, we arrange for armored car and vault
service.
16
We provide a high level of personal service to our high net worth individual customers who have
significant funds available to invest. We believe our Jumbo CDs are a stable source of funding because they are
based primarily on service and personal relationships with senior Bank officers rather than the interest rate. Further
evidence of this is the fact that our average Jumbo CD customer has been a customer of the Bank for over eight
years. Further, 5% of these Jumbo CDs are pledged as collateral for loans from us to the depositor or the depositor’s
affiliated business or family member. We monitor interest rates offered by our competitors and pay a rate we believe
is competitive with the range of rates offered by such competitors.
The Bank has a robust Contingency Funding Plan which is designed to identify potential liquidity events,
specifies monitoring requirements and also indicates steps to be taken in order to raise liquidity levels to ensure that
the Bank has sufficient liquidity. On a quarterly basis, management prepares liquidity stress simulations according to
the steps outlined in the Contingency Funding Plan in order to assess the effectiveness of our Contingency Funding
Plan Due to the high levels of cash on hand and marketable securities as well as ongoing monitoring and forecasting
efforts, management is confident that the Bank has sufficient liquidity to meet all of its obligations for at least the
next twelve months.
At December 31, 2024, excluding government deposits, brokered deposits and deposits as direct collateral
for loans, we had 203 depositors with deposits in excess of $3.0 million that totaled $2.38 billion, or 40.2% of our
total deposits.
At December 31, 2024, excluding government deposits, brokered deposits and deposits as direct collateral
for loans, deposit balances for our largest 20 depositors totaled $1.05 billion, or 17.8% of our total deposits.
We’ll continue to focus our efforts on attracting deposits from our business lending relationships in order to
reduce our cost of funds, improve our net interest margin and enhance the franchise value of the Bank.
In addition to the marketing methods listed above, we seek to attract new clients and deposits by:
Expanding long-term business customer relationships, including referrals from our customers, and
Building deposit relationships through our branch relationship officers.
Other Borrowings: We had no outstanding FHLB advances at December 31, 2024 and 2023. At December
31, 2024, approximately $1.89 billion of the Bank’s real estate loans was pledged as collateral with the Federal Home
Loan Bank and the corresponding remaining borrowing capacity, after considering the use of collateral for letters of
credit, was $772.2 million. In addition, we have pledged $111.6 million in securities at the Federal Reserve Bank
Discount Window that we may borrow against.
On June 16, 2021, the Bank completed a public offering of $150.0 million in aggregate principal amount of
3.375% fixed-to-floating rate subordinated notes due June 15, 2031. A majority of the proceeds from the placement
of the notes were used to repay the subordinated notes due 2026. The subordinated notes mature on June 15, 2031
and bear interest at a fixed rate per annum of 3.375%, payable semi-annually in arrears until June 15, 2026. On that
date, the subordinated notes will bear interest at a floating rate per annum equal to a benchmark rate, which is
expected to the Three-Month Term SOFR, plus 278 basis points (2.78%), payable quarterly in arrears; provided,
however, in the event that the then-current benchmark rate is less than zero, then the benchmark rate will be deemed
zero. The Bank may, at its option, redeem the subordinated notes in whole or in part beginning on June 15, 2026
and, in other certain limited circumstances. The subordinated notes have been structured to qualify as Tier 2 capital
for regulatory purposes. Debt issuance costs incurred in conjunction with the offering were $2.2 million.
Our Investment Activities
Our investment strategy is designed to be complementary to and interactive with our other strategies (i.e.,
cash position; borrowed funds; maturity distribution, quality and earnings of loans; nature and stability of deposits;
capital and tax planning). The target percentage for our investment portfolio is between 10% and 40% of total assets
although the level of percentage is smaller as of December 31, 2024. This is due to management’s desire to hold
much more cash in the wake of the events of March, 2023 and the fact that overnight funds are earning a yield that
surpasses that of our investment portfolio. Management did not want to invest in longer duration investment
securities that yielded barely more than cash, only to see their value decline in a rising rate environment which
17
would impair the Bank’s capital levels. Therefore, the Bank’s cash levels have been much higher than they have
been historically. Our general objectives with respect to our investment portfolio are to:
Achieve an acceptable asset/liability mix;
Provide a suitable balance of quality and diversification to our assets;
Provide liquidity necessary to meet cyclical and long-term changes in the mix of assets and liabilities;
Provide a stable flow of dependable earnings;
Maintain collateral for pledging requirements;
Manage and mitigate interest rate risk; and
Provide funds for local community needs.
The total carrying value of investment securities (including both securities held-to-maturity and securities
available-for-sale) amounted to $368.7 million and $335.0 million as of December 31, 2024 and 2023, respectively.
Investment securities consist primarily of investment grade corporate notes, municipal bonds, collateralized
mortgage obligations, U.S. government agency securities, U.S. treasury bills, and U.S. agency mortgage-backed
securities.
As of December 31, 2024 and 2023 the Bank had four investment securities with total amortized cost of
$20.0 million and $21.2 million, respectively, classified as “held-to-maturity.” The remainder of our investment
securities is classified as “available-for-sale” pursuant to Investments – Debt Securities Topic of the Financial
Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Available-for-sale securities
are reported at fair value, with unrealized gains and losses excluded from earnings and instead reported as a separate
component of shareholders’ equity. Held-to-maturity securities are securities for which we have both the intent and
the ability to hold to maturity. These securities are carried at cost adjusted for amortization of premium and
accretion of discount.
Our securities portfolio is managed in accordance with guidelines set by our Asset/Liability and Funds
Management Policy (“ALFM”). Specific day-to-day transactions affecting the securities portfolio are managed by
our Chief Financial Officer, in accordance with our ALFM. These securities activities are reviewed monthly by our
Investment Committee and are reported to our Board of Directors.
Our ALFM addresses strategies, types and levels of allowable investments and is reviewed and approved
annually (or more often, as required) by our Board of Directors. It also limits the amount we can invest in various
types of securities, places limits on average life and duration of securities, and places requirements on the securities
dealers with whom we can conduct business.
Our Competition
The banking and financial services business in Southern California, the Greater San Francisco Bay Area
and the Tri-State area of the Northeast is highly competitive. This increasingly competitive environment faced by
banks is a result primarily of changes in laws and regulation, the emergence of non-bank financial service providers,
changes in technology and product delivery systems, and the accelerating pace of consolidation among financial
services providers. We compete for loans, deposits and customers with other commercial banks, savings and loan
associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies,
money market funds, credit unions and other non-bank financial services providers. Many of these competitors are
much larger in total assets and capitalization, have greater access to capital markets, including foreign ownership
and/or offer a broader range of financial services than we can offer.
We also compete with two publicly listed, larger banks which share a focus on the Chinese-American
market, and subsidiary banks and branches of foreign banks, from countries such as Taiwan and China, many of
which have larger lending limits, and a greater variety of products and services. Additionally, we compete with
mainstream community banks and with Chinese-American community banks for both deposits and loans.
Competition for deposit and loan products remains strong from both banking and non-banking firms and this
competition directly affects the rates of those products and the terms on which they are offered to customers. Most
recently, financial technology firms, or “Fintech” firms, have created another channel of competition for traditional
banks that are not depository partners of these Fintechs. As these Fintechs grow in number and size, additional
competition may result for traditional banks.
18
Technological innovation continues to contribute to greater competition in domestic and international
financial services markets. Many customers now expect a choice of several delivery systems and channels including
mobile banking, internet, ATMs, remote deposit capture and physical branch offices.
Mergers between financial institutions have placed additional pressure on banks to consolidate their
operations, reduce expenses and increase revenues to remain competitive. The competitive environment is also
significantly impacted by federal and state legislation that make it easier for non-bank financial institutions to
compete with us.
The Bank’s profitability, like most financial institutions, is primarily dependent on our ability to maintain a
favorable differential or “spread” between the yield on our interest-earning assets and the rate paid on our deposits
and other interest-bearing liabilities. In general, the difference between the interest rates paid by the Bank on
interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by the Bank on our
interest-earning assets, such as loans extended to customers and securities held in our investment portfolio, will
comprise the major portion of the Bank’s earnings. These rates are highly sensitive to many factors that are beyond
the control of the Bank, such as inflation, recession and unemployment, and the impact of future changes in
domestic and foreign economic conditions might have on the Bank cannot be predicted.
The Bank’s business is also influenced by the monetary and fiscal policies of the federal government, and
the policies of the regulatory agencies, particularly the Board of Governors of the Federal Reserve System (the
“FRB”). The FRB implements national monetary policies (with objectives such as curbing inflation and combating
recession) through its open-market operations in United States government securities, by adjusting the required level
of reserves for financial institutions subject to its reserve requirements and by varying the target federal funds and
discount rates applicable to borrowings by depository institutions. The actions of the FRB in these areas influence
the growth of bank loans, investments and deposits and also affect interest earned on interest-earning assets and paid
on interest-bearing liabilities. The nature and impact of any future changes in monetary and fiscal policies on the
Bank cannot be predicted.
Foreign Operations
We have no foreign operations.
Segment Information
As discussed above, through our branch network, the Bank provides a broad range of financial services to
individuals and companies located primarily in Southern California. Their services include demand, time and
savings deposits and real estate, business and consumer lending. While our chief decision makers monitor the
revenue streams of our various products and services, operations are managed and financial performance is
evaluated on a company-wide basis. Accordingly, the Bank considers all of our operations to be aggregated in one
reportable operating segment, which accounted for 100% of our revenue, net income and assets as of and for the
fiscal year ended December 31, 2024.
Human Capital
As of December 31, 2024, we had 323 full-time equivalent employees of which 69% were female. 74% of
our employees were Asian or Asian-American, 15% were other minorities and 11% were Caucasian.
We offer a comprehensive benefits program to our employees and design our compensation programs to
attract, retain and motivate employees, as well as to align with the Bank’s performance.
We are committed to maintaining a work environment where every employee is treated with dignity and
respect, free from the threat of discrimination and harassment. We require employees to annually complete training
on our Code of Personal and Business Conduct certifying that they have read and understand our policies and
principles. As stated in our Board approved Code of Personal and Business Conduct, we expect these same
standards apply to shareholders clients, vendors and independent contractors.
We are concerned with the health and safety of our employees, clients and the communities we serve. All
employees are asked not to come to work when they experience signs or symptoms of a possible illness and have
been provided paid time off to cover compensation during such absences. On an ongoing basis, we further promote
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the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work
schedules, and keeping the employee portion of health care premiums to a minimum.
Employee retention helps us operate efficiently and achieve one of our business objectives. We believe
our commitment to our core values (integrity, collaboration, adaptability, respect and excellence) as well as actively
prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive
wages and providing valuable fringe benefits aids in the retention of our top-performing employees. As of December
31, 2024, 27% of our current staff had been with us for ten years or more.
We share our talents in our communities we serve through volunteer activities. The pandemic has had an
impact on volunteer opportunities and events that bring people together in support of those in need. We are pleased
that this did not stop our employees from doing what they could, when and how they could.
Our employees are not represented by any collective bargaining group and Management believes that we
have good relations with our employees.
REGULATION AND SUPERVISION
The following discussion of statutes and regulations affecting banks is only a summary and does not
purport to be complete nor does it address all applicable statutes and regulations. This discussion is qualified in its
entirety by reference to such statutes and regulations referred to in this discussion. No assurance can be given that
such statutes or regulations will not change in the future.
General
We are extensively regulated under both federal and state laws. Regulation and supervision by the federal
and state banking agencies is intended primarily for the protection of depositors, the Deposit Insurance Fund
(“DIF”) administered by the FDIC, borrowers and the stability of the U.S. banking system, and not for the benefit of
the Bank’s shareholders.
As a California state-chartered bank that is not a member of the Federal Reserve System, we are subject to
supervision, periodic examination and regulation by the California Department of Financial Protection and
Innovation (“CDFPI”), CDFPI as the Bank’s state regulator, and the FDIC as the Bank’s primary federal regulator.
The regulations of these agencies govern most aspects of our business, including the filing of periodic reports by us,
and our activities relating to dividends, investments, loans, borrowings, capital requirements, certain check-clearing
activities, branching, mergers and acquisitions, reserves against deposits, the timing of the availability of deposited
funds, the nature and amount of and collateral for certain loans, and numerous other areas. The regulatory agencies
have adopted guidelines to assist in identifying and addressing potential safety and soundness concerns before an
institution’s capital becomes impaired. The guidelines establish operational and managerial standards generally
relating to: (1) internal controls, information systems, and internal audit systems; (2) loan documentation; (3) credit
underwriting; (4) interest-rate exposure; (5) asset growth and asset quality; and (6) compensation, fees, and benefits.
Further, the regulatory agencies have adopted safety and soundness guidelines for asset quality and for evaluating
and monitoring earnings to ensure that earnings are sufficient for the maintenance of adequate capital and reserves.
If, as a result of an examination, either the CDFPI or the FDIC should determine that the financial condition, capital
resources, asset quality, earnings prospects, management, liquidity, or other aspects of the Bank’s operations are
unsatisfactory or that we or our management is violating or has violated any law or regulation, various remedies are
available to the CDFPI and the FDIC. These remedies include, but are not limited to, the power to (i) require
affirmative action to correct any conditions resulting from any violation or unsafe and unsound practice; (ii) direct
an increase in capital and the maintenance of higher specific minimum capital ratios, which may preclude us from
being deemed well capitalized and restrict our ability to accept certain brokered deposits; (iii) restrict our growth
geographically, by products and services, or by mergers and acquisitions, including bidding in FDIC receiverships
for failed banks; (iv) enter into informal nonpublic or formal public memoranda of understanding or written
agreements and consent orders with us to take corrective action; (v) issue an administrative cease and desist order
that can be judicially enforced; (vi) enjoin unsafe or unsound practices; (vii) assess civil monetary penalties; and
(viii) require prior approval of senior executive officer and director changes or remove officers and directors.
Ultimately the FDIC could terminate our FDIC insurance and the CDFPI could revoke our charter or take possession
and close and liquidate the Bank.
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Pursuant to the Federal Deposit Insurance Act (“FDI Act”) and the California Financial Code, California
state chartered commercial banks may generally engage in any activity permissible for national banks. Therefore,
the Bank may form subsidiaries to engage in the many so-called “closely related to banking” or “nonbanking”
activities commonly conducted by national banks in operating subsidiaries or in subsidiaries of bank holding
companies. Further, California banks may conduct certain “financial” activities permitted under the Gramm-Leach-
Bliley Act of 1999 in a “financial subsidiary” to the same extent as may a national bank, provided the bank is and
remains “well-capitalized,” “well-managed” and in satisfactory compliance with the Community Reinvestment Act
(the “CRA”). Generally, a financial subsidiary is permitted to engage in activities that are “financial in nature” or
incidental thereto, even though they are not permissible for a national bank to conduct directly within the bank. The
definition of “financial in nature” includes, among other items, underwriting, dealing in or making a market in
securities, including, for example, distributing shares of mutual funds. The Bank presently has no non-banking or
financial subsidiaries other than PB Consulting.
From time to time, federal and state legislation is enacted and implemented by regulations which may have the
effect of materially increasing the cost of doing business, limiting or expanding permissible activities, or affecting
the competitive balance between banks and other financial services providers. Changes in federal or state banking
laws or the regulations, policies or guidance of the federal or state banking agencies could have an adverse cost or
competitive impact on the Bank’s operations. We cannot predict whether or when potential legislation or new
regulations will be enacted, and if enacted, the effect that new legislation or any implemented regulations and
supervisory policies would have on our financial condition and results of operations. Such developments may
further alter the structure, regulation, and competitive relationship among financial institutions, and may subject us
to increased regulation, disclosure, and reporting requirements. Moreover, the bank regulatory agencies continue to
be aggressive in responding to concerns and trends identified in examinations, and this has resulted in the increased
issuance of enforcement actions to financial institutions requiring action to address credit quality, capital adequacy,
liquidity and risk management, as well as other safety and soundness and compliance concerns. In addition, the
outcome of any investigations initiated by federal or state authorities or the outcome of litigation may result in
additional regulation, necessary changes in our operations and increased compliance costs.
Legislative and Regulatory Developments
The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 and the Community Bank
Leverage Ratio
On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 (the
“EGRRCPA”) had the effect of eliminating or easing certain requirements to which we were subject. The principal
provisions of the EGRRCPA relevant to us include: (i) creating a new category of "qualified mortgages" presumed
to satisfy ability-to-repay requirements for loans that meet certain criteria and are held in portfolio by banks with
less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans
held in portfolio; (ii) not require appraisals for certain transactions valued at less than $400,000 in rural areas; (iii)
exempt banks that originate fewer than 500 open-end and 500 closed-end mortgages from the Home Mortgage
Disclosure Act's expanded data disclosures (with the Bank taking advantage of such exemption); (iv) clarify that,
subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker
through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered
brokered deposits subject to the FDIC's brokered-deposit regulations; and (v) simplify capital calculations by
requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio (tangible
equity to average consolidated assets) at a percentage not less than 8% and not greater than 10% that such
institutions may elect to replace the general applicable risk-based capital requirements for determining well-
capitalized status.
In September 2019, the FDIC finalized a rule that introduces an optional simplified measure of capital
adequacy for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR”)
framework), as required by the EGRRCPA. The CBLR framework is designed to reduce the 15 requirements for
calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the
framework. In order to qualify for the CBLR framework, a community banking organization must have a tier 1
leverage ratio of greater than 9 percent, less than $10 billion in total consolidated assets, and limited amounts of off
balance-sheet exposures and trading assets and liabilities. A qualifying community banking organization that opts
into the CBLR framework and meets all requirements under the framework will be considered to have met the well
capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or
calculate risk-based capital. The CBLR framework became available for banks to use in their March 31, 2020, Call
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Report. We elected not to opt in to the CBLR framework. The FDIC also finalized a rule that permits non-advanced
approaches banking organizations to use the simpler regulatory capital requirements for mortgage-servicing assets,
certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial
institutions, and minority interest when measuring their tier 1 capital as of January 1, 2020. Banking organizations
may use this new measure of tier 1 capital under the CBLR framework. We did not adopt the CBLR framework.
Capital Adequacy Requirements
We are subject to various regulatory capital requirements administered by state and federal banking agencies.
New capital rules described below were effective on January 1, 2014, and are being phased in over various periods.
The basic capital rule changes, which were fully effective on January 1, 2015, have been fully phased in. Capital
adequacy guidelines and prompt corrective action regulations (See “Prompt Corrective Action Regulations” below)
involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators
about components, risk weighting, and other factors. The risk-based capital guidelines for bank holding companies
and banks require capital ratios that vary based on the perceived degree of risk associated with a banking
organization’s operations for both transactions reported on the balance sheet as assets, such as loans, and those
recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements. The risk-
based capital ratio is determined by classifying assets and certain off-balance sheet financial instruments into
weighted categories, with higher levels of capital being required for those categories perceived as representing
greater risks and dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. Banks
engaged in significant trading activity may also be subject to the market risk capital guidelines and be required to
incorporate additional market and interest rate risk components into their risk-based capital standards.
Under the risk-based capital guidelines in place prior to the effectiveness of the new capital rules, there were
three fundamental capital ratios: a total risk-based capital ratio, a Tier 1 risk-based capital ratio and a Tier 1 leverage
ratio. To be deemed “well capitalized” a bank must have a total risk-based capital ratio, a Tier 1 risk-based capital
ratio and a Tier 1 leverage ratio of at least ten percent, six percent and five percent, respectively.
Prompt Corrective Action Regulations
The FDI Act requires the federal bank regulatory agencies to take “prompt corrective action” with respect to a
depository institution if that institution does not meet certain capital adequacy standards, including requiring the
prompt submission of an acceptable capital restoration plan. Depending on a bank’s capital ratios, the agencies’
regulations define five categories in which an insured depository institution will be placed: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. At each
successive lower capital category, an insured bank is subject to more restrictions, including restrictions on the bank's
activities, operational practices or the ability to pay dividends. Based upon its capital levels, a bank that is classified
as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower
capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that
an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment.
The prompt corrective action standards were changed when the new capital rule ratios became effective.
Under the new standards, in order to be considered well capitalized, we are required to meet the new Common
Equity Tier 1 ratio of 6.5%, an increased Tier 1 ratio of 8% (increased from 6%), a total capital ratio of 10%
(unchanged) and a leverage ratio of 5% (unchanged).
The regulatory capital guidelines as well as the Bank’s actual capitalization as of December 31, 2024 and
2023, are as follows:
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December 31,
2024
December 31,
2023
Tier 1 Leverage Ratio
Preferred Bank
11.33%
10.85%
Minimum requirement for “Well-Capitalized” institution
5.00%
5.00%
Common Equity Tier 1 Risk-Based Capital Ratio
Preferred Bank
11.80%
11.57%
Minimum requirement for “Well-Capitalized” institution
6.50%
6.50%
Tier 1 Risk-Based Capital Ratio
Preferred Bank
11.80%
11.57%
Minimum requirement for “Well-Capitalized” institution
8.00%
8.00%
Total Risk-Based Capital Ratio
Preferred Bank
15.11%
15.18%
Minimum requirement for “Well-Capitalized” institution
10.00%
10.00%
The federal banking agencies may require banks subject to enforcement actions to maintain capital ratios in
excess of the minimum ratios otherwise required to be deemed well capitalized, in which case institutions may no
longer be deemed to be well capitalized and may therefore be subject to restrictions on taking brokered deposits.
Capital Rules and Minimum Capital Returns; Basel International Capital Agreements
The federal bank regulatory agencies adopted final regulations in July 2013, which revised their risk-based
and leverage capital requirements for banking organizations to meet requirements of Dodd–Frank and to implement
Basel III international agreements reached by the Basel Committee. Although the rules contained in these final
regulations are applicable generally only to large, internationally active banks, some of them will apply on a phased-
in basis to all banking organizations, including the Bank.
The following are among the new requirements that were phased in beginning January 1, 2015:
An increase in the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets;
A new category and a required 4.50% of risk-weighted assets ratio is established for “Common
Equity Tier 1” as a subset of Tier 1 capital limited to common equity;
A minimum non-risk-based leverage ratio is set at 4.00%, eliminating a 3.00% exception for higher
rated banks;
Changes in the permitted composition of Tier 1 capital to exclude trust preferred securities,
mortgage servicing rights and certain deferred tax assets and include unrealized gains and losses on
available-for-sale debt and equity securities;
The risk-weights of certain assets for purposes of calculating the risk-based capital ratios are
changed for high volatility commercial real estate acquisition, development and construction loans,
certain past due non-residential mortgage loans and certain mortgage-backed and other securities
exposures;
An additional “countercyclical capital buffer” is required for larger and more complex institutions;
and
A new additional capital conservation buffer of 2.5% of risk weighted assets over each of the
required capital ratios, which was phased in over four years beginning 2016 and which must be met
to avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay
discretionary bonuses.
Including the capital conservation buffer of 2.5%, the new final capital rules result in the following minimum
ratios: (i) a Tier 1 capital ratio of 8.5%, (ii) a Common Equity Tier 1 capital ratio of 7.0%, and (iii) a total capital
ratio of 10.5%. The new capital conservation buffer requirement began to be phased in beginning in January 2016 at
0.625% of risk-weighted assets and increased each year until it was fully implemented in January 2019. The
required capital conservation buffer for 2019 was 2.5%. At December 31, 2024 and 2023, the Bank's capital
conservation buffer was 5.80% and 5.57%, respectively.
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While the new final capital rule sets higher regulatory capital standards for the Bank, bank regulators may
also continue their past policies of expecting banks to maintain additional capital beyond the new minimum
requirements. The implementation of the new capital rules or more stringent requirements to maintain higher levels
of capital beyond the aforementioned or to maintain higher levels of liquid assets could adversely impact the Bank's
net income and return on equity, restrict the ability to pay dividends or executive bonuses and require the raising of
additional capital.
We believe that, as of December 31, 2024, we met all applicable capital requirements under the new capital
rules.
In December 2017, the Basel Committee published standards that it described as the finalization of the
Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things,
these standards revise the Basel Committee's standardized approach for credit risk (including by recalibrating risk
weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as
unused credit card lines of credit) and provides a new standardized approach for operational risk capital. Under the
Basel framework, these standards generally became effective on January 1, 2023, with an aggregate output floor
phasing in through January 1, 2028. Under the current U.S. capital rules, operational risk capital requirements and a
capital floor apply only to advanced approaches institutions, and not to the Bank. The impact of Basel IV on us will
depend on the manner in which it is implemented by the federal bank regulators.
Incentive Compensation
Under regulatory guidance applicable to all banking organizations, incentive compensation policies must be
consistent with safety and soundness principles. Under this guidance, financial institutions must review their
compensation programs to ensure that they: (i) provide employees with incentives that appropriately balance risk
and reward and that do not encourage imprudent risk, (ii) are compatible with effective controls and risk
management, and (iii) are supported by strong corporate governance, including active and effective oversight by the
banking organization’s board of directors. Monitoring methods and processes used by a banking organization should
be commensurate with the size and complexity of the organization and its use of incentive compensation. During
2016, as required by the Dodd-Frank Act, the federal bank regulatory agencies and the SEC proposed revised rules
on incentive-based payment arrangements at specified regulated entities having at least $1 billion of total assets.
These proposed rules have not been finalized.
In October 2022, the SEC adopted final rules implementing the incentive-based compensation recovery
(clawback) provisions of the Dodd-Frank Act. The final rule requires the stock exchanges to, among other things,
establish listing standards for listed companies which must develop and implement policies for the recovery of
erroneously awarded incentive-based compensation received by former or current executive officers. The SEC’s
final rules became effective on January 27, 2023. The Nasdaq Stock Market proposed listing standards on February
22, 2023 that were amended on June 5, 2023, and approved by the SEC on June 9, 2023. The Nasdaq Stock Market
listing standards became effective on October 2, 2023. In December 2023, our Board of Directors adopted a
clawback policy that complies with the SEC rules and the Nasdaq Stock Market’s listing standards
Pay for Performance Disclosure Rules
In August 2022 the SEC adopted amendments to its rules to require registrants to disclose information reflecting the
relationship between executive compensation actually paid by a registrant and the registrant’s financial performance.
Specifically, the amendments require registrants to provide a table in their annual reports or proxy statements
disclosing specified executive compensation and financial performance measures for their five most recently
completed fiscal years. With respect to the measures of performance, a registrant will be required to report its total
shareholder return (TSR), the TSR of companies in the registrant's peer group, its net income, and a financial
performance measure chosen by the registrant. Using the information presented in the table, registrants will be
required to describe the relationships between the executive compensation actually paid and each of the performance
measures, as well as the relationship between the registrant’s TSR and the TSR of its selected peer group. A
registrant will also be required to provide a list of three to seven financial performance measures that it determines
are its most important performance measures for linking executive compensation actually paid to company
performance. Smaller reporting companies will be subject to scaled disclosure requirements under the rules. We
will be providing the required information in our proxy statement for the 2025 annual meeting.
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Cybersecurity
The FRB and other bank regulatory agencies have adopted guidelines that address standards for developing
and implementing administrative, technical and physical safeguards to protect the security, confidentiality, and
integrity of customer information. These guidelines require each financial institution to create, implement, and
maintain a comprehensive written information security program to control the identified risks, commensurate with
the sensitivity of the information as well as the complexity and scope of the institution's activities. We have adopted
a customer information security program to comply with these requirements.
Federal regulators have issued statements regarding cybersecurity. One statement indicates that financial
institutions should design multiple layers of security controls to establish lines of defense and to ensure that their
risk management processes also address the risk posed by compromised customer credentials, including security
measures to reliably authenticate customers accessing internet-based services of the financial institution. Another
statement indicates that a financial institution’s management is expected to maintain sufficient business continuity
planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a
cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes
to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if
the institution or its critical service providers fall victim to this type of cyber-attack. In November 2021, the federal
banking agencies adopted a final rule, with compliance required by May 1, 2022, that requires banking organizations
to notify their primary banking regulator within 36 hours of determining that a “computer-security incident” has
materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s
ability to carry out banking operations or deliver banking products and services to a material portion of its customer
base, its businesses and operations that would result in material loss, or its operations that would impact the stability
of the United States. If we fail to observe the regulatory guidance, we could be subject to various regulatory
sanctions, including financial penalties. For a further discussion of risks related to cybersecurity, see "Item 1A. Risk
Factors" included in this Form 10-K.
Dividends and Other Transfers of Funds
We are subject to various statutory and regulatory restrictions on its ability to pay dividends. In addition, the
banking agencies have the authority to prohibit the Bank from paying dividends, depending upon the Bank’s
financial condition, if such payment would be deemed to constitute an unsafe or unsound practice.
Our ability to declare cash dividends is subject to California law, which limits the amount available for cash
dividends to the lesser of the Bank’s retained earnings or net income for its last three fiscal years (less any
distributions made to shareholders during that period). This restriction may only be exceeded with advance approval
of the CDFPI, which may approve declaration of an amount not exceeding the greatest of retained earnings of the
Bank, the Bank’s prior fiscal year net income, or the Bank’s current fiscal year net income.
Deposit Insurance
The FDIC is an independent federal agency that insures deposits, up to prescribed statutory limits, of
federally insured banks and savings institutions and safeguards the safety and soundness of the banking and savings
industries. The FDIC insures our customer deposits through the DIF up to prescribed limits for each depositor.
Dodd-Frank revised the FDIC’s DIF management authority by setting requirements for the Designated Reserve
Ratio (“DRR”) (the DIF balance divided by estimated insured deposits) and redefining the assessment base, which is
used to calculate banks’ quarterly assessments. The amount of FDIC assessments paid by each DIF member
institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory
factors. The FDIC may terminate a depository institution’s deposit insurance upon a finding that the institution’s
financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices that pose a
risk to the DIF or that may prejudice the interest of the bank’s depositors. The termination of deposit insurance for a
bank would also result in the revocation of the bank’s charter by the CDFPI.
Our FDIC insurance expense totaled $2.6 million for 2024. We are generally unable to control the amount of
premiums that we are required to pay for FDIC insurance, which can be affected by the cost of bank failures to the
FDIC among other factors.
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The FDIC will, at least semi-annually, update its income and loss projections for the DIF and, if necessary,
propose rules to further increase assessment rates. Any future increases in FDIC insurance premiums may have a
material and an adverse effect on our earnings and could have a material effect on the value of, or market for, our
common stock.
Brokered Deposits
The FDIC limits the ability to accept brokered deposits to those insured depository institutions that are well
capitalized. Institutions that are less than well capitalized cannot accept, renew or roll over any brokered deposit
unless they have applied for and been granted a waiver by the FDIC. In addition, less than well-capitalized banks
are subject to restrictions on the interest rates they may pay on deposits. The characterization of deposits as
“brokered” may result in the imposition of higher deposit assessments on such deposits. As mandated by the
EGRRCPA, the FDIC adopted a final rule in February 2019 to include a limited exception for reciprocal deposits for
FDIC-insured depository institutions that are well rated and well capitalized (or adequately capitalized and have
obtained a waiver from the FDIC as mentioned above). Under the limited exception, qualified FDIC-insured
depository institutions are able to except from treatment as “brokered” deposits up to $5 billion or 20 percent of the
institution’s total liabilities in reciprocal deposits (which is defined as deposits received by a financial institution
through a deposit placement network with the same maturity (if any) and in the same aggregate amount as deposits
placed by the institution in other network member banks).
In December 2019, the FDIC issued a notice of proposed rulemaking on its brokered deposits regulation in
the interest of clarifying and modernizing the FDIC’s existing regulatory framework. In December 2020, the
FDIC adopted final changes to the rule, thereby establishing a new framework for analyzing a “deposit broker”
and determining whether deposits should be treated as brokered deposits. The final rule reduced the
amount of deposits that may be classified as brokered. The final rule took effect on April 1, 2021, with full
compliance required by January 1, 2022.
Climate Related Risk Management and Environmental Regulation
In recent years the federal banking agencies have increased their focus on climate-related risks affecting the
operations of banks, the communities they serve and the broader financial system. Accordingly, the agencies have
begun to enhance their supervisory expectations regarding banks’ climate risk management practices, including by
encouraging banks to: ensure that management of climate-related risk exposures has been incorporated into existing
governance structures; evaluate the potential impact of climate-related risks on the bank’s financial condition,
operations and business objectives as part of its strategic planning process; account for the effects of climate change
in stress testing scenarios and systemic risk assessments; revise expectations for credit portfolio concentrations
based on climate-related factors; consider investments in climate-related initiatives and lending to communities
disproportionately impacted by the effects of climate change; evaluate the impact of climate change on the bank’s
borrowers and consider possible changes to underwriting criteria to account for climate-related risks to mortgaged
properties; incorporate climate-related financial risk into the bank’s internal reporting, monitoring and escalation
processes; and prepare for the transition risks to the bank associated with the adjustment to a low-carbon economy
and related changes in laws, regulations, governmental policies, technology, and consumer behavior and
expectations.
In December 2022, the FRB requested comments on draft principles that would provide a high-level
framework for the safe and sound management of exposures to climate-related financial risks. While these
principles are aimed at the largest financial institutions (e.g. $100 billion or more) it is possible that the principles
will be applied to smaller institutions. As climate-related supervisory guidance is formalized, and relevant risk
areas and corresponding control expectations are further refined, we may be required to incur compliance, operating,
maintenance and remediation costs in order to conform to such requirements. With a change in administrations in
Washington D.C. there could be a reduced supervisory emphasis on climate related issues facing banks, but it is too
early to confirm what if any changes will result, and if any supervisory changes are made what impact they will have
on the Bank.
Commercial Real Estate Concentration Limits
In December 2006, the federal banking regulators issued guidance entitled “Concentrations in Commercial
Real Estate Lending, Sound Risk Management Practices” to address increased concentrations in commercial real
estate, or CRE, loans. In addition, in December 2015, the federal bank agencies issued additional guidance entitled
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“Statement on Prudent Risk Management for Commercial Real Estate Lending.” Together, these guidelines describe
the criteria the agencies will use as indicators to identify institutions potentially exposed to CRE concentration risk.
An institution that has (i) experienced rapid growth in CRE lending, (ii) notable exposure to a specific type of CRE,
(iii) total reported loans for construction, land development, and other land representing 100% or more of the
institution’s capital plus the allowance for credit losses, or (iv) total CRE loans (which excludes owner-occupied
CRE loans) representing 300% or more of the institution’s capital plus the allowance for credit losses, and the
outstanding balance of the institutions CRE portfolio has increased by 50% or more in the prior 36 months, may be
identified for further supervisory analysis of the level and nature of its CRE concentration risk. As of December 31,
2024, the Bank’s total CRE loan concentration based on total outstanding loans is 256% of total capital.
Federal Home Loan Bank System
We are a member of the FHLB. Among other benefits, each of the 12 Federal Home Loan Banks serves as a
reserve or central bank for its members within its assigned region. The FHLB makes available loans or advances to
its members in compliance with the policies and procedures established by the Board of Directors of the individual
FHLB. As an FHLB member, we are required to own a certain amount of restricted capital stock and maintain a
certain amount of cash reserves in the FHLB. As of December 31, 2024, we had no outstanding FHLB advances. At
December 31, 2024, we were in compliance with the FHLB’s stock ownership and cash reserve requirements. As of
both December 31, 2024 and 2023, our investment in FHLB capital stock totaled $15.0 million.
Securities Registration
The Bank’s common stock is publicly held and listed on the NASDAQ Global Select Market (“NASDAQ”),
and the Bank is subject to the periodic reporting information, proxy solicitation, insider trading, corporate
governance and other requirements and restrictions of the Exchange Act as adopted by the FDIC and the regulations
of the Securities and Exchange Commission (the “SEC”) promulgated thereunder to the extent such regulations have
been adopted by the FDIC as well as listing requirements of NASDAQ.
Loans-to-One Borrower Limitations
With certain limited exceptions, the maximum amount of obligations, secured or unsecured, that any
borrower (including certain related entities) may owe to a California state bank at any one time may not exceed 25%
of the sum of the shareholders’ equity, allowance for credit losses, capital notes and debentures of the bank.
Unsecured obligations may not exceed 15% of the sum of the shareholders’ equity, allowance for credit losses,
capital notes and debentures of the bank. The Bank has established internal loan limits which are lower than the
legal lending limits for a California state chartered bank. At December 31, 2024, our largest single lending
relationship had a combined outstanding balance of $162.5 million, secured predominantly by commercial real
estate properties in our primary lending area, and which is performing in accordance with the terms of the Bank’s
loans.
Extensions of Credit to Insiders and Transactions with Affiliates
We are subject to Federal Reserve Regulation O and companion California banking law limitations and
conditions on loans or extensions of credit to:
Our executive officers, directors and principal shareholders (i.e., in most cases, those persons who own,
control or have power to vote more than 10% of any class of voting securities);
Any company controlled by any such executive officer, director or shareholder; or
Any political or campaign committee controlled by such executive officer, director or principal
shareholder.
Loans extended to any of the above persons must comply with loan-to-one-borrower limits, require prior full
Board approval when aggregate extensions of credit to the person exceed specified amounts, must be made on
substantially the same terms (including interest rates and collateral) as, and follow credit-underwriting procedures
that are not less stringent than those prevailing at the time for comparable transactions with non-insiders, and must
not involve more than the normal risk of repayment or present other unfavorable features. In addition, Regulation O
provides that the aggregate limit on extensions of credit to all insiders of a bank as a group cannot exceed the bank’s
unimpaired capital and unimpaired surplus. Regulation O also prohibits a bank from paying an overdraft on an
account of an executive officer or director, except pursuant to a written pre-authorized interest-bearing extension of
27
credit plan that specifies a method of repayment or a written pre-authorized transfer of funds from another account
of the officer or director at the bank. California has laws and the CDFPI has regulations which adopt and also apply
Regulation O to the Bank.
We are also subject to certain restrictions imposed by Federal Reserve Act Sections 23A and 23B and Federal
Reserve Regulation W on any extensions of credit to, or the issuance of a guarantee or letter of credit on behalf of,
any affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as
collateral for loans, and the purchase of assets of any affiliates. Such restrictions prevent any affiliates from
borrowing from the Bank unless the loans are secured by marketable obligations of designated amounts. Further,
such secured loans and investments to or in any affiliate are limited, individually, to 10.0% of the Bank’s capital and
surplus (as defined by federal regulations), and such secured loans and investments are limited, in the aggregate, to
20.0% of the Bank’s capital and surplus. A financial subsidiary is considered an affiliate subject to these restrictions
whereas other non-banking subsidiaries are not considered affiliates. Additional restrictions on transactions with
affiliates may be imposed on the Bank under the FDI Act prompt corrective action provisions and the supervisory
authority of the federal and state banking agencies.
Operations and Consumer Compliance
We must comply with numerous federal and state anti-money laundering and consumer protection statutes
and implementing regulations, including the USA PATRIOT Act of 2001, the Bank Secrecy Act, as amended by the
Anti-Money Laundering Act of 2020, the Foreign Account Tax Compliance Act, the CRA, the Fair Credit Reporting
Act, as amended by the Fair and Accurate Credit Transactions Act, the Equal Credit Opportunity Act, the Truth in
Lending Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act,
the National Flood Insurance Act, the California Homeowner Bill of Rights and various federal and state privacy
protection laws. Noncompliance with any of these laws could subject the Bank to compliance enforcement actions
as well as lawsuits and could also result in administrative penalties, including, fines and reimbursements. The Bank
is also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading
advertising and unfair competition.
These laws and regulations mandate certain disclosure and reporting requirements and regulate the manner in
which financial institutions must deal with customers when taking deposits, making loans, servicing, collecting and
foreclosure of loans, and providing other services. Failure to comply with these laws and regulations can subject the
Bank to various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties,
punitive damages to consumers, and the loss of certain contractual rights.
Community Reinvestment Act and Fair Lending
We are subject to certain fair lending requirements and reporting obligations involving home mortgage
lending operations. We are also subject to the Community Reinvestment Act, or CRA. The CRA generally requires
the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local
communities, including low- and moderate-income neighborhoods in a safe and sound manner. In addition to
substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the
federal banking agencies may take compliance with such laws and CRA into account when regulating and
supervising other activities. Federal regulators are required to provide a written examination report of an
institution’s CRA performance using a four-tiered descriptive rating system. We received a rating of “Satisfactory”
in our most recent CRA examination. These ratings and written examination reports are available to the public.
In December 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) jointly proposed
rules that would significantly change existing CRA regulations. The proposed rules are intended to increase bank
activity in low- and moderate-income communities where there is significant need for credit, more responsible
lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four
key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit;
(iii) providing a more transparent and objective method for measuring CRA performance; and (iv) revising CRA-
related data collection, record keeping, and reporting. However, the Federal Reserve Board did not join in that
proposed rulemaking. In June 2020, the OCC issued its final CRA rule, effective October 1, 2020, while the FDIC
did not finalize any revisions to its CRA rule. In September 2020, the Federal Reserve Board issued an Advance
Notice of Proposed Rulemaking (“ANPR”) that invited public comment on an approach to modernize the
regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking
landscape and better meet the core purpose of the CRA. The ANPR sought feedback on ways to evaluate how banks
28
meet the needs of low- and moderate-income communities and address inequities in credit access. In December
2021, the OCC issued a final rule to rescind its June 2020 final rule in favor of working with other agencies to put
forward a joint rule. In May 2022 the three federal banking agencies issued a joint proposal to strengthen and
modernize CRA regulations. We will continue to evaluate the impact of any changes to the regulations
implementing the CRA and their impact to our financial condition, results of operations, and/or liquidity, which
cannot be predicted at this time.
Consumer Finance Protection
Dodd-Frank provided for the creation of the Consumer Finance Protection Bureau (“CFPB”) as an
independent entity within the Federal Reserve with broad rulemaking, supervisory and enforcement authority over
consumer financial products and services, including deposit products, residential mortgages, home-equity loans and
credit cards. The CFPB’s functions include investigating consumer complaints, conducting market research,
rulemaking, supervising and examining bank consumer transactions, and enforcing rules related to consumer
financial products and services. CFPB regulations and guidance apply to all financial institutions and banks with $10
billion or more in assets. Accordingly, these financial institutions and banks are subject to examination by the
CFPB. Banks with less than $10 billion in assets, including the Bank, will continue to be examined for compliance
by their primary federal banking agency, which is the FDIC in our case.
In 2014, the CFPB adopted revisions to Regulation Z, which implement the Truth in Lending Act, pursuant to
Dodd-Frank, and apply to all consumer mortgages (except home equity lines of credit, timeshare plans, reverse
mortgages, or temporary loans). The revisions mandate specific underwriting criteria for home loans in order for
creditors to make a reasonable, good faith determination of a consumer's ability to repay and establish certain
protections from liability under this requirement for “qualified mortgages” meeting certain standards. In particular, it
will prevent banks from making “no doc” and “low doc” home loans, as the rules require that banks determine a
consumer’s ability to pay based in part on verified and documented information. Because we do not originate “no
doc” or “low doc” loans, we do not believe this regulation will have a significant impact on our operations.
However, because a substantial portion of the mortgage loans originated by us do not meet the definition of a
“qualified mortgage” under final regulations adopted by the CFPB, we may be subject to additional disclosure
obligations and extended time periods for the assertion of defenses by the borrower against enforcement in
connection with such mortgage loans. The CFPB is currently under orders to stop regulatory activity, which has
caused significant opposition from consumer groups and members of Congress. Litigation challenging the Trump
Administration's stop work order at the CFPB is being challenged in federal court in the District of Columbia. At
this point it is impossible to predict what the ultimate status of the CFPB is and will be, and what impact this
uncertainty will have on our operations.
Restrictions on Unfair, Deceptive or Abusive Acts or Practices
The review of products and practices to prevent unfair, deceptive or abusive acts or practices ("UDAAP") is a
continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened
scrutiny is uncertain but could result in changes to pricing, practices, products and procedures. It could also result in
increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and
possible penalties. In addition, Dodd-Frank provides the CFPB with broad supervisory, examination and
enforcement authority over various consumer financial products and services, including the ability to require
reimbursements and other payments to customers for alleged violations of UDAAP and other legal requirements and
to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful
practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or
monetary penalties. Dodd-Frank does not prevent states from adopting stricter consumer protection standards. State
regulation of financial products and potential enforcement actions could also adversely affect the Bank’s business,
financial condition or results of operations.
Office of Foreign Assets Control Regulation
The U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, administers and enforces
economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws,
including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets
and countries. We are responsible for, among other things, blocking accounts of, and transactions with, such targets
and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions
after their occurrence. Failure to comply with these sanctions could have serious financial, legal and reputational
29
consequences, including causing applicable bank regulatory authorities not to approve merger or acquisition
transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.
Regulatory authorities have imposed cease and desist orders and civil money penalties against institutions found to
be violating these obligations.
Employees
As of December 31, 2024, the Bank had a total of 323 full-time equivalent employees. None of the employees
are represented by a union or collective bargaining group. Management believes that employee relations are
satisfactory.
Information About Our Executive Officers
The following table sets forth our executive officers, their positions and their ages. Each officer is appointed
by, and serves at the pleasure of the Board of Directors.
Name
Age (1)
Position with Bank
Li Yu .........................
84
Chairman of the Board and Chief Executive Officer
Wellington Chen .......
65
President and Chief Operating Officer
Edward J. Czajka ......
60
Executive Vice President and Chief Financial Officer
Nick Pi ......................
64
Executive Vice President and Chief Credit Officer
Johnny Hsu ...............
50
Executive Vice President and Deputy Chief Operating
Officer
(1) As of March 1, 2025.
Li Yu has been Preferred Bank’s Chief Executive Officer since 1993 and was the Bank's President from 1993
to August 2012. From December 1991 to the present, he has served as Chairman of the Board of Directors. From
1987 to 1991, he was involved in several privately held companies of which he was the owner. From 1982 to 1987,
he served as Chairman of the Board of California Pacific National Bank, which became a part of Bank of America.
Mr. Yu received a Masters of Business Administration, or MBA, from the University of California, Los Angeles. He
was also the past President of the National Association of Chinese American Bankers, and is currently a member of
the Board of Visitors of UCLA’s Anderson Graduate School of Management.
Wellington Chen has been the President and Chief Operating Officer since August 2012. He joined the Bank
in June 2011 as Chief Operating Officer. Prior to joining the Bank, Mr. Chen served over seven years as Executive
Vice President and Director of Corporate Banking for East West Bank in Pasadena, California where he oversaw a
significant portion of the loan and deposit production activities of the bank. Prior to joining East West Bank in
December 2003, Mr. Chen was Senior Executive Vice President of Far East National Bank (“Far East”) heading up
their Commercial Bank Group, Consumer Banking Group, and Branch Channel. He also served on the Board of
Directors of Far East. Mr. Chen’s career with Far East began in 1986 and included a variety of branch and credit
management positions. Prior to that, Mr. Chen spent three years with Security Pacific National Bank where he
completed the management training program and served as an asset based lending auditor. Mr. Chen received his
Bachelors of Science degree in Business Finance from University of Southern California and is a graduate of Pacific
Coast Banking School at University of Washington.
Edward J. Czajka has been Senior Vice President and Chief Financial Officer since 2006 and was promoted
to Executive Vice President in 2008. Before joining Preferred Bank, Mr. Czajka was Chief Financial Officer of
Presidio Bank, a San Francisco-based bank that was then in organization. Prior to this, Mr. Czajka was Executive
Vice President and Chief Financial Officer of North Valley Bancorp, (Nasdaq: NOVB) a publicly-traded multi-bank
holding company located in Redding, California. From 1994 through 2000, Mr. Czajka held the position of Vice
President, Corporate Controller for Pacific Capital Bancorp (Nasdaq: PCBC) in Santa Barbara, California. Mr.
Czajka graduated Summa Cum Laude from Capella University with a Bachelor of Science in Business
Administration and is a graduate of the Bank Administration Institute Graduate School of Banking at Vanderbilt
University. Mr. Czajka serves as the Board Treasurer of Inclusion Matters by Shane’s Inspiration, a non-profit based
in Sherman Oaks, California.
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Nick Pi has been with the Bank since 2003 and has been our Executive Vice President Chief Credit Officer
since June 2015. Before joining us, Mr. Pi was the Senior Vice President and Commercial Real Estate Lending
Team Leader of Chinatrust Bank (U.S.A.) from 2000 to 2003. Prior to this, he held various corporate titles from
Assistant Vice President to Senior Vice President at Chinatrust Bank (U.S.A.), mainly in the branch operation and
lending fields from 1995 to 2000. His lending and credit experience also includes Grand Pacific Financing
Corporation from 1989 to 1995, an affiliate of China Trust Group. Mr. Pi received a Bachelor of Arts degree in
Business from National Taiwan University, Taiwan and a MBA degree from Emporia State University.
Johnny Hsu has been Executive Vice President and Deputy Chief Operating Officer since 2018, Mr. Hsu
has been with the Bank since 1992 when he began his banking career in branch operations. Over the next 15 years,
Mr. Hsu worked in various production and portfolio management positions both at various branches and eventually
at the main office. Mr. Hsu became head of Commercial Real Estate Lending in 2007. As Deputy COO, Mr. Hsu
oversees a significant portion of the loan and deposit production activities for the Bank as well as head up various
special projects for the Bank. Mr. Hsu received a Bachelor of Arts degree in Economics from the University of
Southern California.
Available Information
The Bank also maintains an Internet website at www.preferredbank.com. The Bank makes its website content
available for information purposes only. It should not be relied upon for investment purposes. None of the
information on, or hyperlinked, from our website is incorporated into this Report.
We are subject to the reporting and other requirements of the Exchange Act, as adopted by the FDIC. In
accordance with Sections 12, 13 and 14 of the Exchange Act and as a bank that is not a member of the Federal
Reserve System, we file certain reports, proxy materials, information statements and other information with the
FDIC, copies of which can be inspected and copied at the public reference facilities maintained by the FDIC, at the
Accounting and Securities Disclosure Section, Division of Supervision and Consumer Protection, 550 17th Street,
N.W., Washington, DC 20429. Requests for copies may be made by telephone at (202) 898-8913 or by fax at (202)
898-3909. Forms 3, 4 and 5 are filed electronically with FDIC, at the FDIC’s website at http://www.fdic.gov. This
statement has not been reviewed, or confirmed for accuracy or relevance, by the FDIC.
ITEM 1A.
RISK FACTORS
Risk Factors That May Affect Future Results
In addition to the other information on the risks we face and our management of risk contained in this
Annual Report or in our other filings, the following are significant risks which may affect us. Events or
circumstances arising from one or more of these risks could adversely affect our business, financial condition,
operations and prospects and the value and price of our common stock could decline. The risks identified below are
not intended to be a comprehensive list of all risks we face and additional risks that we may currently view as not
material may also impair our business operations and results.
Risks Related to our Loan Portfolio
If our allowance for credit losses is inadequate to cover actual losses, our financial results would be
harmed.
A significant source of risk arises from the possibility that we could sustain losses because borrowers,
guarantors and related parties may fail to perform in accordance with the terms of their loans. The underwriting and
credit monitoring policies and procedures that we have adopted to address this risk may not prevent losses that could
have an adverse effect on our business, financial condition, results of operations and cash flows. Losses may arise
for a wide variety of reasons, many of which are beyond our ability to predict, influence or control. Some of these
reasons could include an economic downturn in the State of California or in the Northeast Tri-State Area (New
York, New Jersey and Connecticut) a reversal of the gains made in the California and New York real estate markets,
changes in the interest rate environment, adverse economic conditions in Asia and natural disasters.
Like all financial institutions, we maintain an allowance for credit losses to provide for loan defaults and
non-performance. Our allowance for credit losses may not be adequate to cover actual loan losses, and future
provisions credit losses could materially and adversely affect our business, financial condition, results of operations
31
and cash flows. Our allowance for credit losses reflects our best estimate of the probable incurred losses in the
existing loan portfolio at the relevant balance sheet date and is based on management’s evaluation of the
collectability of the loan portfolio, which evaluation is based on historical loss experience and other significant
factors. For the year ended December 31, 2024, we recorded a provision of credit losses of $12.1 million and
recorded net charge-offs of $19.0 million, compared to a provision for credit losses of $10.0 million and net charge-
offs of $117,000 for the year ended December 31, 2023.
The determination of an appropriate level of allowance of credit losses is an inherently difficult process and
is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and
other conditions, including changes in interest rates, that may be beyond our control and future losses may exceed
current estimates. While we believe that our allowance for credit losses is adequate to cover probable incurred
losses, we cannot ensure that we will not increase the allowance for credit losses or that regulators will not require
us to increase our allowance. Either of these occurrences would not affect cash flow directly but could materially
adversely affect our business, financial condition and results of operations.
If the risks inherent in construction lending are realized, our net income could be adversely affected.
At December 31, 2024, our construction loans were $583.8 million, or 10.3% of our total loans held, and
the average loan size of our construction loans was $6.6 million. The risks inherent in construction lending include,
among other things, the possibility that contractors may fail to complete, or fail to complete on a timely basis,
construction of the relevant properties; substantial cost overruns in excess of original estimates and financing;
market deterioration during construction; and a lack of permanent take-out financing. Loans secured by these
properties also involve additional risk because the properties have no operating histories. In these loans, funds are
advanced upon the security of the project under construction, which is of uncertain value prior to completion of
construction, and the estimated operating cash flow to be generated, by the completed project. The borrowers’
ability to repay their obligations to us and the value of our security interest in the collateral will be materially
adversely affected if the projects do not generate sufficient cash flow by being either sold or leased.
If our underwriting practices are not effective, we may suffer further losses in our loan portfolio and our
results of operations may be harmed.
We seek to mitigate the risks inherent in our loan portfolio by adhering to specific underwriting practices.
Depending on the type of loan, these practices include analysis of a borrower’s prior credit history, financial
statements, tax returns and cash flow projections, valuation of collateral based on reports of independent appraisers,
verification of liquid assets and any other information deemed relevant. Although we believe that our underwriting
criteria are appropriate for the types of loans we make, we cannot be assured that they will be effective in mitigating
all risks. If our conservative underwriting criteria in effect when loans were granted proves to be ineffective, we may
incur additional losses in our loan portfolio, and these losses may exceed the amounts set aside as reserves in our
allowance for credit losses.
A significant portion of the Bank’s loan portfolio is secured by real estate and thus the Bank has a
higher degree of risk from a downturn in real estate markets.
A decline in real estate markets could hurt the Bank’s business because many of the Bank’s loans are
secured by real estate. Real estate values and real estate markets are generally affected by changes in national,
regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential
purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature and
national disasters, such as earthquakes and wildfires, which are particular to California. A significant portion of the
Bank’s real estate collateral is located in California. If real estate values decline, the value of real estate collateral
securing the Bank’s loans could be significantly reduced. The Bank’s ability to recover on defaulted loans by
foreclosing and selling the real estate collateral would then be diminished and the Bank would be more likely to
suffer losses on defaulted loans. Furthermore, CRE and multifamily loans typically involve large balances to single
borrowers or groups of related borrowers. Since payments on these loans are often dependent on the successful
operation or management of the properties, as well as the business and financial condition of the borrower,
repayment of such loans may be subject to adverse conditions in the real estate market, adverse economic conditions
32
or changes in applicable government regulations. Borrowers’ inability to repay such loans may have an adverse
effect on the Bank’s business.
Risks Related to the Economy and Markets in Which We Operate
Difficult economic and market conditions have adversely affected, and in the future could adversely affect,
our industry and us.
Our operations and performance depend significantly on global, national and local economic conditions. In
particular, the process we use to estimate losses inherent in our credit exposure requires difficult, subjective and
complex judgements, including forecasts of economic conditions and how these economic conditions might impair
the ability of our borrowers to repay their loans. The level of uncertainty concerning economic conditions may
adversely affect the accuracy of our estimates which may, in turn, impact the reliability of the process. Furthermore,
we may be adversely affected by disruptions to the financial markets as a result of the current or anticipated impact
of military conflict, including escalating military tension between Russia and Ukraine, terrorism or other
geopolitical events.
These and other global, national and local economic events and conditions including the impact of public
health epidemics on the global economy, such as the COVID-19 pandemic, could have a material adverse impact on
demand for our products and services, our results of operations and our financial condition.
We rely heavily on our senior management team and other key employees, the loss of whom could
materially and adversely affect our business.
Our success depends heavily on the abilities and continued service of our executive officers, especially Li Yu,
Chairman and Chief Executive Officer, and our President and Chief Operating Officer, Wellington Chen. Mr. Yu,
who founded the Bank, and Mr. Chen, are both integral to implementing our business plan. We currently do not
have an employment agreement or non-competition agreement with Messrs. Yu or Chen or our other executives.
Accordingly, members of our senior management team are not contractually prohibited from leaving or joining one
of our competitors. If we lose the services of any of our executive officers, especially Mr. Yu or Mr. Chen, our
business, financial condition, results of operations and cash flows may be adversely affected. Furthermore, attracting
suitable replacements may be difficult and may require significant management time and resources.
We also rely to a significant degree on the abilities and continued service of our commercial banking, loan
origination, underwriting, administrative, marketing and technical personnel. Competition for qualified employees
and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge
of, and experience in, the California community banking industry. The process of recruiting personnel with the
combination of skills and attributes required to carry out our strategies is often lengthy. If we fail to attract, integrate
and retain qualified management personnel and the necessary deposit generation, loan origination, underwriting,
administrative, finance, marketing and technical personnel, our business, financial condition, results of operations
and cash flows may be materially adversely affected.
Our operations are concentrated geographically in California, particularly Southern California, and the
Northeast Tri-State Area and poor economic conditions in this area could adversely affect the demand for our
products and our credit quality.
Our operations are located primarily in California as well as the Northeast Tri-State Area. Local economic
conditions in Southern California can have a significant impact on the demand for our products and services, our
loans and wealth management business, the ability of borrowers to pay interest on and repay the principal of these
loans, and the value of the collateral securing these loans. Adverse changes in economic conditions in California and
the Northeast Tri-State Area may negatively affect our business, results of operations or financial condition. Our
loan portfolio, in particular, is concentrated in California in general and the Northeast Tri-State Area. As of
December 31, 2024, approximately 88% of the total dollar amount of our loans outstanding were secured by real
estate located in California and the Northeast Tri-State Area (New York, New Jersey and Connecticut).
Approximately 56% of loans outstanding are secured by real estate in Southern California, 14% are secured by loans
in other areas of California, and 18% are secured by loans in the Northeast Tri-State Area. Declines in values in the
California and the Northeast Tri-State Area real estate markets could have an adverse impact on our borrowers and
33
on the value of the collateral securing many of our loans, which in turn could adversely affect our currently
performing loans, leading to future delinquencies or defaults and increases in our provision for loan losses.
Climate change has the potential to disrupt our business and adversely impact the operations and
creditworthiness of our clients.
Climate change presents both near and long-term risks to our business and that of our customers, and these
risks are expected to increase over time. Climate change has caused severe weather patterns and events that could
disrupt operations at one or more of our locations, which may disrupt our ability to provide financial products and
services to our clients. Longer-term changes, such as increasing average temperatures and rising sea levels, may
damage, destroy or otherwise impact the value or productivity of our properties, and real estate collateral of certain
of our loans and other assets, reduce the availability of insurance, and/or lead to prolonged disruptions in our
operations. Climate change could also have a negative effect on the financial status and creditworthiness of our
clients which may decrease revenues and business activities from those clients and increase the credit risk associated
with loans and other credit exposures to such clients.
A natural disaster or recurring energy shortage, especially in California, could harm our business.
The majority of the Bank’s loans are to customers and businesses in the state of California and/or secured by
properties located in the greater Los Angeles metropolitan area. Historically, Southern California has been
vulnerable to natural disasters. Therefore, we are susceptible to the risks of natural disasters, such as earthquakes,
wildfires, floods and mudslides. Natural disasters could harm our operations directly through interference with
communications, as well as through the destruction of facilities and our operational, financial and management
information systems. Uninsured or underinsured disasters may reduce a borrower’s ability to repay mortgage loans.
Disasters may also reduce the value of the real estate securing our loans, impairing our ability to recover on
defaulted loans. Southern California has also experienced energy shortages which, if they recur, could impair the
value of the real estate in those areas affected. Climate change and the occurrence of natural disasters or energy
shortages in Southern California could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
Our business is subject to interest rate risk and variations in interest rates may negatively affect our
financial performance.
Market interest rates are affected by many factors that are beyond our control and are hard to predict,
including inflation, recession, performance of the stock markets, a rise in unemployment, tightening money supply,
exchange rates, monetary and other policies of various governmental and regulatory agencies, domestic and
international disorder and instability in domestic and foreign financial markets.
Changes in the interest rate environment may reduce our profits. Changes in interest rates will influence not
only the interest we receive on our loans and investment securities and the amount of interest we pay on deposits, it
will also affect our ability to originate loans and obtain deposits and our costs incurred in doing so. Rising interest
rates, generally, are associated with a lower volume of loan originations, while lower interest rates are usually
associated with higher loan originations.
We expect that we will continue to realize a substantial portion of our income from the differential or
“spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on
deposits, borrowings and other interest-bearing liabilities. Because interest rates are based on the maturity, re-pricing
and other characteristics of an instrument, conditions that trigger changes in interest rates do not produce equivalent
changes in interest income earned on our interest-earning assets and interest expense paid on our interest-bearing
liabilities. Although management measures the impact of changing interest rates on the Bank’s net interest income
and believes that current interest rate risk is low, fluctuations in interest rates could adversely affect our interest rate
spread and, in turn, our profitability.
In addition, an increase in the general level of interest rates may adversely affect the ability of some
borrowers to pay the interest on and principal of their obligations, which could reduce our cash flows and harm our
asset quality. In rising interest rate environments, loan repayment rates may decline and in falling interest rate
environments, loan repayment rates may increase.
34
Rising interest rates have decreased the value of the Bank’s available for sale and held-to-maturity
securities and loan portfolios, and the Bank would realize losses if it were required to sell such securities or loans
to meet liquidity needs.
As a result of inflationary pressures and the resulting rapid increases in interest rates initiated by the Federal
Reserve over the last year, the market values of previously issued government and other fixed income securities
have declined significantly. These securities make up a majority of the securities portfolio of most banks in the U.S.,
including the Bank’s, resulting in unrealized losses embedded in the available-for-sale and held-to-maturity portion
of U.S. banks’ securities and loan portfolios. While the Bank does not currently have a need to sell these securities
or loans, should it do so in the future to meet liquidity needs, it could incur losses, which could adversely affect the
Bank’s capital, financial condition, results of operations and stock price. While the Bank has taken actions to
maximize and diversify its funding sources, there is no guarantee that such actions will be successful or sufficient in
the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a Bank Term
Funding Program available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-
backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of
such instruments, there is no guarantee that such programs will be effective in addressing the Bank’s liquidity needs
should they arise.
The U.S. government’s monetary policies or changes in those policies could have a major effect on our
operating results, and we cannot predict what those policies will be or any changes in such policies or the effect
of such policies on us.
Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the
U.S. government and its agencies. The monetary policies of the Federal Reserve Bank, or the FRB, have had, and
will continue to have, an important effect on the operating results of commercial banks and other financial
institutions through its power to implement national monetary policy in order, among other things, to curb inflation
or combat a recession.
The monetary policies of the FRB, implemented principally through open market operations and regulation of
the discount rate and reserve requirements, have had major effects upon the levels of bank loans, investments and
deposits. For example, in late 2019 and early 2020, multiple rate decreases in the Fed Funds rate by the Federal
Open Market Committee placed pressure on the profitability of many financial institutions because of the resulting
contraction of net interest margins due to high levels of adjustable rate loans. It is not possible to predict the nature
or effect of future changes in monetary and fiscal policies.
We face strong competition from financial services companies and other companies that offer banking
services, and our failure to compete effectively with these companies could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
We conduct our operations primarily in California and the Northeast Tri-State area. The banking and financial
services businesses in California and the Northeast Tri-State area are highly competitive and increased competition
within California and the Northeast Tri-State area may result in a reduction in the Bank’s loan originations and
deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many
competitors offer the types of loans and banking services that we offer in our service areas. These competitors
include national banks, regional banks and other community banks. We also face competition from many other types
of financial institutions, including saving and loan associations, finance companies, brokerage firms, insurance
companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors include
financial institutions whose greater resources may afford them a marketplace advantage by enabling them to
maintain numerous banking locations and mount extensive promotional and advertising campaigns. Areas of
competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in
quality of products and services provided, including new technology-driven products and services. Competitive
conditions may intensify as continued merger activity in the financial services industry produces larger, better-
capitalized and more geographically diverse companies. Additionally, banks and other financial institutions with
larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have larger lending
limits which would allow them to serve the credit needs of larger customers. These institutions, particularly to the
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extent they are more diversified than we are, may be able to offer the same loan products and services we offer at
more competitive rates and prices.
We also face competition from out-of-state financial intermediaries that have opened loan production offices
or that solicit deposits in our market areas. In addition, we compete with other alternative lenders, including finance
companies, private equity and hedge funds, real estate investment funds, business development companies, and
“marketplace” and peer-to-peer lenders. If we are unable to attract and retain banking customers, we may be unable
to continue our loan growth and level of deposits, and our business, financial condition, results of operations and
cash flows may be materially adversely affected.
Adverse economic conditions in Asia could impact our business adversely.
We believe that our Chinese-American customers maintain significant ties to many Asian countries and,
therefore, could be affected by economic and other conditions in those countries, including the impact of public
health epidemics. We cannot predict the behavior of the Asian economies. U.S. economic policies, the economic
policies of countries in Asia, domestic unrest and/or military tensions, crises in leadership succession, currency
devaluations, and an unfavorable global economic condition may among other things adversely impact the Asian
economies. We generally do not loan to customers or take collateral located outside of our service area; however, we
may occasionally make loans in other parts of United States. If Asian economic conditions should deteriorate, we
could experience an outflow of deposits by our Chinese-American customers. In addition, adverse economic
conditions could prevent or delay these customers from meeting their obligations to us. This may adversely impact
the recoverability of investments with or loans made to these customers. Adverse economic conditions may also
negatively impact asset values and the profitability and liquidity of companies operating in Asia, which will also
impact the Bank’s liquidity.
In a stated effort to stem the flow of illegal immigrants and fentanyl into the U.S. from Mexico, Canada and
China, President Trump has imposed tariffs on imports from these countries. Tariffs on imports from the European
Union and other countries are being considered as well. Effective March 4, 2025, tariffs were imposed on all imports
from China at the rate of 20%, 25% on all imports from Mexico, and 25% on most imports from Canada with a 10%
rate for energy imports. Additional tariffs are under consideration on all foreign cars, which could incrementally
increase the tariffs on these and other countries, such as Japan and Korea, and other countries that export cars into
the U.S. In retaliation for these U.S. tariffs China and Canada announced tariffs on certain products imported from
the U.S. and Mexico announced its intention to do so as well.
Since these tariffs are so new and the responses are only emerging, it is impossible to determine the impact of
these tariffs on the U.S. economy, and the economies of other countries with which many of our customers have ties.
Some economists indicate that such tariffs could result in higher inflation rates which could result in higher interest
rates, which could negatively impact loan customers even if they are not directly involved in foreign trade.
Adverse developments affecting the financial services industry, such as actual events or concerns
involving liquidity could adversely affect our financial condition and results of operations.
Recently, several prominent banks were closed by their primary regulators, which appointed the FDIC as
receiver for these institutions. These banks’ business operations were concentrated in the technology and crypto
currency markets. The Federal Reserve Board System and the FDIC have taken steps to protect uninsured depositor
balances, but not investors and creditors of the banks. The quick failure of these institutions and uncertainty related
to overall liquidity concerns in the broader financial services industry could adversely impact our financial condition
and result of operations. Additionally, perceived concerns about liquidity events or other similar risks, have in the
past and may in the future lead to market-wide liquidity problems.
Increasing scrutiny and evolving expectations from regulators, customers, investors, and other stakeholders
with respect to our environmental, social and governance practices may impose additional costs on us or expose us
to new or additional risks.
Many companies are facing increasing scrutiny from regulators, customers, investors, and other stakeholders
related to their environmental, social and governance ("ESG") practices and disclosures. Investor advocacy groups,
investment funds and influential investors are also increasingly focused on these practices, especially as they relate to
the environment, health and safety, diversity, labor conditions and human rights. Increased ESG-related compliance
costs for us as well as among our suppliers, vendors and various other parties within our supply chain could result in
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increases to our overall operational costs. Failure to adapt to or comply with regulatory requirements or investor or
stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain
partners, access to capital, and our stock price. Both recently adopted and pending government regulations, including
recently adopted regulations in California, will result in new or more stringent forms of ESG oversight and expanding
mandatory and voluntary reporting, diligence, and disclosure.
Potential downgrades of U.S. government securities by one or more of the credit ratings agencies could have
a material adverse effect on our operations, earnings and financial condition.
A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the
perceived creditworthiness of U.S. government-related obligations could impact our ability to obtain funding that is
collateralized by affected instruments, as well as affect the pricing of that funding when it is available. A downgrade
may also adversely affect the market value of such instruments. We cannot predict if, when or how any changes to the
credit ratings or perceived creditworthiness of these organizations will affect economic conditions. Such ratings
actions could result in a significant adverse impact on us. Among other things, a downgrade in the U.S. government’s
credit rating could adversely impact the value of our securities portfolio and may trigger requirements that we post
additional collateral for trades relative to these securities. A downgrade of the sovereign credit ratings of the U.S.
government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the
other risks to which we are subject and any related adverse effects on the business, financial condition and results of
operations.
Risks Related to Deposits
If we cannot attract deposits, our growth may be inhibited.
Although we are planning to continue to grow the balance sheet, we intend to seek additional deposits by
continuing to establish and strengthen our personal relationships with our customers and by offering deposit
products that are competitive with those offered by other financial institutions in our markets. Although we are
confident that our liquidity is sufficient, we cannot assure you that our liquidity management efforts will be
successful. Our inability to attract additional deposits at competitive rates could have a material adverse effect on
our business, financial condition, results of operations and cash flows.
We rely to a certain degree on large certificates of deposits (over $250,000) to fund our operations, and the
potential volatility of such deposits and the reduced availability of any such funds in the future could adversely
impact our growth strategy and prospects.
Our average jumbo deposit customer has been a customer of the Bank for over nine years which indicates that
these are long-term customers who consistently renew their CDs with the Bank. At December 31, 2024, we held
$1.48 billion of Jumbo CDs, representing 25.0% of total deposits. These deposits are considered by the banking
industry to be volatile and could be subject to withdrawal. Withdrawal of a material amount of such deposits would
adversely impact our liquidity, profitability, business, financial condition, results of operations and cash flows.
Negative developments affecting the banking industry could adversely impact our liquidity.
High-profile bank failures in 2023 generated significant market volatility among publicly traded bank holding
companies and, in particular, regional community banks like the Bank. These market developments negatively
impacted customer confidence in the safety and soundness of smaller regional and community banks. As a result,
customers may choose to maintain deposits with larger more systemically important financial institutions or invest
in higher yielding and higher-rated short-term fixed income securities, all of which could materially adversely
impact the Bank’s liquidity, loan funding capacity, net interest margin, capital and results of operations. While the
Bank currently has access to substantial borrowing capacity from the Federal Reserve Bank, the Federal Home Loan
Bank and credit facilities established with larger banks, there can be no assurance that customer confidence in
regional banks and the banking system more broadly will be fully restored or that potential liquidity concerns will
recede or that such access will continue unimpaired.
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Risks Related to Information Technology
We rely on communications, information, operating and financial control systems technology from third-
party service providers, and we may suffer an interruption in or break of those systems.
We rely heavily on third-party service providers for much of our communications, information, operating and
financial control systems technology, including customer relationship management, general ledger, deposit,
servicing and loan origination systems. Any failure, interruption or breach in security of these systems could result
in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan
origination systems. We cannot be assured that such failures or interruptions will not occur or, if they do occur, that
they will be adequately addressed by us or the third parties on which we rely. The occurrence of any failures or
interruptions could have a material adverse effect on our business, financial condition, results of operations and cash
flows. If any of our third-party service providers experience financial, operational or technological difficulties, or if
there is any other disruption in our relationships with them, we may be required to locate alternative sources of such
services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services
with similar functionality as found in our existing systems without the need to expend substantial resources, if at all.
Any of these circumstances could have a material adverse effect on our business, financial condition, results of
operations and cash flows.
We may be adversely affected by disruptions to our network and computer systems or to those of our
service providers as a result of denial-of-service or other cyber-attacks.
We may experience disruptions or failures in our computer systems and network infrastructure or in those of
our third-party service providers as a result of denial-of-service or other cyber-attacks. In recent years, federal and
state regulators, including the FDIC, have made statements concerning cybersecurity risk management, preparedness
and resiliency for financial institutions such as us. These statements range from issues with respect to client account
protections to business continuity, and represent the regulators’ expectations for financial institutions to have more
robust cybersecurity risk management, preparedness and resiliency programs for themselves and their third-party
service providers. A financial institution is also expected to develop processes to enable recovery of data and
business operations and address rebuilding network capabilities and restoring data if the institution, or its critical
third-party service providers, fall victim to this type of cyber-attack. We have developed and continue to invest in,
systems and processes that are designed to detect, prevent and minimize the impact of security breaches and cyber-
attacks. Due to the increasing sophistication of such attacks, we may not be able to prevent denial-of-service or other
cyber-attacks that could compromise our normal business operations or the normal business operations of our
clients, or result in the unauthorized use of clients’ confidential and proprietary information. The occurrence of any
failure, interruption or security breach of network and computer systems resulting from denial-of-service or other
cyber-attacks could damage our reputation, result in a loss of client business, subject us to additional regulatory
scrutiny, or expose us to civil litigation and possible financial liability, any of which could adversely affect our
business, results of operations or financial condition.
The occurrence of fraudulent activity, breaches or failures of our information security controls or
cybersecurity-related incidents could have a material adverse effect on our business, financial condition and
results of operations.
As a financial institution, we are susceptible to fraudulent activity, information security breaches and
cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses
or increased costs to us or our clients, disclosure or misuse of our information or our client information,
misappropriation of assets, privacy breaches against our clients, litigation, or damage to our reputation. Such
fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, online banking fraud,
phishing, and other dishonest acts. Information security breaches and cybersecurity-related incidents may include
fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks, and
malware or other cyber-attacks. In recent periods, there continues to be a rise in electronic fraudulent activity,
security breaches and cyber-attacks within the financial services industry, especially in the commercial banking
sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also
experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity-related
incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions
and retail companies, have suffered major data breaches, in some cases exposing not only confidential and
proprietary corporate information, but also sensitive financial and other personal information of their customers and
38
employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these
breaches, which increase their risks of identity theft, credit card fraud and other fraudulent activity that could
involve their accounts with us.
Information pertaining to us and our clients is maintained, and transactions are executed, on the networks and
systems of ours, our clients and certain of our third party providers, such as our online banking or core systems. The
secure maintenance and transmission of confidential information, as well as execution of transactions over these
systems, are essential to protect us and our clients against fraud and security breaches and to maintain our clients’
confidence. Breaches of information security also may occur, and in infrequent, incidental, cases have occurred,
through intentional or unintentional acts by those having access to our systems or our clients’ or counterparties’
confidential information, including employees. In addition, increases in criminal activity levels and sophistication,
advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers
and operating systems) or other developments could result in a compromise or breach of the technology, processes
and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying
transactions, as well as the technology used by our clients to access our systems. Although we have developed, and
continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyber-
attacks and periodically test our security, our inability to anticipate, or failure to adequately mitigate, breaches of
security could result in: losses to us or our clients; our loss of business and/or clients; damage to our reputation; the
incurrence of additional expenses; disruption to our business; our inability to grow our online services or other
businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial
liability — any of which could have a material adverse effect on our business, financial condition and results of
operations.
More generally, publicized information concerning security and cyber-related problems could inhibit the use
or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions.
Such publicity may also cause damage to our reputation as a financial institution. As a result, our business, financial
condition and results of operations could be adversely affected.
Risks Related to Governmental Regulation
Governmental regulation and enforcement actions against us could impair our operations or restrict our
growth and could result in a decrease in the value of your shares.
We are subject to significant governmental supervision and regulation under federal and state laws, as well as
supervision and examination by the FDIC, the CDFPI, and the CFPB. Because our business is highly regulated, the
laws, rules and regulations and supervisory guidance and policies applicable to us are subject to regular modification
and change, which may have the effect of increasing or decreasing the cost of doing business, modifying permissible
activities or enhancing the competitive position of other financial institutions. These laws are primarily intended for
the protection of consumers, depositors and not for the protection of shareholders of bank holding companies or
banks. Perennially, various laws, rules and regulations are proposed which, if adopted, could impact our operations
by making compliance much more difficult or expensive, restricting our ability to originate or sell loans or further
restricting the amount of interest or other charges or fees earned on loans or other products. We cannot be assured
that laws, rules or regulations will not be adopted in the future that could make compliance much more difficult or
expensive, restrict our ability to originate loans, further limit or restrict the amount of commissions, interest or other
charges earned on loans originated by us or otherwise adversely affect our business, financial condition, results of
operations or cash flows, which could result in a decrease in the value of your shares.
Any enhanced regulatory examination scrutiny or new regulatory requirements arising from recent events
in the banking industry could increase the Bank’s expenses and affect the Bank’s operations and acquisition
opportunities.
Recent adverse events, including significant bank failures, which occurred in 2023 in the banking industry
could result in increased regulatory scrutiny in the course of routine examinations and otherwise, and new
regulations directed towards regional banks, designed to address the recent negative developments in the banking
industry, could increase the Bank’s costs of doing business, lead to an increased risk of regulatory oversight actions
or restrictions, result in decreased regulatory support for merger and acquisition activity, and reduce our
profitability. Among other things, there may be an increased focus by both regulators and investors on deposit
composition, levels of uninsured deposits, embedded interest rate risk on bank balance sheets, and bank risk
management programs generally. As a primarily commercial bank, the Bank has a relatively higher percentage of
39
uninsured deposits compared to larger national banks or smaller community banks with a stronger focus on retail
deposits. As a result, the Bank could face increased scrutiny or be viewed as higher risk by regulators and the
investor community.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money
laundering statutes and regulations.
The Bank Secrecy Act, as amended by the Anti-Money Laundering Act of 2020, the USA PATRIOT Act of
2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an
effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate.
The federal Financial Crimes Enforcement Network is authorized to impose significant civil money penalties for
violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual
federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration, and
Internal Revenue Service. We are also subject to scrutiny of compliance with the rules enforced by the Office of
Foreign Assets Control and compliance with the Foreign Corrupt Practices Act. If our policies, procedures and
systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may
include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with
certain aspects of our business plan. Failure to maintain and implement adequate programs to combat money
laundering and terrorist financing could also have serious reputational consequences for us. Any of these results
could materially and adversely affect our business, financial condition and results of operations.
We are exposed to risk of environmental liability with respect to properties to which we take title.
In the course of our business, we may foreclose on and take title to properties securing our loans. If hazardous
substances were discovered on any of the properties, we may be held liable to governmental entities or to third
parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection
with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or
chemical releases at a property. Many environmental laws can impose liability regardless of whether we knew of or
were responsible for the contamination. In addition, if we arrange for the disposal of hazardous or toxic substances
at another site, we may be liable for the costs of cleaning up and removing those substances from the site, even if we
neither own nor operate the disposal site. Environmental laws may require us to incur substantial expenses and may
materially limit use of properties we acquire through foreclosure, reduce their value or limit our ability to sell them
in the event of a default on the loans they secure. In addition, future laws or more stringent interpretations or
enforcement policies with respect to existing laws may increase our exposure to environmental liability.
Negative publicity could damage our reputation.
Reputation risk, or the risk to our earnings and capital from negative publicity or public opinion, is inherent in
our business. Negative publicity or public opinion could adversely affect our ability to keep and attract customers
and expose us to adverse legal and regulatory consequences. Negative public opinion could result from our actual or
perceived conduct in any number of activities, including lending practices, corporate governance, regulatory
compliance, mergers and acquisitions, and disclosure, sharing or inadequate protection of customer information, and
from actions taken by government regulators and community organizations in response to that conduct.
Terrorist attacks may have depressed the economy in the past and if there are additional terrorist events,
especially in our market, the economy could be adversely affected.
The possibility of further terrorist attacks, as well as combined continued terrorist threats, may create and
perpetuate economic uncertainty. Future terrorist acts and response to such activities could adversely affect us in a
number of ways, including an increase in delinquencies, bankruptcies or defaults that could result in a higher level
of non-performing assets, net charge-offs and provision for loan losses.
Risks Related to Accounting and Internal Control Over Financial Reporting
Failure to maintain effective internal control over financial reporting or disclosure controls and
procedures could adversely affect our ability to report our financial condition and results of operations
accurately and on a timely basis.
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A failure to maintain effective internal control over financial reporting or disclosure controls and procedures
could adversely affect our ability to report our financial results accurately and on a timely basis, which could result
in a loss of investor confidence in our financial reporting or adversely affect our access to sources of liquidity.
Furthermore, because of the inherent limitations of any system of internal control over financial reporting, including
the possibility of human error, the circumvention or overriding of controls and fraud, even effective internal controls
may not prevent or detect all misstatements.
Changes in accounting standards or inaccurate estimates or assumptions in applying accounting policies
could materially impact the Bank’s financial statements.
From time to time, the FASB or the SEC may change the financial accounting and reporting standards that
govern the preparation of the Bank’s financial statements. In addition, the FASB, SEC, banking regulators and the
Bank’s independent registered public accounting firm may also amend or even reverse their previous interpretations
or positions on how various standards should be applied. These changes may be difficult to predict and could impact
how we prepare and report the Bank’s financial statements. In some cases, we could be required to apply a new or
revised standard retroactively, resulting in the Bank revising and republishing prior-period financial statements.
Risks Related to Our Common Stock
The price of our common stock may be volatile or may decline.
The stock market is subject to fluctuations in the share prices and trading volumes that affect the market
prices of the shares of many companies. These broad market fluctuations could adversely affect the market price of
our common stock. Among the factors that could affect our stock price are:
Actual or anticipated quarterly fluctuations in our operating results and financial condition;
Changes in revenue or earnings estimates or publication of research reports and recommendations by
financial analysts;
Failure to meet analysts’ revenue or earnings estimates;
Speculation in the press or investment community;
Strategic actions by us or our competitors, such as acquisitions or restructurings;
Actions by institutional shareholders;
Fluctuations in the stock price and operating results of our competitors;
General market conditions and, in particular, developments related to market conditions for the
financial services industry including as a result of current or anticipated military conflict, terrorism or
other geopolitical events;
Proposed or adopted regulatory changes or developments;
Anticipated or pending investigations, proceedings or litigation that involve or affect us;
Domestic and international economic factors, including inflation, unrelated to our performance; or
Other factors identified above in “Forward-Looking Statements.”
Your share ownership may be diluted by the issuance of additional shares of our common stock in the
future.
Your share ownership may be diluted by the issuance of additional shares of our common stock in the future.
Our amended and restated articles of incorporation do not provide for preemptive rights to the holders of our
common stock. Any authorized but unissued shares are available for issuance by our Board of Directors. As a result,
41
if we issue additional shares of common stock to raise additional capital or for other corporate purposes, you may be
unable to maintain your pro rata ownership in the Bank.
Federal and state laws and regulations may restrict our ability to pay dividends.
The ability of the Bank to pay dividends to its shareholders is limited by applicable federal and California law
and regulations. See “Business — Regulation and Supervision.”
We may be subject to risks related to acquisitions.
Among the risks associated with expansion via acquisition are incorrectly assessing the quality of an acquired
bank’s assets, greater than anticipated costs associated with integrating acquired banks, resistance from customers or
employees of acquired banks, and inability to generate a profit using assets acquired in the transaction. Additionally,
new region-specific risks are introduced when a bank is acquired outside the Bank’s current area of business. If we
were to issue capital stock in connection with future transactions, the transactions and related stock issuances may
have a dilutive effect on earnings per share and share ownership.
We may not be able to manage our growth successfully.
We seek to grow safely and consistently. Successful and safe growth requires that we follow adequate loan
underwriting standards, balance loan, investment portfolio and deposit growth without increasing interest rate risk or
compressing our net interest margin, maintain satisfactory regulatory capital at all times, raise capital in advance of
growth, scale our operations and systems to support our growth, employ an effective risk management framework
and hire and retain qualified employees. If we do not manage our growth successfully, then our business, results of
operations or financial condition may be adversely affected. There is no assurance that any new office that we open
in connection with our growth will be successful or will otherwise satisfy expectations. In addition, any plans to
open new offices may change or become limited.
Our decisions regarding the fair value of assets acquired could be different than initially estimated, which
could materially and adversely affect our business, financial condition, results of operations, and future
prospects.
In business combinations, we may acquire significant portfolios of loans that are marked to their estimated
fair value, there is no assurance that the acquired loans will not suffer deterioration in value. The fluctuations in
national, regional and local economic conditions, including those related to local residential, commercial real estate
and construction markets, may increase the level of charge-offs in the loan portfolio that we acquire and
correspondingly reduce our net income. These fluctuations are not predictable, cannot be controlled and may have a
material adverse impact on our operations and financial condition, even if other favorable events occur.
Anti-takeover provisions and federal law may limit the ability of another party to acquire us, which could
cause our stock price to decline.
Various provisions of our articles of incorporation and bylaws and certain other actions we have taken could
delay or prevent a third-party from acquiring us, even if doing so might be beneficial to our shareholders. The
Change in Bank Control Act of 1978, as amended, together with federal regulations, requires that, depending on the
particular circumstances, regulatory approval and/or appropriate regulatory filings may be required from the FDIC
and/or the CDFPI prior to any person or entity acquiring “control” (as defined in the applicable regulations) of a
state non-member bank, such as the Bank. These provisions may prevent a merger or acquisition that would be
attractive to shareholders and could limit the price investors would be willing to pay in the future for our common
stock.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
ITEM 1C.
CYBERSECURITY
Risk Management and Strategy
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We have developed and implemented a cybersecurity program intended to protect the confidentiality,
integrity, and availability of our critical information technology (“IT”) systems and information. Our cybersecurity
approach includes: a cybersecurity incident response plan, Cybersecurity Program, and a Disaster Recovery plan.
These policies, procedures, techniques and tools that Preferred Bank employs to manage cybersecurity risk. Many of
the mechanisms for identifying, managing, and reporting on cybersecurity risk are integrated into the Bank’s broader
policies and procedures relating to risk management; however, due to the unique nature of cybersecurity risk, key
aspects of our cybersecurity risk management program are intended to function on a stand-alone basis, including to
ensure rapid escalation and response to cybersecurity incidents.
Our cybersecurity program includes:
•
Risk assessments designed to help identify material cybersecurity risks to our critical systems,
information, operations, and the Bank’s overall IT environment.
•
An Incident Response Team (“IRT”) which is comprised of executives, senior managers, and IT
management representing each critical internal business function to manage the Bank’s response to
cybersecurity incidents.
•
Use of third-party service providers, where appropriate, to assess, test or otherwise assist with aspects of
our security controls, including, without limitation, periodic penetration testing, network vulnerability,
and system monitoring via System Information and Event Management (“SIEM”) or other monitoring
tools.
•
Employee training on information security awareness, data privacy awareness, and phishing/social
engineering mitigation, as well as periodic tabletop exercises involving IT and incident response team to
review roles and responsibilities and walk through practical aspects of responding to cybersecurity
incidents.
•
A cybersecurity incident response plan that sets forth guidelines, policies and procedures for
identification, containment, eradication / response, recovery, notification, lessons learned, and related
processes and actions in response to a cybersecurity incident.
•
A vendor management process for third-party service providers, suppliers, and vendors, which includes
criteria for risk-based categorization of these third parties and policies and procedures relating to
assessing their cybersecurity practices prior to engagement and periodic monitoring during the course of
engagement.
We base our cybersecurity policies and programs on the Gramm-Leach-Bliley Act (GLBA), Privacy Act, the
California Consumer Privacy Act, and Federal Financial Institutions Examination Council (FFIEC) guidelines.
We have not currently identified risks from known cybersecurity threats, including as a result of any prior
cybersecurity incidents, that have materially affected or that we believe are reasonably likely to materially affect us,
including our operations, business strategy, results of operations, or financial condition.
Governance
As part of its risk oversight function, our Board, including through delegation to its Audit Committee,
regularly receives risk management reporting from the IT Steering Committee (ITSC), Chief Information Officer
(CIO), and Information Security Officer (ISO) and other officers of the Bank responsible for different risk
disciplines, including with respect to cybersecurity and IT risk, and oversees management’s administration of our
cybersecurity risks. For example, management provides periodic reports to the Board and/or Audit Committee
related to information security program, risk assessments, internal controls, patch management, disaster recovery,
service provider oversight, and periodic attestations and statements regarding the Bank’s compliance with regulatory
requirements and established policies and procedures. These reports supplement materials and presentations from
outside experts that are also provided to our Board members from time to time as part of the Board’s and the Audit
Committee’s continuing education on risk oversight topics such as cybersecurity that impact companies in our
industry and, more generally, publicly traded companies. In addition, management provides event-driven updates to
the Audit Committee and Board regarding any material cybersecurity incidents and, as appropriate, any incidents
with lesser impact potential.
43
The IT department is responsible for assessing and managing our material risks from cybersecurity threats.
The CIO and ISO have primary responsibility for our overall cybersecurity risk management program and manage
both our internal cybersecurity program and the external cybersecurity vendors we retain. The ITSC members who
oversee our IT and cybersecurity risks have significant experience, individually and collectively. The Bank also
relies on the professional expertise of third-party security firms that specialize in securing and monitoring the
Bank’s IT environment. These third parties typically have teams of IT professionals skilled in a range of disciplines
related to the design and implementation of our cybersecurity tools, as well as in assessing security controls and
processes and addressing or remediating emerging threats and findings that are identified.
The ITSC oversees the IT and Information Security functions and its efforts to prevent, detect, mitigate, and
remediate cybersecurity risks and incidents. In addition to day-to-day management, our senior management team’s
supervision of these efforts includes receiving and responding to briefings from IT personnel, updates on cyberthreat
intelligence and other information obtained from governmental, public or private sources, including external
consultants engaged by us, and notification of significant alerts and reports produced by third parties and security
tools deployed in our IT environment.
ITEM 2.
PROPERTIES
Our corporate headquarters and main branch office are located at 601 S. Figueroa Street, 48th and 47th
Floors, Los Angeles, California, 90017, respectively. This lease expires in August of 2030. In addition to this, we
also maintain leased offices in a property in El Monte, California which houses a number of administrative
departments.
At December 31, 2024, we maintained twelve other full-service branch offices in in the California cities of
Alhambra, Century City, City of Industry, Torrance, Arcadia, Irvine (2 branches), Diamond Bar, Pico Rivera,
Tarzana, and San Francisco (2 branches), and one branch in Flushing, New York and one branch in the Houston
suburb of Sugar Land, Texas. We lease all of our branches with the exception of our first Irvine branch which we
own. Additionally, the Bank also has a satellite office in Manhattan which is only for meeting and communications,
as no business is transacted there. We market our services and conduct our business primarily in Los Angeles,
Orange, Ventura, Riverside, San Bernardino, and San Francisco counties within California, and the Northeast Tri-
State area of New York, New Jersey and Connecticut and the Houston Metro area. We believe that no single lease
has annual payments material to our operations. Leases for branch offices are generally 3 to 10 years in length and
generally provide renewal option terms of 3 to 5 additional years.
We believe that our existing facilities are adequate for our present purposes. We believe that, if necessary,
we could secure alternative facilities on similar terms without adversely affecting our operations. Our total lease
expense was $11.2 million for the year ended December 31, 2024 and $2.7 million for the year ended December 31,
2023. During the year ended December 31, 2024, the Bank recorded a one-time $8.1 million increase in occupancy
expense due to an error in the calculation of ASC 842, Accounting for Leases. This calculation error goes back to
the adoption of ASC 842 in 2019 and the $8.1 million item represents the cumulative erroneous calculation through
the years from 2019 to present.
We account for leases under ASC Topic 842 Leases. Operating lease right-of-use (“ROU”) assets represent
the Bank’s right to use the underlying asset during the lease term and operating lease liabilities represent the Bank’s
obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized
at lease commencement based on the present value of the remaining lease payments using the Bank’s incremental
borrowing rate at the lease commencement date. Operating lease expense, which is comprised of amortization of the
ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis
over the lease term and is recorded in occupancy expense in the Consolidated Statements of Operations and
Comprehensive Income.
ITEM 3.
LEGAL PROCEEDINGS
From time to time we are a party to claims and legal proceedings arising in the ordinary course of business.
We accrue for any probable loss contingencies that are estimable and disclose any possible losses in accordance with
ASC 450, "Contingencies." There are no pending legal proceedings or, to the best of our knowledge, threatened
44
legal proceedings, to which we are a party which may have a material adverse effect upon our financial condition,
results of operations and business prospects.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
45
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the symbol “PFBC.” Our
common stock closed at $81.04 on March 13, 2025 and there were 13,243,310 outstanding shares of our common
stock on that date.
Holders
As of March 13, 2025, 13,243,310 shares of the Bank’s common stock were held by 180 shareholders of
record.
Dividends
Dividends depend upon our earnings, financial condition, results of operations, capital requirements,
available investment opportunities, regulatory restrictions, contractual restrictions and other factors that our Board of
Directors may deem relevant. Accordingly, there can be no assurance that any stock or cash dividends will be
declared in the future, and if any are declared, what amount they will be.
Because we are a California state-chartered bank, our ability to pay dividends or make distributions to
shareholders are subject to restrictions set forth in the California Financial Code. California Financial Code Section
1132 restricts the amount available for cash dividends by state-chartered banks to the lesser of: (1) retained earnings;
or (2) the bank’s net income for its last three fiscal years (less any distributions to shareholders made during such
period).
However, Section 1133 of the California Financial Code provides that notwithstanding the provisions of
Section 1132, a state-chartered bank may, with the prior approval of the California Commissioner of Business
Oversight, or Commissioner, make a distribution to its shareholders in an amount not exceeding the greater of:
Retained earnings;
Net income for a bank’s last preceding fiscal year; or
Net income of the bank for its current fiscal year.
If the California Commissioner finds that the shareholders’ equity of the Bank is not adequate or that the
payment of a dividend would be unsafe or unsound for the Bank, the California Commissioner may order the Bank
not to pay a dividend to the Bank’s shareholders.
In addition, under California law, the California Commissioner has the authority to prohibit a bank from
engaging in business practices which the California Commissioner considers to be unsafe or unsound to its business
or financial condition. It is possible, depending on our financial condition and other factors, that the California
Commissioner could assert that the payment of dividends or other payments to our shareholders might under some
circumstances be unsafe or unsound to our business or financial condition and prohibit such payment.
The FDIC also has the authority to prohibit a bank from engaging in business practices which the FDIC
considers to be unsafe or unsound. It is possible, depending upon our financial condition and other factors, that the
FDIC could assert that the payment of dividends or other payments might under some circumstances be such an
unsafe or unsound practice and prohibit such payment.
46
Issuer’s Purchases of Equity Securities
The following table summarizes purchases made by the Bank of its common stock during 2024:
Total Number
of Shares
Purchased
Average
Price
Paid Per
Share
Total number of
shares (or units)
purchased as part
of publicly
announced plans
or programs
Maximum number
(or approximate
dollar value) of
shares (or units)
that may yet be
purchased under
the plans or
programs
October 1, 2024 through October 31, 2024
81,724
$ 79.11
81,724
$ 15,752,323
November 1, 2024 through November 30, 2024
—
—
—
$ 15,752,323
December 1, 2024 through December 31, 2024
—
—
—
$ 15,752,323
Total
81,724
$ 79.11
81,724
On June 9, 2023, the Bank received approval from the California Department of Financial Protection and
Innovation for the repurchase of up to $150 million in the Bank’s common stock or 5% of total outstanding shares,
whichever is less, in the open market. The timing, price and volume of the share repurchases will be determined by
Bank management based on its evaluation of market conditions and other relevant factors. This repurchase was
approved by shareholders at the Bank’s Annual Shareholders Meeting on May 16, 2023. On June 12, 2023, the
Board of Directors approved what was to be the first tranche of that repurchase plan, which called for the repurchase
of up to $50 million of the total $150 million repurchase. The first tranche was completed in October 2023. On
January 9, 2024, the Board of Directors approved what will be the second tranche of that repurchase plan, which
will call for the repurchase of up to $50 million of the $100 million remaining under the repurchase plan. During
the year ended December 31, 2024, the Bank repurchased 464,314 shares of common stock at a weighted average
price of $73.76. The share repurchase program may be suspended, terminated or modified at any time by the Bank
for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative
investment opportunities, liquidity, and other factors deemed appropriate.
Rule 10b5-1 Trading Arrangements
During the quarter ended December 31, 2024, none of our directors or executive officers adopted or
terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (in each case, as defined in
item 408 of Regulation S-K) for the purchase or sale of the Bank’s securities. During the quarter ended December
31, 2024, the Bank did not adopt or terminate any Rule 10b5-1 trading arrangement.
Securities Authorized for Issuance Under Equity Compensation Plans.
The following table provides information as of December 31, 2024, regarding equity compensation plans
under which equity securities of the Bank were authorized for issuance.
Number of
securities to be
issued upon
exercise of
outstanding
options
Weighted average
exercise price of
outstanding
options
Number of securities
available for future
issuance under equity
compensation plans
excluding securities
reflected in column (a)
Plan Category
(a)
(b)
(c)
Equity incentive plans approved by security holders
—
$—
1,169,849
Equity incentive plans not approved by security holders
—
—
—
—
1,169,849
Unregistered Sales of Equity Securities and Use of Proceeds.
None.
47
Stock Performance Graph
The following graph shows a comparison of shareholder return on the Bank’s common stock based on the
market price of the common stock assuming the reinvestment of dividends, for the period beginning December 31,
2019 assuming an investment of $100 in each as of December 31, 2019. The Bank is not included in these indices.
Total shareholder return for the Bank, as well as for the indices, is based on the cumulative amount of dividends for
a given period (assuming dividend reinvestment) and the difference between the share price at the beginning and at
the end of the period. This graph is historical only and may not be indicative of possible future performance of the
common stock.
Period Ending
Index
12/31/2019
12/31/2020
12/31/2021
12/31/2022
12/31/2023
12/31/2024
Preferred Bank
100.00
86.62
126.15
134.35
136.44
167.45
NASDAQ Composite Index
100.00
144.92
177.06
119.45
172.77
223.87
S&P U.S. BMI Banks Index
100.00
87.24
118.61
98.38
107.32
143.68
KBW NASDAQ Bank Index
100.00
89.69
124.06
97.52
96.65
132.60
ITEM 6.
RESERVED
50
100
150
200
250
12/31/19
12/31/20
12/31/21
12/31/22
12/31/23
12/31/24
Index Value
Total Return Performance
Preferred Bank
NASDAQ Composite Index
S&P U.S. BMI Banks Index
KBW NASDAQ Bank Index
48
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our discussion and analysis of earnings and related financial data are presented herein to assist investors in
understanding the financial condition of the Bank at December 31, 2024 and 2023, and the results of operations for
the years ended December 31, 2024, 2023 and 2022. This discussion should be read in conjunction with the
consolidated financial statements and related footnotes of our Company presented elsewhere herein.
Overview
We are one of the larger independent commercial banks headquartered in California. The Bank is chartered
by the State of California, and its deposits are insured by the Federal Deposit Insurance Corporation, or FDIC, to the
maximum extent permitted by law. The Bank conducts its banking business from its main office in Los Angeles,
California, and through twelve full-service branch banking offices in California (Alhambra, Century City, City of
Industry, Torrance, Arcadia, Irvine (2), Diamond Bar, Pico Rivera, Tarzana and San Francisco (2)), one branch in
Flushing, New York, a branch office in the Houston, Texas suburb of Sugar Land and a loan production office in
Sunnyvale, California. In addition, the Bank also maintains a satellite office in New York City. Preferred Bank
offers a broad range of deposit and loan products and services to both commercial and consumer customers. The
Bank provides personalized deposit services as well as real estate finance, commercial loans and trade finance to
small and mid-sized businesses, entrepreneurs, real estate developers, professionals and high net worth individuals.
We are generally focused on businesses as opposed to retail customers and thus we have a smaller number of
customer relationships for whom we provide a high level of service and personal attention. Although originally
founded as a Chinese-American Bank, Preferred Bank now derives most of its customers from the diversified
mainstream market but does continue to benefit from the significant migration to California of ethnic Chinese from
China and other areas of East Asia.
We derive our income primarily from interest received on our loan and investment securities portfolios and
our excess cash, and fee income we receive in connection with servicing our loan and deposit customers. Our major
operating expenses are the interest we pay on deposits and borrowings, and the salaries and related benefits we pay
our management and staff.
For the year ended December 31, 2024, the Bank recorded net income of $130.7 million as compared to net
income of $150.0 million for the year ended December 31, 2023. At December 31, 2024, the Bank’s total assets
were $6.92 billion up from $6.66 billion as of the end of 2023. In 2024, loans grew by $367.1 million, or 7.0%, and
deposits grew by $207.5 million, or 3.6%. See “Results of Operations.”
Federal Reserve Bank Actions
Beginning in the first quarter of 2022, the Federal Reserve Open Market Committee (“FOMC”) initiated a
series of actions in response to inflation. In March 2022, the FOMC increased the federal funds rate by 25 bps. This
was the first rate hike by the FOMC in more than three years. The FOMC then increased the federal funds rate by
another 500 bps over the course of 2022 and early 2023. These increases in the federal funds rate were designed to
reduce overall demand which was expected to cause a reduction in prices. However, the Bank’s net interest income
has benefited significantly from rising interest rates as a large majority of the Bank’s interest-earning assets are
floating rate and reprice at a faster pace than our interest-bearing liabilities. Conversely, when the federal funds rate
starts to come down, the Bank’s net interest income will likely decrease. Because inflation is now significantly
lower, the FOMC began to reduce the federal funds rate at its September, 2024 meeting with a 50 basis point
reduction, and an additional 25 basis point reduction in both its November and December 2024 meetings. In
preparation for declining interest rates, the Bank has made a concerted effort to begin replacing some of the floating
rate loans with a fixed rate or with a loner duration index, as they come up for renewal/maturity. In addition, the
Bank has tied a significant amount of money market and interest checking deposit accounts to the fed funds rate so
that when the FOMC reduces the fed funds rate, these deposits will reprice immediately. These efforts have had the
effect of muting the impact of a decrease in the fed funds rate and the Prime interest rate on the Bank’s net interest
income.
49
Economy
Our operating results indicate that our underlying economic fundamentals in our footprint were healthy and
we believe that we are well positioned to continue to create significant shareholder value. In response to the high
level of inflation in 2022 and 2023, the FOMC raised overnight interest rates by 525 basis points from March 2022
through July 2023. The FOMC paused changes in the benchmark rate beginning with its August 2023 and then
reduced rates 100 basis points from September through December 2024. These rapid rate hikes have created
volatility in nearly all financial markets and are starting to have an effect on non-financial markets such as real
estate. There is still a possibility that these rapid and significant rate hikes will put the economy into a recession in
2025 although odds of that occurrence are not as high as they were just a few months ago. Even with more recent
economic stability, we are acutely focused on credit quality and the financial health of our borrowers.
Critical Accounting Policies
Our accounting policies are integral to understanding the financial results reported. Our most complex
accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and
contingencies. We have established detailed policies and control procedures that are intended to ensure valuation
methods are well controlled and consistently applied from period to period. In addition, these policies and
procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The
following is a brief description of our current accounting policies involving significant management valuation
judgments.
Allowance for Credit Losses
The allowance for credit is estimated using the current expected credit losses model. The allowance for
credit losses on loans represents our best estimate of expected credit losses inherent in the existing loan portfolio.
The allowance for credit losses on loans is increased (decreased) by the provision for (reversal of) credit losses
charged to expense and reduced by loans charged off, net of recoveries.
We evaluate our allowance for credit losses quarterly. We believe that the allowance for credit losses is a
“critical accounting estimate” because it is based upon management’s assessment of various factors affecting the
collectability of the loans using the relevant available information, from internal and external sources, relating to
past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides
the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for
differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix,
delinquency level, or term as well as for changes in environmental conditions, such as changes in unemployment
rates, property values, or other relevant factors.
We segment the loan portfolio into seven main categories: commercial, international trade finance,
construction, real estate, residential mortgage, cash secured and SBA. Within those categories, we further segment
into collective pools with similar risk characteristics. The segmentation reflects management’s view of risks inherent
in the portfolio based on historical loan experiences.
Loans are individually evaluated for credit losses when they no longer exhibit similar risk characteristics
with other loans in the portfolio. We individually review and analyze non-accrual loans, classified loans, and certain
other loans as determined necessary. Collateral dependent loans are loans for which the repayment is expected to be
provided substantially through the operation or sale of the collateral when the borrower, based on management's
assessment, is experiencing financial difficulty as of the reporting date. Collateral dependent loans are typically
analyzed by comparing the loan amount to the fair value of collateral less cost to sell, with a prompt charge-off
taken for the ‘shortfall’ amount once the value is confirmed. Other methods can be used including, for example loan
sale market price or present value of expected future cash flows discounted at the loan’s effective interest rate.
We also make adjustments, if warranted, in our allowance methodology in both quantitative and qualitative
modeling to estimate the allowance. Such adjustments are intended to account for conditions that management
believes directly impact loss potential in the portfolio that is not currently being captured in the model. To the extent
possible, management accounts for the impact of quantitative factors on a pool by pool basis, and qualitative factors
on a portfolio basis. Qualitative factors consisted of nine factors including recent trends and economic conditions.
We apply environmental and general economic factors to our allowance methodology including: credit
50
concentrations; delinquency trends; national and local economic and business conditions; the quality of lending
management and staff; lending policies and procedures; loss and recovery trends; nature and volume of the
portfolio; changes in the value of underlying collateral for collateral dependent loans; the quality of loan reviews;
and other external factors including competition, legal, and regulatory factors. We aggregate the sums of the
estimates of probable loss for each category with the specific individually evaluated reserves to arrive at the total
estimated allowance for credit losses.
The allowance adequacy analysis requires a significant amount of judgment and subjectivity by
management especially in regards to the qualitative portion of the analysis. We do not provide any assurance that
further economic difficulties or other circumstances which would adversely affect our borrowers and their ability to
repay outstanding loans will not occur. These difficulties or other circumstances could result in increased losses in
our loan portfolio, which could result in actual losses that exceed loss reserves previously established.
Allowance for credit losses – sensitivity analysis
The Bank performs sensitivity analyses of the ACL keenly focused on a key component in the ACL model
involving the Constant Prepayment Rate (CPR). The rate of prepayment plays a crucial role in arriving at the
estimated ACL as it can either limit the exposure to defaults by shortening the life of loan in the pool leading to a
reduction of the allowance, or increase the likelihood of defaults over an extended period of time leading to a higher
allowance. The sensitivity analysis is evaluated based on the assumption of the CPR moving at a faster or slower
pace from its original rate to observe the potential impact on the allowance under different conditions. The
assumption takes into consideration market conditions including near-term economic outlooks, unemployment rates,
competitions, and among others. The tables below show the impact of how the stress analysis in prepayment rates
affecting the allowance of the credit losses as of December 31, 2024:
CPR
+30%
+20%
+10%
Base
-10%
-20%
-30%
Impact on ACL
(3.14)%
(2.11)%
(1.06)%
—%
1.08%
2.19%
3.31%
The impact of probable default events is captured by modeling the probability of default rates at the highest
for commercial and commercial real estate loan pools, while maintaining unemployment rate at 5% in the forecast.
While overall unemployment demonstrated resilience, it slowly rose upward during 2024 and is expected to be in
the 4% range during 2025. While relief from the high interest rates has occurred from interest rate cuts that started
in the latter half of 2024, management continues to maintain a conservative approach in calibrating risk.
ASC 326-20 requires an estimate of lifetime credit loss allowance for the held-to-maturities (“HTM”) debt
securities. The Bank holds the HTM debt securities that are issued by the government agencies which are highly
rated by the rating agencies and have a long history of no credit losses so no ACL on these securities has been
recorded.
Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements are discussed in “Notes to Consolidated Financial
Statements, Note 1 — Summary of Significant Accounting Policies” included in Item 8. of this Annual Report on
Form 10-K.
51
Results of Operations
The following tables summarize key financial results for the periods indicated:
Year Ended December 31,
2024
2023
2022
(Dollars in thousands, except per share data)
Net income
$ 130,662
$ 150,040
$ 128,845
Net income per share, basic
$ 9.79
$ 10.64
$ 8.84
Net income per share, diluted
$ 9.64
$ 10.52
$ 8.70
Return on average assets
1.91%
2.28%
2.08%
Return on average shareholders’ equity
17.85%
22.31%
21.34%
Dividend payout ratio
29.11%
22.08%
20.82%
Equity to assets ratio
11.02%
10.44%
9.81%
Management’s Discussion and Analysis of Financial Condition and Results of Operations generally
includes tables with 3-year financial performance, accompanied by narrative for 2024 and 2023 periods. Refer to the
2023 Form 10-K filed on March 14, 2024 for discussion related to 2023 activity compared to 2022 activity.
Year Ended December 31, 2024 Compared to Year Ended December 31, 2023
Year Ended December 31,
2024
2023
Increase
(Decrease)
(Dollars in thousands, except per share data)
Statement of Operations Data:
Interest income
$ 509,096
$ 477,988
$ 31,108
Interest expense
236,468
188,614
47,854
Net interest income
272,628
289,374 (16,746)
Provision for credit losses
12,100
10,000
2,100
Net interest income after provision for credit losses
260,528
279,374 (18,846)
Noninterest income
13,565
7,113
6,452
Noninterest expense
90,060
76,634
13,426
Income before income taxes
184,033
209,853 (25,820)
Income tax expense
53,371
59,813
(6,442)
Net income
$ 130,662
$ 150,040
$ (19,378)
Net income per share, basic
$ 9.79
$ 10.64
$ (0.85)
Net income per share, diluted
$ 9.64
$ 10.52
$ (0.88)
Net income decreased $19.4 million or 12.9% from $150.0 million or $10.52 per diluted share in 2023 to
$130.7 million or $9.64 in 2024. The decrease in net income was the result of lower net interest income, higher
provision for credit losses and higher noninterest expense, partially offset by higher noninterest income between the
years. The $16.7 million, or 5.8%, decrease in net interest income was a result of higher yields on loans and our cash
as market interest rates have risen at an unprecedented pace as well as growth in total loans between the two periods,
partially offset by higher average deposit balances and deposit costs. Our overall average yields on earning assets
increased by 20 basis points to 7.61% in 2024 from 7.41% while the cost of interest-bearing liabilities increased 62
basis points from 3.85% during 2023 to 4.47% for 2024. The yield on earning assets increased primarily due to the
10 basis point increase in average interest rates on loans during the year, increasing from 8.14% to 8.24%.
Additionally, the yield on investment securities increased 34 basis points from 3.71% to 4.05% in 2024. Finally, our
yield on overnight cash increased by 15 basis points from 5.26% to 5.41% in 2024.
52
Net Interest Income and Net Interest Margin
Year ended December 31, 2024 compared to 2023
Net interest income before the provision for credit losses for the year ended December 31, 2024 decreased
by $16.7 million, or 5.8%, to $272.6 million from $289.4 million for the year ended December 31, 2023. Our net
interest margin for the year ended December 31, 2024 was 4.08%, a decrease of 41 basis points from 4.49% for the
prior year due to the impact increases in the Federal Reserve benchmark interest rate has had on the cost of interest-
bearing liabilities.
This decrease in net interest income was due to an increase in interest expense of $47.9 million outpacing
the increase in interest income of $31.1 million. The increase in interest income is primarily due to an increase in
average loan yields between periods from 8.14% to 8.24%, coupled with higher average total loans, which increased
by $330.4 million to $5.40 billion in 2024 from the average of $5.07 billion in 2023.
The average yield on our interest-earning assets increased by 20 basis points to 7.61% in the year ended
December 31, 2024 from 7.41% in the year ended December 31, 2023. The increase in yield was primarily due to
the impact increases in market interest rates during 2022 and into 2023 had on our loan portfolio. Interest income,
interest expense, net interest income, and the net interest margin are all influenced by the distribution of assets and
liabilities and the income earned and costs incurred on such assets and liabilities. For the year ended December 31,
2024, average interest-earning assets totaled $6.70 billion, an increase of $244.5 million from the prior year. The
increase in average interest-earning assets during the year was primary related to growth in the loan portfolio,
partially offset by lower average balances of investment securities and cash balances.
At December 31, 2024, 60% of our loans carried interest rates that adjust with changes in the Prime Rate,
which has the potential to re-price daily, and 25% carried interest rates tied to the Secured Overnight Financing Rate
(“SOFR”) indices and other indices which re-price periodically. The remaining 15% of our loans were either fixed
rate or had an interest rate tied to the certificate of deposit (“CD”) it was collateralized by. Approximately 82% of
our adjustable-rate loan portfolio had an interest rate floor at various levels, which will provide us with some
protection in the future if interest rates decrease from the current levels. In addition, approximately 96% of our loans
tied to the Prime rate had interest rate floors. Approximately 13% of our loan portfolio had interest rate ceilings at
various rates limiting the amount of interest rate increases that can be passed on to the borrower.
The average cost of interest-bearing liabilities increased 62 basis points to 4.47% for the year ended
December 31, 2024 from 3.85% for the prior year. The increase in the cost of interest-bearing liabilities during the
year was primarily due to the overall impact of increasing market interest rates and its effect on the cost of existing
and new depositors. For the year ended December 31, 2024, average interest-bearing deposits totaled $5.14 billion,
an increase of $459.5 million from the prior year. The increases in average interest-bearing deposits during the year
was primarily due to growth in time deposits and interest-bearing demand accounts based on higher market deposit
rates. Average FHLB advances were zero for the year ended December 31, 2024, compared to $75.6 million for the
prior year when the steps taken in the aftermath of the 2023 bank failures led to an outsized increase in the Bank’s
overall cost of funds as the Bank took out $150 million in short term FHLB borrowings to increase liquidity in an
abundance of caution, which it otherwise would not have done. The cost of these borrowings was higher than the
deposit rates we would have paid during this period. This short-term FHLB advance matured in September of 2023.
The following tables present, for the periods indicated, the information regarding the distribution of
average assets, liabilities and shareholders’ equity, as well as the net interest income from average interest-earning
assets and the resulting yields expressed in percentages. Non-accrual loans are included in the calculation of average
loans and leases while non-accrued interest thereon is excluded from the computation of yields earned.
53
Year Ended December 31,
Average
Balance
Interest
Income or
Expense
Average Yield
or Cost
Average
Balance
Interest
Income or
Expense
Average Yield
or Cost
Average
Balance
Interest
Income or
Expense
Average Yield
or Cost
Assets
Interest-earning assets:
Loans
(1)(2)
$ 5,398,916 $ 445,139
8.24%
$ 5,068,486 $ 412,505
8.14%
$ 4,760,815 $ 269,011
5.65%
Investment securities
(3)
352,416 14,257
4.05%
389,584 14,461
3.71%
432,777 11,584
2.68%
Federal funds sold
20,397 1,103
5.41%
20,090 1,056
5.26%
20,070 374
1.86%
Other earning assets
925,389 48,994
5.29%
974,501 50,372
5.17%
841,270 13,837
1.64%
Total interest-earning assets
6,697,118 509,493
7.61%
6,452,661 478,394
7.41%
6,054,932 294,806
4.87%
Deferred loan fees
(10,301)
(10,212)
(8,697)
Allowance for credit losses
(76,448)
(70,992)
(61,645)
Noninterest earning assets:
Cash and due from banks
10,624
11,978
11,068
Other assets
209,259
194,255
185,480
Total assets
$ 6,830,252
$ 6,577,690
$ 6,181,138
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Deposits:
Interest-bearing demand
$ 1,294,758 $ 52,876
4.08%
$ 1,094,590 $ 41,886
3.83%
$ 1,025,212 $ 13,159
1.28%
Money market
874,705 35,075
4.01%
980,450 33,531
3.42%
1,159,332 11,062
0.95%
Savings
29,374 323
1.10%
33,147 225
0.68%
38,599 91
0.23%
Time certificates of deposit
2,939,543 142,894
4.86%
2,570,706 103,853
4.04%
1,825,307 17,412
0.95%
Total interest-bearing deposits
5,138,380 231,168
4.50%
4,678,893 179,495
3.84%
4,048,450 41,724
1.03%
Short-term borrowings
1
-
0.00%
75,616 3,819
5.05%
- -
0.00%
Subordinated debt
148,344 5,300
3.57%
148,106 5,300
3.58%
147,871 5,300
3.58%
Total interest-bearing liabilities
5,286,725 236,468
4.47%
4,902,615 188,614
3.85%
4,196,321 47,024
1.12%
Non-interest bearing liabilities:
Demand deposits
710,920
898,262
1,292,083
Other liabilities
100,549
104,352
88,856
Total liabilities
6,098,194
5,905,229
5,577,260
Shareholders’ equity
732,058
672,461
603,878
Total liabilities and shareholders’ equity
$ 6,830,252
$ 6,577,690
$ 6,181,138
Net interest income
$ 273,025
$ 289,780
$ 247,782
Net interest spread
3.14%
3.56%
3.75%
Net interest margin
4.08%
4.49%
4.09%
2024
2023
(Dollars in thousands)
2022
(1) Includes average non-accrual loans.
(2) Includes net loan fee income of $4.6 million, $4.2 million and $3.8 million for the years ended December 31, 2024, 2023 and 2022, respectively, are included in the yield computations.
(3) Yields on securities have been adjusted to a tax-equivalent basis.
54
In addition to the distribution, yields and costs of our assets and liabilities, our net income is also affected
by changes in the volume of and rates on our assets and liabilities. The following table shows the change in interest
income and interest expense and the amount of change attributable to variances in volume, rates and the
combination of volume and rates based on the relative changes of volume and rates.
Year Ended December 31,
Net Change
Rate
Volume
Net Change
Rate
Volume
(In thousands)
Interest income:
Loans
$ 32,634
$ 5,449
$ 27,185
$ 143,494
$ 125,129
$ 18,365
Investment securities(1)
(204)
1,240 (1,444)
2,877
4,125 (1,248)
Federal funds sold
47
31
16
682
682
-
Other earning assets
(1,378)
1,202
(2,580)
36,535
34,020
2,515
Total interest income
31,099
7,922
23,177
183,588
163,956
19,632
Interest expense:
Interest-bearing demand
10,990
2,954
8,036
28,727
27,778
949
Money market
1,544
5,400
(3,856)
22,469
24,424
(1,955)
Savings
98
126
(28)
134
148
(14)
Time certificates of deposits
39,041
22,985
16,056
86,441
77,058
9,383
Short-term borrowings
(3,819)
(1,909)
(1,910)
3,819
1,910
1,909
Subordinated debt
- (9)
9
- (8)
8
Total interest expense
47,854
29,547
18,307
141,590
131,310
10,280
Net interest income
$ (16,755)
$ (21,625)
$ 4,870
$ 41,998
$ 32,646
$ 9,352
2023 vs. 2022
2024 vs. 2023
(1)
Amounts have been adjusted to a tax-equivalent basis.
Provision for Credit Losses
In response to the credit risk inherent in our business, we maintain allowances for credit losses through
charges to earnings.
The Bank recorded a $12.1 million provision for credit losses for the year ended December 31, 2024
compared to $10.0 million for the prior year. Management considered various conditions to determine the
appropriate provision for credit losses. The provision for credit losses during the year ended December 31, 2024
reflects various events that occurred during the year, including trends in loan performance and growth, criticized
activity, changing economic conditions, and changes in government leadership and policy. These events culminated
in total net charge-offs of $19.0 million for the year ended December 31, 2024, compared to net charge-offs of
$117,000 for prior year. Net charge-offs during the year ended December 31, 2024 related to seven commercial
relationships. Net charge-offs during the year ended December 31, 2023 related to two commercial and industrial
loans.
The provision for credit losses is based on the Bank’s determination of the allowance for credit losses under
a current expected credit losses methodology. We also apply qualitative factors in calculating allowance levels by
loan type, which are revised quarterly and take into consideration reasonable and supportable economic forecasts,
the mix of the loan portfolio, concentration levels and trends, local and national economic conditions, changes in
capabilities, experience of lending management and staff, and other external factors such as industry conditions,
competition and regulatory requirements.
Non-performing loans increased $9.1 million to $37.9 million at December 31, 2024, compared to $28.7
million as of December 31, 2023. The increase was from $37.0 million in note sales and paydowns of nonaccrual
loans, 18.0 million of loans that cured back to accrual status and $9.5 million of charge-offs, offset by additions of
$72.6 million including one loan over 90 days past due and still accruing of $1.1 million. The $72.6 million in
additions of nonaccrual loans during the year was due to reasons specific to those borrowers/loans. The ratio of
55
allowance for credit losses on loans to total loans increased to 1.27% at December 31, 2024 compared to 1.49% at
December 31, 2023. The 22 basis point decrease between periods is primarily attributable to the factors applied in
the economic forecasts of the Bank’s CECL model, such as charge-offs and loan growth.
Management believes that through the application of the allowance methodology’s quantitative and
qualitative components, that the provision and overall level of allowance for credit losses on loans is adequate for
current expected credit losses inherent in the portfolio as of December 31, 2024. For details on the non-performing
loans, please see the table under Non-Performing Assets below.
Additionally, a separate reserve is maintained related to off-balance sheet items such as commitments to
extend credits, or letters of credit. See the “Contractual Obligations” section below for further discussion of off-
balance sheet items.
Noninterest Income
We earn noninterest income primarily through fees related to:
Services provided to deposit customers;
Services provided in connection with trade finance; and
Services provided to current loan customers;
In addition, we earn income from the sale of SBA loans, increases in the cash surrender value of bank
owned life insurance policies (“BOLI”) and from time to time, may earn rental income from OREO property, and
record gains on the sale of non-SBA loans and investment securities.
The following table presents, for the periods indicated, the major categories of noninterest income:
Year Ended December 31,
2024
2023
2022
(In thousands)
Fees and service charges on deposit accounts
$ 3,172
$ 3,333
$ 2,728
Letter of credit fee income
7,188
5,798
4,463
BOLI income
420
412
401
Net gain on sale of loans
659
752
-
Net (loss) gain on sale or call of investment securities
-
(5,046)
297
Other income
2,126
1,864
1,973
Total noninterest income
$ 13,565
$ 7,113
$ 9,862
The $6.5 million increase in noninterest income was primarily attributable to a $5.0 million change in net
gain (loss) on sale of securities as the prior year included a $4.2 million loss on sale of a corporate note, which was
sold in the days following the issuer’s failure during the first quarter of 2023. There were no comparable sales in
2024.
Letter of credit fee income was $7.2 million for the year ended December 31, 2024, an increase of $1.4
million over the previous year.
Gains on sales of loans were $659,000 for the year ended December 31, 2024 compared to $752,000 for the
prior year. During the year, the Bank sold $8.3 million of SBA loans, resulting in a gain of $659,000, compared to
sales of $12.0 million, resulting in a gain of $752,000 in the prior year.
Finally, service charges on deposits were down $161,000 over the prior year from lower account analysis
and transaction fees as a result of lower average noninterest-bearing demand accounts.
56
Our results can be influenced by the unpredictable nature of gains and losses in connection with the sale of
loans and investment securities. We do not engage in active securities trading; however, from time to time we sell
securities in our available-for-sale portfolio to change the duration of the portfolio or to re-position the portfolio for
various reasons. We plan to continue this practice at our discretion for the foreseeable future. From time to time, we
acquire real estate in connection with non-performing loans, and sell such real estate to recoup the principal amount
of the defaulted loans. These sales can result in gains or losses from time to time that are not expected to occur in
predictable patterns during future periods.
Noninterest Expense
Noninterest expense is the cost, other than interest expense and the provision for credit losses, associated
with providing banking and financial services to customers and conducting our business.
The following table presents, for the periods indicated, the major categories of noninterest expense:
Year Ended December 31,
2024
2023
2022
(In thousands)
Salaries and employee benefits
$ 53,648
$ 51,314
$ 48,607
Net occupancy expense
15,420
6,049
5,759
Business development and promotion expense
1,250
737
811
Professional services
6,711
5,270
4,892
Office supplies and equipment expense
1,781
1,588
1,864
Loss on sale of other real estate owned (“OREO”) and
repossessed asset and related expense, net
2,234
3,344
2,818
Other
9,016
8,332
5,922
Total noninterest expense
$ 90,060
$ 76,634
$ 70,673
Total noninterest expense was $90.1 million for the year ended December 31, 2024 compared to $76.6
million for the prior year. The $13.4 million increase was primarily the result a one-time $8.1 million increase in
occupancy expense and an increase in salaries and employee benefits and net occupancy expense.
Salaries and employee benefits were $53.6 million for the year ended December 31, 2024, compared to
$51.3 million in the prior year. The $2.3 million increase was mainly due to new hires, merit increases and an
increase in incentive compensation.
Net occupancy expense was $15.4 million for the year ended December 31, 2024, compared to $6.0 million
in the prior year. The $9.4 million increase during the year was primarily due to a one-time $8.1 million increase in
occupancy expense during the fourth quarter of 2024 due to the previously disclosed error in the calculation of ASC
842, Accounting for Leases. As previously disclosed, this calculation error goes back to the adoption of ASC 842 in
2019 and the $8.1 million item represents the cumulative erroneous calculation through the years from 2019 to
present.
Business development and promotion expense was $1.3 million for the year ended December 31, 2024,
compared to $737,000 in the prior year. The $513,000 increase was primarily due to higher costs for business
travel, investor relations, promotions and donations.
Professional services were $6.7 million for the year ended December 31, 2024, compared to $5.3 million in
the prior year. The $1.4 million increase was due to higher legal fees, offset by lower audit and exam-related fees.
Loss on sale of other real estate owned and repossessed asset expense was $2.2 million, compared to $3.3
million in the prior year. The $1.1 million decrease was due to a $266,000 reduction in valuation write-downs and a
$730,000 reduction in property taxes of repossessed assets during the year.
57
Other expense was $9.0 million for the year ended December 31, 2024, compared to $8.3 million in the
prior year. The $684,000 increase was primarily due to an increase in CDARS and ICS transaction fees, insurance
costs and other operating costs, partially offset by a decrease in FDIC premiums.
Provision for Income Taxes
We accounted for income taxes under the asset and liability method, which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the
financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences
between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities
is recognized in income in the period that includes the enacted date.
We record net tax assets to the extent we believe these assets will more likely than not be realized. In
making such determination, we consider all available positive and negative evidence, including scheduled reversals
of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. A
valuation allowance is provided when it is more likely than not that some portion of deferred tax assets will not be
realized. As of December 31, 2023 and 2022, the Bank determined that a valuation allowance for deferred tax assets
was not required.
For the year ended December 31, 2024, the effective rate was 29.0%, compared to 28.5% for the year
ended December 31, 2023 and 28.1% for the year ended December 31, 2022.
As of December 31, 2024, we had no federal net operating loss (“NOL”) carryforward and state NOL
carryforward of $11.9 million.
Pursuant to Sections 382 and 383 of the Internal Revenue Code (“IRC”), annual use of NOL and credit
carryforwards may be limited in the event a cumulative change in ownership of more than 50 percent points occurs
within a three-year period. We determined that such an ownership change occurred as of June 21, 2010 as a result of
stock issuances in 2010 and 2009. This ownership change resulted in estimated limitations on the utilization of NOL
carryforwards. Although we have fully utilized all of the federal NOL carryforward prior to their expiration, the
California NOL carryover was significantly impacted by the IRC Sec. 382 limitation. We estimate that of
approximately $69.8 million of the California NOL as of December 31, 2024, $55.8 million is expected to expire in
2029 and $3.2 million is expected to expire in 2030 as it will be unutilized as a result of IRS Sec 382 limitation. The
remaining California NOL carryforward of the approximately $10.7 million at December 31, 2024, is subject to IRC
Sec. 382 annual limitation amount of approximately $1.5 million. Additionally, the Bank has no Federal excess
realized built in losses and $6.1 million of California excess built in losses as of December 31, 2024 which are also
subject to IRC Sec. 382 annual limitation amount of approximately $1.5 million.
As of December 31, 2024, the Bank had no federal NOLs and New York NOLs remaining as a result of the
UIB acquisition. Management fully expects to use the acquired NOL carryforwards before their expiration
beginning in 2025 for New York NOLs and 2033 for federal NOLs. All acquired NOL carryforwards were fully
utilized before their expiration.
Financial Condition
Total assets as of December 31, 2024 were $6.92 billion, an increase of $264.2 million or 4.0%, compared
to $6.66 billion as of December 31, 2023. Earning assets as of December 31, 2024 totaled $6.80 billion compared to
$6.52 billion as of December 31, 2023. Total deposits were $5.92 billion as of December 31, 2024 compared to
$5.71 billion as of December 31, 2023.
Loans
The largest component of our assets and largest source of interest income is our loan portfolio. The
following table sets forth the amount of our loans outstanding at the end of each of the periods indicated, and the
percentages the overall loan segment represented. The Bank had no foreign loans.
58
December 31,
(In thousands)
Real Estate Mortgage:
Residential
790,069
$
14.0%
688,058
$
13.0%
Commercial
2,840,771
50.4%
2,760,761
52.4%
Total Real Estate Mortgage
3,630,840
3,448,819
Real Estate - Construction:
Residential
296,580
5.3%
246,201
4.7%
Commercial
287,185
5.1%
179,775
3.4%
Total Real Estate - Construction
583,765
425,976
Commercial & Industrial
1,418,445
25.1%
1,393,830
26.4%
SBA
6,833
0.1%
3,469
0.1%
Trade Finance
485
0.0%
1,041
0.0%
Consumer & other
247
0.0%
363
0.0%
Total gross loans
5,640,615
100.0%
5,273,498
100.0%
Less: allowance for credit losees
(71,477)
(78,355)
Deferred loan and fees, net
(9,234)
(11,079)
Total loans excluding loans held for sale
5,559,904
5,184,064
Loans held for sale
2,214
360
Total net loans
5,562,118
$
5,184,424
$
Loans (by portfolio and class):
2024
2023
The majority of the Bank’s loans are made to customers and businesses in the state of California and/or
secured by properties located primarily in the greater Los Angeles metropolitan area and to a lesser extent, the San
Francisco Bay, New York and Houston, Texas areas. All loans are typically made based on substantially the same
credit standards regardless of where the customers and/or collateral properties are located although there may be
circumstances whereby geographical location would require more stringent requirements for a loan.
Total gross loans increased by $367.1 million, or 7.0%, to $5.64 billion as of December 31, 2024 from
$5.27 billion as of December 31, 2023. Real estate mortgage loans, which include real estate loans collateralized by
various types of commercial and residential real estate, increased $182.0 million from $3.45 billion as of December
31, 2023 to $3.63 billion at December 31, 2024. Real estate construction loans which are loans made to borrowers
and developers for the purpose of constructing residential or commercial properties, increased $157.8 million from
$426.0 million at December 31, 2023 to $583.8 million at December 31, 2024. Commercial and industrial loans
increased $24.6 million from $1.39 billion at December 31, 2023 to $1.42 billion at December 31, 2024, and trade
finance loans, which are primarily working capital revolving and term loans for business operations, decreased
$556,000 from $1.0 million at December 31, 2023 to $485,000 at December 31, 2024.
SBA loans increased $3.4 million from $3.5 million at December 31, 2023 to $6.8 million at December 31,
2024. At December 31, 2024, SBA loans consisted of $6.8 million in traditional SBA loans and $50,000 in loans
originated under the SBA’s PPP Program. At December 31, 2023, SBA loans consisted of $3.4 million in traditional
SBA loans and $97,000 of SBA PPP loans. The net increase between periods is primarily due to originations of non-
PPP SBA loans, offset by forgiveness/paydowns of SBA PPP loans.
59
The following table provides information about our real estate mortgage portfolio by property type:
At December 31, 2024
At December 31, 2023
Property Type
Amount
Percentage of
Loans in Each
Category in
Total Loan
Portfolio
Amount
Percentage of
Loans in Each
Category in
Total Loan
Portfolio
(Dollars in thousands)
Commercial/Office
$ 441,657
7.83%
$ 444,635
8.43%
Retail
710,995
12.60%
649,938
12.32%
Industrial
406,645
7.21%
404,870
7.68%
Residential 1-4
778,109
13.79%
688,058
13.05%
Apartment 4+
538,981
9.56%
555,073
10.53%
Land(1)
46,271
0.82%
4,000
0.08%
Special purpose
708,182
12.56%
702,245
13.32%
Total
$ 3,630,840
64.37%
$ 3,448,819
65.41%
(1) Includes residential and commercial land loans.
There were $2.2 million of loans held for sale at December 31, 2024, compared to $360,000 at December
31, 2023.
Other loans, examples of which include installment/consumer debt leases receivable, are relatively
insignificant.
Management’s focus from a lending perspective is to continue monitoring the Bank’s existing loan
relationships due to the increase in interest rates in 2022 and into 2023, as this has a negative effect on debt service
coverage ratios for the Bank’s borrowers. In addition, office property valuations are declining in major urban areas
which could spill over into other commercial real estate sectors and could affect some of the Bank’s borrowers.
While management is focused on monitoring credit quality as noted above, we believe there will be greater
opportunities for new loans due to the recent rate cuts and so loan growth will continue to remain a management
goal.
Non-Performing Assets
Non-performing assets are composed of loans on non-accrual status, including loans that were modified
with borrowers experiencing financial difficulty that are on non-accrual status, and Other Real Estate Owned
(“OREO”) and Repossessed Assets. Generally, loans are placed on non-accrual status when they become 90 days or
more past due or at such earlier time as management determines timely recognition of interest to be in doubt, unless
they are both fully secured and in process of collection. Accrual of interest is discontinued on a loan when
management believes, after considering economic and business conditions and collection efforts that the borrower’s
financial condition is such that collection of principal and contractually due interest is not likely. When, in our
judgment, the borrower’s ability to make required interest and principal payments has resumed and collectability is
no longer in doubt, the loan could be returned to accrual status. OREO consists of real property acquired through
foreclosure or similar means that the Bank intends to offer for sale.
60
The following table summarizes the loans for which the accrual of interest has been discontinued, loans
more than 90 days past due and still accruing interest, OREO and other repossessed assets held for sale:
December 31,
2024
2023
(Dollars in thousands)
Non-accrual loans
$ 36,751
$ 28,719
Accruing loans past due 90 days or more
1,100
-
Total non-performing loans (NPLs)
37,851
28,719
Other real estate owned and repossessed assets
14,991
16,716
Total non-performing assets (NPAs)
$ 52,842
$ 45,435
Selected ratios:
Nonaccrual to total gross loans held for investment
0.65%
0.54%
NPLs to total gross loans held for investment
0.67%
0.54%
NPAs to total assets
0.76%
0.68%
Non-accrual loans increased by $8.0 million, from $28.7 million as of December 31, 2023 to $36.8 million
as of December 31, 2024. The increase was mainly from was primarily related to $37.0 million in note sales and
paydowns, $18.0 million in loans curing back to accrual status and $9.5 million in charge-offs, offset by $72.6
million of additions. At December 31, 2024, non-performing loans included i) two residential real estate loans with a
carrying value of $969,000, ii) two commercial real estate loans totaling $29.5 million, iii) one commercial and
industrial loan totaling $6.3 million, and iv) one residential real estate loans over 90 days past due and still accruing.
At December 31, 2023, non-performing loans included i) two residential real estate loans with a carrying value of
$7.6 million, ii) three commercial real estate loans totaling $10.4 million, and iii) six commercial and industrial
loans totaling $10.8 million.
When an asset is placed on non-accrual status, previously accrued but unpaid interest is reversed against
current income. Subsequent collections of cash are applied as principal reductions when received, except when the
ultimate collectability of principal is probable, in which case interest payments are credited to income. See Note 3
of the Consolidated Financial Statements for further details regarding non-accrual and past due loans by loan class.
OREO and repossessed assets totaled $15.0 million and $16.7 million at December 31, 2024 and 2023,
respectively. At December 31, 2024, OREO and repossessed assets included residential real estate of $15.0 million.
At December 31, 2023, OREO and repossessed assets included residential real estate of $16.6 million and other
repossessed assets of $91,000. There was a $1.6 million write-down on the value of OREO during the year ended
December 31, 2024. During the year ended December 31, 2023, the Bank sold $3.4 million in other repossessed
assets and recorded a $1.9 million write-down on the value of its residential real estate asset.
OREO and repossessed assets are initially recorded at the fair value of the property based on appraisal, less
estimated selling costs. Any cost in excess of the fair value at the time of acquisition is accounted for as a loan
charge-off and deducted from the allowance for credit losses on loans. A valuation allowance is established for any
subsequent declines in value through a charge to earnings. At December 31, 2024 and 2023, the valuation allowance
related to OREO and repossessed assets totaled $5.0 million and $3.3 million, respectively. Operating expenses of
such properties, net of related income, and gains and losses on their disposition are included in noninterest income
or expense, as appropriate.
Allowance for Credit Losses
See “Notes to Consolidated Interim Financial Statements Note 3 — Loans and Allowance for Credit Losses
on Loans” for further details regarding allowance for credit losses on loans. The allowance for credit losses on loans
is maintained at a level which, in management’s judgment, is adequate to absorb current expected credit losses in the
loan portfolio. Management estimates the allowance balance using relevant available information, from internal and
external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical
credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss
information are made for differences in current loan-specific risk characteristics such as differences in underwriting
61
standards, portfolio mix, delinquency level, or term as well as for changes in environmental conditions, such as
changes in unemployment rates, property values, or other relevant factors.
Our loan portfolio is categorized into several segments for purposes of determining allowance amounts by
loan segment. The loan segments we currently evaluate are: commercial & industrial, international trade finance,
real estate, real estate construction, and SBA. Real estate is further segmented by individual product type with a
general class, residential or commercial. The commercial class is represented by office, industrial, retail,
multifamily, special purpose and land commercial product types. The residential class is represented by single
family residential (“SFR”) and land residential. Real estate construction is similarly further segmented by office,
industrial, retail, multifamily and SFR product types. The SBA portfolio represents both traditional SBA loans and
PPP loans. Within these loan pools, we then evaluate loans rated as pass credits, separately from loans designated as
“Special mention” or adversely classified loans. The allowance amounts for pass rated loans, which are not reviewed
individually, are determined using historical loss rates developed through migration analyses. The adversely
classified loans are further grouped into three credit risk rating categories: substandard, doubtful and loss. All loans
in the doubtful category are analyzed individually and all loans in the loss category are charged off within the
quarter identified as such.
The Bank performs an analysis to estimate the credit losses for off-balance sheet commitments, including
letters of credit, acceptances outstanding, and committed loan amounts, on a quarterly basis. On a quarterly basis,
management performs a qualitative evaluation for AFS debt securities in an unrealized loss position to determine if
the impairment of an investment’s value is related to credit or all other factors under the guidance of ASC 326- 30.
The ASC 326-20 requires to estimate the lifetime credit loss allowance for the HTM debt securities. The Bank holds
the HTM debt securities that are issued by the government agencies which are highly rated by the agencies and have
a long history of no credit losses so no ACL on these securities are recorded.
Although we believe that our allowance for credit losses is adequate and believe that we have considered
all risks, there can be no assurance that our allowance will be adequate to absorb future losses. Factors such as a
prolonged and deepened recession, a worsening banking crisis, higher unemployment rates than we have already
anticipated, deterioration of California real estate values as well as natural disasters, civil unrest, terrorism and
pandemic diseases can have a significantly negative impact on the performance of our loan portfolio and the
occurrence of any single one of these factors may lead to additional future losses which can negatively impact our
earnings, capital and liquidity.
The table below summarizes loans, average loans, non-performing loans and changes in the allowance for
credit losses on loans arising from loan losses and additions to the allowance from provisions charged to operating
expense:
62
Allowance for Credit Losses & Loss Histories
Year Ended December 31,
2024
2023
2022
(Dollars in thousands)
Allowance for credit losses:
Balance at beginning of period
$ 78,355
$ 68,472
$ 59,969
Actual charge-offs:
Commercial & Industrial
19,028
124
1,222
Real estate mortgage
-
- 1
Total charge-offs
19,028
124
1,223
Less recoveries:
Commercial & Industrial
50
7
-
Real estate mortgage
-
- 2,376
Total recoveries
50
7
2,376
Net loans (recovery) charged-off
18,978
117
(1,153)
Provision for credit losses
12,100
10,000
7,350
Balance at end of period
$ 71,477
$ 78,355
$ 68,472
Total gross loans at end of period
$ 5,640,615
$ 5,273,498
$ 5,074,793
Average total loans (1)
$ 5,398,916
$ 5,068,486
$ 4,760,815
Non-performing loans
$ 37,851
$ 28,719
$ 5,480
Selected ratios:
Net charge-offs (recoveries) to average loans
0.35%
0.00%
-0.02%
Provision for (reversal of) credit losses to average loans
0.22%
0.20%
0.15%
Allowances for credit losses to loans at end of period
1.27%
1.49%
1.35%
Allowance for credit losses to non-accrual loans
1.94x
2.73x
12.49x
Allowance for credit losses to non-performing loans
1.89x
2.73x
12.49x
(1) Includes average loans held for sale balance of $2.1 million for 2024, $616,000 for 2023, and $0 for 2022.
The coverage ratio for the allowance for credit losses on loans to non-performing loans increased to
188.8% at December 31, 2024 from 272.8% at December 31, 2023. The decrease in this coverage ratio was due
primarily to the increase in non-performing loans coupled with a decrease in the allowance for credit losses as a
result of loan growth offset by changes in economic forecast between periods.
63
2024
2023
2022
Net
Charge-offs
(Recoveries)
Average
Loans
Net
Charge-off
(Recovery)
Ratio
Net
Charge-offs
(Recoveries)
Average
Loans
Net
Charge-off
(Recovery)
Ratio
Net
Charge-offs
(Recoveries)
Average
Loans
Net
Charge-off
(Recovery)
Ratio
(Dollars in thousands)
Commercial & Industrial
18,978
$
1,332,726
$
1.42%
117
$
1,308,478
$
0.01%
1,222
1,266,339
$
0.10%
Trade Finance
-
1,199
0.00%
-
5,898
0.00%
-
16,229
0.00%
Real estate construction
-
502,131
0.00%
-
364,271
0.00%
-
368,127
0.00%
Real estate mortgage
-
3,553,220
0.00%
-
3,381,918
0.00%
(2,375)
3,083,176
-0.08%
SBA
-
4,706
0.00%
-
4,218
0.00%
-
22,066
0.00%
Consumer & other
-
2,862
0.00%
-
3,087
0.00%
-
4,878
0.00%
Net charge-offs (recoveries)
18,978
$
5,396,844
$
0.35%
117
$
5,067,870
$
0.00%
(1,153)
$
4,760,815
$
-0.02%
Net charge-offs to average loans were 0.35% for the year ended December 31, 2024 compared to 0.002%
for the year ended December 31, 2023. The increase in the net charge-off (recovery) ratio between period was due
to increases in net charge-offs, offset by higher average balances between periods. During the year ended
December 31, 2024, net charge-offs primarily consisted of net charge-offs of $19.0 million related to seven
commercial relationships. During the year ended December 31, 2023, net charge-offs primarily consisted of net
charge-offs of $117,000 related to two commercial relationships.
In determining our allowance for credit losses, management has considered the credit risk in the various
loan categories in our portfolio. As such, the establishment of the allowance for credit losses is based upon our
historical net loan loss experience and the other factors discussed above.
The following table reflects management’s allocation of the allowance for credit losses and the percent of
loans in each portfolio to total loans as of each of the following dates:
At December 31,
2024
2023
Allocation of
the Allowance
Percent of
Loans in Each
Category in
Total Loans
Allocation of
the Allowance
Percent of
Loans in Each
Category in
Total Loans
(Dollars in thousands)
Real estate mortgage
$ 40,940
64.4%
$ 40,732
65.4%
Real estate construction
3,180
10.3%
2,016
8.1%
Commercial
26,786
25.2%
35,129
26.4%
SBA
36
0.1%
16
0.1%
Trade finance
3
0.0%
5
0.0%
Consumer & Other
5
0.0%
9
0.0%
Unallocated
527
0.0%
448
0.0%
Total
$ 71,477
100.0%
$ 78,355
100.0%
Allowance for Credit Losses Related to Undisbursed Loan Commitments
We maintain an allowance for credit losses for undisbursed loan commitments. Management estimates the
amount by applying the loss factors used in our allowance for credit losses on loans using the current expected credit
losses methodology to our estimate of the expected usage of undisbursed commitments for each loan type.
Provisions for credit losses for undisbursed loan commitments are recorded in other expense. The allowance for
credit losses on undisbursed loan commitments totaled $1.2 million at December 31, 2024 and 2023. There was no
provision for credit losses on undisbursed loan commitment for the years ended December 31, 2024, 2023 and 2022.
Investment Securities Available-for-Sale and Held-to-Maturity and Trading
The Bank classifies its debt and equity securities in two categories: held-to-maturity or available-for-sale.
Securities that could be sold in response to changes in interest rates, increased loan demand, liquidity needs, capital
64
requirements, or other similar factors are classified as securities available-for-sale. These securities are carried at fair
value. Unrealized holding gains or losses, net of the related tax effect, on available for sale securities are excluded
from income and are reported as a separate component of shareholders’ equity as other comprehensive income net of
applicable taxes until realized. Realized gains and losses from the sale of available for sale securities are determined
on a specific-identification basis. Securities classified as held-to-maturity are those that the Bank has the intent and
ability to hold until maturity. These securities are carried at amortized cost, adjusted for the amortization or
accretion of premiums or discounts.
Management performs a credit impairment analysis of the investment securities portfolio in accordance
with FASB’s ASC 326 current expected credit losses (CECL). Under the standard, the credit loss evaluations of debt
securities classified as available-for-sale and held-to-maturity are separated.
Management performs a quarterly qualitative evaluation for available-for-sale securities in an unrealized
loss position to determine if the impairment of an investment’s value (fair value being below amortized cost) is
related to credit or all other factors (such as due to changes in interest rates, illiquidity in the market, changes in
general market conditions, etc.). In determining whether a security’s decline in fair value is credit related,
management considers a number of factors including, but not limited to: (i) the extent to which the fair value of the
investment is less than its amortized cost; (ii) the financial condition and near-term prospects of the issuer; (iii)
downgrades in credit ratings; (iv) payment structure of the security, (v) the ability of the issuer of the security to
make scheduled principal and interest payments and (vi) general market conditions which reflect prospects for the
economy as a whole, including interest rates and sector credit spreads. If it is determined through the Bank’s
qualitative assessment of available-for-sale securities that the decline in fair value below a security’s amortized cost
can be attributed to credit loss, the Bank records the amount of credit loss through a charge to provision for (reversal
of) credit losses in current period earnings. If the Bank determines the security’s unrealized loss, or a portion
thereof, is not related to credit, the Bank records the non-credit related loss, net of tax, through a debit to
accumulated other comprehensive income.
The Bank have made a policy election to exclude accrued interest from the amortized cost basis of
available-for-sale securities and report accrued interest in accrued interest receivables in the consolidated balance
sheets. Available-for-sale securities are placed on non-accrual status when we no longer expect to receive all
contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against
interest income when a security is placed on non-accrual status. Accordingly, we do not recognize an allowance for
credit loss against accrued interest receivable.
For held-to-maturity securities, the Bank recognizes expected lifetime credit losses on a collective basis
according to shared risk characteristics. Credit losses on held-to-maturity securities are only recognized at the
individual security level when the Bank determines a security no longer possesses risk characteristics similar to
others in the portfolio.
Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-
for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are
recognized when earned.
Our portfolio of investment securities consists primarily of investment grade corporate notes, U.S. Agency
mortgage-backed securities (“MBS”), municipal bonds, collateralized mortgage obligations (“CMOs”) and U.S.
Government agency securities, U.S. Treasury notes, and small business administration (“SBA”) securities. We
invest in securities to generate interest income and to maintain a liquid source of funding for our lending and other
operations, including withdrawals of deposits. We do not engage in active trading in our investment securities
portfolio. While management has the intent and ability to hold all securities until maturity, we have realized and
from time to time and again may realize gains (or losses) from sales of selected securities primarily in response to
changes in interest rates or to re-position the portfolio.
At December 31, 2024 and 2023 the Bank owned four mortgage-backed securities considered held-to-
maturity with a carrying value of $20.0 and $21.2 million, respectively. The decrease between periods was due to
principal paydowns and premium amortization of $1.2 million during the year.
At December 31, 2024 and 2023, investment securities held-to-maturity and available-for-sale with a fair
value of $64.7 million and $57.8 million, respectively, were pledged to secure public deposits.
65
The carrying value of our portfolio of available-for-sale investment securities at December 31, 2024 and
2023 was as follows:
At December 31,
2024
2023
(In thousands)
Asset-backed securities
2,827
$
2,831
$
Corporate notes
120,364
90,522
U.S. Agency mortgage-backed securities
7,730
9,084
Collateralized mortgage obligations
125,284
134,924
Municipal securities
60,515
63,813
U.S. Agency principal-only strip securities
217
289
SBA Securities
-
41
U.S. Treasury notes
31,769
12,338
Total securities available-for-sale
348,706
$
313,842
$
The carrying value of our available-for-sale investment securities at December 31, 2024 totaled $348.7
million compared to $313.8 million at December 31, 2023. The $34.9 million increase was primarily due to $31.9
million in purchases of corporate notes and $19.5 million in purchases of treasury bills, and $6.0 million in fair
value increases, offset by $8.4 million in maturities and calls of corporate notes and municipal securities and $13.7
million in principal reductions. As of December 31, 2024, available-for-sale securities had a net unrealized loss of
$38.2 million compared to a net unrealized loss of $44.1 million as of December 31, 2023. The decrease in net
unrealized losses was attributable to increases in the value of corporate notes, collateralized mortgage obligations,
municipal securities and treasury securities.
The following table shows the maturities of available-for-sale investment securities at December 31, 2024,
and the weighted average yields of such securities. The table does not consider the impact of prepayments on the
maturities:
December 31, 2024
Within One
After One Year
After Five Years
After Ten
Total
Year
but within
but within
Years
Five Years
Ten Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
(Dollars in thousands)
Asset-backed securities
-
$
0.00%
-
$
0.00%
-
$
0.00%
2,827
$
5.85%
2,827
$
5.85%
Corporate notes
-
0.00%
30,187
5.50%
90,177
4.58%
-
0.00%
120,364
4.79%
U. S. Agency mortgage-backed
securities
3
1.98%
562
1.57%
1,734
6.19%
5,431
5.60%
7,730
5.44%
Collateralized mortgage obligations
-
0.00%
-
0.00%
2
5.37%
125,282
3.07%
125,284
3.07%
Municipal securities
-
0.00%
2,936
3.34%
15,135
3.91%
42,444
2.50%
60,515
2.90%
U.S. Agency principal-only strips
-
0.00%
-
0.00%
-
0.00%
217
2.09%
217
2.09%
SBA securities
-
0.00%
-
0.00%
-
0.00%
-
0.00%
-
0.00%
U.S. Treasury notes
-
0.00%
-
0.00%
31,769
2.99%
-
2.17%
31,769
2.99%
Total securities available for sale
3
$
1.98%
33,685
$
5.23%
138,817
$
4.17%
176,201
$
3.04%
348,706
$
3.69%
The Bank performs a regular impairment analysis on its investment securities portfolio and management
has analyzed all investment securities which have an amortized cost that exceeds fair value as of December 31,
2024. Refer to Note 2 of the “Notes to Consolidated Financial Statements” in this Annual Report for information
regarding unrealized losses on investment securities.
In accordance with Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the
Bank performs a thorough annual review of each of the investment securities in its portfolio (other than US
Government and Agency securities) to determine, among other things, the current financial status of the issuer as
well as the issuer’s ability to repay the debt. This analysis is performed in addition to the quarterly review that is
performed on all investment securities which are in an unrealized loss position. We do not intend to sell these
66
securities until recovery and have determined that it is not more likely than not that we will be required to sell the
securities prior to recovery of their amortized cost basis. Additional information concerning investment securities is
provided in Note 2 of the “Notes to Consolidated Financial Statements” in this Annual Report.
Deposits
Total deposits at December 31, 2024 were $5.92 billion, an increase of $207.5 million or 3.6% from the
balance of $5.71 billion as of December 31, 2023. Noninterest-bearing demand deposits decreased by $82.1 million
or 10.4%. This decrease was partly due to depositor responses to increases in market rates as depositors want a
greater return on their deposits and that changes the mix of noninterest-bearing and interest-bearing deposits. The
ratio of noninterest-bearing deposits to total deposits decreased to 11.9% at December 31, 2024 from 13.8% at
December 31, 2023. Interest-bearing demand and savings deposits decreased by $47.2 million or 2.2%, and time
deposits increased $336.9 million or 12.0%. At December 31, 2024, interest bearing demand and savings accounts
comprised $2.06 billion or 34.8% of total deposits, compared to $2.10 billion or 36.9% of total deposits at December
31, 2023. The decrease in noninterest-bearing and interest-bearing demand accounts and increases in time deposits
was due to a higher interest rate environment as depositors will seek to maximize their returns when the interest rate
environment allows for it.
As of December 31, 2024, total uninsured deposits represented approximately 46.3% of total deposits and
accrued interest. Since mid-March 2023, the Bank has been diligently working with our larger deposit clients to
enroll them in the IntraFi/ICS reciprocal deposit program and another deposit program to ensure that all of their
deposits are FDIC insured.
The following table shows the composition of deposits at December 31, 2024 and 2023:
% of Total
% of Total
Amount
Deposits
Amount
Deposits
Noninterest-bearing deposits
$ 704,859
11.91%
$ 786,995
13.78%
Interest-bearing deposits:
Interest-bearing demand
2,026,965
34.26%
2,075,156
36.35%
Savings
30,150
0.51%
29,167
0.51%
Time certificates of $250,000 or more
1,477,931
24.98%
1,317,862
23.08%
Other time certificates
1,676,943
28.34%
1,500,162
26.28%
Total deposits
$ 5,916,848
100.00%
$ 5,709,342
100.00%
December 31, 2024
December 31, 2023
(Dollars in thousands)
The following table shows the average amount and average rate paid on the categories of deposits for each
of the periods indicated:
Year Ended December 31,
2024
2023
2022
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
(Dollars in thousands)
Noninterest-bearing deposits
710,920
$
0.00%
898,262
$
0.00%
1,292,083
$
0.00%
Interest-bearing demand
1,294,758
4.08%
1,094,590
3.83%
1,025,212
1.28%
Money market
874,705
4.01%
980,450
3.42%
1,159,332
0.95%
Savings
29,374
1.10%
33,147
0.68%
38,599
0.23%
Time certificates of deposit
2,939,543
4.86%
2,570,706
4.04%
1,825,307
0.95%
Total
5,849,300
$
3.95%
5,577,155
$
3.22%
5,340,533
$
0.78%
Average total deposits increased by $272.1 million in 2024 and $236.6 million in 2023. The increases in
average total deposits for 2024 and 2023 are the result of continued focus on business customers and commercial
and industrial loan relationships maintaining their primary operating accounts at the Bank.
67
Although we have increased demand deposits significantly, and to a lesser extent money market accounts,
over the past three years, the largest single component of our deposits continues to be time certificates of deposit.
We market and receive time certificates of deposit from our existing and new high net worth customers, especially
from the Chinese communities within our branch network. While we do not attempt to be a market leader in offered
interest rates, we attempt to offer competitive rates on these time certificates of deposit within a range offered by
other competing banks.
The following table shows the maturities of time certificates of deposit over $250,000 at December 31,
2024 and 2023:
At December 31,
2024
2023
(In thousands)
Three months or less
940,777
$
614,407
$
Over three months through six months
292,630
463,999
Over six months through twelve months
244,524
233,606
Over twelve months
-
5,850
Total
1,477,931
$
1,317,862
$
Borrowings
At December 31, 2024 and 2023, there were no advances from Federal Home Loan Bank of San Francisco
(“FHLB”).
Subordinated Debentures
On June 16, 2021, the Bank completed a public offering of $150.0 million in aggregate principal amount of
3.375% fixed-to-floating rate subordinated notes due June 15, 2031. A majority of the proceeds from the placement
of the notes were used to repay the subordinated notes due 2026. The subordinated notes mature on June 15, 2031
and bear interest at a fixed rate per annum of 3.375%, payable semi-annually in arrears until June 15, 2026. On that
date, the subordinated notes will bear interest at a floating rate per annum equal to a benchmark rate, which is
expected to the Three-Month Term SOFR, plus 278 basis points, payable quarterly in arrears; provided, however, in
the event that the then-current benchmark rate is less than zero, then the benchmark rate will be deemed zero. The
Bank may, at its option, redeem the subordinated notes in whole or in part beginning on June 15, 2026 and, in other
certain limited circumstances. The subordinated notes have been structured to qualify as Tier 2 capital for regulatory
purposes. Debt issuance costs incurred in conjunction with the offering were $2.4 million.
Capital Resources
Current risk-based regulatory capital standards generally require banks to maintain a ratio of “core” or
“Tier 1” capital (consisting principally of common equity) to risk-weighted assets of at least 8.0%, a ratio of only
common equity Tier 1 capital to risk-weighted assets of at least 6.5%, a ratio of Tier 1 capital to adjusted total assets
(leverage ratio) of at least 5.0% and a ratio of total capital (which includes Tier 1 capital plus certain forms of
subordinated debt, a portion of the allowance for credit losses on loans and preferred stock) to risk-weighted assets
of at least 10.0%. Risk-weighted assets are calculated by multiplying the balance in each category of assets by a risk
factor, which ranges from zero for cash assets and certain government obligations to 100% for some types of loans,
and adding the products together. The Bank elected to permanently opt-out of excluding accumulated other
comprehensive income from common equity tier 1 capital.
A new capital conservation buffer of 2.50% became effective starting January 1, 2019 and must be met to
avoid limitations on the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The
Bank's capital conservation buffer was 5.80% and 5.57% as of December 31, 2024 and 2023, respectively.
In December 2018, the Federal Reserve announced that a banking organization that experiences a reduction
in retained earnings due to the CECL adoption as of the beginning of the fiscal year in which CECL is adopted may
elect to phase in the regulatory capital impact of adopting CECL. Transitional amounts are calculated for the
following items: retained earnings, temporary difference deferred tax assets and credit loss allowances eligible for
68
inclusion in regulatory capital. When calculating regulatory capital ratios, 25% of the transitional amounts are
phased in during the first year. An additional 25% of the transitional amounts are phased in over each of the next
two years and at the beginning of the fourth year, the day-one effects of CECL are completely reflected in regulatory
capital. We did not elect to phase in the regulatory capital impact of adopting CECL.
Additionally, in March 2020, the Office of the Comptroller of the Currency, Treasury, the Board of
Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation announced the 2020
CECL interim final rule (“IFR”) designed to allow eligible firms 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 COVID-19
pandemic. The 2020 CECL IFR allows firms that adopt CECL before December 31, 2020 to defer 100 percent of the
day one transitional amounts described above through December 31, 2021 for regulatory capital purposes.
Additionally, the 2020 CECL IFR allows electing firms to defer through December 31, 2021 the approximate
portion of the post day one allowance attributable to CECL relative to the incurred loss methodology. This is
calculated by applying a 25% scaling factor to the CECL provision. The Bank did not adopt the transition guidance
and the 2020 CECL IFR relief.
On August 6, 2021, the Bank received approval from the California Department of Financial Protection and
Innovation for the repurchase of up to $50 million in the Bank’s common stock or 5% of total outstanding shares,
whichever is less, in the open market. The timing, price and volume of the share repurchases will be determined by
Bank management based on its evaluation of market conditions and other relevant factors. This repurchase was
approved by shareholders at the Bank’s Annual Shareholders Meeting on May 18, 2021. Under this program, during
2021 the Bank repurchased 282,949 shares, at an average price of $61.69, for total consideration of $17.5 million.
In May of 2022, the Board of Directors elected to re-commence the repurchase plan which began in 2021
and received all the required approvals. During 2022, the Bank repurchased 464,438 shares, at an average price of
$68.86 per share, for total consideration of $32 million, completing the stock repurchase plan.
On June 9, 2023, the Bank received approval from the California Department of Financial Protection and
Innovation for the repurchase of up to $150 million in the Bank’s common stock or 5% of total outstanding shares,
whichever is less, in the open market. The timing, price and volume of the share repurchases will be determined by
Bank management based on its evaluation of market conditions and other relevant factors. This repurchase was
approved by shareholders at the Bank’s Annual Shareholders Meeting on May 16, 2023. On June 12, 2023, the
Board of Directors approved what was to be the first tranche of that repurchase plan, which called for the repurchase
of up to $50 million of the total $150 million repurchase. The first tranche was completed in October 2023. On
January 9, 2024, the Board of Directors approved what will be the second tranche of that repurchase plan, which
will call for the repurchase of up to $50 million of the $100 million remaining under the repurchase plan. The share
repurchase program may be suspended, terminated or modified at any time by the Bank for any reason, including
market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity,
and other factors deemed appropriate. During the year ended December 31, 2024, the Bank repurchased 464,314
shares of common stock at a weighted average price of $73.76. During the year ended December 31, 2023, the Bank
repurchased 863,879 shares of common stock at a weighted average price of $58.59.
Our goal is to exceed the Basel III minimum regulatory capital requirements for well capitalized
institutions. At December 31, 2024 and 2023, our capital ratios were above the Basel III minimum requirements for
well capitalized institutions. On a quarterly basis, we perform a stress test on our capital to determine our level of
69
capital in various adverse economic scenarios looking out twenty-four months into the future. Below are the Bank’s
capital ratios as of December 31 2024 and 2023:
December 31,
2024
December 31,
2023
Tier 1 Leverage Ratio
Preferred Bank
11.33%
10.85%
Minimum requirement for “Well-Capitalized” institution
5.00%
5.00%
Common Equity Tier 1 Risk-Based Capital Ratio
Preferred Bank
11.80%
11.57%
Minimum requirement for “Well-Capitalized” institution
6.50%
6.50%
Tier 1 Risk-Based Capital Ratio
Preferred Bank
11.80%
11.57%
Minimum requirement for “Well-Capitalized” institution
8.00%
8.00%
Total Risk-Based Capital Ratio
Preferred Bank
15.11%
15.18%
Minimum requirement for “Well-Capitalized” institution
10.00%
10.00%
Contractual Obligations and Off-Balance Sheet Arrangements
The following table presents our contractual cash obligations, excluding deposits and unrecognized tax
benefits, as of December 31, 2024:
Amount of Commitment Expiring per Period
Contractual Obligations (1)
Total
Amounts
Committed
Within
One Year
After
One Year
through
Three Years
After
Three Years
through
Five Years
After
5 Years
(In thousands)
Operating lease obligations
$ 19,603 $ 4,284
$ 6,714
$ 4,980
$ 3,625
Data processing
8,094
1,257
2,742
3,224
871
Commitments to fund affordable
housing
21,623 15,048
4,642
754
1,179
Subordinated debt
150,000 -
-
- 150,000
Total
$ 199,320
$ 20,589
$ 14,098
$ 8,958
$ 155,675
(1) Contractual obligations do not include interest.
In the normal course of business, we enter into off-balance sheet arrangements consisting of commitments
to extend credit, to fund commercial letters of credit and standby letters of credit. Commercial letters of credit are
originated to facilitate transactions both domestic and foreign while standby letters of credit are originated to issue
payments on behalf of the Bank’s customers when specific future events occur. Historically, the Bank has rarely
issued payment under standby letters of credit, in which the Bank’s customer is obligated to reimburse the Bank.
The Bank could also liquidate collateral or offset a customer’s deposit accounts to satisfy this payment.
Financial instrument transactions are subject to our normal credit standards, financial controls and risk
limiting and monitoring procedures. Collateral requirements are based on a case-by-case evaluation of each
customer and product.
70
The following table presents these off-balance sheet arrangements at December 31, 2024:
Amount of Off-balance Sheet Arrangements Expiring per Period
Off-balance Sheet Arrangements
Total
Amounts
Committed
Within
One Year
After
One Year
through
Three Years
After
Three Years
through
Five Years
After
5 Years
(In thousands)
Commitments to Extend Credit
$ 1,256,235
$ 450,356
$ 644,363
$ 137,388
$ 24,128
Commercial Letters of Credit
4,648
4,648
-
-
-
Standby Letters of Credit
471,560
140,250
203,373
32,512
95,425
Total
$ 1,732,443
$ 595,254
$ 847,736
$ 169,900
$ 119,553
Liquidity
Based on our existing business plan, we believe that our level of liquid assets is sufficient to meet our
current and presently anticipated funding needs for at least the next twelve months. We rely on deposits as the
principal source of funds and, therefore, must be in a position to service depositors’ needs as they arise. We attempt
to maintain a loan-to-deposit ratio below approximately 95%. Our loan-to-deposit ratio was 95.3% at December 31,
2024 compared to 92.4% at December 31, 2023. The Bank has typically carried more cash as a percentage of assets
than most financial institutions in our peer group. This is in part for the purpose of maintaining a conservative
balance sheet, but also it is because due to the fact that the Bank’s high level of core earnings render investing in
long duration securities which add additional interest rate risk unnecessary.
Borrowings from the FHLB are another source of funding for our loan and investment activities. At
December 31, 2024, there were no outstanding FHLB advances, and we could borrow up to an additional $772.2
million with collateral of specifically identified loans and securities. In addition, we have pledged securities with a
fair value of $111.6 million at the Federal Reserve Discount Window from which we may borrow on an overnight
basis. We have one uncommitted fed funds line with a financial institution for $25.0 million. Finally, we have
approximately $180.8 million in unpledged securities that could be pledged to the Federal Reserve and its Bank
Term Funding Program. As an additional condition of borrowing from the FHLB, we are required to purchase
FHLB stock. As of December 31, 2024, the Bank was required to maintain the minimum stock requirement of $15.0
million of FHLB stock based on the volume of “membership assets” as defined by the FHLB. At December 31,
2024, the Bank held $15.0 million in FHLB stock. For the years ended December 31, 2024 and 2023, dividends
from the FHLB totaled $1.3 million and $1.2 million, respectively, representing an average yield of 8.88% and
7.90%, respectively.
We also attempt to maintain a total liquidity ratio (liquid assets, including cash and due from banks, federal
funds sold and investment securities not pledged as collateral expressed as a percentage of total deposits) above
approximately 18%. Our total liquidity ratios were 32% at December 31, 2024 and 39% at December 31, 2023. We
also calculate and have certain thresholds for the Bank’s on-balance sheet liquidity ratio. We believe that in the
event the level of liquid assets (our primary liquidity) does not meet our liquidity needs, other available sources of
liquid assets (our secondary liquidity), including the sales of securities under agreements to repurchase, sales of
unpledged investment securities or loans, utilizing the discount window borrowings from the Federal Reserve Bank
as well as borrowing from the FHLB could be employed to meet those funding needs. We have a Contingency
Funding Plan which is reviewed annually by the Board of Directors which sets forth actions to be taken in the event
that our liquidity ratios fall below Board-established guidelines. We also perform quarterly liquidity stress tests to
model various adverse scenarios contained in our Contingency Funding Plan. Although we believe that our funding
resources will be adequate to meet our obligations, we cannot be certain of this adequacy if economic deterioration
or other negative events occur that could impair our ability to meet our funding obligations.
71
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss in a financial instrument arising from adverse changes in market prices and
rates, foreign currency exchange rates, commodity prices and equity prices. Market risk arises primarily from
interest rate risk inherent in our lending, securities investing, and deposit taking activities. Interest rate risk arises
when rate-sensitive assets and rate-sensitive liabilities mature or reprice during different periods or in differing
amounts. Our earnings and capital are sensitive to risk of interest rate fluctuations. To that end, management actively
monitors and manages interest rate risk exposure. The Bank does not have any market risk sensitive instruments
entered into for trading purposes. We manage interest rate sensitivity by matching the repricing opportunities on
earning assets to those on funding liabilities. Management uses various asset/liability strategies to manage the re-
pricing characteristics of assets and liabilities designed to ensure that exposure to interest rate fluctuations is limited
and within guidelines of acceptable levels of risk-taking.
Interest rate risk is addressed by our Investment Committee which is comprised of the Chief Executive
Officer and members of our Board. The Investment Committee monitors interest rate risk by analyzing the potential
impact on the net portfolio of equity value and net interest income from potential changes in interest rates, and
considers the impact of alternative strategies or changes in balance sheet structure. The Investment Committee
manages the balance sheet in part to maintain the potential impact on net portfolio value and net interest income
within acceptable ranges despite rate changes in interest rates.
Exposure to interest rate risk is monitored continuously by senior management and is reviewed by the
Investment Committee at least quarterly. Interest rate risk exposure is measured using interest rate sensitivity
analysis to determine changes in net portfolio value and net interest income under alternative in the event of
hypothetical changes in interest rates. If potential changes to net portfolio value and net interest income resulting
from the analysis of hypothetical interest rate changes are not within Board-approved limits, the Board may direct
management to adjust the asset and liability mix to bring interest rate risk within Board-approved limits. Adverse
interest rate risk exposures are managed through the shortening or lengthening of the duration of assets and
liabilities. This analysis of hypothetical interest rate changes is performed on a quarterly basis by a third party
vendor utilizing detailed data that we provide to them.
Market Value of Portfolio Equity
The Bank measures the impact of market interest rate changes on the net present value of estimated cash
flows from assets, liabilities and off-balance sheet items, defined as the market value of portfolio equity, using a
simulation model. This simulation model assesses the changes in the market value of interest rate sensitive financial
instruments that would occur in response to an instantaneous and sustained increase or decrease in market interest
rates.
The following table presents forecasted changes in net portfolio value using a base market rate and the
estimated change to the base scenario given an immediate and sustained upward movement in interest rates of 100,
200, and 300 basis points and an immediate and sustained downward movement in interest rates of 100, 200, 300
and 400 basis points as of December 31, 2024.
Interest Rate Scenario
Market Value
Percentage
Change
from Basis
Percentage
of Total
Assets
Percentage of
Portfolio Equity
Book Value
Up 300 basis points
1,112,171
$
3.8%
16.1%
145.7%
Up 200 basis points
1,105,406
$
3.2%
16.0%
144.8%
Up 100 basis points
1,091,942
$
1.9%
15.8%
143.1%
Base
1,071,336
$
0.0%
15.5%
140.4%
Down 100 basis points
1,040,144
$
-2.9%
15.0%
136.3%
Down 200 basis points
1,015,656
$
-5.2%
14.7%
133.1%
Down 300 basis points
990,095
$
-7.6%
14.3%
129.7%
Down 400 basis points
958,250
$
-10.6%
13.8%
125.6%
(Dollars in thousands)
Market Value of Portfolio Equity
72
The computation of prospective effects of hypothetical interest rate changes are based on numerous
assumptions, including relative levels of market interest rates, asset prepayments and deposit decay, and should not
be relied upon as indicative of actual results. Further, the computations do not contemplate any actions management
may undertake in response to changes in interest rates. Actual amounts may differ from the projections set forth
above should market conditions vary from the underlying assumptions.
Net Interest Income
In order to measure interest rate risk as of December 31, 2024, we used a simulation model to project
changes in net interest income that result from forecasted changes in interest rates. This analysis calculates the
difference between net interest forecasted using a rising and a falling interest rate scenario and a net interest income
forecast using a base market interest rate derived from the current treasury yield curve. The income simulation
model includes various assumptions regarding the re-pricing relationships for each of our products. Many of our
assets are floating rate loans, which are assumed to reprice immediately, and to the same extent as the change in
market rates according to their contracted index. Some loans and investment vehicles include the opportunity of
prepayment (embedded options), and accordingly the simulation model uses national indexes to estimate these
prepayments and reinvest their proceeds at current yields. Non-term deposit products reprice more slowly, usually
changing less than the change in market rates and at management’s discretion.
This analysis indicates the impact of changes in net interest income for the given set of rate changes and
assumptions. It assumes no growth in the balance sheet and that its structure will remain similar to the structure at
year end. It does not account for all factors that may impact this analysis, including changes by management to
mitigate the impact of interest rate changes or secondary impacts such as changes to the credit risk profile as interest
rates change. Furthermore, loan prepayment rate estimates and spread relationships change regularly. Interest rate
changes create changes in actual loan prepayment rates that will differ from the market estimates incorporated in this
analysis. Changes that vary significantly from the assumptions may have significant effects on net interest income.
For the rising and falling interest rate scenarios, the base market interest rate forecast was increased or
decreased on an instantaneous and sustained basis.
Net Interest
Percentage
Net Interest
Margin
Adjusted Net
Change
Margin
Change
Interest Rate Scenario
Interest Income
from Basis
Percent
(basis points)
(Dollars in thousands)
Up 300 basis points
334,613
$
19.9%
4.77%
77
Up 200 basis points
316,405
$
13.3%
4.52%
52
Up 100 basis points
298,029
$
6.7%
4.26%
26
Base
279,184
$
0.0%
4.00%
—
Down 100 basis points
255,432
$
-8.5%
3.66%
(33)
Down 200 basis points
246,081
$
-11.9%
3.53%
(47)
Down 300 basis points
253,790
$
-9.1%
3.64%
(36)
Down 400 basis points
267,857
$
-4.1%
3.84%
(16)
Sensitivity of Net Interest Income
Inflation
The majority of our assets and liabilities are monetary items held by us, the dollar value of which may be
affected by inflation, which had declined through much of 2024 only to rise dramatically during the fourth quarter of
the year and into the start of 2025. Only a small portion of total assets is in premises and equipment which
minimizes any material effect of asset values and depreciation expenses that may result from fluctuating market
values due to inflation. Higher inflation rates may increase operating expenses or have other adverse effects on our
73
borrowers, making collection on extensions of credit more difficult for us. Rates of interest paid or charged
generally rise if the marketplace believes inflation rates will increase.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For quantitative and qualitative disclosures regarding market risks in our portfolio, see, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosure
About Market Risk.”
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Bank, including the “Report of Independent Registered Public Accounting
Firm,” are included in this Annual Report immediately following Part IV.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2024, we carried out an evaluation, under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures and internal controls over financial reporting
pursuant to SEC rules, as such rules are adopted by the FDIC. Based upon that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
December 31, 2024. We believe that the financial statements in this Annual Report on Form 10-K fairly present, in
all material respects, our financial position, results of operations and cash flows for the periods presented in
conformity with U.S. generally accepted accounting principles.
Management’s Report on Internal Control over Financial Reporting
The Management of the Bank is responsible for establishing and maintaining adequate internal control over
financial reporting pursuant to the rules and regulations of the SEC. The Bank’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 U.S. generally accepted accounting
principles. Internal control over financial reporting includes those written policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles;
• Provide reasonable assurance that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and
• 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 consolidated 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.
74
Management under the supervision and with the participation of the Bank’s principal executive officer and
principal financial officer assessed the effectiveness of the Bank’s internal control over financial reporting as of
December 31, 2024. Management based this assessment on criteria for effective internal control over financial
reporting described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of the
Bank’s internal control over financial reporting and testing of the operational effectiveness of its internal control
over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board
of Directors. Based on this evaluation, management determined that the Bank’s system of internal controls over
financial reporting was effective as of December 31, 2024. Crowe LLP, an independent registered public accounting
firm, has issued its report on the effectiveness of internal control over financial reporting as of December 31, 2024.
75
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Preferred Bank
Los Angeles, California
Opinion on Internal Control over Financial Reporting
We have audited Preferred Bank’s (the “Company”) internal control over financial reporting as of December 31,
2024, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2024, based on criteria
established in Internal Control – Integrated Framework: (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (“PCAOB”), the consolidated statements of financial condition of the Company as of December 31, 2024
and 2023, the related consolidated statements of operations and comprehensive income, changes in shareholders’
equity, and cash flows for each of the years in the three-year period ended December 31, 2024, and the related notes
(collectively referred to as the "financial statements") and our report dated March 14, 2025 expressed an unqualified
opinion.
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.
76
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
Costa Mesa, California
March 14, 2025
77
ITEM 9B.
OTHER INFORMATION
None
ITEM 9C.
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS
None
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning directors and executive officers of the Bank, to the extent not included under
“Item 1 under the heading “Information About Our Executive Officers”, will appear in the Bank’s definitive proxy
statement for the 2025 Annual Meeting of Shareholders (the “2025 Proxy Statement”), and such information either
shall be (i) deemed to be incorporated herein by reference from the section entitled “ELECTION OF DIRECTORS”
AND “DELINQUENT SECTION 16(a) REPORTS” and “THE COMMITTEES OF THE BOARD,” if filed with
the Federal Deposit Insurance Corporation pursuant to Regulation 14A not later than 120 days after the end of the
Bank’s most recently completed fiscal year or (ii) included in an amendment to this Annual Report filed with the
Federal Deposit Insurance Corporation on Form 10-K/A not later than the end of such 120 day period.
Code of Ethics
The Bank has adopted a Code of Ethics that applies to its principal executive officer, principal financial and
accounting officer, controller, and persons performing similar functions. The Code of Ethics is posted on our
internet website at www.preferredbank.com.
ITEM 11.
EXECUTIVE COMPENSATION
Information concerning executive compensation will appear in the 2025 Proxy Statement, and such
information either shall be (i) deemed to be incorporated herein by reference from the sections entitled
“COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION,” “COMPENSATION
COMMITTEE’S REPORT,” “COMPENSATION DISCUSSION AND ANALYSIS,” “SUMMARY
COMPENSATION TABLE,” “OUTSTANDING EQUITY AWARDS, ” “NON-QUALIFIED DEFERRED
COMPENSATION,” “CHANGE OF CONTROL AGREEMENTS, ” and “COMPENSATION OF DIRECTORS,”
if filed with the Federal Deposit Insurance Corporation pursuant to Regulation 14A not later than 120 days after the
end of the Bank’s most recently completed fiscal year or (ii) included in an amendment to this Annual Report filed
with the Federal Deposit Insurance Corporation on Form 10-K/A not later than the end of such 120 day period.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial owners and management and information
related to the Bank’s equity compensation plans will appear in the 2025 Proxy Statement, and such information
either shall be (i) deemed to be incorporated herein by reference from the sections entitled “SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” and “EQUITY
COMPENSATION PLANS,” if filed with the Federal Deposit Insurance Corporation pursuant to Regulation 14A
not later than 120 days after the end of the Bank’s most recently completed fiscal year or (ii) included in an
amendment to this Annual Report filed with the Federal Deposit Insurance Corporation on Form 10-K/A not later
than the end of such 120 day period.
78
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information concerning certain relationships and related transactions will appear in the 2025 Proxy
Statement, and such information either shall be (i) deemed to be incorporated herein by reference from the section
entitled “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS and “BOARD INDEPENDENCE,” if
filed with the Federal Deposit Insurance Corporation pursuant to Regulation 14A not later than 120 days after the
end of the Bank’s most recently completed fiscal year, or (ii) included in an amendment to this Annual Report filed
with the Federal Deposit Insurance Corporation on Form 10-K/A not later than the end of such 120 day period.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
Information concerning principal accountant fees and services will appear in the 2025 Proxy Statement, and
such information either shall be (i) deemed to be incorporated herein by reference from the section entitled
“INDEPENDENT AUDITOR FEES,” and “AUDIT COMMITTEE PRE-APPROVAL POLICY” if filed with the
Federal Deposit Insurance Corporation pursuant to Regulation 14A not later than 120 days after the end of the
Bank’s most recently completed fiscal year or (ii) included in an amendment to this Annual Report filed with the
Federal Deposit Insurance Corporation on Form 10-K/A not later than the end of such 120 day period.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
Page
Report of Independent Registered Public Accounting Firm – Crowe LLP.....................................................................
79
Consolidated Statements of Financial Condition at December 31, 2024 and 2023.........................................................
81
Consolidated Statements of Operations and Comprehensive Income for the Years Ended December 31, 2024, 2023
and 2022...................................................................................................................................................................
82
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2024, 2023 and
2022..........................................................................................................................................................................
83
Consolidated Statements of Cash Flows for the Years Ended December 31, 2024, 2023 and 2022...............................
84
Notes to Consolidated Financial Statements ...................................................................................................................
86
(a)(2) Financial Statement Schedules
Schedules have been omitted because they are not applicable, not material or because the information is
included in the consolidated financial statements or the notes thereto.
79
(a)(3) Exhibits
Exhibit No.
Exhibit Description
1.1
Equity Distribution Agreement dated October 3, 2017, by and among Preferred Bank, FBR Capital
Markets & Co., Raymond James & Associates, Inc., and Sandler O’Neill & Partners, L.P.(8)
3.1
Amended and Restated Articles of Incorporation(4)
3.2
Certificate of Determination of the Series A Preferred Stock(2)
3.3
Certificate of Amendment of Amended and Restated Articles of Incorporation(12)
3.4
Agreement of Merger by and between Preferred Bank and United International Bank(12)
3.5
Amended and Restated Bylaws(11)
4.1
Common Stock Certificate(3)
4.2
Description of Capital Stock(11)
4.3
Form of Global Note(13)
10.1*
Management Incentive Bonus Plan(4)
10.2*
2004 Equity Incentive Plan(4)
10.3*
2014 Equity Incentive Plan(1)
10.4*
Revised Bonus Plan(1)
10.5*
Retention and Severance Agreement-Li Yu(1)
10.6*
Form of Indemnification Agreement for directors and executive officers(4)
10.7
Lease relating to the Bank’s principal executive office at 601 S. Figueroa Street, 47th and 48th Floors, Los
Angeles, California with 601 Figueroa Co. LLC, dated March 26, 2018(10)
10.8
Purchase Agreement dated June 10, 2021, by and among Preferred Bank, Piper Sandler & Co., as
representative for the initial purchasers(13)
14.1
Code of Ethics
19.1
Insider Trading Policy
21.1
Subsidiary of Preferred Bank
26.1
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
31.1
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section
906 of the Sarbanes-Oxley Act of 2002
32.2
Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To Section
906 of the Sarbanes-Oxley Act of 2002
97.1
Clawback Policy
(1)
Incorporated by reference from Registrant’s Registration Statement on Form 10-K filed with the Federal
Deposit Insurance Corporation on March 16, 2015.
(2)
Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Federal Deposit
Insurance Corporation on June 23, 2010.
(3)
Incorporated by reference from Registrant’s Registration Statement on Form 10 Amendment No. 1 filed with
the Federal Deposit Insurance Corporation on February 2, 2005.
(4)
(5)
Incorporated by reference from Registrant’s Registration Statement on Form 10 filed with the Federal Deposit
Insurance Corporation on January 18, 2005.
Reserved.
(6)
Reserved
(7)
Incorporated by reference from Registrant's Annual Report on Form 10-K filed with the Federal Deposit
Insurance Corporation on March 24, 2016.
(8)
Incorporated by reference from Registrant’s Current Report on Form 8-K filed with the Federal Deposit
Insurance Corporation on October 3, 2017.
(9)
Reserved
(10)
Incorporated by reference from Registrant's Annual Report on Form 10-K filed with the Federal Deposit
Insurance Corporation on February 28, 2019.
(11)
Incorporated by reference from Registrant's Annual Report on Form 10-K filed with the Federal Deposit
Insurance Corporation on March 2, 2020.
(12)
Incorporated by reference from Registrant's Annual Report on Form 10-K filed with the Federal Deposit
Insurance Corporation on March 15, 2021.
(13)
Incorporated by reference from Registrant's Current Report on Form 8-K filed with the Federal Deposit
Insurance Corporation on June 10, 2021.
80
*
Denotes management contract or compensatory plan or arrangement.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of Preferred Bank
Los Angeles, California
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Preferred Bank (the "Company")
as of December 31, 2024 and 2023, the related consolidated statements of operations and comprehensive income,
changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2024, 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, 2024 and 2023, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, 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, 2024, 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 14, 2025 expressed an unqualified
opinion.
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.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial
statements that was communicated or required to be communicated to the audit committee and that: (1) relates to
accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter
below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
81
Allowance for Credit Losses on Loans – Qualitative Factors
As of December 31, 2024, the Bank had a gross loan portfolio of $5.64 billion and a related allowance for credit losses
(ACL) on loans of $71.5 million. As described in Note 1 to the consolidated financial statements, estimates of expected
credit losses under the Bank’s Current Expected Credit Losses (CECL) model is dependent largely on the availability of
historical loan data based on a loan level risk approach using Probability of Default/Loss Given Default (PD/LGD). The
Bank uses a software solution to apply transition matrices to develop the PD/LGD approach.
The Bank estimates the allowance balance using relevant available information, from internal and external sources, relating
to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience provides the
basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in
current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or
term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other
relevant factors.
The Bank also makes adjustments in both quantitative and qualitative modeling to estimate the allowance. Such adjustments
are intended to account for conditions that management believes directly impact loss potential in the portfolio that is not
currently being captured in the model. To the extent possible, management accounts for the impact of quantitative factors on a
pool-by-pool basis, and qualitative factors on a portfolio basis. Qualitative factors consist of nine factors including recent trends
and economic conditions. The Bank applies environmental and general economic factors to their allowance methodology
including: credit concentrations; delinquency trends; national and local economic and business conditions; the quality of lending
management and staff; lending policies and procedures; loss and recovery trends; nature and volume of the portfolio; changes
in the value of underlying collateral for collateral dependent loans; the quality of loan reviews; and other external factors
including competition, legal, and regulatory factors. The allowance adequacy analysis requires a significant amount of
judgment and subjectivity by management, especially in regards to the qualitative portion of the analysis.
We identified auditing the impact of the qualitative factors on the allowance for credit losses on loans to be a critical audit
matter as it involved significant audit effort and especially subjective auditor judgment.
The primary procedures performed to address the critical audit matter included:
Testing the operating effectiveness of controls over management’s determination of qualitative factors, including
relevance and reliability of data used as the basis for adjustments related to the qualitative factors and the
reasonableness of management’s judgments and assumptions used to develop the qualitative factors.
Substantively testing management’s process for developing the qualitative factors, which included testing the
relevance and reliability of data used to develop factors and evaluating the reasonableness of management’s
judgments and assumptions.
Analytically comparing trends within the qualitative factors to trends within the portfolio and other economic data
for reasonableness, which included comparison to the prior period end and evaluating the reasonableness of the
qualitative factors as of period end.
/s/ Crowe LLP
We have served as the Company’s auditor since 2016.
Costa Mesa, California
March 14, 2025
PREFERRED BANK
Consolidated Statements of Financial Condition
December 31, 2024 and 2023
(In thousands, except for shares)
82
2024
2023
Assets
Cash and due from banks
$ 765,515
$ 890,852
Federal funds sold
20,000
20,000
Cash and cash equivalents
785,515
910,852
Securities held-to-maturity, at amortized cost (fair value of $18,273 and $19,540
at December 31, 2024 and 2023, respectively)
20,021
21,171
Securities available-for-sale, at fair value
348,706
313,842
Loans held for sale, at lower of cost or fair value
2,214
360
Loans
5,640,615
5,273,498
Less: allowance for credit losses
(71,477)
(78,355)
Less: unamortized deferred loan fees, net
(9,234)
(11,079)
Net loans
5,559,904
5,184,064
Other real estate owned ("OREO") and repossessed assets
14,991
16,716
Customers’ liability on acceptances
- 315
Bank furniture and fixtures, net
8,462
9,694
Bank-owned life insurance ("BOLI")
10,433
10,632
Accrued interest receivable
33,561
33,892
Investment in affordable housing partnerships
58,346
65,276
Federal Home Loan Bank ("FHLB") stock, at cost
15,000
15,000
Net deferred tax assets
47,402
48,991
Income tax receivable
2,195
2,391
Operating lease right-of-use assets
13,182
22,050
Other assets
3,497
4,030
Total assets
$ 6,923,429
$ 6,659,276
Liabilities and Shareholders’ Equity
Deposits:
Demand
$ 704,859
$ 786,995
Interest-bearing demand
2,026,965
2,075,156
Savings
30,150
29,167
Time certificates of $250,000 or more
1,477,931
1,317,862
Other time certificates
1,676,943
1,500,162
Total deposits
5,916,848
5,709,342
Acceptances outstanding
- 315
Subordinated debt issuance, net, net of $1,531 and $1,768 at December 31, 2024
and 2023, respectively
148,469
148,232
Accrued interest payable
16,517
16,124
Commitments to fund investment in affordable housing partnership
21,623
30,824
Operating lease liabilities
16,990
19,766
Other liabilities
39,830
39,568
Total liabilities
6,160,277
5,964,171
Commitments and Contingencies – Notes 10 and 16
Shareholders’ equity:
Preferred Stock, no par value. Authorized 25,000,000 shares; no issued or
outstanding shares at December, 2024 and 2023, respectively.
-
-
Common stock, no par value. Authorized 100,000,000 shares; issued and
outstanding 16,181,044 and 13,188,776 shares at December 31, 2024,
respectively and 16,181,044 and 13,583,285 shares at December 31, 2023,
respectively.
210,882
210,882
Treasury stock, at cost; 3,113,129 and 2,597,759 shares at December 31, 2024
and 2023, respectively.
(201,172)
(163,175)
Additional paid-in capital
95,791
86,827
Retained earnings
685,108
592,325
Accumulated other comprehensive loss
(27,457)
(31,754)
Total shareholders’ equity
763,152
695,105
Total liabilities and shareholders’ equity
$ 6,923,429
$ 6,659,276
See accompanying notes to the consolidated financial statements.
PREFERRED BANK
Consolidated Statements of Operations and Comprehensive Income
Years Ended December 31, 2024, 2023 and 2022
(In thousands, except share and per share data)
83
2024
2023
2022
Interest income:
Loans and leases
$ 445,139
$ 412,505
$ 269,011
Investment securities
62,854
64,427
24,997
Federal funds sold
1,103
1,056
374
Total interest income
509,096
477,988
294,382
Interest expense:
Interest-bearing demand
87,951
75,417
24,221
Savings
323
225
91
Time certificates of $250,000 or more
69,176
53,200
10,768
Other time certificates
73,718
50,653
6,644
FHLB borrowings
-
3,819
-
Subordinated debt
5,300
5,300
5,300
Total interest expense
236,468
188,614
47,024
Net interest income before provision for credit losses
272,628
289,374
247,358
Provision for credit losses
12,100
10,000
7,350
Net interest income after provision for credit losses
260,528
279,374
240,008
Noninterest income:
Fees and service charges on deposit accounts
3,172
3,333
2,728
Letter of credit fee income
7,188
5,798
4,463
BOLI income
420
412
401
Net gain on sale of loans
659
752
-
Net (loss) gain on sale or call of investment securities
-
(5,046)
297
Other income
2,126
1,864
1,973
Total noninterest income
13,565
7,113
9,862
Noninterest expense:
Salaries and employee benefits
53,648
51,314
48,607
Net occupancy expense
15,420
6,049
5,759
Business development and promotion expense
1,250
737
811
Professional services
6,711
5,270
4,892
Office supplies and equipment expense
1,781
1,588
1,864
Loss on sale of OREO and repossessed assets and related expenses
2,234
3,344
2,818
Other
9,016
8,332
5,922
Total noninterest expense
90,060
76,634
70,673
Income before income taxes
184,033
209,853
179,197
Income tax expense
53,371
59,813
50,352
Net income
130,662
150,040
128,845
Income allocated to participating shares
-
-
(2)
Dividends allocated to participating shares
-
-
-
Net income available to common shareholders
130,662
150,040
128,843
Other comprehensive income (loss):
Unrealized net gain (loss) on securities available-for-sale
5,972
(9,423)
(46,306)
Reclassification adjustments included in net income
-
(5,046)
297
Other comprehensive income (loss), before tax
5,972
(4,377)
(46,603)
Income tax expense (benefit) related to items of other comprehensive
income
1,675
(1,228)
(13,072)
Other comprehensive income (loss), net of tax
4,297
(3,149)
(33,531)
Comprehensive income
$ 134,959
$ 146,891
$ 95,314
Net income per share
Basic
$ 9.79
$ 10.64
$ 8.84
Diluted
$ 9.64
$ 10.52
$ 8.70
Weighted-average common shares outstanding
Basic
13,347,004
14,095,745
14,579,132
Diluted
13,554,266
14,261,644
14,809,416
See accompanying notes to the consolidated financial statements.
PREFERRED BANK
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2024, 2023 and 2022
(In thousands, except share and dividends declared per share data)
84
Common Stock
Shares
Amount
Balance as of December 31, 2021
$ - 14,679,769
$ 210,882 $ (75,207)
$ 73,165
$ 372,952
$ 4,926
$ 586,718
Cash dividend declared ($1.84 per share)
-
-
-
-
- (26,725)
- (26,725)
Common stock issued
- 160,122
-
-
-
-
-
-
Repurchase of common stock
- (464,438)
- (31,981)
(18)
-
- (31,999)
Stock-based compensation
-
—
-
- 8,412
-
- 8,412
Stock surrendered due to employee tax liability
- (17,308)
- (1,294)
-
-
- (1,294)
Net income
-
-
-
-
- 128,845
- 128,845
Other comprehensive loss, net of tax
-
-
-
-
-
- (33,531)
(33,531)
Balance as of December 31, 2022
$ - 14,358,145
$ 210,882 $ (108,482)
$ 81,559
$ 475,072 $ (28,605)
$ 630,426
Cash dividend declared ($2.35 per share)
-
-
-
-
- (32,787)
- (32,787)
Common stock issued
- 143,546
-
-
-
-
-
-
Repurchase of common stock
- (863,879)
- (50,618)
(542)
-
- (51,160)
Stock-based compensation
-
-
-
- 5,810
-
- 5,810
Stock surrendered due to employee tax liability
- (54,527)
- (4,075)
-
-
- (4,075)
Net income
-
-
-
-
- 150,040
- 150,040
Other comprehensive loss, net of tax
-
-
-
-
-
- (3,149)
(3,149)
Balance as of December 31, 2023
$ - 13,583,285
$ 210,882 $ (163,175)
$ 86,827
$ 592,325 $ (31,754)
$ 695,105
Cash dividend declared ($2.85 per share)
-
-
-
-
- (37,879)
- (37,879)
Common stock issued
- 120,861
-
-
-
-
-
-
Repurchase of common stock
- (464,314)
- (34,247)
(250)
-
- (34,497)
Stock-based compensation
-
-
-
- 9,214
-
- 9,214
Stock surrendered due to employee tax liability
- (51,056)
- (3,750)
-
-
- (3,750)
Net income
-
-
-
-
- 130,662
- 130,662
Other comprehensive income, net of tax
-
-
-
-
-
- 4,297
4,297
Balance as of December 31, 2024
$ - 13,188,776
$ 210,882 $ (201,172)
$ 95,791
$ 685,108 $ (27,457)
$ 763,152
Retained
Earnings
Total
Shareholders'
Equity
Preferred
Stock
Treasury
Stock
Additional
Paid-In
Capital
Accumulated
Other
Comprehensive
Income (Loss)
See accompanying notes to the consolidated financial statements.
PREFERRED BANK
Consolidated Statements of Cash Flows
Years Ended December 31, 2024, 2023 and 2022
(In thousands)
85
Year Ended December 31,
2024
2023
2022
Cash flows from operating activities:
Net income
$ 130,662
$ 150,040
$ 128,845
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for credit losses
12,100
10,000
7,350
Amortization of deferred loan fees, net
(4,581)
(4,223)
(3,842)
Net loss (gain) on sale and call of securities available-for-
sale
-
5,046
(297)
Net loss on sale of other real estate owned
-
-
426
Valuation of other real estate owned
1,634
1,900
1,425
Direct write up of other real estate owned
-
-
(2,376)
Amortization of investment securities discounts and
premiums, net
491
185
586
Amortization of investment in affordable housing
6,930
10,898
7,845
Amortization of subordinated debt issuance costs
237
237
237
Loans originated for sale
(10,148)
(12,299)
-
(Gain) loss on sale of loans
(659)
(752)
-
Proceeds from the sale of loans originated for sale
8,953
12,691
-
Depreciation and amortization
2,151
1,720
1,890
Stock-based compensation expense
9,214
5,810
8,412
Income from bank owned life insurance, net
199
(275)
(269)
Deferred tax benefit
(87)
(4,545)
(3,472)
Change in income tax receivable
196
(2,391)
-
Change in accrued interest receivable and other assets
9,732
(11,743)
(8,616)
Change in accrued interest payable and other liabilities
(2,500)
13,092
5,612
Net cash provided by operating activities
164,524
175,391
143,756
Cash flows from investing activities:
Proceeds from maturities, redemptions and principal pay-
down of securities held-to-maturity
1,040
1,166
1,774
Proceeds from maturities, redemptions and principal pay-
down of securities available-for-sale
20,629
88,128
31,243
Purchase of securities held to maturity
-
-
(10,366)
Purchase of securities available-for-sale
(51,432)
(60,890)
(104,445)
Proceeds from sale of securities available-for-sale
1,530
77,730
50,021
Purchase of investments in affordable housing partnerships
(9,201)
(11,666)
(5,116)
Proceeds from sale of other real estate owned
-
3,374
2,234
Payoff of liens in connection with taking possession of real
estate owned
-
-
(15,325)
Settlement received on other repossessed assets
91
-
-
Proceeds from recoveries of charged-off loans
50
7
-
Proceeds from sale of loans
27,826
-
-
Net increase in loans
(411,235)
(193,466)
(649,556)
Purchase of bank premises and equipment
(919)
(2,415)
(356)
Net cash used in investing activities
(421,621)
(98,032)
(699,892)
See accompanying notes to the consolidated financial statements.
PREFERRED BANK
Consolidated Statements of Cash Flows, Continued
Years Ended December 31, 2024, 2023 and 2022
(In thousands)
86
Year Ended December 31,
2024
2023
2022
Cash flows from financing activities:
Net increase in deposits
207,506
152,345
331,486
Purchase of treasury stock
(38,247)
(55,235)
(33,293)
Cash dividends paid
(37,499)
(31,143)
(25,141)
Net cash provided by financing activities
131,760
65,967
273,052
Net increase (decrease) in cash and cash equivalents
(125,337)
143,326
(283,084)
Cash and cash equivalents at beginning of period
910,852
767,526
1,050,610
Cash and cash equivalents at end of period
$ 785,515
$ 910,852
$ 767,526
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest
$ 236,075
$ 175,098
$ 45,131
Income taxes
46,331
58,385
43,670
Noncash activities:
Common stock dividends declared, but not paid
$ 9,920
$ 9,540
$ 7,896
Real estate acquired in settlement of loans
-
-
4,909
Repossessed assets acquired in settlement of loans
-
-
3,465
Operating lease liabilities arising from right-of-use
1,352
1,057
2,759
Transfers of loans held for investment to loans held for
sale
27,826
-
-
New commitments to fund affodable housing
-
15,000
9,507
See accompanying notes to the consolidated financial statements.
PREFERRED BANK
Notes to Consolidated Financial Statements
December 31, 2024, 2023 and 2022
87
Note 1 – Summary of Significant Accounting Policies
Preferred Bank (the “Bank”) commenced operations in 1991 as a California state-chartered bank and offers a
wide range of financial services. As of December 31, 2024, the Bank operates through twelve full-service branch
banking offices in Los Angeles, Orange, and San Francisco Counties in California, one full-service branch in
Queens County, New York, one full-service branch in the Houston suburb of Sugar Land, Texas, a loan production
office in Sunnyvale in California and a satellite office in New York City. As of December 31, 2024, approximately
88% of the total dollar amount of the Bank’s gross loans were secured by real estate located in California and the
Northeast Tri-State area (New York, New Jersey and Connecticut). The Bank is a member of the Federal Home
Loan Bank system (“FHLB”) and the Bank’s deposits are insured by the Federal Deposit Insurance Corporation
(“FDIC”).
The accounting and reporting policies of the Bank are in accordance with accounting principles generally
accepted in the United States of America and conform to general practices in the banking industry. The following is
a summary of the Bank’s significant accounting policies.
Basis of Presentation
The consolidated financial statements include the accounts of Preferred Bank and its subsidiary, PB
Investment and Consulting, Inc. (collectively the “Bank” or the “Company”). The consolidated financial statements
of the Company have been prepared in conformity with accounting principles generally accepted in the United
States of America.
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods.
The consolidated financial statements reflect management’s evaluation of subsequent events through the date
of issuance of this Annual Report.
Principles of Consolidation
The financial statements include the accounts of the Company and its subsidiary, PB Investment and
Consulting, Inc. All intercompany transactions and accounts have been eliminated in consolidation.
Use of Estimates
Management of the Bank has made a number of estimates and assumptions relating to the reporting of assets
and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in
conformity with accounting principles generally accepted in the United States of America. Actual results could
differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and cash due from banks, and federal funds sold, all of which
have original or purchased maturities of less than 90 days. Cash flows are reported on a net basis for loans and
deposits.
Investment Securities
The Bank classifies its debt and equity securities in two categories: held-to-maturity or available-for-sale.
Securities that could be sold in response to changes in interest rates, increased loan demand, liquidity needs, capital
requirements, or other similar factors are classified as securities available-for-sale. These securities are carried at fair
value. Realized gains and losses from the sale of available-for-sale securities are determined on a
specific-identification basis. Securities classified as held-to-maturity are those that the Bank has the positive intent
and ability to hold until maturity. These securities are carried at amortized cost, adjusted for the amortization or
88
accretion of premiums or discounts. At December 31, 2024 and 2023, there were $20.0 million and $21.2 million,
respectively, classified in the held-to-maturity portfolio. The Bank does not own any securities classified as equity
or trading securities.
At each reporting date, the Bank evaluates its investment securities portfolio, following FASB standards in
identifying whether a market for an asset or liability is distressed or inactive, determining whether an entity has the
intent and ability to hold a security to its anticipated recovery and whether an investment is impaired. If it is
determined that the securities are in an unrealized loss position, the Bank will assess whether the impairment is
credit-related or non-credit-related and record the credit component through ACL and the non-credit component in
other comprehensive income when the Bank does not intend to sell the security and it is more likely than not that the
Bank will not be required to sell the security prior to recovery. The new cost basis is not changed for subsequent
recoveries in fair value.
Premiums and discounts are amortized or accreted over the life of the related held-to-maturity or available-
for-sale security as an adjustment to yield using the effective-interest method. Dividend and interest income are
recognized when earned.
Loans and Loan Origination Fees and Costs
Loans held for sale are recorded at the lower of cost or fair value as determined on an aggregate basis. Fees
received from the borrower and the direct costs of loan originations are deferred and recorded as an adjustment to
the sales price, when such loans are sold.
Loans that the Bank has both the intent and ability to hold for the foreseeable future, or until maturity, are
held at carrying value, less related allowance for credit losses for loans and deferred loan fees. Interest income is
recorded on an accrual basis in accordance with the terms of the loans.
Loan origination fees, offset by certain direct loan origination costs and commitment fees, are deferred and
recognized in income as a yield adjustment using the effective interest yield method over the contractual life of the
loan. If a commitment expires unexercised, the commitment fee is recognized as income.
Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. The accrual
of interest on loans is discontinued when principal or interest is past due 90 days or more unless the loan is both well
secured and in the process of collection. In addition, a loan that is current may be placed on non-accrual status if the
Bank believes substantial doubt exists as to whether the Bank will collect all principal and contractual due interest.
When loans are placed on non-accrual status, all interest previously accrued, but not collected, is reversed against
current period interest income. Interest received on non-accrual loans is subsequently recognized as interest income
or applied against the principal balance of the loan. The loan is generally returned to accrual status when the
borrower has brought the past due principal and interest payments current and, in the opinion of management, the
borrower has demonstrated the ability to make future payments of principal and interest as scheduled.
Loans are considered for full or partial charge-offs in the event that they are individually evaluated,
considered collateral dependent, principal or interest is over 90 days past due, the loan lacks sufficient collateral
protection and are not in the process of collection. The Bank also considers charging off loans in the event of any of
the following circumstances: 1) the individually evaluated loan balances are not covered by the fair value of the
collateral or discounted cash flow; 2) the loan has been identified for charge-off by regulatory authorities; and 3) any
overdrafts greater than 90 days.
Loan Modifications to Borrowers Experiencing Financial Difficulty
Prior to the adoption of ASU 2022-02, the Bank accounted for a modification to the contractual terms of a
loan that resulted in granting a concession to a borrower experiencing financial difficulties as a troubled debt
restructuring (“TDR”). Effective January 1, 2023, the Bank adopted ASU 2022-02, which eliminated TDR
accounting prospectively for all restructurings occurring on or after January 1, 2023. Loans that were considered a
TDR prior to the adoption of ASU 2022-02 will continue to be accounted for under the superseded TDR accounting
guidance until the loan is paid off, liquidated, or subsequently modified. Since adoption of ASU 2022-02 on January
1, 2023, we have evaluated all loan modifications under ASC 310-20 to determine whether a modification made to a
borrower results in a new loan or is a continuation of the existing loan.
89
Allowance for Credit Losses on Loans
We evaluate our allowance for credit losses quarterly. The allowance for credit losses (“ACL”) is based upon
management’s assessment of various factors affecting the collectability of the loans using the relevant available
information, from internal and external sources, relating to past events, current conditions, and reasonable and
supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit
losses. Adjustments to historical loss information are made for differences in current loan-specific risk
characteristics such as differences in underwriting standards, portfolio mix, delinquency level, or term as well as for
changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant
factors.
Credit losses are estimated using the Current Expected Credit Losses (“CECL”) methodology. This
methodology is dependent largely on the availability of historical loan data based on loan level risk approach using
Probability of Default / Loss Given Default (“PD/LGD”). PD is the probability that a borrower will default on its
obligation. LGD is the amount of money a bank loses when a loan defaults net of any recovery expressed as a
percentage of the outstanding loan amount at the time of default. We selected a software solution to help apply
transition matrices to develop the PD/LGD approach. This method assesses historical loss data to estimate expected
credit losses over the historical, current, and forecast periods that represents the life of loans under CECL. The
considerations to establish a look back period are influenced by data availability, historical economic cycles,
changes to lending practices, improvement in credit risk management and oversight control over the years. Based on
our assessment, we have decided to use a look back period beginning from January, 2010. For the forecasted
periods, management has considered a more near-term outlook of twelve months to be reasonable and supportable
based on management’s understanding of the current loan portfolio and management’s best judgement to forecast
credit losses. Management has also considered a reversion period equal to half of the forecast period or equivalent
to six months of the reasonable and supportable forecast. Accrued interest is not considered in computed expected
credit losses.
The loan portfolio is segmented into pools with similar characteristics, primarily based on loan product type
(collateral driven). The Bank examined the loan portfolio and the current loan segmentations reasonably reflect the
homogenous risk characteristics related to each loan pool. For ACL purposes, the loan portfolio is segmented into
seven main categories: commercial, international trade finance, construction, real estate, residential mortgage, cash
secured and SBA. Within these categories, we further segment into collective pools with similar risk characteristics.
Management has examined the current loan pools and concluded the segmentations reasonably reflect homogenous
risk characteristics related to each loan pool. The Bank remains focused on commercial loan products which have
comprised the majority of the loan portfolio. The loan products have not changed over the years before or after the
last economic cycle. The existing loan pools are considered appropriate for use to estimate ACL.
Loans are individually evaluated for credit losses when they no longer exhibit similar risk characteristics with
other loans in the portfolio. We individually review and analyze non-accrual loans, and classified loans. Collateral
dependent loans are loans for which the repayment is expected to be provided substantially through the operation or
sale of the collateral when the borrower, based on management's assessment, is experiencing financial difficulty as
of the reporting date. Collateral dependent loans are typically analyzed by comparing the loan amount to the fair
value of collateral less cost to sell, with a prompt charge-off taken for the ‘shortfall’ amount once the value is
confirmed. Other methods can be used; i.e. loan sale market price or present value of expected future cash flows
discounted at the loan’s effective interest rate.
The Bank also makes adjustments, if warranted, in both quantitative and qualitative modeling to estimate the
allowance. Such adjustments are intended to account for conditions that management believes directly impact loss
potential in the portfolio that is not currently being captured in the model. To the extent possible, management
accounts for the impact of quantitative factors on a pool by pool basis, and qualitative factors on a portfolio basis.
Qualitative factors consist of nine factors including recent trends and economic conditions. We apply environmental
and general economic factors to our allowance methodology including: credit concentrations; delinquency trends;
national and local economic and business conditions; the quality of lending management and staff; lending policies
and procedures; loss and recovery trends; nature and volume of the portfolio; changes in the value of underlying
collateral for collateral dependent loans; the quality of loan reviews; and other external factors including
competition, legal, and regulatory factors. The Bank aggregates the sums of the estimates of probable loss for each
category with the specific individually evaluated reserves to arrive at the total estimated allowance for credit losses.
90
Reserve for Undisbursed Loan Commitments
The Bank maintains an allowance for credit losses for undisbursed loan commitments. Management estimates
the amount by applying the loss factors used in our allowance for credit losses on loans using the current expected
credit losses methodology to its estimate of the expected usage of undisbursed commitments for each loan type.
Provisions for credit losses for undisbursed loan commitments are recorded in provisions for credit losses in the
accompanying consolidated statements of operations and comprehensive income. The allowance for credit losses on
undisbursed loan commitments totaled $1.2 million at December 31, 2024 and 2023. There was no provision for
credit losses on undisbursed loan commitment for the years ended December 31, 2024, 2023 and 2022.
SBA Loan Sales and Servicing
The Bank originates and sells Small Business Administration (“SBA”) loans under section 7(a) of the Small
Business Act (“7(a) loans”) and section 504 of the Small Business Investment Act (“504 loans”). A portion of the
premium on sale of these loans is recognized as gain on sale of loans at the time of the sale by allocating the
carrying amount between the asset sold and the retained interest, which may include servicing assets, based on their
relative fair values. The remaining portion of the premium is recorded as a discount on the retained interest and is
amortized over the remaining life of the loan as an adjustment to yield. The retained interest, net of any discount, is
included in gross loans in the accompanying consolidated statement of financial condition.
Servicing assets are recognized when SBA loans are sold with servicing retained, with the related gain on sale
of loans recognized in the accompanying consolidated income statement. Servicing assets are initially recorded at
fair value based on the present value of the contractually specified servicing fee, net of servicing costs, over the
estimated life of the loan, using a discount rate. 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. Management periodically evaluates servicing
assets for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is
recognized through a valuation allowance, to the extent that fair value is less than the carrying amount.
During the year ended December 31, 2024 the Bank sold $8.3 million of SBA loans and recognized a gain of
$659,000, which included a $199,000 servicing asset. During the year ended December 31, 2023 the Bank sold
$12.0 million of SBA loans and recognized a gain of $752,000, which included a $280,000 servicing asset. There
was no similar sale activity in 2022.
At December 31, 2024 and 2023, there were $2.2 million and $360,000, respectively, of SBA loans held for
sale.
Other Real Estate Owned (OREO) and Repossessed Assets
Other real estate owned and repossessed assets, consisting of real estate and other assets acquired through
foreclosure or other proceedings, is initially stated at fair value of the property based on appraisal, less estimated
selling costs. Any cost in excess of the fair value at the time of acquisition is accounted for as a loan charge-off and
deducted from the allowance for credit losses. A valuation allowance is established for any subsequent declines in
value through a charge to earnings. Operating expenses of such properties, net of related income, and gains and
losses on their disposition are included in loss on sale of OREO and repossessed assets and related expense, as
appropriate.
Bank Furniture and Fixtures
Bank furniture and fixtures are stated at cost, less accumulated depreciation and amortization. Depreciation
on furniture and equipment is computed on a straight-line method over the estimated useful lives of the assets,
generally three to five years. Leasehold improvements are capitalized and amortized on the straight-line method
over the estimated useful life of the improvement or the term of lease, whichever is shorter. Buildings are amortized
on the straight-line method over 30 years.
91
Investments in Affordable Housing Partnerships
The Bank invests in qualified affordable housing projects (low income housing). The Bank recognized its
share of partnership losses in other operating expenses with the tax benefits recognized in the income tax provision
using the proportional amortization method.
Comprehensive Income
Comprehensive income consists of net income and net unrealized gains on securities available-for-sale and is
presented in the statements of operations and comprehensive income.
Income Taxes
The Bank accounts for income taxes using the asset and liability method. The objective of the asset and
liability method is to establish deferred tax assets and liabilities for the temporary differences between the financial
reporting basis and the tax basis of the Bank’s assets and liabilities at enacted tax rates expected to be in effect when
such amounts are realized or settled. 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. Additionally, the effect of a change in tax rates
on amounts included in accumulated other comprehensive income are reclassified to retained earnings at the
enactment date. A valuation allowance is established for deferred tax assets if based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The
valuation allowance is sufficient to reduce the deferred tax assets to the amount that is more likely than not to be
realized.
Earnings per Share
Earnings per share (EPS) are computed on a basic and diluted basis. Basic EPS is computed by dividing net
income adjusted by presumed dividend payments and earnings on unvested restricted stock by the weighted average
number of common shares outstanding. Losses are not allocated to participating securities. Unvested shares of
restricted stock are excluded from basic shares outstanding. 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 shares in the earnings of the Bank.
Share-Based Compensation
Employees and directors participate in the Bank’s 2004 Equity Incentive Plan and 2014 Equity Incentive
Plan. Share-based compensation expense for all share-based payment awards is based on the grant-date fair value
estimated in accordance with the provisions of ASC 718. The Bank recognizes these compensation costs on a
straight-line basis over the requisite service period for the entire award of generally three to five years, and options
expire between four and ten years from the date of grant. The Bank’s policy is to recognize costs net of estimated
forfeitures. See Note 13 for further discussion.
Leases
The Bank accounts for its leases in accordance with ASC 842 and records a lease liability for future lease
obligations as well an asset representing the right to use the underlying leased asset. Contractual payments are
discounted using the rate implicit in the lease or using the Bank’s estimated incremental borrowing rate, which is the
rate of interest it would pay on a secured borrowing over a similar term. Lease liabilities are reduced by the Bank’s
periodic lease payments net of interest accretion. Right-of-use assets for operating leases are amortized over the term
of the associated lease by amounts that represent the difference between periodic straight-line lease expense and
periodic interest accretion in the related liability to make future lease payments.
Bank-Owned Life Insurance (BOLI)
In order to economically fund its obligation under the prior deferred compensation arrangements, the Bank
purchased BOLI under which the executive officers and directors are the insured, while the Bank is the owner and
beneficiary thereof. Bank-owned life insurance policies are carried at their cash surrender value. Income from BOLI
92
is recognized when earned. At December 31, 2024 and 2023, the cash surrender value of the policies totaled $10.4
million and $10.6 million, respectively. During 2024, 2023 and 2022, the income on the insurance policies was
$420,000, $412,000 and $401,000, respectively.
Segment Reporting
Through our branch network, the Bank provides a broad range of financial services to individuals and
companies located primarily in Southern California. Their services include demand, time and savings deposits and
real estate, business and consumer lending. The Bank’s chief executive officer is its chief operating decision maker
(“CODM”). While our CODM monitors the revenue streams of our various products and services, operations are
managed and financial performance is evaluated on a company-wide consolidated basis. Accordingly, the Bank
considers all of our operations to be aggregated in one reportable operating segment. The CODM uses consolidated
net income to benchmark the Bank against its competitors. The benchmarking analysis coupled with monitoring of
budget to actual results are used in assessing performance and establishing compensation. The significant revenues
of the Bank are provided by loans, debt securities, and depositor activity. The significant expense categories
reviewed by the CODM are also consistent with those presented on the consolidated statements of operations and
comprehensive income, with emphasis on interest expense, provisions for credit losses, salaries and benefits, and net
occupancy expenses. Segment assets are reflected in the accompanying consolidated statements of financial
condition as “total assets.”
Recently Issued Accounting Standards
Adoption of New Accounting Standards
ASU 2023-02, Investments—Equity Method and Joint Ventures (Topic 323) Accounting for Investments in
Tax Credit Structures Using the Proportional Amortization Method. In March 2023, the FASB issued ASU 2023-02
which expands use of the proportional amortization method of accounting to equity investments in tax credit
programs beyond those in low-income-housing tax credit (“LIHTC”) programs. The ASU allows entities to elect the
proportional amortization method, on a tax-credit-program-by-tax-credit-program basis, for all equity investments in
tax credit programs meeting the eligibility criteria. ASU 2023-02 is effective for reporting periods beginning after
December 15, 2023, for public business entities. Early adoption is permitted. The adoption of ASU 2023-02 on
January 1, 2024 did not have a significant impact on our financial condition or results of operations.
ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. In
November 2023, the FASB issued ASU 2023-07, which requires additional interim and annual disclosures about a
reportable segment's expenses, even for companies with only one reportable segment. The amendments in ASU
2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years
beginning after December 15, 2024. The adoption of this standard did not have a material effect on the Bank’s
operating results or financial condition.
Recently Issued Accounting Standards
Following are the recently issued updates to the codification of U.S. Accounting Standards (“ASUs”),
which are the most relevant to the Bank.
ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. In December 2023,
the FASB issued ASU 2023-09 to address investor requests for more transparency about income tax information
through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid
information. The ASU also includes certain other amendments to improve the effectiveness of income tax
disclosures. The amendments in ASU 2023-09 are effective for fiscal years beginning after December 15, 2024.
Early adoption is permitted. The Bank does not expect the adoption of ASU 2023-09 to have a significant impact on
our financial condition or results of operations.
ASU 2024-02, Codification Improvements—Amendments to Remove References to the Concepts
Statements. In March 2024, the FASB issued ASU 2024-02 which removes references to the Board’s concepts
statements from the FASB Accounting Standards Codification (the “Codification” or ASC). The ASU is part of the
93
Board’s standing project to make “Codification updates for technical corrections such as conforming amendments,
clarifications to guidance, simplifications to wording or the structure of guidance, and other minor improvements.
These amendments are effective for public business entities for fiscal years beginning after December 15, 2024.
Early application of the amendments in ASU 2024-03 is permitted for all entities, for any fiscal year or interim
period for which financial statements have not yet been issued (or made available for issuance). The Bank does not
expect the adoption of ASU 2024-02 to have a significant impact on our financial condition or results of operations.
ASU 2024-03, Income Statement– Reporting Comprehensive Income-Expense Disaggregation Disclosures.
In November 2024, the FASB issued ASU 2024-03 requires disclosure in the notes to the financial statements of
specified information about certain costs and expenses. In January 2025, the FASB issued ASU 2025-01 Income
Statement—Reporting Comprehensive Income– Expense Disaggregation Disclosures– Clarifying the Effective
Date which amends the effective date of ASU 2024-03 to clarify that all public business entities are required to
adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim periods within
annual reporting periods beginning after December 15, 2027. Early adoption of Update 2024-03 is permitted. The
Bank is currently evaluating the impact of ASU 2024-03 on its disclosures.
Note 2 – Securities Held-to-Maturity and Available-for-Sale
Financial instruments that potentially subject the Bank to concentrations of credit risk consist primarily of
loans and investments. The Bank monitors its exposure to such risks and the concentrations may be impacted by
changes in economic, industry or political factors.
The Bank aims to maintain a diversified investment portfolio including issuer, sector and geographic
stratification, where applicable, and has established certain exposure limits, diversification standards and review
procedures to mitigate credit risk.
Other than U.S. government agencies (Fannie Mae and Freddie Mac, when combined), the Bank has no
exposure within its investment portfolio to any single issuer greater that 10% of equity capital.
The carrying value of our held-to-maturity investment securities was $20.0 million at December 31, 2024
and $21.2 million at December 31, 2023. The tables below show the amortized cost, gross unrecognized gains and
losses and estimated fair value of securities held-to-maturity as of December 31, 2024 and 2023:
Amortized
cost
Gross
unrecognized
gains
Gross
unrecognized
losses
Estimated
fair value
Mortgage-backed securities
$ 20,021
$ - $ (1,748)
$ 18,273
(In thousands)
December 31, 2024
Amortized
cost
Gross
unrecognized
gains
Gross
unrecognized
losses
Estimated
fair value
Mortgage-backed securities
$ 21,171
$ - $ (1,631)
$ 19,540
December 31, 2023
(In thousands)
The following tables summarize unrecognized losses on our held-to-maturity investment securities,
aggregated by the length of time the securities have been in a continuous unrecognized loss position, at
December 31, 2024 and 2023:
94
December 31, 2024
Less than 12 months
12 months or greater
Total
Estimated
fair value
Unrecognized
losses
Estimated
fair value
Unrecognized
losses
Estimated
fair value
Unrecognized
losses
(In thousands)
Mortgage-backed securities
$ -
$ -
$ 18,273
$ (1,748)
$ 18,273
$ (1,748)
Total securities available-for-sale
$ -
$ -
$ 18,273
$ (1,748)
$ 18,273
$ (1,748)
December 31, 2023
Less than 12 months
12 months or greater
Total
Estimated
fair value
Unrecognized
losses
Estimated
fair value
Unrecognized
losses
Estimated
fair value
Unrecognized
losses
(In thousands)
Mortgage-backed securities
$ -
$ -
$ 19,540
$ (1,631)
$ 19,540
$ (1,631)
Total securities available-for-sale
$ -
$ -
$ 19,540
$ (1,631)
$ 19,540
$ (1,631)
The amortized cost and estimated fair value of securities held-to-maturity at December 31, 2024 and 2023, by
contractual maturity, are shown below. Investment securities are classified in accordance with their estimated
average life. Expected maturities differ from contractual maturities mainly due to prepayment rates; changes in
prepayment rates will affect a security’s average life.
December 31,
2024
2023
Amortized
cost
Estimated
fair value
Amortized
cost
Estimated
fair value
(In thousands)
Due after one year through five years
$ 10,256
$ 9,897
$ -
$ -
Due after five years through ten years
486
463
10,946
10,650
Due after ten years
9,279
7,913
10,225
8,890
Total
$ 20,021
$ 18,273
$ 21,171
$ 19,540
The tables below show the amortized cost, gross unrealized gains and losses, and estimated fair value of
securities available for sale as of December 31, 2024 and 2023.
December 31, 2024
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair value
(In thousands)
Asset-backed securities
$ 2,822
$ 12
$ (7)
$ 2,827
Corporate notes
126,014
418
(6,068)
120,364
U.S. Agency mortgage-backed securities
8,024
- (294)
7,730
Collateralized mortgage obligations
145,530
- (20,246)
125,284
Municipal securities
69,797
3
(9,285)
60,515
U.S. Agency principal-only strip securities
235
- (18)
217
U.S. Treasury notes
34,445
- (2,676)
31,769
Total securities available-for-sale
$ 386,867
$ 433 $ (38,594)
$ 348,706
95
December 31, 2023
Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Estimated
fair value
(In thousands)
Asset-backed securities
$ 3,000
$ - $ (169)
$ 2,831
Corporate notes
100,799
21
(10,298)
90,522
U.S. Agency mortgage-backed securities
9,530
1
(447)
9,084
Collateralized mortgage obligations
157,540
- (22,616)
134,924
Municipal securities
71,805
25
(8,017)
63,813
U.S. Agency principal-only strip securities
314
- (25)
289
SBA securities
41
-
- 41
U.S. Treasury notes
14,946
- (2,608)
12,338
Total securities available-for-sale
$ 357,975
$ 47 $ (44,180)
$ 313,842
Gross unrealized losses on securities available-for-sale and the fair value of the related securities, aggregated
by investment category and length of time that the individual securities have been in a continuous unrealized loss
position, at December 31, 2024 and 2023 are as follows:
December 31, 2024
Less than 12 months
12 months or greater
Total
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
(In thousands)
Asset-backed securities
$ -
$ -
$ 702
$ (7)
$ 702
$ (7)
Corporate notes
13,170
(145)
76,853
(5,923)
90,023
(6,068)
U.S. Agency mortgage-backed securities
1,298
(15)
6,392
(279)
7,690
(294)
Collateralized mortgage obligations
1
-
125,282
(20,246)
125,283
(20,246)
Municipal securities
3,286
(49)
53,984
(9,236)
57,270
(9,285)
U.S. Agency principal-only strip securities
-
-
217
(18)
217
(18)
U.S. Treasury notes
19,491
-
12,278
(2,676)
31,769
(2,676)
Total securities available-for-sale
$ 37,246
$ (209)
$ 275,708
$ (38,385)
$ 312,954
$ (38,594)
December 31, 2023
Less than 12 months
12 months or greater
Total
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
Estimated
fair value
Unrealized
losses
(In thousands)
Asset-backed securities
$ -
$ -
$ 2,831
$ (169)
$ 2,831
$ (169)
Corporate notes
8,515
(52)
79,464
(10,246)
87,979
(10,298)
U.S. Agency mortgage-backed securities
178
(3)
8,782
(444)
8,960
(447)
Collateralized mortgage obligations
2
-
134,919
(22,616)
134,921
(22,616)
Municipal securities
1,095
(8)
54,139
(8,009)
55,234
(8,017)
U.S. Agency principal-only strip securities
-
-
289
(25)
289
(25)
SBA securities
-
-
41
-
41
-
U.S. Treasury notes
-
-
12,338
(2,608)
12,338
(2,608)
Total securities available-for-sale
$ 9,790
$ (63)
$ 292,803
$ (44,117)
$ 302,593
$ (44,180)
Accrued interest on investment securities totaled $2.2 million and $1.8 million at December 31, 2024 and
2023 and is included in accrued interest receivable in the consolidated balance sheets.
The Bank’s investment portfolio is primarily comprised of corporate notes, U.S. government securities,
collateralized mortgage obligations, municipal securities, mortgage-backed securities and U.S. treasury bills.
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In accordance with Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the
Bank performs a thorough annual review of each of the investment securities in its portfolio (other than US
Government and Agency securities) to determine, among other things, the current financial status of the issuer as
well as the issuer’s ability to repay the debt. This analysis is performed in addition to the quarterly review that is
performed on all investment securities which are in an unrealized loss position. We do not intend to sell these
securities until recovery and have determined that it is not more likely than not that we will be required to sell the
securities prior to recovery of their amortized cost basis.
At December 31, 2024, there were a total of twenty-three investment securities that were in an unrealized loss
position for less than 12 months and 114 investment securities that were in an unrealized loss position for 12 months
or longer. Temporary impairments primarily related to corporate notes (which are all considered investment grade
by Moody’s, Standard & Poor’s, Kroll Bond Rating Agency or Fitch rating agencies), mortgage-backed securities
(which are generally guaranteed by the U.S. government and are highly rated by rating agencies and have a long
history of no credit losses), and municipal securities are primarily attributable to declining market prices caused by
dramatically higher interest rates, which began rising in March 2022, and subsequent to the date that these securities
were purchased. None of the securities in the Bank’s investment portfolio rely on an insurance wrap as a credit
enhancement. Management believes that it is more likely than not that the Bank will receive all amounts due under
the contractual terms of these securities. If economic conditions deteriorate, or if the financial condition of specific
issuers within these portfolios deteriorates, then the Bank could record an allowance for credit losses for available-
for-sale (“AFS”) debt securities under the ASC 326-30. ASC 326-20 requires the Bank to estimate lifetime credit
loss allowance for the HTM debt securities. However, the Bank holds held-to-maturities (“HTM”) debt securities
that are guaranteed by the U.S. government which are highly rated by rating agencies and have a long history of no
credit losses so no expected credit losses will be recorded. There were no debt securities considered past due at
December 31, 2024 and 2023. There were no purchases of debt securities with credit deterioration during the years
ended December 31, 2024, 2023 and 2022.
Cash proceeds from sales, calls and maturities of securities available-for-sale totaled $8.4 million, $150.4
million and $57.8 million for the years ended December 31, 2024, 2023 and 2022, respectively. Realized gains for
the years ended December 31, 2024, 2023 and 2022 totaled $0, $45,000 and $297,000, respectively. There were no
realized losses for sales and calls of securities for the years ended December 31, 2024, 2023 and 2022, respectively.
Investment securities having a fair value of approximately $111.6 million and $92.9 million were pledged to secure
governmental deposits, treasury tax and loan deposits, borrowing lines from the Federal Reserve Bank and FHLB as
of December 31, 2024 and 2023, respectively. At December 31, 2024 and 2023, approximately $64.7 million and
$57.8 million, respectively, of the Bank’s investment securities were pledged as collateral for certain public
deposits.
The amortized cost and estimated fair value of securities available-for-sale at December 31, 2024 and 2023,
by contractual maturity, are shown below. Investment securities are classified in accordance with their estimated
average life. Expected maturities differ from contractual maturities mainly due to prepayment rates; changes in
prepayment rates will affect a security’s average life.
December 31,
2024
2023
Amortized
cost
Estimated
fair value
Amortized
cost
Estimated
fair value
(In thousands)
Due in one year or less
$ 3
$ 3
$ 6,902
$ 6,802
Due after one year through five years
34,155
33,685
20,929
20,279
Due after five years through ten years
147,266
138,815
103,140
90,905
Due after ten years
205,443
176,203
227,004
195,856
Total
$ 386,867
$ 348,706
$ 357,975
$ 313,842
The Bank had no debt securities that have been credit impaired as of or during the years ended December 31,
2024, 2023, or 2022.
97
98
Note 3 – Loans and Allowance for Credit Losses on Loans
The Bank’s loan portfolio includes originated loans as well as purchased loans.
The loans portfolio as of December 31, 2024 and 2023 is summarized as follows:
December 31,
December 31,
2024
2023
Real estate mortgage:
Residential
790,069
688,058
Commercial
2,840,771
2,760,761
Total real estate mortgage
3,630,840
3,448,819
Real estate construction:
Residential
296,580
246,201
Commercial
287,185
179,775
Total real estate construction
583,765
425,976
Commercial & industrial
1,418,445
1,393,830
SBA
6,833
3,469
Trade finance
485
1,041
Consumer & other
247
363
Gross loans
5,640,615
5,273,498
Less:
Allowance for credit losses
(71,477)
(78,355)
Deferred loan and fees, net
(9,234)
(11,079)
Total loans, net
$ 5,559,904
$ 5,184,064
(In thousands)
Real estate loans are secured by retail, industrial, office, special purpose, and residential single and multi-
family properties and comprise 75% of our loan portfolio as of December 31, 2024. The Bank seeks diversification
in our loan portfolio by maintaining a broad base of borrowers and monitoring our exposure to various property
types as well as geographic and industry concentrations.
Accrued interest on loans totaled $30.2 million and $30.7 million at December 31, 2024 and 2023 and is
included in accrued interest receivable in the consolidated balance sheets.
There were no transfers of loans from held for investment to held for sale during the years ended December
31, 2024, 2023 and 2022.
The Bank had $36.8 million of non-accrual loans at December 31, 2024 compared to $28.7 million at
December 31, 2023. These loans had interest due, but not recognized, of approximately $693,000 and $1.2 million
in 2024 and 2023, respectively. The Bank had $1.1 million and zero of loans past due 90 or more days and still
accruing interest as of December 31, 2024 and 2023, respectively.
99
The following tables depict the Bank’s recorded investment in past due loans held for investment by class as
of December 31, 2024 and 2023:
Total
Non-accrual
Total
Past Due
Loans
Loans
Loan Class:
Real estate mortgage
Residential
$ 8,028
$ - $ 1,100
$ 9,128
$ 779,972
$ 789,100
$ 969
$ 790,069
Commercial
2,927
67,947
- 70,874
2,740,425
2,811,299
29,472
2,840,771
Total real estate mortgage
10,955
67,947
1,100
80,002
3,520,397
3,600,399
30,441
3,630,840
Real estate construction
Residential
-
-
-
- 296,580
296,580
- 296,580
Commercial
- - - - 287,185 287,185
- 287,185
Total real estate construction
-
-
-
- 583,765
583,765
- 583,765
Commercial and industrial
3,646
-
- 3,646
1,408,489
1,412,135
6,310
1,418,445
SBA
-
-
-
- 6,833
6,833
- 6,833
Trade finance
-
-
-
- 485
485
- 485
Consumer & other
- - - - 247 247
- 247
Total as of December 31, 2023
$ 14,601
$ 67,947
$ 1,100
$ 83,648
$ 5,520,216
$ 5,603,864
$ 36,751
$ 5,640,615
Accruing Loans
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Current
Total
(in thousands)
At December 31, 2024, nonaccrual loans included i) two residential real estate loans with a carrying value of
$969,000, ii) two commercial real estate loans totaling $29.5 million and (iii) one commercial and industrial loan
totaling $6.3 million.
Total
Non-accrual
Total
Past Due
Loans
Loans
Loan Class:
Real estate mortgage
Residential
$ 4,037
$ 911
$ - $ 4,948
$ 675,506
$ 680,454
$ 7,604
$ 688,058
Commercial
- - - - 2,750,411 2,750,411 10,350
2,760,761
Total real estate mortgage
4,037
911
- 4,948
3,425,917
3,430,865
17,954
3,448,819
Real estate construction
Residential
-
-
-
- 246,201
246,201
- 246,201
Commercial
- - - - 179,775 179,775
- 179,775
Total real estate construction
-
-
-
- 425,976
425,976
- 425,976
Commercial and Industrial
-
-
-
- 1,383,065
1,383,065
10,765
1,393,830
SBA
-
-
-
- 3,469
3,469
- 3,469
Trade Finance
-
-
-
- 1,041
1,041
- 1,041
Consumer & other
- - - - 363 363
- 363
Total as of December 31, 2022
$ 4,037 $ 911
$ - $ 4,948
$ 5,239,831 $ 5,244,779 $ 28,719
$ 5,273,498
(in thousands)
Accruing Loans
30-59 Days
Past Due
60-89 Days
Past Due
90+ Days
Past Due
Current
Total
At December 31, 2023, nonaccrual real estate mortgage loans included two loans totaling $7.6 million and
three loans totaling $10.4 million. At December 31, 2023, nonaccrual commercial and industrial loans included six
loans totaling $10.8 million.
100
The following tables depict the Bank’s non-accrual loans with and without an allowance for credit losses and
related interest income recognized by class as of December 31, 2024 and 2023:
Nonaccrual Loans
without
ACL
with
ACL
Total
December 31, 2024
Real estate mortgage:
Residential
969
$
-
$
969
$
1,100
$
-
$
Commercial
29,472
-
29,472
-
-
Total R/E mortgage
30,441
-
30,441
1,100
-
Commercial & industrial
-
6,310
6,310
-
367
Total
30,441
$
6,310
$
36,751
$
1,100
$
367
$
Loans 90+
Days Past
Due and
Accruing
Interest
(in thousands)
Interest
Income
Recognized
Nonaccrual Loans
without
ACL
with
ACL
Total
December 31, 2023
Real estate mortgage:
Residential
7,604
$
-
$
7,604
$
-
$
316
$
Commercial
10,350
-
10,350
-
733
Total R/E mortgage
17,954
-
17,954
-
1,049
Commercial & industrial
7,385
3,380
10,765
-
-
Total
25,339
$
3,380
$
28,719
$
-
$
1,049
$
Loans 90+
Days Past
Due and
Accruing
Interest
(in thousands)
Interest
Income
Recognized
The following table presents a summary of loans modified with borrowers experiencing financial difficulty by
type of modification at December 31, 2024:
December 31, 2024:
Amortized
Cost Basis
% of Total
Class of
Amortized
Cost Basis
% of Total
Class of
Loan Type
Real estate mortgage:
Commercial
28,500
$
1.00%
28,500
$
1.00%
Total
28,500
$
0.51%
28,500
$
0.51%
Total
Combination -
Term Extension and Interest
Rate Reduction
At December 31, 2024, there was one commercial real estate loan totaling $28.5 million which was past due
60-89 days.
101
The following table presents a summary of loans modified with borrowers experiencing financial difficulty by
type of modification at December 31, 2023:
December 31, 2023:
Cost Basis
Class of
Cost Basis
Class of
Loan Type
Commercial and industrial
3,000
$
0.22%
3,000
$
0.22%
Total
3,000
$
0.06%
3,000
$
0.06%
Total
Combination -
Term Extension and Interest
Rate Reduction
At December 31, 2023, there was one commercial and industrial loan totaling $3.0 million which was past
due over 90 days and on nonaccrual status.
During the year ended December 31, 2024, there was one $1.5 million commercial and industrial loan and
one $28.5 million commercial real estate loan that was modified with borrowers experiencing financial difficulty.
The terms of the $1.5 million commercial and industrial loan modification included both a term extension and
significant payment delay with $50,000 monthly principal payments plus accrued interest during the loan term. The
Bank charged-off $1.4 million related to this loan during the year ended December 31, 2024. The terms of the $28.5
million commercial real estate loan modification included both a term extension and reduction in interest rate of 75
basis points.
During the year ended December 31, 2023, there was one $3.0 million loan that was modified with borrowers
experiencing financial difficulty. The modification was involved with a three-year extension with 0.5% reduction in
interest rate from the original terms. The Bank charged off $3.0 million for this loan during the year ended
December 31, 2024.
102
The following tables detail activity in the allowance for credit losses by portfolio segment for the years ended December 31, 2024, 2023 and 2022. Allocation of a
portion of the allowance to one particular portfolio segment does not indicate that it is no longer available to absorb losses in other portfolio segments.
Commercial
Trade
Consumer
Residential
Commercial
Residential
Commercial
& Industrial
SBA
Finance
& Other
Unallocated
Total
(in thousands)
Year ended December 31, 2024
Balance at December 31, 2023
6,265
$
34,467
$
1,143
$
873
$
35,129
$
16
$
5
$
9
$
448
$
78,355
$
Provision (benefit) for credit losses
962
(754)
413
751
10,635
20
(2)
(4)
79
12,100
Loans charged off
-
-
-
-
(19,028)
-
-
-
-
(19,028)
Recoveries
-
-
-
-
50
-
-
-
-
50
Net charge offs
-
-
-
-
(18,978)
-
-
-
-
(18,978)
Balance at December 31, 2024
7,227
$
33,713
$
1,556
$
1,624
$
26,786
$
36
$
3
$
5
$
527
$
71,477
$
Real Estate-Mortgage
Real Estate-Construction
Commercial
Trade
Consumer
Residential
Commercial
Residential
Commercial
& Industrial
SBA
Finance
& Other
Unallocated
Total
(in thousands)
Year ended December 31, 2023
Balance at December 31, 2022
2,435
$
33,597
$
922
$
1,086
$
30,068
$
-
$
21
$
13
$
330
$
68,472
$
Provision (benefit) for credit losses
3,830
870
221
(213)
5,178
16
(16)
(4)
118
10,000
Loans charged off
-
-
-
-
(124)
-
-
-
-
(124)
Recoveries
-
-
-
-
7
-
-
-
-
7
Net recoveries (charge offs)
-
-
-
-
(117)
-
-
-
-
(117)
Balance at December 31, 2023
6,265
$
34,467
$
1,143
$
873
$
35,129
$
16
$
5
$
9
$
448
$
78,355
$
Real Estate-Mortgage
Real Estate-Construction
Commercial
Trade
Consumer
Residential
Commercial
Residential
Commercial
& Industrial
SBA
Finance
& Other
Unallocated
Total
(in thousands)
Year ended December 31, 2022
Balance at December 31, 2021
2,667
$
23,371
$
548
$
851
$
31,853
$
-
$
46
$
3
$
630
$
59,969
$
Provision (benefit) for credit losses
(2,608)
10,227
374
235
(563)
-
(25)
10
(300)
7,350
Loans charged off
-
(1)
-
-
(1,222)
-
-
-
-
(1,223)
Recoveries
2,376
-
-
-
-
-
-
-
-
2,376
Net recoveries (charge offs)
2,376
(1)
-
-
(1,222)
-
-
-
-
1,153
Balance at December 31, 2022
2,435
$
33,597
$
922
$
1,086
$
30,068
$
-
$
21
$
13
$
330
$
68,472
$
Real Estate-Mortgage
Real Estate-Construction
103
The following table represents the amortized cost basis of collateral-dependent loans by class of
loans as of December 31, 2024 and 2023.
Real
Estate
Total
(In thousands)
December 31, 2024
Real estate mortgage:
Residential
969
$
969
$
Commercial
75,948
75,948
Commercial(1)
6,310
6,310
TOTAL
83,227
$
83,227
$
December 31, 2023
Real estate mortgage:
Residential
7,604
$
7,604
$
Commercial(2)
10,350
10,350
Commercial
6,521
6,521
TOTAL
24,475
$
24,475
$
1)
Collateral-dependent commercial loans include a $6.3 million loan relationship secured by a first deed trust
on three commercial lots.
2)
Collateral-dependent commercial loans include a $4.5 million loan secured by a second deed trust on three
industrial properties and a $2.0 million loan secured by a second deed trust on single family residential
property.
As required by federal regulations, we classify our assets on a regular basis. In order to monitor the quality of
our lending portfolio and quantify the risk therein, we maintain a loan grading system consisting of eight different
categories (Grades 1-8). The grading system is used to determine, in part, the allowance for credit losses on loans.
The first four grades in the system are considered “pass”, whereas the fifth grade is a transition grade known as
“special mention.” The other three grades (6-8) range from a “substandard” to “doubtful” to a “loss” category. Loans
graded as “loss” are charged-off in the period so rated. We use grades 6 and 7 of our loan grading system to identify
potential problem assets for individual analysis. The grade on each individual loan rated in the first four grades is
reviewed on a regular basis by the loan officer responsible for monitoring the credit whereas the grade for loans
rated special mention, substandard, or doubtful are reviewed at least quarterly for appropriateness. Credit
Administration reviews a sample of loans assigned a grade in the first four grades and all loans assigned a grade of 5
or above each quarter for appropriateness. Additionally, loan grades are subject to further review by our Chief Credit
Officer, Director’s Loan Committee, and our Board of Directors (our “Board”). In reviewing loans and evaluating
the adequacy of the allowance, there are several risk characteristics considered. Those most relevant to the major
portfolio segments includes vacancy and lease rates on commercial real estate, state of the general housing market,
home prices, commercial real estate values and the impact of economic conditions and employment levels on the
various businesses in our market area.
The following table presents risk grades and classified loans by recorded investment in class of loan by
origination year as of December 31, 2024 and 2023. Classified loans include loans in risk grades 6 and 7, which
correlate to substandard and doubtful for risk classification purposes.
104
Term Loans by Origination Year
2024
2023
2022
2021
2020
Prior
Total
Revolving
Loans
Total
(In thousands)
December 31, 2024:
Real estate mortgage
Pass
545,245
$
409,616
$
727,417
$
445,948
$
187,510
$
523,091
$
2,838,827
$
443,794
$
196,384
$
3,479,005
$
Special mention
-
-
9,500
-
1,632
32,641
43,773
31,146
-
74,919
Substandard
-
-
-
-
756
9,703
10,459
66,457
-
76,916
Doubtful
-
-
-
-
-
-
-
-
-
-
Real estate construction
Pass
-
-
-
-
-
-
-
583,765
-
583,765
Special mention
-
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
-
Commercial & industrial
Pass
129,716
107,152
96,459
26,202
19,334
66,169
445,032
958,233
8,870
1,412,135
Special mention
-
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
6,310
-
6,310
-
-
6,310
Doubtful
-
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
-
-
-
SBA
Pass
3,217
2,454
993
44
7
-
6,715
-
118
6,833
Special mention
-
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
-
Trade finance
Pass
-
-
-
-
-
-
-
485
-
485
Special mention
-
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
-
Consumer & other
Pass
247
-
-
-
-
-
247
-
-
247
Special mention
-
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
-
Total
678,425
$
519,222
$
834,369
$
472,194
$
215,549
$
631,604
$
3,351,363
$
2,083,880
$
205,372
$
5,640,615
$
Gross charge-offs during the year:
Real estate mortgage
-
-
-
-
-
-
-
-
-
-
Real estate construction
-
-
-
-
-
-
-
-
-
-
Commercial & industrial
-
-
-
851
3,983
14,194
19,028
-
-
19,028
SBA
-
-
-
-
-
-
-
-
-
-
Trade finance
-
-
-
-
-
-
-
-
-
-
Consumer & other
-
-
-
-
-
-
-
-
-
-
Total
-
$
-
$
-
$
851
$
3,983
$
14,194
$
19,028
$
-
$
-
$
19,028
$
Revolving
Loans
Converted to
Term During
the Year
105
Term Loans by Origination Year
2023
2022
2021
2020
2019
Prior
Total
Revolving
Loans
Total
(In thousands)
December 31, 2023:
Real estate mortgage
Pass
516,295
$
798,204
$
500,725
$
207,307
$
126,143
$
556,246
$
2,704,920
$
683,777
$
-
$
3,388,697
$
Special mention
-
9,500
-
-
26,969
4,787
41,256
-
-
41,256
Substandard
-
9,199
-
912
7,355
249
17,715
1,151
-
18,866
Doubtful
-
-
-
-
-
-
-
-
-
-
Real estate construction
Pass
-
-
-
-
-
-
-
388,328
37,648
425,976
Special mention
-
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
-
Commercial & industrial
Pass
122,996
143,406
33,801
34,770
50,087
40,383
425,443
945,558
-
1,371,001
Special mention
-
-
-
-
-
-
-
-
-
-
Substandard
-
-
991
-
2,021
1,236
4,248
15,581
-
19,829
Doubtful
-
-
-
-
-
-
-
-
-
-
Loss
-
-
-
-
-
-
-
3,000
3,000
SBA
Pass
2,342
1,030
-
-
-
-
3,372
-
-
3,372
Special mention
-
-
-
-
-
-
-
-
-
-
Substandard
-
-
81
16
-
-
97
-
-
97
Doubtful
-
-
-
-
-
-
-
-
-
-
Trade finance
Pass
-
-
-
-
-
-
-
1,041
-
1,041
Special mention
-
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
-
Consumer & other
Pass
363
-
-
-
-
-
363
-
-
363
Special mention
-
-
-
-
-
-
-
-
-
-
Substandard
-
-
-
-
-
-
-
-
-
-
Doubtful
-
-
-
-
-
-
-
-
-
-
Total
641,996
$
961,339
$
535,598
$
243,005
$
212,575
$
602,901
$
3,197,414
$
2,035,436
$
40,648
$
5,273,498
$
Gross charge-offs during the year:
Real estate mortgage
-
-
-
-
-
-
-
-
-
-
Real estate construction
-
-
-
-
-
-
-
-
-
-
Commercial & industrial
-
-
80
-
-
44
124
-
-
124
SBA
-
-
-
-
-
-
-
-
-
-
Trade finance
-
-
-
-
-
-
-
-
-
-
Consumer & other
-
-
-
-
-
-
-
-
-
-
Total
-
$
-
$
80
$
-
$
-
$
44
$
124
$
-
$
-
$
124
$
Revolving
Loans
Converted to
106
Note 4 – Bank, Premises, Furniture and Fixtures
As of December 31, 2024 and 2023, furniture and fixtures consists of the following:
2024
2023
Land and buildings
$ 2,782
$ 2,782
Leasehold improvements
16,124
15,592
Furniture and fixtures
10,477
10,147
29,383
28,521
Less accumulated depreciation and amortization
(20,921)
(18,827)
$ 8,462
$ 9,694
(In thousands)
Depreciation and amortization expense was $2.2 million, $1.7 million and $1.9 million for the years ended
December 31, 2024, 2023 and 2022, respectively. There were no sales of fixed asset for the years ended December
31, 2024, 2023 and 2022.
Note 5 – Deposits
Time deposit accounts at December 31, 2024 mature as follows:
Maturities of Time
Deposits
(In thousands)
2025
2,987,651
$
2026
150,703
2027
16,520
Total
3,154,874
$
The aggregate amount of overdrafts that have been reclassified as loan balances was $247,000 and $363,000
at December 31, 2024 and 2023, respectively.
The aggregate amount of deposits that exceed the FDIC Insurance limit of $250,000 at December 31, 2024
and 2023 were $2.75 billion and $2.58 billion, respectively.
At December 31, 2024 and 2023, investment securities classified as held-to-maturity and available-for-sale
with a fair value of $64.7 million and $57.8 million, respectively, were pledged to secure public deposits.
107
Note 6 – Income Taxes
Income taxes expense for the years ended December 31, 2024, 2023 and 2022 was as follows:
2024
2023
2022
Current income tax expense:
Federal
$ 33,958
$ 41,888
$ 34,945
State
19,500
22,470
18,879
53,458
64,358
53,824
Deferred income tax benefit:
Federal
608 (3,539)
(2,861)
State
(695)
(1,006)
(611)
(87)
(4,545)
(3,472)
Income tax expense
$ 53,371
$ 59,813
$ 50,352
( In thousands)
108
At December 31, 2024 and 2023, the current net income tax receivable was $2.2 million and $2.4
million, respectively.
The components of the deferred tax assets and deferred tax liabilities as of December 31, 2024 and
2023 are as follows:
December 31,
2024
2023
Deferred tax assets:
Allowance for credit losses
21,841
$
23,671
$
Unrealized loss on securities available-for-sale
10,705
12,380
State taxes
3,162
4,115
Capital loss carryforward
63
83
Restricted stock
3,645
3,300
Lease liability
5,107
5,883
Net operating loss carryforward
1,075
1,118
Excess realized build in loss
439
449
Accrued bonuses
5,904
5,658
Fair value adjustment on acquired loans
6
10
Other real estate and repossessed assets
1,490
990
Other
1,108
1,225
Gross deferred tax assets
54,545
58,882
Deferred tax liabilities:
Operating lease right-of-use assets
(3,962)
(6,563)
Deferred loan costs
(2,257)
(1,982)
Bank furniture and fixtures, net
(361)
(830)
FHLB stock
(286)
(283)
Core deposit intangible from acquisition
(19)
(39)
Other
(258)
(194)
Gross deferred liabilities
(7,143)
(9,891)
Net deferred tax assets
47,402
$
48,991
$
(in thousands)
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets
is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that
the Bank will realize all benefits related to these deductible differences at December 31, 2024.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of NOL and credit carryforwards
may be limited in the event a cumulative change in ownership of more than 50 percent points occurs within a three-
year period. We determined that such an ownership change occurred as of June 21, 2010 as a result of stock
issuances in 2010 and 2009. This ownership change resulted in estimated limitations on the utilization of NOL
carryforwards. Although we have fully utilized all of the federal NOL carryforward prior to their expiration, the
California NOL carryover was significantly impacted by the IRC Sec. 382 limitation. We estimate that of
approximately $69.8 million of the California NOL as of December 31, 2024, $55.8 million is expected to expire in
2029 and $3.2 million is expected to expire in 2030 as it will be unutilized as a result of IRS Sec 382 limitation. The
remaining California NOL carryforward of the approximately $10.7 million at December 31, 2024, is subject to IRC
Sec. 382 annual limitation amount of approximately $1.5 million. Additionally, the bank has no Federal excess
realized built in losses and $6.1 million of California excess built in losses as of December 31, 2024 which are also
subject to IRC Sec. 382 annual limitation amount of approximately $1.5 million.
109
As of December 31, 2024, the Bank has no federal NOLs and New York NOLs remaining as a result of the
UIB acquisition. All acquired NOL carryforwards were fully utilized before their expiration.
As of December 31, 2024, the Bank had no federal NOL carryforward and $11.9 million of state NOL
carryforward.
A reconciliation of the income tax expense and the amount computed by applying the statutory federal
income tax rate to the loss before income taxes is as follows for the years ended December 31, 2024, 2023 and 2022:
Amount
Percentage
Amount
Percentage
Amount
Percentage
(In thousands)
Statutory U.S. federal income tax
$ 38,647
21.0%
$ 44,069
21.0%
$ 37,631
21.0%
State taxes, net of federal benefit
14,856
8.1
16,957
8.1
14,432
8.1
Share-based compensation
(541)
(0.3)
(335)
(0.2)
(586)
(0.3)
Life insurance policies
(58)
- (58)
- (57)
-
Low income housing credits
(835)
(0.5)
307
0.1
(1,197)
(0.7)
Other
1,302 0.7
(1,127)
(0.5)
129
-
$ 53,371
29.0%
$ 59,813
28.5%
$ 50,352
28.1%
2024
2023
2022
During the year ended December 31, 2024, the Bank purchased transferable federal tax credits in the amount
of $6.1 million, at a discount of $487 thousand. During the year ended December 31, 2023, the Bank purchased
transferable federal tax credits in the amount of $2.2 million, at a discount of $161 thousand. There were no similar
purchases during the years ended December 31, 2022. The discounts are recorded as a component of tax expense
and is reported in the “other” line of the reconciliation of income tax table above.
The Bank is subject to U.S. Federal income tax as well as various state and local income taxes. The Bank is
generally no longer subject to examination by taxing authorities for years prior to 2000. The Bank is currently under
examination by the New York Department of Taxation and Finance for the tax years ended December 2023, 2022,
and 2021. Management believes the examination results will have an immaterial impact to its financial statements.
There were no unrecognized tax benefits for the years ended December 31, 2024 and 2023.
Note 7 – Other Real Estate Owned and Repossessed Assets
OREO and repossessed assets totaled $15.0 million and $16.7 million at December 31, 2024 and 2023,
respectively. The balance at December 31, 2024 included residential real estate of $15.0 million. The balance at
December 31, 2023 included residential real estate of $16.6 million and other repossessed assets of $91,000.
The following table provides a summary of changes in real estate owned and other repossessed assets for the
years ended December 31, 2024, 2023 and 2022:
2024
2023
2022
(Dollars in thousands)
Balance, beginning
16,716
$
21,990
$
-
$
Additions
-
-
8,374
First and second lien payoffs
-
-
15,325
Sales/payoffs
-
(3,374)
(2,660)
Valuation write-down
(1,634)
(1,900)
(1,425)
Other settlements
(91)
-
-
Recoveries
-
-
2,376
Balance, ending
14,991
$
16,716
$
21,990
$
110
There were no foreclosures or possession of other assets during the years ended December 31, 2024 and
2023.
At December 31, 2024 and 2023, there was a $5.0 million and $3.3 million valuation allowance related to
OREO. Valuation write-downs of other real estate owned and repossessed assets are included in loss on sale of
OREO and related expenses in the accompanying consolidated statements of operations and comprehensive income.
During the years ended December 31, 2024, 2023 and 2022, the Bank sold residential real estate owned of
zero, zero and $2.7 million, respectively, and recognized a loss of zero, zero and $426,000, respectively, which is
included in loss on sale of OREO and related expenses in the accompanying consolidated statements of operations
and comprehensive income. During the years ended December 31, 2024, 2023 and 2022, the Bank sold other
repossessed assets of zero, $3.4 million and zero, respectively, and recognized no gains or losses.
Note 8 – Borrowings
There were no advances from the Federal Home Loan Bank at December 31, 2024 and 2023. FHLB advances
are payable at their respective maturity dates and are collateralized by commercial or residential real estate loans or
by certain marketable investment securities. At December 31, 2024, approximately $1.89 billion of the Bank’s real
estate loans was pledged as collateral with Federal Home Loan Bank and the remaining borrowing capacity was
$772.2 million.
The Bank had an approved short-term borrowings line available through the discount window at the Federal
Reserve Bank of San Francisco (FRBSF) in the amount of $111.6 million. The Bank had no borrowing outstanding
through the discount window outstanding as of December 31, 2024 or 2023.
On June 16, 2021, the Bank completed a public offering of $150.0 million in aggregate principal amount of
3.375% fixed-to-floating rate subordinated notes due June 15, 2031. A majority of the proceeds from the placement
of the notes were used to repay the subordinated notes due 2026. The subordinated notes mature on June 15, 2031
and bear interest at a fixed rate per annum of 3.375%, payable semi-annually in arrears until June 15, 2026. On that
date, the subordinated notes will bear interest at a floating rate per annum equal to a benchmark rate, which is
expected to the Three-Month Term SOFR, plus 278 basis points (2.78%), payable quarterly in arrears; provided,
however, in the event that the then-current benchmark rate is less than zero, then the benchmark rate will be deemed
zero. The Bank may, at its option, redeem the subordinated notes in whole or in part beginning on June 15, 2026
and, in other certain limited circumstances. The subordinated notes have been structured to qualify as Tier 2 capital
for regulatory purposes. Debt issuance costs incurred in conjunction with the offering were $2.4 million.
Debt issuance costs are reported as a direct deduction from the face of the note. The premium and related debt
issuance costs are being amortized into interest expense over a 10-year period. A summary of outstanding long-term
debt at December 31, 2024 is as follows:
Long-term Debt Summary
December 31,
December 31,
(In thousands)
2024
2023
Subordinated notes payable
($150,000 face amount, net of cost
and premium)
$ 148,469
$ 148,232
3.375%
June 15, 2031
June 15, 2026
Interest
rate
Maturity
date
Earliest
call date
Note 9 – Affordable Housing Partnerships
The Bank has invested in limited partnerships that are formed to develop and operate high-quality affordable
housing for lower income tenants within the United States. These partnerships must meet the regulatory
requirements for affordable housing for a minimum 15-year compliance period to fully utilize the tax credits. The
Bank is not the primary beneficiary and therefore does not consolidate these partnerships. If the partnerships cease
to qualify during the compliance period, the credits may be denied for any period in which the projects are not in
compliance, and credits previously taken may be partially subject to recapture with interest.
111
As of December 31, 2024, the Bank had ten investments, with a net carrying value of $58.3 million.
Commitments to fund investment in affordable housing partnerships as of December 31, 2023 totaled $21.6 million.
As of December 31, 2023, the Bank had ten investments, with a net carrying value of $65.3 million. Commitments
to fund investment in affordable housing partnerships as of December 31, 2023 totaled $30.8 million. As of
December 31, 2024 and 2023, there was no impairment in investment in affordable housing partnerships.
The Bank amortizes investment in affordable housing partnerships in proportion with tax credits and benefits
realized. Total proportional amortization of our investments in affordable housing partnerships was $6.9 million,
$10.9 million and $7.8 million for the years ended December 31, 2024, 2023 and 2022. The related tax benefits were
$4.0 million, $940,000 and $2.2 million for the years ended December 31, 2024, 2023 and 2022.
Note 10 – Commitments and Contingencies
Credit Extensions: As a financial institution, the Bank enters into a variety of financial transactions with its
customers in the normal course of business. Many of these products do not necessarily entail present or future
funded asset or liability positions, instead the nature of these is considered in the form of executor contracts.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of
a fee. Since some commitments expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. Financial instrument transactions are subject to the Bank’s normal credit
standards, financial controls and risk-limiting and monitoring procedures. Collateral requirements are based on a
case-by-case evaluation of each customer and product. The most significant categories of collateral include real
estate properties underlying mortgage loans, liens on equipment and inventory and personal property and cash on
deposit with the Bank.
The Bank’s exposure to credit risk under commitments to extend credit, standby letters of credit, commercial
letters of credit, commitments to fund investments in affordable housing partnerships, operating lease commitments,
and financial guarantees written is limited to the contractual amount of those instruments.
At December 31, 2024 and 2023, the Bank had commitments to fund loans of $1.26 billion. Financial
instruments with off-balance-sheet risk at December 31, 2024 and 2023 are as follows:
December 31, 2024
December 31, 2023
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
(In thousands)
Commitments to extend credit
$ 3,793
$ 1,252,442
$ 1,431
$ 1,259,309
Commercial letters of credit
4,648
- 5,567
-
Standby letters of credit
471,560
- 447,588
-
Total
$ 480,001
$ 1,252,442
$ 454,586
$ 1,259,309
The Bank’s exposure to credit losses in the event of non-performance by the other party to commitments to
extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional obligations as it does for extending
loan facilities to customers. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s
credit evaluation of the counterparty.
Lease Commitments: The Bank is obligated under non-cancellable operating leases for our corporate
office/main branch, 14 branch offices, one LPO, one satellite office and one administrative office. Our leases have
remaining terms of two months to 9 years, with a weighted average remaining lease term of 5.6 years and 6.3 years
as of December 31, 2024 and 2023, respectively. The majority of our leases provide for increases in future
minimum annual rental payments as defined in the lease agreements. We have one variable lease where the increase
in lease liability is tied to the Consumer Price Index capped at 3% and no options to extend were incorporated into
our lease liability calculations. At December 31, 2024 and 2023, weighted average discount rate used to determine
the operating lease liability was 5.0%. Cash paid for amounts included in the measurement of operating lease
112
liabilities was $5.0 million, $4.4 million and $4.1 million for the years ended December 31, 2024, 2023 and 2022,
respectively.
As of December 31, 2024, the future total minimum lease payments for the Bank’s premises are as follows:
Total
lease payment
Year:
(In thousands)
2025
$ 4,284
2026
3,629
2027
3,085
2028
2,875
2029
2,105
Thereafter
3,625
Total future lease payments
19,603
Discount to present value
(2,613)
Total lease liabilitiy
$ 16,990
Rental expense on operating leases was $11.2 million, $2.7 million and $2.5 million for the years ended
December 31, 2024, 2023 and 2022, respectively. In the fourth quarter of 2024, the Bank recorded a one-time $8.1
million increase in occupancy expense due to an error in the calculation of ASC 842, Accounting for Leases. This
calculation error goes back to the adoption of ASC 842 in 2019 and the $8.1 million item represents the cumulative
erroneous calculation through the years from 2019 to present.
Note 11 – Related Party Transactions
Loan and Commitments: The Bank has extended credit to certain directors and officers and companies in
which they have an interest and certain shareholders which beneficially own more than 5% of the Bank’s capital
stock.
At December 31, 2024 and 2023, the aggregate loans (including commitments) to related parties were
approximately $6.1 million (of which $1.8 million was outstanding) and $6.7 million (of which $2.4 million was
outstanding), respectively. All related party loans were current at December 31, 2024 and 2023.
Changes in the outstanding loans to related parties are summarized as follows:
2024
2023
2022
(In thousands)
Balance at beginning of year
2,372
$
2,618
$
1,082
$
New loans/line advances
-
-
1,625
Net drawdowns (repayments)
(552)
(246)
(89)
Balance at end of year
1,820
$
2,372
$
2,618
$
Deposits: The amount of deposits from related parties was $12.6 million and $12.5 million at December 31,
2024 and 2023, respectively.
Note 12 – Restrictions on Cash Dividends, Regulatory Capital Requirements
The Bank has authorized 25,000,000 shares of preferred stock. The Board has the authority to issue the
preferred stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications, and
restrictions, including dividend rights, conversion rights, voting rights and terms of redemptions, liquidation
preferences, and sinking fund terms, any or all of which may be greater than the rights of the common stock.
113
Under Section 1132 of the California Financial Code, funds available for cash dividend payments by a bank
are restricted to the lesser of: (i) retained earnings or (ii) the bank’s net income for its last three fiscal years (less any
distributions to shareholders made during such period). Cash dividends may also be paid out of the greatest of:
(i) retained earnings, (ii) net income for a bank’s last preceding fiscal year, or (iii) net income of the bank for its
current fiscal year upon the prior approval of the Commissioner of Financial Institutions, State of California, without
regard to retained earnings or net income for its prior three fiscal years.
Banks and bank holding companies are subject to regulatory capital requirements administered by federal
banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations,
involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators.
Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on
Banking Supervision’s capital guidelines for U.S. banks (“Basel III rules”) became effective for the Bank on
January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and
fully phased in by January 1, 2019. The Bank elected to permanently opt-out of excluding accumulated other
comprehensive income from common equity tier 1 capital. Under the Basel III rules, the Bank must hold a capital
conversation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer was
phased in from 0.0% for 2015 to 2.50% by 2019. The required capital conservation buffer for 2023 and 2022 was
2.50%. The Bank's capital conservation buffer was 5.80% and 5.57% as of December 31, 2024 and 2023,
respectively. Management believes that as of December 31, 2024 the Bank meets all capital adequacy requirements
to which it is subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to
represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited as is asset growth and expansion, and capital
restoration plans are required. At December 31, 2024 and 2023, the most recent regulatory notifications 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 institution’s category.
The quantitative measures established by the regulation to ensure capital adequacy require the Bank to
maintain amounts and ratios (set forth in the table below) of total and Tier 1 risk-based capital (as defined in the
regulation) to risk-weighted assets (as defined) and of Tier 1 risk-based capital (as defined) to average assets
(as defined). Management believes, as of December 31, 2024, that the Bank meets all capital adequacy requirements
to which it is subject.
The Bank’s actual capital and various regulatory required capital thresholds without conservation
are presented in the following table:
114
Actual
For capital adequacy
purposes
To be well capitalized
under prompt corrective
action provision
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2024:
Total risk-based capital
$ 1,009,989
15.11%
$ 534,803
> 8.00%
$ 668,504
> 10.00%
Tier 1 risk-based capital
788,853
11.80
401,102
6.00
534,803
8.00
Common equity tier 1 risk-
based capital ratio
788,853
11.80
300,827
4.50
434,527
6.50
Leverage ratio
788,853
11.33
278,430
4.00
348,038
5.00
As of December 31, 2023:
Total risk-based capital
$ 951,250
15.18%
$ 501,227
> 8.00%
$ 626,533
> 10.00%
Tier 1 risk-based capital
724,686
11.57
375,920
6.00
501,227
8.00
Common equity tier 1 risk-
based capital ratio
724,686
11.57
281,940
4.50
407,247
6.50
Leverage ratio
724,686
10.85
267,194
4.00
333,992
5.00
(In thousands)
Note 13 – Share-Based Compensation
The Bank remunerates employees and directors through, among other means, the 2014 Equity Incentive Plan
(the “2014 Plan”) and the 2024 Equity Incentive Plan (the “2024 Plan”)(collectively, the “Equity Inventive Plans”),
which are discussed below.
Share-based compensation expense for all share-based payment awards is based on the grant-date fair value
estimated in accordance with the provisions of ASC 718 “Compensation –Stock Compensation”. The Bank
recognizes these compensation costs on a straight-line basis over the requisite service period for the entire award,
which is the vesting term of generally three to five years, for only those options expected to vest. The fair value of
stock options and awards was estimated using the Black-Scholes option pricing model with the grant-date
assumptions and weighted-average fair value. When options are exercised, the Bank’s policy is to issue new shares
of stock.
For the years ended December 31, 2024, 2023 and 2022, the Bank recognized share-based compensation
expense of $9.2 million, $5.8 million and $8.4 million, respectively, resulting in the recognition of $778,000,
$478,000 and $836,000 in related tax benefits (expense), respectively.
Equity Incentive Plans
The 2014 Plan provided for granting of nonstatutory stock options, incentive stock options, RSAs and RSUs
to employees, officers, and directors of the Bank. Stock options granted under the 2014 Plan had an exercise price
equal to the fair value of the underlying common stock on the date of grant. Stock options and share awards granted
under the 2014 Plan are generally vested in installments between 20-25% each year, became fully vested after four
to five years, and expired four to six years from the date of grant. All option and share awards provided for
accelerated vesting if there is a change in control (as defined in the 2014 Plan). There were 2,500,000 shares
authorized under this plan. The 2014 Plan has expired by its terms, which expiration has no effect on options and
awards outstanding under the 2014 Plan. Under the 2014 Plan, there were no options outstanding as of December
31, 2024 and 2023 and no options were exercised during the years ended December 31, 2024, 2023 and 2022.
During the years ended December 31, 2024, 2023 and 2022, no money was received from option exercises under the
2014 Plan.
115
In October 2024, the Bank’s shareholders approved the 2024 Plan. The 2024 Plan provides for grants of up to
670,000 shares of stock options, stock appreciation rights (SARs), stock awards and restricted stock units
(collectively, “awards”) to employees, consultants, non-employee directors of our company and its subsidiaries.
Restricted Stock Awards and Restricted Stock Units
The Bank’s Equity Incentive Plans provide for granting of restricted stock awards and restricted stock units to
employees, officers, and directors of the Bank.
The RSAs and RSUs granted to our employees, officers and directors under the Equity Incentive Plans have
an immediate-to four year vesting period and the vested number of shares are distributed at the end of the vesting
period. Unlike RSAs, RSUs do not entitle the recipients to receive cash dividends.
Performance-based RSUs are granted to our CEO at the target amount of awards, payable at the end of the
three-year performance period. Based on achievement of pre-determined financial goals, the number of shares that
vest can be adjusted to a maximum of 175% of the target.
The compensation costs of both time-based and performance-based awards are estimated based on awards
ultimately expected to vest and recognized on a straight-line basis from the grant date until the vesting date of each
grant. The total unrecognized compensation expense for outstanding RSUs was $7.3 million as of December 31,
2024, and will be recognized over an average of 1.5 years. There was no unrecognized compensation expense
associated with RSAs at December 31, 2024.
The total fair value of restricted stock awards vested during the years ended December 31, 2024, 2023 and
2022 was $0, $627,000 million and $2.0 million, respectively. The total fair value of restricted stock units vested
during the years ended December 31, 2024, 2023 and 2022 was $8.9 million, $9.6 million and $9.6 million.
The following is a summary of the activities for non-vested RSAs under the Equity Incentive Plans for the
years ended December 31:
Shares
Weighted-
Average
Grant Date
Fair Value
Outstanding, December 31, 2021
1,800
$ 55.58
Granted
26,110
70.57
Forfeited
-
-
Vested
(27,910)
69.61
Outstanding, December 31, 2022
-
$ -
Granted
-
-
Forfeited
-
-
Vested
-
-
Outstanding, December 31, 2023
-
$ -
Granted
-
-
Forfeited
-
-
Vested
-
-
Outstanding, December 31, 2024
-
$ -
The following is a summary of the activities for the time-based RSUs and the performance-based RSUs that
will be settled under the Equity Incentive Plans for the years ended December 31. The number of outstanding
performance-based RSUs stated below assumes the associated performance targets will be met at the target level.
116
Performance-based
Time-based
Shares
Weighted-
Average
Grant Date
Fair Value
Shares
Weighted-
Average
Grant Date
Fair Value
Outstanding, December 31, 2021
96,063
$ 53.56
277,279
$ 53.94
Granted
27,938
67.69
74,150
71.79
Forfeited
-
- (3,925)
52.87
Vested
(38,500)
49.25 (95,512)
49.35
Outstanding, December 31, 2022
85,501
60.12
251,992
60.95
Granted
30,249
71.52
97,784
74.42
Forfeited
-
- (2,646)
66.93
Vested
(36,750)
61.00 (92,796)
61.23
Outstanding, December 31, 2023
79,000
64.08
254,334
65.96
Granted
27,343
56.71
111,378
66.94
Forfeited
-
- (2,597)
70.44
Vested
(31,500)
50.47
(89,361)
51.66
Outstanding, December 31, 2024
74,843
$ 67.11
273,754
$ 70.98
Note 14 – Employee Benefit Plan
Effective January 1, 1994, the Bank began a 401k profit sharing plan for its eligible employees. Under the
plan, the Bank matches 50% of a participant’s contributions up to 6% of his/her salary subject to federal limitations
on maximum contributions. Contributions made by the Bank for the years ended December 31, 2024, 2023 and 2022
totaled $701,000, $673,000 and $581,000, respectively.
Note 15 – Incentive Compensation Plan
The Bank’s Incentive Compensation Plan is administered by the Compensation Committee of the Board of
Directors (the “Compensation Committee”). The Compensation Committee determines which employees may
participate in the plan, the total amount of incentive compensation payable to our employees each year, the amount
to be carried over and paid in subsequent years and the allocation of the total amounts among our chairman, officers,
and other employees. All awards are contingent upon the Bank attaining certain financial objectives with the
exception of certain amounts which may be awarded by the Compensation Committee irrespective of the certain
financial targets as part of new employees’ first year compensation. This is typically done as an alternative to a
signing bonus. For the years ended December 31, 2024, 2023 and 2022, financial objectives required under the plan
were met. Total expense of the plan recorded by the Bank was $11.7 million, $14.1 million and $11.9 million for
2024, 2023 and 2022, respectively. As of December 31, 2024 and 2023, the total incentive compensation accrual
included in other liabilities amounted to $18.9 million and $18.2 million, respectively.
Note 16 – Litigation
From time to time, the Bank is a party to claims and legal proceedings arising in the ordinary course of
business. There are no pending legal proceedings or, to the best of management’s knowledge, threatened legal
proceedings, to which the Bank is a party which may have a material adverse effect upon the Bank’s financial
condition, results of operations, or liquidity.
117
Note 17 – Earnings per Share
The following table summarizes the basic and diluted earnings per share calculations for the periods
indicated:
2024
2023
2022
Basic earnings per share:
Net income
$ 130,662
$ 150,040
$ 128,845
Less: income and dividends allocated to participating
securities
-
- (2)
Net income allocated to common shareholders-basic
130,662
150,040
128,843
Basic weighted average common shares outstanding
13,347,004
14,095,745
14,579,132
Basic earnings per share
$ 9.79
$ 10.64
$ 8.84
Diluted earnings per share:
Net income
$ 130,662
$ 150,040
$ 128,845
Less: income and dividends allocated to participating
securities
-
- (2)
Add: reallocation of income to dilutive securities
-
-
-
Net income allocated to common shareholders-diluted
130,662
150,040
128,843
Basic weighted average common shares outstanding
13,347,004
14,095,745
14,579,132
Effect of dilutive securities – restricted shares
207,262
165,899
230,284
Diluted weighted average shares outstanding
13,554,266
14,261,644
14,809,416
Diluted earnings per share
$ 9.64
$ 10.52
$ 8.70
(In thousands, except per share data)
For the years ended December 31, 2024, 2023 and 2022 there were 19, 309 and 33 shares, respectively,
related to such awards which were excluded from the computation of diluted EPS due to their anti-dilutive effect.
Note 18 – Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires that an entity disclose the fair value of all financial
instruments, as defined, regardless of whether recognized in the financial statements of the reporting entity. For
purposes of determining fair value, Financial Instruments Topic of FASB ASC provides that the fair value of a
financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Fair value is an exit price (price to sell an asset), to
willing parties, other than in a forced or liquidation sale.
The following methods and assumptions were used to estimate the fair value of each class of financial
instruments.
(a)
Cash Due from Banks, Federal Funds Sold and Securities Purchased under Resale Agreements
For cash and short-term instruments whose original or purchased maturity is less than 90 days, the carrying
amount was assumed to be a reasonable estimate of fair value.
(b)
Securities Held-to-Maturity and Securities Available-for-Sale
For securities held-to maturity and securities available-for-sale, fair values were based on quoted market
prices obtained from market quotes, a Level 1 measurement. If a quoted market price was not available, fair value
118
was estimated using quoted market prices for similar securities or if no quotes on similar securities were available, a
Level 2 measurement, or a discounted cash flow analysis was used based on a market discount rate and adjusted for
prepayments and defaults, a Level 3 measurement.
(c)
Federal Home Loan Bank Stock
It is not practical to determine the fair value of FHLB stock due to the restrictions placed on its transferability.
(d)
Loans Held for Sale
Loans and loans held for sale are not measured at fair value on a recurring basis. Therefore, the following
valuation discussion relates to estimating the fair value disclosures under ASC 825, Fair Value Measurements and
Disclosures. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are
segregated by type and further segmented into fixed and adjustable rate interest terms. The fair value estimates does
take into consideration an exit price concept as contemplated in ASC 825. The fair value is determined using a
discounted cash flow analysis approach, using prepayment and charge-off adjusted cash flow projections at a loan
level. The projected cash flows were discounted to fair value using discount rates that were estimated using a
buildup method reflecting a hypothetical market participant’s funding and serving costs, and a charge for
variability/liquidity. As these loans reprice frequently at market rates and the credit risk is not considered to be
greater than normal, the market value is typically close to the carrying amount of these loans.
(e)
Loans
Loans are not measured at fair value on a recurring basis. Therefore, the following valuation discussion
relates to estimating the fair value disclosures under ASC 825, Fair Value Measurements and Disclosures. Fair
values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type and
further segmented into fixed and adjustable rate interest terms. The fair value estimates does take into consideration
an exit price concept as contemplated in ASC 825. The fair value is determined using a discounted cash flow
analysis approach, using prepayment and charge-off adjusted cash flow projections at a loan level. The projected
cash flows were discounted to fair value using discount rates that were estimated using a build-up method reflecting
a hypothetical market participant’s funding and serving costs, and a charge for variability/liquidity. As these loans
reprice frequently at market rates and the credit risk is not considered to be greater than normal, the market value is
typically close to the carrying amount of these loans.
Collateral-dependent loans are recorded at fair value on a non-recurring basis using the fair value of the
underlying collateral. These loans include all of the Bank’s non-accrual loans and certain restructured loans, all of
which are reviewed individually for purposes of establishing and maintain an allocated allowance for credit losses, if
any. The fair value of each loan's collateral is generally based on estimated market prices from an independently
prepared appraisal, which is then adjusted for the cost related to liquidating such collateral; such valuation inputs
result in a non-recurring fair value measurement that is categorized as a Level 2 measurement. When adjustments
are made to an appraised value to reflect various factors such as the age of the appraisal or known changes in the
market or the collateral or if an appraisal value is based on a discount cash flow rather than a market comparable,
such valuation inputs are considered unobservable and the fair value measurement is categorized as a Level 3
measurement. In addition, unsecured collateral-dependent loans are measured at fair value based generally on
unobservable inputs, such as the strength of a guarantor, discounted cash flow models and management's judgment;
the fair value measurement of these loans is also categorized as a Level 3 measurement. Fair values were estimated
for portfolios of loans with similar financial characteristics. Each loan category was further segmented into fixed and
adjustable rate interest terms and by performing and non-performing categories.
(f)
Customers’ Liability on Acceptances and Acceptances Outstanding
The carrying amounts of customers’ liability on acceptances and acceptances outstanding approximate its fair
value due to their short-term nature.
(g)
Accrued Interest Receivable and Accrued Interest Payable
The carrying amounts of accrued interest receivable and accrued interest payable approximate its fair value
due to their short-term nature.
119
(h)
Deposits
The fair value of demand deposits, saving accounts, and certain money market deposits were assumed to be
the amount payable on demand at the reporting date. The fair value of interest bearing deposits and fixed maturity
certificates of deposit was estimated based on discounted cash flow analysis. The discount rate used for fair
valuation is based on interest rates currently offered on deposits with similar remaining maturities. This is a Level 2
measurement.
(i)
FHLB Borrowings
The fair value of FHLB borrowings was based on discounted cash flow analysis. The discount rate used for
fair valuation is based on rates currently offered for borrowings with similar remaining maturities, a Level 2
measurement.
(j)
Commitment to Extend Credit and Letters of Credit
The majority of our commitments to extend credit carry market interest rates if converted to loans. Because
these commitments are generally unassignable by either the borrower or us, they only have value to the borrower
and us. The estimated fair value is not material. The fair value of letters of credit was based on fees currently
charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
(k)
Subordinated Debt Issuance
The fair value of subordinated debt is estimated by discounting the cash flows through the maturity date
based on observable market rates which the Bank would pay for new issuances, a Level 2 measurement.
The carrying amount and estimated fair value of assets and liabilities as of December 31, 2024 and 2023 is
detailed on the table below.
December 31, 2024
Carrying
amount
Estimated
fair value
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
785,515
$
785,515
$
785,515
$
-
$
-
$
Securities held-to-maturity
20,021
18,273
-
18,273
-
Securities available-for-sale
348,706
348,706
348,706
-
Loans held for sale
2,214
2,214
2,214
-
-
Loans, net of allowance and net
deferred loan fees
5,559,904
5,717,826
-
-
5,717,826
Accrued interest receivable
33,561
33,561
-
3,387
30,174
Federal Home Loan Bank stock
15,000
N/A
N/A
N/A
N/A
Liabilities:
Demand deposits and savings:
Noninterest-bearing
704,859
$
704,859
$
-
$
704,859
$
-
$
Interest-bearing
2,057,115
2,057,115
-
2,057,115
-
Time deposits
3,154,874
3,155,552
-
3,155,552
-
Subordinated debt issuance
148,469
163,646
-
163,646
-
Accrued interest payable
16,517
16,517
-
16,517
-
(In thousands)
120
December 31, 2023
Carrying
amount
Estimated
fair value
Level 1
Level 2
Level 3
Assets:
Cash and cash equivalents
910,852
$
910,852
$
910,852
$
-
$
-
$
Securities held-to-maturity
21,171
19,540
-
19,540
-
Securities available-for-sale
313,842
313,842
313,842
-
Loans held for sale
360
360
-
360
-
Loans, net of allowance and net
deferred loan fees
5,184,064
5,352,530
-
-
5,352,530
Accrued interest receivable
33,892
33,892
-
3,165
30,727
Federal Home Loan Bank stock
15,000
N/A
N/A
N/A
N/A
Liabilities:
Demand deposits and savings:
Noninterest-bearing
786,995
$
786,995
$
-
$
786,995
$
-
$
Interest-bearing
2,104,323
2,104,323
-
2,104,323
-
Time deposits
2,818,024
2,813,824
-
2,813,824
-
Subordinated debt issuance
148,232
179,349
-
179,349
-
Accrued interest payable
16,124
16,124
-
16,124
-
(In thousands)
The fair value estimates do not reflect any premium or discount that could result from offering the
instruments for sale. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not
reflected in amounts disclosed. The fair value estimates are dependent upon subjective estimates of market
conditions and perceived risks of financial instruments at a point in time and involve significant uncertainties
resulting in variability in estimates with changes in assumptions.
The Bank determines the fair values of its financial instruments based on the fair value hierarchy established
in ASC 820. ASC 820 defines fair value, establishes a three-level fair value hierarchy based on the quality of inputs
used to measure fair value and expands disclosures about fair value measurements.
The three-level categorizations to measure the fair value of assets and liabilities are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable prices in active markets for similar assets or liabilities; prices for identical or similar
assets or liabilities in markets that are not active; directly observable market inputs for substantially the full term of
the asset and liability; market inputs that are not directly observable but are derived from or corroborated by
observable market data.
Level 3 - Unobservable inputs based on the Bank’s own judgments about the assumptions that a market
participant would use.
The Bank uses the following methodologies to measure the fair value of its financial assets on a recurring
basis:
Asset-backed securities – The Bank measures fair value of asset-backed securities by using quoted market
prices for similar securities or dealer quotes, a level 2 measurement.
Corporate notes – The Bank measures fair value of corporate notes by using quoted market prices for
similar securities or dealer quotes, a level 2 measurement.
121
U.S. Agency principal-only strip securities - The Bank measures fair value of principal-only strip securities
by using quoted market prices for similar securities or dealer quotes, a level 2 measurement.
U.S. Agency mortgage-backed securities – The Bank measures fair value of mortgage-backed securities by
using quoted market prices for similar securities or dealer quotes, a level 2 measurement.
SBA securities – The Bank measures fair value of small business administration (SBA) securities by using
quoted market prices for similar securities or dealer quotes, a level 2 measurement.
Collateralized mortgage obligations – The Bank measures fair value of collateralized mortgage obligations
by using quoted market prices for similar securities or dealer quotes, a level 2 measurement.
Municipal securities – The Bank measures fair value of state and municipal securities by using quoted
market prices for similar securities or dealer quotes, a level 2 measurement.
U.S. Treasury Notes – The Bank measures fair value of U.S. Treasury Notes by using quoted market prices
for similar securities or dealer quotes, a Level 2 measurement.
The following table presents the Bank’s hierarchy for its assets and liabilities measured at fair value on a
recurring basis at December 31, 2024:
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31,
2024
(In thousands)
Securities, available-for-sale:
Asset-backed securities
$ - $ 2,827
$ - $ 2,827
Corporate notes
- 120,364
- 120,364
U.S. Agency principal-only strips
- 217
- 217
U.S. Agency mortgage-backed securities
- 7,730
- 7,730
Collateralized mortgage obligations
- 125,284
- 125,284
Municipal securities
- 60,515
- 60,515
U.S. Treasury notes
- 31,769
- 31,769
Total
$ - $ 348,706
$ - $ 348,706
Fair Value Measurements Using
The following table presents the Bank’s hierarchy for its assets and liabilities measured at fair value on a
recurring basis at December 31, 2023:
122
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31,
2023
(In thousands)
Securities, available-for-sale:
Asset-backed securities
$ - $ 2,831
$ - $ 2,831
Corporate notes
- 90,522
- 90,522
U.S. Agency principal-only strips
- 289
- 289
U.S. Agency mortgage-backed securities
- 9,084
- 9,084
Collateralized mortgage obligations
- 134,924
- 134,924
SBA Securities
- 41
- 41
Municipal securities
- 63,813
- 63,813
U.S. Treasury notes
12,338
- 12,338
Total
$ - $ 313,842
$ - $ 313,842
Fair Value Measurements Using
There was one corporate note security that was transferred from Level 2 to Level 3 during the year ended
December 31, 2024. There were no transfers in or out of Level 1 and Level 2 fair value measurements to Level 3
during the years ended December 31, 2024 and 2023.
Collateral-dependent loans – On a non-recurring basis, the Bank measures the fair value of collateral-
dependent loans based on fair value of the collateral value which is derived from appraisals that take into
consideration prices in observable transactions involving similar assets in similar locations in accordance with
Receivables Topic of FASB ASC. Collateral value determined based on recent independent appraisals are
considered a level 2 measurement. Collateral values based on unobservable inputs that are supported by little or no
market data and less current appraisals are considered a level 3 measurement.
Other real estate owned and repossessed assets – Real estate and repossessed assets acquired in the settlement
of loans is initially recorded at fair value, less estimated costs to sell. The Bank records other real estate owned at
fair value on a nonrecurring basis. As from time to time, nonrecurring fair value adjustments to other real estate
owned are recorded based on current appraisal value of the property, a Level 2 measurement, or management’s
judgment and estimation based on reported appraisal value, a Level 3 measurement. There were $15.0 million and
$16.7 million of other real estate owned and repossessed assets measured at estimated fair value on a non-recurring
basis at December 31, 2024 and 2023, respectively. There were $1.6 million, $1.9 million and $1.4 million of losses
resulting from the measurement of other real estate owned or repossessed assets measured on a non-recurring basis
for the years ended December 31, 2024, 2023 and 2022, respectively.
The following table presents the Bank’s hierarchy for its assets measured at estimated fair value on a
nonrecurring basis at December 31, 2024 and 2023, and the total losses resulting from these fair value adjustments
for the year ended December 31, 2024 and 2024:
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31,
2024
Year Ended
December 31,
2024
Total Losses
(In thousands)
Collateral dependent loans:
Commercial and industrial
-
$
-
$
1,807
$
$ 1,807
5,481
$
Real estate owned
-
-
14,991
14,991
1,634
Total
-
$
-
$
16,798
$
16,798
$
7,115
$
123
Fair Value Measurements Using
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Balance at
December 31,
2023
Year Ended
December 31,
2023
Total Losses
(In thousands)
Real estate owned
-
$
-
$
16,625
$
$ 16,625
1,900
$
Total
-
$
-
$
16,625
$
16,625
$
1,900
$
The following table represents quantitative information regarding the significant unobservable inputs used in
significant Level 3 assets measured at fair value on a non-recurring basis at December 31, 2024 and 2023.
Fair Value
Valuation Technique
Unobservable Input
Range
Collateral-dependent loans:
Commercial and industrial
1,807
$
Market comparable
Adjustment to purchase agreement for
selling costs
5%
Real estate owned
14,991
$
Market comparable
Adjustment to appraisal for selling costs
5%
December 31, 2024
(In thousands)
Fair Value
Valuation Technique
Unobservable Input
Range
Real estate owned
16,625
$
Market comparable
Adjustment to appraisal for selling costs
5%
December 31, 2023
(In thousands)
Note 19 – Common Stock Repurchases and Issuances
In May of 2022, the Board of Directors elected to re-commence the repurchase plan which began in 2021
and received all the required approvals. During 2022, the Bank repurchased 464,438 shares, at an average price of
$68.86 per share, for total consideration of $32 million, completing the stock repurchase plan.
On June 9, 2023, the Bank received approval from the California Department of Financial Protection and
Innovation for the repurchase of up to $150 million in the Bank’s common stock or 5% of total outstanding shares,
whichever is less, in the open market. The timing, price and volume of the share repurchases will be determined by
Bank management based on its evaluation of market conditions and other relevant factors. This repurchase was
approved by shareholders at the Bank’s Annual Shareholders Meeting on May 16, 2023. On June 12, 2023, the
Board of Directors approved what will be the first tranche of that repurchase plan, which will call for the repurchase
of up to $50 million of the total $150 million repurchase. The share repurchase program may be suspended,
terminated or modified at any time by the Bank for any reason, including market conditions, the cost of repurchasing
shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate.
During the year ended December 31, 2024, the Bank repurchased 464,314 shares of common stock at a weighted
average price of $73.76. During the year ended December 31, 2023, the Bank repurchased 863,879 shares of
common stock at a weighted average price of $58.59.
ITEM 16.
FORM 10-K SUMMARY
None.
124
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 14, 2025
PREFERRED BANK
(Registrant)
By /s/ Li Yu
Li Yu
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant in the capacities and on the dates indicated.
/s/ Li Yu
Li Yu
Chairman and
Chief Executive Officer
(Principal executive officer)
March 14, 2025
/s/ Edward J. Czajka
Edward J. Czajka
Executive Vice President and
Chief Financial Officer
(Principal financial and accounting officer)
March 14, 2025
/s/ J. Richard Belliston
J. Richard Belliston
Director
March 14, 2025
/s/ William C. Y. Cheng
William C.Y. Cheng
Director
March 14, 2025
/s/ Clark Hsu
Clark Hsu
Director
March 14, 2025
/s/ Gary S. Nunnelly
Gary S. Nunnelly
Director
March 14, 2025
/s/ Chih-Wei Wu
Chih-Wei Wu
Director
March 14, 2025
/s/ Wayne Wu
Wayne Wu
Director
March 14, 2025
/s/ Kathleen Shane
Kathleen Shane
Director
March 14, 2025
125
Exhibit 21.1
SUBSIDIARIES OF THE REGISTRANT
PB Investment and Consulting, Inc. (PBICI), a California corporation
126
Exhibit 31.1
CERTIFICATION PURSUANT TO RULE
13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Li Yu, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Preferred Bank;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s Board of Directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 14, 2025
/s/ Li Yu
127
Li Yu
Chairman and Chief Executive Officer
128
Exhibit 31.2
CERTIFICATION PURSUANT TO RULE
13a-14(a) AND 15d-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Edward J. Czajka, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Preferred Bank;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and
have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, 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;
c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in
this report our conclusions about the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in
the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant’s auditors and the audit committee of the
registrant’s Board of Directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control
over financial reporting which are reasonably likely to adversely affect the registrant’s ability to
record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: March 14, 2025
/s/ Edward J. Czajka
Edward J. Czajka
Executive Vice President and Chief Financial Officer
129
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Preferred Bank (the “Bank”) on Form 10-K for the period ending
December 31, 2024 as filed with the Federal Deposit Insurance Corporation on the date hereof (the “Report”), I, Li
Yu, Chairman and Chief Executive Officer of the Bank, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2)
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Bank.
Date: March 14, 2025
/s/ Li Yu
Li Yu
Chairman and Chief Executive Officer
A signed original of this written statement required by Section 906, or other document authenticating
acknowledging, or otherwise adopting the signature that appears in typed form within this version of this written
statement required by Section 906, has been provided to the Bank and will be retained by the Bank and furnished to
the Federal Deposit Insurance Corporation or its staff upon request.
130
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Preferred Bank (the “Bank”) on Form 10-K for the period ending
December 31, 2024 as filed with the Federal Deposit Insurance Corporation on the date hereof (the “Report”), I,
Edward J. Czajka, Executive Vice President and Chief Financial Officer of the Bank, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2)
The information contained in the Report fairly presents, in all material respects, the financial
condition and results of operations of the Bank.
Date: March 14, 2025
/s/ Edward J. Czajka
Edward J. Czajka
Executive Vice President & Chief Financial Officer
A signed original of this written statement required by Section 906, or other document authenticating
acknowledging, or otherwise adopting the signature that appears in typed form within this version of this written
statement required by Section 906, has been provided to the Bank and will be retained by the Bank and furnished to
the Federal Deposit Insurance Corporation or its staff upon request.