UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-38149
RBB BANCORP
(Exact name of Registrant as specified in its Charter)
California
(State or other jurisdiction of
incorporation or organization)
1055 Wilshire Blvd., 12th floor
Los Angeles, California
(Address of principal executive offices)
27-2776416
(I.R.S. Employer
Identification No.)
90017
(Zip Code)
Registrant’s telephone number, including area code: (213) 627-9888
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, No Par Value
Trading Symbol(s)
RBB
Name of exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
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 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 filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐
Emerging growth company ☐
Accelerated filer
Smaller reporting 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 Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed
second fiscal quarter was $207,343,729.
The number of shares of the registrant’s common stock outstanding as of March 8, 2024, was 18,621,781.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K will be found in the Company’s definitive proxy
statement for its 2024 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, and
such information is incorporated herein by this reference.
Table of Contents
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 1C.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 9C.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Business
Risk Factors
Unresolved Staff Comments
Cybersecurity
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Reserved
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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FORWARD-LOOKING STATEMENTS
In this Annual Report on Form 10-K (this “Annual Report”), the term “Bancorp” refers to RBB Bancorp and the term “Bank” refers to Royal
Business Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively. The statements in this report include forward-
looking statements within the meaning of the applicable provisions of the Private Securities Litigation Reform Act of 1995, 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”), regarding
management’s beliefs, projections, and assumptions concerning future results and events. We intend such forward-looking statements to be covered by the
safe harbor provision for forward-looking statements in these provisions. All statements other than statements of historical fact are “forward-looking
statements” for purposes of federal and state securities laws, including statements about anticipated future operating and financial performance, financial
position and liquidity, growth opportunities and growth rates, growth plans, acquisition and divestiture opportunities, business prospects, strategic
alternatives, business strategies, financial expectations, regulatory and competitive outlook, investment and expenditure plans, financing needs and
availability, and other similar forecasts and statements of expectation and statements of assumptions underlying any of the foregoing. Words such as
“aims,” “anticipates,” “believes,” “can,” “could,” “estimates,” “expects,” “hopes,” “intends,” “may,” “plans,” “projects,” “seeks,” “shall,”
“should,” “will,” “predicts,” “potential,” “continue,” “possible,” “optimistic,” and variations of these words and similar expressions are intended to
identify these forward-looking statements. Forward-looking statements by us are based on estimates, beliefs, projections, and assumptions of management
and are not guarantees of future performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual
results to differ materially from our historical experience and our present expectations or projections. Such risks and uncertainties and other factors
include, but are not limited to, adverse developments or conditions related to or arising from:
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the Bank's ability to comply with the requirements of the consent order we have entered into with the Federal Deposit Insurance Corporation
(“FDIC”) and the California Department of Financial Protection and Innovation (“DFPI”) and the possibility that we may be required to
incur additional expenses or be subject to additional regulatory action, if we are unable to timely and satisfactorily comply with the consent
order;
the effectiveness of the Company's internal control over financial reporting and disclosure controls and procedures;
the potential for additional material weaknesses in the Company's internal controls over financial reporting or other potential control
deficiencies of which the Company is not currently aware or which have not been detected;
business and economic conditions generally and in the financial services industry, nationally and within our current and future geographic
markets, including the tight labor market, ineffective management of the United States (“U.S.”) federal budget or debt or turbulence or
uncertainly in domestic or foreign financial markets;
the strength of the U.S. economy in general and the strength of the local economies in which we conduct operations;
adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on
customer confidence, liquidity and regulatory responses to these developments;
possible additional provisions for credit losses and charge-offs;
credit risks of lending activities and deterioration in asset or credit quality;
extensive laws and regulations and supervision that we are subject to, including potential supervisory action by bank supervisory authorities;
increased costs of compliance and other risks associated with changes in regulation, including any amendments to the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the “Dodd-Frank Act”);
compliance with the Bank Secrecy Act and other money laundering statutes and regulations;
potential goodwill impairment;
liquidity risk;
fluctuations in interest rates;
risks associated with acquisitions and the expansion of our business into new markets;
inflation and deflation;
real estate market conditions and the value of real estate collateral;
the effects of having concentrations in our loan portfolio, including commercial real estate and the risks of geographic and industry
concentrations;
environmental liabilities;
our ability to compete with larger competitors;
our ability to retain key personnel;
successful management of reputational risk;
severe weather, natural disasters, earthquakes, fires; or other adverse external events could harm our business;
geopolitical conditions, including acts or threats of terrorism, actions taken by the U.S. or other governments in response to acts or threats of
terrorism and/or military conflicts, including the war between Russia and Ukraine and in the Middle East, which could impact business and
economic conditions in the U.S. and abroad;
public health crises and pandemics, and their effects on the economic and business environments in which we operate, including our credit
quality and business operations, as well as the impact on general economic and financial market conditions;
general economic or business conditions in Asia, and other regions where the Bank has operations;
failures, interruptions, or security breaches of our information systems;
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climate change, including any enhanced regulatory, compliance, credit and reputational risks and costs;
cybersecurity threats and the cost of defending against them;
our ability to adapt our systems to the expanding use of technology in banking;
risk management processes and strategies;
adverse results in legal proceedings;
the impact of regulatory enforcement actions, if any;
certain provisions in our charter and bylaws that may affect acquisition of the Company;
changes in tax laws and regulations;
the impact of governmental efforts to restructure the U.S. financial regulatory system;
the impact of recent or future changes in the FDIC insurance assessment rate and the rules and regulations related to the calculation of the
FDIC insurance assessments;
the effect of changes in accounting policies and practices or accounting standards, as may be adopted from time-to-time by bank regulatory
agencies, the U.S. Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting
Standards Board (“FASB”) or other accounting standards setters, including Accounting Standards Update (“ASU” or “Update”) 2016-13
(Topic 326, “Measurement of Current Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses Model
(“CECL”) model, which changed how we estimate credit losses and may further increase the required level of our allowance for credit losses in
future periods;
market disruption and volatility;
fluctuations in our stock price;
restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure;
issuances of preferred stock;
our ability to raise additional capital, if needed, and the potential resulting dilution of interests of holders of our common stock;
the soundness of other financial institutions and our ongoing relations with our various federal and state regulators, including the SEC, FDIC,
FRB and DFPI; and
our success at managing the risks involved in the foregoing items.
These and other factors are further described in this Annual Report (at Item 1A in particular), the Company’s other reports filed with the SEC and
other filings the Company makes with the SEC from time to time. Actual results in any future period may also vary from the past results discussed in this
report. Given these risks and uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements, which speak to the date
of this report. We have no intention and undertake no obligation to update any forward-looking statement or to publicly announce any revision of any
forward-looking statement to reflect future developments or events, except as required by law.
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Item 1. Business.
Company Overview
PART I
RBB Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. RBB Bancorp’s principal business
is to serve as the holding company for its wholly-owned banking subsidiaries, Royal Business Bank (“Bank”) and RBB Asset Management Company
(“RAM”), collectively referred to herein as “the Company.” The Bank began operations in 2008 as a California state-chartered commercial bank. In 2012,
we established RBB Asset Management Company (“RAM”), as a wholly-owned subsidiary of the Company. We may continue to utilize RAM to purchase
certain assets from the Bank from time to time, including assets acquired in acquisitions that we may make in the future. When we refer to “we”, “us”,
“our”, or the “Company”, we are referring to RBB Bancorp and its consolidated subsidiaries including the Bank, collectively. When we refer to the “parent
company”, “Bancorp”, or the “holding company”, we are referring to RBB Bancorp, the parent company, on a stand-along basis.
The Bank was organized by a group of experienced bankers, some of whom began their banking careers in Asia and have worked together at various
banks in California during the 1980s and 1990s. After working for many years in positions of increasing responsibility at such banks, these individuals
identified an opportunity resulting from the 2007 credit crisis to capitalize on the general dissatisfaction that many customers had with the nature and level
of services being provided by existing Asian-American banks at that time. These bankers observed that first generation Chinese immigrants were not well
served by existing banks.
Our strategic plan focuses on providing commercial and consumer banking services to Asian American communities. The Bank’s management team
has utilized their strong local community ties along with their credibility and relationships with both federal and California bank regulatory agencies to
create a bank that we believe emphasizes strong credit quality, a solid balance sheet without the burden of the troubled legacy assets of other banks, and a
robust capital base, with the ability to raise additional capital.
In recent years, the Bank has brought in independent directors and senior managers from diverse ethnic backgrounds. Using the experience and
expertise of our officers and employees, we have tailored our loan and deposit products to serve the Chinese-American, Korean-American, and other
Asian-American markets. We focus both on existing businesses and individuals already established in our local market area, as well as Asian immigrants
who desire to establish their own businesses, purchase a home, or educate their children in the United States. Our size and infrastructure allow us to serve
customers who require higher lending limits than normally associated with other smaller, local banking institutions that serve the Asian-American
communities in which we operate. Our strategic plan is centered on delivering high-touch, superior customer service, customized solutions, and quick and
local decision-making with respect to loan originations and servicing.
After forming the Bank and retaining a strong executive management team, we established RBB Bancorp, a California corporation, as our holding
company in January 2011. We began to review potential acquisition candidates and over the next several years, we acquired six banks to strategically grow
our customer base by expanding our geographic footprint into other key Asian-American markets. Initially, we made a series of all cash
transactions acquiring Las Vegas, Nevada-based First Asian Bank (“FAB”) and Oxnard, California-based Ventura County Business Bank (“VCBB”) in
2011, California-based Los Angeles National Bank (“LANB”) in 2013, California-based TFC Holding Company (“TFC”) and its wholly-owned subsidiary,
TomatoBank in 2016, New York-based First American International Corp. (“FAIC”) and its wholly-owned subsidiary First American International Bank
(“FAIB”) in 2018, and Chicago-based PGB Holdings, Inc. (“PGBH”) and its wholly-owned subsidiary, Pacific Global Bank (“PGB”) in 2020.
On January 14 2022, we purchased the Bank of the Orient's (“BOTO”) Honolulu, Hawaii branch (the “Hawaii Branch”). We received a payment of
$71.0 million to acquire all the premises and equipment at the Hawaii Branch, all deposits totaling $81.7 million and performing loans totaling $7.4 million
as of the purchase date, reflecting a premium paid by us of approximately $2.3 million.
We previously disclosed that, on December 28, 2021, we entered into a definitive agreement to acquire Gateway Bank F.S.B. (“Gateway”) in an all
cash transaction, subject to certain terms and conditions. On September 28, 2023, we announced that the Company and Gateway had mutually agreed to
terminate the definitive agreement, effective as of that date. Neither party has or will have any liability or pay any penalty to the other party as a result of
the termination, and each party has released the other from any and all claims related to the definitive agreement or the transactions contemplated by the
definitive agreement.
We intend to continue to pursue organic growth opportunities and, once we fully resolve the matters contained in our Consent Order, growth
through acquisitions that meet our criteria. We will consider opportunistic acquisitions that we believe will be beneficial to our long-term growth strategy
for loans and deposits and immediately accretive to earnings.
We operate as a minority depository institution, which is defined by the FDIC as a federally insured depository institution (“IDI”) where 51% or
more of the voting stock is owned by minority individuals. A minority depository institution is eligible to receive from the FDIC and other federal
regulatory agencies training, technical assistance and review, and assistance regarding the implementation of proposed new deposit taking and lending
programs, as well as with respect to the adoption of applicable policies and procedures governing such programs. We intend to maintain our minority
depository institution designation, as it is expected that at least 51% of our issued and outstanding shares of capital shall remain owned by minority
individuals. The minority depository institution designation has been historically beneficial to us, as the FDIC has reviewed and assisted with the
implementation of our deposit and lending programs, and we continue to use the program for technical assistance.
In addition, in 2016, we became a community development financial institution (“CDFI”) which is a financial institution that has a primary mission
of community development, serves a target market, is a financing entity, provides development services, remains accountable to its community, and is a
non-governmental entity. CDFIs are certified by the CDFI Fund at the U.S. Department of the Treasury (“Treasury”), which provide funds to CDFIs
through a variety of programs. We have established a CDFI advisory board to assist the Bank in finding organizations that provide services to low-to-
moderate income individuals. In our commitment to this designation, the Bank has a policy that requires management above the level of vice president to
contribute at least 24 hours of community service annually to a qualified organization. In 2021, the Bank was awarded a $1.8 million CDFI grant under
the Treasury’s Rapid Response Program to facilitate a rapid response to the economic impacts of the COVID-19 pandemic in distressed and underserved
communities. The award was subject to various performance goals and measures that specify the use of the funds to provide affordable housing. The Bank
utilized all of such funds to originate two loans that provide affordable housing to underserved communities. In 2023, the Bank was awarded a $5.0 million
CDFI grant under the Treasury’s Equitable Recovery Program (“ERP”) in response to the economic impacts of the COVID-19 pandemic in low and
moderate-income communities that were disproportionally harmed by health and economic effects of the pandemic. The CDFI ERP award was subject to
various performance goals and measures that specify the use of the funds. The Bank utilized all of such funds to originate two loans in the fourth quarter of
2023, which fulfilled the performance obligations specified under the ERP.
The Bank currently operates 24 branches across two separate regions: the Western region with branches in Los Angeles County, California; Orange
County, California; Ventura County, California; Clark County, Nevada; and Honolulu, Hawaii; and the Eastern region with branches in Manhattan,
Brooklyn and Queens, New York; Chicago, Illinois and Edison, New Jersey.
As of December 31, 2023, the Company had total consolidated assets of $4.03 billion, total consolidated held for investment loans of $3.03 billion,
total consolidated deposits of $3.17 billion and total consolidated shareholders’ equity of $511.3 million. Our common stock is traded on the NASDAQ
Global Select Market under the symbol “RBB.”
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Our Strategic Plan
In connection with the organization of the Company, we adopted a strategic plan that reflects the Company’s growth and recent developments. The
Company’s current strategic plan contains the following key elements:
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Maintain regulatory capital levels in excess of fully phased-in Basel III requirements;
Provide commercial banking services and products primarily to businesses and their owners operating within Asian-American communities;
Maintain a board of directors comprised of business leaders who work closely with community leaders;
Attract and retain an experienced management team with demonstrated industry knowledge and lending expertise;
Focus on a target market consisting of businesses that:
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are located in southern California, the San Francisco Bay area, the Chicago metropolitan area, the New York metropolitan area (including
northern New Jersey), Nevada and Hawaii;
provide or receive goods or services to or from Asian countries, primarily Chinese-speaking regions, such as China, Hong Kong, Macau,
Taiwan;
have annual sales between $5 million and $50 million and between approximately 50 to 500 employees;
have loan needs of $1 million to $40 million; and
prioritize using bankers with strong market knowledge who are dedicated to serving the local markets in which we operate.
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Provide five main lending products:
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Commercial real estate (“CRE”) lending consisting of owner occupied and non-owner occupied commercial property, including loans
secured by single-family residences for a business purposes and multi-family residential property;
Construction and land development (“C&D”) loans comprised of residential construction, commercial construction and land acquisition
and development construction;
Commercial and Industrial (“C&I”) lending that emphasizes trade finance, operating lines of credit, and working capital loans secured by
inventory, accounts receivables, fixed assets and real estate;
Single-family residential (“SFR”) mortgage lending primarily to Asian-Americans willing to provide higher down payment amounts and
pay higher fees and interest rates in return for reduced documentation requirements. The Bank originates these loans through its
correspondent banking relationships, and through its branch network. In addition, we offer 15-year and 30-year qualified mortgage loans
that are sold directly to the Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation
(“FHLMC”), and in most cases, the Bank retains the loan servicing rights and obligations and;
Small Business Administration (“SBA”) loans consisting primarily of 7(a) loans through our SBA Preferred Lender status. We sell the
SBA guarantee portion of the loan in the secondary market generally on a quarterly basis, subject to market conditions.
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Consider new markets, products and services;
Invest in new technologies or products where appropriate to improve efficiency, increase earnings, acquire new bank customers, or deepen
relationships with existing clients;
Explore digital banking initiatives for consumers and businesses to improve convenience, speed, and user experience; and
Explore new niche markets to gain a competitive advantage.
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Our Competition
We view the Asian-American banking market, including the Company, as comprised of 29 banks divided into three overlapping segments: publicly-
traded banks, locally-based banks, and banks that are subsidiaries of Taiwanese or Chinese banks. These banks promote competition for attracting deposits
and making loans in the markets we target.
In addition to Chinese-American banks, we also compete with other banks in the region, particularly with Korean-American banks in our lending
areas for SFR and SBA loans. Although we were founded by and market primarily to Chinese-Americans, we are broadening our marketing efforts to
include all Asian-American communities. In certain geographic markets where we currently operate, there is an overlap between Chinese-American,
Korean-American and other Asian-American banks for loan and deposit business. We aim to grow both organically and potentially through
opportunistic acquisitions in these markets.
Lending Activities
We seek to be the premier provider of lending products and services in our market areas and serve the credit needs of high quality business and
individual borrowers in the communities that we serve. Our lending strategy is to maintain a broadly diversified loan portfolio based on the type of
customer (e.g., businesses versus individuals), type of loan product (e.g., owner occupied commercial real estate, commercial loans, etc.), geographic
location and industries in which our business customers are engaged. We principally focus our lending activities on loans that we originate from borrowers
located in our market areas.
We strive to expedite all requests from potential borrowers by promptly responding after we receive required financials and certain preliminary
information. Our ability to provide quick responses to borrowers with financial solutions, while performing appropriate underwriting if a borrower decides
to move forward, is due primarily to the experiences and expertise of our professionals who understand the needs of borrowers in our target markets and the
areas of commercial lending practices that the Bank is engaged in. In addition, our credit approval process is streamlined since decision-making often only
requires a couple of key executive management members while any loans that exceed executive management's delegated authority is elevated to a board
loan committee which meets regularly or whenever needed.
We have five principal lending areas:
Commercial and Industrial Loans. We have significant expertise in small to middle market C&I lending. Our success is the result of our product and
market expertise. We focus on delivering high-quality, customized and quick turnaround service for our clients while maintaining an appropriate balance
between prudent and disciplined underwriting and flexibility and responsiveness to our clients. Our trade financing unit provides international letters of
credit, SWIFT, export advice, trade finance discounts and foreign exchange to many of our C&I loan customers. As of December 31, 2023, we had
outstanding C&I loans of $130.1 million, or 4.3% of our total loan portfolio, compared to $201.2 million, or 6.0% of our total loan portfolio as of
December 31, 2022. C&I loans on nonaccrual totaled $854,000 and $713,000 at December 31, 2023 and 2022.
Commercial Real Estate Loans. We offer real estate loans for owner occupied and non-owner occupied commercial property, including loans secured
by single-family residences for business purposes, multi-family residential property and construction and land development loans. Our management team
has an extensive knowledge of the markets where we operate and our borrowers; we take a conservative approach to CRE lending, focus on high quality
credits with low loan-to-value ratios, income-producing properties with stable cash flow, and strong collateral profiles. The real estate securing our existing
CRE loans includes a wide variety of property types, such as multi-family properties, mixed-use residential and commercial, mobile home parks, hotels,
offices, apartments, warehouses and retail centers.
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The total CRE portfolio was $1.2 billion, or 38.5% of our total loan portfolio, at December 31, 2023 of which $193.4 million was secured by owner
occupied properties compared to $1.3 billion, or 39.3% of our total loan portfolio, at December 31, 2022, of which $255.2 million was secured by owner
occupied properties. The multi-family residential loan portfolio totaled $573.4 million as of December 31, 2023 compared to $643.2 million as of
December 31, 2022. Non-accrual CRE loans totaled $10.6 million and $13.2 million at December 31, 2023 and 2022.
Construction and Land Development Loans. Our C&D loans are comprised of residential construction, commercial construction and land acquisition
and development construction. Interest reserves are generally established on real estate construction loans. As of December 31, 2023, our real estate
construction loan portfolio totaled $181.5 million, or 6.0% of our total loan portfolio, and was divided among the following categories: $80.3 million of
residential construction; $78.1 million of commercial construction; and $23.1 million of land acquisition and development. As of December 31, 2022, the
C&D loans were comprised of $166.6 million of residential construction, $77.2 million of commercial construction, and $33.1 million of land acquisition
and development. There were no non-accrual C&D loans as of December 31, 2023 compared to $141,000 as of December 31, 2022.
SBA Loans. We are designated as a Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We
originate all loans to hold for investment and move loans to available for sale as management decides which loans to sell. We generally sell the guaranteed
portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service
businesses for working capital needs or business expansions. SBA loans can have any maturity up to 25 years. Typically, non-real estate secured loans
mature in less than 10 years. Collateral may include inventory, accounts receivable and equipment, and personal guarantees. From time to time, we also
originate SBA 504 loans. As of December 31, 2023, our SBA loan portfolio totaled $52.1 million, or 1.7% of our total loan portfolio compared to $61.4
million, or 1.8% at December 31, 2022. Our non-accrual SBA loans as of December 31, 2023 were $2.1 million, compared to $2.2 million as of December
31, 2022.
SFR Loans. We originate qualified SFR mortgage loans and non-qualified, alternative documentation SFR mortgage loans through correspondent
relationships and retail channels, including our branch network, to accommodate the needs of the Asian American market. The qualified SFR mortgage
loans are 15-year and 30-year conforming mortgages, which are generally originated through our branch network and may be sold directly to FNMA and
FHLMC. As of December 31, 2023, we had $1.49 billion of SFR mortgage loans, representing 49.1% of our total loan portfolio compared to $1.46 billion,
or 43.9% at December 31, 2022. We had $18.1 million in non-accrual SFR real estate loans as of December 31, 2023 compared to $5.9 million in non-
accrual loans at December 31, 2022.
We originate non-qualified SFR mortgage loans generally to hold for investment. The loans generated through our retail branch network are to our
customers, many of whom establish a deposit relationship with us. During 2023, we originated $78.6 million of such loans through our retail channel and
$113.7 million through our correspondent and wholesale channel of such loans. During 2022, we originated $386.1 million through our retail channel and
$286.0 million through our correspondent and wholesale channel of such loans. The decrease in loan originations was due to increases in market interest
rates.
We have sold non-qualified SFR mortgage loans to other Asian-American banks and other investors. During 2023, we engaged in loan sales to one
affiliated bank, and are working to expand our network of entities who will acquire our SFR loan product. Loans held for sale consist primarily of first trust
deed mortgages on SFR properties located in California, New York and New Jersey. SFR mortgage loans held for sale are generally sold with the servicing
rights retained.
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Deposits
The quality of our deposit franchise and access to stable funding are key components to our success. We offer traditional depository products,
including checking, savings, money market and certificates of deposits, to individuals, businesses, municipalities and other entities through our branch
network. Deposits at the Bank are insured by the FDIC up to statutory limits. We consider all deposit relationships under $250,000 as a core relationship
except for time deposits originated through an internet listing service.
As an Asian-American business bank that focuses on successful businesses and their owners, many of our depositors choose to leave large deposits
with us. We monitor all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be stable if there are any three or more of the
following characteristics: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services
with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the
relationship with us. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate
assessment of our deposit base. As of December 31, 2023, $2.36 billion or 74.4% of our relationships are considered stable relationships.
Many of our management team members, including our branch managers, have worked together for up to 30 years, and our deposits relationships
have been cultivated over that time period. Our ability to gather deposits, particularly core deposits, is an important aspect of our business franchise and we
believe core deposits are a significant driver of franchise value as a cost efficient and stable source of funding to support our growth. As of December
31, 2023, we had $3.17 billion of total deposits, with a weighted average spot rate of 3.51%.
Other Subsidiaries
In addition to the Bank and RAM, the holding Company has three statutory business trusts as follows:
TFC Statutory Trust. In connection with our 2016 acquisition of TomatoBank and its holding company, TFC, the Company acquired the TFC
Statutory Trust (the “TFC Trust”), a statutory business trust that was established by TFC in 2006 as a wholly-owned subsidiary.
FAIC Statutory Trust. In connection with our 2018 acquisition of FAIB and its holding company, FAIC, the Company acquired the FAIC Statutory
Trust (the “FAIC Trust”), a statutory business trust that was established by FAIC in 2004 under the laws of Delaware as a wholly-owned subsidiary.
PGBH Trust. In connection with our 2020 acquisition of PGB and its holding company, PGBH, the Company acquired Pacific Global Bank Trust I
(“PGB Capital Trust I”), a statutory business trust that was established by PGB in 2004 under the laws of Delaware as a wholly-owned subsidiary.
Each of the foregoing trusts issued trust preferred securities representing undivided preferred beneficial interests in the assets of the trusts. The
proceeds of these trusts preferred securities were invested in certain securities issued by us, with similar terms to the relevant series of securities issued by
the trusts, which we refer to as subordinated debentures. The Company guarantees on a limited basis the payments of distributions on the capital securities
of the trusts and payments on redemption of the capital securities of the trusts. The Company is the owner of all the beneficial interests represented by the
common securities of the trusts.
In addition, the Bank has a wholly-owned subsidiary, FAIB Capital Corp, a real estate investment trust, which was acquired in connection with the
2018 acquisition of FAIC. FAIB Capital Corp. is a New York State corporation formed on August 28, 2013. The purpose of this real estate investment
trust is to minimize New York State and local taxes.
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Human Capital Resources
We believe in the value of teamwork and the power of diversity. We expect and encourage participation and collaboration, and understand that we
need each other to be successful. We value accountability because it is essential to our success, and we accept our responsibility to hold ourselves and
others accountable for meeting shareholder commitments and achieving exceptional standards of performance.
Staffing Model. The majority of our staff are regular full-time employees. We also employ regular part-time associates and some
seasonal/temporary associates. As of December 31, 2023, we had 376 full-time equivalent employees. We do not outsource job functions or use
subcontractors to fill open positions. None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining
agreement.
Diversity, Equity and Inclusion. We believe that diversity of thought and experiences results in better outcomes and empowers our employees to
make more meaningful contributions within our company and communities. Our board of directors is comprised of six Asian-Americans and
four Caucasians, of which seven members are men and three members are women. Our executive committee is comprised of six Asian-Americans and
two Caucasians, including two members who are women. Our workforce includes 332 Asian-Americans, 23 Latin-Americans, 20 Caucasians, one Pacific
Islander and four employees who identify with two or more races.
Health & Safety. We are focused on conducting our business in a safe manner and in compliance with all local, state and federal safety and health
regulations, and special safety concerns.
Benefits. We are committed to offering a competitive total compensation package. We regularly compare compensation and benefits with peer
companies and market data, making adjustments as needed to ensure compensation stays competitive. We also offer a wide array of benefits for our
associates and their families, including:
● Competitive bonus programs;
● Comprehensive medical, dental and vision benefits;
● 401(k) plan including a competitive company match;
● Flexible work schedules;
● Paid time off (PTO), holidays and bank holidays;
● Internal training and development; and
● Employee Assistance Plans (EAP)
Climate-related Discussion
The SEC adopted a final rule that will require companies to disclose a broad array of climate-related exposures, including, among other things,
material climate-related risks; activities to mitigate or adapt to such risks; information about the registrant’s board of directors’ oversight of climate-related
risks and management’s role in managing material climate-related risks; and information on any climate-related targets or goals that are material to the
registrant’s business, results of operations, or financial condition. The final rule will also require disclosure of Scope 1 and/or Scope 2 greenhouse gas
(GHG) when such emissions are material, the filing of an attestation report covering the required disclosure of a company’s Scope 1 and/or Scope 2
emissions and disclosure of the financial statement effects of severe weather events and other natural conditions.
The disclosures related to GHG emissions would include a company’s material direct emissions and indirect emissions in the form of purchased
energy — otherwise known as Scope 1 and Scope 2 emissions, respectively.
As a financial institution, the Company has minimal Scope 1 direct GHG emissions. Scope 1 GHG emissions result from a leased automobile, and
three owned vehicles, all of which are compliant with state emissions regulations. Scope 2 emissions result from 23 leased office properties and six owned
office properties, which have indirect GHG emissions from acquired electricity, steam heat or cooling.
Under the SEC's final rule, Scope 1 and Scope 2 disclosures will be required on a phased-in basis for larger registrants when such emissions are
material and will be required to be made by accelerated filers reporting fiscal year 2028 results.
We are committed to overseeing the Company’s environmental efforts. The Company considers environmental matters throughout the
organization. The Company’s environmental initiatives are currently focused on reducing the Company’s environmental impact through supporting
employees' use of mass transit where possible, recycling efforts and supporting organizations in the communities the Company serves that address
sustainable development goals.
Properties
We believe that the leases to which we are subject are generally on terms consistent with prevailing market terms. None of the leases are with our
directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates of the foregoing.
Corporate Information
Our principal executive offices are located at 1055 Wilshire Blvd. Suite 1200, Los Angeles, California 90017, and our telephone number at that
address is (213) 627-9888.
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Available Information
We invite you to visit our website at www.royalbusinessbankusa.com, to access free of charge our Annual Reports on Form 10-K, Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, all of which are made available as soon as reasonably practicable after we
electronically file such material with or furnish it to the SEC. The content of our website is not incorporated into and is not part of this Annual Report. In
addition, you can write to us to obtain a free copy of any of those reports at RBB Bancorp, 1055 Wilshire Blvd. Suite 1200, Los Angeles, California 90017,
Attn: Investor Relations. These reports are also available through the SEC’s Public Reference Room, located at 100 F Street NE, Washington, DC 20549
and online at the SEC’s website, available at http://www.sec.gov. Investors can obtain information about the operation of the SEC’s Public Reference Room
by calling 800-SEC-0330. Our Code of Ethics and other corporate governance documents are located on our website at www.royalbusinessbankusa.com.
Supervision and Regulation
General
Financial institutions, their holding companies and their affiliates are extensively regulated under U.S. federal and state laws. As a result, the growth
and earnings performance of the Company and its subsidiaries may be affected not only by management decisions and general economic conditions, but
also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the DFPI, the Board
of Governors of the Federal Reserve System (“Federal Reserve”), the FDIC, and the Consumer Financial Protection Bureau (“CFPB”). Furthermore, tax
laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the FASB, securities laws administered by
the SEC and state securities authorities, anti-money laundering laws enforced by the Treasury, and mortgage related rules, including with respect to loan
securitization and servicing by the U.S. Department of Housing and Urban Development, and agencies such as FNMA and FHLMC, have an impact on the
Company’s business. The effect of these statutes, regulations, regulatory policies and rules are significant to the financial condition and results of
operations of the Company and its subsidiaries, including the Bank, and the nature and extent of future legislative, regulatory or other changes affecting
financial institutions are impossible to predict with any certainty.
Additional initiatives may be proposed or introduced before Congress, the California Legislature, and other governmental bodies in the future. Such
proposals, if enacted, may further alter the structure, regulation, and competitive relationship among financial institutions and may subject us to increased
supervision and disclosure and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules, regulations and policies to
implement and enforce existing legislation. It cannot be predicted whether, or in what form, any such legislation or regulatory changes in policy may be
enacted or the extent to which the business of the Bank would be affected thereby. The outcome of examinations, any litigation, or any investigations
initiated by state or federal authorities also may result in necessary changes in our operations and increased compliance costs.
Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of financial institutions,
their holding companies and affiliates intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than their
shareholders. These federal and state laws, and the related regulations of the bank regulatory agencies, affect, among other things, the scope of business, the
kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans,
the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends.
This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory
agencies, which results in examination reports and ratings that, while not publicly available, can affect the conduct and growth of their businesses. These
examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and
performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations
on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with
applicable laws or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.
The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and its subsidiaries,
including the Bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those
that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.
Bank Holding Company and Bank Regulation
Bancorp is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “BHCA”), and is registered as
such with the Federal Reserve. Bancorp is also a bank holding company within the meaning of Section 1280 of the California Financial Code. Therefore,
Bancorp and its subsidiaries are subject to examination by, and may be required to file reports with, the Federal Reserve and the DFPI. Federal Reserve and
DFPI approvals are also required for financial holding companies to acquire control of a bank. As a California commercial bank, the deposits of which are
insured by the FDIC, the Bank is subject to regulation, supervision, and regular examination by the DFPI and by the FDIC, as the Bank’s primary federal
regulator, and must additionally comply with certain applicable regulations of the Federal Reserve.
The wide range of requirements and restrictions contained in both federal and state banking laws include:
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Requirements that bank holding companies and banks file periodic reports.
Requirements that bank holding companies and banks meet or exceed minimum capital requirements (See “Regulatory Capital Requirements”
below.)
Requirements that bank holding companies serve as a source of financial and managerial strength for their banking subsidiaries. In addition, the
regulatory agencies have “prompt corrective action” authority to limit activities and require a limited guaranty of a required bank capital
restoration plan by a bank holding company if the capital of a bank subsidiary falls below capital levels required by the regulators. (See
“Source of Strength” and “Prompt Corrective Action” below.)
Limitations on dividends payable to stockholders. Bancorp’s ability to pay dividends is subject to legal and regulatory restrictions. A
substantial portion of Bancorp’s funds to pay dividends or to pay principal and interest on our debt obligations is derived from dividends paid
by the Bank. (See “The Company – Dividend Payments” below).
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Limitations on dividends payable by bank subsidiaries. These dividends are subject to various legal and regulatory restrictions. The federal
banking agencies have indicated that paying dividends that deplete a depositary institution’s capital base to an inadequate level would be an
unsafe and unsound banking practice. Moreover, the federal agencies have issued policy statements that provide that bank holding companies
and insured banks should generally only pay dividends out of current operating earnings. (See “The Bank – Dividend Payments” below).
Safety and soundness requirements. Banks must be operated in a safe and sound manner and meet standards applicable to internal controls,
information systems, internal audit, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, as well as
other operational and management standards. These safety and soundness requirements give bank regulatory agencies significant latitude in
exercising their supervisory authority and the authority to initiate informal or formal enforcement actions.
Requirements for notice, application and approval, or non-objection of acquisitions and certain other activities conducted directly or in
subsidiaries of Bancorp or the Bank.
Compliance with the Community Reinvestment Act (“CRA”). The CRA requires that banks help meet the credit needs in their communities,
including the availability of credit to low and moderate income individuals. If the Bank fails to adequately serve its communities, restrictions
may be imposed, including denials of applications for adding branches, subsidiaries or affiliate companies, for engaging in new activities or
for merger or purchase of other financial institutions. In its last reported examination by the FDIC in May 2023, the Bank received a CRA
rating of “Satisfactory.”
Compliance with the Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) and other anti-money laundering laws (“AML”), and the regulations of the Treasury’s
Office of Foreign Assets Control (“OFAC”). (See “The Bank – Anti-Money Laundering and OFAC Regulation" below).
Limitations on the amount of loans to one borrower and its affiliates and to executive officers and directors.
Limitations on transactions with affiliates.
Restrictions on the nature and amount of investments in, and the ability to underwrite, certain securities.
Requirements for opening of intra- and interstate branches.
Compliance with truth in lending and other consumer protection and disclosure laws to ensure equal access to credit and to protect consumers
in credit transactions. (See “Operations, Consumer and Privacy Compliance Laws” below).
Compliance with provisions of the Gramm-Leach-Bliley Act of 1999 (“GLB Act”) and other federal and state laws dealing with privacy for
nonpublic personal information of customers, including but not limited to the California Consumer Privacy Act of 2018 (the “CCPA”), which
took effect January 1, 2020. The CCPA gives consumers more control over the personal information that businesses collect about them and
the CCPA regulations provide guidance on how to implement the law. This landmark law secures new privacy rights for California consumers,
including: (i) the right to know about the personal information a business collects about them and how it is used and shared; (ii) the right to
delete personal information collected from them (with some exceptions); (iii) the right to opt-out of the sale of their personal information; and
(iv) the right to non-discrimination for exercising their CCPA rights. The federal bank regulators have adopted rules limiting the ability of
banks and other financial institutions to disclose non-public information about consumers to unaffiliated third parties. These limitations require
disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information
to an unaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and
conveyed to outside vendors.
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Specific federal and state laws and regulations which are applicable to banks regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of deposited funds, their activities relating to dividends, the nature and amount
of collateral for certain loans, servicing and foreclosing on loans, borrowings, capital requirements, certain check-clearing activities, branching, and
mergers and acquisitions. California banks are also subject to statutes and regulations including Federal Reserve Regulation O and Federal Reserve Act
Sections 23A and 23B and Regulation W, which restrict or limit loans or extensions of credit to “insiders,” including officers, directors, and principal
shareholders, and affiliates, and purchases of assets from affiliates, including parent bank holding companies, except pursuant to certain exceptions and
only on terms and conditions at least as favorable to those prevailing for comparable transactions with unaffiliated parties. The Dodd-Frank Act expanded
definitions and restrictions on transactions with affiliates and insiders under Sections 23A and 23B, and also lending limits for derivative transactions,
repurchase agreements and securities lending, and borrowing transactions.
The Bank operates branches and/or loan production offices in California, Illinois, Nevada, New York, New Jersey and Hawaii. While the
DFPI remains the Bank’s primary state regulator, the Bank’s operations in these jurisdictions are subject to examination and supervision by local bank
regulators, and transactions with customers in those jurisdictions are subject to local laws, including consumer protection laws.
CFPB Actions
The Dodd-Frank Act provided for the creation of the 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, which are also subject to examination by the CFPB. As the Bank has less than $10 billion in
assets, it is not examined by the CFPB for compliance with CFPB regulations, although it is examined by the FDIC and the DFPI.
The CFPB has enforcement authority over unfair, deceptive or abusive acts and practices (“UDAAP”). UDAAP is considered one of the most far
reaching enforcement tools at the disposal of the CFPB and covers all consumer and small business financial products or services such as deposit and
lending products or services such as overdraft programs and third-party payroll card vendors. It is a wide-ranging regulatory net that potentially picks up
the gaps not included in other consumer laws, rules and regulations. Violations of UDAAP can be found in many areas and can include advertising and
marketing materials, the order of processing and paying items in a checking account or the design of client overdraft programs. The scope of coverage
includes not only direct interactions with clients and prospects but also actions by third-party service providers. The Dodd-Frank Act does not prevent
states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely
affect our business, financial condition or results of operations.
In 2020, the California Legislature passed Assembly Bill 1864, which enacts the California Consumer Financial Protection Law (“CCFPL”). Among
other items, the CCFPL:
● Establishes UDAAP authority for the DFPI, adding “abusive” to “unfair or deceptive” acts or practices prohibited by California law, and
authorizing remedies similar to those provided in the Dodd-Frank Act;
● Authorizes the DFPI to impose penalties of $2,500 for “each act or omission” in violation of the law without a showing that the violation was
willful, which, arguably, represents an enhancement of DFPI’s existing enforcement powers in contrast to Dodd-Frank and existing
California law, enhanced penalties for “reckless” violations of up to $25,000 per day or $10,000 per violation, and for “knowing” violations,
the penalty may be up to $1,000,000 per day or 1% of the violator’s net worth (whichever is less) or $25,000 per violation;
● Exempts from the DFPI’s UDAAP authority, banks, credit unions, federal savings and loan associations, and similar entities, as well as
current licensees of the DFPI and licensees of other California agencies, “to the extent that licensee or employee is acting under the authority
of” the license;
● Creates a “registration” requirement (subject to the DFPI’s implementing regulations) that greatly expands the reach of the DFPI to oversee
entities that are not currently subject to licensure/registration;
● Provides the DFPI with broad discretion to determine what constitutes a “financial product or service” within the law’s coverage, including
by a regulation finding that the financial product or service is either: “(A) Entered into or conducted as a subterfuge or with a purpose to
evade any consumer financial law,” or “(B) Permissible for a bank to offer or provide but has, or likely will have, a material impact on
consumers,” with certain enumerated exclusions; and
● Provides that administration of the law will be funded through the fees generated by the new registration process and other funds generated
from fines, penalties, settlements, or judgments.
Interchange Fees
Under the Durbin Amendment to the Dodd-Frank Act, the Federal Reserve adopted rules establishing standards for assessing whether the interchange
fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for
processing such transactions.
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Interchange fees, or “swipe” fees, are charges that merchants pay to us and other card-issuing banks for processing electronic payment transactions.
Under the final rules, for those card-issuing banks with $10 billion or more in total assets, the maximum permissible interchange fee is equal to no more
than 21 cents plus 5 basis points of the transaction value for many types of debit interchange transactions. We are not subject to this limitation because we
have less than $10 billion in total assets. The Federal Reserve also adopted a rule to allow a debit card issuer to recover 1 cent per transaction for fraud
prevention purposes if the issuer complies with certain fraud-related requirements required by the Federal Reserve. The Federal Reserve also has rules
governing routing and exclusivity that require issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
Based on the CFPB issued Compliance Bulletin 2022-06 on “Unfair Returned Deposit Item Fee Assessment Practices” and Consumer Financial
Protection Circular 2022-06 on “Unanticipated Overdraft Fee Assessment Practices,” the Bank lowered “Overdraft Fees and Non-sufficient Fees” from $35
per item to $15 per item, effective July 1, 2022. The Bank further lowered the “Overdraft Fees and Non-sufficient Fees” from $15 per item to $10 per item,
effective February 1, 2023. The Bank also removed the “Return Items Fees” from the Bank’s Schedule of Deposit Accounts, Services and Fees.
Financial Regulatory Reform
The Dodd-Frank Act, which was enacted in July 2010, significantly restructured the financial regulatory landscape in the United States, including the
creation of a systemic risk oversight body, the Financial Stability Oversight Council (the “FSOC”). The FSOC oversees and coordinates the efforts of the
primary U.S. financial regulatory agencies (including the Federal Reserve, SEC, the Commodity Futures Trading Commission and the FDIC) in
establishing regulations to address financial stability concerns. The Dodd-Frank Act and the Federal Reserve’s implementing regulations impose
increasingly stringent regulatory requirements on financial institutions as their size and scope of activities increases.
In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was enacted. While the EGRRCPA reduced
the impact of the Dodd-Frank Act on bank holding companies of our size, the Dodd-Frank Act nonetheless subjected us to additional significant regulatory
requirements.
Regulatory Capital Requirements
Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal agencies. These agencies
may establish higher minimum requirements if, for example, a banking organization previously has received special attention or has a high susceptibility to
interest rate risk. Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance
sheet items. Under the Dodd-Frank Act, the Federal Reserve must apply consolidated capital requirements to depository institution holding companies that
are no less stringent than those currently applied to depository institutions. The Dodd-Frank Act additionally requires capital requirements to be
countercyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent
with safety and soundness.
Under federal regulations, bank holding companies and banks must meet certain risk-based capital requirements. Effective as of January 1, 2015, the
Basel III final capital framework, among other things, (i) introduced as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specified that Tier 1
capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defined CET1 narrowly by requiring that most
adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expanded the scope of the adjustments, as
compared to existing regulations. Beginning January 1, 2016, financial institutions were required to maintain a minimum capital conservation buffer to
avoid restrictions on capital distributions such as dividends and equity repurchases and other payments such as discretionary bonuses to executive officers.
The minimum capital conservation buffer was phased in over a four year transition period with minimum buffers of 0.625%, 1.25%, 1.875%, and 2.50%
during 2016, 2017, 2018 and 2019, respectively.
As fully phased-in on January 1, 2019, Basel III subjects bank holding companies and banks to the following risk-based capital requirements:
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a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer,” or 7.0%;
a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer, or 8.5%;
a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer, or 10.5%; and
a minimum leverage ratio of 4%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures.
To be considered “well capitalized,” a bank holding company or bank must have the following minimum ratios: (i) a Tier 1 leverage ratio of 5.0%,
(ii) a CET1 capital ratio of 6.5%, (iii) a Tier 1 risk-based capital ratio of 8.0%, and (iv) a Total risk-based capital ratio of 10.0%.
The Basel III final framework provides for a number of deductions from and adjustments to CET1. These include, for example, a limitation on the
amount mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial
entities that may be held on a Bank's balance sheet, with any excess to be deducted from CET1. Basel III also includes, as part of the definition of CET1
capital, a requirement that banking institutions include the amount of Additional Other Comprehensive Income (“AOCI”), which primarily consists of
unrealized gains and losses on available for sale securities, which are not required to be treated as other-than-temporary impairment, net of tax, in
calculating regulatory capital. Banking institutions had the option to opt out of including AOCI in CET1 capital if they elected to do so in their first
regulatory report following January 1, 2015. As permitted by Basel III, the Company elected to exclude AOCI from CET1.
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The Dodd-Frank Act excludes trust preferred securities issued after May 19, 2010 from being included in Tier 1 capital, unless the issuing company
is a bank holding company with less than $500 million in total assets. Trust preferred securities issued prior to that date will continue to count as Tier 1
capital for bank holding companies with less than $15 billion in total assets, such as Bancorp. The trust preferred securities issued by our unconsolidated
subsidiary capital trusts qualify as Tier 1 capital up to a maximum limit of 25% of total Tier 1 capital. Any additional portion of our trust preferred
securities would qualify as “Tier 2 capital.”
In addition, goodwill and most intangible assets are deducted from Tier 1 capital. For purposes of applicable total risk-based capital regulatory
guidelines, Tier 2 capital (sometimes referred to as “supplementary capital”) is defined to include, subject to limitations: perpetual preferred stock not
included in Tier 1 capital, intermediate-term preferred stock and any related surplus, certain hybrid capital instruments, perpetual debt and mandatory
convertible debt securities, allowances for credit losses, and intermediate-term subordinated debt instruments. The maximum amount of qualifying Tier 2
capital is 100% of qualifying Tier 1 capital. For purposes of determining total capital under federal guidelines, total capital equals Tier 1 capital, plus
qualifying Tier 2 capital, minus investments in unconsolidated subsidiaries, reciprocal holdings of bank holding company capital securities, and deferred
tax assets and other deductions.
We had outstanding subordinated debentures and subordinated notes in the aggregate principal amount of $134.1 million as of December 31, 2023.
Of this amount, $14.9 million is attributable to subordinated debentures issued to statutory trusts in connection with prior issuances of trust preferred
securities, which qualifies as Tier 1 capital, and $119.1 million is attributable to outstanding subordinated notes, which qualifies as Tier 2 capital.
Basel III changed the manner of calculating risk-weighted assets. New methodologies for determining risk-weighted assets in the general capital
rules are included, including revisions to recognition of credit risk mitigation, including a greater recognition of financial collateral and a wider range of
eligible guarantors. They also include risk weighting of equity exposures and past due loans; and higher (greater than 100%) risk weighting for certain
commercial real estate exposures that have higher credit risk profiles, including higher loan-to-value and equity components. In particular, loans
categorized as “high-volatility commercial real estate” loans, as defined as pursuant to applicable federal regulations, are required to be assigned a 150%
risk weighting, and require additional capital support.
In addition to the uniform risk-based capital guidelines and regulatory capital ratios that apply across the industry, the regulators have the discretion
to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. Future changes in
regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect our ability to
grow and could restrict the amount of profits, if any, available for the payment of dividends.
In addition, the Dodd-Frank Act requires the federal banking agencies to adopt capital requirements that address the risks that the activities of an
institution poses to the institution and the public and private stakeholders, including risks arising from certain enumerated activities.
Basel III became applicable to Bancorp and the Bank on January 1, 2015. As a result of the EGRRCPA, Bancorp was not subject to the more
stringent Basel III minimum capital requirements until Bancorp’s total consolidated assets equaled or exceeded $3 billion. However, as of December 31,
2023, Bancorp had total consolidated assets of $4.03 billion and, consequently, the more stringent Basel III minimum capital requirements are applicable.
Overall, the Company believes that implementation of the more stringent Basel III minimum capital requirements has not had and will not have a material
adverse effect on Bancorp’s or the Bank’s capital ratios, earnings, shareholder’s equity, or its ability to pay dividends, effect stock repurchases or pay
discretionary bonuses to executive officers.
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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 will generally
be effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk
capital requirements and a capital floor apply only to advanced approaches institutions, and not to Bancorp or the Bank. The impact of Basel IV on us will
depend on the manner in which it is implemented by the federal bank regulators.
In 2018, the federal bank regulatory agencies issued a variety of proposals and made statements concerning regulatory capital standards. These
proposals touched on such areas as commercial real estate exposure, credit loss allowances under U.S. generally accepted accounting principles (“GAAP”)
and capital requirements for covered swap entities, among others. In July 2019, the federal bank regulators adopted a final rule that simplifies the capital
treatment for certain deferred tax assets, mortgage servicing assets, investments in non-consolidated financial entities and minority interests for banking
organizations, such as Bancorp and the Bank, that are not subject to the advanced approaches requirements.
In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to
phase-in over a three-year period the Day 1 adverse regulatory capital effects of CECL accounting standard. Additionally, in March 2020, the U.S. federal
bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory
capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on
supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the COVID-19 pandemic. The
capital relief in the interim is calibrated to approximate the difference in allowances under CECL relative to the incurred loss methodology for the first two
years of the transition period using a 25% scaling factor. The cumulative difference at the end of the second year of the transition period is then phased in to
regulatory capital at 25% per year over a three-year transition period. Effective January 1, 2022, the Company adopted ASU 2016-13, reflected the full
effect of CECL at December 31, 2022, and did not elect the three-year or five-year CECL phase-in options on regulatory capital.
As of December 31, 2023, the Bank’s capital ratios exceeded the minimum capital adequacy guideline percentage requirements of the federal
banking agencies for “well capitalized” institutions under the Basel III capital rules on a fully phased-in basis.
With respect to the Bank, the Basel III Capital Rules also revise the Prompt Corrective Action (“PCA”) regulations pursuant to Section 38 of the
Federal Deposit Insurance Act (the “FDIA”), as discussed below under “Prompt Corrective Action.”
Prompt Corrective Action
The FDIA requires federal banking agencies to take PCA in respect of depository institutions that do not meet minimum capital requirements. The
FDIA includes the following five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and
“critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures
and certain other factors, as established by regulation. Effective January 1, 2015, the Basel III Capital Rules revised the PCA requirements. Under the
revised PCA provisions of the FDIA, an IDI generally will be classified in the following categories based on the capital measures indicated:
PCA Category
Well capitalized
Adequately capitalized
Undercapitalized
Significantly undercapitalized
Critically undercapitalized
Total Risk-
Based Capital
Ratio
10%
8%
< 8%
< 6%
Tier 1 Risk-
Based Capital
Ratio
8%
6%
< 6%
< 4%
CET1 Risk-
Based Ratio
6.5%
4.5%
< 4.5%
< 3.0%
Tier 1
Leverage
Ratio
5%
4%
< 4%
< 3%
Tangible Equity/Total Assets =< 2%
An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in
an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined
solely for the purpose of applying PCA regulations and the capital category may not constitute an accurate representation of such bank’s overall financial
condition or prospects for other purposes.
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The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any
management fee to its parent holding company, if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are
subject to growth limitations and are required to submit capital restoration plans. If a depository institution fails to submit an acceptable plan, it is treated as
if it is “significantly undercapitalized.” “Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions,
including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits
from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.
The capital classification of a bank holding company and a bank affects the frequency of regulatory examinations, the bank holding company’s and
the bank’s ability to engage in certain activities and the deposit insurance premium paid by the bank. As of December 31, 2023, we met the requirements to
be “well-capitalized” based upon the aforementioned ratios for purposes of the PCA regulations, as currently in effect.
The Company
General. Bancorp, as the sole shareholder of the Bank, is a bank holding company under federal law and regulation. As a bank holding company,
Bancorp is registered with, and is subject to regulation by, the Federal Reserve under the BHCA. In accordance with Federal Reserve policy, and as now
codified by the Dodd-Frank Act, Bancorp is legally obligated to act as a source of financial strength to the Bank and to commit resources to support the
Bank in circumstances where Bancorp might not otherwise do so. Under the BHCA, Bancorp is subject to periodic examination by the Federal Reserve.
Bancorp is required to file with the Federal Reserve periodic reports of Bancorp’s operations and such additional information regarding Bancorp and its
subsidiaries as the Federal Reserve may require.
Acquisitions, Activities and Change in Control. The primary purpose of a bank holding company is to control and manage banks. The BHCA
generally requires the prior approval by the Federal Reserve for any merger involving a bank holding company or any acquisition of control by a bank
holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA
and the Dodd-Frank Act), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving
interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be
held by the acquiring bank holding company and its IDI affiliates in the state in which the target bank is located (provided that those limits do not
discriminate against out-of-state depository institutions or their holding companies) and state laws that require that the target bank have been in existence
for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with
the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a
discussion of the capital requirements, see “Regulatory Capital Requirements” above.
The BHCA generally prohibits Bancorp from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company
that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their
subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to
own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking as to
be a proper incident thereto.” This authority would permit Bancorp to engage in a variety of banking-related businesses, including the ownership and
operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including
software development) and mortgage banking and brokerage. The BHCA generally does not place territorial restrictions on the domestic activities of
nonbank subsidiaries of bank holding companies.
Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding
companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting
and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or
order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such
financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. Bancorp has
elected to be a bank holding company.
In order to maintain Bancorp’s status as a bank holding company, Bancorp and the Bank must be well-capitalized, well-managed, and have at least a
satisfactory CRA rating. If the Federal Reserve subsequently determines that Bancorp, as a bank holding company, is not well-capitalized or well-managed,
Bancorp would have a period of time during which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any
limitations on Bancorp it believes to be appropriate. Furthermore, if the Federal Reserve subsequently determines that the Bank, as a bank holding
company subsidiary, has not received a satisfactory CRA rating, Bancorp would not be able to commence any new financial activities or acquire a company
that engages in such activities.
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Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without
prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding
voting securities of a bank or bank holding company, but may arise under certain circumstances between 5% and 24.99% ownership.
Under the California Financial Code, any proposed acquisition of “control” of the Bank by any person (including a company) must be approved by
the Commissioner of the DFPI. The California Financial Code defines “control” as the power, directly or indirectly, to direct the Bank’s management or
policies or to vote 25% or more of any class of the Bank’s outstanding voting securities. Additionally, a rebuttable presumption of control arises when any
person (including a company) seeks to acquire, directly or indirectly, 10% or more of any class of the Bank’s outstanding voting securities.
Capital Requirements. Bank holding companies are required to maintain capital in accordance with Federal Reserve capital adequacy requirements,
as affected by the Dodd-Frank Act and Basel III. For a discussion of capital requirements, see “Regulatory Capital Requirements” above.
Dividend Payments. Bancorp’s ability to pay dividends to its shareholders may be affected by both general corporate law considerations and the
policies of the Federal Reserve applicable to bank holding companies. As a California corporation, Bancorp is subject to the limitations of California law,
which allows a corporation to distribute cash or property to shareholders, including a dividend or repurchase or redemption of shares, if the corporation
meets either a retained earnings test or a “balance sheet” test. Under the retained earnings test, Bancorp may make a distribution from retained earnings to
the extent that its retained earnings exceed the sum of (a) the amount of the distribution plus (b) the amount, if any, of dividends in arrears on shares with
preferential dividend rights. Bancorp may also make a distribution if, immediately after the distribution, the value of its assets equals or exceeds the sum of
(a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the
distribution. Indebtedness is not considered a liability if the terms of such indebtedness provide that payment of principal and interest thereon are to be
made only if, and to the extent that, a distribution to shareholders could be made under the balance sheet test. A California corporation may specify in its
articles of incorporation that distributions under the retained earnings test or balance sheet test can be made without regard to the preferential rights amount.
Bancorp’s articles of incorporation do not address distributions under either the retained earnings test or the balance sheet test.
As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly
reduce dividends to shareholders if: (i) Bancorp’s net income available to shareholders for the past four quarters, net of dividends previously paid during
that period, is not sufficient to fully fund the dividends; (ii) the prospective rate of earnings retention is inconsistent with Bancorp’s capital needs and
overall current and prospective financial condition; or (iii) Bancorp will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy
ratios. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment
of dividends by banks and bank holding companies.
The terms of our junior subordinated notes also limit our ability to pay dividends on our common stock. If we are not current on our payment of
interest on our Junior Subordinated Notes, we may not pay dividends on our common stock. The amount of future dividends by Bancorp will depend on
our earnings, financial condition, capital requirements and other factors, and will be determined by our board of directors in accordance with the capital
management and dividend policy.
The Bank is a legal entity that is separate and distinct from its holding company. Bancorp is dependent on the performance of the Bank for funds,
which may be received as dividends from the Bank, for use in the operation of Bancorp and the ability of Bancorp to pay dividends to its stockholders.
Future cash dividends by the Bank will also depend upon management’s assessment of future capital requirements, contractual restrictions, and other
factors. When phased in, the new capital rules will restrict dividends by the Bank if the capital conservation buffer is not achieved.
The Bank
General. The Bank is a California-chartered bank, but is not a member of the Federal Reserve System (a “non-member bank”). The deposit accounts
of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations. As a
California-chartered FDIC-insured non-member bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the
DFPI, the chartering authority for California banks, and as a non-member bank, the FDIC.
Supervisory Assessments. California-chartered banks are required to pay supervisory assessments to the DFPI to fund its operations. The amount of
the assessment paid by a California bank to the DFPI is calculated on the basis of the institution’s total assets, including consolidated subsidiaries, as
reported to the DFPI. During the years ended December 31, 2023 and 2022, the Bank paid supervisory assessments to the DFPI totaling $268,000 and
$212,000, respectively.
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Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements,
see “Regulatory Capital Requirements” above.
Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under the California Financial Code, the Bank is
permitted to pay a dividend in the following circumstances: (i) without the consent of either the DFPI or the Bank’s shareholders, in an amount not
exceeding the lesser of (a) the retained earnings of the Bank; or (b) the net income of the Bank for its last three fiscal years, less the amount of any
distributions made during the prior period; (ii) with the prior approval of the DFPI, in an amount not exceeding the greatest of: (a) the retained earnings of
the Bank; (b) the net income of the Bank for its last fiscal year; or (c) the net income for the Bank for its current fiscal year; and (iii) with the prior approval
of the DFPI and the Bank’s shareholders in connection with a reduction of its contributed capital. The payment of dividends by any financial institution is
affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a financial institution
generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank
exceeded its minimum capital requirements under applicable regulatory guidelines as of December 31, 2023.
Transactions with Affiliates and Insiders. Depository institutions are subject to the restrictions contained in the Federal Reserve Act (the “FRA”)
with respect to loans to directors, executive officers and principal stockholders. Under the FRA, loans to directors, executive officers and stockholders who
own more than 10% of a depository institution and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding
loans to such person and affiliated entities, the institution’s loans-to-one-borrower limit. Federal regulations also prohibit loans above amounts prescribed
by the appropriate federal banking agency to directors, executive officers, and stockholders who own more than 10% of an institution, and their respective
affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any “interested” director may not participate
in the voting. The proscribed loan amount, which includes all other outstanding loans to such person, as to which such prior board of director approval is
required, is the greater of $25,000 or 5% of capital and surplus up to $500,000. The Federal Reserve also requires that loans to directors, executive officers
and principal stockholders be made on terms substantially the same as offered in comparable transactions to non-executive employees of the bank and must
not involve more than the normal risk of repayment. There are additional limits on the amount a bank can loan to an executive officer.
Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under Sections 23A and 23B of the FRA. Section 23A
restricts the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the financial institution. The
aggregate amount of covered transactions with all affiliates is limited to 20% of the institution’s capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates are generally
prohibited.
Section 23B generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under
circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for
comparable transactions with non-affiliated companies. The Federal Reserve has promulgated Regulation W, which codifies prior interpretations under
Sections 23A and 23B of the FRA and provides interpretive guidance with respect to affiliate transactions. Affiliates of a bank include, among other
entities, a bank’s holding company and companies that are under common control with the bank. Bancorp is considered to be an affiliate of the Bank.
The Dodd-Frank Act generally enhanced the restrictions on transactions with affiliates under Section 23A and 23B of the FRA, including an
expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered credit
transactions must be satisfied. Insider transaction limitations are expanded through the strengthening of loan restrictions to insiders and the expansion of
the types of transactions subject to the various limits, including derivatives transactions, repurchase agreements, reverse repurchase agreements and
securities lending or borrowing transactions. Restrictions are also placed on certain asset sales to and from an insider to an institution, including
requirements that such sales be on market terms and, in certain circumstances, approved by the institution’s board of directors.
Loans to One Borrower. Under California law, our ability to make aggregate secured and unsecured loans-to-one-borrower is limited to 25% and
15%, respectively, of unimpaired capital and surplus. At December 31, 2023, the Bank’s regulatory limit on aggregate secured loans-to-one-borrower was
$163.9 million and unsecured loans-to-one borrower was $98.3 million. The Bank did not have any loans to one borrower that exceeded either of these
limits at December 31, 2023.
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Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted guidelines that establish operational and
managerial standards to promote the safety and soundness of federally insured depository institutions. The guidelines set forth standards for internal
controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and
benefits, asset quality and earnings.
In general, the safety and soundness guidelines prescribe the goals to be achieved in each area, and each institution is responsible for establishing its
own procedures to achieve those goals. If an institution fails to comply with any of the standards set forth in the guidelines, the financial institution’s
primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If a financial institution fails to submit an
acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the
regulator is required to issue an order directing the institution to cure the deficiency. Until the deficiency cited in the regulator’s order is cured, the regulator
may restrict the financial institution’s rate of growth, require the financial institution to increase its capital, restrict the rates the institution pays on deposits
or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with the standards established by the
safety and soundness guidelines may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and
desist orders and civil money penalty assessments.
During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong
internal controls when evaluating the activities of the financial institutions they supervise. Properly managing risks has been identified as critical to the
conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of
financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including,
but not limited to, credit, market, liquidity, operational, legal, and reputational risk. In particular, recent regulatory pronouncements have focused on
operational risk, which arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or
unforeseen catastrophes will result in unexpected losses. New products and services, third-party risk management and cybersecurity are critical sources of
operational risk that financial institutions are expected to address in the current environment. The Bank is expected to have active board and senior
management oversight; adequate policies, procedures, and limits; adequate risk measurement, monitoring, and management information systems; and
comprehensive internal controls.
Branching Authority. California banks, such as the Bank, may, under California law, establish a banking office so long as the bank’s board of
directors approves the banking office and the DFPI is notified of the establishment of the banking office. Deposit-taking banking offices must be approved
by the FDIC, which considers a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the
community and consistency with corporate power. The Dodd-Frank Act permits insured state banks to engage in de novo interstate branching if the laws of
the state where the new banking office is to be established would permit the establishment of the banking office if it were chartered by such state. Finally,
we may also establish banking offices in other states by merging with banks or by purchasing banking offices of other banks in other states, subject to
certain restrictions.
Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound
manner to help meet the credit needs of its entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the
Bank’s record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s
effectiveness in meeting its CRA requirements. In April 2018, the Treasury issued a memorandum to the federal banking regulators recommending changes
to the CRA’s regulations to reduce their complexity and associated burden on banks, and in December 2019, the FDIC and the Office of the Comptroller of
the Currency (“OCC”) proposed for public comment rules to modernize the agencies’ regulations under the CRA. In September 2020, the Federal
Reserve released for public comment its proposed rules to modernize CRA regulations. We will continue to evaluate the impact of any changes to the CRA
regulations. The Bank received a “satisfactory” rating on its most recent CRA examination, which was conducted in May 2023.
In May 2022, federal bank regulatory agencies jointly issued a proposal to strengthen and modernize regulations implementing the CRA to better
achieve the purposes of the law. On October 24, 2023, the federal banking agencies issued a final rule that significantly amends the CRA regulations and
revises the framework for evaluating banks’ records of community reinvestment under the CRA. Under the revised framework, banks with assets of at least
$2 billion, such as the Bank, are considered large banks and their retail lending, retail services and products, community development financing, and
community development services will be subject to periodic evaluation. Depending on a large bank’s geographic distribution of lending, the evaluation of
retail lending may include assessment areas in which the bank extends loans but does not operate any deposit-taking facilities, in addition to assessment
areas in which the Bank has deposit-taking facilities. The effective date of the rule is April 1, 2024, however, certain provisions of the final rule will apply
beginning January 1, 2026, and the remaining provisions will apply beginning January 1, 2027. The Company is evaluating the impact of the final rule.
Anti-Money Laundering and OFAC Regulation. The USA Patriot Act is designed to deny terrorists and criminals the ability to obtain access to the
U.S. financial system and has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money.
The USA Patriot Act mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the
following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious activities
and currency transactions; (v) currency crimes; and (vi) cooperation between financial institutions and law enforcement authorities. Banking regulators also
examine banks for compliance with the economic sanctions regulations administered by OFAC. Failure of a financial institution to maintain and implement
adequate anti-money laundering and OFAC programs, or to comply with all of the relevant laws or regulations, could have serious legal and reputational
consequences for the institution.
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Concentrations in Commercial Real Estate. Concentration risk exists when financial institutions deploy too many assets to any one industry or
segment. Concentration stemming from commercial real estate is one area of regulatory concern. The CRE Concentration Guidance, provides supervisory
criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan
concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the
preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Concentration Guidance does not limit banks’
levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are
commensurate with the level and nature of their commercial real estate concentrations. Based on the Bank’s loan portfolio, the Bank does not exceed these
guidelines.
Consumer Financial Services
Banks and other financial institutions are subject to numerous laws and regulations intended to protect consumers in their transactions with banks.
These laws include, among others, laws regarding unfair and deceptive acts and practices and usury laws, as well as the following consumer protection
statutes: Truth in Lending Act, Truth in Savings Act, Electronic Fund Transfer Act, Expedited Funds Availability Act, Equal Credit Opportunity Act, Fair
and Accurate Credit Transactions Act, Fair Housing Act, Fair Credit Reporting Act, Fair Debt Collection Act, GLB Act, Home Mortgage Disclosure Act,
Right to Financial Privacy Act and Real Estate Settlement Procedures Act.
Many states and local jurisdictions including California have consumer protection laws analogous, and in addition, to those listed above. These
federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans or conducting other
types of transactions. Examples include but are not limited to the CCPA and the CCFPL described above. Failure to comply with these laws and regulations
could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability.
The structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly
on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for
a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to
prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion
in assets. Banks and savings institutions with $10 billion or less in assets, like the Bank, will continue to be examined by their applicable bank regulators.
Mortgage and Mortgage-Related Products. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-
4 family residential real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the
Dodd-Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly
encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.” The Dodd-
Frank Act generally required lenders or securitizers to retain an economic interest in the credit risk relating to loans that the lender sells, and other asset-
backed securities that the securitizer issues, if the loans do not comply with the ability-to-repay standards described below. The risk retention requirement
generally is 5%, but could be increased or decreased by regulation. The Bank does not currently expect the CFPB’s rules to have a significant impact on its
operations, except for higher compliance costs.
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Incentive Compensation Guidance
The federal bank regulatory agencies have issued comprehensive guidance intended to ensure that the incentive compensation policies of banking
organizations do not undermine the safety and soundness of those organizations by encouraging excessive risk-taking. The incentive compensation
guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and
governance processes. The incentive compensation guidance, which covers all employees that have the ability to materially affect the risk profile of an
organization, either individually or as part of a group, is based upon three primary principles: (1) balanced risk-taking incentives; (2) compatibility with
effective controls and risk management; and (3) strong corporate governance. Any deficiencies in compensation practices that are identified may be
incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or take other actions. In addition, under the
incentive compensation guidance, a banking organization’s federal supervisor may initiate enforcement action if the organization’s incentive compensation
arrangements pose a risk to the safety and soundness of the organization. In addition, beginning January 1, 2016, the Basel III rules limit discretionary
bonus payments to the Bank’s executive officers if its capital ratios are below the threshold levels of the capital conservation buffer established by the rules.
The capital conservation buffer was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer of 2.5% (as a percentage
of risk-weighted assets) became effective. The capital conservation buffer is in addition to the minimum risk-based capital requirement. The scope and
content of the U.S. banking regulators’ policies on executive compensation are continuing to develop and are likely to continue evolving in the near future.
Sarbanes-Oxley Act
The Company is subject to the accounting oversight and corporate governance requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act”), including, among other things, required executive certification of financial presentations, requirements for board audit committees and their
members, and disclosure of controls and procedures and internal control over financial reporting.
Enforcement Powers of Federal and State Banking Agencies
The federal bank regulatory agencies have broad enforcement powers, including the power to terminate deposit insurance, impose substantial fines
and other civil and criminal penalties, and appoint a conservator or receiver for financial institutions. Failure to comply with applicable laws and
regulations could subject us and our officers and directors to administrative sanctions and potentially substantial civil money penalties. In addition to the
grounds discussed above under “Prompt Corrective Actions,” the appropriate federal bank regulatory agency may appoint the FDIC as conservator or
receiver for a banking institution (or the FDIC may appoint itself, under certain circumstances) if any one or more of a number of circumstances exist,
including, without limitation, the fact that the banking institution is undercapitalized and has no reasonable prospect of becoming adequately capitalized,
fails to become adequately capitalized when required to do so, fails to submit a timely and acceptable capital restoration plan or materially fails to
implement an accepted capital restoration plan. The DFPI also has broad enforcement powers over us, including the power to impose orders, remove
officers and directors, impose fines and appoint supervisors and conservators.
Financial Privacy
The federal bank regulatory agencies have adopted rules that limit the ability of banks and other financial institutions to disclose non-public
information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some
circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These regulations affect how consumer
information is transmitted through financial services companies and conveyed to outside vendors. In addition, consumers may also prevent disclosure of
certain information among affiliated companies that is assembled or used to determine eligibility for a product or service, such as that shown on consumer
credit reports and asset and income information from applications. Consumers also have the option to direct banks and other financial institutions not to
share information about transactions and experiences with affiliated companies for the purpose of marketing products or services.
Additional Constraints on the Company and the Bank
Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies
and their subsidiaries. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government
securities, changes in the discount rate on member bank borrowings and changes in reserve requirements against member bank deposits. These means are
used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates
charged on loans or paid on deposits.
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The Volcker Rule. In addition to other implications of the Dodd-Frank Act discussed above, the Dodd-Frank Act amended the BHCA to require the
federal regulatory agencies to adopt rules that prohibit banking entities and their affiliates from engaging in proprietary trading and investing in and
sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). This statutory provision is commonly called the
“Volcker Rule.” On December 10, 2013, the federal regulatory agencies issued final rules to implement the prohibitions required by the Volcker Rule.
Thereafter, in reaction to industry concern over the adverse impact to community banks of the treatment of certain collateralized debt instruments in the
final rule, the federal regulatory agencies approved an interim final rule to permit financial institutions to retain interests in collateralized debt obligations
backed primarily by trust preferred securities (“TruPS CDOs”), from the investment prohibitions contained in the final rule. Under the interim final rule,
the regulatory agencies permitted the retention of an interest in or sponsorship of covered funds by banking entities if the following qualifications were
met: (i) the TruPS CDO was established, and the interest was issued, before May 19, 2010; (ii) the banking entity reasonably believes that the offering
proceeds received by the TruPS CDO were invested primarily in qualifying TruPS collateral; and (iii) the banking entity’s interest in the TruPS CDO was
acquired on or before December 10, 2013.
Revisions to the Volcker Rule in 2019, that become effective in 2020, simplifies and streamlines the compliance requirements for banks that do not
have significant trading activities. In 2020, the OCC, Federal Reserve, FDIC, SEC and Commodity Futures Trading Commission finalized further
amendments to the Volcker Rule. The amendments include new exclusions from the Volcker Rule’s general prohibitions on banking entities investing in
and sponsoring private equity funds, hedge funds, and certain other investment vehicles (collectively “covered funds”). The amendments in the final rule,
which became effective on October 1, 2020, clarify and expand permissible banking activities and relationships under the Volcker Rule.
Additional Restrictions on Bancorp and Bank Activities
Subject to prior notice or Federal Reserve approval, bank holding companies may generally engage in, or acquire shares of companies engaged in,
activities determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Bank
holding companies, such as Bancorp, which elect and retain “financial holding company” status pursuant to the GLB Act may engage in these nonbanking
activities and broader securities, insurance, merchant banking and other activities that are determined to be “financial in nature” or are incidental or
complementary to activities that are financial in nature without prior Federal Reserve approval. Pursuant to the GLB Act and the Dodd-Frank Act, in order
to elect and retain financial holding company status, a bank holding company and all depository institution subsidiaries of a bank holding company must be
well capitalized and well managed, and, except in limited circumstances, depository subsidiaries must be in satisfactory compliance with the CRA. Failure
to sustain compliance with these requirements or correct any non-compliance within a fixed time period could lead to divestiture of subsidiary banks or
require all activities to conform to those permissible for a bank holding company.
Pursuant to the FDIA 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 subsidiaries of bank holding companies. Further, pursuant to the GLB Act,
California banks may conduct certain “financial” activities in a subsidiary to the same extent as a national bank, provided the bank is and remains “well-
capitalized,” “well-managed” and in satisfactory compliance with the CRA. The Bank currently has no financial subsidiaries.
Source of Strength
Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary
banks. Under this requirement, Bancorp is expected to commit resources to support the Bank, including at times when Bancorp may not be in a financial
position to provide such resources, and it may not be in Bancorp’s, or Bancorp’s stockholders’ or creditors’, best interests to do so. In addition, any capital
loans Bancorp makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of Bancorp’s
bankruptcy, any commitment by Bancorp to a federal bank regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee
and entitled to priority of payment.
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Enforcement Authority
The federal and California regulatory structure gives the bank regulatory agencies extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss
reserves for regulatory purposes. 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: (i) internal
controls, information systems, and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest-rate exposure; (v) asset growth and
asset quality; (vi) loan concentration; and (vii) 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, the DFPI 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 the Bank or its management is violating or has
violated any law or regulation, the DFPI and the FDIC have residual authority to:
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Require affirmative action to correct any conditions resulting from any violation or practice;
Direct an increase in capital and the maintenance of higher specific minimum capital ratios, which may preclude the Bank from being deemed
“well-capitalized” and restrict its ability to accept certain brokered deposits, among other things;
Restrict the Bank’s growth geographically, by products and services, or by mergers and acquisitions;
Issue, or require the Bank to enter into, informal or formal enforcement actions, including required board resolutions, memoranda of
understanding, written agreements and consent or cease and desist orders or prompt corrective action orders to take corrective action and cease
unsafe and unsound practices;
Require prior approval of senior executive officer or director changes, remove officers and directors, and assess civil monetary penalties; and
Terminate FDIC insurance, revoke the Bank’s charter, take possession of, close and liquidate the Bank, or appoint the FDIC as receiver.
The Federal Reserve has similar enforcement authority over bank holding companies and commonly takes parallel action in conjunction with actions
taken by a subsidiary bank’s regulators.
In the exercise of their supervisory and examination authority, the regulatory agencies have recently emphasized corporate governance, stress testing,
enterprise risk management and other board responsibilities; anti-money laundering compliance and enhanced high-risk customer due diligence; vendor
management; cyber security and fair lending and other consumer compliance obligations.
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 of $250,000 for each depositor pursuant to the Dodd-Frank Act. 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 uses a performance score and a loss-severity
score to calculate an initial assessment rate for the Bank. In calculating these scores, the FDIC uses the Bank’s capital level and regulatory supervisory
ratings and certain financial measures to assess the Bank’s ability to withstand asset-related stress and funding-related stress. The FDIC also has the ability
to make discretionary adjustments to the total score based upon significant risk factors that are not adequately captured in the calculations. In addition to
ordinary assessments described above, the FDIC has the ability to impose special assessments in certain instances.
We are generally unable to control the amount of assessments that we are required to pay for FDIC insurance. If there are additional bank or financial
institution failures or if the FDIC otherwise determines, we may be required to pay even higher FDIC assessments than the recently increased levels. These
increases in FDIC insurance assessments may have a material and adverse effect on our earnings and could have a material adverse effect on the value of,
or market for, our common stock.
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
On October 18, 2022, the FDIC adopted a final rule that increased initial base deposit insurance assessment rates by 2 basis points, beginning with
the first quarterly assessment period of 2023. Due to the decline in the DIF reserve ratio below the statutory minimum of 1.35% as of June 30, 2020, caused
by extraordinary growth in insured deposits during the first and second quarters of 2020, the FDIC established a Restoration Plan in September 2020 to
restore the DIF reserve ratio to meet or exceed the statutory minimum of 1.35% within eight years. The Restoration Plan did not include an increase in the
deposit insurance assessment rate. On June 21, 2022, however, the FDIC adopted an Amended Restoration Plan and notice of proposed rulemaking to
increase the deposit insurance assessment rates as it was otherwise at risk of not reaching the statutory minimum by the statutory deadline of September 30,
2028. The proposed rule was adopted as final without change.
Also, in the final rule adopted on October 18, 2022, the FDIC incorporated Accounting Standards Update (“ASU”) 2022-02, Financial Instruments -
Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures in the risk-based deposit insurance assessment system applicable to all
large and highly complex IDIs. In March 2022, the FASB issued ASU 2022-02, which eliminates accounting guidance for troubled debt restructurings
(“TDRs”) and introduces new disclosures and enhances existing disclosures concerning certain loan refinancings and restructurings when a borrower is
experiencing financial difficulty. The FDIC final rule amends the assessment regulations to include a new term, “modifications to borrowers experiencing
financial difficulty,” in two financial measures—the underperforming assets ratio and the higher-risk assets ratio—used to determine deposit insurance
assessments for large and highly complex IDIs. The final rule became effective on January 1, 2023, and was applicable to the first quarterly assessment
period of 2023.
On November 16, 2023, the FDIC adopted a final rule on special assessment to recover the losses to the DIF from the protection of uninsured
depositors following the closures of Silicon Valley Bank, Santa Clara, CA, and Signature Bank, New York, NY during March 2023. The assessment base
for the special assessment is equal to an IDI’s estimated uninsured deposits, reported for the quarter that ended December 31, 2022, adjusted to exclude the
first $5 billion in estimated uninsured deposits from the IDI, or for IDIs that are part of a holding company with one or more subsidiary IDIs, at the banking
organization level. The FDIC will collect the special assessment at an annual rate of approximately 13.4 basis points, over eight quarterly assessment
periods. The FDIC retains the ability to cease collection early, extend the special assessment collection period, and impose a final shortfall special
assessment to collect the difference between actual losses and the amounts collected after the receiverships for Silicon Valley Bank and Signature Bank
terminate. The final rule will be effective April 1, 2024, with the first collection for the special assessment reflected on the invoice for the first quarterly
assessment period of 2024 with a payment date of June 28, 2024. Our deposits as of December 31, 2022 were below $5 billion and therefore the Bank is
not subject to this special assessment.
Operations, Consumer and Privacy Compliance Laws
The Bank must comply with numerous federal and state anti-money laundering and consumer protection statutes and implementing regulations,
including the USA Patriot Act, the Bank Secrecy Act, 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, including but not limited to the CCPA. The Bank and Bancorp are also subject to federal and state laws prohibiting unfair
or fraudulent business practices, untrue or misleading advertising, and unfair competition. Some of these laws are further discussed below:
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The Equal Credit Opportunity Act (“ECOA”) generally prohibits discrimination in any credit transaction, whether for consumer or business
purposes, on the basis of race, color, religion, national origin, sex, marital status, age, receipt of income from public assistance programs, or good faith
exercise of any rights under the Consumer Credit Protection Act.
The Truth in Lending Act (“TILA”) is designed to ensure that credit terms are disclosed in a meaningful way so that consumers may compare credit
terms more readily and knowledgeably. As a result of the TILA, all creditors must use the same credit terminology to express rates and payments, including
the annual percentage rate, the finance charge, the amount financed, the total of payments and the payment schedule, among other things.
The Fair Housing Act (“FH Act”) regulates many practices, including making it unlawful for any lender to discriminate in its housing-related lending
activities against any person because of race, color, religion, national origin, sex, handicap or familial status. A number of lending practices have been
found by the courts to be, or may be considered, illegal under the FH Act, including some that are not specifically mentioned in the FH Act itself.
The Home Mortgage Disclosure Act (“HMDA”) grew out of public concern over credit shortages in certain urban neighborhoods and provides public
information that will help show whether financial institutions are serving the housing credit needs of the neighborhoods and communities in which they are
located. The HMDA also includes a “fair lending” aspect that requires the collection and disclosure of data about applicant and borrower characteristics as
a way of identifying possible discriminatory lending patterns and enforcing anti-discrimination statutes.
Finally, the Real Estate Settlement Procedures Act (“RESPA”) requires lenders to provide borrowers with disclosures regarding the nature and cost of
real estate settlements. Also, RESPA prohibits certain abusive practices, such as kickbacks, and places limitations on the amount of escrow accounts.
Penalties under the above laws may include fines, reimbursements and other civil money penalties.
Due to heightened regulatory concern related to compliance with the CRA, TILA, FH Act, ECOA, HMDA and RESPA generally, the Bank may
incur additional compliance costs or be required to expend additional funds for investments in its local community.
The Federal Reserve and other bank regulatory agencies also have adopted guidelines for safeguarding confidential, personal customer information.
These guidelines require financial institutions to create, implement and maintain a comprehensive written information security program designed to ensure
the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information
and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. Financial
institutions are also required to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-
affiliated third parties. In general, financial institutions must provide explanations to consumers on policies and procedures regarding the disclosure of such
nonpublic personal information and, except as otherwise required by law, prohibits disclosing such information. The Bank has adopted a customer
information security and privacy program to comply with such requirements.
Operations, consumer and privacy compliance laws and regulations also mandate certain disclosure and reporting requirements and regulate the
manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure
to comply with these laws and regulations can subject the Bank to lawsuits and penalties, including enforcement actions, injunctions, fines or criminal
penalties, punitive damages to consumers, and the loss of certain contractual rights.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank (“FHLB”) of San Francisco. Among other benefits, each FHLB serves as a reserve or central
bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each
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. Each member of the FHLB of San Francisco is required to own stock in an amount equal to the greater of (i) a membership stock
requirement, or (ii) an activity based stock requirement (based on a percentage of outstanding advances). There can be no assurance that the FHLB will pay
dividends at the same rate it has paid in the past, or that it will pay any dividends in the future.
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Impact of Monetary Policies
The earnings and growth of the Bank are largely dependent on its ability to maintain a favorable differential or spread between the yield on its
interest-earning assets and the rates paid on its deposits and other interest-bearing liabilities. As a result, the Bank’s performance is influenced by general
economic conditions, both domestic and foreign, the monetary and fiscal policies of the federal government, and the policies of the regulatory agencies.
The Federal Reserve implements national monetary policies (with objectives such as seeking to curb inflation and combat recession) by its open-market
operations in U.S. government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements, and by
varying the discount rate applicable to borrowings by banks from the Federal Reserve Banks. The actions of the Federal Reserve in these areas influence
the growth of bank loans, investments and deposits, and also affect interest rates charged on loans and deposits. The nature and impact of any future
changes in monetary policies cannot be predicted.
Securities and Corporate Governance
Bancorp is subject to the disclosure and regulatory requirements of the Securities Act and the Exchange Act, both as administered by the SEC. As a
company listed on the NASDAQ Global Select Market, the Company is subject to NASDAQ listing standards for listed companies. Bancorp is also subject
to the Sarbanes-Oxley Act, provisions of the Dodd-Frank Act, and other federal and state laws and regulations which address, among other issues, required
executive certification of financial presentations, corporate governance requirements for board audit and compensation committees and their members, and
disclosure of controls and procedures and internal control over financial reporting, auditing and accounting, executive compensation, and enhanced and
timely disclosure of corporate information. NASDAQ has also adopted corporate governance rules, which are intended to allow stockholders and investors
to more easily and efficiently monitor the performance of companies and their directors. Under the Sarbanes-Oxley Act, management and the Bancorp’s
independent registered public accounting firm are required to assess the effectiveness of the Bancorp’s internal control over financial reporting. These
assessments are included in Part II — Item 9A — “Controls and Procedures.”
Federal Banking Agency Compensation Guidelines
Guidelines adopted by the federal banking agencies pursuant to the FDIA prohibit excessive compensation as an unsafe and unsound practice and
describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer,
employee, director or principal stockholder. The federal banking agencies have issued comprehensive guidance on incentive compensation policies
intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by
encouraging excessive risk-taking.
The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, is based upon the key
principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the
organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be
supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. In accordance with the Dodd-
Frank Act, the federal banking agencies prohibit incentive-based compensation arrangements that encourage inappropriate risk taking by covered financial
institutions (generally institutions, like us, that have over $1 billion in assets) and are deemed to be excessive, or that may lead to material losses.
The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking
organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the
scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory
initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the
organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive
compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness, and the
organization is not taking prompt and effective measures to correct the deficiencies.
The scope and content of the U.S. banking regulators’ policies on executive compensation may continue to evolve in the near future. It cannot be
determined at this time whether compliance with such policies will adversely affect the Company’s ability to hire, retain, and motivate its key employees.
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Audit Requirements
The Bank is required to have an annual independent audit, alone or as a part of its bank holding company’s audit, and to prepare all financial
statements in accordance with GAAP. The Bank and Bancorp are also each required to have an audit committee comprised entirely of independent
directors. As required by NASDAQ, Bancorp has certified that its audit committee has adopted formal written charters and meets the requisite number of
directors, independence, and other qualification standards.
Regulation of Non-Bank Subsidiaries
Non-bank subsidiaries are subject to additional or separate regulation and supervision by other state, federal and self-regulatory bodies. Additionally,
any foreign-based subsidiaries would also be subject to foreign laws and regulations.
Future Legislation and Regulation
Congress may enact, modify or repeal legislation from time to time that affects the regulation of the financial services industry, and state legislatures
may enact, modify or repeal legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal
and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are
applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of
proposed legislation (or modification or repeal of existing legislation) could impact the regulatory structure under which the Company and the Bank
operate and may significantly increase its costs, impede the efficiency of its internal business processes, require the Bank to increase its regulatory capital
and modify its business strategy, and limit its ability to pursue business opportunities in an efficient manner. The Company’s business, financial condition,
results of operations or prospects may be adversely affected, perhaps materially.
Federal and State Taxation
Bancorp and the Bank report their income on a consolidated basis using the accrual method of accounting and are subject to federal income taxation
in the same manner as other corporations with some exceptions. The Company has not been audited by the Internal Revenue Service. For 2023, 2022 and
2021, the Company was subject to a maximum federal income tax rate of 21.00%, California state income tax rate of 10.84% and various state tax rates for
other various state jurisdictions.
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Item 1A. Risk Factors.
Risks Related to Interest Rates
Fluctuations in interest rates may reduce net interest income and otherwise negatively impact our financial condition and results of operations.
Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Net interest income is the
difference between the amounts received by us on our interest-earning assets and the interest paid by us on our interest-bearing liabilities. When interest
rates rise, the rate of interest we receive on our assets, such as loans, rises more quickly than the rate of interest that we pay on our interest-bearing
liabilities, such as deposits, which may cause our profits to increase. When interest rates decrease, the rate of interest we receive on our assets, such as
loans, declines more quickly than the rate of interest that we pay on our interest-bearing liabilities, such as deposits, which may cause our profits to
decrease. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-
term interest rates or when long-term interest rates decrease more than short-term interest rates.
Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate
environment, there may be an increase in prepayments on loans as borrowers refinance their mortgages and other indebtedness at lower rates. At December
31, 2023, total loans held for investment were 80.2% of our earning assets and exhibited a positive 4% sensitivity to rising interest rates in a 100 basis point
parallel shock.
Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of
borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have
a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but
unpaid interest receivable, which decreases interest income. Subsequently, we continue to have a cost to fund the loan, which is reflected as interest
expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an
adverse impact on net interest income.
Rising interest rates will result in a decline in the value of the fixed-rate debt securities we hold in our investment securities portfolio. The unrealized
losses resulting from holding these securities would be recognized in accumulated other comprehensive income (loss) and reduce total shareholders’ equity.
Unrealized losses do not negatively impact our regulatory capital ratios; however, tangible common equity and the associated ratios would be reduced. If
debt securities in an unrealized loss position are sold, such losses become realized and will reduce our regulatory capital ratios.
If short-term interest rates remain constant but longer-term interest rates fall, we could experience net interest margin compression as our interest
earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. This would have a material
adverse effect on our net interest income and our results of operations.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions
deteriorate.
As of December 31, 2023, the fair value of our securities portfolio was approximately $324.2 million. Factors beyond our control can significantly
influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate
securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating
agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the
underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future
periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective
judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all
contractual principal and interest payments on the security. Because of changing economic and market conditions affecting interest rates, the financial
condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods,
which could have an adverse effect on our financial condition and results of operations.
At December 31, 2023, $319.0 million of our securities were classified as available-for-sale with an aggregate net unrealized loss of $28.1 million.
We increase or decrease shareholders’ equity by the amount of change from the unrealized gain or loss (the difference between the estimated fair value and
the amortized cost) of our available-for-sale securities portfolio, net of the related tax, under the category of accumulated other comprehensive income
(loss). Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported shareholders’ equity, book value per common
share, and tangible book value per common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these
securities are never sold and there are no credit impairments, the decrease will be recovered over the life of the securities. In the case of equity securities,
which have no stated maturity, the declines in fair value may or may not be recovered over time.
Risks Related to Our Business
A decline in general business and economic conditions and any regulatory responses to such conditions could have a material adverse effect on our
business, financial position, results of operations and growth prospects.
Our business and operations are sensitive to general business and economic conditions in the United States, generally, and particularly in the states of
California, Nevada, Illinois, New Jersey, Hawaii and New York, and the Los Angeles, New York City, Chicago, Las Vegas and Honolulu metropolitan
areas. Unfavorable or uncertain economic and market conditions could lead to credit quality concerns related to repayment ability and collateral protection
as well as reduced demand for the products and services we offer. In the recent year there has been a gradual decline in the U.S. economy as evidenced by a
decline in the housing market, higher unemployment and lower prices in the equities markets; however, economic growth has been uneven, and opinions
vary on the strength and direction of the economy. Uncertainties also have arisen regarding the potential for a reversal or renegotiation of international trade
agreements, as the current U.S. administration has with China, the European Union and the United Kingdom. In addition, concerns about the performance
of international economies, especially in Europe and emerging markets, and economic conditions in Asia, particularly the economies of China and Taiwan,
can impact the economy and financial markets in the U.S. If the national, regional and local economies experience worsening economic conditions,
including high levels of unemployment, our growth and profitability could be constrained. Weak economic conditions are characterized by, among other
indicators, deflation, elevated levels of unemployment, fluctuations in the debt and equity capital markets, increased delinquencies on mortgage,
commercial and consumer loans, residential and commercial real estate price declines, lower home sales and commercial activity, and fluctuations in the
commercial and Federal Housing Administration financing sector. All of these factors are generally detrimental to our business. Our business is
significantly affected by monetary and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities. Changes
in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a
material adverse effect on our business, financial position, results of operations and growth prospects.
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In the wake of actions by government authorities and other parties to mitigate health risks associated with the COVID-19 pandemic, and fiscal and
monetary policy measures used to mitigate the adverse effects of the pandemic on individual households and businesses, a number of macroeconomic
challenges emerged, including, without limitation, inflation, supply chain issues and labor market disruptions.
Ongoing elevated inflation poses risk to the economy overall, and could indirectly pose challenges to our clients and to our business. Elevated
inflation can impact our business customers through loss of purchasing power for their customers, leading to lower sales. Rising inflation can also increase
input and inventory costs for our customers, forcing them to raise their prices or lower their profitability. Supply chain disruption, also leading to inflation,
can delay our customers’ shipping ability, or timing on receiving inputs for their production or inventory. Inflation can lead to higher wages for our
business customers, increasing costs. All of these inflationary risks for our business customer base can be financially detrimental, leading to increased
likelihood that the customer may default on a loan. In addition, sustained inflationary pressure has led the Federal Reserve’s Federal Open Market
Committee to raise interest rates rapidly, which has increased our interest rate risk. To the extent such conditions exist or worsen, we could experience
adverse effects on our business, financial condition, and results of operations.
Financial markets may be adversely affected by the current or anticipated impact of military conflict, other geopolitical risk, and trade tensions.
Military conflicts include military actions between Russia and Ukraine, Israel and Hamas, overall tension and conflict in the Middle East, and terrorism.
Geopolitical risk is generally rising, with shipping incidents in the Red Sea causing losses and disruption to commercial shipping routes. In addition, trade
tensions between the U.S. and China, the two largest global economies, increases economic uncertainty.
While customer confidence in the banking system has improved considerably since the first half of 2023, risk related to disintermediation and
uninsured deposits remain, and could continue to have a material effect on the Company’s operations and/or stock price.
Several high-profile bank failures in the first half of 2023 generated significant market volatility among publicly traded bank holding companies and,
in particular, regional banks. The industry has stabilized since these failures and the customer confidence in the safety and soundness of smaller regional
banks has improved considerably. Nevertheless, risks remain that customers may choose to invest in higher yielding and higher-rated short-term fixed
income securities or maintain deposits with larger more systematically important financial institutions, all of which could materially and adversely impact
our liquidity, loan funding capacity, net interest margin, capital, and results of operations. In addition, the banking operating environments and public
trading prices of banking institutions can be highly correlated, in particular during times of stress, which could adversely impact the trading prices of our
common stock and potentially, our results of operations. Separately, banking regulators have announced a more stringent supervisory posture after the bank
failures.
Health crises have in the past, and could in the future, materially and adversely affect our business and our customers, counterparties, employees, and
third-party service providers.
Pandemics, epidemics, or other health crises, including COVID-19, have had and could have repercussions that could impact household, business,
economic, and market conditions. These events have caused and could in the future, cause us to implement measures to combat such health crises,
including restrictions impacting individual, including our current and potential investors and customers, and the manner in which business continues to
operate. Additionally, our operations may be impacted by the need to close certain offices and limit how customers conduct business through our branch
network.
Pandemics, epidemics, or other health crises could impact our business, capital, liquidity, financial position, results of operations, and business
prospects due to the potential effect on our customers, employees, and third-party service providers. In addition, health crises can lead to lingering impacts
on economies and markets, for example, the unprecedented extent of economic stimulus during the COVID-19 pandemic that caused and/or exacerbated
inflationary pressures.
We are subject to liquidity risk, which could adversely affect our financial condition and results of operations.
Effective liquidity management is essential for the operation of our business. Although we have implemented strategies to maintain sufficient and
diverse sources of funding to accommodate planned, as well as unanticipated, changes in assets, liabilities, and off-balance sheet commitments under
various economic conditions, an inability to raise funds through deposits, borrowings, the sales of investment securities and other sources could have a
material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect
us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the
level of our business activity due to a market disruption, a decrease in the borrowing capacity assigned to our pledged assets by our secured creditors, or
adverse regulatory action against us. Deterioration in economic conditions and the loss of confidence in financial institutions may increase our cost of
funding and limit our access to some of our customary sources of liquidity, including, but not limited to, inter-bank borrowings and borrowings from the
Federal Reserve and FHLB. Our ability to acquire deposits or borrow, and the possibility of deposit outflows, could also be impaired by various stress
environments and other factors that are not specific to us, including a severe disruption of the financial markets or negative views and expectations about
the prospects for the financial services industry generally as a result of conditions faced by banking organizations in the domestic and international credit
markets. Other factors, for example a cybersecurity breach that is specific to us, could also impair our ability to acquire or retain deposits.
Our business depends on our ability to attract and retain Asian-American immigrants as clients.
A significant portion of our business is based on successfully attracting and retaining Asian-American immigrants as clients for both our non-
qualified residential mortgage loans and deposits. We may be limited in our ability to attract Asian-American clients to the extent the U.S. adopts restrictive
domestic immigration laws. Changes to U.S. immigration policies that restrain the flow of immigrants may inhibit our ability to meet our goals and budgets
for non-qualified SFR mortgage loans and deposits, which may adversely affect our net interest income and net income.
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Risks Related to Our Loans
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and
liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
At December 31, 2023, approximately 93.6% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of
collateral. Adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio.
The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is
located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated
with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure
without a loss or additional losses, which could result in losses that would adversely affect profitability. Such declines and losses would have a material
adverse impact on our business, results of operations and growth prospects. In addition, if hazardous or toxic substances are found on properties pledged as
collateral, the value of the real estate could be impaired. If we foreclose on and take title to such properties, we may be liable for remediation costs, as well
as for personal injury and property damage. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may
materially reduce the affected property’s value or limit our ability to use or sell the affected property.
Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.
At December 31, 2023, we had $1.5 billion of commercial loans, consisting of $1.17 billion of CRE loans, $130.1 million of C&I loans for which
real estate is not the primary source of collateral and $181.5 million of C&D loans. C&I loans represented 4.3% of our total loan portfolio at December 31,
2023. Commercial loans are often larger and involve greater risks than other types of lending. Because payments on such loans are often dependent on the
successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of loans to
adverse conditions in the real estate market or the general business climate and economy. Accordingly, a downturn in the real estate market and a
challenging business and economic environment may increase our risk related to commercial loans, particularly commercial real estate loans. Unlike
residential mortgage loans, which generally are made on the basis of the borrowers’ ability to make repayment from their employment and other income
and which are secured by real property whose value tends to be more easily ascertainable, commercial loans typically are made on the basis of the
borrowers’ ability to make repayment from the cash flow of the commercial venture. Our C&I loans are primarily made based on the identified cash flow
of the borrower and secondarily on the collateral underlying the loans. Most often, this collateral consists of accounts receivable, inventory and equipment.
Inventory and equipment may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. If the cash
flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired. Due to the larger average size of each commercial loan
as compared with other loans such as residential loans, as well as collateral that is generally less readily-marketable, losses incurred on a small number of
commercial loans could have a material adverse impact on our financial condition and results of operations.
We have a concentration in commercial real estate, which could cause our regulators to restrict our ability to grow.
As a part of their regulatory oversight, the federal regulators have issued the CRE Concentration Guidance on sound risk management practices with
respect to a financial institution’s concentrations in commercial real estate lending activities. These guidelines were issued in response to the agencies’
concerns that rising CRE concentrations might expose institutions to unanticipated earnings and capital volatility in the event of adverse changes in the
commercial real estate market. The CRE Concentration Guidance identifies certain concentration levels that, if exceeded, will expose the institution to
additional supervisory analysis with regard to the institution’s CRE concentration risk. The CRE Concentration Guidance is designed to promote
appropriate levels of capital and sound loan and risk management practices for institutions with a concentration of CRE loans. In general, the CRE
Concentration Guidance establishes the following supervisory criteria as preliminary indications of possible CRE concentration risk: (1) the institution’s
total construction, land development and other land loans represent 100% or more of total risk-based capital; or (2) total CRE loans as defined in the
regulatory guidelines represent 300% or more of total risk-based capital, and the institution’s CRE loan portfolio has increased by 50% or more during the
prior 36-month period. Pursuant to the CRE Concentration Guidelines, loans secured by owner occupied commercial real estate are not included for
purposes of CRE Concentration calculation. We believe that the CRE Concentration Guidance is applicable to us. As of December 31, 2023, our CRE loans
represented 183% of our Bank total risk-based capital, as compared to 215% and 251% as of December 31, 2022 and 2021, respectively. We actively work
to manage our CRE concentration and we have discussed the CRE Concentration Guidance with the FDIC and believe that our underwriting policies,
management information systems, independent credit administration process, and monitoring of real estate loan concentrations are currently sufficient to
address the CRE Concentration Guidance. Nevertheless, the FDIC could become concerned about our CRE loan concentrations, and they could limit our
ability to grow by restricting their approvals for the establishment or acquisition of branches, or approvals of mergers or other acquisition opportunities.
Our SFR loan product consists primarily of non-qualified SFR mortgage loans, which may be considered less liquid and more risky.
As of December 31, 2023, our SFR mortgage loan portfolio amounted to $1.49 billion or 49.1% of our held for investment loan portfolio. As of that
date, 96.7% of our SFR mortgage loans consisted of non-qualified mortgage loans, which are considered to have a higher degree of risk and are less liquid
than qualified mortgage loans. We offer two SFR mortgage products, a low loan-to-value, alternative document hybrid non-qualified SFR mortgage loan,
or non-qualified SFR mortgage loan, and a qualified SFR mortgage loan. As of December 31, 2023, our non-qualified SFR mortgage loans had an average
loan-to-value of 57.3% and an average FICO score of 763. As of December 31, 2023, 3.3% of our total SFR mortgage loan portfolio were loans originated
to foreign nationals. The non-qualified single-family residential mortgage loans that we originate are designed to assist Asian-Americans who have recently
immigrated to the United States and as such are willing to provide higher down payment amounts and pay higher interest rates and fees in return for
reduced documentation requirements. Non-qualified SFR mortgage loans are considered less liquid than qualified SFR mortgage loans because such loans
are not able to be securitized and can only be sold directly to other financial institutions. Such non-qualified loans may be considered more risky than
qualified mortgage loans although we attempt to address this enhanced risk through our underwriting process, including requiring larger down payments
and, in some cases, interest reserves.
We also have a concentration in our SFR secondary sale market, as a substantial portion of our non-qualified mortgage loans have been
historically sold to two banks; although, we are currently selling SFR mortgage loans to three banks. Although, we are taking steps to reduce our
dependence on these banks by expanding the number of banks that we sell our non-qualified SFR mortgages to, we may not be successful expanding our
sales market for our non-qualified mortgage loans. These loans also present pricing risk as rates change, and our sale premiums cannot be guaranteed.
Further, the criteria for our loans to be purchased by other banks may change from time to time, which could result in a lower volume of corresponding
loan originations.
Mortgage production historically, including refinancing activity, declines in rising interest rate environments such as the current environment in
which we have experienced increasing rates over the last year.
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The non-guaranteed portion of SBA loans that we retain on our balance sheet as well as the guaranteed portion of SBA loans that we sell could expose
us to various credit and default risks.
We originated $11.4 million of SBA loans for the year ended December 31, 2023. We sold $4.1 million of the guaranteed portion of our SBA loans
for the year ended December 31, 2023. Consequently, as of December 31, 2023, we held $52.1 million of SBA loans on our balance sheet, $47.4 million of
which consisted of the non-guaranteed portion of SBA loans and $4.7 million or 8.9% consisted of the guaranteed portion of SBA loans. The non-
guaranteed portion of SBA loans have a higher degree of credit risk and risk of loss as compared to the guaranteed portion of such loans. We attempt to
limit this risk by generally requiring such loans to be collateralized and limiting the overall amount that can be held on our balance sheet to 75% of our
total capital.
When we sell the guaranteed portion of SBA loans in the ordinary course of business, we are required to make certain representations and warranties
to the purchaser about the SBA loan and the manner in which they were originated. Under these agreements, we may be required to repurchase the
guaranteed portion of the SBA loan if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if
repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations and financial condition could be
adversely affected. Further, we generally retain the non-guaranteed portions of the SBA loans that we originate and sell, and to the extent the borrowers of
such loans experience financial difficulties, our financial condition and results of operations could be adversely impacted.
Curtailment of government guaranteed loan programs could affect a segment of our business.
A significant segment of our business consists of originating and periodically selling U.S. government guaranteed loans, in particular those
guaranteed by the SBA. Presently, the SBA guarantees 75% of the principal amount of each qualifying SBA loan originated under the SBA’s 7(a) loan
program. There is no assurance that the U.S. government will maintain the SBA 7(a) loan program or if it does, that such guaranteed portion will remain at
its current level. In addition, from time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee future
loans. In addition, these agencies may change their rules for qualifying loans or Congress may adopt legislation that would have the effect of discontinuing
or changing the loan guarantee programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be
equally acceptable. Therefore, if these changes occur, the volume of loans to small business, industrial and agricultural borrowers of the types that now
qualify for government guaranteed loans could decline. Also, the profitability associated with the sale of the guaranteed portion of these loans could decline
as a result of market displacements due to increases in interest rates, and could cause the premiums realized on the sale of the guaranteed portions to
decline from current levels. As the funding and sale of the guaranteed portion of SBA 7(a) loans is a major portion of our business and a significant portion
of our noninterest income, any significant changes to the funding for the SBA 7(a) loan program may have an unfavorable impact on our prospects, future
performance and results of operations.
Real estate construction loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate,
and we may be exposed to significant losses on loans for these projects.
Real estate construction loans, including land development loans, comprised approximately 6.0% of our total loan portfolio as of December 31, 2023,
and such lending involves additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion,
and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the
realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately
the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of
substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather
than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or
market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we
are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued
interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and
may have to hold the property for an unspecified period of time while we attempt to dispose of it.
The risks inherent in construction lending may affect adversely our results of operations. Such risks include, among other things, the possibility that
contractors may fail to complete, or 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 lack of permanent take-out financing. Loans secured by such properties also involve
additional risk because they have no operating history. In these loans, loan 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. Such properties may
not be sold or leased so as to generate the cash flow anticipated by the borrower. A general decline in real estate sales and prices across the United States or
locally in the relevant real estate market, a decline in demand for residential real estate, economic weakness, higher interest rates, high rates of
unemployment, and reduced availability of mortgage credit, are some of the factors that can adversely affect the borrowers’ ability to repay their
obligations to us and the value of our security interest in collateral, and thereby adversely affect our results of operations and financial results.
Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition, and could result in further
losses in the future.
As of December 31, 2023, our nonperforming loans (which consist of nonaccrual loans and modified loans) totaled $31.6 million, or 1.04%, of our
held for investment (HFI) loan portfolio, and our nonperforming assets totaled $31.6 million, or 0.79%, of total assets. In addition, we had $16.8 million in
accruing loans that were 30-89 days delinquent as of December 31, 2023.
Our nonperforming assets (which consist of nonperforming loans and other real estate owned) adversely affect our net income in various ways. We
do not record interest income on nonaccrual loans or OREO, thereby adversely affecting our net income and returns on assets and equity, increasing our
loan administration costs and adversely affecting our efficiency ratio. When we take collateral in foreclosure and similar proceedings, we are required to
mark the collateral to its then-fair market value, which may result in a loss. These nonperforming loans and other real estate owned also increase our risk
profile and the level of capital our regulators believe is appropriate for us to maintain in light of such risks. The resolution of nonperforming assets requires
significant time commitments from management and can be detrimental to the performance of their other responsibilities. If we experience increases in
nonperforming loans and nonperforming assets, our net interest income may be negatively impacted and our loan administration costs could increase, each
of which could have an adverse effect on our net income and related ratios, such as return on assets and equity.
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Adverse conditions in Asia and elsewhere could adversely affect our business.
We are likely to feel the effects of adverse economic and political conditions in Asia, including the effects of rising inflation or slowing growth and
volatility in the real estate and stock markets in China and other regions. U.S. and global economic policies, military tensions, and unfavorable global
economic conditions may adversely impact the Asian economies. In addition, pandemics and other public health crises or concerns over the possibility of
such crises could create economic and financial disruptions in the region. A significant deterioration of economic conditions in Asia could expose us to,
among other things, economic and transfer risk, and we could experience an outflow of deposits by those of our customers with connections to Asia.
Transfer risk may result when an entity is unable to obtain the foreign exchange needed to meet its obligations or to provide liquidity. This may adversely
impact the recoverability of investments with, or loans made to, such entities. Adverse economic conditions in Asia, and in China or Taiwan in particular,
may also negatively impact asset values and the profitability and liquidity of our customers who operate in this region.
The Bank is a California state chartered bank with operations in California, Hawaii, Illinois, New York, New Jersey, and Nevada. We have no
overseas operations, including in China and the Far East.
Risks Related to Our Deposits
Our deposit portfolio includes significant concentrations and a large percentage of our deposits are attributable to a relatively small number of clients.
As a commercial bank, we provide services to a number of clients whose deposit levels vary considerably and have a significant amount of
seasonality. At December 31, 2023, 148 clients maintained balances (aggregating all related accounts, including multiple business entities and personal
funds of business owners) in excess of $2.0 million per client. This amounted to $844.4 million, or approximately 26.6%, of the Bank’s total deposits as of
December 31, 2023. In addition, our ten largest depositor relationships accounted for approximately 7.8% of our deposits at December 31, 2023. Our
largest depositor relationship accounted for approximately 1.4% of our deposits at December 31, 2023. These deposits can and do fluctuate
substantially. The loss of any combination of these depositors, or a significant decline in the deposit balances due to ordinary course fluctuations related to
these customers’ businesses, would adversely affect our liquidity and require us to raise deposit rates to attract new deposits, purchase federal funds or
borrow funds on a short-term basis to replace such deposits. Depending on the interest rate environment and competitive factors, low cost deposits may
need to be replaced with higher cost funding, resulting in a decrease in net interest income and net income. During 2023, noninterest-bearing deposits
decreased by $259.1 million due to the Bank's customers pursuing higher rates offered by the Bank's time deposits, interest-bearing non-maturity deposits
increased by $17.4 million, and time deposits increased by $438.8 million. While these events could have a material impact on the Bank’s results, the Bank
expects, in the ordinary course of business, that these deposits will fluctuate and believes it is capable of mitigating this risk, as well as the risk of losing
one of these depositors, through additional liquidity, and business generation in the future. However, should a significant number of these customers leave
the Bank, it could have a material adverse impact on the Bank.
Risk Related to our Allowance for Credit Losses (“ACL”)
If we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonperforming loans and charge-offs, which
could require increases in our provision for loan losses.
As of January 1, 2022, we adopted ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments,” commonly referenced as the
CECL model, which changes how we estimate credit losses and increased the required level of our ACL. There are risks inherent in making any loan,
including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and
cash flows available to service debt and risks resulting from changes in economic and market conditions. We cannot guarantee that our credit underwriting
and monitoring procedures will reduce these credit risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic
climate in the U.S., generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of
nonperforming loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses, which would cause our net
income, return on equity and capital to decrease.
Our ACL may prove to be insufficient to absorb potential credit losses in our loan portfolio.
We establish our ACL and maintain it at a level that management considers adequate to absorb expected credit losses based on an analysis of our
portfolio and market environment. The ACL represents our estimate of expected credit losses in the portfolio at each balance sheet date and is based upon
relevant information available to us. The allowance contains provisions for expected credit losses that have been identified relating to specific borrowing
relationships, as well as expected credit losses inherent in the loan portfolio and credit undertakings that are not specifically identified. Additions to the
ACL, which are charged to earnings through the provision for credit losses, are determined based on a variety of factors, including an analysis of the loan
portfolio, historical loss experience, reasonable and supportable forecasts and an evaluation of current economic conditions in our market areas. The actual
amount of credit losses is affected by changes in economic, operating and other conditions within our markets, which may be beyond our control, and such
losses may exceed current estimates.
We estimate credit losses using the CECL model, which incorporates the use of and is more reliant on reasonable and supportable forecasts of
economic conditions, including, but not limited to: forecasts of GDP growth rates, levels of unemployment, vacancy rates, and changes in the value of
commercial real estate properties. Because the CECL methodology is more dependent on future economic forecasts, assumptions, and models than the
previous accounting standards, it may result in increases and add volatility to our ACL and future provisions for loan losses. The forecasts, assumptions,
and models required by CECL are based upon third-party forecasts, subject to management’s review and adjustment in light of information currently
available.
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As of December 31, 2023, our ACL as a percentage of total loans was 1.38% and as a percentage of total nonperforming loans was 132.5%.
Although management believes that the ACL is adequate to absorb losses on any existing loans that may become uncollectible, we may be required to take
additional provisions for credit losses in the future to further supplement the ACL, either due to management’s decision to do so or because our banking
regulators require us to do so. Our bank regulatory agencies will periodically review our ACL and the value attributed to nonaccrual loans or to real estate
acquired through foreclosure and may require us to adjust our determination of the value for these items. These adjustments may adversely affect our
business, financial condition and results of operations.
Risks Related to our Acquisition Strategy
Our strategy of pursuing growth via acquisitions exposes us to financial, execution and operational risks that could have a material adverse effect on
our business, financial position, results of operations and growth prospects.
Since late 2010, we have been pursuing a strategy of leveraging our human and financial capital by acquiring other financial institutions in our target
markets. We have completed several acquisitions in recent years and we may continue pursuing this strategy.
Our acquisition activities could require us to use a substantial amount of cash, other liquid assets, and/or incur debt. In addition, if goodwill recorded
in connection with our potential future acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings,
which could materially and adversely affect our results of operations during the period in which the impairment was recognized.
There are risks associated with an acquisition strategy, including the following:
● We may incur time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions,
resulting in management’s attention being diverted from the operation of our existing business.
● We may encounter insufficient revenue and/or greater than anticipated costs in integrating acquired businesses.
● We may encounter difficulties in retaining business relationships with vendors and customers of the acquired companies.
● We are exposed to potential asset and credit quality risks and unknown or contingent liabilities of the banks or businesses we acquire. If these
●
●
issues or liabilities exceed our estimates, our earnings, capital and financial condition may be materially and adversely affected.
The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity. This integration
process is complicated and time consuming and can also be disruptive to the customers and employees of the acquired business and our
business. If the integration process is not conducted successfully, we may not realize the anticipated economic benefits of acquisitions within
the expected time frame, or ever, and we may lose customers or employees of the acquired business. We may also experience greater than
anticipated customer losses even if the integration process is successful.
To finance an acquisition, we may borrow funds or pursue other forms of financing, such as issuing voting and/or non-voting common stock or
convertible preferred stock, which may have high dividend rights or may be highly dilutive to holders of our common stock, thereby increasing
our leverage and diminishing our liquidity, or issuing capital stock, which could dilute the interests of our existing shareholders.
● We may be unsuccessful in realizing the anticipated benefits from acquisitions. For example, we may not be successful in realizing anticipated
cost savings. We also may not be successful in preventing disruptions in service to existing customer relationships of the acquired institution,
which could lead to a loss in revenues.
In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of business or new products, or enter new
geographic areas, in which we have little or no current experience, especially if we lose key employees of the acquired operations. Future acquisitions or
business combinations also could cause us to incur debt or contingent liabilities or cause us to issue equity securities. These actions could negatively impact
the ownership percentages of our existing shareholders, our financial condition and results of operations. In addition, we may not find candidates which
meet our criteria for such transactions, and if we do find such a situation, our shareholders may not agree with the terms of such acquisition or business
relationship.
In addition, our ability to grow may be limited if we cannot make acquisitions. We compete with other financial institutions with respect to proposed
acquisitions. We cannot predict if or when we will be able to identify and attract acquisition candidates or make acquisitions on favorable terms.
We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our
inability to overcome risks associated with acquisitions could have an adverse effect on our ability to successfully implement our acquisition growth
strategy and grow our business and profitability.
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a
negative impact on our financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase.
We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset
might be impaired.
We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the
carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that
excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, 2023, our goodwill
totaled $71.5 million. We evaluated our goodwill and core deposit intangibles in the fourth quarter of 2022 and the third and fourth quarter of 2023. The
impairment evaluation did not identify an impairment of goodwill or the core deposit intangibles in those quarters of 2022 and 2023. There can be no
assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse
effect on our financial condition and results of operations.
We may not be able to continue growing our business, particularly if we cannot make acquisitions or increase loans and deposits through organic
growth, either because of an inability to find suitable acquisition candidates, constrained capital resources or otherwise.
We have grown our consolidated assets from $300.5 million as of December 31, 2010 to $4.0 billion as of December 31, 2023, and our deposits from
$236.4 million as of December 31, 2010 to $3.2 billion as of December 31, 2023. Some of this growth has resulted from several acquisitions that we have
completed since 2010. While we intend to continue to grow our business through strategic acquisitions coupled with organic loan and deposit growth, we
anticipate that much of our future growth will be dependent on our ability to successfully implement our acquisition growth strategy. A risk exists,
however, that we will not be able to identify suitable additional candidates for acquisitions.
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In addition, even if suitable targets are identified, we expect to compete for such businesses with other potential bidders, many of which may have
greater financial resources than we have, which may adversely affect our ability to make acquisitions at attractive prices. Although we have historically
been disciplined in pricing our acquisitions, there can be no assurance that the higher multiples being paid in bank acquisitions will not adversely impact
our ability to execute acquisitions in the future or adversely affect the return we earn from such acquisitions.
Furthermore, many acquisitions we may wish to pursue would be subject to approvals by bank regulatory authorities, and we cannot predict whether
any targeted acquisitions will receive the required regulatory approvals. Moreover, our ability to continue to grow successfully will depend to a significant
extent on our capital resources. It also will depend, in part, upon our ability to attract deposits and lessen our dependence on larger deposit accounts,
identify favorable loan and investment opportunities and on whether we can continue to fund growth while maintaining cost controls and asset quality, as
well on other factors beyond our control, such as national, regional and local economic conditions and interest rate trends.
As we expand our business outside of California markets, we may encounter risks that could adversely affect us.
We primarily operate in California, New York, New Jersey and Illinois markets with a concentration of Asian-American individuals and businesses;
however, one of our strategies is to expand beyond California into other domestic markets that have concentrations of Asian-American individuals and
businesses. We also currently have operations in Las Vegas, Nevada and Honolulu, Hawaii, including operating a branch office, and would consider
strategic opportunities for additional branch expansion. In the course of any expansion, we may encounter significant risks and uncertainties that could
have a material adverse effect on our operations. These risks and uncertainties include increased expenses and operational difficulties arising from, among
other things, our ability to attract sufficient business in new markets, to manage operations in noncontiguous market areas, to comply with all of the various
local laws and regulations, and to anticipate events or differences in markets in which we have no current experience.
Other Risks Related to Our Business
If we fail to maintain effective internal control over financial reporting, or if we fail to remediate material weaknesses previously identified, we may not
be able to report our financial results accurately and timely.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for evaluating and reporting
on that system of internal control. In the past, material weaknesses have been identified in our internal controls over financial reporting. A material
weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a
material misstatement of our financial statements will not be prevented or detected on a timely basis. Following identification of the material weaknesses,
we implemented a number of controls and procedures designed to improve our control environment, which we believe will be sufficient to remediate our
previously identified material weakness. Our actions to maintain effective controls and remedy any weakness or deficiency may not be sufficient to result
in an effective internal control environment and any future failure to maintain effective internal control over financial reporting could impair the reliability
of our financial statements, which in turn could harm our business, impair investor confidence in the accuracy and completeness of our financial reports,
impair our access to the capital markets, cause the price of our common stock to decline and subject us to increased regulatory scrutiny and/or penalties,
and higher risk of shareholder litigation.
The Bank is operating under enhanced regulatory supervision that could materially and adversely affect our business.
As previously disclosed in the Company's Current Report on Form 8-K filed with the SEC on October 31, 2023, effective on October 25, 2023, the
Bank entered into a Stipulation to the Issuance of a Consent Order with its bank regulatory agencies, the FDIC and DFPI, consenting to the issuance of
a consent order (the “Consent Order”) relating to weaknesses in the Bank’s Anti-Money Laundering/Countering the Financing of Terrorism (“AML/CFT”)
compliance program.
Under the terms of the Consent Order, the Bank is required to make certain enhancements and take certain actions, which include, but are not limited
to: (i) enhancing personnel with oversight responsibilities with respect to the Bank’s AML/CFT compliance program, (ii) enhancing existing AML/CFT
policies and practices, internal controls, customer due diligence, and training programs, and (iii) establishing an independent testing program to analyze and
assess the Bank’s BSA Department. The Consent Order also requires the Bank to correct certain alleged violations of the AML/CFT compliance program,
including internal controls, staffing and the timing of the filing of one suspicious activity report.
If the Bank fails to timely and satisfactorily comply with the Consent Order, the Bank may be required to incur additional expenses in order to
comply with the Consent Order and may be subject to additional regulatory action, including civil money penalties against the Bank and its officers and
directors or enforcement of the Consent Order through court proceedings. These additional expenses or regulatory actions, including penalties and legal
expenses, could have a material and adverse effect on our business, results of operations, financial condition, cash flows and stock price.
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We are exposed to risks related to fraud and cyber-attacks.
The Company is continuously enhancing and expanding our digital products and services to meet client and business needs with desired outcomes.
These digital products and services often include storing, transmitting, and processing confidential client, employee, monetary, and business information.
Due to the nature of this information, and the value it has for internal and external threat actors, we, and our third-party service providers, continue to be
subject to cyber-attacks and fraud activity that attempts to gain unauthorized access, misuse information and information systems, steal information, disrupt
or degrade information systems, spread malicious software, and other illegal activities.
We believe we have robust preventive, detective, and administrative safeguards and security controls to minimize the probability and magnitude of a
material event. However, because the tactics and techniques used by threat actors to bypass safeguards and security controls change frequently, and often
are not recognized until after an event has occurred, we may be unable to anticipate future tactics and techniques, or to implement adequate and timely
protective measures.
Cybersecurity, and the continued development and enhancement of controls, processes, and practices designed to protect client information, systems,
computers, software, data, and networks from attack, damage, or unauthorized access remain a priority for the Company. As cybersecurity threats continue
to evolve, we may be required to expend additional resources to continue to enhance, modify, and refine our protective measures against these evolving
threats.
To date, we have no knowledge of a successful cyber-attack or other material information security breach affecting our systems. However, our risk
and exposure to these matters remains heightened because of, among other things, the evolving nature of these threats, the continuation of a remote work
environment for our employees and service providers and our plans to continue to implement and expand digital banking services, expand operations, and
use third-party information systems that includes cloud-based infrastructure, platforms, and software. Recent instances of attacks specifically targeting
financial services businesses indicate that the risk to our systems remains significant. If we or a critical third party vendor were to experience a cyber-attack
or information security breach, we could suffer damage to our reputation, productivity losses, response costs associated with investigation and resumption
of services, and incur substantial additional expenses, including remediation expenses costs associated with client notification and credit monitoring
services, increased insurance premiums, regulatory penalties and fines, and costs associated civil litigation, any of which could have a materially adverse
effect on our business, financial condition, and results of operations.
In addition, the Company’s clients and vendors rely on technology and systems unmanaged by the Company, such as networking devices, server
infrastructure, personal computers, smartphones, tablets, and other mobile devices, to contact and conduct business with the Company. If the devices of the
Company’s clients or vendors become the target of a cyber-attack, or information security breach, it could result in unauthorized access to, misuse of, or
loss of confidential client, employee, monetary, or business information. Threat actors using improperly obtained personal or financial information of
consumers can attempt to obtain loans, lines of credit, or other financial products from the Company, or attempt to fraudulently persuade the Company’s
employees, clients, or other users of the Company’s systems to disclose confidential information in order to gain improper access to the Company’s
information and information systems.
We also face additional costs when our customers become the victims of cyber-attacks. For example, various retailers have reported that they have
been the victims of a cyber-attack in which large amounts of their clients’ data, including debit and credit card information, is obtained. Our clients may be
the victims of phishing scams, providing cyber criminals access to their accounts, or credit or debit card information. In these situations, we incur costs to
replace compromised cards and address fraudulent transaction activity affecting our clients.
Both internal and external fraud and theft are risks. If confidential client, employee, monetary, or business information were to be mishandled or
misused, we could suffer significant regulatory consequences, reputational damage, and financial loss. Such mishandling or misuse could include, for
example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees,
or counterparties, or if such information were to be intercepted or otherwise inappropriately taken by third parties, or if our own employees abused their
access to financial systems to commit fraud against our clients and the Company. These activities can occur in connection with the origination of loans and
lines of credit, ACH transactions, wire transactions, ATM transactions, and checking transactions, and result in financial losses as well as reputational
damage.
Operational errors can include information system misconfiguration, clerical or record-keeping errors, or disruptions from faulty or disabled
computer or telecommunications systems. Because the nature of the financial services business involves a high volume of transactions, certain errors may
be repeated or compounded before they are discovered and successfully rectified. Because of the Company’s large transaction volume and its necessary
dependence upon automated systems to record and process these transactions, there is a risk that technical flaws, tampering, or manipulation of those
automated systems, arising from events wholly or partially beyond its control, may give rise to disruption of service to customers and to financial loss or
liability. We are exposed to the risk that our business continuity and data security systems prove to be inadequate.
The occurrence of any of these risks could result in a diminished ability for us to operate our business, additional costs to correct defects, potential
liability to clients, reputational intervention, any of which could adversely affect our business, financial condition and results of operations.
Liabilities from environmental regulations could materially and adversely affect our business and financial condition.
In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these
properties. We may be held liable to a governmental entity 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 clear up hazardous or toxic substances, or chemical
releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of
any contaminated site, we may be subject to common law claims by third parties based on damages, and costs resulting from environmental contamination
emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition, liquidity, and results of
operations could be materially and adversely affected.
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A natural or man-made disaster or recurring energy shortage in our geographic markets, especially in California, could harm our business.
We are based in California and at December 31, 2023, approximately 50.5% of the aggregate outstanding principal of our total loan portfolio was
secured by real estate located in California or business in California. In addition, the computer systems that operate our Internet websites and some of their
back-up systems are located in California. Historically, California has been vulnerable to natural disasters. Therefore, we are susceptible to the risks of
natural disasters, such as earthquakes, wildfires, floods and mudslides. Certain of these natural disasters may be exacerbated by climate change. Natural or
man-made disasters and recurring energy shortages could harm our operations directly through interference with communications, including the
interruption or loss of our information technology structure and websites, which could prevent us from gathering deposits, originating loans and processing
and controlling our flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. A
natural or man-made disaster or recurring power outages may also impair the value of our largest class of assets, our loan portfolio, which is comprised
substantially of real estate loans. Uninsured or underinsured disasters may reduce borrowers’ 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 through foreclosure and making it more likely that we would
suffer losses on defaulted loans. California has also experienced energy shortages, which, if they recur, could impair the value of the real estate in those
areas affected. Although we have implemented several back-up systems and protections (and maintain business interruption insurance), these measures
may not protect us fully from the effects of a natural disaster. The occurrence of natural and man-made disasters or energy shortages in California could
have a material adverse effect on our business prospects, financial condition and results of operations.
Climate change could have a material negative impact on the Company and clients.
The Company’s business, as well as the operations and activities of our clients, could be negatively impacted by climate change. Climate change
presents both immediate and long-term risks to the Company and its clients, and these risks are expected to increase over time. Climate change presents
multi-faceted risks, including: operational risk from the physical effects of climate events on the Company and its clients’ facilities and other assets; credit
risk from borrowers with significant exposure to climate risk; transition risks associated with the transition to a less carbon- dependent economy; and
reputational risk from stakeholder concerns about our practices related to climate change, the Company’s carbon footprint, and the Company’s business
relationships with clients who operate in carbon-intensive industries.
Federal and state banking regulators and supervisory authorities, investors, and other stakeholders have increasingly viewed financial institutions as
important in helping to address the risks related to climate change both directly and with respect to their clients, which may result in financial institutions
coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities. Given that
climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of
climate change or changes in policies as the economy transitions to a less carbon-intensive environment, the Company may face regulatory risk of
increasing focus on the Company’s resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios. Ongoing
legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit, and
reputational risks and costs.
With the increased importance and focus on climate change, we are making efforts to enhance our governance of climate change-related risks and
integrate climate considerations into our risk governance framework. Nonetheless, the risks associated with climate change are rapidly changing and
evolving in an escalating fashion, making them difficult to assess due to limited data and other uncertainties. We could experience increased expenses
resulting from strategic planning, litigation, and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory
scrutiny, and reduced investor and stakeholder confidence due to our response to climate change and our climate change strategy, which, in turn, could have
a material negative impact on our business, results of operations, and financial condition.
We face strong competition from financial services companies and other companies that offer banking and mortgage banking services, which could
harm our business.
Our operations consist of offering banking and mortgage banking services to generate both interest and noninterest income. Many of our competitors
offer the same, or a wider variety of, banking and related financial services within our market areas. These competitors include national banks, regional
banks and other community banks. We also face competition from many other types of financial institutions, including savings and loan institutions,
finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-
of-state financial intermediaries have opened production offices or otherwise solicit deposits in our market areas. Additionally, we face growing
competition from so-called “online businesses” with few or no physical locations, including online banks, lenders and consumer and commercial lending
platforms, as well as automated retirement and investment service providers. Increased competition in our markets may result in reduced loans, deposits
and commissions and brokers’ fees, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against
current and future competitors. If we are unable to attract and retain banking and mortgage loan customers and expand our sales market for such loans, we
may be unable to continue to grow our business, and our financial condition and results of operations may be adversely affected.
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial
condition or results of operations.
Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all of our operations. Federal and state banking regulators have significant
discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws or regulations by financial institutions and bank holding
companies in the performance of their supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on our
financial condition and results of operations. Additionally, in order to conduct certain activities, including acquisitions, we are required to obtain regulatory
approval. There can be no assurance that any required approvals can be obtained, or obtained without conditions or on a timeframe acceptable to us.
In addition, other new proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of
the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct
business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner
in which existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial
industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices,
including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to
additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to
make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.
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Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory requirements and
attention.
We regularly use third party vendors as part of our business. We also have substantial ongoing business relationships with other third parties. These
types of third party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators. Recent
regulation requires us to enhance our due diligence, ongoing monitoring and control over our third party vendors and other ongoing third party business
relationships. In certain cases we may be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could
increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third party relationships and in
the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight
and control over our third party vendors or other ongoing third party business relationships or that such third parties have not performed appropriately, we
could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for
customer remediation, any of which could have a material adverse effect our business, financial condition or results of operations.
Risks Related to an Investment in Our Common Stock
The price of our common stock may fluctuate significantly, and this may make it difficult for you to sell shares of common stock owned by you at times
or at prices you find attractive.
The trading price of our common stock may fluctuate widely as a result of a number of factors, many of which are outside our control. In addition,
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:
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actual or anticipated quarterly fluctuations in our operating results and financial condition and prospects;
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;
acquisitions of other banks or financial institutions;
actions by institutional stockholders;
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;
adverse audit opinion on the effectiveness of our internal controls;
existing or increased regulatory compliance requirements, changes or proposed changes in laws or regulations, or differing interpretations
thereof, affecting our business, or enforcement of laws and regulations;
anticipated or pending investigations, proceedings, or litigation that involve or affect us;
successful management of reputational risk;
geopolitical and public health conditions such as acts or threats of terrorism, military conflicts, pandemics and public health issues or crises;
and
domestic and international economic factors, such as interest rates or foreign exchange rates, stock, commodity, credit, or asset valuations or
volatility, unrelated to our performance.
The stock market and, in particular, the market for financial institution stocks, has experienced significant volatility. As a result, the market price of
our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate more than usual and cause significant price
variations to occur. The trading price of the shares of our common stock and the value of our other securities will depend on many factors, which may
change from time to time, including, without limitation, our financial condition, performance, creditworthiness and prospects, future sales of our equity or
equity related securities, and other factors identified above in “Forward-Looking Statements,” and in this Item 1A — “Risk Factors.” The capital and credit
markets can experience volatility and disruption. Such volatility and disruption can reach unprecedented levels, resulting in downward pressure on stock
prices and credit availability for certain issuers without regard to their underlying financial strength. A significant decline in our stock price could result in
substantial losses for individual stockholders and could lead to costly and disruptive securities litigation.
Our dividend policy may change.
We have paid quarterly dividends since our initial public offering in the third quarter of 2017. We paid $0.51 per share in 2021, $0.56 per share in
2022 and $0.64 per share in 2023. We have no obligation to pay dividends and we may change our dividend policy at any time without notice to our
shareholders. Holders of our common stock are only entitled to receive such cash dividends as our board of directors, in its discretion, may declare out of
funds legally available for such payments. Furthermore, consistent with our strategic plans, growth initiatives, capital availability and requirements,
projected liquidity needs, financial condition, and other factors, we have made, and will continue to make, capital management decisions and policies that
could adversely impact the amount of dividends paid to our common shareholders.
We are a separate and distinct legal entity from our subsidiaries, including the Bank. We receive substantially all of our revenue from dividends from
the Bank and RAM, which we use as the principal source of funds to pay our expenses. Various federal and/or state laws and regulations limit the amount
of dividends that the Bank and certain of our non-bank subsidiaries may pay us. Such limits are also tied to the earnings of our subsidiaries. If the Bank
does not receive regulatory approval or if our subsidiaries’ earnings are not sufficient to make dividend payments to us while maintaining adequate capital
levels, our ability to pay our expenses and our business, financial condition or results of operations could be materially and adversely impacted.
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Shares of certain shareholders may be sold into the public market in the near future. This could cause the market price of our common stock to
decline.
We have outstanding options to purchase 397,903 shares of our common stock as of December 31, 2023 that may be exercised and sold (assuming all
vesting requirements are met), and we have the ability to issue options exercisable for up to an additional 1,032,173 shares of common stock pursuant to
our 2017 Omnibus Stock Incentive Plan. The sale of any of such shares could cause the market price of our stock to decline, and concerns that those sales
may occur could cause the trading price of our common stock to decrease or to be lower than it might otherwise be.
Our business and financial results could be impacted materially by adverse results in legal proceedings.
Various aspects of our operations involve the risk of legal liability. We have been, and expect to continue to be, named or threatened to be named as
defendants in legal proceedings arising from our business activities. We establish accruals for legal proceedings when information related to the loss
contingencies represented by those proceedings indicates both that a loss is probable and that the amount of the loss can be reasonably estimated, but we do
not have accruals for all legal proceedings where we face a risk of loss. In addition, amounts accrued may not represent the ultimate loss to us from those
legal proceedings. Thus, our ultimate losses may be higher or lower, and possibly significantly so, than the amounts accrued for loss contingencies arising
from legal proceedings, and these losses could have a material and adverse effect on our business, financial condition, results of operations and the value of
our common stock.
Future equity issuances could result in dilution, which could cause our common stock price to decline.
We are generally not restricted from issuing additional shares of our common stock, up to the 100 million shares of common stock and 100 million
shares of preferred stock authorized in our articles of incorporation, which in each case could be increased by a vote of a majority of our shares. We may
issue additional shares of our common stock in the future pursuant to current or future equity compensation plans, upon conversions of preferred stock or
debt, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock
for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price
of our common stock.
Provisions in our charter documents and California law may have an anti-takeover effect, and there are substantial regulatory limitations on changes
of control of bank holding companies.
Provisions of our charter documents and the California General Corporation Law (“CGCL”) could make it more difficult for a third party to acquire
us, even if doing so would be perceived to be beneficial by our shareholders. Furthermore, with certain limited exceptions, federal regulations prohibit a
person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a
bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or
otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. Accordingly,
prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common
stock. Moreover, the combination of these provisions effectively inhibits certain mergers or other business combinations, which, in turn, could adversely
affect the market price of our common stock.
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Item 1B. Unresolved Staff Comments.
None.
Item 1C. Cybersecurity.
Cybersecurity threats continue to evolve as the threat landscape evolves. The Bank continuously works to evolve its cybersecurity practices with the
changing landscape. Significant resources are devoted to protecting and enhancing the security of networks, computer systems, data storage devices, and
other systems and technology. The Bank’s security efforts and implemented controls are designed to protect against, among other things, cybersecurity
attacks that can result in unauthorized access to confidential information, the destruction of data, disruptions to or degradations of service, the sabotaging of
systems or other damage.
Third parties with which the Bank does business, that facilitate the Bank’s business activities, e.g., vendors, supply chain, exchanges, clearing houses,
central depositories, and financial intermediaries are sources of cybersecurity risk to the Bank. Third-party incidents such as system breakdowns or failures,
misconduct by the employees of such parties, or cyber-attacks, including ransomware and supply-chain compromises could have a material adverse effect
on the Bank, including in circumstances in which an affected third party is unable to deliver a product or service to the Bank or results in lost or
compromised information of the Bank or its clients or customers.
Bank customers are also sources of cybersecurity risk to the Bank and its information assets, particularly when their activities and systems are beyond the
Bank’s own security and control systems. The Bank provides information to its customers and other external parties concerning cybersecurity risks
including opportunities to reduce cybersecurity risk.
The security program is commensurate with the size and complexity of the Bank. Risks from cybersecurity threats, including any previous cybersecurity
events, have not materially affected the Bank or its business strategy, results of operations or financial condition.
Cybersecurity Risk Management
The Bank maintains an Information Security and Cybersecurity Program to support the management of cybersecurity risk as a component of the Bank’s
Enterprise Risk Management (“ERM”) framework. The information security and cybersecurity program is designed to assess, identify, and manage risks
from cybersecurity threats and leverages controls, best practices recommendations, and standards from the Federal Financial Institutions Examination
Council (“FFIEC”) and the National institute of Standards and Technology (“NIST”) Cybersecurity Framework, and standards set by relevant legal and
regulatory authorities. Our policies and procedures concerning cybersecurity matters include processes to safeguard our information systems, monitor these
systems, protect the confidentiality and integrity of our data, detect intrusions into our systems, and respond to cybersecurity incidents.
The Chief Information Security Officer (“CISO”) reports to the Chief Information Officer (“CIO”) and Chief Risk Officer (“CRO”). The CISO leads the
Information Security team, which is responsible for identifying and assessing information security and cybersecurity risks, and for implementing and
maintaining controls to manage information security and cybersecurity threats. The CISO is responsible for the Bank’s Information Security and
Cybersecurity Program, which is designed to prevent, detect and respond to cybersecurity threats and incidents in order to help safeguard the
confidentiality, integrity and availability of the Bank's information systems and information.
As part of the Information Security and Cybersecurity Program, the Bank conducts periodic employee training to educate employees on information and
cybersecurity risks and to reinforce security management practices and compliance with the Bank's security policies and standards. The training is
mandatory for all employees and is supplemented by testing initiatives, including periodic phishing tests.
Extensive technical controls are in place for identifying and managing cybersecurity risks and safeguarding our information systems and information. The
Bank uses sophisticated industry-recognized monitoring and threat detection technologies that continuously monitor our information systems and provide
threat detection alerts. The Bank’s strategy for assessing, identifying, and managing cybersecurity risks and for evaluating the effectiveness of its
cybersecurity program includes periodic risk assessments and testing of our systems, processes and procedures through audits, penetration testing,
vulnerability scans, tabletop exercises, and other related exercises.
The Bank has an incident response program designed to enable the Bank to respond to cybersecurity incidents, coordinate as appropriate with law
enforcement and other government agencies, notify clients and customers, as applicable, and recover from such incidents. In addition, the Bank actively
partners with appropriate government and law enforcement agencies and peer industry forums to participate in threat intelligence discussions and
simulations to assist with understanding the full spectrum of cybersecurity risks and enhancing defenses and improving resiliency in the Bank’s operating
environment.
The Bank engages third parties on a regular basis to assess, test, audit or assist with the implementation of our risk management strategies, policies, and
procedures to enhance our detection and management of cybersecurity risks, including, but not limited to: consultants who assist with assessing risks,
assess of our systems alignment with NIST Cybersecurity Framework, FFIEC, penetration testing, tabletop exercises and other regulatory agency
requirements.
The Bank maintains a process to evaluate and manage risks associated with third-party service providers. We conduct a full vendor due diligence review
before engagement, review specific security measures in our contracts, and maintain continued monitoring during the engagement including yearly due
diligence reviews.
Governance
The IT Committee and Audit Committee are the principal board committees that oversees the Bank’s assessment and management of cybersecurity risk,
including oversight of the implementation and maintenance of appropriate controls in support of the Bank’s Information Security and Cybersecurity
Program. Both the IT and Audit Committees are comprised of professionals with risk management and information technology expertise to manage any
material risk from a cybersecurity threat standpoint.
The membership of the IT Committee includes members of the executive management team as well as directors of the Bank. The CIO and CISO actively
participate in all IT Committee meetings. The CIO has over 20 years of work experience in the development, operation and management of Information
Technology at financial institutions. The CISO has over 10 years of work experience in building and overseeing cybersecurity programs at financial
institutions. Both CIO and CISO have extensive experience and qualifications in various technology and information security disciplines, including
relevant experience at the Bank. Additionally, the Audit Committee has oversight of the management of cybersecurity risk via validation and review of IT
and cybersecurity risk assessments and audits. The CISO provides reporting metrics on cybersecurity risks to the IT Committee, which meets eight times a
year. The IT and Audit Committees assist the Board of Directors in its oversight.
As part of its oversight of management’s implementation and maintenance of the Bank’s risk management framework, the Bank’s Board of Directors
receives regular updates directly from both IT and Audit Committees concerning cybersecurity matters. These updates generally include information
regarding cybersecurity and technology developments, the Bank’s Information Security Program and recommended changes to that program, cybersecurity
policies and practices, and ongoing initiatives to improve information security, as well as any significant cybersecurity incidents and the Bank's efforts to
address those incidents.
Notwithstanding our efforts at cybersecurity, the Bank cannot guarantee that those efforts will successfully prevent or mitigate a cybersecurity incident that
could have a material adverse effect on it. To our knowledge, cybersecurity threats, including as a result of any previous cybersecurity incidents, have not
materially affected the Bank, including its business strategy, results of operations or financial condition. With regard to the possible impact of future
cybersecurity threats or incidents, see Item 1A, Risk Factors – Risks Related to Our Business.
Item 2. Properties.
We are headquartered in Los Angeles County, California. We currently have nine branches in Los Angeles County located in downtown Los Angeles,
San Gabriel, Torrance, Rowland Heights, Monterey Park, Silver Lake, Arcadia, Cerritos, and Diamond Bar. We have one branch in Irvine, Orange County,
California. We operate two branches in Ventura County, California, in Westlake Village and in Oxnard. We operate one branch in Las Vegas, Nevada. We
also have one branch in Honolulu, Hawaii.
We have ten branches in the Eastern Region, with seven branches in the New York City metropolitan area located in Manhattan, Brooklyn, and
Queens, two branches in Chicago, Illinois and one branch in New Jersey.
Our Eastern Region loan center, located at 4101 8th Avenue, Brooklyn, New York, houses our Eastern Region mortgage unit, FNMA and Freddie
Mac servicing, commercial lending and credit administration areas.
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Our headquarters office is located at 1055 Wilshire Blvd. Suite 1200, Los Angeles, California 90017. The headquarters is in downtown Los Angeles
and houses our risk management unit, including audit, compliance and BSA groups, our single-family residential mortgage group, SBA lending,
commercial lending, credit administration, human resources and administrative group.
Our administrative center is located at 1055 Wilshire Blvd., Suite 1200, Los Angeles, California 91776 and houses our branch administration. Our
operations center is located at 7025 Orangethorpe Avenue, Buena Park, California 90621 and houses the operations, IT, marketing and finance teams.
We lease 20 locations and own six locations for our operations. We believe that the leases to which we are subject are generally on terms consistent
with prevailing market terms. None of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates
of the foregoing. The owned locations include our Monterey Park, California branch, our Buena Park, California operations center, our Eastern region loan
center, our Bensonhurst, New York branch and two branches in Chicago.
Item 3. Legal Proceedings.
In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management, following consultation
with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our business.
However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations
governing consumer protection, fair lending, fair labor, privacy, information security and anti-money laundering and anti-terrorism laws), we, like all
banking organizations, are subject to heightened legal and regulatory compliance and litigation risk.
The Company accrues reserves for outstanding lawsuits, claims and proceedings when a loss contingency is probable and can be reasonably
estimated in accordance with FASB guidance ASC 450, “Contingencies." The outcome of litigation and other legal and regulatory matters is inherently
uncertain, however, and it is possible that one or more of the legal or regulatory matters currently pending or threatened could have a material adverse
effect on our liquidity, consolidated financial position, and/or results of operations. As of December 31, 2023, the Company had a litigation reserve of
$100,000 for a potential claim from a former director of the Company.
Item 4. Mine Safety Disclosures.
Not applicable.
39
Table of Contents
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock began trading on the NASDAQ Global Select Market (NASDAQ) under the symbol “RBB” on July 27, 2017. Prior to that, there
was no public market for our common stock.
Shareholders
As of March 8, 2024, the Company had approximately 1,730 common stock shareholders of record, and the closing price of the Company’s common
stock was $17.67 per share. The number of holders of record does not represent the actual number of beneficial owners of our common stock because
securities dealers and others frequently hold shares in “street name” for the benefit of individual owners who have the right to vote shares.
Dividend Policy
It has been our policy to pay quarterly dividends to holders of our common stock, and we intend to generally maintain our current dividend levels.
Our dividend policy and practice may change in the future, however, and our board of directors may change or eliminate the payment of future dividends at
its discretion, without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will depend on our results of
operations, financial condition, capital requirements, banking regulations, contractual restrictions and any other factors that our board of directors may
deem relevant.
Under the terms of our subordinated notes issued in March 2021, and the related subordinated note purchase agreements, we are not permitted to
declare or pay any dividends on our capital stock if an event of default occurs under the terms of the subordinated notes. Additionally, under the terms of
such notes, we are not permitted to declare or pay any dividends on our capital stock if we are not “well capitalized” for regulatory purposes immediately
prior to the payment of such dividend. The terms of the debentures underlying our Trust Preferred Securities also prohibit us from paying dividends on our
capital stock if we are in deferral of interest payments on those debentures. There have been no events of default under the terms of the subordinated notes
as of December 31, 2023.
As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the Federal Reserve. Information on
regulatory restrictions on our ability to pay dividends is set forth in “Part I, Item I – Business – Supervision and Regulation – The Company – Dividend
Payments.” In addition, because we are a holding company, we are dependent upon the payment of dividends by the Bank to us as our principal source of
funds to pay dividends in the future, if any, and to make other payments. The Bank is also subject to various legal, regulatory and other restrictions on its
ability to pay dividends and make other distributions and payments to us, as further discussed in “Part I, Item I – Business – Supervision and Regulation—
The Bank—Dividend Payments.”
40
Table of Contents
Stock Performance Graph
The following graph compares the cumulative total shareholder return on the Company's common stock from December 31, 2018 through December
31, 2023. The graph compares the Company's common stock with the Russell 2000 Index and the SNL Bank $1B-$5B Index. The graph assumes an
investment of $100.00 in the Company's common stock and each index on December 31, 2018 and reinvestment of all quarterly dividends. Measurement
points are December 31, 2018 and the last trading day of each year-end through December 31, 2023. There is no assurance that the Company's common
stock performance will continue in the future with the same or similar results as shown in the graph.
Index
RBB Bancorp
Russell 2000 Index
KBW Nasdaq Regional Banking Index
Source: S&P Global Market Intelligence
© 2024
Unregistered Sales and Issuer Purchases of Equity Securities
12/31/18
100.00
100.00
100.00
12/31/19
122.98
125.53
123.81
12/31/20
91.38
150.58
113.03
12/31/21
159.34
172.90
154.45
12/31/22
129.87
137.56
143.75
12/31/23
124.13
160.85
143.17
On April 22, 2021, March 16, 2022 and June 14, 2022 the Board of Directors approved a stock repurchase program to buy back up to an aggregate of
500,000 shares of Company common stock for each authorization date. We repurchased 396,374 shares for $6.8 million of our outstanding common stock
during the fourth quarter of 2023 and as of December 31, 2023, there are 36,750 shares remaining under an authorized repurchase program.
Period
October 1, 2023 to October 31, 2023
November 1, 2023 to November 30, 2023
December 1, 2023 to December 31, 2023
Total
Issuer Purchases of Equity Securities
(a)
(b)
Total Number
of Shares
Purchased
Average Price
Paid per
Share
(c)
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plan
(d)
Maximum
Number of
Shares that
May Yet Be
Purchased
Under the
Plan
— $
118,596 $
277,778 $
396,374 $
—
14.82
17.96
17.02
—
118,596
277,778
396,374
433,124
314,528
36,750
36,750
41
Table of Contents
Item 6. [Reserved.]
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of the Company’s audited consolidated financial statements are based upon its audited consolidated financial statements,
which have been prepared in accordance with GAAP. The preparation of these audited consolidated financial statements requires management to make
estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and
liabilities at the date of our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Allowance for Credit Losses (“ACL”) on Loans Held for Investment
The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected
lifetime credit losses for loans at the time of origination. The ACL is maintained at a level deemed appropriate by management to provide for expected
credit losses in the portfolio as of the date of the consolidated balance sheets. Estimating expected credit losses requires management to use relevant
forward-looking information, including the use of reasonable and supportable forecasts.
The use of reasonable and supportable forecasts requires significant judgment, such as utilizing the Federal Open Market Committee's projected
unemployment rate as part of the economic forecast and related scenario-weighting based on Management's direct control/influence over specific
qualitative factors and internal understanding of level of exposure, as well as determining the appropriate length of the forecast horizon. Management
estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other factors. Any unexpected adverse changes or uncertainties to these factors that are
beyond the Company’s control could result in increases in the ACL through additional provision for credit losses.
A sensitivity analysis of our ACL was performed as of December 31, 2023. Based on this sensitivity analysis, a positive 25% change in prepayment
speed would result in a $968,000, or (2.31)%, decrease to the ACL. A negative 25% change in prepayment speed would result in a $1.3 million, or 3.08%,
increase to the ACL. Additionally, a one percentage point increase in the unemployment rate would result in a $738,000, or 1.76%, increase to the ACL and
a one percentage point decrease in the unemployment rate would result in a $678,000, or (1.62)%, decrease to the ACL. Management reviews the results
using the comparison scenario for sensitivity analysis and considered the results when evaluating the qualitative factor adjustments.
On a quarterly basis, we stress test the qualitative factors, which are lending policy, procedures & strategies, economic conditions, changes in nature
and volume of the portfolio, credit & lending staff, problem loan trends, loan review results, collateral value, concentrations and regulatory and business
environment by creating two scenarios, moderate risk and major risk. In the Moderate Stress scenario, the status of all nine risk factors were set at
“Moderate Risk.” In the Major Stress scenario, the status of all nine risk factors across all pooled loan segments were set at “Major Risk.” Under the
Moderate Stress scenario, ACL increased by $3.9 million, or 9.2%, as of December 31, 2023. Under the Major Stress scenario, ACL increased by $19.3
million or 46.0% as of December 31, 2023.
Investment Securities
Effective January 1, 2022, upon the adoption of ASU 2016-13, the Company accounts for credit losses on available for sale (“AFS”) securities in
accordance with ASC 326-30. Debt securities are measured at fair value and subject to impairment testing. When a debt security is considered impaired, the
Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit
loss by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss)
any non-credit related components of the fair value change. If the amount of the amortized cost basis expected to be recovered increases in a future period,
the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security.
Our significant accounting policies are described in greater detail in our 2023 audited financial statements included in Item 8. Financial Statements
and Supplementary Data of this Annual Report, specifically in “Note 2 – Basis of Presentation and Summary of Significant Accounting Policies,” which
are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
For AFS debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required
to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized
cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, we evaluate whether the
decline in fair value has resulted from credit losses or other factors.
The determination of credit losses when there is a decrease in fair value of an AFS debt security involves significant judgment. Adverse changes in
management’s assessment that concluded a credit impairment on an investment security would result in an increase in impairment charges that would
negatively impact our earnings.
Goodwill
Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests
in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill resulting from whole bank
acquisitions is not amortized but tested for impairment at least annually.
The Company performs goodwill impairment tests in accordance with ASC 350 “Intangibles- Goodwill and Other.” Fair value of goodwill is based
on selection and weighting of valuation methods using management assumptions not limited to discounted cash flow (“DCF”), diversification, market
position, customer dependence, access to capital markets, financial risk, growth, and earnings trends. Consideration of economic conditions is also an
important part of the valuation process.
Changes to assumptions, to selection and weighting in the valuation methods and to economic conditions could result in goodwill impairment losses
that negatively impact our earnings. As discussed more fully herein, we have not recognized any goodwill impairment.
42
Table of Contents
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax basis. Deferred tax assets are also recognized for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect
of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. The value of deferred
tax assets and liabilities are based on many factors including: estimates of the timing of reversals of temporary differences, the application of federal and
state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could
differ from the estimates and interpretations used in determining the current and deferred income tax liabilities.
Under ASC 740, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of the Company's deferred tax
assets will not be realized. The Company's policy is to evaluate the deferred tax assets on a quarterly basis and record a valuation allowance for the
Company's deferred tax assets if there is not sufficient positive evidence available to demonstrate utilization of the Company's deferred tax assets. Initial
setup or an increase to deferred tax asset valuation allowance would be charged to income tax expense that would negatively impact our earnings.
Our significant accounting policies are described in greater detail in our 2023 audited financial statements included in Item 8. Financial Statements
and Supplementary Data of this Annual Report, specifically in “Note 2 – Basis of Presentation and Summary of Significant Accounting Policies,” which
are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
For the year 2023, we reported net earnings of $42.5 million, compared with $64.3 million for the year 2022. This represented a decrease of
$21.9 million, or 34.0%, over the prior year. The decrease in net earnings reflected a $30.3 million decrease in net interest income and a $6.2 million
increase in non-interest expenses, which was partially offset by a $3.8 million increase in noninterest income, a $1.6 million decrease in the provision for
credit losses and a $9.2 million decrease in income tax expense.
At December 31, 2023, total assets were $4.03 billion, an increase of $107.0 million, or 2.7%, from total assets of $3.92 billion at December 31,
2022. The increase in assets was primarily due to a $347.8 million increase in interest-bearing cash and due from banks, and an increase of $61.6 million in
investment securities, partially offset by a decrease of $304.6 million in loans held for investment (“LHFI”).
At December 31, 2023, AFS investment securities totaled $319.0 million inclusive of a pre-tax net unrealized loss of $28.1 million, compared to
$256.8 million inclusive of a pre-tax net unrealized loss of $31.3 million at December 31, 2022. At December 31, 2023, held to maturity (“HTM”)
investment securities totaled $5.2 million, compared to $5.7 million as of December 31, 2022.
Net loans (held for investment, net of deferred fees, discounts, and the allowance for loan losses) were $2.99 billion at December 31, 2023, compared
to $3.30 billion at December 31, 2022. Net loans decreased $305.4 million, or 9.3%, from December 31, 2022. The decrease in net loans was mainly due to
decreases of $144.3 million in CRE loans, $95.4 million in C&D loans, $71.1 million in C&I loans, $9.3 million in SBA loans and $8.1 million in other
loans, partially offset by a $23.7 million increase in SFR mortgage loans.
Total deposits were $3.17 billion at December 31, 2023, an increase of $197.1 million, or 6.6%, compared to $2.98 billion at December 31, 2022,
primarily due to an increase of $438.8 million in time deposits, partially offset by a decrease of $241.7 million of non-maturity deposits.
Noninterest-bearing deposits were $539.6 million at December 31, 2023, a decrease of $259.1 million, or 32.4%, from $798.7 million at December
31, 2022. At December 31, 2023, noninterest-bearing deposits were 17.0% of total deposits, compared to 26.8% at December 31, 2022. The decrease in
noninterest-bearing deposits and consequently the overall mix of deposits was due to a combination of factors including the higher rate environment where
customers shifted funds to a higher level of interest-bearing deposits, management’s decision to decrease certain deposit concentration risks and a higher
level of wholesale funding to maintain a higher level of liquidity related to the Company’s loan portfolio.
Borrowings, consisting of FHLB advances, long-term debt and subordinated debt, decreased $124.2 million to $284.1 million as of December 31,
2023, compared to $408.3 million as of December 31, 2022. The Company had no short-term FHLB advances and $150.0 million in long-term FHLB
advances at December 31, 2023, compared to $70.0 million in short-term FHLB advances and $150.0 million in long-term FHLB advances at December
31, 2022. We redeemed all $55.0 million of our outstanding 6.18% fixed-to-floating rate subordinated notes on December 1, 2023 at par. The subordinated
notes had an original maturity date of December 1, 2028 and an effective interest rate of 6.18% as of their redemption date.
The ACL for LHFI was $41.9 million at December 31, 2023, reflecting an increase of $827,000 from $41.1 million at December 31, 2022. During
2023, there was a $3.9 million provision for credit losses on loans compared to $6.0 million for 2022. The decrease in the 2023 provision for credit losses
was due to a higher level of specific reserves and net charge-offs, offset by the impact of lower total loans held for investment at the end of 2023. The ACL
to LHFI outstanding was 1.38% and 1.23% as of December 31, 2023 and December 31, 2022, respectively.
Shareholders’ equity increased $26.7 million, or 5.5%, to $511.3 million as of December 31, 2023 from $484.6 million at December 31, 2022. The
increase during 2023 was primarily due to net income of $42.5 million and a decrease in net accumulated other comprehensive loss of $2.2 million,
partially offset by cash dividends of $12.2 million and common stock repurchases of $6.8 million. As a result, book value per share increased 7.5% to
$27.47 from $25.55 and tangible book value per share increased 8.8% to $23.48 from $21.58.
Our capital ratios under the Basel III capital framework regulatory standards remain well capitalized. As of December 31, 2023, Bancorp’s Tier 1
leverage capital ratio was 11.99%, common equity Tier 1 ratio was 19.07%, Tier 1 risk-based capital ratio totaled 19.69%, and total risk-based capital ratio
was 25.92%. As of December 31, 2022, Bancorp’s Tier 1 leverage capital ratio was 11.67%, common equity Tier 1 ratio was 16.03%, Tier 1 risk-based
capital ratio totaled 16.58%, and total risk-based capital ratio was 24.27%.
43
Table of Contents
Financial Performance
ANALYSIS OF THE RESULTS OF OPERATIONS
Interest income
Interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income
Noninterest expense
Income before income taxes
Income tax expense
Net income
Share Data
Earnings per common share (1):
Basic
Diluted
Performance Ratios
Return on average assets
Return on average shareholders’ equity
Efficiency ratio
Tangible common equity to tangible assets (2)
Return on average tangible common equity (2)
Tangible book value per share (2)
$
$
$
$
2023
2021
$
$
Year Ended December 31,
2022
(dollars in thousands, except per share data)
221,148
101,862
119,286
3,362
115,924
15,018
70,696
60,246
17,781
42,465
180,970
31,416
149,554
4,935
144,619
11,252
64,526
91,345
27,018
64,327
$
$
$
2.24
2.24
1.06%
8.48%
52.64%
11.06%
9.97%
$
23.48
$
3.37
3.33
1.62%
13.66%
40.13%
10.65%
16.26%
$
21.58
147,063
22,720
124,343
3,959
120,384
18,745
58,192
80,937
24,031
56,906
2.92
2.86
1.48%
12.71%
40.67%
9.47%
15.22%
20.22
(1)
(2)
Earnings per share are calculated utilizing the two-class method. Basic earnings per share are calculated by dividing earnings to common
shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing earnings by the
weighted average number of shares adjusted for the dilutive effect of outstanding stock options using the treasury stock method.
Tangible book value per share, return on average tangible common equity, and tangible common equity to tangible assets are non-GAAP financial
measures. See “Non-GAAP Financial Measures” for a reconciliation of these measures to their most comparable GAAP measures.
Management's Discussion and Analysis of Financial Condition and Results of Operations generally includes tables with 3-year financial performance,
accompanied by narrative for the years ended December 31, 2023 and 2022. For further discussion of financial results for the years ended December 31,
2022 and 2021 please refer to Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on April 7,
2023.
Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2023 to December 31, 2022
Net Interest Income/Average Balance Sheet
In 2023, we generated fully-taxable equivalent net interest income of $119.4 million, a decrease of $30.3 million, or 20.2%, from $149.7 million in
2022. This decrease was largely due to a $455.3 million increase in the average balance of interest-bearing liabilities, in part due to higher time
deposits, and a 225 basis point increase in the average cost of interest-bearing liabilities, partially offset by a 99 basis point increase in the average
yield on interest-earning assets and a $55.1 million increase in the average balance of interest-earning assets. Average noninterest-bearing deposits declined
in 2023 due primarily to customers transferring their deposit balances into higher yielding money market accounts and time deposits. Such transfers were
due, in part, to the Federal Reserve raising the federal funds rates by 450 basis points during 2022 and another 100 basis points during 2023, in
addition to the ongoing peer competition for deposits.
44
Table of Contents
For the years ended December 31, 2023 and 2022, our net interest margin was 3.16% and 4.02%, respectively. The decrease in net interest margin
was primarily due to a 263 basis point increase in the average rate paid on interest-bearing deposits and a $479.3 million increase in average interest-
bearing deposits, partially offset by a 54 basis point increase in the average yield on gross loans, and a $107.6 million increase in average gross loans. The
cost of interest-bearing deposits increased due to increasing market rates and peer bank deposit competition.
Interest Income. Total fully-taxable equivalent interest income was $221.2 million in 2023 compared to $181.1 million in 2022. The $40.2 million, or
22.2%, increase in total interest income was mainly due to an increase in the average balance of LHFI of $107.6 million, partially offset by a decrease of
$7.4 million in the average balance of securities and a decrease of $45.1 million in the average balance of Federal funds sold, cash equivalents and other
investments.
Interest and fees on total loans was $194.3 million in 2023 compared to $171.1 million in 2022. The $23.2 million, or 13.5%, increase in interest
income on loans was primarily due to a $107.6 million increase in the average balance of total loans outstanding and a 54 basis point increase in the
average yield on total loans. The increase in the average balance of loans outstanding was primarily due to organic loan growth in SFR mortgage
loans during 2023. For the years 2023 and 2022, the average yield on total loans was 6.06% and 5.52%, respectively.
Tax equivalent interest income from our securities portfolio increased $7.9 million, or 128.5%, to $14.1 million in 2023. The increase in tax
equivalent interest income on securities was primarily due to a 240 basis point increase in the average tax equivalent yield of securities due to increases in
market interest rates, partially offset by the impact of a $7.4 million, or 2.2%, decrease in the average balance of securities.
Interest income on our federal funds sold, cash equivalents and other investments increased $9.1 million, or 239.5%, to $12.9 million in 2023. The
increase in interest income on these earning assets was primarily due to a 417 basis point increase in average yield of cash equivalents, partially offset by a
$45.1 million decrease in the average balance. The decrease in the average balance resulted from the utilization of these funds to fund higher yielding loans
in the rising rate environment.
Interest Expense. Interest expense on interest-bearing liabilities increased $70.4 million, or 224.2%, to $101.9 million in 2023 primarily due to a
225 basis point increase in the average rate on these liabilities and a $455.3 million increase in the average balance of interest-bearing liabilities.
Our average cost of total deposits was 2.87% for 2023, compared to 0.61% for 2022. The increase was due to a 263 basis point increase in the
average rate paid on interest-bearing deposits due to increases in the market interest rates coupled with peer bank competition for deposits.
Interest expense on total deposits increased to $89.0 million in 2023. The $70.1 million, or 371.2%, increase in interest expense on total deposits was
primarily due to a 263 basis point increase in the average rate paid on total average interest-bearing deposits due to higher rates paid on time deposits, and a
$714.8 million increase in the average balance of time deposits. Average noninterest-bearing deposits decreased $447.8 million to $602.3 million from
$1.05 billion in 2022 primarily due to the strategic exit of a single deposit relationship and customers transferring their noninterest-bearing deposit balances
into higher yielding money market accounts and time deposits.
45
Table of Contents
Average Balance Sheet, Interest and Yield/Rate Analysis
The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments
(interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a
percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-
bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest earning assets minus the cost of
average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (“TE”) basis by adjusting interest income
utilizing the federal statutory tax rate of 21% for 2023, 2022 and 2021. Our net interest income, interest spread, and net interest margin are sensitive to
general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of
the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage
net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income
through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing
liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. See “Analysis of Financial Condition—Capital
Resources and Liquidity Management” and Item 7A “Quantitative and Qualitative Disclosures about Market Risk” included herein.
The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and
rates paid for the years 2023, 2022 and 2021. The average balances are principally daily averages and, for loans, include both performing and
nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield
adjustments.
2023
Year Ended December 31,
2022
2021
Average
Balance & Fees
Interest Yield /
Rate
Average
Balance & Fees
Interest Yield /
Rate
Average
Balance & Fees
Interest Yield /
Rate
$ 231,851 $
12,856
5.54% $ 276,923 $
3,787
1.37% $ 504,809 $
2,115
0.42%
331,357
5,509
13,928
198
4.20%
3.59%
338,437
5,865
5,973
208
1.76%
3.55%
320,544
6,543
3,217
238
1.00%
3.64%
(tax-equivalent basis,
dollars in
thousands)
Interest-earning assets:
Federal funds sold, cash
equivalents and other (1)
Securities: (2)
Available for sale
Held to maturity
Loans held for investment:
(3)(4)
Real estate
Commercial
2,998,877 176,786
17,478
206,748
5.90% 2,775,611 151,230
19,869
322,438
8.45%
5.45% 2,384,663 122,874
18,695
381,646
6.16%
5.15%
4.90%
Total loans held for
investment
Total interest-
earning assets
Total noninterest-
3,205,625 194,264
6.06% 3,098,049 171,099
5.52% 2,766,309 141,569
5.12%
3,774,342 $ 221,246
5.86% 3,719,274 $ 181,067
4.87% 3,598,205 $ 147,139
4.09%
earning assets
246,980
Total average
assets
$ 4,021,322
244,894
$ 3,964,168
235,267
$ 3,833,472
Interest-bearing
liabilities:
NOW
Money market
Savings deposits
Time deposits, $250,000
$
58,191 $
429,102
126,062
725
10,565
915
1.25% $
2.46%
0.73%
73,335 $
631,094
144,409
262
5,114
185
0.36% $
0.81%
0.13%
69,211 $
637,539
137,534
184
2,468
134
0.27%
0.39%
0.10%
and under
1,146,513
47,150
4.11%
609,464
6,583
1.08%
640,747
4,462
0.70%
Time deposits, greater
than $250,000
Total interest-bearing
deposits
FHLB advances
Long-term debt
Subordinated debentures
Total interest-bearing
742,839
29,687
4.00%
565,059
6,755
1.20%
597,770
4,708
0.79%
2,502,707
172,219
169,182
14,821
89,042
2,869
8,477
1,474
3.56% 2,023,361
192,438
1.67%
173,275
5.01%
14,603
9.95%
18,899
2,872
8,777
868
0.93% 2,082,801
150,000
1.49%
157,719
5.07%
14,385
5.94%
11,956
1,765
8,404
595
0.57%
1.18%
5.33%
4.14%
liabilities
Noninterest-bearing
liabilities
Noninterest-bearing
deposits
Other noninterest-bearing
liabilities
Total noninterest-
bearing liabilities
Shareholders' equity
Total liabilities
and shareholders'
equity
Net interest income /
interest rate spreads
2,858,929 101,862
3.56% 2,403,677
31,416
1.31% 2,404,905
22,720
0.94%
602,291
59,562
661,853
500,540
1,050,063
39,647
1,089,710
470,781
938,710
42,143
980,853
447,714
$ 4,021,322
$ 3,964,168
$ 3,833,472
$ 119,384
2.30%
$ 149,651
3.56%
$ 124,419
3.15%
Net interest margin
3.16%
4.02%
Total cost of deposits
Total cost of funds
89,042
$ 3,104,998 $
$ 3,461,220 $ 101,862
2.87% $ 3,073,424 $
2.94% $ 3,453,740 $
18,899
31,416
0.61% $ 3,021,511 $
0.91% $ 3,343,615 $
11,956
22,720
3.46%
0.40%
0.68%
(1)
(2)
(3)
(4)
Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing
assets.
Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis.
Includes average loans held for sale of $627,000, $1.3 million and $20.8 million for the years ended December 31, 2023, 2022 and 2021,
respectively.
Total loans are net of deferred fees and discounts but exclude the ACL. Nonaccrual loans are included in the average balance. Interest income
includes purchased discounts of $612,000, $471,000 and $1.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Discounts on purchased loans were $969,000, $1.2 million and $1.7 million as of December 31, 2023, 2022 and 2021, respectively.
46
Table of Contents
The following table summarizes the extent to which changes in (1) interest rates and (2) volume of average interest-earning assets and average
interest-bearing liabilities affected by the Company’s net interest income for the periods presented. The total change for each category of interest-earning
assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate. Changes that are not solely due to either
volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average yield/rate.
(tax-equivalent basis, dollars in
thousands)
Interest-earning assets:
Federal funds sold, cash equivalents &
other (1)
Securities: (2)
Available for sale
Held to maturity
Loans held for investment: (3)(4)
Real estate
Commercial
Total loans held for investment
Total interest-earning assets
Interest-bearing liabilities
NOW
Money market
Saving deposits
Time deposits, less than $250,000
Time deposits, $250,000 and over
Total interest-bearing deposits
FHLB advances
Long-term debt
Subordinated debentures
$
$
Total interest-bearing liabilities
Changes in net interest income
$
Year Ended December 31, 2023 Compared with
Year Ended December 31, 2022
Year Ended December 31, 2022 Compared with
Year Ended December 31, 2021
Change due to:
Change due to:
Volume
Yield/Rate
Interest
Variance
Volume
Yield/Rate
Interest
Variance
$
(711) $
9,780 $
9,069 $
(1,317) $
2,989 $
1,672
(128)
(12)
12,611
(8,428)
4,183
3,332 $
(65) $
(2,088)
(27)
9,696
2,724
10,240
(323)
(200)
13
9,730
(6,398) $
8,083
2
12,945
6,037
18,982
36,847 $
528 $
7,539
757
30,871
20,208
59,903
320
(100)
593
60,716
(23,869) $
7,955
(10)
25,556
(2,391)
23,165
40,179 $
463 $
5,451
730
40,567
22,932
70,143
(3)
(300)
606
70,446
(30,267) $
189
(24)
20,922
(3,177)
17,745
16,593 $
12 $
(25)
7
(227)
(272)
(505)
574
798
9
876
15,717 $
2,567
(6)
7,434
4,351
11,785
17,335 $
66 $
2,671
44
2,348
2,319
7,448
533
(425)
264
7,820
9,515 $
2,756
(30)
28,356
1,174
29,530
33,928
78
2,646
51
2,121
2,047
6,943
1,107
373
273
8,696
25,232
(1)
(2)
(3)
(4)
Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing
assets.
Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis.
Includes average loans held for sale of $627,000, $1.3 million and $20.8 million for the years ended December 31, 2023, 2022 and 2021,
respectively.
Total loans are net of deferred fees and discounts but exclude the ACL. Nonaccrual loans are included in the average balance. Interest income
includes purchased discounts of $612,000, $471,000 and $1.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.
Discounts on purchased loans were $969,000, $1.2 million and $1.7 million as of December 31, 2023, 2022 and 2021, respectively.
47
Table of Contents
Provision for Credit Losses
The provision for credit losses decreased $1.6 million to $3.4 million in 2023 compared to $4.9 million in 2022. The provision for credit losses for
the year ended December 31, 2023 included a provision for loan losses of $3.9 million, partially offset by a reversal of the reserve for unfunded
commitments of $516,000. The provision for credit losses on loans of $3.9 million was due to a higher level of specific reserves and net charge-offs,
offset by the impact of lower total loans held for investment at the end of 2023. The specific credit losses related to non-performing loans that
were individually analyzed totaled $816,000 in 2023 and $48,000 in 2022. The net charge-offs totaled $3.1 million for 2023 compared to $2,000 for
2022. The reversal of the reserve for unfunded commitments of $516,000 for the year ended December 31, 2023 was due to lower total unfunded loan
commitments.
Noninterest Income
The following table sets forth the major components of noninterest income for the dates indicated:
(dollars in thousands)
Noninterest income:
Service charges, fees and other
Loan servicing income, net of
amortization
Increase in cash surrender of bank owned
life insurance
Gain on sale of loans
Gain on sale of fixed assets
Other income
Total noninterest income
$
Year Ended December 31,
2022
2023
2021
2023 vs. 2022 Increase
(Decrease)
2022 vs. 2021 Increase
(Decrease)
$
%
$
%
$
4,172 $
4,145 $
4,524 $
27
0.7% $
(379)
(8.4)%
2,576
2,209
684
367
16.6%
1,525
223.0%
1,409
374
32
6,455
15,018 $
1,322
1,895
757
924
11,252 $
1,067
9,991
—
2,479
18,745 $
87
(1,521)
(725)
5,531
3,766
6.6%
(80.3)%
(95.8)%
598.6%
33.5% $
255
(8,096)
757
(1,555)
(5,938)
23.9%
(81.0)%
100.0%
(62.7)%
(31.7)%
Noninterest income increased $3.8 million, or 33.5%, to $15.0 million in 2023 from $11.3 million in 2022. The increase was primarily attributable
to $5.0 million of income recognized from the CDFI ERP award included in other income and a $367,000 increase in loan servicing fees, partially offset by
a $1.5 million decrease in gain on sale of loans and a $725,000 decrease in gain on sale of fixed assets.
48
Table of Contents
Loan servicing income, net of amortization. Loan servicing income, net of amortization, increased by $367,000 to $2.6 million for 2023 compared to
net servicing income of $2.2 million for 2022. Loan servicing income, net of amortization increased due to higher interest rates, resulting in lower pre-
payment speeds which reduced the amortization expense on loans serviced. The following table presents information on loan servicing income for the years
ended December 31, 2023, 2022 and 2021.
(dollars in thousands)
Loan servicing income, net of
amortization:
Single-family residential loans serviced
SBA loans serviced
Total
Year Ended December 31,
2022
2023
2021
2023 vs. 2022 Increase
(Decrease)
2022 vs. 2021 Increase
(Decrease)
$
%
$
%
$
$
2,119 $
457
2,576 $
1,706 $
503
2,209 $
268 $
416
684 $
413
(46)
367
24.2% $
(9.1)%
16.6% $
1,438
87
1,525
536.6%
20.9%
223.0%
As of December 31, 2023, we were servicing SFR mortgage loans for other financial institutions, FHLMC, FNMA and SBA loans. The decline in
the respective servicing portfolios reflects lower amounts of loans sold servicing retained and repayment of loans from 2022 through 2023.
The following table shows the total loans being serviced for others as of the dates indicated:
(dollars in thousands)
Loans serviced
Single-family residential loans serviced
SBA loans serviced
Commercial real estate loans serviced
Construction loans
Total
As of December 31,
2022
2021
2023
2023 vs. 2022 Increase
(Decrease)
2022 vs. 2021 Increase
(Decrease)
$
%
$
%
$ 1,014,017 $ 1,127,668 $ 1,308,672 $ (113,651)
(19,557)
(178)
1,033
$ 1,122,876 $ 1,255,229 $ 1,450,915 $ (133,386)
100,336
3,813
4,710
138,173
4,070
—
119,893
3,991
3,677
(10.1)% $ (181,004)
(18,280)
(16.3)%
(79)
(4.5)%
28.1%
3,677
(10.6)% $ (199,363)
(13.8)%
(13.2)%
(1.9)%
100%
(13.7)%
Gain on sale of loans. Gains on sale of loans are comprised primarily of gains on sale of SFR mortgage loans and SBA loans. Gains on sale of
loans totaled $374,000 in 2023, compared to $1.9 million in 2022. The $1.5 million, or 80.3%, decrease was primarily caused by lower margins for gains
on the loans sold combined with a decrease of $20.6 million in the volume of loans sold; these decreases were primarily due to the increase in interest
rates, which resulted in the decreases in FNMA, FHLMC, and non-qualified loan originations and consequently loan sales. In addition, during 2023,
$20.0 million of mortgage loans were sold at par value but reflecting the net deferred costs resulted in a loss of $103,000 with respect to those loans sold.
The following table presents information on loans sold and gain on loans sold for the years ended December 31, 2023, 2022 and 2021.
(dollars in thousands)
Loans sold:
SBA
Single-family residential mortgage
Gain on loans sold:
SBA
Single-family residential mortgage
Year Ended December 31,
2022
2023
2021
2023 vs. 2022 Increase
(Decrease)
2022 vs. 2021 Increase
(Decrease)
$
%
$
%
$
$
$
$
4,164 $
34,060
38,224 $
12,740 $
46,077
58,817 $
20,922 $
276,650
297,572 $
(8,576)
(12,017)
(20,593)
(8,182)
(67.3)% $
(26.1)%
(230,573)
(35.0)% $ (238,755)
262 $
112
374 $
696 $
1,199
1,895 $
2,091 $
7,900
9,991 $
(434)
(1,087)
(1,521)
(62.4)% $
(90.7)%
(80.3)% $
(1,395)
(6,701)
(8,096)
(39.1)%
(83.3)%
(80.2)%
(66.7)%
(84.8)%
(81.0)%
49
Table of Contents
Noninterest Expense
The following table sets forth the major components of our noninterest expense for the years ended December 31, 2023, 2022 and 2021:
$
(dollars in thousands)
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment expenses
Data processing
Legal and professional
Office expenses
Marketing and business promotion
Insurance and regulatory assessments
Core deposit premium
Other expenses
Total noninterest expense
$
Year Ended December 31,
2022
2023
2021
2023 vs. 2022 Increase
(Decrease)
2022 vs. 2021 Increase
(Decrease)
$
%
$
%
37,795 $
9,629
5,326
8,198
1,512
1,132
3,165
923
3,016
70,696 $
35,488 $
9,092
5,060
5,383
1,438
1,578
1,850
1,086
3,551
64,526 $
33,568 $
8,691
4,474
3,773
1,197
1,157
1,561
1,121
2,650
58,192 $
2,307
537
266
2,815
74
(446)
1,315
(163)
(535)
6,170
6.5% $
5.9%
5.3%
52.3%
5.1%
(28.3)%
71.1%
(15.0)%
(15.1)%
9.6% $
1,920
401
586
1,610
241
421
289
(35)
901
6,334
5.7%
4.6%
13.1%
42.7%
20.1%
36.4%
18.5%
(3.1)%
34.0%
10.9%
Noninterest expense increased $6.2 million, or 9.6%, to $70.7 million in 2023 from $64.5 million in 2022. This increase was primarily due to a
$2.8 million increase in legal and other professional expense, a $2.3 million increase in salaries and employee benefits expense due to merit increases to
reflect economic inflation and a $1.3 million increase in insurance and regulatory assessments, partially offset by a $446,000 decrease in marketing and
business promotion expense due to a decrease in advertising and a $274,000 decrease in directors' fees, included in other expenses.
Salaries and employee benefits expense. Salaries and employee benefits expense increased $2.3 million due to a decrease in deferred
loan salary costs due to lower loan originations, merit increases and increases in health benefit costs, partially offset by decreases in bonuses and
commissions. The number of full-time equivalent employees was 376 at December 31, 2023, 379 at December 31, 2022 and 365 at December
31, 2021. None of our employees are represented by a labor union, or governed by any collective bargaining agreements.
Occupancy and equipment expense. Occupancy and equipment expense increased $537,000, or 5.9%, to $9.6 million for 2023 compared to
$9.1 million for 2022 due to increases in rent and real estate property taxes.
Data processing expense. Data processing expense increased $266,000, or 5.3%, to $5.3 million for 2023, compared to $5.1 million for 2022 due to
data processing and software license fees.
Legal and professional expense. Legal and professional expense increased $2.8 million, or 52.3%, to $8.2 million in 2023 compared to $5.4 million
in 2022. This increase was due to an increase in legal expenses related to the Company's voluntary cooperation with the SEC’s requests for information, as
disclosed in the Company's Current Report on Form 8-K filed with the SEC on July 24, 2023, which has concluded, an increase in external auditor fees,
and higher consulting fees as we engaged outside advisory firms to assist the Company in enhancing the internal controls over financial reporting and other
risk management activities, such as enhancing the Bank's BSA compliance program.
50
Table of Contents
Marketing and business promotion expense. Marketing and business promotion expense decreased $446,000, due to decreases in advertising and
CRA donation expenses.
Insurance and regulatory assessments. Insurance and regulatory assessments increased $1.3 million, or 71.1%, to $3.2 million in 2023 due to a $1.1
million increase in the FDIC assessment and a $178,000 increase in directors and officers’
insurance expense.
Other noninterest expenses. Other expenses decreased by $535,000, or 15.1%, to $3.0 million primarily due to a $274,000 decrease in director fees
and a $168,000 decrease in loan servicing expense.
Income Tax Expense
Income tax expense was $17.8 million in 2023 compared to $27.0 million in 2022, a decrease of $9.2 million, or 34.2%. The effective tax rate for
2023 was 29.5% and 29.6% for 2022. Income tax expense included a $3,000 expense for stock options exercised in 2023 and a $587,000 benefit in 2022.
ANALYSIS OF FINANCIAL CONDITION
Total assets were $4.0 billion as of December 31, 2023 and $3.9 billion as of December 31, 2022. The increase in assets was primarily due to a
$347.8 million increase in cash and cash equivalents and a $62.1 million increase in investment securities, partially offset by a $305.4 million decrease in
net loans. The increase in cash and cash equivalents was due to an increase in the balances of time deposits due to Bank-wide promotions of time deposits
and wholesale deposits to strengthen our liquidity position and a slowdown in lending.
Investment Securities. We manage our securities portfolio and cash to maintain adequate liquidity and to ensure the safety and preservation of
invested principal, with a secondary focus on yield and returns. Specific goals of our investment portfolio include:
●
●
●
providing a ready source of balance sheet liquidity to ensure adequate availability of funds to meet fluctuations in loan demand, deposit
balances and other changes in balance sheet volumes and composition;
serving as a means for diversification of our assets with respect to credit quality, maturity and other attributes; and
serving as a tool for modifying our interest rate risk profile pursuant to our established policies.
Our investment portfolio is comprised primarily of U.S. government agency securities, corporate note securities, mortgage-backed securities backed
by government-sponsored entities and taxable and tax-exempt municipal securities.
Our investment policy is reviewed annually by our board of directors. Overall investment goals are established by our board of directors, CEO, CFO
and members of our Asset Liability Committee (“ALCO”) of our board of directors. Our board of directors has delegated the responsibility of monitoring
our investment activities to our ALCO. Day-to-day activities pertaining to the securities portfolio are conducted under the supervision of our CEO and
CFO. We actively monitor our investments on an ongoing basis to identify any material changes in the securities. We also review our securities for
potential other-than-temporary impairment at least quarterly.
51
Table of Contents
The following table sets forth the book value and percentage of each category of securities at December 31, 2023, 2022 and 2021. The book value for
securities classified as available for sale is equal to fair market value and the book value for securities classified as held to maturity is equal to amortized
cost.
December 31, 2023
December 31, 2022
December 31, 2021
Amount
% of Total
Amount
% of Total
Amount
% of Total
(dollars in thousands)
Securities, available for sale, at fair value
$
Government agency securities
SBA agency securities
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
Collateralized mortgage obligations:
residential
Collateralized mortgage obligations:
commercial
Commercial paper
Corporate debt securities (1)
Municipal securities
8,161
13,217
34,652
—
2.5% $
4.1%
10.7%
0.0%
4,495
2,411
38,057
4,871
1.7% $
0.9%
14.4%
1.9%
5,610
3,469
45,052
9,973
82,327
25.3%
69,903
26.6%
60,216
67,299
73,105
30,691
9,509
20.8%
22.6%
9.5%
2.8%
41,690
49,537
37,012
8,854
15.9%
18.9%
14.1%
3.4%
59,295
129,926
42,205
12,514
Total securities, available for sale, at
fair value
Securities, held to maturity, at amortized
cost
$
318,961
98.3% $
256,830
97.8% $
368,260
Taxable municipal securities
Tax-exempt municipal securities
Total securities, held to maturity, at
amortized cost
Total securities
$
$
501
4,708
5,209
324,170
0.2% $
1.5%
1,003
4,726
0.4% $
1.8%
1,506
4,746
1.7%
100.0% $
5,729
262,559
2.2%
100.0% $
6,252
374,512
(1) Comprised of corporate debt securities and individual financial institution subordinated debentures
52
1.5%
0.9%
12.0%
2.7%
16.1%
15.8%
34.7%
11.3%
3.3%
98.3%
0.4%
1.3%
1.7%
100.0%
Table of Contents
The tables below set forth the amortized cost and fair value of AFS and HTM securities and the corresponding amounts of gross unrealized gains and
losses for the periods presented.
(dollars in thousands)
December 31, 2023
Available for sale
Government agency securities
SBA agency securities
Mortgage-backed securities: residential
Collateralized mortgage obligations: residential
Collateralized mortgage obligations: commercial
Commercial paper
Corporate debt securities
Municipal securities
Held to maturity
Municipal taxable securities
Municipal securities
December 31, 2022
Available for sale
Government agency securities
SBA securities
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
Collateralized mortgage obligations: residential
Collateralized mortgage obligations: commercial
Commercial paper
Corporate debt securities
Municipal securities
Held to maturity
Municipal taxable securities
Municipal securities
Amortized Unrealized Unrealized
Gains
Losses
Cost
$
$
$
$
$
$
$
$
8,705 $
13,289
40,507
94,071
69,941
73,121
34,800
12,636
347,070 $
501 $
4,708
5,209 $
5,012 $
2,634
44,809
4,887
82,759
44,591
49,551
41,176
12,669
288,088 $
1,003 $
4,726
5,729 $
— $
144
—
454
22
—
—
—
620 $
3 $
—
3 $
— $
—
—
—
—
—
2
1
—
3 $
7 $
—
7 $
(544) $
(216)
(5,855)
(12,198)
(2,664)
(16)
(4,109)
(3,127)
(28,729) $
— $
(115)
(115) $
(517) $
(223)
(6,752)
(16)
(12,856)
(2,901)
(16)
(4,165)
(3,815)
(31,261) $
(3) $
(170)
(173) $
Fair
Value
8,161
13,217
34,652
82,327
67,299
73,105
30,691
9,509
318,961
504
4,593
5,097
4,495
2,411
38,057
4,871
69,903
41,690
49,537
37,012
8,854
256,830
1,007
4,556
5,563
The weighted-average yield on the total investment portfolio at December 31, 2023 was 4.00% with a weighted-average life of 5.1 years. This
compares to a weighted-average yield of 2.55% at December 31, 2022 with a weighted-average life of 5.8 years. The weighted average life is the average
number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all
future cash flows, using as the weights the dollar amounts of the principal pay downs.
Approximately 17.3% of the securities in the total investment portfolio at December 31, 2023, are issued by the U.S. government or U.S.
government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of December 31, 2023, no U.S.
government agency bonds are callable.
53
Table of Contents
The table below shows the Company’s investment securities’ fair value and weighted average yields by maturity in the following maturity groupings
as of December 31, 2023. The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may
differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
(dollars in thousands)
December 31, 2023
Government agency securities
SBA securities
Mortgage-backed securities:
residential
Collateralized mortgage obligations:
residential
Collateralized mortgage obligations:
commercial
Commercial paper
Corporate debt securities
Municipal securities
Total available for sale
Municipal taxable securities
Municipal securities
Total held to maturity
Value
$
—
—
—
17
3,018
73,105
—
—
76,140
—
—
—
$
$
$
Less than One Year
Fair
Weighted
Average
Yield
More than One Year to
Five Years
More than Five Years to
Ten Years
Fair
Value
Weighted
Average
Yield
Fair
Value
Weighted
Average
Yield
More than Ten Years
Fair
Value
Weighted
Average
Yield
Total
Fair
Value
Weighted
Average
Yield
—% $
—%
—%
8,161
2,095
9,986
2.94% $
2.65%
—
11,122
—% $
5.92%
—
—
—% $
—%
8,161
13,217
0.92%
16,965
2.26%
7,701
2.04%
34,652
1.65%
35,758
4.28%
46,552
1.86%
—
—%
82,327
6.95%
5.84%
—%
—%
5.88% $
—% $
—%
—% $
18,481
—
12,491
—
86,972
504
—
504
3.95%
0.00%
4.09%
—%
45,800
—
16,232
—
3.63% $ 136,671
5.25% $
—%
5.25% $
—
2,873
2,873
54
5.83%
—%
3.61%
—%
3.78% $
—% $
2.77%
2.77% $
—
—
1,968
9,509
19,178
—
1,720
1,720
67,299
—%
73,105
—%
30,691
2.89%
1.92%
9,509
2.07% $ 318,961
—% $
2.59%
2.59% $
504
4,593
5,097
2.94%
5.35%
1.84%
2.81%
5.33%
5.84%
3.73%
1.92%
4.00%
5.25%
2.70%
2.95%
Table of Contents
The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that
individual securities have been in a continuous unrealized loss position at December 31, 2023 and December 31, 2022. The unrealized losses on these
securities were primarily attributed to changes in interest rates. The issuers of these securities have not evidenced any cause for default on these securities.
These securities have fluctuated in value since their purchase dates as market interest rates have fluctuated. However, we have the ability and the intention
to hold these securities until their fair values recover to cost or maturity. A summary of our analysis of these securities and the unrealized losses is
described more fully in Note 4 — Investment Securities in the notes to the consolidated financial statements included in this Annual Report.
(dollars in thousands)
December 31, 2023
Government sponsored agencies
SBA securities
Mortgage-backed securities: residential
Collateralized mortgage obligations:
residential
Collateralized mortgage obligations:
commercial
Commercial paper (1)
Corporate debt securities
Municipal securities
Total available for sale
Municipal securities
Total held to maturity
$
$
$
Less than Twelve Months
Twelve Months or More
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Total
Unrealized
Losses
4,238 $
5,102
—
(72) $
(18)
—
3,923 $
2,094
34,652
(472) $
(198)
(5,855)
8,161 $
7,196
34,652
(544)
(216)
(5,855)
2,597
(37)
60,275
(12,161)
62,872
(12,198)
18,463
53,211
—
—
83,611 $
1,397
1,397 $
(70)
(16)
—
—
(213) $
(19)
(19) $
35,077
—
30,691
9,509
176,221 $
(2,594)
—
(4,109)
(3,127)
(28,516) $
53,540
53,211
30,691
9,509
259,832 $
3,196
3,196 $
(96)
(96) $
4,593
4,593 $
(2,664)
(16)
(4,109)
(3,127)
(28,729)
(115)
(115)
(1)
The Company held $19.9 million of commercial paper where the recorded value and fair value are equal as of December 31, 2023.
Less than Twelve Months
Twelve Months or More
Total
(dollars in thousands)
December 31, 2022
Government sponsored agencies
SBA securities
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
Collateralized mortgage obligations:
residential
Collateralized mortgage obligations:
commercial
Commercial paper (1)
Corporate debt securities
Municipal securities
Total available for sale
Municipal taxable securities
Municipal securities
Total held to maturity
(1)
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
$
$
$
354 $
2,411
5,535
4,871
(24) $
(223)
(362)
(16)
4,141 $
—
32,522
—
(493) $
—
(6,390)
—
4,495 $
2,411
38,057
4,871
(517)
(223)
(6,752)
(16)
27,050
(1,842)
39,815
(11,014)
66,865
(12,856)
18,741
39,624
22,977
—
121,563 $
498 $
4,556
5,054 $
(790)
(16)
(1,843)
—
(5,116) $
(3) $
(170)
(173) $
22,949
—
10,330
8,854
118,611 $
— $
—
— $
(2,111)
—
(2,322)
(3,815)
(26,145) $
— $
—
— $
41,690
39,624
33,307
8,854
240,174 $
498 $
4,556
5,054 $
(2,901)
(16)
(4,165)
(3,815)
(31,261)
(3)
(170)
(173)
The Company held $9.9 million of commercial paper where the recorded value and fair value are equal as of December 31, 2022.
There was no reserve of credit losses on the HTM securities portfolio as of December 31, 2023 and 2022. We monitor our securities portfolio to
ensure all of our investments have adequate credit support and we consider the lowest credit rating for identification of potential credit impairment. As of
December 31, 2023, we believe there was no impairment. In addition, we did not have the current intent to sell securities with a fair value below amortized
cost at December 31, 2023, and it is more likely than not that we will not be required to sell such securities prior to the recovery of their amortized cost
basis. As of December 31, 2023, all of our investment securities in an unrealized loss position received an investment grade credit rating. The overall net
decreases in fair value during the period were attributable to a combination of changes in interest rates and market conditions.
Loans
The loan portfolio is the largest category of our earning assets. At December 31, 2023, total loans held for investment, net of ALL, totaled
$3.0 billion. Net loans held for investment decreased $305.4 million, or 9.3%, to $3.0 billion at December 31, 2023 as compared to $3.3 billion at
December 31, 2022. The decrease was primarily due to decreases in CRE loans of $144.3 million, C&D loans of $95.4 million, and C&I loans of
$71.1 million, partially offset by an increase in SFR mortgage loans of $23.7 million. SFR mortgage loans represent approximately 50% of our total loans
as of December 31, 2023, up from approximately 44% as of the end of 2022.
55
Table of Contents
The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31 for the past five
years:
(dollars in thousands)
Loans:(1)
2023
2022
As of December 31,
2021
2020
2019
$
%
$
%
$
%
$
%
$
%
Construction and land
development
$ 181,469
Commercial real estate (2) 1,167,857
Single-family residential
mortgages
Commercial and industrial
SBA
Other loans
1,487,796
130,096
52,074
12,569
3,031,861
(41,903)
$ 2,989,958
Total loans
Allowance for loan losses
Total loans, net
6.0% $ 276,876
38.5% 1,312,132
8.3% $ 303,144
39.3% 1,247,999
10.3% $ 186,723
42.6% 1,003,637
6.9% $
37.1%
96,020
793,268
4.4%
36.1%
49.1% 1,464,108
201,223
4.3%
61,411
1.7%
20,699
0.4%
100.0% 3,336,449
(41,076)
$ 3,295,373
43.9% 1,004,576
268,709
6.0%
76,136
1.8%
30,786
0.7%
100.0% 2,931,350
(32,912)
$ 2,898,438
34.3% 1,124,357
290,139
9.2%
97,821
2.6%
4,089
1.03%
100.0% 2,706,766
(29,337)
$ 2,677,429
41.5%
10.7%
3.6%
0.2%
957,254
274,586
74,985
821
100.0% 2,196,934
(18,816)
$ 2,178,118
43.6%
12.5%
3.4%
0.0%
100.0%
(1) Net of discounts on acquired loans and deferred fees and costs
(2)
Includes non-farm and non-residential real estate loans, multifamily residential and 1-4 family SFR loans originated for a business purpose
The locations of loans in the Company's total loan portfolio as of December 31, 2023 were as follows:
$
(dollars in thousands)
Loans:
California
Hawaii
Illinois
New Jersey
Nevada
New York
Other
Total loans, net
$
Construction and
land development
$
Commercial real
estate
$
Single-family
residential mortgages
$
Commercial and
Industrial
$
As of December 31,
SBA
$
Other
$
Total loans, net
$
%
115,943
—
229
—
—
53,625
11,672
181,469
$
$
558,771
2,057
41,745
19,797
64,136
171,695
309,656
1,167,857
$
$
702,779
4,263
51,192
24,184
21,522
676,509
7,347
1,487,796
$
$
117,788
841
1,309
470
912
830
7,946
130,096
$
$
32,755
—
—
—
2,820
3,287
13,212
52,074
$
$
1,749
11
107
196
122
4,067
6,317
12,569
$ 1,529,785
7,172
94,582
44,647
89,512
910,013
356,150
$ 3,031,861
50.5%
0.2%
3.1%
1.5%
3.0%
30.0%
11.7%
100.0%
The majority of our loan portfolio is based on collateral or businesses in California and New York, which represent 81% of our loan portfolio. Loans
secured by collateral in other states represented approximately 19% of our portfolio and the majority of these loans are secured by CRE with a weighted
average LTV of 59% at December 31, 2023.
Commercial and Industrial Loans. We provide a mix of variable and fixed rate C&I loans. The loans are typically made to small- and medium-sized
manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and for international trade financing. C&I loans
include lines of credit with a maturity of one year or less, C&I term loans with maturities of five years or less, shared national credits with maturities of five
years or less, mortgage warehouse lines with a maturity of one year or less, bank subordinated debentures with a maturity of 10 years and international
trade discounts with a maturity of three months or less. Substantially all of our C&I loans are collateralized by business assets or by real estate.
We originate commercial and industrial lines of credit, term loans, mortgage warehouse lines and international trade discounts, which totaled
$130.1 million as of December 31, 2023 and $201.2 million at December 31, 2022. This decrease resulted primarily due to decreases in mortgage
warehouse lines and a decrease in usages of the credit lines due to increases in market rates of interest. The interest rate on these loans are generally Wall
Street Journal Prime rate based.
56
Table of Contents
Our trade finance unit supplies financial needs to many of our core customers including trade financing needs for many of our commercial and
industrial loan customers. The unit provides international letters of credit, SWIFT, export advice, trade finance discounts and foreign exchange. Our trade
finance has a correspondent relationship with many of the largest banks in China, Taiwan, Vietnam, Hong Kong and Singapore. All of our international
letters of credit, SWIFT, export advice and trade finance discounts are denominated in U.S. currency, and all foreign exchange is issued through a major
bank that is also denominated in U.S. currency.
Commercial Real Estate Loans. CRE loans include owner-occupied and non-occupied commercial real estate, multi-family residential and SFR loans
originated for a business purpose. Except for the multi-family residential loan portfolio, the interest rate for the majority of these loans are Prime rate based
and have a maturity of five years or less except for the SFR loans originated for a business purpose which may have a maturity of one year. The multi-
family residential loans generally have interest rates based on the 5-year treasury, 10-year maturity with a five year fixed rate period followed by a five year
floating rate period, and have a declining prepayment penalty over the first five years. At December 31, 2023, approximately 18% of the CRE portfolio
consisted of fixed-rate loans. The total CRE portfolio totaled $1.2 billion as of December 31, 2023 and $1.3 billion as of December 31, 2022, of which
$193.4 million and $255.2 million, respectively, are secured by owner occupied properties. The multi-family residential loan portfolio totaled
$573.4 million as of December 31, 2023 and $643.2 million as of December 31, 2022. The SFR loan portfolio originated for a business purpose totaled
$48.7 million as of December 31, 2023 and $69.3 million as of December 31, 2022.
The following table presents the loan-to-value (LTV) ratios at origination for CRE loans by property type as of December 31, 2023:
$
(dollars in thousands)
December 31, 2023
Non-owner occupied
Hotel/Motel
Office
Rent Controlled NY Multifamily
Mobile Home
Mixed Use
Apartments
Warehouse
Retail
SFR Rental
Other
Total non-owner occupied
$
Owner-occupied
Hotel/Motel
Office
Rent Controlled NY Multifamily
Mixed Use
Warehouse
Retail
SFR Rental
Other
Total owner-occupied
Total
$
$
(1) No loans in the 75% - 85% LTV Distribution
<45%
45%-55%
55%-65% 65%-75% (1)
>85%
Total
LTV Distribution
7,635 $
8,649
24,503
43,049
39,902
25,127
13,550
12,404
13,315
1,990
190,124 $
7,940
666
1,457
3,974
6,013
3,992
178
1,403
25,623 $
215,747 $
12,165 $
—
17,142
66,756
25,363
44,769
21,341
37,096
29,649
462
254,743 $
28,568
2,857
—
4,063
13,846
7,597
992
—
57,923 $
312,666 $
16,804 $
17,285
11,312
65,804
8,877
33,449
49,262
22,739
12,460
1,696
239,688 $
43,096
1,693
363
5,263
21,677
4,880
—
613
77,585 $
317,273 $
6,101 $
—
—
92,528
115,471
54,094
4,225
911
5,816
—
279,146 $
644
1,309
—
—
24,519
—
—
5,830
32,302 $
311,448 $
— $
8,770
—
—
—
514
1,439
—
—
—
10,723 $
—
—
—
—
—
—
—
—
— $
10,723 $
42,705
34,704
52,957
268,137
189,613
157,953
89,817
73,150
61,240
4,148
974,424
80,248
6,525
1,820
13,300
66,055
16,469
1,170
7,846
193,433
1,167,857
The following table presents the loan-to-value ratios at origination for CRE loans by state as of December 31, 2023:
(dollars in thousands)
December 31, 2023
Non-owner occupied
California
New York
Nevada
Illinois
New Jersey
Hawaii
Other
Total non-owner occupied
Owner-occupied
California
New York
Nevada
Illinois
New Jersey
Hawaii
Other
Total owner-occupied
Total
<45%
45%-55%
55%-65% 65%-75% (1)
>85%
Total
LTV Distribution
$
$
$
$
79,918 $
64,470
8,310
20,058
334
301
16,733
190,124 $
16,728
7,267
—
1,080
548
—
—
25,623 $
215,747 $
118,075 $
56,815
33,466
2,692
346
896
42,453
254,743 $
34,458
1,772
2,627
1,106
988
861
16,111
57,923 $
312,666 $
92,198 $
32,764
16,954
3,184
16,368
—
78,220
239,688 $
62,490
3,438
—
1,736
302
—
9,619
77,585 $
317,273 $
124,792 $
4,309
1,447
1,166
911
—
146,521
279,146 $
30,110
860
1,332
—
—
—
—
32,302 $
311,448 $
— $
—
—
10,723
—
—
—
10,723 $
—
—
—
—
—
—
—
— $
10,723 $
414,983
158,358
60,177
37,823
17,959
1,197
283,927
974,424
143,786
13,337
3,959
3,922
1,838
861
25,730
193,433
1,167,857
(1) No loans in the 75% - 85% LTV Distribution
Construction and Land Development Loans. Our C&D loans are comprised of residential construction, commercial construction and land acquisition
and development construction. Interest reserves are generally established on real estate construction loans. These loans are typically Prime rate based and
have maturities of less than 18 months. C&D loans decreased $95.4 million, or 34.5%, to $181.5 million at December 31, 2023 as compared to
$276.9 million at December 31, 2022. This decrease was primarily due to decreases in residential construction loans. As of December 31, 2023 and 2022,
our real estate construction loan portfolio was divided among the following categories as shown in the table below.
(dollars in thousands)
$
Mix %
Mix %
As of December 31, 2023
As of December 31, 2022
$
166,558
77,231
33,087
Increase (Decrease)
$
%
(86,217)
822
(10,012)
(51.8)%
1.1%
(30.3)%
60.1% $
27.9%
12.0%
Residential construction
Commercial construction
Land development
Total construction and
land development loans
$
80,341
78,053
23,075
44.3% $
43.0%
12.7%
$
181,469
100.0% $
276,876
100.0% $
(95,407)
(34.5)%
SBA Guaranteed Loans. We are designated a Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate
loans. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing,
wholesale, retail, hotel/motel and service businesses for working capital needs or business expansions. SBA loans secured by real estate can have any
maturity up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral may include inventory, accounts
receivable, equipment, and personal guarantees.
We originate SBA loans through our branch staff, loan officers and through SBA brokers. In 2023, we originated $11.4 million in SBA loans, of
which $8.6 million were SBA 7A loans and $2.8 million were SBA 504 loans.
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Table of Contents
As of December 31, 2023, our SBA portfolio totaled $52.1 million of which $4.7 million was guaranteed by the SBA and $47.4 million
was unguaranteed, of which $46.2 million was secured by real estate and $1.2 million was unsecured or secured by business assets. We monitor the
unguaranteed portfolio by type of real estate collateral. As of December 31, 2023, $21.6 million or 45.6% was secured by hotel/motels; $3.8 million or
8.1% by gas stations; $2.9 million or 6.0% by retail; and $19.1 million or 40.3% in other real estate types. As of December 31, 2023, $28.3 million or
59.6% was located in California; $3.7 million or 7.8% was located in Texas; $3.9 million or 8.2% was located in Nevada; $3.5 million or 7.3% was located
in Washington; and $8.1 million or 17.0% was located in other states.
SBA loans decreased $9.3 million, or 15.2%, to $52.1 million at December 31, 2023 compared to $61.4 million at December 31, 2022. This decrease
was primarily due to SBA loan sales of $3.5 million and net loan payoffs and payments of $17.1 million, partially offset by $11.4 million
in loan originations.
SFR real estate loans. We originate qualified SFR mortgage loans and non-qualified, alternative documentation SFR mortgage loans through
correspondent relationships and retail channels, including our branch network, to accommodate the needs of the Asian American market. The qualified
SFR mortgage loans are 15-year and 30-year conforming mortgages, which are generally originated through our branch network and may be sold directly
to FNMA and FHLMC.
During 2023, we originated $192.3 million of SFR mortgage loans. Loans originated through our retail branch network are to our customers, many of
whom establish a deposit relationship with us. During 2023, we originated $78.6 million through our retail channel and $113.7 million through our
wholesale and correspondent channel of such loans. These amounts included $18.2 million in FNMA loans, of which $12.7 million were sold to FNMA. In
addition, we sold $20.0 million of non-qualified mortgage loans at par to another bank as we worked to deleverage the Bank's balance sheet and generate
higher levels of liquidity in the current economic environment.
The loans sold to other banks are sold with no representations or warranties and with a replacement feature for the first 90-days if the loan pays off
early. For SFR loans sold to FNMA, FHLMC and to investment funds we provide limited representations and warranties and with a repurchase and
premium refund for loans that become delinquent in the first 90-days or a premium refund if paid-off in the first 90-days with respect to all loans sold. As a
condition of the sale, the buyer must have the loans audited for underwriting and compliance standards.
SFR real estate loans held for investment increased $23.7 million, or 1.6%, to $1.49 billion as of December 31, 2023 as compared to $1.46 billion as
of December 31, 2022. There were $1.9 million loans held for sale as of December 31, 2023 compared to none as of December 31, 2022. In addition, our
SFR mortgage lending unit originates mortgage warehouse lines to our correspondents. These loans are included in our C&I loans and totaled $4.2 million
as of December 31, 2023 and $29.3 million as of December 31, 2022.
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Table of Contents
The loan maturities in the table below are based on contractual maturities as of December 31, 2023. As is customary in the banking industry, loans
that meet underwriting criteria can be renewed by mutual agreement between the borrower and us. Because we are unable to estimate the extent to which
our borrowers will renew their loans, the table is based on contractual maturities. As a result, the data shown below should not be viewed as an indication
of future cash flows.
(dollars in thousands)
Construction & land development
Fixed rate
Floating rate
Commercial real estate
Fixed rate
Floating rate
SFR mortgage
Fixed rate
Floating rate
Commercial & industrial
Fixed rate
Floating rate
SBA
Fixed rate
Floating rate
Other
Fixed rate
Floating rate
Total loans
Fixed rate
Floating rate
Total loans
Allowance for loan losses
Net loans
Mortgage loans held for sale
Loan Quality
One Year or
Less
After One
Year to Five
Years
After Five
Years to
Fifteen Years
Over Fifteen
Years
$
11,708 $
169,689
— $
—
— $
—
— $
72
53,184
55,125
130,212
137,114
21,766
534,122
2,952
233,382
Total
11,708
169,761
208,114
959,743
167
—
4,198
995
11,508
765
1,470,163
—
1,486,036
1,760
21,343
58,184
1,026
36,722
4,711
8,110
—
—
27,080
103,016
—
—
86
2,171
6,286
15,893
—
27,638
6,372
45,702
79
18
369,497 $
86,481 $
283,016
369,497 $
6,044
—
318,568 $
141,566 $
177,002
318,568 $
$
$
$
6,428
—
609,589 $
—
—
1,734,207 $
12,551
18
3,031,861
50,699 $
558,890
609,589 $
1,473,115 $
261,092
1,734,207 $
$
$
$
1,751,861
1,280,000
3,031,861
(41,903)
2,989,958
1,911
We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan
portfolio. Our underwriting policies and practices govern the risk profile and credit and geographic concentration for our loan portfolio. We also have what
we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential
problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.
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Analysis of the Allowance for Loan Losses. The following table allocates the ALL, or the allowance, by category:
(dollars in thousands)
Loans:
Construction and land
development
Commercial real estate (2)
Single-family residential
mortgages
Commercial and industrial
SBA
Other
Unallocated
Allowance for loan losses
2023
% (1)
$
2022
% (1)
$
As of December 31,
2021
% (1)
$
2020
% (1)
$
2019
% (1)
$
$ 1,219
17,826
0.67% $ 2,638
1.53% 17,657
0.95% $ 4,150
1.35% 16,603
1.37% $ 2,473
1.33% 13,718
1.32% $ 1,268
7,668
1.37%
20,117
1,348
1,196
197
—
$ 41,903
1.35% 17,640
1,804
1.04%
621
2.30%
716
1.57%
—
—
1.38% $ 41,076
1.20%
0.90%
1.01%
3.46%
—
7,839
2,813
980
527
—
1.23% $ 32,912
0.78%
1.05%
1.29%
1.71%
—
8,486
3,690
927
43
—
1.12% $ 29,337
0.75%
1.27%
0.95%
1.05%
—
6,182
2,736
852
9
101
1.08% $ 18,816
1.32%
0.97%
0.65%
1.00%
1.14%
1.10%
—
0.86%
(1)
(2)
Represents the percentage of the allowance to total loans in the respective category.
Includes non-farm and non-residential real estate loans, multi-family residential and SFR loans originated for a business purpose.
Allowance for Credit Losses - Loans
The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected
lifetime credit losses for loans at the time of origination. The ACL for loans is maintained at a level deemed appropriate by management to provide for
expected credit losses in the portfolio as of the date of the consolidated balance sheet. Estimating expected credit losses requires management to use
relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL for loans is performed by
collectively evaluating loans with similar risk characteristics. The Company has elected to utilize a DCF approach for all segments except consumer loans
and warehouse mortgage loans, for these a remaining life approach was elected.
The Company’s DCF loss rate methodology incorporates a probability of default, loss given default and exposure at default to derive expected loss
within the CECL model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. The Company uses both
internal and external qualitative factors within the CECL model including: lending policies, procedures, and strategies; changes in nature and volume of the
portfolio; credit and lending personnel experience; changes in volume and trends in classified loans, delinquencies, and nonaccrual; concentration risk;
collateral values; regulatory and business environment; loan review results; and economic conditions. Management estimates the allowance balance
required using past loan loss experience from peers with similar portfolio sizes and geographic locations to the Company, the nature and volume of the
portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. The Company’s
CECL methodology utilizes a four-quarter reasonable and supportable forecast period, and a four-quarter reversion period. The Company is using the
Federal Open Market Committee to obtain forecasts for the unemployment rate, while reverting to a long-run average of each considered economic factor.
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Table of Contents
Individual loans considered to be uncollectible are charged off against the ACL. Factors used in determining the amount and timing of charge-offs on
loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the
borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans
once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged off are added to the ACL. Net charge-offs to
average LHFI were 0.10% and 0.00% for the twelve months ended December 31, 2023 and 2022, respectively.
The ACL for loans was $41.9 million at December 31, 2023 compared to $41.1 million at December 31, 2022. The $827,000 increase in 2023 was
primarily due to a provision for credit losses on loans of $3.9 million, partially offset by net charge-offs of $3.1 million. The provision for credit losses on
loans of $3.9 million was due to a higher level of specific reserves and net charge-offs, offset by the impact of lower total loans held for investment at the
end of 2023.
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Table of Contents
The following table provides a summary of components of the ACL, provision for credit losses and net charge-offs for the years 2019 to 2023:
(dollars in thousands)
Balance, beginning of period
ASU 2016-13 transition adjustment
Adjusted beginning balance
Charge-offs:
Construction & land development
Commercial real estate
Single-family residential mortgages
Commercial and industrial
SBA
Other
Total charge-offs
Recoveries:
Commercial real estate
Commercial and industrial
SBA
Other
Total recoveries
Net (charge-offs)/recoveries
Provision for credit losses - loans
Balance, end of period
Reserve for off-balance sheet credit commitments
Balance at beginning of year
ASU 2016-13 transition adjustment
Adjusted beginning balance
(Reversal of) reserve for unfunded commitments
Balance at the end of period
Total allowance for credit losses (ACL)
$
$
$
$
$
2023
$
$
41,076
—
41,076
$
$
Year Ended December 31,
2021(1)
2022
2020(1)
2019(1)
32,912
2,135
35,047
$
$
29,337
—
29,337
$
$
18,816
—
18,816
$
$
(140)
(2,537)
(93)
—
(62)
(362)
(3,194)
80
2
1
60
143
(3,051)
3,878
41,903
$
$
1,156
—
1,156
$
(516)
$
640
—
—
—
(5)
(14)
(237)
(256)
—
2
227
29
258
2
6,027
41,076
$
$
1,203
1,045
2,248
$
(1,092)
$
1,156
—
(67)
—
(500)
(1)
(59)
(627)
61
1
95
86
243
(384)
3,959
32,912
$
$
1,383
—
1,383
$
(180)
$
1,203
—
(85)
—
(200)
(973)
(45)
(1,303)
—
—
1
—
1
(1,302)
11,823
29,337
$
826
—
826
557
1,383
$
$
$
17,577
—
17,577
—
(166)
—
—
(1,093)
—
(1,259)
—
—
108
—
108
(1,151)
2,390
18,816
688
—
688
138
826
42,543
$
42,232
$
34,115
$
30,720
$
19,642
Total LHFI at end of period
Average LHFI
Net charge-offs to average LHFI
Allowance for loan losses to total LHFI
(1) Reserve was under the Allowance for Loan Loss (“ALL”) method in accordance with ASC 450 and ASC 310
$
$
0.10%
1.38%
$
$
0.00%
1.23%
3,031,861
3,205,625
3,336,449
3,096,786
2,931,350
2,745,492
$
$
0.01%
1.12%
$
$
2,706,766
2,544,413
$
$
0.05%
1.08%
2,196,934
2,112,933
0.05%
0.86%
Problem Loans. Loans are considered delinquent when principal or interest payments are past due 30 days or more; delinquent loans may remain on
accrual status between 30 days and 89 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans.
Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management,
there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued
but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is
received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management
believes full collectability of principal and interest is probable.
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Table of Contents
In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is
classified as a modified loan. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or
other actions intended to minimize potential losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time
the loan is modified may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their
modified terms.
Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a
charge to the allowance for credit losses, if necessary. OREO is carried at the lower of the Company's carrying value of the property or its fair value, less
estimated carrying costs and costs of disposition. Fair value is based on current appraisals less estimated selling costs. Any subsequent write-downs are
charged against operating expenses and recognized as a valuation allowance. Operating expenses and related income of such properties and gains and
losses on their disposition are included in other operating income and expenses.
The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated.
Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt
restructurings. The Company did not have any loans past due 90 days or more but still accruing interest at any of the dates presented. The balances of
nonperforming loans reflect the net investment in these assets.
(dollars in thousands)
Accruing troubled debt restructured loans(1):
Construction and land development
Commercial real estate
Commercial and industrial
SBA
Total accruing troubled debt restructured loans
Non-accrual loans:
$
Construction and land development
Commercial real estate
Single-family residential mortgages
Commercial and industrial
SBA
Other
Total non-accrual loans
Total non-performing loans
OREO
Nonperforming assets
Nonperforming loans to total LHFI
Nonperforming assets to total assets
Nonperforming loans to tangible common equity and ACL
Nonperforming assets to tangible common equity and ACL
(1)
$
2023
2022
As of December 31,
2021
2020
2019
$
—
—
—
—
—
—
10,569
18,103
854
2,085
8
31,619
31,619
—
31,619
$
1.04%
0.79%
6.60%
6.60%
$
—
894
306
—
894
$
—
1,328
410
—
1,328
$
—
1,434
502
34
1,434
141
13,189
5,936
713
2,245
99
22,323
23,217
577
23,794
$
0.71%
0.61%
5.15%
5.28%
149
4,672
4,191
3,712
6,263
—
18,987
20,315
293
20,608
$
0.71%
0.50%
4.77%
4.83%
173
1,193
7,714
1,661
6,828
15
17,584
19,018
293
19,311
$
0.72%
0.59%
4.96%
5.04%
264
1,472
-
45
1,736
—
725
1,334
—
9,378
—
11,437
13,173
293
13,466
0.60%
0.48%
3.64%
3.72%
Prior to the Company’s adoption of ASU 2022-02 on January 1, 2023, the Company, in infrequent situations would modify loans when the borrower
was experiencing financial difficulties by making a concession to the borrower. These concessions would include a reduction of the interest rate,
principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. These modifications were
classified as TDRs and were made for the purpose of alleviating temporary impairments to the borrower’s financial condition.
The $8.1 million increase in nonperforming loans at December 31, 2023 was primarily due to two CRE loans totaling $10.9 million, 12 SFR loans
totaling $16.9 million, one SBA loan of $283,000 and three other consumer loans aggregating to $68,000 placed on non-accrual status during 2023.
Offsetting the increases were non-accrual loan payoffs or paydowns of $15.7 million, loans that migrated to accruing status of $1.5 million and net charge-
offs of $2.7 million on non-accrual loans.
Our 30-89 day delinquent loans, excluding non-accrual loans, increased to $16.8 million as of December 31, 2023, compared to $15.2 million at
December 31, 2022. From December 31, 2022 to December 31, 2023, the increase in past due loans (excluding non-accrual loans) resulted from increases
of $1.5 million in C&I loans, $206,000 in SBA loans, and $543,000 in CRE loans, partially offset by a $688,000 decrease in SFR mortgage loans and a
$51,000 decrease in other loans.
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We did not recognize any interest income on non-accrual loans during the years ended December 31, 2023 and December 31, 2022 while the loans
were in non-accrual status.
We utilize an asset risk classification system in compliance with guidelines established by the FDIC as part of our efforts to improve asset quality. In
connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are
three classifications for problem assets: “substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a
high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little
value that continuance as an asset is not warranted.
We use a risk grading system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 6,
which are “special mention,” loans with a risk grade of 7, which are “substandard” loans that are generally not considered to be impaired and loans with a
risk grade of 8, which are “doubtful” loans generally considered to be impaired. These loans generally require more frequent loan officer contact and
receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of
processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the
Bank’s senior management.
The following table presents the risk categories for total loans by class of loans as of December 31, 2023 and 2022:
(dollars in thousands)
December 31, 2023
Real Estate:
Construction and land development
Commercial real estate
Single-family residential mortgages
Commercial:
Commercial and industrial
SBA
Other
Total
(dollars in thousands)
December 31, 2022
Real Estate:
Construction and land development
Commercial real estate
Single-family residential mortgages
Commercial:
Commercial and industrial
SBA
Other
Total
Pass
Special
Mention
Substandard
Doubtful
Total
169,793 $
1,123,887
1,464,531
119,858
47,397
12,462
2,937,928 $
11,676 $
12,599
4,474
2,737
1,356
—
32,842 $
— $
31,371
18,791
7,501
3,321
107
61,091 $
— $
—
—
—
—
—
— $
181,469
1,167,857
1,487,796
130,096
52,074
12,569
3,031,861
Pass
Special
Mention
Substandard
Doubtful
Total
276,735 $
1,267,936
1,448,041
162,881
56,142
20,536
3,232,271 $
— $
9,280
3,925
29,007
—
—
42,212 $
141 $
34,916
12,142
9,335
5,269
163
61,966 $
— $
—
—
—
—
— $
276,876
1,312,132
1,464,108
201,223
61,411
20,699
3,336,449
$
$
$
$
Cash and Cash Equivalents. Cash and cash equivalents increased $347.8 million, or 416.3%, to $431.4 million as of December 31, 2023 as
compared to $83.5 million at December 31, 2022. This increase was primarily due to $243.3 million provided by investing activities, $53.2 million
provided by financing activities and $51.3 million provided by cash from operating activities. During 2023, we maintained a conservative strategy to hold
extra liquidity due to the volatility of our deposits.
Goodwill and Other Intangible Assets. Goodwill was $71.5 million at December 31, 2023 and at December 31, 2022. The Company evaluates
goodwill for impairment annually, or more frequently if events and circumstances lead management to believe the value of goodwill may be impaired. In
accordance with ASC 350-20, “Goodwill,” impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes
goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill,
exceeds its fair value. No impairment of goodwill was recognized during 2023 and 2022.
During the first half of 2023, there were bank failures that caused a significant decline in bank stock prices, including the Company’s stock price.
After evaluating the prolonged decrease in the Company’s market value, management performed a quantitative goodwill impairment analysis as of
September 30, 2023, as an acceleration of the Company's annual October 1 analysis. Given that the Company has concluded that it does not have any
separately identifiable segments, the evaluation was performed at the Company-wide level. We engaged a third-party valuation specialist to assist with the
quantitative analysis. Management estimated the fair value of the Company using both the guideline public company method, also referred to as the
“market approach”, and the DCF method, also referred to as the “income approach”. Based on this quantitative analysis, the fair value of the Company
exceeds its carrying amount with a passing amount of 9.6% at September 30, 2023.
In addition, due to changes in the Company’s projections of income in future periods during the fourth quarter of 2023 resulting from the current
economic environment, at December 31, 2023, management performed certain calculations and sensitivity analyses related to the quantitative goodwill
impairment analysis performed at September 30, 2023 and the current information. Based on this most recent analysis, management concluded that
goodwill was also not impaired at December 31, 2023.
Our other intangible assets, which consist of core deposit intangibles, were $2.8 million at December 31, 2023 and $3.7 million at December 31,
2022. These core deposit intangible assets are amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 3 to
10 years.
Liabilities. Total liabilities increased $80.3 million, or 2.3%, to $3.5 billion, at December 31, 2023 from $3.4 billion at December 31, 2022, primarily
due to a $197.1 million increase in deposits, partially offset by a $70.0 million decrease in short-term FHLB advances and a $54.4 million decrease in
subordinated notes. We redeemed all $55.0 million of our outstanding 6.18% fixed-to-floating rate subordinated notes on December 1, 2023 at par. The
subordinated notes had an original maturity date of December 1, 2028 and an effective interest rate of 6.18% as of their redemption date.
Deposits. As an Asian-American business bank that focuses on successful businesses and their owners, many of our depositors choose to leave large
deposits with us. The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis. We track all deposit relationships over
$250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or
shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand
deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. This differs from the traditional definition of
core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit
with us, we believe that using this method reflects a more accurate assessment of our deposit base. We consider all deposit relationships under $250,000 as
a core relationship except for time deposits originated through an internet listing service.
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Table of Contents
Total deposits increased $197.1 million to $3.2 billion at December 31, 2023 as compared to $3.0 billion at December 31, 2022. The increase was
mainly due to increases in the balances of higher yielding time deposits. During 2023, noninterest-bearing deposits decreased by $259.1 million due to
the Bank's customers pursuing higher rates offered by the Bank's time deposits and interest-bearing non-maturity deposits, which increased by $438.8
million and $17.4 million, respectively. As of December 31, 2023, total deposits were comprised of 17.0% noninterest-bearing demand accounts, 19.9%
interest-bearing non-maturity deposit accounts and 63.1% of time deposits compared to 26.8% noninterest-bearing demand accounts, 20.7% interest-
bearing non-maturity deposit accounts and 52.5% of time deposits as of December 31, 2022.
The following table presents the composition of our deposit portfolio by account type as of the dates indicated:
(dollars in thousands)
Noninterest-bearing demand deposits
Interest-bearing deposits:
NOW
Money market
Savings
Time deposits $250,000 and under
Time deposits over $250,000
Total interest-bearing deposits
Total deposits
$
December 31, 2023
%
$
For the Year Ended
December 31, 2022
%
$
December 31, 2021
%
$
$
539,621
17.00% $
798,741
26.82% $
1,291,484
38.15%
57,969
412,415
162,344
1,190,822
811,589
2,635,139
3,174,760
1.83%
12.99%
5.11%
37.51%
25.56%
83.00%
100.00% $
63,542
420,057
131,740
837,369
726,234
2,178,942
2,977,683
2.13%
14.11%
4.42%
28.12%
24.40%
73.18%
100.00% $
72,876
140,194
714,539
587,940
578,499
2,094,048
3,385,532
2.15%
4.14%
21.11%
17.37%
17.08%
61.85%
100.00%
The following table summarizes our average deposit balances and weighted average rates as of the dates indicated:
(dollars in thousands)
Noninterest-bearing demand deposits
Interest-bearing deposits:
NOW
Money market
Savings
Time deposits $250,000 and under
Time deposits over $250,000
Total interest-bearing deposits
Total deposits
$
December 31, 2023
Average
Balance
Weighted
Average
Rate (%)
For the Year Ended
December 31, 2022
Average
Balance
Weighted
Average
Rate (%)
December 31, 2021
Average
Balance
Weighted
Average
Rate (%)
$
602,291
—
$
1,050,063
—
$
938,710
—
58,191
429,102
126,062
1,146,513
742,839
2,502,707
3,104,998
1.25%
2.46%
0.73%
4.11%
4.00%
3.56%
2.87% $
73,335
631,094
144,409
609,464
565,059
2,023,361
3,073,424
0.36%
0.81%
0.13%
1.08%
1.20%
0.93%
0.61% $
69,211
637,539
137,534
640,747
597,770
2,082,801
3,021,511
0.27%
0.39%
0.10%
0.70%
0.79%
0.57%
0.40%
The following table sets forth the maturity schedule of time deposits over $250,000, wholesale deposits and brokered time deposits as of December
31, 2023:
(dollars in thousands)
Time deposits $250,000 and under
Wholesale deposits (1)
Brokered
Other
Total time deposits $250,000 and under
Time deposits over $250,000 (2)
Total time deposits
Three Months
$
$
40,138 $
139,953
269,249
449,340
352,015
801,355 $
After Three to
Six Months
Maturity Within:
Six to 12
Months
After 12
Months
3,734 $
114,987
286,010
404,731
200,336
605,067 $
8,090 $
—
322,764
330,854
257,895
588,749 $
— $
—
5,897
5,897
1,343
7,240 $
Total
51,962
254,940
883,920
1,190,822
811,589
2,002,411
(1) Wholesale deposits are defined as time deposits under $250,000 originated through the internet listing service and/or through other deposit
originators.
(2) Amounts include $50.0 million and $30.0 million of collateralized state of CA time deposits with maturity dates of February 1, 2024 and February 9,
2024.
The following table sets forth the estimated deposits exceeding the FDIC insurance limit:
(dollars in thousands)
Uninsured deposits
For the Year Ended December 31,
2023
2022
$
1,367,568 $
1,212,517
Of the $811.6 million in time deposits over $250,000, the estimated aggregate amount of time deposits in excess of the FDIC insurance limit is
$629.2 million at December 31, 2023. The following table sets forth the maturity distribution of time deposits in amounts of more than $250,000 as of
December 31, 2023.
(dollars in thousands)
3 months or less
Over 3 months through 6 months
December
31, 2023
$ 284,107
148,229
Over 6 months through 12 months
Over 12 months
Total
181,618
15,263
$ 629,217
Time deposits equal to and less than $250,000 include certain wholesale and brokered deposits and we do not consider these core deposits. We
acquired wholesale deposits from the internet listing service and other outside deposits originators as needed to supplement liquidity. The total amount of
such deposits as of December 31, 2023 was $52.0 million and $7.1 million as of December 31, 2022. Brokered time deposits were $254.9 million at
December 31, 2023 and $255.0 million at December 31, 2022.
In addition, we offer deposit products through the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweeps (“ICS”)
programs where customers are able to achieve FDIC insurance for balances on deposit in excess of the $250,000 FDIC limit. Time deposits held through
the CDARS program were $135.7 million at December 31, 2023 and $17.7 million at December 31, 2022 and ICS funds totaled $109.2 million at
December 31, 2023 and $13.6 million at December 31, 2022. The increase in the participation in these programs is attributed to the general banking
landscape and premium placed on liquidity in the marketplace.
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FHLB Borrowings. In addition to deposits, we have used long- and short-term borrowings, such as federal funds purchased and FHLB long-and
short-term advances, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. We had no FHLB short-term
advances at December 31, 2023 and $70.0 million at December 31, 2022. In the first quarter of 2020, the Company obtained $150.0 million in long-term
FHLB advances with an original term of five years and a maturity date in March 2025. The average fixed interest rate is 1.18%. The Company secured this
funding in case there was a liquidity issue caused by the COVID-19 pandemic and to obtain an attractive interest rate. The following table sets forth
information on our total FHLB advances during the periods presented:
(dollars in thousands)
Outstanding at period-end
Average amount outstanding
Maximum amount outstanding at any month-end
Weighted average interest rate:
During period
End of period
$
2023
Year Ended December 31,
2022
2021
$
150,000
172,219
220,000
1.67%
1.18%
$
220,000
192,438
270,000
1.49%
2.28%
150,000
150,000
150,000
1.18%
1.18%
Long-Term Debt. Long-term debt consists of subordinated notes. As of December 31, 2023, the amount of subordinated notes outstanding was
$119.1 million as compared to $173.6 million at December 31, 2022. The $55.0 million decrease was due to the redemption of the 2028 Subordinated
Notes as described herein.
In November 2018, the Company issued $55.0 million in fixed-to-floating rate subordinated notes due December 1, 2028 (“the 2028 Subordinated
Notes”). The 2028 Subordinated Notes bore a fixed rate of 6.18% for the first five years and reset quarterly to the then-current three-month London
Interbank Offered Rate (“LIBOR”) rate plus 315 basis points. The 2028 Subordinated Notes were assigned an investment grade rating of BBB by the Kroll
Bond Rating Agency, Inc. Under the terms of our subordinated notes and the related subordinated notes purchase agreements, we were not permitted to
declare or pay any dividends on our capital stock if an event of default occurs under the terms of the long-term debt. On December 1, 2023, we
redeemed the 2028 Subordinated Notes at a redemption price equal to 100% of the principal amount of the 2028 Subordinated Notes plus accrued and
unpaid interest to but excluding December 1, 2023. From and after December 1, 2023, all interest on the 2028 Subordinated Notes ceased to accrue.
In March 2021, the Company issued $120.0 million of 4.00% fixed to floating rate subordinated notes due April 1, 2031 (the “2031 Subordinated
Notes”). The interest rate is fixed through April 1, 2026 and floats at three month Secured Overnight Financing Rate (“SOFR”) plus 329 basis points
thereafter. The Company can redeem the 2031 Subordinated Notes beginning April 1, 2026. The 2031 Subordinated Notes are considered Tier 2 capital at
the Company.
The Company used the net proceeds from these subordinated debt offerings for general corporate purposes, including providing capital to the Bank
and maintaining adequate liquidity at Bancorp. The subordinated notes qualified as Tier 2 capital for Bancorp for regulatory purposes and the portion that
Bancorp contributed to the Bank qualified as Tier 1 capital for the Bank.
Subordinated Debentures. Subordinated debentures consist of subordinated debentures issued in connection with three separate trust preferred
securities and totaled $14.9 million and $14.7 million as of December 31, 2023 and 2022, respectively. Under the terms of our subordinated debentures
issued in connection with the issuance of trust preferred securities, we are not permitted to declare or pay any dividends on our capital stock if an event of
default occurs under the terms of the long-term debt. In addition, the Company has the option to defer interest payments on the subordinated debentures
from time to time for a period not to exceed five consecutive years. These subordinated debentures consist of the following and are described in detail after
the table below:
(dollars in
thousands)
Subordinated
debentures
TFC Trust
FAIC Trust
Issue
Date
Principal Unamortized Recorded
Valuation
Reserve
Amount
Value
Stated Rate
Description
December 31,
2023
Stated
Effective Rate Maturity
December 22,
2006
December 15,
2004
December 15,
2004
$
5,155 $
1,189 $
3,966
7,217
842
6,375
Three-month CME Term SOFR plus
0.26% (a) plus 1.65%,
Three-month CME Term SOFR 0.26% (a)
plus 2.25%
Three-month CME Term SOFR 0.26% (a)
plus 2.10%
March 15,
2037
December
15, 2034
December
15, 2034
7.30%
7.90%
7.75%
PGBH Trust
Total
(a) Represents applicable tenor spread adjustment when the original Libor index was discontinued on June 30, 2023
5,155
$ 17,527 $
558
2,589 $
4,597
14,938
In 2016, the Company, through the acquisition of TomatoBank, acquired the TFC Trust. The TFC Trust issued 5,000 units of fixed-to-floating rate
capital securities with an aggregate liquidation amount of $5.0 million and all of its common securities with an aggregate liquidation amount of $155,000.
At the close of this acquisition, a $1.9 million valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment
and amortized over the life of the security. The unamortized valuation reserve was $1.2 million at December 31, 2023 and $1.3 million at December 31,
2022. The subordinated debentures have a variable rate of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment
of 0.26% plus 1.65%, which was 7.30% as of December 31, 2023, and three-month LIBOR plus 1.65%, which was 6.42% at December 31, 2022.
In October 2018, the Company, through the acquisition of FAIC, acquired the FAIC Trust. The FAIC Trust issued 7,000 units of fixed-to-floating rate
capital securities with an aggregate liquidation amount of $7.0 million and all of its common securities with an aggregate liquidation amount of $217,000.
At the close of this acquisition, a $1.2 million valuation reserve was recorded to arrive at it fair market value, which is treated as a yield adjustment and
amortized over the life of the security. The unamortized valuation reserve was $842,000 at December 31, 2023 and $918,000 at December 31, 2022. The
subordinated debentures have a variable rate of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26%
plus 1.65%, which was 7.90% as of December 31, 2023, and three-month LIBOR plus 2.25%, which was 7.02% at December 31, 2022.
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In January 2020, the Company, through the acquisition of PGBH, acquired PGBH Trust. PGBH Trust issued 5,000 units of fixed-to-floating rate
capital securities with an aggregate liquidation amount of $5.0 million and all of its common securities with an aggregate liquidation amount of $155,000.
At the close of this acquisition, a $763,000 valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment and
amortized over the life of the security. The unamortized valuation reserve was $559,000 at December 31, 2023 and $610,000 at December 31, 2022. The
subordinated debentures have a variable rate of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26%
plus 1.65%, which was 7.75% as of December 31, 2023, and three-month LIBOR plus 2.10%, which was 6.87% at December 31, 2022.
At December 31, 2023, we were in compliance with all covenants under our long-term debt agreements.
Capital Resources and Liquidity Management
Capital Resources. Shareholders’ equity is influenced primarily by earnings, dividends, sales and redemptions of common stock and preferred stock
and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on AFS
investment securities.
Shareholders’ equity increased $26.7 million, or 5.5%, to $511.3 million as of December 31, 2023 from $484.6 million at December 31, 2022. The
increase during 2023 was primarily due to $42.5 million of net income and a $2.2 million decrease in net accumulated other comprehensive loss, partially
offset by $12.2 million of cash dividends and a $6.8 million repurchase of common stock.
Liquidity Management. Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the
same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure
that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements, both known and unknown. We manage
our liquidity position to meet the daily cash flow needs of customers, while also maintaining an appropriate balance between assets and liabilities to meet
the return on investment objectives of our shareholders.
Our liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include
cash, interest-earning deposits in banks, federal funds sold, available for sale securities, term federal funds, purchased receivables and maturing or
prepaying balances in our securities and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase
agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market noncore deposits, the
issuance of additional collateralized borrowings through FHLB advances or the Federal Reserve’s discount window, and the ability to access the capital
markets through the issuance of debt securities, preferred securities or common securities. Our short-term and long-term liquidity requirements are
primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and
shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing
balances in our loan and investment portfolios, debt financing and increases in customer deposits. For additional information regarding our operating,
investing and financing cash flows, see the consolidated statements of cash flows provided in our consolidated financial statements.
Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable to obtain sufficient liquidity through
core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.
The Company has sufficient capital and does not anticipate any need for additional liquidity as of December 31, 2023. As of December 31, 2023, we
pledged loans of $1.5 billion with the FHLB of San Francisco and based on the values of loans we had $1.0 billion of additional borrowing capacity with
the FHLB. At December 31, 2023 and 2022, there were $150.0 million in FHLB long-term advances outstanding. At December 31, 2023, we had no FHLB
short-term advances outstanding and $70.0 million outstanding at December 31, 2022. We also maintain relationships in the capital markets with brokers
and dealers to issue certificates of deposit. As of December 31, 2023 and December 31, 2022, we had an aggregate of $92.0 million in unsecured federal
funds lines through four different commercial banking relationships, with no amounts advanced against the lines as of such dates. In addition, we have a
secured line of credit from the Federal Reserve Discount Window at December 31, 2023 and December 31, 2022 of $42.3 million and $12.0 million,
respectively. Federal Reserve Discount Window lines were collateralized by a pool of CRE loans totaling $62.8 million and $16.8 million as of December
31, 2023 and December 31, 2022, respectively. We did not have any borrowings outstanding with the Federal Reserve at December 31, 2023 and December
31, 2022 and our borrowing capacity is limited only by eligible collateral.
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Bancorp is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. Bancorp’s main source of funding is
dividends received from the Bank and RAM. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay
dividends to Bancorp. Management believes that these limitations will not impact our ability to meet our ongoing short-term cash obligations. During the
year ended December 31, 2023, the Bank paid $85.0 million of dividends to Bancorp and none during the year ended December 31, 2022. During 2023,
Bancorp used its liquidity to redeem $55.0 million subordinated debt, buy back approximately 2% of its then outstanding shares of common stock for $6.8
million, and make $12.2 million in dividend distributions to common stock shareholders in addition to its other operational needs. At December 31, 2023,
Bancorp had $47.1 million in cash, all of which was on deposit at the Bank.
Regulatory Capital Requirements
We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital
requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material
effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), we
must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting policies.
The table below summarizes the minimum capital requirements applicable to us and the Bank pursuant to Basel III regulations as of the dates
reflected and assuming the capital conservation buffer has been fully phased-in. The minimum capital requirements are only regulatory minimums and
banking regulators can impose higher requirements on individual institutions. For example, banks and bank holding companies experiencing internal
growth or making acquisitions generally will be expected to maintain strong capital positions substantially above the minimum supervisory levels. Higher
capital levels may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The table below also
summarizes the capital requirements applicable to Bancorp and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well
as Bancorp's and the Bank’s capital ratios as of December 31, 2023 and December 31, 2022. We exceeded all regulatory capital requirements under Basel
III and was considered to be “well-capitalized” as of the dates reflected in the table below:
Ratio at
December 31,
2023
Ratio at
December 31,
2022
Regulatory
Capital Ratio
Requirements
Regulatory
Capital Ratio
Requirements,
including fully
phased-in
Capital
Conservation
Buffer
Minimum
Requirement
for "Well
Capitalized"
Depository
Institution
Tier 1 Leverage Ratio
Consolidated
Bank
Common Equity Tier 1 Risk-Based Capital Ratio (1)
Consolidated
Bank
Tier 1 Risk-Based Capital Ratio
Consolidated
Bank
Total Risk-Based Capital Ratio
Consolidated
Bank
11.99%
13.62%
19.07%
22.41%
19.69%
22.41%
25.92%
23.67%
11.67%
14.89%
16.03%
21.14%
16.58%
21.14%
24.27%
22.40%
4.00%
4.00%
4.50%
4.50%
6.00%
6.00%
8.00%
8.00%
4.00%
4.00%
7.00%
7.00%
8.50%
8.50%
5.00%
5.00%
6.50%
6.50%
8.00%
8.00%
10.50%
10.50%
10.00%
10.00%
(1)
The common equity tier 1 risk-based ratio, or CET1, is a ratio created by the Basel III regulations beginning January 1, 2015.
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Contractual Obligations
The following table contains supplemental information regarding our total contractual obligations at December 31, 2023:
(dollars in thousands)
Deposits without a stated maturity
Time deposits
FHLB advances
Long-term debt
Subordinated debentures
Leases
Total contractual obligations
Off-Balance Sheet Arrangements
Within
One Year
One to
Three Years
Payments Due
Three to
Five Years
After Five
Years
$
$
1,172,350 $
1,994,517
—
—
—
4,728
3,171,595 $
— $
6,689
150,000
—
—
10,230
166,919 $
— $
1,204
—
—
—
9,050
10,254 $
— $
—
—
119,147
14,938
10,699
144,784 $
Total
1,172,350
2,002,410
150,000
119,147
14,938
34,707
3,493,552
We have limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial
condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial
commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those
instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the ACL in the consolidated balance
sheets. Such off-balance sheet commitments totaled $190.7 million and $355.8 million as of December 31, 2023 and 2022.
The Company’s exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since
many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The
Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is
based on management’s credit evaluation of the customer.
In addition, the Company invests in various affordable housing partnerships and Small Business Investment Company ("SBIC") funds. Pursuant to
these investments, the Company commits to an investment amount to be fulfilled in future periods. Such unfunded commitments totaled $3.3 million and
$3.5 million as of December 31, 2023 and 2022.
Non-GAAP Financial Measures
Some of the financial measures included in this Annual Report are not measures of financial performance recognized by GAAP. These non-GAAP
financial measures include “tangible common equity to tangible assets,” “tangible book value per share” and “return on average tangible common
equity.” Our management uses these non-GAAP financial measures in its analysis of our performance.
Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value per Share. The tangible common equity to tangible assets ratio and
tangible book value per share are non-GAAP measures generally used by financial analysts and investment bankers to evaluate capital adequacy. We
calculate: (i) tangible common equity as total shareholders’ equity less goodwill and other intangible assets (excluding mortgage servicing rights); (ii)
tangible assets as total assets less goodwill and other intangible assets; and (iii) tangible book value per share as tangible common equity divided by shares
of common stock outstanding.
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Our management, banking regulators, many financial analysts and other investors use these measures in conjunction with more traditional bank
capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically
stem from the use of the purchase accounting method of accounting for mergers and acquisitions. Tangible common equity, tangible assets, tangible book
value per share and related measures should not be considered in isolation or as a substitute for total shareholders’ equity, total assets, book value per share
or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible common equity, tangible assets, tangible
book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table
reconciles shareholders’ equity (on a GAAP basis) to tangible common equity and total assets (on a GAAP basis) to tangible assets, and calculates our
tangible book value per share:
(dollars in thousands)
Tangible common equity:
Total shareholders' equity
Adjustments
Goodwill
Core deposit intangible
Tangible common equity
Tangible assets:
Total assets-GAAP
Adjustments
Goodwill
Core deposit intangible
Tangible assets:
Common shares outstanding
Common equity to assets ratio
Book value per share
Tangible common equity to tangible assets ratio
Tangible book value per share
December 31,
2023
December 31,
2022
$
$
$
$
$
$
511,260
$
484,563
(71,498)
(2,795)
$
436,967
(71,498)
(3,718)
409,347
4,026,025
$
3,919,058
(71,498)
(2,795)
$
3,951,732
18,609,179
12.70%
27.47
$
11.06%
$
23.48
(71,498)
(3,718)
3,843,842
18,965,776
12.36%
25.55
10.65%
21.58
Return on Average Tangible Common Equity. Management measures return on average tangible common equity (“ROATCE”) to assess the
Company’s capital strength and business performance. Tangible equity excludes goodwill and other intangible assets (excluding mortgage servicing rights),
and is reviewed by banking and financial institution regulators when assessing a financial institution’s capital adequacy. This non-GAAP financial measure
should not be considered a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled
measures used by other companies. The following table reconciles return on average tangible common equity to its most comparable GAAP measure:
(dollars in thousands)
Net income available to common shareholders
Average shareholders' equity
Adjustments:
Average goodwill
Average core deposit intangible
Adjusted average tangible common equity
Return on average tangible common equity
2023
For the year
2022
42,465
500,540
$
64,327
470,781
$
2021
56,906
447,714
(71,498)
(3,282)
$
9.97%
425,760
(70,948)
(4,131)
$
16.26%
395,702
(69,243)
(4,657)
373,814
15.22%
$
$
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business
through exposures to market interest rates, equity prices, and credit spreads. We have identified three primary sources of market risk: interest rate risk, price
risk and basis risk.
Interest Rate Risk. Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing
differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of
assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to
redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel
fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and SOFR (basis risk).
Price Risk. Price risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value
and subject to fair value accounting. We have price risk from the available for sale SFR mortgage loans and fixed-rate available for sale securities.
Basis Risk. Basis risk represents the risk of loss arising from asset and liability pricing movements not changing in the same direction. We have basis
risk in the SFR mortgage loan portfolio, the multifamily loan portfolio and our securities portfolio.
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Our ALCO establishes broad policy limits with respect to interest rate risk. The ALCO establishes specific operating guidelines within the
parameters of the board of directors’ policies. In general, we seek to minimize the impact of changing interest rates on net interest income and the
economic values of assets and liabilities. The ALCO meets monthly to monitor the level of interest rate risk sensitivity to ensure compliance with the board
of directors’ approved risk limits and to oversee management's balance sheet risk management strategies.
Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding
activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the
appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.
An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net
interest income, as rates earned on interest-earning assets would reprice upward more quickly than rates paid on interest-bearing liabilities, thus expanding
the net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is
expected to generate lower net interest income, as rates paid on interest-bearing liabilities would reprice upward more quickly than rates earned on interest-
earning assets, thus compressing the net interest margin.
Income Simulation and Economic Value Analysis. Interest rate risk measurement is calculated and reported to the board and the ALCO at least
quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit
breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.
We use two approaches to model interest rate risk: Net Interest Income at Risk (NII at Risk), and Economic Value of Equity (“EVE”). Under NII at
Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives over a 12 month and 24 month time horizon
assuming a flat balance sheet and an instantaneous and parallel shift in market interest rates of -300, -200, -100, +100, +200 and +300. We report NII at
Risk to isolate the change in income related solely to interest-earning assets and interest-bearing liabilities. The model results do not take into consideration
any steps management might take to respond to the changes in interest rates. EVE measures the period end market value of assets minus the market value
of liabilities and the change in this value as rates change. EVE is a period end measurement.
Net Interest Income Sensitivity
Immediate Change in Rates
(dollars in
thousands)
December 31, 2023
$
Dollar change
Percent change
December 31, 2022
$
Dollar change
Percent change
-300
-200
-100
+100
+200
+300
11,086
$
10.48%
3,267
$
2.39%
6,553
$
6.20%
5,538
$
4.06%
2,545
$
2.41%
3,462
$
2.54%
470
$
0.44%
50
$
0.05%
(455)
(0.43)%
5,745
$
4.21%
11,545
$
8.46%
17,212
12.61%
At December 31, 2023, our NII at Risk profile is liability sensitive in the down rate scenarios and this is directionally consistent with our December
31, 2022 profile. For the up rate scenarios, at December 31, 2023, our NII at Risk profile is “neutral” compared to “asset sensitive” at December 31, 2022.
The NII at Risk results are within board policy limits. This shift is primarily due to the change in the mix of assets and funding sources during 2023 due to
deleveraging the balance sheet and increasing our on balance sheet liquidity. Actual results could vary materially from those calculated by our model, due
to a variety of factors or assumptions such as the uncertainty of the magnitude, timing and direction of future interest rate movement or the shape of the
yield curve.
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Table of Contents
(dollars in
thousands)
December 31,
2023
Economic Value of Equity Sensitivity (Shock)
Immediate Change in Rates
-300
-200
-100
+100
+200
+300
Dollar change
Percent change
(26,488)
(4.79)%
(7,430)
(1.34)%
4,856
0.88%
(28,251)
(5.11)%
(69,646)
(12.60)%
(111,281)
(20.14)%
December 31,
2022
Dollar change
Percent change
(83,032)
(12.92%)
(30,544)
(4.75)%
(3,801)
(0.59)%
(22,540)
(47,643)
(3.51)%
(7.41)%
(74,319)
(11.56)%
The EVE reported at December 31, 2023 indicates that if interest rates increased immediately, the EVE position is expected to decrease and if
interest rates were to decrease immediately, the EVE position is expected to increase in the down 100 basis points scenario and then decrease for the down
200 basis points and down 300 basis points scenarios. When interest rates rise, fixed rate assets generally lose economic value as these assets are
discounted at a higher rate demonstrating that the longer duration causes greater value to be lost. When interest rates fall, the opposite is true, however
these positives are being offset by a decrease in the value of floating rate assets as well as the value of noninterest-bearing deposits. Noninterest-bearing
have a lower value in lower interest rate environments. Actual results could vary materially from those calculated by our model, due to a variety of factors
or assumptions such as the uncertainty of the magnitude, timing and direction of future interest rate movement or the shape of the yield curve. The EVE
results are within board policy limits.
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Item 8. Financial Statements and Supplementary Data.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Crowe LLP Los Angeles, California PCAOB ID
173)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Eide Bailly LLP Laguna Hills, California
PCAOB ID 286)
CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statement of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
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75
78
79
80
81
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Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of
RBB Bancorp
Los Angeles, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of RBB Bancorp (the "Company") as of December 31, 2023 and 2022, and the related
consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years ended December 31, 2023 and
2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years ended
December 31, 2023 and 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s
internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 12, 2024 expressed an adverse opinion.
Change in Accounting Principal
As discussed in Note 2 to the financial statements, the Company changed its method for accounting for credit losses effective January 1, 2022, due to the
adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (ASC
326). The Company adopted the new credit loss standard using the modified retrospective method provided in Accounting Standards Update No. 2016-13
such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting
principles.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to
those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
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Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or
required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our
opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses on Loans
As described in Notes 2 and 5 to the consolidated financial statements, the Company adopted ASU 2016-13 “Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments”, effective January 1, 2022, which requires the Company to record an estimate of expected
lifetime credit losses for loans at the time of origination. Due to the adoption of Current Expected Credit Losses (CECL), the Company recorded a $2.10
million transition adjustment for the allowance for credit losses (ACL) through retained earnings on January 1, 2022. As of December 31, 2023, the
Company had gross loan portfolio of $3.03 billion and a related allowance for credit losses on loans of $41.90 million.
The Company’s discounted cash flow methodology incorporates a probability of default, loss given default and exposure at default model, as well as
expectations of future economic conditions, using reasonable and supportable forecasts. The Company uses both internal and external qualitative factors
within the current expected credit losses (“CECL”) model: lending policies, procedures, and strategies; changes in nature and volume of the portfolio;
credit and lending personnel experience; changes in volume and trends in classified loans, delinquencies, and nonaccrual; concentration risk; collateral
values; regulatory and business environment; loan review results; and economic conditions.
We identified auditing the Company’s estimate of Current Expected Credit Losses to be a critical audit matter, particularly as it pertains to auditing the
application of qualitative factors, as the matter involved significant audit effort and especially subjective auditor judgment.
The primary procedures performed to address the critical audit matter included:
•
•
•
Management’s review of the reasonableness of assumptions and judgments, including the qualitative risk factors.
Management’s evaluation of the relevance and reliability of data utilized in the calculation of the qualitative factors.
Testing the design and operating effectiveness of controls over qualitative adjustments within the ACL model, including controls addressing:
o
o
Testing the relevance and reliability of the data used in the determination of qualitative factor adjustments.
Evaluating the reasonableness of management’s assumptions and judgments used in the determination of the qualitative factor adjustments and the
resulting qualitative allocation to the allowance for credit losses.
/s/ Crowe LLP
We have served as the Company's auditor since 2022.
Los Angeles, California
March 12, 2024
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Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of
RBB Bancorp
Los Angeles, California
Opinion on Internal Control over Financial Reporting
We have audited RBB Bancorp’s (the “Company”) internal control over financial reporting as of December 31, 2023, based on criteria established in
Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our
opinion, because of the effects of the material weaknesses discussed in the following paragraph, the Company has not maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework:
(2013) issued by COSO.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. The following
material weakness has been identified and included in management's report.
● Material weakness in controls related to infrequent transactions such as the income recognition for the Community Development Financial
Institution Equitable Recovery Program award.
● Material weakness in the Company’s control environment. Specifically, the Company failed to demonstrate a commitment to attract,
develop, and retain competent individuals in the area of internal control over financial reporting.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
balance sheets of RBB Bancorp (the "Company") as of December 31, 2023 and 2022, and the related consolidated statements of income, comprehensive
income, changes in shareholders’ equity, and cash flows for the years ended December 31, 2023 and 2022, and the related notes (collectively referred to as
the "financial statements") and our report dated March 12, 2024 expressed an unqualified opinion. We considered the material weaknesses identified above
in determining the nature, timing, and extent of audit procedures applied in our audit of the 2023 financial statements, and this report on Internal Control
over Financial Reporting does not affect such report on the financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other
procedures as
we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Crowe LLP
Los Angeles, California
March 12, 2024
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders of
RBB Bancorp and Subsidiaries
Los Angeles, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows of RBB
Bancorp and Subsidiaries (the Company) for the year ended December 31, 2021, and the related notes (collectively referred to as the “financial
statements”). In our opinion, these financial statements present fairly, in all material respects, the results of operations and cash flows of RBB Bancorp and
Subsidiaries for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 and Note 14 to the financial statements, the Company has adopted the provisions of FASB Accounting Standards Codification Topic
842, Leases, as of January 1, 2021 using the modified retrospective approach with an adjustment at the beginning of the adoption period. Our opinion is not
modified with respect to this matter.
Basis for Opinion
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on the Company’s financial
statements. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control
over financial reporting was maintained in all material respects.
Our audit of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that responds to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
We served as the Company’s auditor since 2019. Vavrinek, Trine, Day & Co., LLP, who joined Eide Bailly LLP in 2019, had served as the Company’s
auditor since 2008.
Laguna Hills, California
March 12, 2024
78
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RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(In thousands, except for share data)
Assets
Cash and due from banks
Interest-earning deposits in other financial institutions
Securities:
Available for sale
Held to maturity (fair value of $5,097 and $5,563 at December 31, 2023 and December 31, 2022)
Mortgage loans held for sale
Loans held for investment
Unaccreted discount on acquired loans
Deferred loan costs, net
Total loans, net of deferred loan costs and unaccreted discounts on acquired loans
Allowance for loan losses
Total loans held for investment, net
Premises and equipment, net
Federal Home Loan Bank (FHLB) stock
Net deferred tax assets
Cash surrender value of bank owned life insurance (BOLI)
Goodwill
Servicing assets
Core deposit intangibles
Right-of-use assets - operating leases
Accrued interest and other assets
Total assets
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand
Savings, NOW and money market accounts
Time deposits $250,000 and under
Time deposits over $250,000
Total deposits
Reserve for unfunded commitments
FHLB advances
Long-term debt, net of issuance costs
Subordinated debentures (net of unamortized valuation reserve of $2,589 and $2,807 at December 31, 2023
and December 31, 2022)
Lease liabilities - operating leases
Accrued interest and other liabilities
Total liabilities
Commitments and contingencies - Note 13
Shareholders' equity:
Preferred Stock - 100,000,000 shares authorized, no par value; none outstanding
Common Stock - 100,000,000 shares authorized, no par value; 18,609,179 shares issued and outstanding
at December 31, 2023 and 18,965,776 shares issues and outstanding at December 31, 2022
Additional paid-in capital
Retained earnings
Non-controlling interest
Accumulated other comprehensive loss, net
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying notes are an integral part of these consolidated financial statements.
79
2023
2022
431,373 $
600
318,961
5,209
1,911
3,031,319
(970)
1,512
3,031,861
(41,903)
2,989,958
25,684
15,000
15,765
58,719
71,498
8,110
2,795
29,803
50,639
4,026,025 $
539,621 $
632,729
1,190,821
811,589
3,174,760
640
150,000
119,147
14,938
31,191
24,089
3,514,765
83,548
600
256,830
5,729
—
3,336,970
(1,238)
717
3,336,449
(41,076)
3,295,373
27,009
15,000
16,977
57,310
71,498
9,521
3,718
25,447
50,498
3,919,058
798,741
615,339
837,369
726,234
2,977,683
1,157
220,000
173,585
14,720
26,523
20,827
3,434,495
—
—
271,925
3,623
255,152
72
(19,512)
511,260
4,026,025 $
276,912
3,361
225,883
72
(21,665)
484,563
3,919,058
$
$
$
$
Table of Contents
RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31,
(In thousands, except share and per share data)
2023
2022
2021
Interest and dividend income:
Interest and fees on loans
Interest on interest-earning deposits
Interest on investment securities
Dividend income on FHLB stock
Interest on federal funds sold and other
Total interest and dividend income
Interest expense:
Interest on savings deposits, NOW and money market accounts
Interest on time deposits
Interest on subordinated debentures and long-term debt
Interest on other borrowed funds
Total interest expense
Net interest income before provision for credit losses
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Service charges and fees
Loan servicing fees, net of amortization
Increase in cash surrender value of BOLI
Gain on sale of loans
Gain on sale of fixed assets
Other income
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy and equipment expenses
Data processing
Legal and professional
Office expenses
Marketing and business promotion
Insurance and regulatory assessments
Core deposit premium amortization
Other expenses
Total noninterest expense
Net income before income taxes
Income tax expense
Net income
Net income per share
Basic
Diluted
Weighted-average common shares outstanding
Basic
Diluted
$
$
$
194,264 $
10,746
14,028
1,125
985
221,148
12,205
76,837
9,951
2,869
101,862
119,286
3,362
115,924
4,172
2,576
1,409
374
32
6,455
15,018
37,795
9,629
5,326
8,198
1,512
1,132
3,165
923
3,016
70,696
60,246
17,781
42,465 $
171,099 $
1,353
6,084
938
1,496
180,970
5,561
13,338
9,645
2,872
31,416
149,554
4,935
144,619
4,145
2,209
1,322
1,895
757
924
11,252
35,488
9,092
5,060
5,383
1,438
1,578
1,850
1,086
3,551
64,526
91,345
27,018
64,327 $
2.24 $
2.24
3.37 $
3.33
141,569
552
3,379
869
694
147,063
2,786
9,170
8,999
1,765
22,720
124,343
3,959
120,384
4,524
684
1,067
9,991
—
2,479
18,745
33,568
8,691
4,474
3,773
1,197
1,157
1,561
1,121
2,650
58,192
80,937
24,031
56,906
2.92
2.86
18,965,346
18,985,233
19,099,509
19,332,639
19,423,549
19,834,306
The accompanying notes are an integral part of these consolidated financial statements.
80
Table of Contents
RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31,
(In thousands)
Net income
Other comprehensive income/(loss):
Unrealized gains/(losses) on securities available for sale
Related income tax effect
Total other comprehensive income/(loss)
2023
2022
2021
$
42,465 $
64,327 $
56,906
3,149
(996)
2,153
(28,905)
8,896
(20,009)
(3,957)
1,172
(2,785)
54,121
Total comprehensive income
$
44,618 $
44,318 $
The accompanying notes are an integral part of these consolidated financial statements.
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RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021
(In thousands, except share data)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Non-
Controlling
Interest
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance at January 1, 2021
Net income
Stock-based compensation, net
Restricted stock granted
Restricted stock vested
Cash dividends on common stock ($0.51 per
share)
Stock options exercised
Repurchase of common stock
Other comprehensive loss, net of taxes
Balance at December 31, 2021
Cumulative effect of change in accounting
principle related to ASC 326 (1)
Net income
Stock-based compensation, net
Restricted stock cancelled
Restricted stock vested
Restricted stock unit vested
Cash dividends on common stock ($0.56 per
share)
Stock options exercised
Repurchase of common stock
Other comprehensive loss, net of taxes
Balance at December 31, 2022
Net income
Stock-based compensation, net
Restricted stock unit vested
Cash dividends on common stock ($0.64 per
share)
Stock options exercised
Repurchase of common stock
Other comprehensive income, net of taxes
Balance at December 31, 2023
19,565,921 $ 284,261 $
—
—
—
—
—
60,000
425
—
4,932 $ 138,094 $
56,906
—
—
—
—
1,086
—
(425)
—
—
4,465
302,745
(6,816)
(473,122)
—
—
19,455,544 $ 282,335 $
—
(990)
—
—
(9,947)
—
(3,724)
—
4,603 $ 181,329 $
—
—
—
(40,000)
—
7,450
—
—
—
—
355
202
—
—
848
—
(355)
(202)
(2,204)
64,327
—
—
—
—
—
—
7,009
445,308
(12,989)
(902,526)
—
—
18,965,776 $ 276,912 $
—
—
391
—
—
20,374
—
(1,533)
—
—
(10,736)
—
(6,833)
—
3,361 $ 225,883 $
42,465
—
—
—
750
(391)
—
19,403
(396,374)
—
—
392
(5,770)
—
18,609,179 $ 271,925 $
—
(97)
—
—
(12,163)
—
(1,033)
—
3,623 $ 255,152 $
72 $
—
—
—
—
—
—
—
—
72 $
—
—
—
—
—
—
—
—
—
—
72 $
—
—
—
—
—
—
—
72 $
1,129 $ 428,488
56,906
1,086
—
—
—
—
—
—
(9,947)
—
3,475
—
(10,540)
—
(2,785)
(2,785)
(1,656) $ 466,683
—
—
—
—
—
—
(2,204)
64,327
848
—
—
—
(10,736)
—
5,476
—
(19,822)
—
(20,009)
(20,009)
(21,665) $ 484,563
42,465
750
—
—
—
—
—
—
—
2,153
(12,163)
295
(6,803)
2,153
(19,512) $ 511,260
(1) Represents the impact of the adoption of Accounting Standards Update ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1,
2022.
The accompanying notes are an integral part of these consolidated financial statements.
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RBB BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2023, 2022 AND 2021
(In thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash from Operating activities:
Depreciation and amortization of premises and equipment
Net accretion of discount for securities, loans, deposits, and other
Unrealized (gain)/loss on equity securities
Amortization of investment in affordable housing tax credits
Amortization of intangible assets
Reversal of an impairment allowance on mortgage servicing rights
Amortization of right-of-use asset
Change in operating lease liabilities
Provision for credit losses
Stock-based compensation, net
Deferred tax expense/(benefit)
Gain on sale of loans
Gain on sale of OREO
Gain on sale of fixed assets
Increase in cash surrender value of BOLI
Loans originated and purchased for sale, net
Proceeds from loans sold
Other items
Net cash provided by operating activities
Investing activities
Securities available for sale:
Purchases
Maturities, repayments and calls
Securities held to maturity:
Maturities, repayments and calls
Redemption of Federal Home Loan Bank stock
Purchase of Federal Home Loan Bank stock and other equity securities, net
Net increase of investment in qualified affordable housing projects
Net decrease/(increase) in loans
Proceeds from sales of OREO
Purchase of bank owned life insurance
Net cash received in connection with acquisition
Proceeds from sale of fixed assets
Purchases of premises and equipment
Net cash provided by/(used in) investing activities
Financing activities
Net (decrease)/increase in demand deposits and savings accounts
Net increase/(decrease) in time deposits
Advances from Federal Home Loan Bank
Repayment of Federal Home Loan Bank borrowings
Cash dividends paid
Redemption of subordinated notes
Issuance of subordinated notes, net of issuance costs
Common stock repurchased, net of repurchased costs
Exercise of stock options
Net cash provided by/(used in) financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information
Cash paid during the period:
Interest paid
Taxes paid
Non-cash investing and financing activities:
Transfer from loans to other real estate owned
Loans transfer to held for sale, net
Additions to servicing assets
Recognition of operating lease right-of-use assets
Recognition of operating lease liabilities
Acquisition:
Assets acquired, net of cash received
Liabilities assumed
Cash receipts
Goodwill
2023
2022
2021
$
42,465 $
64,327 $
56,906
2,018
(5,396)
(24)
1,127
2,568
—
5,042
(4,730)
3,362
750
216
(374)
(134)
(32)
(1,409)
(15,058)
18,743
2,158
51,292
(694,210)
640,993
500
—
(479)
(279)
296,693
711
—
—
32
(652)
243,309
(241,730)
438,625
80,000
(150,000)
(12,163)
(55,000)
—
(6,803)
295
53,224
347,825
83,548
431,373 $
93,721 $
21,389
—
5,254
234
(9,398)
9,398
—
—
—
—
2,022
(432)
—
1,053
3,853
—
5,145
(4,897)
4,935
848
(2,249)
(1,895)
—
(757)
(1,322)
(39,152)
60,170
2,163
93,812
(402,656)
485,796
500
—
(2,608)
(227)
(411,316)
—
—
71,352
1,053
(2,065)
(260,171)
(886,712)
397,329
570,000
(500,000)
(10,736)
—
—
(19,822)
5,476
(444,465)
(610,824)
694,372
83,548 $
29,734 $
24,019
142
13,166
771
(8,138)
8,138
8,183
81,790
(71,040)
2,255
1,943
(191)
360
1,037
6,347
(417)
5,245
(5,058)
3,959
1,086
(1,093)
(9,991)
—
—
(1,067)
(161,972)
305,337
(256)
202,175
(603,836)
442,056
900
641
(5,839)
(763)
(315,551)
—
(19,800)
—
—
(1,989)
(504,181)
870,803
(120,178)
—
—
(9,947)
(50,000)
118,111
(10,540)
3,475
801,724
499,718
194,654
694,372
22,507
25,786
—
89,368
2,361
(27,699)
27,699
—
—
—
—
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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RBB BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BUSINESS DESCRIPTION
RBB Bancorp is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. RBB Bancorp’s principal business is to
serve as the holding company for its wholly owned banking subsidiaries, Royal Business Bank (“Bank”) and RBB Asset Management Company (“RAM”),
collectively referred to herein as “the Company.” RBB Bancorp was formed in January 2011 as a bank holding company and RAM was formed in 2012 to
hold and manage problem assets acquired in business combinations. When we refer to “we”, “us”, “our”, or the “Company”, we are referring to RBB
Bancorp and its consolidated subsidiaries including the Bank, collectively. When we refer to the “parent company”, “Bancorp”, or the “holding company”,
we are referring to RBB Bancorp, the parent company, on a stand-along basis.
At December 31, 2023, the Company had total assets of $4.0 billion, gross consolidated loans (held for investment and held for sale) of $3.0 billion, total
deposits of $3.2 billion and total shareholders' equity of $511.3 million.
The Bank provides business-banking products and services predominantly to the Asian-American communities through full service branches located in Los
Angeles County, Orange County and Ventura County in California, in the Las Vegas, Nevada and New York City metropolitan areas, Chicago
(Illinois), Edison (New Jersey) and Honolulu (Hawaii). The products and services include commercial and investor real estate loans, business loans and
lines of credit, Small Business Administration (“SBA”) 7A and 504 loans, mortgage loans, trade finance and a full range of depository accounts, including
specialized services such as remote deposit, E-banking, and mobile banking. The Bank acquired the Honolulu, Hawaii branch (the “Hawaii Branch”) from
Bank of the Orient (“BOTO”) on January 14, 2022.
The Company operates full-service banking offices in Arcadia, Cerritos, Diamond Bar, Irvine, Los Angeles, Monterey Park, Oxnard, Rowland Heights, San
Gabriel, Silver Lake, Torrance, and Westlake Village, California; Las Vegas, Nevada; Manhattan, Brooklyn, Flushing and Elmhurst, New York;
the Chinatown and Bridgeport neighborhoods of Chicago, Illinois; Edison, New Jersey; and Honolulu, Hawaii. The Company's primary source of revenue
is providing loans to customers, who are predominately small and middle-market businesses and individuals.
The Company generates its revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment
securities. The Company also derives income from noninterest sources, such as fees received in connection with various lending and deposit services, loan
servicing, gain on sales of loans and wealth management services. The Company’s principle expenses include interest expense on deposits and other long-
term debt, and operating expenses, such as salaries and employee benefits, occupancy and equipment, data processing, and income tax expense.
The Company completed six whole bank acquisitions and one branch acquisition from July 2011 through January 2022. All of the Company’s acquisitions
have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in
the consolidated financial statements from their respective acquisition dates. The Company previously disclosed that, on December 28, 2021, it entered into
a definitive agreement to acquire Gateway Bank F.S.B. (“Gateway”) in an all cash transaction, subject to certain terms and conditions. On September 28,
2023, the Company announced that it and Gateway have mutually agreed to terminate the definitive agreement, effective as of September 28, 2023. Neither
party has or will have any liability or pay any penalty to the other party as a result of the termination, and each party has released the other from any and all
claims related to the definitive agreement or the transactions contemplated by the definitive agreement.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of
the Securities and Exchange Commission (“SEC”) for Form 10-K and conform to practices within the banking industry and include all of the information
and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for financial reporting.
Principles of Consolidation and Nature of Operations
The accompanying consolidated financial statements include the accounts of RBB Bancorp and its wholly-owned subsidiaries RBB and RAM. All
significant intercompany transactions have been eliminated.
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RBB Bancorp has no significant business activity other than its investments in the Bank and in RAM. However, through our whole bank
acquisition activity, we have acquired three statutory business trusts: TFC Statutory Trust, FAIC Statutory Trust and PGB Capital Trust I. These trusts
issued trust preferred securities representing undivided preferred beneficial interests in the assets of these trusts. The proceeds of these trust preferred
securities were invested in certain securities issued by the entities we have acquired, with similar terms to the relevant series of securities issued by these
trusts, which we refer to as subordinated debentures, and are included in Tier 2 capital.
The parent company only condensed financial information on RBB Bancorp is provided in Note 22.
In connection with the 2018 acquisition of First American International Corp (“FAIC”), the Company acquired FAIB Capital Corp. (“FAICC”), a real estate
investment trust formed on August 28, 2013 as a New York State corporation, which operates as a wholly-owned subsidiary of the Bank.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. It is reasonably possible that these estimates could change as actual results could differ from those estimates. The
allowance for credit losses, realization of deferred tax assets, the valuation of goodwill and other intangible assets, other derivatives, and the fair value
measurement of financial instruments are particularly subject to change and such change could have a material effect on the consolidated financial
statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, term federal funds sold and interest-bearing deposits in other financial institutions with
original maturities of less than 90 days. Net cash flows are reported for customer loan and deposit transactions and interest-bearing deposits in other
financial institutions.
Cash and Due from Banks
Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. There were
no reserves required to be held as of December 31, 2023 and 2022. The Company maintains amounts in due from bank accounts, which may exceed
federally insured limits. The Company has not experienced any losses in such accounts.
Interest-Earning Deposits in Other Financial Institutions
Interest-bearing deposits in other financial institutions not included in cash and cash equivalents are carried at cost and generally mature in one year or less.
Investment Securities
Investment securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to
maturity. Debt securities not classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value, with
unrealized holding gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are amortized on the level-yield method to
the earlier of the maturity date or call date of the underlying securities. Gains and losses on sales are recorded on the trade date and determined using the
specific identification method.
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Prior to January 1, 2022, management evaluated debt securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more
frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considered the extent
and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assessed whether it intended to sell,
or it was more likely than not that it would be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either
of the criteria regarding intent or requirement to sell was met, the entire difference between amortized cost and fair value was recognized as impairment
through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment was split into two components as follows;
OTTI related to credit loss, which must be recognized in the income statement and; OTTI related to other factors, which was recognized in other
comprehensive income. The credit loss was defined as the difference between the present value of the cash flows expected to be collected and the
amortized cost basis.
Effective January 1, 2022, upon the adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), the Company accounts for credit losses
on available for sale securities in accordance with ASC 326-30. Debt securities are measured at fair value and subject to impairment testing. When a debt
security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1)
recognize an allowance for credit loss by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in
other comprehensive income (loss) any non-credit related components of the fair value change. If the amount of the amortized cost basis expected to be
recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that
security.
For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it
will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, then the
security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned
criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management
considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions
specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, then the present value of cash flows expected to
be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less
than the amortized cost basis, then a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair
value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other
comprehensive income (loss).
Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management
believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Accrued interest receivable on available-for-sale debt securities totaled $919,000 and $759,000 at December 31, 2023 and 2022, and is excluded from the
estimate of credit losses.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable
on held-to-maturity debt securities totaled $43,000 and $51,000 at December 31, 2023 and 2022, and is excluded from the estimate of credit losses.
Loans Held For Sale
Mortgage loans originated or acquired and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined
by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans held for
sale consist primarily of first trust deed mortgages on single-family residential properties located in California and New York.
Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is determined by reducing the
amount allocated to the servicing right, when applicable. Gains and losses on sales of mortgage loans are based on the difference between the selling price
and the carrying value of the related loans sold.
Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding
unpaid principal balances reduced by any charge-offs and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on
purchased loans. Loan origination fees and certain direct origination costs are deferred and recognized in interest income using the level-yield method
without anticipating prepayments.
Premiums and discounts on loans purchased are grouped by type and certain common risk characteristics and amortized or accreted as an adjustment of
yield over the weighted-average remaining contractual lives of each group of loans, adjusted for prepayments when applicable, using methodologies which
approximate the interest method.
Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when
principal or interest is past due 90 days or when, in the opinion of management, there is reasonable doubt as to collectability based on contractual terms of
the loan. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income.
Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible.
Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of
management, the loans are estimated to be fully collectible as to all principal and interest.
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Allowance for Credit Losses - Loans
Effective January 1, 2022, upon the adoption of ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), the Company accounts for credit losses
on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of
origination. The allowance for credit losses (“ACL”) is maintained at a level deemed appropriate by management to provide for expected credit losses in
the loan portfolio as of the date of the consolidated balance sheet. Estimating expected credit losses requires management to use relevant forward-looking
information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with
similar risk characteristics. The Company has elected to utilize a DCF approach for all segments except for consumer loans and loans to non-depository
financial institutions, which use a remaining life approach.
The Company’s DCF methodology incorporates a probability of default, loss given default and exposure at default model, as well as expectations of future
economic conditions, using reasonable and supportable forecasts. The Company uses both internal and external qualitative factors within the current
expected credit losses (“CECL”) model including: lending policies, procedures, and strategies; changes in nature and volume of the portfolio; credit and
lending personnel experience; changes in volume and trends in classified loans, delinquencies, and nonaccrual; concentration risk; collateral values;
regulatory and business environment; loan review results; and economic conditions. The Company determines the weighting of the qualitative factors
based on management’s ability to directly control or influence the level of risk exposure. The factors related to economic conditions, collateral values, and
the regulatory and business environment were assigned a higher allocation, and the remaining factors related to internal conditions received a lower
allocation. Management further estimates the allowance balance required using past loan loss experience from peers with similar portfolio sizes and
geographic locations to the Company, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral
values, economic conditions, and other factors. The Company’s CECL methodology utilizes a four-quarter reasonable and supportable forecast period, and
a four-quarter reversion period. The Company is using the Federal Open Market Committee to obtain forecasts for the unemployment rate, while reverting
to a long-run average of each considered economic factor.
The Company records a liability for lifetime expected credit losses on off-balance-sheet credit exposure that do not fit the definition of unconditionally
cancelable in accordance with ASC 326. The Company uses the loss rate and exposure of default framework to estimate a reserve for unfunded
commitments. Loss rates for the expected funded balances are determined based on the associated pooled loan analysis loss rate and the exposure at default
is based on an estimated utilization given default.
The Company assesses expected credit losses for individual instruments that have different risk characteristics than those that are evaluated on a collective
(pooled) basis, in accordance with ASC 326. An individual analysis will provide a specific reserve for instruments involved with fair market value of
collateral or present value of future cash flow. In such a manner, the Bank performs individual analysis on loans that are 90 or more days past due, on non-
accrual status or modified loans. Credit losses are not estimated for accrued interest receivable as interest that is deemed uncollectible is written off through
interest income.
The Company adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326), effective January 1, 2023. Upon adoption, the Company
evaluates all receivable modifications under ASC 310 to determine whether a modification made to a borrower results in a new loan or a continuation of
the existing loan. The Company no longer considers renewals, modifications, or extensions resulting from reasonably expected troubled debt restructurings
(“TDRs”) when calculating the allowance for credit losses under ASC 326. The post-modification effective interest rate is used to calculate the allowance
for credit losses when the DCF method is applied.
Allowance for Loan Losses (prior to January 1, 2022)
Prior to the Company's adoption of ASC 326, Financial Instruments—Credit Losses, on January 1, 2022, the Company maintained an allowance for loan
losses (“ALL”) in accordance with ASC 450, Contingencies, and ASC 310, Receivables. The ALL was a valuation allowance for probable incurred credit
losses. Loan losses were charged against the allowance when management believed the uncollectibility of a loan balance was confirmed. Subsequent
recoveries, if any, were credited to the allowance. Management estimated the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions, and other factors. Allocations of
the allowance may have been made for specific loans, but the entire allowance was available for any loan that, in management's judgment, should be
charged-off. Amounts were charged-off when available information confirmed that specific loans or portions thereof, were uncollectible. This methodology
for determining charge-offs was consistently applied to each segment.
Servicing Rights
Servicing rights are established as an intangible asset when mortgage loans and SBA loans are sold with servicing retained and they are initially recorded at
fair value with the income statement effect recorded in the gain on sale of loans. Fair value is based on a valuation model that calculates the present value
of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing
rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Quarterly impairment is based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a charge to income to
establish a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines
that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to
income. The estimated fair value of the servicing rights is obtained through independent third party valuations based on an analysis of future cash flows,
incorporating key assumptions including discount rates, prepayment speeds and interest rates.
Servicing fee income, which is reported on the income statement as loan servicing fees, net of amortization, is recorded for fees earned for servicing loans.
The fees are based on a contractual percentage of the outstanding principal. The amortization of the mortgage and SBA servicing rights is offset against
loan servicing fee income and reported as a net amount in the consolidated income statement.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be
surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
Gains on sale of mortgage loans totaled $112,000, $1.2 million, and $7.9 million, and gains on sale of SBA loans totaled $262,000, $696,000, and $2.1
million in 2023, 2022, and 2021, respectively.
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Premises and Equipment
Land is carried at cost. Premises, leasehold improvements and equipment are carried at cost less accumulated depreciation and amortization. Depreciation
is computed using the straight-line method over the estimated useful lives, which is thirty years for premises and ranges from three to ten years for
leasehold improvements and equipment. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the
improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs
and maintenance are charged to operations as incurred.
Operating Lease ROU Assets and Lease Liabilities
Operating lease Right-of-Use (“ROU”) assets and lease liabilities are included in other assets and other liabilities, respectively, on the Company’s
consolidated balance sheet. The ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the
lease term at commencement date. The lease terms include periods covered by options to extend or terminate the lease depending on whether the Company
is reasonably certain to exercise such options. The Company uses its incremental borrowing rate to determine the present value of its lease liabilities.
The ROU asset, at adoption of ASU 2016-02, Leases (Topic 842), was recorded at the amount of the lease liability plus any prepaid rent and initial direct
costs, less any lease incentives and accrued rent. Upon adoption of this Topic on January 1, 2021, the Company elected the package of practical expedients
that permits the Company to not reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company also
elected all of the new standard’s available transition practical expedients, including the short-term lease recognition exemption that includes not
recognizing ROU assets or lease liabilities for existing short-term leases, and the practical expedient to not separate lease and non-lease components for all
of the Company’s leases.
The Company determines if a contract arrangement is a lease at inception and primarily enters into operating lease contracts for its branch locations, office
space, and certain equipment. As part of its property lease agreements, the Company may seek to include options to extend or terminate at lease when it is
reasonably certain that the Company will exercise those options. The Company's measurement of the ROU assets and operating lease liabilities does not
include payments associated with the option to extend or terminate the lease term unless the Company is reasonably certain to exercise such options then
the period will cover the option to extend or terminate. The ROU lease asset also includes any lease payments made and lease incentives. Lease expense for
lease payments is recognized on a straight-line basis over the lease term. The Company did not possess any leases that have variable lease payments or
residual value guarantees as of December 31, 2023.
Other Real Estate Owned
Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a
charge to the allowance for credit losses, if necessary. Other real estate owned is carried at the lower of the Company's carrying value of the property or its
fair value, less estimated carrying costs and costs of disposition. Fair value is based on current appraisals less estimated selling costs. Any subsequent
write-downs are charged against operating expenses and recognized as a valuation allowance. Operating expenses and related income of such properties
and gains and losses on their disposition are included in other operating income and expenses.
Goodwill and Other Intangible Assets
Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the
acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill resulting from whole bank and branch
acquisitions is not amortized, but tested for impairment at least annually. The Company has selected October 1 as the date to perform the annual
impairment test. Goodwill amounted to $71.5 million as of December 31, 2023 and 2022, and is the only intangible asset with an indefinite life on the
balance sheet. No impairment was recognized on goodwill during 2023 and 2022. Goodwill in the amount of $2.3 million was recognized in conjunction
with the acquisition of the Hawaii Branch from BOTO.
After evaluating the prolonged decrease in the Company’s market value, management performed a quantitative goodwill impairment analysis as of
September 30, 2023. Management engaged a third-party valuation specialist to assist with the quantitative analysis. The evaluation used two methods to
estimate the value of the Company: the market approach and the income approach. The market approach uses pricing information available on publicly
traded companies that are similar to the subject company to determine the value of the subject company. Estimates used in the market approach included
selecting a representative peer group of institutions, determining the price to tangible book value based on the results of the peer group institutions, and
estimating a control premium based on the whole-bank acquisition prices for representative transactions. The income approach is based on the discounted
free cash flows of the subject company using projections of future results, and considering future economic forecasts and management’s plans. Estimates
used in the income approach include management’s projections of the Company’s income in future periods and an appropriate rate of return that would be
required by a market participant. Based on this quantitative analysis, the fair value of the Company exceeds its carrying amount with a passing amount of
9.6% at September 30, 2023. In addition, due to changes in the Company’s projections of income in future periods during the fourth quarter of 2023
resulting from the current economic environment, at December 31, 2023, management performed certain calculations and sensitivity analyses related to the
quantitative goodwill impairment analysis performed at September 30, 2023 and the current information. Based on this most recent analysis, management
concluded that goodwill was also not impaired at December 31, 2023.
Other intangible assets consist of core deposit intangible (“CDI”) assets arising from acquisitions. CDI assets are amortized on an accelerated method over
their estimated useful life of 8 to 10 years. CDI was recognized in the 2013 acquisition of Los Angeles National Bank, in the 2016 acquisition of TFC
Holding Company, in the 2018 acquisition of FAIC and in the 2020 acquisition of PGBH. In January 2022, $729,000 of CDI was recognized in conjunction
with the Hawaii Branch purchase from BOTO.
The following table presents changes in the carrying amount of CDI for the periods indicated:
(dollars in thousands)
Core deposit intangibles
Balance, beginning of year
Acquired from acquisitions
Balance, end of year
2023
Year ended December 31,
2022
2021
$
$
10,459 $
—
10,459 $
9,730 $
729
10,459 $
9,730
—
9,730
Accumulated amortization:
Balance, beginning of year
Amortization
Balance, end of year
Core deposit intangibles, net
Estimated CDI amortization expense for the next 5 years is as follows:
$
$
$
6,741 $
923
7,664 $
2,795 $
5,655 $
1,086
6,741 $
3,718 $
(dollars in thousands)
Year ending December 31:
2024
2025
2026
2027
2028
Thereafter
Total
Bank Owned Life Insurance
$
$
4,534
1,121
5,655
4,075
784
672
501
417
297
124
2,795
The Company has purchased life insurance policies on a select group of employees and directors. Bank Owned Life Insurance (“BOLI”) is recorded at the
amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other
amounts due that are probable at settlement. Increases of the cash value of these policies, as well as insurance proceeds received, are recorded in the other
noninterest income and are not subject to income tax for as long as they are held for the life of the covered employees and directors.
FHLB Stock and Other Equity Securities
The Company is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required to own a certain amount of stock based on the level
of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically
evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
The Company also owns an equity investment in Pacific Coast Banker’s Bank and Atlantic Community Bankers Bank stock. The Company adopted ASU
2016-01 on January 1, 2019, and elected the measurement alternative for measuring equity securities without readily determinable fair values at cost less
impairment, plus or minus observable price changes in orderly transactions.
As of December 31, 2023, the Company had several equity investments without readily determinable fair values in the amount of $22.3 million, and
$22.2 million at December 31, 2022. There were no impairment charges in 2023 or 2022. There was a $360,000 impairment charge in 2021.
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Stock-Based Compensation
The Company currently recognizes stock-based compensation based on the grant date fair value of equity awards, including stock options, restricted stock
units and restricted stock, which have been granted to employees. The expense related to equity-based awards granted to directors or other qualified non-
employee awardees is recognized as other noninterest expense.
Stock option compensation expense is calculated based on the fair value of the award at the grant date for those options expected to vest and is recognized
as an expense over the vesting period of the grant using the straight-line method. The Company uses the Black-Scholes option-pricing model to estimate
the value of granted stock options. This model takes into account the option exercise price, the expected life, the current price of the underlying stock, the
expected volatility of the Company’s stock, expected dividends on the stock and a risk-free interest rate. The Company estimates the expected volatility
based on the Company’s historical stock prices for the period corresponding to the expected life of the stock options. Restricted stock and restricted stock
units are valued based on the closing price of the Company’s stock on the date of the grant. Stock-based compensation expense is recognized over the
period which an employee is required to provide services in exchange for the award, generally defined as the vesting period. When the options are
exercised, the Company’s policy is to issue new shares of stock. The Company’s accounting policy is to recognize forfeitures as they occur.
Income Taxes
Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.
The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense represents each entity’s
proportionate share of the consolidated provision for income taxes. Income tax expense is the total of the current year income tax due or refundable and the
change in deferred tax assets and liabilities. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax
rates. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. A
valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Tax effects from an uncertain tax position are recognized
in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. Interest and
penalties related to uncertain tax positions are recorded as part of income tax expense.
Under ASC 740, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of the Company's deferred tax assets
will not be realized. The Company's policy is to evaluate the deferred tax assets on a quarterly basis and record a valuation allowance for the Company's
deferred tax assets if there is not sufficient positive evidence available to demonstrate utilization of the Company's deferred tax assets. Initial setup or an
increase to deferred tax asset valuation allowance would be charged to income tax expense that would negatively impact our earnings.
Retirement Plans
The Company established a 401(k) plan in 2010. The Company contributed $707,000, $594,000, and $532,000 in 2023, 2022 and 2021, respectively.
Comprehensive Income
Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on
securities available for sale, net of taxes.
Financial Instruments
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial
commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit as
described in Note 13. Such financial instruments are recorded in the financial statements when they are funded.
Derivatives
Interest Rate Lock Commitments (“IRLCs”) are agreements under which the Company agrees to extend credit to a borrower under certain specified terms
and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under the agreement, the Company commits to lend
funds to a potential borrower (subject to the Company’s approval of the loan) on a fixed or adjustable rate basis, regardless of whether interest rates change
in the market, or on a floating rate basis. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of
issuance through the date of loan funding, cancelling or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is
not obligated to obtain the loan. The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the
loans within the terms of the IRLCs. The Company uses best efforts commitments to substantially eliminate these risks. Historical commitment-to-closing
ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs.
ASC 815, Derivatives and Hedging, provides that IRLCs on mortgage loans that will be held for resale are derivatives and must be accounted for at fair
value on the balance sheet. ASC 820, Fair Value Measurements and Disclosures, specifies how these derivatives are to be valued. Commitments to
originate mortgage loans to be held for investment and other types of loans are generally not derivatives. The Company has elected to account for these
obligations at fair value.
Forward Mortgage Loan Sale Contracts (“FMLSC”) are utilized to avoid interest rate risk at the time an interest rate lock commitment is made to the
buyer. The Company is subject to interest rate and price risk on its mortgage loans held for sale from the loan funding date until the date the loan is
sold. Best efforts commitments which fix the forward sales price that will be realized in the secondary market are used to eliminate the interest rate and
price risk to the Company. To avoid interest rate risk, the Company will enter into FMLSCs at the time they make an interest rate lock commitment to the
buyer. The buyer can enter into mortgage loan sales commitments on a “mandatory” or “best efforts” basis. Mandatory commitments provide that the loan
must be delivered or the commitment be “paired off.” In general, best efforts commitments provide that the loan be delivered if and when it closes.
Forward commitments, also known as forward loan sales commitments, are considered derivatives under ASC Topic 815, Derivatives and
Hedging, because they meet all of the following criteria:
● They have a specified underlying (the contractually specified price for the loans);
● They have a notional amount (the committed loan principal amount);
● They require little or no initial net investment; and
● They require or permit net settlement as the institution via a pair-off transaction or the payment of a pair-off fee.
See Note 18 for more information and disclosures relating to the Company's derivatives.
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Earnings Per Share (“EPS”)
Basic and diluted EPS are calculated using the two-class method since the Company has issued share-based payment awards considered participating
securities because they entitle holders the rights to dividends during the vesting term. The two-class method is an earnings allocation formula that
determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in
undistributed earnings. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.
Fair Value Measurement
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value
hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There
are three levels of inputs that may be used to measure fair values:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement
date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in
pricing an asset or liability.
See Note 18 for more information and disclosures relating to the Company's fair value measurements.
Operating Segments
Management has determined that since generally all of the banking products and services offered by the Company are available in each branch of the Bank,
all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending
or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment.
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Recent Accounting Pronouncements
Recently Adopted
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instrument (Topic 326), including subsequent amendments to
this ASU. This ASU changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value
through net income. The standard replaced the “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model,
applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but
is not limited to, loans, leases, held to maturity securities, loan commitments, and financial guarantees. For available for sale (“AFS”) debt securities with
unrealized losses, losses will be recognized as allowances rather than reductions in the amortized cost of the securities. ASU 2016-13 also expands the
disclosure requirements regarding an entity's assumptions, models, and methods for estimating the allowance for credit losses. In addition, entities are
required to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The
Company retroactively adopted CECL to January 1, 2022 as the Company’s emerging growth company status expired as of December 31, 2022. A one-
time cumulative adjustment of $2.1 million was made to the Company’s ACL, which was recorded through retained earnings upon adoption of ASU 2016-
13 as of January 1, 2022.
The following table sets forth the cumulative effect of the changes to the Company's consolidated balance sheets at January 1, 2022, for the adoption of
ASU 2016-13:
(dollars in thousands)
Assets:
Allowance for credit losses on loans
Deferred tax assets
Liabilities:
Reserve for unfunded commitments
Stockholders' equity:
Retained earnings, net of tax
Balance at
December 31, 2021
Adjustments
due to
Adoption of
ASC 326
Balance at
January 1, 2022
$
$
$
32,912 $
4,855
2,135 $
977
1,203 $
1,045 $
35,047
5,832
2,248
181,329 $
(2,204) $
179,125
In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase
in over a three-year period the day-one adverse regulatory capital effects of ASU 2016-13. Additionally, in March 2020, the U.S. federal bank regulatory
agencies issued an interim final rule that provided banking organizations that adopted CECL in the 2020 an option to delay the estimated CECL impact on
regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better
focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the novel coronavirus
disease 2019 (“COVID-19”) pandemic. As a result, entities that adopted CECL in 2020 had the option to gradually phase in the full effect of CECL on
regulatory capital over a five-year transition period. For entities who adopted CECL after 2020, the three-year phase-in transition provision is available if
any entity experiences a reduction in retained earnings due to CECL adoption as of the beginning of the fiscal year in which the institution adopts CECL
and makes an election to use this phase-in option. Effective January 1, 2022, the Company adopted ASU 2016-13, reflected the full effect of CECL at
December 31, 2022, and did not elect the three-year CECL phase-in option on regulatory capital.
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350). This Update simplifies how an entity is required to test
goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied
fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendments in this Update are required for public business entities
and other entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent
measurement of goodwill. As a result, under this Update, “an entity should perform its annual, or interim, goodwill impairment test by comparing the fair
value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.” The Company
adopted this ASU on December 31, 2022. Adoption of ASU 2017-04 did not have a significant impact on the Company’s consolidated financial statements.
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In February 2020, the FASB issued ASU 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC
Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No.
2016-02, Leases (Topic 842) (SEC Update). This is an amendment to add the SEC Staff guidance on CECL) to the FASB codification. It contains guidance
on what the SEC would expect the Company to perform and document when measuring and recording its allowance for credit losses for financial assets
recorded at amortized cost. The Company implemented CECL on January 1, 2022. Upon adoption of CECL, the Company recorded a $2.1 million
transition adjustment for the allowance for credit losses through retained earnings.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial
Reporting, which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank
Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”). This pronouncement is applicable to all
companies with contracts or hedging relationships that reference an interest rate that is expected to be discontinued. The ASU provides companies with
optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued.
Companies can apply the ASU immediately. However, the guidance will only be available for a limited time. The optional relief generally does not apply to
contract modifications made, sales and transfers of HTM debt securities, and hedging relationships entered into or evaluated after December 31, 2022. The
guidance was effective upon issuance and generally can be applied through December 31, 2022. In December 2022, the FASB issued 2022-06, Reference
Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, to defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024,
after which entities will no longer be permitted to apply the relief in Topic 848. The LIBOR termination date was June 30, 2023. The Company converted
all loans indexed under LIBOR to CME Term SOFR with relevant spread adjustment as the alternative reference rate beginning on and after July 3,
2023. No LIBOR indexed loans are being originated. The Company has several issuances of LIBOR based long-term debt and subordinated debentures.
Refer to Notes 9 and 10 of the Company’s consolidated financial statements included in this Annual Report.
In October 2021, the FASB issued ASU 2021-08, Accounting for Contract Assets and Contract Liabilities, to require an acquirer to recognize and measure
contract assets and contract liabilities acquired in a business combination in accordance with revenue recognition guidance as if the acquirer had originated
the contract. That is, such acquired contracts will not be measured at fair value. The Update is effective for public companies in fiscal years starting after
December 15, 2022. The Company adopted ASU 2021-08 on January 1, 2023 and the adoption did not have a material impact on the Company's
consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326). The standard addresses the following: 1) eliminates the
accounting guidance for TDRs, and will require an entity to determine whether a modification results in a new loan or a continuation of an existing loan, 2)
expands disclosures related to modifications, and 3) will require disclosure of current period gross write-offs of financing receivables within the vintage
disclosures table. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those
fiscal years and are applied prospectively, except with respect to the recognition and measurement of TDRs, where an entity has the option to apply a
modified retrospective transition method. Early adoption of the amendments in this ASU is permitted. An entity may elect to early adopt the amendments
regarding TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company adopted ASU 2022-
02 on January 1, 2023 and see Note 5 for the disclosure impact.
Recently Issued; Not Yet Effective
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820)—Fair Value Measurement of Equity Securities Subject to Contractual
Sale Restrictions. This pronouncement clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of
the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 also clarifies that an entity cannot, as a separate unit of account,
recognize and measure a contractual sale restriction and requires certain new disclosures for equity securities subject to contractual sale restrictions.
ASU 2022-03 will be effective for the Company on January 1, 2024. Adoption of ASU 2022-03 is not expected to have a material impact on the
Company’s consolidated financial statements.
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323). This Update permits reporting entities to
elect to account for their tax equity investments using the proportional amortization method if certain conditions are met. It requires that a liability be
recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event
when that contingent event becomes probable. The reporting entity needs to disclose the nature of its tax equity investments and the effect of its tax equity
investments on its financial position and results of operations. ASU 2023-02 will be effective for the Company in fiscal years beginning after December
15, 2023, including interim periods within those fiscal years. Adoption of ASU 2023-02 is not expected to have a material impact on the Company's
consolidated financial statements.
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements. This pronouncement amends the FASB Accounting Standards Codification to
reflect updates and simplifications to certain disclosure requirements referred to the FASB by the SEC in 2018, including disclosures for the statement of
cash flows, earnings per share, commitments, debt and equity instruments, and certain industry information, among other things. Each amendment is
effective when the related disclosure is effectively removed from Regulations S-X or S-K; early adoption is prohibited. All amendments should be applied
prospectively. If the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K by June 30, 2027, the pending amendments
will be removed and will not become effective for any entity.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures. This Update enhances the
transparency and decision usefulness of income tax disclosures. The amendments in this Update require the following: 1) consistent categories and greater
disaggregation of information in the rate reconciliation, and 2) income taxes paid disaggregated by jurisdiction. The amendments in the ASU are effective
for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made
available for issuance. The amendments in this Update should be applied on a prospective basis. Retrospective application is permitted. Adoption of ASU
2023-09 is not expected to have a material impact on the Company's consolidated financial statements.
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NOTE 3 – ACQUISITIONS
Completion of Acquisition of Certain Assets and Liabilities of the Honolulu, Hawaii Branch Office of Bank of the Orient
On January 14, 2022, the Company completed the acquisition of the Hawaii Branch from BOTO. The assets and liabilities, both tangible and intangible,
were recorded at their estimated fair values as of January 14, 2022. The total fair value of assets acquired approximated $8.5 million, which included
$312,000 in cash and cash equivalents, $7.4 million in selected performing loans, $729,000 in core deposit intangible assets and $64,000 in other assets.
The total fair value of liabilities assumed was $81.8 million, which included $81.7 million in deposits, $27,000 in certificate of deposit premium, and
$90,000 in other liabilities. The Bank received $71.0 million in cash in connection with the acquisition, which represented consideration for the deposits
assumed by the Bank, partially offset by the purchase price of the assets acquired and the premium paid.
The Company acquired Hawaii Branch from BOTO to strategically establish a presence in the Hawaiian Islands area. Goodwill in the amount of
$2.3 million and core deposit intangible of $729,000 was recognized in connection with this acquisition. Goodwill represents the future economic benefits
arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from
the combination of the two entities. Goodwill is not deductible for income tax purposes.
The following table represents the assets acquired and liabilities assumed from the Hawaii Branch as of January 14, 2022 and the fair value adjustments
and amounts recorded by the Company under the acquisition method of accounting:
(dollars in thousands)
Assets acquired
Cash and cash equivalents
Loans, gross
Bank premises and equipment
Core deposit intangible
Other assets
Total assets acquired
Liabilities assumed
Deposits
Escrow Payable
Other liabilities
Total liabilities assumed
Excess of assets acquired over liabilities assumed
Cash received
Goodwill recognized
BOTO
Book Value
Fair Value
Adjustments
Fair
Value
$
$
$
$
312 $
7,352
12
—
412
8,088 $
81,673 $
2
460
82,135
(74,047)
8,088 $
— $
38
—
729
(360)
407 $
27 $
—
(372)
(345)
752
407
$
312
7,390
12
729
52
8,495
81,700
2
88
81,790
(73,295)
71,040
2,255
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The Company accounted for this transaction under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which
requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition.
The loan portfolio of the Hawaii branch was recorded at fair value at the date of acquisition with the assistance of a third-party valuation. A valuation of the
loan portfolio was performed as of the acquisition date to assess the fair value of the loan portfolio. The loan portfolio was segmented into two groups;
loans with credit deterioration and loans without credit deterioration, and then split further by loan type. There were no loans acquired with credit
deterioration. The fair value was calculated on an individual loan basis using a DCF analysis. The discount rate utilized was based on a weighted average
cost of capital, considering the cost of equity and cost of debt. Also factored into the fair value estimates were loss rates, recovery period and prepayment
rates based on industry standards.
The Company also determined the fair value of the core deposit intangible, premises and equipment and deposits with the assistance of third-party
valuations.
The core deposit intangible on non-maturing deposits was determined by evaluating the underlying characteristics of the deposit relationships, including
customer attrition, deposit interest rates, service charge income, overhead expense and costs of alternative funding. Since the fair value of intangible assets
are calculated as if they were stand-alone assets, the presumption is that a hypothetical buyer of the intangible asset would be able to take advantage of
potential tax benefits resulting from the asset purchase. The value of the benefit is the present value over the period of the tax benefit, using the discount
rate applicable to the asset.
In determining the fair value of certificates of deposit, a DCF analysis was used, which involved present valuing the contractual payments over the
remaining life of the certificates of deposit at market-based interest rates.
Third-party acquisition related expenses are recognized as incurred and continue until the acquired system is converted and operational functions become
fully integrated.
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NOTE 4 - INVESTMENT SECURITIES
The following table summarizes the amortized cost and fair value of available for sale (“AFS”) securities and held to maturity (“HTM”) securities at
December 31, 2023 and 2022, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:
(dollars in thousands)
December 31, 2023
Available for sale
Government agency securities
SBA agency securities
Mortgage-backed securities: residential
Collateralized mortgage obligations: residential
Collateralized mortgage obligations: commercial
Commercial paper
Corporate debt securities
Municipal securities
Total
Held to maturity
Municipal taxable securities
Municipal securities
Total
(dollars in thousands)
December 31, 2022
Available for sale
Government agency securities
SBA agency securities
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
Collateralized mortgage obligations: residential
Collateralized mortgage obligations: commercial
Commercial paper
Corporate debt securities
Municipal securities
Total
Held to maturity
Municipal taxable securities
Municipal securities
Total
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
$
$
$
$
8,705 $
13,289
40,507
94,071
69,941
73,121
34,800
12,636
347,070 $
501 $
4,708
5,209 $
— $
144
—
454
22
—
—
—
620 $
3 $
—
3 $
$
$
$
$
5,012 $
2,634
44,809
4,887
82,759
44,591
49,551
41,176
12,669
288,088 $
1,003 $
4,726
5,729 $
— $
—
—
—
—
—
2
1
—
3 $
7 $
—
7 $
Fair
Value
8,161
13,217
34,652
82,327
67,299
73,105
30,691
9,509
318,961
(544) $
(216)
(5,855)
(12,198)
(2,664)
(16)
(4,109)
(3,127)
(28,729) $
— $
(115)
(115) $
504
4,593
5,097
Fair
Value
4,495
2,411
38,057
4,871
69,903
41,690
49,537
37,012
8,854
256,830
(517) $
(223)
(6,752)
(16)
(12,856)
(2,901)
(16)
(4,165)
(3,815)
(31,261) $
(3) $
(170)
(173) $
1,007
4,556
5,563
Gross
Amortized Unrealized Unrealized
Gains
Losses
Gross
Cost
There was no sale of investment securities during the years ended December 31, 2023, 2022, and 2021.
At December 31, 2023, we pledged investment securities with a fair value of $95.2 million for certificates of deposit from the state of California. One
security with a fair value of $61,000 and $76,000 was pledged to secure a local agency deposit at December 31, 2023 and 2022.
Accrued interest receivable for investment debt securities at December 31, 2023 and 2022 totaled $962,000 and $810,000.
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The amortized cost and fair value of the investment securities portfolio as of December 31, 2023 and 2022 are shown by expected maturity below.
Mortgage-backed securities are classified in accordance with their estimated average life. Expected maturities may differ from contractual maturities if
borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
Less than One Year
Amortized
Cost
Fair Value
More than One Year to
Five Years
More than Five Years to
Ten Years
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
More than Ten Years
Amortized
Cost
Fair Value
Total
Amortized
Cost
Fair Value
$
$
8,705
2,292
$
8,161
2,095
—
10,997
$
—
11,122
$
$
—
—
$
—
—
8,705
13,289
$
(dollars in thousands)
December 31, 2023
Government agency securities
SBA securities
Mortgage-backed securities:
residential
Collateralized mortgage
obligations: residential
Collateralized mortgage
obligations: commercial
Commercial paper
Corporate debt securities
Municipal securities
Total available for sale
Municipal taxable securities
Municipal securities
Total held to maturity
(dollars in thousands)
December 31, 2022
Government agency securities
SBA securities
Mortgage-backed securities:
residential
Mortgage-backed securities:
commercial
Collateralized mortgage
obligations: residential
Collateralized mortgage
obligations: commercial
Commercial paper
Corporate debt securities
Municipal securities
Total available for sale
Municipal taxable securities
Municipal securities
Total held to maturity
$
$
$
$
$
$
$
$
$
—
—
—
18
$
$
$
$
3,014
73,121
—
—
76,153
—
—
—
—
—
—
—
—
—
—
—
17
3,018
73,105
—
—
76,140
—
—
—
—
—
—
—
—
$
$
$
$
—
49,551
3,705
—
53,256
501
—
501
$
$
$
—
49,537
3,706
—
53,243
498
—
498
$
$
$
11,023
36,876
20,296
—
12,912
—
92,104
501
—
501
$
$
$
9,986
35,758
18,481
—
12,491
—
86,972
504
—
504
$
$
$
19,762
57,177
46,631
—
19,249
—
153,816
—
2,952
2,952
$
$
$
16,965
46,552
45,800
—
16,232
—
136,671
—
2,873
2,873
$
$
$
9,722
7,701
—
—
—
2,639
12,636
24,997
—
1,756
1,756
$
$
$
—
—
—
1,968
9,509
19,178
—
1,720
1,720
$
$
$
40,507
94,071
69,941
73,121
34,800
12,636
347,070
501
4,708
5,209
$
$
$
$
5,012
2,634
$
4,495
2,411
$
—
—
$
—
—
$
—
—
$
—
—
$
5,012
2,634
13,013
11,598
29,114
24,361
2,682
2,098
44,809
4,887
20,687
16,382
—
11,355
—
73,970
502
—
502
$
$
$
4,871
19,646
14,644
—
10,806
—
68,471
509
—
509
—
—
62,072
50,257
28,209
—
23,454
—
142,849
—
1,739
1,739
$
$
$
27,046
—
20,662
—
122,326
—
1,692
1,692
$
$
$
$
$
$
—
—
—
—
2,662
12,669
18,013
—
2,987
2,987
$
$
$
—
—
—
—
1,838
8,854
12,790
—
2,864
2,864
$
$
$
4,887
82,759
44,591
49,551
41,176
12,669
288,088
1,003
4,726
5,729
$
$
$
8,161
13,217
34,652
82,327
67,299
73,105
30,691
9,509
318,961
504
4,593
5,097
4,495
2,411
38,057
4,871
69,903
41,690
49,537
37,012
8,854
256,830
1,007
4,556
5,563
The securities that were in an unrealized loss position at December 31, 2023, and December 31, 2022, were evaluated to determine whether the decline in
fair value below the amortized cost basis resulted from a credit loss or other factors. For a discussion of the factors and criteria the Company uses in
analyzing securities for impairment related to credit losses, see Note 2 Summary of Significant Accounting Policies - Allowance for Credit Losses on
Available-for-Sale Securities and Held-to-Maturity Securities. At December 31, 2023 and 2022, there was no reserve of credit losses on the HTM securities
portfolio.
Based on the Company’s review of its debt securities in an unrealized loss position, the Company concluded the unrealized losses were due to non-credit
factors primarily attributed to yield curve movement, together with widened liquidity spreads. The issuers have not, to the Company's knowledge,
established any cause for default on these securities. All the securities that the Company owned were investment grade at December 31, 2023. At December
31, 2023, unrealized losses of $28.7 million comprised of $18.1 million, or 62.8%, residential mortgage-backed securities and collateralized mortgage
obligations, $4.1 million, or 14.3%, corporate debt securities, $3.1 million, or 10.9%, municipal securities, $2.7 million, or 9.3%, commercial collateralized
mortgage obligations, and $760,000, or 2.6%, government agency securities and SBA securities. The Company expects to recover the amortized cost basis
of its securities and has no present intent to sell and will not be required to sell securities that have declined below their cost before their anticipated
recovery based on the Company’s current financial condition.
96
Table of Contents
The following tables show the related fair value and the gross unrealized losses of the Company's investment securities, aggregated by investment
category and the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2023, and December 31,
2022:
(dollars in thousands)
December 31, 2023
Government agency securities
SBA securities
Mortgage-backed securities: residential
Collateralized mortgage obligations:
residential
Collateralized mortgage obligations:
commercial
Commercial paper (1)
Corporate debt securities
Municipal securities
Total available for sale
$
Less than Twelve Months
Twelve Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
4,238 $
5,102
—
(72) $
(18)
—
3,923 $
2,094
34,652
(472) $
(198)
(5,855)
8,161 $
7,196
34,652
(544)
(216)
(5,855)
2,597
(37)
60,275
(12,161)
62,872
(12,198)
18,463
53,211
—
—
83,611 $
(70)
(16)
—
—
(213) $
35,077
—
30,691
9,509
176,221 $
(2,594)
—
(4,109)
(3,127)
(28,516) $
53,540
53,211
30,691
9,509
259,832 $
Municipal securities
Total held to maturity
The Company held $19.9 million of commercial paper where the recorded value and fair value are equal as of December 31, 2023.
(1)
$
$
1,397 $
1,397 $
(19) $
(19) $
3,196 $
3,196 $
(96) $
(96) $
4,593 $
4,593 $
(dollars in thousands)
December 31, 2022
Government agency securities
SBA securities
Mortgage-backed securities: residential
Mortgage-backed securities: commercial
Collateralized mortgage obligations:
residential
Collateralized mortgage obligations:
commercial
Commercial paper (1)
Corporate debt securities
Municipal securities
Total available for sale
Municipal taxable securities
Municipal securities
$
$
$
Less than Twelve Months
Twelve Months or More
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
354 $
2,411
5,535
4,871
(24) $
(223)
(362)
(16)
4,141 $
—
32,522
—
(493) $
—
(6,390)
—
4,495 $
2,411
38,057
4,871
(517)
(223)
(6,752)
(16)
27,050
(1,842)
39,815
(11,014)
66,865
(12,856)
18,741
39,624
22,977
—
121,563 $
(790)
(16)
(1,843)
—
(5,116) $
22,949
—
10,330
8,854
118,611 $
(2,111)
—
(2,322)
(3,815)
(26,145) $
41,690
39,624
33,307
8,854
240,174 $
Total held to maturity
The Company held $9.9 million of commercial paper where the recorded value and fair value are equal as of December 31, 2022.
(1)
$
— $
—
— $
— $
—
— $
498 $
4,556
5,054 $
498 $
4,556
5,054 $
(3) $
(170)
(173) $
97
(2,664)
(16)
(4,109)
(3,127)
(28,729)
(115)
(115)
(2,901)
(16)
(4,165)
(3,815)
(31,261)
(3)
(170)
(173)
Table of Contents
NOTE 5 - LOANS AND ALLOWANCE FOR CREDIT LOSSES - LOANS
The Company's loan portfolio consists primarily of loans to borrowers within the Los Angeles, California metropolitan area, the New York City
metropolitan area, Chicago, Illinois metropolitan area and Las Vegas, Nevada. Although the Company seeks to avoid concentrations of loans to a single
industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company's
market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries.
The types of loans in the Company's consolidated balance sheets as of December 31, 2023, and December 31, 2022 were as follows:
(dollars in thousands)
Loans: (1)
Construction and land development
Commercial real estate (2)
Single-family residential mortgages
Commercial and industrial
SBA
Other loans
Total loans (1)
Allowance for loan losses
Total loans, net
2023
2022
$181,469
1,167,857
1,487,796
130,096
52,074
12,569
3,031,861 $
(41,903)
2,989,958 $
$276,876
1,312,132
1,464,108
201,223
61,411
20,699
3,336,449
(41,076)
3,295,373
$
$
(1)
(2)
net of discounts on acquired loans and deferred fees and costs
includes non-farm & non-residential real estate loans, multifamily resident and 1-4 family single-family residential loan for a business purpose
A summary of the changes in the ACL for the years indicated follows:
(dollars in thousands)
2023
Reserve for
unfunded
loan
commitments
Allowance
for loan
losses
Allowance
for credit
losses
Allowance
for loan
losses
2022
Reserve for
unfunded
loan
commitments
Allowance
for credit
losses
Allowance
for loan
losses
2021 (1
Reserve for
unfunded
loan
commitments
)
Allowance
for credit
losses
$
Beginning balance
ASU 2016-13
transition adjustment
Adjusted beginning
balance
Provision/(reversal)
for credit losses
Less loans charged-off
Recoveries on loans
charged-off
Ending balance
$
$
41,076 $
1,156 $
42,232 $
32,912 $
1,203 $
34,115 $
29,337 $
1,383 $
30,720
—
—
—
2,135
1,045
3,180
—
—
—
41,076 $
1,156 $
42,232 $
35,047 $
2,248 $
37,295 $
29,337 $
1,383 $
30,720
3,878
(3,194)
143
41,903 $
(516)
—
3,362
(3,194)
6,027
(256)
(1,092)
—
4,935
(256)
3,959
(627)
(180)
—
3,779
(627)
—
640 $
143
42,543 $
258
41,076 $
—
1,156 $
258
42,232 $
243
32,912 $
—
1,203 $
243
34,115
(1) Reserve was under the ALL method in accordance with ASC 450 and ASC 310.
The following tables present the activity in the ALL by portfolio segment for the years ended December 31, 2023 and 2022:
(dollars in thousands)
December 31, 2023
Construction and
land development
Commercial real
estate
Single-family
residential
mortgages
Commercial and
industrial
SBA Other Total
Allowance for loan losses:
$
Beginning of year
(Reversals)/provisions
for credit losses
Charge-offs
Recoveries
Ending allowance
balance
2,638 $
17,657 $
17,640 $
1,804 $
621 $
716 $ 41,076
(1,279)
(140)
—
2,626
(2,537)
80
2,570
(93)
—
(458)
—
2
636
(62)
1
(217)
(362)
60
3,878
(3,194)
143
$
1,219 $
17,826 $
20,117 $
1,348 $
1,196 $
197 $ 41,903
98
Table of Contents
(dollars in thousands)
December 31, 2022
Construction and
land development
Commercial real
estate
Single-family
residential
mortgages
Commercial and
industrial
SBA Other Total
Allowance for loan losses:
$
Beginning of year
ASU 2016-13
Transition Adjustment
Adjusted beginning
balance
(Reversals)/provisions
for credit losses
Charge-offs
Recoveries
Ending allowance
balance
$
$
4,150 $
16,603 $
7,839 $
2,813 $
980 $
527 $ 32,912
314
(2,662)
3,960
(188)
(416)
1,127
2,135
4,464 $
13,941 $
11,799 $
2,625 $
564 $ 1,654 $ 35,047
(1,826)
—
—
3,716
—
—
5,841
—
—
(818)
(5)
2
(156)
(14)
227
(730)
(237)
29
6,027
(256)
258
2,638 $
17,657 $
17,640 $
1,804 $
621 $
716 $ 41,076
The following table presents the activity in the ALL by portfolio segment for the year ended December 31, 2021, prior to the adoption of ASU 2016-13:
(dollars in thousands)
December 31, 2021
Allowance for loan
losses:
Construction and
land development
Commercial real
estate
Single-family
residential
mortgages
Commercial and
industrial
SBA Other Total
Beginning of year
$
Provisions/(reversals)
Charge-offs
Recoveries
Ending allowance
balance
$
2,472 $
1,678
—
—
4,150 $
13,719 $
2,951
(67)
—
16,603 $
8,486 $
(647)
—
—
7,839 $
3,690 $
(533)
(501)
157
927 $
53
—
—
43 $ 29,337
3,959
457
(627)
(59)
243
86
2,813 $
980 $
527 $ 32,912
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current
financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The
Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as
commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company
uses the following definitions for risk ratings:
Pass - Loans classified as pass include loans not meeting the risk ratings defined below.
Special Mention - Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.
Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the
distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
99
Table of Contents
The following tables summarize the Company's loan held for investment as of December 31, 2023 and 2022 by loan portfolio segments, risk ratings and
vintage year. The vintage year is the year of origination, renewal or major modification. Revolving loans that are converted to term loans presented in the
table below are excluded from the term loans by vintage year columns.
(dollars in thousands)
Term Loan by Vintage
December 31, 2023
Real estate:
Construction and land
2023
2022
2021
2020
2019
Prior
Revolving
Period
Total
Revolving
Converted
to Term
During the
— $
—
—
—
— $
— $
— $
—
—
—
— $
— $
1,720 $
—
44
—
1,764 $
— $
development
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
$ 127,602 $
—
—
—
$ 127,602 $
— $
$
Commercial real estate
$
25,880 $
—
—
—
25,880 $
— $
12,168 $
11,676
—
—
23,844 $
— $
3,919 $
—
—
—
3,919 $
— $
192 $
—
—
—
192 $
— $
32 $
—
—
—
32 $
140 $
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
$
$
—
301
—
90,126 $ 423,564 $ 186,904 $ 175,650 $
—
11,410
—
94,796 $ 152,847 $
4,880
7,719
17,365
2,295
—
—
90,427 $ 423,564 $ 186,904 $ 187,060 $ 104,810 $ 175,092 $
— $
—
—
—
—
—
—
2,078 $
459 $
— $
— $
— $
Single-family
residential mortgages
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
Commercial:
Commercial and
industrial
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
SBA
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
Other:
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
Total by risk rating:
Pass
Special mention
Substandard
Doubtful
Total loans
Total YTD gross
write-offs
—
—
—
$ 156,372 $ 593,539 $ 239,502 $ 125,346 $
—
—
719
4,985
—
—
$ 156,372 $ 594,258 $ 240,879 $ 130,331 $
93 $
— $
$
619
758
—
— $
— $
—
545
—
83,002 $ 265,050 $
3,855
11,740
—
83,547 $ 280,645 $
— $
— $
$
$
$
$
$
$
$
$
$
1,305 $
—
—
—
1,305 $
— $
5,642 $
—
—
—
5,642 $
— $
193 $
—
—
—
193 $
— $
3,283 $
—
87
—
3,370 $
— $
6,281 $
—
—
—
6,281 $
— $
11,023 $
—
—
—
11,023 $
— $
10,037 $
331
—
—
10,368 $
— $
2,727 $
—
80
—
2,807 $
79 $
8,813 $
—
28
—
8,841 $
273 $
2,901 $
—
1,410
—
4,311 $
— $
2,324 $
—
—
—
2,324 $
— $
674 $
—
7
—
681 $
10 $
2,049 $
—
7
—
2,056 $
— $
4,588 $
—
85
—
4,673 $
— $
29 $
—
—
—
29 $
— $
4,700 $
—
4,952
—
99,339 $
2,737
1,045
—
9,652 $ 103,121 $
— $
— $
13,783 $
1,025
3,236
—
18,044 $
62 $
— $
—
—
—
— $
— $
— $
—
—
—
— $
— $
18 $
—
—
—
18 $
— $
$ 381,240 $ 1,060,016 $ 463,705 $ 310,814 $ 184,656 $ 436,412 $ 101,077 $
2,737
1,089
—
$ 381,541 $ 1,060,902 $ 477,117 $ 328,626 $ 195,307 $ 483,465 $ 104,903 $
9,760
37,293
—
—
17,812
—
12,626
786
—
7,719
2,932
—
—
301
—
—
886
—
— $ 169,793
11,676
—
—
—
—
—
— $ 181,469
140
— $
— $ 1,123,887
12,599
—
31,371
—
—
—
— $ 1,167,857
2,537
— $
— $ 1,464,531
—
4,474
18,791
—
—
—
— $ 1,487,796
93
— $
— $ 119,858
2,737
—
—
7,501
—
—
— $ 130,096
—
— $
— $
—
—
—
— $
— $
— $
—
—
—
— $
— $
47,397
1,356
3,321
—
52,074
62
12,454
—
115
—
12,569
362
— $ 2,937,920
32,842
—
61,099
—
—
—
— $ 3,031,861
$
— $
2,157 $
273 $
562 $
— $
202 $
— $
— $
3,194
100
Table of Contents
(Dollars in thousands)
Term Loan by Vintage
December 31, 2022
Real estate:
Construction and land
development
2022
2021
2020
2019
2018
Prior
Revolving
Period
Total
Revolving
Converted
to Term
During the
$
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
$
$
Commercial real estate
$
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
Single-family
residential mortgages
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
Commercial:
Commercial and
industrial
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
SBA
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
Other:
Pass
Special mention
Substandard
Doubtful
Total
YTD gross write-offs
Total by risk rating:
Pass
Special mention
Substandard
Doubtful
Total loans
Total YTD gross
write-offs
125,216 $
—
—
—
125,216 $
— $
52,262 $
—
—
—
52,262 $
— $
99,016 $
—
—
—
99,016 $
— $
201 $
—
—
—
201 $
— $
— $
—
—
—
— $
— $
40 $
—
141
—
181 $
— $
—
287
—
479,304 $ 293,058 $ 195,051 $ 110,442 $
—
2,329
—
479,591 $ 293,058 $ 212,983 $ 112,771 $
— $
9,280
8,652
—
—
—
—
— $
— $
— $
—
222
—
73,013 $ 117,068 $
—
23,426
—
73,235 $ 140,494 $
— $
— $
—
—
—
637,893 $ 255,529 $ 137,964 $
—
3,954
—
637,893 $ 255,529 $ 141,918 $
— $
—
—
—
— $
— $
—
—
—
96,355 $ 134,415 $ 182,893 $
—
3,925
452
7,631
—
—
96,355 $ 145,971 $ 183,345 $
— $
— $
— $
— $
—
—
—
— $
— $
— $
—
—
—
— $
— $
2,992 $
—
105
—
3,097 $
— $
8,038 $
—
—
—
8,038 $
— $
14,922 $
—
—
—
14,922 $
— $
4,224 $
—
105
—
4,329 $
— $
7,513 $
5,987
—
—
13,500 $
— $
10,664 $
—
—
—
10,664 $
— $
14,684 $
—
48
—
14,732 $
237 $
4,448 $
—
1,600
—
6,048 $
— $
6,496 $
—
—
—
6,496 $
— $
1,505 $
—
10
—
1,515 $
— $
3,470 $
—
16
—
3,486 $
5 $
4,688 $
—
91
—
4,779 $
— $
90 $
—
—
—
90 $
— $
1,016 $
1,638
—
—
2,654 $
— $
2,579 $
—
1,017
—
3,596 $
— $
7 $
—
—
—
7 $
— $
8,827 $ 129,483 $
3,577
17,805
7,380
339
—
—
26,971 $ 140,440 $
— $
— $
16,793 $
—
4,161
—
20,954 $
14 $
— $
—
—
—
— $
— $
— $
—
—
—
— $
— $
26 $
—
—
—
26 $
— $
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$ 1,269,597 $ 633,710 $ 444,480 $ 215,246 $ 211,030 $ 325,621 $ 132,501 $
3,577
7,485
—
$ 1,269,989 $ 639,745 $ 467,976 $ 217,682 $ 225,463 $ 371,945 $ 143,563 $
17,805
28,519
—
9,280
14,216
—
—
2,436
—
5,563
8,870
—
5,987
48
—
—
392
—
— $ 276,735
—
—
141
—
—
—
— $ 276,876
—
— $
— $ 1,267,936
—
9,280
34,916
—
—
—
— $ 1,312,132
—
— $
— $ 1,448,041
—
3,925
12,142
—
—
—
— $ 1,464,108
—
— $
86 $ 162,881
29,007
—
9,335
—
—
—
86 $ 201,223
5
— $
— $
—
—
—
— $
— $
— $
—
—
—
— $
— $
56,142
—
5,269
—
61,411
14
20,536
—
163
—
20,699
237
86 $ 3,232,271
42,212
—
61,966
—
—
—
86 $ 3,336,449
$
— $
237 $
— $
5 $
— $
14 $
— $
— $
256
101
Table of Contents
The following tables present the aging of the recorded investment in past-due loans as of December 31, 2023 and 2022 by class of loans. Past due loans
presented in tables below also include non-accrual loans.
(dollars in thousands)
30-59
60-89
90 Days
Total
Loans Not
December 31, 2023
Days
Days
Or More Past Due Past Due
Non-
Accrual
Total
Loans
Loans (1)
Real estate:
Construction and land development
Commercial real estate
Single-family residential mortgages
Commercial:
Commercial and industrial
SBA
Other:
Real estate:
Single-family residential mortgage loans
held for sale
________________
(1)
Included in total loans
(dollars in thousands)
December 31, 2022
Real estate:
Construction and land development
Commercial real estate
Single-family residential mortgages
Commercial:
Commercial and industrial
SBA
Other:
Real estate:
Single-family residential mortgage loans
held for sale
(1)
Included in total loans
$
$
$
$
$
$
— $
1,341
9,050
1,544
356
160
12,451 $
— $
216
5,795
—
—
20
6,031 $
— $
1,582
15,134
— $
181,469 $
181,469 $
3,139 1,164,718 1,167,857
29,979 1,457,817 1,487,796
854
2,085
8
19,663 $
2,398
2,441
188
130,096
127,698
52,074
49,633
12,569
12,381
38,145 $ 2,993,716 $ 3,031,861 $
—
10,569
18,103
854
2,085
8
31,619
— $
— $
— $
— $
1,911 $
1,911 $
—
30-59
Days
60-89
90 Days
Total
Loans Not
Days
Or More Past Due Past Due
Non-
Accrual
Total
Loans
Loans (1)
— $
558
12,764
—
150
154
13,626 $
— $
240
2,555
545
1,017
76
4,433 $
141 $
1,191
4,100
7
1,228
99
6,766 $
141 $
276,876 $
276,735 $
1,989 1,310,143 1,312,132
19,419 1,444,689 1,464,108
552
2,395
329
201,223
200,671
61,411
59,016
20,699
20,370
24,825 $ 3,311,624 $ 3,336,449 $
141
13,189
5,936
713
2,245
99
22,323
— $
— $
— $
— $
— $
— $
—
The Company has no loans that are 90 days or more past due and still accruing at December 31, 2023 and December 31, 2022.
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The following tables present the loans on nonaccrual status as of December 31, 2023 and 2022:
(dollars in thousands)
December 31, 2023
(dollars in thousands)
December 31, 2022
Real estate:
Commercial real estate
Single-family residential mortgages
Commercial:
Commercial and industrial
SBA
Other:
Total
Real estate:
Construction and land development
Commercial real estate
Single-family residential mortgages
Commercial:
Commercial and industrial
SBA
Other:
Total
Nonaccrual
With No
Allowance
for Credit Loss
Nonaccrual
10,569
18,103
610
937
—
30,219 $
10,569
18,103
854
2,085
8
31,619
Nonaccrual
With No
Allowance
for Credit Loss
Nonaccrual
141 $
1,191
5,936
713
2,245
51
10,277 $
141
13,189
5,936
713
2,245
99
22,323
$
$
$
At December 31, 2023, nonaccrual commercial real estate loans comprised of $8.8 million collateralized by office, $1.4 million by warehouse, and
$360,000 by other.
No interest income was recognized on a cash basis during the years ended December 31, 2023 and 2022. We did not recognize any interest income on
nonaccrual loans during the years ended December 31, 2023 and December 31, 2022 while the loans were in nonaccrual status.
Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, or interest rate reduction.
The Company may provide multiple types of concessions on one loan. When principal forgiveness is provided, the amount of forgiveness is charged-off
against the allowance for loan losses.
There were no loans that were both experiencing financial difficulty and modified during the year ended December 31, 2023 and 2022.
There were no commitments to lend additional amounts at December 31, 2023 and 2022 to customers with outstanding modified loans. There were no
nonaccrual loans that were modified during the past twelve months that had payment defaults during the periods.
NOTE 6 - LOAN SERVICING
The mortgage loans and SBA loans being serviced for others are not reported as assets in the Company’s consolidated balance sheet. The principal balances
of the loans serviced for others are as follows for the dates indicated:
(dollars in thousands)
Loans serviced for others:
Mortgage loans
SBA loans
Commercial real estate loans
Construction loans
At December 31,
2023
2022
$
1,014,017 $
100,336
3,813
4,710
1,127,668
119,893
3,991
3,677
Loan servicing fees, net of amortization, totaled $2.6 million, $2.2 million and $684,000 for the years ended December 31, 2023, 2022 and 2021. Custodial
balances maintained in connection with the foregoing loan servicing (including in non-interest bearing deposits) totaled $6.4 million and $7.0 million as of
December 31, 2023 and 2022.
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When mortgage and SBA loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect
recorded in gains on sale of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All
classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest
income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.
Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a
valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a
portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income. During the
year ended December 31, 2021, the Company reversed an impairment allowance of $417,000 on mortgage servicing rights, which is included in other
income.
The following table presents the activity in serving assets for the years ended December 31, 2023, 2022, and 2021:
(dollars in thousands)
Servicing assets:
Beginning of period
Additions
Disposals
Amortized to expense
Impairment reversal
End of period
2023
2022
2021
Mortgage
Loans
SBA
Loans
Mortgage
Loans
SBA
Loans
Mortgage
Loans
SBA
Loans
$
$
7,354 $
176
(329)
(692)
—
6,509 $
2,167 $
58
(344)
(280)
—
1,601 $
8,748 $
532
(794)
(1,132)
—
7,354 $
2,769 $
239
(478)
(363)
—
2,167 $
10,529 $
1,920
(2,129)
(1,989)
417
8,748 $
3,436
441
(646)
(462)
—
2,769
Estimates of the loan servicing asset fair value are derived through a DCF analysis. Portfolio characteristics include loan delinquency rates, age of loans,
note rate and geography. The assumptions embedded in the valuation are obtained from a range of metrics utilized by active buyers in the market place.
The analysis accounts for recent transactions, and supply and demand within the market.
The fair value of servicing assets for mortgage loans was $12.1 million and $18.3 million as of December 31, 2023 and 2022, respectively. Fair value at
December 31, 2023 was determined using a discount rate of 11.23%, average prepayment speed of 7.91%, depending on the stratification of the specific
right, and a weighted-average default rate of 0.10%. Fair value at December 31, 2022 was determined using a discount rate of 11.10%, average prepayment
speed of 7.73%, depending on the stratification of the specific right, and a weighted-average default rate of 0.10%.
The fair value of servicing assets for SBA loans was $2.8 million and $3.5 million as of December 31, 2023 and 2022, respectively. Fair value at December
31, 2023 was determined using a discount rate of 8.5%, average prepayment speed of 17.68%, depending on the stratification of the specific right, and a
weighted-average default rate of 0.73%. Fair value at December 31, 2022 was determined using a discount rate of 8.5% and average prepayment speed of
16.79%, depending on the stratification of the specific right and a weighted-average default rate of 0.37%.
NOTE 7 - PREMISES AND EQUIPMENT
A summary of premises and equipment as of December 31, 2023 and 2022 follows:
(dollars in thousands)
2023
2022
Land
Building and improvements
Furniture, fixtures, and equipment
Leasehold improvements
Less accumulated depreciation and amortization
Construction in progress
$
$
8,974 $
15,549
8,411
7,696
40,630
(14,949)
3
25,684 $
8,974
15,523
8,339
6,775
39,611
(13,387)
785
27,009
Depreciation and leasehold amortization expense was $2.0 million, $2.0 million, and $1.9 million for 2023, 2022, and 2021, respectively.
A $32,000 gain on sale of fixed assets was recorded from the sale of an automobile during 2023. A $757,000 gain on sale of fixed assets was recorded
from the sale of a real estate asset during 2022, which was used to house staff while traveling.
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NOTE 8 - DEPOSITS
At December 31, 2023, the scheduled maturities of time deposits are as follows:
(dollars in thousands)
One year
Two to three years
Over three years
Total
December 31, 2023
1,994,517
$
6,689
1,204
2,002,410
$
Time deposits include deposits acquired through both retail and wholesale channels. Wholesale funding includes brokered deposits, collateralized deposits
from the State of California, and deposits acquired through internet listing services totaled $405.6 million at December 31, 2023. Retail deposits
include time deposits. Brokered time deposits were $254.9 million at December 31, 2023 and $255.0 million at December 31, 2022. Collateralized deposits
from the State of California totaled $80.0 million at December 31, 2023 and none at December 31, 2022. Time deposits acquired through internet listing
services totaled $61.4 million at December 31, 2023 and $10.7 million at December 31, 2022.
In addition, we offer retail deposit products where customers are able to achieve FDIC insurance for balances on deposit in excess of the $250,000 FDIC
limit through the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweeps (“ICS”) programs. Time deposits held through the
CDARS program were $135.7 million at December 31, 2023 and $17.7 million at December 31, 2022.
NOTE 9 - LONG-TERM DEBT
In November 2018, the Company issued $55.0 million of 6.18% fixed-to-floating rate subordinated notes, with a December 1, 2028 maturity date
(the “2028 Subordinated Notes”). The interest rate was fixed through December 1, 2023 and was scheduled to float at three-month CME Term SOFR plus
applicable tenor spread adjustment of 26 basis points plus 315 basis points thereafter. On December 1, 2023, the Company redeemed the 2028
Subordinated Notes at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest.
In March 2021, the Company issued $120.0 million of 4.00% fixed-to-floating rate subordinated notes, with an April 1, 2031 maturity date
(the “2031 Subordinated Notes”). The interest rate is fixed through April 1, 2026 and is scheduled to float at three-month SOFR plus 329 basis points
thereafter. The Company can redeem the 2031 Subordinated Notes beginning April 1, 2026. The 2031 Subordinated Notes are considered Tier 2 capital at
the Company.
Long-term debt and unamortized debt issuance costs were as follows as of the dates indicated:
2028 Subordinated Notes
2031 Subordinated Notes
Total
(dollars in thousands)
Principal
Unamortized
debt issuance
costs
Unamortized
debt issuance
costs
Principal
At December 31, 2023
At December 31, 2022
$
$
— $
120,000
120,000 $
— $
853
853 $
55,000 $
120,000
175,000 $
180
1,235
1,415
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The following table presents interest and amortization expense the Company incurred for the years ended December 31, 2023 and 2022:
(dollars in thousands)
Interest Expense:
Interest
Amortization
For the Year Ended December 31,
2023
2022
$
7,916 $
562
8,199
578
At December 31, 2023, the Company duly and punctually paid all payments and timely delivered both the annual reports and compliance certificate to the
Trustee as agreed. The Company was in compliance with all covenants under the long-term debt at December 31, 2023.
NOTE 10 - SUBORDINATED DEBENTURES
Subordinated debentures consist of subordinated debentures issued in connection with three separate trust preferred securities and totaled $14.9 million and
$14.7 million as of December 31, 2022 and 2023, respectively. Under the terms of our subordinated debentures issued in connection with the issuance of
trust preferred securities, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the long-
term debt. In addition, the Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed
five consecutive years. The subordinated debentures may be included in Tier 1 capital (with certain limitations applicable) under current regulatory
guidelines and interpretations. The Company may redeem the subordinated debentures, subject to prior approval by the Board of Governors of the Federal
Reserve System at 100% of the principal amount, plus accrued and unpaid interest. These subordinated debentures consist of the following and are
described in detail after the table below:
Issue
Date
Principal
Unamortized Recorded
Stated Rate
December 31,
2023
Stated
Amount
Valuation
Reserve
Value
Description
Effective Rate Maturity
(dollars in
thousands)
Subordinated
debentures
TFC Trust
FAIC Trust
December
22, 2006 $
December
15, 2004
December
15, 2004
$
5,155 $
1,189 $
3,966
7,217
842
6,375
Three-month CME Term SOFR plus
0.26% (a) plus 1.65%,
Three-month CME Term SOFR
0.26% (a) plus 2.25%
Three-month CME Term SOFR
0.26% (a) plus 2.10%
March 15,
2037
December
15, 2034
December
15, 2034
7.30%
7.90%
7.75%
PGBH Trust
Total
(a) Represents applicable tenor spread adjustment when the original Libor index was discontinued on June 30, 2023
5,155
17,527 $
558
2,589 $
4,597
14,938
In 2016, the Company, through the acquisition of TomatoBank and its holding company, TFC Holding Company (“TFC”), acquired TFC Statutory Trust
(the “TFC Trust”). TFC Trust issued 5,000 fixed-to-floating rate capital securities with an aggregate liquidation amount of $5.0 million to an independent
investor, and all of its common securities, with an aggregate liquidation amount of $155,000. TFC issued $5 million of subordinated debentures to
TFC Trust in exchange for ownership of all of the common securities of TFC Trust and the proceeds of the preferred securities sold by TFC Trust. The
Company is not considered the primary beneficiary of TFC trust (variable interest entity), therefore TFC Trust is not consolidated in the Company's
financial statements, but rather the subordinated debentures are shown as a liability. The Company also purchased an investment in the common stock of
TFC Trust for $155,000, which is included in other assets. At the close of this acquisition, a $1.9 million valuation reserve was recorded to arrive at its fair
market value, which is treated as a yield adjustment and amortized over the life of the security. The unamortized valuation reserve was $1.2 million at
December 31, 2023 and $1.3 million at December 31, 2022. The subordinated debentures have a variable rate of interest equal to three-month CME Term
SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 7.30% as of December 31, 2023, and three-month LIBOR plus 1.65%,
which was 6.42% at December 31, 2022.
In October 2018, the Company, through the acquisition of FAIC, acquired First American International Statutory Trust I (“FAIC Trust”). FAIC Trust issued
7,000 units of thirty-year fixed-to-floating rate capital securities with an aggregate liquidation amount of $7.0 million to an independent investor, and all of
its common securities, with an aggregate liquidation amount of $217,000. The Company is not considered the primary beneficiary of FAIC Trust (variable
interest entity), therefore FAIC Trust is not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a
liability. The Company purchased an investment in the common stock of FAIC Trust for $217,000, which is included in other assets. At the close of this
acquisition, a $1.2 million valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment and amortized over the
life of the security. The unamortized valuation reserve was $842,000 at December 31, 2023 and $918,000 at December 31, 2022. The subordinated
debentures have a variable rate of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was
7.90% as of December 31, 2023, and three-month LIBOR plus 2.25%, which was 7.02% at December 31, 2022.
In January 2020, the Company, through the acquisition of PGBH, acquired PGB Capital Trust I (“PGBH Trust”). PGBH Trust issued 5,000 units of fixed-
to-floating rate capital securities with an aggregate liquidation amount of $5 million to an independent investor, and all of its common securities, with an
aggregate liquidation amount of $155,000. The Company is not considered the primary beneficiary of PGBH Trust (variable interest entity), therefore
PGBH Trust is not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company
purchased an investment in the common stock of PGBH Trust for $155,000, which is included in other assets. At the close of this acquisition, a $763,000
valuation reserve recorded to arrive at it fair market value, which is treated as a yield adjustment and amortized over the life of the security. The
unamortized valuation reserve was $559,000 at December 31, 2023 and $610,000 at December 31, 2022. The subordinated debentures have a variable rate
of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 7.75% as of December 31,
2023, and three-month LIBOR plus 2.10%, which was 6.87% at December 31, 2022.
The Company paid interest expense of $1.3 million in 2023, $650,000 in 2022 and $377,000 in 2021. The amount of aggregate amortization expense
recognized was $218,000 in each of the years ended December 31, 2023, 2022 and 2021.
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For regulatory reporting purposes, the Federal Reserve Board has indicated that the capital securities qualify as Tier 1 capital of the Company subject to
previously specified limitations, until further notice. If regulators make a determination that the capital securities can no longer be considered in regulatory
capital, the securities become callable and the Company may redeem them.
At December 31, 2023, the Company duly and punctually paid all payments, maintained 100% ownership of the common securities, and did not incur any
additional indebtedness as agreed. The Company was in compliance with all covenants under all subordinated debentures at December 31, 2023.
NOTE 11 - BORROWING ARRANGEMENTS
The Company has established secured and unsecured lines of credit. The Company may borrow funds from time to time on a term or overnight basis from
the Federal Home Loan Bank of San Francisco (“FHLB”), the Federal Reserve Bank of San Francisco (“FRB”) and other financial institutions as indicated
below.
Federal Funds Arrangements with Commercial Banks. As of December 31, 2023, the Company may borrow on an unsecured basis, up to $92.0
million from other financial institutions.
Letter of Credit Arrangements. As of December 31, 2023, the Company had an unsecured commercial letter of credit line with another financial
institution for $2.0 million.
FRB Secured Line of Credit. As of December 31, 2023, the Bank had a secured borrowing capacity with the FRB of $42.3 million at December 31,
2023 collateralized by pledged loans with a carrying value of $62.8 million.
FHLB Secured Line of Credit and Advances. As of December 31, 2023, the Bank had a secured borrowing capacity with the FHLB of $1.0 billion
collateralized by pledged residential and commercial loans with a carrying value of $1.5 billion. At December 31, 2023, the Company had no overnight
advances and $150.0 million of long-term advances with an original term of 5 years at a weighted average rate of 1.18%. The Company paid interest
expenses of $2.9 million, $2.9 million and $1.8 million on such FHLB advances for the years ended December 31, 2023, 2022 and 2021, respectively.
There were no amounts outstanding under any of the other borrowing arrangements above as of December 31, 2023 except FHLB advances maturing in
2025.
NOTE 12 - INCOME TAXES
The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Income tax expense consists of the following:
(dollars in thousands)
2023
2022
2021
Current:
Federal
State
Total Current
Deferred:
Federal
State
Total Deferred
Total income tax expense
10,804 $
6,761
17,565
(288)
504
216
17,781 $
$
$
107
18,315 $
10,952
29,267
(1,756)
(493)
(2,249)
27,018 $
16,037
9,087
25,124
(1,148)
55
(1,093)
24,031
Table of Contents
A comparison of the federal statutory income tax rates to the Company's effective income tax rates for the years ended December 31 follows:
2023
2022
2021
(dollars in thousands)
Amount
Rate
Amount
Rate
Amount
Rate
Statutory federal tax
State tax, net of federal benefit
Tax-exempt income
Stock-based compensation
Other items, net
Total income tax expense
$
$
12,652
5,181
(399)
54
293
17,781
21.0% $
8.6%
(0.7)%
0.1%
0.5%
29.5% $
19,182
8,278
(355)
(396)
309
27,018
21.0% $
9.1%
(0.4)%
(0.4)%
0.3%
29.6% $
16,997
7,182
(285)
(404)
541
24,031
21.0%
8.9%
(0.4)%
(0.5)%
0.7%
29.7%
Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense
recognition. The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying balance sheets as of
December 31:
(dollars in thousands)
2023
2022
Deferred tax assets:
Allowance for credit losses
Stock-based compensation
Operating loss carryforwards
Unrealized loss on AFS securities
Lease liability
State tax
Other
Deferred tax liabilities:
Depreciation
Deferred loan costs
Acquisition accounting fair value adjustments
Mortgage servicing rights
Right of use asset
Other
Net deferred tax assets
$
$
13,011 $
472
32
8,597
9,539
1,444
1,237
34,332
(1,389)
(3,123)
(2,794)
(1,991)
(9,115)
(155)
(18,567)
15,765 $
12,834
546
154
9,614
8,149
2,426
917
34,640
(1,598)
(2,808)
(3,052)
(2,259)
(7,818)
(128)
(17,663)
16,977
At December 31, 2023, the Company has usable net operating loss carryforwards from acquisitions of $21,104 for federal and $5,570 for California income
tax purposes. Net operating loss carry forwards, to the extent not used, will begin to expire in 2028. The net operating loss carryforwards were generated
through acquisitions, and as a result, are substantially limited by Section 382 of the Internal Revenue Code. Benefits not expected to be realized due to the
limitation have been excluded from the deferred tax asset and net operating loss carryforward amounts noted above. Based on management's assessment,
the Company concluded that no valuation allowance was necessary for the Company's deferred tax assets as of December 31, 2023.
The Company files income tax returns in federal and various state jurisdictions. The Company is subject to examinations in federal jurisdiction for the
years ended after December 31, 2019. The statutes of limitations for state income tax returns remain open for tax years in accordance with each state's
statutes. The audit of the Company's New York State tax returns for the tax period from January 1, 2018 to December 31, 2020 was completed in August
2023. The Company paid additional tax and interest of $70,000 without penalties to settle the tax audit findings with New York State. The Company had no
material uncertain tax positions at December 31, 2023 and 2022, and recognized no material interest or penalties as part of income taxes for the years ended
December 31, 2023, 2022, and 2021.
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NOTE 13 - COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial
commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those
instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company's financial statements.
The Company's exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements.
As of December 31, 2023 and 2022, the Company had the following financial commitments whose contractual amount represents credit risk:
(dollars in thousands)
Commitments to make loans
Unused lines of credit
Commercial and similar letters of credit
Standby letters of credit
Total
2023
2022
Fixed
Rate
Variable
Rate
Fixed
Rate
Variable
Rate
$
$
614 $
10,629
90
1,626
12,959 $
77,230 $
95,686
3,814
1,061
177,791 $
1,141 $
13,730
1,154
1,577
17,602 $
128,680
197,314
867
1,061
327,922
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The
Company evaluates each client's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based
on management's credit evaluation of the customer.
The Company records a liability for lifetime expected losses on off-balance-sheet credit exposure that do not fit the definition of unconditionally cancelable
in accordance with ASC 326. The Company uses the loss rate and exposure of default framework to estimate a reserve for unfunded commitments. Loss
rates for the expected funded balances are determined based on the associated pooled loan analysis loss rate and the exposure at default is based on an
estimated utilization given default. The off-balance sheet commitment allowance were $640,000 and $1.2 million as of December 31, 2023 and December
31, 2022, respectively. The (reversal of)/provision for off-balance sheet commitments totaled were ($516,000) and $1.1 million for the years ended
December 31, 2023 and 2022.
Additionally, we have commitments to invest in certain affordable housing partnerships and SBIC funds that call for capital contributions up to an amount
specific in the partnership agreements. Such unfunded commitments totaled $3.3 million and $3.5 million as of December 31, 2023 and 2022.
The Company is involved in various matters of litigation, which have arisen in the ordinary course of business, and accruals for estimates of potential
losses have been provided when necessary and appropriate under generally accepted accounting principles. In the opinion of management, the disposition
of such pending litigation will not have a material effect on the Company's financial statements.
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NOTE 14 - LEASES
The Company leases several of its operating facilities under various non-cancellable operating leases expiring at various dates through 2037. The Company
is also responsible for common area maintenance, taxes, and insurance at the various branch locations.
Future minimum rent payments on the Company’s leases were as follows at December 31, 2023:
For the year ended December 31,:
(dollars in thousands)
2024
2025
2026
2027
2028
Thereafter
Total
Less amount of payment representing interest
Total present value of lease payments
$
$
$
4,728
5,109
5,121
4,998
4,052
10,699
34,707
(3,516)
31,191
The minimum rent payments shown above are given for the existing lease obligation and are not a forecast of future rental expense. Total rental expense,
recognized on a straight-line basis, was $5.7 million, $5.4 million, and $5.3 million for the years ended December 31, 2023, 2022, and 2021,
respectively. The Company received rental income of $570,000, $548,000, and $479,000 for the years ended December 31, 2023, 2022, and 2021,
respectively.
The following table presents the operating lease related assets and liabilities recorded on the consolidated balance sheets, and the weighted-average
remaining lease terms and discount rates as of December 31, 2023 and December 31, 2022:
(dollars in thousands)
Operating Leases
ROU assets
Lease liabilities
Weighted-average remaining lease term (in years)
Weighted-average discount rate
110
December 31,
2023
December 31,
2022
$
29,803
31,191
$
7.63
1.72%
25,447
26,523
7.91
2.19%
Table of Contents
NOTE 15 - RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates were as follows:
(dollars in thousands)
Beginning balance
Repayments
Balance re-categorized to non-related party
Ending balance
For the year ended December 31,
2023
2022
$
$
6,869 $
—
(6,869)
— $
8,441
(1,572)
—
6,869
Outstanding loan commitments to executive officers, directors and their related interests with whom they are associated were none and $1.6 million as of
December 31, 2023 and 2022, respectively.
Deposits from principal officers, directors, and their affiliates at December 31, 2023 and 2022 were $25.7 million and $88.1 million, respectively.
Certain directors and their affiliates own $6.0 million of RBB subordinated debentures as of December 31, 2023 and $8.1 million as of December 31, 2022.
NOTE 16 - STOCK OPTION PLAN
RBB Bancorp 2010 Stock Option Plan
Under the RBB Bancorp 2010 Stock Option Plan (the “2010 Plan”), the Company was permitted to grant awards to eligible persons in the form of qualified
and non-qualified stock options. The Company reserved up to 30% of the issued and outstanding shares of common stock as of the date the Company
adopted the 2010 Plan, or 3,494,478 shares, for issuance under the 2010 Plan. Following receipt of shareholder approval of the 2017 Omnibus Stock
Incentive Plan (the “OSIP”) in May 2017, no additional grants were made under the 2010 Plan. The 2010 Plan has been terminated and options that were
granted under the 2010 Plan have become subject to the OSIP. Awards that were granted under the 2010 Plan will remain exercisable pursuant to the terms
and conditions set forth in individual award agreements, but such awards will be assumed and administered under the OSIP. The 2010 Plan award
agreements allow for acceleration of exercise privileges of grants upon occurrence of a change in control of the Company. If a participant’s job is
terminated for cause, then all unvested awards expire at the date of termination.
Amended and Restated RBB Bancorp 2017 Omnibus Stock Incentive Plan
The Amended and Restated RBB Bancorp 2017 Omnibus Stock Incentive Plan (the “Amended OSIP”) was approved by the Company’s board of directors
in January 2019 and approved by the Company’s shareholders in May 2022. The Amended OSIP was designed to ensure continued availability of equity
awards that will assist the Company in attracting and retaining competent managerial personnel and rewarding key employees, directors and other service
providers for high levels of performance. Pursuant to the Amended OSIP, the Company’s board of directors are allowed to grant awards to eligible persons
in the form of qualified and non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights and other incentive awards. The
Company has reserved up to 30% of issued and outstanding shares of common stock as of the date the Company adopted the Amended OSIP, or
3,848,341 shares. As of December 31, 2023, there were 1,032,173 shares of common stock available for issuance under the Amended OSIP. This
represents 5.5% of the issued and outstanding shares of the Company’s common stock as of December 31, 2023. Awards vest, become exercisable and
contain such other terms and conditions as determined by the board of directors and set forth in individual agreements with the employees receiving the
awards. The Amended OSIP enables the board of directors to set specific performance criteria that must be met before an award vests. The Amended OSIP
allows for acceleration of vesting and exercise privileges of grants if a participant’s termination of employment is due to a change in control, death or total
disability. If a participant’s job is terminated for cause, then all awards expire at the date of termination.
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The Company recognized total stock-based compensation expense of $750,000, $848,000, and $1.1 million in 2023, 2022 and 2021. The total
unrecognized stock-based expense totaled $517,000, $581,000, and $1.4 million as of December 31, 2023, 2022, and 2021.
Stock Options
The recorded compensation expense for stock option was $246,000, $300,000, and $485,000 and the Company recognized income tax expense/(benefit)
of $3,000, ($587,000), and ($873,000) for the years ended December 31, 2023, 2022, and 2021, respectively. Unrecognized stock-based compensation
expense related to options was $179,000, $400,000, and $635,000 as of December 31, 2023, 2022, and 2021, respectively. Unrecognized stock-based
compensation expense will be recognized over a weighted-average period of 1.2 years as of December 31, 2023.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average
assumptions presented below for 2023, 2022 and 2021.
Expected volatility
Expected term (years)
Expected dividends
Risk free rate
Grant date fair value
March 2023
December
2022
May 2022
July 2021
January 2021
28.4%
8.0
2.92%
4.27%
$
5.49
28.9%
8.0
2.55%
4.00%
$
6.16
29.5%
6.0
2.52%
2.71%
$
5.28
31.6%
6.0
1.98%
0.48%
$
5.69
30.8%
6.0
1.86%
0.26%
4.14
$
The expected volatility was based on the historical volatility of the Company stock trading history. The expected term represents the estimated average
period of time that the options remain outstanding. The expected term represents the estimated average period of time that the options remain outstanding.
The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding. The
risk free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasury bonds over the expected term of the options.
A summary of the status of the Company's stock option plan as of December 31, 2023 and changes during the year ended is presented below:
(dollars in thousands, except for shares and per share data)
Shares
Weighted-
Average
Exercise
Price
Weighted-
Average
Remaining Aggregate
Intrinsic
Contractual
Value
Term in years
Outstanding at beginning of year
Granted
Exercised
Forfeited/cancelled
Outstanding at end of period
Options exercisable
454,610 $
30,000
(19,403)
(67,304)
397,903 $
16.97
19.87
15.18
15.04
17.61
3.86 $
332,232 $
17.26
3.05 $
703
657
The total fair value of the shares vested was $1.1 million, $1.1 million, and $1.2 million in 2023, 2022, and 2021, respectively. The number of unvested
stock options were 65,671, 127,005, and 237,500 with a weighted average grant date fair value of $4.99, $4.69, and $4.28 as of December 31, 2023,
2022 and 2021, respectively. The decrease of unvested stock options during 2023 was due to 56,334 stock options vested with a weighted average grant
date stock price of $18.40, 30,000 stock options forfeited with a weighted average grant date stock price of $19.87, 5,000 stock options exercised with a
weighted average grant date stock price of $17.74, offset by 30,000 stock options granted with a weighted average grant date stock price of $19.87.
Cash received from the exercise of 19,403 share options was $295,000 for the period ended December 31, 2023. Cash received from the exercise of
445,308 share options was $5.5 million for the period ended December 31, 2022. Cash received from the exercise of 302,744 share options was $3.5
million for the period ended December 31, 2021. The intrinsic value of options exercised was $90,000, $4.0 million, and $3.8 million in 2023, 2022, and
2021, respectively.
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Restricted Stock Units
The Company granted 32,248 restricted stock units at a closing price of $20.46 on January 18, 2023 to its directors and executive officers and 16,500
restricted stock units at a closing price of $13.93 on July 20, 2023 to its new president. These restricted stock units are scheduled to vest over a one year
period for shares granted to directors and a three-year period for shares granted to executive officers from the grant date. As of December 31, 2023, there
were 43,160 remaining unvested restricted stock units.
The recorded compensation expense for restricted stock units was $504,000 and $453,000 for the years ended December 31, 2023 and 2022, respectively.
The Company did not grant restricted stock units in 2021. Unrecognized stock-based compensation expense related to restricted stock units
was $338,000 and $182,000 as of December 31, 2023 and 2022, respectively. As of December 31, 2023, unrecognized stock-based compensation expense
related to restricted stock units is expected to be recognized over the next 1.5 years.
The following table presents restricted stock unit activity during the twelve months ended December 31, 2023.
Outstanding at beginning of year
Granted
Vested
Outstanding at end of period
Restricted Stock Awards
Weighted-Average
Grant Date
Fair Value
Shares
14,786 $
48,748
(20,374)
43,160 $
27.16
18.25
23.35
18.89
The Company granted restricted stock awards for 60,000 shares at a closing price of $17.74 in 2021. These restricted stock awards were scheduled to vest
over a three-year period from the January 21, 2021 grant date. Unvested restricted stock awards of 40,000 shares were forfeited and the expense related to
the forfeited shares was reversed on April 8, 2022, due to a former employee's resignation. As of December 31, 2023, there were no outstanding restricted
stock awards. The Company did not grant restricted stock awards in 2023 or 2022.
The recorded compensation expense for restricted stock awards was zero, $95,000, and $602,000 for the years ended December 31, 2023, 2022, and 2021,
respectively. Unrecognized stock-based compensation expense related to restricted stock awards was zero, zero, and $729,000 as of December 31, 2023,
2022, and 2021, respectively.
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NOTE 17 - REGULATORY MATTERS
Update on Previously Disclosed Regulatory Matters
As previously disclosed in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on October 31,
2023, effective on October 25, 2023, the Bank entered into a Stipulation to the Issuance of a Consent Order (the “Stipulation”) with the Federal Deposit
Insurance Corporation (the “FDIC”) and the California Department of Financial Protection and Innovation (the “DFPI”), consenting to the issuance of a
consent order (the “Consent Order”) relating to the Bank’s Anti-Money Laundering/Countering the Financing of Terrorism (“AML/CFT”) compliance
program. In connection to the issuance of the Consent Order, the Bank did not admit or deny any charges of violating Bank Secrecy Act (“BSA”) and its
implementing regulations.
Regulatory Capital
Holding companies (with assets over $3 billion at the beginning of the year) and banks are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary -
actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements.
In July 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines
for U.S. banks. The new rules became effective on January 1, 2015, with certain of the requirements phased-in over a multi-year schedule. Under the rules,
minimum requirements increased for both the quantity and quality of capital held by the Bank. The rules include a new common equity Tier 1 (“CET1”)
capital to risk-weighted assets ratio with minimums for capital adequacy and prompt corrective action purposes of 4.5% and 6.5%, respectively. The
minimum Tier 1 capital to risk-weighted assets ratio was raised from 4.0% to 6.0% under the capital adequacy framework and from 6.0% to 8.0% to be
well capitalized under the prompt corrective action framework. In addition, the rules introduced the concept of a “conservation buffer” of 2.5% applicable
to the three capital adequacy risk-weighted asset ratios (CET1, Tier 1, and Total). The implementation of the capital conservation buffer began on January
1, 2016 at 0.625% and was phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reached 2.5% on January 1,
2019). If the capital adequacy minimum ratios plus the phased-in conservation buffer amount exceed actual risk-weighted capital ratios, then dividends,
share buybacks, and discretionary bonuses to executives could be limited in amount.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital
amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative
measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of
total, Tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to
opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. Management believes, at December 31,
2023 and December 31, 2022, that the Bank satisfied all capital adequacy requirements to which it is subject.
In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase
in over a three-year period the day-one adverse regulatory capital effects of ASU 2016-13. Additionally, in March 2020, the U.S. federal bank regulatory
agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an
additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting
lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the novel coronavirus disease 2019
(“COVID-19”) pandemic. As a result, entities that adopted CECL in 2020 had the option to gradually phase in the full effect of CECL on regulatory capital
over a five-year transition period. Effective January 1, 2022, the Company adopted ASU 2016-13, reflected the full effect of CECL at December 31, 2022,
and did not elect the three-year CECL phase-in options on regulatory capital.
As of December 31, 2023 and 2022, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank’s category). To be
categorized as well capitalized, the Bank must maintain minimum ratios as set forth in the table below.
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The following table sets forth Bancorp’s consolidated and the Bank’s actual capital amounts and ratios and related regulatory requirements for the Bank as
of December 31, 2023:
(dollars in thousands)
Amount
Ratio
Actual
Amount of Capital Required
Minimum Required for
Capital Adequacy Purposes
Amount
Ratio (1)
To Be Well Capitalized
Under Prompt Corrective
Provisions
Amount
Ratio
As of December 31, 2023:
Tier 1 Leverage Ratio
Consolidated
Bank
$
472,152
535,952
11.99% $
13.62%
157,526
157,454
4.0% $
4.0%
196,907
196,818
Common Equity Tier 1 Risk-Based Capital Ratio
$
Consolidated
Bank
Tier 1 Risk-Based Capital Ratio
Consolidated
Bank
Total Risk-Based Capital Ratio
Consolidated
Bank
$
$
457,214
535,952
472,152
535,952
621,423
565,997
(1) These ratios are exclusive of the capital conservation buffer.
19.07% $
22.41%
107,886
107,598
4.5% $
4.5%
155,836
155,419
19.69% $
22.41%
143,849
143,464
6.0% $
6.0%
191,798
191,285
25.92% $
23.67%
191,798
191,285
8.0% $
8.0%
239,748
239,106
10.0%
10.0%
The following table sets forth Bancorp’s consolidated and the Bank’s actual capital amounts and ratios and related regulatory requirements for the Bank as
of December 31, 2022:
(dollars in thousands)
Amount
Ratio
Actual
Amount of Capital Required
Minimum Required for
Capital Adequacy Purposes
Amount
Ratio (1)
To Be Well Capitalized
Under Prompt Corrective
Provisions
Amount
Ratio
As of December 31, 2022:
Tier 1 Leverage Ratio
Consolidated
Bank
$
446,776
569,071
11.67% $
14.89%
153,116
152,900
4.0% $
4.0%
191,395
191,124
Common Equity Tier 1 Risk Based Capital Ratio
$
Consolidated
Bank
Tier 1 Risk-Based Capital Ratio
Consolidated
Bank
Total Risk-Based Capital Ratio
Consolidated
Bank
$
$
432,056
569,071
446,776
569,071
654,159
602,819
(1) These ratios are exclusive of the capital conservation buffer.
16.03% $
21.14%
121,291
121,110
4.5% $
4.5%
175,199
174,937
16.58% $
21.14%
161,722
161,481
6.0% $
6.0%
215,629
215,307
24.27% $
22.40%
215,629
215,307
8.0% $
8.0%
269,537
269,134
10.0%
10.0%
5.0%
5.0%
6.5%
6.5%
8.0%
8.0%
5.0%
5.0%
6.5%
6.5%
8.0%
8.0%
The California Financial Code generally acts to prohibit banks from making a cash distribution to its shareholders in excess of the lesser of the bank’s
undivided profits or the bank's net income for its last three fiscal years less the amount of any distribution made by the bank’s shareholders during the same
period.
The California General Corporation Law generally acts to prohibit companies from paying dividends on common stock unless retained earnings,
immediately prior to the dividend payment, equals or exceeds the amount of the dividend. If a company fails this test, then it may still pay dividends if after
giving effect to the dividend the company’s assets are at least 125% of its liabilities.
Additionally, the Federal Reserve has issued guidance, which requires that they be consulted before payment of a dividend if a bank holding company does
not have earnings over the prior four quarters of at least equal to the dividend to be paid, plus other holding company obligations.
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NOTE 18 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable
inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include
quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than
quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques
where all significant assumptions are observable, either directly or indirectly, in the market.
Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the
market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or
liability. Valuation techniques may include use of matrix pricing, DCF models, and similar techniques.
The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:
Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1)
or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for
specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2).
Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are
measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an
impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to
reflect an expectation of the amount to be ultimately collected and selling costs (Level 3).
Appraisals for other real estate owned are performed by state licensed appraisers (for commercial properties) or state certified appraisers (for residential
properties) whose qualifications and licenses have been reviewed and verified by the Company. When a Notice of Default is recorded, an appraisal report is
ordered. Once received, a member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the
overall resulting fair value in comparison to independent data sources such as recent market data or industry wide-statistics for residential
appraisals. Commercial appraisals are sent to an independent third party to review. The Company also compares the actual selling price of collateral that
has been sold to the most recent appraised value to determine what additional adjustments, if any, should be made to the appraisal values on any remaining
other real estate owned to arrive at fair value. If the existing appraisal is older than twelve months, a new appraisal report is ordered. No significant
adjustments to appraised values have been made as a result of this comparison process as of December 31, 2023.
Interest Rate Lock Contracts and Forward Mortgage Loan Sale Contracts: The fair values of interest rate lock contracts and forward mortgage loan sale
contracts are determined by loan lock-in rate, loan funded rate, market interest rate, fees to be collected from the borrower, fees and costs associated with
the origination of the loan, expiration timing, sale price, and the value of the retained servicing. The company classified these derivatives as level 3 due to
management’s estimate of market rate, cost and expiration timing on these contracts.
Collateral-dependent individually evaluated loans: Collateral-dependent individually evaluated loans are carried at fair value when it is probable that the
Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to
the fair value of its underlying collateral, net of expected disposition costs where applicable.
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The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at December 31, 2023 and
2022:
(dollars in thousands)
December 31, 2023
Assets measured at fair value:
On a recurring basis:
Securities available for sale
Government agency securities
SBA agency securities
Mortgage-backed securities
Collateralized mortgage obligations
Commercial paper
Corporate debt securities
Municipal securities
Interest Rate Lock Contracts
Forward Mortgage Loan Sale Contracts
On a non-recurring basis:
Commercial real estate loans - collateral-dependent impaired loans
SBA loans - collateral-dependent impaired loans
December 31, 2022
Assets measured at fair value:
On a recurring basis:
Securities available for sale
Government agency securities
SBA agency securities
Mortgage-backed securities
Collateralized mortgage obligations
Commercial paper
Corporate debt securities
Municipal securities
Forward Mortgage Loan Sale Contracts
On a non-recurring basis:
Other real estate owned
$
$
$
$
$
$
$
Fair Value Measurements Using:
Level 2
Level 1
Level 3
— $
—
—
—
—
—
—
—
—
— $
— $
—
— $
8,161 $
13,217
34,652
149,626
73,105
30,691
9,509
—
—
318,961 $
— $
—
—
—
—
—
—
32
14
46 $
— $
—
— $
10,209 $
1,148
11,357 $
Total
8,161
13,217
34,652
149,626
73,105
30,691
9,509
32
14
319,007
10,209
1,148
11,357
Level 1
Level 2
Level 3
Total
— $
—
—
—
—
—
—
—
— $
— $
4,495 $
2,411
42,928
111,593
49,537
37,012
8,854
—
256,830 $
— $
—
—
—
—
—
—
18
18 $
4,495
2,411
42,928
111,593
49,537
37,012
8,854
18
256,848
— $
577 $
577
There was a $521,000 write-down on collateral-dependent loans that were individually evaluated to the fair value of $11.4 million as of December
31, 2023. There was no collateral-dependent loan that was individually evaluated and written down to the fair value as of December 31, 2022. Collateral-
dependent individually evaluated loans were evaluated by third party appraisals with unobservable input of management adjustment of 10% to reflect
selling costs.
Quantitative information about the Company's OREO non-recurring Level 3 fair value measurements as of December 31, 2023 and 2022 is as follows:
There was no OREO as of December 31, 2023 and there were two single-family residences with a fair value of $577,000 as of December 31, 2022. During
2023, the Company sold one of the properties with a book value of $293,000 for a gain of $190,000 and the other property with a book value of $284,000
was sold for a loss of $57,000. OREO was evaluated by third party appraisals with unobservable input of management adjustment in the range of 5%-6% to
reflect current conditions and selling costs.
No write-downs to OREO were recorded in 2023 or 2022.
The fair value measurement of IRLCs and FMLSCs were primarily based on the buy price from borrowers ranging from 99.5 to 100.3, the sale price to
Fannie Mae ranging from 102 to 104, and the significant unobservable inputs using margin cost rate of ranging from 0.50% to 1.00%.
The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information
about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire
holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are
based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
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Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the
unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.
Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, and involve
uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the
fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent
limitations in any estimation technique.
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements.
Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in
time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could
result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of
anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in any of these estimates.
The following methods and assumptions were used to estimate the fair value of significant financial instruments not previously presented:
Cash and Due From Banks -- The carrying amounts of cash and short-term instruments approximate fair values, a Level 1 measurement.
Time Deposits in Other Banks -- Fair values for time deposits with other banks are estimated using DCF analyses, using interest rates currently being
offered with similar terms, a Level 1 measurement.
Investment securities available for sale and held to maturity -- Fair values are measured by using quoted market prices for similar securities or dealer
quotes, a Level 2 measurement.
Mortgage Loans Held for Sale -- The Company records mortgage loans held for sale at fair value based on the net premium received on recent sales of
mortgage loans for identical pools of loans, a Level 2 measurement.
Loans -- For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair
values for all other loans are estimated using DCF analyses, using interest rates currently being offered for loans with similar terms to borrowers with
similar credit quality. In accordance with the prospective adoption of ASU 2016-01, the fair value of loans as of December 31, 2023, and 2022 was
measured using an exit price notion, a Level 3 measurement.
Equity Securities -- The fair values of the Company’s equity securities are measured based on unobservable inputs at the reporting date, a Level 3
measurement. Equity securities are comprised of affordable housing investment funds and other restricted stocks.
Servicing Rights -- Mortgage and SBA servicing rights are calculated by discounting scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent in the loan, a Level 3 measurement.
Accrued Interest Receivable -- Accrued interest receivable includes accrued interest on investment securities (Level 2), accrued interest on loans (Level 3),
accrued interest on due from banks (Level 1), and accrued interest on equity securities (Level 3).
Off-Balance Sheet Financial Instruments -- The fair value of commitments to extend credit and standby letters of credit, interest rate lock commitments and
forward mortgage loan sales contracts is estimated using the fees currently charged to enter into similar agreements. Unobservable inputs that reflect the
Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability result in a Level 3 measurement.
Deposits -- The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money market
accounts are, by definition based on carrying value. Fair value for fixed-rate certificates of deposit is estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits, a Level 2
measurement. Early withdrawal of fixed-rate certificates of deposit is not expected to be significant.
FHLB Advances -- The fair values of the Company’s FHLB Advances are calculated by discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.
Long-Term Debt -- The fair values of the Company’s long-term borrowings are calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.
Subordinated Debentures -- The fair values of the Company’s subordinated debentures are calculated by discounting scheduled cash flows through the
estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.
Fair value is estimated in accordance with ASC Topic 825. Fair value estimates are made at specific points in time, based on relevant market information
and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time
the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair
value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect the estimates.
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The fair value hierarchy level and estimated fair value of significant financial instruments at December 31, 2023 and 2022 are summarized as follows:
(dollars in thousands)
Financial Assets:
December 31, 2023
December 31, 2022
Fair Value
Hierarchy
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Cash and due from banks
Interest-earning deposits in other financial institutions
Investment securities - AFS
Investment securities - HTM
Mortgage loans held for sale
Loans, net
Equity securities (1)
Servicing assets
Accrued interest receivable (1)
$
Level 1
Level 1
Level 2
Level 2
Level 2
Level 3
Level 3
Level 3
Level 1/2/3
431,373 $
600
318,961
5,209
1,911
2,989,958
22,251
8,110
13,743
431,373 $
600
318,961
5,097
1,845
2,918,296
22,251
14,883
13,743
83,548 $
600
256,830
5,729
—
3,295,373
22,238
9,521
14,536
83,548
600
256,830
5,563
—
3,251,464
22,238
21,712
14,536
Derivative assets:
Interest Rate Lock Contracts (1)
Forward Mortgage Loan Sale Contracts (1)
Financial Liabilities:
Deposits
FHLB advances
Long-term debt
Subordinated debentures
Accrued interest payable
Notional
Value
Fair
Value
Notional
Value
Fair
Value
Level 3
Level 3
$
1,255 $
1,104
32 $
14
— $
1,179
—
18
Carrying
Value
3,174,760 $
150,000
119,147
14,938
11,671
Fair
Value
3,181,495 $
144,891
83,864
14,566
11,671
Carrying
Value
2,977,683 $
220,000
173,585
14,720
3,711
Fair
Value
2,960,529
210,470
132,709
14,195
3,711
$
Level 2
Level 3
Level 3
Level 3
Level 2/3
(1) Included in “Accrued interest and other assets” on the consolidated balance sheets.
NOTE 19 - EARNINGS PER SHARE (“EPS”)
The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS:
2023
2022
2021
(dollars in thousands except shares and per
share data)
Net income as reported
Less: Earnings allocated to participating
securities
Shares outstanding
Impact of weighting shares
Used in basic EPS
Dilutive effect of outstanding
Stock options
Restricted Stock Unit
Used in dilutive EPS
Basic earnings per common share
Diluted earnings per common share
Income
Shares
Income
Shares
Income
Shares
$
42,465
$
64,327
$
56,906
—
(34)
(192)
42,465
$
$
42,465
2.24
2.24
18,609,179
356,167
18,965,346
15,322
4,565
18,985,233 $
$
18,965,776
133,733
19,099,509
211,477
21,653
19,332,639 $
$
64,293
64,293
3.37
3.33
56,714
56,714
2.92
2.86
19,455,544
(31,995)
19,423,549
410,757
—
19,834,306
Stock options for 332,500 shares of common stock and restricted stock units for 6,012 shares were not considered in computing diluted earnings per
common share for December 31, 2023 because they were anti-dilutive. Stock options for zero share of common stock and restricted stock units for zero
share were not considered in computing diluted earnings per common share for December 31, 2022 and 2021, respectively, because they were anti-dilutive.
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NOTE 20 – REVENUE FROM CONTRACTS WITH CUSTOMERS
The following is a summary of revenue from contracts with customers that are in-scope and not in-scope under Topic 606:
(dollars in thousands)
Non-interest income, in scope (1)
Fees and service charges on deposit accounts
Other fees (2)
Other income (3)
Gain on sale of OREO and fixed assets
Total in-scope non-interest income
Non-interest income, not in scope (4)
Total non-interest income
For the Year Ended December 31,
2022
2023
2021
$
$
2,014 $
984
2,158
166
5,322
9,696
15,018 $
2,051 $
677
2,094
757
5,579
5,673
11,252 $
2,367
2,543
2,157
—
7,067
11,678
18,745
There were no adjustments to the Company's financial statements recorded as a result of the adoption of ASC 606.
(1)
(2) Other fees consist of wealth management fees, miscellaneous loan fees and postage/courier fees.
(3) Other income consists of safe deposit box rental income, wire transfer fees, security brokerage fees, annuity sales, insurance activity, and OREO
(4)
income.
The amounts primarily represent revenue from contracts with customers that are out of scope of ASC 606: Net loan servicing income, letter of credit
commissions, import/export commissions, recoveries on purchased loans, BOLI income, gains (losses) on sales of mortgage loans, loans and
investment securities, and CDFI ERP award.
The major revenue streams by fee type that are within the scope of ASC 606 presented in the above tables are described in additional detail below:
Fees and Services Charges on Deposit Accounts
Fees and service charges on deposit accounts include charges for analysis, overdraft, cashier's check fees, ATM, and safe deposit activities executed by our
deposit clients, as well as interchange income earned through card payment networks for the acceptance of card based transactions. Fees earned from our
deposit clients are governed by contracts that provide for overall custody and access to deposited funds and other related services, and can be terminated at
will by either party; this includes fees from money service businesses (MSBs). Fees received from deposit clients for the various deposit activities are
recognized as revenue once the performance obligations are met. Periodic service charges are generally collected monthly directly from the customer’s
deposit account, and at the end of a statement cycle, while transaction based service charges are typically collected at the time of or soon after the service is
performed. The adoption of ASU 2014-09 had no impact to the recognition of fees and service charges on deposit accounts.
Wealth Management Fees
The Company employs financial consultants to provide investment planning services for customers including wealth management services, asset allocation
strategies, portfolio analysis and monitoring, investment strategies, and risk management strategies. The commission fees the Company earns are variable
and are generally received monthly. The Company recognizes revenue for the services performed at quarter-end based on actual transaction details received
from the broker dealer the Company engages.
In the Company’s wealth management division, revenue is primarily generated from (1) securities brokerage accounts, (2) investment advisor accounts, (3)
full service brokerage implementation fees, and (4) life insurance and annuity products.
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Table of Contents
Gain (loss) on Sales of Other Real Estate Owned and Fixed Assets
The Company records a gain or loss from the sale of OREO and fixed assets, when control of the property or asset transfers to the buyer, which generally
occurs at the time of an executed deed or sales agreement. When the Company finances the sale of OREO to a buyer, the Company assesses whether the
buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are
met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain
or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present.
NOTE 21 – QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS
The Company began investing in qualified affordable housing projects in 2016. At December 31, 2023 and December 31, 2022, the balance of the
investment for qualified affordable housing projects was $6.4 million and $7.6 million, respectively. This balance is reflected in the accrued interest and
other assets line on the consolidated balance sheets. Total unfunded commitments related to the investments in qualified affordable housing projects totaled
$2.3 million and $2.6 million at December 31, 2023 and December 31, 2022. The Company expects to fulfill these commitments between 2024 and 2038.
During the years ended December 31, 2023, 2022 and 2021, the Company recognized amortization expense of $1.1 million, $1.1 million, and $1.0 million,
respectively, which was included within income tax expense on the consolidated statements of income.
During the years ended December 31, 2023, 2022 and 2021, the Company recognized tax credits from its investment in affordable housing tax credits of
$1.0 million, $991,000 and $1.0 million, respectively. The Company had no impairment losses during the years ended December 31, 2023, 2022 and 2021.
NOTE 22 - PARENT ONLY CONDENSED FINANCIAL INFORMATION
The parent company only condensed balance sheet as of December 31, 2023 and 2022, and the related condensed statements of income and condensed
statements of cash flows for the years ended December 31, 2023, 2022 and 2021 are presented below:
(dollars in thousands)
2023
2022
Condensed Balance Sheet
ASSETS
Cash and cash equivalents
Investment in Bank
Investment in RAM
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Long term debt
Subordinated debentures
Other liabilities
Total liabilities
Shareholders' equity:
Common stock
Additional paid-in capital
Retained earnings
Non-controlling interest
Accumulated other comprehensive loss
Total shareholders' equity
Total liabilities and shareholders' equity
121
$
$
$
47,125 $
589,998
3,244
6,333
646,700 $
119,147
14,938
1,355
135,440
271,925
3,623
255,152
72
(19,512)
511,260
646,700 $
43,718
621,580
3,049
6,161
674,508
173,585
14,720
1,640
189,945
276,912
3,361
225,883
72
(21,665)
484,563
674,508
Table of Contents
Condensed Statements of Income
(dollars in thousands)
2023
2022
2021
Dividend from subsidiaries
Interest (reversal)/income
Interest expense
Noninterest expense
Income/(loss) before equity in undistributed income of subsidiaries
(Distributed income in excess of earnings)/undistributed income of:
Bank
RAM
Income before income taxes
Income tax benefit
Net income
Other comprehensive income/(loss)
Total comprehensive income
Condensed Statements of Cash Flows
Cash flows from operating activities:
(dollars in thousands)
Net income
Net amortization of other
Provision for deferred income taxes
Distributed income in excess of earnings/(undistributed income) of subsidiaries
Change in other assets and liabilities
Net cash provided by/(used in) operating activities
Cash flows from investment activities:
Purchase of other equity securities, net
Net cash used in investing activities
Cash flows from financing activities:
Issuance of subordinated debentures, net of issuance costs
Redemptions of subordinated debentures
Dividends paid
Common stock repurchased, net of repurchased costs
Stock options exercised
Net cash (used in)/provided by financing activities
Increase/(decrease) in cash and cash equivalents
Cash and cash equivalents beginning of year
Cash and cash equivalents end of year
NOTE 23 – REPURCHASE OF COMMON STOCK
$
$
$
$
85,000 $
(41)
9,951
1,897
73,111
(34,477)
195
38,829
3,636
42,465
2,153
44,618 $
— $
52
9,645
2,056
(11,649)
72,340
57
60,748
3,579
64,327
(20,009)
44,318 $
25,000
—
8,999
1,452
14,549
39,109
59
53,717
3,189
56,906
(2,785)
54,121
2023
2022
2021
42,465 $
780
(72)
34,282
113
77,568
(490)
(490)
—
(55,000)
(12,163)
(6,803)
295
(73,671)
3,407
43,718
47,125 $
64,327 $
796
(57)
(72,397)
216
(7,115)
(1,663)
(1,663)
—
—
(10,736)
(19,822)
5,476
(25,082)
(33,860)
77,578
43,718 $
56,906
724
(337)
(39,168)
1,645
19,770
(380)
(380)
118,111
(50,000)
(9,947)
(10,540)
3,475
51,099
70,489
7,089
77,578
On April 22, 2021, March 16, 2022 and June 14, 2022, the Board of Directors approved a stock repurchase program to buy back up to an aggregate of
500,000 shares of Company common stock for each authorization date. In 2021, the Company repurchased 473,122 shares of common stock for a total of
$10.5 million at a weighted average share price of $22.28. In 2022, the Company repurchased 902,526 shares of common stock for a total of $19.8
million at a weighted average share price of $21.96. In 2023, the Company repurchased 396,374 shares of common stock for a total of $6.8 million at a
weighted average share price of $17.02. As of December 31, 2023, the Company may repurchase up to 36,750 shares under the remaining authorized
repurchase program.
NOTE 24 – SUBSEQUENT EVENTS
On January 18, 2024, the Company announced the Board of Directors had declared a common stock cash dividend of $0.16 per share, payable on February
9, 2024 to common shareholders of record as of January 31, 2024.
On February 29, 2024, the Company announced the Board of Directors authorized a stock repurchase plan providing for the repurchase of up to 1 million
shares of the Company’s outstanding common stock through March 31, 2026.
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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.
The Company’s management, including our principal executive officer and principal financial officer, have evaluated the effectiveness of our
“disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this Annual Report.
Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s
disclosure controls and procedures were not effective due to material weaknesses in the Company’s internal control over financial reporting described
below.
Management’s Report on Internal Control over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is
defined in Rule 13a-15(f) under the Exchange Act. The Company’s internal control over financial reporting is a process designed under the supervision of
the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of the Company’s financial statements for external purposes in accordance with GAAP.
The 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 Company's transactions and dispositions of the Company's assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with GAAP, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of the Company's management and directors; 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 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.
As of December 31, 2023, under the supervision and with the participation of the Company’s management, including the Company’s principal
executive officer and principal financial officer, the Company assessed the effectiveness of its internal control over financial reporting based on the criteria
for effective internal control over financial reporting established in “Internal Control — Integrated Framework (2013),” issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management identified material weaknesses related to the
Company’s internal control over financial reporting and, as such, concluded that the Company's internal control over financial reporting was ineffective as
of December 31, 2023. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a
reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected and corrected
on a timely basis. The following material weaknesses were identified in the Company’s internal control over financial reporting:
●
●
The Company’s control environment failed to demonstrate a commitment to attract, develop, and retain competent individuals in the area of internal
control over financial reporting. The material weakness did not result in a misstatement.
The Company failed to design and maintain effective controls related to infrequent transactions such as the income recognition for the CDFI ERP
award. The material weakness resulted in external auditor’s audit adjustment and did not result in a misstatement.
Crowe LLP, the independent registered public accounting firm that audited the Company's consolidated financial statements included in this Annual
Report, has issued an attestation report on the effectiveness of the Company's internal control over financial reporting, a copy of which appears in Item 8.
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Remediation Efforts
Subsequent to the period covered by the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, with respect to the
material weakness set forth in the first bullet point above, and subsequent to the period covered by the Company’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2023, with respect to the material weakness set forth in the second bullet point above, management has been actively engaged
in developing remediation plans to address the material weaknesses noted above.
In order to remediate the material weakness related to the Company’s control environment, the Company has invested in additional resources in the
area of internal controls over financial reporting. In the fourth quarter of 2023, the Company hired an Interim Chief Financial Officer who has more than 30
years of experience in the financial services industry, specifically with public company financial institutions that are similar (or larger) in, size, and
complexity to the Company. Also during 2023, the Company hired a dedicated SOX Manager with knowledge and skills in the area of internal control over
financial reporting. In addition to supplementing internal staff, the Company engaged an outside advisory firm to assist the Company with enhancing the
design of its internal control over financial reporting and testing of such internal controls. These newly hired individuals, supplemented by the efforts of the
outside advisory firm and ongoing oversight by the Audit Committee will focus on the remediation of controls that have been deficient in the past while
ensuring that the overall system of internal control over financial reporting is appropriately designed and regularly evaluated for operating effectiveness.
In order to remediate the material weakness related to infrequent transactions, the Company has designed and implemented new and enhanced
controls to address infrequent transactions. The Company has enhanced its internal disclosure committee meetings, which are conducted prior to the filing
of documents with the SEC that contain financial information, to specifically include the identification and discussion of infrequent transactions. For the
CDFI ERP award related process, the Company plans to enhance controls to review performance requirements and conditions to be fully satisfied prior to
recognizing the full basis of the CDFI ERP award.
We believe the actions described above will be sufficient to remediate the identified material weaknesses and strengthen our internal control over
financial reporting. However, the new and enhanced controls have not operated for a sufficient amount of time to conclude that the described controls are
effective and the material weaknesses have been remediated. We will continue to monitor the effectiveness of these controls and will make any further
changes management determines appropriate. We expect that the remediation of these material weaknesses will be completed in the first half of 2024.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2023, the Company has fully remediated the internal control weaknesses related to related party
transactions, journal entries and accounts payable transactions, and CECL. In addition, the Company believes it has retained competent individuals in the
area of internal controls over financial reporting and has designed and implemented a control to ensure that unusual or infrequent transactions are evaluated
for the proper accounting treatment and financial statement disclosure. The material weaknesses will not be considered remediated, however, until the
applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Other than described above, during the most recent fiscal year, there have not been any changes in the Company’s internal control over financial
reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Item 9B. Other Information.
Rule 10b5-1 Trading Plans
During the quarter ended December 31, 2023, no officer or director of the Company adopted or terminated any contract, instruction, or written plan
for the purchase or sale of securities of the Company’s common stock that is intended to satisfy the affirmative defense conditions of Exchange Act
Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement as defined in 17 CFR § 229.408(c).
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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Table of Contents
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this Item with respect to our directors, executive officers and certain corporate governance practices is contained in our
Proxy Statement for our 2024 Annual Meeting of Shareholders (the “Proxy Statement”) to be filed with the SEC within 120 days after the end of the
Company’s fiscal year ended December 31, 2023. Such information is incorporated herein by reference.
We maintain a Code of Ethics applicable to our board of directors, principal executive officer, as well as all of our other employees. Our Code of
Ethics can be found on our internet website located at www.royalbusinessbankusa.com.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC within 120 days after the
end of the Company’s fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item regarding security ownership of certain beneficial owners and management is incorporated by reference to our
Proxy Statement to be filed with the SEC within 120 days after the end of the Company’s fiscal year.
Securities Authorized for Issuance under Equity Compensation Plan Information
The following table provides information as of December 31, 2023, with respect to options outstanding and available under our Amended and
Restated RBB Bancorp 2017 Omnibus Stock Incentive Plan, which is our only equity compensation plan other than an employee benefit plan meeting the
qualification requirements of Section 401(a) of the Internal Revenue Code:
Plan Category
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options
Weighted-
Average Exercise
Price of
Outstanding
Options
397,903 $
—
397,903 $
17.61
—
17.61
Number of
Securities
Remaining
Available for
Future Issuance
1,032,173
—
1,032,173
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC within 120 days after the
end of the Company’s fiscal year.
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated herein by reference to our Proxy Statement to be filed with the SEC within 120 days after the
end of the Company’s fiscal year.
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Table of Contents
Item 15. Exhibits, Financial Statement Schedules.
(a)
Documents filed as part of this report.
PART IV
(1) The following financial statements are incorporated by reference from Item 8 hereof:
Report of Independent Registered Public Accounting Firm.
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets as of December 31, 2023 and 2022.
Consolidated Statements of Income for the Years Ended December 31, 2023, 2022 and 2021.
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2023, 2022 and 2021.
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2023, 2022 and 2021.
Consolidated Statements of Cash Flows for the Years Ended December 31, 2023, 2022 and 2021.
Notes to Consolidated Financial Statements.
(2) All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because they are not applicable or the
required information is included in the consolidated financial statements or related notes thereto.
(b)
The following exhibits are filed with or incorporated by reference in this Annual Report, and this list includes the Exhibit Index.
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Table of Contents
Exhibit
Number
3.1
3.2
3.3
4.1
EXHIBIT INDEX
Description
Articles of Incorporation of RBB Bancorp (incorporated herein by reference to Exhibit 3.1 to our Registration Statement on Form S-1
(Registration No. 333-219018) filed with the SEC on June 28,2017)
Bylaws of RBB Bancorp (incorporated herein by reference to Exhibit 3.2 to our Registration Statement on Form S-1 (Registration No. 333-
219018) filed with the SEC on June 28, 2017)
Amendment to Bylaws of RBB Bancorp (incorporated herein by reference to Exhibit 3.3 to our Quarterly Report on Form 10-Q filed with the
SEC on November 13, 2018)
Specimen Common Stock Certificate of RBB Bancorp (incorporated herein by reference to Exhibit 4.1 to our Registration Statement on
Form S-1 (Registration No. 333-219018) filed with the SEC on June 28, 2017
Instruments defining the rights of holders of the long-term debt securities of the Company and its subsidiaries are omitted pursuant to section
(b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company hereby agrees to furnish copies of these instruments to the SEC upon request.
4.2
Description of Registrant’s Securities (incorporated herein by reference to Exhibit 4.2 to our Form 10-K filed with the SEC on December 31,
2019)
10.1
Employment Agreement dated April 12, 2017 between RBB Bancorp, Royal Business Bank and David Morris (incorporated herein by
reference to Exhibit 10.2 to our Registration Statement on Form S-1 (Registration No. 333-219018) filed on June 28, 2017)*
10.2
Employment Agreement, dated April 12, 2017 between RBB Bancorp, Royal Business Bank and Vincent (I-Ming) Liu (incorporated herein
by reference to Exhibit 10.4 to our Form 10-K/A filed with the SEC on April 4, 2022)*
10.3
Employment Agreement, dated April 12, 2017 between RBB Bancorp, Royal Business Bank and Jeffrey Yeh (incorporated herein by
reference to Exhibit 10.5 to our Form 10-K/A filed with the SEC on April 4, 2022)*
10.4
First Amendment of Employment Agreement dated October 22, 2021 between RBB Bancorp, Royal Business Bank and Mr. I-Ming
(Vincent) Liu (incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q filed with the SEC on November 8,
2021)*
10.5
First Amendment of Employment Agreement dated October 22, 2021 between RBB Bancorp, Royal Business Bank and Mr. David R. Morris
(incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q filed with the SEC on November 8, 2021)*
10.6
First Amendment of Employment Agreement dated October 22, 2021 between RBB Bancorp, Royal Business Bank and Mr. Jeffrey Yeh
(incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q filed with the SEC on November 8, 2021)*
10.7
Second Amendment of Employment Agreement, effective as of May 11, 2023, between RBB Bancorp, Royal Business Bank and David R.
Morris (incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on May 11, 2023)*
10.8
Employment Agreement, effective as of March 22, 2023, between RBB Bancorp, Royal Business Bank and Alex Ko (incorporated herein by
reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on May 11, 2023)*
10.9
Employment Agreement, effective as of March 22, 2023, between RBB Bancorp, Royal Business Bank and Gary Fan (incorporated herein by
reference to Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on May 11, 2023)*
10.10
Employment Agreement, effective as of July 20, 2023, between RBB Bancorp, Royal Business Bank and Johnny Lee (incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on July 24, 2023)*
10.11
Employment Agreement, effective as of December 7, 2023, between RBB Bancorp, Royal Business Bank and Ms. Lynn Hopkins
(incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on December 11, 2023)*
10.12
RBB Bancorp 2017 Amended and Restated Omnibus Stock Incentive Plan (incorporated herein by reference to Exhibit 99.2 to our Current
Report on Form 8-K filed with the SEC on January 21, 2022)*
10.13
Form of Stock Option Award Terms under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated herein by reference to
Exhibit 10.7 to our Registration Statement on Form S-1 (Registration No. 333-219018) filed on June 28, 2017)*
10.14
Form of Stock Appreciation Rights Award under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated herein by reference to
Exhibit 10.8 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28, 2017)*
10.15
Form of Deferred Stock Award Agreement under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated herein by reference to
Exhibit 10.9 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28, 2017)*
10.16
Form of Restricted Stock Award Agreement under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated herein by reference
to Exhibit 10.10 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28, 2017)*
127
Table of Contents
10.17
Form of Performance Award Agreement under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated herein by reference to
Exhibit 10.11 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28, 2017)*
10.18
Form of Indemnification Agreements entered into with all of the directors and executive officers of RBB Bancorp (incorporated herein by
reference to Exhibit 10.12 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on June 28, 2017)*
10.19
Form of Indemnification Agreement entered into with all of the former directors and executive officers of TFC Holding
Company (incorporated herein by reference to Exhibit 10.13 to our Form S-1 Registration Statement (Registration No. 333-219018) filed on
June 28, 2017)*
10.20
Form of Restricted Stock Unit Award Agreement for Employees under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.20 to our Form 10-K/A filed with the SEC on April 4, 2022)*
10.21
Form of Restricted Stock Unit Award Agreement for Directors under the RBB Bancorp 2017 Omnibus Stock Incentive Plan (incorporated
herein by reference to Exhibit 10.21 to our Form 10-K/A filed with the SEC on April 4, 2022)*
21.1
23.1
23.2
31.1
31.2
32.1
32.2
97
Subsidiaries of RBB Bancorp (Reference is made to “Item 1. Business” for the required information.)
Consent of Crowe LLP
Consent of Eide Bailly
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
RBB Bancorp Mandatory Recovery of Compensation Policy
99.1
Consent Order dated October 25, 2023 (incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K filed with the
SEC on October 31, 2023)
99.2
Stipulation to the Issuance of a Consent Order (incorporated herein by reference to Exhibit 99.2 to our Current Report on Form 8-K filed with
the SEC on October 31, 2023)
Inline XBRL Instance Document
101.INS
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
104
Inline XBRL Taxonomy Extension Presentation Linkbase Document
The cover page of RBB Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2023, formatted in Inline XBRL
(contained in Exhibit 101)
*
Indicates a management contract or compensatory plan.
Item 16. Form 10-K Summary
None.
128
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on March 12, 2024.
SIGNATURES
RBB BANCORP
/s/ David R. Morris
By:
Name: David R. Morris
Title:
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on
behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ David R. Morris
David R. Morris
/s/ Lynn Hopkins
Lynn Hopkins
/s/ James W. Kao
James W. Kao
/s/ Christina Kao
Christina Kao
/s/ Joyce Wong Lee
Joyce Wong Lee
/s/ Christopher Lin
Christopher Lin
/s/ Geraldine Pannu
Geraldine Pannu
/s/ Scott Polakoff
Scott Polakoff
/s/ Robert Franko
Robert Franko
/s/ William A Bennett
William A Bennett
/s/ Frank Wong
Frank Wong
Director and Chief Executive Officer (principal executive
March 12, 2024
officer)
Interim Executive Vice President; Chief Financial Officer
(principal financial and accounting officer)
March 12, 2024
Director, Chairman
Director
Director
Director
Director
Director
Director
Director
Director
129
March 12, 2024
March 12, 2024
March 12, 2024
March 12, 2024
March 12, 2024
March 12, 2024
March 12, 2024
March 12, 2024
March 12, 2024
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the registration statement (No. 333-219626) on Form S-8 of RBB Bancorp and Subsidiaries of our
report dated March 12, 2024 relating to our audit of the consolidated financial statements and the effectiveness of internal control over financial reporting
appearing in this annual report on Form 10-K for the year ended December 31, 2023.
/s/ Crowe LLP
Los Angeles, California
March 12, 2024
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
We hereby consent to the incorporation by reference in the registration statement (No. 333-219626) on Form S-8 of RBB Bancorp and Subsidiaries of our
report dated March 12, 2023 relating to our audit of the the consolidated statements of income, comprehensive income, changes in shareholders’ equity and
cash flows for the years ended December 31, 2021 appearing in this annual report on Form 10-K for the year ended December 31, 2023.
/s/ Eide Bailly LLP
Los Angeles, California
March 12, 2024
Exhibit 31.1
CERTIFICATION
I, David R. Morris, certify that:
1. I have reviewed this annual report on Form 10-K of RBB Bancorp;
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 12, 2024
By: /s/ David R. Morris
David R. Morris,
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Lynn Hopkins, certify that:
1. I have reviewed this annual report on Form 10-K of RBB Bancorp;
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 12, 2024
By: /s/ Lynn Hopkins
Lynn Hopkins,
Interim Executive Vice President and Chief Financial Officer
Exhibit 32.1
CERTIFICATION
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 RBB Bancorp (the “Company”) on Form 10-K for the period ended December 31, 2023, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, David R. Morris, Chief Executive Officer of the Company, certify, pursuant to
18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 12, 2024
By: /s/ David R. Morris
David R. Morris
Chief Executive Officer
Exhibit 32.2
CERTIFICATION
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 RBB Bancorp (the “Company”) on Form 10-K for the period ended December 31, 2023, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Lynn Hopkins, Interim Executive Vice President and Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of my
knowledge that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 12, 2024
By: /s/ Lynn Hopkins
Lynn Hopkins,
Interim Executive Vice President and Chief Financial Officer
RBB BANCORP
Mandatory Recovery of Compensation Policy
Exhibit 97
I. Applicability. This Mandatory Recovery of Compensation Policy (the “Policy”) applies to any Incentive Compensation that is received by an RBB
Bancorp (the “Company”) Executive Officer on or after October 2, 2023, even if such Incentive Compensation was approved, awarded, granted or
paid to such Executive Officer prior to that date. The Policy is intended to comply with and be interpreted in accordance with the requirements of
Listing Rule 5608 (“Listing Rule 5608”) of The Nasdaq Stock Market LLC (“Nasdaq”). The provisions of Listing Rule 5608 shall prevail in the
event of any conflict between the text of this Policy and such listing rule. Certain capitalized terms not defined in text are defined in Section IV
hereof.
II. Recovery.
a. Triggering Event.
Except as provided herein and subject to Section II(b) below, in the event that the Company is required to prepare a Financial
Restatement, the Company’s Board of Directors (the “Board”) shall recover any Recoverable Amount of any Incentive Compensation
received by a current or former Executive Officer during the Look-Back Period. The Recoverable Amount shall be repaid to the
Company within a reasonable time after the current or former Executive Officer is notified of the Recoverable Amount as set forth in
Section II(c) below. For the sake of clarity, the recovery rule in this Section II(a) shall apply regardless of any misconduct, fault, or illegal
activity of the Company, the Executive Officer, the Board, or any committee thereof.
b. Compensation Subject to Recovery.
i.
Incentive Compensation subject to mandatory recovery under Section II(a) consists of any Incentive Compensation received by an
Executive Officer:
a. After beginning service as an Executive Officer;
b. Who served as an Executive Officer at any time during the performance period for that Incentive Compensation;
c. While the Company has a class of securities listed on a national securities exchange or a national securities association; and
d. During the Look-Back Period.
ii. As used in this Section II(b), Incentive Compensation is deemed “received” in the fiscal period that the Financial Reporting Measure
specified in the applicable Incentive Compensation award is attained, even if the payment or grant of the Incentive Compensation
occurs after the end of that period. This Section II(b) will only apply to Incentive Compensation received in any fiscal period ending on
or after the effective date of Listing Rule 5608.
1
c. Recoupment.
i. The Compensation Committee of the Board (the “Compensation Committee”) shall determine, at its sole discretion, the method for
recouping Incentive Compensation, which may include (A) requiring reimbursement of Incentive Compensation previously paid; (B)
seeking recovery of any gain realized on the vesting, exercise, settlement, sale, transfer, or other disposition of any equity-based
awards; (C) deducting the amount to be recouped from any compensation otherwise owed by the Company to the Executive Officer;
and/or (D) taking any other remedial and recovery action permitted by law, as determined by the Compensation Committee.
d. Recoverable Amount.
i. The Recoverable Amount is equal to the amount of Incentive Compensation received in excess of the amount of Incentive
Compensation that would have been received had the Incentive Compensation been determined based on the restated amounts in the
Financial Restatement, without regard to taxes paid by the Company or the Executive Officer.
ii. In the event the Incentive Compensation is based on a measurement that is not subject to mathematical recalculation, the Recoverable
Amount shall be based on a reasonable estimate of the effect of the Financial Restatement, as determined by the Compensation
Committee, which shall be set forth in writing. For example in the case of Incentive Compensation based on stock price or total
shareholder return, the Recoverable Amount shall be based on a reasonable estimate of the effect of the Financial Restatement on the
stock price or total shareholder return.
e. Exceptions to Applicability.
The Company or a delegate thereof must recover the Recoverable Amount of Incentive Compensation as stated above in Section II(a),
unless the Company’s Compensation Committee, or in the absence of such a committee, a majority of the independent directors serving
on the Board makes a determination that recovery would be impracticable, and at least one of the following applies:
i. The direct expense paid to a third party to assist in enforcing recovery would exceed the Recoverable Amount, and a reasonable
attempt to recover the Recoverable Amount has already been made and documented;
ii. Recovery of the Recoverable Amount would violate home country law (provided such law was adopted prior to November 28, 2022
and that an opinion of counsel in such country is obtained stating that recoupment would result in such violation); or
2
iii. Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the
Company and its subsidiaries, to fail to meet the qualification requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(A) and
regulations thereunder.
III. Miscellaneous.
a. The Board or Compensation Committee may require that any incentive plan, employment agreement, equity award agreement, or similar
agreement entered into on or after the date hereof shall, as a condition to the grant of any benefit thereunder, require an Executive Officer to
agree to abide by the terms of this Policy, including the repayment of the Recoverable Amount of erroneously awarded Incentive
Compensation.
b. The Company shall not indemnify any Executive Officer or other individual against the loss of any Incentive Compensation determined to be
incorrectly awarded pursuant to this Policy or any otherwise recouped Incentive Compensation.
c. The Company shall comply with applicable compensation recovery policy disclosure rules of the Securities and Exchange Commission (the
“Commission”).
d. The Company shall comply with the applicable Golden Parachute and Indemnification Payments requirements in 12 C.F.R. Part 359.
IV. Definitions.
a.
b. Executive Officer. “Executive Officer” shall mean the Company’s Chief Executive Officer, President, Chief Financial Officer, or principal
accounting officer (or, if there is no such accounting officer, the Controller), any vice-president of the Company in charge of a principal
business unit, division or function (such as sales, administration or finance), and any other officer or person who performs a significant
policy-making function for the Company (including any employees of a parent or subsidiary of the Company who perform such a policy-
making function for the Company). For the sake of clarity, “Executive Officer” includes at a minimum executive officers identified by the
Board pursuant to 17 CFR 229.401(b).
c. Financial Reporting Measure. “Financial Reporting Measure” means any reporting measure that is determined and presented in accordance
with the accounting principles used in preparing the Company’s financial statements, and any measures that are derived wholly or in part
from such measures. Stock price and total shareholder return are considered to be Financial Reporting Measures for purposes of this Policy,
but are not the only possible Financial Reporting Measures. A Financial Reporting Measure need not be presented within the financial
statements or included in a filing with the Commission.
3
d. Financial Restatement. A “Financial Restatement” means any accounting restatement due to the material noncompliance of the Company
with any financial reporting requirement under applicable securities laws, including any required accounting restatement to correct an error in
previously issued financial statements that (i) is material to the previously issued financial statements (commonly referred to as a “Big
R” restatement), or (ii) is not material to previously issued financial statements, but would result in a material misstatement if the error was
left uncorrected in the current period or the error correction were recognized in the current period (commonly referred to as a “little
r” restatement). For purposes of this Policy, the date of a Financial Restatement will be deemed to be the earlier of (i) the date the Board, a
committee of the Board, or officers authorized to take such action if Board action is not required concludes, or reasonably should have
concluded, that the Company is required to prepare an accounting restatement, and (ii) the date a court, regulator, or other legally authorized
body directs the Company to prepare an accounting restatement.
e. Incentive Compensation. “Incentive Compensation” means an award which is granted, earned, or vests based wholly or in part upon the
attainment of a Financial Reporting Measure, but does not include awards that are earned or vest based solely on the continued provision of
services for a period of time.
f. Look-Back Period. The “Look-Back Period” means the three completed fiscal years immediately preceding the date of a Financial
Restatement and any transition period as specified in Listing Rule 5608.
4