RBB Bancorp (RBB) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from RBB Bancorp's 10-K for fiscal year 2023. Filing date: 2024-03-12. Report date: 2023-12-31. Accession: 0001437749-24-007474.

This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.

Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high.

Company profile: RBB · All MD&A years: index · Previous year: FY 2022 · Next year: FY 2024

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 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.

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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.

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%.

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ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance

	Year Ended December 31,
	2023			2022			2021
	(dollars in thousands, except per share data)
Interest income	$	221,148			$	180,970		$	147,063
Interest expense		101,862				31,416			22,720
Net interest income		119,286				149,554			124,343
Provision for credit losses		3,362				4,935			3,959
Net interest income after provision for credit losses		115,924				144,619			120,384
Noninterest income		15,018				11,252			18,745
Noninterest expense		70,696				64,526			58,192
Income before income taxes		60,246				91,345			80,937
Income tax expense		17,781				27,018			24,031
Net income	$	42,465			$	64,327		$	56,906
Share Data
Earnings per common share (1):
Basic	$	2.24			$	3.37		$	2.92
Diluted		2.24				3.33			2.86
Performance Ratios
Return on average assets		1.06	%			1.62	%		1.48	%
Return on average shareholders’ equity		8.48	%			13.66	%		12.71	%
Efficiency ratio		52.64	%			40.13	%		40.67	%
Tangible common equity to tangible assets (2)		11.06	%			10.65	%		9.47	%
Return on average tangible common equity (2)		9.97	%			16.26	%		15.22	%
Tangible book value per share (2)	$	23.48			$	21.58		$	20.22

Column 1	Column 2
(1)	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.

Column 1

Column 2

(1)

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.

Column 1	Column 2
(2)	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.

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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.

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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.

	Year Ended December 31,
	2023		2022			2021
(tax-equivalent basis, dollars in	Average		Interest			Yield /	Average		Interest		Yield /			Average	Interest		Yield /
thousands)	Balance		& Fees			Rate	Balance		& Fees		Rate			Balance	& Fees		Rate
Interest-earning assets:
Federal funds sold, cash equivalents and other (1)	$	231,851		$	12,856		5.54	%	$	276,923		$	3,787		1.37	%	$	504,809	$	2,115	0.42	%
Securities: (2)
Available for sale		331,357			13,928		4.20	%		338,437			5,973		1.76	%		320,544		3,217	1.00	%
Held to maturity		5,509			198		3.59	%		5,865			208		3.55	%		6,543		238	3.64	%
Loans held for investment: (3)(4)
Real estate		2,998,877			176,786		5.90	%		2,775,611			151,230		5.45	%		2,384,663		122,874	5.15	%
Commercial		206,748			17,478		8.45	%		322,438			19,869		6.16	%		381,646		18,695	4.90	%
Total loans held for investment		3,205,625			194,264		6.06	%		3,098,049			171,099		5.52	%		2,766,309		141,569	5.12	%
Total interest-earning assets		3,774,342		$	221,246		5.86	%		3,719,274		$	181,067		4.87	%		3,598,205	$	147,139	4.09	%
Total noninterest-earning assets		246,980								244,894								235,267
Total average assets	$	4,021,322							$	3,964,168							$	3,833,472
Interest-bearing liabilities:
NOW	$	58,191		$	725		1.25	%	$	73,335		$	262		0.36	%	$	69,211	$	184	0.27	%
Money market		429,102			10,565		2.46	%		631,094			5,114		0.81	%		637,539		2,468	0.39	%
Savings deposits		126,062			915		0.73	%		144,409			185		0.13	%		137,534		134	0.10	%
Time deposits, $250,000 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		742,839			29,687		4.00	%		565,059			6,755		1.20	%		597,770		4,708	0.79	%
Total interest-bearing deposits		2,502,707			89,042		3.56	%		2,023,361			18,899		0.93	%		2,082,801		11,956	0.57	%
FHLB advances		172,219			2,869		1.67	%		192,438			2,872		1.49	%		150,000		1,765	1.18	%
Long-term debt		169,182			8,477		5.01	%		173,275			8,777		5.07	%		157,719		8,404	5.33	%
Subordinated debentures		14,821			1,474		9.95	%		14,603			868		5.94	%		14,385		595	4.14	%
Total interest-bearing liabilities		2,858,929			101,862		3.56	%		2,403,677			31,416		1.31	%		2,404,905		22,720	0.94	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		602,291								1,050,063								938,710
Other noninterest-bearing liabilities		59,562								39,647								42,143
Total noninterest-bearing liabilities		661,853								1,089,710								980,853
Shareholders' equity		500,540								470,781								447,714
Total liabilities and shareholders' equity	$	4,021,322							$	3,964,168							$	3,833,472
Net interest income / interest rate spreads				$	119,384		2.30	%				$	149,651		3.56	%			$	124,419	3.15	%
Net interest margin							3.16	%							4.02	%					3.46	%
Total cost of deposits	$	3,104,998		$	89,042		2.87	%	$	3,073,424		$	18,899		0.61	%	$	3,021,511	$	11,956	0.40	%
Total cost of funds	$	3,461,220		$	101,862		2.94	%	$	3,453,740		$	31,416		0.91	%	$	3,343,615	$	22,720	0.68	%

Column 1	Column 2
(1)	Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.

Column 1	Column 2
(2)	Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis.

Column 1	Column 2
(3)	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.

Column 1	Column 2
(4)	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.

Column 1

Column 2

(4)

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.

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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.

	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:
(tax-equivalent basis, dollars in thousands)	Volume			Yield/Rate			Interest Variance			Volume		Yield/Rate			Interest Variance
Interest-earning assets:
Federal funds sold, cash equivalents & other (1)	$	(711	)		$	9,780			$	9,069		$	(1,317	)		$	2,989		$	1,672
Securities: (2)
Available for sale		(128	)			8,083				7,955			189				2,567			2,756
Held to maturity		(12	)			2				(10	)		(24	)			(6	)		(30	)
Loans held for investment: (3)(4)
Real estate		12,611				12,945				25,556			20,922				7,434			28,356
Commercial		(8,428	)			6,037				(2,391	)		(3,177	)			4,351			1,174
Total loans held for investment		4,183				18,982				23,165			17,745				11,785			29,530
Total interest-earning assets	$	3,332			$	36,847			$	40,179		$	16,593			$	17,335		$	33,928
Interest-bearing liabilities
NOW	$	(65	)		$	528			$	463		$	12			$	66		$	78
Money market		(2,088	)			7,539				5,451			(25	)			2,671			2,646
Saving deposits		(27	)			757				730			7				44			51
Time deposits, less than $250,000		9,696				30,871				40,567			(227	)			2,348			2,121
Time deposits, $250,000 and over		2,724				20,208				22,932			(272	)			2,319			2,047
Total interest-bearing deposits		10,240				59,903				70,143			(505	)			7,448			6,943
FHLB advances		(323	)			320				(3	)		574				533			1,107
Long-term debt		(200	)			(100	)			(300	)		798				(425	)		373
Subordinated debentures		13				593				606			9				264			273
Total interest-bearing liabilities		9,730				60,716				70,446			876				7,820			8,696
Changes in net interest income	$	(6,398	)		$	(23,869	)		$	(30,267	)	$	15,717			$	9,515		$	25,232

Column 1	Column 2
(1)	Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.

Column 1	Column 2
(2)	Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis.

Column 1	Column 2
(3)	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.

Column 1	Column 2
(4)	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.

Column 1

Column 2

(4)

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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:

	Year Ended December 31,		2023 vs. 2022 Increase (Decrease)			2022 vs. 2021 Increase (Decrease)
(dollars in thousands)	2023		2022			2021		$	%			$		%
Noninterest income:
Service charges, fees and other	$	4,172		$	4,145		$	4,524	$	27			0.7	%	$	(379	)	(8.4	)%
Loan servicing income, net of amortization		2,576			2,209			684		367			16.6	%		1,525		223.0	%
Increase in cash surrender of bank owned life insurance		1,409			1,322			1,067		87			6.6	%		255		23.9	%
Gain on sale of loans		374			1,895			9,991		(1,521	)		(80.3	)%		(8,096	)	(81.0	)%
Gain on sale of fixed assets		32			757			—		(725	)		(95.8	)%		757		100.0	%
Other income		6,455			924			2,479		5,531			598.6	%		(1,555	)	(62.7	)%
Total noninterest income	$	15,018		$	11,252		$	18,745	$	3,766			33.5	%	$	(5,938	)	(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.

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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.

	Year Ended December 31,		2023 vs. 2022 Increase (Decrease)			2022 vs. 2021 Increase (Decrease)
(dollars in thousands)	2023		2022			2021		$	%			$		%
Loan servicing income, net of amortization:
Single-family residential loans serviced	$	2,119		$	1,706		$	268	$	413			24.2	%	$	1,438	536.6	%
SBA loans serviced		457			503			416		(46	)		(9.1	)%		87	20.9	%
Total	$	2,576		$	2,209		$	684	$	367			16.6	%	$	1,525	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:

	As of December 31,		2023 vs. 2022 Increase (Decrease)			2022 vs. 2021 Increase (Decrease)
(dollars in thousands)	2023		2022			2021		$	%			$		%
Loans serviced
Single-family residential loans serviced	$	1,014,017		$	1,127,668		$	1,308,672	$	(113,651	)		(10.1	)%	$	(181,004	)	(13.8	)%
SBA loans serviced		100,336			119,893			138,173		(19,557	)		(16.3	)%		(18,280	)	(13.2	)%
Commercial real estate loans serviced		3,813			3,991			4,070		(178	)		(4.5	)%		(79	)	(1.9	)%
Construction loans		4,710			3,677			—		1,033			28.1	%		3,677		100	%
Total	$	1,122,876		$	1,255,229		$	1,450,915	$	(133,386	)		(10.6	)%	$	(199,363	)	(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.

	Year Ended December 31,		2023 vs. 2022 Increase (Decrease)			2022 vs. 2021 Increase (Decrease)
(dollars in thousands)	2023		2022			2021		$	%			$		%
Loans sold:
SBA	$	4,164		$	12,740		$	20,922	$	(8,576	)		(67.3	)%	$	(8,182	)	(39.1	)%
Single-family residential mortgage		34,060			46,077			276,650		(12,017	)		(26.1	)%		(230,573	)	(83.3	)%
	$	38,224		$	58,817		$	297,572	$	(20,593	)		(35.0	)%	$	(238,755	)	(80.2	)%
Gain on loans sold:
SBA	$	262		$	696		$	2,091	$	(434	)		(62.4	)%	$	(1,395	)	(66.7	)%
Single-family residential mortgage		112			1,199			7,900		(1,087	)		(90.7	)%		(6,701	)	(84.8	)%
	$	374		$	1,895		$	9,991	$	(1,521	)		(80.3	)%	$	(8,096	)	(81.0	)%

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Noninterest Expense

The following table sets forth the major components of our noninterest expense for the years ended December 31, 2023, 2022 and 2021:

	Year Ended December 31,		2023 vs. 2022 Increase (Decrease)			2022 vs. 2021 Increase (Decrease)
(dollars in thousands)	2023		2022			2021		$	%			$		%
Noninterest expense:
Salaries and employee benefits	$	37,795		$	35,488		$	33,568	$	2,307			6.5	%	$	1,920		5.7	%
Occupancy and equipment expenses		9,629			9,092			8,691		537			5.9	%		401		4.6	%
Data processing		5,326			5,060			4,474		266			5.3	%		586		13.1	%
Legal and professional		8,198			5,383			3,773		2,815			52.3	%		1,610		42.7	%
Office expenses		1,512			1,438			1,197		74			5.1	%		241		20.1	%
Marketing and business promotion		1,132			1,578			1,157		(446	)		(28.3	)%		421		36.4	%
Insurance and regulatory assessments		3,165			1,850			1,561		1,315			71.1	%		289		18.5	%
Core deposit premium		923			1,086			1,121		(163	)		(15.0	)%		(35	)	(3.1	)%
Other expenses		3,016			3,551			2,650		(535	)		(15.1	)%		901		34.0	%
Total noninterest expense	$	70,696		$	64,526		$	58,192	$	6,170			9.6	%	$	6,334		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.

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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:

Column 1	Column 2	Column 3
	●	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;

Column 1	Column 2	Column 3
	●	serving as a means for diversification of our assets with respect to credit quality, maturity and other attributes; and

Column 1	Column 2	Column 3
	●	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.

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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, 2021
(dollars in thousands)		Amount	% of Total			Amount	% of Total			Amount	% of Total
Securities, available for sale, at fair value
Government agency securities	$	8,161	2.5	%	$	4,495	1.7	%	$	5,610	1.5	%
SBA agency securities		13,217	4.1	%		2,411	0.9	%		3,469	0.9	%
Mortgage-backed securities: residential		34,652	10.7	%		38,057	14.4	%		45,052	12.0	%
Mortgage-backed securities: commercial		—	0.0	%		4,871	1.9	%		9,973	2.7	%
Collateralized mortgage obligations: residential		82,327	25.3	%		69,903	26.6	%		60,216	16.1	%
Collateralized mortgage obligations: commercial		67,299	20.8	%		41,690	15.9	%		59,295	15.8	%
Commercial paper		73,105	22.6	%		49,537	18.9	%		129,926	34.7	%
Corporate debt securities (1)		30,691	9.5	%		37,012	14.1	%		42,205	11.3	%
Municipal securities		9,509	2.8	%		8,854	3.4	%		12,514	3.3	%
Total securities, available for sale, at fair value	$	318,961	98.3	%	$	256,830	97.8	%	$	368,260	98.3	%
Securities, held to maturity, at amortized cost
Taxable municipal securities	$	501	0.2	%	$	1,003	0.4	%	$	1,506	0.4	%
Tax-exempt municipal securities		4,708	1.5	%		4,726	1.8	%		4,746	1.3	%
Total securities, held to maturity, at amortized cost		5,209	1.7	%		5,729	2.2	%		6,252	1.7	%
Total securities	$	324,170	100.0	%	$	262,559	100.0	%	$	374,512	100.0	%

Column 1	Column 2
(1)	Comprised of corporate debt securities and individual financial institution subordinated debentures

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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)	Amortized		Unrealized			Unrealized		Fair
December 31, 2023	Cost		Gains			Losses		Value
Available for sale
Government agency securities	$	8,705		$	—		$	(544	)	$	8,161
SBA agency securities		13,289			144			(216	)		13,217
Mortgage-backed securities: residential		40,507			—			(5,855	)		34,652
Collateralized mortgage obligations: residential		94,071			454			(12,198	)		82,327
Collateralized mortgage obligations: commercial		69,941			22			(2,664	)		67,299
Commercial paper		73,121			—			(16	)		73,105
Corporate debt securities		34,800			—			(4,109	)		30,691
Municipal securities		12,636			—			(3,127	)		9,509
	$	347,070		$	620		$	(28,729	)	$	318,961
Held to maturity
Municipal taxable securities	$	501		$	3		$	—		$	504
Municipal securities		4,708			—			(115	)		4,593
	$	5,209		$	3		$	(115	)	$	5,097
December 31, 2022
Available for sale
Government agency securities	$	5,012		$	—		$	(517	)	$	4,495
SBA securities		2,634			—			(223	)		2,411
Mortgage-backed securities: residential		44,809			—			(6,752	)		38,057
Mortgage-backed securities: commercial		4,887			—			(16	)		4,871
Collateralized mortgage obligations: residential		82,759			—			(12,856	)		69,903
Collateralized mortgage obligations: commercial		44,591			—			(2,901	)		41,690
Commercial paper		49,551			2			(16	)		49,537
Corporate debt securities		41,176			1			(4,165	)		37,012
Municipal securities		12,669			—			(3,815	)		8,854
	$	288,088		$	3		$	(31,261	)	$	256,830
Held to maturity
Municipal taxable securities	$	1,003		$	7		$	(3	)	$	1,007
Municipal securities		4,726			—			(170	)		4,556
	$	5,729		$	7		$	(173	)	$	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.

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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.

	Less than One Year		More than One Year to Five Years		More than Five Years to Ten Years		More than Ten Years	Total
(dollars in thousands)	Fair		Weighted		Fair		Weighted	Fair			Weighted			Fair	Weighted		Fair		Weighted
December 31, 2023	Value		Average Yield		Value		Average Yield	Value			Average Yield			Value	Average Yield		Value		Average Yield
Government agency securities	$	—		—	%	$	8,161		2.94	%		$	—		—	%	$	—		—	%	$	8,161	2.94	%
SBA securities		—		—	%		2,095		2.65	%			11,122		5.92	%		—		—	%		13,217	5.35	%
Mortgage-backed securities: residential		—		—	%		9,986		0.92	%			16,965		2.26	%		7,701		2.04	%		34,652	1.84	%
Collateralized mortgage obligations: residential		17		1.65	%		35,758		4.28	%			46,552		1.86	%		—		—	%		82,327	2.81	%
Collateralized mortgage obligations: commercial		3,018		6.95	%		18,481		3.95	%			45,800		5.83	%		—		—	%		67,299	5.33	%
Commercial paper		73,105		5.84	%		—		0.00	%			—		—	%		—		—	%		73,105	5.84	%
Corporate debt securities		—		—	%		12,491		4.09	%			16,232		3.61	%		1,968		2.89	%		30,691	3.73	%
Municipal securities		—		—	%		—		—	%			—		—	%		9,509		1.92	%		9,509	1.92	%
Total available for sale	$	76,140		5.88	%	$	86,972		3.63	%		$	136,671		3.78	%	$	19,178		2.07	%	$	318,961	4.00	%
Municipal taxable securities	$	—		—	%	$	504		5.25	%		$	—		—	%	$	—		—	%	$	504	5.25	%
Municipal securities		—		—	%		—		—	%			2,873		2.77	%		1,720		2.59	%		4,593	2.70	%
Total held to maturity	$	—		—	%	$	504		5.25	%		$	2,873		2.77	%	$	1,720		2.59	%	$	5,097	2.95	%

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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.

	Less than Twelve Months		Twelve Months or More			Total
(dollars in thousands)			Unrealized					Unrealized				Unrealized
December 31, 2023	Fair Value		Losses			Fair Value		Losses	Fair Value			Losses
Government sponsored agencies	$	4,238		$	(72	)	$	3,923	$	(472	)		$	8,161	$	(544	)
SBA securities		5,102			(18	)		2,094		(198	)			7,196		(216	)
Mortgage-backed securities: residential		—			—			34,652		(5,855	)			34,652		(5,855	)
Collateralized mortgage obligations: residential		2,597			(37	)		60,275		(12,161	)			62,872		(12,198	)
Collateralized mortgage obligations: commercial		18,463			(70	)		35,077		(2,594	)			53,540		(2,664	)
Commercial paper (1)		53,211			(16	)		—		—				53,211		(16	)
Corporate debt securities		—			—			30,691		(4,109	)			30,691		(4,109	)
Municipal securities		—			—			9,509		(3,127	)			9,509		(3,127	)
Total available for sale	$	83,611		$	(213	)	$	176,221	$	(28,516	)		$	259,832	$	(28,729	)
Municipal securities		1,397			(19	)		3,196		(96	)			4,593		(115	)
Total held to maturity	$	1,397		$	(19	)	$	3,196	$	(96	)		$	4,593	$	(115	)

Column 1	Column 2
(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)					Unrealized					Unrealized						Unrealized
December 31, 2022	Fair Value		Losses			Fair Value		Losses	Fair Value			Losses
Government sponsored agencies	$	354		$	(24	)	$	4,141	$	(493	)		$	4,495	$	(517	)
SBA securities		2,411			(223	)		—		—				2,411		(223	)
Mortgage-backed securities: residential		5,535			(362	)		32,522		(6,390	)			38,057		(6,752	)
Mortgage-backed securities: commercial		4,871			(16	)		—		—				4,871		(16	)
Collateralized mortgage obligations: residential		27,050			(1,842	)		39,815		(11,014	)			66,865		(12,856	)
Collateralized mortgage obligations: commercial		18,741			(790	)		22,949		(2,111	)			41,690		(2,901	)
Commercial paper (1)		39,624			(16	)		—		—				39,624		(16	)
Corporate debt securities		22,977			(1,843	)		10,330		(2,322	)			33,307		(4,165	)
Municipal securities		—			—			8,854		(3,815	)			8,854		(3,815	)
Total available for sale	$	121,563		$	(5,116	)	$	118,611	$	(26,145	)		$	240,174	$	(31,261	)
Municipal taxable securities	$	498		$	(3	)	$	—	$	—			$	498	$	(3	)
Municipal securities		4,556			(170	)		—		—				4,556		(170	)
Total held to maturity	$	5,054		$	(173	)	$	—	$	—			$	5,054	$	(173	)

Column 1	Column 2
(1)	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.

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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:

	As of December 31,
	2023			2022		2021		2020		2019
(dollars in thousands)	$			%		$		%		$			%			$	%		$			%
Loans:(1)
Construction and land development	$	181,469			6.0	%	$	276,876			8.3	%		$	303,144		10.3	%	$	186,723			6.9	%	$	96,020		4.4	%
Commercial real estate (2)		1,167,857			38.5	%		1,312,132			39.3	%			1,247,999		42.6	%		1,003,637			37.1	%		793,268		36.1	%
Single-family residential mortgages		1,487,796			49.1	%		1,464,108			43.9	%			1,004,576		34.3	%		1,124,357			41.5	%		957,254		43.6	%
Commercial and industrial		130,096			4.3	%		201,223			6.0	%			268,709		9.2	%		290,139			10.7	%		274,586		12.5	%
SBA		52,074			1.7	%		61,411			1.8	%			76,136		2.6	%		97,821			3.6	%		74,985		3.4	%
Other loans		12,569			0.4	%		20,699			0.7	%			30,786		1.03	%		4,089			0.2	%		821		0.0	%
Total loans		3,031,861			100.0	%		3,336,449			100.0	%			2,931,350		100.0	%		2,706,766			100.0	%		2,196,934		100.0	%
Allowance for loan losses		(41,903	)					(41,076	)						(32,912	)				(29,337	)					(18,816	)
Total loans, net	$	2,989,958					$	3,295,373						$	2,898,438				$	2,677,429					$	2,178,118

Column 1	Column 2
(1)	Net of discounts on acquired loans and deferred fees and costs

Column 1	Column 2
(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:

	As of December 31,
	Construction and land development		Commercial real estate			Single-family residential mortgages		Commercial and Industrial	SBA		Other			Total loans, net
(dollars in thousands)	$		$			$		$	$		$			$		%
Loans:
California	$	115,943		$	558,771		$	702,779	$	117,788		$	32,755		$	1,749	$	1,529,785	50.5	%
Hawaii		—			2,057			4,263		841			—			11		7,172	0.2	%
Illinois		229			41,745			51,192		1,309			—			107		94,582	3.1	%
New Jersey		—			19,797			24,184		470			—			196		44,647	1.5	%
Nevada		—			64,136			21,522		912			2,820			122		89,512	3.0	%
New York		53,625			171,695			676,509		830			3,287			4,067		910,013	30.0	%
Other		11,672			309,656			7,347		7,946			13,212			6,317		356,150	11.7	%
Total loans, net	$	181,469		$	1,167,857		$	1,487,796	$	130,096		$	52,074		$	12,569	$	3,031,861	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.

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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)	LTV Distribution
December 31, 2023	45%		45%-55%			55%-65%		65%-75% (1)	85%		Total
Non-owner occupied
Hotel/Motel	$	7,635		$	12,165		$	16,804	$	6,101		$	—	$	42,705
Office		8,649			—			17,285		—			8,770		34,704
Rent Controlled NY Multifamily		24,503			17,142			11,312		—			—		52,957
Mobile Home		43,049			66,756			65,804		92,528			—		268,137
Mixed Use		39,902			25,363			8,877		115,471			—		189,613
Apartments		25,127			44,769			33,449		54,094			514		157,953
Warehouse		13,550			21,341			49,262		4,225			1,439		89,817
Retail		12,404			37,096			22,739		911			—		73,150
SFR Rental		13,315			29,649			12,460		5,816			—		61,240
Other		1,990			462			1,696		—			—		4,148
Total non-owner occupied	$	190,124		$	254,743		$	239,688	$	279,146		$	10,723	$	974,424
Owner-occupied
Hotel/Motel		7,940			28,568			43,096		644			—		80,248
Office		666			2,857			1,693		1,309			—		6,525
Rent Controlled NY Multifamily		1,457			—			363		—			—		1,820
Mixed Use		3,974			4,063			5,263		—			—		13,300
Warehouse		6,013			13,846			21,677		24,519			—		66,055
Retail		3,992			7,597			4,880		—			—		16,469
SFR Rental		178			992			—		—			—		1,170
Other		1,403			—			613		5,830			—		7,846
Total owner-occupied	$	25,623		$	57,923		$	77,585	$	32,302		$	—	$	193,433
Total	$	215,747		$	312,666		$	317,273	$	311,448		$	10,723	$	1,167,857

Column 1	Column 2
(1)	No loans in the 75% - 85% LTV Distribution

The following table presents the loan-to-value ratios at origination for CRE loans by state as of December 31, 2023:

(dollars in thousands)	LTV Distribution
December 31, 2023	45%		45%-55%			55%-65%		65%-75% (1)	85%		Total
Non-owner occupied
California	$	79,918		$	118,075		$	92,198	$	124,792		$	—	$	414,983
New York		64,470			56,815			32,764		4,309			—		158,358
Nevada		8,310			33,466			16,954		1,447			—		60,177
Illinois		20,058			2,692			3,184		1,166			10,723		37,823
New Jersey		334			346			16,368		911			—		17,959
Hawaii		301			896			—		—			—		1,197
Other		16,733			42,453			78,220		146,521			—		283,927
Total non-owner occupied	$	190,124		$	254,743		$	239,688	$	279,146		$	10,723	$	974,424
Owner-occupied
California		16,728			34,458			62,490		30,110			—		143,786
New York		7,267			1,772			3,438		860			—		13,337
Nevada		—			2,627			—		1,332			—		3,959
Illinois		1,080			1,106			1,736		—			—		3,922
New Jersey		548			988			302		—			—		1,838
Hawaii		—			861			—		—			—		861
Other		—			16,111			9,619		—			—		25,730
Total owner-occupied	$	25,623		$	57,923		$	77,585	$	32,302		$	—	$	193,433
Total	$	215,747		$	312,666		$	317,273	$	311,448		$	10,723	$	1,167,857

Column 1	Column 2
(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.

	As of December 31, 2023		As of December 31, 2022		Increase (Decrease)
(dollars in thousands)	$		Mix %		$		Mix %	$			%
Residential construction	$	80,341		44.3	%	$	166,558		60.1	%		$	(86,217	)	(51.8	)%
Commercial construction		78,053		43.0	%		77,231		27.9	%			822		1.1	%
Land development		23,075		12.7	%		33,087		12.0	%			(10,012	)	(30.3	)%
Total construction and land development loans	$	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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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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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)	One Year or Less					Over Fifteen Years	Total
Construction & land development
Fixed rate	$	11,708	$	—	$	—	$	—	$	11,708
Floating rate		169,689		—		—		72		169,761
Commercial real estate
Fixed rate		53,184		130,212		21,766		2,952		208,114
Floating rate		55,125		137,114		534,122		233,382		959,743
SFR mortgage
Fixed rate		167		4,198		11,508		1,470,163		1,486,036
Floating rate		—		995		765		—		1,760
Commercial & industrial
Fixed rate		21,343		1,026		4,711		—		27,080
Floating rate		58,184		36,722		8,110		—		103,016
SBA
Fixed rate		—		86		6,286		—		6,372
Floating rate		—		2,171		15,893		27,638		45,702
Other
Fixed rate		79		6,044		6,428		—		12,551
Floating rate		18		—		—		—		18
Total loans	$	369,497	$	318,568	$	609,589	$	1,734,207	$	3,031,861
Fixed rate	$	86,481	$	141,566	$	50,699	$	1,473,115	$	1,751,861
Floating rate		283,016		177,002		558,890		261,092		1,280,000
Total loans	$	369,497	$	318,568	$	609,589	$	1,734,207	$	3,031,861
Allowance for loan losses									$	(41,903	)
Net loans									$	2,989,958
Mortgage loans held for sale									$	1,911

Loan Quality

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:

	As of December 31,
	2023		2022		2021		2020	2019
(dollars in thousands)	$		% (1)		$		% (1)	$			% (1)			$	% (1)		$		% (1)
Loans:
Construction and land development	$	1,219		0.67	%	$	2,638		0.95	%		$	4,150		1.37	%	$	2,473		1.32	%	$	1,268	1.32	%
Commercial real estate (2)		17,826		1.53	%		17,657		1.35	%			16,603		1.33	%		13,718		1.37	%		7,668	0.97	%
Single-family residential mortgages		20,117		1.35	%		17,640		1.20	%			7,839		0.78	%		8,486		0.75	%		6,182	0.65	%
Commercial and industrial		1,348		1.04	%		1,804		0.90	%			2,813		1.05	%		3,690		1.27	%		2,736	1.00	%
SBA		1,196		2.30	%		621		1.01	%			980		1.29	%		927		0.95	%		852	1.14	%
Other		197		1.57	%		716		3.46	%			527		1.71	%		43		1.05	%		9	1.10	%
Unallocated		—		—			—		—				—		—			—		—			101	—
Allowance for loan losses	$	41,903		1.38	%	$	41,076		1.23	%		$	32,912		1.12	%	$	29,337		1.08	%	$	18,816	0.86	%

Column 1	Column 2
(1)	Represents the percentage of the allowance to total loans in the respective category.

Column 1	Column 2
(2)	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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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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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:

	Year Ended December 31,
(dollars in thousands)	2023			2022			2021(1)		2020(1)		2019(1)
Balance, beginning of period	$	41,076			$	32,912		$	29,337		$	18,816		$	17,577
ASU 2016-13 transition adjustment		—				2,135			—			—			—
Adjusted beginning balance	$	41,076			$	35,047		$	29,337		$	18,816		$	17,577
Charge-offs:
Construction & land development		(140	)			—			—			—			—
Commercial real estate		(2,537	)			—			(67	)		(85	)		(166	)
Single-family residential mortgages		(93	)			—			—			—			—
Commercial and industrial		—				(5	)		(500	)		(200	)		—
SBA		(62	)			(14	)		(1	)		(973	)		(1,093	)
Other		(362	)			(237	)		(59	)		(45	)		—
Total charge-offs		(3,194	)			(256	)		(627	)		(1,303	)		(1,259	)
Recoveries:
Commercial real estate		80				—			61			—			—
Commercial and industrial		2				2			1			—			—
SBA		1				227			95			1			108
Other		60				29			86			—			—
Total recoveries		143				258			243			1			108
Net (charge-offs)/recoveries		(3,051	)			2			(384	)		(1,302	)		(1,151	)
Provision for credit losses - loans		3,878				6,027			3,959			11,823			2,390
Balance, end of period	$	41,903			$	41,076		$	32,912		$	29,337		$	18,816
Reserve for off-balance sheet credit commitments
Balance at beginning of year	$	1,156			$	1,203		$	1,383		$	826		$	688
ASU 2016-13 transition adjustment		—				1,045			—			—			—
Adjusted beginning balance	$	1,156			$	2,248		$	1,383		$	826		$	688
(Reversal of) reserve for unfunded commitments		(516	)			(1,092	)		(180	)		557			138
Balance at the end of period	$	640			$	1,156		$	1,203		$	1,383		$	826
Total allowance for credit losses (ACL)	$	42,543			$	42,232		$	34,115		$	30,720		$	19,642
Total LHFI at end of period	$	3,031,861			$	3,336,449		$	2,931,350		$	2,706,766		$	2,196,934
Average LHFI	$	3,205,625			$	3,096,786		$	2,745,492		$	2,544,413		$	2,112,933
Net charge-offs to average LHFI		0.10	%			0.00	%		0.01	%		0.05	%		0.05	%
Allowance for loan losses to total LHFI		1.38	%			1.23	%		1.12	%		1.08	%		0.86	%

Column 1	Column 2
(1)	Reserve was under the Allowance for Loan Loss (“ALL”) method in accordance with ASC 450 and ASC 310

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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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.

	As of December 31,
(dollars in thousands)	2023			2022			2021		2020		2019
Accruing troubled debt restructured loans(1):
Construction and land development	$	—			$	—		$	—		$	—		$	264
Commercial real estate		—				894			1,328			1,434			1,472
Commercial and industrial		—				306			410			502			-
SBA		—				—			—			34			45
Total accruing troubled debt restructured loans		—				894			1,328			1,434			1,736
Non-accrual loans:
Construction and land development		—				141			149			173			—
Commercial real estate		10,569				13,189			4,672			1,193			725
Single-family residential mortgages		18,103				5,936			4,191			7,714			1,334
Commercial and industrial		854				713			3,712			1,661			—
SBA		2,085				2,245			6,263			6,828			9,378
Other		8				99			—			15			—
Total non-accrual loans		31,619				22,323			18,987			17,584			11,437
Total non-performing loans		31,619				23,217			20,315			19,018			13,173
OREO		—				577			293			293			293
Nonperforming assets	$	31,619			$	23,794		$	20,608		$	19,311		$	13,466
Nonperforming loans to total LHFI		1.04	%			0.71	%		0.71	%		0.72	%		0.60	%
Nonperforming assets to total assets		0.79	%			0.61	%		0.50	%		0.59	%		0.48	%
Nonperforming loans to tangible common equity and ACL		6.60	%			5.15	%		4.77	%		4.96	%		3.64	%
Nonperforming assets to tangible common equity and ACL		6.60	%			5.28	%		4.83	%		5.04	%		3.72	%

Column 1	Column 2
(1)	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.

Column 1

Column 2

(1)

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)				Special
December 31, 2023	Pass		Mention			Substandard		Doubtful	Total
Real Estate:
Construction and land development	$	169,793		$	11,676		$	—	$	—	$	181,469
Commercial real estate		1,123,887			12,599			31,371		—		1,167,857
Single-family residential mortgages		1,464,531			4,474			18,791		—		1,487,796
Commercial:
Commercial and industrial		119,858			2,737			7,501		—		130,096
SBA		47,397			1,356			3,321		—		52,074
Other		12,462			—			107		—		12,569
Total	$	2,937,928		$	32,842		$	61,091	$	—	$	3,031,861

(dollars in thousands)				Special
December 31, 2022	Pass		Mention			Substandard		Doubtful	Total
Real Estate:
Construction and land development	$	276,735		$	—		$	141	$	—	$	276,876
Commercial real estate		1,267,936			9,280			34,916				1,312,132
Single-family residential mortgages		1,448,041			3,925			12,142		—		1,464,108
Commercial:
Commercial and industrial		162,881			29,007			9,335		—		201,223
SBA		56,142			—			5,269		—		61,411
Other		20,536			—			163		—		20,699
Total	$	3,232,271		$	42,212		$	61,966	$	—	$	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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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:

	For the Year Ended
	December 31, 2023		December 31, 2022		December 31, 2021
	$		%		$		%	$			%
(dollars in thousands)
Noninterest-bearing demand deposits	$	539,621		17.00	%	$	798,741		26.82	%		$	1,291,484	38.15	%
Interest-bearing deposits:
NOW		57,969		1.83	%		63,542		2.13	%			72,876	2.15	%
Money market		412,415		12.99	%		420,057		14.11	%			140,194	4.14	%
Savings		162,344		5.11	%		131,740		4.42	%			714,539	21.11	%
Time deposits $250,000 and under		1,190,822		37.51	%		837,369		28.12	%			587,940	17.37	%
Time deposits over $250,000		811,589		25.56	%		726,234		24.40	%			578,499	17.08	%
Total interest-bearing deposits		2,635,139		83.00	%		2,178,942		73.18	%			2,094,048	61.85	%
Total deposits	$	3,174,760		100.00	%	$	2,977,683		100.00	%		$	3,385,532	100.00	%

The following table summarizes our average deposit balances and weighted average rates as of the dates indicated:

	For the Year Ended
	December 31, 2023		December 31, 2022			December 31, 2021
				Weighted					Weighted							Weighted
	Average		Average			Average		Average		Average			Average
(dollars in thousands)	Balance		Rate (%)			Balance		Rate (%)		Balance			Rate (%)
Noninterest-bearing demand deposits	$	602,291			—		$	1,050,063			—			$	938,710		—
Interest-bearing deposits:
NOW		58,191			1.25	%		73,335			0.36	%			69,211		0.27	%
Money market		429,102			2.46	%		631,094			0.81	%			637,539		0.39	%
Savings		126,062			0.73	%		144,409			0.13	%			137,534		0.10	%
Time deposits $250,000 and under		1,146,513			4.11	%		609,464			1.08	%			640,747		0.70	%
Time deposits over $250,000		742,839			4.00	%		565,059			1.20	%			597,770		0.79	%
Total interest-bearing deposits		2,502,707			3.56	%		2,023,361			0.93	%			2,082,801		0.57	%
Total deposits	$	3,104,998			2.87	%	$	3,073,424			0.61	%		$	3,021,511		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:

	Maturity Within:
(dollars in thousands)	Three Months		After Three to Six Months			Six to 12 Months		After 12 Months	Total
Time deposits $250,000 and under
Wholesale deposits (1)	$	40,138		$	3,734		$	8,090	$	—	$	51,962
Brokered		139,953			114,987			—		—		254,940
Other		269,249			286,010			322,764		5,897		883,920
Total time deposits $250,000 and under		449,340			404,731			330,854		5,897		1,190,822
Time deposits over $250,000 (2)		352,015			200,336			257,895		1,343		811,589
Total time deposits	$	801,355		$	605,067		$	588,749	$	7,240	$	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)		For the Year Ended December 31,
		2023			2022
Uninsured deposits		$	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)	December 31, 2023
3 months or less	$	284,107
Over 3 months through 6 months		148,229
Over 6 months through 12 months		181,618
Over 12 months		15,263
Total	$	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:

	Year Ended December 31,
(dollars in thousands)	2023			2022			2021
Outstanding at period-end	$	150,000			$	220,000		$	150,000
Average amount outstanding		172,219				192,438			150,000
Maximum amount outstanding at any month-end		220,000				270,000			150,000
Weighted average interest rate:
During period		1.67	%			1.49	%		1.18	%
End of period		1.18	%			2.28	%		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:

	Issue		Principal		Unamortized			Recorded		Stated Rate		December 31, 2023		Stated
(dollars in thousands)	Date		Amount		Valuation Reserve			Value		Description		Effective Rate		Maturity
Subordinated debentures
TFC Trust	December 22, 2006		$	5,155		$	1,189			$	3,966		Three-month CME Term SOFR plus 0.26% (a) plus 1.65%,		7.30	%	March 15, 2037
FAIC Trust	December 15, 2004			7,217			842				6,375		Three-month CME Term SOFR 0.26% (a) plus 2.25%		7.90	%	December 15, 2034
PGBH Trust	December 15, 2004			5,155			558				4,597		Three-month CME Term SOFR 0.26% (a) plus 2.10%		7.75	%	December 15, 2034
Total		$	17,527		$	2,589			$	14,938

Column 1	Column 2
(a)	Represents applicable tenor spread adjustment when the original Libor index was discontinued on June 30, 2023

In 2016, the Company, through the acquisition of TomatoBank, 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:

				Regulatory Capital Ratio Requirements	Regulatory Capital Ratio Requirements, including fully phased-in Capital Conservation Buffer
Tier 1 Leverage Ratio
Consolidated	11.99	%	11.67	%	4.00	%	4.00	%	5.00	%
Bank	13.62	%	14.89	%	4.00	%	4.00	%	5.00	%
Common Equity Tier 1 Risk-Based Capital Ratio (1)
Consolidated	19.07	%	16.03	%	4.50	%	7.00	%	6.50	%
Bank	22.41	%	21.14	%	4.50	%	7.00	%	6.50	%
Tier 1 Risk-Based Capital Ratio
Consolidated	19.69	%	16.58	%	6.00	%	8.50	%	8.00	%
Bank	22.41	%	21.14	%	6.00	%	8.50	%	8.00	%
Total Risk-Based Capital Ratio
Consolidated	25.92	%	24.27	%	8.00	%	10.50	%	10.00	%
Bank	23.67	%	22.40	%	8.00	%	10.50	%	10.00	%

Column 1	Column 2
(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:

	Payments Due
	Within		One to			Three to		After Five
(dollars in thousands)	One Year		Three Years			Five Years		Years	Total
Deposits without a stated maturity	$	1,172,350		$	—		$	—	$	—	$	1,172,350
Time deposits		1,994,517			6,689			1,204		—		2,002,410
FHLB advances		—			150,000			—		—		150,000
Long-term debt		—			—			—		119,147		119,147
Subordinated debentures		—			—			—		14,938		14,938
Leases		4,728			10,230			9,050		10,699		34,707
Total contractual obligations	$	3,171,595		$	166,919		$	10,254	$	144,784	$	3,493,552

Off-Balance Sheet Arrangements

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)	December 31, 2023
Tangible common equity:
Total shareholders' equity	$	511,260		$	484,563
Adjustments
Goodwill		(71,498	)		(71,498	)
Core deposit intangible		(2,795	)		(3,718	)
Tangible common equity	$	436,967		$	409,347
Tangible assets:
Total assets-GAAP	$	4,026,025		$	3,919,058
Adjustments
Goodwill		(71,498	)		(71,498	)
Core deposit intangible		(2,795	)		(3,718	)
Tangible assets:	$	3,951,732		$	3,843,842
Common shares outstanding		18,609,179			18,965,776
Common equity to assets ratio		12.70	%		12.36	%
Book value per share	$	27.47		$	25.55
Tangible common equity to tangible assets ratio		11.06	%		10.65	%
Tangible book value per share	$	23.48		$	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:

	For the year
(dollars in thousands)	2023			2022			2021
Net income available to common shareholders	$	42,465			$	64,327		$	56,906
Average shareholders' equity		500,540				470,781			447,714
Adjustments:
Average goodwill		(71,498	)			(70,948	)		(69,243	)
Average core deposit intangible		(3,282	)			(4,131	)		(4,657	)
Adjusted average tangible common equity	$	425,760			$	395,702		$	373,814
Return on average tangible common equity		9.97	%			16.26	%		15.22	%

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