HOPE BANCORP INC

Previous wording

(3)Net interest income expressed as a percentage of average interest earning assets.

Current wording

(3)Net interest income divided by average interest earning assets.

Previous wording

Certain key macroeconomic variable inputs used in the calculation of our allowance for credit losses experienced a weakening between projections as of December 31, 2022 versus projections as of December 31, 2023, particularly projected GDP growth and CRE Price Index growth rates. This contributed to an increase in our allowance for credit losses estimated loss rates at December 31, 2023, compared with at December 31, 2022. Changes in the key macroeconomic variables are presented in the tables below.

Current wording

Certain key macroeconomic variable inputs used in the calculation of our allowance for credit losses experienced a change between projections as of December 31, 2023 versus projections as of December 31, 2024, particularly projected GDP growth which had improved projections and CRE Price Index growth rates, which had declining projections. This contributed to a decrease in our allowance for credit losses estimated loss rates at December 31, 2024, compared with December 31, 2023. Changes in the key macroeconomic variables are presented in the tables below.

Previous wording

In addition to an estimate of quantitatively derived losses, our allowance for credit losses also includes an estimate of qualitatively derived losses to account for risks not fully captured by the quantitative calculation of estimated credit losses. At December 31, 2023, the qualitative portion of our allowance for credit losses totaled $35.7 million compared with $45.1 million at December 31, 2022. The qualitative portion of our allowance for credit losses is determined by management and takes into consideration factors related to changes to lending policies, changes in the nature and volume of loans, risks related to lending management, changes to the volume and severity of past due and nonaccrual loans, changes in the quality of loan review, concentrations of credit, and other external factors. Some of these factors are more subjective than others and require significant judgment from management to determine estimated losses.

Current wording

In addition to an estimate of quantitatively derived losses, our allowance for credit losses also includes an estimate of qualitatively derived losses to account for risks not fully captured by the quantitative calculation of estimated credit losses. At December 31, 2024, the qualitative portion of our allowance for credit losses totaled $50.1 million compared with $35.7 million at December 31, 2023. The qualitative portion of our allowance for credit losses is determined by management and takes into consideration factors related to changes to lending policies, changes in the nature and volume of loans, risks related to lending management, changes to the volume and severity of past due and nonaccrual loans, changes in the quality of loan review, concentrations of credit, and other external factors. Some of these factors are more subjective than others and require significant judgment from management to determine estimated losses.

Previous wording

Moody’s consensus forecast assumes that the probability that the economy will perform better than the consensus estimates is equal to the probability that it will perform worse. A sensitivity analysis of our allowance for credit losses was performed by estimating credit losses using the Moody’s S2 scenario as of December 31, 2023, which has a more negative outlook on the economy compared with the Moody’s consensus scenario. The S2 scenario includes assumptions including elevated market interest rates despite a weakening of the economy due to inflationary concerns, elevated risk associated with the Russian invasion of Ukraine and the Hamas/Israel conflict, rising tensions with China regarding Taiwan that could limit the global chip supply, a decline in consumer confidence due to concerns of additional bank failures, increased risk of a federal government shutdown, and a decline in the stock market in 2024. Incorporating key macroeconomic inputs from Moody’s S2 projected scenario in our calculation of the allowance for credit losses resulted in additional allowance for credit losses of approximately $21.6 million compared with the results using the Moody’s consensus forecast as of December 31, 2023. Management reviews the results using the comparison scenario for sensitivity analysis and considered the results when evaluating the qualitative factor adjustments.

Current wording

Moody’s consensus forecast assumes that the probability that the economy will perform better than the consensus estimates is equal to the probability that it will perform worse. A sensitivity analysis of our allowance for credit losses was performed by estimating credit losses using the Moody’s S2 scenario as of December 31, 2024, which has a more negative outlook on the economy compared with the Moody’s consensus scenario. The S2 scenario includes assumptions including elevated market interest rates, which weakens credit sensitive spending more than anticipated. In addition, the combination of tariffs, rising inflation, deportations, global political unrest and tensions, and reduced credit availability causes the economy to fall into a mild recession in 2025. Incorporating key macroeconomic inputs from Moody’s S2 projected scenario in our calculation of the allowance for credit losses resulted in additional allowance for credit losses of approximately $28.5 million compared with the results using the Moody’s consensus forecast as of December 31, 2024. Management reviews the results using the comparison scenario for sensitivity analysis and considered the results when evaluating the qualitative factor adjustments.

Previous wording

Impact if Actual Results Differ From Estimates and Judgments - Changes in qualitative factors assessed, changes to assumptions used in the impairment test, selection and weighting of the various fair value techniques, and downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses which could have a material impact our financial condition and earnings. We performed a goodwill impairment quantitative test as of September 30, 2023 and based on this analysis we concluded the fair value of the Company exceeded the carrying value by 15.4% using a discount rate of 13.6% for the income approach. Management performed a sensitivity analysis of the discount rate used in the income approach of the goodwill impairment analysis and a 50 basis point increase to the discount rate would result in the fair value of the Company exceeding the carrying amount by 10.9% a reduction of 4.5%.

Current wording

Impact if Actual Results Differ From Estimates and Judgments - Changes in qualitative factors assessed, changes to assumptions used in the impairment test, selection and weighting of the various fair value techniques, and downturns in economic or business conditions, could have a significant adverse impact on the carrying value of goodwill and could result in impairment losses which could have a material impact in our financial condition and earnings. We performed a goodwill impairment quantitative test as of September 30, 2023, and based on this analysis we concluded the fair value of the Company exceeded the carrying value by 15.4%, using a discount rate of 13.6% for the income approach. Management performed a sensitivity analysis of the discount rate used in the income approach of the goodwill impairment analysis, and a 50 basis point increase to the discount rate would result in the fair value of the Company exceeding the carrying amount by 10.9%. We did not perform a quantitative test for the year ended December 31, 2024, as we performed a qualitative analysis that indicated that goodwill was more than likely not impaired.

Previous wording

Goodwill is discussed in more detail in Note 5 to our Consolidated Financial Statements presented this Report.

Current wording

Goodwill is discussed in more detail in Note 5 to our Notes to Consolidated Financial Statements presented in this Report.

Previous wording

Our net income was $133.7 million for 2023 compared with $218.3 million for 2022 and $204.6 million for 2021. Our diluted earnings per common share totaled $1.11, $1.81, and $1.66 for the years 2023, 2022, and 2021, respectively. The return on average assets was 0.67%, 1.20%, and 1.17% and the return on average stockholders’ equity was 6.48%, 10.73%, and 9.88% for the years 2023, 2022, and 2021, respectively. The decrease in net income for 2023 compared with 2022 was primarily due to increases in interest expense, provision for credit losses and noninterest expense. The increase in net income for 2022 compared with 2021 was due primarily to an increase in net interest income, offset partially by increases in the provision for credit losses and noninterest expense.

Current wording

Our net income was $99.6 million for 2024 compared with $133.7 million for 2023 and $218.3 million for 2022. Our diluted earnings per common share totaled $0.82, $1.11, and $1.81 for the years 2024, 2023, and 2022, respectively. The return on average assets was 0.56%, 0.67%, and 1.20% and the return on average stockholders’ equity was 4.68%, 6.48%, and 10.73% for the years 2024, 2023, and 2022, respectively. The decrease in net income for 2024 compared with 2023 was primarily due to decreases in net interest income, offset partially by decreases in provision for credit losses and noninterest expense. The decrease in net income for 2023 compared with 2022 was primarily due to increases in interest expense, provision for credit losses and noninterest expense.

Previous wording

Net interest income was $525.9 million for 2023, compared with $578.4 million for 2022 and $512.8 million for 2021. Changes in net interest income are a function of changes in interest rates and volumes of interest earning assets and interest bearing liabilities. The table below sets forth information regarding the changes in interest income and interest expense for the periods indicated. The total change for each category of interest earning assets and interest bearing liabilities is segmented into the change attributable to variations in volume (changes in volume multiplied by the old rate) and the change attributable to variations in interest rates (changes in rates multiplied by the old volume). Nonaccrual loans are included in average loans used to compute this table.

Current wording

Net interest income was $427.9 million for 2024, compared with $525.9 million for 2023 and $578.4 million for 2022. Changes in net interest income are a function of changes in interest rates and volumes of interest earning assets and interest bearing liabilities. The table below sets forth information regarding the changes in interest income and interest expense for the periods indicated. The total change for each category of interest earning assets and interest bearing liabilities is segmented into the change attributable to variations in volume (changes in volume multiplied by the old rate) and the change attributable to variations in interest rates (changes in rates multiplied by the old volume). Nonaccrual loans are included in average loans used to compute this table.

Previous wording

Net interest income before provision for credit losses decreased by $52.6 million, or 9%, for 2023 compared with 2022. The decrease in net interest income was driven by a higher cost of funds and increases in average interest bearing deposits and short-term borrowings, partially offset by expanding yields on interest earning assets and higher average balances in loans and interest earning cash and deposits in other banks. The expanding interest earning asset yields and higher deposit costs reflected rising market interest rates during the period. The upper range of the target Federal Funds rate increased to 5.50% at December 31, 2023, up from 4.50% at December 31, 2022. The increase in average interest earning cash and deposits at other banks reflected a conservative approach to liquidity risk management, given the banking industry volatility caused by multiple bank failures in the first half of 2023. The increase in the average interest earning cash and deposits in other banks was largely funded through FRB’s BTFP borrowings.

Current wording

Net interest income before provision for credit losses decreased by $52.6 million, or 9%, for 2023 compared with 2022. The decrease in net interest income was driven by a higher cost of funds and increases in average balance of interest bearing deposits and short-term borrowings, partially offset by expanding yields on interest earning assets and higher average balances in loans and interest earning cash and deposits in other banks. The expanding interest earning asset yields and higher deposit costs reflected rising market interest rates during the period. The upper range of the target federal funds rate increased to 5.50% at December 31, 2023, up from 4.50% at December 31, 2022. The year-over-year increase in the average balance of interest earning cash and deposits at other banks between 2023 and 2022 was largely funded through FRB’s BTFP borrowings, reflecting our conservative approach to liquidity risk management, given the banking industry volatility caused by multiple bank failures in the first half of 2023.

Previous wording

Interest income was $1.05 billion for 2023, compared with $716.1 million for 2022, and $566.5 million for 2021. The yield on average interest earning assets was 5.60% for 2023, compared with 4.16% for 2022, and 3.42% for 2021.

Current wording

Interest income was $954.0 million for 2024, compared with $1.05 billion for 2023, and $716.1 million for 2022. The yield on average interest earning assets was 5.69% for 2024, compared with 5.60% for 2023, and 4.16% for 2022.

Previous wording

Interest expense on deposits was $441.2 million for 2023, compared with $114.8 million for 2022, and $42.0 million for 2021. The average cost of deposits was 2.82% for 2023, compared with 0.76% for 2022, and 0.29% for 2021. The average cost of interest bearing deposits was 3.92% for 2023, compared with 1.20% for 2022, and 0.46% for 2021.

Current wording

Interest expense on deposits was $495.4 million for 2024, compared with $441.2 million for 2023, and $114.8 million for 2022. The average cost of deposits was 3.38% for 2024, compared with 2.82% for 2023, and 0.76% for 2022. The average cost of interest bearing deposits was 4.51% for 2024, compared with 3.92% for 2023, and 1.20% for 2022.

Previous wording

The increase in interest expense on total deposits of $326.4 million, or 284%, for 2023 compared with 2022 was due to a higher cost of interest bearing deposits, growth in average time deposits, and an increase in average borrowings, reflecting usage of the BTFP. The increase in the cost of deposits was driven by rising market interest rates, a remix of low-yielding deposits into higher-cost options, and deposit pricing competition.

Current wording

The increase in interest expense on total deposits of $326.4 million, or 284%, for 2023 compared with 2022 was due to a higher cost of interest bearing deposits and growth in average time deposits. The increase in the cost of deposits was driven by rising interest rates during the period, a remix of low-yielding deposits into higher-cost options, and deposit pricing competition.

Previous wording

Average FHLB and FRB borrowings were $1.62 billion for 2023, compared with $528.3 million in 2022, and $208.7 million in 2021. Interest expense on FHLB and FRB borrowings was $69.4 million for 2023 compared with $11.5 million for 2022, and $2.6 million for 2021. The average cost of FHLB and FRB borrowings was 4.29% for 2023, compared with 2.18% for 2022, and 1.23% for 2021. Given the attractive cost and structure of the BTFP, we utilized it in 2023 to bolster our on-balance sheet liquidity in response to the banking industry disruption caused by the multiple bank failures in the first half of the year.

Current wording

Average FHLB and FRB borrowings were $531.9 million for 2024, compared with $1.62 billion in 2023, and $528.3 million in 2022. Interest expense on FHLB and FRB borrowings was $19.9 million for 2024 compared with $69.4 million for 2023, and $11.5 million for 2022. The average cost of FHLB and FRB borrowings was 3.73% for 2024, compared with 4.29% for 2023, and 2.18% for 2022. The year-over-year decrease in the cost of FHLB and FRB borrowings for 2024 compared to 2023 primarily reflected the payoff of $1.70 billion in FRB BTFP borrowings, which had a weighted average rate of 4.47%, and the impact of our cash flow hedges which reduced interest expense on borrowings starting in the second quarter of 2024.

Previous wording

In 2018, we issued $217.5 million in senior convertible notes. Interest expense on convertible notes was $1.9 million for 2023 compared with $5.3 million for 2022 and 2021. The cost of our convertible notes for 2023 was 2.47% compared with 2.44% for 2022 and 2.45% for 2021. The cost of our convertible notes consisted of the 2.00% coupon rate and non-cash interest expense from the capitalization of issuance cost. On January 1, 2021, we early adopted ASU 2020-06, which eliminated the discount on our convertible notes and reduced interest expense that was previously recognized on amortization of the discount.

Current wording

In 2018, we issued $217.5 million in senior convertible notes. Interest expense on convertible notes was $9 thousand for 2024 compared with $1.9 million and $5.3 million for 2023 and 2022, respectively. The cost of our convertible notes for 2024 was 2.00% compared with 2.47% for 2023 and 2.44% for 2022. The cost of our convertible notes consisted of the 2.00% coupon rate and non-cash interest expense from the capitalization of issuance cost.

Previous wording

During the year ended December 31, 2023, we repurchased our notes in the aggregate principal amount of $19.9 million and recorded a gain on debt extinguishment of $405 thousand. The repurchased notes were immediately cancelled subsequent to repurchase. On May 15, 2023, most holders of our convertible notes exercised their right to put their notes and therefore we paid off $197.1 million of convertible note principal in cash. During the years ended December 31, 2022 and 2021, there were no repurchases or put options.

Current wording

During the year ended December 31, 2023, we repurchased our notes in the aggregate principal amount of $19.9 million and recorded a gain on debt extinguishment of $405 thousand. The repurchased notes were immediately cancelled subsequent to repurchase. On May 15, 2023, most holders of our convertible notes exercised their right to put their notes and therefore we paid off $197.1 million of convertible note principal in cash. There were no repurchases or put options exercised for the years ended December 31, 2024 and 2022.

Previous wording

The subordinated debentures bear interest at the 3-month Chicago Mercantile Exchange term Secured Financing Overnight Rate (“SOFR”) rate, plus a designated spread. Prior to LIBOR cessation at June 2023, the interest rate was tied to the 3-month LIBOR rate, plus a designated spread. There were no changes in our balance of subordinated debentures during 2023 or 2022 aside from the increases related to the discount accretion on subordinated debentures acquired from previous acquisitions. Interest expense on subordinated debentures was $10.5 million for 2023 compared with $6.0 million for 2022, $3.9 million for 2021. The average rate on other borrowings increased to 10.02% for 2023, compared with 5.84% for 2022, and 3.82% for 2021. The change in cost of other borrowings for 2023 and 2022 compared with prior years was due to changes in the 3-month SOFR and 3-month LIBOR rates.

Current wording

The subordinated debentures bear interest at the 3-month Chicago Mercantile Exchange term Secured Financing Overnight Rate (“SOFR”) rate, plus a designated spread. Prior to LIBOR cessation at June 2023, the interest rate was tied to the 3-month LIBOR rate, plus a designated spread. There were no changes in our balance of subordinated debentures during 2024 or 2023 aside from the increases related to the discount accretion on subordinated debentures acquired from previous acquisitions. Interest expense on subordinated debentures was $10.8 million for 2024 compared with $10.5 million for 2023, and $6.0 million for 2022. The average rate on other borrowings increased to 10.17% for 2024, compared with 10.02% for 2023, and 5.84% for 2022. The change in cost of other borrowings for 2023 and 2022 compared with 2024 was due to changes in the 3-month SOFR and 3-month LIBOR rates.

Previous wording

The provision for credit losses reflects our judgment of the current period cost associated with credit risk inherent in our loan portfolio. The provision for credit losses for each period is dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, assessments by management, third parties’ and regulators’ examination of the loan portfolio, the value of the underlying collateral on problem loans, the general economic conditions in our market areas, and future projections of the economy. Specifically, the provision for credit losses represents the amount charged against current period earnings to achieve an allowance for credit losses that, in our judgment, is adequate to absorb probable lifetime losses inherent in our loan portfolio. Periodic fluctuations in the provision for credit losses result from management’s assessment of the adequacy of the allowance for credit losses; however, actual credit losses could potentially vary materially from current estimates. If the allowance for credit losses is inadequate, we may be required to record additional provision for credit losses, which could have a material adverse effect on our business, financial condition, and results of operations.

Current wording

The provision for credit losses reflects management’s assessment of the current period cost associated with credit risk inherent in the loan portfolio. The provision for credit losses for each period includes provision for credit losses on loans and provision for unfunded loan commitments. Provision for credit losses on loans is dependent upon many factors, including loan growth, net charge offs, changes in the composition of the loan portfolio, delinquencies, assessments by management, examinations of the loan portfolio, the value of the underlying collateral on problem loans, the general economic conditions in our market areas, and future projections of the economy. Specifically, the provision for credit losses on loans represents the amount charged against current period earnings to achieve an allowance for credit losses that, in management’s judgment, is adequate to absorb probable lifetime losses inherent in the loan portfolio. Provision for unfunded loan commitments is based on the estimated future funding of loan commitments. Periodic fluctuations in the provision for credit losses result from management’s assessment of the adequacy of the allowance for credit losses and allowance for unfunded loan commitments, and actual credit losses may vary in material respects from current estimates. If the allowances for credit losses are inadequate, we may be required to record additional provisions, which may have a material and adverse effect on business, financial condition, and results of operations.

Previous wording

The provision for credit losses was $29.1 million for 2023, an increase of $19.5 million from $9.6 million for 2022. The increase in provision for credit losses was largely due to increased net charge offs. During 2023, we recorded an idiosyncratic full charge off of $23.4 million related to a borrower that entered into Chapter 7 liquidation in August 2023. In comparison, in 2022, we recorded $17.3 million in recoveries from a previously charged off loan, resulting in total net recoveries in 2022. The increase to the provision for credit losses due to charge offs was partially offset by the year over year decline loans receivable, which reduced the required ACL balance. The allowance for credit losses coverage ratio was 1.15% of loans receivable at December 31, 2023, compared with 1.05% at December 31, 2022.

Current wording

The provision for credit loss on loans was $29.1 million for 2023, an increase of $19.5 million from $9.6 million for 2022. The increase in provision for credit loss on loans was largely due to increased net charge offs. During 2023, we recorded an idiosyncratic full charge off of $23.4 million related to a borrower that entered into Chapter 7 liquidation in August 2023. In comparison, in 2022, we recorded $17.3 million in recoveries from a previously charged off loan, resulting in total net recoveries in 2022. The increase to the provision for credit loss on loans due to charge offs was partially offset by the year over year decline in loans receivable, which reduced the required ACL balance. The allowance for credit losses coverage ratio was 1.15% of loans receivable at December 31, 2023, compared with 1.05% at December 31, 2022.

Previous wording

Noninterest income is primarily comprised of service fees on deposit accounts, international service fees (fees received on trade finance letters of credit), wire transfer fees, swap fee income, net gains on sales of loans, and other income and fees, which included loan servicing fees, earnings on bank owned life insurance, changes in the fair value of our equity investments with readily determinable fair value, and other miscellaneous income. Noninterest income was $45.6 million for 2023 compared with $51.4 million for 2022, and $43.6 million for 2021.

Current wording

Noninterest income is primarily comprised of service fees on deposit accounts, international service fees (fees received on trade finance letters of credit), wire transfer fees, swap fee income, net gains on sales of loans, net gain on branch sales, and other income and fees, which included loan servicing fees, earnings on bank owned life insurance, changes in the fair value of our equity investments with readily determinable fair value, and other miscellaneous income. Noninterest income was $47.1 million for 2024 compared with $45.6 million for 2023, and $51.4 million for 2022.

Previous wording

During the year ended December 31, 2022, we sold $227.3 million in SBA guaranteed loans and recorded $16.3 million in net gains on sale of SBA loans. During the year ended December 31, 2021, we sold $102.4 million in SBA guaranteed loans and recorded $8.4 million in net gains on sale of SBA loans. The average weighted premium on SBA loans sold was 7.19% for 2022 compared with 8.25% for 2021.

Current wording

During the year ended December 31, 2024, we sold $119.6 million in SBA guaranteed loans and recorded $7.8 million in net gains on sale of SBA loans. During the year ended December 31, 2023, we sold $79.1 million in SBA guaranteed loans and recorded $4.1 million in net gains on sale of SBA loans. The Bank resumed the sales of SBA guaranteed loans in the second quarter of 2024 due to improved premiums in the secondary markets, after retaining loan production on balance sheet starting in the second half of 2023.

Previous wording

Noninterest expense was $364.5 million for 2023, compared with $324.2 million for 2022, and $293.3 million for 2021. The increase in noninterest expense was $40.3 million, or 12%, for 2023 compared with 2022, and $30.9 million, or 11%, for 2022 compared with 2021. Noninterest expense as a percentage of average assets for 2023 was 1.84%, compared with 1.78% for 2022 and 1.68% for 2021.

Current wording

Noninterest expense was $324.7 million for 2024, compared with $362.0 million for 2023, and $323.9 million for 2022. The decrease in noninterest expense was $37.3 million, or 10%, for 2024 compared with 2023, and an increase of $38.0 million, or 12%, for 2023 compared with 2022. Noninterest expense as a percentage of average assets for 2024 was 1.83%, compared with 1.83% for 2023 and 1.78% for 2022.

Previous wording

Professional fees decreased by $5.9 million in 2022 compared with 2021. The decrease in professional fees was due primarily to lower legal fees related to litigation costs and other professional fees.

Current wording

Professional fees increased by $2.5 million, or 39%, for 2024 compared with 2023. The year-over-year increase in professional fees was due overall increase in legal fees and other professional services.

Previous wording

Earned interest credits increased $9.2 million for 2022 compared with 2021. Earned interest credits are provided to certain commercial depositors in the residential mortgage industry to help offset deposit service charges incurred. The earned interest credits are tied to the Federal Funds rate and increased as interest rates went up in 2022.

Current wording

Earned interest credits are provided to certain commercial depositors in the residential mortgage industry to help offset deposit service charges incurred. The earned interest credits are tied to short-term interest rates and have increased with the increases in the federal funds rates since mid-2022. Earned interest credit expense increased $1.0 million for 2024 compared with 2023, reflecting the changes in the federal funds rates as well as changes in the average balances of the underlying deposits.

Previous wording

The increase in noninterest expense for 2023 compared with 2022 was primarily driven by restructuring costs, higher earned interest credits, and higher FDIC assessments expense.

Current wording

The increase in noninterest expense for 2023 compared with 2022 was primarily driven by restructuring costs, higher earned interest credit expense, and higher FDIC assessments expense.

Previous wording

Salaries and employee benefits expense increased by $3.2 million, or 1.5%, for 2023 compared with 2022. The increase in salaries and employee benefits was primarily due to inflation and higher rates of compensation in a competitive staffing market. Also included in the 2023 salaries and employee benefits expense was $1.7 million of severance costs incurred in the first quarter related to a staffing rationalization, which reduced the Bank’s workforce by 5%. The number of full-time equivalent employees decreased to 1,244 at December 31, 2023, down from 1,549 at December 31, 2022.

Current wording

Salaries and employee benefits expense increased by $3.2 million, or 1.5%, for 2023 compared with 2022. The increase in salaries and employee benefits was primarily due to inflation and higher rates of compensation in a competitive staffing market. Also included in the 2023 salaries and employee benefits expense was $1.7 million of severance costs incurred in the first quarter related to a staffing rationalization, which reduced the Bank’s workforce by 5%. The number of full-time equivalent employees decreased to 1,244 at December 31, 2023, down from 1,549 at December 31, 2022. Severance costs related to the Company’s restructuring in the fourth quarter of 2023 were accounted for in restructuring-related expenses.

Previous wording

FDIC assessments expense increased by $7.0 million, or 112.8%, for 2023 compared with 2022. The FDIC assessment expense utilizes an initial base assessment rate, which is calculated as a percentage of the Bank’s average consolidated total assets less average tangible equity. In addition to the initial assessment base, adjustments are added based upon the Bank’s regulatory rating and on other financial measures. In 2023, the FDIC annual base assessment rate increased by two basis points industry-wide. In addition, in November 2023, the FDIC approved a special assessment at the rate of approximately 13.4 basis points per year, paid in eight quarterly installments beginning in the first quarter of 2024. This rate will be applied to an assessment base of the insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. The increase in FDIC assessment fees for 2023 compared with 2022 was due primarily to the aforementioned increased annual base assessment rate and an additional $4.0 million accrued for the special assessment.

Current wording

FDIC assessments expense increased by $7.0 million, or 112.8%, for 2023 compared with 2022. The FDIC assessment expense utilizes an initial base assessment rate, which is calculated as a percentage of the Bank’s average consolidated total assets less average tangible equity. In addition to the initial assessment base, adjustments are added based upon the Bank’s regulatory rating and on other financial measures. In 2023, the FDIC annual base assessment rate increased by two basis points industry-wide. In addition, in November 2023, the FDIC approved a special assessment at the rate of approximately 13.4 basis points per year, paid in eight quarterly installments beginning in the first quarter of 2024. This rate was applied to an assessment base of the insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. The increase in FDIC assessments expense for 2023 compared with 2022 was due primarily to the aforementioned increased annual base assessment rate.

Previous wording

Earned interest credits are provided to certain commercial depositors in the residential mortgage industry to help offset deposit service charges incurred. The earned interest credits are tied to short-term interest rates and have increased with the increases in the Federal Funds rate since mid-2022. Earned interest credits increased $11.4 million for 2023 compared with 2022.

Current wording

Earned interest credits are provided to certain commercial depositors in the residential mortgage industry to help offset deposit service charges incurred. The earned interest credits are tied to short-term interest rates and have increased with the increases in the federal funds rate since mid-2022. Earned interest credit expenses increased $11.4 million for 2023 compared with 2022, reflecting the changes in the federal funds rate.

Previous wording

Restructuring costs totaled $11.6 million in 2023, and were related to the Company’s strategic reorganization announced in October 2023. Restructuring costs primarily comprised severance costs, planned branch closure charges and professional fees. As part of the restructuring, the Company reduced its workforce by 13% in October 2023, and will consolidate certain branches in the first half of 2024. There were no restructuring costs incurred in 2022.

Current wording

Restructuring costs totaled $11.6 million in 2023 and related to the Company’s strategic reorganization announced in October 2023. Restructuring costs primarily comprised severance costs, planned branch closure charges and professional fees. As part of the restructuring, the Company reduced its workforce by 13% in October 2023, and consolidated certain branches in the first half of 2024. There were no restructuring costs incurred in 2022.

Previous wording

The provision for income taxes for 2023 was $44.2 million, compared with $77.8 million in 2022 and $70.7 million in 2021. The effective income tax rate was 24.86% for 2023 compared with 26.27% for 2022 and 25.68% for 2021. The decrease in effective tax rate for 2023 compared with 2022 was primarily due to the benefit from affordable housing partnership investment tax credits having a larger effect because of lower annual pre-tax book income.

Current wording

The provision for income taxes for 2024 was $33.3 million, compared with $44.2 million in 2023 and $77.8 million in 2022. The effective income tax rate was 25.07% for 2024 compared with 24.86% for 2023 and 26.27% for 2022. The increase in effective tax rate for 2024 compared with 2023 was primarily due to adjustments made with the filings of the tax returns.

Previous wording

We invest in affordable housing partnerships and receive CRA credits and tax credits that reduce the overall effective tax rate. Amortization of investments in affordable housing partnerships is recorded in noninterest expense based on benefit schedules of individual investment projects under the equity method of accounting. The benefit schedules show tax deductions investors can take each year. We amortize the initial cost of the investments in affordable housing partnerships. This amortization expense is more than offset by both tax credits received, which reduce our tax provision expense dollar for dollar, and the tax benefits related to any tax losses generated through the affordable housing project’s expenditures. Total tax credits related to our investment in affordable housing partnership investment was approximately $8.6 million for the year ended December 31, 2023, compared with $8.9 million for the year ended December 31, 2022. The balance of investments in affordable housing partnerships increased from $47.7 million at December 31, 2022, to $54.5 million at December 31, 2023.

Current wording

We invest in affordable housing partnerships and receive CRA credits and tax credits that reduce the overall effective tax rate. Amortization of investments in affordable housing partnerships is recorded in noninterest expense based on benefit schedules of individual investment projects under the equity method of accounting. The benefit schedules show tax deductions investors can take each year. We amortize the initial cost of the investments in affordable housing partnerships. This amortization expense is more than offset by both tax credits received, which reduce our tax provision expense dollar for dollar, and the tax benefits related to any tax losses generated through the affordable housing project’s expenditures. Total tax credits related to our investment in affordable housing partnership investment was approximately $8.5 million and $8.6 million for the year ended December 31, 2024 and 2023, respectively. The balance of investments in affordable housing partnerships decreased from $54.5 million at December 31, 2023, to $32.4 million at December 31, 2024.

Previous wording

Our total assets were $19.13 billion at December 31, 2023, compared with $19.16 billion at December 31, 2022, a slight decrease of $33.0 million, or 0.2% year over year.

Current wording

Our total assets were $17.05 billion at December 31, 2024, compared with $19.13 billion at December 31, 2023, a decrease of $2.08 billion, or 10.9% year over year.

Previous wording

Our investment securities AFS totaled $2.15 billion at December 31, 2023, compared with $1.97 billion at December 31, 2022. At December 31, 2023, we had $263.9 million in investment securities HTM compared with $271.1 million at December 31, 2022. We have the ability and intent to hold investment securities classified as HTM to maturity. $465.7 million in investment securities were purchased and $333.9 million in investment securities were paid down in 2023. There were no sales of investment securities in 2023. At December 31, 2023, $1.70 billion in securities were pledged to the BTFP, to secure public deposits, or for other purposes required or permitted by law, of which $230.4 million in securities were pledged in the State of California time deposit program, and $133 thousand was pledged for other public deposits.

Current wording

Our investment securities AFS totaled $1.82 billion at December 31, 2024, compared with $2.15 billion at December 31, 2023. At December 31, 2024, we had $252.4 million in investment securities HTM compared with $263.9 million at December 31, 2023. We have the ability and intent to hold investment securities classified as HTM to maturity. $275.0 million in investment securities were purchased and $167.7 million in investment securities were paid down in 2024. There were $275.3 million sales of investment securities AFS in 2024. At December 31, 2024, $219.4 million in HTM securities were pledged to secure public deposits, or for other purposes required or permitted by law, of which $219.3 million in securities were pledged in the State of California time deposit program, and $129 thousand in AFS securities was pledged for other public deposits.

Previous wording

Our investment securities portfolio is primarily invested in residential CMOs and residential and commercial MBS, which combined to represent 76% and 84% of our total investment securities portfolio at December 31, 2023 and 2022, respectively. At December 31, 2023 and 2022, all of our CMOs and MBS were issued by the Government National Mortgage Association (“GNMA”), Fannie Mae (“FNMA”), or Freddie Mac (“FHLMC”), which guarantee the contractual cash flows of these investments. All of our corporate, asset-backed, and municipal securities at December 31, 2023, were rated as investment grade.

Current wording

Our investment securities portfolio is primarily invested in residential CMOs and residential and commercial MBS, which combined to represent 85% and 76% of our total investment securities portfolio at December 31, 2024 and 2023, respectively. At December 31, 2024 and 2023, all of our CMOs and MBS were issued by the Government National Mortgage Association (“GNMA”), Fannie Mae (“FNMA”), or Freddie Mac (“FHLMC”), which guarantee the contractual cash flows of these investments. All of our corporate, asset-backed, and municipal securities at December 31, 2024, were rated as investment grade.

Previous wording

We performed an analysis on our investment securities portfolio at December 31, 2023 and 2022, and determined that an allowance for credit losses was not required for investment securities AFS or HTM. The majority of our investment portfolio consisted of securities issued by U.S. Government agencies or U.S. Government sponsored enterprises, which were determined to have a zero loss expectation. At December 31, 2023, we also had 18 asset-backed securities, six corporate securities, and 53 municipal bonds not issued by U.S. Government agencies or U.S. Government sponsored enterprises that were in unrealized loss positions. Based on our analysis of these investment securities, we concluded a credit loss did not exist due to the strength of the issuers, high bond ratings, and because we expect full payment of principal and interest.

Current wording

We performed an analysis on our investment securities portfolio at December 31, 2024 and 2023, and determined that an allowance for credit losses was not required for investment securities AFS or HTM. The majority of our investment portfolio consisted of securities issued by U.S. Government agencies or U.S. Government sponsored enterprises, which were determined to have a zero loss expectation. At December 31, 2024, we also had one asset-backed security, six corporate securities, and 57 municipal bonds not issued by U.S. Government agencies or U.S. Government sponsored enterprises that were in unrealized loss positions. Based on our analysis of these investment securities, we concluded a credit loss did not exist due to the strength of the issuers, high bond ratings, and because we expect full payment of principal and interest.

Previous wording

At December 31, 2023, equity investments totaled $43.8 million compared with $42.4 million at December 31, 2022. For the year ended December 31, 2023, we recorded an increase in equity investments due to reinvestments of $1.3 million and change in fair value of $60 thousand, partially offset by return of equity investments of $3 thousand. Equity investments at December 31, 2023 included $4.4 million in equity investments with readily determinable fair values and $39.4 million in equity investments without readily determinable fair values.

Current wording

At December 31, 2024, equity investments totaled $39.9 million compared with $43.8 million at December 31, 2023. For the year ended December 31, 2024, we recorded a decrease in equity investments due to $4.8 million in adjustments to CRA unfunded commitments resulting from implementation of ASU 2023-02, capital redemption of $539 thousand, and change in fair value of $42 thousand, partially offset by reinvestments of $1.6 million. Equity investments at December 31, 2024 included $4.3 million in equity investments with readily determinable fair values and $35.6 million in equity investments without readily determinable fair values.

Previous wording

Equity investments with readily determinable fair values at December 31, 2023, consisted of mutual funds totaling $4.4 million. Changes to the fair value of equity investments with readily determinable fair values are recorded in other noninterest income. Equity investments without readily determinable fair values at December 31, 2023, included $38.0 million in CRA investments, $1.0 million in Community Development Financial Institutions investments, and $370 thousand in correspondent bank stock. Equity investments without readily determinable fair values are carried at cost, less impairment, and adjustments are made to the carrying balance based on observable price changes. There were no impairments or observable price changes for these investments during the year ended December 31, 2023.

Current wording

Equity investments with readily determinable fair values at December 31, 2024, consisted of mutual funds totaling $4.3 million. Changes to the fair value of equity investments with readily determinable fair values are recorded in other noninterest income. Equity investments without readily determinable fair values at December 31, 2024, included $34.2 million in CRA investments, $1.0 million in Community Development Financial Institutions investments, and $370 thousand in correspondent bank stock. Equity investments without readily determinable fair values are carried at cost, less impairment, and adjustments are made to the carrying balance based on observable price changes. There were no impairments or observable price changes for these investments during the year ended December 31, 2024.

Previous wording

At December 31, 2023, we had $135.2 million in net deferred tax assets compared with $150.4 million at December 31, 2022. The decrease in net deferred tax assets was primarily due to lower deferred taxes resulting from a decline in unrealized losses on our investments securities AFS during the year ended December 31, 2023.

Current wording

At December 31, 2024, we had $140.0 million in net deferred tax assets compared with $135.2 million at December 31, 2023. The increase in net deferred tax assets was primarily due to an increase in unrealized losses on our investments securities AFS, partially offset by deferred tax expense during the year ended December 31, 2024.

Previous wording

At December 31, 2023, we had $54.5 million in investments in affordable housing partnerships compared with $47.7 million at December 31, 2022. The increase in investments in affordable housing partnerships was due to new investments, partially offset by amortization recorded during the year ended December 31, 2023. Commitments to fund investments in affordable housing partnerships totaled $21.0 million at December 31, 2023, compared with $11.8 million at December 31, 2022. The increase in commitments to fund investments in affordable housing partnerships during the year ended December 31, 2023, was due to new commitments made, partially offset by our cash contributions, which reduced the prior commitment balances.

Current wording

At December 31, 2024, we had $32.4 million in investments in affordable housing partnerships compared with $54.5 million at December 31, 2023. The decrease in investments in affordable housing partnerships was due to $13.1 million derecognition of delayed contributions, $1.6 million in impairment resulting from implementation of ASU 2023-02, and $7.4 million in amortization recorded during the year ended December 31, 2024. Commitments to fund investments in affordable housing partnerships totaled $0 at December 31, 2024, compared with $21.0 million at December 31, 2023. The decrease in commitments to fund investments in affordable housing partnerships during the year ended December 31, 2024, was due to $13.1 million derecognition of delayed contribution, $4.8 million in adjustments to CRA unfunded commitments and $3.1 million in cash contributions.

Previous wording

Loans held for sale at December 31, 2023, totaled $3.4 million compared with $49.2 million at December 31, 2022, representing a decrease of $45.8 million, or 93.1%. Loans held for sale at December 31, 2023, comprised $2.3 million in CRE loans held for sale, and $1.1 million in residential mortgage loans held for sale. At December 31, 2022, loans held for sale consisted of $48.8 million in CRE loans held for sale, and $450 thousand in residential mortgage loans held for sale. The decrease in loans held for sale was primarily due to more loans sold than were originated or transferred to loans held for sale.

Current wording

Loans held for sale at December 31, 2024, totaled $14.5 million compared with $3.4 million at December 31, 2023, representing an increase of $11.1 million, or 325.2%. Loans held for sale at December 31, 2024, comprised $13.8 million in C&I loans and $646 thousand in residential mortgage loans. At December 31, 2023, loans held for sale consisted of $2.3 million in CRE loans, and $1.1 million in residential mortgage loans.

Previous wording

We offer a variety of products designed to meet the credit needs of our borrowers. Our lending activities primarily consist of CRE loans, C&I loans, residential mortgage, and consumer and other loans. Real estate loans as a percentage to total loans were 64% at December 31, 2023, compared with 61% at December 31, 2022. Gross loans receivable decreased by $1.55 billion to $13.85 billion at December 31, 2023, from $15.40 billion at December 31, 2022.

Current wording

We offer a variety of products designed to meet the credit needs of our borrowers. Our lending activities primarily consist of CRE loans, C&I loans, residential mortgage, and consumer and other loans. CRE loans as a percentage to total loans were 63% at December 31, 2024, compared with 64% at December 31, 2023. Gross loans receivable decreased by $235.3 million to $13.62 billion at December 31, 2024, from $13.85 billion at December 31, 2023.