RBB Bancorp

NOTE1 - BUSINESS DESCRIPTION

RBB Bancorp is a bank holding company registered under the Bank Holding Company Act of1956, as amended. RBB Bancorp’s principal business is to serve as the holding company for its wholly owned banking subsidiaries, Royal Business Bank (“Bank”) and RBB Asset Management Company (“RAM”), collectively referred to herein as “the Company.” RBB Bancorp was formed in* January 2011as a bank holding company and RAM was formed in2012* to hold and manage problem assets acquired in business combinations. When we refer to “we”, “us”, “our”, or the “Company”, we are referring to RBB Bancorp and its consolidated subsidiaries including the Bank, collectively. When we refer to the “parent company”, “Bancorp”, or the “holding company”, we are referring to RBB Bancorp, the parent company, on a stand-along basis.

At* December 31, 2023,*the Company had total assets of $4.0 billion, gross consolidated loans (held for investment and held for sale) of $3.0 billion, total deposits of $3.2 billion and total shareholders' equity of $511.3 million.

The Bank provides business-banking products and services predominantly to the Asian-American communities through full service branches located in Los Angeles County, Orange County and Ventura County in California, in the Las Vegas, Nevada and New York City metropolitan areas, Chicago (Illinois), Edison (New Jersey) and Honolulu (Hawaii). The products and services include commercial and investor real estate loans, business loans and lines of credit, Small Business Administration (“SBA”)7A and504 loans, mortgage loans, trade finance and a full range of depository accounts, including specialized services such as remote deposit, E-banking, and mobile banking. The Bank acquired the Honolulu, Hawaii branch (the “Hawaii Branch”) from Bank of the Orient (“BOTO”) on* January 14, 2022.*

The Company operates full-service banking offices in Arcadia, Cerritos, Diamond Bar, Irvine, Los Angeles, Monterey Park, Oxnard, Rowland Heights, San Gabriel, Silver Lake, Torrance, and Westlake Village, California; Las Vegas, Nevada; Manhattan, Brooklyn, Flushing and Elmhurst, New York; the Chinatown and Bridgeport neighborhoods of Chicago, Illinois; Edison, New Jersey; and Honolulu, Hawaii. The Company's primary source of revenue is providing loans to customers, who are predominately small and middle-market businesses and individuals.

The Company generates its revenue primarily from interest received on loans and leases and, to a lesser extent, from interest received on investment securities. The Company also derives income from noninterest sources, such as fees received in connection with various lending and deposit services, loan servicing, gain on sales of loans and wealth management services. The Company’s principle expenses include interest expense on deposits and other long-term debt, and operating expenses, such as salaries and employee benefits, occupancy and equipment, data processing, and income tax expense.

The Company completedsix whole bank acquisitions andone branch acquisition from* July 2011through January 2022.All of the Company’s acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. The Company previously disclosed that, on December 28, 2021,it entered into a definitive agreement to acquire Gateway Bank F.S.B. (“Gateway”) in an all cash transaction, subject to certain terms and conditions. On September 28, 2023,the Company announced that it and Gateway have mutually agreed to terminate the definitive agreement, effective as of September 28, 2023.*Neither party has or will have any liability or pay any penalty to the other party as a result of the termination, and each party has released the other from any and all claims related to the definitive agreement or the transactions contemplated by the definitive agreement.

NOTE2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form10-K and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for financial reporting.

Principles of Consolidation and Nature of Operations

The accompanying consolidated financial statements include the accounts of RBB Bancorp and its wholly-owned subsidiaries RBB and RAM. All significant intercompany transactions have been eliminated.

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RBB Bancorp hasno significant business activity other than its investments in the Bank and in RAM. However, through our whole bank acquisition activity, we have acquiredthree statutory business trusts: TFC Statutory Trust, FAIC Statutory Trust and PGB Capital Trust I. These trusts issued trust preferred securities representing undivided preferred beneficial interests in the assets of these trusts. The proceeds of these trust preferred securities were invested in certain securities issued by the entities we have acquired, with similar terms to the relevant series of securities issued by these trusts, which we refer to as subordinated debentures, and are included in Tier2 capital.

The parent company only condensed financial information on RBB Bancorp is provided in Note22.

In connection with the2018 acquisition of First American International Corp (“FAIC”), the Company acquired FAIB Capital Corp. (“FAICC”), a real estate investment trust formed on* August**28,* 2013 as a New York State corporation, which operates as a wholly-owned subsidiary of the Bank.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. It is reasonably possible that these estimates could change as actual results could differ from those estimates. The allowance for credit losses, realization of deferred tax assets, the valuation of goodwill and other intangible assets, other derivatives, and the fair value measurement of financial instruments are particularly subject to change and such change could have a material effect on the consolidated financial statements.

Cash and Cash Equivalents

Cash and cash equivalents include cash and due from banks, term federal funds sold and interest-bearing deposits in other financial institutions with original maturities of less than90 days. Net cash flows are reported for customer loan and deposit transactions and interest-bearing deposits in other financial institutions.

Cash and Due from Banks

Banking regulations require that banks maintain a percentage of their deposits as reserves in cash or on deposit with the Federal Reserve Bank. There wereno reserves required to be held as of* December 31, 2023and2022.* The Company maintains amounts in due from bank accounts, which* mayexceed federally insured limits. The Company hasnot* experienced any losses in such accounts.

Interest-Earning Deposits in Other Financial Institutions

Interest-bearing deposits in other financial institutionsnot included in cash and cash equivalents are carried at cost and generally mature inone year or less.

Investment Securities

Investment securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Debt securitiesnot classified as held to maturity are classified as available for sale. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premiums or discounts. Premiums and discounts on securities are amortized on the level-yield method to the earlier of the maturity date or call date of the underlying securities. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

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Prior to* January 1, 2022,management evaluated debt securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considered the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assessed whether it intended to sell, or it was more likely thannot* that it would be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell was met, the entire difference between amortized cost and fair value was recognized as impairment through earnings. For debt securities that donot meet the aforementioned criteria, the amount of impairment was split intotwo components as follows; OTTI related to credit loss, which must be recognized in the income statement and; OTTI related to other factors, which was recognized in other comprehensive income. The credit loss was defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

Effective* January 1, 2022,upon the adoption of ASU2016*-13, Financial Instruments—Credit Losses (Topic326), the Company accounts for credit losses on available for sale securities in accordance with ASC326-30. 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, butnot more than the amount of the current existing reserve for that security.

For available-for-sale debt securities in an unrealized loss position, the Companyfirst assesses whether it intends to sell, or it is more likely thannot that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, then the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that donot meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, then the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, then a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that hasnot been recorded through an allowance for credit losses is recognized in other comprehensive income (loss).

Changes in the allowance for credit losses are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available-for-sale debt securities totaled $919,000 and $759,000 at* December 31, 2023and2022,* and is excluded from the estimate of credit losses.

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. Accrued interest receivable on held-to-maturity debt securities totaled $43,000 and $51,000 at* December 31, 2023and2022,* and is excluded from the estimate of credit losses.

Loans Held For Sale** **

Mortgage loans originated or acquired and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value, as determined by outstanding commitments from investors. Net unrealized losses, if any, are recorded as a valuation allowance and charged to earnings. Loans held for sale consist primarily offirst trust deed mortgages on single-family residential properties located in California and New York.

Mortgage loans held for sale are generally sold with servicing rights retained. The carrying value of mortgage loans sold is determined by reducing the amount allocated to the servicing right, when applicable. Gains and losses on sales of mortgage loans are based on the difference between the selling price and the carrying value of the related loans sold.

Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs and net of any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Loan origination fees and certain direct origination costs are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Premiums and discounts on loans purchased are grouped by type and certain common risk characteristics and amortized or accreted as an adjustment of yield over the weighted-average remaining contractual lives of each group of loans, adjusted for prepayments when applicable, using methodologies which approximate the interest method.

Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. The accrual of interest on loans is discontinued when principal or interest is past due90 days or when, in the opinion of management, there is reasonable doubt as to collectability based on contractual terms of the loan. When loans are placed on nonaccrual status, all interest previously accrued butnot collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan's principal balance is deemed collectible. Interest accruals are resumed on such loans only when they are brought current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to all principal and interest.

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Allowance for Credit Losses - Loans

Effective* January 1, 2022,upon the adoption of ASU2016*-13, Financial Instruments—Credit Losses (Topic326), the Company accounts for credit losses on loans in accordance with ASC326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination. The allowance for credit losses (“ACL”) is maintained at a level deemed appropriate by management to provide for expected credit losses in the loan portfolio as of the date of the consolidated balance sheet. Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. The Company has elected to utilize a DCF approach for all segments except for consumer loans and loans to non-depository financial institutions, which use a remaining life approach.

The Company’s DCF methodology incorporates a probability of default, loss given default and exposure at default model, as well as expectations of future economic conditions, using reasonable and supportable forecasts. The Company uses both internal and external qualitative factors within the current expected credit losses (“CECL”) model including: lending policies, procedures, and strategies; changes in nature and volume of the portfolio; credit and lending personnel experience; changes in volume and trends in classified loans, delinquencies, and nonaccrual; concentration risk; collateral values; regulatory and business environment; loan review results; and economic conditions. The Company determines the weighting of the qualitative factors based on management’s ability to directly control or influence the level of risk exposure. The factors related to economic conditions, collateral values, and the regulatory and business environment were assigned a higher allocation, and the remaining factors related to internal conditions received a lower allocation. Management further estimates the allowance balance required using past loan loss experience from peers with similar portfolio sizes and geographic locations to the Company, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. The Company’s CECL methodology utilizes afour-quarter reasonable and supportable forecast period, and afour-quarter reversion period. The Company is using the Federal Open Market Committee to obtain forecasts for the unemployment rate, while reverting to a long-run average of each considered economic factor.

The Company records a liability for lifetime expected credit losses on off-balance-sheet credit exposure that donot fit the definition of unconditionally cancelable in accordance with ASC326. The Company uses the loss rate and exposure of default framework to estimate a reserve for unfunded commitments. Loss rates for the expected funded balances are determined based on the associated pooled loan analysis loss rate and the exposure at default is based on an estimated utilization given default.

The Company assesses expected credit losses for individual instruments that have different risk characteristics than those that are evaluated on a collective (pooled) basis, in accordance with ASC326. An individual analysis will provide a specific reserve for instruments involved with fair market value of collateral or present value of future cash flow. In such a manner, the Bank performs individual analysis on loans that are90 or more days past due, on non-accrual status or modified loans. Credit losses arenot estimated for accrued interest receivable as interest that is deemed uncollectible is written off through interest income.

The Company adopted ASU2022-02, Financial Instruments—Credit Losses (Topic326), effective* January 1, 2023.Upon adoption, the Company evaluates all receivable modifications under ASC310* to determine whether a modification made to a borrower results in a new loan or a continuation of the existing loan. The Companyno longer considers renewals, modifications, or extensions resulting from reasonably expected troubled debt restructurings (“TDRs”) when calculating the allowance for credit losses under ASC326. The post-modification effective interest rate is used to calculate the allowance for credit losses when the DCF method is applied.

Allowance for Loan Losses (prior to* January 1, 2022)*

Prior to the Company's adoption of ASC326, Financial Instruments—Credit Losses, on* January 1, 2022,the Company maintained an allowance for loan losses (“ALL”) in accordance with ASC450,* Contingencies, and ASC310, Receivables. The ALL was a valuation allowance for probable incurred credit losses. Loan losses were charged against the allowance when management believed the uncollectibility of a loan balance was confirmed. Subsequent recoveries, if any, were credited to the allowance. Management estimated the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values, economic conditions, and other factors. Allocations of the allowance* may*have been made for specific loans, but the entire allowance was available for any loan that, in management's judgment, should be charged-off. Amounts were charged-off when available information confirmed that specific loans or portions thereof, were uncollectible. This methodology for determining charge-offs was consistently applied to each segment.

Servicing Rights

Servicing rights are established as an intangible asset when mortgage loans and SBA loans are sold with servicing retained and they are initially recorded at fair value with the income statement effect recorded in the gain on sale of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Quarterly impairment is based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a charge to income to establish a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairmentno longer exists for a particular grouping, a reduction of the allowance* maybe recorded as an increase to income. The estimated fair value of the servicing rights is obtained through independentthird* party valuations based on an analysis of future cash flows, incorporating key assumptions including discount rates, prepayment speeds and interest rates.

Servicing fee income, which is reported on the income statement as loan servicing fees, net of amortization*,*is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal. The amortization of the mortgage and SBA servicing rights is offset against loan servicing fee income and reported as a net amount in the consolidated income statement.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company doesnot maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Gains on sale of mortgage loans totaled $112,000, $1.2 million, and $7.9 million, and gains on sale of SBA loans totaled $262,000, $696,000, and $2.1 million in2023, 2022, and2021, respectively.

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Premises and Equipment

Land is carried at cost. Premises, leasehold improvements and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives, which isthirty years for premises and ranges from three toten years for leasehold improvements and equipment. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the improvements or the remaining lease term, whichever is shorter. Expenditures for betterments or major repairs are capitalized and those for ordinary repairs and maintenance are charged to operations as incurred.

Operating Lease ROU Assets and Lease Liabilities

Operating lease Right-of-Use (“ROU”) assets and lease liabilities are included in other assets and other liabilities, respectively, on the Company’s consolidated balance sheet. The ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The lease terms include periods covered by options to extend or terminate the lease depending on whether the Company is reasonably certain to exercise such options. The Company uses its incremental borrowing rate to determine the present value of its lease liabilities.

The ROU asset, at adoption of ASU2016-02, Leases (Topic842), was recorded at the amount of the lease liability plus any prepaid rent and initial direct costs, less any lease incentives and accrued rent. Upon adoption of this Topic on* January 1, 2021,the Company elected the package of practical expedients that permits the Company tonot* reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected all of the new standard’s available transition practical expedients, including the short-term lease recognition exemption that includesnot recognizing ROU assets or lease liabilities for existing short-term leases, and the practical expedient tonot separate lease and non-lease components for all of the Company’s leases.

The Company determines if a contract arrangement is a lease at inception and primarily enters into operating lease contracts for its branch locations, office space, and certain equipment. As part of its property lease agreements, the Company* mayseek to include options to extend or terminate at lease when it is reasonably certain that the Company will exercise those options. The Company's measurement of the ROU assets and operating lease liabilities doesnot* include payments associated with the option to extend or terminate the lease term unless the Company is reasonably certain to exercise such options then the period will cover the option to extend or terminate. The ROU lease asset also includes any lease payments made and lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company didnot possess any leases that have variable lease payments or residual value guarantees as of* December 31, 2023.*

Other Real Estate Owned

Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for credit losses, if necessary. Other real estate owned is carried at the lower of the Company's carrying value of the property or its fair value, less estimated carrying costs and costs of disposition. Fair value is based on current appraisals less estimated selling costs. Any subsequent write-downs are charged against operating expenses and recognized as a valuation allowance. Operating expenses and related income of such properties and gains and losses on their disposition are included in other operating income and expenses.

Goodwill and Other Intangible Assets

Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill resulting from whole bank and branch acquisitions isnot amortized, but tested for impairment at least annually. The Company has selected* October**1* as the date to perform the annual impairment test. Goodwill amounted to $71.5 million as of* December 31, 2023and2022,* and is the only intangible asset with an indefinite life on the balance sheet. No impairment was recognized on goodwill during2023 and2022. Goodwill in the amount of $2.3 million was recognized in conjunction with the acquisition of the Hawaii Branch from BOTO.

After evaluating the prolonged decrease in the Company’s market value, management performed a quantitative goodwill impairment analysis as of* September**30,* 2023. Management engaged athird-party valuation specialist to assist with the quantitative analysis. The evaluation usedtwo methods to estimate the value of the Company: the market approach and the income approach. The market approach uses pricing information available on publicly traded companies that are similar to the subject company to determine the value of the subject company. Estimates used in the market approach included selecting a representative peer group of institutions, determining the price to tangible book value based on the results of the peer group institutions, and estimating a control premium based on the whole-bank acquisition prices for representative transactions. The income approach is based on the discounted free cash flows of the subject company using projections of future results, and considering future economic forecasts and management’s plans. Estimates used in the income approach include management’s projections of the Company’s income in future periods and an appropriate rate of return that would be required by a market participant. Based on this quantitative analysis, the fair value of the Company exceeds its carrying amount with a passing amount of 9.6% at* September 30, 2023.In addition, due to changes in the Company’s projections of income in future periods during thefourth* quarter of2023 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, 2023and the current information. Based on this most recent analysis, management concluded that goodwill was alsonot impaired at December 31, 2023.*

Other intangible assets consist of core deposit intangible (“CDI”) assets arising from acquisitions. CDI assets are amortized on an accelerated method over their estimated useful life of 8 to 10 years. CDI was recognized in the2013 acquisition of Los Angeles National Bank, in the2016 acquisition of TFC Holding Company, in the2018 acquisition of FAIC and in the2020 acquisition of PGBH. In* January 2022,*$729,000 of CDI was recognized in conjunction with the Hawaii Branch purchase from BOTO.

The following table presents changes in the carrying amount of CDI for the periods indicated:

Estimated CDI amortization expense for the next5 years is as follows:

Bank Owned Life Insurance

The Company has purchased life insurance policies on a select group of employees and directors. Bank Owned Life Insurance (“BOLI”) is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Increases of the cash value of these policies, as well as insurance proceeds received, are recorded in the other noninterest income and arenot subject to income tax for as long as they are held for the life of the covered employees and directors.

FHLB Stock and Other Equity Securities

The Company is a member of the Federal Home Loan Bank (“FHLB”) system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and* may*invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

The Company also owns an equity investment in Pacific Coast Banker’s Bank and Atlantic Community Bankers Bank stock. The Company adopted ASU2016-01 on* January 1, 2019,*and elected the measurement alternative for measuring equity securities without readily determinable fair values at cost less impairment, plus or minus observable price changes in orderly transactions.

As of* December 31, 2023,the Company had several equity investments without readily determinable fair values in the amount of $22.3 million, and $22.2 million at December 31, 2022.There wereno impairment charges in2023* or2022. There was a $360,000 impairment charge in2021.

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Stock-Based Compensation

The Company currently recognizes stock-based compensation based on the grant date fair value of equity awards, including stock options, restricted stock units and restricted stock, which have been granted to employees. The expense related to equity-based awards granted to directors or other qualified non-employee awardees is recognized as other noninterest expense.

Stock option compensation expense is calculated based on the fair value of the award at the grant date for those options expected to vest and is recognized as an expense over the vesting period of the grant using the straight-line method. The Company uses the Black-Scholes option-pricing model to estimate the value of granted stock options. This model takes into account the option exercise price, the expected life, the current price of the underlying stock, the expected volatility of the Company’s stock, expected dividends on the stock and a risk-free interest rate. The Company estimates the expected volatility based on the Company’s historical stock prices for the period corresponding to the expected life of the stock options. Restricted stock and restricted stock units are valued based on the closing price of the Company’s stock on the date of the grant. Stock-based compensation expense is recognized over the period which an employee is required to provide services in exchange for the award, generally defined as the vesting period. When the options are exercised, the Company’s policy is to issue new shares of stock. The Company’s accounting policy is to recognize forfeitures as they occur.

Income Taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

The Company files its income taxes on a consolidated basis with its subsidiaries. The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely thannot to be sustained on audit by the taxing authorities. Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.

Under ASC740, a valuation allowance is required to be recognized if it is “more likely thannot” that all or a portion of the Company's deferred tax assets willnot 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 isnot sufficient positive evidence available to demonstrate utilization of the Company's deferred tax assets. Initial setup or an increase to deferred tax asset valuation allowance would be charged to income tax expense that would negatively impact our earnings.

Retirement Plans

The Company established a401(k) plan in2010. The Company contributed $707,000, $594,000, and $532,000 in2023, 2022 and2021, respectively.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, net of taxes.

Financial Instruments

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit as described in Note13. Such financial instruments are recorded in the financial statements when they are funded.

Derivatives

Interest Rate Lock Commitments* (“IRLCs”) are agreements under which the Company agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under the agreement, the Company commits to lend funds to a potential borrower (subject to the Company’s approval of the loan) on a fixed or adjustable rate basis, regardless of whether interest rates change in the market, or on a floating rate basis. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancelling or expiration. Loan commitments generally range between30* and90 days; however, the borrower isnot obligated to obtain the loan. The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choosenot to close on the loans within the terms of the IRLCs. The Company uses best efforts commitments to substantially eliminate these risks. Historical commitment-to-closing ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs.

ASC815, Derivatives and Hedging, provides that IRLCs on mortgage loans that will be held for resale are derivatives and must be accounted for at fair value on the balance sheet. ASC820, Fair Value Measurements and Disclosures, specifies how these derivatives are to be valued. Commitments to originate mortgage loans to be held for investment and other types of loans are generallynot derivatives. The Company has elected to account for these obligations at fair value.

Forward Mortgage Loan Sale Contracts* (“FMLSC”) are utilized to avoid interest rate risk at the time an interest rate lock commitment is made to the buyer. The Company is subject to interest rate and price risk on its mortgage loans held for sale from the loan funding date until the date the loan is sold. Best efforts commitments which fix the forward sales price that will be realized in the secondary market are used to eliminate the interest rate and price risk to the Company. To avoid interest rate risk, the Company will enter into FMLSCs at the time they make an interest rate lock commitment to the buyer. The buyer can enter into mortgage loan sales commitments on a “mandatory” or “best efforts” basis. Mandatory commitments provide that the loan must be delivered or the commitment be “paired off.” In general, best efforts commitments provide that the loan be delivered if and when it closes. Forward commitments, also known as forward loan sales commitments, are considered derivatives under ASC Topic815,* Derivatives and Hedging, because they meet all of the following criteria:

See Note18 for more information and disclosures relating to the Company's derivatives.

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Earnings Per Share (“EPS”)

Basic and diluted EPS are calculated using thetwo-class method since the Company has issued share-based payment awards considered participating securities because they entitle holders the rights to dividends during the vesting term. Thetwo-class method is an earnings allocation formula that determines net income per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

Fair Value Measurement

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Current accounting guidance establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There arethree levels of inputs that* may*be used to measure fair values:

Level1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level2: Significant other observable inputs other than Level1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that arenot active; or other inputs that are observable or can be corroborated by observable market data.

Level3: Significant unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

See Note18 for more information and disclosures relating to the Company's fair value measurements.

Operating Segments

Management has determined that since generally all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management doesnot allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment.

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Recent Accounting Pronouncements

Recently Adopted

In* June 2016,the FASB issued ASU2016*-13, Measurement of Credit Losses on Financial Instrument (Topic326), including subsequent amendments to this ASU. This ASU changes how entities measure credit losses for most financial assets and certain other instruments that arenot measured at fair value through net income. The standard replaced the “incurred loss” approach with an “expected loss” model. The new model, referred to as the CECL model, applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but isnot limited to, loans, leases, held to maturity securities, loan commitments, and financial guarantees. For available for sale (“AFS”) debt securities with unrealized losses, losses will be recognized as allowances rather than reductions in the amortized cost of the securities. ASU2016-13 also expands the disclosure requirements regarding an entity's assumptions, models, and methods for estimating the allowance for credit losses. In addition, entities are required to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. The Company retroactively adopted CECL to* January 1, 2022as the Company’s emerging growth company status expired as of December**31,* 2022. Aone-time cumulative adjustment of $2.1 million was made to the Company’s ACL, which was recorded through retained earnings upon adoption of ASU2016-13 as of* January 1, 2022.*

The following table sets forth the cumulative effect of the changes to the Company's consolidated balance sheets at* January 1, 2022,for the adoption of ASU2016*-13:

In* February 2019,the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over athree*-year period the day-one adverse regulatory capital effects of ASU2016-13. Additionally, in* March 2020,the U.S. federal bank regulatory agencies issued an interim final rule that provided banking organizations that adopted CECL in the2020* an option to delay the estimated CECL impact on regulatory capital for an additionaltwo years for a total transition period of up tofive years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the novel coronavirus disease2019 (“COVID-19”) pandemic. As a result, entities that adopted CECL in2020 had the option to gradually phase in the full effect of CECL on regulatory capital over afive-year transition period. For entities who adopted CECL after2020, thethree-year phase-in transition provision is available if any entity experiences a reduction in retained earnings due to CECL adoption as of the beginning of the fiscal year in which the institution adopts CECL and makes an election to use this phase-in option. Effective* January 1, 2022,the Company adopted ASU2016*-13, reflected the full effect of CECL at* December 31, 2022,and didnot* elect thethree-year CECL phase-in option on regulatory capital.

In* January 2017,the FASB issued ASU2017*-04, Intangibles—Goodwill and Other (Topic350). This Update simplifies how an entity is required to test goodwill for impairment by eliminating Step2 from the goodwill impairment test. Step2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The amendments in this Update are required for public business entities and other entities that have goodwill reported in their financial statements and havenot elected the private company alternative for the subsequent measurement of goodwill. As a result, under this Update, “an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized shouldnot exceed the total amount of goodwill allocated to that reporting unit.” The Company adopted this ASU on* December 31, 2022.Adoption of ASU2017*-04 didnot have a significant impact on the Company’s consolidated financial statements.

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In* February 2020,the FASB issued ASU2020*-02, Financial Instruments—Credit Losses (Topic326) and Leases (Topic842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting BulletinNo. 119 and Update to SEC Section on Effective Date Related to Accounting Standards UpdateNo. 2016-02, Leases (Topic842) (SEC Update). This is an amendment to add the SEC Staff guidance on CECL) to the FASB codification. It contains guidance on what the SEC would expect the Company to perform and document when measuring and recording its allowance for credit losses for financial assets recorded at amortized cost. The Company implemented CECL on* January**1,* 2022. Upon adoption of CECL, the Company recorded a $2.1 million transition adjustment for the allowance for credit losses through retained earnings.

In* March 2020,the FASB issued ASU2020*-04, Reference Rate Reform (Topic848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”). This pronouncement is applicable to all companies with contracts or hedging relationships that reference an interest rate that is expected to be discontinued. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time. The optional relief generally doesnot apply to contract modifications made, sales and transfers of HTM debt securities, and hedging relationships entered into or evaluated after* December 31, 2022.The guidance was effective upon issuance and generally can be applied through December 31, 2022.In December 2022,the FASB issued2022*-06, Reference Rate Reform (Topic848): Deferral of the Sunset Date of Topic848, to defer the sunset date of Topic848 from* December 31, 2022to December 31, 2024,after which entities willno* longer be permitted to apply the relief in Topic848. The LIBOR termination date was* June 30, 2023.The Company converted all loans indexed under LIBOR to CME Term SOFR with relevant spread adjustment as the alternative reference rate beginning on and after July 3, 2023.*No LIBOR indexed loans are being originated. The Company has several issuances of LIBOR based long-term debt and subordinated debentures. Refer to Notes9 and10 of the Company’s consolidated financial statements included in this Annual Report.

In* October 2021,the FASB issued ASU2021*-08, Accounting for Contract Assets and Contract Liabilities, to require an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue recognition guidance as if the acquirer had originated the contract. That is, such acquired contracts willnot be measured at fair value. The Update is effective for public companies in fiscal years starting after* December 15, 2022.The Company adopted ASU2021*-08 on* January 1, 2023and the adoption didnot* have a material impact on the Company's consolidated financial statements.

In* March 2022,the FASB issued ASU2022*-02, Financial Instruments-Credit Losses (Topic326). The standard addresses the following:1) eliminates the accounting guidance for TDRs, and will require an entity to determine whether a modification results in a new loan or a continuation of an existing loan,2) expands disclosures related to modifications, and3) will require disclosure of current period gross write-offs of financing receivables within the vintage disclosures table. The amendments in this ASU are effective for fiscal years beginning after* December 15, 2022,including interim periods within those fiscal years and are applied prospectively, except with respect to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method. Early adoption of the amendments in this ASU is permitted. An entity mayelect to early adopt the amendments regarding TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company adopted ASU2022*-02 on* January 1, 2023and see Note5* for the disclosure impact.

Recently Issued;Not Yet Effective

In* June 2022,the FASB issued ASU2022*-03*,* Fair Value Measurement (Topic820)—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This pronouncement clarifies that a contractual restriction on the sale of an equity security isnot considered part of the unit of account of the equity security and, therefore, is* not considered in measuring fair value. ASU2022-03 also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires certain new disclosures for equity securities subject to contractual sale restrictions. ASU2022-03 will be effective for the Company on January 1, 2024**.* Adoption of ASU2022-03 isnot expected to have a material impact on the Company’s consolidated financial statements.

In* March 2023,the FASB issued ASU2023*-02*,* Investments - Equity Method and Joint Ventures (Topic323). This Update permits reporting entities to elect to account for their tax equity investments using the proportional amortization method if certain conditions are met. It requires that a liability be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable. The reporting entity needs to disclose the nature of its tax equity investments and the effect of its tax equity investments on its financial position and results of operations. ASU2023-02 will be effective for the Company in fiscal years beginning after* December 15, 2023**,* including interim periods within those fiscal years. Adoption of ASU2023-02 isnot expected to have a material impact on the Company's consolidated financial statements.

In* October*2023,* the FASB issued ASU2023-06,* Disclosure Improvements. This pronouncement amends the FASB Accounting Standards Codification to reflect updates and simplifications to certain disclosure requirements referred to the FASB by the SEC in2018, including disclosures for the statement of cash flows, earnings per share, commitments, debt and equity instruments, and certain industry information, among other things. Each amendment is effective when the related disclosure is effectively removed from Regulations S-X or S-K; early adoption is prohibited. All amendments should be applied prospectively. If the SEC hasnot removed the applicable requirement from Regulation S-X or Regulation S-K by* June 30, 2027,the pending amendments will be removed and willnot* become effective for any entity.

In* December 2023,the FASB issued ASU2023*-09, Income Taxes (Topic740) - Improvements to Income Tax Disclosures. This Update enhances the transparency and decision usefulness of income tax disclosures. The amendments in this Update require the following:1) consistent categories and greater disaggregation of information in the rate reconciliation, and2) income taxes paid disaggregated by jurisdiction. The amendments in the ASU are effective for annual periods beginning after* December 15, 2024.Early adoption is permitted for annual financial statements that havenot* yet been issued or made available for issuance. The amendments in this Update should be applied on a prospective basis. Retrospective application is permitted. Adoption of ASU2023-09 isnot expected to have a material impact on the Company's consolidated financial statements.

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NOTE3 – ACQUISITIONS

Completion of Acquisition of Certain Assets and Liabilities of the Honolulu, Hawaii Branch Office of Bank of the Orient

On* January 14, 2022,the Company completed the acquisition of the Hawaii Branch from BOTO. The assets and liabilities, both tangible and intangible, were recorded at their estimated fair values as of January 14, 2022.*The total fair value of assets acquired approximated $8.5 million, which included $312,000 in cash and cash equivalents, $7.4 million in selected performing loans, $729,000 in core deposit intangible assets and $64,000 in other assets. The total fair value of liabilities assumed was $81.8 million, which included $81.7 million in deposits, $27,000 in certificate of deposit premium, and $90,000 in other liabilities. The Bank received $71.0 million in cash in connection with the acquisition, which represented consideration for the deposits assumed by the Bank, partially offset by the purchase price of the assets acquired and the premium paid.

The Company acquired Hawaii Branch from BOTO to strategically establish a presence in the Hawaiian Islands area. Goodwill in the amount of $2.3 million and core deposit intangible of $729,000 was recognized in connection with this acquisition. Goodwill represents the future economic benefits arising from net assets acquired that arenot individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of thetwo entities. Goodwill isnot deductible for income tax purposes.

The following table represents the assets acquired and liabilities assumed from the Hawaii Branch as of* January 14, 2022*and the fair value adjustments and amounts recorded by the Company under the acquisition method of accounting:

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The Company accounted for this transaction under the acquisition method of accounting in accordance with ASC805, Business Combinations, which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition.

The loan portfolio of the Hawaii branch was recorded at fair value at the date of acquisition with the assistance of athird-party valuation. A valuation of the loan portfolio was performed as of the acquisition date to assess the fair value of the loan portfolio. The loan portfolio was segmented intotwo groups; loans with credit deterioration and loans without credit deterioration, and then split further by loan type. There wereno loans acquired with credit deterioration. The fair value was calculated on an individual loan basis using a DCF analysis. The discount rate utilized was based on a weighted average cost of capital, considering the cost of equity and cost of debt. Also factored into the fair value estimates were loss rates, recovery period and prepayment rates based on industry standards.

The Company also determined the fair value of the core deposit intangible, premises and equipment and deposits with the assistance ofthird-party valuations.

The core deposit intangible on non-maturing deposits was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates, service charge income, overhead expense and costs of alternative funding. Since the fair value of intangible assets are calculated as if they were stand-alone assets, the presumption is that a hypothetical buyer of the intangible asset would be able to take advantage of potential tax benefits resulting from the asset purchase. The value of the benefit is the present value over the period of the tax benefit, using the discount rate applicable to the asset.

In determining the fair value of certificates of deposit, a DCF analysis was used, which involved present valuing the contractual payments over the remaining life of the certificates of deposit at market-based interest rates.

Third-party acquisition related expenses are recognized as incurred and continue until the acquired system is converted and operational functions become fully integrated.

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NOTE4 - INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of available for sale (“AFS”) securities and held to maturity (“HTM”) securities at* December 31, 2023and2022,* and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss:

There wasno sale of investment securities during the years ended* December 31, 2023,*2022, and2021.

At* December 31, 2023,we pledged investment securities with a fair value of $95.2 million for certificates of deposit from the state of California. One security with a fair value of $61,000 and $76,000 was pledged to secure a local agency deposit at December 31, 2023and2022.*

Accrued interest receivable for investment debt securities at* December 31, 2023and2022* totaled $962,000 and $810,000.

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The amortized cost and fair value of the investment securities portfolio as of* December 31, 2023and2022* are shown by expected maturity below. Mortgage-backed securities are classified in accordance with their estimated average life. Expected maturities* may*differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

The securities that were in an unrealized loss position at* December 31, 2023,and December 31, 2022,were evaluated to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. For a discussion of the factors and criteria the Company uses in analyzing securities for impairment related to credit losses, see Note2* Summary of Significant Accounting Policies - Allowance for Credit Losses on Available-for-Sale Securities and Held-to-Maturity Securities. At* December 31, 2023and2022,* there wasno reserve of credit losses on the HTM securities portfolio.

Based on the Company’s review of its debt securities in an unrealized loss position, the Company concluded the unrealized losses were due to non-credit factors primarily attributed to yield curve movement, together with widened liquidity spreads. The issuers havenot, to the Company's knowledge, established any cause for default on these securities. All the securities that the Company owned were investment grade at* December 31, 2023.At December 31, 2023,unrealized losses of $28.7 million comprised of $18.1 million, or 62.8%, residential mortgage-backed securities and collateralized mortgage obligations, $4.1 million, or 14.3%, corporate debt securities, $3.1 million, or 10.9%, municipal securities, $2.7 million, or 9.3%, commercial collateralized mortgage obligations, and $760,000, or 2.6%, government agency securities and SBA securities. The Company expects to recover the amortized cost basis of its securities and hasno* present intent to sell and willnot be required to sell securities that have declined below their cost before their anticipated recovery based on the Company’s current financial condition.

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The following tables show the related fair value and the gross unrealized losses of the Company's investment securities, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of* December 31, 2023,and December 31, 2022:*

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NOTE5 - LOANS AND ALLOWANCE FOR CREDIT LOSSES - LOANS

The Company's loan portfolio consists primarily of loans to borrowers within the Los Angeles, California metropolitan area, the New York City metropolitan area, Chicago, Illinois metropolitan area and Las Vegas, Nevada. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company's market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries.

The types of loans in the Company's consolidated balance sheets as of* December 31, 2023,and December 31, 2022*were as follows:

A summary of the changes in the ACL for the years indicated follows:

(1) Reserve was under the ALL method in accordance with ASC450 and ASC310.

The following tables present the activity in the ALL by portfolio segment for the years ended* December 31, 2023and2022:*

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The following table presents the activity in the ALL by portfolio segment for the year ended* December 31, 2021,prior to the adoption of ASU2016*-13:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

Pass - Loans classified as pass include loansnot meeting the risk ratings defined below.

Special Mention-** *Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may*result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard- Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies arenot corrected.

Doubtful- Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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The following tables summarize the Company's loan held for investment as of* December 31, 2023and2022* by loan portfolio segments, risk ratings and vintage year. The vintage year is the year of origination, renewal or major modification. Revolving loans that are converted to term loans presented in the table below are excluded from the term loans by vintage year columns.

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The following tables present the aging of the recorded investment in past-due loans as of* December 31, 2023and2022* by class of loans. Past due loans presented in tables below also include non-accrual loans.

The Company hasno loans that are90 days or more past due and still accruing at* December**31,* 2023 and* December 31, 2022.*

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The following tables present the loans on nonaccrual status as of* December 31, 2023and2022:*

At* December 31, 2023,*nonaccrual commercial real estate loans comprised of $8.8 million collateralized by office, $1.4 million by warehouse, and $360,000 by other.

No interest income was recognized on a cash basis during the years ended* December 31, 2023and2022.* We didnot recognize any interest income on nonaccrual loans during the years ended* December 31, 2023and December 31, 2022*while the loans were in nonaccrual status.

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, or interest rate reduction. The Company* mayprovide multiple types of concessions onone* loan. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for loan losses.

There wereno loans that were both experiencing financial difficulty and modified during the year ended* December 31, 2023and2022.*

There wereno commitments to lend additional amounts at* December 31, 2023and2022* to customers with outstanding modified loans. There wereno nonaccrual loans that were modified during the pasttwelve months that had payment defaults during the periods.

NOTE6 - LOAN SERVICING

The mortgage loans and SBA loans being serviced for others arenot reported as assets in the Company’s consolidated balance sheet. The principal balances of the loans serviced for others are as follows for the dates indicated:

Loan servicing fees, net of amortization, totaled $2.6 million, $2.2 million and $684,000 for the years ended* December 31, 2023,2022 and2021. Custodial balances maintained in connection with the foregoing loan servicing (including in non-interest bearing deposits) totaled $6.4 million and $7.0 million as of December 31, 2023and2022.*

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When mortgage and SBA loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sale of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairmentno longer exists for a particular grouping, a reduction of the allowance* maybe recorded as an increase to income. During the year ended December 31, 2021,*the Company reversed an impairment allowance of $417,000 on mortgage servicing rights, which is included in other income.

The following table presents the activity in serving assets for the years ended* December 31, 2023,*2022, and2021:

Estimates of the loan servicing asset fair value are derived through a DCF analysis. Portfolio characteristics include loan delinquency rates, age of loans, note rate and geography. The assumptions embedded in the valuation are obtained from a range of metrics utilized by active buyers in the market place. The analysis accounts for recent transactions, and supply and demand within the market.

The fair value of servicing assets for mortgage loans was $12.1 million and $18.3 million as of* December 31, 2023and2022,* respectively. Fair value at* December 31, 2023was determined using a discount rate of 11.23%, average prepayment speed of 7.91%, depending on the stratification of the specific right, and a weighted-average default rate of 0.10%. Fair value at December 31, 2022*was determined using a discount rate of 11.10%, average prepayment speed of 7.73%, depending on the stratification of the specific right, and a weighted-average default rate of 0.10%.

The fair value of servicing assets for SBA loans was $2.8 million and $3.5 million as of* December 31, 2023and2022,* respectively. Fair value at* December 31, 2023was determined using a discount rate of 8.5%, average prepayment speed of 17.68%, depending on the stratification of the specific right, and a weighted-average default rate of 0.73%. Fair value at December 31, 2022*was determined using a discount rate of 8.5% and average prepayment speed of 16.79%, depending on the stratification of the specific right and a weighted-average default rate of 0.37%.

NOTE7 - PREMISES AND EQUIPMENT

A summary of premises and equipment as of* December 31, 2023and2022* follows:

Depreciation and leasehold amortization expense was $2.0 million, $2.0 million, and $1.9 million for2023, 2022, and2021, respectively.

A $32,000 gain on sale of fixed assets was recorded from the sale of an automobile during2023. A $757,000 gain on sale of fixed assets was recorded from the sale of a real estate asset during2022, which was used to house staff while traveling.

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NOTE8 - DEPOSITS

At* December 31, 2023,*the scheduled maturities of time deposits are as follows:

Time deposits include deposits acquired through both retail and wholesale channels. Wholesale funding includes brokered deposits, collateralized deposits from the State of California, and deposits acquired through internet listing services totaled $405.6 million at* December 31, 2023.Retail deposits include time deposits. Brokered time deposits were $254.9 million at December 31, 2023and $255.0 million at December 31, 2022.Collateralized deposits from the State of California totaled $80.0 million at December 31, 2023andnone at December 31, 2022.Time deposits acquired through internet listing services totaled $61.4 million at December 31, 2023and $10.7 million at December 31, 2022.*

In addition, we offer retail deposit products where customers are able to achieve FDIC insurance for balances on deposit in excess of the*$250,000* FDIC limit through the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweeps (“ICS”) programs. Time deposits held through the CDARS program were $135.7 million at* December 31, 2023and $17.7 million at December 31, 2022.*

**NOTE9 ****-**LONG-TERM DEBT

In* November 2018,the Company issued $55.0 million of 6.18% fixed-to-floating rate subordinated notes, with a December 1, 2028maturity date (the“2028* Subordinated Notes”). The interest rate was fixed through* December 1, 2023and was scheduled to float atthree*-month CME Term SOFR plus applicable tenor spread adjustment of26 basis points plus 315 basis points thereafter. On* December 1, 2023,the Company redeemed the2028* Subordinated Notes at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest.

In* March2021,* the Company issued $120.0 million of 4.00% fixed-to-floating rate subordinated notes, with an* April1,* 2031 maturity date (the*“2031* Subordinated Notes”). The interest rate is fixed through* April1,* 2026 and is scheduled to float atthree-month SOFR plus 329 basis points thereafter. The Company can redeem the2031 Subordinated Notes beginning* April1,* 2026. The2031 Subordinated Notes are considered Tier2 capital at the Company.

Long-term debt and unamortized debt issuance costs were as follows as of the dates indicated:

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The following table presents interest and amortization expense the Company incurred for the years ended* December 31, 2023and2022:*

At December 31, 2023, the Company duly and punctually paid all payments and timely delivered both the annual reports and compliance certificate to the Trustee as agreed. The Company was in compliance with all covenants under the long-term debt at December 31, 2023.

**NOTE10 -**SUBORDINATED DEBENTURES

Subordinated debentures consist of subordinated debentures issued in connection withthree separate trust preferred securities and totaled $14.9 million and $14.7 million as of* December 31, 2022and2023,* respectively. Under the terms of our subordinated debentures issued in connection with the issuance of trust preferred securities, we arenot 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 periodnot to exceedfive consecutive years. The subordinated debentures* maybe included in Tier1* capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The Company* mayredeem the subordinated debentures, subject to prior approval by the Board of Governors of the Federal Reserve System at100%* of the principal amount, plus accrued and unpaid interest. These subordinated debentures consist of the following and are described in detail after the table below:

In2016, the Company, through the acquisition of TomatoBank and its holding company, TFC Holding Company (“TFC”), acquired TFC Statutory Trust (the “TFC Trust”). TFC Trust issued 5,000 fixed-to-floating rate capital securities with an aggregate liquidation amount of $5.0 million to an independent investor, and all of its common securities, with an aggregate liquidation amount of $155,000. TFC issued $5 million of subordinated debentures to TFC Trust in exchange for ownership of all of the common securities of TFC Trust and the proceeds of the preferred securities sold by TFC Trust. The Company isnot considered the primary beneficiary of TFC trust (variable interest entity), therefore TFC Trust isnot consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company also purchased an investment in the common stock of TFC Trust for $155,000, which is included in other assets. At the close of this acquisition, a $1.9 million valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment and amortized over the life of the security. The unamortized valuation reserve was $1.2 million at* December 31, 2023and $1.3 million at December 31, 2022.The subordinated debentures have a variable rate of interest equal tothree**-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 7.30% as of December 31, 2023,andthree*-month LIBOR plus 1.65%, which was 6.42% at* December 31, 2022.*

In* October 2018,the Company, through the acquisition of FAIC, acquired First American International Statutory Trust I (“FAIC Trust”). FAIC Trust issued 7,000 units ofthirty-year fixed-to-floating rate capital securities with an aggregate liquidation amount of $7.0 million to an independent investor, and all of its common securities, with an aggregate liquidation amount of $217,000. The Company isnot* considered the primary beneficiary of FAIC Trust (variable interest entity), therefore FAIC Trust isnot consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company purchased an investment in the common stock of FAIC Trust for $217,000, which is included in other assets. At the close of this acquisition, a $1.2 million valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment and amortized over the life of the security. The unamortized valuation reserve was $842,000 at* December 31, 2023and $918,000 at December 31, 2022.The subordinated debentures have a variable rate of interest equal tothree**-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 7.90% as of December 31, 2023,andthree*-month LIBOR plus 2.25%, which was 7.02% at* December 31, 2022.*

In* January 2020,the Company, through the acquisition of PGBH, acquired PGB Capital Trust I (“PGBH Trust”). PGBH Trust issued 5,000 units of fixed-to-floating rate capital securities with an aggregate liquidation amount of $5 million to an independent investor, and all of its common securities, with an aggregate liquidation amount of $155,000. The Company isnot* considered the primary beneficiary of PGBH Trust (variable interest entity), therefore PGBH Trust isnot consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability. The Company purchased an investment in the common stock of PGBH Trust for $155,000, which is included in other assets. At the close of this acquisition, a $763,000 valuation reserve recorded to arrive at it fair market value, which is treated as a yield adjustment and amortized over the life of the security. The unamortized valuation reserve was $559,000 at* December 31, 2023and $610,000 at December 31, 2022.The subordinated debentures have a variable rate of interest equal tothree**-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 7.75% as of December 31, 2023,andthree*-month LIBOR plus 2.10%, which was 6.87% at* December 31, 2022.*

The Company paid interest expense of $1.3 million in2023, $650,000 in2022 and $377,000 in2021. The amount of aggregate amortization expense recognized was $218,000 in each of the years ended* December 31, 2023,*2022 and2021.

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For regulatory reporting purposes, the Federal Reserve Board has indicated that the capital securities qualify as Tier1 capital of the Company subject to previously specified limitations, until further notice. If regulators make a determination that the capital securities canno longer be considered in regulatory capital, the securities become callable and the Company* may*redeem them.

At* December 31, 2023,the Company duly and punctually paid all payments, maintained100%* ownership of the common securities, and didnot incur any additional indebtedness as agreed. The Company was in compliance with all covenants under all subordinated debentures at* December 31, 2023.*

NOTE11 - BORROWING ARRANGEMENTS

The Company has established secured and unsecured lines of credit. The Company* may*borrow funds from time to time on a term or overnight basis from the Federal Home Loan Bank of San Francisco (“FHLB”), the Federal Reserve Bank of San Francisco (“FRB”) and other financial institutions as indicated below.

Federal Funds Arrangements with Commercial Banks. As of* December 31, 2023,the Company may*borrow on an unsecured basis, up to $92.0 million from other financial institutions.

*Letter of Credit Arrangements.As of December 31, 2023,*the Company had an unsecured commercial letter of credit line with another financial institution for $2.0 million.

FRB Secured Line of Credit.As of December 31, 2023,the Bank had a secured borrowing capacity with the FRB of $42.3 million at December 31, 2023collateralized by pledged loans with a carrying value of $62.8 million.

FHLB Secured Line of Credit and Advances.As of December 31, 2023,the Bank had a secured borrowing capacity with the FHLB of $1.0 billion collateralized by pledged residential and commercial loans with a carrying value of $1.5 billion. At December 31, 2023,the Company hadno overnight advances and $150.0 million of long-term advances with an original term of 5 years at a weighted average rate of 1.18%. The Company paid interest expenses of $2.9 million, $2.9 million and $1.8 million on such FHLB advances for the years ended December 31, 2023,*2022 and2021,* respectively.

There wereno amounts outstanding under any of the other borrowing arrangements above as of* December 31, 2023except FHLB advances maturing in2025.*

NOTE12 - INCOME TAXES

The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

Income tax expense consists of the following:

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A comparison of the federal statutory income tax rates to the Company's effective income tax rates for the years ended* December**31* follows:

Deferred taxes are a result of differences between income tax accounting and generally accepted accounting principles with respect to income and expense recognition. The following is a summary of the components of the net deferred tax asset accounts recognized in the accompanying balance sheets as of* December 31:*

At* December 31, 2023,the Company has usable net operating loss carryforwards from acquisitions of $21,104 for federal and $5,570 for California income tax purposes. Net operating loss carry forwards, to the extentnot* used, will begin to expire in2028. The net operating loss carryforwards were generated through acquisitions, and as a result, are substantially limited by Section382 of the Internal Revenue Code. Benefitsnot expected to be realized due to the limitation have been excluded from the deferred tax asset and net operating loss carryforward amounts noted above. Based on management's assessment, the Company concluded thatno valuation allowance was necessary for the Company's deferred tax assets as of* December 31, 2023.*

The Company files income tax returns in federal and various state jurisdictions. The Company is subject to examinations in federal jurisdiction for the years ended after* December 31, 2019.The statutes of limitations for state income tax returns remain open for tax years in accordance with each state's statutes. The audit of the Company's New York State tax returns for the tax period from January 1, 2018to December 31, 2020was completed in August 2023.The Company paid additional tax and interest of $70,000 without penalties to settle the tax audit findings with New York State. The Company hadno material uncertain tax positions at December 31, 2023and2022,* and recognizedno material interest or penalties as part of income taxes for the years ended* December 31, 2023,*2022, and2021.

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NOTE13 - COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risknot recognized in the Company's financial statements.

The Company's exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements.

As of* December 31, 2023and2022,* the Company had the following financial commitments whose contractual amount represents credit risk:

Commitments to extend credit are agreements to lend to a customer as long as there isno violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts donot necessarily represent future cash requirements. The Company evaluates each client's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management's credit evaluation of the customer.

The Company records a liability for lifetime expected losses on off-balance-sheet credit exposure that donot fit the definition of unconditionally cancelable in accordance with ASC326. The Company uses the loss rate and exposure of default framework to estimate a reserve for unfunded commitments. Loss rates for the expected funded balances are determined based on the associated pooled loan analysis loss rate and the exposure at default is based on an estimated utilization given default. The off-balance sheet commitment allowance were $640,000 and $1.2 million as of* December 31, 2023and December 31, 2022,respectively. The (reversal of)/provision for off-balance sheet commitments totaled were ($516,000) and $1.1 million for the years ended December 31,*2023 and2022.

Additionally, we have commitments to invest in certain affordable housing partnerships and SBIC funds that call for capital contributions up to an amount specific in the partnership agreements. Such unfunded commitments totaled $3.3 million and $3.5 million as of* December 31, 2023and2022.*

The Company is involved in various matters of litigation, which have arisen in the ordinary course of business, and accruals for estimates of potential losses have been provided when necessary and appropriate under generally accepted accounting principles. In the opinion of management, the disposition of such pending litigation willnot have a material effect on the Company's financial statements.

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NOTE14 - LEASES

The Company leases several of its operating facilities under various non-cancellable operating leases expiring at various dates through2037. The Company is also responsible for common area maintenance, taxes, and insurance at the various branch locations.

Future minimum rent payments on the Company’s leases were as follows at* December 31, 2023:*

The minimum rent payments shown above are given for the existing lease obligation and arenot a forecast of future rental expense. Total rental expense, recognized on a straight-line basis, was $5.7 million, $5.4 million, and $5.3 million for the years ended* December 31, 2023,2022, and2021, respectively. The Company received rental income of $570,000, $548,000, and $479,000 for the years ended December 31, 2023,*2022, and2021, respectively.

The following table presents the operating lease related assets and liabilities recorded on the consolidated balance sheets, and the weighted-average remaining lease terms and discount rates as of* December 31, 2023and December*31,* 2022:*

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NOTE15 - RELATED PARTY TRANSACTIONS

Loans to principal officers, directors, and their affiliates were as follows:

Outstanding loan commitments to executive officers, directors and their related interests with whom they are associated were none and $1.6 million as of* December 31, 2023and2022,* respectively.

Deposits from principal officers, directors, and their affiliates at* December 31,*2023 and2022 were $25.7 million and $88.1 million, respectively.

Certain directors and their affiliates own $6.0 million of RBB subordinated debentures as of* December 31, 2023and $8.1 million as of December 31, 2022.*

NOTE*16*** **- STOCK OPTION PLAN

RBB Bancorp 2010 Stock Option Plan

Under the RBB Bancorp2010 Stock Option Plan (the*“2010* Plan”), the Company was permitted to grant awards to eligible persons in the form of qualified and non-qualified stock options. The Company reserved up to 30% of the issued and outstanding shares of common stock as of the date the Company adopted the2010 Plan, or 3,494,478 shares, for issuance under the2010 Plan. Following receipt of shareholder approval of the2017 Omnibus Stock Incentive Plan (the “OSIP”) in* May2017,* no additional grants were made under the2010 Plan. The2010 Plan has been terminated and options that were granted under the2010 Plan have become subject to the OSIP. Awards that were granted under the2010 Plan will remain exercisable pursuant to the terms and conditions set forth in individual award agreements, but such awards will be assumed and administered under the OSIP. The2010 Plan award agreements allow for acceleration of exercise privileges of grants upon occurrence of a change in control of the Company. If a participant’s job is terminated for cause, then all unvested awards expire at the date of termination.

Amended and Restated RBB Bancorp 2017 Omnibus Stock Incentive Plan

The Amended and Restated RBB Bancorp2017 Omnibus Stock Incentive Plan (the “Amended OSIP”) was approved by the Company’s board of directors in* January 2019and approved by the Company’s shareholders in May 2022**.* The Amended OSIP was designed to ensure continued availability of equity awards that will assist the Company in attracting and retaining competent managerial personnel and rewarding key employees, directors and other service providers for high levels of performance. Pursuant to the Amended OSIP, the Company’s board of directors are allowed to grant awards to eligible persons in the form of qualified and non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights and other incentive awards. The Company has reserved up to 30% of issued and outstanding shares of common stock as of the date the Company adopted the Amended OSIP, or 3,848,341 shares. As of* December 31, 2023,there were 1,032,173 shares of common stock available for issuance under the Amended OSIP. This represents 5.5% of the issued and outstanding shares of the Company’s common stock as of December 31, 2023.*Awards vest, become exercisable and contain such other terms and conditions as determined by the board of directors and set forth in individual agreements with the employees receiving the awards. The Amended OSIP enables the board of directors to set specific performance criteria that must be met before an award vests. The Amended OSIP allows for acceleration of vesting and exercise privileges of grants if a participant’s termination of employment is due to a change in control, death or total disability. If a participant’s job is terminated for cause, then all awards expire at the date of termination.

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The Company recognized total stock-based compensation expense of $750,000, $848,000, and $1.1 million in2023, 2022 and2021. The total unrecognized stock-based expense totaled $517,000, $581,000, and $1.4 million as of* December 31, 2023,*2022, and2021.

Stock Options

The recorded compensation expense for stock option was $246,000, $300,000, and $485,000 and the Company recognized income tax expense/(benefit) of $3,000, ($587,000), and ($873,000) for the years ended* December**31,* 2023, 2022, and2021, respectively. Unrecognized stock-based compensation expense related to options was $179,000, $400,000, and $635,000 as of* December 31, 2023,2022, and2021, respectively. Unrecognized stock-based compensation expense will be recognized over a weighted-average period of 1.2 years as of December 31, 2023.*

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions presented below for2023, 2022 and2021.

The expected volatility was based on the historical volatility of the Company stock trading history. The expected term represents the estimated average period of time that the options remain outstanding. The expected term represents the estimated average period of time that the options remain outstanding. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding. The risk free rate of return reflects the grant date interest rate offered forzero coupon U.S. Treasury bonds over the expected term of the options.

A summary of the status of the Company's stock option plan as of* December 31, 2023*and changes during the year ended is presented below:

The total fair value of the shares vested was $1.1 million, $1.1 million, and $1.2 million in2023, 2022, and2021, respectively. The number of unvested stock options were 65,671,127,005, and 237,500 with a weighted average grant date fair value of $4.99, $4.69, and $4.28 as of* December 31, 2023,*2022 and2021, respectively. The decrease of unvested stock options during2023 was due to 56,334 stock options vested with a weighted average grant date stock price of $18.40,30,000 stock options forfeited with a weighted average grant date stock price of $19.87,5,000 stock options exercised with a weighted average grant date stock price of $17.74, offset by 30,000 stock options granted with a weighted average grant date stock price of $19.87.

Cash received from the exercise of 19,403 share options was $295,000 for the period ended* December 31, 2023.Cash received from the exercise of 445,308 share options was $5.5 million for the period ended December 31, 2022.Cash received from the exercise of 302,744 share options was $3.5 million for the period ended December 31, 2021.The intrinsic value of options exercised was $90,000, $4.0 million, and $3.8 million in2023,* 2022, and2021, respectively.

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Restricted Stock Units

The Company granted 32,248 restricted stock units at a closing price of $20.46 on* January 18,2023 to its directors and executive officers and 16,500 restricted stock units at a closing price of $13.93 on July 20, 2023to its new president. These restricted stock units are scheduled to vest over aone year period for shares granted to directors and athree*-year period for shares granted to executive officers from the grant date. As of* December 31, 2023,*there were 43,160 remaining unvested restricted stock units.

The recorded compensation expense for restricted stock units was $504,000 and $453,000 for the years ended* December 31, 2023and2022,* respectively. The Company didnot grant restricted stock units in2021. Unrecognized stock-based compensation expense related to restricted stock units was $338,000 and $182,000 as of* December 31, 2023and2022,* respectively. As of* December 31, 2023,*unrecognized stock-based compensation expense related to restricted stock units is expected to be recognized over the next 1.5 years.

The following table presents restricted stock unit activity during thetwelve** months ended December 31, 2023.

Restricted Stock Awards

The Company granted restricted stock awards for 60,000 shares at a closing price of $17.74 in2021**. These restricted stock awards were scheduled to vest over athree-year period from the* January 21, 2021grant date. Unvested restricted stock awards of 40,000 shares were forfeited and the expense related to the forfeited shares was reversed on April 8, 2022**,* due to a former employee's resignation. As of* December 31, 2023,there wereno outstanding restricted stock awards. The Company didnot grant restricted stock awards in2023* or2022**.

The recorded compensation expense for restricted stock awards waszero, $95,000, and $602,000 for the years ended* December**31,* 2023, 2022, and2021, respectively. Unrecognized stock-based compensation expense related to restricted stock awards waszero, zero, and $729,000 as of* December 31, 2023,*2022, and2021, respectively.

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NOTE17 - REGULATORY MATTERS

Update on Previously Disclosed Regulatory Matters

As previously disclosed in the Company's Current Report on Form8-K filed with the Securities and Exchange Commission (“SEC”) on* October 31, 2023**,* effective on* October 25, 2023**,* the Bank entered into a Stipulation to the Issuance of a Consent Order (the “Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the California Department of Financial Protection and Innovation (the “DFPI”), consenting to the issuance of a consent order (the “Consent Order”) relating to the Bank’s Anti-Money Laundering/Countering the Financing of Terrorism (“AML/CFT”) compliance program. In connection to the issuance of the Consent Order, the Bank didnot admit or deny any charges of violating Bank Secrecy Act (“BSA”) and its implementing regulations.

Regulatory Capital

Holding companies (with assets over $3 billion at the beginning of the year) and banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements.

In* July**2013,* the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks. The new rules became effective on* January 1, 2015,with certain of the requirements phased-in over a multi-year schedule. Under the rules, minimum requirements increased for both the quantity and quality of capital held by the Bank. The rules include a new common equity Tier1* (“CET1”) capital to risk-weighted assets ratio with minimums for capital adequacy and prompt corrective action purposes of 4.5% and 6.5%, respectively. The minimum Tier1 capital to risk-weighted assets ratio was raised from 4.0% to 6.0% under the capital adequacy framework and from 6.0% to 8.0% to be well capitalized under the prompt corrective action framework. In addition, the rules introduced the concept of a “conservation buffer” of 2.5% applicable to thethree capital adequacy risk-weighted asset ratios (CET1, Tier1, and Total). The implementation of the capital conservation buffer began on* January 1, 2016at 0.625% and was phased in over afour*-year period (increasing by that amount on each subsequent* January 1,until it reached 2.5% on January 1, 2019).*If the capital adequacy minimum ratios plus the phased-in conservation buffer amount exceed actual risk-weighted capital ratios, then dividends, share buybacks, and discretionary bonuses to executives could be limited in amount.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier1 andCET1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier1 capital (as defined) to average assets (as defined). As permitted by the regulators for financial institutions that arenot deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. Management believes, at* December 31, 2023and December 31, 2022,*that the Bank satisfied all capital adequacy requirements to which it is subject.

In* February 2019,the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over athree*-year period the day-one adverse regulatory capital effects of ASU2016-13. Additionally, in* March 2020,the U.S. federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additionaltwo* years for a total transition period of up tofive years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the novel coronavirus disease2019 (“COVID-19”) pandemic. As a result, entities that adopted CECL in2020 had the option to gradually phase in the full effect of CECL on regulatory capital over afive-year transition period. Effective* January 1, 2022,the Company adopted ASU2016*-13, reflected the full effect of CECL at* December 31, 2022,and didnot* elect thethree-year CECL phase-in options on regulatory capital.

As of* December 31, 2023and2022,* the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action (there areno conditions or events since that notification that management believes have changed the Bank’s category). To be categorized as well capitalized, the Bank must maintain minimum ratios as set forth in the table below.

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The following table sets forth Bancorp’s consolidated and the Bank’s actual capital amounts and ratios and related regulatory requirements for the Bank as of* December 31, 2023:*

(1) These ratios are exclusive of the capital conservation buffer.

The following table sets forth Bancorp’s consolidated and the Bank’s actual capital amounts and ratios and related regulatory requirements for the Bank as of* December 31, 2022:*

(1) These ratios are exclusive of the capital conservation buffer.

The California Financial Code generally acts to prohibit banks from making a cash distribution to its shareholders in excess of the lesser of the bank’s undivided profits or the bank's net income for its lastthree fiscal years less the amount of any distribution made by the bank’s shareholders during the same period.

The California General Corporation Law generally acts to prohibit companies from paying dividends on common stock unless retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend. If a company fails this test, then it* may*still pay dividends if after giving effect to the dividend the company’s assets are at least 125% of its liabilities.

Additionally, the Federal Reserve has issued guidance, which requires that they be consulted before payment of a dividend if a bank holding company doesnot have earnings over the priorfour quarters of at least equal to the dividend to be paid, plus other holding company obligations.

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NOTE18 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value inthree levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level1 measurements) and the lowest priority to unobservable inputs (Level3 measurements). Thethree levels of the fair value hierarchy are described as follows:

Level1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level2 - Inputs other than quoted prices included in Level1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that arenot active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

Level3 - Valuation is generated from model-based techniques whereone or more significant inputs arenot observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques* may*include use of matrix pricing, DCF models, and similar techniques.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level2).

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based onthird party appraisals of the property which are commonly adjusted by management to reflect an expectation of the amount to be ultimately collected and selling costs (Level3).

Appraisals for other real estate owned are performed by state licensed appraisers (for commercial properties) or state certified appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. When a Notice of Default is recorded, an appraisal report is ordered. Once received, a member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison to independent data sources such as recent market data or industry wide-statistics for residential appraisals. Commercial appraisals are sent to an independentthird party to review. The Company also compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustments, if any, should be made to the appraisal values on any remaining other real estate owned to arrive at fair value. If the existing appraisal is older thantwelve months, a new appraisal report is ordered.No significant adjustments to appraised values have been made as a result of this comparison process as of* December 31, 2023.*

Interest Rate Lock Contracts and Forward Mortgage Loan Sale Contracts: The fair values of interest rate lock contracts and forward mortgage loan sale contracts are determined by loan lock-in rate, loan funded rate, market interest rate, fees to be collected from the borrower, fees and costs associated with the origination of the loan, expiration timing, sale price, and the value of the retained servicing. The company classified these derivatives as level3 due to management’s estimate of market rate, cost and expiration timing on these contracts.

Collateral-dependent individually evaluated loans: Collateral-dependent individually evaluated loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable.

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The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at* December 31, 2023and2022:*

There was a $521,000 write-down on collateral-dependent loans that were individually evaluated to the fair value of $11.4 million as of* December 31,2023.* There wasno collateral-dependent loan that was individually evaluated and written down to the fair value as of* December 31, 2022**.* Collateral-dependent individually evaluated loans were evaluated bythird party appraisals with unobservable input of management adjustment of 10% to reflect selling costs.

Quantitative information about the Company's OREO non-recurring Level3 fair value measurements as of* December 31, 2023and2022* is as follows:

There wasno OREO as of* December 31, 2023and there weretwo* single-family residences with a fair value of $577,000 as of* December 31, 2022.During2023,* the Company soldone of the properties with a book value of $293,000 for a gain of $190,000 and the other property with a book value of $284,000 was sold for a loss of $57,000. OREO was evaluated bythird party appraisals with unobservable input of management adjustment in the range of 5%-6% to reflect current conditions and selling costs.

No write-downs to OREO were recorded in2023 or2022.

The fair value measurement of IRLCs and FMLSCs were primarily based on the buy price from borrowers ranging from 99.5 to 100.3, the sale price to Fannie Mae ranging from 102 to 104, and the significant unobservable inputs using margin cost rate of ranging from 0.50% to 1.00%.

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates donot reflect any premium or discount that could result from offering for sale atone time the entire holdings of a particular financial instrument. Becauseno market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that arenot considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and havenot been considered in many of the estimates.

Becauseno market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates donot reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale atone time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and havenot been considered in any of these estimates.

The following methods and assumptions were used to estimate the fair value of significant financial instrumentsnot previously presented:

Cash and Due From Banks -- The carrying amounts of cash and short-term instruments approximate fair values, a Level1 measurement.

Time Deposits in Other Banks -- Fair values for time deposits with other banks are estimated using DCF analyses, using interest rates currently being offered with similar terms, a Level1 measurement.

Investment securities available for sale and held to maturity -- Fair values are measured by using quoted market prices for similar securities or dealer quotes, a Level2 measurement.

Mortgage Loans Held for Sale -- The Company records mortgage loans held for sale at fair value based on the net premium received on recent sales of mortgage loans for identical pools of loans, a Level2 measurement.

Loans -- For variable rate loans that reprice frequently and withno significant change in credit risk, fair values are based on carrying amounts. The fair values for all other loans are estimated using DCF analyses, using interest rates currently being offered for loans with similar terms to borrowers with similar credit quality. In accordance with the prospective adoption of ASU2016-01, the fair value of loans as of* December 31, 2023,and2022* was measured using an exit price notion, a Level3 measurement.

Equity Securities -- The fair values of the Company’s equity securities are measured based on unobservable inputs at the reporting date, a Level3 measurement. Equity securities are comprised of affordable housing investment funds and other restricted stocks.

Servicing Rights -- Mortgage and SBA servicing rights are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, a Level3 measurement.

Accrued Interest Receivable --Accrued interest receivable includes accrued interest on investment securities (Level2), accrued interest on loans (Level3), accrued interest on due from banks (Level1), and accrued interest on equity securities (Level3).

Off-Balance Sheet Financial Instruments -- The fair value of commitments to extend credit and standby letters of credit, interest rate lock commitments and forward mortgage loan sales contracts is estimated using the fees currently charged to enter into similar agreements. Unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability result in a Level3 measurement.

Deposits -- The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money market accounts are, by definition based on carrying value. Fair value for fixed-rate certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits, a Level2 measurement. Early withdrawal of fixed-rate certificates of deposit isnot expected to be significant.

FHLB Advances -- The fair values of the Company’s FHLB Advances are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level3 measurement.

Long-Term Debt -- The fair values of the Company’s long-term borrowings are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level3 measurement.

Subordinated Debentures -- The fair values of the Company’s subordinated debentures are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level3 measurement.

Fair value is estimated in accordance with ASC Topic825**. Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates donot reflect any premium or discount that could result from offering for sale atone time the Bank’s entire holdings of a particular financial instrument. Becauseno market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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The fair value hierarchy level and estimated fair value of significant financial instruments at* December 31, 2023and2022* are summarized as follows:

(1) Included in “Accrued interest and other assets” on the consolidated balance sheets.

NOTE19 - EARNINGS PER SHARE (“EPS”)

The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute EPS:

Stock options for 332,500 shares of common stock and restricted stock units for 6,012 shares werenot considered in computing diluted earnings per common share for* December 31, 2023because they were anti-dilutive. Stock options forzero share of common stock and restricted stock units forzero share werenot* considered in computing diluted earnings per common share for* December 31, 2022and2021,* respectively, because they were anti-dilutive.

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NOTE20 – REVENUE FROM CONTRACTS WITH CUSTOMERS

The following is a summary of revenue from contracts with customers that are in-scope andnot in-scope under Topic606:

The major revenue streams by fee type that are within the scope of ASC606 presented in the above tables are described in additional detail below:

Fees and Services Charges on Deposit Accounts

Fees and service charges on deposit accounts include charges for analysis, overdraft, cashier's check fees, ATM, and safe deposit activities executed by our deposit clients, as well as interchange income earned through card payment networks for the acceptance of card based transactions. Fees earned from our deposit clients are governed by contracts that provide for overall custody and access to deposited funds and other related services, and can be terminated at will by either party; this includes fees from money service businesses (MSBs). Fees received from deposit clients for the various deposit activities are recognized as revenue once the performance obligations are met. Periodic service charges are generally collected monthly directly from the customer’s deposit account, and at the end of a statement cycle, while transaction based service charges are typically collected at the time of or soon after the service is performed. The adoption of ASU2014-09 hadno impact to the recognition of fees and service charges on deposit accounts.

Wealth Management Fees

The Company employs financial consultants to provide investment planning services for customers including wealth management services, asset allocation strategies, portfolio analysis and monitoring, investment strategies, and risk management strategies. The commission fees the Company earns are variable and are generally received monthly. The Company recognizes revenue for the services performed at quarter-end based on actual transaction details received from the broker dealer the Company engages.

In the Company’s wealth management division, revenue is primarily generated from (1) securities brokerage accounts, (2) investment advisor accounts, (3) full service brokerage implementation fees, and (4) life insurance and annuity products.

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Gain (loss) on Sales of Other Real Estate Owned* and Fixed Assets*

The Company records a gain or loss from the sale of OREO and fixed assets, when control of the property or asset transfers to the buyer, which generally occurs at the time of an executed deed or sales agreement. When the Company finances the sale of OREO to a buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Company adjusts the transaction price and related gain or loss on sale if a significant financing component is present.

NOTE*21*** – QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS**

The Company began investing in qualified affordable housing projects in2016. At* December 31, 2023and December 31, 2022,the balance of the investment for qualified affordable housing projects was $6.4 million and $7.6 million, respectively. This balance is reflected in the accrued interest and other assets line on the consolidated balance sheets. Total unfunded commitments related to the investments in qualified affordable housing projects totaled $2.3 million and $2.6 million at December 31, 2023and December 31, 2022.*The Company expects to fulfill these commitments between 2024 and 2038.

During the years ended* December 31, 2023,*2022 and2021, the Company recognized amortization expense of $1.1 million, $1.1 million, and $1.0 million, respectively, which was included within income tax expense on the consolidated statements of income.

During the years ended* December 31, 2023,2022 and2021, the Company recognized tax credits from its investment in affordable housing tax credits of $1.0 million, $991,000 and $1.0 million, respectively. The Company hadno impairment losses during the years ended December 31, 2023,*2022 and2021.

NOTE*22*** - PARENT ONLY CONDENSED FINANCIAL INFORMATION**

The parent company only condensed balance sheet as of* December 31, 2023and2022,* and the related condensed statements of income and condensed statements of cash flows for the years ended* December 31, 2023,*2022 and2021 are presented below:

Condensed Balance Sheet

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Condensed Statements of Income

Condensed Statements of Cash Flows

NOTE*23*** – REPURCHASE OF COMMON STOCK**

On* April**22,* 2021, * March 16, 2022and June 14, 2022,the Board of Directors approved a stock repurchase program to buy back up to an aggregate of 500,000 shares of Company common stock for each authorization date. In2021,* the Company repurchased 473,122 shares of common stock for a total of $10.5 million at a weighted average share price of $22.28. In2022, the Company repurchased 902,526 shares of common stock for a total of $19.8 million at a weighted average share price of $21.96. In2023, the Company repurchased 396,374 shares of common stock for a total of $6.8 million at a weighted average share price of $17.02. As of* December 31, 2023,the Company may*repurchase up to 36,750 shares under the remaining authorized repurchase program.

NOTE24 – SUBSEQUENT EVENTS

On* January 18, 2024,the Company announced the Board of Directors had declared a common stock cash dividend of $0.16 per share, payable on February 9, 2024 to common shareholders of record as of January 31, 2024.*

On* February**29,* 2024, the Company announced the Board of Directors authorized a stock repurchase plan providing for the repurchase of up to 1 million shares of the Company’s outstanding common stock through* March 31, 2026.*

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