RBB Bancorp

Previous wording

In this Quarterly Report on Form 10-Q (this “Report” or “Form 10-Q”), the term “Bancorp” refers to RBB Bancorp and the term “Bank” refers to Royal Business Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively. This Report contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our results of operations, financial condition and financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

Current wording

In this Quarterly Report on Form 10-Q (this “Report” or “Form 10-Q”), the term “Bancorp” refers to RBB Bancorp and the term “Bank” refers to Royal Business Bank. The terms “Company,” “we,” “us,” and “our” refer to Bancorp and the Bank collectively. This Report contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our results of operations, financial condition and financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be

Previous wording

Management has established various accounting policies that govern the application of generally accepted accounting principles in the U.S. (“GAAP”) in the preparation of our financial statements. Certain accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Current wording

Management has established various accounting policies that govern the application of generally accepted accounting principles in the U.S. (“GAAP”) in the preparation of our financial statements. Certain accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions. The Company’s critical accounting policies consist of the allowance for credit losses on loans held for investment, investment securities, goodwill and income taxes. Please seeItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operationsin our Annual Report on Form 10-K for the year ended December 31, 2023 ("2023 Annual Report") for additional discussion concerning these critical accounting policies. Also, our significant accounting policies are described in greater detail in Note 2 – Basis of Presentation and Summary of Significant Accounting Policies to the audited consolidated financial statements included in our 2023 Annual Report, and are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Previous wording

A sensitivity analysis of our ACL was performed as of March 31, 2024. Based on this sensitivity analysis, a positive 25% change in prepayment speed would result in a $961,000, or (2.32)%, decrease to the ACL. A negative 25% change in prepayment speed would result in a $1.27 million, or 3.08%, increase to the ACL. Additionally, a one percentage point increase in the unemployment rate would result in a $742,000, or 1.80%, increase to the ACL and a one percentage point decrease in the unemployment rate would result in a $675,000, or (1.63)%, decrease to the ACL. Management reviews the results using the comparison scenario for sensitivity analysis and considered the results when evaluating the qualitative factor adjustments.

Current wording

A sensitivity analysis of our ACL was performed as of June 30, 2024. Based on this sensitivity analysis, a positive 25% change in prepayment speed would result in a $943,000, or 2%, decrease to the ACL. A negative 25% change in prepayment speed would result in a $1.2 million, or 3%, increase to the ACL. Additionally, a one percentage point increase in the unemployment rate would result in a $717,000, or 2%, increase to the ACL and a one percentage point decrease in the unemployment rate would result in a $678,000, or 2%, decrease to the ACL. Management reviews the results using the comparison scenario for sensitivity analysis and considered the results when evaluating the qualitative factor adjustments.

Previous wording

On a quarterly basis, we stress test the qualitative factors, which are lending policy, procedures and strategies, economic conditions, changes in nature and volume of the portfolio, credit and lending staff, problem loan trends, loan review results, collateral value, concentrations and regulatory and business environment by creating two scenarios, moderate risk and major risk. In the Moderate Stress scenario, the status of all nine risk factors across all pooled loan segments were set at “Moderate Risk” while in the Major Stress scenario, the status of all nine risk factors across all pooled loan segments were set at “Major Risk.” Under the Moderate Stress scenario, the ACL would increase by $3.8 million, or 9.20%, as of March 31, 2024. Under the Major Stress scenario, the ACL would increase by $19.0 million, or 46.01%, as of March 31, 2024.

Current wording

On a quarterly basis, we stress test the qualitative factors, which are lending policy, procedures and strategies, economic conditions, changes in nature and volume of the portfolio, credit and lending staff, problem loan trends, loan review results, collateral value, concentrations and regulatory and business environment by creating two scenarios, moderate risk and major risk. In the Moderate Stress scenario, the status of all nine risk factors across all pooled loan types were set at “Moderate Risk” while in the Major Stress scenario, the status of all nine risk factors across all pooled loan types were set at “Major Risk.” Under the Moderate Stress scenario, the ACL would increase by $3.5 million, or 8%, as of June 30, 2024. Under the Major Stress scenario, the ACL would increase by $18.9 million, or 45%, as of June 30, 2024.

Previous wording

For additional information on the policies, methodologies and judgments used to determine the ACL, see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2023 ("2023 Annual Report"), and Note 4 — Loans and Allowance for Credit Losses to the Notes to Consolidated Financial Statements in this Form 10-Q.

Current wording

For additional information on the policies, methodologies and judgments used to determine the ACL, see Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies in our 2023 Annual Report and Note 4 — Loans and Allowance for Credit Losses to the Notes to Consolidated Financial Statements in this Form 10-Q.

Previous wording

RBB is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. RBB Bancorp’s principal business is to serve as the holding company for its wholly-owned banking subsidiaries, the Bank and RBB Asset Management Company (“RAM”). RAM was formed 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 March 31, 2024, we had total assets of $3.9 billion, gross loans of $3.0 billion, total deposits of $3.0 billion and total shareholders' equity of $514.0 million. RBB’s common stock trades on the Nasdaq Global Select Market under the symbol “RBB.”

Current wording

RBB is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. RBB Bancorp’s principal business is to serve as the holding company for its wholly-owned subsidiaries, the Bank and RBB Asset Management Company (“RAM”). RAM was formed 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-alone basis. At June 30, 2024, we had total assets of $3.9 billion, gross loans held for investment ("HFI") of $3.0 billion, total deposits of $3.0 billion and total shareholders' equity of $511.3 million. RBB’s common stock trades on the Nasdaq Global Select Market under the symbol “RBB.”

Previous wording

The Bank provides business-banking products and services predominantly to the Asian-American communities through full service branches located in Los Angeles County, Orange County and Ventura County in California, in the Las Vegas, Nevada and New York City metropolitan areas, Chicago (Illinois), Edison (New Jersey) and Honolulu (Hawaii). The products and services include commercial and investor real estate loans, business loans and lines of credit, Small Business Administration (“SBA”) 7A and 504 loans, mortgage loans, trade finance and a full range of depository accounts, including specialized services such as remote deposit, E-banking, and mobile banking.

Current wording

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), the New York City metropolitan areas, Chicago (Illinois), Edison (New Jersey) and Honolulu (Hawaii). The products and services include commercial and investor real estate loans, business loans and lines of credit, Small Business Administration (“SBA”) 7A and 504 loans, mortgage loans, trade finance and a full range of depository accounts, including specialized services such as remote deposit, E-banking, mobile banking and treasury management services.

Previous wording

We operate as a minority depository institution, which is defined by the FDIC as a federally insured depository institution where 51% or more of the voting stock is owned by minority individuals or a majority of the board of directors is minority and the community that the institution serves is predominantly minority. A minority depository institution is eligible to receive from the FDIC and other federal regulatory agencies training, technical assistance and review, and assistance regarding the implementation of proposed new deposit taking and lending programs, as well as with respect to the adoption of applicable policies and procedures governing such programs. We intend to maintain our minority depository institution designation, as it is expected that at least 51% of our issued and outstanding shares of capital shall remain owned by minority individuals. The minority depository institution designation has been historically beneficial to us, as the FDIC has reviewed and assisted with the implementation of our deposit and lending programs, and we continue to use the program for technical assistance.

Current wording

We operate as a minority depository institution, which is defined by the FDIC as a federally insured depository institution where 51% or more of the voting stock is owned by minority individuals or a majority of the board of directors is minority and the community that the institution serves is predominantly minority. A minority depository institution is eligible to receive support from the FDIC and other federal regulatory agencies such as training, technical assistance and review of proposed new deposit taking and lending programs, and the adoption of applicable policies and procedures governing such programs. We intend to maintain our minority depository institution designation, as it is expected that at least 51% of our issued and outstanding shares of capital shall remain owned by minority individuals. The minority depository institution designation has been historically beneficial to us, and we continue to use the program for technical assistance.

Previous wording

The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of RBB and its wholly owned subsidiaries. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our audited financial statements included in our 2023 Annual Report, and the unaudited consolidated financial statements and accompanying notes presented elsewhere in this Report.

Current wording

The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of RBB and its wholly owned subsidiaries. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our audited financial statements included in our 2023 Annual Report, and the unaudited consolidated financial statements and accompanying notes presented elsewhere in this Report. The results for the three and six months ended June 30, 2024 are not necessarily indicative of the results expected for the year ending December 31, 2024.

Previous wording

We reported net income of $8.0 million, or $0.43 diluted earnings per share, for the quarter ended March 31, 2024, compared to net income of $12.1 million, or $0.64 diluted earnings per share, for the quarter ended December 31, 2023 and $11.0 million, or $0.58 per share for the quarter ended March 31, 2023. The results for the quarter ended December 31, 2023 included a Community Development Financial Institution (“CDFI”) Equitable Recovery Program (“ERP”) award of $5.0 million on a pre-tax basis; there was no similar income in the other periods presented.

Current wording

We reported net income of $7.2 million, or $0.39 diluted earnings per share, for the quarter ended June 30, 2024, compared to net income of $8.0 million, or $0.43 diluted earnings per share, for the quarter ended March 31, 2024 and $11.0 million, or $0.58 diluted earnings per share for the quarter ended June 30, 2023.

Previous wording

At March 31, 2024, total assets were $3.9 billion, a decrease of $148.0 million, or 3.7%, from total assets of $4.0 billion at December 31, 2023, primarily due to a $162.1 million decrease in cash and cash equivalents and a $2.5 million decrease in gross loans, including loans held for sale (“HFS”), partially offset by a $16.2 million increase in available for sale ("AFS") investment securities. The decrease in cash and cash equivalents was primarily due to a decrease of $208.0 million in wholesale deposits. Wholesale deposits include brokered deposits, collateralized deposits from the State of California, and deposits acquired through internet listing services.

Current wording

At June 30, 2024, total assets were $3.9 billion, a decrease of $157.8 million, or 3.9%, from total assets of $4.0 billion at December 31, 2023, primarily due to a $178.6 million decrease in cash and cash equivalents, partially offset by a $17.1 million increase in gross loans, including loans held for sale (“HFS”) and a $6.6 million increase in available for sale ("AFS") investment securities. The decrease in cash and cash equivalents was primarily due to a decrease of $284.9 million in wholesale deposits, partially replaced by retail deposits. Wholesale deposits include brokered deposits, collateralized deposits from the State of California, and deposits acquired through internet listing services.

Previous wording

At March 31, 2024, AFS investment securities totaled $335.2 million, inclusive of a pre-tax net unrealized loss of $30.2 million, compared to $319.0 million, inclusive of a pre-tax unrealized loss of $28.1 million at December 31, 2023. The pre-tax unrealized loss was due to a decline in the value of AFS investment securities due to continued higher market interest rates in 2023 and the first quarter of 2024.

Current wording

At June 30, 2024, AFS investment securities totaled $325.6 million, inclusive of a pre-tax net unrealized loss of $30.2 million, compared to $319.0 million, inclusive of a pre-tax unrealized loss of $28.1 million at December 31, 2023. The pre-tax unrealized loss was due to a decline in the value of AFS investment securities due to continued higher market interest rates in 2024.

Previous wording

Total loans held for investment (“HFI”), net of deferred fees and discounts, decreased $4.5 million, or 0.15%, to $3.0 billion at March 31, 2024, from $3.0 billion at December 31, 2023. The decrease was primarily due to a decrease in single-family residential ("SFR") mortgages of $24.3 million and commercial and industrial (“C&I”) loans of $8.7 million, partially offset by increases in construction and land development ("C&D") loans of $16.6 million, commercial real estate ("CRE") loans of $10.6 million, and Small Business Administration (“SBA”) loans of $2.6 million. In addition, mortgage loans HFS were $3.9 million at March 31, 2024, compared to $1.9 million at December 31, 2023. The loanto deposit ratio was 98.6% at March 31, 2024, compared to 94.2% at December 31, 2023, and 104.7% at March 31, 2023.

Current wording

Total loans HFI, net of deferred fees and discounts, increased $15.9 million, or 0.5%, to $3.0 billion at June 30, 2024 from December 31, 2023. The increase was primarily due to an increase in commercial real estate ("CRE") loans of $22.4 million, and construction and land development ("C&D") loans of $21.0 million, partially offset by decreases in single-family residential ("SFR") mortgages of $20.0 million, commercial and industrial (“C&I”) loans of $3.4 million, Small Business Administration (“SBA”) loans of $1.8 million and other loans of $2.3 million. In addition, mortgage loans HFS increased $1.2 million to $3.1 million at June 30, 2024. The loan to deposit ratio was 99.4% at June 30, 2024, compared to 94.2% at December 31, 2023, and 99.3% at June 30, 2023.

Previous wording

Total deposits were $3.0 billion as of March 31, 2024, a $146.4 million, or 4.6%, decrease compared to December 31, 2023. This decrease was due to a decrease in interest-bearing deposits as noninterest-bearing deposits remained relatively stable at $539.5 million. At March 31, 2024, noninterest-bearing deposits represented 17.8% of total deposits, compared to 17.0% at December 31, 2023. The decrease in interest-bearing deposits included a decrease in time deposits of $156.4 million, offset by an increase in non-maturity deposits of $10.1 million. The decrease in time deposits included a $208.0 million decrease in wholesale deposits. Wholesale deposits totaled $197.6 million at March 31, 2024 and $405.6 million at December 31, 2023.

Current wording

Total deposits were $3.0 billion as of June 30, 2024, a $151.2 million, or 4.8%, decrease compared to $3.2 billion as of December 31, 2023. This decrease was due to a decrease in interest-bearing deposits. Noninterest-bearing deposits increased $3.4 million to $543.0 million at June 30, 2024, or 18.0% of total deposits, compared to $539.6 million, or 17.0% of total deposits at December 31, 2023. The decrease in interest-bearing deposits included a decrease in time deposits of $169.5 million, offset by an increase in non-maturity deposits of $15.0 million. The decrease in time deposits included a $284.9 million decrease in wholesale deposits, partially replaced by an increase of $115.4 million in retail deposits. Wholesale deposits totaled $120.7 million at June 30, 2024 and $405.6 million at December 31, 2023.

Previous wording

Borrowings, consisting of Federal Home Loan Bank ("FHLB")advances, long-term debt and subordinated debt, were $284.2 million at March 31, 2024, relatively unchanged compared to $284.1 million as of December 31, 2023. These balances include FHLB term advances of $150.0 million, which mature in the first quarter of 2025.

Current wording

Borrowings, consisting of Federal Home Loan Bank ("FHLB") advances, long-term debt and subordinated debt, were $284.4 million at June 30, 2024, relatively unchanged compared to $284.1 million as of December 31, 2023. These balances include FHLB term advances of $150.0 million, which mature in the first quarter of 2025.

Previous wording

As of March 31, 2024, the ACL totaled $42.4 million and was comprised of an ALL of $41.7 million and a reserve for unfunded commitments of $671,000 (included in “Accrued interest and other liabilities”). This compares to the ACL of $42.5 million comprised of an ALL of $41.9 million and a reserve for unfunded commitments of $640,000 at December 31, 2023. The ACL decreased $184,000 during the first quarter of 2024 due to net charge-offs. The allowance for loan losses (“ALL”) as a percentage of loans HFI was 1.38% at March 31, 2024, unchanged from December 31, 2023. The ALL as a percentage of nonperforming loans was 116% at March 31, 2024, a decrease from 133% at December 31, 2023.

Current wording

As of June 30, 2024, the ACL totaled $42.4 million and was comprised of an allowance for loan losses (“ALL”) of $41.7 million and a reserve for unfunded commitments (“RUC”) of $ 624,000 (included in “Accrued interest and other liabilities”). This compares to the ACL of $42.4 million comprised of an ALL of $41.7 million and a RUC of $671,000 at March 31, 2024. The ACL for the second quarter of 2024 included a $557,000 provision for credit losses, net charge-offs of $551,000. Although nonperforming loans increased, additional specific reserves were not required based on sufficient collateral for individually reviewed, collateral dependent loans. Charge-offs in the second quarter of 2024 were mostly related to a CRE non-owner occupied loan, which migrated to nonaccrual status and was written-down to its estimated fair value. The ALL as a percentage of loans HFI was 1.37% at June 30, 2024, compared to 1.38% at March 31, 2024. The ALL as a percentage of nonperforming loans was 76% at June 30, 2024, a decrease from 116% at March 31, 2024 due to the $18.7 million increase in nonperforming loans during the second quarter of 2024.

Previous wording

At March 31, 2024, total shareholders' equity was $514.0 million, a $2.7 million increase compared to December 31, 2023, and a $19.2 million increase compared to March 31, 2023. The increase in shareholders' equity for the first quarter was due to net earnings of $8.0 million and $541,000 from the exercise of stock options, offset by dividends paid of $3.0 million, common stock share repurchases totaling $1.5 million, and higher net after tax unrealized losses on AFS securities of $1.5 million. As a result, book value per share increased to $27.67 from $27.47 and tangible book value per share increased to $23.68 from $23.48. For additional information, see “Non-GAAP Financial Measures.”

Current wording

At June 30, 2024, total shareholders' equity was $511.3 million, a $2.7 million decrease compared to March 31, 2024, and an $11.0 million increase compared to June 30, 2023. The decrease in shareholders' equity for the second quarter of 2024 was due to dividends paid of $3.0 million and common stock share repurchases totaling $8.1 million, offset by net earnings of $7.2 million, stock option exercises and other equity award activity of $1.1 million and lower net unrealized loss on AFS securities of $67,000. Book value per share increased to $28.12 from $27.67 and tangible book value per share increased to $24.06 from $23.68. For additional information, see “Non-GAAP Financial Measures.”

Previous wording

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the periods presented. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

Current wording

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the periods presented. The average balances are daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination fees and costs accounted for as yield adjustments.

Previous wording

The following table summarizes the extent to which changes in (1) interest rates and (2) volume of average interest-earning assets and average interest-bearing liabilities affected by our net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate. Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average yield/rate.

Current wording

The following table summarizes the extent to which changes in (1) interest rates and (2) volume of average interest-earning assets and average interest-bearing liabilities affected our net interest income for the periods presented. The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate. Changes that are not solely due to either volume or yield/rate are allocated proportionally based on the absolute value of the change related to average volume and average yield/rate.

Previous wording

Interest and fees on total loans for the first quarter of 2024 were $45.5 million compared to $49.9 million for the first quarter of 2023. The $4.4 million decrease was primarily due to a $324.2 million decrease in the average balance of total loans outstanding. The decrease in the average loan balance was primarily due to strategic loans sales and moderated loan production to improve the risk profile of the loan portfolio and strengthen overall on-balance sheet liquidity in response to market conditions during 2023. For the three months ended March 31, 2024 and 2023, the yield on total loans was 6.07% and 6.06%.

Current wording

Interest and fees on loans HFI for the second quarter of 2024 were $45.3 million compared to $50.8 million for the second quarter of 2023. The $5.5 million decrease was primarily due to a $258.1 million decrease in the average balance of loans HFI outstanding. The decrease in the average loan balance was primarily due to strategic loans sales and moderated loan production to improve the risk profile of the loan portfolio and strengthen overall on-balance sheet liquidity in response to market conditions during 2023. For the three months ended June 30, 2024 and 2023, the yield on loans HFI was 6.04% and 6.23%.

Previous wording

Net interest income was $24.9 million for the first quarter of 2024, compared to $34.1 million for the first quarter of 2023. The $9.2 million decrease in net interest income was primarily due to higher interest expense of $10.3 million offset partially by higher interest income of $1.1 million. The increase in interest expense was due to higher average rates paid on interest-bearing deposits, and a change in the mix of total deposits. The increase in interest income was primarily due to higher market rates, offset by a change in the mix of interest earning assets including lower average loan balances as compared to the same quarter last year.

Current wording

Net interest income was $48.9 million for the six months ended June 30, 2024, compared to $66.1 million for the six months ended June 30, 2023. The $17.2 million decrease in net interest income was primarily due to higher interest expense of $14.1 million and lower interest income of $3.1 million. The increase in interest expense was due to higher average rates paid on interest-bearing deposits, and a change in the mix of total deposits. The decrease in interest income was primarily due to a change in the mix of average interest-earning assets including lower average loan balances as compared to the same period last year. Average loans represented 82% of average interest-earning assets in the first half of 2024 compared to 88% in the first half of 2023.

Previous wording

Net interest margin was 2.69% for the first quarter of 2024, a decrease of 101 basis points from 3.70% for the first quarter of 2023. The decrease was primarily due to a 157 basis point increase in the cost of interest-bearing deposits, partially offset by an increase in the yield on interest earning cash, investment securities, and loans. The cost of interest-bearing deposits increased due to increased market rates including the Federal Reserve raising the target Federal Funds Rates during 2023 and peer bank deposit competition. The Federal Reserve increased the target Federal Funds Rate 100 basis points since the end of 2022, including 50 basis points since the end of first quarter of 2023. The weighted average Federal Funds Rate was 5.33% for the first quarter of 2024 compared to 4.65% for the first quarter of 2023.

Current wording

NIM was 2.68% for the six months ended June 30, 2024, a decrease of 85 basis points from 3.53% for the six months ended June 30, 2023. The decrease was primarily due to a 121 basis point increase in the cost of interest-bearing deposits, partially offset by an increase in the yield on interest-earning deposits in other financial institutions, and investment securities. The cost of interest-bearing deposits increased due to increased market rates including the Federal Reserve raising the target Federal Funds Rate 100 basis points between January 1, 2023 and July 31, 2023, and peer bank deposit competition. The weighted average Federal Funds Rate was 5.33% for the first half of 2024 compared to 4.75% for the first half of 2023.

Previous wording

Interest expense on deposits increased to $27.8 million for the first quarter of 2024 as compared to $15.7 million for the first quarter of 2023. The $12.1 million increase in interest expense on deposits was primarily due to the increase in the average rates paid on interest-bearing deposits and a $270.5 million increase in average interest-bearing deposits. Average interest-bearing deposits increased, in part, to help offset a decrease in noninterest-bearing deposits as we worked to lower concentration risk in our deposit portfolio coupled with the impact of customers preferring their deposit balances in higher yielding deposit products in response to higher market interest rates. Average noninterest-bearing deposits decreased $170.0 million to $528.3 million in the first quarter of 2024 from $698.4 million in the first quarter of 2023. Average noninterest-bearing deposits as a percentage of total average deposits was 16% for the first quarter of 2024 compared to 23% for the first quarter of 2023.

Current wording

Interest expense on deposits increased to $54.6 million for the six months ended June 30, 2024 as compared to $37.6 million for the six months ended June 30, 2023. The $17.0 million increase in interest expense on deposits was primarily due to the increase in market rates and average rates paid on interest-bearing deposits and a $104.4 million increase in average interest-bearing deposit balances. Average interest-bearing deposits increased, in part, to help offset a decrease in noninterest-bearing deposits as we worked to lower concentration risk in our deposit portfolio coupled with the impact of customers preferring higher yielding deposit products in response to higher market interest rates. Average noninterest-bearing deposits decreased $123.0 million to $528.9 million in the first six months of 2024 from $651.9 million in the first six months of 2023. Average noninterest-bearing deposits as a percentage of total average deposits was 17.3% for the first half of 2024 compared to 21.2% for the first half of 2023.

Previous wording

We recorded no provision for credit losses for the first quarter of 2024 compared to a reversal of provision for credit losses of $431,000 in the fourth quarter of 2023. The provision for credit losses for the three months ended March 31, 2024, included a reversal of provision for loan losses of $31,000, offset by a provision for credit losses for unfunded commitments of $31,000. The overall provision for credit losses for the first quarter of 2024 took into consideration several factors including: lower specific reserves, changes in the loan portfolio mix, credit quality metrics, including higher nonperforming loans at the end of the first quarter of 2024 compared to the end of 2023, and ongoing uncertainty in the economic indicators such as inflation and the outlook on market interest rates.

Current wording

We recorded a $557,000 provision for credit losses for the second quarter of 2024 compared to no provision for credit losses for the first quarter of 2024. The second quarter provision took into consideration factors including changes in the loan portfolio mix, ongoing uncertainty in the economy related to inflation and the outlook for market interest rates, and credit quality metrics, including higher nonperforming loans at the end of the second quarter of 2024 compared to the end of the first quarter of 2024.

Previous wording

We recorded a provision for credit losses of $2.0 million for the first quarter of 2023 compared to no provision for the first quarter of 2024. There were $184,000 in net loan charge-offs in the first quarter of 2024, as compared to $157,000 in net loan charge-offs in the first quarter of 2023. The higher provision during the first quarter of 2023 was reflective of increases in classified loans during the first quarter of 2023 that increased the qualitative factors in the our CECL model.

Current wording

We recorded a provision for credit losses of $557,000 for the second quarter of 2024 compared to a $380,000 provision for the second quarter of 2023. There were $551,000 in net loan charge-offs in the second quarter of 2024, as compared to $580,000 in net loan charge-offs in the second quarter of 2023. The higher provision for the second quarter of 2024 was reflective of factors including changes in the loan portfolio mix, ongoing uncertainty in the economy related to inflation and the outlook for market interest rates and credit quality metrics, including the level of classified and nonperforming loans at June 30, 2024.

Previous wording

Noninterest income increased $1.0 million to $3.4 million for the first quarter of 2024, compared to $2.4 million for the same quarter in the prior year. The increase was primarily attributable to a $724,000 increase in gain on OREO, as described above, and a $283,000 increase in gain on sale of loans, offset partially by a $142,000 decrease in loan servicing income, net of amortization. The decrease in loan servicing income is due to a decrease in average loans being serviced, offset by the impact of lower pre-payments on such loans due to higher market rates.

Current wording

Noninterest income increased $2.0 million to $6.9 million for the six months ended June 30, 2024, compared to $4.9 million for the same period in the prior year. The increase was due to higher gain on OREO of $1.0 million, higher gain on sale of loans of $716,000 and higher income from equity investments (included in other income) of $359,000, partially offset by lower loan servicing income, net of amortization of $169,000. The decrease in loan servicing income was due to a decrease in average loans being serviced including higher pre-payments on such loans.

Previous wording

The following table presents information on loans sold and gain on loans sold for the periods presented:

Current wording

The following table presents information on loans sold and gain on sale of loans for the periods presented:

Previous wording

Noninterest expense for the first quarter of 2024 was $17.0 million, an increase of $576,000 from $16.4 million for the fourth quarter of 2023. This increase was due primarily to higher salaries and employee benefits expenses of $1.1 million, partially offset by lower legal and professional fees of $411,000 and lower insurance and regulatory assessments of $140,000. The increase in salaries and benefits is attributed to the timing of taxes and benefits, which are higher in the first quarter of the year. The number of full-time equivalent employees was 371 at March 31, 2024 compared to 376 at December 31, 2023. The decrease in legal and professional expenses from the fourth quarter of 2023 was due in part to higher legal recoveries of $65,000 as the first quarter included $165,000 in recoveries compared to $100,000 in the fourth quarter of 2023 coupled with lower external auditor fees.

Current wording

Noninterest expense for the second quarter of 2024 was $17.1 million, an increase of $155,000 from $17.0 million for the first quarter of 2024. This increase was primarily due to higher legal and professional expenses and other expenses, partially offset by a decrease in salaries and employee benefits expense due to the timing of taxes and benefits. The increase in legal and professional expenses was primarily due to higher legal expenses for credit matters in the second quarter and the first quarter of 2024 including an insurance reimbursement of $165,000. There was no similar insurance reimbursement in the second quarter of 2024.

Previous wording

Noninterest expense decreased $1.9 million to $17.0 million in the first quarter of 2024 compared to $18.9 million for the first quarter of 2023. The $1.9 million decrease was primarily due to a decrease in legal and other professional expenses of $2.1 million, other expenses of $333,000, and marketing and business promotion expense of $128,000, partially offset by an increase in insurance and regulatory assessments of $478,000. The decrease in legal and professional expenses was due mostly to lower legal expenses and external consulting and audit fees related to the previously disclosed internal investigation that was subsequently resolved. Marketing and business promotion expense decreased due to decreases in advertising and CRA donation expenses. Other expenses includes board of director compensation costs, which decreased $270,000 due to the reconstitution of the board after the first quarter of 2023. Insurance and regulatory assessments increased due mostly to a $435,000 increase in our FDIC assessment due in part to the consent order issued in October 2023.

Current wording

Noninterest expense for the second quarter of 2024 was $17.1 million, a decrease of $1.4 million from $18.5 million for the second quarter of 2023. The decrease was mostly due to lower legal and professional expenses of $1.6 million offset by higher insurance and regulatory assessments of $172,000. The decrease in legal and professional expenses was due to a previously disclosed internal investigation that has been subsequently resolved and lower external auditor fees. Insurance and regulatory assessments increased primarily due to a $125,000 increase in our FDIC assessment due in part to the consent order issued in October 2023.

Previous wording

We recorded an income tax provision of $3.2 million and $4.6 million, reflecting an effective tax rate of 28.8% and 29.4%, for the three months ended March 31, 2024 and 2023. Income tax included an $8,000 expense for stock options exercised for the three months ended March 31, 2024 and a $5,000 benefit for the same period in 2023.

Current wording

We recorded an income tax provision of $5.8 million and $9.1 million, reflecting an effective tax rate of 27.4% and 29.4%, for the six months ended June 30, 2024 and 2023. The decrease in the effective tax rate for the first six months of 2024 was due in part to utilizing a higher level of tax credits.

Previous wording

At March 31, 2024, total assets were $3.9 billion, a decrease of $148.0 million, from total assets of $4.0 billion at December 31, 2023, primarily due to a $162.1 million decrease in cash and cash equivalents and a $2.5 million decrease in gross loans, partially offset by a $16.2 million increase in AFS investment securities. The decrease in cash and cash equivalents was primarily due to a decrease of $208.0 million in wholesale deposits.

Current wording

At June 30, 2024, total assets were $3.9 billion, a decrease of $157.8 million, from total assets of $4.0 billion at December 31, 2023, primarily due to a $178.6 million decrease in cash and cash equivalents, partially offset by a $15.9 million increase in loans HFI, and a $6.6 million increase in AFS investment securities. The decrease in cash and cash equivalents was primarily due to a decrease of $284.9 million in wholesale deposits, partially offset by an increase in retail deposits.

Previous wording

The following table sets forth the book value and percentage of each category of securities as of the dates indicated. The book value for debt securities classified as AFS are reflected at fair market value and the book value for securities classified as HTM are reflected at amortized cost.

Current wording

The following table sets forth the book value of each category of securities and the percentage each category represents of total of securities as of the dates indicated. The book value for debt securities classified as AFS are reflected at fair market value and the book value for securities classified as HTM are reflected at amortized cost.

Previous wording

The weighted-average book yield on the total investment portfolio at March 31, 2024 was 4.16% with a weighted-average life of 5.1 years. This compares to a weighted-average book yield of 4.00% with a weighted-average life of 5.1 years at December 31, 2023. The weighted-average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs.

Current wording

The weighted-average life on the total investment portfolio at June 30, 2024 was 4.9 years. This compares to a weighted-average life of 5.1 years at December 31, 2023. The weighted-average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs.

Previous wording

The table below shows our investment securities’ fair value and weighted average yields by maturity in the following maturity groupings as of March 31, 2024. The amortized cost and fair value of the investment securities portfolio are shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Current wording

The table below shows our investment securities’ fair value and weighted average yields by maturity in the following maturity groupings as of June 30, 2024. The fair value of the securities portfolio is shown by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

Previous wording

The table below shows our investment securities’ gross unrealized losses and estimated fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2024 and December 31, 2023. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily-impaired. A summary of our analysis of these securities and the unrealized losses is described more fully in "Note 4 —* *Investment Securities" of our consolidated financial statements included in our 2023 Annual Report. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.

Current wording

The table below shows our investment securities’ gross unrealized losses and estimated fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2024 and December 31, 2023. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily-impaired. A summary of our analysis of these securities and the unrealized losses is described more fully in "Note 4 —* *Investment Securities" of our audited consolidated financial statements included in our 2023 Annual Report. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.

Previous wording

The loan portfolio is the largest category of our earning assets. At March 31, 2024, total loans HFI, net of ALL, totaled $3.0 billion. Net loans HFI decreased $4.5 million, or 0.1%, to $3.0 billion at March 31, 2024 as compared to $3.0 billion at December 31, 2023. The decrease was primarily due a $24.3 million decrease in SFR mortgages, an $8.7 million decrease in C&I loans, and a $1.4 million decrease in other loans, partially offset by a $16.6 million increase in C&D loans, a $10.6 million increase in CRE loans, and a $2.6 million increase in SBA loans. SFR mortgage loans represent approximately 50% of our total loans as of March 31, 2024 and December 31, 2023.

Current wording

The loan portfolio is the largest category of our interest-earning assets. Total loans HFI increased $15.9 million, or 0.5%, to $3.05 billion at June 30, 2024 as compared to $3.03 billion at December 31, 2023. The increase was primarily due to an increase in CRE loans of $22.4 million, and C&D loans of $21.0 million, partially offset by decreases in SFR mortgages of $20.0 million, C&I loans of $3.4 million, SBA loans of $1.8 million and other loans of $2.3 million. SFR mortgage loans represent approximately 48% of our total loans as of June 30, 2024 and 49% at December 31, 2023.

Previous wording

The following table presents the balance and associated percentage of our loan portfolio, by loan segment, as of the dates indicated:

Current wording

The following table presents the balance and associated percentage of our loan portfolio, by loan type, as of the dates indicated:

Previous wording

The following table presents the geographic locations of loans in our loan portfolio, by loan segment, as of the date indicated:

Current wording

The following table presents the geographic locations of loans in our loan portfolio, by loan type, as of the date indicated:

Previous wording

The majority of our loan portfolio is based on collateral or businesses located in California and New York, which represent 80.8% of our loan portfolio. Loans secured by collateral in other states represented approximately 19.2% of our portfolio and the majority of these loans are secured by CRE with a weighted average loan-to-value (“LTV”) of 58.5% at March 31, 2024.

Current wording

The majority of our loan portfolio is based on collateral or businesses located in California and New York, which represented 81.2% of our loan portfolio. Loans secured by collateral in other states represented approximately 18.8% of our portfolio and the majority of these loans are secured by CRE with a weighted average loan-to-value (“LTV”) of 53.4% at June 30, 2024.

Previous wording

Construction and land development loans. Our C&D loans are comprised of residential construction, commercial construction and land acquisition and development construction. Interest reserves are generally established on real estate construction loans. These loans are typically Prime rate based and have maturities of less than 18 months. C&D loans increased $16.6 million, or 9.1%, to $198.1 million at March 31, 2024 as compared to $181.5 million at December 31, 2023, as originations exceeded loan repayments.

Current wording

Construction and land development loans. Our C&D loans are comprised of residential construction, commercial construction and land acquisition and development. Interest reserves are generally established on real estate construction loans. These loans are typically Prime rate based and have maturities of less than 18 months.