# OP Bancorp: Form 10-Q for the period ended Mar 31, 2023

- Company: [OP Bancorp](/companies/opbk.md) (CIK 1722010)
- Form: 10-Q
- Filed: 2023-05-15
- Accepted by EDGAR: May 15, 2023, 20:08 ET
- Period: 2023-03-31
- Accession: 0001628280-23-018156
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1722010/000162828023018156/opbk-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1722010/000162828023018156/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $418.0k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $10.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $3.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $7.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.48 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.48 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 15,312,673 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $44.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $618.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $1.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $571.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-03-31 | $181.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-03-31 | $2.17bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $1.99bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $183.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 57,260 characters.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our historical financial statements and the related notes thereto contained in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

### OVERVIEW

We are a bank holding company headquartered in Los Angeles, California. Our commercial community banking activities are operated through Open Bank, our banking subsidiary. We offer commercial banking services to small and medium-sized businesses, their owners and retail customers primarily in the Korean-American community.

Our results of operations depend primarily on our net interest income. We drive our income from interest received on our loan portfolio and the fee income we receive in connection with our deposits, and the sale and service of SBA loans. Our major operating expenses are the interest we pay on deposits, the salaries and related benefits we pay our management and staff, and the rent we pay on our leased properties. We rely primarily on locally-generated deposits, mostly from the Korean-American market within California, to fund our loan activities. We currently operate eight branches in Los Angeles County and Orange County, California, one branch in Santa Clara County, California, and one branch in Carrollton, Texas. We have four loan production offices in Pleasanton, California, Atlanta, Georgia, Aurora, Colorado, and Lynnwood, Washington.

We adopted Accounting Standards Update (“ASU”) 2016-13, which replaced the current incurred loss accounting model with the Current Expected Credit Losses approach. The adoption of this ASU increased the allowance for credit losses by $1.9 million and allowance for off-balance sheet commitments by $184 thousand and recorded an deferred tax assets of $624 thousand and decrease to opening retained earnings of $1.5 million on January 1, 2023.

The following significant items are of note as of or for the periods presented:

### As of March 31, 2023 compared to as of 2022

- Total assets were $2.17 billion, an increase of $76.1 million, or 3.6%, from $2.09 billion.
- Gross loans were $1.69 billion, an increase of $14.2 million, or 0.8%, from $1.68 billion.
- Total deposits were $1.90 billion, an increase of $19.0 million, or 1.0%, from $1.89 billion.
- Shareholders’ equity was $183.8 million, an increase of $6.9 million, or 3.9%, from $176.9 million.

### For the three months ended March 31, 2023 compared to 2022

- Net interest income increased to $17.9 million, an increase of $602 thousand, or 3.5%, from $17.3 million.
- Net income was $7.5 million or $0.48 per diluted common share, a decrease of $618 thousand, or 7.6%, from $8.2 million or $0.53 per diluted common share.

### SELECTED FINANCIAL DATA

*($ in thousands, except share and per share data)*

| Income Statement Data: | For the Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Interest income | $28,594 | $17,944 |
| Interest expense | 10,702 | 654 |
| Net interest income | 17,892 | 17,290 |

35

|  |  |  |
| --- | ---: | ---: |
| (Reversal of) provision for credit losses | (338) | 341 |
| Noninterest income | 4,295 | 4,216 |
| Noninterest expense | 11,908 | 9,662 |
| Income before income taxes | 10,617 | 11,503 |
| Income tax expense | 3,083 | 3,351 |
| Net income | 7,534 | 8,152 |
| **Per Share Data:** |  |  |
| Basic income per share | $0.48 | $0.53 |
| Diluted income per share | $0.48 | $0.53 |
| Book value per share | $12.02 | $10.97 |
| Shares of common stock outstanding | 15,286,558 | 15,137,808 |
| **Performance Ratios:** |  |  |
| Return on average assets (1) | 1.43% | 1.85% |
| Return on average equity (1) | 16.82% | 19.54% |
| Yield on total loans (1) | 6.10% | 4.84% |
| Yield on average earning assets (1) | 5.71% | 4.28% |
| Cost of average interest bearing liabilities (1) | 3.55% | 0.34% |
| Cost of deposits (1) | 2.25% | 0.17% |
| Net interest margin (1) | 3.56% | 4.12% |
| Efficiency ratio (2) | 53.67% | 44.93% |
|  | **As of** |  |
| ($ in thousands) | **March 31, 2023** | **December 31, 2022** |
| **Balance Sheet Data:** |  |  |
| Gross loans receivable | $1,692,485 | $1,678,292 |
| Loans held for sale | 7,534 | 44,335 |
| Allowance for credit losses | (20,814) | (19,241) |
| Total assets | 2,170,594 | 2,094,497 |
| Deposits | 1,904,818 | 1,885,771 |
| Shareholders’ equity | 183,781 | 176,916 |
| **Asset Quality Data:** |  |  |
| Nonperforming loans to gross loans receivable | 0.26% | 0.18% |
| Allowance for credit losses to nonperforming loans | 477.60% | 625.00% |
| Allowance for credit losses to gross loans receivable | 1.23% | 1.15% |
| **Balance Sheet and Capital Ratios:** |  |  |
| Gross loans receivable to deposits | 88.85% | 89.00% |
| Noninterest-bearing deposits to deposits | 33.80% | 37.20% |
| Average equity to average total assets | 8.51% | 8.88% |
| Leverage ratio | 9.43% | 9.38% |
| Common equity tier 1 ratio | 12.06% | 11.87% |
| Tier 1 risk-based capital ratio | 12.06% | 11.87% |
| Total risk-based capital ratio | 13.27% | 13.06% |

(1) Annualized

(2) Represent noninterest expense divided by the sum of net interest income and noninterest income.

### RESULTS OF OPERATIONS

### Net Income

We reported net income for the three months ended March 31, 2023 of $7.5 million, compared to net income of $8.2 million for the same period of 2022. The decrease was primarily due to a $2.2 million increase in noninterest expense, partially offset by a $679 thousand decrease in provision for credit losses and $602 thousand increase in net interest income.

*($ in thousands)*

|  | Three Months Ended March 31, 2023 | 2022 | Change |
| --- | ---: | ---: | ---: |
| Interest income | $28,594 | $17,944 | $10,650 |
| Interest expense | 10,702 | 654 | 10,048 |
| Net interest income | 17,892 | 17,290 | 602 |
| (Reversal of) provision for credit losses | (338) | 341 | (679) |
| Noninterest income | 4,295 | 4,216 | 79 |
| Noninterest expense | 11,908 | 9,662 | 2,246 |
| Income before income tax expense | 10,617 | 11,503 | (886) |
| Income tax expense | 3,083 | 3,351 | (268) |
| Net income | $7,534 | $8,152 | $(618) |

### Net Interest Income

The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of our total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing us to an excessive level of interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields, (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates, (iii) net interest income, (iv) the interest rate spread, and (v) the net interest margin.

*($ in thousands)*

| Interest-earning assets: | Three Months Ended March 31, 2023 Average Balance | Interest and Fees | Yield / Rate (1) | 2022 Average Balance | Interest and Fees | Yield / Rate (1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits in other banks | $74,162 | $846 | 4.56% | $86,875 | $42 | 0.19% |
| Federal funds sold and other investments (2) | 12,130 | 171 | 5.65 | 10,957 | 115 | 4.19 |
| Available-for-sale debt securities | 210,462 | 1,566 | 2.94 | 156,913 | 530 | 1.35 |
| Total investments | 296,754 | 2,583 | 3.45 | 254,745 | 687 | 1.75 |
| Commercial real estate loans | 840,402 | 11,179 | 5.39 | 710,993 | 7,802 | 4.45 |
| SBA loans | 274,889 | 6,982 | 10.30 | 358,725 | 5,834 | 6.60 |
| Commercial and industrial loans | 121,915 | 2,200 | 7.32 | 156,355 | 1,536 | 3.98 |
| Home mortgage loans | 486,800 | 5,633 | 4.63 | 217,103 | 2,074 | 3.82 |
| Consumer & other loans | 1,386 | 17 | 5.07 | 878 | 11 | 4.88 |
| Loans (3) | 1,725,392 | 26,011 | 6.10 | 1,444,054 | 17,257 | 4.84 |
| Total interest-earning assets | 2,022,146 | 28,594 | 5.71 | 1,698,799 | 17,944 | 4.28 |
| Noninterest-earning assets | 82,538 |  |  | 63,016 |  |  |
| Total assets | $2,104,684 |  |  | $1,761,815 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Money market deposits and others | $409,813 | $3,150 | 3.12% | $412,295 | $251 | 0.25% |
| Time deposits | 786,381 | 7,232 | 3.73 | 374,620 | 403 | 0.44 |
| Total interest-bearing deposits | 1,196,194 | 10,382 | 3.52 | 786,915 | 654 | 0.34 |
| Borrowings | 26,168 | 320 | 4.95 | — | — | — |
| Total interest-bearing liabilities | 1,222,362 | 10,702 | 3.55 | 786,915 | 654 | 0.34 |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Noninterest-bearing deposits | 671,490 |  |  | 783,461 |  |  |
| Other noninterest-bearing liabilities | 31,648 |  |  | 24,599 |  |  |
| Total noninterest-bearing liabilities | 703,138 |  |  | 808,060 |  |  |
| Shareholders’ equity | 179,184 |  |  | 166,840 |  |  |
| Total liabilities and shareholders’ equity | $2,104,684 |  |  | $1,761,815 |  |  |
| Net interest income / interest rate spreads |  | $17,892 | 2.16% |  | $17,290 | 3.94% |
| Net interest margin |  |  | 3.56% |  |  | 4.12% |
| Cost of deposits |  |  | 2.25% |  |  | 0.17% |
| Cost of funds |  |  | 2.29% |  |  | 0.17% |

(1) Annualized

(2) Includes income and average balances for Federal Home Loan Bank (“FHLB”) and Pacific Coast Bankers Bank stock, CRA qualified mutual fund, term federal funds, interest-earning time deposits and other miscellaneous interest-earning assets.

(3) Average loan balances include non-accrual loans and loans held for sale.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume and rate ratably.

*($ in thousands)*

| Interest-earning assets: | Three Months Ended March 31, 2023 vs 2022 Increases (Decreases) Due to Change in Volume | Rate | Total |
| --- | ---: | ---: | ---: |
| Interest-bearing deposits in other banks | $(76) | $880 | $804 |
| Federal funds sold and other investments | 22 | 34 | 56 |
| Available-for-sale debt securities | 292 | 744 | 1,036 |
| Total investments | 238 | 1,658 | 1,896 |
| Commercial real estate loans | 1,571 | 1,806 | 3,377 |
| SBA loans | (1,655) | 2,803 | 1,148 |
| Commercial and industrial loans | (549) | 1,213 | 664 |
| Home mortgage loans | 2,781 | 778 | 3,559 |
| Consumer & other loans | 5 | 1 | 6 |
| Total loans | 2,153 | 6,601 | 8,754 |
| Total interest-earning assets | 2,391 | 8,259 | 10,650 |
| **Interest-bearing liabilities:** |  |  |  |
| Money market deposits and others | 329 | 2,570 | 2,899 |
| Time deposits | 2,151 | 4,678 | 6,829 |
| Total interest-bearing deposits | 2,480 | 7,248 | 9,728 |
| Borrowings | 160 | 160 | 320 |
| Total interest-bearing liabilities | 2,640 | 7,408 | 10,048 |
| Net interest income | $(249) | $851 | $602 |

Net interest income increased $602 thousand, or 3.5%, primarily due to higher interest income on loans and available-for-sale debt securities, mostly offset by higher interest expenses on time deposits and money market deposits. Net interest margin was 3.56%, a decrease of 56 basis point from 4.12%.

An $8.8 million increase in interest income on loans was primarily due to a $281.3 million increase in average balance and a 126 basis point increase in contractual loan yield as a result of the Federal Reserve’s rate increases.

A $1.0 million increase in interest income on available-for-sale debt securities was primarily due to a $53.5 million increase in average balance and a 159 basis point increase in average yield due to higher yields on recently purchased securities.

A $6.8 million increase in interest expense on time deposits was primarily due to a $411.8 million increase in average balance and a 329 basis point increase in average cost driven by the Federal Reserve’s rate increases.

A $2.9 million increase in interest expense on money market deposits was primarily due to a 287 basis point increase in average cost driven by the Federal Reserve’s rate increases.

### Provision for Credit Losses

Credit risk is inherent in the business of making loans. We establish an allowance for credit losses both on loans and off-balance sheet commitments through charges to earnings, which are shown in the statements of operations as the provision for credit losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for credit losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for credit losses and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for credit losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area.

The reversal of credit losses was $338 thousand for the three months ended March 31, 2023, compared to provision for credit losses of $341 thousand for the same period of 2022. The reversal of credit losses was primarily due to changes in the qualitative adjustments, reflecting improving trends in loan concentration ratios.

### Noninterest Income

While interest income remains the largest single component of total revenues, noninterest income is also an important component. A portion of our noninterest income is associated with SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. Other sources of noninterest income include service charges on deposit.

The following table sets forth the various components of our noninterest income for the three months ended March 31, 2023 and 2022:

*($ in thousands)*

| Noninterest income: | Three Months Ended March 31, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Service charges on deposits | $418 | $388 | $30 | 7.7% |
| Loan servicing fees, net of amortization | 846 | 447 | 399 | 89.3 |
| Gain on sale of loans | 2,570 | 3,238 | (668) | (20.6) |
| Other income | 461 | 143 | 318 | 222.4 |
| Total noninterest income | $4,295 | $4,216 | $79 | 1.9% |

Noninterest income for the three months ended March 31, 2023 was $4.3 million, an increase of $79 thousand, or 1.9%, compared to $4.2 million for the same period of 2022.

Loan servicing fees, net of amortization, were $846 thousand, for the three month ended March 31, 2023, compared to $447 thousand for the same period of 2022. The increase was primarily due to an increase in servicing portfolio and a decrease in servicing asset amortization driven by slower loan prepayments in the first quarter of 2023. Our total SBA loan servicing portfolio was $720.6 million as of March 31, 2023, compared to $659.2 million as of the same period of 2022.

Gain on sale of loans was $2.6 million for the three months ended March 31, 2023, compared to $3.2 million for the same period of 2022, a decrease of $668 thousand or 20.6%. The decrease was primarily due to a lower average sales premium partially offset by a higher SBA loans sold amount. We sold $44.7 million of SBA loans with an average premium of 7.33% for the three months ended March 31, 2023, compared to a sale of $31.8 million of SBA loans with an average premium of 11.00% in the same period of 2022.

Other income was $461 thousand, an increase of $318 thousand from $143 thousand, primarily due to an increase of $226 thousand in fair value of equity investment.

### Noninterest Expense

The following table sets forth the major components of our noninterest expense for the three months ended March 31, 2023 and 2022:

*($ in thousands)*

| Noninterest expense: | Three Months Ended March 31, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $7,252 | $5,657 | $1,595 | 28.2% |
| Occupancy and equipment | 1,570 | 1,378 | 192 | 13.9 |
| Data processing and communication | 550 | 493 | 57 | 11.6 |
| Professional fees | 359 | 324 | 35 | 10.8 |
| FDIC insurance and regulatory assessments | 467 | 207 | 260 | 125.6 |
| Promotion and advertising | 162 | 189 | (27) | (14.3) |
| Directors' fees | 161 | 177 | (16) | (9.0) |
| Foundation donation and other contributions | 753 | 815 | (62) | (7.6) |
| Other expenses | 634 | 422 | 212 | 50.2 |
| Total noninterest expense | $11,908 | $9,662 | $2,246 | 23.2% |

Noninterest expense for the three months ended March 31, 2023 was $11.9 million, compared with $9.7 million for the same period of 2022, an increase of $2.2 million, or 23.2%.

Salaries and employee benefits expense for the three months ended March 31, 2023 was $7.3 million, compared to $5.7 million for the same period of 2022, an increase of $1.6 million, or 28.2%. The increase was primarily due to 23 additional full-time employees to support our continued growth.

FDIC insurance and regulatory assessments increased $260 thousand primarily due to our deposit growth from the first quarter of 2022 and increases in FDIC assessment fees in 2023.

### Income Tax Expense

Income tax expense was $3.1 million $3.4 million for the three months ended March 31, 2023 and 2022, respectively. Effective tax rates were 29.0% and 29.1% for the three months ended March 31, 2023 and 2022, respectively.

After consideration of the matters in the preceding paragraph, we have determined that it is more likely than not that net deferred tax assets as of March 31, 2023 will be fully realized in future years.

### FINANCIAL CONDITION

### Investment Portfolio

The securities portfolio is the second largest component of our interest earning assets, and the structure and composition of this portfolio is important to an analysis of our financial condition. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, because it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and our other funding sources; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.

We classify our securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect changes in the fair value of our available-for-sale securities.

All securities in our investment portfolio were classified as available-for-sale as of March 31, 2023. There were no held-to-maturity or trading securities in our investment portfolio as of March 31, 2023. All available-for-sale securities are carried at fair value and consist of U.S. government agencies or sponsored agency securities and tax-exempt municipal securities.

Available-for-sale debt securities increased $3.0 million, or 1.4%, to $212.8 million at March 31, 2023 from $209.8 million at December 31, 2022, primarily due to purchases of $5.6 million in tax exempt municipal securities, partially offset by principal paydowns of $5.7 million and an decrease in unrealized loss of $3.1 million for the three months ended March 31, 2023. No issuer of the available-for-sale securities, other than U.S. Government and its agencies, comprised more than ten percent of our shareholders’ equity as of March 31, 2023 and December 31, 2022.

The following table summarizes the fair value of the available-for-sale securities portfolio as of the dates presented:

*($ in thousands)*

| U.S. Government agencies or sponsored agency securities: | March 31, 2023 Amortized Cost | Fair Value | Unrealized Loss | December 31, 2022 Amortized Cost | Fair Value | Unrealized Loss |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential mortgage-backed securities | $53,503 | $48,715 | $(4,788) | $55,189 | $49,764 | $(5,425) |
| Residential collateralized mortgage obligations | 175,840 | 158,189 | (17,651) | 179,953 | 160,045 | (19,908) |
| Municipal securities-tax exempt | 5,653 | 5,863 | 210 | — | — | — |
| Total available-for-sale debt securities | $234,996 | $212,767 | $(22,229) | $235,142 | $209,809 | $(25,333) |

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. The unrealized losses were primarily attributable to interest rate movement, not credit quality. These securities (Fannie Mae, Ginnie Mae, and Freddie Mac) are guaranteed or sponsored by agencies of the U.S. government, and the issuers of the securities are of high credit quality. We believe that the net unrealized losses presented in the previous tables are temporary and no credit losses are expected. As a result, we expects full collection of the carrying amount of these securities, does not intend to sell the securities in an unrealized loss position, and it was more-likely-than-not we will not have to sell these securities prior to recovery of amortized cost. Accordingly, for available-for-sale debt securities, we did not record allowance for credit losses on January 1, 2013 and does not have allowance for credit losses as of March 31, 2023.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the dates presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

*($ in thousands)*

| U.S. Government agencies or sponsored agency securities: | March 31, 2023 Due in One Year or Less Amortized Cost | Weighted Average Yield | Due after One Year Through Five Years Amortized Cost | Weighted Average Yield | Due after Five Years Through Ten Years Amortized Cost | Weighted Average Yield | Due after Ten Years Amortized Cost | Weighted Average Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential mortgage-backed securities | $— | —% | $1,129 | 2.23% | $1,202 | 2.12% | $51,172 | 2.27% |
| Residential collateralized mortgage obligations | — | — | 338 | 1.81 | 3,301 | 1.56 | 172,201 | 2.82 |
| Municipal securities-tax exempt | — | — | — | — | — | — | 5,653 | 5.10 |
| Total available-for-sale debt securities | $— | —% | $1,467 | 2.13% | $4,503 | 1.71% | $229,026 | 2.75% |

42

We have not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities to otherwise mitigate interest rate risk.

### Loans

Our loans represent the largest portion of our earning assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition.

The loan distribution table that follows sets forth our gross loans outstanding, and the percentage distribution in each category as of the dates indicated:

*($ in thousands)*

|  | March 31, 2023 Amount | % of Total | December 31, 2022 Amount | % of Total |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate | $833,615 | 49.2% | $842,208 | 50.1% |
| SBA—real estate | 225,719 | 13.3 | 221,340 | 13.2 |
| SBA—non-real estate | 13,275 | 0.8 | 13,377 | 0.8 |
| Commercial and industrial | 117,841 | 7.0 | 116,951 | 7.0 |
| Home mortgage | 500,635 | 29.6 | 482,949 | 28.8 |
| Consumer | 1,400 | 0.1 | 1,467 | 0.1 |
| Gross loans receivable | 1,692,485 | 100.0% | 1,678,292 | 100.0% |
| Allowance for credit losses | (20,814) |  | (19,241) |  |
| Loans receivable, net (1) | $1,671,671 |  | $1,659,051 |  |

(1) Includes net deferred loan fees or costs, unamortized premiums and unaccreted discounts of $(70) thousand and $160 thousand as of March 31, 2023 and December 31, 2022, respectively.

Gross loans increased $14.2 million, or 0.8%, to $1.69 billion as of March 31, 2023, compared to $1.68 billion as of December 31, 2022. The increase was primarily attributable to new loan production of $69.1 million and home mortgage loan purchases of $12.1 million, mainly offset by loan payoffs and paydowns of $68.7 million.

The following tables presents the contractual loan maturities by loan category and the contractual distribution of loans to changes in interest rates as of March 31, 20231 and December 31, 2022:

*($ in thousands)*

|  | March 31, 2023 Due in One Year or Less Fixed Rate | Adjustable Rate | Due after One Year Through Five Years Fixed Rate | Adjustable Rate | Due after Five Years Fixed Rate | Adjustable Rate | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate | $22,779 | $52,726 | $412,111 | $89,306 | $229,100 | $27,593 | $833,615 |
| SBA—real estate | — | — | — | 31 | — | 225,688 | 225,719 |
| SBA—non- real estate | — | 138 | 247 | 3,936 | — | 8,954 | 13,275 |
| Commercial and industrial | 18,533 | 24,362 | 7,113 | 23,925 | 25,767 | 18,141 | 117,841 |
| Home mortgage | — | — | — | — | 481,257 | 19,378 | 500,635 |
| Consumer | — | 1,107 | — | 293 | — | — | 1,400 |
| Gross loans | $41,312 | $78,333 | $419,471 | $117,491 | $736,124 | $299,754 | $1,692,485 |

43

*($ in thousands)*

|  | December 31, 2022 Due in One Year or Less Fixed Rate | Adjustable Rate | Due after One Year Through Five Years Fixed Rate | Adjustable Rate | Due after Five Years Fixed Rate | Adjustable Rate | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate | $27,735 | $33,894 | $387,902 | $116,088 | $248,812 | $27,777 | $842,208 |
| SBA—real estate | — | — | — | 34 | — | 221,306 | 221,340 |
| SBA—non- real estate | — | 75 | 442 | 3,964 | — | 8,896 | 13,377 |
| Commercial and industrial | 8,905 | 27,917 | 1,611 | 28,082 | 31,185 | 19,251 | 116,951 |
| Home mortgage | — | — | — | — | 465,749 | 17,200 | 482,949 |
| Consumer | — | 1,136 | — | 331 | — | — | 1,467 |
| Gross loans | $36,640 | $63,022 | $389,955 | $148,499 | $745,746 | $294,430 | $1,678,292 |

Our loan portfolio is concentrated in commercial real estate, which includes unguaranteed balances in SBA loans, home mortgage and commercial (primarily manufacturing, wholesale, and services oriented entities). We do not have any material concentrations by industry or group of industries in the loan portfolio. However, 92.2% of our gross loans were secured by real property as of March 31, 2023, compared to 92.1% as of December 31, 2022.

***Loans — Commercial Real Estate:*** We have established concentration limits in the loan portfolio for commercial real estate loans, commercial and industrial loans, and unsecured lending, among others. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending agreements to allow us to react to a borrower’s deteriorating financial condition, should that occur.

Commercial real estate loans include owner-occupied and non-occupied commercial real estate. We originate both fixed and adjustable rate loans. Adjustable rate loans are based on the *Wall Street Journal* prime rate. Our commercial real estate loan portfolio totaled $833.6 million at March 31, 2023 compared to $842.2 million at December 31, 2022. During the three months ended March 31, 2023, we originated $24.2 million of commercial real estate loans. As of March 31, 2023, approximately 79.7% of the commercial real estate portfolio consisted of fixed-rate loans. Our policy maximum loan-to-value, or LTV, is 70% for commercial real estate loans. As of March 31, 2023, our average loan to value for commercial real estate loans was 51.3%.

***Loans — SBA***: We are designated as an SBA Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or business expansions. SBA loans have maturities up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and may include personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and included in our commercial real estate Concentration Guidance.

As of March 31, 2023, our SBA portfolio totaled $239.0 million, compared to $234.7 million including $441 thousand of SBA PPP loans as of December 31, 2022. We originated $16.3 million for the three months ended March 31, 2023. We sold SBA loans of $44.7 million with 7.33% average premium and $31.8 million with 11.00% average premium during the three months ended March 31, 2023 and 2022, respectively.

From our total SBA loan portfolio, $225.7 million is secured by real estate and $13.3 million is unsecured or secured by business assets as of March 31, 2023.

***Loans — Commercial and Industrial:*** Commercial and industrial loans totaled $117.8 million as of March 31, 2023, compared to $117.0 million as of December 31, 2022. We originated $7.7 million for the three months ended March 31, 2023.

***Loans - Home Mortgage:*** We originate mainly non-qualified, alternative documentation single-family home mortgage loans (“home mortgage”) primarily through our retail branch network and our correspondent lender network. The primary loan product is a five-year or seven-year hybrid adjustable rate mortgage, which reprices after five years to a selected SOFR plus certain spreads. We also purchase residential mortgage loans from third party mortgage originators based on the review of their underwriting and file quality as opportunities arise.

Home mortgage loans totaled $500.6 million as of March 31, 2023, compared to $482.9 million as of December 31, 2022. For the three months ended March 31, 2023, we originated $20.9 million of home mortgage loans and purchased $12.1 million of home mortgage loans from third party mortgage originators.

### Loan Servicing

As of March 31, 2023 and December 31, 2022, we serviced $720.6 million and $702.1 million, respectively, of SBA loans for others. Activity for loan servicing rights was as follows:

*($ in thousands)*

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Beginning balance | $12,759 | $12,720 |
| Additions from loans sold with servicing retained | 1,100 | 792 |
| Amortized to expense | (961) | (1,171) |
| Ending balance | $12,898 | $12,341 |

Loan servicing rights are reported on our Consolidated Balance Sheets and reported net of amortization.

### Allowance for Credit Losses

We adopted ASU 2016-13 using a modified retrospective approach on January 1, 2023 without electing the fair value option on eligible financial instruments under ASU 2019-05. We replaced the current incurred loss accounting model with the Current Expected Credit Losses ("CECL") approach for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable forecasts.

The adoption of this ASU increased the allowance for credit losses by $1.9 million and allowance for off-balance sheet commitments by $184 thousand. We also recorded an deferred tax assets of $624 thousand and decrease to opening retained earnings of $1.5 million on January 1, 2023. The increase to allowance for credit losses was primarily longer duration of home mortgage loans, offset primarily by shorter duration of commercial and industrial loans. We did not record an allowance for credit losses on our available-for-sale debt securities as a result of this adoption. Disclosures for periods after January 1, 2023 are presented in accordance with ASC 326 while prior period amounts continue to be reported in accordance with previously applicable standards and the accounting policies.

We employ a modeled approach that takes into account current and future economic conditions to estimate lifetime expected losses on a collective basis. With the adoption of CECL, we elected not to consider accrued interest receivable in its estimated credit losses because we write off uncollectible accrued interest receivable in a timely manner. We consider writing off accrued interest amounts once the amounts become 90 days past due to be considered within a timely manner. We have elected to write off accrued interest receivable by reversing interest income. We use transition matrices to develop the Probability of Default ("PD") and Loss Given Default ("LGD") approach, incorporating quantitative factors and qualitative considerations in the calculation of the allowance for credit losses for collectively assessed loans. The model provides forecasts of PD and LGD based on national unemployment rates using regression analysis. We incorporate future economic conditions using a weighted multiple scenario approach: baseline and adverse. We apply a reasonable and supportable period of one year for the baseline scenario and two years for the adverse scenario, after which loss assumptions revert to historical loss information through a one-year reversion period for the baseline scenario and a two-year reversion period for the adverse scenario.

In order to quantify the credit risk impact of other trends and changes within the loan portfolio, we utilize qualitative adjustments to the modeled estimated loss approaches. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors listed below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the loss rates. This matrix considers the following nine factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council Interagency Policy Statement on the Allowance for Credit Losses, updated to reflect the adoption of CECL:

- Changes in lending policies and procedures, including changes in underwriting standards and practices for collection, charge-offs, and recoveries;
- Actual and expected changes in national and local economic and business conditions and developments in which the institution operates that affect the collectivity of loans;
- Changes in the nature and volume of the loan portfolio;
- Changes in the experience, ability, and depth of lending management and staff;
- Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;
- Changes in the quality of the credit review function;
- Changes in the value of the underlying collateral for loans that are not collateral-dependent;
- The existence, growth, and effect of any concentrations of credit, and
- The effect of other external factors, such as the regulatory, legal and technological environments; competition; and events such as natural disasters.

For loans that do not share similar risk characteristics such as nonaccrual loans above $250 thousand, we evaluates these loans on an individual basis in accordance with ASC 326. Such nonaccrual loans are considered to have different risk profiles than performing loans and are therefore evaluated individually. We elected to collectively assess nonaccrual loans with balances below $250 thousand along with the performing and accrual loans, in order to reduce the operational burden of individually assessing small nonaccrual loans with immaterial balances. For individually assessed loans, the allowance for credit losses is measured using either 1) the present value of future cash flows discounted at the loan’s effective interest rate; or 2) the fair value of the collateral, if the loan is collateral-dependent. For the collateral-dependent loans, We obtains a new appraisal to determine the fair value of collateral. The appraisals are based on an “as-is” valuation. To ensure that appraised values remain current, we obtains updated appraisals every twelve months from a qualified independent appraiser. If the fair value of the collateral is less than the amortized balance of the loan, we recognizes an allowance for credit losses with a corresponding charge to the provision for credit losses.

We maintains a separate allowance for credit losses for its off-balance sheet commitments. We uses an estimated funding rate to allocate an allowance to undrawn exposures. This funding rate is used as a credit conversion factor to capture how much undrawn lines of credit can potentially become drawn at any point. The funding rate is determined based on a look-back period of 8 quarters. Credit loss is not estimated for off-balance sheet commitments that are unconditionally cancellable by us.

The allowance for credit losses was $20.8 million at March 31, 2023, compared to $19.2 million at December 31, 2022. The reversal of credit losses was $338 thousand for the three months ended March 31, 2023, compared to provision for credit losses of $341 thousand for the same period in 2022. The $338 thousand in reversal of credit losses was primarily due to changes in the qualitative adjustments, reflecting improvements in commercial real state loan concentration ratios.

### Analysis of the Allowance for Credit Losses

The following table provides an analysis of the allowance for credit losses, provision for credit losses and net charge-offs, by category, for the three months ended March 31, 2023 and 2022:

*($ in thousands)*

|  | As of and for the Three Months Ended March 31, 2023 Beginning | Impact of CECL Adoption | (Reversal of) Provision (1) | Net (Charge-offs) Recoveries | Ending | 2022 Beginning | (Reversal of) Provision (1) | Net (Charge-offs) Recoveries | Ending |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate | $6,951 | $875 | $(951) | $(91) | $6,784 | $8,150 | $(1,670) | $— | $6,480 |
| SBA—real estate | 1,607 | (238) | (140) | (11) | 1,218 | 2,022 | (258) | (14) | 1,750 |
| SBA—non- real estate | 207 | (142) | (7) | 9 | 67 | 199 | (47) | 17 | 169 |
| Commercial and industrial | 1,643 | (320) | (53) | — | 1,270 | 2,848 | 644 | — | 3,492 |
| Home mortgage | 8,826 | 1,753 | 893 | — | 11,472 | 2,891 | 1,877 | — | 4,768 |
| Consumer | 7 | (4) | — | $— | 3 | 13 | — | — | 13 |
| Total | $19,241 | $1,924 | $(258) | $(93) | $20,814 | $16,123 | $546 | $3 | $16,672 |
| Gross loans (2) |  |  |  |  | $1,692,485 |  |  |  | $1,428,410 |
| Average loans (2) |  |  |  |  | $1,725,392 |  |  |  | $1,350,458 |
| Net (charge-offs) recoveries to average gross loans |  |  |  |  | (0.02)% |  |  |  | 0.00% |
| Allowance for credit losses to gross loans |  |  |  |  | 1.23% |  |  |  | 1.17% |

(1) Excludes reversal of uncollectible accrued interest receivable of $205 thousand for the three months ended March 31, 2022.

(2) Excludes loans held for sale.

The following table presents an allocation of the allowance for credit losses by portfolio as of March 31, 2023 and December 31, 2022:

*($ in thousands)*

|  | March 31, 2023 Amount | % to Total | December 31, 2022 Amount | % to Total |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate | $6,784 | 32.6% | $6,951 | 36.1% |
| SBA—real estate | 1,218 | 5.9 | 1,607 | 8.4 |
| SBA—non- real estate | 67 | 0.3 | 207 | 1.1 |
| Commercial and industrial | 1,270 | 6.1 | 1,643 | 8.5 |
| Home mortgage | 11,472 | 55.1 | 8,826 | 45.9 |
| Consumer | 3 | — | 7 | — |
| Total | $20,814 | 100.0% | $19,241 | 100.0% |

### Nonperforming Assets

Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are 90 days past due or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on non-accrual loans is subsequently recognized only to the extent that cash is received, and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

Nonperforming loans include loans that are 90 days past due and still accruing, loans accounted for on a non-accrual basis and accruing restructured loans. Nonperforming assets consist of nonperforming loans plus other real estate owned ("OREO").

Nonperforming loans were $4.4 million at March 31, 2023, compared to $3.1 million at December 31, 2022. As of March 31, 2023 and December 31, 2022, nonaccrual loans of $1.6 million and $1.0 million, respectively were the guaranteed portion of SBA loans.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. We had no OREO as of March 31, 2023 and December 31, 2022.

The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings.

*($ in thousands)*

|  | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Nonaccrual loans | $4,112 | $2,639 |
| Past due loans 90 days or more and still accruing | 246 | 442 |
| Total nonperforming loans | 4,358 | 3,081 |
| OREO | — | — |
| Total nonperforming assets | $4,358 | $3,081 |
| Nonperforming loans to gross loans | 0.26% | 0.18% |
| Nonperforming assets to total assets | 0.20% | 0.15% |
| Allowance for credit losses to nonperforming loans | 478% | 625% |

### Deposits and Other Sources of Funds

We gather deposits primarily through our branch locations. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We dedicate continuing effort into gathering noninterest demand deposits accounts through marketing to our existing and new loan customers, customer referrals, our marketing staff and various involvement with community networks.

The following table show the composition of deposits by type as of the dates presented:

*($ in thousands)*

|  | March 31, 2023 Amount | Percent | December 31, 2022 Amount | Percent |
| --- | ---: | ---: | ---: | ---: |
| Noninterest-bearing demand | $643,902 | 33.8% | $701,584 | 37.2% |
| Interest-bearing: |  |  |  |  |
| Money market and others | 436,796 | 22.9 | 526,321 | 27.9 |
| Time deposits (more than $250) | 411,648 | 21.6 | 356,197 | 18.9 |
| Time deposits ($250 or less) | 412,472 | 21.7 | 301,669 | 16.0 |
| Total interest-bearing | 1,260,916 | 66.2 | 1,184,187 | 62.8 |
| Total deposits | $1,904,818 | 100.0% | $1,885,771 | 100.0% |

The following tables set forth the maturity of time deposits as of March 31, 2023:

*($ in thousands)*

|  | Maturity Within: Three Months | Three to Six Months | Six to 12 Months | After 12 Months | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Time deposits (more than $250) | $84,818 | $29,657 | $296,428 | $745 | $411,648 |
| Time deposits ($250 or less) | 48,402 | 65,444 | 256,086 | 42,540 | 412,472 |
| Total time deposits | $133,220 | $95,101 | $552,514 | $43,285 | $824,120 |

48

Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and commercial real estate loans. As of March 31, 2023 and December 31, 2022, we had maximum borrowing capacity from the FHLB of $650.7 million and $582.8 million, respectively. We had $50 million borrowings from FHLB as of March 31, 2023 and no borrowing from FHLB as of December 31, 2022.

### Liquidity and Capital Recourses

Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

Deposits are the primarily funding source for the Bank. Deposits provide a stable source of funding and reduce our reliance on the wholesale funding markets. The following table presents the loan and deposit balances, the loans-to-deposit ratios, and deposits as a percentage of total liabilities as of March 31, 2023 and December 31, 2022:

*($ in thousands)*

|  | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Deposits | $1,904,818 | $1,885,771 |
| Deposits as a % of total liabilities | 95.9% | 98.3% |
| Loans, net | $1,671,671 | $1,659,051 |
| Loans-to-deposits ratio | 87.8% | 88.0% |

In addition to deposits, we have access to various sources of wholesale funding, as well as borrowing capacity at the FHLB, Federal Reserve, and correspondent banks to sustain an adequate liquid asset portfolio, meet daily cash demands and allow management flexibility to execute the business strategy. Economic conditions and the stability of capital markets impact the access to and the cost of wholesale funding. The access to capital markets is also affected by the ratings received from various credit rating agencies.

We had $100.0 million of unsecured federal funds lines with no amounts advanced as of March 31, 2023 and December 31, 2022. In addition, on such dates we had lines of credit from the Federal Reserve discount window of $174.3 million and $175.6 million.. The Federal Reserve discount window lines were collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $248.2 million and $254.7 million as of March 31, 2023 and December 31, 2022, respectively. We did not have any borrowings outstanding with the Federal Reserve as of March 31, 2023 or December 31, 2022, and our borrowing capacity is limited only by eligible collateral.

Based on the values of loans pledged as collateral, we had $406.5 million of additional borrowing availability with the FHLB as of March 31, 2023. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

We maintain ample access to liquidity, including highly liquid assets on our balance sheet and available unused borrowings from other financial institutions. The following table presents our liquid assets and available borrowings as of March 31, 2023 and December 31, 2022:

*($ in thousands)*

| Liquid assets: | March 31, 2023 | December 31, 2022 | % Change |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $181,509 | $82,972 | 118.8% |
| AFS debt securities | 212,767 | 209,809 | 1.4 |
| Liquid assets | $394,276 | $292,781 | 34.7% |
| Liquid assets to total assets | 18.2% | 14.0% |  |
| Available borrowings: |  |  |  |
| FHLB | $406,500 | $440,358 | (7.7)% |
| Federal Reserve Bank | 174,284 | 175,605 | (0.8) |
| Pacific Coast Bankers Bank | 50,000 | 50,000 | — |
| Zions Bank | 25,000 | 25,000 | — |
| First Horizon Bank | 25,000 | 24,950 | 0.2 |
| Total available borrowings | $680,784 | $715,913 | (4.9)% |
| Total available borrowings to total assets | 31.4% | 34.2% |  |
| Liquid assets and available borrowings to total assets | 49.5% | 48.2% |  |

The following tables summarizes short- and long-term material cash requirements as of March 31, 2023, which we believe that we will be able to fund these obligations through cash generated from our operations and available alternative sources of funds:

*($ in thousands)*

|  | Material Cash Requirements Within One Year | One to Three Years | Three to Five Years | After Five Years | Indeterminable maturity (1) | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Deposits (2) | $530,585 | $276,017 | $17,518 | $— | $1,080,698 | $1,904,818 |
| Operating lease commitments | 2,477 | 3,932 | 3,789 | 3,053 | — | 13,251 |
| Commitments to fund investment for Low Income Housing Tax Credit | 4,535 | 3,699 | 56 | 345 | — | 8,635 |
| Total contractual obligations | $587,597 | $283,648 | $21,363 | $3,398 | $1,080,698 | $1,976,704 |

(1) Includes deposits with no defined maturity, such as noninterest-bearing demand, savings and money market.

(2) Excludes accrued interest.

In addition to contractual obligations, other commitments of us impact liquidity. These include unused commitments to extend credit, standby letters of credit and commercial letters of credit. Since many of these commitments expire without being drawn upon, and each customer must continue to meet the conditions established in the contract, the total amount of these commercial commitments does not necessarily represent the future cash requirements of us. Our liquidity sources have been, and are expected to be, sufficient to meet the cash requirements of its lending activities, Information about our loan commitments, standby letters of credit and commercial letters of credit is provided in Note 9. Commitments and Contingencies to the Consolidated Financial Statements in this Form 10-Q.

### Capital Requirements

We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators regarding components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and various ratios of CET1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”

The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of March 31, 2023 and December 31, 2022. The Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be “well-capitalized” as of the dates reflected in the table below. As of March 31, 2023, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since March 31, 2023 that management believes would change this classification.

*($ in thousands)*

| As of March 31, 2023 Total capital (to risk-weighted assets) | Actual (1) Amount | Ratio | Regulatory Capital Ratio Requirements Amount | Ratio | Minimum to be Considered "Well Capitalized" Amount | Ratio | Regulatory Capital Ratio Requirements, including fully phased in Capital Conservation Buffer Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $220,207 | 13.27% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 215,964 | 13.01 | $132,733 | 8.00% | $165,917 | 10.00% | $174,212 | 10.50% |
| Tier 1 capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |
| Consolidated | 200,141 | 12.06 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 195,898 | 11.81 | 99,550 | 6.00 | 132,733 | 8.00 | 141,029 | 8.50 |
| CET1 capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |
| Consolidated | 200,141 | 12.06 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 195,898 | 11.81 | 74,662 | 4.50 | 107,846 | 6.50 | 116,142 | 7.00 |
| Tier 1 leverage (to average assets) |  |  |  |  |  |  |  |  |
| Consolidated | 200,141 | 9.43 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 195,898 | 9.23 | 84,888 | 4.00 | 106,110 | 5.00 | 84,888 | 4.00 |

(1) The capital requirements are only applicable to the Bank, and our ratios are included for comparison purpose.

*($ in thousands)*

| As of December 31, 2022 Total capital (to risk-weighted assets) | Actual (1) Amount | Ratio | Regulatory Capital Ratio Requirements Amount | Ratio | Minimum to be Considered "Well Capitalized" Amount | Ratio | Regulatory Capital Ratio Requirements, including fully phased in Capital Conservation Buffer Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $213,862 | 13.06% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 211,981 | 12.94 | $131,020 | 8.00% | $163,775 | 10.00% | $171,964 | 10.50% |
| Tier 1 capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |
| Consolidated | 194,358 | 11.87 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 192,477 | 11.75 | 98,265 | 6.00 | 131,020 | 8.00 | 139,209 | 8.50 |
| CET1 capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |
| Consolidated | 194,358 | 11.87 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 192,477 | 11.75 | 73,699 | 4.50 | 106,454 | 6.50 | 114,642 | 7.00 |
| Tier 1 leverage (to average assets) |  |  |  |  |  |  |  |  |
| Consolidated | 194,358 | 9.38 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 192,477 | 9.29 | 82,836 | 4.00 | 103,545 | 5.00 | 82,836 | 4.00 |

(1) The capital requirements are only applicable to the Bank, and our ratios are included for comparison purpose.

## Market risk

As filed, 5,784 characters.

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified interest rate risk as our primary source of market risk.

#### Interest Rate Risk

Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricing and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and SOFR (basis risk).

Our board’s asset liability committee, or ALM, establishes broad policy limits with respect to interest rate risk. Our management’s asset liability committee, or ALCO, establishes specific operating guidelines within the parameters of the policies set by the ALM. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO monitors the level of interest rate risk sensitivity on a quarterly basis to ensure compliance with the ALM-approved risk limits. The policy requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis, and noninterest-bearing and interest-bearing deposit durations based on historical analysis.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Interest rate risk measurement is calculated and reported to the ALCO and ALM at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

#### Evaluation of Interest Rate Risk

We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run various hypothetical interest rate scenarios at least quarterly and compare these results against a scenario with no changes in interest rates. We use two approaches to model interest rate risk: Earnings at Risk, or EAR, and Economic Value of Equity, or EVE. Under EAR, net interest income is modeled utilizing various assumptions for assets and liabilities. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

Our simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of March 31, 2023 and December 31, 2022 are presented in the following table. The projections assume (1) immediate, parallel shifts downward of the yield curve of 100, 200 and 300 basis points and (2) immediate, parallel shifts upward of the yield curve of 100, 200, and 300 basis points over 12 months.

|  | Net Interest Sensitivity March 31, 2023 | December 31, 2022 | Economic Value of Equity Sensitivity March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: | ---: | ---: |
| +300 basis points | 0.29% | 0.12% | (37.87)% | (42.72)% |
| +200 basis points | 1.19 | 1.13 | (17.80) | (23.29) |
| +100 basis points | 0.95 | 0.97 | (6.58) | (9.11) |
| -100 basis points | (0.91) | (0.94) | (1.09) | (1.78) |
| -200 basis points | (0.38) | (0.70) | (3.50) | (7.31) |
| -300 basis points | (1.01) | (3.24) | (15.16) | (18.42) |

## Controls and procedures

As filed, 1,772 characters.

#### Evaluation of disclosure controls and procedures

Our management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered in this report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by us in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by us in the reports it files or submits under the Exchange Act is accumulated and communicated to our management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

#### Changes in internal control over financial reporting

We identified, designed, and documented additional internal controls to address new risks posed by the new processes and estimation activities resulting from the CECL adoption. However, there have not been any material changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period covered to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 689 characters.

A discussion of the risk factors affecting us is set forth in Part I, Item 1A. Risk Factors in our 2022 Annual Report on Form 10-K. The discussion of risk factors provides a description of some of the important risk factors that could affect our actual results and could cause our results to vary materially from those expressed in public statements or documents. However, other factors besides those included in the discussion of risk factors or discussed elsewhere in other of our reports filed with or furnished to the SEC could affect our business or results. The readers should not consider any description of such factors to be a complete set of all potential risks that we may face.

Filed May 15, 2023.
Source: SEC EDGAR, the filing index for accession 0001628280-23-018156. Last ingested by Listed: Oct 24, 2026, 15:07 ET. No prices; not investment advice.