OP Bancorp: Form 10-Q for the period ended Sep 30, 2023

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, one branch in Carrollton, Texas and one branch in Las Vegas, Nevada. 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 a deferred tax assets of $624 thousand and decrease to opening retained earnings of $1.5 million on January 1, 2023.

Banking Economy and Recent Developments

Beginning in late 2021, the Federal Reserve Board Open Markets Committee, which strives to manage benchmark interest rates in the United States, began a series of upward adjustments to the “discount rate” for short-term borrowings in response to perceived increases in inflationary pressures. Financial institutions and markets promptly followed these adjustments, significantly increasing interest rate pricing on loans and deposits. While such adjustments are commonplace and tend to affect the banking industry as a whole, the pace and degree of these adjustments were nearly unprecedented, resulting in banks, including the Bank, experiencing substantial pressure on multiple fronts. In particular, banks were forced to increase interest rates paid on deposits in order to meet competitive pressures from other financial institutions, as well as from treasury securities and other investment opportunities that offered greater earning capabilities for those customers. These increases correspondingly increased the Bank’s cost of funds and exerted downward pressure on our net interest margins.

The increases in market interest rates also were reflected in loan pricing, which had multiple effects, including a reduction in borrowing (and thus a reduction in interest paid to banks) by customers that had the ability to avoid or defer additional indebtedness, a decline in the origination of new loans, and an increase in credit risk as borrowers who faced rising interest rates found it more difficult to comply with their loan obligations. The combination of these factors has exerted downward pressure on our fee income, the volume of our interest-earning assets and our net interest income.

Lastly, as a result of the prolonged low-interest-rate environment that had prevailed for years prior to the more recent market rate increases, the Bank, like most other financial institutions, had invested in treasury securities and other relatively low-yielding but stable instruments as a means to preserve liquidity, accepting the lower returns as a trade-off for a perceived lower risk profile. However, the rapidity of the Federal Reserve’s rate increases resulted in a dramatic loss of value for bonds that were paying at lower interest rates as investors eschewed those investments for higher-yielding fixed- and adjustable-rate debt securities. These forces even resulted in the closure of three large U.S. banks, including two banks with extensive operations in our market area, when customers alarmed at the apparent instability in the banking sector quickly demanded a return of their deposits at a time when banks were confronting substantial challenges.

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

As of September 30, 2023 compared to as of December 31, 2022

• Total assets were $2.14 billion, an increase of $48.2 million, or 2.3%, from $2.09 billion.
• Gross loans were $1.76 billion, an increase of $81.2 million, or 4.8%, from $1.68 billion.
• Total deposits were $1.83 billion, a decrease of $60.6 million, or 3.2%, from $1.89 billion.
• Shareholders’ equity was $184.3 million, an increase of $7.4 million, or 4.2%, from $176.9 million.

For the three months ended September 30, 2023 compared to the three months ended September 30, 2022

• Net interest income decreased to $17.3 million, a decrease of $3.0 million, or 14.9%, from $20.3 million.
• Net income was $5.1 million or $0.33 per diluted common share, a decrease of $3.5 million, or 40.8%, from $8.7 million or $0.55 per diluted common share.

For the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022

• Net interest income decreased to $52.5 million, a decrease of $4.3 million, or 7.5%, from $56.7 million.
• Net income was $18.7 million or $1.21 per diluted common share, a decrease of $6.5 million, or 25.9%, from $25.3 million or $1.62 per diluted common share.

SELECTED FINANCIAL DATA

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

(1) Annualized

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

($ in thousands)

RESULTS OF OPERATIONS

Net Income

We reported net income for the three months ended September 30, 2023 of $5.1 million, a decrease of $3.5 million, or 40.8%, compared to net income of $8.7 million for the same period of 2022. The decrease was primarily due to a $3.0 million decrease in net interest income, a $2.2 million decrease in noninterest income and a $697 thousand increase in provision for credit losses, offset by a $1.6 million decrease in income tax expense and a $803 thousand decrease in noninterest expense.

($ in thousands)

We reported net income for the nine months ended September 30, 2023 of $18.7 million, a decrease of $6.5 million, or 25.9%, compared to net income of $25.3 million for the same period of 2022. The decrease was primarily due to a $4.3 million decrease in net interest income, a $3.9 million decrease in noninterest income and a $2.2 million increase in noninterest expense, offset by a $2.9 million decrease income tax expense and a $1.0 million decrease in provision for credit losses.

($ in thousands)

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)

(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.

($ in thousands)

(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)

43

($ in thousands)

Comparison for the Three Months Ended September 30, 2023 and 2022

Net interest income decreased $3.0 million, or 14.9%, primarily due to higher interest expense on deposits, partially offset by higher interest income on loans. Net interest margin was 3.38%, a decrease of 93 basis points from 4.31%.

A $10.1 million increase in interest expense on deposits was primarily due to a $274.7 million increase in average balance and a 301 basis point increase in average cost driven by the Federal Reserve’s rate increases.

A $6.5 million increase in interest income on loans was primarily due to a $126.2 million increase in average balance and a 109 basis point increase in loan yield as a result of the Federal Reserve’s rate increases.

Comparison for the Nine Months Ended September 30, 2023 and 2022

Net interest income decreased $4.3 million, or 7.5%, primarily due to higher interest expense on deposits, partially offset by higher interest income on loans. Net interest margin was 3.45%, a decrease of 77 basis points from 4.22%.

A $30.7 million increase in interest expense on deposits was primarily due to a $341.6 million increase in average balance and a 420 basis point increase in average cost driven by the Federal Reserve’s rate increases.

A $23.4 million increase in interest income on loans was primarily due to a $190.5 million increase in average balance and a 125 basis point increase in loan yield as a result of 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 provision for credit losses of $1.4 million for the three months ended September 30, 2023 was composed of a $488 thousand in net charge-offs, a $356 thousand increase from loan balance and historical loss factor changes, and a $575 thousand increase in qualitative factor adjustments in the third quarter of 2023. The provision for credit losses was $662 thousand for the same period of 2022.

The provision for credit losses of $1.0 million for the nine months ended September 30, 2023 was composed of a $593 thousand in net charge-offs, a $692 thousand increase in qualitative factor adjustments in 2023, partially offset by a $250 thousand decrease on individually evaluated loans. The provision for credit losses was $2.0 million for the same period of 2022.

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.

Comparison for the Three Months Ended September 30, 2023 and 2022

The following table sets forth the various components of our noninterest income for the three months ended September 30, 2023 and 2022:

($ in thousands)

Noninterest income for the three months ended September 30, 2023 was $2.6 million, a decrease of $2.2 million, or 46.0%, compared to $4.8 million for the same period of 2022, primarily due to a decrease of 2.3 million in gain on sale of loans.

Gain on sale of loans was $1.2 million for the three months ended September 30, 2023, compared to $3.5 million for the same period of 2022, a decrease of $2.3 million or 66.2%. The decrease was primarily due to a lower SBA loans sold amount and a lower average sales premium. We sold $23.4 million of SBA loans with an average premium of 6.50% for the three months ended September 30, 2023, compared to a sale of $59.3 million of SBA loans with an average premium of 6.67% in the same period of 2022.

Comparison for the Nine Months Ended 2023 and 2022

The following table sets forth the various components of our noninterest income for the Nine Months Ended September 30, 2023 and 2022:

($ in thousands)

Noninterest income for the nine months ended September 30, 2023 was $10.5 million, a decrease of $3.9 million, or 27.1%, compared to $14.4 million for the same period of 2022, primarily due to a decrease of $4.8 million in gain on sale of loans, partially offset by increases $364 thousand in other income.

Gain on sale of loans was $5.8 million for the nine months ended September 30, 2023, compared to $10.6 million for the same period of 2022, a decrease of $4.8 million or 44.8%. The decrease was primarily due to a lower average sales premium and a lower SBA loans sold amount. We sold $104.8 million of SBA loans with an average premium of 6.91% for the nine months ended September 30, 2023, compared to a sale of $149.7 million of SBA loans with an average premium of 7.73% in the same period of 2022.

Other income was $1.2 million, an increase of $364 thousand from $815 thousand, primarily due to a $330 thousand decrease in holding loss on equity investment.

Noninterest Expense

Comparison for the Three Months Ended September 30, 2023 and 2022

The following table sets forth the major components of our noninterest expense for the three months ended September 30, 2023 and 2022:

($ in thousands)

Noninterest expense for the three months ended September 30, 2023 was $11.5 million, compared with $12.3 million for the same period of 2022, a decrease of $803 thousand or 6.5%, primarily due to lower foundation donation and other contributions, salaries and employee benefits, and data processing and communication.

Foundation donations and other contributions for the three months ended September 30, 2023 was $529 thousand, compared to $875 thousand, a decrease of $346 thousand, of 39.5%. The decrease was primarily due to lower donation accruals for Open Stewardship as a result of lower net income.

Salaries and employee benefits for the three months ended September 30, 2023 was $7.0 million, compared to $7.3 million for the same period of 2022, a decrease of $329 thousand, or 4.5%. The decrease was primarily due to a lower accrual on employee incentives.

Data processing and communication for the three months ended September 30, 2023 was $369 thousand, compared to $586 thousand, a decrease of $217 thousand, or 37.0%. The decrease was primarily due to an accrual adjustment for a credit received on data processing fees.

Comparison for the Nine Months Ended 2023 and 2022

($ in thousands)

Noninterest expense for the nine months ended September 30, 2023 was $35.7 million, compared with $33.5 million for the same period of 2022, an increase of $2.2 million or 6.7%, primarily due to a higher salaries and employee benefits, FDIC insurance and regulatory assessments, and occupancy and equipment, partially offset by a lower foundation donation and other contributions.

Salaries and employee benefits for the nine months ended September 30, 2023 was $21.9 million, compared to $20.1 million for the same period of 2022, an increase of $1.8 million, or 9.1%. The increase was primarily due to a $1.0 million increase from 20 additional full-time employees to support our continued growth and a $656 thousand decrease in loan origination costs as a result of lower loan originations.

FDIC insurance and regulatory assessments for the nine months ended September 30, 2023 was $1.2 million, compared to $637 thousand, an increase of $583 thousand, or 91.5%. The increase was primarily due to our deposit growth from the same period of 2022 and increases in FDIC assessment fees in 2023.

Occupancy and equipment for the nine months ended September 30, 2023 was $4.9 million, compared to $4.4 million for the same period of 2022, an increase of $470 thousand, or 10.7%. The increase was primarily due to increases in leasehold improvements and equipment expense accrual adjustments.

Foundation donations and other contributions for the nine months ended September 30, 2023 was $1.9 million, compared to $2.5 million, a decrease of $666 thousand, or 26.2%. The decrease was primarily due to lower donation accruals for Open Stewardship as a result of lower net income.

Income Tax Expense

Income tax expense was $1.9 million and $3.5 million for the three months ended September 30, 2023 and 2022, respectively. Effective tax rates were 27.1% and 28.9% for the three months ended September 30, 2023 and 2022, respectively. Income tax expense was $7.4 million and $10.3 million for the nine months ended September 30, 2023 and 2022, respectively. Effective tax rates were 28.4% and 29.0% for the nine months ended September 30, 2023 and 2022, respectively. The decrease in the effective tax rate was primarily due to adjustments for differences between the prior year tax provision and the final tax returns that were applied in the third quarter of 2023.

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 September 30, 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 September 30, 2023. There were no held-to-maturity or trading securities in our investment portfolio as of September 30, 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 decreased $18.5 million, or 8.8%, to $191.3 million at September 30, 2023 from $209.8 million at December 31, 2022, primarily due to principal paydowns of 18.9 million, mainly offset by purchases of $5.6 million in tax exempt municipal securities for the nine months ended September 30, 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 September 30, 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)

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, 2023 and does not have allowance for credit losses as of September 30, 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)

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)

(1) Includes net deferred loan costs(fees) and unamortized premiums(unaccreted discounts) of $314 thousand and $160 thousand as of September 30, 2023 and December 31, 2022, respectively.

Gross loans increased $81.2 million, or 4.8%, to $1.76 billion as of September 30, 2023, compared to $1.68 billion as of December 31, 2022. The increase was primarily attributable to new loan production of $277.6 million, partially offset by loan payoffs and paydowns of $170.3 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 September 30, 2023 and December 31, 2022:

($ in thousands)

($ in thousands)

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, 92.1% of our gross loans were secured by real property as of September 30, 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 $878.8 million at September 30, 2023 compared to $842.2 million at December 31, 2022. During the nine months ended September 30, 2023, we originated $87.4 million of commercial real estate loans. As of September 30, 2023, approximately 77.8% 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 September 30, 2023, our average loan to value for commercial real estate loans was 49.8%.

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 September 30, 2023, our SBA portfolio totaled $240.2 million, compared to $234.7 million as of December 31, 2022. We originated $89.6 million for the nine months ended September 30, 2023. We sold SBA loans of $104.8 million with a 6.91% average premium during the nine months ended September 30, 2023.

From our total SBA loan portfolio, $225.6 million is secured by real estate and $14.6 million is unsecured or secured by business assets as of September 30, 2023.

Loans — Commercial and Industrial: Commercial and industrial loans totaled $124.6 million as of September 30, 2023, compared to $117.0 million as of December 31, 2022. We originated $48.0 million for the nine months ended September 30, 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 $515.8 million as of September 30, 2023, compared to $482.9 million as of December 31, 2022. For the nine months ended September 30, 2023, we originated $52.5 million of home mortgage loans and purchased $21.9 million of home mortgage loans from third party mortgage originators.

Loan Servicing

As of September 30, 2023 and December 31, 2022, we serviced $706.9 million and $707.1 million, respectively, of SBA and USDA loans for others. Activity for loan servicing rights was as follows:

($ in thousands)

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 a 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 evaluate 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 obtain 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 obtain 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 recognize an allowance for credit losses with a corresponding charge to the provision for credit losses.

Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. The estimated credit losses for these loans are based on the collateral’s fair value less selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less selling costs at the time of foreclosure.

As of September 30, 2023, there were $3.8 million of collateral-dependent loans which are primarily secured by residential and commercial real estate, as well as equipment. The allowance for credit losses allocated to these loans as of September 30, 2023 was $14 thousand.

The following table represents the amortized cost basis of collateral-dependent loans by class of loans as of September 30, 2023, for which repayment is expected to be obtained through the sale of the underlying collateral.

($ in thousands)

(1) Excludes guaranteed portion of SBA loans of $3.4 million as of September 30, 2023.

We maintain a separate allowance for credit losses for off-balance sheet commitments. We use 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 $21.6 million as of September 30, 2023, compared to $19.2 million as of December 31, 2022. $1.4 million provision of credit losses was recorded for the three months ended September 30, 2023, compared to provision for credit losses of $662 thousand for the same period in 2022.

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 September 30, 2023 and 2022:

($ in thousands)

(1) Excludes loans held for sale.

(2) Annualized.

The following table provides an analysis of the allowance for credit losses, provision for credit losses and net charge-offs, by category, for the nine months ended September 30, 2023 and 2022:

($ in thousands)

(1) Excludes loans held for sale.

(2) Annualized.

The following table presents an allocation of the allowance for credit losses by portfolio as of September 30, 2023 and December 31, 2022:

($ in thousands)

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 $4.2 million at September 30, 2023, compared to $2.0 million at December 31, 2022. Nonperforming loans excluded the guaranteed portion of SBA loans of $5.2 million and $1.0 million as of September 30, 2023 and December 31, 2022, respectively.

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 September 30, 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)

(1) Excludes guaranteed portion of SBA loans of $5.2 million and $1.0 million as of September 30, 2023 and December 31, 2022, respectively.

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)

55

The following tables set forth the maturity of time deposits as of September 30, 2023:

($ in thousands)

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 September 30, 2023 and December 31, 2022, we had maximum borrowing capacity from the FHLB of $661.6 million and $582.8 million, respectively. We had $95.0 million borrowings from FHLB as of September 30, 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 September 30, 2023 and December 31, 2022:

($ in thousands)

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 September 30, 2023 and December 31, 2022. In addition, on such dates we had lines of credit from the Federal Reserve discount window of $186.4 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 $260.5 million and $254.7 million as of September 30, 2023 and December 31, 2022, respectively. We did not have any borrowings outstanding with the Federal Reserve as of September 30, 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 $375.9 million of additional borrowing availability with the FHLB as of September 30, 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 September 30, 2023 and December 31, 2022:

($ in thousands)

The following tables summarizes short- and long-term material cash requirements as of September 30, 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)

(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 September 30, 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 September 30, 2023, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since September 30, 2023 that management believes would change this classification.

($ in thousands)

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

($ in thousands)

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

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 September 30, 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.

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.

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. In addition to the disclosures set forth in such report, certain factors that developed or were discovered after the date of our Form 10-K are set forth below, and you should read those discussions carefully. 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.

Recent and continuing uncertainties surrounding the banking sector may disproportionately affect our business.

During the first quarter and early in the second quarter of 2023, a number of regional banks suffered liquidity crises that ultimately resulted in their closure by federal and state banking regulators. During and since those failures, customer confidence in the safety of their deposits has declined, particularly with respect to uninsured deposits. News articles and other media items have created greater skepticism among all banking customers, and both the news media and customers have tended to scrutinize smaller institutions much more closely than larger ones. Although we have been largely successful in maintaining our depositors’ confidence, a continuation or exacerbation of these developments may further erode customer confidence generally or with respect to smaller institutions such as the Bank. In part in response to these concerns, we have been forced to maintain, and we expect to continue to maintain, higher liquidity levels, which will limit our ability to invest funds from customer deposits into higher-yielding investments and thus will adversely impact our net income. Further, if we cannot maintain sufficient liquidity to assure an ability to meet customer withdrawal demands, our business could suffer or, in particularly acute circumstances, could fail. Because the Bank is the Company's primary operating subsidiary and is responsible for substantially all of the Company's financial capacity, a failure of the Bank would materially and adversely affect the value of the Company's securities.

Increasing challenges in credit markets and the effects on our current and future borrowers may have an adverse impact on our loan portfolio and may result in losses or increasing provision expense.

In late 2021 and early 2022, partially as a response to inflation in the U.S. and global economies, the Federal Reserve Board began tightening a years-long series of economic stimulus measures that had included historically low interest rates. As those measures were reversed, the Federal Reserve Open Markets committee increased benchmark interest rates from near zero to more than five percent in less than two years. These increases have had a variety of significant impacts, among them a substantial and rapid increase in the interest paid on variable-rate loans. These effects have included a significant reduction in borrowing on existing lines of credit by corporate and individual customers that have the ability to limit increasing indebtedness, and a reduction in the volume of new loans (each of which has the effect of reducing our interest-earning assets), as well as an increase in delinquencies and classified loans (which requires us to increase our reserves for loan and leases losses and increases our collection costs). These increases also effectively reduce demand for loans that we would typically originate and hold for resale, thus reducing our noninterest income. If interest rates increase further, or if they remain at relatively elevated levels for prolonged periods, our borrowers may experience increasing difficulty in repaying their loans.

Increasing delinquencies has resulted in our allowance for credit losses on loans decreasing as a percentage of nonperforming loans, from 625% as of December 31, 2022, to 513% as of September 30, 2023. If these trends continue, or if economic conditions affecting our borrowers worsen, we may be forced to increase our provision expense, which would result in a reduction in net income for the corresponding period, or in some cases we may experience losses in excess of established reserves, which would have a similar effect. These outcomes, alone or in combination with other factors, may have a material adverse effect on our results of operations.

Adverse developments affecting the banking industry, and resulting media coverage, have eroded customer confidence in the banking system and could have a material effect on the Company’s operations and/or stock price.

The recent high-profile bank failures of Silicon Valley Bank, Signature Bank and First Republic have generated significant market volatility among publicly traded bank holding companies. These market developments have negatively impacted customer confidence in the safety and soundness in the financial services industry. While negative publicity and public opinion appear to have diminished in recent months, we cannot offer assurances that the underlying risks have ameliorated or that adverse media stories, other bank failures, or geopolitical or market conditions will not exacerbate or continue these conditions. Partly as a result of these conditions, some community and regional bank depositors have chosen to place their deposits with larger financial institutions or to invest in higher yielding short-term fixed income securities, all of which have adversely affected, and may continue to materially adversely impact our liquidity, cost of funding, loan funding capacity, net interest margin, capital, and results of operations. In connection with high-profile bank failures, uncertainty and concern has been, and may be in the future, compounded by advances in technology that increase the speed at which deposits can be moved, as well as the speed and reach of media attention, including social media, and its ability to disseminate concerns or rumors, in each case potentially exacerbating liquidity concerns. Further, measures announced by the Department of the Treasury, the Federal Reserve, and the Federal Deposit Insurance Corporation (“FDIC”) intended to reassure depositors of to the availability of their deposits may not be successful in restoring customer confidence in the banking system.

In addition, the interest rate environment and the prices of financial institutions stocks are often highly correlated, in particular during times of stress. These adverse conditions often tend to affect community banks disproportionately. These circumstances have at times adversely affected, and in the future are likely to continue to adversely affect, the trading prices of our common stock. Further, recent experience has shown that the effects of these events on bank stock prices can cause a much more pronounced and widespread decline in trading values than might be expected based on an individual institution’s specific risk profile.

These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business. The cost of resolving the recent bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

Rising interest rates have decreased the value of a portion of the Bank's securities portfolio, and the Bank would realize losses if it were required to sell such securities to meet liquidity needs.

As a result of inflationary pressures and other general economic conditions, Federal Open Market Committee of the Board of Governors of the Federal Reserve System has rapidly and significantly increased interest rates over the last year. When interest rates increase, fixed-rate investment securities and loans held for sale tend to decline in value, because investors can often place funds in higher-yielding instruments rather than purchasing debt securities that have a yield that is lower than those earning at a newly-increased market interest rate. This sequence of events has caused a decline, and may cause a further decline, in the fair value of our securities classified as available-for-sale, resulting in both a charge against earnings to reflect the adverse impacts on securities and loans held for sale, and in unrealized losses affecting our loans and securities held to maturity. These trends can be exacerbated if the Bank were required to sell such securities to meet liquidity needs, including in the event of deposit outflows or slower deposit growth.

The loss of the Bank's deposit clients or a substantial reduction in deposit balances could force us to fund our business with more expensive and less stable funding sources.

The composition of our deposit base, and particularly the extent to which our deposits are not federally insured, may present a heightened risk of withdrawal, particularly during periods of economic uncertainty. Our measures to mitigate the risks, including correspondent deposit relationships, may not be completely effective in reassuring customers about the safety of their deposits. Further, significant economic fluctuations, or customers’ expectations about such events (whether or not those expectations materialize) may exacerbate depositors’ sensitivity to the availability of cash to fund immediate withdrawals. If our depositors were to experience such conditions, the resulting demand for withdrawals may materially decrease the volume of our deposits, thus adversely impacting our liquidity. This risk is particularly significant if the FDIC or other federal banking regulators were to withdraw or revise recently announced policies assuring the availability of both insured and uninsured deposits. A reduction in liquidity, particularly if it were to occur rapidly or at excessive levels, would have a material adverse effect upon our financial condition or results of operations, and on the trading price of our common stock.

We may be subject to greater than ordinary degrees of scrutiny from federal and state banking regulators.

In times of significant uncertainty surrounding the banking industry, federal and state banking regulators have tended to scrutinize regulated institutions much more closely to assure the safety and soundness of deposits, the security of the banking system, and the integrity of the Federal Deposit Insurance Fund. These measures, as well as consumer protection regulations, are intended solely for the protection of depositors and other customers, and banking regulators charged with enforcing those regulations are not focused on the protection of shareholders. Among other things, regulators are vested with broad discretion regarding the adequacy of a bank’s liquidity and the quality of its loan and deposit portfolios. We expect the recent failures of two regional banks in California to cause our regulators to scrutinize our assets and our liquidity much more carefully. While we believe we have taken appropriate measures to respond to current market conditions and trends, our regulators may disagree, and may require us to take further actions such as increasing liquidity, reducing our loan-to-deposit ratio, increasing our reserves for credit losses, or both, or to take other measures to protect customers or the Deposit Insurance Fund. If our regulators impose additional requirements in response to these conditions, we may experience further reductions to our net income or we may be required to take other actions that adversely affect our results of operations.