rbb20230331_10q.htm
0001499422 RBB Bancorp false --12-31 Q1 2023 5,661 5,563 1,270 1,415 100,000,000 100,000,000 0 0 0 0 0 0 100,000,000 100,000,000 0 0 18,992,903 18,992,903 18,965,776 18,965,776 0.16 0.14 0 1,000 0 22.2 0 0 0 0 0 0 71.5 6.18 6.18 4.00 4.00 5 30 5 5 55,000 5 0 0 0 0 0 1 0 577,000 2.6 2023 2038 April 19, 2023 May 12, 2023 May 01, 2023 Represents the impact of the adoption of Accounting Standards Update ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2022. The amounts primarily represent revenue from contracts with customers that are out of scope of ASC 606: Net loan servicing income, letter of credit commissions, import/export commissions, recoveries on purchased loans, BOLI income, and gains (losses) on sales of mortgage loans, loans and investment securities. Other income consists of safe deposit box rental income, wire transfer fees, security brokerage fees, annuity sales, insurance activity and OREO income. Other fees consists of wealth management fees, miscellaneous loan fees and postage/courier fees. 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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2023 or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

Commission File Number: 001-38149

 

RBB BANCORP

(Exact name of registrant as specified in its charter)

 

California

27-2776416

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)

 

1055 Wilshire Blvd., Suite 1200,

 

Los Angeles, California

90017

(Address of principal executive offices)

(Zip Code)

 

(213) 627-9888

(Registrants telephone number, including area code)

 

Securities registered pursuant to Section 12 (b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of exchange on which registered

Common Stock, No Par Value

 

RBB

 

NASDAQ Global Select Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

Emerging growth company

 

    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes     No  ☒

 

Number of shares of common stock of the registrant:  18,992,903 outstanding as of May 4, 2023.

 



 

 

 

 

TABLE OF CONTENTS

 

PART I  FINANCIAL INFORMATION (UNAUDITED)

3

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9

ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

35

 

CRITICAL ACCOUNTING POLICIES

36

 

OVERVIEW

38

 

ANALYSIS OF THE RESULTS OF OPERATIONS

39

 

ANALYSIS OF FINANCIAL CONDITION

46

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

59

ITEM 4.

CONTROLS AND PROCEDURES

60

PART II - OTHER INFORMATION

62

ITEM 1.

LEGAL PROCEEDINGS

62

ITEM 1A.

RISK FACTORS

62

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

62

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

62

ITEM 4.

MINE SAFETY DISCLOSURES

62

ITEM 5.

OTHER INFORMATION

62

ITEM 6.

EXHIBITS

63

SIGNATURES

 

64

 

 

 

PART I - FINANCIAL INFORMATION 

 

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 MARCH 31, 2023 AND DECEMBER 31, 2022

(In thousands, except share amounts)

 

  

(Unaudited)

     
  

March 31,

  

December 31,

 
  

2023

  

2022

 

Assets

        

Cash and due from banks

 $230,703  $83,548 

Interest-earning deposits in other financial institutions

  600   600 

Securities:

        

Available for sale

  293,371   256,830 

Held to maturity (fair value of $5,661 and $5,563 at March 31, 2023 and December 31, 2022, respectively)

  5,722   5,729 

Loans held for investment:

        

Real estate

  3,109,486   3,053,864 

Commercial and other

  232,839   283,106 

Total loans

  3,342,325   3,336,970 

Unaccreted discount on acquired loans

  (1,091)  (1,238)

Deferred loan fees, net

  1,182   717 

Total loans, net of deferred loan fees and unaccreted discounts on acquired loans

  3,342,416   3,336,449 

Allowance for credit losses

  (43,071)  (41,076)

Net loans

  3,299,345   3,295,373 
         

Premises and equipment, net

  27,040   27,009 

Federal Home Loan Bank (FHLB) stock

  15,000   15,000 

Net deferred tax assets

  16,479   16,977 

Cash surrender value of bank owned life insurance (BOLI)

  57,645   57,310 

Goodwill

  71,498   71,498 

Servicing assets

  9,159   9,521 

Core deposit intangibles

  3,481   3,718 

Right-of-use assets- operating leases

  29,931   25,447 

Accrued interest and other assets

  50,110   50,498 

Total assets

 $4,110,084  $3,919,058 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 MARCH 31, 2023 AND DECEMBER 31, 2022

(In thousands, except share amounts)

 

 

 

 (Unaudited)     
  

March 31,

  

December 31,

 
  

2023

  

2022

 

Liabilities and Shareholders’ Equity

        

Deposits:

        

Noninterest-bearing demand

 $672,177  $798,741 

Savings, NOW and money market accounts

  617,100   615,339 

Time deposits $250,000 and under

  1,122,687   837,369 

Time deposits over $250,000

  739,098   726,234 

Total deposits

  3,151,062   2,977,683 
         

Reserve for unfunded commitments

  1,017   1,157 

FHLB advances

  220,000   220,000 

Long-term debt (net of unamortized debt issuance costs of $1,270 and $1,415 at March 31, 2023 and December 31, 2022, respectively)

  173,730   173,585 

Subordinated debentures

  14,774   14,720 

Lease liabilities - operating leases

  31,078   26,523 

Accrued interest and other liabilities

  23,666   20,827 

Total liabilities

  3,615,327   3,434,495 
         

Commitments and contingencies - Note 13

          
         

Shareholders' equity:

        

Preferred Stock - 100,000,000 shares authorized, no par value; none outstanding

      

Common Stock - 100,000,000 shares authorized, no par value; 18,992,903 shares issued and outstanding at March 31, 2023 and 18,965,776 shares issues and outstanding at December 31, 2022

  277,432   276,912 

Additional paid-in capital

  3,316   3,361 

Retained earnings

  233,815   225,883 

Non-controlling interest

  72   72 

Accumulated other comprehensive loss, net

  (19,878)  (21,665)

Total shareholders’ equity

  494,757   484,563 

Total liabilities and shareholders’ equity

 $4,110,084  $3,919,058 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(In thousands, except per share amounts)

 

  

Three Months Ended

 
  

March 31,

 
  

2023

  

2022

 

Interest and dividend income:

        

Interest and fees on loans

 $49,942  $37,886 

Interest on interest-earning deposits

  791   171 

Interest on investment securities

  2,536   1,007 

Dividend income on FHLB stock

  265   227 

Interest on federal funds sold and other

  217   275 

Total interest income

  53,751   39,566 

Interest expense:

        

Interest on savings deposits, now and money market accounts

  2,296   718 

Interest on time deposits

  13,406   1,574 

Interest on subordinated debentures and long-term debt

  2,539   2,348 

Interest on other borrowed funds

  1,409   435 

Total interest expense

  19,650   5,075 

Net interest income

  34,101   34,491 

Provision for credit losses

  2,014   366 

Net interest income after provision for credit losses

  32,087   34,125 

Noninterest income:

        

Service charges, fees and other

  1,257   1,121 

Gain on sale of loans

  29   1,174 

Loan servicing fees, net of amortization

  731   432 

Unrealized gain (loss) on derivatives

  10   (108)

Increase in cash surrender value of life insurance

  335   325 
   2,362   2,944 

Noninterest expense:

        

Salaries and employee benefits

  9,864   9,369 

Occupancy and equipment expenses

  2,398   2,206 

Data processing

  1,299   1,258 

Legal and professional

  3,013   1,006 

Office expenses

  375   293 

Marketing and business promotion

  300   307 

Insurance and regulatory assessments

  504   441 

Core deposit premium

  237   279 

Other expenses

  921   902 
   18,911   16,061 

Income before income taxes

  15,538   21,008 

Income tax expense

  4,568   6,391 

Net income

 $10,970  $14,617 
         

Net income per share

        

Basic

 $0.58  $0.75 

Diluted

  0.58   0.74 
         

Weighted-average common shares outstanding

        

Basic

  18,985,846   19,377,407 

Diluted

  19,049,685   19,799,323 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(In thousands)

 

   

Three Months Ended

 
   

March 31,

 
   

2023

   

2022

 

Net income

  $ 10,970     $ 14,617  
                 

Other comprehensive gain/(loss):

               

Unrealized gain/(loss) on securities available for sale:

    2,577       (12,557 )
                 

Related income tax effect:

    (790 )     3,889  
                 

Total other comprehensive gain/(loss)

    1,787       (8,668 )
                 

Total comprehensive income

  $ 12,757     $ 5,949  

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(In thousands, except share amounts)

 

 

  

Common Stock

              

Accumulated

     
  

Shares

  

Amount

  

Additional Paid-in Capital

  

Retained Earnings

  

Non- Controlling Interest

  

Other Comprehensive Income (Loss)

  

Total

 

Balance at January 1, 2023

  18,965,776  $276,912  $3,361  $225,883  $72  $(21,665) $484,563 

Net income

           10,970         10,970 

Stock-based compensation

        316            316 

Restricted stock unit vested

  17,974   361   (361)            

Cash dividends on common stock ($0.16 per share)

           (3,038)        (3,038)

Stock options exercised

  9,153   159               159 

Other comprehensive gain/(loss), net of taxes

                 1,787   1,787 

Balance at March 31, 2023

  18,992,903  $277,432  $3,316  $233,815  $72  $(19,878) $494,757 
                             

Balance at January 1, 2022

  19,455,544  $282,335  $4,603  $181,329  $72  $(1,656) $466,683 

Cumulative effect of change in accounting principle related to ASC 326 (1)

           (2,204)        (2,204)

Net income

           14,617         14,617 

Stock-based compensation

        257            257 

Restricted stock vested

     355   (355)            

Cash dividends on common stock ($0.14 per share)

           (2,724)        (2,724)

Stock options exercised

  25,763   507   (113)           394 

Repurchase of common stock

  (233,337)  (3,361)     (2,373)        (5,734)

Other comprehensive gain/(loss), net of taxes

                 (8,668)  (8,668)

Balance at March 31, 2022

  19,247,970  $279,836  $4,392  $188,645  $72  $(10,324) $462,621 

 

(1) Represents the impact of the adoption of Accounting Standards Update ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) on January 1, 2022.

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

 

 

 

RBB BANCORP AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2023 AND 2022

(In thousands)

 

  

Three Months Ended

 
  

March 31,

 
  

2023

  

2022

 

Operating activities

        

Net income

 $10,970  $14,617 

Adjustments to reconcile net income to net cash from Operating activities:

        

Depreciation and amortization of premises and equipment

  504   494 

Net accretion of securities, loans, deposits, and other

  (629)  (70)

Amortization of investment in affordable housing tax credits

  282   255 

Amortization of intangible assets

  609   1,210 

Amortization of right-of-use asset

  1,280   1,290 

Change in operating lease liabilities

  (1,209)  (1,256)

Provision for credit losses

  2,014   366 

Stock-based compensation

  316   257 

Deferred tax benefit

  (293)  (244)

Gain on sale of loans

  (29)  (1,174)

Increase in cash surrender value of life insurance

  (335)  (325)

Loans originated and purchased for sale, net

  (831)  (24,015)

Proceeds from loans sold

  991   36,271 

Other items

  3,178   5,480 

Net cash provided by operating activities

  16,818   33,156 

Investing activities

        

Securities available for sale:

        

Purchases

  (87,070)  (185,335)

Maturities, prepayments and calls

  53,838   120,537 

(Purchase)/distribution of other equity securities, net

  (222)  16 

Net increase of investment in qualified affordable housing projects

  (24)  (3)

Net increase in loans

  (6,124)  (76,643)

Net cash received in connection with a branch purchase

     71,352 

Purchases of premises and equipment

  (524)  (725)

Net cash used in investing activities

  (40,126)  (70,801)

Financing activities

        

Net decrease in demand deposits and savings accounts

  (124,803)  (256,038)

Net increase (decrease) in time deposits

  298,145   (42,858)

Advances on short-term FHLB advances

  80,000    

Repays of short-term FHLB Advances

  (80,000)   

Cash dividends paid

  (3,038)  (2,724)

Common stock repurchased, net of repurchased costs

     (5,734)

Exercise of stock options

  159   394 

Net cash provided by (used in) financing activities

  170,463   (306,960)

Net increase (decrease) in cash and cash equivalents

  147,155   (344,605)

Cash and cash equivalents at beginning of period

  83,548   694,372 

Cash and cash equivalents at end of period

 $230,703  $349,767 

Supplemental disclosure of cash flow information

        

Cash paid during the period:

        

Interest paid

 $18,700  $3,020 

Taxes refunded

  (46)  (125)

Non-cash investing and financing activities:

        

Loans transfer to held for sale, net

  132   8,697 

Additions to servicing assets

  10   462 

Net change in unrealized holding gain on securities available for sale

  2,577   (12,557)

Recognition of operating lease right-of-use assets

  (5,764)  (1,287)

Recognition of operating lease liabilities

  5,764   1,287 

Acquisition:

        

Assets acquired, net of cash received

     8,183 

Liabilities assumed

     81,790 

Cash considerations

     (71,040)

Goodwill

     2,255 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

 

RBB BANCORP AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

 

 

NOTE 1 - BUSINESS DESCRIPTION

 

RBB Bancorp (“RBB”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended. RBB Bancorp’s principal business is to serve as the holding company for its wholly-owned banking subsidiaries, Royal Business Bank ("Bank") and RBB Asset Management Company ("RAM"), collectively referred to herein as "the Company". RAM was formed to hold and manage problem assets acquired in business combinations.

 

At March 31, 2023, the Company had total consolidated assets of $4.1 billion, gross consolidated loans of $3.3 billion, total consolidated deposits of $3.2 billion and total consolidated shareholders' equity of $494.8 million. RBB’s common stock trades on the Nasdaq Global Select Market under the symbol “RBB”.

 

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

 

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

 

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

 

The Company has completed six whole bank acquisitions and one branch acquisition from July 2011 through January 2022. All of the Company’s acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. In addition, on December 28, 2021, the Company announced that it had entered into an agreement to acquire Gateway Bank F.S.B. (“Gateway”), a commercial bank based in Oakland, California, in a cash transaction valued at approximately $22.9 million, subject to certain terms and conditions, including customary holdbacks if certain contingencies are not met, and other possible adjustments as contained in the agreement. The expiration of the agreement has been extended to September 30, 2023 and the acquisition is subject to several conditions, including the receipt of all requisite regulatory approvals.

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results for the full year. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2022, included in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2022 (our “2022 Annual Report”).

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. It is reasonably possible that these estimates could change as actual results could differ from those estimates. 

 

Summary of Significant Accounting Policies

 

The accompanying unaudited consolidated financial statements were compiled in accordance with the accounting policies set forth in "Note 2 – Basis of Presentation and Summary of Significant Policies" in our consolidated financial statements as of and for the year ended December 31, 2022, included in our 2022 Annual Report. The Financial Accounting Standards Board ("FASB") issues Accounting Standards Updates ("ASU" or “Update”) and Accounting Standards Codifications (“ASC”), which are the primary source of GAAP.

 

 

9

 

Recent Accounting Pronouncements

 

Recently adopted

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instrument (Topic 326), including subsequent amendments to this ASU. This ASU changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard replaced today's "incurred loss" approach with an "expected loss" model. The new model, referred to as the current expected credit loss ("CECL") model, applies to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held to maturity securities, loan commitments, and financial guarantees. For available for sale (“AFS”) debt securities with unrealized losses are recognized as allowances rather than reductions in the amortized cost of the securities. ASU 2016-13 also expands the disclosure requirements regarding an entity's assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. On December 31, 2022, the Company retroactively adopted CECL effective  January 1, 2022 as the Company's status as an emerging growth company expired as of December 31, 2022. A one-time cumulative adjustment of $2.1 million was made to the Company's allowance for credit losses which was recorded through retained earnings upon adoption of ASU 2016-13 as of January 1, 2022.

 

The following table sets forth the cumulative effect of the changes to the Company's consolidated balance sheet at January 1, 2022, for the adoption of ASU 2016-13:

 

      

Adjustments

     
      

due to

     
  

Balance at

  

Adoption of

  

Balance at

 

(dollars in thousands)

 

December 31, 2021

  

ASC 326

  

January 1, 2022

 

Assets:

            

Allowance for credit losses on loans

 $32,912  $2,135  $35,047 

Deferred tax assets

  4,855   977   5,832 

Liabilities:

            

Allowance for unfunded commitments

 $1,203  $1,045  $2,248 

Shareholders' equity:

            

Retained earnings, net of tax

 $181,329  $(2,204) $179,125 

 

 

In February 2019, the U.S. federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a three year period the day-one adverse regulatory capital effects of ASU 2016-13. Additionally, in March 2020, the U.S. federal bank regulatory agencies issued an interim final rule that provides banking organizations an option to delay the estimated CECL impact on regulatory capital for an additional two years for a total transition period of up to five years to provide regulatory relief to banking organizations to better focus on supporting lending to creditworthy households and businesses in light of recent strains on the U.S. economy as a result of the novel coronavirus disease 2019 ("COVID-19") pandemic. As a result, entities will have the option to gradually phase in the full effect of CECL on regulatory capital over a five-year transition period. Effective January 1, 2022, the Company adopted ASU 2016-13, reflected the full effect of CECL at December 31, 2022, and did not elect the three-year or five-year CECL phase-in options on regulatory capital.

 

In February 2020, the FASB issued ASU 2020-02, “Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842)—Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) (SEC Update)”. This is an amendment to add the SEC Staff guidance on CECL to the FASB codification. It contains guidance on what the SEC would expect the Company to perform and document when measuring and recording its allowance for credit losses for financial assets recorded at amortized cost. The Company retroactively adopted CECL on January 1, 2022.

 

In  October 2021, the FASB issued ASU 2021-08, "Accounting for Contract Assets and Contract Liabilities", to require an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue recognition guidance as if the acquirer had originated the contract. That is, such acquired contracts will not be measured at fair value. The ASU is potentially material to the Company, depending on the materiality of an acquired contract asset or liability. The Update is effective for public companies in fiscal years starting after  December 15, 2022. The Company adopted ASU 2021-08 on January 1, 2023 and the adoption did not have a material impact on the Company's consolidated financial statements.

 

In March 2022, the FASB issued ASU 2022-02, "Financial Instruments—Credit Losses (Topic 326)". The standard addresses the following: (1) eliminates the accounting guidance for troubled debt restructurings ("TDRs"), and will require an entity to determine whether a modification results in a new loan or a continuation of an existing loan, (2) expands disclosures related to modifications, and (3) will require disclosure of current period gross write-offs of financing receivables within the vintage disclosures table. The amendments in this ASU are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and are applied prospectively, except with respect to the recognition and measurement of TDRs, where an entity has the option to apply a modified retrospective transition method. Early adoption of the amendments in this ASU is permitted. An entity may elect to early adopt the amendments regarding TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company adopted ASU 2022-02 on January 1, 2023 and the adoption did not have a material impact on the Company’s consolidated financial statements.

 

10

 

Recently issued not yet effective

 

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”). This pronouncement is applicable to all companies with contracts or hedging relationships that reference an interest rate that is expected to be discontinued. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time. For contract modifications, companies can account for the modification as a continuation of the existing contract without additional analysis. For held-to-maturity (“HTM”) debt securities, one-time sale and/or transfer to available-for-sale or trading may be made for HTM debt securities that both reference an eligible reference rate and were classified as HTM before January 1, 2020. Regarding the effective date and transition: (1) companies can apply the ASU as of the beginning of the interim period that includes March 12, 2020 (e.g. January 1, 2020 for calendar year-end companies) or any date thereafter, (2) the ASU applies prospectively to contract modifications and hedging relationships, and (3) the one-time election to sell and/or transfer debt securities classified as HTM may be made at any time after March 12, 2020. The optional relief generally does not apply to contract modifications made, sales and transfers of HTM debt securities, and hedging relationships entered into or evaluated after December 31, 2022. The guidance was effective upon issuance and generally can be applied through December 31, 2022. The LIBOR termination deadline (except for the 1-week and 2-month indexes) is June 30, 2023. No LIBOR indexed loans are being originated. The Company's current plan is to convert LIBOR to SOFR for all loans indexed under LIBOR by June 30, 2023. Of the Company’s $3.3 billion in total gross loans as of March 31, 2023, approximately 4.8% have a LIBOR based reference rate. The Company has several issuances of LIBOR based long-term debt and subordinated debentures. Refer to Notes 9 and 10 of the Company’s consolidated financial statements included in this Form 10-Q. After the LIBOR replacement date of June 30, 2023, the Company will adopt SOFR with relevant spread adjustment as the alternative reference rate to replace LIBOR with respect to the Company’s subordinated notes and subordinated debentures. 

 

In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848”, to defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. Topic 848, which was established by the previously issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provides relief to entities during the reference rate’s temporary transition period by providing optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference LIBOR or another reference rate expected to be discontinued. Since ASU 2020-04 was issued, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of US LIBOR to June 30, 2023, which is beyond the current sunset date of Topic 848. The new ASU defers the sunset date accordingly to continue to provide the intended relief. The Company adopted ASU 2022-06 during 2022 with no material impact to the Company’s consolidated financial statements.

 

In June 2022, the FASB issued ASU 2022-03, "Fair Value Measurement (Topic 820)—Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions". This pronouncement clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 also clarifies that an entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction and requires certain new disclosures for equity securities subject to contractual sale restrictions. ASU 2022-03 will be effective for the Company on  January 1, 2024. Adoption of ASU 2022-03 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In March 2023, the FASB issued ASU 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323)". This update permits reporting entities to elect to account for their tax equity investments using the proportional amortization method if certain conditions are met. It requires that a liability to be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable. The reporting entity needs to disclose the nature of its tax equity investments and the effect of its tax equity investments on its financial position and results of operations. ASU 2023-02 will be effective for the Company in fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Adoption of ASU 2023-02 is not expected to have a material impact on the Company's consolidated financial statements.

 

 

NOTE 3 ACQUISITIONS

 

Honolulu, Hawaii Branch Purchase

 

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

 

11

 

The Company acquired the BOTO Honolulu Branch to strategically establish a presence in the Hawaiian Islands area. Goodwill in the amount of $2.3 million and core deposit premium of $729,000 was recognized in connection with this acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill is not deductible for income tax purposes.

 

The following table represents the assets acquired and liabilities assumed in connection with the acquisition of the BOTO Honolulu Branch as of January 14, 2022 and the fair value adjustments and amounts recorded by the Company under the acquisition method of accounting:

 

           

Fair Value

   

Fair

 

(dollars in thousands)

 

Book Value

   

Adjustments

   

Value

 

Assets acquired

                       

Cash and cash equivalents

  $ 312     $     $ 312  

Loans, gross

    7,352       38       7,390  

Bank premises and equipment

    12             12  

Core deposit intangible

          729       729  

Other assets

    412       (360 )     52  

Total assets acquired

  $ 8,088     $ 407     $ 8,495  
                         

Liabilities assumed

                       

Deposits

  $ 81,673     $ 27     $ 81,700  

Escrow Payable

    2             2  

Other liabilities

    460       (372 )     88  

Total liabilities assumed

    82,135       (345 )     81,790  

Excess of assets acquired over liabilities assumed

    (74,047 )     752       (73,295 )

Cash received

                    71,040  

Goodwill recognized

                  $ 2,255  

 

The Company accounted for this transaction under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition.

 

The loan portfolio of the BOTO Honolulu Branch was recorded at fair value at the date of acquisition with the assistance of a third-party valuation. A valuation of the loan portfolio was performed as of the acquisition date to assess the fair value of the loan portfolio. The loan portfolio was segmented into two groups; loans with credit deterioration and loans without credit deterioration, and then split further by loan type. There were no loans acquired with credit deterioration. The fair value was calculated on an individual loan basis using a discounted cash flow analysis. The discount rate utilized was based on a weighted average cost of capital, considering the cost of equity and cost of debt. Also factored into the fair value estimates were loss rates, recovery period and prepayment rates based on industry standards.

 

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

 

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

 

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

 

Third-party acquisition related expenses are recognized as incurred and continue until the acquired system is converted and operational functions become fully integrated. The Company incurred third-party acquisition related expenses in the consolidated statements of income for the periods indicated in the expense item “Merger expenses”.

 

Agreement to Acquire Gateway Bank, F.S.B.

 

On December 28, 2021, the Company announced that it entered into a definitive agreement to acquire Gateway Bank in a cash transaction valued at approximately $22.9 million, subject to certain terms and conditions, including customary holdbacks if certain contingencies are not met, and other possible adjustments as contained in the definitive agreement. Principally serving the Asian-American communities in the San Francisco Bay Area, Gateway Bank has one branch located in Oakland’s Chinatown neighborhood, offering consumer and business banking and loan products and services. The expiration of the agreement has been extended to September 30, 2023 and the acquisition is subject to several conditions, including the receipt of all requisite regulatory approvals.

 

12

 

 

 

NOTE 4 - INVESTMENT SECURITIES

 

The following table summarizes the amortized cost and fair value of available for sale (“AFS”) debt securities and held to maturity (“HTM”) debt securities as of  March 31, 2023 and December 31, 2022, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:

 

      

Gross

  

Gross

     

(dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 

March 31, 2023

 

Cost

  

Gains

  

Losses

  

Value

 

Available for sale

                

Government agency securities

 $4,686  $  $(453) $4,233 

SBA agency securities

  2,566      (197)  2,369 

Mortgage-backed securities: residential

  43,778      (6,059)  37,719 

Mortgage-backed securities: commercial

  4,864      (16)  4,848 

Collateralized mortgage obligations: residential

  86,145   38   (11,936)  74,247 

Collateralized mortgage obligations: commercial

  47,171   1   (2,528)  44,644 

Commercial paper

  79,518   3   (67)  79,454 

Corporate debt securities

  40,663      (4,033)  36,630 

Municipal securities

  12,661      (3,434)  9,227 

Total

 $322,052  $42  $(28,723) $293,371 
                 

Held to maturity

                

Municipal taxable securities

 $1,002  $8  $(2) $1,008 

Municipal securities

  4,720      (67)  4,653 

Total

 $5,722  $8  $(69) $5,661 

 

 

      

Gross

  

Gross

     

(dollars in thousands)

 

Amortized

  

Unrealized

  

Unrealized

  

Fair

 

December 31, 2022

 

Cost

  

Gains

  

Losses

  

Value

 

Available for sale

                

Government agency securities

 $5,012  $  $(517) $4,495 

SBA agency securities

  2,634      (223)  2,411 

Mortgage-backed securities: residential

  44,809      (6,752)  38,057 

Mortgage-backed securities: commercial

  4,887      (16)  4,871 

Collateralized mortgage obligations: residential

  82,759      (12,856)  69,903 

Collateralized mortgage obligations: commercial

  44,591      (2,901)  41,690 

Commercial paper

  49,551   2   (16)  49,537 

Corporate debt securities

  41,176   1   (4,165)  37,012 

Municipal securities

  12,669      (3,815)  8,854 

Total

 $288,088  $3  $(31,261) $256,830 
                 

Held to maturity

                

Municipal taxable securities

 $1,003  $7  $(3) $1,007 

Municipal securities

  4,726      (170)  4,556 

Total

 $5,729  $7  $(173) $5,563 

 

One security with a fair value of $74,000 and $76,000 at March 31, 2023 and December 31, 2022, respectively, was pledged to secure a local agency deposit.

 

There were no sales of investment securities during the three months ended March 31, 2023 and 2022, respectively.

 

Accrued interest receivable for investment debt securities at March 31, 2023 and December 31, 2022 totaled $816,000 and $810,000, respectively.

 

13

 

The amortized cost and fair value of the investment securities portfolio at March 31, 2023 and December 31, 2022 are shown by expected maturity below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

 

  

Less than One Year

  

More than One Year to Five Years

  

More than Five Years to Ten Years

  

More than Ten Years

  

Total

 
  Amortized    Amortized    Amortized    Amortized    Amortized   

(dollars in thousands)

 

Cost

  

Fair Value

  

Cost

  

Fair Value

  

Cost

  

Fair Value

  

Cost

  

Fair Value

  

Cost

  

Fair Value

 

March 31, 2023