SEC Filing | RBB Bancorp

View:

Download DOC

Download PDF

Download XLS

Download XBRL

rbb20230331_10q.htm

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

(Registrant’s 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

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.	MANAGEMENT’S 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

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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.

Table of Contents

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

(dollars in thousands)

Cost

Fair Value

Cost

Fair Value

Cost

Fair Value

Cost

Fair Value

Cost

Fair Value

March 31, 2023

Government agency securities

—

4,686

4,233

—