# California BanCorp \ CA (BCAL) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from California BanCorp \ CA's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1795815/000162828024011472/bcal-20231231.htm
Accession: 0001628280-24-011472
Filing date: 2024-03-15
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/BCAL/
All MD&A years: /company/BCAL/mda/
Next year: /company/BCAL/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our consolidated financial condition and consolidated results of operations should be read in conjunction with our consolidated financial statements and related notes. Historical consolidated results of operations and the percentage relationships among any amounts included, and any trends that may appear, may not indicate trends in operations or consolidated results of operations for any future periods. We are a bank holding company and we conduct all our material business operations through the Bank. As a result, the discussion and analysis below primarily relate to activities conducted at the Bank level.

Overview

Southern California Bancorp is a California corporation incorporated on October 2, 2019, and is headquartered in Del Mar, California. On May 15, 2020, we completed a reorganization whereby Bank of Southern California, N.A. became the wholly owned subsidiary of the Company. We are regulated as a bank holding company by the Board of Governors of the Federal Reserve System (“Federal Reserve”). The Bank operates under a national charter and is regulated by the Office of Comptroller of the Currency (“OCC”).

We are a relationship-focused community bank and we offer a range of financial products and services to individuals, professionals, and small- to medium-sized businesses through our 13 branch offices serving Orange, Los Angeles, San Diego and Ventura counties, as well as the Inland Empire. We have kept a steady focus on our solution-driven, relationship-based approach to banking, providing clients accessibility to decision makers and enhancing value through strong client partnerships. We are a Preferred SBA Lender. Our lending products consist primarily of construction and land development loans, real estate loans, C&I loans, SBA loans, and consumer loans. Our deposit products consist primarily of demand deposit, money market, and certificates of deposit. We also provide treasury management services including online banking, cash vault, sweep accounts and lock box services.

Recent Developments

Nasdaq Listing

Our common stock began trading on the Nasdaq Capital Market (“Nasdaq”) at the opening of trading on May 11, 2023, under the symbol “BCAL.”

Impact of Federal Reserve Rapid Rate Hiking Cycle on Economy and Banking Industry

The COVID-19 pandemic has receded, with business activity returning to more normal conditions and concerns regarding a potential recession moderating with third and fourth quarter 2023 GDP reported at 4.9% and 3.2%, respectively. Between March 2022 and September 2023, the Federal Reserve raised interest rates eleven times by an aggregate of 525 basis points, to a range between 5.25% and 5.50%, the highest level since 2001. The Federal Reserve held its key lending rate steady at a 22-year high in the fourth quarter of 2023 as the central bank aims to assess more economic data to understand how the US economy is responding to previous rate hikes. The rapid rate hiking cycle was in response to an increase in inflation, as measured by the Consumer Price Index, from 1.2% in November 2020 to 9.1% in June 2022, which has since moderated to 3.1% in January 2024. The Federal Reserve paused interest rate increases in September 2023, noting in its statement, “The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity,

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hiring, and inflation. The extent of these effects remains uncertain. The Federal Open Market Committee (“FOMC”) remains highly attentive to inflation risks,” and it “...seeks to achieve maximum employment with inflation at the target rate of 2 percent over the longer run. The FOMC will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” Chairman Powell stated after the December 2023 FOMC meeting, “We believe that our policy rate is likely at or near its peak for this tightening cycle.”

The rapid rise in interest rates beginning in 2022 resulted in an industry-wide reduction in the fair value of many banks’ securities portfolios, pressuring their liquidity. The recent bank runs that led to the failure of several financial institutions beginning in March of 2023, among other events, fostered a state of volatility and uncertainty with respect to the health of the U.S. banking system, particularly around liquidity, uninsured deposits and customer concentrations. The situation stabilized due to strong actions taken by federal regulators in attempts to calm the markets. In March 2023, the Federal Reserve announced the creation of a new Bank Term Funding Program (“BTFP”) which provided an additional source of liquidity against high quality pledged securities, in an effort to minimize the need for banks to quickly sell securities at a loss in times of stress. The BTFP offered advances for a term of up to one year to eligible borrowers that pledged U.S. Treasuries, agency debt, mortgage-backed securities, and other qualifying assets as collateral. Borrowers were allowed to prepay advances (including for purposes of refinancing) at any time without penalty. On January 24, 2024, the Federal Reserve announced the BTFP will cease making new loans as scheduled on March 11, 2024. After expiration of the BTFP, depositories can access funds to manage liquidity risk through the Federal Reserve’s discount window.

Notwithstanding these recent market events and activities, we have not experienced any material impact to our financial condition, operations, customer base, liquidity, capital position or risk profile. We have a strong consolidated balance sheet with diversified deposit and loan portfolios, and with very little sector or individual customer concentration, other than our CRE concentration. Our relationship-based banking model is founded on strong, ongoing relationships with our commercial clients, which represent a broad variety of commercial industries. The recent uncertainty in the banking industry has provided us with an opportunity to attract new clients that have concerns about the banks they have been doing business with, based on the above events. We have no meaningful exposure to cryptocurrency or venture capital business models and our accumulated other comprehensive loss on our available-for-sale debt securities is manageable. However, in an abundance of caution, we have proactively responded to these events by reaching out to our deposit customers and explaining what differentiates us from the recently failed banks and assuring them that their deposits remain safe. We also have elected to vigorously defend our deposit base in the face of increasing competition and deposit costs.

We have a highly skilled and experienced lending team and related support team, and an experienced credit administration team. Given our concentration in commercial real estate secured loans, we mitigate that risk through comprehensive underwriting policies, semi-annual loan level reviews, close monitoring of self-established industry and geographical and collateral type limits, periodic stress testing and continuous portfolio risk management reporting. Per the regulatory definition of commercial real estate, at December 31, 2023, our concentration of such loans represented 529.5% of our total risk-based capital. In addition, at December 31, 2023, total loans secured by commercial real estate under construction and land development represented 84.0% of our total risk-based capital. The non-performing assets and net charge-offs for these segments per the regulatory definition of commercial real estate loans at December 31, 2023 and for the year ended December 31, 2023, were $13.0 million and $1.3 million, respectively.

Given the nature of our commercial banking business, approximately 42% of our total deposits exceeded the FDIC deposit insurance limits at December 31, 2023. However, we offer our deposit

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customers access to the Insured Cash Sweep (“ICS Product”), which allows us to divide customers’ deposits that exceed the FDIC insurance limits into smaller amounts, below the FDIC insurance limits, and place those deposits in other participating FDIC insured institutions with the convenience of managing all deposit accounts through our Bank. Our total deposits in the ICS Product increased to $274.1 million, or 14.1% of total deposits at December 31, 2023, compared to $65.5 million, or 3.4% of total deposits at December 31, 2022. In the third quarter of 2023, we appointed new leadership to oversee our Bank-wide deposit and treasury operations and continue to focus on defending our deposit base while managing our deposit costs.

We have a small investment portfolio of high-quality securities. In 2022, we deployed our excess cash by purchasing held-to-maturity debt securities that are not marked to market, which means there is no unrealized loss recorded through the accumulated other comprehensive loss if their market value is impacted by changes in interest rates. We continue to reposition our debt securities mix to protect us from an unpredictable interest rate environment. At December 31, 2023, the amortized cost of our held-to-maturity debt securities was $53.6 million, or approximately 2.3% of total assets. The fair value of our available-for-sale debt securities was $130.0 million, or approximately 5.5% of total assets. The aforementioned increases in the 10-year Treasury bond yields to over 4% resulted in higher net unrealized losses in our debt securities portfolio. However, yields have fluctuated and at December 31, 2023, our accumulated other comprehensive loss, net of taxes, decreased to $4.5 million, compared to $6.4 million at December 31, 2022. If we realized all of our unrealized losses on both held-to-maturity and available-for-sale debt securities, our losses, net of taxes would be $6.7 million at December 31, 2023. The results of our stress testing on our debt security portfolio at December 31, 2023, illustrated that our losses, net of taxes on both held-to-maturity and available-for-sale debt securities would increase to $37.6 million in a +300 basis point rate shock scenario. If we realized all of these unrealized losses, the Bank would continue to exceed all regulatory capital requirements necessary to be considered well capitalized.

At December 31, 2023, our liquidity position remained strong, with the following financial balances, compared to December 31, 2022:

•Total cash and cash equivalents of approximately $86.8 million, compared to $86.8 million.

•Total liquidity ratio of approximately 11.1%, compared to 10.5%.

•Unpledged, liquid securities at fair value were approximately $130.0 million, compared to $112.6 million.

•Available borrowing capacity from the Federal Home Loan Bank (“FHLB”) secured lines of credit of approximately $339.2 million, compared to $374.4 million. At December 31, 2023, we had overnight FHLB borrowings of $85.0 million.

•Increased our available borrowing capacity from the Federal Reserve Discount Window program to approximately $141.6 million, compared to $11.3 million. There were no outstanding borrowings under this program at December 31, 2023.

•Available borrowing capacity from the three unsecured credit lines from correspondent banks totaling $75.0 million at both period ends. There were no outstanding borrowings on these lines at December 31, 2023.

•Did not participate in Federal Reserve Bank Term Funding Program borrowings at December 31, 2023.

•Total available borrowing capacity was approximately $555.8 million at December 31, 2023, compared to $460.7 million.

•Total available liquidity was approximately $772.6 million at December 31, 2023.

We continue to monitor macroeconomic variables related to increasing interest rates, inflation, and concerns regarding an economic downturn, and its potential effects on our business, customers,

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employees, communities and markets. The following challenges could have an impact on our business, consolidated financial condition or near- or longer-term consolidated results of operations:

•Slower loan growth and declining deposits;

•Difficulty retaining and attracting deposit relationships;

•Credit quality deterioration of our loan portfolio resulting in additional provision for credit losses and impairment charges;

•Margin pressure as we increase deposit rates in response to potential further rate increases by the FOMC and our competitors;

•Increases in other comprehensive loss from the unrealized losses on available-for-sale debt securities; and

•Liquidity stresses to maintain sufficient levels of high-quality liquid assets and access to borrowing lines.

Proposed Merger with California BanCorp

On January 30, 2024, the Company announced the execution of a definitive merger agreement with California BanCorp (NASDAQ: CALB), the holding company for California Bank of Commerce, pursuant to which California BanCorp will merge into Southern California Bancorp in an all-stock merger valued at approximately $233.6 million based on the closing price of Southern California Bancorp on January 29, 2024. Under the terms of the merger agreement, which has been unanimously approved by the boards of directors of Southern California Bancorp and California BanCorp, each outstanding share of California BanCorp common stock will be exchanged for the right to receive 1.590 shares of Southern California Bancorp common stock. As a result of the transaction, Southern California Bancorp shareholders will own approximately 57.1% of the outstanding shares of the combined company and California BanCorp shareholders will own approximately 42.9% of the outstanding shares of the combined company. These amounts are subject to fair value adjustments upon the close of the Merger. The transaction is expected to close in the third quarter of 2024, subject to satisfaction of customary closing conditions, including receipt of required regulatory approvals and approvals from Southern California Bancorp and California BanCorp shareholders. At December 31, 2023, CBC had total loans of $1.56 billion, total assets of $1.99 billion, total deposits of $1.63 billion, and total equity of $196.0 million.

Critical Accounting Policies and Estimates

Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the financial services industry, the most significant of which are described in Note 1 — Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 of this annual report.

The preparation of financial statements in conformity with GAAP requires management to make estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. While we base these estimates, assumptions and judgments on historical experience, current information available and other factors deemed to be relevant, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements.

Critical accounting policies are defined as those that require the most complex or subjective judgment and are reflective of significant uncertainties, and could potentially result in materially different results under different assumptions and conditions. In particular, management has identified several

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accounting policies that, due to the estimates, assumptions and judgments inherent in those policies, are critical in understanding our financial statements. The following is a discussion of these critical accounting policies and significant estimates that require us to make complex and subjective judgments.

On January 1, 2023, we adopted ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326), which replaces the incurred loss impairment methodology with a methodology that reflects current expected credit losses (“CECL”) and requires consideration of historical experience, current conditions and reasonable and supportable forecasts to estimate expected credit losses for financial assets held at the reporting date. The measurement of expected credit losses under the CECL is applicable to financial assets measured at amortized cost, including loans, held-to-maturity debt securities and off-balance sheet credit exposures. ASU 2016-13 also requires credit losses on available-for-sale debt securities be measured through an allowance for credit losses. If the measurement indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses ("ACL") is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. In addition, ASU 2016-13 modifies the other-than-temporary impairment (“OTTI”) model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for reversal of credit impairments in future periods based on improvements in credit. We elected to account for accrued interest receivable separately from the amortized cost of loans and investment securities. We elected the CECL phase-in option provided by regulatory capital rules, which delays the impact of CECL on regulatory capital over a three-year transition period.

Concurrent with the adoption of ASU 2016-13, we adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings (“TDR”) and Vintage Disclosures, which eliminated TDR accounting prospectively for all loan modifications occurring on or after January 1, 2023 and added additional disclosure requirements for current period gross charge-offs by year of origination. It also prescribes guidance for reporting modifications for certain loan re-financings and restructurings made to borrowers experiencing financial difficulty. Loans that were considered a TDR prior to the adoption of ASU 2022-02 will continue to be accounted for under the superseded TDR accounting guidance until the loan is paid off, liquidated, or subsequently modified.

Please also see Significant Accounting Polices under Note 1 — Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in Item 8 of this annual report for additional information.

Allowance for Credit Losses - Loans

An ACL on loans is our estimate of expected lifetime credit losses for our loan held for investment at the time of origination or acquisition and is maintained at a level deemed appropriate by management to provide for expected lifetime credit losses in the portfolio. The ACL on loans consists of: (i) a specific allowance established for CECL on loans individually evaluated, (ii) a quantitative allowance for current expected credit losses based on the portfolio and expected economic conditions over a reasonable and supportable forecast period that reverts back to long-term trends to cover the expected life of the loan, (iii) a qualitative allowance including management judgment to capture factors and trends that are not adequately reflected in the quantitative allowance, and (iv) the ACL for off-balance sheet credit exposure for unfunded loan commitments.

The ACL on loans held for investment represents the portion of the loan’s amortized cost basis that we do not expect to collect due to anticipated credit losses over the loan’s contractual life. Amortized cost does not include accrued interest, which management elected to exclude from the estimate of expected credit losses. Provision for credit losses for loans held for investment is included in the

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provision for credit losses in the consolidated statements of income. Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely. Subsequent recoveries, if any, are credited to the ACL. Credit losses are not estimated for accrued interest receivable, as interest that is deemed uncollectible is written off through interest income.

Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. Pools of loans with similar risk characteristics are collectively evaluated while loans that no longer share risk characteristics with loan pools are evaluated individually. We measure the ACL on loans using a discounted cash flow methodology, which utilizes pool-level assumptions and cash flow projections on an individual loan basis, which then aggregated at the portfolio segment level and supplemented by a qualitative reserve that is applied to each portfolio segment level.

At December 31, 2023, the following loan portfolio segments, based on regulatory call codes and related risk ratings, have been identified:

•Construction and land development

•Real estate

◦1-4 family residential

◦Multifamily residential

◦Commercial real estate and other

•Commercial and industrial

•Consumer

The ACL process involves subjective and complex judgments and is reflective of significant uncertainties that could potentially result in materially different results under different assumptions and conditions. Our ACL model incorporates assumptions for prepayment/curtailment rates, probability of default (“PD”), and loss given default (“LGD”) to project each loan’s cash flow throughout its entire life cycle. For prepayment and curtailment rate, the Company utilized Abrigo’s benchmark since the adoption on January 1, 2023 through the second quarter of 2023 and switched to the Company’s own historical prepayment and curtailment experience covering from December 2020 through August 2023 in the third quarter of 2023. Quarterly PD is forecasted using a regression model that incorporates certain economic variables as inputs. The LGD is derived from PD using the Frye-Jacobs index provided by our third-party model provider. We use numerous key macroeconomic variables within the economic forecast scenarios from Moody’s Analytics. Management recognizes the non-linearity of credit losses relative to economic performance and believes the use of multiple probability-weighted economic scenarios is appropriate in estimating credit losses over the forecast period. By considering multiple scenarios, management believes some of the uncertainty associated with a single scenario approach can be mitigated. Management periodically evaluates economic scenarios, determines whether to utilize multiple probability-weighted scenarios in our ACL model, and, if multiple scenarios are utilized, evaluates and determines the weighting for each scenario used in our ACL model, and thus the scenarios and weightings of each scenario may change in future periods. Economic scenarios as well as assumptions within those scenarios can vary based on changes in current and expected economic conditions. Reasonable and supportable forecasts are used to predict current and future economic conditions. Management elected to use a four quarter reasonable and supportable forecast period followed by an eight quarter straight-line reversion period. After twelve quarters of forecast plus reversion period, the probability of default is assumed to remain unchanged for the remaining life of the loan.

In addition to the quantitative model, management periodically considers the need for qualitative adjustments to the ACL. Such qualitative adjustments may be related to and include, but are not limited to factors such as: differences in segment-specific risk characteristics, periods wherein current conditions

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and reasonable and supportable forecasts of economic conditions differ from the conditions that existed at the time of the estimated loss calculation, model limitations and management’s overall assessment of the adequacy of the ACL. Qualitative risk factors are periodically evaluated by management.

Generally, the measurement of the ACL on loans is performed by collectively evaluating loans with similar risk characteristics. Loans that do not share similar risk characteristics are evaluated individually for credit loss and are not included in the evaluation process discussed above. Expected credit losses on all individually evaluated loans are measured, primarily through the evaluation of estimated cash flows expected to be collected, or collateral values measured by reference to an observable market value, if one exists, or the fair value of the collateral for a collateral-dependent loan. We select the measurement method on a loan-by-loan basis except that collateral-dependent loans for which foreclosure is probable are measured at the net realizable value of the collateral. Cash receipts on individually evaluated loans for which the accrual of interest has been discontinued are applied first to principal and then to interest income. Prior to the adoption of ASC Topic 326, individually evaluated loans were referred to as impaired loans. Amounts are charged-off when available information confirms that specific loans or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each segment.

Prior to the adoption of ASC 326 Financial Instruments — Credit Losses on January 1, 2023, we utilized the incurred loss model to estimate the allowance for loan losses (“ALL”). Refer to Note 1 — Basis of Presentation and Summary of Significant Accounting Policies included in Item 8 of this annual report for additional information regarding accounting for the allowance for loan losses, impaired loans, and troubled debt restructurings.

Business Combinations

Business combinations are accounted for using the acquisition method of accounting under ASC Topic 805 - Business Combinations. Under the acquisition method, identifiable assets acquired, including identifiable intangible assets, and liabilities assumed in a business combination are measured at fair value on the acquisition date. The excess of the fair value of the consideration transferred, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date is recognized as goodwill.

The estimates used to determine the fair values of assets and liabilities acquired in a business combination can be complex and require judgment. For example, we utilize a discounted cash flow approach to measure the fair value of core deposit intangible assets acquired in business combinations. This approach requires us to apply a number of critical estimates that include, but are not limited to, future expected cash flows from depositor relationships, expected “decay” rates, and the determination of discount rates. These critical estimates are difficult to predict and may result in impairment charges in future periods if actual results materially differ from those initially estimated.

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Non-GAAP Financial Measures

This filing contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP. We believe the presentation of certain non-GAAP financial measures provides information useful to assess our consolidated financial condition and consolidated results of operations and to assist investors in evaluating our consolidated financial results relative to our peers. These non-GAAP financial measures complement our GAAP reporting and are presented below to provide investors and others with information that we use to manage the business each period. Because not all companies use identical calculations, the presentation of these non-GAAP financial measures may not be comparable to other similarly titled measures used by other companies. These non-GAAP measures should be taken together with the corresponding GAAP measures and should not be considered a substitute of the GAAP measures.

(1)Efficiency ratio is computed by dividing noninterest expense by total net interest income and noninterest income. We measure our success and the productivity of our operations through monitoring of the efficiency ratio.

(2)Pre-tax pre-provision income is computed by adding net interest income and noninterest income and subtracting noninterest expense. This non–GAAP financial measure provides a greater understanding of pre–tax profitability before giving effect to credit loss expense.

(3)Average tangible common equity is computed by subtracting goodwill and core intangible deposits, net from average shareholders’ equity.

(4)Return on average tangible common equity is computed by dividing net income by average tangible common equity. It helps us measure our performance of businesses consistently, whether they were acquired or developed internally.

(5)Tangible common equity and tangible assets are computed by subtracting goodwill and core intangible deposits, net from total shareholders’ equity and total assets.

(6)Tangible common equity to tangible assets ratio is computed by dividing tangible common equity by tangible assets.

(7)Tangible book value per common share is computed by dividing tangible common equity by total common shares outstanding. We consider tangible book value per share a meaningful measure because it suggests what our common shareholders can expect to receive if we are in financial distress and are forced to liquidate our assets at the book value price. Intangible assets like goodwill are not a part of the process since they cannot be sold for cash during liquidation.

We consider average tangible common equity, tangible common equity, and tangible common equity to tangible asset ratio as useful additional methods to evaluate our capital utilization and adequacy to withstand unexpected market conditions. These ratios differ from the regulatory capital ratios principally in that the numerator excludes goodwill and other intangible assets.

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The following tables present a reconciliation of non-GAAP financial measures to GAAP measures for the periods indicated:

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[["","","","","For the Year Ended December 31,"],["(dollars in thousands, except per share amounts)","","","","","","","","2023","","2022"],["Efficiency Ratio"],["Noninterest expense","","","","","","","","$","59,746","","","$","63,522"],["Net interest income","","","","","","","","94,138","","","87,786"],["Noninterest income","","","","","","","","3,379","","","3,675"],["Total net interest income and noninterest income","","","","","","","","$","97,517","","","$","91,461"],["(1) Efficiency ratio (non-GAAP)","","","","","","","","61.3","%","","69.5","%"],["Pre-tax pre-provision income"],["Net interest income","","","","","","","","$","94,138","","","$","87,786"],["Noninterest income","","","","","","","","3,379","","","3,675"],["Total net interest income and noninterest income","","","","","","","","97,517","","","91,461"],["Less: Noninterest expense","","","","","","","","59,746","","","63,522"],["(2) Pre-tax pre-provision income (non-GAAP)","","","","","","","","$","37,771","","","$","27,939"],["Return on Average Assets, Equity, and Tangible Equity"],["Net income","","","","","","","","$","25,910","","","$","16,113"],["Average assets","","","","","","","","$","2,306,233","","","$","2,301,418"],["Average shareholders\u2019 equity","","","","","","","","273,346","","","250,054"],["Less: Average intangible assets","","","","","","","","39,195","","","38,960"],["(3) Average tangible common equity (non-GAAP)","","","","","","","","$","234,151","","","$","211,094"],["Return on average assets","","","","","","","","1.12","%","","0.70","%"],["Return on average equity","","","","","","","","9.48","%","","6.44","%"],["(4) Return on average tangible common equity (non-GAAP)","","","","","","","","11.07","%","","7.63","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Tangible Common Equity Ratio/Tangible Book Value Per Share"],["Shareholders\u2019 equity","","$","288,152","","","","","$","260,355"],["Less: Intangible assets","","38,998","","","","","39,387"],["(5) Tangible common equity (non-GAAP)","","$","249,154","","","","","$","220,968"],["Total assets","","$","2,360,252","","","","","$","2,283,927"],["Less: Intangible assets","","38,998","","","","","39,387"],["(5) Tangible assets (non-GAAP)","","$","2,321,254","","","","","$","2,244,540"],["Equity to asset ratio","","12.21","%","","","","11.40","%"],["(6) Tangible common equity to tangible asset ratio (non-GAAP)","","10.73","%","","","","9.84","%"],["Book value per share","","$","15.69","","","","","$","14.51"],["(7) Tangible book value per common share (non-GAAP)","","$","13.56","","","","","$","12.32"],["Shares outstanding","","18,369,115","","","","","17,940,283"]]
[[/GREPCENT_TABLE]]

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Financial Highlights

The following table sets forth certain of our financial highlights as of and for each of the periods presented. This data should be read in conjunction with our consolidated financial statements and related notes included herein at Item 8 of this annual report.

[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["($ in thousands except share and per share data)","","","","","","","2023","","2022"],["EARNINGS"],["Net interest income","","","","","","","$","94,138","","","$","87,786"],["Provision for credit losses","","","","","","","$","915","","","$","5,956"],["Noninterest income","","","","","","","$","3,379","","","$","3,675"],["Noninterest expense","","","","","","","$","59,746","","","$","63,522"],["Income tax expense","","","","","","","$","10,946","","","$","5,870"],["Net income","","","","","","","$","25,910","","","$","16,113"],["Pre-tax pre-provision income (1)","","","","","","","$","37,771","","","$","27,939"],["Diluted earnings per share","","","","","","","$","1.39","","","$","0.88"],["Ending shares outstanding","","","","","","","18,369,115","","","17,940,283"],["PERFORMANCE RATIOS"],["Return on average assets","","","","","","","1.12","%","","0.70","%"],["Return on average common equity","","","","","","","9.48","%","","6.44","%"],["Yield on loans","","","","","","","5.94","%","","5.02","%"],["Yield on earning assets","","","","","","","5.69","%","","4.33","%"],["Cost of deposits","","","","","","","1.37","%","","0.23","%"],["Cost of funds","","","","","","","1.46","%","","0.29","%"],["Net interest margin","","","","","","","4.33","%","","4.06","%"],["Efficiency ratio (1)","","","","","","","61.3","%","","69.5","%"],["Net charge-offs to average loans held-for-investment","","","","","","","(0.07)","%","","0.00","%"],["CAPITAL"],["Tangible common equity to tangible assets (1)","","","","","","","10.73","%","","9.84","%"],["Book value (BV) per common share","","","","","","","$","15.69","","","$","14.51"],["Tangible BV per common share (1)","","","","","","","$","13.56","","","$","12.32"],["ASSET QUALITY"],["Allowance for loan losses (ALL)","","","","","","","$","22,569","","","$","17,099"],["Reserve for unfunded loan commitments","","","","","","","933","","","1,310"],["Allowance for credit losses (ACL)","","","","","","","$","23,502","","","$","18,409"],["ALL to total loans","","","","","","","1.15","%","","0.90","%"],["ACL to total loans","","","","","","","1.20","%","","0.97","%"],["Nonperforming loans","","","","","","","$","13,004","","","$","41"],["Other real estate owned","","","","","","","\u2014","","","\u2014"],["Nonperforming assets","","","","","","","$","13,004","","","$","41"],["Nonperforming assets to total assets","","","","","","","0.55","%","","0.00","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","","","Year Ended December 31,"],["($ in thousands except share and per share data)","","","","","","","2023","","2022"],["END OF PERIOD BALANCES"],["Total loans, including loans held for sale","","","","","","","$","1,964,791","","","$","1,906,800"],["Total assets","","","","","","","$","2,360,252","","","$","2,283,927"],["Deposits","","","","","","","$","1,943,556","","","$","1,931,905"],["Loans to deposits","","","","","","","101.1","%","","98.7","%"],["Shareholders' equity","","","","","","","$","288,152","","","$","260,355"]]
[[/GREPCENT_TABLE]]

(1) Refer to Non-GAAP Financial Measures, included in the Management's Discussion and Analysis of Financial Condition and Results of Operations of this annual report.

Results of Operations

Net Income

Net income for the year ended December 31, 2023 was $25.9 million, or $1.39 per diluted share, compared to $16.1 million, or $0.88 per diluted share in the prior year. The $9.8 million increase in net income from the prior year was primarily due to a $6.4 million increase in net interest income, a $5.0 million decrease in the provision for credit losses, and a $3.8 million decrease in noninterest expense, partially offset by a $5.1 million increase in income taxes. Net income for the year ended December 31, 2022 included the litigation settlements, net of $5.5 million primarily related to a comprehensive settlement of all litigation with PacWest Bancorp and Pacific Western Bank and costs related to an employment settlement, and a $768 thousand loss on sale of a building and related fixed assets that were acquired as part of the Bank of Santa Clarita acquisition in 2021. Pre-tax, pre-provision income for the year ended December 31, 2023 was $37.8 million, an increase of $9.8 million, or 35.2% compared to pre-tax, pre-provision income of $27.9 million for the year ended December 31, 2022.

Net Interest Income and Margin

Net interest income is our primary source of revenue, which is the difference between interest income on loans, debt securities and other investments (collectively, “interest-earning assets”) and interest expense on deposits and borrowings (collectively, “interest-bearing liabilities”). Net interest margin represents net interest income expressed as a percentage of interest-earning assets. Net interest income is affected by changes in volume, mix, and rates of interest-earning assets and interest-bearing liabilities, as well as days in a period.

We closely monitor both total net interest income and the net interest margin and seek to maximize net interest income without exposing us to an excessive level of interest rate risk through our asset and liability management policies.

The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their corresponding yields and costs for the years indicated:

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[[GREPCENT_TABLE]]
[["","Year Ended"],["","December 31, 2023","","December 31, 2022"],["","Average Balance","","Income/Expense","","Yield/Cost","","Average Balance","","Income/Expense","","Yield/Cost"],["Assets","($ in thousands)"],["Interest-earning assets:"],["Total loans(1)","$","1,918,443","","","$","113,951","","","5.94","%","","$","1,720,560","","","$","86,366","","","5.02","%"],["Taxable debt securities","107,021","","","3,497","","","3.27","%","","96,357","","","2,013","","","2.09","%"],["Tax-exempt debt securities (2)","65,674","","","1,655","","","3.19","%","","54,744","","","1,372","","","3.17","%"],["Deposits in other financial institutions","46,826","","","2,434","","","5.20","%","","210,467","","","1,508","","","0.72","%"],["Fed funds sold/resale agreements","18,114","","","923","","","5.10","%","","65,172","","","1,388","","","2.13","%"],["Restricted stock investments and other bank stock","15,930","","","1,062","","","6.67","%","","14,668","","","928","","","6.33","%"],["Total interest-earning assets","2,172,008","","","123,522","","","5.69","%","","2,161,968","","","93,575","","","4.33","%"],["Total noninterest-earning assets","134,225","","","","","","","139,450"],["Total assets","$","2,306,233","","","","","","","$","2,301,418"],["Liabilities and Shareholders\u2019 Equity"],["Interest-bearing liabilities:"],["Interest-bearing NOW accounts","308,537","","","5,161","","","1.67","%","","211,075","","","312","","","0.15","%"],["Money market and savings accounts","673,176","","","15,000","","","2.23","%","","690,830","","","3,481","","","0.50","%"],["Time deposits","180,219","","","6,704","","","3.72","%","","100,746","","","797","","","0.79","%"],["Total interest-bearing deposits","1,161,932","","","26,865","","","2.31","%","","1,002,651","","","4,590","","","0.46","%"],["Borrowings:"],["FHLB advances","26,390","","","1,434","","","5.43","%","","932","","","43","","","4.61","%"],["Subordinated debt","17,818","","","1,085","","","6.09","%","","17,723","","","1,086","","","6.13","%"],["Junior subordinated debentures","\u2014","","","\u2014","","","\u2014","%","","1,239","","","70","","","5.65","%"],["Total borrowings","44,208","","","2,519","","","5.70","%","","19,894","","","1,199","","","6.03","%"],["Total interest-bearing liabilities","1,206,140","","","29,384","","","2.44","%","","1,022,545","","","5,789","","","0.57","%"],["Noninterest-bearing liabilities:"],["Noninterest-bearing deposits (3)","801,882","","","","","","","1,006,795"],["Other liabilities","24,865","","","","","","","22,024"],["Shareholders\u2019 equity","273,346","","","","","","","250,054"],["Total Liabilities and Shareholders\u2019 Equity","$","2,306,233","","","","","","","$","2,301,418"],["Net interest spread","","","","","3.25","%","","","","","","3.76","%"],["Net interest income and margin(4)","","","$","94,138","","","4.33","%","","","","$","87,786","","","4.06","%"],["Cost of deposits(5)","$1,963,814","","","$26,865","","","1.37","%","","$2,009,446","","","$4,590","","","0.23","%"],["Cost of funds(6)","$2,008,022","","","$29,384","","","1.46","%","","$2,029,340","","","$5,789","","","0.29","%"]]
[[/GREPCENT_TABLE]]

(1)Total loans are net of deferred loan origination fees/costs and discounts/premiums, and include average balances of loans held for sale and nonperforming loans. Interest income includes accretion of net deferred loan fees and net purchased discounts of $2.0 million and $3.8 million for the years ended December 31, 2023 and 2022, respectively.

(2)Tax-exempt debt securities yields are presented on a tax equivalent basis using a 21% tax rate.

(3)Average noninterest-bearing deposits represent 40.83%, and 50.10% of average total deposits for the years ended December 31, 2023 and 2022, respectively.

(4)Net interest income divided by average interest-earning assets.

(5)Total deposits is the sum of interest-bearing deposits and noninterest-bearing deposits. The cost of deposits is calculated as total interest expense on deposits divided by average total deposits.

(6)Total funding is the sum of total interest-bearing liabilities and noninterest-bearing deposits. The cost of total funding is calculated as total interest expense divided by average total funding.

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Net interest income for the year ended December 31, 2023 was $94.1 million, compared to $87.8 million for the year ended December 31, 2022. The increase was primarily due to a $29.9 million increase in total interest income, partially offset by a $23.6 million increase in total interest expense. During the year ended December 31, 2023, total loan interest income increased $27.6 million, total debt securities income increased $1.8 million, and interest and dividend income from other financial institutions and investments increased $595 thousand. The increase in interest income was due to a number of factors: higher average loans from organic loan growth; a change in the interest-earning asset mix; and increases in yields on interest-earning assets resulting from increases in the target Fed fund rates. Average interest-earning assets increased $10.0 million, resulting from a $197.9 million increase in average total loans, and a $21.6 million increase in total average debt securities, partially offset by a $163.6 million decrease in average deposits in other financial institutions, and a $47.1 million decrease in average Fed funds sold/resale agreements.

During the year ended December 31, 2023, total interest expense increased by $23.6 million to $29.4 million, comprised primarily of a $22.3 million increase in interest expense on average interest-bearing deposits due to increases in target Fed fund rates, coupled with the increase in average total borrowings between periods.

Net interest margin for the year ended December 31, 2023 was 4.33%, compared with 4.06% for the year ended December 31, 2022. The increase was primarily related to a 136 basis point increase in the total interest-earning assets yield resulting from higher market interest rates and a change in our interest-earning asset mix, partially offset by a 117 basis point increase in the cost of funds. The yield on total earning assets during the year ended December 31, 2023 was 5.69%, compared with 4.33% for the year ended December 31, 2022. The yield on average total loans during the year ended December 31, 2023 was 5.94%, a 92 basis points increase from 5.02% for the year ended December 31, 2022.

Total cost of funds for the year ended December 31, 2023 was 1.46%, an increase of 117 basis points from 0.29% for the year ended December 31, 2022. The increase was primarily driven by a 185 basis point increase in the cost of interest-bearing deposits, coupled with an increase in average interest-bearing deposits, and a decrease in average noninterest-bearing deposits. Average noninterest-bearing demand deposits decreased $204.9 million to $801.9 million and represented 40.8% of total average deposits for the year ended December 31, 2023, compared with $1.01 billion and 50.1%, respectively, for the same 2022 period; average interest-bearing deposits increased $159.3 million to $1.16 billion during the year ended December 31, 2023. The decrease in noninterest-bearing deposits and increase in interest bearing deposits was primarily due to customers transferring their noninterest-bearing deposit balances into higher yielding interest-bearing deposit accounts and time deposit accounts. The total cost of deposits for the year ended December 31, 2023 was 1.37%, up 114 basis points from 0.23% for the same 2022 period. The increase in the total cost of deposits was primarily due to increases in the market interest rates coupled with peer bank competition for deposits.

Average total borrowings increased $24.3 million to $44.2 million for the year ended December 31, 2023 resulting primarily from a $25.5 million increase in average FHLB advances, partially offset by a $1.2 million decrease in average junior subordinated debentures from early extinguishment during the year ended December 31, 2022. The average cost of total borrowings was 5.70% for the year ended December 31, 2023, a 33 basis points decrease from 6.03% for the same 2022 period.

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Rate/Volume Analysis

The following table presents the changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. Information is provided on changes attributable to (i) changes in volume multiplied by the prior rate and (ii) changes in rate multiplied by the prior volume. Changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

[[GREPCENT_TABLE]]
[["","Year Ended December 31, 2023 vs. 2022"],["","Increase (Decrease) Due to"],["","Volume","","Rate","","Net"],["Interest-earning assets:","($ in thousands)"],["Total loans","$","10,317","","","$","17,268","","","$","27,585"],["Taxable debt securities","245","","","1,239","","","1,484"],["Tax-exempt debt securities","273","","","10","","","283"],["Deposits in other financial institutions","(1,983)","","","2,909","","","926"],["Fed fund sold/resale agreements","(1,479)","","","1,014","","","(465)"],["Restricted stock investments and other bank stock","81","","","53","","","134"],["Total interest-earning assets","7,454","","","22,493","","","29,947"],["Interest-bearing liabilities:"],["Interest-bearing NOW accounts","208","","","4,641","","","4,849"],["Money market and savings accounts","(91)","","","11,610","","","11,519"],["Time deposits","961","","","4,946","","","5,907"],["Total interest-bearing deposits","1,078","","","21,197","","","22,275"],["Borrowings:"],["FHLB advances","1,381","","","10","","","1,391"],["Subordinated debts","3","","","(4)","","","(1)"],["Junior subordinated debentures","(35)","","","(35)","","","(70)"],["Total borrowings","1,349","","","(29)","","","1,320"],["Total interest-bearing liabilities","2,427","","","21,168","","","23,595"],["Net interest income","$","5,027","","","$","1,325","","","$","6,352"]]
[[/GREPCENT_TABLE]]

Provision for Credit Losses

We recorded a provision for credit losses of $915 thousand under the CECL model during the year ended December 31, 2023, compared to $6.0 million using the incurred loss model for the prior year. The provision for credit losses for the year ended December 31, 2023 included a $816 thousand negative provision for unfunded loan commitments primarily due to lower unfunded loan commitments. Total unfunded loan commitments decreased $190.4 million to $410.8 million at December 31, 2023, from $601.1 million at December 31, 2022. The provision for credit losses for the loan portfolio in 2023 was $1.7 million. The 2023 loan loss provision was driven primarily by an increase in net charge-offs of $1.3 million, loan growth of $59.7 million and an increase in substandard loans of $15.7 million, and changes in the portfolio mix, partially offset by an improvement in the reasonable and supportable forecast, primarily related to the economic outlook from the Federal Reserve's actions to control inflation, and a decrease in special mention loans of $4.1 million.

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Noninterest Income

The following table sets forth the various components of our noninterest income for the periods indicated:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(dollars in thousands)","","2023","","2022"],["Service charges and fees on deposit accounts","","$","1,202","","","$","1,014"],["Interchange and ATM income","","744","","","782"],["Gain on sale of loans","","831","","","1,349"],["Income from bank-owned life insurance","","946","","","1,490"],["Servicing and related income on loans, net","","240","","","192"],["Loss on sale of debt securities","","(974)","","","(994)"],["Loss on sale and disposal of fixed assets","","\u2014","","","(768)"],["Other charges and fees","","390","","","610"],["Total noninterest income","","$","3,379","","","$","3,675"]]
[[/GREPCENT_TABLE]]

Total noninterest income during the year ended December 31, 2023 was $3.4 million, a decrease of $296 thousand compared to total noninterest income of $3.7 million in the prior year. The decrease was due primarily to lower gains on sale of loans, lower income from bank-owned life insurance, and lower other charges and fees, partially offset by higher deposit-related fees, higher servicing and related income on loans, and the previous year including a loss on sale and disposal of fixed assets.

Gain on sale of loans was $831 thousand during the year ended December 31, 2023, compared to $1.3 million for the same 2022 period. The $518 thousand decrease was primarily due to a decrease in the SBA 7(a) loan sales during the year ended December 31, 2023. During the year ended December 31, 2023, we sold nine SBA 7(a) loans with a net carrying value of $10.9 million, resulting in a gain of $874 thousand, at an average premium of 8.0% and one non-SBA loan with a net carrying value of $39 thousand, resulting in a gain of $11 thousand. These gains were partially offset by the $54 thousand loss related to a guaranty denial from the U.S. Small Business Administration for an SBA 7(a) loan. In the prior year, we sold 17 SBA 7(a) loans with a net carrying value of $20.0 million, resulting in a gain on sale of $1.3 million at an average premium of 6.47%, and one non-SBA loan with a net carrying value of $360 thousand, resulting in a gain of $56 thousand.

Income from bank-owned life insurance was $946 thousand during the year ended December 31, 2023, compared to $1.5 million for the same 2022 period. The $544 thousand decrease between periods primarily related to a $621 thousand death benefit income realized for the year ended December 31, 2022. There was no comparable income realized in 2023.

Deposit-related fees were $1.9 million during the year ended December 31, 2023, an increase of $150 thousand from $1.8 million for the same 2022 period. The increase in fees was due primarily to higher analysis charges for certain deposit accounts.

During the year ended December 31, 2022, we recorded a $768 thousand loss on sale of a building and related fixed assets that were acquired as part of the Bank of Santa Clarita acquisition in 2021; there was no comparable transaction in the current year.

Other charges and fees during the year ended December 31, 2023 were $390 thousand, a decrease of $220 thousand compared to $610 thousand for the same 2022 period. The decrease was due primarily to lower income from equity investments.

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Noninterest Expense

The following table sets forth the various components of our noninterest expense for the periods indicated:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31,"],["(dollars in thousands)","","2023","","2022"],["Salaries and employee benefits","","$","39,249","","","$","37,069"],["Occupancy and equipment","","6,231","","","6,210"],["Data processing and communications","","4,534","","","4,609"],["Legal, audit and professional","","3,211","","","2,597"],["Regulatory assessments","","1,508","","","1,550"],["Director and shareholder expenses","","849","","","946"],["Merger and related expenses","","\u2014","","","1,177"],["Core deposit intangible amortization","","389","","","438"],["Litigation settlements, net","","\u2014","","","5,525"],["Other expenses","","3,775","","","3,401"],["Total noninterest expense","","$","59,746","","","$","63,522"]]
[[/GREPCENT_TABLE]]

Total noninterest expense during the year ended December 31, 2023 was $59.7 million, a decrease of $3.8 million compared with total noninterest expense of $63.5 million for the same 2022 period. The decrease was primarily due to decreases in litigation settlements, net, merger and related expenses, and data processing and communications, partially offset by increases in salaries and employee benefits, legal, audit and professional, and other expenses.

Salaries and employee benefits were $39.2 million during the year ended December 31, 2023, compared to $37.1 million during the prior year. The $2.2 million increase in salaries and benefits was due primarily to increase in salary expense and increase in stock compensation expense recorded during the year ended December 31, 2023, coupled with a decrease in deferred loan origination costs resulting from slower loan growth during 2023, partially offset by a decrease in bonus and incentive expenses.

Legal, audit and professional fees were $3.2 million during the year ended December 31, 2023, compared to $2.6 million during the prior year. The $614 thousand increase was due primarily to an increase in legal expenses and consulting expenses primarily related to the completion of the Company's listing on the Nasdaq Capital Market in the first half of 2023, and other compliance projects and loan review projects in the second half of 2023.

There were no merger and related expenses during the year ended December 31, 2023, compared to $1.2 million for the same 2022 period. The $1.2 million decrease was due primarily to the prior year including $656 thousand related to the completion of the acquisition of Bank of Santa Clarita, and $460 thousand related to the completion of the core system conversion for the legacy bank.

During the year ended December 31, 2022, we had settlements of certain legal matters primarily related to a comprehensive settlement of all litigation with PacWest Bancorp and Pacific Western Bank and recognized aggregate net losses of $5.5 million. There was no similar activity during the year ended December 31, 2023.

Other expense was $3.8 million during the year ended December 31, 2023, compared to $3.4 million during the prior year. The $374 thousand increase was due primarily to an increase in loan related expense, an increase in customer service related expense, partially offset by the decrease in sundry losses related to affidavits of forgery. Other expense also included a $347 thousand loss on an early

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extinguishment of the junior subordinated debentures acquired from CalWest Bancorp in 2022, for which there was no corresponding transaction in 2023.

Our efficiency ratio for the years ended December 31, 2023 and 2022 was 61.3% and 69.5%, respectively.

Income Taxes

For the years ended December 31, 2023 and 2022, income tax expense was $10.9 million and $5.9 million resulting in an effective income tax rate of 29.7% and 26.7%. Differences in the statutory tax rate of 29.6% for the years ended December 31, 2023 and 2022 as compared to the effective tax rate are a result of the tax effect of stock-based compensation, BOLI income, tax-exempt interest income, and excess executive compensation. There was no tax effect of excess executive compensation for the year ended December 31, 2022.

For additional information, see Note 9 — Income Taxes of the Notes to Consolidated Financial Statements included in Item 8 of this annual report.

Financial Condition

Summary

Total assets at December 31, 2023 were $2.36 billion, an increase of $76.3 million from $2.28 billion at December 31, 2022. The increase in total assets was primarily related to a $17.1 million increase in debt securities and a $59.7 million increase in loans held for investment.

Total liabilities were $2.07 billion at December 31, 2023, an increase of $48.5 million from $2.02 billion at December 31, 2022. The increase in total liabilities was driven by a $35.1 million increase in borrowings and a $11.7 million increase in deposits. Shareholders’ equity was $288.2 million at December 31, 2023, an increase of $27.8 million from $260.4 million at December 31, 2022. The increase in shareholders’ equity was driven by net income of $25.9 million generated during the year, $4.5 million related to stock-based compensation activity, coupled with a $2.0 million decrease in net of tax unrealized losses on available-for-sale debt securities, partially offset by a $3.9 million net reduction related to the adoption of CECL.

Debt Securities

Our debt securities portfolio consists of both held-to-maturity and available-for-sale securities aggregating $183.7 million and $166.5 million at December 31, 2023 and 2022, respectively. Our held-to-maturity and available-for-sale debt securities represented 2.27% and 5.51%, respectively, of total assets at December 31, 2023, compared to 2.36% and 4.93%, respectively, at December 31, 2022.

During the fourth quarter of 2023, we repositioned our securities portfolio by selling $21.3 million of lower-yielding AFS securities at fair value, resulting in a net loss of $1.0 million, to enhance our future interest income and provide some protection if interest rates decrease. The portfolio is monitored on a continual basis with consideration given to interest rate trends and the structure of the yield curve and with constant assessment of economic projections and analysis.

During the years ended December 31, 2023 and 2022, there were no transfers between held-to-maturity and available-for-sale debt securities.

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At December 31, 2023, held-to-maturity debt securities with an amortized cost of $53.6 million were pledged to the Federal Reserve Bank as collateral for a $47.3 million secured line of credit. There were no debt securities pledged at December 31, 2022.

Held-to-Maturity Debt Securities

The amortized cost of held-to-maturity debt securities and their estimated fair values at December 31, 2023 and 2022 were as follows:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Amortized Cost","","Gross Unrealized Gains","","Gross Unrealized Losses","","Estimated Fair Value"],["December 31, 2023"],["Taxable municipals","","$","551","","","$","\u2014","","","$","(73)","","","$","478"],["Tax exempt bank-qualified municipals","","53,065","","","25","","","(3,136)","","","49,954"],["","","$","53,616","","","$","25","","","$","(3,209)","","","$","50,432"],["December 31, 2022"],["Taxable municipals","","$","550","","","$","\u2014","","","$","(105)","","","$","445"],["Tax exempt bank-qualified municipals","","53,396","","","\u2014","","","(5,935)","","","47,461"],["","","$","53,946","","","$","\u2014","","","$","(6,040)","","","$","47,906"]]
[[/GREPCENT_TABLE]]

At December 31, 2023, we had 61 held-to-maturity debt securities in a net unrealized loss position with an amortized cost basis of $53.6 million with pre-tax unrealized losses of $3.2 million, compared to $53.9 million with pre-tax unrealized losses of $6.0 million at December 31, 2022. The effective duration of this portfolio was 5.58 years and 6.35 years at December 31, 2023 and 2022, respectively. We have the intent and ability to hold the securities classified as held to maturity until they mature, at which time we will receive full value for the securities.

All held-to-maturity debt securities were municipal securities, and historically have had limited credit loss experience. At December 31, 2023, the total fair value of taxable municipal and tax exempt bank-qualified municipal securities were $478 thousand, and $50.0 million, respectively. At December 31, 2023, the total fair value of held-to-maturity debt securities rated AA and above was $47.0 million and rated AA- was $3.4 million. Accordingly, we applied a zero credit loss assumption for these securities and no allowance for credit loss was recorded as of December 31, 2023.

At December 31, 2022, held-to-maturity debt securities were evaluated for OTTI, taking into

consideration the extent and length of time the fair value has been less than cost, the financial condition of the issuer and whether we have the intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value, and concluded that no unrealized losses were deemed to be other-than-temporary.

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Available-for-Sale Debt Securities

The amortized cost of available-for-sale debt securities and their estimated fair values at December 31, 2023 and 2022, were as follows:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Amortized Cost","","Gross Unrealized Gains","","Gross Unrealized Losses","","Estimated Fair Value"],["December 31, 2023"],["U.S. government and agency and government sponsored enterprise securities:"],["Mortgage-backed securities","","$","77,031","","","$","631","","","$","(3,228)","","","$","74,434"],["SBA securities","","5,886","","","5","","","(109)","","","5,782"],["U.S. Treasury","","2,760","","","\u2014","","","(343)","","","2,417"],["U.S. Agency","","2,000","","","\u2014","","","(330)","","","1,670"],["Collateralized mortgage obligations","","46,330","","","173","","","(3,002)","","","43,501"],["Taxable municipal","","1,528","","","\u2014","","","(107)","","","1,421"],["Tax exempt bank-qualified municipals","","831","","","\u2014","","","(21)","","","810"],["","","$","136,366","","","$","809","","","$","(7,140)","","","$","130,035"],["December 31, 2022"],["U.S. government and agency and government sponsored enterprise securities:"],["Mortgage-backed securities","","$","27,029","","","$","\u2014","","","$","(3,734)","","","$","23,295"],["SBA securities","","7,988","","","16","","","(132)","","","7,872"],["U.S. Treasury","","6,652","","","\u2014","","","(700)","","","5,952"],["U.S. Agency","","7,025","","","\u2014","","","(842)","","","6,183"],["Collateralized mortgage obligations","","47,778","","","20","","","(3,375)","","","44,423"],["Taxable municipals","","4,403","","","36","","","(211)","","","4,228"],["Tax exempt bank-qualified municipals","","20,777","","","163","","","(313)","","","20,627"],["","","$","121,652","","","$","235","","","$","(9,307)","","","$","112,580"]]
[[/GREPCENT_TABLE]]

Available-for-sale debt securities were $130.0 million at December 31, 2023, an increase of $17.5 million, from $112.6 million at December 31, 2022. The increase was primarily due to purchases of $63.6 million, and a decrease in net unrealized losses of $2.7 million, partially offset by sales of $38.4 million, calls and maturities of $1.6 million, and principal paydowns and amortization of discounts and premiums aggregating to $8.9 million.

At December 31, 2023, we had 76 available-for-sale debt securities in a gross unrealized loss position with an amortized cost basis and fair value of $100.7 million and $93.5 million, respectively, with pre-tax unrealized losses of $7.1 million, compared to 88 available-for-sale debt securities with an amortized cost basis and fair value of $106.3 million and $97.0 million, respectively with pre-tax unrealized holding losses of $9.3 million at December 31, 2022. The net of tax unrealized loss on available-for-sale debt securities is reflected in accumulated other comprehensive loss. The effective duration of total available-for-sale debt securities was 5.13 years and 4.56 years at December 31, 2023 and December 31, 2022, respectively. We do not have the current intent to sell these available-for-sale debt securities with a fair value below amortized cost, and it is more likely than not that we will not be required to sell such securities prior to the recovery of their amortized cost basis. The issuers of these

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securities have not, to our knowledge, established any cause for default on these securities. As a result, we expect to recover the entire amortized cost basis of these securities.

When market interest rates decrease, bond prices tend to increase and, consequently, the fair value of our securities may also increase. Decreases in longer-term market interest rates in the fourth quarter of 2023 resulted in lower net unrealized losses in our debt securities. The decrease in net unrealized losses on our debt securities classified as available–for-sale could positively affect our total and tangible shareholders’ equity.

Management determined that the decrease in unrealized losses related to each available-for-sale debt securities at December 31, 2023 was primarily attributable to factors other than credit related, including changes in interest rates driven by the Federal Reserve’s policy to fight against inflation and general volatility in market conditions. Our available-for-sale debt securities consisted of U.S. Treasury, U.S. government and agency and government sponsored enterprise securities, and municipals, which historically have had limited credit loss experience. In addition, we reviewed the credit rating of the municipal securities. At December 31, 2023, the total fair value of taxable municipal and tax exempt bank-qualified municipal securities was $1.4 million, and $810 thousand, respectively. At December 31, 2023, available-for-sale debt securities rated AA and above totaled $1.4 million and rated A+ totaled $810 thousand. Accordingly, we applied a zero credit loss assumption for these securities and no ACL was recorded as of December 31, 2023.

At December 31, 2022, available-for-sale debt securities were evaluated for OTTI, taking into consideration the extent and length of time the fair value has been less than cost, the financial condition of the issuer and whether we have the intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value, and concluded that no unrealized losses were deemed to be other-than-temporary.

The amortized cost, estimated fair value and weighted average yield of held-to-maturity and available-for-sale debt securities as of December 31, 2023 are presented below by contractual maturities. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

[[GREPCENT_TABLE]]
[["","","Held-to-Maturity","","Available-for-Sale"],["(dollars in thousands)","","Amortized Cost","","Estimated Fair Value","","Weighted Average Yield (1)","","Amortized Cost","","Estimated Fair Value","","Weighted Average Yield (1)"],["Due in one year or less","","$","\u2014","","","$","\u2014","","","\u2014","%","","$","520","","","$","513","","","3.00","%"],["Due after one year through five years","","\u2014","","","\u2014","","","\u2014","%","","5,608","","","5,122","","","2.09","%"],["Due after five years through ten years","","12,915","","","12,297","","","2.25","%","","20,219","","","18,066","","","2.90","%"],["Due after ten years","","40,701","","","38,135","","","2.28","%","","110,019","","","106,334","","","3.64","%"],["","","$","53,616","","","$","50,432","","","2.27","%","","$","136,366","","","$","130,035","","","3.46","%"]]
[[/GREPCENT_TABLE]]

(1)Weighted average yields are computed based on the amortized cost of the individual underlying securities.

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The following table presents the amortized cost and weighted average yields using amortized cost of held-to-maturity debt securities as of December 31, 2023, based on the contractual maturity dates:

[[GREPCENT_TABLE]]
[["","One Year or Less","","More than One Year through Five Years","","More than Five Years through Ten Years","","More than Ten Years","","Total"],["","Amortized Cost","","Weighted Average Yield (1)","","Amortized Cost","","Weighted Average Yield (1)","","Amortized Cost","","Weighted Average Yield (1)","","Amortized Cost","","Weighted Average Yield (1)","","Amortized Cost","","Weighted Average Yield (1)"],["Held-to-maturity:"],["Taxable municipals","$","\u2014","","","\u2014","%","","$","\u2014","","","\u2014","%","","$","551","","","2.29","%","","$","\u2014","","","\u2014","%","","$","551","","","2.29","%"],["Tax exempt bank-qualified municipals","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","12,364","","","2.25","%","","40,701","","","2.28","%","","53,065","","","2.27","%"],["Total","$","\u2014","","","\u2014","%","","$","\u2014","","","\u2014","%","","$","12,915","","","2.25","%","","$","40,701","","","2.28","%","","$","53,616","","","2.27","%"]]
[[/GREPCENT_TABLE]]

(1)Weighted average yields are computed based on the amortized cost of the individual underlying securities.

The following table presents the fair value and weighted average yields using amortized cost of available-for-sale debt securities as of December 31, 2023, based on the contractual maturity dates:

[[GREPCENT_TABLE]]
[["","One Year or Less","","More than One Year through Five Years","","More than Five Years through Ten Years","","More than Ten Years","","Total"],["","Fair Value","","Weighted Average Yield (1)","","Fair Value","","Weighted Average Yield (1)","","Fair Value","","Weighted Average Yield (1)","","Fair Value","","Weighted Average Yield (1)","","Fair Value","","Weighted Average Yield (1)"],["Available-for-sale:"],["U.S. government and agency and government sponsored enterprise securities:"],["Mortgage-backed securities","$","\u2014","","","\u2014","%","","$","888","","","1.52","%","","$","9,639","","","1.82","%","","$","63,907","","","3.67","%","","$","74,434","","","3.37","%"],["SBA securities","\u2014","","","\u2014","%","","507","","","5.99","%","","5,063","","","5.30","%","","212","","","5.08","%","","5,782","","","5.36","%"],["U.S. Treasury","\u2014","","","\u2014","%","","2,417","","","0.94","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","2,417","","","0.94","%"],["U.S. Agency","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","1,670","","","2.05","%","","\u2014","","","\u2014","%","","1,670","","","2.05","%"],["Collateralized mortgage obligations","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","1,286","","","4.49","%","","42,215","","","3.59","%","","43,501","","","3.61","%"],["Taxable municipals","513","","","3.00","%","","500","","","5.24","%","","408","","","1.73","%","","\u2014","","","\u2014","%","","1,421","","","3.31","%"],["Tax exempt bank-qualified municipals","\u2014","","","\u2014","%","","810","","","2.30","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","810","","","2.30","%"],["Total","$","513","","","3.00","%","","$","5,122","","","2.09","%","","$","18,066","","","2.90","%","","$","106,334","","","3.64","%","","$","130,035","","","3.46","%"]]
[[/GREPCENT_TABLE]]

(1)Weighted average yields are computed based on the amortized cost of the individual underlying securities.

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Loans Held for Sale

Loans held for sale consisted of SBA 7(a) loans originated and held for sale in the secondary market. At December 31, 2023, loans held for sale totaled $7.3 million, compared to $9.0 million at December 31, 2022.

During the year ended December 31, 2023, we originated $9.2 million of SBA 7(a) loans. During the year ended December 31, 2023, loan sales related to nine SBA loans with a net carrying value of $10.9 million, resulted in a gain of $874 thousand, at an average premium of 8.0% and one non-SBA loan with a net carrying value of $39 thousand, resulting in a gain of $11 thousand. This compares to 17 SBA loans with a net carrying value of $20.0 million, resulting in a gain of $1.3 million, at an average premium of 6.5% and one non-SBA loan with a net carrying value of $360 thousand, resulting in a gain of $56 thousand during the year ended December 31, 2022.

Loans Held for Investment

The composition of our loan portfolio at December 31, was as follows:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","2023","","2022"],["Construction and land development","","$","243,521","","","$","239,067"],["Real estate - other:"],["1-4 family residential","","143,903","","","144,322"],["Multifamily residential","","221,247","","","218,606"],["Commercial real estate and other","","1,024,243","","","958,676"],["Commercial and industrial(1)","","320,142","","","331,644"],["Consumer","","4,386","","","5,458"],["Loans(2)","","1,957,442","","","1,897,773"],["Allowance for loan losses","","(22,569)","","","(17,099)"],["Net loans","","$","1,934,873","","","$","1,880,674"]]
[[/GREPCENT_TABLE]]

(1)Includes PPP loans with total outstanding principal of $1.3 million and $3.6 million and net unearned fees of $31 thousand and $76 thousand at December 31, 2023 and 2022.

(2)Loans held for investment includes net unearned fees of $2.3 million and $3.3 million and net unearned discount of $1.4 million and $1.8 million at December 31, 2023 and 2022.

Total loans held for investment were $1.96 billion, or 82.9% of total assets, at December 31, 2023, an increase of $59.7 million from $1.90 billion, or 83.1% of total assets, at December 31, 2022. The change in loans during the year ended December 31, 2023, was due primarily to originations of $211.2 million, partially offset by payoffs and net paydowns of $151.5 million.

Loans secured by real estate, defined as construction and land development loans and real estate - other loans, increased by $72.2 million to $1.63 billion at December 31, 2023. The increase in loans secured by real estate was primarily driven by a $4.5 million increase in construction and land development loans, a $2.6 million increase in multifamily residential loans, and a $65.6 million increase in CRE and other loans.

Commercial and industrial loans were $320.1 million at December 31, 2023, a decrease of $11.5 million from $331.6 million at December 31, 2022. The decrease in C&I loans was primarily attributable to net paydowns and payoffs totaling $98.0 million, partially offset by originations of $86.5 million.

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Loan Maturities

The following table sets forth the amounts of gross loans, by maturity, at December 31, 2023:

[[GREPCENT_TABLE]]
[["","","December 31, 2023"],["(dollars in thousands)","","Due in One Year or Less","","Due after One Year through Five Years","","Due after Five Years through Fifteen Years","","Due after Fifteen Years","","Total"],["Construction and land development","","$","157,709","","","$","82,561","","","$","3,251","","","$","\u2014","","","$","243,521"],["Real estate:"],["1-4 family residential","","32,770","","","38,330","","","49,556","","","23,247","","","143,903"],["Multifamily residential","","37,575","","","71,204","","","91,919","","","20,549","","","221,247"],["Commercial real estate and other","","82,794","","","248,041","","","614,081","","","79,327","","","1,024,243"],["Commercial and industrial","","153,210","","","116,373","","","50,555","","","4","","","320,142"],["Consumer","","4,240","","","141","","","3","","","2","","","4,386"],["","","$","468,298","","","$","556,650","","","$","809,365","","","$","123,129","","","$","1,957,442"]]
[[/GREPCENT_TABLE]]

The following table sets forth the amounts of gross loans, due after one year, presented by fixed or floating interest rates at December 31, 2023:

[[GREPCENT_TABLE]]
[["","","December 31, 2023"],["(dollars in thousands)","","Fixed Rate","","Floating Rate","","Total"],["Construction and land development","","$","14,914","","","$","70,898","","","$","85,812"],["Real estate:"],["1-4 family residential","","34,441","","","76,692","","","111,133"],["Multifamily residential","","89,106","","","94,566","","","183,672"],["Commercial real estate and other","","333,152","","","608,297","","","941,449"],["Commercial and industrial","","68,818","","","98,114","","","166,932"],["Consumer","","146","","","\u2014","","","146"],["","","$","540,577","","","$","948,567","","","$","1,489,144"]]
[[/GREPCENT_TABLE]]

Loan Concentrations

Commercial real estate loans are generally viewed as having more risk of default than residential real estate loans. They are also typically larger than most residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt. Because our loan portfolio, including loans held for sale, contains a number of CRE loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in our levels of nonperforming assets. Approximately 52.1% of our total loan portfolio, including loans held for sale, was comprised of commercial real estate loans as of December 31, 2023 as presented below:

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[[GREPCENT_TABLE]]
[["(dollars in thousands)","","December 31, 2023","","Percentage of CRE Portfolio","","Average Loan Size","","Weighted Average LTV"],["Commercial real estate loans:"],["Industrial","","$","295,900","","","28.9","%","","$","1,672","","","52","%"],["Office","","214,400","","","20.9","%","","1,625","","","51","%"],["Retail","","125,900","","","12.3","%","","1,272","","","47","%"],["Special purpose","","124,900","","","12.2","%","","2,357","","","39","%"],["Self storage","","51,100","","","5.0","%","","8,513","","","45","%"],["Restaurant","","35,700","","","3.5","%","","1,489","","","44","%"],["Other","","175,800","","","17.2","%","","3,742","","","48","%"],["Total","","$","1,023,700","","","100.0","%","","$","1,903","","","48","%"]]
[[/GREPCENT_TABLE]]

The following table presents the percentages of our commercial real estate loans broken out by occupancy as of December 31, 2023:

[[GREPCENT_TABLE]]
[["","","December 31, 2023"],["(dollars in thousands)","","Owner Occupied","","Non-owner Occupied"],["Commercial real estate loans:","","Balance","% of Total","","Balance","% of Total"],["Industrial","","$","182,800","","48.1","%","","$","113,100","","17.6","%"],["Office","","75,600","","19.9","%","","138,800","","21.6","%"],["Retail","","23,200","","6.1","%","","102,700","","16.0","%"],["Special purpose","","62,300","","16.4","%","","62,600","","9.7","%"],["Self storage","","\u2014","","\u2014","%","","51,100","","7.9","%"],["Restaurant","","9,600","","2.5","%","","26,100","","4.1","%"],["Other","","26,700","","7.0","%","","149,100","","23.1","%"],["Total","","$","380,200","","100.0","%","","$","643,500","","100.0","%"]]
[[/GREPCENT_TABLE]]

With the increases in remote work over the last few years, rising interest rates and increasing vacancy rates nationwide, commercial real estate loans collateralized by office properties have unique credit risks. We attempt to reduce our credit risk within this portfolio by emphasizing loan-to-value ratios and debt service ratios. The following table presents a summary of the balances and weighted average loan-to-values of office loans within our commercial real estate loan portfolio as of December 31, 2023:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","December 31, 2023","","Weighted Average LTV"],["Office loans:"],["Up to $500","","$","12,600","","","39","%"],["More than $500 through $2,000","","58,200","","","49","%"],["More than $2,000 through $5,000","","42,800","","","50","%"],["More than $5,000 through $10,000","","42,300","","","56","%"],["More than $10,000 through $20,000","","33,600","","","49","%"],["Greater than $20,000","","24,900","","","55","%"],["Total","","$","214,400","","","51","%"]]
[[/GREPCENT_TABLE]]

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Delinquent Loans

A summary of past due loans, loans still accruing and nonaccrual loans as of December 31, 2023 and 2022 follows:

[[GREPCENT_TABLE]]
[["","","Still Accruing"],["(dollars in thousands)","","30-59 Days Past Due","","60-89 Days Past Due","","Over 90 Days Past Due","","Total Past Due","","Nonaccrual"],["December 31, 2023"],["Construction and land development","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Real estate - other:"],["1-4 family residential","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Multifamily residential","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","13,004"],["Commercial real estate and other","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Commercial and industrial","","19","","","\u2014","","","\u2014","","","19","","","\u2014"],["Consumer","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["","","$","19","","","$","\u2014","","","$","\u2014","","","$","19","","","$","13,004"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Still Accruing"],["(dollars in thousands)","","30-59 Days Past Due","","60-89 Days Past Due","","Over 90 Days Past Due","","Total Past Due","","Nonaccrual"],["December 31, 2022"],["Construction and land development","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Real estate - other:"],["1-4 family residential","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","39"],["Multifamily residential","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Commercial real estate and other","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","2"],["Commercial and industrial","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Consumer","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","41"]]
[[/GREPCENT_TABLE]]

Total past due loans still accruing increased during the year ended December 31, 2023 to $19 thousand from a Paycheck Protection Program loan. Total nonaccrual loans increased during the year ended December 31, 2023 to $13.0 million primarily due to one multifamily loan that was downgraded and placed on non-accrual status during the third quarter of 2023, partially offset by a $39 thousand payoff from a 1-4 family residential loan.

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The following table presents the risk categories for total loans by class of loans as of December 31, 2023 and December 31, 2022:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Pass","","Special Mention","","Substandard","","","","Total"],["December 31, 2023"],["Construction and land development","","$","243,429","","","$","\u2014","","","$","92","","","","","$","243,521"],["Real estate - other:"],["1-4 family residential","","143,903","","","\u2014","","","\u2014","","","","","143,903"],["Multifamily residential","","208,243","","","\u2014","","","13,004","","","","","221,247"],["Commercial real estate and other","","1,020,076","","","2,996","","","1,171","","","","","1,024,243"],["Commercial and industrial","","314,907","","","\u2014","","","5,235","","","","","320,142"],["Consumer","","4,386","","","\u2014","","","\u2014","","","","","4,386"],["","","$","1,934,944","","","$","2,996","","","$","19,502","","","","","$","1,957,442"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Pass","","Special Mention","","Substandard","","","","Total"],["December 31, 2022"],["Construction and land development","","$","238,965","","","$","\u2014","","","$","102","","","","","$","239,067"],["Real estate - other:"],["1-4 family residential","","143,284","","","999","","","39","","","","","144,322"],["Multifamily residential","","218,606","","","\u2014","","","\u2014","","","","","218,606"],["Commercial real estate and other","","956,649","","","\u2014","","","2,027","","","","","958,676"],["Commercial and industrial","","323,999","","","6,057","","","1,588","","","","","331,644"],["Consumer","","5,458","","","\u2014","","","\u2014","","","","","5,458"],["","","$","1,886,961","","","$","7,056","","","$","3,756","","","","","$","1,897,773"]]
[[/GREPCENT_TABLE]]

Special mention loans decreased by $4.1 million during the year ended December 31, 2023 due mostly to upgrades of two loan relationships that totaled $4.5 million, of which $3.5 million were commercial and industrial loans and $999 thousand were 1-4 family residential loans, payoffs totaled $1.8 million, and downgrades of two loan relationships to substandard accruing loans totaling $754 thousand in commercial and industrial loans, partially offset by downgrades of one loan relationship from pass loans to special mention loans totaling $3.0 million in commercial real estate loans and commercial and industrial loans. At December 31, 2023, substandard loans totaled $19.5 million, of which $6.5 million were accruing loans and $13.0 million was a multifamily loan on nonaccrual. The $15.7 million increase in substandard loans during the year ended December 31, 2023 was due mostly to downgrades of six loan relationships that totaled $17.0 million, partially offset by an upgrade of one loan relationship totaling $818 thousand, combined with paydowns and payoffs that totaled $471 thousand.

There were no loans classified as doubtful or loss loans at December 31, 2023 and December 31, 2022.

Loan Modifications

We do not have any modifications of loans that were made to borrowers experiencing financial difficulty as of December 31, 2023. There were no TDRs at December 31, 2022.

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Non-performing Assets

Nonperforming assets consist of loans on which we have ceased accruing interest (nonaccrual loans), OREO, and other repossessed assets owned. Nonaccrual loans consist of all loans 90 days or more past due and loans where, in the opinion of management, there is reasonable doubt as to the collection of principal and interest.

The following table presents a summary of nonperforming assets, along with corresponding nonperforming asset ratios, as of December 31, 2023 and 2022:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","2023","","2022"],["Nonaccrual loans:"],["Construction and land development","","$","\u2014","","","$","\u2014"],["Real estate - other:"],["1-4 family residential","","\u2014","","","39"],["Multifamily residential","","13,004","","","\u2014"],["Commercial real estate and other","","\u2014","","","2"],["Commercial and industrial","","\u2014","","","\u2014"],["Consumer","","\u2014","","","\u2014"],["Total nonaccrual loans","","13,004","","","41"],["Loans past due over 90 days or more and still on accrual","","\u2014","","","\u2014"],["Total nonperforming loans","","13,004","","","41"],["Other real estate owned","","\u2014","","","\u2014"],["Total nonperforming assets","","$","13,004","","","$","41"],["Allowance for loan losses to total loans","","1.15","%","","0.90","%"],["Nonaccrual loans to total loans","","0.66","%","","0.00","%"],["Allowance for loan losses to nonaccrual loans","","1.74x","","417.05x"],["Nonperforming assets to total assets","","0.55","%","","0.00","%"]]
[[/GREPCENT_TABLE]]

At December 31, 2023, nonaccrual and nonperforming loans were $13.0 million, compared to $41 thousand at December 31, 2022. The increase from December 31, 2022 was due primarily to a multifamily loan with a net carrying value of $13.0 million that was placed on non-accrual status and downgraded to substandard, partially offset by a payoff of a 1-4 family residential loan with a net carrying value of $39 thousand. The multifamily loan added to non-accrual loans during the third quarter of 2023 is collateralized by three investment multifamily properties located in the city of Santa Monica, California. A court appointed receiver is in place and we are aggressively pursuing the resolution of this matter. During the fourth quarter of 2023, we received updated appraisals for the three multifamily properties; the combined "As-Is" collateral value, after accounting for estimated selling costs, was lower than the subject loan's net carrying value resulting in a partial charge-off of $1.3 million.

Allowance for Credit Losses

On January 1, 2023, the Company adopted ASU 2016-13 using the modified retrospective method through a cumulative effect adjustment to retained earnings. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards.

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The ACL consists of: (i) a specific allowance established for CECL on loans individually evaluated, (ii) a quantitative allowance for current expected loan losses based on the portfolio and expected economic conditions over a reasonable and supportable forecast period that reverts back to long-term trends to cover the expected life of the loan, (iii) a qualitative allowance including management judgment to capture factors and trends that are not adequately reflected in the quantitative allowance, and (iv) the ACL for off-balance sheet credit exposure for unfunded loan commitments.

The following table presents a summary of the changes in the ACL for the periods indicated:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2023","","Year Ended December 31, 2022"],["(dollars in thousands)","","Allowance for Loan Losses","","Reserve for Unfunded Loan Commitments","","Total Allowance for Credit Losses","","Allowance for Loan Losses","","Reserve for Unfunded Loan Commitments","","Total Allowance for Credit Losses"],["Balance, beginning of period","","$","17,099","","","$","1,310","","","$","18,409","","","$","11,657","","","$","804","","","$","12,461"],["Adoption of ASU No. 2016-13 (1)","","5,027","","","439","","","5,466","","","\u2014","","","\u2014","","","\u2014"],["Provision for (reversal of) credit losses","","1,731","","","(816)","","","915","","","5,450","","","506","","","5,956"],["Charge-offs","","(1,303)","","","\u2014","","","(1,303)","","","(21)","","","\u2014","","","(21)"],["Recoveries","","15","","","\u2014","","","15","","","13","","","\u2014","","","13"],["Net charge-offs","","(1,288)","","","\u2014","","","(1,288)","","","(8)","","","\u2014","","","(8)"],["Balance, end of period","","$","22,569","","","$","933","","","$","23,502","","","$","17,099","","","$","1,310","","","$","18,409"]]
[[/GREPCENT_TABLE]]

(1)Represents the impact of adopting ASU 2016-13, Financial Instruments - Credit Losses on January 1, 2023. As a result of adopting ASU 2016-13, our methodology to compute our ACL is based on a CECL methodology, rather than the previously applied incurred loss methodology.

The following table presents a summary of the ALL, by loan class, along with the corresponding percentage of each loan class to total loans as of December 31:

[[GREPCENT_TABLE]]
[["","","December 31, 2023","","December 31, 2022"],["(dollars in thousands)","","Amount","","Percent of loans in each category to total loans","","Amount","","Percent of loans in each category to total loans"],["Construction and land development","","$","2,032","","","12.4","%","","$","2,301","","","12.6","%"],["Real estate:"],["1-4 family residential","","1,195","","","7.4","%","","972","","","7.6","%"],["Multifamily residential","","1,449","","","11.3","%","","1,331","","","11.5","%"],["Commercial real estate and other","","13,636","","","52.3","%","","9,388","","","50.5","%"],["Commercial and industrial","","4,242","","","16.4","%","","3,079","","","17.5","%"],["Consumer","","15","","","0.2","%","","28","","","0.3","%"],["","","$","22,569","","","100.0","%","","$","17,099","","","100.0","%"]]
[[/GREPCENT_TABLE]]

Accrued interest receivable on loans receivable, net totaled $6.4 million and $5.7 million at December 31, 2023 and December 31, 2022, respectively, and is included within accrued interest receivable and other assets in the accompanying consolidated balance sheets. Accrued interest receivable is excluded from the ACL.

The ALL was $22.6 million at December 31, 2023, compared to $17.1 million at December 31, 2022. The $5.5 million change in the ALL during the year ended December 31, 2023 was due primarily to the $5.0 million impact of adopting CECL, combined with a $1.7 million provision for credit losses, and partially offset by $1.3 million in net charge-offs. The provision for loan losses was driven primarily by

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an increase in net charge-offs of $1.3 million, loan growth of $59.7 million and an increase in substandard loans of $15.7 million, and changes in the portfolio mix, partially offset by an improvement in the reasonable and supportable forecast, primarily related to the economic outlook from the Federal Reserve's actions to control inflation, and a decrease in special mention loans of $4.1 million. We also adjusted the qualitative reserve to consider the potential losses resulting from future recessionary pressures and the impact of the banking turmoil that were not captured in quantitative analysis. Management continues to monitor macroeconomic variables related to increasing interest rates, inflation and the concerns of an economic downturn, and believes it is appropriately provisioned for the current environment.

At December 31, 2023 and 2022, our ratio of ALL to total loans was 1.15% and 0.90%, respectively. The increase in our ratio of ALL to total loans was impacted by the adoption of the CECL standard on January 1, 2023, which increased our December 31, 2022 ratio from 0.90% to 1.17%.

Beginning in the third quarter of 2023, we updated certain key assumptions in our ACL model which included increasing the asset size range of our peer group to $1 billion to $4 billion, updating macroeconomic variables and regression model that is used to forecast the quarterly PD by our third-party model provider, switching third-party vendor’s benchmark prepayment and curtailment rate to our own historical prepayment and curtailment experience covering the period from December 2020 through August 2023, reducing the recovery lag from 24 months to 18 months, and reducing our probability-weighted forecast from a three-scenario forecast to a two-scenario forecast, representing a base-case scenario and one downside scenario, to estimate the ACL. At September 30, 2023, the aggregate impact to the ACL from the aforementioned assumptions that are periodically evaluated by management was considered immaterial.

We utilized economic forecasts released by Moody’s Analytics during the second week of December 2023. The outlook of these forecasts is based on the current economic data, which included the impact of the financial system turmoil and related governmental and other reactions to the rising interest rate environment, ongoing inflationary pressures throughout the U.S. economy, general uncertainty concerning future economic conditions, and the potential for recessionary conditions.

The underlying assumptions in the Moody’s economic forecasts supporting the baseline forecast remained consistent in the expectation that the Federal Reserve is done raising rates and will continue to reduce the Federal Reserve’s balance sheet through quantitative tightening at its current pace of $100 billion per month, ultimately reducing it from $8 trillion to $5 trillion. This resulted in a modest change in Moody’s expectation that the Federal Reserve will postpone its first rate drop from the first quarter of 2024 to the fourth quarter of 2024, and that a Fed funds rate of 5.25% combined with continued reductions in the Federal Reserve’s balance sheet will be sufficient to slow the economy and bring inflation back to the Federal Reserve’s target rate of 2% without tipping the economy into recession. The outlook for Gross Domestic Product (“GDP”) growth was improved to 2.1% in 2023 and 1.4% in 2024. This is consistent with the Federal Reserve’s outlook for economic growth of 2.1% for 2023, and also consistent with the Conference Board’s forecast for GDP growth of 2.2% in 2023. Management assigned a 70% probability to this scenario. The downside scenario predicts slower downside growth, with a still-elevated Fed funds rate and reduced credit availability causing the economy to fall into a mild recession in the first quarter of 2024. The decline is predicted to last for three quarters and the peak-to-trough decline in real GDP is predicted to be 1%. The weakening in the economy is predicted to cause the unemployment rate to rise in the first quarter of 2024, and reach a peak of 6.5% in the fourth quarter of 2024. Management assigned a 30% probability to this scenario. We also reviewed assumptions underlying the stagflation scenario, which assumed that, in reaction to a resurgence in inflation, the Federal Reserve would raise the Fed funds rate another 300 basis points, tipping the economy into a more extreme recession leading to a 5.4% unemployment rate in the first quarter of 2024. Ultimately, in this scenario, the Federal Reserve is predicted to respond with more aggressive rate hikes in 2024,

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precipitating a deep recession beginning in the fourth quarter of 2024. We viewed the risks to these forecasts to include a prolonged U.S. government shutdown, an unanticipated resurgence in inflation, a significant decline in consumer and business confidence, or additional geopolitical turmoil that could impact future economic activity. Given the current economic backdrop of a slowing economy driven by lower consumer, business and government spending, the end of all pandemic related stimulus, a softening labor market and an upcoming presidential election year, management concluded the assumptions underlying the stagflation scenario are more extreme, and highly unlikely to happen. This resulted in the removal of the stagflation scenario from the probability-weighted scenarios to estimate the ACL at December 31, 2023.

The ACL process involves subjective and complex judgments and is reflective of significant uncertainties that could potentially result in materially different results under different assumptions and conditions. Management reviews the level of the ACL at least quarterly and performs a sensitivity analysis on the significant assumptions utilized in estimating the ACL for collectively evaluated loans. By applying a 100% probability weighting to the downside scenario and the stagflation scenario rather than using the probability-weighted two scenario approach would result in an increase in ACL by approximately $3.4 million and $9.0 million, respectively, or an additional 17 basis points and 46 basis points, respectively, to the ALL to total loans held for investment ratio. This sensitivity analysis and related impact on the ACL is a hypothetical analysis and is not intended to represent management’s judgments or assumptions of qualitative loss factors that were utilized at December 31, 2023.

The following table presents net charge-offs, average loans and net charge-offs as a percentage of average loans for the periods indicated:

[[GREPCENT_TABLE]]
[["","","Year Ended December 31, 2023","","Year Ended December 31, 2022"],["(dollars in thousands)","","Net Charge-off","","Average Loans","","NetCharge-offRatio","","Net Charge-off","","Average Loans","","NetCharge-offRatio"],["Construction and land development","","$","\u2014","","","$","233,970","","","\u2014","%","","$","\u2014","","","$","147,423","","","\u2014","%"],["Real estate:"],["1-4 family residential","","(12)","","","140,833","","","(0.01)","%","","\u2014","","","134,844","","","\u2014","%"],["Multifamily residential","","(1,267)","","","231,403","","","(0.55)","%","","\u2014","","","187,145","","","\u2014","%"],["Commercial real estate and other","","\u2014","","","993,177","","","\u2014","%","","\u2014","","","920,868","","","\u2014","%"],["Commercial and industrial","","(9)","","","316,298","","","0.00","%","","(8)","","","326,424","","","\u2014","%"],["Consumer","","\u2014","","","2,762","","","\u2014","%","","\u2014","","","3,856","","","\u2014","%"],["","","$","(1,288)","","","$","1,918,443","","","(0.07)","%","","$","(8)","","","$","1,720,560","","","0.00","%"]]
[[/GREPCENT_TABLE]]

Net charge-offs increased to $1.3 million, or 0.07% of average loans for the year ended December 31, 2023 from $8 thousand, or 0.00% of average loans for the year ended December 31, 2022. The increase was primarily due to a $1.3 million charge-off for a nonaccrual multifamily loan, which was the result of new appraisals of the collateral backing the loan.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

We also maintain a separate allowance for off-balance sheet commitments, which is included in accrued interest payable and other liabilities in our consolidated balance sheets. Management evaluates the loss exposure for off-balance sheet commitments to extend credit following the same principles used for the ACL, with consideration for experienced utilization rates on client credit lines and the inherently lower risk of unfunded loan commitments relative to disbursed commitments. The allowance for off-balance sheet commitments totaled $933 thousand and $1.3 million at December 31, 2023 and 2022,

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respectively. The change in the allowance for off-balance sheet commitments between periods was the result of a $439 thousand increase related to the adoption of the CECL standard, offset by a $816 thousand reversal of provision for credit losses on unfunded commitments from lower unfunded loan commitment balances at December 31, 2023. Total unfunded loan commitments decreased $190.4 million to $410.8 million at December 31, 2023, from $601.1 million at December 31, 2022.

Servicing Asset and Loan Servicing Portfolio

We sell loans in the secondary market and, for certain loans, retain the servicing responsibility. The loans serviced for others are accounted for as sales and are therefore not included in the accompanying consolidated balance sheets. We receive servicing fees ranging from 0.25% to 1.00% for the services provided over the life of the loan; the servicing asset is initially recognized at fair value based on the present value of the estimated future net servicing income, incorporating assumptions that market participants would use in their estimates of fair value. The risks inherent in the SBA servicing asset relates primarily to changes in prepayments that result from shifts in interest rates and a reduction in the estimated future cash flows. The servicing asset activity includes additions from loan sales with servicing retained and acquired servicing rights and reductions from amortization as the serviced loans are repaid and servicing fees are earned. Loans serviced for others totaled $58.8 million and $59.4 million at December 31, 2023 and 2022, respectively. This includes SBA loans serviced for others of $35.4 million and $30.3 million at December 31, 2023 and 2022, respectively, for which there was a related servicing asset of $546 thousand and $514 thousand, respectively. The fair value of the servicing asset approximated its carrying value at December 31, 2023 and 2022. Consideration for each SBA loan sale includes the cash received and the fair value of the related servicing asset. The significant assumptions used in the valuation of the SBA servicing asset at December 31, 2023 included a weighted average discount rate of 16.1% and a weighted average prepayment speed assumption of 19.0%.

Goodwill and Core Deposit Intangibles

Goodwill totaled $37.8 million at December 31, 2023 and 2022.

Core deposit intangibles totaled $1.2 million and $1.6 million at December 31, 2023 and 2022, respectively. The $389 thousand decrease in core deposit intangibles between periods was the result of amortization during the period. At December 31, 2023, core deposit intangibles had a weighted average remaining amortization period of 6.1 years. We performed the annual impairment analysis for the core deposit intangibles during the 2023. The results indicated there was an impairment in the savings account core deposit intangible acquired from Bank of Santa Clarita, which resulted in the acceleration of the remaining amortization of $38 thousand.

Refer to Note 6 - Goodwill and Other Intangible Assets of the Notes to Consolidated Financial Statements included in Item 8 of this annual report for more information regarding business combinations and related activity.

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Deposits

The following table presents the composition of deposits, and related percentage of total deposits, as of December 31, 2023:

[[GREPCENT_TABLE]]
[["","","December 31, 2023","","December 31, 2022"],["(dollars in thousands)","","Amount","","Percentage of Total Deposits","","SpotRate(1)","","Amount","","Percentage of Total Deposits","","SpotRate(1)"],["Noninterest-bearing demand","","$","675,098","","","34.7","%","","\u2014","%","","$","923,899","","","47.8","%","","\u2014","%"],["Interest-bearing NOW accounts (2)","","381,943","","","19.7","%","","2.1","%","","209,625","","","10.9","%","","0.3","%"],["Money market and savings accounts (3)","","636,685","","","32.8","%","","2.9","%","","668,602","","","34.6","%","","1.2","%"],["Time deposits","","142,005","","","7.3","%","","4.5","%","","109,032","","","5.6","%","","2.1","%"],["Broker time deposits","","107,825","","","5.5","%","","4.6","%","","20,747","","","1.1","%","","1.1","%"],["Total deposits","","$","1,943,556","","","100.0","%","","1.9","%","","$","1,931,905","","","100.0","%","","0.6","%"]]
[[/GREPCENT_TABLE]]

(1) Weighted average interest rates at December 31, 2023 and 2022.

(2) Included ICS products of $265.8 million and $51.7 million at December 31, 2023 and 2022, respectively.

(3) Included ICS products of $8.3 million and $13.8 million at December 31, 2023 and 2022, respectively.

We offer our depositors access to the Insured Cash Sweep (“ICS Product”), which allows us to divide customers deposits that exceed the FDIC insurance limits into smaller amounts, below the FDIC insurance limits, and place those deposits in other participating FDIC insured institutions with the convenience of managing all deposit accounts through our Bank. Our total deposits in the ICS Product increased to $274.1 million, or 14.1% of total deposits at December 31, 2023, compared to $65.5 million, or 3.4% of total deposits at December 31, 2022.

Total deposits were $1.94 billion at December 31, 2023, an increase of $11.7 million from $1.93 billion at December 31, 2022. The increase in total deposits was primarily driven by a $208.6 million increase in ICS deposits, a $33.0 million increase in time deposits, and a $87.1 million increase in brokered time deposits, partially offset by a $248.8 million decrease in noninterest-bearing demand deposits, a $41.7 million decrease in interest-bearing NOW accounts, excluding ICS, and a $26.5 million decrease in money market and savings accounts, excluding ICS.

At December 31, 2023, noninterest-bearing demand deposits totaled $675.1 million and represented 34.7% of total deposits, compared to $923.9 million or 47.8% at December 31, 2022. At December 31, 2023 and 2022, total deposits exceeding FDIC deposit insured limits were $816.6 million, or 42% of total deposits and $1.19 billion, or 62% of total deposits, respectively.

The following table sets forth the average balance of deposit accounts and the weighted average rates paid for the periods indicated:

[[GREPCENT_TABLE]]
[["","","For the Year Ended December 31,"],["","","2023","","2022"],["(dollars in thousands)","","Amount","","Average Rate Paid","","Amount","","Average Rate Paid"],["Noninterest-bearing demand","","$","801,882","","","\u2014","%","","$","1,006,795","","","\u2014","%"],["Interest-bearing NOW accounts","","308,537","","","1.67","%","","211,075","","","0.15","%"],["Money market and savings accounts","","673,176","","","2.23","%","","690,830","","","0.50","%"],["Time deposits","","180,219","","","3.72","%","","100,746","","","0.79","%"],["Total deposits","","$","1,963,814","","","1.37","%","","$","2,009,446","","","0.23","%"]]
[[/GREPCENT_TABLE]]

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The increase in the weighted average rate on deposits was primarily due to increases in market interest rates during 2022 and the year ended December 31, 2023. Beginning in March 2022 through July 2023, the Federal Reserve’s Federal Open Market Committee raised the target Fed funds rate by 525 basis points. At December 31, 2023, the target Fed funds rate was 5.25% to 5.50%.

The following table sets forth the maturities of time deposits at December 31, 2023:

[[GREPCENT_TABLE]]
[["","","December 31, 2023"],["(dollars in thousands)","","Three Months of Less","","Over Three Months through Six Months","","Over Six Months through Twelve Months","","Over Twelve Months","","Total"],["Time deposits in amounts of $250,000 or less","","$","52,880","","","$","25,842","","","$","32,283","","","$","16,259","","","$","127,264"],["Time deposits in amounts over $250,000","","58,024","","","34,264","","","28,766","","","1,512","","","122,566"],["Total time deposits","","$","110,904","","","$","60,106","","","$","61,049","","","$","17,771","","","$","249,830"]]
[[/GREPCENT_TABLE]]

Borrowings

Total borrowings increased $35.1 million to $102.9 million at December 31, 2023 from $67.8 million at December 31, 2022. The increase was primarily attributable to a $35.0 million increase in overnight borrowings. In connection with the early redemption of junior subordinated debentures in June 2022 (refer to Note 8 - Borrowing Arrangements of the Notes to Consolidated Financial Statements included in Item 8 of this annual report), we recorded a loss of $347 thousand which is included in other expenses in the consolidated statements of income for the year ended December 31, 2022.

A summary of outstanding borrowings, and related information, as of December 31 follows:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","2023","","2022"],["FHLB Advances"],["Outstanding balance","$","85,000","","","$","50,000"],["Weighted average interest rate, end of period","5.70","%","","4.65","%"],["Average balance outstanding","$","26,390","","","$","932"],["Weighted average interest rate during year","5.43","%","","4.61","%"],["Maximum amount outstanding at any month-end during the year","$","85,000","","","$","50,000"],["Subordinated Notes"],["Outstanding balance","$","17,865","","","$","17,770"],["Weighted average interest rate, end of period","5.50","%","","5.50","%"],["Average balance outstanding(1)","$","17,818","","","$","17,723"],["Weighted average interest rate during year(2)","6.09","%","","6.13","%"],["Maximum amount outstanding at any month-end during the year","$","17,865","","","$","17,770"],["Junior Subordinated Debentures"],["Outstanding balance","$","\u2014","","","$","\u2014"],["Weighted average interest rate, end of period","\u2014","%","","\u2014","%"],["Average balance outstanding(3)","$","\u2014","","","$","1,239"],["Weighted average interest rate during year(4)","\u2014","%","","5.65","%"],["Maximum amount outstanding at any month-end during the year","$","\u2014","","","$","2,746"]]
[[/GREPCENT_TABLE]]

(1)Average balance outstanding includes average net unamortized issuance costs for the periods presented.

(2)Weighted average interest rate includes issuance costs for the periods presented.

(3)Average balance outstanding includes average acquisition-related discounts for the periods presented.

(4)Weighted average interest rate includes amortization of acquisition-related discounts for the periods presented.

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Shareholders’ Equity

Total shareholders’ equity was $288.2 million at December 31, 2023, compared to $260.4 million at December 31, 2022. The $27.8 million increase between periods was primarily due to net income of $25.9 million, stock-based compensation expense of $4.5 million, and a decrease in the unrealized losses on debt securities available-for-sale, net of taxes of $2.0 million, partially offset by the net impact of adopting ASU 2016-13 of $3.9 million and the repurchase of shares in settlement of restricted stock units of $889 thousand.

In 2022, we deployed our excess cash by purchasing held-to-maturity debt securities that are not marked to market, which means there is no unrealized loss recorded through the accumulated other comprehensive loss if their market value is impacted by changes in interest rates.

On June 14, 2023, we announced an authorized share repurchase plan, providing for the repurchase of up to 550,000 shares of our outstanding common stock, or approximately 3% of our then outstanding shares. Repurchases under the program may occur from time to time in open market transactions, in privately negotiated transactions, or by other means in accordance with federal securities laws and other restrictions. We intend to fund these repurchases from available working capital and cash provided by operating activities. The timing of repurchases, as well as the number of shares repurchased, will depend on a variety of factors, including price; trading volume; business, economic and general market conditions; and the terms of any Rule 10b5-1 plan adopted by us. The repurchase program has no expiration date and may be suspended, modified, or terminated at any time without prior notice.

There were no shares repurchased under this share repurchase plan during the year ended December 31, 2023.

Tangible book value per common share at December 31, 2023 was $13.56, compared with $12.32 at December 31, 2022. The $1.24 increase in tangible book value per common share was primarily the result of net income generated, the impact of share-based compensation expense, and other comprehensive losses related to changes in unrealized losses, net of taxes on available-for-sale securities, partially offset by the impact of adopting ASU 2016-13. Tangible book value per common share is also impacted by certain other items, including amortization of intangibles, and share changes resulting from share-based compensation results.

The Bank’s leverage capital ratio and total risk-based capital ratio were 11.65% and 13.51%, respectively, at December 31, 2023.

Liquidity and Capital Resources

Liquidity

Liquidity is a measure of our ability to meet our cash flow requirements, including inflows and outflows of cash for depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs. Several factors influence our liquidity needs, including depositor and borrower activity, interest rate trends, changes in the economy, maturities, re-pricing and interest rate sensitivity of our debt securities, loan portfolio and deposits. We attempt to maintain a total liquidity ratio (liquid assets, including cash and due from banks, federal funds sold, fully disbursed loans held for sale, investments maturing one year or less, and available-for-sale debt securities not pledged as collateral expressed as a percentage of total deposits and short term debt) above approximately 10.0%. Our total liquidity ratios were 11.1% at December 31, 2023 and 10.5% at December 31, 2022. During the year ended December 31, 2023, we deployed our excess liquidity into higher yielding assets, and new loan

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funding for organic growth. For additional information regarding our operating, investing, and financing cash flows, see “Consolidated Statements of Cash Flows” in our audited consolidated financial statements contained in Item 8 of this annual report.

Bank of Southern California, N.A.

The Bank’s primary sources of liquidity are derived from deposits from customers, principal and interest payments on loans and debt securities, FHLB advances and other borrowings. The Bank’s primary uses of liquidity include customer withdrawals of deposits, extensions of credit to borrowers, operating expenses, and repayment of FHLB advances and other borrowings. While maturities and scheduled amortization of loans and debt securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and competition.

At December 31, 2023, we had a secured line of credit of $499.2 million from the FHLB, of which $339.2 million was available. This secured borrowing arrangement is collateralized under a blanket lien on qualifying real estate loans and is subject to us providing adequate collateral and continued compliance with the Advances and Security Agreement and other eligibility requirements established by the FHLB. At December 31, 2023, we had pledged qualifying loans with an unpaid principal balance of $893.8 million for this line. In addition, at December 31, 2023, we used $75.0 million of our secured FHLB borrowing capacity by having the FHLB issue letters of credit to meet collateral requirements for deposits from the State of California and other public agencies. We had an overnight borrowing of $85.0 million at December 31, 2023.

At December 31, 2023, we had credit availability of $141.6 million at the Federal Reserve discount window to the extent of collateral pledged. At December 31, 2023, we had pledged our held-to-maturity debt securities with an amortized cost of $53.6 million and qualifying loans with an unpaid principal balance of $116.8 million as collateral through the Borrower-in-Custody (“BIC”) program. We had no discount window borrowings at December 31, 2023 or 2022. At December 31, 2023, we did not establish any borrowing capacity through the BTFP program.

We have three overnight unsecured credit lines from correspondent banks totaling $75.0 million. The lines are subject to annual review. There were no outstanding borrowings under these lines at December 31, 2023 and 2022.

Southern California Bancorp

The primary sources of liquidity of the Company, on a stand-alone holding company basis, are derived from dividends from the Bank, borrowings, and its ability to issue debt and raise capital. The Company’s primary uses of liquidity are operating expenses and payments of interest and principal on borrowings.

On May 28, 2020, we issued $18 million of 5.50% Fixed-to-Floating Rate Subordinated Notes Due 2030 (the “Notes”). The Notes which mature March 25, 2030 accrue interest at a fixed rate of 5.50% through the fixed rate period to March 26, 2025, after which interest accrues at a floating rate of 90-day SOFR plus 350 basis points, until maturity, unless redeemed early, at our option, after the end of the fixed rate period. Issuance costs of $475 thousand were incurred and are being amortized over the first 5-year fixed term of the Notes; unamortized issuance costs at December 31, 2023 and 2022, were $135 thousand and $230 thousand, respectively. The net unamortized issuance costs are netted against the balance and recorded in the borrowings in the consolidated balance sheets. The amortization expenses are recorded in interest expense on the consolidated statements of income. At December 31, 2023, we were in compliance with all covenants and terms of the Notes.

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In the acquisition of CalWest Bancorp in 2020, we assumed $3.1 million of junior subordinated deferrable interest debentures (the “Junior Subordinated Debentures”) which were issued to CalWest Statutory Trust I (the “Trust”). The Junior Subordinated Debentures were scheduled to mature on September 17, 2033, and accrued interest at three-month LIBOR plus 2.95%. We also acquired a 3% common interest in the Trust, which was comprised of mandatorily redeemable preferred securities. At acquisition, the Junior Subordinated Debentures were valued at a premium of $408 thousand which was included in the initial carrying value, and was being amortized over the remaining term of the borrowing. In June of 2022, we fully redeemed the Junior Subordinated Debentures before the maturity date. We recorded a loss of $347 thousand related to the unamortized premium at the time of early redemption in the other expenses of the consolidated statements of income for the year ended December 31, 2022.

At December 31, 2023, consolidated cash and cash equivalents totaled $86.8 million, an increase of $33 thousand from $86.8 million at December 31, 2022. The increase in cash and cash equivalents is the result of $33.1 million in net cash provided by operating cash flows and $45.9 million of net cash flows provided by financing cash flows, offset by $78.9 million net cash used in investing cash flows .

Our operating cash flows are comprised of net income, adjusted for certain non-cash transactions, including but not limited to, depreciation and amortization, provision for credit losses, loans originated for sale and related gains and proceeds from sales, stock-based compensation, and amortization of net deferred loan costs and premiums. Net cash flows from operating cash flows were $33.1 million for the year ended December 31, 2023, compared to $13.4 million in the prior year. The $19.8 million increase was primarily due to the $9.8 million increase in net income and a $2.6 million increase in net cash provided by sales of loans for sale, net of originations.

Our investing cash flows are primarily comprised of cash inflows and outflows from our debt securities and loan portfolios, as applicable, and to a lesser extent, purchases of stock investments, purchases and proceeds from bank-owned life insurance, and capital expenditures. Net cash used in investing activities was $78.9 million for the year ended December 31, 2023, compared to net cash used in investing activities of $512.7 million in the prior year. The $433.8 million decrease in cash used in investing activities was primarily due to decreases in net loan fundings of $331.0 million and net investment securities purchases of $107.3 million.

Our financing cash flows are primarily comprised of inflows and outflows of deposits, borrowing activity, proceeds from the issuance of common shares, and to a lesser extent, repurchases of common shares and cash flows from share-based compensation arrangements. Net cash provided by financing activities was $45.9 million for the year ended December 31, 2023, compared to $6.1 million in the prior year. The $39.8 million increase in financing cash flows was primarily due to a $52.9 million net increase in deposit cash flows and the prior year’s financing cash flows including $3.1 million in cash used for full redemption of the junior subordinated debentures acquired CalWest Bancorp before the maturity date, partially offset by $15.0 million in net repayment activity on FHLB advances.

We believe that our liquidity sources are stable and are adequate to meet our day-to-day cash flow requirements as of December 31, 2023.

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Commitments and Contractual Obligations

The following table presents information regarding our outstanding commitments and contractual obligations as of December 31, 2023:

[[GREPCENT_TABLE]]
[["(Dollars in thousands)","","One Yearor Less","","Over One Year to Three Years","","Over Three Years to Five Years","","More than Five Years","","Total"],["Commitments to extend credit","","$","210,649","","","$","114,069","","","$","19,380","","","$","61,756","","","$","405,854"],["Letters of credit issued to customers","","4,899","","","40","","","\u2014","","","\u2014","","","4,939"],["Total commitments","","$","215,548","","","$","114,109","","","$","19,380","","","$","61,756","","","$","410,793"],["FHLB advances","","$","85,000","","","$","\u2014","","","$","\u2014","","","$","\u2014","","","$","85,000"],["Subordinated notes","","\u2014","","","\u2014","","","\u2014","","","17,865","","","17,865"],["Certificates of deposit","","232,059","","","17,687","","","84","","","\u2014","","","249,830"],["Lease obligations","","2,165","","","4,120","","","3,795","","","2,037","","","12,117"],["Total contractual obligations","","$","319,224","","","$","21,807","","","$","3,879","","","$","19,902","","","$","364,812"]]
[[/GREPCENT_TABLE]]

At December 31, 2023 and 2022, we also had unfunded commitments of $3.2 million and $6.0 million, respectively, for investments in equity investments.

Capital Resources

Maintaining adequate capital is always an important objective of the Company. Abundant and high quality capital helps weather economic downturns and market volatility, protect depositors’ funds, and support growth, such as expanding the operations or acquisitions. Capital is also a source of funds for loan demand and enables the Company to effectively manage its assets and liabilities. We are authorized to issue 50,000,000 shares of common stock of which 18,369,115 have been issued as of December 31, 2023. We are also authorized to issue 50,000,000 shares of preferred stock, of which none have been issued as of December 31, 2023. On June 14, 2023, we announced an authorized share repurchase plan, providing for the repurchase of up to 550,000 shares of our outstanding common stock, or approximately 3% of our then outstanding shares.

As of December 31, 2023 and 2022, we qualified for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) and, therefore, is not subject to consolidated capital rules at the bank holding company level.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

As of December 31, 2023 and 2022, the Bank’s regulatory capital ratios exceeded the regulatory capital requirements and the Bank is considered to be “well capitalized” under the regulatory framework for prompt corrective action (PCA). There are no changes to the Bank’s categories since December 31,

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2023. Management believes, as of December 31, 2023 and 2022, that the Bank met all capital adequacy requirements to which it is subject.

To be categorized as well-capitalized, the Bank must maintain minimum ratios as set forth in the table below.

The following table also sets forth the Bank’s actual capital amounts and ratios:

[[GREPCENT_TABLE]]
[["","","","","","Amount of Capital Required"],["","","","","","To be","","To be Well-"],["","","","","","Adequately","","Capitalized under"],["","Actual","","","","Capitalized","","PCA Provisions"],["(dollars in thousands)","Amount","","Ratio","","Amount","","Ratio","","Amount","","Ratio"],["As of December 31, 2023:"],["Total Capital (to Risk-Weighted Assets)","$","289,743","","","13.51","%","","$","171,575","","","8.0","%","","$","214,469","","","10.0","%"],["Tier 1 Capital (to Risk-Weighted Assets)","270,341","","","12.61","%","","128,681","","","6.0","%","","171,575","","","8.0","%"],["CET1 Capital (to Risk-Weighted Assets)","270,341","","","12.61","%","","96,511","","","4.5","%","","139,405","","","6.5","%"],["Tier 1 Capital (to Average Assets)","270,341","","","11.65","%","","92,818","","","4.0","%","","116,022","","","5.0","%"],["As of December 31, 2022:"],["Total Capital (to Risk-Weighted Assets)","$","260,788","","","11.97","%","","$","174,256","","","8.0","%","","$","217,820","","","10.0","%"],["Tier 1 Capital (to Risk-Weighted Assets)","242,379","","","11.13","%","","130,692","","","6.0","%","","174,256","","","8.0","%"],["CET1 Capital (to Risk-Weighted Assets)","242,379","","","11.13","%","","98,019","","","4.5","%","","141,583","","","6.5","%"],["Tier 1 Capital (to Average Assets)","242,379","","","10.62","%","","91,297","","","4.0","%","","114,122","","","5.0","%"]]
[[/GREPCENT_TABLE]]

On January 1, 2023, we adopted the current expected credit losses (“CECL”) accounting standard that requires management’s estimate of credit losses over the expected contractual lives of the Company's relevant financial assets. We elected the CECL phase-in option provided by regulatory capital rules, which delays the impact of CECL on regulatory capital over a three-year transition period.

Refer to Note 14 - Regulatory Matters of the Notes to Consolidated Financial Statements included in Item 8 of this annual report for more information regarding regulatory capital.

Dividend Restrictions

The primary source of funds for the Company is dividends from the Bank. Under federal law, the Bank may not declare a dividend in excess of its undivided profits if, absent the approval of the OCC, the Bank’s primary banking regulator, the total amount of dividends declared by the Bank in any calendar year exceeds the total of the Bank’s retained net income of that current period, year to date, combined with its retained net income for the preceding two years. The Bank also is prohibited from declaring or paying any dividend if, after making the dividend, the Bank would be considered “undercapitalized” (as defined by reference to other OCC regulations). Federal bank regulatory agencies have authority to prohibit banking institutions from paying dividends if those agencies determine that, based on the financial condition of the bank, such payment will constitute an unsafe or unsound practice.

During the year ended December 31, 2023, the Bank paid dividends to the Company of $2.0 million. The Bank paid dividends to the Company of $3.0 million during the year ended December 31, 2022.

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The Federal Reserve limits the amount of dividends that bank holding companies may pay on common stock to income available over the past year, and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. It is also the Federal Reserve’s policy that bank holding companies should not maintain dividend levels that undermine their ability to be a source of strength to its banking subsidiaries. Additionally, in consideration of the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policies.

During the years ended December 31, 2023 and 2022, there were no dividends declared to shareholders by the Company.