PCB BANCORP (PCB) FY 2024 MD&A

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

You should read the following discussion and analysis of financial condition and results of operations together with the Consolidated Financial Statements and accompanying notes included in Item 8 of this Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under Item 1A “Risk Factors” and “Forward Looking Statements” immediately preceding Part I of this Annual Report on Form 10-K.

Critical Accounting Estimates

The Company follows accounting and reporting policies and procedures that conform, in all material respects, to GAAP and to practices generally applicable to the financial services industry, the most significant of which are described in Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K. The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make judgments and accounting estimates that affect the amounts reported for assets, liabilities, revenues and expenses on the Consolidated Financial Statements and accompanying notes, and amounts disclosed as contingent assets and liabilities. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. Accounting estimates are necessary in the application of certain accounting policies and procedures that are particularly susceptible to significant change. 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.

The following is a summary of the more subjective and complex accounting estimates and principles affecting the financial condition and results reported in financial statements. In each area, the Company has identified the variables that management believes to be the most important in the estimation process. The Company uses the best information available to make the estimations necessary to value the related assets and liabilities in each of these areas.

Allowance for Credit Losses

On January 1, 2023, the Company adopted the provisions of Accounting Standards Codification (“ASC”) 326, “Financial Instruments - Credit Losses (Topic 326).” The adoption of ASC 326 changes the way the Company estimates the ACL on certain financial assets. The adoption of ASC 326 requires the Company to measure and record current expected credit losses for financial assets within the scope of ASC 326, which the Company currently consist substantially of loans, off-balance sheet credit exposures and securities available-for-sale. Measuring credit losses under the current expected credit losses (“CECL”) framework requires a significant amount of judgment, including the incorporation of reasonable and supportable forecasts about future conditions that may ultimately impact the level of credit losses the Company may recognize. Under the CECL framework, current expected credit losses are recorded on financial assets within the scope of ASC 326 at the time of their origination or acquisition.

The following table summarizes the initial adjustment to the ACL as of January 1, 2023:

In conjunction with the adoption of ASC 326, the Company made an accounting policy election not to measure an ACL on accrued interest receivables for the loans collectively evaluated. For the loans individually evaluated, the Company considers accrued interest receivables as a part of the amortized cost and measures an ACL.

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When accrued interest receivable is deemed to be uncollectable, the Company promptly reverses such balances through current period interest income in the period they are deemed uncollectable. Additionally, the Company has also elected not to include the balance of accrued interest receivable in the amortized cost basis of financial assets within the scope of ASC 326. Accrued interest receivable will continue to be presented separately in the Consolidated Balance Sheets.

Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts. The measurement of the ACL is performed by collectively evaluating loans with similar risk characteristics. The Company’s discounted cash flow methodology incorporates a probability of default (“PD”) and loss given default (“LGD”) model, as well as expectations of future economic conditions, using reasonable and supportable forecasts.

The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios, as well as determining the appropriate length of the forecast horizon. Management leverages economic projections from a reputable and independent third party to inform and provide its reasonable and supportable economic forecasts. Although no one economic variable can fully demonstrate the sensitivity of the ACL estimate to changes in economic variables used in the ACL model, the Company utilized changes in U.S. unemployment rate and year-over-year change in real gross domestic product (“GDP”) growth rate as its key economic variables. Other internal and external indicators of economic forecasts may also be considered by management when developing the forecast metrics. The Company’s ACL model reverts to long-term average loss rates for purposes of estimating expected cash flows beyond a period deemed reasonable and supportable. The Company forecasts economic conditions and expected credit losses over a one-year time horizon. Beyond the one-year forecast time horizon, the Company’s ACL model reverts to historical long-term average loss rates over a one-year period.

Within the various economic scenarios considered as of December 31, 2024, the quantitative estimate of the ACL would increase by approximately $19.0 million under sole consideration of the more adverse downside scenario. The quoted sensitivity calculation reflects the sensitivity of the modeled ACL estimate to macroeconomic forecast data, but is absent of qualitative overlays and other qualitative adjustments that are part of the quarterly reserving process and does not necessarily reflect the nature and extent of future changes in the ACL for reasons including increases or decreases in qualitative adjustments, changes in the risk profile and size of the portfolio, changes in the severity of the macroeconomic scenario and the range of scenarios under management consideration.

A portion of the collectively evaluated ACL on loans also includes qualitative adjustments for risk factors not reflected or captured by the quantitative modeled ACL but are relevant in estimating future expected credit losses. Qualitative adjustments may be related to and include, but not limited to factors such as: (i) management’s assessment of economic forecasts used in the model and how those forecasts align with management’s overall evaluation of current and expected economic conditions, (ii) organization-specific risks such as credit concentrations, collateral specific risks, regulatory risks, and external factors that may ultimately impact credit quality, (iii) potential model limitations such as limitations identified through back-testing, and other limitations associated with factors such as underwriting changes, acquisition of new portfolios and changes in portfolio segmentation, and (iv) management’s overall assessment of the adequacy of the ACL, including an assessment of ACL model data inputs.

Although management uses the best information reasonably available to derive estimates and assumptions necessary to measure an appropriate level of the ACL, these estimates and assumptions are subject to change in future periods, which may have a material impact on the level of the ACL and the Company’s results of operations.

As a part of the adoption of ASC 326, the Company reviewed and revised certain loan segments for the Company’s ACL model. Before the adoption of ASC 326, commercial property and SBA property loans were separately presented and represented 63.0% and 6.6% of loans held-for-investment at December 31, 2022, respectively. The Company re-divided these loan segments into commercial property, business property and multifamily loans, as described below, as these new loan segments are determined to share similar characteristics under the Company’s ACL model. In addition, four loan segments before the adoption of ASC 326 (commercial term loans, commercial lines of credit, SBA term loans and SBA PPP loans), which represented 12.2% of loans held-for-investment at December 31, 2022, are combined into a single loan segment, commercial and industrial loans, as these loans are determined to share similar risk characteristics under the Company’s ACL model. However, loan related disclosures for prior periods continue to be presented under the legacy loan segments in this Annual Report on Form 10-K.

Loan portfolio segments identified by the Company include: commercial real estate (commercial property, business property, multifamily and construction), commercial and industrial, and consumer loans (residential mortgage and other consumer).

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Each loan segment bears varying degrees of risk based on, among other things, the type of loan and collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions and interest rate changes. The loan segments are as follows:

Commercial Real Estate Loans:

•Commercial property loans – Commercial property loans include loans for which the Company holds real property as collateral, but where the borrower does not occupy the underlying property. The primary risks associated with investor property loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, significant increases in interest rates, changes in market rents, and vacancy and conditions of the underlying property, any of which may make the real estate property unprofitable to the borrower. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

•Business property loans – Business property loans include loans for which the Company holds real property as collateral and where the underlying property is occupied by the borrower, such as with a place of business. These loans are primarily underwritten based on the cash flows of the business and secondarily on the real estate. The primary risks associated with business property loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which reduce the cash flows of the underlying business. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

•Multifamily loans: Multifamily loans are secured by multi-tenant (5 or more units) residential real properties. Payments on multifamily loans are dependent on the successful operation or management of the properties, and repayment of these loans may be subject to adverse conditions in the real estate market or the economy.

•Construction loans: Construction loans are considered to have higher risks due to construction completion and timing risk, and the ultimate repayment being sensitive to interest rate changes, government regulation of real property, and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project. The fair value of the underlying collateral may fluctuate as market conditions change. The primary risks include the borrower’s inability to pay and the inability of the Company to recover its investment due to a decline in the fair value of the underlying collateral.

Commercial and Industrial Loans:

•Commercial and industrial loans – The C&I loan category includes commercial term loans and commercial lines of credit. Commercial term loans are typically extended to finance business acquisitions, permanent working capital needs, and/or equipment purchases. Commercial lines of credit are generally provided to finance short-term working capital needs and warehouse lending credit facilities. Warehouse lending is a line of credit given to a loan originator, the funds from which are used to finance a residential mortgage or CRE loans that a borrower uses to purchase property or refinance an existing loan. The primary risk associated with C&I loans is the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans, and occasionally upon other borrower assets and guarantor assets.

Consumer Loans:

•Residential mortgage loans – The primary risks of residential mortgage loans include the borrower’s inability to pay, material decreases in the value of the real estate that is being held as collateral, and significant increases in interest rates, which may reduce the borrower’s capacity to pay.

•Other consumer loans – Other consumer loans primarily include automobile loans, as well as unsecured lines of credit and term loans to high net worth individuals. Automobile loans have relatively higher LTV ratios on average and carry higher interest rates to offset for the inherently higher default risks. Unsecured lines of credit and term consumer loans are underwritten primarily based on the individual borrower’s income, current debt level, and past credit history. Repayment of these loans is dependent on the borrower’s ability to pay, and the fair value of the underlying collateral for automobile loans.

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The following table presents a summary of reclassification of loans held-for-investment as of the date indicated:

(1)    Commercial property loans under the legacy loan segments included all commercial property, business property and multifamily loans under the new loan segments.

The following table presents a summary of reclassification of ACL on loans as of the date indicated as well as the initial adjustment to the ACL as of January 1, 2023:

(1)    Commercial property loans under the legacy loan segments included all commercial property, business property and multifamily loans under the new loan segments.

ACL and provision (reversal) for credit losses for reporting periods beginning with January 1, 2023 are presented under ASC 326, while prior period amounts, comparisons and related ratios continue to be presented under legacy ASC 450 and ASC 310 in this Annual Report on Form 10-K.

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Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that exclude (or include) amounts that are included in (or excluded from) the most directly comparable measure calculated, and presented in accordance with GAAP. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures and may not be comparable to non-GAAP financial measures that may be presented by other companies.

The following tables present reconciliation of return on average tangible common equity, tangible common equity per common share and tangible common equity to tangible assets ratios to their most comparable GAAP measures as of the dates or for the periods indicated. These non-GAAP measures are used by management in its analysis of the Company's performance.

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Five-Year Summary of Selected Financial Data

The following table presents certain selected financial data as of the dates or for the periods indicated:

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(1)    ACL and provision (reversal) for credit losses for the year ended December 31, 2024 and 2023 is presented under ASC 326, while prior period comparisons continue to be presented under legacy ASC 450 and ASC 310. Provision (reversal) for credit losses on off-balance sheet credit exposures of $85 thousand, $(24) thousand, and $(63) thousand, respectively, for the years ended December 31, 2022, 2021, and 2020 were recorded in Other Expense on the Consolidated Income Statement.

(2)    Shareholders' equity divided by common shares outstanding.

(3)    Dividends declared per common share divided by basic earnings per common share.

(4)    Noninterest expenses divided by the sum of net interest income and noninterest income.

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

(6)    Total loans include both loans held-for-sale and loans held-for-investment.

(7)    NPAs include total NPLs (nonaccrual loans plus loans past due 90 days or more and still accruing) and OREO.

(8)    Non-GAAP measure. See "Non-GAAP Measures" for a reconciliation to its most comparable GAAP measure.

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Executive Summary

Financial Highlights

•Net income was $25.8 million for the year ended December 31, 2024, a decrease of $4.9 million, or 15.9%, from $30.7 million for the year ended December 31, 2023 and a decrease of $9.2 million, or 26.2%, from $35.0 million for the year ended December 31, 2022;

◦Provision (reversal) for credit losses (1) was $3.4 million, $(132) thousand and $3.6 million for the years ended December 31, 2024, 2023 and 2022, respectively.

◦Diluted earnings per common share was $1.74, $2.12 and $2.31 for the years ended December 31, 2024, 2023 and 2022, respectively.

◦Net interest margin was 3.17%, 3.57% and 4.08% for the years ended December 31, 2024, 2023 and 2022, respectively.

•Total assets were $3.06 billion at December 31, 2024, an increase of $274.5 million, or 9.8%, from $2.79 billion at December 31, 2023;

•Loans held-for-investment were $2.63 billion at December 31, 2024, an increase of $305.9 million, or 13.2%, from $2.32 billion at December 31, 2023;

•Total deposits were $2.62 billion at December 31, 2024, an increase of $264.2 million, or 11.2%, from $2.35 billion at December 31, 2023;

•The Company declared and paid cash dividends of $0.72, $0.69, and $0.60 per common share for the years ended December 31, 2024, 2023 and 2022, respectively; and

•The Company purchased and retired 14,947, 512,657, and 362,557 shares of common stock for the years ended December 31, 2024, 2023 and 2022, respectively.

(1)     Provision (reversal) for credit losses for the years ended December 31, 2024 and 2023 is presented under ASC 326, while provision for credit losses for the year ended December 31, 2022 continues to be presented under legacy ASC 450 and ASC 310. Provision for credit losses on off-balance sheet credit exposures of $85 thousand for the year ended December 31, 2022 was recorded in Other Expense on the Consolidated Income Statement.

The decrease in net income for the year ended December 31, 2024 compared with the year ended December 31, 2023 was primarily due to an increase in noninterest expense, partially offset by increases in noninterest income and net interest income, and provision for credit losses of $3.4 million for the year ended December 31, 2024 compared with reversal for credit losses of $132 thousand for the year ended December 31, 2023.

The decrease in net income for the year ended December 31, 2023 compared with the year ended December 31, 2022 was primarily due to an increase in noninterest expense, decreases in noninterest income and net interest income, partially offset by reversal for credit losses of $132 thousand for the year ended December 31, 2023 compared with provision for credit losses of $3.6 million for the year ended December 31, 2022.

The increase in total assets for the year ended December 31, 2024 was primarily due to increases in loans held-for-investment and deferred tax assets.

The Company is committed to making corporate decisions that directly benefit its shareholders, and during the year ended December 31, 2024, increased its dividend per common share by $0.03, or 4.3%, to $0.72 from $0.69 for the year ended December 31, 2023. During the year ended December 31, 2024, the Company also repurchased 14,947 shares of common stock, totaling $222 thousand. Overall, the Company returned 42.0% of its earnings to common shareholders through dividends and common share repurchases during the year ended December 31, 2024.

Result of Operations

Net Interest Income

A principal component of the Company’s earnings is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and borrowed funds. Net interest income expressed as a percentage of average interest-earning assets is referred to as the net interest margin. The net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities. Net interest income is affected by changes in the balances of interest-earning assets and interest-bearing liabilities and changes in the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities.

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The following table presents interest income, average interest-earning assets, interest expense, average interest-bearing liabilities, and their correspondent yields and costs expressed both in dollars and rates for the periods indicated:

(1)    Average balance includes both loans held-for-sale and loans held-for-investment, as well as nonaccrual loans. Net amortization of deferred loan fees (cost) of $1.2 million, $1.1 million and $2.2 million, respectively, and net accretion of discount on loans of $2.8 million, $2.2 million and $3.6 million, respectively, are included in the interest income for the years ended December 31, 2024, 2023 and 2022, respectively.

(2)    The yield on municipal bonds has not been computed on a tax-equivalent basis.

(3)    Net interest spread is calculated by subtracting average rate on interest-bearing liabilities from average yield on interest-earning assets.

(4)    Net interest margin is calculated by dividing net interest income by average interest-earning assets.

(5)    Cost of funds is calculated by dividing total interest expense by the sum of total interest-bearing liabilities and noninterest-bearing demand deposits.

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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.

Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

The following table presents the components of net interest income for the periods indicated:

Net interest income increased primarily due to a 12.7% increase in average balance of interest-earning assets and a 37 basis point increase in average yield on interest-earning assets, partially offset by a 24.3% increase in average balance of interest-bearing liabilities and a 74 basis point increase in average cost of interest-bearing liabilities. The increase in average balance of interest-earning assets was primarily due to growth in loans and investment securities, supported by deposit growth. The increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to re-pricing at evaluated rates and originations at higher market rates during the year ended December 31, 2024.

Interest and fees on loans increased primarily due to a 14.4% increase in average balance and a 36 basis point increase in average yield. The increase in average balance was primarily due to an increase in commercial real estate, commercial and industrial, and residential mortgage loans, partially offset by a decrease in other consumer loans. The increase in average yield was primarily due to the higher market rates, partially offset by a decrease in net accretion of discount on loans.

Interest on investment securities increased primarily due to a 36 basis point increase in average yield and a 2.7% increase in average balance. The increase in average yield was primarily due to new investment securities purchased at higher market rates and a decrease in net amortization. The Company purchased $23.5 million and $17.3 million, respectively, of investment securities during the years ended December 31, 2024 and 2023. For the years ended December 31, 2024 and 2023, average yield on total investment securities was 3.69% and 3.33%, respectively.

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Interest income on other interest-earning assets increased primarily due to a 23 basis point increase in average yield and a 2.2% increase in average balance. The increase in average yield was primarily due to the higher market rates and an increase in dividend on FHLB stock. The increase in average balance was primarily due to an increase in average balance of deposits, partially offset by an increase in loans. For the years ended December 31, 2024 and 2023, yield on total other interest-earning assets was 5.50% and 5.27%, respectively.

Interest expense on deposits increased primarily due to a 23.1% increase in average balance of interest-bearing deposits and a 74 basis point increase in average cost of interest-bearing deposits. The increase in average balance was primarily due to an increase in time deposits, and NOW and money market accounts, partially offset by decreases in savings. The increase in average cost was primarily due to the higher market rates. For the years ended December 31, 2024 and 2023, average cost on total interest-bearing deposits was 4.78% and 4.04%, respectively.

Interest expense on other borrowings increased primarily due to a 237.6% increase in average balance. The Company utilized additional borrowings to support its balance sheet growth.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table presents the components of net interest income for the periods indicated:

Net interest income decreased primarily due to a 38.4% increase in average balance of interest-bearing liabilities and a 297 basis point increase in average cost of interest-bearing liabilities, partially offset by a 12.6% increase in average balance of interest-earning assets and a 147 basis point increase in average yield on interest-earning assets. The increase in average balance of interest-earning assets was primarily due to growth in loans and investment securities, supported by deposit growth. The increases in average yield on interest-earning assets and average cost of interest-bearing liabilities were primarily due to the rising market rates during the year ended December 31, 2023.

Interest and fees on loans increased primarily due to a 14.2% increase in average balance and a 128 basis point increase in average yield. The increase in average balance was primarily due to an increase in commercial real estate, commercial and industrial, and residential mortgage loans, partially offset by a decrease in other consumer loans. The increase in average yield was primarily due to the rising market rates, partially offset by a decrease in net amortization of deferred fees on SBA PPP loans.

Interest on investment securities increased primarily due to a 114 basis point increase in average yield and a 6.1% increase in average balance. The increase in average yield was primarily due to new investment securities purchased at higher market rates and a decrease in net amortization of premium. The Company purchased $17.3 million and $57.4 million, respectively, of investment securities during the years ended December 31, 2023 and 2022. For the years ended December 31, 2023 and 2022, average yield on total investment securities was 3.33% and 2.19%, respectively.

Interest income on other interest-earning assets increased primarily due to a 332 basis point increase in average yield and a 2.4% increase in average balance. The increase in average yield was primarily due to the rising market rates and an increase in dividend on FHLB stock. The increase in average balance was primarily due to an increase in average balance of deposits, partially offset by an increase in loans. For the years ended December 31, 2023 and 2022, yield on total other interest-earning assets was 5.27% and 1.95%, respectively.

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Interest expense on deposits increased primarily due to a 38.4% increase in average balance of interest-bearing deposits and a 296 basis point increase in average cost of interest-bearing deposits. The increase in average balance was primarily due to an increase in time deposits, partially offset by decreases in savings, NOW and money market accounts. The increase in average cost was primarily due to the rising market rates. For the years ended December 31, 2023 and 2022, average cost on total interest-bearing deposits was 4.04% and 1.08%, respectively.

Interest expense on other borrowings increased primarily due to a 46.1% increase in average balance and a 338 basis point increase in average cost. The increase in average cost was primarily due to the rising market rates.

Provision (reversal) for Credit Losses

The following table presents a composition of provision (reversal) for credit losses for the periods indicated:

(1)Provision (reversal) for credit losses on off-balance sheet credit exposures for the years ended December, 2022 was recorded in Other Expense on the Consolidated Income Statement.

Provision for credit losses on loans for the year ended December 31, 2024 was primarily due to increases in loans held-for-investment, partially offset by a decrease in quantitatively measured loss reserve requirement. See further discussion in “Allowance for Credit Losses.”

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Noninterest Income

Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

The following table presents the components of noninterest income for the periods indicated:

Service charges and fees on deposits increased primarily due to an increase in fee-based transactions.

Loan servicing income represents fees received on loans that the Company services, net of amortization of servicing assets. The increase was primarily due to a decrease in amortization of servicing assets from lower prepayments of loans being serviced.

Bank-owned life insurance income represents the increase in cash surrender value of the insurance policy.

Gain on sale of loans increased primarily due to an increase in gain margin, partially offset by a decrease in sales volume. The Company sold SBA loans of $71.1 million with a gain of $3.8 million and a residential mortgage loan of $676 thousand with no gain during the year ended December 31, 2024. During the year ended December 31, 2023, SBA loans of $82.3 million with a gain of $3.6 million during the year ended December 31, 2023.

Other income included wire and remittance fees of $626 thousand and $625 thousand, respectively, and debit card interchange fees of $340 thousand and $339 thousand, respectively, for the years ended December 31, 2024 and 2023.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table presents the components of noninterest income for the periods indicated:

Service charges and fees on deposits increased primarily due to an increase in fee-based transactions.

Loan servicing income represents fees received on loans that the Company services, net of amortization of servicing assets. The increase was primarily due to an increase in servicing income received and a decrease in amortization of servicing assets from lower prepayments of loans being serviced.

Bank-owned life insurance income represents the increase in cash surrender value of the insurance policy.

Gain on sale of loans decreased primarily due to decreases in sales volume and gain margin. The Company sold SBA loans of $82.3 million with a gain of $3.6 million during the year ended December 31, 2023. During the year ended December 31, 2022, the Company sold SBA loans of $122.9 million with a gain of $8.0 million and residential mortgage loans of $858 thousand with a gain of $8 thousand.

Other income included wire and remittance fees of $625 thousand and $643 thousand, respectively, and debit card interchange fees of $339 thousand and $335 thousand, respectively, for the years ended December 31, 2023 and 2022.

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Noninterest Expense

Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

The following table presents the components of noninterest expense for the periods indicated:

Salaries and employee benefits increased primarily due to increases in salaries, bonus accrual, and incentives tied to LPO originated SBA loan sales, partially offset by a decrease in vacation accruals. The number of full-time equivalent employees averaged 265.8 for the year ended December 31, 2024 compared to 272.5 for the year ended December 31, 2023.

Occupancy and equipment expense increased primarily due to an expansion of headquarters location in the second half of 2023 and a relocation of a regional office and two branches into one location in Orange County, California in 2024.

Professional fees increased primarily due to additional professional fees related to a core system conversion, which was completed in April 2024.

Marketing and business promotion expense decreased primarily due to a higher, nonrecurring volume of advertisements in 2023 related to the Company’s 20th anniversary celebration.

Data processing expense decreased primarily due to one-time new relationship credit from the aforementioned core system conversion.

Director fees and expenses increased primarily due to an increase in stock-based compensation expense from stock options granted during the three months ended December 31, 2023.

Regulatory assessment expense increased primarily due to an increase in balance sheet.

Other expense included other loan related legal expenses of $432 thousand and $534 thousand, respectively, armed guard expense of $867 thousand and $798 thousand, respectively, office expenses of $2.2 million and $2.2 million, respectively. In addition, the Company recognized a termination charge for the legacy core system of $508 thousand and an expense of $815 thousand for a reimbursement for an SBA loan guarantee previously paid by the SBA on a loan originated in 2014 that subsequently defaulted and was ultimately determined to be ineligible for the SBA guarantee during the second quarter of 2024. The Company has retained a law firm specializing in SBA recovery and intends to seek that SBA reconsider its decision so that the Company may recoup all or part of the reimbursement.

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Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

The following table presents the components of noninterest expense for the periods indicated:

Salaries and employee benefits increased primarily due to increases in wages and other employee benefits, partially offset by decreases in bonus and vacation accruals, and incentives tied to LPO originated SBA loan sales and loan origination cost, which offsets the recognition of salaries. The number of full-time equivalent employees averaged 272.5 for the year ended December 31, 2023 compared to 268.3 for the year ended December 31, 2022.

Occupancy and equipment expense increased primarily due to an expansion of headquarters location and relocations of a regional office and branches, as well as three new branch openings during the second half of 2022. The Company plans to relocate a regional office and consolidate two branches into one location in Orange County, California in 2024. The Company opened three new branches in Dallas and Carrollton, Texas, and Palisades Park, New Jersey during the second half of 2022.

Professional fees increased primarily due to increases in consulting and internal audit fees for enhancing internal controls and process, and professional fees related to a planned core system conversion.

Marketing and business promotion expense increased primarily due to increased marketing activities and advertisement, as well as the Company’s 20th anniversary celebration during the year ended December 31, 2023.

Data processing expense decreased primarily due to a decrease in processing costs from a decrease in transaction accounts.

Director fees and expenses increased primarily due to additional expenses related to stock options issued to directors during the year ended December 31, 2023.

Regulatory assessment expense increased primarily due to increases in FDIC assessment rates and balance sheet. The FDIC increased the initial base deposit insurance assessment rate schedules by two basis points beginning in the first quarterly assessment period of 2023.

Other expense included other loan related legal expenses of $534 thousand and $389 thousand, respectively, armed guard expense of $798 thousand and $656 thousand, respectively, office expenses of $2.2 million and $1.9 million, respectively, and provision for off-balance sheet credit exposures was $85 thousand for the year ended December 31, 2022.

Income Tax Expense

Income tax expense was $10.5 million, $12.6 million and $14.4 million, respectively, and the effective tax rate was 28.9%, 29.0% and 29.2%, respectively, for the years ended December 31, 2024, 2023 and 2022.

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Financial Condition

Investment Securities

The Company’s investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on current and projected liquidity and interest rate sensitivity positions.

The following table presents the amortized cost and fair value of the investment securities portfolio as of the dates indicated:

Total carrying value of investment securities were $146.3 million at December 31, 2024, an increase of $3.0 million, or 2.1%, from $143.3 million at December 31, 2023. The increase was primarily due to purchases of $23.5 million, partially offset by principal paydowns and calls of $19.8 million, a decrease in fair value of securities available-for-sale of $541 thousand, and net premium amortization of $159 thousand.

As of December 31, 2024 and 2023, 95.3% and 94.7%, respectively, of the Company's securities available-for-sale at amortized cost basis were issued by U.S. government agency and U.S. GSEs. Because the decline in fair value is attributable to changes in interest rates, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell these securities before their anticipated recovery, the Company determined that these securities with unrealized losses did not warrant an ACL as of December 31, 2024 and 2023.

Municipal and corporate bonds had an investment grade rating upon purchase. The issuers of these securities have not established any cause for default on these securities and various rating agencies have reaffirmed their long-term investment grade status as of December 31, 2024 and 2023. These securities have fluctuated in value since their purchase dates as market interest rates fluctuated. Additionally, the Company continues to receive contractual principal and interest payments in a timely manner. The Company does not intend to sell these securities and it is more likely than not that the Company will not be required to sell before the recovery of its amortized cost basis. The Company therefore determined that the investment securities with unrealized losses did not warrant an ACL as of December 31, 2024 and 2023.

As of December 31, 2024 and 2023, the Company recorded no ACL on securities available-for-sale.

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The following table presents the contractual maturity schedule for securities, at amortized cost, and their weighted-average yields as of the date indicated. Weighted-average yields are based upon the amortized cost of securities and are calculated using the interest method which takes into consideration of premium amortization and discount accretion. Weighted-average yields on tax-exempt debt securities exclude the federal income tax benefit.

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Loans Held-For-Investment and 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. Balance sheet information and results for reporting periods beginning with January 1, 2023 are presented under ASC 326, while prior period comparisons continue to be presented under legacy ASC 450 and ASC 310.

The following table presents the composition of the Company’s loans held-for-investment as of the dates indicated:

The following table presents the composition of the Company’s loans held-for-investment by legacy loan segments as of the dates indicated:

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The following table presents activities in loans held-for-investment for the period indicated:

(1) Net of changes in deferred loan fees and discount on loans

The following table presents the contractual maturities of loans held-for-investment and the distribution between fixed and floating interest rate loans at the date indicated: