RBB Bancorp - Quarter Report: 2023 September (Form 10-Q)

rbb20230930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2023

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

For the transition period from ______ to ______

Commission File Number: 001-38149

RBB BANCORP

(Exact name of registrant as specified in its charter)

California

27-2776416

(State or other jurisdiction of

Incorporation or organization)

(I.R.S. Employer

Identification No.)

1055 Wilshire Blvd., Suite 1200,
Los Angeles, California	90017

(Address of principal executive offices)

(Zip Code)

(213) 627-9888

(Registrant’s telephone number, including area code)

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

Title of each class		Trading Symbol(s)		Name of exchange on which registered
Common Stock, No Par Value		RBB		NASDAQ Global Select Market

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

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

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

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

Number of shares of common stock of the registrant: 18,995,303 outstanding as of October 31, 2023.

Table of Contents

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION (UNAUDITED)		3
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	3
	NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	9
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	36
	CRITICAL ACCOUNTING POLICIES	37
	OVERVIEW	39
	ANALYSIS OF THE RESULTS OF OPERATIONS	40
	ANALYSIS OF FINANCIAL CONDITION	49
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	62
ITEM 4.	CONTROLS AND PROCEDURES	63
PART II - OTHER INFORMATION		65
ITEM 1.	LEGAL PROCEEDINGS	65
ITEM 1A.	RISK FACTORS	65
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	65
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	65
ITEM 4.	MINE SAFETY DISCLOSURES	65
ITEM 5.	OTHER INFORMATION	65
ITEM 6.	EXHIBITS	66
SIGNATURES		67

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2023 AND DECEMBER 31, 2022

(In thousands, except share amounts)

	(Unaudited)
	*September 30,*			*December 31,*
	*2023*			*2022*
Assets
Cash and due from banks	$	330,791		$	83,548
Interest-earning deposits in other financial institutions		600			600
Securities:
Available for sale		354,378			256,830
Held to maturity (fair value of $4,750 and $5,563 at September 30, 2023 and December 31, 2022, respectively)		5,214			5,729
Mortgage loans held for sale		62			—
Loans held for investment:
Real estate		2,929,017			3,053,864
Commercial and other		191,552			283,106
Total loans		3,120,569			3,336,970
Unaccreted discount on acquired loans		(998	)		(1,238	)
Deferred loan costs, net		1,381			717
Total loans, net of deferred loan costs and unaccreted discounts on acquired loans		3,120,952			3,336,449
Allowance for credit losses		(42,430	)		(41,076	)
Net loans		3,078,522			3,295,373

Premises and equipment, net		26,134			27,009
Federal Home Loan Bank (FHLB) stock		15,000			15,000
Net deferred tax assets		18,323			16,977
Cash surrender value of bank owned life insurance (BOLI)		58,346			57,310
Goodwill		71,498			71,498
Servicing assets		8,439			9,521
Core deposit intangibles		3,010			3,718
Right-of-use assets- operating leases		29,949			25,447
Accrued interest and other assets		69,088			50,498
Total assets	$	4,069,354		$	3,919,058

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

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RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2023 AND DECEMBER 31, 2022

(In thousands, except share amounts)

	(Unaudited)
	*September 30,*			*December 31,*
	*2023*			*2022*
Liabilities and Shareholders’ Equity
Deposits:
Noninterest-bearing demand	$	572,393		$	798,741
Savings, NOW and money market accounts		608,020			615,339
Time deposits $250,000 and under		1,237,831			837,369
Time deposits over $250,000		735,828			726,234
Total deposits		3,154,072			2,977,683

Reserve for unfunded commitments		654			1,157
FHLB advances		150,000			220,000
Long-term debt (net of unamortized debt issuance costs of $981 and $1,415 at September 30, 2023 and December 31, 2022, respectively)		174,019			173,585
Subordinated debentures		14,884			14,720
Lease liabilities - operating leases		31,265			26,523
Accrued interest and other liabilities		41,949			20,827
Total liabilities		3,566,843			3,434,495

Commitments and contingencies - Note 13

Shareholders' equity:
Preferred Stock - 100,000,000 shares authorized, no par value; none outstanding		—			—
Common Stock - 100,000,000 shares authorized, no par value; 18,995,303 shares issued and outstanding at September 30, 2023 and 18,965,776 shares issues and outstanding at December 31, 2022		277,462			276,912
Additional paid-in capital		3,579			3,361
Retained earnings		247,159			225,883
Non-controlling interest		72			72
Accumulated other comprehensive loss, net		(25,761	)		(21,665	)
Total shareholders’ equity		502,511			484,563
Total liabilities and shareholders’ equity	$	4,069,354		$	3,919,058

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

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RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME – (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(In thousands, except per share amounts)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Interest and dividend income:
Interest and fees on loans	$	47,617	$	43,588	$	148,369	$	121,631
Interest on interest-earning deposits		3,193		373		6,096		655
Interest on investment securities		4,211		1,784		10,321		4,210
Dividend income on FHLB stock		290		224		814		673
Interest on federal funds sold and other		252		445		716		1,149
Total interest income		55,563		46,414		166,316		128,318
Interest expense:
Interest on savings deposits, now and money market accounts		3,106		1,529		8,180		3,091
Interest on time deposits		21,849		2,460		54,424		5,540
Interest on subordinated debentures and long-term debt		2,579		2,427		7,668		7,154
Interest on other borrowed funds		440		1,020		2,428		1,974
Total interest expense		27,974		7,436		72,700		17,759
Net interest income		27,589		38,978		93,616		110,559
Provision for credit losses		1,399		1,766		3,793		3,048
Net interest income after provision for credit losses		26,190		37,212		89,823		107,511
Noninterest income:
Service charges, fees and other		1,357		1,214		4,150		3,745
Gain on sale of loans		212		265		258		1,783
Loan servicing fees, net of amortization		623		724		1,959		1,628
Increase in cash surrender value of life insurance		356		332		1,036		986
Gain on sale of OREO		190		—		190		—
Gain on sale of fixed assets		32		—		32		757
		2,770		2,535		7,625		8,899
Noninterest expense:
Salaries and employee benefits		9,744		9,561		28,935		28,558
Occupancy and equipment expenses		2,414		2,349		7,242		6,728
Data processing		1,315		1,306		3,969		3,857
Legal and professional		1,022		1,077		6,907		4,337
Office expenses		437		382		1,163		1,033
Marketing and business promotion		340		364		892		1,172
Insurance and regulatory assessments		730		441		2,043		1,360
Core deposit premium		236		277		708		833
Other expenses		638		940		2,445		2,489
		16,876		16,697		54,304		50,367
Income before income taxes		12,084		23,050		43,144		66,043
Income tax expense		3,611		6,398		12,752		19,297
Net income	$	8,473	$	16,652	$	30,392	$	46,746

Net income per share
Basic	$	0.45	$	0.88	$	1.60	$	2.44
Diluted		0.45		0.87		1.60		2.41

Weighted-average common shares outstanding
Basic		18,995,303		18,988,443		18,991,579		19,142,732
Diluted		18,997,304		19,130,447		19,013,838		19,415,558

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

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RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(In thousands)

	*Three Months Ended*						*Nine Months Ended*
	*September 30,*						*September 30,*
	*2023*			*2022*			*2023*			*2022*
Net income	$	8,473		$	16,652		$	30,392		$	46,746

Other comprehensive loss:
Unrealized loss on securities available for sale:		(4,824	)		(9,773	)		(5,838	)		(30,140	)

Related income tax effect:		1,468			2,999			1,742			9,275

Total other comprehensive loss		(3,356	)		(6,774	)		(4,096	)		(20,865	)

Total comprehensive income	$	5,117		$	9,878		$	26,296		$	25,881

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

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RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY – (UNAUDITED)

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(In thousands, except share amounts)

	*Common Stock*														*Accumulated*
	*Shares*			*Amount*			*Additional Paid-in Capital*			*Retained Earnings*			*Non- Controlling Interest*		*Other Comprehensive Loss, net*			*Total*
Balance at June 30, 2023		18,995,303		$	277,462		$	3,436		$	241,725		$	72	$	(22,405	)	$	500,290
Net income		—			—			—			8,473			—		—			8,473
Stock-based compensation		—			—			143			—			—		—			143
Cash dividends on common stock ($0.16 per share)		—			—			—			(3,039	)		—		—			(3,039	)
Other comprehensive loss, net of taxes		—			—			—			—			—		(3,356	)		(3,356	)
Balance at September 30, 2023		18,995,303		$	277,462		$	3,579		$	247,159		$	72	$	(25,761	)	$	502,511

Balance at June 30, 2022		18,881,829		$	275,096		$	4,193		$	197,889		$	72	$	(15,747	)	$	461,503
Net income		—			—			—			16,652			—		—			16,652
Stock-based compensation		—			—			274			—			—		—			274
Restricted stock unit vested		6,450			175			(175	)		—			—		—			—
Cash dividends on common stock ($0.14 per share)		—			—			—			(2,663	)		—		—			(2,663	)
Stock options exercised		217,932			3,680			(1,099	)		—			—		—			2,581
Repurchase of common stock		(94,539	)		(1,370	)		—			(608	)		—		—			(1,978	)
Other comprehensive loss, net of taxes		—			—			—			—			—		(6,774	)		(6,774	)
Balance at September 30, 2022		19,011,672		$	277,581		$	3,193		$	211,270		$	72	$	(22,521	)	$	469,595

	*Common Stock*														*Accumulated*
	*Shares*			*Amount*			*Additional Paid-in Capital*			*Retained Earnings*			*Non- Controlling Interest*		*Other Comprehensive Loss, net*			*Total*
Balance at January 1, 2023		18,965,776		$	276,912		$	3,361		$	225,883		$	72	$	(21,665	)	$	484,563
Net income		—			—			—			30,392			—		—			30,392
Stock-based compensation		—			—			609			—			—		—			609
Restricted stock unit vested		20,374			391			(391	)		—			—		—			—
Cash dividends on common stock ($0.48 per share)		—			—			—			(9,116	)		—		—			(9,116	)
Stock options exercised		9,153			159			—			—			—		—			159
Other comprehensive loss, net of taxes		—			—			—			—			—		(4,096	)		(4,096	)
Balance at September 30, 2023		18,995,303		$	277,462		$	3,579		$	247,159		$	72	$	(25,761	)	$	502,511

Balance at January 1, 2022		19,455,544		$	282,335		$	4,603		$	181,329		$	72	$	(1,656	)	$	466,683
Cumulative effect of change in accounting principle related to ASC 326 ⁽¹⁾		—			—			—			(2,204	)		—		—			(2,204	)
Net income		—			—			—			46,746			—		—			46,746
Stock-based compensation		—			—			680			—			—		—			680
Restricted stock cancelled		(40,000	)		—			—			—			—		—			—
Restricted stock vested		—			355			(355	)		—			—		—			—
Restricted stock unit vested		7,450			202			(202	)		—			—		—			—
Cash dividends on common stock ($0.42 per share)		—			—			—			(8,074	)		—		—			(8,074	)
Stock options exercised		442,308			6,969			(1,533	)		—			—		—			5,436
Repurchase of common stock		(853,630	)		(12,280	)		—			(6,527	)		—		—			(18,807	)
Other comprehensive loss, net of taxes		—			—			—			—			—		(20,865	)		(20,865	)
Balance at September 30, 2022		19,011,672		$	277,581		$	3,193		$	211,270		$	72	$	(22,521	)	$	469,595

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

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

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RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS – (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(In thousands)

	*Nine Months Ended*
	*September 30,*
	*2023*			*2022*
Operating activities
Net income	$	30,392		$	46,746
Adjustments to reconcile net income to net cash from Operating activities:
Depreciation and amortization of premises and equipment		1,520			1,869
Net accretion of securities, loans, deposits, and other		(4,257	)		(391	)
Amortization of investment in affordable housing tax credits		846			778
Amortization of intangible assets		1,976			3,023
Amortization of right-of-use asset		3,765			3,858
Change in operating lease liabilities		(3,525	)		(3,754	)
Provision for credit losses		3,793			3,048
Stock-based compensation		609			680
Deferred tax benefit		395			72
Gain on sale of loans		(258	)		(1,783	)
Gain on sale of OREO		(190	)		—
Gain on sale of fixed assets		(32	)		(757	)
Increase in cash surrender value of life insurance		(1,036	)		(986	)
Loans originated and purchased for sale, net		(10,236	)		(37,612	)
Proceeds from loans sold		14,626			56,480
Other items		21,716			17
Net cash provided by operating activities		60,104			71,288
Investing activities
Securities available for sale:
Purchases		(592,177	)		(340,226	)
Maturities, repayments and calls		493,220			412,480
Securities held to maturity:
Maturities, repayments and calls		500			500
Purchase of other equity securities, net		(378	)		(1,208	)
Net increase of investment in qualified affordable housing projects		(72	)		(133	)
Net decrease (increase) in loans		188,856			(294,693	)
Proceeds from sales of OREO		483			—
Net cash received in connection with a branch purchase		—			71,352
Proceeds from sale of fixed assets		32			757
Purchases of premises and equipment		(614	)		(1,473	)
Net cash provided by (used in) investing activities		89,850			(152,644	)
Financing activities
Net decrease in demand deposits and savings accounts		(233,667	)		(502,364	)
Net increase (decrease) in time deposits		409,913			(5,028	)
Proceeds from FHLB advances		80,000			470,000
Repayments of FHLB Advances		(150,000	)		(380,000	)
Cash dividends paid		(9,116	)		(8,074	)
Common stock repurchased, net of repurchased costs		—			(18,807	)
Exercise of stock options		159			5,436
Net cash provided by (used in) financing activities		97,289			(438,837	)
Net increase (decrease) in cash and cash equivalents		247,243			(520,193	)
Cash and cash equivalents at beginning of period		83,548			694,372
Cash and cash equivalents at end of period	$	330,791		$	174,179
Supplemental disclosure of cash flow information
Cash paid during the period:
Interest paid	$	64,936		$	15,500
Taxes paid		2,829			19,263
Non-cash investing and financing activities:
Loans transfer to held for sale, net		4,194			12,313
Additions to servicing assets		186			727
Net change in unrealized holding gain on securities available for sale		(5,838	)		(30,140	)
Recognition of operating lease right-of-use assets		(8,267	)		(6,172	)
Recognition of operating lease liabilities		8,267			6,172
Acquisition:
Assets acquired, net of cash received		—			8,183
Liabilities assumed		—			81,790
Cash considerations		—			(71,040	)
Goodwill		—			2,255

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

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RBB BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (UNAUDITED)

NOTE 1 - BUSINESS DESCRIPTION

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

At September 30, 2023, the Company had total consolidated assets of $4.1 billion, gross consolidated loans of $3.1 billion, total consolidated deposits of $3.2 billion and total consolidated shareholders' equity of $502.5 million. RBB’s common stock trades on the Nasdaq Global Select Market under the symbol “RBB.”

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

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

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

The Company has completed six whole bank acquisitions and one branch acquisition from July 2011 through January 2022. All of the Company’s acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. The Company previously disclosed that, on December 28, 2021, it entered into a definitive agreement to acquire Gateway Bank F.S.B. (“Gateway”) in an all cash transaction, subject to certain terms and conditions. On September 28, 2023, the Company announced that it and Gateway have mutually agreed to terminate the definitive agreement, effective as of September 28, 2023. Neither party has or will have any liability or pay any penalty to the other party as a result of the termination, and each party has released the other from any and all claims related to the definitive agreement or the transactions contemplated by the definitive agreement.

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

Basis of Presentation

The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for Form 10-Q and conform to practices within the banking industry and include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments), which are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the three months and the nine months ended September 30, 2023 are not necessarily indicative of the results for the full year. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2022, included in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2022 and Amendment No. 1 to the Annual Report on Form 10-K/A (collectively our “2022 Annual Report”).

Use of Estimates in the Preparation of Financial Statements

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

Summary of Significant Accounting Policies

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

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Recent Accounting Pronouncements

Recently adopted

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

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

			*Adjustments*
			*due to*
	*Balance at*		*Adoption of*			*Balance at*
*(dollars in thousands)*	*December 31, 2021*		*ASC 326*			*January 1, 2022*
Assets:
Allowance for credit losses on loans	$	32,912	$	2,135		$	35,047
Deferred tax assets		4,855		977			5,832
Liabilities:
Allowance for unfunded commitments	$	1,203	$	1,045		$	2,248
Shareholders' equity:
Retained earnings, net of tax	$	181,329	$	(2,204	)	$	179,125

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

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

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

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

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In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting," which provides temporary optional expedients to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) to an alternative reference rate such as Secured Overnight Financing Rate (“SOFR”). This pronouncement is applicable to all companies with contracts or hedging relationships that reference an interest rate that is expected to be discontinued. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. Companies can apply the ASU immediately. However, the guidance will only be available for a limited time. The optional relief generally does not apply to contract modifications made, sales and transfers of HTM debt securities, and hedging relationships entered into or evaluated after December 31, 2022. The guidance was effective upon issuance and generally can be applied through December 31, 2022. In December 2022, the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848,” to defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The LIBOR termination was June 30, 2023. The Company converted LIBOR to CME Term SOFR with relevant spread adjustment as the alternative reference rate for all loans indexed under LIBOR beginning on and after July 3, 2023. No LIBOR indexed loans are being originated. The Company has several issuances of LIBOR based long-term debt and subordinated debentures. Refer to Notes 9 and 10 of the Company’s consolidated financial statements included in this Quarterly Report on Form 10-Q.

Recently issued not yet effective

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

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

NOTE 3 – ACQUISITIONS

Honolulu, Hawaii Branch Purchase

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

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

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

				*Fair Value*			*Fair*
*(dollars in thousands)*	*Book Value*			*Adjustments*			*Value*
Assets acquired
Cash and cash equivalents	$	312		$	—		$	312
Loans, gross		7,352			38			7,390
Bank premises and equipment		12			—			12
Core deposit intangible		—			729			729
Other assets		412			(360	)		52
Total assets acquired	$	8,088		$	407		$	8,495

Liabilities assumed
Deposits	$	81,673		$	27		$	81,700
Escrow Payable		2			—			2
Other liabilities		460			(372	)		88
Total liabilities assumed	$	82,135		$	(345	)	$	81,790
Excess of assets acquired over liabilities assumed	$	(74,047	)	$	752		$	(73,295	)
Cash received								71,040
Goodwill recognized							$	2,255

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

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

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

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

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

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

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NOTE 4 - INVESTMENT SECURITIES

The following table summarizes the amortized cost and fair value of available for sale (“AFS”) debt securities and HTM debt securities as of September 30, 2023 and December 31, 2022, and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income:

			*Gross*		*Gross*
*(dollars in thousands)*	*Amortized*		*Unrealized*		*Unrealized*			*Fair*
September 30, 2023	*Cost*		*Gains*		*Losses*			*Value*
Available for sale
Government agency securities	$	8,694	$	—	$	(800	)	$	7,894
SBA agency securities		7,533		—		(272	)		7,261
Mortgage-backed securities: residential		41,501		—		(8,064	)		33,437
Collateralized mortgage obligations: residential		86,343		—		(15,144	)		71,199
Collateralized mortgage obligations: commercial		70,837		1		(3,343	)		67,495
Commercial paper		129,105		—		(32	)		129,073
Corporate debt securities		34,817		—		(5,011	)		29,806
Municipal securities		12,644		—		(4,431	)		8,213
Total	$	391,474	$	1	$	(37,097	)	$	354,378

Held to maturity
Municipal taxable securities	$	502	$	—	$	(3	)	$	499
Municipal securities		4,712		—		(461	)		4,251
Total	$	5,214	$	—	$	(464	)	$	4,750

			*Gross*		*Gross*
*(dollars in thousands)*	*Amortized*		*Unrealized*		*Unrealized*			*Fair*
December 31, 2022	*Cost*		*Gains*		*Losses*			*Value*
Available for sale
Government agency securities	$	5,012	$	—	$	(517	)	$	4,495
SBA agency securities		2,634		—		(223	)		2,411
Mortgage-backed securities: residential		44,809		—		(6,752	)		38,057
Mortgage-backed securities: commercial		4,887		—		(16	)		4,871
Collateralized mortgage obligations: residential		82,759		—		(12,856	)		69,903
Collateralized mortgage obligations: commercial		44,591		—		(2,901	)		41,690
Commercial paper		49,551		2		(16	)		49,537
Corporate debt securities		41,176		1		(4,165	)		37,012
Municipal securities		12,669		—		(3,815	)		8,854
Total	$	288,088	$	3	$	(31,261	)	$	256,830

Held to maturity
Municipal taxable securities	$	1,003	$	7	$	(3	)	$	1,007
Municipal securities		4,726		—		(170	)		4,556
Total	$	5,729	$	7	$	(173	)	$	5,563

At September 30, 2023, we pledged investment securities with a fair value of $93.1 million for certificates of deposit from the state of California. One security with a fair value of $63,000 and $76,000 at September 30, 2023 and December 31, 2022, respectively, was pledged to secure a local agency deposit.

There were no sales of investment securities during the three and nine months ended September 30, 2023 and 2022, respectively.

Accrued interest receivable for investment debt securities at September 30, 2023 and December 31, 2022 totaled $839,000 and $810,000, respectively.

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The amortized cost and fair value of the investment securities portfolio at September 30, 2023 and December 31, 2022 are shown by expected maturity below. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	*Less than One Year*				*More than One Year to Five Years*				*More than Five Years to Ten Years*				*More than Ten Years*				*Total*
	*Amortized*				*Amortized*				*Amortized*				*Amortized*				*Amortized*
*(dollars in thousands)*	*Cost*		*Fair Value*		*Cost*		*Fair Value*		*Cost*		*Fair Value*		*Cost*		*Fair Value*		*Cost*		*Fair Value*
September 30, 2023
Government agency securities	$	—	$	—	$	8,694	$	7,894	$	—	$	—	$	—	$	—	$	8,694	$	7,894
SBA agency securities		—		—		2,387		2,115		5,146		5,146		—		—		7,533		7,261
Mortgage-backed securities: residential		—		—		11,546		10,028		20,114		16,164		9,841		7,245		41,501		33,437
Collateralized mortgage obligations: residential		—		—		23,737		22,217		58,783		46,416		3,823		2,566		86,343		71,199
Collateralized mortgage obligations: commercial		3,173		3,163		22,470		20,230		45,194		44,102		—		—		70,837		67,495
Commercial paper		129,105		129,073		—		—		—		—		—		—		129,105		129,073
Corporate debt securities		—		—		12,919		12,225		19,253		15,822		2,645		1,759		34,817		29,806
Municipal securities		—		—		—		—		—		—		12,644		8,213		12,644		8,213
Total available for sale	$	132,278	$	132,236	$	81,753	$	74,709	$	148,490	$	127,650	$	28,953	$	19,783	$	391,474	$	354,378

Municipal taxable securities	$	—	$	—	$	502	$	499	$	—	$	—	$	—	$	—	$	502	$	499
Municipal securities		—		—		—		—		2,338		2,085		2,374		2,166		4,712		4,251
Total held to maturity	$	—	$	—	$	502	$	499	$	2,338	$	2,085	$	2,374	$	2,166	$	5,214	$	4,750
*(dollars in thousands)*
December 31, 2022
Government agency securities	$	—	$	—	$	5,012	$	4,495	$	—	$	—	$	—	$	—	$	5,012	$	4,495
SBA agency securities		—		—		2,634		2,411		—		—		—		—		2,634		2,411
Mortgage-backed securities: residential		—		—		13,013		11,598		29,114		24,361		2,682		2,098		44,809		38,057
Mortgage-backed securities: commercial		—		—		4,887		4,871		—		—		—		—		4,887		4,871
Collateralized mortgage obligations: residential		—		—		20,687		19,646		62,072		50,257		—		—		82,759		69,903
Collateralized mortgage obligations: commercial		—		—		16,382		14,644		28,209		27,046		—		—		44,591		41,690
Commercial paper		49,551		49,537		—		—		—		—		—		—		49,551		49,537
Corporate debt securities		3,705		3,706		11,355		10,806		23,454		20,662		2,662		1,838		41,176		37,012
Municipal securities		—		—		—		—		—		—		12,669		8,854		12,669		8,854
Total available for sale	$	53,256	$	53,243	$	73,970	$	68,471	$	142,849	$	122,326	$	18,013	$	12,790	$	288,088	$	256,830

Municipal taxable securities	$	501	$	498	$	502	$	509	$	—	$	—	$	—	$	—	$	1,003	$	1,007
Municipal securities		—		—		—		—		1,739		1,692		2,987		2,864		4,726		4,556
Total held to maturity	$	501	$	498	$	502	$	509	$	1,739	$	1,692	$	2,987	$	2,864	$	5,729	$	5,563

The following tables show the related fair value and the gross unrealized losses of the Company's investment securities, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2023, and December 31, 2022:

	*Less than Twelve Months*					*Twelve Months or More*					*Total*
*(dollars in thousands)*	*Fair Value*		*Unrealized Losses*			*Fair Value*		*Unrealized Losses*			*Fair Value*		*Unrealized Losses*
September 30, 2023
Government agency securities	$	4,119	$	(174	)	$	3,775	$	(626	)	$	7,894	$	(800	)
SBA securities		—		—			2,115		(272	)		2,115		(272	)
Mortgage-backed securities: residential		—		—			33,437		(8,064	)		33,437		(8,064	)
Collateralized mortgage obligations: residential		11,956		(310	)		59,243		(14,834	)		71,199		(15,144	)
Collateralized mortgage obligations: commercial		23,696		(121	)		38,800		(3,222	)		62,496		(3,343	)
Commercial paper		114,185		(32	)		—		—			114,185		(32	)
Corporate debt securities		—		—			29,806		(5,011	)		29,806		(5,011	)
Municipal securities		—		—			8,213		(4,431	)		8,213		(4,431	)
Total available for sale	$	153,956	$	(637	)	$	175,389	$	(36,460	)	$	329,345	$	(37,097	)

Municipal taxable securities	$	499	$	(3	)	$	—	$	—		$	499	$	(3	)
Municipal securities		1,281		(134	)		2,970		(327	)		4,251		(461	)
Total held to maturity	$	1,780	$	(137	)	$	2,970	$	(327	)	$	4,750	$	(464	)

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	*Less than Twelve Months*					*Twelve Months or More*					*Total*
*(dollars in thousands)*	*Fair Value*		*Unrealized Losses*			*Fair Value*		*Unrealized Losses*			*Fair Value*		*Unrealized Losses*
December 31, 2022
Government agency securities	$	354	$	(24	)	$	4,141	$	(493	)	$	4,495	$	(517	)
SBA securities		2,411		(223	)		—		—			2,411		(223	)
Mortgage-backed securities: residential		5,535		(362	)		32,522		(6,390	)		38,057		(6,752	)
Mortgage-backed securities: commercial		4,871		(16	)		—		—			4,871		(16	)
Collateralized mortgage obligations: residential		27,050		(1,842	)		39,815		(11,014	)		66,865		(12,856	)
Collateralized mortgage obligations: commercial		18,741		(790	)		22,949		(2,111	)		41,690		(2,901	)
Commercial paper		39,624		(16	)		—		—			39,624		(16	)
Corporate debt securities		22,977		(1,843	)		10,330		(2,322	)		33,307		(4,165	)
Municipal securities		—		—			8,854		(3,815	)		8,854		(3,815	)
Total available for sale	$	121,563	$	(5,116	)	$	118,611	$	(26,145	)	$	240,174	$	(31,261	)

Municipal taxable securities	$	498	$	(3	)	$	—	$	—		$	498	$	(3	)
Municipal securities		4,556		(170	)		—		—			4,556		(170	)
Total held to maturity	$	5,054	$	(173	)	$	—	$	—		$	5,054	$	(173	)

The securities that were in an unrealized loss position at September 30, 2023 and December 31, 2022, were evaluated to determine whether the decline in fair value below the amortized cost basis resulted from a credit loss or other factors. The ACL on HTM securities was immaterial at September 30, 2023 and December 31, 2022.

The Company concluded that the unrealized losses were primarily attributed to yield curve movement, together with widened liquidity spreads and credit spreads. The issuers have not, to the Company's knowledge, established any cause for default on these securities. The Company expects to recover the amortized cost basis of its securities and has no present intent to sell and will not be required to sell securities that have declined below their cost before their anticipated recovery. Accordingly, no ACL was recorded as of September 30, 2023 and December 31, 2022, against AFS securities, and there was no provision for credit losses recognized for the nine months ended September 30, 2023 and the year ended December 31, 2022.

Equity Securities - The Company has several Community Reinvestment Act ("CRA") equity investments. The Company recorded no gain nor loss for the three and nine months ended September 30, 2023 and September 30, 2022. CRA equity securities were $22.2 million and $22.2 million as of September 30, 2023 and December 31, 2022, respectively.

NOTE 5 - LOANS AND ALLOWANCE FOR CREDIT LOSSES

The Company's loan portfolio consists primarily of loans to borrowers within the Southern California metropolitan area, the New York City metropolitan area, the Chicago, Illinois metropolitan area, Las Vegas, Nevada, Edison, New Jersey and Honolulu, Hawaii. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company's market area and, as a result, the Company's loan and collateral portfolios are, to some degree, concentrated in those industries.

The types of loans in the Company's consolidated balance sheets as of September 30, 2023 and December 31, 2022 were as follows:

*(dollars in thousands)*	*September 30, 2023*			*December 31, 2022*
Loans:⁽¹⁾
Real Estate:
Construction and land development	$	259,778		$	276,876
Commercial real estate ⁽²⁾		1,164,210			1,312,132
Single-family residential mortgages		1,505,307			1,464,108
Commercial:
Commercial and industrial		127,655			201,223
SBA		50,420			61,411
Other:
Other loans		13,582			20,699
Total loans ⁽¹⁾	$	3,120,952		$	3,336,449
Allowance for credit losses		(42,430	)		(41,076	)
Total loans, net	$	3,078,522		$	3,295,373

(1) Net of discounts and deferred fees and costs.

(2) Includes non-farm and non-residential real estate loans, multifamily residential and 1-4 family single family residential loans for a business purpose

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Allowance for Credit Losses

The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination. The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated balance sheet. 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 has elected to utilize a discounted cash flow (“DCF”) approach for all segments except consumer loans and warehouse mortgage loans, for which a remaining life approach was elected.

The Company’s DCF methodology incorporates a probability of default, loss given default and exposure at default 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 unemployment forecast scenarios and related scenario-weighting, as well as determining the appropriate length of the forecast horizon. Management estimates the allowance balance required using past loan loss experience from peers with similar portfolio sizes and geographic locations to the Company, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. The Company’s CECL methodology utilizes a four-quarter reasonable and supportable forecast period, and a four-quarter reversion period. The Company is using the Federal Open Market Committee to obtain forecasts for the unemployment rate, while reverting to a long-run average of each considered economic factor.

The Company uses both internal and external qualitative factors within the CECL model: lending policies, procedures, and strategies; economic conditions; changes in nature and volume of the portfolio; credit staffing and administration experience; problem loan trends; loan review results; collateral values; concentrations; and regulatory and business environment. During the third quarter of 2023, the Company recorded an increase of $1.5 million to ACL and a decrease of $144,000 to allowance for unfunded commitments compared to an increase of $1.8 million to ACL and a decrease of $28,000 to allowance for unfunded commitments during the third quarter of 2022.

The following tables present the balance and activity related to the ACL for held for investment loans by type for the periods presented.

	*For the Three Months Ended September 30,*
	*2023*											*2022*
*(dollars in thousands)*	*Real Estate*			*Commercial*		*Other*			*Total*			*Real Estate*		*Commercial*			*Other*			*Total*
Allowance for credit losses:
Beginning balance	$	40,869		$	1,733	$	490		$	43,092		$	32,105	$	2,646		$	1,538		$	36,289
Provisions		963			809		(228	)		1,544			2,271		(525	)		20			1,766
Charge-offs		(2,150	)		—		(67	)		(2,217	)		—		(5	)		(44	)		(49	)
Recoveries		—			1		10			11			—		169			7			176
Ending allowance balance	$	39,682		$	2,543	$	205		$	42,430		$	34,376	$	2,285		$	1,521		$	38,182

	*For the Nine Months Ended September 30,*
	*2023*												*2022*
*(dollars in thousands)*	*Real Estate*			*Commercial*			*Other*			*Total*			*Real Estate*		*Commercial*			*Other*			*Total*
Allowance for credit losses:
Beginning balance	$	37,935		$	2,425		$	716		$	41,076		$	28,592	$	3,793		$	527		$	32,912
ASU 2016-13 Transition Adjustment		—			—			—			—			1,612		(604	)		1,127			2,135
Adjusted beginning balance	$	37,935		$	2,425		$	716		$	41,076		$	30,204	$	3,189		$	1,654		$	35,047
Provisions		4,389			178			(270	)		4,297			4,172		(1,128	)		4			3,048
Charge-offs		(2,642	)		(62	)		(288	)		(2,992	)		—		(5	)		(146	)		(151	)
Recoveries		—			2			47			49			—		229			9			238
Ending allowance balance	$	39,682		$	2,543		$	205		$	42,430		$	34,376	$	2,285		$	1,521		$	38,182

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

Pass - Loans classified as pass include loans not meeting the risk ratings defined below.

Special Mention - Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date.

Substandard - Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful - Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Table of Contents

The following table summarizes the Company's loans held for investment as of September 30, 2023 and December 31, 2022 by loan portfolio segments, risk ratings and vintage year. The vintage year is the year of origination, renewal or major modification. Revolving loans that are converted to term loans presented in the table below are excluded from the term loans by vintage year columns.

*(dollars in thousands)*	*Term Loan by Vintage*
September 30, 2023	*2023*		*2022*			*2021*			*2020*			*2019*		*Prior*			*Revolving*		*Revolving Converted to Term During the Period*		*Total*
Real estate:
Construction and land development
Pass	$	198,431	$	34,695		$	10,659		$	3,925		$	195	$	39		$	—	$	—	$	247,944
Special mention		—		—			11,706			—			—		—			—		—		11,706
Substandard		—		—			—			—			—		128			—		—		128
Doubtful		—		—			—			—			—		—			—		—		—
Total	$	198,431	$	34,695		$	22,365		$	3,925		$	195	$	167		$	—	$	—	$	259,778
YTD period charge-offs	$	—	$	—		$	—		$	—		$	—	$	(12	)	$	—	$	—	$	(12	)
YTD period recoveries		—		—			—			—			—		—			—		—		—
Net	$	—	$	—		$	—		$	—		$	—	$	(12	)	$	—	$	—	$	(12	)
Commercial real estate
Pass	$	56,171	$	428,412		$	189,451		$	178,948		$	97,249	$	159,579		$	—	$	—	$	1,109,810
Special mention		—		—			—			—			7,778		4,904			—		—		12,682
Substandard		303		9,800			—			11,514			2,303		17,798			—		—		41,718
Doubtful		—		—			—			—			—		—			—		—		—
Total	$	56,474	$	438,212		$	189,451		$	190,462		$	107,330	$	182,281		$	—	$	—	$	1,164,210
YTD period charge-offs	$	—	$	(2,078	)	$	—		$	(459	)	$	—	$	—		$	—	$	—	$	(2,537	)
YTD period recoveries		—		—			—			—			—		—			—		—		—
Net	$	—	$	(2,078	)	$	—		$	(459	)	$	—	$	—		$	—	$	—	$	(2,537	)
Single-family residential mortgages
Pass	$	147,380	$	601,539		$	243,372		$	127,839		$	85,342	$	276,884		$	1,813	$	—	$	1,484,169
Special mention		—		—			—			—			—		3,862			—		—		3,862
Substandard		—		455			—			4,868			545		11,323			85		—		17,276
Doubtful		—		—			—			—			—		—			—		—		—
Total	$	147,380	$	601,994		$	243,372		$	132,707		$	85,887	$	292,069		$	1,898	$	—	$	1,505,307
YTD period charge-offs	$	—	$	—		$	—		$	(93	)	$	—	$	—		$	—	$	—	$	(93	)
YTD period recoveries		—		—			—			—			—		—			—		—		—
Net	$	—	$	—		$	—		$	(93	)	$	—	$	—		$	—	$	—	$	(93	)
Commercial:
Commercial and industrial																						—
Pass	$	1,524	$	3,448		$	6,582		$	3,021		$	2,186	$	6,943		$	93,638	$	—	$	117,342
Special mention		—		—			—			—			—		—			2,632		—		2,632
Substandard		—		91			—			1,433			10		4,969			1,175		—		7,678
Doubtful		—		—			—			—			—		—			3		—		3
Total	$	1,524	$	3,539		$	6,582		$	4,454		$	2,196	$	11,912		$	97,448	$	—	$	127,655
YTD period charge-offs	$	—	$	—		$	—		$	—		$	—	$	—		$	—	$	—	$	—
YTD period recoveries		—		—			—			—			—		2			—		—		2
Net	$	—	$	—		$	—		$	—		$	—	$	2		$	—	$	—	$	2
SBA
Pass	$	2,812	$	11,066		$	10,146		$	3,079		$	4,607	$	13,934		$	—	$	—	$	45,644
Special mention		—		—			330			—			—		—			—		—		330
Substandard		—		—			—			—			85		4,361			—		—		4,446
Doubtful		—		—			—			—			—		—			—		—		—
Total	$	2,812	$	11,066		$	10,476		$	3,079		$	4,692	$	18,295		$	—	$	—	$	50,420
YTD period charge-offs	$	—	$	—		$	—		$	—		$	—	$	(62	)	$	—	$	—	$	(62	)
YTD period recoveries		—		—			—			—			—		—			—		—		—
Net	$	—	$	—		$	—		$	—		$	—	$	(62	)	$	—	$	—	$	(62	)
Other:
Pass	$	204	$	3,002		$	9,326		$	839		$	39	$	—		$	17	$	—	$	13,427
Special mention		—		—			—			—			—		—			—		—		—
Substandard		—		111			36			8			—		—			—		—		155
Doubtful		—		—			—			—			—		—			—		—		—
Total	$	204	$	3,113		$	9,362		$	847		$	39	$	—		$	17	$	—	$	13,582
YTD period charge-offs	$	—	$	(79	)	$	(199	)	$	(10	)	$	—	$	—		$	—	$	—	$	(288	)
YTD period recoveries		—		—			46			1			—		—			—		—		47
Net	$	—	$	(79	)	$	(153	)	$	(9	)	$	—	$	—		$	—	$	—	$	(241	)
Total by risk rating:
Pass	$	406,522	$	1,082,162		$	469,536		$	317,651		$	189,618	$	457,379		$	95,468	$	—	$	3,018,336
Special mention		—		—			12,036			—			7,778		8,766			2,632		—		31,212
Substandard		303		10,457			36			17,823			2,943		38,579			1,260		—		71,401
Doubtful		—		—			—			—			—		—			3		—		3
Total loans	$	406,825	$	1,092,619		$	481,608		$	335,474		$	200,339	$	504,724		$	99,363	$	—	$	3,120,952
Net charge-offs	$	—	$	(2,157	)	$	(153	)	$	(561	)	$	—	$	(72	)	$	—	$	—	$	(2,943	)

Table of Contents

*(dollars in thousands)*	*Term Loan by Vintage*
December 31, 2022	*2022*		*2021*			*2020*		*2019*			*2018*		*Prior*			*Revolving*		*Revolving Converted to Term During the Period*		*Total*
Real estate:
Construction and land development
Pass	$	125,216	$	52,262		$	99,016	$	201		$	—	$	40		$	—	$	—	$	276,735
Special mention		—		—			—		—			—		—			—		—		—
Substandard		—		—			—		—			—		141			—		—		141
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	125,216	$	52,262		$	99,016	$	201		$	—	$	181		$	—	$	—	$	276,876
YTD period charge-offs	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
YTD period recoveries		—		—			—		—			—		—			—		—		—
Net	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
Commercial real estate
Pass	$	479,304	$	293,058		$	195,051	$	110,442		$	73,013	$	117,068		$	—	$	—	$	1,267,936
Special mention		—		—			9,280		—			—		—			—		—		9,280
Substandard		287		—			8,652		2,329			222		23,426			—		—		34,916
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	479,591	$	293,058		$	212,983	$	112,771		$	73,235	$	140,494		$	—	$	—	$	1,312,132
YTD period charge-offs	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
YTD period recoveries		—		—			—		—			—		—			—		—		—
Net	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
Single-family residential mortgages
Pass	$	637,893	$	255,529		$	137,964	$	96,355		$	134,415	$	182,893		$	2,992	$	—	$	1,448,041
Special mention		—		—			—		—			3,925		—			—		—		3,925
Substandard		—		—			3,954		—			7,631		452			105		—		12,142
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	637,893	$	255,529		$	141,918	$	96,355		$	145,971	$	183,345		$	3,097	$	—	$	1,464,108
YTD period charge-offs	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
YTD period recoveries		—		—			—		—			—		—			—		—		—
Net	$	—	$	—		$	—	$	—		$	—	$	—		$	—	$	—	$	—
Commercial:
Commercial and industrial																					—
Pass	$	8,038	$	7,513		$	4,448	$	3,470		$	1,016	$	8,827		$	129,483	$	86	$	162,881
Special mention		—		5,987			—		—			1,638		17,805			3,577		—		29,007
Substandard		—		—			1,600		16			—		339			7,380		—		9,335
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	8,038	$	13,500		$	6,048	$	3,486		$	2,654	$	26,971		$	140,440	$	86	$	201,223
YTD period charge-offs	$	—	$	—		$	—	$	(5	)	$	—	$	—		$	—	$	—	$	(5	)
YTD period recoveries		—		—			—		—			—		2			—		—		2
Net	$	—	$	—		$	—	$	(5	)	$	—	$	2		$	—	$	—	$	(3	)
SBA
Pass	$	14,922	$	10,664		$	6,496	$	4,688		$	2,579	$	16,793		$	—	$	—	$	56,142
Special mention		—		—			—		—			—		—			—		—		—
Substandard		—		—			—		91			1,017		4,161			—		—		5,269
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	14,922	$	10,664		$	6,496	$	4,779		$	3,596	$	20,954		$	—	$	—	$	61,411
YTD period charge-offs	$	—	$	—		$	—	$	—		$	—	$	(14	)	$	—	$	—	$	(14	)
YTD period recoveries		—		—			—		—			—		227			—		—		227
Net	$	—	$	—		$	—	$	—		$	—	$	213		$	—	$	—	$	213
Other:
Pass	$	4,224	$	14,684		$	1,505	$	90		$	7	$	—		$	26	$	—	$	20,536
Special mention		—		—			—		—			—		—			—		—		—
Substandard		105		48			10		—			—		—			—		—		163
Doubtful		—		—			—		—			—		—			—		—		—
Total	$	4,329	$	14,732		$	1,515	$	90		$	7	$	—		$	26	$	—	$	20,699
YTD period charge-offs	$	—	$	(237	)	$	—	$	—		$	—	$	—		$	—	$	—	$	(237	)
YTD period recoveries		—		27			2		—			—		—			—		—		29
Net	$	—	$	(210	)	$	2	$	—		$	—	$	—		$	—	$	—	$	(208	)
Total by risk rating:
Pass	$	1,269,597	$	633,710		$	444,480	$	215,246		$	211,030	$	325,621		$	132,501	$	86	$	3,232,271
Special mention		—		5,987			9,280		—			5,563		17,805			3,577		—		42,212
Substandard		392		48			14,216		2,436			8,870		28,519			7,485		—		61,966
Doubtful		—		—			—		—			—		—			—		—		—
Total loans	$	1,269,989	$	639,745		$	467,976	$	217,682		$	225,463	$	371,945		$	143,563	$	86	$	3,336,449
Net (charge-offs)/recoveries	$	—	$	(210	)	$	2	$	(5	)	$	—	$	215		$	—	$	—	$	2

Table of Contents

The following tables present the aging of the recorded investment in past due loans at September 30, 2023 and December 31, 2022 by class of loans. Past due loans presented in tables below also include nonaccrual loans.

*(dollars in thousands)*		30-59		60-89	*90 Days*		*Total*		*Loans Not*				*Nonaccrual*
September 30, 2023	*Days*		*Days*		*Or More*		*Past Due*		*Past Due*		*Total Loans*		Loans ⁽¹⁾
Real estate:
Construction and land development	$	—	$	—	$	128	$	128	$	259,650	$	259,778	$	128
Commercial real estate		16,450		—		9,800		26,250		1,137,960		1,164,210		20,330
Single-family residential mortgages		3,531		3,919		10,829		18,279		1,487,028		1,505,307		16,868
Commercial:
Commercial and industrial		244		—		517		761		126,894		127,655		761
SBA		72		129		2,009		2,210		48,210		50,420		2,009
Other:		61		15		23		99		13,483		13,582		50
	$	20,358	$	4,063	$	23,306	$	47,727	$	3,073,225	$	3,120,952	$	40,146
Real estate:
Single-family residential mortgages held for sale	$	—	$	—	$	—	$	—	$	62	$	62	$	—

(1)

Included in total loans.

*(dollars in thousands)*		30-59		60-89	90 Days		Total		Loans Not				Nonaccrual
December 31, 2022	Days		Days		Or More		Past		Past Due		Total		Loans
Real estate:
Construction and land development	$	—	$	—	$	141	$	141	$	276,735	$	276,876	$	141
Commercial real estate		558		240		1,191		1,989		1,310,143		1,312,132		13,189
Single-family residential mortgages		12,764		2,555		4,100		19,419		1,444,689		1,464,108		5,936
Commercial:
Commercial and industrial		—		545		7		552		200,671		201,223		713
SBA		150		1,017		1,228		2,395		59,016		61,411		2,245
Other:		154		76		99		329		20,370		20,699		99
	$	13,626	$	4,433	$	6,766	$	24,825	$	3,311,624	$	3,336,449	$	22,323

(1)

Included in total loans.

The Company has no loans that are 90 days or more past due and still accruing at September 30, 2023 and December 31, 2022.

The following table presents the loans on nonaccrual status as of September 30, 2023 and December 31, 2022:

	*Nonaccrual*
	*With No*
*(dollars in thousands)*	*Allowance*
September 30, 2023	*for Credit Loss*		*Nonaccrual*
Real estate:
Construction and land development	$	128	$	128
Commercial real estate		20,330		20,330
Single-family residential mortgages		16,868		16,868
Commercial:
Commercial and industrial		517		761
SBA		861		2,009
Other:		27		50
Total	$	38,731	$	40,146

	Nonaccrual
	With No
*(dollars in thousands)*	*Allowance*
December 31, 2022	*for Credit Loss*		*Nonaccrual*
Real estate:
Construction and land development	$	141	$	141
Commercial real estate		1,191		13,189
Single-family residential mortgages		5,936		5,936
Commercial:
Commercial and industrial		713		713
SBA		2,245		2,245
Other:		51		99
Total	$	10,277	$	22,323

Table of Contents

No interest income on nonaccrual loans was recognized on a cash basis for the three or nine months ended September 30, 2023 and 2022.

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, or interest rate reduction. The Company may provide multiple types of concessions on one loan. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

There were no loans that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2023 and the year ended December 31, 2022.

There were no commitments to lend additional amounts at September 30, 2023 and December 31, 2022 to customers with outstanding modified loans. There were no nonaccrual loans that were modified during the past twelve months that had payment defaults during the periods.

NOTE 6 - LOAN SERVICING

Mortgage and SBA loans serviced for others are not reported as assets. The principal balances at September 30, 2023 and December 31, 2022 were as follows:

	*September 30,*		*December 31,*
*(dollars in thousands)*	*2023*		*2022*
Loans serviced for others:
Mortgage loans	$	1,041,352	$	1,127,668
SBA loans		102,605		119,893
Commercial real estate loans		3,933		3,991
Construction loans		4,388		3,677

Under the prepayment rate assumption of 7.59% and 7.71%, mortgage par rate of 7.28% and 6.48% and the actual weighted average interest rate of servicing portfolio at 4.23% and 4.14%, at September 30, 2023 and at December 31, 2022, respectively, the fair value of servicing assets for mortgage loans was $16.6 million and $18.3 million at September 30, 2023 and December 31, 2022, respectively. The fair value of servicing assets for SBA loans was $2.9 million and $3.5 million at September 30, 2023 and December 31, 2022, respectively. Estimates of the loan servicing asset fair value are derived through a discounted cash flow analysis. Portfolio characteristics include loan delinquency rates, age of loans, note rate and geography. The assumptions embedded in the valuation are obtained from a range of metrics utilized by active buyers in the marketplace. The analysis accounts for recent transactions, and supply and demand within the market.

Servicing fees net of servicing asset amortization totaled $623,000 and $724,000 for the three months ended September 30, 2023 and 2022, respectively, and $2.0 million and $1.6 million for the nine months ended September 30, 2023 and 2022, respectively.

When mortgage and SBA loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans.

Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. Impairment is recognized through a valuation allowance for an individual grouping, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists for a particular grouping, a reduction of the allowance may be recorded as an increase to income.

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Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal. The amortization of mortgage servicing rights is netted against loan servicing fee income.

	*Three Months Ended*
	*September 30, 2023*						*September 30, 2022*
	*Mortgage*			*SBA*			*Mortgage*			*SBA*
*(dollars in thousands)*	*Loans*			*Loans*			*Loans*			*Loans*
Servicing assets:
Beginning of period	$	6,856		$	1,846		$	7,966		$	2,490
Additions		112			46			49			46
Disposals		(82	)		(103	)		(151	)		(28	)
Amortized to expense		(171	)		(65	)		(229	)		(89	)
End of period	$	6,715		$	1,724		$	7,635		$	2,419

	*Nine Months Ended*
	*September 30, 2023*						*September 30, 2022*
	*Mortgage*			*SBA*			*Mortgage*			*SBA*
*(dollars in thousands)*	*Loans*			*Loans*			*Loans*			*Loans*
Servicing assets:
Beginning of period	$	7,354		$	2,167		$	8,748		$	2,769
Additions		139			47			497			230
Disposals		(255	)		(274	)		(715	)		(299	)
Amortized to expense		(523	)		(216	)		(895	)		(281	)
End of period	$	6,715		$	1,724		$	7,635		$	2,419

NOTE 7 - GOODWILL AND INTANGIBLES

Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill resulting from whole bank and branch acquisitions are tested for impairment at least annually. Goodwill amounted to $71.5 million at both September 30, 2023 and December 31, 2022, and is the only intangible asset with an indefinite life on the Company's balance sheet.

The bank failures in the first half of 2023 caused a significant decline in bank stock prices, including the Company’s stock price. After evaluating the prolonged decrease in the Company's market value, management performed a quantitative goodwill impairment analysis as of September 30, 2023. Management estimated the fair value of the Company using both the guideline public company method, market approach, and the discounted cash flow method, income approach. Based on this quantitative analysis, the fair value of the Company exceeds its carrying amount with a passing amount of 9.6%. Management has concluded that goodwill was not impaired at September 30, 2023.

Other intangible assets consist of core deposit intangible ("CDI") assets arising from whole bank and branch acquisitions. CDI assets are amortized on an accelerated method over their estimated useful life of 8 to 10 years. The unamortized balance at September 30, 2023 and December 31, 2022 was $3.0 million and $3.7 million, respectively. CDI amortization expense was $236,000 and $277,000 for the three months ended September 30, 2023 and 2022, respectively, and $708,000 and $833,000 for the nine months ended September 30, 2023 and 2022, respectively.

Estimated CDI amortization expense for future years is as follows:

*(dollars in thousands)*
As of September 30, 2023:
Remainder of 2023	$	215
2024		784
2025		672
2026		501
2027		417
Thereafter		421
Total	$	3,010

NOTE 8 - DEPOSITS

At September 30, 2023, the scheduled maturities of time deposits are as follows:

(dollars in thousands)		*$250,000 and under*		*Greater than $250,000*		*Total*
One year	$	1,229,527	$	733,866	$	1,963,393
Two to three years		7,537		1,662		9,199
Over three years		767		300		1,067
Total	$	1,237,831	$	735,828	$	1,973,659

Brokered time deposits were $320.7 million and $255.0 million at September 30, 2023 and December 31, 2022, respectively.

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NOTE 9 - LONG-TERM DEBT

In November 2018, the Company issued $55 million of 6.18% fixed-to-floating rate subordinated notes, due December 1, 2028 (the “2028 Subordinated Notes”). The interest rate is fixed through December 1, 2023 and floats at three-month CME Term SOFR plus applicable tenor spread adjustment of 26 basis points plus 315 basis points thereafter. The Company can redeem the 2028 Subordinated Notes beginning December 1, 2023. The 2028 Subordinated Notes are considered Tier 2 capital at the Company. The Company contributed $25 million to the Bank as Tier 1 capital. On December 1, 2023, the Company intends to redeem the 2028 Subordinated Notes at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest to but excluding December 1, 2023.

In March 2021, the Company issued $120 million of 4.00% fixed-to-floating rate subordinated notes, due April 1, 2031 (the “2031 Subordinated Notes”). The interest rate is fixed through April 1, 2026 and floats at three month SOFR plus 329 basis points thereafter. The Company can redeem the 2031 Subordinated Notes beginning April 1, 2026. The 2031 Subordinated Notes are considered Tier 2 capital at the Company.

At September 30, 2023 and December 31, 2022, long-term debt was as follows:

	*September 30, 2023*				*December 31, 2022*
*(dollars in thousands)*	*Principal*		*Unamortized debt issuance costs*		*Principal*		*Unamortized debt issuance costs*
2028 Subordinated Notes ⁽¹⁾	$	55,000	$	33	$	55,000	$	180
2031 Subordinated Notes		120,000		948		120,000		1,235
Total	$	175,000	$	981	$	175,000	$	1,415

(1) The Company intends to redeem the 2028 Subordinated Notes on December 1, 2023.

The following table presents interest and amortization expense the Company incurred for the three and nine months ended September 30, 2023 and 2022:

	*For the Three Months Ended September 30,*				*For the Nine Months Ended September 30,*
*(dollars in thousands)*	*2023*		*2022*		*2023*		*2022*
Interest Expense:
Interest	$	2,050	$	2,050	$	6,149	$	6,149
Amortization		145		145		434		434

NOTE 10 - SUBORDINATED DEBENTURES

The Company, through the acquisition of Tomato Bank and its holding company, TFC Holding Company (“TFC”) in 2016, acquired TFC Statutory Trust (the “TFC Trust”). TFC Trust conducted a pooled private offering of 5,000 trust preferred securities with a liquidation amount of $1,000 per security. TFC issued $5 million of subordinated debentures to TFC Trust in exchange for ownership of all of the common securities of the Trust and the proceeds of the preferred securities sold by TFC Trust. The Company is not considered the primary beneficiary of the TFC Trust (variable interest entity), therefore the TFC Trust is not consolidated in the Company's financial statements, but rather the subordinated debentures are shown as a liability at market value as of the close of the acquisition, which was $3.3 million. There was a $1.9 million valuation reserve recorded to arrive at market value, which is treated as a yield adjustment and is amortized over the life of the security. The Company also purchased an investment in the common stock of the TFC Trust for $155,000, which is included in other assets. The Company may redeem the subordinated debentures, subject to prior approval by the Federal Reserve on or after March 15, 2012, at 100% of the principal amount, plus accrued and unpaid interest. The subordinated debentures mature on March 15, 2037. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The Company has been paying interest on a quarterly basis. The subordinated debentures may be included in Tier I capital (with certain limitations applicable) under current regulatory guidelines and interpretations. The subordinated debentures have a variable rate of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 7.32% as of September 30, 2023 and three-month LIBOR plus 1.65%, which was 6.42% at December 31, 2022.

In October 2018, the Company, through the acquisition of First American International Corp. (“FAIC”), acquired First American International Statutory Trust I (“FAIC Trust”), a Delaware statutory trust formed in December 2004. The FAIC Trust issued 7,000 units of thirty-year fixed-to-floating rate capital securities with an aggregate liquidation amount of $7 million to an independent investor, and FAIC issued $7.2 million of subordinated debentures to the FAIC Trust for all of its common securities, amounting to $217,000, which is included in other assets. There was a $1.2 million valuation reserve recorded to arrive at market value which is treated as a yield adjustment and is amortized over the life of the security. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The subordinated debentures have a variable rate of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 2.25% through final maturity on December 15, 2034. The rate at September 30, 2023 was 7.92% and 7.02% at December 31, 2022.

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In January 2020, the Company, through the acquisition of PGB Holdings, Inc., acquired Pacific Global Bank Trust I (“PGBH Trust”), a Delaware statutory trust formed in December 2004. PGBH Trust issued 5,000 units of fixed to floating rate capital securities with an aggregate liquidation amount of $5 million and 155 common securities with an aggregate liquidation amount of $155,000. PGBH issued $5.2 million of subordinated debentures to PGBH Trust in exchange for ownership of all the common securities of PGBH Trust. There was a $763,000 valuation reserve recorded to arrive at market value which is treated as a yield adjustment and is amortized over the life of the security. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The subordinated debentures have a variable rate of interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 2.10% through final maturity on December 15, 2034. The rate at September 30, 2023 was 7.77% and 6.87% at December 31, 2022.

The Company paid interest expense of $330,000 and $178,000 for three months ended September 30, 2023 and 2022, respectively, and $921,000 and $407,000 for the nine months ended September 30, 2023 and 2022, respectively, on the subordinated debentures. The amount of amortization expense was $55,000 for both three months ended September 30, 2023 and 2022, and $164,000 for both nine months ended September 30, 2023 and 2022.

For regulatory reporting purposes, the Federal Reserve has indicated that the capital or trust preferred securities qualify as Tier 1 capital of the Company subject to previously specified limitations (including that the asset size of the issuer did not exceed $15 billion), until further notice. If regulators make a determination that the capital securities can no longer be considered in regulatory capital, the securities become callable and the Company may redeem them.

NOTE 11 - BORROWING ARRANGEMENTS

The Company has established secured and unsecured lines of credit. The Company may borrow funds from time to time on a term or overnight basis from the Federal Home Loan Bank of San Francisco ("FHLB"), the Federal Reserve Bank of San Francisco ("FRB") and other financial institutions as indicated below.

Federal Funds Arrangements with Commercial Banks. At September 30, 2023, the Company may borrow on an unsecured basis, up to $92.0 million from other financial institutions.

Letter of Credit Arrangements. At September 30, 2023, the Company had an unsecured commercial letter of credit line with another financial institution for $2.0 million.

FRB Secured Line of Credit. The secured borrowing capacity with the FRB of $41.9 million at September 30, 2023 is collateralized by loans pledged with a carrying value of $63.3 million.

FHLB Secured Line of Credit and Advances. The secured borrowing capacity with the FHLB of $1.1 billion at September 30, 2023 is pledged by residential and commercial loans with a carrying value of $1.5 billion. At September 30, 2023, the Company had no overnight advances but long-term (five year original term) advances of $150.0 million at a weighted average rate of 1.18% with the FHLB. The Company paid interest expenses of $440,000 and $1.0 million on such FHLB advances for the three months ended September 30, 2023 and 2022, respectively, and $2.4 million and $2.0 million on such FHLB advances for the nine months ended September 30, 2023 and 2022, respectively. There were no other borrowing arrangements other than FHLB advances as of September 30, 2023 and at December 31, 2022. On May 3, 2023, the FHLB issued a letter of credit of $30.0 million on behalf of the Bank for a certificate of deposit of $30.0 million from the State of California. The letter of credit expired on August 31, 2023.

NOTE 12 - INCOME TAXES

The asset and liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

During the three months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $3.6 million and $6.4 million, respectively, reflecting an effective tax rate of 29.9% and 27.8% for the three months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $12.8 million and $19.3 million, respectively, reflecting an effective tax rate of 29.6% and 29.2% for the nine months ended September 30, 2023 and 2022, respectively. The Company recognized a tax benefit from stock option exercises of zero and $276,000 for the three months ended September 30, 2023 and 2022, respectively, and $5,000 and $578,000 for the nine months ended September 30, 2023 and 2022, respectively.

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NOTE 13 - COMMITMENTS

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company's financial statements.

The Company's exposure to loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements.

At September 30, 2023 and December 31, 2022, the Company had the following financial commitments whose contractual amount represents credit risk:

	*September 30,*		*December 31,*
*(dollars in thousands)*	*2023*		*2022*
Commitments to make loans	$	85,170	$	129,821
Unused lines of credit		106,670		211,044
Commercial and similar letters of credit		3,852		2,021
Standby letters of credit		2,687		2,638
Total	$	198,379	$	345,524

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management's credit evaluation of the customer.

The Company records a liability for lifetime expected losses on off-balance-sheet credit exposure that do not fit the definition of unconditionally cancelable in accordance with ASC 326. The Company uses the loss rate and exposure of default framework to estimate a reserve for unfunded commitments. Loss rates for the expected funded balances are determined based on the associated pooled loan analysis loss rate and the exposure at default is based on an estimated utilization given default. The off-balance sheet commitment allowance was $654,000 and $1.2 million as of September 30, 2023 and December 31, 2022, respectively. The benefit for off-balance sheet commitment expenses was $144,000 and $28,000 for the three months ended September 30, 2023 and 2022, respectively, and $503,000 and $162,000 for the nine months ended September 30, 2023 and 2022.

The Company is involved in various matters of litigation which have arisen in the ordinary course of business and accruals for estimates of potential losses have been provided when necessary and appropriate under GAAP. In the opinion of management, the disposition of such pending litigation will not have a material effect on the Company's financial statements.

NOTE 14 - LEASES

The Company adopted ASU 2016-02, Leases (Topic 842) and elected the package of practical expedients, which allows the Company not to reassess its prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected all of the new standard’s available transition practical expedients, including the short-term lease recognition exemption that includes not recognizing Right-of-Use (“ROU”) assets or lease liabilities for existing short-term leases, and the practical expedient to not separate lease and non-lease components for all of the Company's leases.

The Company determines if a contract arrangement is a lease at inception and primarily enters into operating lease contracts for its branch locations, office space, and certain equipment. As part of its property lease agreements, the Company may seek to include options to extend or terminate at lease when it is reasonably certain that the Company will exercise those options. The Company's measurement of the ROU assets and operating lease liabilities does not include payments associated with the option to extend or terminate the lease. The ROU lease assets also include any lease payments made and lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term. The Company did not possess any leases that have variable lease payments or residual value guarantees as of September 30, 2023.

The ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses FHLB advance rates to determine the present value of its lease liabilities.

The Company leases several of its operating facilities under various non-cancellable operating leases expiring at various dates through 2037. The Company is also responsible for common area maintenance, taxes, and insurance at the various branch locations.

Future minimum rent payments on the Company’s leases were as follows at September 30, 2023:

*(dollars in thousands)*
As of September 30, 2023:
2023 remaining	$	956
2024		4,884
2025		4,762
2026		4,884
2027		4,816
Thereafter		14,564
Total	$	34,866
Less amount of payment representing interest		(3,601	)
Total present value of lease payments	$	31,265

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The minimum rent payments shown above are given for the existing lease obligation and are not a forecast of future rental expense. Total rental expense, recognized on a straight-line basis, was $1.5 million and $1.4 million for the three months ended September 30, 2023 and 2022, respectively, and $4.3 million and $4.0 million for the nine months ended September 30, 2023 and 2022, respectively. The Company recorded rental income of $144,000 and $106,000 for the three months ended September 30, 2023 and 2022, respectively, and $425,000 and $376,000 for the nine months ended September 30, 2023 and 2022, respectively.

The following table presents the operating lease related assets and liabilities recorded on the Company's consolidated balance sheet, and the weighted-average remaining lease terms and discount rates as of September 30, 2023 and December 31, 2022:

	*September 30,*			*December 31,*
*(dollars in thousands)*	*2023*			*2022*
Operating Leases
ROU assets	$	29,949		$	25,447
Lease liabilities		31,265			26,523

Weighted-average remaining lease term (in years)		7.91			7.91
Weighted-average discount rate		2.95	%		2.19	%

NOTE 15 - RELATED PARTY TRANSACTIONS

Loans to principal officers, directors, and their affiliates were as follows:

	*For the nine months ended*			*For the year ended*
	*September 30,*			*December 31,*
*(dollars in thousands)*	*2023*			*2022*
Beginning balance	$	6,869		$	8,441
Repayments		—			(1,572	)
Balance re-categorized to non-related party		(6,869	)		—
Ending balance	$	—		$	6,869

Outstanding loan commitments to executive officers, directors and their related interests with whom they are associated were none and $1.6 million at September 30, 2023 and December 31, 2022, respectively.

Deposits from principal officers, directors, and their affiliates at September 30, 2023 and December 31, 2022 were $22.5 million and $88.1 million, respectively.

Certain directors and their affiliates own $6.0 million of RBB's subordinated debentures as of September 30, 2023.

NOTE 16 - STOCK-BASED COMPENSATION

RBB Bancorp 2010 Stock Option Plan

Under the RBB Bancorp 2010 Stock Option Plan (the “2010 Plan”), the Company was permitted to grant awards to eligible persons in the form of qualified and non-qualified stock options. The Company reserved up to 30% of the issued and outstanding shares of common stock as of the date the Company adopted the 2010 Plan or 3,494,478 shares, for issuance under the 2010 Plan. Following receipt of shareholder approval of the 2017 Omnibus Stock Incentive Plan (the “OSIP”) in May 2017, no additional grants were made under the 2010 Plan. The 2010 Plan has been terminated and options that were granted under the 2010 Plan have become subject to the OSIP. Awards that were granted under the 2010 Plan will remain exercisable pursuant to the terms and conditions set forth in individual award agreements, but such awards will be assumed and administered under the OSIP. The 2010 Plan award agreements allow for acceleration of exercise privileges of grants upon occurrence of a change in control of the Company. If a participant’s job is terminated for cause, then all unvested awards expire at the date of termination.

Amended and Restated RBB Bancorp 2017 Omnibus Stock Incentive Plan

The Amended and Restated RBB Bancorp 2017 Omnibus Stock Incentive Plan (the "Amended OSIP") was approved by the Company’s board of directors in January 2019. In May 2022, the Amended OSIP was approved by the Company's shareholders to allow for the granting of restricted stock units. The Amended OSIP was designed to ensure continued availability of equity awards that will assist the Company in attracting and retaining competent managerial personnel and rewarding key employees, directors and other service providers for high levels of performance. Pursuant to the Amended OSIP, the Company’s board of directors are allowed to grant awards to eligible persons in the form of qualified and non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights and other incentive awards. The Company has reserved up to 30% of issued and outstanding shares of common stock as of the date the Company adopted the Amended OSIP, or 3,848,341 shares. As of September 30, 2023, there were 1,018,673 shares of common stock available for issuance under the Amended OSIP. This represents 5.4% of the issued and outstanding shares of the Company’s common stock as of September 30, 2023. Awards vest, become exercisable and contain such other terms and conditions as determined by the board of directors and set forth in individual agreements with the employees receiving the awards. The Amended OSIP enables the board of directors to set specific performance criteria that must be met before an award vests. The Amended OSIP allows for acceleration of vesting and exercise privileges of grants if a participant’s termination of employment is due to a change in control, death or total disability. If a participant’s job is terminated for cause, then all awards expire at the date of termination.

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The recorded compensation expense for stock options was $59,000 and $72,000 and the Company recognized income tax benefit of zero and $276,000 for the three months ended September 30, 2023 and 2022, respectively. The recorded compensation expense for stock options was $190,000 and $228,000 and the Company recognized income tax benefit of $5,000 and $578,000 for the nine months ended September 30, 2023 and 2022, respectively. Unrecognized stock-based compensation expense related to options was $375,000 and $332,000 as of September 30, 2023 and 2022, respectively. Unrecognized stock-based compensation expense related to options will be recognized over a weighted-average period of 2.0 years as of September 30, 2023.

The fair value of each option grants was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions presented below for 2023 and 2022.

	March 2023			December 2022			May 2022
Expected volatility		28.4	%		28.9	%		29.5	%
Expected term (years)		8.0			8.0			6.0
Expected dividends		2.92	%		2.55	%		2.52	%
Risk free rate		4.27	%		4.00	%		2.71	%
Grant date fair value	$	5.49		$	6.16		$	5.28

The expected volatility is based on the historical volatility of the Company's stock trading history. The expected term is based on historical data and represents the estimated average period of time that the options remain outstanding. The risk free rate of return reflects the grant date interest rate offered for zero coupon U.S. Treasury bonds over the expected term of the options.

A summary of the status of option awards pursuant to the Company's stock option plans as of September 30, 2023 and changes during the nine months ended September 30, 2023 is presented below:

						*Weighted-*
				*Weighted-*		*Average*
				*Average*		*Remaining*		*Aggregate*
				*Exercise*		*Contractual*		*Intrinsic*
*(dollars in thousands, except for shares and per share data)*	*Shares*			*Price*		*Term in years*		*Value*
Outstanding at beginning of year		454,610		$	16.97
Granted		30,000			19.87
Exercised		(9,153	)		17.38
Forfeited/cancelled		(37,304	)		11.15
Outstanding at end of period		438,153		$	17.66		4.39	$	—

Options exercisable		336,482		$	17.06		3.11	$	—

As of December 31, 2022, the number of unvested stock options was 127,005 with a weighted-average grant date fair value of $4.69. During nine months ended September 30, 2023, there were 30,000 unvested stock options granted with a weighted-average grant date stock price of $19.87 and 50,334 stock options vested with a weighted average grant date stock price of $18.07. During the nine months ended September 30, 2023, there were a total of 5,000 stock options exercised with weighted average grant date stock price of $17.74 and no unvested stock options were forfeited.

The total fair value of the 50,334 shares and 62,495 shares vested during the nine months ended September 30, 2023 and 2022, was $643,000 and $1.3 million, respectively. The number of unvested stock options was 101,671 and 107,005 with a weighted-average grant date fair value of $5.21 and $4.37 as of September 30, 2023 and 2022, respectively.

No stock options were exercised during three months ended September 30, 2023 and cash received from the exercise of 217,932 stock options was $2.6 million for the three months ended September 30, 2022. The intrinsic value of options exercised was $2.1 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, cash received from the exercise of 9,153 stock options was $159,000, and for the nine months ended September 30, 2022, cash received from the exercise of 442,308 stock options was $5.4 million. The intrinsic value of options exercised was $25,000 and $3.9 million for the nine months ended September 30, 2023 and 2022, respectively.

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The Company granted 32,248 restricted stock units at a closing price of $20.46 on January 18, 2023 to its directors and executive officers. These restricted stock units are scheduled to vest over a one-year period for shares granted to directors and a three year period for shares granted to executive officers from the grant date. As of September 30, 2023, there were 26,660 remaining unvested restricted stock units.

The recorded compensation expense for restricted stock units was $84,000 and $202,000 for the three months ended September 30, 2023 and 2022, respectively, and $420,000 and $357,000 for the nine months ended September 30, 2023 and 2022, respectively. Unrecognized stock-based compensation expense related to restricted stock units was $422,000 and $320,000 as of September 30, 2023 and 2022, respectively. As of September 30, 2023, unrecognized stock-based compensation expense related to restricted stock units is expected to be recognized over the next 1.4 years.

The following table presents restricted stock unit activity during the nine months ended September 30, 2023.

				Weighted-Average
				Grant Date
	*Shares*			*Fair Value*
Outstanding at beginning of year		14,786		$	27.16
Granted		32,248			20.46
Vested		(20,374	)		23.35
Forfeited/cancelled		—			—
Outstanding at end of period		26,660		$	21.97

NOTE 17 - REGULATORY MATTERS

Holding companies (with assets over $3 billion at the beginning of the year) and banks are 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 Company’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. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Tier 1 and CET1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). As permitted by the regulators for financial institutions that are not deemed to be “advanced approaches” institutions, the Company has elected to opt out of the Basel III requirement to include accumulated other comprehensive income in risk-based capital. Management believes that at September 30, 2023 and December 31, 2022, RBB and the Bank satisfied all capital adequacy requirements to which they were subject.

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

As previously disclosed in the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on October 31, 2023, effective on October 25, 2023, the Bank entered into a Stipulation to the Issuance of a Consent Order (the “Stipulation”) with the Federal Deposit Insurance Corporation (the “FDIC”) and the California Department of Financial Protection and Innovation (the “DFPI”), consenting to the issuance of a consent order (the “Consent Order”) relating to the Bank’s Anti-Money Laundering/Countering the Financing of Terrorism (“AML/CFT”) compliance program. In connection to the issuance of the Consent Order, the Bank did not admit or deny any charges of violating Bank Secrecy Act (“BSA”) and its implementing regulations.

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As defined in applicable regulations and set forth in the tables below, RBB and the Bank continue to exceed the regulatory capital minimum requirements and the Bank continues to exceed the "well capitalized" standards at the dates indicated:

						*Amount of Capital Required*
											*To Be Well-Capitalized*
						*Minimum Required for*					*Under Prompt Corrective*
	*Actual*					*Capital Adequacy Purposes*					*Provisions*
*(dollars in thousands)*	*Amount*		*Ratio*			*Amount*		Ratio ⁽¹⁾			*Amount*		*Ratio*
As of September 30, 2023:
Tier 1 Leverage Ratio
Consolidated	$	469,453		11.68	%	$	160,744		4.0	%	$	200,930		5.0	%
Bank		561,797		13.99	%		160,666		4.0	%		200,833		5.0	%
Common Equity Tier 1 Risk-Based Capital Ratio
Consolidated	$	454,569		17.65	%	$	115,916		4.5	%	$	167,434		6.5	%
Bank		561,797		21.83	%		115,791		4.5	%		167,254		6.5	%
Tier 1 Risk-Based Capital Ratio
Consolidated	$	469,453		18.22	%	$	154,554		6.0	%	$	206,072		8.0	%
Bank		561,797		21.83	%		154,389		6.0	%		205,851		8.0	%
Total Risk-Based Capital Ratio
Consolidated	$	675,805		26.24	%	$	206,072		8.0	%	$	257,590		10.0	%
Bank		594,096		23.09	%		205,851		8.0	%		257,314		10.0	%

(1) These ratios are exclusive of the capital conservation buffer.

						*Amount of Capital Required*
											*To Be Well-Capitalized*
						*Minimum Required for*					*Under Prompt Corrective*
	*Actual*					*Capital Adequacy Purposes*					*Provisions*
*(dollars in thousands)*	*Amount*		*Ratio*			*Amount*		Ratio ⁽¹⁾			*Amount*		*Ratio*
As of December 31, 2022:
Tier 1 Leverage Ratio
Consolidated	$	446,776		11.67	%	$	153,116		4.0	%	$	191,395		5.0	%
Bank		569,071		14.89	%		152,900		4.0	%		191,124		5.0	%
Common Equity Tier 1 Risk Based Capital Ratio
Consolidated	$	432,056		16.03	%	$	121,291		4.5	%	$	175,199		6.5	%
Bank		569,071		21.14	%		121,110		4.5	%		174,937		6.5	%
Tier 1 Risk-Based Capital Ratio
Consolidated	$	446,776		16.58	%	$	161,722		6.0	%	$	215,629		8.0	%
Bank		569,071		21.14	%		161,481		6.0	%		215,307		8.0	%
Total Risk-Based Capital Ratio
Consolidated	$	654,159		24.27	%	$	215,629		8.0	%	$	269,537		10.0	%
Bank		602,819		22.40	%		215,307		8.0	%		269,134		10.0	%

(1) These ratios are exclusive of the capital conservation buffer.

The California Financial Code generally acts to prohibit banks from making a cash distribution to its shareholders in excess of the lesser of the bank's undivided profits or the bank's net income for its last three fiscal years less the amount of any distribution made by the bank's shareholders during the same period.

The California General Corporation Law generally acts to prohibit companies from paying dividends on common stock unless retained earnings, immediately prior to the dividend payment, equals or exceeds the amount of the dividend. If a company fails this test, then it may still pay dividends if after giving effect to the dividend the company's assets are at least 125% of its liabilities.

Additionally, the Federal Reserve has issued guidance which requires that they be consulted before payment of a dividend if a financial holding company does not have earnings over the prior four quarters of at least equal to the dividend to be paid, plus other holding company obligations.

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NOTE 18 - FAIR VALUE MEASUREMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS

In accordance with accounting guidance, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, prepayment speeds, volatilities, etc.) or model-based valuation techniques where all significant assumptions are observable, either directly or indirectly, in the market.

Level 3 - Valuation is generated from model-based techniques where one or more significant inputs are not observable, either directly or indirectly, in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques may include use of matrix pricing, discounted cash flow models, and similar techniques.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value:

Securities: The fair values of securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1) or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2).

Other Real Estate Owned: Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (“OREO”) are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect an expectation of the amount to be ultimately collected and selling costs (Level 3).

Appraisals for OREO are performed by state licensed appraisers (for commercial properties) or state certified appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. When a Notice of Default is recorded, an appraisal report is ordered. Once received, a member of the credit administration department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison to independent data sources such as recent market data or industry-wide statistics for residential appraisals. Commercial appraisals are sent to an independent third party to review. The Company also compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustments, if any, should be made to the appraisal values on any remaining other real estate owned to arrive at fair value. If the existing appraisal is older than twelve months a new appraisal report is ordered. No significant adjustments to appraised values have been made as a result of this comparison process prior to OREO sale date.

Interest Rate Lock Contracts and Forward Mortgage Loan Sale Contracts: The fair values of interest rate lock contracts and forward mortgage loan sale contracts are determined by loan lock-in rate, loan funded rate, market interest rate, fees to be collected from the borrower, fees and costs associated with the origination of the loan, expiration timing, sale price, and the value of the retained servicing. The Company classified these derivatives as Level 3 due to management’s estimate of market rate, cost and expiration timing on these contracts.

Collateral-dependent individually evaluated loans: Collateral-dependent individually evaluated loans are carried at fair value when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the original loan agreement and the loan has been written down to the fair value of its underlying collateral, net of expected disposition costs where applicable. There were $2.6 million write-down on collateral-dependent loans that were individually evaluated to the fair value for the first nine months of 2023. There was no collateral-dependent loan that was individually evaluated and written down to the fair value as of December 31, 2022.

The following table provides the hierarchy and fair value for each major category of assets and liabilities measured at fair value at September 30, 2023 and December 31, 2022:

*(dollars in thousands)*	*Fair Value Measurements Using:*
September 30, 2023	*Level 1*		*Level 2*		*Level 3*		*Total*
Assets measured at fair value:
On a recurring basis:
Securities available for sale
Government agency securities	$	—	$	7,894	$	—	$	7,894
SBA agency securities		—		7,261		—		7,261
Mortgage-backed securities		—		33,437		—		33,437
Collateralized mortgage obligations		—		138,694		—		138,694
Commercial paper		—		129,073		—		129,073
Corporate debt securities		—		29,806		—		29,806
Municipal securities		—		8,213		—		8,213
Interest Rate Lock Contracts		—		—		9		9
Forward Mortgage Loan Sale Contracts		—		—		16		16
	$	—	$	354,378	$	25	$	354,403
On a non-recurring basis:
Other real estate owned	$	—	$	—	$	284	$	284

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December 31, 2022	*Level 1*		*Level 2*		*Level 3*		*Total*
Assets measured at fair value:
On a recurring basis:
Securities available for sale
Government agency securities	$	—	$	4,495	$	—	$	4,495
SBA agency securities		—		2,411		—		2,411
Mortgage-backed securities		—		42,928		—		42,928
Collateralized mortgage obligations		—		111,593		—		111,593
Commercial paper		—		49,537		—		49,537
Corporate debt securities		—		37,012		—		37,012
Municipal securities		—		8,854		—		8,854
Forward Mortgage Loan Sale Contracts		—		—		18		18
	$	—	$	256,830	$	18	$	256,848
On a non-recurring basis:
Other real estate owned	$	—	$	—	$	577	$	577

No write-downs to OREO were recorded for the nine months ended September 30, 2023 or for the year ended December 31, 2022.

Quantitative information about the Company's OREO non-recurring Level 3 fair value measurements at September 30, 2023 and December 31, 2022 is as follows:

OREO consisted of one single-family residence with a fair value of $284,000 as of September 30, 2023 and two single-family residences with a fair value of $577,000 as of December 31, 2022. On September 1, 2023, OREO with a book value of $293,000 was sold for a gain of $190,000. OREO was evaluated by third party appraisals with unobservable input of management adjustment in the range of 5%-6% to reflect current conditions and selling costs.

Interest Rate Lock Commitments ("IRLCs"): Agreements under which the Company agrees to extend credit to a borrower under certain specified terms and conditions in which the interest rate and the maximum amount of the loan are set prior to funding. Under the agreement, the Company commits to lend funds to a potential borrower (subject to the Company’s approval of the loan) on a fixed or adjustable rate basis, regardless of whether interest rates change in the market, or on a floating rate basis. As such, outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of issuance through the date of loan funding, cancelling or expiration. Loan commitments generally range between 30 and 90 days; however, the borrower is not obligated to obtain the loan. The Company is subject to fallout risk related to IRLCs, which is realized if approved borrowers choose not to close on the loans within the terms of the IRLCs. The Company uses best efforts commitments to substantially eliminate these risks. Historical commitment-to-closing ratios are considered to estimate the quantity of mortgage loans that will fund within the terms of the IRLCs.

The FASB ASC provides that IRLCs on mortgage loans that will be held for resale are derivatives and must be accounted for at fair value on the balance sheet (if material). FASB ASC Topic 820 – Fair Value Measurements and Disclosures specifies how these derivatives are to be valued. Consequently, the Company has elected to account for these obligations at fair value.

Forward Mortgage Loan Sale Contracts ("FMLSCs"): The Company is subject to interest rate and price risk on its mortgage loans held for sale (“HFS”) from the loan funding date until the date the loan is sold. Best efforts commitments which fix the forward sales price that will be realized in the secondary market are used to eliminate the interest rate and price risk to the Company. To avoid interest rate risk, the Company will enter into FMLSCs at the time they make an interest rate lock commitment to the buyer. They can enter into mortgage loan sales commitments on a “mandatory” or “best efforts” basis. Mandatory commitments provide that the loan must be delivered or the commitment be “paired off.” In general, best efforts commitments provide that the loan be delivered if and when it closes.

Quantitative information about the Company's recurring Level 3 fair value measurements as of September 30, 2023 and December 31, 2022 is as follows:

At December 31, 2022, fair value for IRLCs and FMLSCs totaled $18,000. All IRLCs and FMLSCs at December 31, 2022 were funded and sold to Fannie Mae in the first three months of 2023. Changes in fair value were $7,000 in 2023. Fair value for IRLCs and FMLSCs totaled $25,000 at September 30, 2023.

The fair value measurements of IRLCs and FMLSCs were primarily based on the buy price from borrowers ranging from 99 to 100, the sale price to Fannie Mae ranging from 99 to 102, and the significant unobservable inputs using margin cost rate of ranging from 0.50% to 0.50%.

Forward commitments, also known as forward loan sales commitments, are considered to be derivatives under FASB ASC Topic 815 (Derivatives and Hedging) because they meet all of the following criteria:

●

They have a specified underlying (the contractually specified price for the loans)

●

They have a notional amount (the committed loan principal amount)

●

They require little or no initial net investment

●

They require or permit net settlement as the institution via a pair-off transaction or the payment of a pair-off fee.

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the entire holdings of a particular financial instrument. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, involve uncertainties and matters of judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on financial instruments both on and off the balance sheet without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Additionally, tax consequences related to the realization of the unrealized gains and losses can have a potential effect on fair value estimates and have not been considered in many of the estimates.

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature, and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent limitations in any estimation technique.

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A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Management maximizes the use of observable inputs and attempts to minimize the use of unobservable inputs when determining fair value measurements. Estimated fair values are disclosed for financial instruments for which it is practicable to estimate fair value. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The Company uses the following methods and assumptions to estimate the fair value of each class of financial instruments:

For cash and due from banks, Federal funds sold, and cash equivalents, the carrying amount is assumed to be a reasonable estimate of fair value, a Level 1 measurement.

For short-term investments and interest-bearing deposits, the carrying amount is assumed to be a reasonable estimate of fair value, a Level 1 measurement.

Securities available for sale and held-to-maturity are measured by using quoted market prices for similar securities or dealer quotes, a Level 2 measurement. This category generally includes U.S. Government agency securities, U.S. Government sponsored entities, state and municipal securities, mortgage backed securities, collateralized mortgage obligations and corporate bonds.

Equity securities fair value are measured based on unobservable inputs at the reporting date, a Level 3 measurement. Equity securities are comprised of affordable housing investment funds and other restricted stocks.

Fair values are estimated for portfolios of loans with similar financial characteristics. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories. The fair values are based primarily on third-party vendor pricing to determine fair values based on the exit price notion.

The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, a Level 3 measurement.

The fair value of impaired loans is calculated based on the net realizable fair value of the collateral or the observable market price of the most recent sale or quoted price from HFS loans. The Company does not record loans at fair value on a recurring basis. Nonrecurring fair value adjustments to collateral dependent impaired loans are recorded based on the adjusted appraised value of the collateral, a Level 3 measurement.

The Company records HFS loans at fair value based on quoted prices from third party sale analysis, existing sale agreements, or appraisal reports adjusted by sales commission assumption, a Level 2 measurement.

Mortgage and SBA servicing rights are calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, a Level 3 measurement.

The fair value of demand deposits, savings accounts, and certain money market deposits is assumed to be the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits with similar remaining maturities, a Level 2 measurement.

The fair value of commitments to extend credit and standby letters of credit, interest rate lock commitments and forward mortgage loan sales contracts is estimated using the fees currently charged to enter into similar agreements. Unobservable inputs that reflect the Company's own assumptions about the assumptions that market participants would use in pricing an asset or liability result in a Level 3 measurement.

The fair value of FHLB advances is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.

Subordinated debentures fair value is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.

The fair value of long-term debt is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk, a Level 3 measurement.

Fair value is estimated in accordance with ASC Topic 825. Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

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The fair value hierarchy level and estimated fair value of significant financial instruments at September 30, 2023 and December 31, 2022 are summarized as follows:


		*September 30, 2023*				*December 31, 2022*
	*Fair Value*	*Carrying*		*Fair*		*Carrying*		*Fair*
*(dollars in thousands)*	*Hierarchy*	*Value*		*Value*		*Value*		*Value*
Financial Assets:
Cash and due from banks	Level 1	$	330,791	$	330,791	$	83,548	$	83,548
Interest-earning deposits in other financial institutions	Level 1		600		600		600		600
Investment securities - AFS	Level 2		354,378		354,378		256,830		256,830
Investment securities - HTM	Level 2		5,214		4,750		5,729		5,563
Mortgage loans held for sale	Level 1		62		57		—		—
Loans, net	Level 3		3,078,522		3,023,903		3,295,373		3,251,464
Equity securities	Level 3		22,235		22,235		22,238		22,238
Servicing assets	Level 3		8,439		19,486		9,521		21,712
Accrued Interest Receivable	Level 1/2/3		14,008		14,008		14,536		14,536

		*Carrying*		*Fair*		*Carrying*		*Fair*
Derivative assets:		*Value*		*Value*		*Value*		*Value*
Interest Rate Lock Contracts	Level 3	$	9	$	9	$	—	$	—
Forward Mortgage Loan Sale Contracts	Level 3		16		16		18		18

		*Carrying*		*Fair*		*Carrying*		*Fair*
Financial Liabilities:		*Value*		*Value*		*Value*		*Value*
Deposits	Level 2	$	3,154,072	$	3,120,299	$	2,977,683	$	2,960,529
FHLB advances	Level 3		150,000		142,576		220,000		210,470
Long-term debt	Level 3		174,019		130,154		173,585		132,709
Subordinated debentures	Level 3		14,884		14,561		14,720		14,195
Accrued Interest Payable	Level 2/3		11,333		11,333		3,711		3,711

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NOTE 19 - EARNINGS PER SHARE

The following is a reconciliation of net income and shares outstanding to the income and number of shares used to compute earnings per share (“EPS”):

	*For the Three Months Ended September 30,*
	*2023*				*2022*
*(dollars in thousands except shares and per share data)*	*Income*		*Shares*		*Income*		*Shares*
Net income	$	8,473			$	16,652
Shares outstanding				18,995,303				19,011,672
Impact of weighting shares				—				(23,229	)
Used in basic EPS		8,473		18,995,303		16,652		18,988,443
Dilutive effect of outstanding
Stock options				2,001				125,684
Restricted Stock Unit				—				16,320
Used in dilutive EPS	$	8,473		18,997,304	$	16,652		19,130,447

Basic earnings per common share	$	0.45			$	0.88
Diluted earnings per common share	$	0.45			$	0.87

	*For the Nine Months Ended September 30,*
	*2023*					*2022*
*(dollars in thousands except shares and per share data)*	*Income*		*Shares*			*Income*			*Shares*
Net income	$	30,392				$	46,746
Less: Earnings allocated to participating securities		—					(34	)
Shares outstanding				18,995,303						19,011,672
Impact of weighting shares				(3,724	)					131,060
Used in basic EPS		30,392		18,991,579			46,712			19,142,732
Dilutive effect of outstanding
Stock options				17,633						249,115
Restricted Stock Units				4,626						23,711
Used in dilutive EPS	$	30,392		19,013,838		$	46,712			19,415,558

Basic earnings per common share	$	1.60				$	2.44
Diluted earnings per common share	$	1.60				$	2.41

Stock options for 362,500 shares and restricted stock units for 26,660 shares were not considered in computing diluted earnings per common share for September 30, 2023, and stock options for 15,000 shares were not considered in computing diluted earnings per common share for September 30, 2022, because they were anti-dilutive.

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NOTE 20 – REVENUE FROM CONTRACTS WITH CUSTOMERS

The following is a summary of revenue from contracts with customers that are in-scope and not in-scope under Topic 606:

	*For the Three Months Ended September 30,*				*For the Nine Months Ended September 30,*
*(dollars in thousands)*	*2023*		*2022*		*2023*		*2022*
Noninterest income, in scope
Fees and service charges on deposit accounts	$	500	$	508	$	1,534	$	1,582
Other fees (1)		202		157		682		474
Other income (2)		558		549		1,667		1,622
Gain on sale of OREO and fixed assets		222		—		222		757
Total in-scope noninterest income		1,482		1,214		4,105		4,435
Noninterest income, not in scope (3)		1,288		1,321		3,520		4,464
Total noninterest income	$	2,770	$	2,535	$	7,625	$	8,899

(1)

Other fees consists of wealth management fees, miscellaneous loan fees, and postage/courier fees.

(2)

Other income consists of safe deposit box rental income, wire transfer fees, security brokerage fees, annuity sales, insurance activity and OREO income.

(3)

The amounts primarily represent revenue from contracts with customers that are out of scope of ASC 606: Net loan servicing income, letter of credit commissions, import/export commissions, recoveries on purchased loans, BOLI income, and gains (losses) on sales of mortgage loans, loans and investment securities.

The major revenue streams by fee type that are within the scope of ASC 606 presented in the above tables are described in additional detail below:

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Fees and Services Charges on Deposit Accounts

Fees and service charges on deposit accounts include charges for analysis, overdraft, cash checking, ATM, and safe deposit activities executed by our deposit clients, as well as interchange income earned through card payment networks for the acceptance of card based transactions. Fees earned from our deposit clients are governed by contracts that provide for overall custody and access to deposited funds and other related services, and can be terminated at will by either party; this includes fees from money service businesses. Fees received from deposit clients for the various deposit activities are recognized as revenue once the performance obligations are met.

Wealth Management Fees

The Company employs financial consultants to provide investment planning services for customers including wealth management services, asset allocation strategies, portfolio analysis and monitoring, investment strategies, and risk management strategies. The fees the Company earns are variable and are generally received monthly. The Company recognizes revenue for the services performed at quarter-end based on actual transaction details received from the broker dealer the Company engages.

In the Company’s wealth management division, revenue is primarily generated from (1) securities brokerage accounts, (2) investment advisor accounts, (3) full service brokerage implementation fees, and (4) life insurance and annuity products.

NOTE 21 - QUALIFIED AFFORDABLE HOUSING PROJECT INVESTMENTS

The Company began investing in qualified housing projects in 2016. At September 30, 2023 and December 31, 2022, the balance of the investment for qualified affordable housing projects was $6.7 million and $7.6 million, respectively. This balance is reflected in the accrued interest and other assets line on the consolidated balance sheets. Total unfunded commitments related to the investments in qualified housing projects totaled $2.5 million at September 30, 2023 and $2.6 million at December 31, 2022. The Company expects to fulfill these commitments between 2023 and 2038.

For the three months ended September 30, 2023 and 2022, the Company recognized amortization expense of $282,000 and $268,000, respectively, and for the nine months ended September 30, 2023 and 2022, the Company recognized amortization expense of $846,000 and $778,000, respectively. The amortization expense recognized was included within income tax expense on the consolidated statements of income.

NOTE 22 - SUBSEQUENT EVENTS

On October 19, 2023, RBB announced a cash dividend of $0.16 per share for the third quarter of 2023. The dividend is payable on November 10, 2023 to common shareholders of record as of October 30, 2023.

As previously disclosed in the Company's Current Report on Form 8-K filed with the SEC on October 31, 2023, effective October 25, 2023, the Bank entered into a Stipulation with the FDIC and the DFPI, consenting to the issuance of the Consent Order relating to the Bank’s AML/CFT compliance program. In connection to the issuance of the Consent Order, the Bank did not admit or deny any charges of violating BSA and its implementing regulations.

Pursuant to the terms of the Consent Order, and within certain timeframes, the Bank is required to make certain enhancements and take certain actions with respect to its AML/CFT compliance program, including (i) enhancing personnel with oversight responsibilities with respect to the Bank’s AML/CFT compliance program, (ii) enhancing existing AML/CFT policies and practices, internal controls, customer due diligence, and training programs, and (iii) establishing an independent testing program to analyze and assess the Bank’s BSA Department. The Consent Order also requires the Bank to correct certain alleged violations of the BSA program, including internal controls, staffing and the timing of the filing of one suspicious activity report. The Consent Order does not require the Bank to pay any civil money penalty, require additional capital, increase liquidity, improve asset quality or otherwise concern other aspects of the Bank’s operations.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

In this Quarterly Report on Form 10-Q (the “Report” or “Form 10-Q”), the term "Bancorp" refers to RBB Bancorp and the term "Bank" refers to Royal Business Bank. The terms "Company," "we," "us," and "our" refer to Bancorp and the Bank collectively. This Report contains forward-looking statements. These forward-looking statements reflect our current views with respect to, among other things, future events and our results of operations, financial condition and financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” or the negative version of those words or other comparable words of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:

	●	business and economic conditions generally and in the financial services industry, nationally and within our current and future geographic markets, including the tight labor market, ineffective management of the United States. federal budget or debt or turbulence or uncertainty in domestic or foreign financial markets;
	●	recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, liquidity and regulatory responses to these developments;

●

the strength of the United States economy in general and the strength of the local economies in which we conduct operations;

●

possible additional provisions for credit losses and charge-offs;

●

credit risks of lending activities and deterioration in asset or credit quality;

●

extensive laws and regulations and supervision that we are subject to, including potential supervisory action by bank supervisory authorities;

●

increased costs of compliance and other risks associated with changes in regulation, including any amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);

●

compliance with the Bank Secrecy Act and other money laundering statutes and regulations;

●

potential goodwill impairment;

●

liquidity risk;

	●	fluctuations in interest rates;
	●	the transition away from the London Interbank Offered Rate ("LIBOR") and related uncertainty, as well as the risks and costs related to our adoption of Secured Overnight Financing Rate ("SOFR")

●

risks associated with acquisitions and the expansion of our business into new markets;

●

inflation and deflation;

●

real estate market conditions and the value of real estate collateral;

●

environmental liabilities;

●

our ability to compete with larger competitors;

●

our ability to retain key personnel;

●

successful management of reputational risk;

●

severe weather, natural disasters, earthquakes, fires; or other adverse external events could harm our business;

●

geopolitical conditions, including acts or threats of terrorism, actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, including the conflicts between Russia and Ukraine and in the Middle East, which could impact business and economic conditions in the United States and abroad;

●

public health crises and pandemics and their effects on the economic and business environments in which we operate, including our credit quality and business operations, as well as the impact on general economic and financial market conditions;

●

general economic or business conditions in Asia, and other regions where the Bank has operations;

●

failures, interruptions, or security breaches of our information systems;

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●

climate change, including any enhanced regulatory, compliance, credit and reputational risks and costs;

●

cybersecurity threats and the cost of defending against them;

●

our ability to adapt our systems to the expanding use of technology in banking;

●

risk management processes and strategies;

●

adverse results in legal proceedings;

●

the impact of regulatory enforcement actions, if any;

●

certain provisions in our charter and bylaws that may affect acquisition of the Company;

●

changes in tax laws and regulations;

●

the impact of governmental efforts to restructure the U.S. financial regulatory system;

●

the impact of future or recent changes in the Federal Deposit Insurance Corporation ("FDIC") insurance assessment rate of the rules and regulations related to the calculation of the FDIC insurance assessment amount;

●

the effect of changes in accounting policies and practices or accounting standards, as may be adopted from time-to-time by bank regulatory agencies, the U.S. Securities and Exchange Commission (“SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board (“FASB”) or other accounting standards setters, including Accounting Standards Update (“ASU” or “Update”) 2016-13 (Topic 326, “Measurement of Current Losses on Financial Instruments, commonly referenced as the Current Expected Credit Losses Model (“CECL”) model, which changed how we estimate credit losses and may further increase the required level of our allowance for credit losses in future periods;

●

market disruption and volatility;

●

fluctuations in our stock price;

●

restrictions on dividends and other distributions by laws and regulations and by our regulators and our capital structure;

●

issuances of preferred stock;

	●	our ability to raise additional capital, if needed, and the potential resulting dilution of interests of holders of our common stock; and
	●	the soundness of other financial institutions.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

CRITICAL ACCOUNTING POLICIES

Management has established various accounting policies that govern the application of GAAP in the preparation of our financial statements. Certain accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.

Allowance for Credit Losses on Loans Held for Investment

The use of reasonable and supportable forecasts requires significant judgment, such as selecting forecast scenarios and related scenario-weighting, as well as determining the appropriate length of the forecast horizon. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Any unexpected adverse changes or uncertainties to these factors that are beyond the Company’s control could result in increases to the ACL through additional provision for credit losses.

A sensitivity analysis of our ACL was performed as of September 30, 2023. Based on this sensitivity analysis, a positive 25% change in prepayment speeds would result in a $981,000, or (2.31)%, decrease to the ACL. A negative 25% change in prepayment speeds would result in a $1.3 million, or 3.1%, increase to the ACL. Additionally, a 1% increase in the unemployment rate would result in a $773,000, or 1.8%, increase to the ACL and a 1% decrease in the unemployment rate would result in a $686,000, or (1.6)%, decrease to the ACL. Management reviews the results using the comparison scenario for sensitivity analysis and considered the results when evaluating the qualitative factor adjustments.

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Investment Securities

Effective January 1, 2022, upon the adoption of ASU 2016-13, the Company accounts for credit losses on available for sale (“AFS”) securities in accordance with ASC 326-30. Debt securities are measured at fair value and subject to impairment testing. When a debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit loss by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value change. If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security.

For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors.

The determination of credit losses when fair value declines with respect to AFS securities involves significant judgment. Adverse changes in management’s assessment that concluded a credit impairment on investment securities could result in an increase in impairment charges that could negatively impact our earnings.

Goodwill and Other Intangible Assets

The Company performs goodwill impairment test in accordance with ASC 350 “Intangibles- Goodwill and Other.” The bank failures in the first half of 2023 caused a significant decline in bank stock prices, including the Company’s stock price. The bank failures in the first half of 2023 caused a significant decline in bank stock prices, including the Company’s stock price. After evaluating the prolonged decrease in the Company's market value, management performed a quantitative goodwill impairment analysis as of September 30, 2023. Management estimated the fair value of the Company using both the guideline public company method, market approach, and the discounted cash flow method, income approach. Based on this quantitative analysis, the fair value of the Company exceeds its carrying amount with a passing amount of 9.6%. Management has concluded that goodwill was not impaired at September 30, 2023.

Changes to assumptions, to selection and weighting in the valuation methods and to economic conditions could result in goodwill impairment losses that negatively impact our earnings.

Income Taxes

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets are also recognized for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The value of deferred tax assets and liabilities are based on many factors including: estimates of the timing of reversals of temporary differences, the application of federal and state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities. Actual results could differ from the estimates and interpretations used in determining the current and deferred income tax liabilities.

Under ASC 740, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of the Company's deferred tax assets will not be realized. The Company's policy is to evaluate the deferred tax assets on a quarterly basis and record a valuation allowance for the Company's deferred tax assets if there is not sufficient positive evidence available to demonstrate utilization of the Company's deferred tax assets. Initial setup or an increase to deferred tax asset valuation allowance would be charged to income tax expense that would negatively impacted our earnings.

Our significant accounting policies are described in greater detail in our audited consolidated financial statements included in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2022 and Amendment No. 1 to the Annual Report on Form 10-K/A (collectively our "2022 Annual Report"), which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

RECENT DEVELOPMENTS

As a result of the bank failures in the first half of 2023, we anticipate that regulators will propose certain actions, including reforms that will require higher capital, including increased requirements to issue long-term debt, as well as special assessments to repay losses to the FDIC's Deposit Insurance Fund. The Company expects to manage liquidity ratios based on these events but anticipates growth of deposits in tandem with loans. We are proactively offering various alternatives, including IntraFi Cash Service and Certificate of Deposit Account Registry Service, to clients with deposit balances that exceed $250,000 to reduce the level of uninsured deposits. The Company continues to monitor the economic environment, including recent disruptions in the banking sector, and will make changes as appropriate, but the continuing impact of the banking crisis on the Company's future operating results for the remainder of 2023 is uncertain and cannot be predicted.

The Company has sufficient capital and does not anticipate any need for additional liquidity as of September 30, 2023. As of September 30, 2023, we pledged loans of $1.5 billion with the Federal Home Loan Bank ("FHLB") and based on the values of loans we had $1.1 billion of additional borrowing capacity with the FHLB. We also maintain relationships in the capital markets with brokers and dealers to issue certificates of deposit. As of September 30, 2023, we had $92.0 million of unsecured federal funds lines. In addition, lines of credit from the Federal Reserve Discount Window were $41.9 million at September 30, 2023. We did not have any borrowings outstanding with the federal fund lines or Federal Reserve Discount Window at September 30, 2023. The Bank and the Company exceeded all regulatory capital requirements under Basel III and were considered to be “well-capitalized” at September 30, 2023.

RBB has been awarded a $5.0 million grant from the Community Development Financial Institutions ("CDFI") Equitable Recovery Program ("ERP") which aims to help CDFI's further their mission of helping low and low-to-moderate income communities. The grant was disbursed in September 2023 and its utilization is subject to various performance goals and measures that specify the use of the funds. Income recognition on the ERP award is deferred until those performance goals have been substantially met.

GENERAL

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

At September 30, 2023, the Company had total consolidated assets of $4.1 billion, gross consolidated loans of $3.1 billion, total consolidated deposits of $3.2 billion and total consolidated shareholders' equity of $502.5 million. RBB’s common stock trades on the Nasdaq Global Select Market under the symbol “RBB”.

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

The Company has completed six whole bank acquisitions and one branch acquisition from July 2011 through January 2022. All of the Company’s acquisitions have been accounted for using the acquisition method of accounting and, accordingly, the operating results of the acquired entities have been included in the consolidated financial statements from their respective acquisition dates. The Company previously disclosed that, on December 28, 2021, it entered into a definitive agreement to acquire Gateway Bank F.S.B.(“Gateway”) in an all cash transaction, subject to certain terms and conditions. On September 28, 2023, the Company announced that it and Gateway have mutually agreed to terminate the definitive agreement, effective as of September 28, 2023. Neither party has or will have any liability or pay any penalty to the other party as a result of the termination, and each party has released the other from any and all claims related to the definitive agreement or the transactions contemplated by the definitive agreement.

OVERVIEW

The following discussion provides information about the results of operations, financial condition, liquidity and capital resources of the Company and its wholly-owned subsidiaries. This information is intended to facilitate the understanding and assessment of significant changes and trends related to our financial condition and the results of our operations. This discussion and analysis should be read in conjunction with our audited financial statements included in our 2022 Annual Report, and the unaudited consolidated financial statements and accompanying notes presented elsewhere in this Report.

For the third quarter of 2023, we reported net earnings of $8.5 million, compared with $16.7 million for the third quarter of 2022, reflecting a decrease of $8.2 million from the third quarter of 2022, primarily due to a decrease of $11.4 million in net interest income and an increase of $179,000 in noninterest expense, partially offset by an increase of $235,000 in noninterest income, a decrease of $2.8 million in income tax expense and a decrease of $367,000 in the provision for credit losses. Diluted earnings per share was $0.45 per share for the third quarter of 2023, compared to $0.87 for the same period last year.

At September 30, 2023, total assets were $4.1 billion, an increase of $150.3 million, or 3.8%, from total assets of $3.9 billion at December 31, 2022, primarily due to a $247.2 million increase in cash and cash equivalents and a $97.5 million increase in AFS investment securities, partially offset by a $215.4 million decrease in gross loans. The increase in cash and cash equivalents was due to an increase in the balances of time deposits of $410.1 million, partially offset by a $226.3 million decrease in noninterest bearing deposits.

At September 30, 2023, AFS investment securities totaled $354.4 million, inclusive of a pre-tax net unrealized loss of $37.1 million, compared to $256.8 million, inclusive of a pre-tax unrealized loss of $31.3 million at December 31, 2022. The pre-tax unrealized losses were due to a decline in the value of AFS investment securities due to increases in market interest rates. HTM investment securities totaled $5.2 million and $5.7 million at September 30, 2023 and December 31, 2022, respectively.

Total loans held for investment ("HFI"), net of deferred fees and discounts, decreased $215.5 million, or 6.5%, to $3.1 billion at September 30, 2023, compared to $3.3 billion at December 31, 2022. The decrease was primarily due to decreases in commercial real estate (“CRE”) loans of $147.9 million, commercial and industrial ("C&I") loans of $73.6 million and construction and land development (“C&D”) loans of $17.1 million, partially offset by an increase in single-family residential (“SFR”) mortgage loans of $41.2 million.

There were $62,000 mortgage loans held for sale ("HFS") as of September 30, 2023, and none as of December 31, 2022.

Noninterest-bearing deposits were $572.4 million at September 30, 2023, a decrease of $226.3 million, or 28.3%, compared to $798.7 million at December 31, 2022. Interest-bearing deposits were $2.6 billion at September 30, 2023, an increase of $402.7 million, or 18.5%, compared to $2.2 billion at December 31, 2022. The decrease in noninterest-bearing deposits was driven primarily by customers transferring their deposit balances into higher yielding money market accounts and time deposits. At September 30, 2023, noninterest-bearing deposits were 18.1% of total deposits, compared to 26.8% at December 31, 2022.

Borrowings, consisting of FHLB advances, long-term debt and subordinated debt, were $338.9 million at September 30, 2023, a decrease of $69.4 million, compared to $408.3 million as of December 31, 2022.

The Company reported $29.9 million and $25.4 million in right-of-use assets for operating leases and $31.3 million and $26.5 million in lease liabilities as of September 30, 2023 and as of December 31, 2022, respectively.

The ACL was $42.4 million at September 30, 2023, compared to $41.1 million at December 31, 2022, an increase of $1.4 million during the nine-month period ended September 30, 2023. The increase was due to an increase in classified loans during the first nine months of 2023 that increased the qualitative factors utilized by the Company in establishing the level of its ACL under CECL. The ACL to total HFI loans outstanding was 1.36% as of September 30, 2023 as compared to 1.23% as of December 31, 2022.

Shareholders’ equity increased $17.9 million, or 3.7%, to $502.5 million during the nine-month period ending September 30, 2023 due to $30.4 million of net income, partially offset by $9.1 million of common stock cash dividends and $4.1 million in unrealized losses on AFS securities.

Our capital ratios under the revised capital framework referred to as Basel III remain well capitalized. As of September 30, 2023, the Company’s Tier 1 leverage capital ratio was 11.68%, the common equity Tier 1 ratio was 17.65%, the Tier 1 risk-based capital ratio was 18.22%, and the total risk-based capital ratio was 26.24%. See “Analysis of Financial Condition — Regulatory Capital Requirements” herein for further discussion of our regulatory capital requirements.

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ANALYSIS OF RESULTS OF OPERATIONS

Financial Performance

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2023			2022			2023			2022
	*(Dollars in thousands, except per share amounts)*
Interest income	$	55,563		$	46,414		$	166,316		$	128,318
Interest expense		27,974			7,436			72,700			17,759
Net interest income		27,589			38,978			93,616			110,559
Provision for credit losses		1,399			1,766			3,793			3,048
Net interest income after provision for credit losses		26,190			37,212			89,823			107,511
Noninterest income		2,770			2,535			7,625			8,899
Noninterest expense		16,876			16,697			54,304			50,367
Income before income taxes		12,084			23,050			43,144			66,043
Income tax expense		3,611			6,398			12,752			19,297
Net income	$	8,473		$	16,652		$	30,392		$	46,746
Share Data
Earnings per common share:
Basic	$	0.45		$	0.88		$	1.60		$	2.44
Diluted (1)		0.45			0.87			1.60			2.41
Weighted average shares outstanding (1):
Basic		18,995,303			18,988,443			18,991,579			19,142,732
Diluted		18,997,304			19,130,447			19,013,838			19,415,558
Performance Ratios
Return on average assets, annualized		0.83	%		1.72	%		1.01	%		1.57	%
Return on average shareholders’ equity, annualized		6.66	%		13.93	%		8.14	%		13.28	%
Noninterest income to average assets, annualized		0.27	%		0.26	%		0.25	%		0.30	%
Noninterest expense to average assets, annualized		1.65	%		1.72	%		1.80	%		1.69	%
Efficiency ratio		55.59	%		40.22	%		53.64	%		42.16	%
Dividend payout ratio		35.56	%		15.91	%		30.00	%		17.21	%
Average equity to asset ratio		12.40	%		12.34	%		12.38	%		11.78	%
Return on average tangible common equity, annualized (2)		7.82	%		16.58	%		9.58	%		15.80	%
Tangible book value per share (2)	$	22.53		$	20.85		$	22.53		$	20.85

		(1)	Basic earnings per share are calculated by dividing earnings to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are calculated by dividing earnings by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options using the treasury stock method.
		(2)	Tangible book value per share and return on average tangible common equity are non-GAAP financial measures. See "Non-GAAP Financial Measures" for a reconciliation of these measures to their most comparable GAAP measures.

Net Interest Income

The principal component of our earnings is net interest income, which is the difference between the interest and fees earned on loans and investments (interest-earning assets) and the interest paid on deposits and borrowed funds (interest-bearing liabilities). Net interest margin is net interest income as a percentage of average interest-earning assets for the period. The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin. The net interest spread is the yield on average interest earning assets minus the cost of average interest-bearing liabilities. Net interest margin and net interest spread are included on a tax equivalent (“TE”) basis by adjusting interest income utilizing the federal statutory tax rate of 21% for 2023 and 2022. Our net interest income, interest spread, and net interest margin are sensitive to general business and economic conditions. These conditions include short-term and long-term interest rates, inflation, monetary supply, and the strength of the international, national and state economies, in general, and more specifically, the local economies in which we conduct business. Our ability to manage net interest income during changing interest rate environments will have a significant impact on our overall performance. We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets. For additional information see “Capital Resources and Liquidity Management” and "Item 3. Quantitative and Qualitative Disclosures about Market Risk" included in this Report.

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The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months and nine months ended September 30, 2023 and 2022. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

Interest-Earning Assets and Interest-Bearing Liabilities

	For the Three Months Ended September 30,
	2023							2022
(tax-equivalent basis, dollars in thousands)	Average		Interest		Yield /			Average		Interest		Yield /
	Balance		& Fees		Rate			Balance		& Fees		Rate
Interest-earning assets:
Federal funds sold, cash equivalents and other ⁽¹⁾	$	285,484	$	3,735		5.19	%	$	141,737	$	1,042		2.92	%
Securities ⁽²⁾
Available for sale		369,459		4,187		4.50	%		318,066		1,758		2.19	%
Held to maturity		5,385		48		3.54	%		5,738		50		3.46	%
Mortgage loans held for sale		739		13		6.98	%		420		6		5.48	%
Loans held for investment: ⁽³⁾
Real estate		2,968,246		43,583		5.83	%		2,820,022		38,999		5.49	%
Commercial		187,140		4,021		8.52	%		303,899		4,583		5.98	%
Total loans held for investment		3,155,386		47,604		5.99	%		3,123,921		43,582		5.53	%
Total earning assets		3,816,453	$	55,587		5.78	%		3,589,882	$	46,438		5.13	%
Noninterest-earning assets		250,083							250,737
Total assets	$	4,066,536						$	3,840,619

Interest-bearing liabilities:
NOW	$	55,325	$	201		1.44	%	$	74,518	$	91		0.48	%
Money market		403,300		2,656		2.61	%		612,743		1,376		0.89	%
Saving deposits		123,709		249		0.80	%		147,349		62		0.17	%
Time deposits, less than $250,000		1,285,320		14,090		4.35	%		566,730		1,221		0.85	%
Time deposits, $250,000 and over		717,026		7,759		4.29	%		531,655		1,239		0.92	%
Total interest-bearing deposits		2,584,680		24,955		3.83	%		1,932,995		3,989		0.82	%
FHLB advances		150,000		440		1.16	%		239,674		1,020		1.69	%
Long-term debt		173,923		2,194		5.00	%		173,345		2,194		5.02	%
Subordinated debentures		14,848		385		10.29	%		14,629		233		6.32	%
Total interest-bearing liabilities		2,923,451		27,974		3.80	%		2,360,643		7,436		1.25	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		571,371							964,867
Other noninterest-bearing liabilities		67,282							41,003
Total noninterest-bearing liabilities		638,653							1,005,870
Shareholders' equity		504,432							474,106
Total liabilities and shareholders' equity	$	4,066,536						$	3,840,619
Net interest income / interest rate spreads			$	27,613		1.98	%			$	39,002		3.88	%
Net interest margin						2.87	%						4.31	%

(1)

Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.

(2)

Interest income and average rates for tax-exempt securities are presented on a TE basis.

(3)

Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs and discount accretion.

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	For the Nine Months Ended September 30,
	2023							2022
(tax-equivalent basis, dollars in thousands)	Average		Interest		Yield /			Average		Interest		Yield /
	Balance		& Fees		Rate			Balance		& Fees		Rate
Interest-earning assets:
Federal funds sold, cash equivalents and other ⁽¹⁾	$	192,393	$	7,626		5.30	%	$	338,253	$	2,477		0.98	%
Securities: ⁽²⁾
Available for sale		332,007		10,245		4.13	%		369,808		4,126		1.49	%
Held to maturity		5,610		151		3.60	%		5,909		158		3.57	%
Mortgage loans held for sale		295		16		7.25	%		1,624		62		5.10	%
Loans held for investment: ⁽³⁾
Real estate		3,041,393		134,791		5.93	%		2,696,183		107,301		5.32	%
Commercial		214,618		13,562		8.45	%		336,630		14,268		5.67	%
Total loans held for investment		3,256,011		148,353		6.09	%		3,032,813		121,569		5.36	%
Total earning assets		3,786,316	$	166,391		5.88	%		3,748,407	$	128,392		4.58	%
Noninterest-earning assets		244,822							245,137
Total assets	$	4,031,138						$	3,993,544

Interest-bearing liabilities:
NOW deposits	$	59,476	$	511		1.15	%	$	75,182	$	185		0.33	%
Money market deposits		431,299		7,315		2.27	%		654,522		2,777		0.57	%
Savings deposits		118,550		354		0.40	%		147,033		129		0.12	%
Time deposits, less than $250,000		1,141,290		33,905		3.97	%		573,401		2,698		0.63	%
Time deposits, $250,000 and over		729,699		20,519		3.76	%		542,535		2,842		0.70	%
Total interest-bearing deposits		2,480,314		62,604		3.37	%		1,992,673		8,631		0.58	%
FHLB advances		179,707		2,428		1.81	%		191,136		1,974		1.38	%
Long-term debt		173,780		6,584		5.07	%		173,202		6,583		5.08	%
Subordinated debentures		14,794		1,084		9.80	%		14,575		571		5.24	%
Total interest-bearing liabilities		2,848,595		72,700		3.41	%		2,371,586		17,759		1.00	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		624,781							1,115,153
Other noninterest-bearing liabilities		58,786							36,257
Total noninterest-bearing liabilities		683,567							1,151,410
Shareholders' equity		498,976							470,548
Total liabilities and shareholders' equity	$	4,031,138						$	3,993,544
Net interest income / interest rate spreads			$	93,691		2.47	%			$	110,633		3.58	%
Net interest margin						3.31	%						3.95	%

(1)

Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.

(2)

Interest income and average rates for tax-exempt securities are presented on a TE basis.

(3)

Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs and discount accretion.

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Interest Rates and Operating Interest Differential

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous period’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous period’s volume. Changes which are not due solely to volume or rate have been allocated to these categories based on the respective percent changes in average volume and average rate as they compare to each other.

	Comparison of Three Months Ended									Comparison of Nine Months Ended
	September 30, 2023 and 2022									September 30, 2023 and 2022
	Change due to:									Change due to:
(tax-equivalent basis, dollars in thousands)	Volume			Rate			Interest Variance			Volume			Rate			Interest Variance
Interest-earning assets:
Federal funds sold, cash equivalents & other (1)	$	1,524		$	1,169		$	2,693		$	(2,145	)	$	7,294		$	5,149
Securities: (2)
Available for sale		323			2,106			2,429			(731	)		6,850			6,119
Held to maturity		(8	)		6			(2	)		(9	)		2			(7	)
Mortgage loans held for sale		5			2			7			(77	)		31			(46	)
Loans held for investment: (3)
Real estate		2,104			2,480			4,584			14,502			12,988			27,490
Commercial		(7,599	)		7,037			(562	)		(8,255	)		7,549			(706	)
Total loans held for investment		(5,495	)		9,517			4,022			6,247			20,537			26,784
Total earning assets	$	(3,651	)	$	12,800		$	9,149		$	3,285		$	34,714		$	37,999

Interest-bearing liabilities:
NOW	$	(150	)	$	260		$	110		$	(71	)	$	397		$	326
Money market		(2,975	)		4,255			1,280			(1,817	)		6,355			4,538
Saving deposits		(69	)		256			187			(46	)		271			225
Time deposits, less than $250,000		3,030			9,839			12,869			4,912			26,295			31,207
Time deposits, $250,000 and over		567			5,953			6,520			1,293			16,384			17,677
Total interest-bearing deposits		403			20,563			20,966			4,271			49,702			53,973
FHLB advances		(316	)		(264	)		(580	)		(192	)		646			454
Long-term debt		32			(32	)		0			22			(21	)		1
Subordinated debentures		4			148			152			8			505			513
Total interest-bearing liabilities		123			20,415			20,538			4,109			50,832			54,941
Changes in net interest income	$	(3,774	)	$	(7,615	)	$	(11,389	)	$	(824	)	$	(16,118	)	$	(16,942	)

(1)

Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.

(2)

Interest income and average rates for tax-exempt securities are presented on a TE basis.

(3)

Average loan balances include nonaccrual loans. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs and discount accretion.

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Results of Operations—Comparison of Results of Operations for the Three Months Ended September 30, 2023 and September 30, 2022

The following discussion of our results of operations compares the three months ended September 30, 2023 and 2022. The results of operations for the three months ended September 30, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023.

Net Interest Income/Average Balance Sheet. In the third quarter of 2023, we generated $27.6 million of taxable-equivalent net interest income, a decrease of $11.4 million, or 29.2%, from the $39.0 million of taxable-equivalent net interest income we earned in the third quarter of 2022. The decrease in net interest income was primarily due to a 301 basis point increase in the average rate paid on interest-bearing deposits and a $651.7 million increase in average interest-bearing deposits, partially offset by a 65 basis point increase in the average yield on interest-earning assets and a $31.8 million increase in average gross loans. The Federal Reserve raised interest rates by 2.25% during the 12-month period from September 30, 2022 to September 30, 2023.

For the three months ended September 30, 2023 and 2022, our net interest margin was 2.87% and 4.31%, respectively. The decrease in net interest margin was primarily due to a 301 basis point increase in the average cost of interest-bearing deposits and a $651.7 million increase in average interest-bearing deposits, partially offset by a 65 basis point increase in the average yield on interest-earning assets, and a $31.8 million increase in average gross loans. The cost of interest-bearing deposits increased due to increasing market rates and peer bank deposit competition. Our net interest margin for the three months ended September 30, 2023 and 2022, excluding accretion income on our purchased loan portfolios, would have been 2.87% and 4.30%, respectively.

Interest and fees on HFI and HFS loans for the third quarter of 2023 was $47.6 million compared to $43.6 million for the third quarter of 2022. The $4.0 million, or 9.2%, increase was primarily due to a 46 basis point increase in the average yield on total loans and a $31.8 million, or 1.0%, increase in the average balance of total loans outstanding. The increase in the average loan balance was primarily due to organic loan growth. Purchased loan discount accretion income totaled $18,000 in the third quarter of 2023 compared to $112,000 in the third quarter of 2022. For the three months ended September 30, 2023 and 2022, the yield on total HFI and HFS loans was 5.99% and 5.53%, respectively, while the yield on total loans excluding accretion income on our purchased loan portfolio would have been 5.98% and 5.52%, respectively.

The table below presents the accretion income by loan type for the three and nine months ended September 30, 2023 and 2022:

	As of and For the Three Months Ended						As of and For the Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2023			2022			2023			2022
Beginning balance of discount on purchased loans	$	1,016		$	1,388		$	1,237		$	1,727
Additions due to acquisitions:
Commercial and industrial		—			—			(6	)		8
Commercial real estate		—			—			350			26
Single family residential mortgages		—			—			—			(52	)
Total additions	$	—		$	—		$	344		$	(18	)
Accretion:
Commercial and industrial		(8	)		(1	)		(11	)		3
SBA		2			2			18			8
Construction and land development		—			—			—			(1	)
Commercial real estate		(62	)		(11	)		309			1
Single family residential mortgages		86			122			267			422
Total accretion	$	18		$	112		$	583		$	433
Ending balance of discount on purchased loans	$	998		$	1,276		$	998		$	1,276

Interest expense on deposits increased to $25.0 million for the third quarter of 2023 as compared to $4.0 million for the third quarter of 2022. The $21.0 million, or 525.6%, increase in interest expense on deposits was primarily due to a 301 basis point increase in the average rate paid on interest-bearing deposits due to average higher rates paid on time deposits and a $651.7 million increase in average interest-bearing deposits. Average noninterest-bearing deposits decreased $393.5 million to $571.4 million from $964.9 million in the third quarter of 2022 primarily due to the exit of a single deposit relationship and customers transferring their deposit balances into higher yielding money market accounts and time deposits.

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The provision for credit losses decreased $367,000 to $1.4 million in the third quarter of 2023 compared to $1.8 million in the third quarter of 2022. The decrease was reflective of declines in loan growth, partially offset by increases in classified loans that increased the qualitative factors in the Company's CECL model. The provision for credit losses included a provision for credit losses of $1.5 million, partially offset by a credit for off-balance sheet commitments of $144,000 in the third quarter of 2023. There were $2.2 million in net loan charge-offs in the third quarter of 2023, as compared to $127,000 in net loan recoveries in the third quarter of 2022.

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

	For the Three Months Ended September 30,				Increase (Decrease)					For the Nine Months Ended September 30,				Increase (Decrease)
(dollars in thousands)	2023		2022		$				%	2023		2022		$				%
Noninterest income:
Service charges, fees and other	$	1,357	$	1,214	$	143		11.8	%	$	4,150	$	3,745	$	405		10.8	%
Gain on sale of loans		212		265		(53	)	(20.0	)%		258		1,783		(1,525	)	(85.5	)%
Loan servicing fee, net of amortization		623		724		(101	)	(14.0	)%		1,959		1,628		331		20.3	%
Increase in cash surrender of life insurance		356		332		24		7.2	%		1,036		986		50		5.1	%
Gain on sale of OREO		190		—		190		100.0	%		190		—		190		100.0	%
Gain on sale of fixed assets		32		—		32		100.0	%		32		757		(725	)	(95.8	)%
Total noninterest income	$	2,770	$	2,535	$	235		9.3	%	$	7,625	$	8,899	$	(1,274	)	(14.3	)%

Noninterest income increased $235,000, or 9.3%, to $2.8 million for the third quarter of 2023, compared to $2.5 million for the same quarter in the prior year. The increase was primarily attributable to a $190,000 increase in gain on sale of other real estate owned ("OREO"), a $143,000 increase in letter of credit commissions, wealth management commissions and other income, partially offset by a $101,000 decrease in loan servicing income.

Gain on sale of loans is comprised primarily of gains on sale of SFR mortgage loans and SBA loans. Gain on sale of loans totaled $212,000 in the third quarter of 2023, compared to $265,000 in the third quarter of 2022. The decrease was primarily due to the increase in interest rates, which resulted in the decreases in FNMA, FHLMC, non-qualified loan originations and sales. In addition, $20 million mortgage loans were sold at par value but reflecting the net deferred cost resulted in a loss of $103,000 from those loans sold.

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The following table presents information on loans sold and gain on loans sold for the three and nine months ended September 30, 2023 and 2022.

	For the Three Months Ended September 30,				Increase (Decrease)						For the Nine Months Ended September 30,				Increase (Decrease)
*(dollars in thousands)*	2023		2022		$			%			2023		2022		$			%
Loans sold:
SBA	$	3,014	$	2,474	$	540			21.8	%	$	3,141	$	11,907	$	(8,766	)		(73.6	)%
Single family residential mortgage		28,846		3,810		25,036			657.1	%		31,092		43,314		(12,222	)		(28.2	)%
	$	31,860	$	6,284	$	25,576			407.0	%	$	34,233	$	55,221	$	(20,988	)		(38.0	)%
Gain on loans sold:
SBA	$	189	$	130	$	59			45.4	%	$	199	$	653	$	(454	)		(69.5	)%
Single family residential mortgage		23		135		(112	)		(83.0	)%		59		1,130		(1,071	)		(94.8	)%
	$	212	$	265	$	(53	)		(20.0	)%	$	258	$	1,783	$	(1,525	)		(85.5	)%

Our loan servicing income, net of amortization, decreased by $101,000 to $623,000 for the three months ended September 30, 2023 compared to net servicing income of $724,000 for the three months ended September 30, 2022. Loan servicing income, net of amortization decreased due to the decrease in volume of SFR and SBA loans we are servicing. The following table presents information on loan servicing income for the three and nine months ended September 30, 2023 and 2022.

*(dollars in thousands)*	For the Three Months Ended September 30,				Increase (Decrease)						For the Nine Months Ended September 30,				Increase (Decrease)
*For the period*	2023		2022		$			%			2023		2022		$			%
Loan servicing income, net of amortization:
Single family residential loans serviced	$	534	$	491	$	43			8.8	%	$	1,614	$	1,189	$	425			35.7	%
SBA loans serviced		89		233		(144	)		(61.8	)%		345		439		(94	)		(21.4	)%
Total	$	623	$	724	$	(101	)		(14.0	)%	$	1,959	$	1,628	$	331			20.3	%

As of September 30, 2023, we were servicing SFR mortgage loans for other financial institutions, FHLMC, and FNMA, and we were also servicing SBA loans. The decline in the respective servicing portfolios reflects prepayment of loans from the third quarter of 2022 through the third quarter of 2023.

The following table shows loans serviced for others as of September 30, 2023 and 2022:

	September 30,				Increase (Decrease)
*(dollars in thousands)*	2023		2022		$			%
*As of period-end*
Single family residential loans serviced	$	1,041,352	$	1,157,832	$	(116,480	)		(10.1	)%
SBA loans serviced		102,605		128,020		(25,415	)		(19.9	)%
Commercial real estate loans serviced		3,933		4,011		(78	)		(1.9	)%
Construction loans serviced		4,388		—		4,388			100	%
Total	$	1,152,278	$	1,289,863	$	(137,585	)		(10.7	)%

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

	For the Three Months Ended September 30,				Increase (Decrease)						For the Nine Months Ended September 30,				Increase (Decrease)
(dollars in thousands)	2023		2022		$			%			2023		2022		$			%
Noninterest expense:
Salaries and employee benefits	$	9,744	$	9,561	$	183			1.9	%	$	28,935	$	28,558	$	377			1.3	%
Occupancy and equipment expense		2,414		2,349		65			2.8	%		7,242		6,728		514			7.6	%
Data processing		1,315		1,306		9			0.7	%		3,969		3,857		112			2.9	%
Legal and professional		1,022		1,077		(55	)		(5.1	)%		6,907		4,337		2,570			59.3	%
Office expenses		437		382		55			14.4	%		1,163		1,033		130			12.6	%
Marketing and business promotion		340		364		(24	)		(6.6	)%		892		1,172		(280	)		(23.9	)%
Insurance and regulatory assessments		730		441		289			65.5	%		2,043		1,360		683			50.2	%
Amortization of core deposit intangible		236		277		(41	)		(14.8	)%		708		833		(125	)		(15.0	)%
Other expenses		638		940		(302	)		(32.1	)%		2,445		2,489		(44	)		(1.8	)%
Total noninterest expense	$	16,876	$	16,697	$	179			1.1	%	$	54,304	$	50,367	$	3,937			7.8	%

Noninterest expense increased $179,000, or 1.1%, to $16.9 million in the third quarter of 2023 compared to $16.7 million in the third quarter of 2022. The increase was primarily due to a $240,000 increase in the FDIC assessment and a $183,000 increase in salaries and benefits expense, partially offset by a $125,000 decrease in director travel expenses and a $144,000 decrease in compensation expense related to director restricted stock units.

Salaries and employee benefits expense increased $183,000, or 1.9%, to $9.7 million for the third quarter of 2023 compared to $9.6 million for the third quarter of 2022, due to normal salary increases and a decreased loan deferred cost salary offset due to lower loan originations partially offset by a decrease in bonus expense and commissions expense. The number of full-time equivalent employees was 380 at September 30, 2023 compared to 382 at September 30, 2022. None of our employees are represented by a labor union, or governed by any collective bargaining agreements.

Occupancy and equipment expense increased $65,000, or 2.8%, to $2.4 million for the third quarter of 2023 compared to $2.3 million for the third quarter of 2022, primarily due to increases in rent.

Legal and professional expense decreased $55,000 to $1.0 million for the three months ended September 30, 2023 compared to $1.1 million for the three months ended September 30, 2022. The decrease in legal and professional expense from the third quarter of 2022 was due to the insurance coverage with respect to legal expenses related to the Company's voluntary cooperation with the SEC's requests for information, as disclosed in the Company's Current Report on Form 8-K filed with the SEC on July 24, 2023, after all prior payments of the Company reached the $1.0 million retention amount.

Insurance and regulatory assessments increased $289,000, or 65.5%, to $730,000 in the third quarter of 2023 due to an increase in the FDIC assessment by $240,000.

During the three months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $3.6 million and $6.4 million, respectively, reflecting an effective tax rate of 29.9% and 27.8% for the three months ended September 30, 2023 and 2022, respectively. The Company did not recognize a tax benefit from stock option exercises for the three months ended September 30, 2023 and recognized a tax benefit from stock option exercises of $276,000 for the same period in 2022.

Net income after tax amounted to $8.5 million for the third quarter of 2023, an $8.2 million, or a 49.1% decrease from $16.7 million in the third quarter of 2022 primarily due to a decrease of $11.4 million in net interest income and an increase of $179,000 in noninterest expense, partially offset by an increase of $235,000 in noninterest income, a decrease of $2.8 million in income tax expense and a decrease of $367,000 in the provision for credit losses.

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Results of Operations—Comparison of Results of Operations for the Nine Months Ended September 30, 2023 and September 30, 2022

The following discussion of our results of operations compares the nine months ended September 30, 2023 and 2022. The results of operations for the nine months ended September 30, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023.

Net Interest Income/Average Balance Sheet. In the first nine months of 2023, we generated $93.7 million of taxable-equivalent net interest income, a decrease of $16.9 million, or 15.3%, from the $110.6 million of taxable-equivalent net interest income we earned in the first nine months of 2022. The decrease in net interest income was primarily due to a 279 basis point increase in the average rate paid on interest-bearing deposits and a $487.6 million increase in average interest-bearing deposits, partially offset by a 130 basis point increase in the average yield on interest-earning assets, and a $221.9 million increase in average gross loans. The Federal Reserve raised interest rates by 2.25% during the 12-month period from September 30, 2022 to September 30, 2023.

For the nine months ended September 30, 2023 and 2022, our net interest margin was 3.31% and 3.95%, respectively. The decrease in net interest margin was primarily due to a 279 basis point increase in the average rate paid on interest-bearing deposits and a $487.6 million increase in average interest-bearing deposits, partially offset by a 130 basis point increase in the average yield on interest-earning assets, and a $221.9 million increase in average gross loans. The cost of interest-bearing deposits increased due to increasing market rates and peer bank deposit competition. Our net interest margin for the nine months ended September 30, 2023 and 2022, excluding accretion income on our purchased loan portfolios, would have been 3.29% and 3.93%, respectively.

Interest and fees on HFI and HFS loans for the first nine months of 2023 was $148.4 million compared to $121.6 million for the first nine months of 2022. The $26.7 million, or 22.0%, increase was primarily due to a $221.9 million, or 7.3%, increase in the average balance of total loans outstanding and a 73 basis point increase in the average yield on total loans. The increase in the average loan balance was primarily due to organic loan growth. Purchased loan discount accretion income totaled $583,000 in the first nine months of 2023 compared to $433,000 in the first nine months of 2022. For the nine months ended September 30, 2023 and 2022, the yield on total HFI and HFS loans was 6.09% and 5.36%, respectively, while the yield on total loans excluding accretion income on our purchased loan portfolio would have been 6.07% and 5.34%, respectively.

Interest expense on deposits increased to $62.6 million for the first nine months of 2023 as compared to $8.6 million for the first nine months of 2022. The $54.0 million, or 625.3%, increase in interest expense on deposits was primarily due to a 279 basis point increase in the average rate paid on interest-bearing deposits due to average higher rates paid on time deposits and a $487.6 million increase in average interest-bearing deposits. Average noninterest-bearing deposits decreased $490.4 million to $624.8 million from $1.1 billion in the first nine months of 2022 primarily due to the exit of a single deposit relationship and customers transferring their deposit balances into higher yielding money market accounts and time deposits.

The provision for credit losses increased $745,000 to $3.8 million in the first nine months of 2023 compared to $3.0 million in the first nine months of 2022. The increase was reflective of increases in classified loans during the first nine months of 2023 that increased the qualitative factors in the Company's CECL model. The provision for credit losses included a provision for credit losses of $4.3 million, partially offset by a credit for off-balance sheet commitments of $503,000 in the first nine months of 2023. There were $2.9 million in net loan charge-offs in the first nine months of 2023, as compared to $87,000 in net loan recoveries in the first nine months of 2022.

Noninterest income decreased $1.3 million, or 14.3%, to $7.6 million for the first nine months of 2023, compared to $8.9 million for the same period in the prior year. The decrease was primarily attributable to a $1.5 million decrease in gain on sale of loans due to increases in market rates of interest that caused decreases in both HFS loans and gain on loans sold and a $725,000 decrease in gain on sale of fixed assets partially offset by a $331,000 increase in loan servicing fees due to loan payoffs slowing down in 2023, a $316,000 increase in wealth management commissions and a $190,000 increase in gain on sale of OREO.

Gain on sale of loans is comprised primarily of gains on sale of SFR mortgage loans and SBA loans. Gain on sale of loans totaled $258,000 in the first nine months of 2023, compared to $1.8 million in the first nine months of 2022. The decrease was primarily caused by a decrease of $21.0 million in loan sale volume, primarily due to the increase in interest rates, which resulted in the decreases in FNMA, FHLMC, non-qualified mortgage loans, and SBA originations and loan sales.

Our loan servicing income, net of amortization, increased by $331,000 to $2.0 million for the nine months ended September 30, 2023 compared to net servicing income of $1.6 million for the nine months ended September 30, 2022. Loan servicing income, net of amortization increased due to higher interest rates, which affects the pre-payment speeds on loans serviced. We are experiencing lower loan pre-payments on SFR and SBA loans due to higher market rates. The decrease in SBA loan servicing income is due to a decrease in the volume of SBA loans we are servicing.

Noninterest expense increased $3.9 million, or 7.8%, to $54.3 million in the first nine months of 2023 compared to $50.4 million in the first nine months of 2022. The $3.9 million increase was primarily due to a $2.6 million increase in legal and other professional expense, a $683,000 increase in insurance and regulatory assessments, a $514,000 increase in occupancy and equipment expense, and a $377,000 increase in salaries and employee benefits expense due to new hires and merit increases to reflect economic inflation.

Salaries and employee benefits expense increased $377,000, or 1.3%, to $28.9 million for the first nine months of 2023 compared to $28.6 million for the first nine months of 2022, due to a $2.5 million decrease in deferred loan salary offset costs due to lower loan originations, normal salary increases and increases in health benefit costs, partially offset by decreases in bonuses and commissions.

Occupancy and equipment expense increased $514,000, or 7.6%, to $7.2 million for the first nine months of 2023 compared to $6.7 million for the first nine months of 2022, primarily due to increases in rent and real estate property taxes.

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Data processing expense increased $112,000, or 2.9%, to $4.0 million for the first nine months of 2023, compared to $3.9 million for the first nine months of 2022, primarily due to data processing and software license fees.

Legal and professional expense increased $2.6 million to $6.9 million in the nine months ended September 30, 2023 compared to $4.3 million for the nine months ended September 30, 2022. The $2.6 million increase in legal and professional expense from the first nine months of 2022 was due to a $1.8 million increase in legal expenses related to the Company's voluntary cooperation with the SEC’s requests for information, as disclosed in the Company's Current Report on Form 8-K filed with the SEC on July 24, 2023 and an increase of $923,000 in external auditor fees.

Insurance and regulatory assessments increased $683,000, or 50.2%, to $2.0 million in the first nine months of 2023 due to a $475,000 increase in the FDIC assessment and a $136,000 increase in directors and officers insurance expense.

During the nine months ended September 30, 2023 and 2022, the Company recorded an income tax provision of $12.8 million and $19.3 million, respectively, reflecting an effective tax rate of 29.6% and 29.2% for the nine months ended September 30, 2023 and 2022, respectively. The Company recognized tax benefit from stock option exercises of $5,000 for the nine months ended September 30, 2023 and $578,000 for the same period in 2022.

Net income after tax amounted to $30.4 million for the first nine months of 2023, a $16.4 million, or a 35.0% decrease from $46.7 million in the first nine months of 2022 primarily due to a $16.9 million decrease in net interest income, an increase of $3.9 million in noninterest expense, a decrease of $1.3 million in noninterest income, and an increase of $745,000 in the provision for credit losses, partially offset by a decrease of $6.5 million in income tax expense.

ANALYSIS OF FINANCIAL CONDITION

Assets

Total assets increased $150.3 million to $4.1 billion as of September 30, 2023, from $3.9 billion as of December 31, 2022, primarily due to increases in cash and cash equivalents of $247.2 million, and investment securities of $97.0 million, partially offset by a decrease in net HFI loans of $215.5 million.

Investment Securities

Our 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 our current and projected liquidity and interest rate sensitivity positions.

The following table sets forth the book value and percentage of each category of securities at September 30, 2023 and December 31, 2022. The book value for debt securities classified as AFS is reflected at fair market value and the book value for securities classified as HTM is reflected at amortized cost.

	September 30, 2023					December 31, 2022
(dollars in thousands)	Amount		% of Total			Amount		% of Total
Securities, available for sale, at fair value
Government agency securities	$	7,894		2.2	%	$	4,495		1.7	%
SBA agency securities		7,261		2.0	%		2,411		0.9	%
Mortgage-backed securities: residential		33,437		9.3	%		38,057		14.4	%
Mortgage-backed securities: commercial		—		0.0	%		4,871		1.9	%
Collateralized mortgage obligations: residential		71,199		19.8	%		69,903		26.6	%
Collateralized mortgage obligations: commercial		67,495		18.8	%		41,690		15.9	%
Commercial paper		129,073		35.9	%		49,537		18.9	%
Corporate debt securities ⁽¹⁾		29,806		8.3	%		37,012		14.1	%
Municipal securities		8,213		2.3	%		8,854		3.4	%
Total securities, available for sale, at fair value	$	354,378		98.6	%	$	256,830		97.8	%
Securities, held to maturity, at amortized cost
Taxable municipal securities	$	502		0.1	%	$	1,003		0.4	%
Tax-exempt municipal securities		4,712		1.3	%		4,726		1.8	%
Total securities, held to maturity, at amortized cost		5,214		1.4	%		5,729		2.2	%
Total securities	$	359,592		100.0	%	$	262,559		100.0	%

(1)

Comprised of corporate note securities, commercial paper and financial institution subordinated debentures.

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The tables below set forth investment debt securities AFS and HTM at September 30, 2023 and December 31, 2022.

*(dollars in thousands)*	Amortized		Unrealized		Unrealized			Fair
September 30, 2023	Cost		Gains		Losses			Value
Available for sale
Government agency securities	$	8,694	$	—	$	(800	)	$	7,894
SBA agency securities		7,533		—		(272	)		7,261
Mortgage-backed securities: residential		41,501		—		(8,064	)		33,437
Collateralized mortgage obligations: residential		86,343		—		(15,144	)		71,199
Collateralized mortgage obligations: commercial		70,837		1		(3,343	)		67,495
Commercial paper		129,105		—		(32	)		129,073
Corporate debt securities		34,817		—		(5,011	)		29,806
Municipal securities		12,644		—		(4,431	)		8,213
	$	391,474	$	1	$	(37,097	)	$	354,378
Held to maturity
Municipal taxable securities	$	502	$	—	$	(3	)	$	499
Municipal securities		4,712		—		(461	)		4,251
	$	5,214	$	—	$	(464	)	$	4,750
December 31, 2022
Available for sale
Government agency securities	$	5,012	$	—	$	(517	)	$	4,495
SBA agency securities		2,634		—		(223	)		2,411
Mortgage-backed securities: residential		44,809		—		(6,752	)		38,057
Mortgage-backed securities: commercial		4,887		—		(16	)		4,871
Collateralized mortgage obligations: residential		82,759		—		(12,856	)		69,903
Collateralized mortgage obligations: commercial		44,591		—		(2,901	)		41,690
Commercial paper		49,551		2		(16	)		49,537
Corporate debt securities		41,176		1		(4,165	)		37,012
Municipal securities		12,669		—		(3,815	)		8,854
	$	288,088	$	3	$	(31,261	)	$	256,830
Held to maturity
Municipal taxable securities	$	1,003	$	7	$	(3	)	$	1,007
Municipal securities		4,726		—		(170	)		4,556
	$	5,729	$	7	$	(173	)	$	5,563

The weighted-average book yield on the total investment portfolio at September 30, 2023 was 3.66% with a weighted-average life of 4.7 years. This compares to a weighted-average book yield of 2.55% with a weighted-average life of 5.8 years at December 31, 2022. The weighted-average life is the average number of years that each dollar of unpaid principal due remains outstanding. Average life is computed as the weighted-average time to the receipt of all future cash flows, using as the weights the dollar amounts of the principal pay-downs.

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The table below shows the Company’s investment securities’ gross unrealized losses and estimated fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2023 and December 31, 2022. The unrealized losses on these securities were primarily attributed to changes in interest rates. The issuers of these securities have not, to our knowledge, evidenced any cause for default on these securities. These securities have fluctuated in value since their purchase dates as market rates have fluctuated. However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity. As such, management does not deem these securities to be other-than-temporarily-impaired. A summary of our analysis of these securities and the unrealized losses is described more fully in "Note 4 — Investment Securities" of our consolidated financial statements included in our 2022 Annual Report. Economic trends may adversely affect the value of the portfolio of investment securities that we hold.

	Less than Twelve Months					Twelve Months or More					Total
*(dollars in thousands)*			Unrealized					Unrealized					Unrealized
September 30, 2023	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses
Government sponsored agencies	$	4,119	$	(174	)	$	3,775	$	(626	)	$	7,894	$	(800	)
SBA Agency Securities		—		—			2,115		(272	)		2,115		(272	)
Mortgage-backed securities: residential		—		—			33,437		(8,064	)		33,437		(8,064	)
Collateralized mortgage obligations: residential		11,956		(310	)		59,243		(14,834	)		71,199		(15,144	)
Collateralized mortgage obligations: commercial		23,696		(121	)		38,800		(3,222	)		62,496		(3,343	)
Commercial paper		114,185		(32	)		—		—			114,185		(32	)
Corporate debt securities		—		—			29,806		(5,011	)		29,806		(5,011	)
Municipal securities		—		—			8,213		(4,431	)		8,213		(4,431	)
Total available for sale	$	153,956	$	(637	)	$	175,389	$	(36,460	)	$	329,345	$	(37,097	)

Municipal taxable securities	$	499	$	(3	)	$	—	$	—		$	499		(3	)
Municipal securities		1,281		(134	)		2,970		(327	)		4,251		(461	)
Total held to maturity	$	1,780	$	(137	)	$	2,970	$	(327	)	$	4,750	$	(464	)

December 31, 2022
Government sponsored agencies	$	354	$	(24	)	$	4,141	$	(493	)	$	4,495	$	(517	)
SBA agency securities		2,411		(223	)		—		—			2,411		(223	)
Mortgage-backed securities: residential		5,535		(362	)		32,522		(6,390	)		38,057		(6,752	)
Mortgage-backed securities: commercial		4,871		(16	)		—		—			4,871		(16	)
Collateralized mortgage obligations: residential		27,050		(1,842	)		39,815		(11,014	)		66,865		(12,856	)
Collateralized mortgage obligations: commercial		18,741		(790	)		22,949		(2,111	)		41,690		(2,901	)
Commercial paper		39,624		(16	)		—		—			39,624		(16	)
Corporate debt securities		22,977		(1,843	)		10,330		(2,322	)		33,307		(4,165	)
Municipal securities		—		—			8,854		(3,815	)		8,854		(3,815	)
Total available for sale	$	121,563	$	(5,116	)	$	118,611	$	(26,145	)	$	240,174	$	(31,261	)

Municipal taxable securities	$	498	$	(3	)	$	—	$	—		$	498		(3	)
Municipal securities		4,556		(170	)		—		—			4,556		(170	)
Total held to maturity	$	5,054	$	(173	)	$	—	$	—		$	5,054	$	(173	)

The Company did not record any charges for other-than-temporary impairment losses for the three and nine months ended September 30, 2023 and 2022.

Loan Portfolio

At September 30, 2023, total HFI loans, net of ACL, totaled $3.1 billion. The following table presents the balance and associated percentage of each major category in our loan portfolio at September 30, 2023 and December 31, 2022:

	As of September 30, 2023						As of December 31, 2022
(dollars in thousands)	$			%			$			%
Loans:⁽¹⁾
Real Estate:
Construction and land development	$	259,778			8.3	%	$	276,876			8.3	%
Commercial real estate ⁽²⁾		1,164,210			37.3	%		1,312,132			39.3	%
Single-family residential mortgages		1,505,307			48.2	%		1,464,108			43.9	%
Commercial:
Commercial and industrial		127,655			4.1	%		201,223			6.0	%
SBA		50,420			1.6	%		61,411			1.8	%
Other:
Other loans		13,582			0.5	%		20,699			0.7	%
Total loans		3,120,952			100.0	%		3,336,449			100.0	%
Allowance for credit losses		(42,430	)					(41,076	)
Total loans, net	$	3,078,522					$	3,295,373

(1)

Net of discounts and deferred fees and costs.

(2)

Includes non-farm and non-residential real estate loans, multifamily residential and single-family residential loans for a business purpose.

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Total HFI loans decreased $215.5 million, or 6.5%, to $3.1 billion at September 30, 2023 compared to $3.3 billion at December 31, 2022. The decrease was primarily due to decreases in CRE loans of $147.9 million, C&I loans of $73.6 million, and C&D loans of $17.1 million, partially offset by an increase in SFR mortgage loans of $41.2 million.

We provide a mix of variable and fixed rate C&I loans. The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and for international trade financing. C&I loans include lines of credit with a maturity of one year or less, commercial and industrial term loans with maturities of five years or less, shared national credits with maturities of five years or less, mortgage warehouse lines with a maturity of one year or less, purchased receivables with a maturity of two months or less and international trade discounts with a maturity of three months or less. Substantially all of our C&I loans are collateralized by business assets or by real estate.

C&I loans decreased $73.6 million, or 36.6%, to $127.7 million as of September 30, 2023 compared to $201.2 million at December 31, 2022 primarily due to a decrease in usages of the credit lines due to interest rates.

CRE loans include owner-occupied and non-occupied commercial real estate, multi-family residential and SFR mortgage loans originated for a business purpose. The interest rate for the majority of these loans are prime-based and have a maturity of five years or less. Our policy maximum loan-to-value (“LTV”) ratio is 75% for CRE loans; however, we temporarily lowered the applicable LTV to 70% to be conservative in regards to real estate valuations. The total CRE portfolio decreased $147.9 million, or 11.3%, to $1.2 billion at September 30, 2023, compared to $1.3 billion at December 31, 2022 primarily due to the Company's efforts to reduce loans with higher risk and partly due to loans refinancing with other lenders. CRE portfolio decreases caused lower loan to deposit ratio and strengthened the liquidity position of the Company. The multi-family residential loan portfolio was $553.5 million as of September 30, 2023 and $643.2 million as of December 31, 2022. The SFR mortgage loan portfolio originated for a business purpose totaled $60.9 million as of September 30, 2023 and $69.3 million as of December 31, 2022.

C&D loans decreased $17.1 million, or 6.2%, to $259.8 million at September 30, 2023 as compared to $276.9 million at December 31, 2022, as repayments exceeded loan originations. The following table shows the categories of our C&D portfolio as of September 30, 2023 and December 31, 2022:

	As of September 30, 2023					As of December 31, 2022					Increase (Decrease)
(dollars in thousands)	$		Mix %			$		Mix %			$			%
Residential construction	$	153,471		59.1	%	$	166,558		60.1	%	$	(13,087	)		(7.9	)%
Commercial construction		74,849		28.8	%		77,231		27.9	%		(2,382	)		(3.1	)%
Land development		31,458		12.1	%		33,087		12.0	%		(1,629	)		(4.9	)%
Total construction and land development loans	$	259,778		100.0	%	$	276,876		100.0	%	$	(17,098	)		(6.2	)%

We are designated a Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or business expansions. SBA loans can have any maturity up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and includes personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and are included in our CRE Concentration Guidance.

SBA loans decreased $11.0 million, or 17.9%, to $50.4 million at September 30, 2023 compared to $61.4 million at December 31, 2022. We originated SBA loans of $7.5 million during the first nine months of 2023. Offsetting these loan originations were loan sales of $3.1 million and net loan payoffs and paydowns of $15.4 million during the first nine months of 2023.

We originate both qualified and non-qualified, alternative documentation SFR mortgage loans through correspondent relationships or through our branch network or retail channel to accommodate the needs of the Asian-American market. As of September 30, 2023, we had $1.5 billion of SFR real estate loans, representing 48.2% of our HFI loan portfolio.

As of September 30, 2023, the weighted-average LTV of the portfolio was 57.4%, the weighted average FICO score was 763, and the average duration of the portfolio was 2.3 years.

We originate non-qualified SFR mortgage loans both to sell and hold for investment. The HFI loans are generally originated through our retail branch network to our customers.

Except for SFR loans sold to FNMA, FHLMC or in connection with a securitization, the loans are sold with no representation or warranties and with a replacement feature for the first 90-days if the loan pays off early. We originate qualified mortgages and sell them directly to FNMA or FHLMC. These loans are underwritten under FNMA or FHLMC guidelines and sold with the normal FNMA conditions. In addition, we may sell some of our non-qualified SFR mortgage loans to FNMA in a bulk sale with limited recourse to us.

SFR mortgage real estate loans increased $41.2 million, or 2.8%, to $1.51 billion as of September 30, 2023 as compared to $1.46 billion as of December 31, 2022. The increase was due to greater loan originations compared to net pay-offs and paydowns. There were $62,000 HFS loans as of September 30, 2023, compared to none as of December 31, 2022, primarily due to decreasing loan originations caused by increases in market interest rates.

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Loan Quality

We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio. Our underwriting policies and practices govern the risk profile and credit and geographic concentration for our loan portfolio. We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.

In connection with our acquisitions, we hire a third-party to determine the fair value of loans acquired. In many instances, fair values were determined by estimating the cash flows expected to result from those loans and discounting them at appropriate market rates. The excess of expected cash flows above the fair value of the majority of loans will be accreted to interest income over the remaining lives of the loans in accordance with FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs.

The following table allocates the allowance for credit losses, or the allowance, by category:

	As of September 30, 2023					As of December 31, 2022
(dollars in thousands)	$		% ⁽¹⁾			$		% ⁽¹⁾
Loans:
Real Estate:
Construction and land development	$	1,767		0.68	%	$	2,638		0.95	%
Commercial real estate ⁽²⁾		17,575		1.51	%		17,657		1.35	%
Single family residential mortgages		20,340		1.35	%		17,640		1.20	%
Commercial:
Commercial and industrial		1,367		1.07	%		1,804		0.90	%
SBA		1,176		2.33	%		621		1.01	%
Other:
Other		205		1.51	%		716		3.46	%
Allowance for credit losses	$	42,430		1.36	%	$	41,076		1.23	%

(1)

% of allowance to total loans in the respective category

(2)

Includes non-farm and non-residential real estate loans, multi-family residential and single-family residential loans originated for a business purpose.

Allowance for Credit Losses.

The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination. The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated balance sheet. 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 has elected to utilize a discounted cash flow (“DCF”) approach for all segments except consumer loans and warehouse mortgage, for which we elected to utilize a remaining life approach.

The Company’s DCF methodology incorporates a probability of default, loss given default and exposure at default 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 unemployment forecast scenarios and related scenario-weighting, as well as determining the appropriate length of the forecast horizon. Management estimates the allowance balance required using past loan loss experience from peers with similar portfolio sizes and geographic locations to the Company, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. The Company’s CECL methodology utilizes a four-quarter reasonable and supportable forecast period, and a four-quarter reversion period. The Company is using the Federal Open Market Committee to obtain forecasts for the unemployment rate, while reverting to a long-run average of each considered economic factor.

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Individual loans considered to be uncollectible are charged off against the allowance. Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower. Collateral value is determined using updated appraisals and/or other market comparable information. Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary. Recoveries on loans previously charged off are added to the allowance. Net charge-offs to average loans were 0.12% for the nine months ended September 30, 2023 and zero percent for the twelve months ended December 31, 2022.

The ACL was $42.4 million at September 30, 2023 compared to $41.1 million at December 31, 2022. The $1.4 million increase in 2023 was primarily due to a provision for credit losses of $4.3 million, partially offset by net charge-offs of $2.9 million.

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

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(dollars in thousands)	2023			2022			2023			2022
Balance, beginning of period	$	43,092		$	36,289		$	41,076		$	32,912
ASU 2016-13 transition adjustment		—			—			—			2,135
Adjusted beginning balance	$	43,092		$	36,289		$	41,076		$	35,047
Charge-offs:
Commercial and industrial		—			(5	)		—			(5	)
SBA		—			—			(62	)		—
Construction & land development		(12	)					(12	)
Commercial real estate		(2,138	)		—			(2,537	)		—
Single-family residential mortgages		—			—			(93	)		—
Other		(67	)		(44	)		(288	)		(146	)
Total charge-offs		(2,217	)		(49	)		(2,992	)		(151	)
Recoveries:
Commercial and industrial		2			1			2			2
SBA		—			168			—			227
Other		9			7			47			9
Total recoveries		11			176			49			238
Net (charge-offs) recoveries		(2,206	)		127			(2,943	)		87
Provision for credit losses		1,544			1,766			4,297			3,048
Balance, end of period	$	42,430		$	38,182		$	42,430		$	38,182

Reserve for off-balance sheet credit commitments
Balance, beginning of period	$	798		$	2,115		$	1,157		$	1,203
Impact of ASU 2016-13 adoption		—			—			—		$	1,045
Adjusted beginning balance	$	798		$	2,115		$	1,157		$	2,248
Reversal for credit losses		(144	)		(28	)		(503	)		(161	)
Balance, end of period	$	654		$	2,087		$	654		$	2,087

Total HFI loans at end of period		3,120,952			3,220,913			3,120,952			3,220,913
Average HFI loans		3,155,386			3,123,921			3,256,011			3,032,813
Net (charge-offs) recoveries to average HFI loans		(0.28	)%		0.02	%		(0.12	)%		0.00	%
Allowance for credit losses to total loans		1.36	%		1.19	%		1.36	%		1.19	%
Credit discount on loans purchased through acquisitions	$	2,257		$	2,769		$	2,257		$	2,769

Loans are considered delinquent when principal or interest payments are past due 30 days or more; delinquent loans may remain on accrual status between 30 days and 89 days past due. Loans on which the accrual of interest has been discontinued are designated as nonaccrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are past due 90 days or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on nonaccrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on nonaccrual loans is subsequently recognized only to the extent that cash is received and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a modified loan. These concessions may include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until sold, and is carried at estimated fair value less estimated costs to sell.

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The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest (of which there were none during the periods presented), and modified loans. Nonperforming loans exclude PCI loans. The balances of nonperforming loans reflect the net investment in these assets.

	As of September 30,			As of December 31,
(dollars in thousands)	2023			2022
Modified loans:
Total modified loans	$	—		$	—
Accruing troubled debt restructured loans:
Commercial and industrial		—			306
Commercial real estate		—			894
Total accruing troubled debt restructured loans		—			1,200
Nonaccrual loans:
Commercial and industrial		761			713
SBA		2,009			2,245
Construction and land development		128			141
Commercial real estate		20,330			13,189
Single-family residential mortgages		16,868			5,936
Other		50			99
Total nonaccrual loans		40,146			22,323
Total nonperforming loans		40,146			23,523
OREO		284			577
Nonperforming assets	$	40,430		$	24,100
Nonperforming loans to total loans		1.29	%		0.71	%
Nonperforming assets to total assets		0.99	%		0.61	%

Nonperforming loans increased $16.6 million to $40.1 million at September 30, 2023, from $23.5 million at December 31, 2022. The $16.6 million increase in nonperforming loans was due to increases in nonperforming residential mortgage loans of $15.5 million and CRE loans of $10.8 million, partially offset by nonperforming loan payoffs or paydowns of $5.5 million, non-performing loan charge-offs of $2.8 million and loans that migrated to accruing status of $1.6 million during the first nine months of 2023.

Our 30-89 day delinquent loans, excluding nonaccrual loans, were $19.7 million as of September 30, 2023, compared to $15.2 million as of December 31, 2022. The $4.4 million increase in past due loans was primarily due to loans that migrated into nonaccrual status of $7.5 million, loans that migrated back to past due for less than 30 days in the amount of $7.4 million, and payoffs and paydowns of $1.0 million, partially offset by the addition of new delinquent loans in the aggregate amount of $20.4 million, including a new delinquent CRE loan of $16.1 million that was over 30 days delinquent due to a one business day payment delay, which reverted back to current status in October 2023.

No interest income on nonaccrual loans was recognized on a cash basis for the three or nine months ended September 30, 2023 and 2022.

Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, or interest rate reduction. The Company may provide multiple types of concessions on one loan. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses.

There were no loans that were both experiencing financial difficulty and modified during the three and nine months ended September 30, 2023 and the year ended December 31, 2022.

We utilize an asset risk classification system in compliance with guidelines established by the FDIC as part of our efforts to improve asset quality. In connection with examinations of insured institutions, examiners have the authority to identify problem assets and, if appropriate, classify them. There are three classifications for problem assets: “substandard,” “doubtful,” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values. An asset classified as loss is not considered collectable and is of such little value that continuance as an asset is not warranted.

We use a risk grading system to categorize and determine the credit risk of our loans. Potential problem loans include loans with a risk grade of 6, which are “special mention,” loans with a risk grade of 7, which are “substandard” loans that are generally not considered to be impaired and loans with a risk grade of 8, which are “doubtful” loans generally considered to be impaired. These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance. Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank’s senior management.

Loans classified as special mention decreased $11.0 million to $31.2 million at September 30, 2023 from $42.2 million at December 31, 2022. The decrease in special mention loans was due to special mention loans payoffs or paydowns of $23.7 million C&I loans and $410,000 CRE loans, downgrades to substandard loans of $8.9 million CRE loans, and upgrades to pass loans of $5.3 million C&I loans, partially offset by additional special mention loans of $12.7 million CRE loans, $11.7 million C&D loans and $2.6 million C&I loans. Loans classified as substandard increased $9.4 million to $71.4 million at September 30, 2023 from $62.0 million at December 31, 2022. The increase in substandard loans was due to downgrades from special mention loans of $8.9 million, additional substandard loans of $11.6 million CRE loans, and $10.2 million SFR mortgage loans, partially offset by upgrades to watch and pass loans of $9.9 million, substandard loans payoffs or paydowns of $6.1 million CRE loans, and substandard loans payoffs or paydowns of $3.8 million SFR mortgage loans.

Cash and cash equivalents increased $247.2 million, or 295.9%, to $330.8 million as of September 30, 2023 as compared to $83.5 million at December 31, 2022. The increase in cash and cash equivalents was due to increases in the balances of time deposits due to Bank-wide promotions of time deposits to strengthen our liquidity position and a slowdown in lending.

The Federal Reserve announced the reduction of the reserve requirement ratio to zero percent across all deposit tiers, effective March 26, 2020. Depository institutions that were required to maintain deposits in a Federal Reserve Bank account to satisfy reserve requirements will no longer be required to do so and can use the additional liquidity to lend to individuals and businesses. It is our understanding that the Federal Reserve currently has no current plans to reinstate the reserve requirement. However, the Federal Reserve may adjust reserve requirement ratios in the future if conditions warrant.

Goodwill was $71.5 million at both September 30, 2023 and December 31, 2022. Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired. Other intangible assets, which consist of core deposit intangibles ("CDI"), were $3.0 million and $3.7 million at September 30, 2023 and December 31, 2022, respectively. The CDI assets are amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of eight to ten years. The bank failures in the first half of 2023 caused a significant decline in bank stock prices, including the Company’s stock price. After evaluating the prolonged decrease in the Company's market value, management performed a quantitative goodwill impairment analysis as of September 30, 2023. Management estimated the fair value of the Company using both the guideline public company method, market approach, and the discounted cash flow method, income approach. Based on this quantitative analysis, the fair value of the Company exceeds its carrying amount with a passing amount of 9.6%. Management has concluded that goodwill was not impaired at September 30, 2023.

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Total liabilities increased by $128.9 million to $3.6 billion at September 30, 2023 from $3.4 billion at December 31, 2022, primarily due to a $410.1 million increase in time deposits, partially offset by a $226.3 million decrease in noninterest-bearing demand deposits and a $70.0 million decrease in FHLB advances.

As an Asian-American business bank that focuses on successful businesses and their owners, many of our depositors choose to make large deposits with us.

The following table summarizes our average deposit balances and weighted average rates for the three months ended September 30, 2023 and year ended December 31, 2022:

	For the Three Months Ended					For the Year Ended
	September 30, 2023					December 31, 2022
			Weighted					Weighted
	Average		Average			Average		Average
(dollars in thousands)	Balance		Rate (%)			Balance		Rate (%)
Noninterest-bearing demand	$	571,371		—		$	1,050,063		—
Interest-bearing:
NOW		55,325		1.44	%		73,335		0.36	%
Money market		403,300		2.61	%		631,094		0.81	%
Savings		123,709		0.80	%		144,409		0.13	%
Time, less than $250,000		1,285,320		4.35	%		609,464		1.08	%
Time, $250,000 and over		717,026		4.29	%		565,059		1.20	%
Total interest-bearing		2,584,680		3.83	%		2,023,361		0.93	%
Total deposits	$	3,156,051		3.14	%	$	3,073,424		0.61	%

The following table sets forth the maturity of time deposits of $250,000 or more and all wholesale deposits as of September 30, 2023:

	Maturity Within:
(dollars in thousands)	Three Months		After Three to Six Months		Six to 12 Months		After 12 Months		Total
Time, $250,000 and over	$	228,022	$	281,606	$	238,989	$	1,961	$	750,578
Wholesale deposits ⁽¹⁾		12,796		39,950		7,000		—		59,746
Time, brokered		180,732		139,985		—		—		320,717
Total	$	421,550	$	461,541	$	245,989	$	1,961	$	1,131,041

(1)

Wholesale deposits are defined as time deposits under $250,000 originated through internet rate line and/or other deposit originators.

We acquire wholesale time deposits from the internet and outside deposit originators as needed to supplement liquidity. The total amount of such deposits was $59.7 million as of September 30, 2023 and $7.1 million as of December 31, 2022. The Bank had $320.7 million in brokered deposits at September 30, 2023 and $255.0 million in brokered deposits at December 31, 2022. The increases in brokered deposits and wholesale deposits were a result of efforts to strengthen our liquidity position.

The following table sets forth the estimated deposits exceeding the FDIC insurance limit:

(dollars in thousands)
	September 30, 2023		December 31, 2022
Uninsured deposits	$	1,316,275	$	1,212,517

The estimated aggregate amount of time deposits in excess of the FDIC insurance limit is $548.1 million at September 30, 2023. The following table sets forth the maturity distribution of the estimated uninsured time deposits

	As of September 30,
(dollars in thousands)	2023
3 months or less	$	159,754
Over 3 months through 6 months		193,071
Over 6 months through 12 months		186,253
Over 12 months		9,042
Total	$	548,120

Total deposits increased $176.4 million to $3.2 billion at September 30, 2023 as compared to $3.0 billion at December 31, 2022. The increase was mainly due to increases in the balances of higher yielding time deposits. As of September 30, 2023, total deposits were comprised of 18.1% noninterest-bearing demand accounts, 19.3% of interest-bearing non-maturity accounts and 62.6% of time deposits.

As of September 30, 2023, $3,000 in deposit overdrafts were reclassified as other loans. As of December 31, 2022, the amount was $108,000.

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In addition to deposits, we have used long- and short-term borrowings, such as federal funds purchased and FHLB long-and short-term advances, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets. We had no FHLB short-term advances at September 30, 2023 and $70.0 million in FHLB short-term advances at December 31, 2022. The Company secured the short-term FHLB advances in order to maintain its liquidity to meet its funding needs due to reduced concentration of certain deposit customers and other deposit outflows. We had $150.0 million in FHLB long-term advances at September 30, 2023 and December 31, 2022. The original term is five years, maturing by March 2025. The average fixed interest rate on FHLB long-term advances is 1.18%. The Company secured this funding in case it experienced a liquidity issue caused by the COVID-19 pandemic and to obtain an attractive interest rate. The following table sets forth information on our total FHLB advances during the periods presented:

	As of and For the Three Months Ended						As of and For the Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2023			2022			2023			2022
Outstanding at period-end	$	150,000		$	240,000		$	150,000		$	240,000
Average amount outstanding		150,000			239,674			179,707			191,136
Maximum amount outstanding at any month-end		150,000			270,000			220,000			270,000
Weighted average interest rate:
During period		1.18	%		1.69	%		1.81	%		1.38	%
End of period		1.18	%		1.94	%		1.18	%		1.94	%

In November 2018, the Company issued $55.0 million of 6.18% fixed-to-floating rate subordinated notes due December 1, 2028 (the "2028 Subordinated Notes"). The Company used the net proceeds from the offering for general corporate purposes, including providing capital to the Bank and maintaining adequate liquidity at the Company. The 2028 Subordinated Notes bear interest at the initial rate of 6.18% per annum from December 1, 2018 until but excluding December 1, 2023, payable on June 1 and December 1 of each year. Thereafter, the Company will pay interest on the principal amount of this note at a variable rate equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 315 basis points each March 1, June 1, September 1 and December 1.

On December 1, 2023, the Company intends to redeem the 2028 Subordinated Notes at a redemption price equal to 100% of the principal amount of the 2028 Subordinated Notes plus accrued and unpaid interest to but excluding December 1, 2023. The 2028 Subordinated Notes have an aggregate principal amount outstanding of $55 million. From and after December 1, 2023, all interest on the 2028 Subordinated Notes will cease to accrue.

In March 2021, the Company issued $120 million of 4.00% fixed-to-floating rate subordinated notes due April 1, 2031 (the "2031 Subordinated Notes"). The interest rate is fixed through July 1, 2026 and floats at three-month SOFR plus 329 basis points thereafter. The Company can redeem the 2031 Subordinated Notes beginning April 1, 2026. The 2031 Subordinated Notes are considered Tier 2 capital at the Company.

Subordinated debentures consist of subordinated notes. As of September 30, 2023 and December 31, 2022, the amount outstanding was $14.9 million and $14.7 million, respectively. Under the terms of our subordinated notes and the related subordinated note purchase agreements, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the long term debt. These subordinated notes consist of the following:

● The Company maintains the TFC Statutory Trust ("TFC Trust"), which has issued a total of $5.2 million securities ($5.0 million in capital securities and $155,000 in common securities). These trust preferred securities were originally issued by TFC Trust, which was a subsidiary of TFC Holding Company, which was acquired by the Company in February 2016. The Company determined the fair value as of the valuation date of the TFC Trust issuance was $3.3 million, indicating a discount of $1.9 million. The underlying debentures bear interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, payable each March 15, June 15, September 15 and December 15. The maturity date is March 15, 2037. The subordinated debentures have a variable rate of interest equal to the three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 7.32% at September 30, 2023 and three-month LIBOR plus 1.65%, which was 6.42% at December 31, 2022.

● The Company maintains the First American International Statutory Trust I ("FAIC Trust"), which has issued a total of $7.2 million securities ($7.0 million in capital securities and $217,000 in common securities). These trust preferred securities were originally issued by FAIC Trust, which was a subsidiary of FAIC, which the Company acquired in October 2018. The Company determined the fair value as of the valuation date of the FAIC Trust issuance was $6.0 million, with a discount of $1.2 million. The underlying debentures bear interest equal to three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 2.25%, payable each March 15, June 15, September 15 and December 15. The maturity is December 15, 2034. The rate was 7.92% at September 30, 2023 and 7.02% at December 31, 2022.

● In January 2020, the Company, through the acquisition of PGB Holdings, Inc., acquired Pacific Global Bank Trust I ("PGBH Trust"), a Delaware statutory trust formed in December 2004. PGBH Trust issued 5,000 units of fixed-to-floating rate capital securities with an aggregate liquidation amount of $5.0 million and 155 common securities with an aggregate liquidation amount of $155,000. There was a $763,000 discount recorded to arrive at market value which is treated as a yield adjustment and is amortized over the life of the security. The Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years. The subordinated debentures have a variable rate of interest equal to the three-month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 2.10% through final maturity on December 15, 2034. The rate was 7.77% at September 30, 2023 and 6.87% at December 31, 2022.

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Capital Resources and Liquidity Management

Shareholders’ equity is influenced primarily by earnings, dividends, sales and redemptions of common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on AFS investment securities.

Shareholders’ equity increased $17.9 million, or 3.7%, to $502.5 million during the nine-month period ended September 30, 2023 due to $30.4 million of net income, partially offset by $9.1 million of common stock cash dividends and $4.1 million in unrealized losses on AFS securities.

Liquidity refers to the measure of our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, all at a reasonable cost. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders.

Our liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in banks, federal funds sold, available for sale securities, term federal funds, purchased receivables and maturing or prepaying balances in our securities and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market non-core deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, additional borrowings through the Federal Reserve Discount Window and the issuance of preferred or common securities. Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, debt financing and increases in customer deposits. For additional information regarding our operating, investing and financing cash flows, see the consolidated statements of cash flows provided in our consolidated financial statements.

Integral to our liquidity management is the administration of short-term borrowings. To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.

The Bank's net loan to deposit ratio was 97.6% at September 30, 2023 and 110.7% at December 31, 2022. The Bank's uninsured deposits were $1.3 billion at September 30, 2023 and $1.2 billion at December 31, 2022.

As of both September 30, 2023 and December 31, 2022, we had $92.0 million of unsecured federal funds lines with no amounts advanced against the lines as of such dates. In addition, lines of credit from the Federal Reserve Discount Window were $41.9 million at September 30, 2023 and $12.0 million at December 31, 2022, respectively. Federal Reserve Discount Window lines were collateralized by a pool of CRE loans totaling $63.3 million and $16.8 million as of September 30, 2023 and December 31, 2022, respectively. We did not have any borrowings outstanding with the Federal Reserve at September 30, 2023 and December 31, 2022, and our borrowing capacity is limited only by eligible collateral.

At September 30, 2023 and December 31, 2022, we had $150.0 million in FHLB long-term advances outstanding. We had no FHLB short-term advances outstanding at September 30, 2023 and $70.0 million in FHLB short-term advances outstanding at December 31, 2022. Based on the values of loans pledged as collateral, we had $1.1 billion of borrowing capacity with the FHLB as of September 30, 2023 and $1.1 billion at December 31, 2022.

RBB is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity. RBB’s main source of funding is dividends declared and paid to RBB by the Bank and RAM. There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to RBB. Management believes that these limitations will not impact our ability to meet the Company’s ongoing short-term cash obligations.

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Regulatory Capital Requirements

We are subject to various regulatory capital requirements administered by the federal and state banking regulators. Failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies.

In the wake of the global financial crisis of 2008-2009, the role of capital has become fundamentally more important, as banking regulators have concluded that the amount and quality of capital held by banking organizations was insufficient to absorb losses during periods of severely distressed economic conditions. The Dodd-Frank Act and banking regulations promulgated by the U.S. federal banking regulators to implement Basel III have established strengthened capital standards for banks and bank holding companies and require more capital to be held in the form of stockholders' equity. These provisions, which generally became applicable to RBB and the Bank on January 1, 2015, impose meaningfully more stringent regulatory capital requirements than those applicable to RBB and the Bank prior to that date. In addition, the Basel III regulations implemented a concept known as the “capital conservation buffer.” In general, banks and bank holding companies are required to hold a buffer of common equity Tier 1 capital equal to 2.5% of risk-weighted assets over each minimum capital ratio to avoid being subject to limits on capital distributions (e.g., dividends, stock buybacks, etc.) and certain discretionary bonus payments to executive officers. For community banks, the capital conservation buffer requirement commenced on January 1, 2016, with a gradual phase-in. Full compliance with the capital conservation buffer was required by January 1, 2019.

The table below summarizes the minimum capital requirements applicable to RBB and the Bank pursuant to Basel III regulations as of the dates reflected and assuming the capital conservation buffer has been fully-phased in. The minimum capital requirements are only regulatory minimums and banking regulators can impose higher requirements on individual institutions. For example, banks and bank holding companies experiencing internal growth or making acquisitions generally will be expected to maintain strong capital positions substantially above the minimum supervisory levels. Higher capital levels may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. The table below also summarizes the capital requirements applicable to RBB and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as RBB’s and the Bank’s capital ratios as of September 30, 2023 and December 31, 2022. RBB and the Bank exceeded all regulatory capital requirements under Basel III and the Bank was considered to be “well-capitalized” as of the dates reflected in the table below:

	Ratio at September 30, 2023			Ratio at December 31, 2022			Regulatory Capital Ratio Requirements			Regulatory Capital Ratio Requirements, including fully phased-in Capital Conservation Buffer			Minimum Requirement for "Well Capitalized" Depository Institution
Tier 1 Leverage Ratio
Consolidated		11.68	%		11.67	%		4.00	%		4.00	%		5.00	%
Bank		13.99	%		14.89	%		4.00	%		4.00	%		5.00	%
Common Equity Tier 1 Risk-Based Capital Ratio
Consolidated		17.65	%		16.03	%		4.50	%		7.00	%		6.50	%
Bank		21.83	%		21.14	%		4.50	%		7.00	%		6.50	%
Tier 1 Risk-Based Capital Ratio
Consolidated		18.22	%		16.58	%		6.00	%		8.50	%		8.00	%
Bank		21.83	%		21.14	%		6.00	%		8.50	%		8.00	%
Total Risk-Based Capital Ratio
Consolidated		26.24	%		24.27	%		8.00	%		10.50	%		10.00	%
Bank		23.09	%		22.40	%		8.00	%		10.50	%		10.00	%

The Basel III regulations also revised the definition of capital and describe the capital components and eligibility criteria for common equity Tier 1 capital, additional Tier 1 capital and Tier 2 capital. The most significant changes to the capital criteria were that: (i) the prior concept of unrestricted Tier 1 capital and restricted Tier 1 capital has been replaced with additional Tier 1 capital and a regulatory capital ratio that is based on common equity Tier 1 capital; and (ii) trust preferred securities and cumulative perpetual preferred stock issued after May 19, 2010 no longer qualify as Tier 1 capital. This change is already effective due to the Dodd-Frank Act, although such instruments issued prior to May 19, 2010 continue to qualify as Tier 1 capital (assuming they qualified as such under the prior regulatory capital standards and that the asset size of the issuer does not exceed $15 billion), subject to the 25% of Tier 1 capital limit.

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Contractual Obligations

The following table contains supplemental information regarding our total contractual obligations at September 30, 2023:

	Payments Due
	Within		One to		Three to		After Five
(dollars in thousands)	One Year		Three Years		Five Years		Years		Total
Deposits without a stated maturity	$	1,180,413	$	—	$	—	$	—	$	1,180,413
Time deposits		1,963,393		9,199		1,067		—		1,973,659
FHLB advances		—		150,000		—		—		150,000
Long-term debt		54,967		—		—		119,052		174,019
Subordinated debentures		—		—		—		14,884		14,884
Leases		4,674		9,579		9,090		11,523		34,866
Total contractual obligations	$	3,203,447	$	168,778	$	10,157	$	145,459	$	3,527,841

Off-Balance Sheet Arrangements

We have limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers. These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit. Those instruments involve to varying degrees, elements of credit and interest rate risk not recognized in the Company’s financial statements.

The Company’s exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments as it does for loans reflected in its financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements. The Company evaluates each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer.

Non-GAAP Financial Measures

Some of the financial measures included herein are not measures of financial performance recognized by GAAP. These non-GAAP financial measures include “tangible common equity to tangible assets,” “tangible book value per share,” “return on average tangible common equity,” “adjusted earnings,” “adjusted diluted earnings per share,” “adjusted return on average assets,” and “adjusted return on average tangible common equity.” Our management uses these non-GAAP financial measures in its analysis of our performance.

The tangible common equity to tangible assets ratio and tangible book value per share are non-GAAP measures generally used by financial analysts and investment bankers to evaluate capital adequacy. We calculate: (i) tangible common equity as total shareholders’ equity less goodwill and other intangible assets (excluding mortgage servicing rights); (ii) tangible assets as total assets less goodwill and other intangible assets; and (iii) tangible book value per share as tangible common equity divided by shares of common stock outstanding.

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Our management, banking regulators, many financial analysts and other investors use these measures in conjunction with more traditional bank capital ratios to compare the capital adequacy of banking organizations with significant amounts of goodwill or other intangible assets, which typically stem from the use of the purchase method of accounting for mergers and acquisitions. Tangible common equity, tangible assets, tangible book value per share and related measures should not be considered in isolation or as a substitute for total shareholders’ equity, total assets, book value per share or any other measure calculated in accordance with GAAP. Moreover, the manner in which we calculate tangible common equity, tangible assets, tangible book value per share and any other related measures may differ from that of other companies reporting measures with similar names. The following table reconciles shareholders’ equity (on a GAAP basis) to tangible common equity and total assets (on a GAAP basis) to tangible assets, and calculates our tangible book value per share:

(dollars in thousands, except share and per share data)	September 30, 2023			December 31, 2022
Tangible common equity:
Total shareholders' equity	$	502,511		$	484,563
Adjustments
Goodwill		(71,498	)		(71,498	)
Core deposit intangible		(3,010	)		(3,718	)
Tangible common equity	$	428,003		$	409,347
Tangible assets:
Total assets-GAAP	$	4,069,354		$	3,919,058
Adjustments
Goodwill		(71,498	)		(71,498	)
Core deposit intangible		(3,010	)		(3,718	)
Tangible assets:	$	3,994,846		$	3,843,842
Common shares outstanding		18,995,303			18,965,776
Common equity to assets ratio		12.35	%		12.36	%
Book value per share	$	26.45		$	25.55
Tangible common equity to tangible assets ratio		10.71	%		10.65	%
Tangible book value per share	$	22.53		$	21.58

Management measures return on average tangible common equity (“ROATCE”) to assess the Company’s capital strength and business performance. Tangible equity excludes goodwill and other intangible assets (excluding mortgage servicing rights), and is reviewed by banking and financial institution regulators when assessing a financial institution’s capital adequacy. This non-GAAP financial measure should not be considered a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled measures used by other companies. The following table reconciles return on average tangible common equity to its most comparable GAAP measure:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
*(dollars in thousands)*	2023			2022			2023			2022
Net income available to common shareholders	$	8,473		$	16,652		$	30,392		$	46,746
Average shareholders' equity		504,432			474,106			498,976			470,548
Adjustments:
Goodwill		(71,498	)		(71,498	)		(71,498	)		(70,763	)
Core deposit intangible		(3,165	)		(4,154	)		(3,398	)		(4,215	)
Adjusted average tangible common equity	$	429,769		$	398,454		$	424,080		$	395,570
Return on average tangible common equity	7.82		%		16.58	%	9.58		%		15.80	%

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified three primary sources of market risk: interest rate risk, price risk, and basis risk.

Interest Rate Risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricings and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay residential mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and SOFR (basis risk).

Our asset liability committee ("ALCO"), establishes broad policy limits with respect to interest rate risk. ALCO establishes specific operating guidelines within the parameters of the board of directors’ policies. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO meets monthly to monitor the level of interest rate risk sensitivity to ensure compliance with the board of directors’ approved risk limits.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Interest rate risk measurement is calculated and reported to the board and ALCO at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

We use two approaches to model interest rate risk: Net Interest Income at Risk ("NII at Risk") and Economic Value of Equity ("EVE"). Under NII at Risk, net interest income is modeled utilizing various assumptions for assets, liabilities, and derivatives. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

	Net Interest Income Sensitivity
	Immediate Change in Rates
(dollars in thousands)		-300			-200			-100		+100			+200			+300
September 30, 2023
Dollar change	$	11,761		$	7,018		$	2,737		$	5,001		$	9,545		$	14,203
Percent change		10.67	%		6.36	%		2.48	%		4.54	%		8.66	%		12.88	%
December 31, 2022
Dollar change	$	3,267		$	5,538		$	3,462		$	5,745		$	11,545		$	17,212
Percent change		2.39	%		4.06	%		2.54	%		4.21	%		8.46	%		12.61	%

We report NII at Risk to isolate the change in income related solely to interest earning assets and interest-bearing liabilities. The NII at Risk results included in the table above reflect the analysis used quarterly by management. It models immediate -300, -200, -100, +100, +200, and +300 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next one-year period.

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The NII at Risk reported at September 30, 2023, projects that our earnings are expected to be asset sensitive to changes in interest rates over the next year.

Economic value of equity ("EVE") is a cash flow calculation that takes the present value of all asset cash flows and subtracts the present value of all liability cash flows. This calculation is used for asset/liability management and measures changes in the economic value of the Bank.

	Economic Value of Equity Sensitivity (Shock)
	Immediate Change in Rates
(dollars in thousands)		-300		-200		-100		+100			+200			+300
September 30, 2023
Dollar change		(23,018	)	(986	)	9,165			(28,637	)		(60,638	)		(93,489	)
Percent change		(3.86	)%	-0.17	%	1.54	%		(4.80	)%		(10.16	)%		(15.67	)%
December 31, 2022
Dollar change		(83,032	)	(30,544	)	(3,801	)		(22,540	)		(47,643	)		(74,319	)
Percent change		(12.92	)%	(4.75	)%	(0.59	)%		(3.51	)%		(7.41	)%		(11.56	)%

The EVE results included in the table above reflect the analysis used quarterly by management. It models immediate +/-100, +/-200, and +/-300 basis point parallel shifts in market interest rates.

The EVE reported at September 30, 2023 projects that as interest rates increase immediately, the economic value of equity position is expected to decrease. When interest rates rise, fixed rate assets generally lose economic value; the longer the duration, the greater the value lost. The opposite is true when interest rates fall.

Price Risk represents the risk of loss arising from adverse movements in the prices of financial instruments that are carried at fair value and subject to fair value accounting. We have price risk from our available for sale SFR mortgage loans and our fixed-rate available for sale securities.

Basis Risk represents the risk of loss arising from asset and liability pricing movements not changing in the same direction. We have basis risk in our SFR mortgage loan portfolio and our securities portfolio.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

The Company’s management, including our principal executive officer and principal financial officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this Report. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective due to material weaknesses in the Company’s internal control over financial reporting described below.

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Material Weakness in Internal Control Over Financial Reporting

Our principal executive officer and principal financial officer identified material weaknesses related to the Company’s internal control over financial reporting and, as such, concluded that the Company's internal control over financial reporting was ineffective as of September 30, 2023. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected and corrected on a timely basis. The following material weaknesses were identified in the Company’s internal control over financial reporting:

	●	The Company failed to design and maintain effective controls with respect to the review, analysis and approval of related party transactions and relied on the completeness and accuracy of director and officer questionnaires. The material weakness resulted in an adjustment to the Company’s related party transaction disclosures as of September 30, 2022 and December 31, 2022. This material weakness did not result in any adjustment to the related party disclosure or misstatement as of September 30, 2023.
	●	The Company failed to design and maintain effective controls over segregation of duties with respect to the review, posting and approval of journal entries and accounts payable transactions and maintain effective IT access controls around the related system. The material weakness did not result in a misstatement.
	●	The Company failed to design and maintain effective controls with respect to the review of various assumptions and judgements within the CECL model including subjective assumptions within the quantitative discounted cash flow calculation and subjective judgements related to qualitative factors and maintain effective IT access controls around the related system. The material weakness did not result in a misstatement.
	●	The Company’s control environment failed to demonstrate a commitment to attract, develop, and retain competent individuals in the area of internal control over financial reporting. The material weakness did not result in a misstatement.
	●	The Company failed to design and maintain effective controls related to infrequent transactions such as the income recognition for the Community Development Financial Institution Equitable Recovery Program award (the "Award"). The material weakness resulted in external auditor’s audit adjustment and did not result in a misstatement in Form 10Q.

The Company has concluded that the existence of these material weaknesses did not result in a material misstatement of the Company’s financial statements included in its 2022 Annual Report or in its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2023, June 30, 2023 and September 30, 2023.

Remediation Efforts

Subsequent to the period covered by the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, with respect to the material weakness set forth in the first and second bullet points above, and subsequent to the period covered by the 2022 Annual Report with respect to the material weaknesses identified in the third and fourth bullet points above, management has been actively engaged in developing remediation plans to address the material weaknesses noted above.

In order to remediate the material weakness related to related party transactions, the Company has enhanced training for those individuals responsible for reporting related party transactions. Further, the Company has and will continue to enhance controls to evaluate the completeness of reported relationships and to flag related party transactions in the Company’s books and records. Based on subsequent remediation efforts and enhanced controls, no adjustment was made to the Company related party transactions disclosure as of September 30, 2023.

In order to remediate the material weakness related to the review, posting and approval of journal entries and accounts payable transactions, the Company implemented new controls to segregate the posting function from review and approval functions of journal entries and accounts payable transactions. The Company will continue to enhance controls over the completeness of journal entry and accounts payable reviews to ensure all transactions are independently reviewed by an individual of sufficient authority. Further, the Company has and will continue to enhance controls over provisioning and periodic monitoring of user access to the related system.

In order to remediate the material weakness related to the CECL model, the Company has and will continue to enhance its review controls over subjective assumptions within the quantitative factors and the subjective judgments related to qualitative factors. Further, the Company has and will continue to enhance controls over provisioning and periodic monitoring of user access to the related system.

In order to remediate the material weakness related to the Company’s control environment, the Company has hired a dedicated SOX Manager with knowledge and skills in the area of internal control over financial reporting. In addition to supplementing internal staff, the Company engaged an outside advisory firm to assist the Company to enhance the internal control over financial reporting.

In order to remediate the material weakness related to infrequent transactions, the Company is designing and implementing new and enhanced controls of infrequent transactions. For the Award related process, the Company plans to enhance controls to review performance requirements and conditions to be fully satisfied prior to recognizing the full basis of the Award. We believe the actions described above will be sufficient to remediate the identified material weakness and strengthen our internal control over financial reporting. However, the new and enhanced controls have not been designed, implemented nor operated for a sufficient amount of time to conclude that the material weakness has been remediated. We will continue to monitor the effectiveness of these controls and will make any further changes management determines appropriate.

Management believes they have made significant progress in implementing new and enhanced controls to address the above identified material weaknesses. However, the new and enhanced controls have not been designed and/or operated for a sufficient amount of time to conclude that the material weaknesses have been remediated. We will continue to monitor the effectiveness of these controls and will make any further changes management determines appropriate.

Changes in Internal Control Over Financial Reporting.

Other than described above, during the most recent fiscal quarter, there have not been any changes in the Company’s internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business. Management believes that none of the legal proceedings occurring in the ordinary course of business, individually or in the aggregate, will have a material adverse impact on the results of operations or financial condition of the Company.

ITEM 1A.

RISK FACTORS

The section titled Risk Factors in Part I, Item 1A of our 2022 Annual Report included a discussion of the many risks and uncertainties we face, any one or more of which could have a material adverse effect on our business, results of operations, financial condition (including capital and liquidity), or prospects or the value of or return on an investment in the Company. The information presented below provides an update to, and should be read in conjunction with, the risk factors and other information contained in our 2022 Annual Report:

The Company and the Bank are operating under enhanced regulatory supervision that could materially and adversely affect our business.

As previously disclosed in the Company's Current Report on Form 8-K filed with the SEC on October 31, 2023, effective on October 25, 2023, the Bank entered into a Stipulation to the Issuance of a Consent Order with its bank regulatory agencies, the FDIC and DFPI, consenting to the issuance of a consent order (the “Consent Order”) relating to weaknesses in the Bank’s Anti-Money Laundering/Countering the Financing of Terrorism (“AML/CFT”) compliance program.

Under the terms of the Consent Order, the Bank is required to make certain enhancements and take certain actions, which include, but are not limited to: (i) enhancing personnel with oversight responsibilities with respect to the Bank’s AML/CFT compliance program, (ii) enhancing existing AML/CFT policies and practices, internal controls, customer due diligence, and training programs, and (iii) establishing an independent testing program to analyze and assess the Bank’s BSA Department. The Consent Order also requires the Bank to correct certain alleged violations of the AML/CFT compliance program, including internal controls, staffing and the timing of the filing of one suspicious activity report.

If the Bank fails to timely and satisfactorily comply with the Consent Order, the Bank may be required to incur additional expenses in order to comply with the Consent Order and may be subject to additional regulatory action, including civil money penalties against the Bank and its officers and directors or enforcement of the Consent Order through court proceedings. These additional expenses or regulatory actions, including penalties and legal expenses, could have a material and adverse effect on our business, results of operations, financial condition, cash flows and stock price.

Our failure to comply with the Consent Order may result in additional regulatory action, including civil money penalties against the Bank and its officers and directors or enforcement of the Consent Order through court proceedings, which could have a material and adverse effect on our business, results of operations, financial condition, cash flows and stock price.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On April 22, 2021, March 16, 2022, and June 14, 2022, the Board of Directors approved a stock repurchase program to buy back up to an aggregate of 500,000 shares, 500,000 shares, and 500,000 shares, respectively, of our common stock. For the three months ended September 30, 2023, we did not repurchase any shares of common stock, as shown in the table below.

	Issuer Purchases of Equity Securities
	(a)		(b)		(c)		(d)
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares that May Yet Be Purchased Under the Plan
July 1, 2023 to July 31, 2023		—	$	—		—		433,124
August 1, 2023 to August 31, 2023		—	$	—		—		433,124
September 1, 2023 to September 30, 2023		—	$	—		—		433,124
Total		—						433,124

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Rule 10b5-1 Trading Plans

During the quarter ended September 30, 2023, no officer or director of the Company adopted or terminated any contract, instruction, or written plan for the purchase or sale of securities of the Company’s common stock that is intended to satisfy the affirmative defense conditions of Exchange Act Rule 10b5-1(c) or any non-Rule 10b5-1 trading arrangement as defined in 17 CFR § 229.408(c).

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ITEM 6.

EXHIBITS

Exhibit No		Description of Exhibits

3.1		Articles of Incorporation of RBB Bancorp ⁽¹⁾

3.2		Bylaws of RBB Bancorp ⁽²⁾

3.3		Amendment to Bylaws of RBB Bancorp ⁽⁴⁾

4.1		Specimen Common Stock Certificate of RBB Bancorp ⁽³⁾

		The other instruments defining the rights of holders of the long-term debt securities of the Company and its subsidiaries are omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company hereby agrees to furnish copies of these instruments to the SEC upon request.

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		Inline XBRL Instance Document

101.SCH		Inline XBRL Taxonomy Extension Schema Document

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document

104		The cover page of RBB Bancorp’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (contained in Exhibit 101)

(1)	Incorporated by reference from Exhibit 3.1 of the Registrant’s Registration Statement in Form S-1 filed with the SEC on June 28, 2017.

(2)	Incorporated by reference from Exhibit 3.2 of the Registrant’s Registration Statement in Form S-1 filed with the SEC on June 28, 2017.

(3)	Incorporated by reference from Exhibit 4.1 of the Registrant’s Registration Statement in Form S-1 filed with the SEC on June 28, 2017.

(4)	Incorporated by reference from Exhibit 3.3 of the Registrant’s Quarterly Report in Form 10-Q filed with the SEC on November 13, 2018.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		RBB BANCORP
		(Registrant)

Date: November 14, 2023		/s/ David Morris
		David Morris Chief Executive Officer

Date: November 14, 2023		/s/ Alex Ko
		Alex Ko Chief Financial Officer