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

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company’s audited consolidated financial statements are based upon its audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these audited consolidated financial statements requires management to make estimates and judgments 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.

The following is a summary of the more judgmental and complex accounting estimates and principles. In each area, we have identified the variables we believe are most important in our estimation process. We utilize information available to us to make the necessary estimates to value the related assets and liabilities. Actual performance that differs from our estimates and future changes in the key variables and information could change future valuations and impact the results of operations.

● Loans held for investment

● Loans available for sale

● Securities

● Allowance for loan losses (ALLL)

● Goodwill and other intangible assets

● Deferred income taxes

● Servicing rights

● Income Taxes

● Stock-Based Compensation

Our significant accounting policies are described in greater detail in our 2020 audited financial statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K, specifically in “Note 2 – Summary of Significant Accounting Policies” which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

For the year 2020, we reported net earnings of $32.9 million, compared with $39.2 million for the year 2019. This represented a decrease of $6.3 million or 16.0% over the prior year. The decrease in net earnings reflected a $9.4 million increase in the provision for credit losses, a $4.3 million decrease in non-interest income and a $2.0 million increase in non-interest expenses, which was partially offset by a $7.9 million increase in net interest income and a $1.6 million decrease in income tax expense.

At December 31, 2020, total assets were $3.4 billion, an increase of $561.5 million, or 20.1%, from total assets of $2.8 billion at December 31, 2019. Interest-earning assets were $3.2 billion as of December 31, 2020, an increase of $555.4 million, or 21.3%, compared to $2.6 billion at December 31, 2019. The increase in interest-earning assets was primarily due to net HFI loan growth of $499.3 million, and investment securities growth of $83.6 million, partially offset by a decrease of $58.2 million in mortgage loans available for sale. The increase in interest-earning assets was due to $212.6 million from the purchase of PGBH and the remainder from organic growth.

At December 31, 2020, available for sale (“AFS”) investment securities totaled $210.9 million inclusive of a pre-tax net unrealized gain of $1.6 million, compared to $126.1 million inclusive of a pre-tax net unrealized gain of $340,000 at December 31, 2019. At December 31, 2020, held to maturity (“HTM”) investment securities totaled $7.2 million, compared to $8.3 million as of December 31, 2019.

Net loans and leases (held for investment, net of deferred fees, discounts, and the allowance for loan losses) were $2.7 billion at December 31, 2020, compared to $2.2 billion at December 31, 2019. Net loans and leases increased $499.3 million, or 22.9%, from December 31, 2019. The increase in net loans was primarily due to the acquisition of PGBH with loan balances of $173.1 million and the remainder from organic growth. The increase in net loans included approximately $167.1 million in SFR mortgage loans, $210.4 million in CRE loans, $15.6 million in C&I loans, $90.7 million in construction loans, and $22.8 million in SBA loans.

Total deposits were $2.6 billion at December 31, 2020, an increase of $386.2 million, or 17.2%, compared to $2.2 billion at December 31, 2019. The increase is due to the acquisition of $188.4 million of deposits from PGBH, a net increase of $9.0 million from wholesale and brokered deposits, and the remainder from organic growth.

Noninterest-bearing deposits were $617.2 billion at December 31, 2020, an increase of $158.4 million, or 34.5%, from $458.8 million at December 31, 2019. At December 31, 2020, noninterest-bearing deposits were 23.4% of total deposits, compared to 20.4% at December 31, 2019.

Our average cost of total deposits was 1.01% for the year 2020, compared to 1.56% for 2019. The decrease is due to a 63 basis point decrease in the average rate paid on interest bearing deposits. Borrowings, consisting of FHLB long-term advances, long-term debt and subordinated debt, increased $155.0 million to $268.7 million as of December 31, 2020 compared to $113.7 million as of December 31, 2019. The Company had no short-term FHLB advances and $150.0 million in long-term advances at December 31, 2020, compared to none at December 31, 2019.

The allowance for loan losses was $29.3 million at December 31, 2020, an increase of $10.5 million or 55.9%, from $18.8 million at December 31, 2019. During 2020, there was a $11.8 million provision for loan losses compared to $2.4 million for 2019. The ALLL to HFI loans and leases outstanding was 1.08% and 0.86% as of December 31, 2020 and December 31, 2019, respectively.

Shareholders’ equity increased $20.8 million, or 5.1%, to $428.5 million as of December 31, 2020 from $407.7 million at December 31, 2019. The increase during 2020 was primarily due to $32.9 million of net income, less $6.6 million of common dividends paid and $7.9 million from the repurchase of common stock.

Our capital ratios under the Basel III capital framework regulatory standards remain well capitalized. As of December 31, 2020, the Company’s Tier 1 leverage capital ratio was 11.32%, common equity Tier 1 ratio was 14.62%, Tier 1 risk-based capital ratio totaled 15.21%, and total risk-based capital ratio was 20.77%.

ANALYSIS OF THE RESULTS OF OPERATIONS

Financial Performance

(Dollars in thousands, except per share amounts)

Earnings per common share:

Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2020 to December 31, 2019

Net Interest Income/Average Balance Sheet

In 2020, we generated fully-taxable equivalent net interest income of $104.8 million, an increase of $7.9 million, or 8.1%, from the net interest income produced in 2019. This increase was largely due to a 11.7% increase in the average balance of interest-earning assets, in part due to the PGBH acquisition and organic loan growth, partially offset by an 11 basis point decrease in the net interest margin. For the years ended December 31, 2020 and 2019 our reported net interest margin was 3.52% and 3.63%, respectively. Our net interest margin benefits from discount accretion on our purchased loan portfolios.

Interest Income. Total interest income was $139.1 million in 2020 compared to $141.7 million in 2019. The $2.6 million, or 1.8%, decrease in total interest income was mainly due to a decrease in the average loan yield of 37 basis points. This was partially offset by increases in the average balance of total loans of $147.5 million, average balance of securities of $88.2 million, and average balance of Federal funds sold, cash equivalents and other investments of $77.5 million.

Interest and fees on loans was $133.9 million in 2020 compared to $135.2 million in 2019. The $1.3 million, or 0.94%, decrease in interest income on loans was primarily due to a 46 basis point decrease in the average yield on loans held for investment and 51 basis point decrease in the average yield on loans held for sale, partially offset by a $147.5 million increase in the average balance of held for investment and held for sale loans outstanding. The increase in the average balance of loans outstanding was primarily due to the PGBH acquisition in January 2020 plus organic growth in commercial real estate and single-family residential mortgage loans during 2020. The yield on the loan portfolio benefited from accretion income associated with purchase accounting discounts established on loans acquired in prior acquisitions. For the years 2020 and 2019, the reported yield on total loans was 5.18% and 5.54%, respectively. The impact of accretion income on our yield on total loans for the years 2020 and 2019 was to increase our reported yield on total loans by 0.08% and 0.11%, respectively. A substantial portion of our acquired loan portfolio that is subject to discount accretion consists of commercial real estate loans and single family residential mortgages.

The table below illustrates by loan type the accretion income for the years 2020, 2019 and 2018:

Years Ended December 31,

Beginning balance of discount on purchased loans $ 5,068 $ 9,228 $ 2,762

Additions due to acquisitions:

Commercial and industrial 39 — 10

Single family residential mortgages 448 — 4,984

Accretion:

Commercial and industrial — 15 119

Construction and land development 5 — —

Single family residential mortgages 714 1,234 79

Ending balance of discount on purchased loans $ 2,872 $ 5,068 $ 9,228

Interest income from our securities portfolio increased $315,000, or 11.7%, to $3.0 million in 2020. The increase in interest income on securities was primarily due to an increased average balance of $88.2 million, or 93.1%, partially offset by a 120 basis point decrease in the average yield of securities.

Interest income on our federal funds sold, cash equivalents and other investments decreased $1.7 million, or 42.3%, to $2.3 million in 2020. The decrease in interest income on these earning assets was primarily due to by an 184 basis point decrease in average yield of cash equivalents, partially offset by a $77.5 million increase in the average balance. The increase in the average balance resulted from pending utilization of these funds to higher yielding loans and securities.

Interest Expense. Interest expense on interest-bearing liabilities decreased $10.5 million, or 23.4%, to $34.4 million in 2020 primarily due to a 67 basis point decrease in the average rate on these liabilities plus an increase in non-interest bearing deposits of $142.9 million, partially offset by a $188.2 million increase in the average balance of interest bearing liabilities.

Interest expense on total deposits decreased to $25.2 million in 2020. The $9.0 million, or 26.4%, decrease in interest expense on total deposits was primarily due to a 63 basis point decrease in the average rate paid on total interest bearing deposits, partially offset by a $168.5 million increase in the average balance of interest-bearing deposits. The increase in the average balance of deposits resulted primarily from the PGBH acquisition in early 2020 and organic growth in 2020.

Interest expense on borrowings decreased from $10.6 million in 2019 to $9.2 million or 13.8% in 2020. This decrease reflected decreased interest expense on subordinated notes, subordinated debentures, and other borrowed funds consisting of FHLB short-term and long-term advances. In 2020, the average rate on these liabilities was 3.70% compared to 4.66% in 2019. A five year FHLB advance was obtained in March 2020 to provide for additional liquidity.

Average Balance Sheet, Interest and Yield/Rate Analysis

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 2020, 2019 and 2018. 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. See “Analysis of Financial Condition—Capital Resources and Liquidity Management” and Item 7A Quantitative and Qualitative Disclosures about Market Risk included herein.

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years 2020, 2019 and 2018. 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.

Years Ended December 31,

thousands) Balance & Fees Rate Balance & Fees Rate Balance & Fees Rate

Interest-earning assets:

Securities (2)

Loans held for investment: (3)

Interest-bearing liabilities:

Noninterest-bearing liabilities

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 tables show 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.

Change due to: Change due to:

Earning assets:

Securities (2)

Loans held for investment: (3)

Interest-bearing liabilities

Provision for Credit Losses

The provision for credit loss expense in 2020 was $11.8 million compared to $2.4 million in 2019. The increase in the 2020 provision expense was primarily attributable to COVID-19 pandemic related market effects of $2.3 million, increases in the size of our overall loan portfolio, and increases in past due loans, substandard loans and impaired loans. Non-performing loans that increased during the year were individually analyzed, with $525,000 in 2020 and none in 2019, net addition to the allowance for loan losses.

Noninterest Income

Noninterest income decreased $4.3 million, or 23.4%, to $14.0 million in 2020 from $18.3 million in 2019. The following table sets forth the major components of noninterest income for the years ended December 31, 2020, 2019 and 2018:

Noninterest income:

Gain on sale of fixed assets — 6 — (6 ) -100.0 % 6 100.0 %

Service charges, fees and others. The increase in noninterest income from service charges, fees and other income was primarily from service charges on the additional transactional deposit accounts originated organically and acquired in the PGBH acquisition in 2020. In 2020, the income from

Gain on sale of loans. The gain on sales of loans decreased $3.9 million due primarily to the decrease of $2.9 million in SFR mortgage loans sold and a $788,000 decrease in premiums received on SBA loans sold. Decreases in gain on sales of loans were due to decreases of $15.1 million on SBA loans sold and $288.3 million on mortgage loans held for sale. The decrease in the mortgage loan sales is attributable to the change in market conditions in the secondary market primarily caused by COVID-19.

Loans sold:

Gain on loans sold:

Loan servicing income, net of amortization. Servicing income decreased due to increased loan pre-payments in the SFR loans serviced causing a decrease in the volume of mortgage loans we are servicing. SBA loan servicing income increased due to a decline in SBA pre-payments.

Loan servicing income, net of amortization:

As of year-end, dollars in thousands

Recoveries on loans acquired in business combinations. Recoveries on loans acquired in business combinations decreased by $59,000 to $84,000 in 2020 compared to $143,000 in 2019.

Gain on derivatives. Due to the amount of loans that were committed to be delivered to FNMA at year-end, we recorded a derivative which resulted in a gain of $78,000 in 2020.

Cash surrender value income of bank owned life insurance. Cash surrender value income of bank owned life insurance (“BOLI”) decreased $8,000 due to slightly lower rates.

Gain on sales of securities, net. Gain on sales of securities, net was $210,000 in 2020 from the sale of $11.7 million securities.

Loss on Sale of OREO. In 2020, there were no sales of OREO. A $106,000 loss on sale of OREO was recognized in 2019 from the sale of two OREO properties.

Noninterest Expense

Noninterest expense increased $2.0 million, or 3.5%, to $59.5 million in 2020 from $57.5 million in 2019. The following table sets forth the major components of our noninterest expense for the years ended December 31, 2020, 2019 and 2018:

Noninterest expense:

Salaries and employee benefits. Salaries and employee benefits expense increased $403,000 due to severance pay to terminated employees in connection with the PGBH merger. The number of full-time equivalent employees were 366 in 2020, 355 in 2019 and 256 in 2018. None of our employees are represented by a labor union, or governed by any collective bargaining agreements. We consider relations with our employees to be satisfactory. On a periodic basis, the human resources department will advise senior management of the following human capital management metrics: (1) open positions, (2) overtime expense, (3) staff turnover, and (4) employee headcount.

Occupancy and equipment. Occupancy and equipment expense decreased $59,000 from 2019 to 2020 mainly due to closing three branches in 2020, partially offset by the addition of three branches in Chicago (one leased and two owned) and opening one branch in Edison, New Jersey.

Data processing. Data processing expense increased $537,000 in 2020. This increase was primarily due to upgrading our infrastructure and also reflected the impact of increased processing costs incurred subsequent to the PGBH acquisition. Effective June 2019, the Company renegotiated its data processing master agreement with its vendor, under which the Company is allowed to offset future monthly data processing expenses up to approximately $2.2 million through January 2026. As of December 31, 2020, this offset benefit amounted to $1.6 million to be recognized through January 2026. Conversion expense associated with the PGBH and FAIC acquisitions is in the “other expenses” line item.

Legal and professional. Legal and professional expense increased $911,000 in 2020 due to increases in problem loan collection expenses, and commission expense recognized in connection with the purchase of a new branch location.

Office expenses. Office expenses comprised of communications, postage, armored car, and office supplies, decreased by $31,000 in 2020. The decrease was primarily due to cost saving implemented in 2020 (following the acquisition of PGBH in January).

Marketing and business promotion. Marketing and business promotion expense decreased $557,000. In 2020, marketing and promotion activity decreased due to COVID-19 pandemic.

Insurance and regulatory assessments. Insurance and regulatory assessments expense increased by $84,000 to $984,000 in 2020 compared to $900,000 in 2019, following the PGBH acquisition in 2020. The FDIC insurance assessment was $455,000 in 2020 and $386,000 in 2019, an increase of $69,000. The California DFPI regulatory assessment increased by $14,000 from $149,000 for the year 2019 to $163,000 for year 2020. The corporate insurance expenses (including directors and officers insurance and fidelity bond), was $363,000 for 2020 compared to $360,000 for 2019.

Amortization of intangibles. Amortization of intangibles totaled $1.4 million in 2020 as compared to $1.5 million for 2019. The decrease was due to continued amortization of the core deposit intangible asset, following the additional core deposit intangible asset of $491,000 recognized in connection with the PGBH acquisition.

OREO expenses. OREO expenses were $35,000 in 2020 and $337,000 in 2019. The $302,000 decrease was due to payments made for delinquent property taxes and construction costs during the year ended 2019.

Merger expenses. Merger expenses were $746,000 in 2020 compared to $471,000 in 2019. The 2019 expense includes $104,000 with respect to the PGBH acquisition which closed in January 2020.

Other noninterest expenses. Other expenses increased by $885,000 from 2019, primarily due to the provision for credit losses associated with unfunded commitments as of the balance sheet date of $558,000 in 2020 compared to $137,000 in 2019. The off-balance sheet liabilities are letters of credit and other commitments to lend. The provision for off-balance sheet liabilities is a function of the volume of undisbursed loans and other loan commitments multiplied by a risk factor. Other expense increases included a $417,000 increase in mortgage servicing rights impairment due to write-downs reflecting the decline in market rates of interest.

Income Tax Expense

Income tax expense was $14.5 million in 2020 compared to $16.1 million in 2019, a decrease of $1.6 million or 9.8%. The effective tax rate for 2020 was 30.6% and 29.2% for 2019. Income tax expense for 2020 included a $26,000 benefit for stock options exercised and a $78,000 benefit for 2019.

Net Income

Net income decreased $6.3 million to $32.9 million in 2020, compared to $39.2 million in 2019. The decrease is primarily due to a decrease in net interest income of $1.5 million, a decrease in non-interest income of $4.3 million, a $2.0 million increase in non-interest expense and a $9.4 million increase in the credit loss provision, partially offset by a $10.5 million decrease in interest expense.

Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2019 to December 31, 2018

Net Interest Income/Average Balance Sheet

In 2019, we generated fully-taxable equivalent net interest income of $96.9 million, an increase of $18.4 million, or 23.4%, from the net interest income produced in 2018. This increase was largely due to a 39.9% increase in the average balance of interest-earning assets, mainly due to the FAIC acquisition, partially offset by a 49 basis point decrease in the net interest margin. For the years ended December 31, 2019 and 2018 our reported net interest margin was 3.63% and 4.12%, respectively. Our net interest margin benefits from discount accretion on our purchased loan portfolios. The impact of accretion income on our net interest margin for the years ended December 31, 2019 and 2018 was to increase our reported net interest margin by 0.11%, and 0.13%, respectively.

Interest Income. Total interest income was $141.7 million in 2019 compared to $102.1 million in 2018. The $39.6 million, or 38.8%, increase in total interest income was mainly due to increases in average total loan balances of $689.2 million partially offset by a 3 basis point decrease in average loan yield. This increase was augmented by higher Federal funds, cash equivalent and other balances resulting in $1.6 million in additional interest income, and $300,000 from an $11.1 million increase in average investment securities, partially offset by a 2 basis point decrease in the average yield on investment securities during the year ended 2019.

Interest and fees on loans was $135.2 million in 2019 compared to $97.5 million in 2018. The $37.7 million, or 38.7%, increase in interest income on loans was primarily due to a 39.4% increase in the average balance of held for investment and held for sale loans outstanding partially offset by a 3 basis point decrease in the average yield on loans. The increase in the average balance of loans outstanding was primarily due to the FAIC acquisition in late 2018 plus organic growth in CRE and SFR mortgage loans during 2019. The yield on the loan portfolio benefited from accretion income associated with purchase accounting discounts established on loans acquired in the FAIC acquisition. For the years ended December 31, 2019 and 2018, the reported yield on total loans was 5.54% and 5.57%, respectively. The impact of accretion income on our yield on total loans for the years ended December 31, 2019 and 2018 was to increase our reported yield on total loans by 0.11% and 0.13%, respectively. A substantial portion of our acquired loan portfolio that is subject to discount accretion consists of CRE loans and SFR mortgages.

Interest income from our securities portfolio increased $300,000, or 12.6%, to $2.7 million in 2019. The increase in interest income on securities was primarily due to an increased average balance of $11.1 million, or 13.3%, partially offset by a 2 basis point decrease in the average yield of securities.

Interest income on our federal funds sold, cash equivalents and other investments increased $1.6 million, or 71.4%, to $3.9 million in 2019. The increase in interest income on these earning assets was primarily due to an increase in the average balance of $61.1 million partially offset by an 18 basis point decrease in average yield of cash equivalents. The increase in the average balance resulted from pending utilization of these funds to higher yielding loans and securities.

Interest Expense. Interest expense on interest-bearing liabilities increased $21.2 million, or 89.7%, to $44.9 million in 2019 due to increases in interest expense on both deposits and borrowings.

Interest expense on total deposits increased to $34.2 million in 2019. The $17.3 million, or 101.9%, increase in interest expense on total deposits was primarily due to the average balance of deposits increasing 43.6% in addition to a 45 basis point increase in the average rate paid. The increase in the average balance of deposits resulted primarily from the FAIC acquisition in late 2018, organic growth in 2019 and a $100.7 million increase in average brokered deposits.

Interest expense on borrowings increased from $6.7 million in 2018 to $10.6 million or 58.9% in 2019. This increase reflected increased interest expense on subordinated notes, subordinated debentures, and other borrowed funds consisting of FHLB short-term advances of less than 90-days. The increase in interest expense on long-term debt and subordinated notes of $3.6 million was due to the issuance of $55.0 million of subordinated notes in November 2018. The increase in interest expense on FHLB advances (other borrowed funds) of $324,000, from $2.6 million in 2018 to $2.9 million in 2019 was due to a 49 basis point increase in the average rate partially offset by a $10.6 million decrease in the average FHLB advances. These FHLB advances were utilized to fund SFR mortgage loans that were originated and held for sale during the year.

Provision for Credit Losses

The provision for credit loss expense in 2019 was $2.4 million compared to $4.5 million in 2018. The decrease in the 2019 provision expense was primarily attributable to a decrease in our concentration levels of commercial real estate and single-family residential mortgage loans. While non-performing loans increased during the year, they were individually analyzed without a net addition to the allowance for loan losses.

Noninterest Income

Noninterest income increased $5.5 million, or 42.7%, to $18.3 million in 2019 from $12.8 million in 2018.

Gain on sale of loans. The gain on sales of loans increased $2.8 million due primarily to the increase of $241.7 million in SFR mortgage loans sold offset by a $37.9 million decrease in SBA loans sold and a decrease in premiums paid on SFR mortgage loans sold in the first half of 2019. The lower premiums on mortgage loans is due to increased 10-year Treasury rates in the first half of 2019 and changes in market conditions.

Loan servicing income, net of amortization. Servicing income increased due to an increase in the volume of mortgage loans we are servicing. SBA loan servicing income also increased due to a decline in SBA pre-payments.

Recoveries on loans acquired in business combinations. Recoveries on loans acquired in business combinations decreased by $1.2 million to $143,000 in 2019 compared to $1.4 million in 2018. The decrease in 2019 was due to a recovery on one VCBB loan purchased that occurred in 2018.

Unrealized gain on equity investments. The $147,000 represents the amount of unrealized gains in equity position the Company has with bankers’ banks and as of a result of implementing ASU 2016-01.

Cash surrender value income of bank owned life insurance. Cash surrender value income of BOLI decreased $22,000 due to slightly lower rates.

Gain on sales of securities, net. Gain on sales of securities, net was $7,000 in 2019. In 2019, the Company sold $6.1 million securities. In late 2018, the Company sold $44.6 million in securities mainly from the FAIC investment portfolio, which were sold immediately after the purchase of FAIC to limit any gains or losses.

Loss on Sale of OREO. A $106,000 loss on sale of OREO was recognized in 2019 from the sale of two OREO properties. There were no OREO sales during 2018.

Noninterest Expense

Noninterest expense increased $16.8 million, or 41.4%, to $57.5 million in 2019 from $40.6 million in 2018.

Salaries and employee benefits. Salaries and employee benefits expense increased $9.7 million. The number of full-time equivalent employees averaged 355 in 2019, 256 in 2018 and 186 in 2017. This increase was primarily due to additional staff and expenses from the FAIC acquisition, plus annual salary increases and increased benefit costs of $994,000.

Occupancy and equipment. Occupancy and equipment expense increased $5.2 million in 2019 mainly due to the addition of the eight branches in the New York region including the depreciation, real estate taxes, utilities, ongoing maintenance and lease obligations associated with the branch and office facilities we added as a result. These expenses were higher as a result of the FAIC acquisition. During 2018, we recognized additional rent expense of $280,000 due to building out our new headquarters location. On October 15, 2018, we opened a new branch in Irvine, California. In 2019 we opened one new branch in Queens, New York and closed one branch and administration center in Manhattan, New York.

Data processing. Data processing expense increased $1.4 million in 2019. This increase was primarily due to upgrading our infrastructure and also reflected the impact of increased processing costs incurred subsequent to the 2018 FAIC acquisition of approximately $350,000. Effective June 2019, the Company renegotiated its data processing master agreement with the vendor, under which the Company is allowed to offset future monthly data processing expenses up to approximately $2.2 million through January 2026. Conversion expense associated with the FAIC acquisition is in the “other expenses” line item.

Legal and professional. Legal and professional expense increased $118,000 in 2019. This increase in 2019 is due to increased auditing and internal control testing fees as the Company grew. In 2018, our legal and professional fees increased substantially due to going public in 2017 and the increased accounting and control audits as well as the cost of the accounting work associated with the FAIC acquisition.

Office expenses. Office expenses comprised of communications, postage, armored car, and office supplies, increased by $367,000 in 2019. The increase was primarily due to the addition of the locations in the New York region for a full year and to normal business activity.

Marketing and business promotion. Marketing and business promotion expense increased $165,000, primarily due to our increase in CRA activities, including increased donations to qualifying non-profit organizations, plus beginning stages of promoting the Company’s presence in the New York City metropolitan area following the FAIC acquisition.

Insurance and regulatory assessments. Insurance and regulatory assessments expense decreased by $51,000 to $900,000 in 2019 compared to $951,000 in 2018, following the FAIC acquisition in 2018. Our FDIC insurance assessment was $386,000 in 2019 and $561,000 in 2018, a decrease of $175,000. Our California DFPI regulatory assessment increased by $17,000 from $131,000 for the year ended 2018 to $149,000 for year ended 2019. Our corporate insurance expenses (including directors and officers insurance and fidelity bond), was $360,000 for 2019 compared to $258,000 for 2018.

Amortization of intangibles. Amortization of intangibles totaled $1.5 million in 2019 as compared to $575,000 for 2018. The increase was due to the additional core deposit intangible asset of $6.7 million from the FAIC acquisition less continued amortization of the core deposit intangible asset associated with the acquisitions of FAIC and TomatoBank.

OREO expenses. OREO expenses were $337,000 in 2019 and $24,000 in 2018. The $313,000 increase was due to payments made for delinquent property taxes and construction costs incurred during the year ended 2019.

Merger expenses. Merger expenses were $471,000 in 2019 compared to $1.7 million in 2018, following the October 2018 FAIC acquisition. The 2019 expense includes $104,000 with respect to the PGB acquisition which closed in January 2020.

Other noninterest expenses. Other expenses decreased by $42,000 from 2018, primarily due to the provision for credit losses associated with unfunded commitments as of the balance sheet date of $137,000 in 2019 compared to $406,000 in 2018. The off-balance sheet liabilities are comprised of loans, letters of credit and other commitments to lend. The provision for off-balance sheet liabilities is a function of the volume of undisbursed loans and other loan commitments multiplied by a risk factor. Other expense increases included a $204,000 increase in loan expenses and $249,000 decrease in director’s fees and expenses.

Income Tax Expense

Income tax expense was $16.1 million in 2019 compared to $10.1 million in 2018, an increase of $6.0 million or 59.5%. The effective tax rate for 2019 was 29.2% and 21.8% for 2018. Income tax expense for 2019 included a $78,000 benefit for stock options exercised and $3.9 million benefit for 2018. The estimated annual effective tax rate will vary depending upon tax-advantaged income, stock option exercises, and available tax credits.

Net Income

Net income increased $3.1 million to $39.2 million in 2019, compared to $36.1 million in 2018. The increase is primarily due to an increase in net interest income of $18.4 million due to the growth in earning assets as a result of the FAIC acquisition in late 2018, organic loan growth, an increase in non-interest income of $5.5 million and a $2.1 million decrease in the credit loss provision partially offset by a $16.8 million increase in non-interest expense.

ANALYSIS OF FINANCIAL CONDITION

Assets

Total assets were $3.4 billion as of December 31, 2020 and $2.8 billion as of December 31, 2019. We increased our loans held for investment by $509.8 million. This increase included $173.1 million from the PGBH acquisition and $336.7 million from loan growth. Organic loan growth increased mainly in single family residential loans and commercial real estate mortgages. Our mortgage loans held for sale decreased by $58.2 million in 2020. The increase in assets was funded by an increase in deposits of $386.2 million (including $188.4 million in deposits from the PGBH acquisition), $150.0 million in a long-term FHLB borrowing, and a $20.8 million increase in equity (primarily resulting from $32.9 million in net income, less $7.9 million in repurchase of common stock and $6.6 million in dividends paid).

Investment Securities. We manage our securities portfolio and cash to maintain adequate liquidity and to ensure the safety and preservation of invested principal, with a secondary focus on yield and returns. Specific goals of our investment portfolio are as follows:

Our investment portfolio is comprised primarily of U.S. government agency securities, corporate note securities, mortgage-backed securities backed by government-sponsored entities and taxable and tax exempt municipal securities.

Our investment policy is reviewed annually by our board of directors. Overall investment goals are established by our board, CEO, CFO and members of our Asset Liability Committee (“ALCO”) of our board of directors. Our board of directors has delegated the responsibility of monitoring our investment activities to our ALCO. Day-to-day activities pertaining to the securities portfolio are conducted under the supervision of our CEO and CFO. We actively monitor our investments on an ongoing basis to identify any material changes in the securities. We also review our securities for potential other-than-temporary impairment at least quarterly.

The following table sets forth the book value and percentage of each category of securities at December 31, 2020, 2019 and 2018. The book value for securities classified as available for sale is equal to fair market value and the book value for securities classified as held to maturity is equal to amortized cost.

% of % of % of

(dollars in thousands) Amount Total Amount Total Amount Total

Securities, available for sale, at fair value

Mortgage-backed securities

Securities, held to maturity, at amortized cost

The tables below set forth investment securities AFS and HTM for the periods presented.

(dollars in thousands) Amortized Unrealized Unrealized Fair

December 31, 2020 Cost Gains Losses Value

Available for sale

Government agency securities $ 1,257 $ 37 $ — $ 1,294

Mortgage-backed securities

Held to maturity

Available for sale

Government agency securities $ 1,591 $ — $ (19 ) $ 1,572

Mortgage-backed securities

Held to maturity

The weighted-average yield on the total investment portfolio at December 31, 2020 was 1.35% with a weighted-average life of 3.3 years. This compares to a weighted-average yield of 2.31% at December 31, 2019 with a weighted-average life of 3.0 years. 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.

Approximately 10.7% of the securities in the total investment portfolio at December 31, 2020, are issued by the U.S. government or U.S. government-sponsored agencies and enterprises, which have the implied guarantee of payment of principal and interest. As of December 31, 2020, no U.S. government agency bonds are callable.

The table below shows the Company’s investment securities’ amortized cost and fair value by maturity in the following maturity groupings as of December 31, 2020.

Mortgage-backed securities

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2020 and December 31, 2019. 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 interest 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 in the notes to the 2020 consolidated financial statements included in the Form 10-K. 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

Mortgage-backed securities

Government sponsored agencies $ (8 ) $ 12,982 3 $ — $ — — $ (8 ) $ 12,982 3

Corporate debt securities (6 ) 994 2 — — — (6 ) 994 2

Government agency securities $ (19 ) $ 1,572 2 $ — $ — — $ (19 ) $ 1,572 2

Mortgage-backed securities

The Company did not record any charges for other-than-temporary impairment losses for the twelve months ended December 31, 2020 and 2019.

The Company has no individual investment security amounting to 10% or more of shareholders’ equity.

Loans

The loan portfolio is the largest category of our earning assets. At December 31, 2020, total loans held for investment, net of ALLL, totaled $2.7 billion.

The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31 for the past five years:

As of December 31,

(dollars in thousands) $ Mix % $ Mix % $ Mix % $ Mix % $ Mix %

Loans:

(2) Net of discounts and deferred fees and costs

Net loans held for investment increased $509.8 million, or 23.2%, to $2.7 billion at December 31, 2020 as compared to $2.2 billion at December 31, 2019. The increase in net loans resulted from $173.1 million loans acquired in the PGBH acquisition, and organic growth for the remaining increase in loans.

Commercial and industrial loans. 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, C&I 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, bank subordinated debentures with a maturity of 10 years, 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.

We originate commercial and industrial lines of credit, term loans, mortgage warehouse lines and international trade discounts which totaled $290.1 million as of December 31, 2020 and $274.6 million at December 31, 2019. The interest rate on these loans are generally Wall Street Journal Prime rate based.

The loan to value and the rate on the underlying loans are based on the policy guidance of the Company.

Our trade finance unit supplies financial needs to many of our core customers including trade financing needs for many of our commercial and industrial loan customers. The unit provides international letters of credit, SWIFT, export advice, trade finance discounts and foreign exchange. Our trade finance area has a correspondent relationship with many of the largest banks in China, Taiwan, Vietnam, Hong Kong and Singapore. All of our international letters of credit, SWIFT, export advice and trade finance discounts are denominated in U.S. currency, and all foreign exchange is issued through a major bank that is also denominated in U.S. currency. As a result, we and our clients are not subject to foreign currency fluctuations, and, therefore, we do not have a need to engage in transactions designed to hedge against foreign currency fluctuations and risk.

Commercial and industrial loans increased $15.6 million, or 5.7%%, to $290.1 million as of December 31, 2020 compared to $274.6 million at December 31, 2019. This increase resulted primarily from a $31.5 million increase in mortgage warehouse lines, and an increase of $6.1 million in undisbursed commercial lines of credit, partially offset by a decrease in shared national credits of $6.1 million, and a $16.9 million decrease in commercial lines of credit.

Commercial real estate loans. CRE loans include owner-occupied and non-occupied commercial real estate, multi-family residential and SFR loans originated for a business purpose. Except for the multi-family residential loan portfolio, the interest rate for the majority of these loans are Prime based and have a maturity of five years or less except for the SFR loans originated for a business purpose which may have a maturity of one year. The interest rate for multi-family residential loans are based on the 5-year treasury, are 10 year maturity with a five year fixed rate period followed by a five year floating rate period, and have a declining prepayment penalty for the first five years. At December 31, 2020, approximately 21.86% of the CRE portfolio consisted of fixed-rate loans. Our policy maximum loan-to-value ("LTV") is 75% for CRE loans. The total CRE portfolio totaled $1.0 billion at December 31, 2020 and $793.3 million as of December 31, 2019, of which $198.8 million and $177.3 million, respectively, are secured by owner occupied properties. The multi-family residential loan portfolio totaled $346.6 million as of December 31, 2020 and $235.8 million as of December 31, 2019. The SFR loan portfolio originated for a business purpose totaled $24.0 million as of December 31, 2020 and $19.2 million as of December 31, 2019.

Construction & land development loans. Our construction and land development loans are comprised of residential construction, commercial construction and land acquisition and development construction. Interest reserves are generally established on real estate construction loans. These loans are typically Prime based and have maturities of less than 18 months. Our LTV policy limits are 75% for construction and land development loans. C&D loans increased $90.7 million or 94.5%, to $186.7 million at December 31, 2020 as compared to $96.0 million at December 31, 2019. This increase was primarily due to increases in residential construction loans. As of December 31, 2020 and 2019, our real estate construction loan portfolio was divided among the foregoing categories as shown in the table below.

As of December 31, 2020 As of December 31, 2019 Increase (Decrease)

(dollars in thousands) $ Mix % $ Mix % $%

SBA guaranteed loans. 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.

We originate SBA loans through our branch staff, loan officers and through SBA brokers. In 2020, we originated $52.3 million in SBA loans, of which $32.9 million were PPP loans and $19.4 million were SBA 7A originations. Of SBA loan originations, $45.2 million or 86.4% were produced by branch staff and loan officers. The remaining $7.1 million or 13.6% was referred to us through SBA brokers.

As of December 31, 2020 our SBA portfolio totaled $97.8 million of which $48.5 million is guaranteed by the SBA and $49.4 million is unguaranteed, of which $37.6 million is secured by real estate and $11.8 million is unsecured or secured by business assets. We monitor the unguaranteed portfolio by type of real estate collateral. As of December 31, 2020, $22.7 million or 46.1% is secured by hotel/motels; $7.3 million or 14.7% by gas stations; and $19.4 million or 39.2% in other real estate types. We further analyze the unguaranteed portfolio by location. As of December 31, 2020, $19.6 million or 39.8% is located in California; $8.3 million or 16.8% is located in Washington; $5.1 million or 10.4% is located in Nevada; $4.4 million or 8.9% is located in Texas; $1.8 million or 3.7% is located in New York; and $10.2 million or 20.4% is located in other states.

SBA loans increased $22.8 million, or 30.5%, to $97.8 million at December 31, 2020 compared to $75.0 million at December 31, 2019. This increase was primarily due to $32.9 million in PPP loan origination, SBA 7A loans originations of $19.4 million less SBA loan sales of $13.7 million, SBA charge-offs of $1.3 million and $14.5 million in loan payments in 2020.

SFR real estate loans. We originate qualified SFR mortgage loans and non-qualified, alternative documentation SFR mortgage loans through correspondent relationships or through our branch network or retail channel. The loan product is a seven-year hybrid adjustable mortgage which re-prices between five or seven years to the one-year CMT plus 2.50%. The qualified SFR mortgage loans, 15-year and 30-year conforming mortgages, are originated by our branch network and are sold directly to FNMA within seven days of funding.

We originate these non-qualified SFR mortgage loans both to sell and hold for investment. The loans held for investment are generally originated through our retail branch network to our customers, many of whom establish a deposit relationships with us. During 2020, we originated $287.3 million of such loans through our retail channel, and $131.8 million through our wholesale and correspondent channel. We sell many of these non-qualified SFR mortgage loans to other Asian-American banks and private investors.

The loans sold to other banks are sold with no representation or warranties and with a replacement feature for the first 90-days if the loan pays off early. For SFR loans sold FNMA and to investment funds we provide limited representations and warranties and with a repurchase and premium refund for loans that become delinquent in the first 90-days or a premium refund if paid-off in the first 90-days with respect to all loans sold. As a condition of the sale, the buyer must have the loans audited for underwriting and compliance standards.

During 2020, we originated $419.0 million of SFR mortgage loans and sold $184.2 million to FNMA, investment funds and other banks in our market. SFR real estate loans include home equity loans acquired in the LANB, FAIC and PGBH acquisitions. As of December 31, 2020, we had a total of $5.6 million of home equity loans.

SFR real estate loans held for investment, which include $5.6 million of home equity loans, increased $167.1 million, or 17.5%, to $1.1 billion as of December 31, 2020 as compared to $957.3 million as of December 31, 2019. Loans held for sale decreased $58.2 million or 53.8% to $50.0 million as of December 31, 2020 compared to $108.2 million December 31, 2019. In addition, our SFR mortgage lending unit originates mortgage warehouse lines to our correspondents. These loans are including in our commercial and industrial lending unit and totaled $78.3 million as of December 31, 2020 and $46.7 million as of December 31, 2019.

The loan maturities in the table below are based on contractual maturities as of December 31, 2020. As is customary in the banking industry, loans that meet underwriting criteria can be renewed by mutual agreement between us and the borrower. Because we are unable to estimate the extent to which our borrowers will renew their loans, the table is based on contractual maturities. As a result, the data shown below should not be viewed as an indication of future cash flows.

Construction & land development

Commercial & industrial

Commercial real estate

SBA

SFR mortgage

Other

Floating rate — — — —

Allowance for loan losses (29,337 )

Mortgage loans held for sale $ 49,963

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 addition to our ALLL, our purchase discounts on acquired loans provide additional protections against credit losses.

Discounts on Purchased Loans. At acquisition we hire a third-party to determine the fair value of loans acquired. In many of the cases 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 Accounting Standards Codification (ASC) 310-20.

None of the loans we acquired after 2011 had evidence of deterioration of credit quality since origination for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable. Loans acquired that had evidence of deterioration of credit quality since origination are referred to as PCI (purchase credit impaired) loans.

With our acquisitions of FAB and VCBB, we acquired $16.7 million contractual amount due with a fair value of $9.7 million of PCI loans. There were no outstanding balance and carrying amount of PCI loans as of December 31, 2020 and December 31, 2019, respectively. For these PCI loans, the Company did not record an ALLL for 2020 or 2019 as there were no significant reductions in the expected cash flows.

Analysis of the ALLL. The following table allocates the ALLL, or the allowance, by category:

As of December 31,

(dollars in thousands) $ % (1) $ % (1) $ % (1) $ % (1) $ % (1)

Loans:

Unallocated — — 101 — — — 420 — — —

The allowance and the balance of accretable credit discounts represent our estimate of probable and reasonably estimable credit losses inherent in loans held for investment as of the respective balance sheet date. The accretable credit discount balance was $4.8 million at December 31, 2020 and $5.3 million at December 31, 2019.

Allowance for loan losses. Our methodology for assessing the appropriateness of the ALLL includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans or loans considered by management to be in a high-risk category. General allowances are established based on a number of factors, including historical loss rates, an assessment of portfolio trends and conditions, accrual status and economic conditions.

For C&I, SBA, CRE, C&D and SFR mortgage loans held for investment, a specific allowance may be assigned to individual loans based on an impairment analysis. Loans are considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. The amount of impairment is based on an analysis of the most probable source of repayment, including the present value of the loan’s expected future cash flows, the estimated market value or the fair value of the underlying collateral. Interest income on impaired loans is accrued as earned, unless the loan is placed on nonaccrual status.

Credit-discount on loans purchased through acquisition. Purchased loans are recorded at market value in two categories, credit discount and liquidity discount and premiums. The remaining credit discount at the end of a period is compared to the analysis for loan losses for each acquisition. If the credit discount is greater than the expected loss no additional provision is needed. The following table shows our credit discounts by loan portfolio for purchased loans only as of December 31, 2020 and December 31, 2019. We have recorded additional reserves of $2.1 million due to the credit discounts on the bank acquisitions being less than the analysis for loan losses on those acquisitions as of December 31, 2020.

As of December 31,

Commercial and industrial $ 53 $ 37

Single family residential mortgages 3,653 3,573

Total credit discount on purchased loans $ 4,777 $ 5,309

Credit-discount to remaining balance of purchased loans 0.82 % 0.92 %

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 0.05% for both the twelve months ended December 31, 2020 and 2019.

The ALLL was $29.3 million at December 31, 2020 compared to $18.8 million at December 31, 2019. The $10.5 million increase in 2020 was primarily due to an addition of $2.3 million related to a COVID-19 special quantitative reserve, loan growth and a $6.3 million increase in non-performing loans. The COVID-19 portion of the ALLL equates to a seven basis point reserve on the entire loan portfolio plus a reserve on all loans being deferred at December 31, 2020.

We analyze the loan portfolio, including delinquencies, concentrations, and risk characteristics, at least quarterly in order to assess the overall level of the allowance and nonaccretable discounts. We also rely on internal and external loan review procedures to further assess individual loans and loan pools, and economic data for overall industry and geographic trends.

In determining the allowance and the related provision for credit losses, we consider three principal elements: (i) valuation allowances based upon probable losses identified during the review of impaired C&I, CRE, C&D loans, (ii) allocations, by loan classes, on loan portfolios based on historical loan loss experience and qualitative factors and (iii) review of the credit discounts in relationship to the valuation allowance calculated for purchased loans. Provisions for credit losses are charged to operations to record changes to the total allowance to a level deemed appropriate by us.

The following table provides an analysis of the ALLL, provision for credit losses and net charge-offs for the years 2016 to 2020:

Years Ended December 31,

Charge-offs:

Commercial and industrial (200 ) — — — —

Commercial real estate (85 ) (166 ) (701 ) — —

Other (45 ) — — — —

Recoveries:

Commercial and industrial — — 36 — —

(1) Total loans are net of discounts and deferred fees and costs.

(2) Excludes loans held for sale

Problem Loans. 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.

A loan is considered impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans include loans on nonaccrual status and performing restructured loans. Income from loans on nonaccrual status is recognized to the extent cash is received and when the loan’s principal balance is deemed collectible. Depending on a particular loan’s circumstances, we measure impairment of a loan based upon either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent. A loan is considered collateral dependent when repayment of the loan is based solely on the liquidation of the collateral. Fair value, where possible, is determined by independent appraisals, typically on an annual basis. Between appraisal periods, the fair value may be adjusted based on specific events, such as if deterioration of quality of the collateral comes to our attention as part of our problem loan monitoring process, or if discussions with the borrower lead us to believe the last appraised value no longer reflects the actual market for the collateral. The impairment amount on a collateral-dependent loan is charged-off to the allowance if deemed not collectible and the impairment amount on a loan that is not collateral-dependent is set up as a specific reserve.

In cases where a borrower experiences financial difficulties and we make certain concessionary modifications to contractual terms, the loan is classified as a troubled debt restructuring (“TDR”). 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. A restructured loan is considered impaired despite its accrual status and a specific reserve is calculated based on the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral less estimated costs to sell if the loan is collateral dependent.

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 the balance of the loan at the time of foreclosure or at estimated fair value less estimated costs to sell, whichever is less.

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, and loans modified under troubled debt restructurings. Nonperforming loans exclude PCI loans. The Company did not have any loans past due 90 days or more but still accruing interest at any of the dates presented. The balances of nonperforming loans reflect the net investment in these assets.

As of December 31,

Accruing troubled debt restructured loans:

Commercial and industrial $ 502 $ — $ — $ — $ —

Non-accrual loans:

Commercial and industrial 580 — — — —

Commercial and industrial - TDR 1,081 — — — —

Construction and land development 173 — — — —

Commercial real estate 1,193 725 — — —

Single-family residential mortgages 7,714 1,334 — — —

Other 15 — — — —

The $6.3 million increase in nonperforming loans at December 31, 2020 was primarily due to the addition of nine SFR mortgage loans for $6.5 million, five commercial and industrial loans for $2.2 million, four SBA loans for $2.1 million and three commercial real estate loans for $552,000, partially offset by payoff of one construction and development loan for $264,000 and one SBA loan for $991,000, and a net balance decrease in nonperforming loans of $3.8 million.

Our 30-89 day delinquent loans, excluding non-accrual loans, increased to $8.9 million as of December 31, 2020, compared to $5.3 million at December 31, 2019.

We did not recognize any interest income on nonaccrual loans during the years ended December 31, 2020 and December 31, 2019 while the loans were in nonaccrual status. We recognized interest income on loans modified under troubled debt restructurings of $170,000 and $128,000 during the years ended December 31, 2020 and December 31, 2019, respectively.

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.

Impact of the COVID-19 Pandemic on the Loan Portfolio

As of December 31, 2020, the Bank originated 260 loans totaling $32.9 million, or 1.2% of the Company’s total loan portfolio, under the SBA’s Paycheck Protection Program due to the COVID-19 pandemic. The following table provides details regarding the Company's COVID-19 loan deferral activity through January 15, 2021.

Loans Deferred Loans Deferred Loans Deferred

Multifamily 6 9,086 — — — —

(1) Loans with a principal amount of $23.5 million are principal deferments only. Interest is paid up to date through December 31, 2020 and January 15, 2021.

The Company does not have any shared national credits or loans, backed by airlines or cruise lines, on deferral as of January 15, 2021.

Cash and Cash Equivalents. Cash and cash equivalents increased $12.9 million, or 7.1%, to $194.7 million as of December 31, 2020 as compared to $181.8 million at December 31, 2019.

Goodwill and Other Intangible Assets. Goodwill was $69.2 and $58.6 million at December 31, 2020 and 2019, respectively. Goodwill represents the excess of the consideration paid over the fair value of the net assets acquired. The $10.7 million increase in 2020 was due to the PGBH acquisition. Our other intangible assets, which consist of core deposit intangibles, were $5.2 million and $6.1 million at December 31, 2020 and December 31, 2019. In 2020, $491,000 was added from the PGBH acquisition. These core deposit intangible assets are amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 3 to 10 years.

On January 10, 2020, we completed the PGBH acquisition. PGBH, and its subsidiary PGB, provided commercial and retail banking services primarily to Asian-Americans through three branches in the metro Chicago area.

We acquired PGBH for $32.9 million in cash. The identifiable assets acquired of $222.8 million and liabilities assumed of $200.6 million were recorded at fair value. The identifiable assets acquired included the establishment of a $491,000 core deposit intangible, which is being amortized on an accelerated basis over 10 years. Based upon the acquisition date fair values of the net assets acquired, we recorded $10.7 million of goodwill in our consolidated balance sheet.

Liabilities. Total liabilities increased $540.0 million to $2.9 billion, or 22.7%, at December 31, 2020 from $2.4 billion at December 31, 2019, primarily due to a $386.2 million increase in deposits, of which $188.4 million were acquired in the PGBH acquisition, and a $150.0 million increase in FHLB advances.

Deposits. As a Chinese-American business bank that focuses on successful businesses and their owners, many of our depositors choose to leave large deposits with us. The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis. We track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base. As of December 31, 2020, the Bank considers $2.3 billion or 88.0% of our deposits as core relationships. As of December 31, 2020, our top ten deposit relationships totaled $368.4 million, of which two are related to directors and shareholders of the Company for a total of $17.9 million or 4.9% of our top ten deposit relationships. As of December 31, 2020, our directors and shareholders with deposits over $250,000 totaled $83.6 million or 5.0% of all relationships over $250,000.

The following table summarizes our average deposit balances and weighted average rates at December 31, 2020, 2019 and 2018:

Year Ended

Weighted Weighted Weighted

Average Average Average Average Average Average

(dollars in thousands) Balance Rate (%) Balance Rate (%) Balance Rate (%)

Interest-bearing:

The following table sets forth the maturity of non-core time deposits as of December 31, 2020:

Maturity Within:

We acquired time deposits from the internet and outside deposits originators as needed to supplement liquidity. These time deposits are primarily under $250,000 and we do not consider them core deposits. The total amount of such deposits as of December 31, 2020 was $93.7 million or 3.6% of total deposits. The balances of such deposits as of December 31, 2019 were $93.2 million.

Total deposits increased $386.2 million to $2.6 billion at December 31, 2020 as compared to $2.2 billion at December 31, 2019, as a result of organic growth and the PGBH acquisition. As of December 31, 2020, total deposits were comprised of 23.4% noninterest-bearing demand accounts, 27.7% interest-bearing non-maturity deposit accounts and 48.8% of time deposits.

As of December 31, 2020, $131,000 in deposit overdrafts were reclassified as other loans. As of December 31, 2019, the amount was $141,000.

FHLB Borrowings. 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 December 31, 2020 and at December 31, 2019. In the first quarter of 2020, the Company obtained $150.0 million in long-term FHLB advances. The term is five years, maturing by March 2025. The average fixed interest rate is 1.18%. The Company secured this funding in case there is 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:

Years Ended December 31,

Weighted average interest rate:

Long-Term Debt. Long-term debt consists of subordinated notes. As of December 31, 2020 the amount of subordinated notes outstanding was $104.4 million as compared to $104.0 million at December 31, 2019.

In March and April 2016, we issued an aggregate of $50.0 million of subordinated notes for aggregate proceeds of $49.4 million. The subordinated notes have a maturity date of April 1, 2026 at a fixed rate of 6.5% for the first five years and a floating rate based on the three-month LIBOR plus 516 basis points thereafter. Under the terms of our subordinated notes and the related subordinated notes 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.

In November 2018, the Company issued $55.0 million in fixed-to-floating rate subordinated notes due December 1, 2028. The Notes bear a fixed rate of 6.18% for the first five years and will reset quarterly thereafter to the then-current three-month LIBOR rate plus 315 basis points. The Notes were assigned an investment grade rating of BBB by the Kroll Bond Rating Agency, Inc. Under the terms of our subordinated notes and the related subordinated notes 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.

The Company used the net proceeds from both subordinated debt offerings for general corporate purposes, including providing capital to the Bank and maintaining adequate liquidity at Bancorp. The subordinated notes qualified as Tier 2 capital for Bancorp for regulatory purposes and the portion that Bancorp contributed to the Bank qualified as Tier 1 capital for the Bank.

In connection with the November 2018 issuance of subordinated notes, Bancorp entered into a registration rights agreement with the purchasers of such notes pursuant to which the Company agreed to take certain actions to provide for the exchange of the notes for subordinated notes that are registered under the Securities Act and that have substantially the same terms as the privately issued notes. The exchange of notes was completed in March 2019.

Subordinated Debentures. Subordinated debentures consist of subordinated notes. As of December 31, 2020 and December 31, 2019, the amount outstanding was $14.3 million and $9.7 million, respectively. Under the terms of our subordinated notes and the related subordinated notes 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:

In 2016, Bancorp acquired $5.2 million of subordinated debentures as part of the TFC acquisition (TFC Trust) and recorded them at fair value of $3.3 million. The fair value adjustment is being accreted over the remaining life of the securities. These debentures mature on March 15, 2037 and have a variable rate of interest equal to the three-month LIBOR plus 1.65%. The rate at December 31, 2020 was 1.87% and 3.54% at December 31, 2019.

In October 2018, the Company, through the acquisition of FAIC, acquired the FAIC Trust. The FAIC Trust issued thirty-year fixed to floating rate capital securities with an aggregate liquidation amount of $7,000,000 to an independent investor, and all of its common securities, amounting to $217,000, financed by the issuance of $7.2 million of debentures. 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 the three-month LIBOR plus 2.25% through final maturity on December 15, 2034. The rate at December 31, 2020 was 2.47% and 4.14% at December 31, 2019.

In January 2020, the Company, through the acquisition of PGBH, acquired PGBH Trust, a Delaware statutory trust formed in December 2004. PGBH Trust issued 5,000 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 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 the three-month LIBOR plus 2.10% through final maturity on December 15, 2034. The rate at December 31, 2020 was 2.32% and 4.14% at December 31, 2019.

In July 2017, British banking regulators announced plans to eliminate the LIBOR rate by the end of 2021, before these subordinated notes and debentures mature. For these subordinated notes and debentures, there are provisions for amendments to establish a new interest rate benchmark.

Capital Resources and Liquidity Management

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

Shareholders’ equity increased $20.8 million, or 5.1%, to $428.5 million during 2020 due to $32.9 million of net income, $712,000 of additional paid in capital from the exercise of stock options and a $890,000 increase in other comprehensive income, partially offset by $6.6 million of cash dividends declared during the year and $7.9 million from the repurchase of shares of the Company’s common stock. The increase in accumulated other comprehensive income primarily resulted from increases in unrealized gains on available for sale securities.

Liquidity Management. 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-earning 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 noncore deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, additional borrowings through the Federal Reserve’s 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.

As of December 31, 2020 and December 31, 2019, we had $92.0 million and $49.0 million, respectively, 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 at December 31, 2020 and December 31, 2019 were $9.8 million and $14.3 million, respectively. Federal Reserve Discount Window lines were collateralized by a pool of CRE loans totaling $20.1 million and $28.7 million as of December 31, 2020 and December 31, 2019, respectively. We did not have any borrowings outstanding with the Federal Reserve at December 31, 2020 and December 31, 2019 and our borrowing capacity is limited only by eligible collateral.

At December 31, 2020 there were $150.0 million in FHLB advances outstanding and none at December 31, 2019. Based on the values of loans pledged as collateral, we had $915.2 million and $636.5 million of additional borrowing capacity with the FHLB as of December 31, 2020 and December 31, 2019, respectively. We also maintain relationships in the capital markets with brokers and dealers to issue certificates of deposit.

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

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.

The table below summarizes the minimum capital requirements applicable to us 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 us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of December 31, 2020 and December 31, 2019. The Bank exceeded all regulatory capital requirements under Basel III and was considered to be “well-capitalized” as of the dates reflected in the table below:

Tier 1 Leverage Ratio

Common Equity Tier 1 Risk-Based Capital Ratio (1)

Tier 1 Risk-Based Capital Ratio

Total Risk-Based Capital Ratio

Contractual Obligations

The following table contains supplemental information regarding our total contractual obligations at December 31, 2020:

Payments Due

Within One to Three to After Five

(dollars in thousands) One Year Three Years Five Years Years Total

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 the 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 in this Annual Report on Form 10-K 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.

Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share. 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.

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 accounting 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:

Tangible common equity:

Adjustments

Core deposit intangible (5,196 ) (6,100 )

Tangible assets:

Adjustments

Core deposit intangible (5,196 ) (6,100 )

Tangible common equity to tangible assets ratio 10.81 % 12.59 %

Tangible book value per share $ 18.10 $ 17.12

Return on Average Tangible Common Equity. 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 year-ended

Adjustments:

Return on average tangible common equity 9.62 % 10.85 % 13.66 %

Efficiency Ratio. The Company uses certain non-GAAP financial measures to provide supplemental information regarding the Company’s performance. The efficiency ratio is non-interest expense divided by net interest income plus non-interest income. The efficiency ratio is presented for the years ended December 31, 2020 and 2019.

For the year ended

Efficiency Ratio (non-GAAP)

Regulatory Reporting to Financial Statements

Some of the financial measures included in this Annual Report on Form 10-K differ from those reported on the FRB Y-9C report. These financial measures include “core deposits to total deposits” and “net non-core funding dependency ratio”. Our management uses these financial measures in its analysis of our performance.

Core Deposits and Non-core Funding Dependency. The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis. We track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following: (i) relationships with us (as a director or shareholder); (ii) deposits within our market area; (iii) additional non-deposit services with us; (iv) electronic banking services with us; (v) active demand deposit account with us; (vi) deposits at market interest rates; and (vii) longevity of the relationship with us. We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet service. This differs from the traditional definition of core deposits which is demand and savings deposits plus time deposits less than $250,000. As many of our customers have more than $250,000 on deposit with us, we believe that using this method reflects a more accurate assessment of our deposit base. The following table reconciles the adjusted core deposit to total deposits and the adjusted net non-core dependency ratio.

As of

Adjusted core deposit to total deposit ratio:

Adjustments:

Less brokered deposits considered non-core (17,374 ) (67,089 )

Less other deposits not considered core (4) (80,016 ) (60,719 )

Adjusted core deposits to total deposits ratio 87.72 % 86.47 %

Short term borrowing outstanding — —

Adjustment to short term assets:

Purchased receivables with maturities less than 90-days — —

Adjusted short term assets (B) — 71,303

Adjusted net non-core funding dependency ratio 10.30 % 9.00 %

(5) Non-core deposits are time deposits greater than $250,000

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

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 two primary sources of market risk: interest rate risk and price risk.

Interest Rate Risk

Overview. 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 LIBOR (basis risk).

Our ALCO committee 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.

Income Simulation and Economic Value Analysis. 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

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 gradual −200, −100, +100 and +200 basis point parallel shifts in market interest rates, implied by the forward yield curve over the next one-year period.

We are within board policy limits for the +/-100 and +/-200 basis point scenarios. The NII at Risk reported at December 31, 2020, projects that our earnings are expected to be neutral to changes in interest rates over the next year. In recent periods, the amount of fixed rate assets increased resulting in a position shift from neutral to slightly asset sensitive.

Economic Value of Equity Sensitivity (Shock)

Immediate Change in Rates

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

We are within board policy limits for the +100, +200, -100 and -200 basis point scenarios. The EVE reported at December 31, 2020 projects that as interest rates increase immediately, the EVE position will be expected to stay nearly flat, and if interest rates were to decrease immediately, the EVE position will be 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. Management has developed a plan to bring the percent change in EVE into compliance with board policy within the next twelve months.

Price Risk. 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 the available for sale SFR mortgage loans and fixed-rate available for sale securities.

Basis Risk. 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 the SFR mortgage loan portfolio, the multifamily loan portfolio and our securities portfolio.

Item 8. Financial Statements and Supplementary Data.

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 87

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets 89

Consolidated Statements of Income 91

Consolidated Statements of Comprehensive Income 92

Consolidated Statement of Changes in Shareholders' Equity 93

Consolidated Statements of Cash Flows 94

Notes to Consolidated Financial Statements 95

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

RBB Bancorp and Subsidiaries

Los Angeles, California

Opinion on the Consolidated Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of RBB Bancorp and Subsidiaries (the Company) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, change in shareholders’ equity, and cash flows for the two years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in 2013 Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the two years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Basis for Opinion

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

Definition and Limitations of Internal Control Over Financial Reporting

An entity’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have served as the Company’s auditor since 2019.

Laguna Hills, California

March 9, 2021

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders

RBB Bancorp and Subsidiaries

Los Angeles, California

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of RBB Bancorp and Subsidiaries as of December 31, 2018 and the related consolidated statements of income and comprehensive income, changes in shareholders’ equity, and cash flows, for the each of the years in the two year period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of RBB Bancorp and Subsidiaries as of December 31, 2018, and the results of its operations and its cash flows for each of the years in the two year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to RBB Bancorp and Subsidiaries in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risk of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company's auditor since 2008.

Rancho Cucamonga, California

March 27, 2019

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31,

(In thousands, except for share amounts)

Assets

Federal funds sold and other cash equivalents 57,000 67,000

Interest-earning deposits in other financial institutions 600 600

Securities:

Loans held for investment:

Unaccreted discount on acquired loans (2,872 ) (5,067 )

Deferred loan costs (fees), net (2,644 ) 404

Other real estate owned (OREO) 293 293

Cash surrender value of life insurance (BOLI) 35,121 34,353

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

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31,

(In thousands, except for share amounts)

Liabilities and Shareholders’ Equity

Deposits:

Reserve for unfunded commitments 1,383 826

Accrued interest and other liabilities 16,399 17,359

Commitments and contingencies - Note 7 and 13 — —

Shareholders' equity:

Non-controlling interest 72 72

Accumulated other comprehensive income, net 1,129 239

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

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31,

(In thousands, except share amounts)

Interest and dividend income:

Interest on federal funds sold and other 1,045 1,050 632

Interest expense:

Interest on savings deposits, now and money market accounts 3,540 4,886 4,408

Interest on subordinated debentures and long-term debt 7,677 7,698 4,083

Noninterest income:

Loan servicing fees, net of amortization 2,052 3,383 850

Recoveries on loans acquired in business combinations 84 143 1,385

Unrealized gain on equity investments — 147 —

Gain on derivatives 78 — —

Increase in cash surrender value of life insurance 767 775 797

Gain on sale of securities 210 7 5

(Loss) on sale of OREO — (106 ) —

Gain on sale of fixed assets — 6 —

Noninterest expense:

Insurance and regulatory assessments 984 900 951

Net income per share

Cash dividends declared per common share 0.33 0.40 0.35

Weighted-average common shares outstanding

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

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, (In thousands)

Other comprehensive income (loss):

Unrealized gains (losses) on securities available for sale:

Reclassification of gains recognized in net income (210 ) (7 ) (5 )

Related income tax effect:

Change in unrealized (gains) losses (436 ) (666 ) 376

Reclassification of gains recognized in net income 62 2 —

Total other comprehensive income (loss) 890 1,577 (895 )

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

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018 (In thousands, except share amounts)

Common Stock Accumulated

Stock-based compensation — — 684 — — — 684

Restricted stock awarded 43,425 —

Cash dividend — — — (5,753 ) — — (5,753 )

Non-controlling interest — — — — 72 — 72

Other comprehensive loss, net of taxes — — (895 ) (895 )

Stock-based compensation — — 689 — — — 689

Restricted stock vested — 425 (425 ) — — — —

Cash dividend — — — (8,033 ) — — (8,033 )

Other comprehensive loss, net of taxes — — — — — 1,577 1,577

Stock-based compensation — — 686 — — — 686

Restricted stock vested — 425 (425 ) — — — —

Cash dividend — — — (6,567 ) — — (6,567 )

Other comprehensive income, net of taxes — — — — — 890 890

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

RBB BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018

(In thousands)

Operating activities

Adjustments to reconcile net income to net cash from

Operating activities:

Depreciation and amortization of premises, and equipment 2,009 1,914 1,833

Unrealized gain on equity securities — (147 ) —

Amortization of investment in affordable housing tax credits 979 900 644

Impairment loss on mortgage servicing rights 417 — —

Gain on sale of securities (210 ) (7 ) (5 )

Loss on sale of OREO — 106 —

Gain on sale of fixed assets — (6 ) —

Increase in cash surrender value of life insurance (767 ) (775 ) (797 )

Investing activities

Securities available for sale:

Securities held to maturity:

Maturities, prepayments and calls 1,135 1,590 —

Redemption of Federal Home Loan Bank stock — 808 —

Proceeds from sales of OREO — 1,053 —

Net cash paid in connection with acquisition 6,634 — 25,073

Proceeds from sale of fixed assets — 17 —

Purchases of premises and equipment (4,206 ) (1,350 ) (2,488 )

Financing activities

Net increase (decrease) in short-term FHLB advances — (319,500 ) 170,000

Advances of long-term FHLB borrowings 150,000 — —

Issuance of subordinated debentures, net of issuance costs — — 54,018

Common stock repurchased, net of repurchased costs (7,851 ) (3,190 ) —

Net increase (decrease) in cash and cash equivalents 12,891 34,078 (2,363 )

Supplemental disclosure of cash flow information

Cash paid during the period:

Non-cash investing and financing activities:

Transfer from loans to other real estate owned — 974 808

Acquisition:

Assets acquired, net of cash received 182,895 — —

Liabilities assumed 200,209 — —

Stock considerations — — 69,602

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

RBB BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020, 2019 AND 2018

NOTE 1 - BUSINESS DESCRIPTION

RBB Bancorp is a financial 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". At December 31, 2020, the Company had total assets of $3.4 billion, gross consolidated loans (held for investment and held for sale) of $2.8 billion, total deposits of $2.6 billion and total stockholders' equity of $428.5 million. On July 31, 2017, the Company completed its initial public offering of 3,750,000 shares at a price to the public of $23.00 per share. The Company’s stock trades on the Nasdaq Global Select Market under the symbol “RBB”.

The Bank provides business-banking services to the Chinese-American communities in Los Angeles County, Orange County, Ventura County and in the Las Vegas, New York City metropolitan area, Chicago and Edison (New Jersey). 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; and Edison, New Jersey. The Company's primary source of revenue is providing loans to customers, who are predominately small and middle-market businesses and individuals.

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

As part of the FAIC acquisition, the Company acquired FAIB Capital Corp. (FAICC) that was formed on January 29, 2014. FAICC is a real estate investment trust subsidiary of the Bank.

The Company has completed six acquisitions from July 8, 2011 through January 10, 2020, including the acquisition of Pacific Global Bank Holdings, Inc. (“PGBH”) and its wholly-owned subsidiary, Pacific Global Bank (“PGB”), in which the PGBH acquisition closed on January 10, 2020. PGB operated three branches in the Chicago neighborhoods of Chinatown and Bridgeport. 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.

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

Basis of Presentation

The accompanying 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-K 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 financial reporting.

Principles of Consolidation and Nature of Operations

The accompanying consolidated financial statements include the accounts of RBB Bancorp and its wholly-owned subsidiaries Royal Business Bank ("Bank") and RBB Asset Management Company ("RAM"), collectively referred to herein as "the Company". All significant intercompany transactions have been eliminated.

RBB US Equity

RBB · 10-K · period ended 2020-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

RBB US Equity☆

RBB · 10-K · period ended 2020-12-31

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Item 8. Financial Statements and Supplementary Data.

RBB US Equity