UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2023

or

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

For the transition period from _________ to _________

Commission file number 001-41684

SOUTHERN CALIFORNIA BANCORP

(Exact name of registrant as specified in its charter)

California	84-3288397
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
12265 El Camino Real, Suite 210 San Diego, California	92130
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (844) 265-7622

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

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, no par value per share	BCAL	The Nasdaq Stock Market LLC

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

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

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

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

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

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

As of June 16, 2023, the registrant had 18,296,365 outstanding shares of common stock.

1

SOUTHERN CALIFORNIA BANCORP

FORM 10-Q QUARTERLY REPORT

MARCH 31, 2023

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	5
	Consolidated Balance Sheets	5
	Consolidated Statements of Income	6
	Consolidated Statements of Comprehensive Income (Loss)	7
	Consolidated Statements of Changes in Shareholders’ Equity	8
	Consolidated Statements of Cash Flows	9
	Notes to Consolidated Financial Statements	11
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	44
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	80
Item 4.	Controls and Procedures	82
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	82
Item 1A.	Risk Factors	82
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	83
Item 3.	Defaults Upon Senior Securities	83
Item 4.	Mine Safety Disclosures	83
Item 5.	Other Information	83
Item 6.	Exhibits	83
SIGNATURES		85

2

Cautionary Note Regarding Forward-Looking Statements

Certain statements contained in this quarterly report are forward-looking statements. These forward-looking statements include statements relating to our projected growth, anticipated future financial performance, financial condition, credit quality and management’s long-term performance goals, as well as statements relating to the anticipated effects on our business, financial condition and results of operations from expected developments or events, our business, growth and strategies. These statements, which are based on certain assumptions and estimates and describe our future plans, results, strategies and expectations, can generally be identified by the use of the words and phrases “may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “aim,” “predict,” “continue,” “seek,” “projection” and other variations of such words and phrases and similar expressions.

We have made the forward-looking statements in this quarterly report based on assumptions and estimates that we believe to be reasonable in light of the information available to us at this time. However, these forward-looking statements are subject to significant risks and uncertainties, and could be affected by many factors. Factors that could have a material adverse effect on our business, consolidated financial condition, consolidated results of operations and future growth prospects include, but are not limited to, the following:

•volatility and uncertainty facing the banking industry following the recent failures of financial institutions;

•challenges related to increasing interest rates and the impact on our consolidated financial condition and consolidated results of operations;

•our ability to manage our liquidity;

•business and economic conditions nationally, regionally and in our target markets, particularly in Southern California, which is the principal area in which we operate;

•the lack of soundness of other financial institutions;

•the possibility that we may be required to pay special assessments or higher premiums for deposit insurance;

•disruptions to the credit and financial markets, either nationally, regionally or locally;

•our dependence on Bank of Southern California, N.A. (the “Bank”) for dividends;

•concentration of our loan portfolio in commercial loans, which loans may be dependent on the borrower’s cash flows for repayment and, to some extent, the local and regional economy;

•concentration of our loan portfolio in loans secured by real estate and changes in the prices, values and sales volumes of commercial and residential real estate;

•risks related to construction and land development lending, which involves estimates that may prove to be inaccurate and collateral that may be difficult to sell following foreclosure;

•risks related to Small Business Administration (“SBA”) lending, including the risk that we could lose our designation as an SBA Preferred Lender;

•risks related to consumer loans, the repayment of which may be dependent on the borrower’s cash flows and may be unsecured;

•concentration of our business activities within the geographic area of Southern California;

•credit risks in our loan portfolio, the adequacy of our reserves for credit losses and the appropriateness of our methodology for calculating such allowance for credit losses;

•the impact of the COVID-19 pandemic;

•the impact of natural disasters, including earthquakes, floods, droughts, and fires, particularly in Southern California;

•our ability to manage the growth of our business and organization;

3

•risks related to any future acquisitions, including transaction expenses, the potential distraction of management resources and the possibility that we will not realize anticipated benefits from any future acquisitions;

•competition in the banking industry, nationally, regionally or locally;

•failure to maintain adequate liquidity and regulatory capital and comply with evolving federal and state banking regulations;

•inability of our risk management framework to effectively mitigate credit risk, interest rate risk, liquidity risk, price risk, compliance risk, technology risk, operational risk, strategic risk and reputational risk;

•our dependence on our management and our ability to attract and retain experienced and talented bankers;

•failure to keep pace with technological change or difficulties when implementing new technologies;

•system failures, data security breaches, including as a result of cyber-attacks, or failures to prevent breaches of our network security;

•our reliance on communications and information systems to conduct business and reliance on third parties and their affiliates to provide key components of business structure, any disruptions of which could interrupt operations or increase the costs of doing business;

•fraudulent and negligent acts by our customers, employees or vendors;

•our ability to prevent or detect all errors or fraud with our financial reporting controls and procedures;

•increased loan losses or impairment of goodwill and other intangibles;

•an inability to raise necessary capital to fund our growth strategy, operations, or to meet increased minimum regulatory capital levels;

•the sufficiency of our capital, including sources of such capital and the extent to which capital may be used or required;

•provisions of our charter documents and federal banking laws that could deter or delay an acquisition of us or changes in our management, even if beneficial to our shareholders;

•the institution and outcome of litigation and other legal proceedings to which we become subject;

•the impact of recent and future legislative and regulatory changes;

•examinations by our regulatory authorities, including the possibility that the regulatory authorities may, among other things, require us to increase our allowance for credit losses, slow the growth of our commercial real estate loans or write-down assets, or otherwise impose restrictions or conditions on our operations, including, but not limited to, our ability to acquire or be acquired;

•our status as an emerging growth company and a smaller reporting company, which reduces our disclosure obligations under the federal securities laws compared to other publicly traded companies;

•the impact of current and future governmental monetary and fiscal policies; and

•other factors and risks described in this quarterly report and from time to time in other documents that we

file or furnish with the Securities and Exchange Commission (“SEC”), including, without limitation, the risks described under Item 1A. Risk Factors in our Registration Statement on Form 10, as amended, that was declared effective by the SEC on May 10, 2023.

Because of these risks and other uncertainties, our actual results, performance or achievement, or industry results, may be materially different from the anticipated or estimated results discussed in this filing. Our past results of operations are not necessarily indicative of our future results. You should not rely on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. We undertake no obligation to update these forward-looking statements, even though circumstances may change in the future, except as required under federal securities law. We qualify all of our forward-looking statements by these cautionary statements.

4

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

SOUTHERN CALIFORNIA BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)

(Unaudited)

	March 31, 2023		December 31, 2022
ASSETS
Cash and due from banks	$	34,159	$	60,295
Federal funds and interest-bearing balances	67,980		26,465
Total cash and cash equivalents	102,139		86,760
Debt securities available for sale	124,438		112,580
Debt securities held to maturity (fair value of $49,713 and $47,906 at March 31, 2023 and December 31, 2022)	53,864		53,946
Loans held for sale	577		9,027
Loans held for investment	1,893,932		1,897,773
Allowance for credit losses	(22,391)		(17,099)
Loans held for investment, net	1,871,541		1,880,674
Restricted stock, at cost	14,557		14,543
Premises and equipment, net	14,105		14,334
Right-of-use asset	8,384		8,607
Goodwill	37,803		37,803
Core deposit intangible, net	1,493		1,584
Bank owned life insurance	38,196		37,972
Deferred taxes, net	10,492		10,699
Accrued interest receivable and other assets	14,464		15,398
Total assets	$	2,292,053	$	2,283,927
LIABILITIES
Noninterest-bearing demand	$	882,000	$	923,899
Interest-bearing NOW accounts	248,809		209,625
Money market and savings accounts	677,636		668,602
Time deposits	177,411		129,779
Total deposits	1,985,856		1,931,905
Borrowings	17,794		67,770
Operating lease liability	10,925		11,055
Accrued interest payable and other liabilities	9,939		12,842
Total liabilities	2,024,514		2,023,572
Commitments and contingencies (Note 10)
SHAREHOLDERS’ EQUITY
Preferred stock - 50,000,000 shares authorized, no par value; no shares issued and outstanding at March 31, 2023 and December 31, 2022	—		—
Common stock - 50,000,000 shares authorized, no par value; issued and outstanding 18,271,194 and 17,940,283 at March 31, 2023 and December 31, 2022	219,659		218,280
Retained earnings	52,889		48,516
Accumulated other comprehensive loss - net of taxes	(5,009)		(6,441)
Total shareholders’ equity	267,539		260,355
Total liabilities and shareholders’ equity	$	2,292,053	$	2,283,927

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

5

SOUTHERN CALIFORNIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)

(Unaudited)

	Three Months Ended
	March 31, 2023		March 31, 2022
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	27,019	$	17,731
Interest on debt securities	731		254
Interest on tax-exempted debt securities	487		76
Interest on deposits at other financial institutions	744		204
Interest and dividends on other interest-earning assets	228		220
Total interest and dividend income	29,209		18,485
INTEREST EXPENSE
Interest on NOW, money market and savings accounts	2,903		282
Interest on time deposits	975		98
Interest on borrowings	439		310
Total interest expense	4,317		690
Net interest income	24,892		17,795
Provision for credit losses	202		1,850
Net interest income after provision for credit losses	24,690		15,945
NONINTEREST INCOME
Service charges and fees on deposit accounts	262		289
Interchange and ATM income	177		198
Gain on sale of loans	808		49
Income from bank owned life insurance	223		832
Servicing and related income on loans, net	75		69
Other charges and fees	25		166
Total noninterest income	1,570		1,603
NONINTEREST EXPENSE
Salaries and employee benefits	10,241		10,196
Occupancy and equipment	1,447		1,410
Data processing and communications	1,056		1,420
Legal, audit and professional	785		617
Regulatory assessments	452		339
Director and shareholder expenses	213		195
Merger and related expenses	—		524
Core deposit intangible amortization	91		99
Other expenses	734		752
Total noninterest expense	15,019		15,552
Income before income taxes	11,241		1,996
Income tax expense	3,017		550
Net income	$	8,224	$	1,446
Earnings per share:
Basic	$	0.46	$	0.08
Diluted	$	0.44	$	0.08

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

6

SOUTHERN CALIFORNIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(Unaudited)

	Three Months Ended
	March 31, 2023		March 31, 2022
Net income	$	8,224	$	1,446
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) on securities available for sale:
Change in net unrealized gain (loss)	1,960		(3,214)
	1,960		(3,214)
Income tax expense (benefit):
Change in net unrealized gain (loss)	528		(933)
	528		(933)
Total other comprehensive income (loss), net of tax	1,432		(2,281)
Total comprehensive income (loss), net of tax	$	9,656	$	(835)

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

7

SOUTHERN CALIFORNIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(dollars in thousands, except share data)

(Unaudited)

	Common Stock			Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders’ Equity
	Shares	Amount
Three months ended March 31, 2023:
Balance at December 31, 2022	17,940,283	$	218,280	$	48,516	$	(6,441)	$	260,355
Adoption of ASU No. 2016-13, net of tax (1)	—	—		(3,851)		—		(3,851)
Balance at January 1, 2023 (as adjusted for change in accounting principal)	17,940,283	$	218,280	$	44,665	$	(6,441)	$	256,504
Stock-based compensation	—	1,686		—		—		1,686
Stock options exercised	6,950	67		—		—		67
Restricted stock units vested	347,097	—		—		—		—
Repurchase of shares in settlement of restricted stock units	(23,136)	(374)		—		—		(374)
Net income	—	—		8,224		—		8,224
Other comprehensive income	—	—		—		1,432		1,432
Balance at March 31, 2023	18,271,194	$	219,659	$	52,889	$	(5,009)	$	267,539
Three months ended March 31, 2022:
Balance at December 31, 2021	17,707,737	$	214,163	$	32,403	$	(38)	$	246,528
Stock-based compensation	—	773		—		—		773
Stock options exercised	41,000	303		—		—		303
Restricted stock units vested	5,625	—		—		—		—
Repurchase of shares in settlement of restricted stock units	(513)	(8)		—		—		(8)
Net income	—	—		1,446		—		1,446
Other comprehensive loss	—	—		—		(2,281)		(2,281)
Balance at March 31, 2022	17,753,849	$	215,231	$	33,849	$	(2,319)	$	246,761

(1) Related to the adoption of Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

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

8

SOUTHERN CALIFORNIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the three months ended March 31, 2023 and 2022
(dollars in thousands)

(Unaudited)

	Three Months Ended March 31,
	2023		2022
OPERATING ACTIVITIES
Net income	$	8,224	$	1,446
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation on premises and equipment	412		365
Core deposit intangible amortization	91		99
Amortization of premiums of debt securities	145		173
Gain on sale of loans	(808)		(49)
Loans originated for sale	(1,469)		(2,857)
Proceeds from sales of and principal collected on loans held for sale	10,802		599
Provision for credit losses	202		1,850
Deferred income tax expense (benefit)	1,294		(1,512)
Stock-based compensation	1,686		773
Increase in cash surrender value of bank owned life insurance	(223)		(218)
Income from bank owned life insurance	—		(614)
Accretion of net discounts and deferred loan fees	(532)		(1,665)
Net decrease in other items	(1,552)		(1,779)
Net cash provided by (used in) operating activities	18,272		(3,389)
INVESTING ACTIVITIES
Proceeds from bank owned life insurance death benefits	—		1,095
Proceeds from maturities and paydowns of debt securities available for sale	1,683		2,275
Proceeds from maturities and paydowns of debt securities held to maturity	—		25
Purchases of debt securities available for sale	(11,644)		(44,562)
Purchases of debt securities held to maturity	—		(44,980)
Net purchase of stock investments	(580)		(2,976)
Net repayment (fundings) of loans	4,043		(121,127)
Proceeds from sale of loans held for investment	50		—
Purchases of premises and equipment	(79)		(304)
Net cash used in by investing activities	(6,527)		(210,554)
FINANCING ACTIVITIES
Net increase in deposits	53,941		39,804
Repayment of Federal Home Loan Bank advances	(50,000)		—
Proceeds from exercise of stock options	67		303
Repurchase of common shares	(374)		(8)
Net cash provided by financing activities	3,634		40,099
The accompanying notes are an integral part of these consolidated financial statements.

9

SOUTHERN CALIFORNIA BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

For the three months ended March 31, 2023 and 2022
(dollars in thousands)

(Unaudited)

Net change in cash and cash equivalents	15,379		(173,844)
Cash and cash equivalents at beginning of period	86,760		580,006
Cash and cash equivalents at end of period	$	102,139	$	406,162
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	4,017	$	411
Taxes paid	—		—
Lease liability arising from obtaining right-of-use assets	405		710
Net impact of adoption of ASU 2016-13 on retained earnings	3,851		—

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

10

SOUTHERN CALIFORNIA BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2023

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Southern California Bancorp is a California corporation incorporated on October 2, 2019 and is registered with the Board of Governors of the Federal Reserve System as a bank holding company for Bank of Southern California, N.A. under the Bank Holding Company Act of 1956, as amended. On May 15, 2020, the Company completed a reorganization whereby Bank of Southern California, N.A. became a wholly-owned subsidiary of the Company. Bank of Southern California, N.A. began business operations in December 2001 under the name Ramona National Bank. The Bank changed its name to First Business Bank, N.A. in 2006 and to Bank of Southern California, N.A. in 2010. The Bank operates under a federal charter and its primary regulator is the Office of the Comptroller of the Currency (“OCC”). The words “we,” “us,” “our,” or the “Company” refer to Southern California Bancorp, and Bank of Southern California, N.A. collectively and on a consolidated basis. References herein to “Southern California Bancorp,” “SCB”, “Bancorp” or the “holding company,” refer to Southern California Bancorp on a stand-alone basis. References to the “Bank” refer to Bank of Southern California, N.A.

As a relationship-focused community bank, the Bank offers a range of financial products and services to individuals, professionals, and small- to medium-sized businesses through its 13 branch offices serving Orange, Los Angeles, Riverside, San Diego and Ventura counties. Many of the banking offices have been acquired through a number of acquisitions.

On May 11, 2023, our common stock became listed on the Nasdaq Capital Market under the symbol BCAL. Prior to that date, our common stock was quoted under the same symbol on the OTC Pink Open Market.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared pursuant to Article 10 of SEC Regulation S-X and other SEC rules and regulations for reporting on the Quarterly Report on Form 10-Q. Accordingly, certain disclosures required by U.S. generally accepted accounting principles (“GAAP”) are not included herein. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in Item 13. Financial Statements and Supplementary Data of the Company’s Registration Statement on Form 10 under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) filed with the SEC and declared effective on May 10, 2023 (our “Registration Statement”).

In the opinion of management of the Company, the accompanying unaudited interim consolidated financial statements reflect all of the adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the consolidated financial condition and consolidated results of operations as of the dates and for the periods presented. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results that may be expected for the year ending December 31, 2023.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and

expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change are the determination of the allowance for credit losses, the fair

11

value of assets and liabilities acquired in business combinations and related purchase price allocation, the valuation of acquired loans, the valuation of goodwill and separately identifiable intangible assets associated with mergers and acquisitions, loan sales and servicing of financial assets and deferred tax assets and liabilities.

Operating Segments

We operate one reportable segment — commercial banking. The factors considered in making this determination include all of the banking products and services offered by the Company are available in each branch of the Company, all branches are located within the same economic environment, management does not allocate resources based on the performance of different lending or transaction activities and how information is reviewed by the chief executive officer and other key decision makers. As a result, we determined that all services we offer relate to commercial banking.

Recently Adopted Accounting Guidance

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

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

The Company adopted ASU 2016-13 using the modified retrospective transition approach, and recorded a net decrease of $3.9 million to the beginning balance of retained earnings as of January 1, 2023 for the cumulative effect adjustment, reflecting an initial adjustment to the allowance for credit losses (“ACL”) of $5.5 million, which included a $5.0 million increase in the ACL - loans and a $439 thousand increase in reserve for unfunded commitments, net of related deferred tax assets arising from temporary differences of $1.6 million, commonly referred to as the “Day 1” adjustment. This Day 1 adjustment reflects the development of the CECL models to estimate lifetime expected credit losses on the loans held for investment and unfunded commitments primarily using a lifetime loss methodology and management’s current expectation of future economic conditions. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the probable incurred loss accounting standards. As permitted under ASC 326, the Company elected to maintain the same loan segments that it previously identified prior to adoption of CECL.

At adoption of CECL and continuing through March 31, 2023, the Company did not record an ACL on available-for-sale debt securities or held-to-maturity debt securities as these investment portfolios primarily consisted of debt securities explicitly or implicitly backed by the U.S. government or state and local governments, and historically have had no credit loss experience. Refer to Note 2, Investment Securities, for more information.

12

The following table presents the impact of adopting ASU 2016-13 on January 1, 2023:

(dollars in thousands)	Pre-CECL Adoption		Impact of CECL Adoption		As Reported under CECL
Assets:
Allowance for credit losses - loans
Construction and land development	$	2,301	$	881	$	3,182
Real estate - other:
1-4 family residential	972		424		1,396
Multifamily residential	1,331		(279)		1,052
Commercial real estate and other	9,388		2,838		12,226
Commercial and industrial	3,079		1,132		4,211
Consumer	28		31		59
	$	17,099	$	5,027	$	22,126
Liabilities:
Allowance for credit losses - unfunded loan commitments	$	1,310	$	439	$	1,749

Significant Accounting Policies

The accounting and reporting policies of the Company are based upon GAAP and conform to predominant practices within the banking industry. We have not made any changes in our significant accounting policies from those disclosed in Item 13. Financial Statements and Supplementary Data of the Company’s Registration Statement. Updates to our significant accounting policies described below reflect the impact of the adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326) and the related amendments, and ASU 2022-02, Financial Instruments—Credit Losses (Topic 326) Troubled Debt Restructurings (“TDR”) and Vintage Disclosures.

Allowance for Credit Losses — Held-to-Maturity Debt Securities

An ACL is established for losses on held-to-maturity debt securities at the time of purchase or designation, and is updated each period to reflect management’s expectations of current expected credit losses as of the date of the consolidated balance sheets. The ACL is estimated collectively for groups of debt securities with similar risk characteristics, and is determined at the individual security level when the Company deems a security to no longer possess shared risk characteristics. Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses. For debt securities where the Company has reason to believe the credit loss exposure is remote, a zero credit loss assumption is applied. Such debt securities are either explicitly or implicitly guaranteed by U.S. Government entities or its agencies, that are highly rated by rating agencies, and historically have had no credit loss experience. The Company does not anticipate any credit related losses in this investment portfolio. Changes in the ACL on held-to-maturity debt securities are recorded as a component of the provision for credit losses in the consolidated statements of income. Losses are charged against the ACL when management believes the uncollectibility of a held-to-maturity debt security is confirmed.

Allowance for Credit Losses — Available-for-Sale Debt Securities

For available-for-sale debt securities, the Company evaluates, on an individual basis, whether a decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. The portion of the decline attributable to credit losses is recognized through an ACL, and changes in the ACL on available-for-sale debt securities are recorded as a component of the provision for credit losses in the consolidated statements of income. The portion of decline in fair value below the amortized cost basis not attributable to credit is recognized through other comprehensive income (loss), net of applicable taxes.

13

Allowance for Credit Losses — Loans

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

The ACL on loans held for investment represents the portion of the loans’ amortized cost basis that the Company does not expect to collect due to anticipated credit losses over the loans’ contractual life. Amortized cost does not include accrued interest, which management elected to exclude from the estimate of expected credit losses. Provision for credit losses for loans held for investment is included in provision for credit losses in the consolidated statements of income. Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely. Subsequent recoveries, if any, are credited to the ACL. Credit losses are not estimated for accrued interest receivable as interest that is deemed uncollectible is written off through interest income.

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

The Company’s loan portfolio consists of the following segments, based on regulatory call codes and related risk ratings:

Construction and land development loans are typically adjustable rate residential and commercial construction loans to builders, developers and consumers, with terms generally limited to 12 to 36 months. These loans generally require payment in full upon the sale or refinance of the property. Construction and development loans generally carry a higher degree of risk because repayment depends on the ultimate completion of the project and usually on the subsequent sale or refinance of the property, unless the project is user-owned which would then convert to a conventional term loan. Specific material risks may include (i) unforeseen delays in the building or the project, (ii) cost overruns or inadequate contingency reserves, (iii) poor management of construction process, (iv) inferior or improper construction techniques, (v) changes in the economic environment during the construction period, (vi) a downturn in the real estate market, (vii) rising interest rates which may impact the sale of the property and its price, and (viii) failure to sell or stabilize completed projects in a timely manner. The Company attempts to reduce risks associated with construction and land development loans by obtaining personal guarantees and by keeping the maximum loan-to-value (“LTV”) ratio at or below 75%, depending on the project type. Many of the construction and land development loans include interest reserves built into the loan commitment. For owner-occupied commercial construction loans, periodic cash payments for interest are required from the borrower’s cash flow.

Real estate loans are secured by single family residential properties (one to four units), multifamily residential properties (five or more units), owner-occupied CRE, and non-owner-occupied CRE. Real estate loans are subject to the same general risks as other loans and may also be impacted by changing demographics, collateral maintenance, and product supply and demand. Rising interest rates, as well as other factors arising after a loan has been made, could negatively affect not only property values but also a borrower’s cash flow, creditworthiness, and ability to repay the loan. Increasing interest rates can impact real estate values as rising rates generally cause a similar movement in capitalization rates which can cause real estate collateral values to decline. The Company usually obtains a security interest in real estate, in addition to any other available collateral, in order to increase the likelihood of the ultimate repayment of the loan. The Company does not underwrite closed-end term consumer loans secured by a borrower’s residence. Junior liens may be considered in connection with a

14

consumer home equity line of credit (“HELOC”), or as additional collateral support for SBA and other business loans.

The Company’s commercial and industrial (“C&I”) loans are generally made to businesses located in the Southern California region and surrounding communities. These loans are made to finance operations, to provide working capital, or for specific purposes such as to finance the purchase of assets or equipment or to finance accounts receivable and inventory. The Company’s C&I loans may be secured (other than by real estate) or unsecured. They may take the form of single payment, installment, or lines of credit. These are generally based on the financial strength and integrity of the borrower and guarantor(s) and generally (with some exceptions) are collateralized by short-term assets such as accounts receivable, inventory, equipment, or a borrower’s other business assets. Commercial term loans are typically made to provide working capital to finance the acquisition of fixed assets, refinance short-term debt originally used to purchase fixed assets or, in rare cases, to finance the purchase of businesses.

Consumer loans consist of loans to individuals for personal and household purposes, including secured and unsecured installment loans and revolving lines of credit. Consumer loans are underwritten based on the borrower’s income, current debt level, past credit history, and the availability and value of collateral. Consumer rates are both fixed and variable, with negotiable terms. The Company’s installment loans typically amortize over periods up to 5 years. Although the Company typically requires monthly payments of interest and a portion of the principal on its loan products, the Company will offer consumer loans with a single maturity date when a specific source of repayment is available. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and more likely to decrease in value than real estate.

The Company’s ACL model incorporates assumptions for prepayment/curtailment rates, probability of default (“PD”), and loss given default (“LGD”) to project each loan’s cash flow throughout its entire life cycle. An initial reserve amount is determined based on the difference between the amortized cost basis of each loan and the present value of all future cash flows. The initial reserve amount is then aggregated at loan segment level to derive the segment level quantitative loss rates. Assumptions for prepayment/curtailment rates are based on benchmark rates provided by the Company’s third-party loss model provider. Quarterly PD is forecasted using a regression model that incorporates certain economic variables as inputs. The LGD is derived from PD using the Frye-Jacobs index provided by the Company’s third-party model provider. Reasonable and supportable forecasts are used to predict current and future economic conditions. Management elected to use a four quarter reasonable and supportable forecast period followed by an eight quarter straight-line reversion period. After twelve quarters of forecast plus reversion period, the probability of default is assumed to remain unchanged for the remaining life of the loan.

The Company uses numerous key macroeconomic variables within the economic forecast scenarios from Moody’s Analytics. These economic forecast scenarios are based on past events, current conditions, and the likelihood of future events occurring. These scenarios include a baseline forecast which represents their best estimate of future economic activity. Moody’s Analytics also provide nine alternative scenarios, including five direct variations of the baseline scenario and four more extensive departures from their baseline forecast, including a slower growth, a stagflation, a next cycle recession and a low oil price scenario. Management recognizes the non-linearity of credit losses relative to economic performance and believes the use of multiple probability-weighted economic scenarios is appropriate in estimating credit losses over the forecast period. This approach is based on certain assumptions. The first assumption is that no single forecast of the economy, however detailed or complex, is completely accurate over a reasonable forecast timeframe and is subject to revisions over time. By considering multiple scenarios, management believes some of the uncertainty associated with a single scenario approach can be mitigated. Management periodically evaluates economic scenarios, determines whether to utilize multiple probability-weighted scenarios in the Company’s ACL model, and, if multiple scenarios are utilized, evaluates and determines the weighting for each scenario used in the Company’s ACL model, and thus the scenarios and weightings of each scenario may change in future periods. Economic scenarios as well as assumptions within those scenarios can vary based on changes in current and expected economic conditions.

The ACL process involves subjective and complex judgments and is reflective of significant uncertainties that could potentially result in materially different results under different assumptions and conditions. In addition

15

to the aforementioned quantitative model, management periodically considers the need for qualitative adjustments to the ACL. Such qualitative adjustments may be related to and include, but are not limited to factors such as: differences in segment-specific risk characteristics, periods wherein current conditions and reasonable and supportable forecasts of economic conditions differ from the conditions that existed at the time of the estimated loss calculation, model limitations and management’s overall assessment of the adequacy of the ACL. Qualitative risk factors are periodically evaluated by management.

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

Loans with terms that have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are evaluated for an ACL utilizing one of the methodologies above.

Allowance for Credit Losses — Off-Balance Sheet Credit Exposures

The Company also maintains a separate allowance for off-balance sheet commitments. Beginning January 1, 2023, management estimates anticipated losses using expected loss factors consistent with those used for the ACL methodology for loans described above, and utilization assumptions based on historical experience. Provision for credit losses for off-balance sheet commitments is included in provision for credit losses in the consolidated statements of income and added to the allowance for off-balance sheet commitments, which is included in accrued interest payable and other liabilities in the consolidated balance sheets.

Loan Modifications, Refinancings and Restructurings

Prior to the adoption of ASU 2022-02, a loan is classified as a TDR when the Company grants a concession to a borrower experiencing financial difficulties that it otherwise would not consider under our normal lending policies under ASC Subtopic 310-40, Troubled Debt Restructurings by Creditors. Upon the adoption of ASU 2022-02, the Company applies the general loan modification guidance provided in ASC 310-20 to all loan modifications, including modifications made for borrowers experiencing financial difficulty. The Company considers some of the indicators that a borrower is experiencing financial difficulty to be: currently in payment default on any of their debt, declaring bankruptcy, going concern, insufficient cash flow to service all debt service requirements, inability to obtain funds from other sources at a market rate for similar debt to non-troubled borrowers, and currently classified as substandard loans that are categorized as having well-defined weaknesses.

Under the general loan modification guidance, a modification is treated as a new loan only if the following two conditions are met: (1) the terms of the new loan are at least as favorable to the Company as the terms for comparable loans to other customers with similar collection risks; and (2) modifications to the terms of the original loan are more than minor. If either condition is not met, the modification is accounted for as the continuation of the existing loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate. If the refinancing or restructuring is deemed to be a new loan, unamortized net fees or costs from the original loan and any prepayment penalties are recognized in interest income when the new loan is granted. In addition, a new effective interest rate will be determined. If the refinancing or restructuring is deemed to be a modification, the investment in the new loan is comprised of the remaining net investment in the original loan, any additional funds advanced to the borrower, any fees received, and direct loan origination costs

16

associated with the refinancing or restructuring. The effective interest rate of the loan is recalculated based upon the amortized cost basis of the new loan and its revised contractual cash flows.

A modification may vary by program and by borrower-specific characteristics, and may include interest rate reductions, principal forgiveness, term extensions, and payment delays, and is intended to minimize the Company’s economic loss and to avoid foreclosure or repossession of collateral. The Company applies the same credit loss methodology it uses for similar loans that were not modified.

GAAP requires that certain types of modifications be reported, which consist of (1) principal forgiveness; (2) interest rate reduction; (3) other-than-insignificant payment delay; (4) term extension; and any combination of the above. Since adoption of ASU 2022-02 on January 1, 2023, the Company did not have any loan modifications under ASU 2022-02. At December 31, 2022, the Company did not have any loans that have been modified in TDRs under previous GAAP.

Recent Accounting Guidance Not Yet Effective

On March 12, 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), which provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments are effective for all entities as of March 12, 2020 and may be adopted through December 31, 2022. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The Company is currently evaluating the impact of ASU 2020-04 to the consolidated financial statements.

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), which clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Specifically, certain provisions in Topic 848, if elected by an entity, apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Amendments in this Update to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in ASU 2021-01 are elective and apply to all entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. The amendments also optionally apply to all entities that designate receive-variable-rate, pay-variable-rate cross-currency interest rate swaps as hedging instruments in net investment hedges that are modified as a result of reference rate reform. The amendments in ASU 2021-01 are effective immediately for all entities. The Company is currently identifying loans and other financial instruments that are impacted by the discontinuance of LIBOR, reviewing the contracts of our LIBOR-based products to ensure that our credit documentation provides for the flexibility to move to alternative reference rates, and choosing the substitute index. The Company does not expect the adoption of ASU 2021-01 will have a material impact to the consolidated financial statements.

In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendments in this ASU defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective upon issuance. The FASB had previously issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting and related amendments in 2020 to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 were elective and applied to all entities that have contracts, hedging relationships, and other transactions that reference the London Inter-bank Offer Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The Company does

17

not expect the adoption of the new ASU will have a material impact to the Company’s consolidated financial statements.

In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements. This standard requires entities to amortize leasehold improvements associated with common control leases over the useful life to the common control group. The standard is effective for the Company for fiscal years beginning after December 15, 2023, including interim periods within these fiscal years. As the Company does not have any such common control leases, adoption of this standard will not have a material impact to the consolidated financial statements.

In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method, a consensus of the Emerging Issues Task Force. The amendments in this update allow the option for an entity to apply the proportional amortization method of accounting to other equity investments that are made for the primary purpose of receiving tax credits or other income tax benefits, if certain conditions are met. Prior to this update, the application of the proportional amortization method of accounting was only limited to low-income housing tax credit (“LIHTC”) structured investments. The proportional amortization method of accounting results in the amortization of applicable investments, as well as the related income tax credits or other income tax benefits received, being presented on a single line in the consolidated statements of income, income tax expense. Under this update, an entity has the option to apply the proportional amortization method of accounting to applicable investments on a tax-credit-program-by-tax-credit-program basis. In addition, the amendments in this update require that all tax equity investments accounted for using the proportional amortization method use the delayed equity contribution guidance in paragraph 323-740-25-3, requiring a liability be recognized for delayed equity contributions that are unconditional and legally binding or for equity contributions that are contingent upon a future event when that contingent event becomes probable. Under this update, LIHTC structured investments for which the proportional amortization method is not applied can no longer be accounted for using the delayed equity contribution guidance. Further, this update specifies that impairment of LIHTC structure investments not accounted for using the equity method must apply the impairment guidance in Subtopic 323-10 - Investments - Equity Method and Joint Ventures - Overall. This update also clarifies that for LIHTC structure investments not accounted for under the proportional amortization method or the equity method, an entity shall account for them under Topic 321 - Investments - Equity Securities. The amendments in this update also require additional disclosures in interim and annual periods concerning investments for which the proportional amortization method is applied, including (i) the nature of tax equity investments, and (ii) the effect of tax equity investments and related income tax credits and other income tax benefits on the financial position and results of operations. The provisions of this update are effective for the Company for interim and annual periods beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact of this update on its consolidated financial statements.

NOTE 2 - INVESTMENT SECURITIES

Debt Securities

Debt securities have been classified as either held-to-maturity or available-for-sale securities in the consolidated balance sheets according to management’s intent. The amortized cost of held-to-maturity debt securities and their approximate fair values at March 31, 2023 and December 31, 2022 were as follows:

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2023
Taxable municipal	$	550	$	—	$	(83)	$	467
Tax exempt bank-qualified municipals	53,314		—		(4,068)		49,246
	$	53,864	$	—	$	(4,151)	$	49,713

18

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
December 31, 2022
Taxable municipal	$	550	$	—	$	(105)	$	445
Tax exempt bank-qualified municipals	53,396		—		(5,935)		47,461
	$	53,946	$	—	$	(6,040)	$	47,906

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

(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
March 31, 2023
U.S. government and agency and government sponsored enterprise securities:
Mortgage-backed securities	$	34,965	$	24	$	(3,413)	$	31,576
SBA securities	7,426		14		(124)		7,316
U.S. Treasury	6,632		—		(583)		6,049
U.S. Agency	7,024		—		(708)		6,316
Collateralized mortgage obligations	50,338		149		(2,721)		47,766
Taxable municipal	4,403		38		(172)		4,269
Tax exempt bank-qualified municipals	20,762		444		(60)		21,146
	$	131,550	$	669	$	(7,781)	$	124,438
December 31, 2022
U.S. government and agency securities:
Mortgage-backed securities	$	27,029	$	—	$	(3,734)	$	23,295
SBA securities	7,988		16		(132)		7,872
U.S. Treasury	6,652		—		(700)		5,952
U.S. Agency	7,025		—		(842)		6,183
Collateralized mortgage obligations	47,778		20		(3,375)		44,423
Taxable municipals	4,403		36		(211)		4,228
Tax exempt bank-qualified municipals	20,777		163		(313)		20,627
	$	121,652	$	235	$	(9,307)	$	112,580

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

At March 31, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of our shareholders’ equity.

Accrued interest receivable on held-to-maturity and available-for-sale debt securities totaled $1.0 million and $1.1 million at March 31, 2023 and December 31, 2022, respectively, and is included within accrued interest and other assets in the consolidated balance sheets. Accrued interest receivable is excluded from the ACL.

There were no debt securities pledged at March 31, 2023 and December 31, 2022.

19

Contractual Maturities

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

	Held-to-Maturity				Available-for-Sale
(dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
March 31, 2023
Due in one year or less	$	—	$	—	$	1,639	$	1,625
Due after one year through five years	—		—		20,201		19,228
Due after five years through ten years	8,679		8,280		25,399		22,786
Due after ten years	45,185		41,433		84,311		80,799
	$	53,864	$	49,713	$	131,550	$	124,438

Realized Gains and Losses

The following table presents gross realized gains and losses, and related proceeds, for sales and calls of available-for-sale debt securities for the three months ended March 31, 2023 and 2022 follows:

	Three months ended
(dollars in thousands)	March 31, 2023		March 31, 2022
Gross gains on sales and calls	$	—	$	—
Gross losses on sales and calls	—		—
(Loss) gain on sale of available-for-sale debt securities	$	—	$	—
Proceeds from sales and calls	$	5	$	—

Unrealized Gains and Losses

The gross unrealized losses and related estimated fair values of all available-for-sale debt securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2023 and December 31, 2022 are summarized as follows:

	Less than 12 Months				12 Months or Longer				Total
(dollars in thousands)	Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value
March 31, 2023:
Available-for-sale debt securities:
U.S. government and agency and government sponsored enterprise securities:
Mortgage-backed securities:	$	(36)	$	2,260	$	(3,377)	$	23,232	$	(3,413)	$	25,492
SBA securities	(6)		2,529		(118)		2,135		(124)		4,664
U.S. Treasury	—		—		(583)		6,049		(583)		6,049
U.S. Agency	—		—		(708)		6,316		(708)		6,316
Collateralized mortgage obligations	(392)		15,452		(2,329)		19,129		(2,721)		34,581
Taxable municipals	(14)		1,625		(158)		2,106		(172)		3,731
Tax exempt bank-qualified municipals	(60)		5,275		—		—		(60)		5,275
	$	(508)	$	27,141	$	(7,273)	$	58,967	$	(7,781)	$	86,108

20

	Less than 12 Months				12 Months or Longer				Total
(dollars in thousands)	Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value
December 31, 2022:
U.S. government and agency and government sponsored enterprise securities:
Mortgage-backed securities:	$	(1,337)	$	9,888	$	(2,397)	$	13,407	$	(3,734)	$	23,295
SBA securities	(1)		202		(131)		2,258		(132)		2,460
U.S. Treasury	(277)		3,563		(423)		2,389		(700)		5,952
U.S. Agency	(51)		474		(791)		5,709		(842)		6,183
Collateralized mortgage obligations	(2,169)		35,331		(1,206)		6,029		(3,375)		41,360
Taxable municipals	(75)		3,318		(136)		373		(211)		3,691
Tax exempt bank-qualified municipals	(313)		14,081		—		—		(313)		14,081
	$	(4,223)	$	66,857	$	(5,084)	$	30,165	$	(9,307)	$	97,022

As of March 31, 2023, the Company had a total of 81 available-for-sale debt securities in a gross unrealized loss position, consisting of 62 securities with total net unrealized losses of $7.3 million that had been in a continual loss position for twelve months and over. As of December 31, 2022, the Company had a total of 88 available-for-sale debt securities in a gross unrealized loss position. There were 43 securities that had been in a continual loss position for twelve months and over. Such unrealized losses on these investment securities have not been recognized into income.

Unrealized losses on available-for-sale debt securities are recognized in shareholders’ equity as accumulated other comprehensive loss. At March 31, 2023, the Company had a net unrealized loss on available-for-sale debt securities of $7.1 million, or $5.0 million net of tax in accumulated other comprehensive loss, compared to a net unrealized loss of $9.1 million, or $6.4 million net of tax in accumulated other comprehensive loss, at December 31, 2022.

Allowance for Credit Losses on Debt Securities

At March 31, 2023, 108 available-for-sale debt securities with fair values totaling $124.4 million had net unrealized losses totaling $7.1 million, or $5.0 million net of tax in accumulated other comprehensive loss. For available-for-sale debt securities with unrealized losses, management considered the financial condition of the issuer and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in fair value. Our available-for-sale debt securities consisted of U.S. Treasury, U.S. government and agency and government sponsored enterprise securities, municipals are issued, guaranteed, or supported by the U.S. government, and historically have had no credit loss experience. In addition, we reviewed the credit rating of the municipal securities. At March 31, 2023, the total fair value of taxable municipal and tax exempt bank-qualified municipal securities was $4.3 million, and $21.1 million, respectively. These available-for-sale debt securities rated AA and above totaled $21.6 million and rated A and above totaled $3.8 million.

At March 31, 2023, 61 held-to-maturity debt securities with fair values totaling $49.7 million had unrealized losses totaling $4.2 million. Management has the intent and ability to hold the securities classified as held-to-maturity until they mature, at which time the Company will receive full value for the securities. At March 31, 2023, held-to-maturity debt securities rated AA and above totaled $46.4 million and rated AA- totaled $3.3 million.

Management determined that the unrealized losses for March 31, 2023 and each investment were primarily attributable to factors other than credit-related, including changes in interest rates driven by The Federal Reserve’s policy to fight against inflation and general volatility in credit market conditions. As such, the Company applied a zero credit loss assumption for these securities and no provision for credit losses were recorded for held-to-maturity or available-for-sale debt securities during the three months ended March 31, 2023.

21

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

Restricted Stock

As a member of the Federal Reserve System, the Company must hold stock of the Federal Reserve Bank of San Francisco in an amount equal to 3% of the Company’s common stock and additional paid-in capital. An investment in the equity stock of the FHLB of San Francisco is required for membership; the amount of the required investment is a function of the Company’s outstanding mortgage assets and outstanding advances from the FHLB.

The table below summarizes the Company’s restricted stock investments at March 31, 2023 and December 31, 2022:

(dollars in thousands)	March 31, 2023		December 31, 2022
Federal Reserve Bank	$	7,332	$	7,318
Federal Home Loan Bank	7,225		7,225
	$	14,557	$	14,543

During the three months ended March 31, 2023, the Company purchased $14 thousand of Federal Reserve Bank stock, and there were no purchases of FHLB stock.

Other Equity Securities Without A Readily Determinable Fair Value

The Company also has equity securities in the form of capital stock invested in two different banker’s bank stocks which totaled $351 thousand at March 31, 2023 and December 31, 2022. These equity securities are reported in other assets in the consolidated balance sheets. During the three months ended March 31, 2023 and March 31, 2022, the Company evaluated the carrying value of these equity securities and determined that they were not impaired, and no loss related to changes in the fair value of these equity securities was recognized.

The Company has other equity investments, including affordable housing investments and an investment in a technology venture capital fund focused on the intersection of fintech and community banking. At March 31, 2023 and December 31, 2022, the balance of these investments, which is included in other assets in the consolidated balance sheets, was $5.2 million and $4.6 million, respectively. These equity securities are measured using the equity method of accounting when the Company’s ownership interest in such investments exceeds 5%, or carried at cost less impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer. Cash distributions considered return of capital are recorded as a reduction of the Company’s investment. During the three months ended March 31, 2023, there were $567 thousand net capital contributions made to these equity investments. At March 31, 2023 and December 31, 2022, the Company evaluated the carrying value of these equity investments and determined they were not impaired, and no loss was recognized related to changes in the fair value.

The Company has also invested in a limited partnership that operates affordable housing projects that qualify for and have received an allocation of federal and/or state low-income housing tax credits. This tax credit investment is reported in other assets in the consolidated balance sheets, and is recorded net of accumulated amortization, using the proportional amortization method. The unfunded portion of these investments is included in other liabilities in the consolidated balance sheets. The aggregate funding commitment for this investment was $2.0 million at March 31, 2023 and December 31, 2022. During the three months ended March 31, 2023, there was no contribution made. At March 31, 2023 and December 31, 2022, the Company evaluated the carrying value of this tax credit equity investment and determined it was not impaired, and no loss was recognized related to changes in the fair value.

22

NOTE 3 - LOANS AND ALLOWANCE FOR CREDIT LOSSES

Loans Held for Investment

The Company’s loan portfolio consists primarily of loans to borrowers within its Southern California markets in San Diego, Orange, Ventura, Los Angeles, and Riverside counties, as well as the Inland Empire. Although the Company seeks to avoid concentrations of loans to a single industry or based upon a single class of collateral, real estate and real estate associated businesses are among the principal industries in the Company’s market area. The Company’s loan portfolio in real estate secured credit represented 83% and 82% of total loans at March 31, 2023 and December 31, 2022, respectively. The Company also originates SBA loans either for sale to institutional investors or for retention in the loan portfolio. Loans identified as held for sale are carried at the lower of carrying value or market value and separately designated as such in the consolidated financial statements. A portion of the Company’s revenues are from origination of loans guaranteed by the SBA under its various programs and sale of the guaranteed portions of the loans. Funding for these loans depends on annual appropriations by the U.S. Congress.

The composition of the Company’s loan portfolio at March 31, 2023 and December 31, 2022 was as follows:

(dollars in thousands)	March 31, 2023		December 31, 2022
Construction and land development	$	256,096	$	239,067
Real estate - other:
1-4 family residential	154,071		144,322
Multifamily residential	227,676		218,606
Commercial real estate and other	936,513		958,676
Commercial and industrial (1)	314,248		331,644
Consumer	5,328		5,458
Loans (2)	1,893,932		1,897,773
Allowance for credit losses	(22,391)		(17,099)
Net loans	$	1,871,541	$	1,880,674

(1)Includes Paycheck Protection Program (“PPP”) loans at net amortized amount of $3.2 million and $3.5 million at March 31, 2023 and December 31, 2022, respectively.

(2)Loans held for investment includes net unearned fees of $3.0 million and $3.3 million and net unearned discount of $1.6 million and $1.8 million at March 31, 2023 and December 31, 2022, respectively.

The Company has pledged $1.33 billion of loans with FHLB under a blanket lien, of which an unpaid principal balance of $846.3 million was considered as eligible collateral under this secured borrowing arrangement and loans with an unpaid principal balance of $134.6 million were pledged as collateral under a secured borrowing arrangement with the Federal Reserve as of March 31, 2023. See Note 7 – Borrowing Arrangements for additional information regarding the FHLB and Federal Reserve secured lines of credit.

Loans Held for Sale

At March 31, 2023 and December 31, 2022, the Company had loans held for sale, consisting of SBA 7(a) loans totaling $577 thousand and $9.0 million, respectively. The Company accounts for loans held for sale at the lower of carrying value or fair value. At March 31, 2023 and December 31, 2022, the fair value of loans held for sale totaled $629 thousand and $9.6 million, respectively.

23

Credit Quality Indicators

The Company categorizes loans using risk ratings based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. Larger, non-homogeneous loans such as CRE and C&I loans are analyzed individually for risk rating assessment. For purposes of risk classification, 1-4 Family Residential loans for investment purposes are evaluated with CRE loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

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

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

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

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

Loss - Loans classified as loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

24

The risk category of loans by class of loans and origination year as of March 31, 2023 follows:

	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Revolving Loans Amortized Cost Basis Converted to Term During the Period
(dollars in thousands)	2023		2022		2021		2020		2019		Prior						Total
March 31, 2023
Construction and land development
Pass	$	184	$	113,866	$	125,814	$	12,339	$	1,720	$	1,070	$	1,003	$	—	$	255,996
Special mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		100		—		—		100
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total construction and land development	184		113,866		125,814		12,339		1,720		1,170		1,003		—		256,096
Real estate - other:
1-4 family residential
Pass	20,536		46,544		20,374		8,059		5,161		17,293		35,105		—