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Item 7. Management’s Discussion and Analysis

2025-03-14 compared with 2024-03-14 · 243 added, 186 removed, 660 unchanged (39% of the section changed)

17 unchanged sentences

Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable and supportable forecasts of economic conditions to differ from the conditions that existed during the historical period included in the development of PD and LGD.

Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which increased to 5.1% at December 31, 2023, from 4.1% at December 31, 2022.

Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which increased to 5.5% at December 31, 2024, from 5.1% a t December 31, 2023.

The ACL model incorporates a one-year forecast.

For periods beyond the forecast horizon, the economic factors revert to historical averages on a straight-line basis over a one-year period.

For periods beyond the forecast horizon, the economic factors revert to historical averages on a straight-line basis over a one-year period through the remaining lives of the loans.

We performed a sensitivity analysis as of December 31, 2024, and estimated that a 100 basis point change (e.g., 4.5% to 5.5%) in the forecasted unemployment rates over the next four quarters would result in about a 6% change to our allowance for credit losses on loans.

This impact does not consider changes to other assumptions for either the quantitative factors, such as probability of default, loss given default, loan mix or cash flows, prepayment/curtailment rates, and individually analyzed loans, or qualitative factors as discussed in Note 1 - Summary of Significant Accounting Policies.

Additionally, b ecause current economic conditions and forecasts can change, as future events are inherently difficult to predict, the estimated credit losses on loans and unfunded commitments could change significantly.

While we believe we use the best information available to determine the allowance for credit losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance.

For information regarding critical estimates related to our allowance for credit losses methodology, the provision for credit losses, and risks to asset quality and lending activity, see ITEM 1A - Risk Factors, the Allowance for Credit Losses section in ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations,

Fair Value Measurements

18 unchanged sentences

Additionally, various events or circumstances could have a negative effect on the estimated fair value of a reporting unit, such as declines in business performance, increases in credit losses, and deterioration in economic or market conditions, which may result in a material impairment charge to earnings in future periods.

In 2023, the Company assessed goodwill for impairment by performing a quantitative assessment, which encompassed an income approach and a market approach.

In both 2024 and 2023, the Company assessed goodwill for impairment by performing a quantitative assessment, which encompassed an income approach and two market approaches (peer metrics and recent transactions).

The income approach considered such factors as the estimated future cash flows of our reporting unit based on internal long-term forecasts, assumptions concerning potential synergies and other economic benefits, and a discount rate used to present value such cash flows to determine the fair value.

4 unchanged sentences

Judgment is applied in determining the weightings between the income approach and the market approach in determining fair value.

The results of this assessment indicated the value of goodwill was not impaired as of our annual impairment testing date of November 30, 2023, and there were no changes to our assessment through December 31, 2023.

The results of these assessments indicated the value of goodwill was not impaired as of our annual impairment testing dates of November 30, 2024 and 2023, and there were no changes to our assessment through December 31, 2024.

RESULTS OF OPERATIONS

13 unchanged sentences

Book value per share $ 27.06 $ 27.17

Tangible book value per share

$ 22.37 $ 22.44

Asset quality ratios:

22 unchanged sentences

81,818 79,481 75,269

Net (loss) income

(8,409) 19,895 46,586

Net income per common share:

Net (loss) income per common share:

Basic $ (0.52) $ 1.24 $ 2.93

5 unchanged sentences

Cost of deposits 1.41 % 0.74 % 0.06 %

Cost of funds

1.42 % 1.02 % 0.07 %

Efficiency ratio 111.62 % 73.76 % 54.39 %

2 unchanged sentences

Cash dividend payout ratio on common stock 1

80.65 % 33.45 % 40.52 %

NM 80.65 % 33.45 %

Cash dividends per common share $ 1.00 $ 1.00 $ 0.98

2 unchanged sentences

Executive Summary

Annual earnings were $19.9 million in 2023, compared to $46.6 million in 2022.

Diluted earnings were $1.24 per share in 2023, compared to $2.92 per share in 2022.

Results for 2023 were significantly impacted by industry disruptions and the aftermath of a few regional bank failures in the first half of the year, causing some deposit run-off and a shift to higher cost funding sources, coupled with the FOMC's monetary policy resulting in rapid interest rate increases impacting both our funding costs and lending activity.

However, we took several actions to reposition our balance sheet and improve our net interest margin, and, although there can be no assurance given, believe we laid the foundation for improved earnings in 2024, as discussed below.

Our annual loss was $8.4 million in 2024, compared to earnings of $19.9 million in 2023.

Diluted loss was $(0.52) per share in 2024, compared to earnings of $1.24 per share in 2023.

Results for 2024 were significantly impacted by our strategic balance sheet repositioning which included the sale of $325.2 million in low yielding investment securities at a $32.5 million pre-tax loss, the payoff of high cost borrowings and the purchase and origination of higher yielding loans and securities.

In addition, we took actions to reduce operating expenses in 2024 which positively impacted our results later in the year.

Though the percentage of non-accrual loans increased from the prior year, we continue to proactively identify and manage credit risk within the loan portfolio and there were some improvements in credit quality trends during the fourth quarter.

We believe the strength of our balance sheet, higher level of productivity that we are seeing from our banking teams, and positive trends in our net interest margin and operating leverage are key factors that should help mitigate any unforeseen credit quality deterioration that may arise and drive further improvement in our financial performance in the year ahead.

The following are highlights of operating and financial performance for the year ended December 31, 2024:

• Over the course of 2023, balance sheet restructuring activities included the sale of $214.5 million in lower yielding available-for-sale securities, offsetting some losses with a gain from the sale of our remaining investment in Visa Inc.

Class B restricted common stock, for a net pretax loss of $5.9 million.

At the time, the sales proceeds were largely directed toward new loan originations and repayment of borrowings, which is expected to accelerate the improvement of the net interest margin over the coming quarters through higher interest earned on cash and loans and lower borrowing costs.

In addition, the Bank entered into various interest rate swap agreements with notional values totaling $101.8 million to hedge balance sheet interest rate sensitivity and protect certain of our fixed-rate available-for-sale securities against changes in fair value related to changes in the benchmark interest rate.

These interest rate swaps were accretive to net interest income in 2023.

• Loan balances of $2.074 billion as of December 31, 2023, were down slightly from $2.093 billion as of December 31, 2022.

Loan originations were $144.1 million in 2023, compared to $240.2 million in 2022.

Excluding paycheck protection loans ("PPP loans"), payoffs were $107.1 million in 2023, compared to $258.5 million in 2022.

PPP loan payoffs during 2023 and 2022 were $2.7 million and $107.7 million, respectively.

In addition, loan amortization from scheduled repayments, partially offset by the net utilization of lines of credit, reduced loans by $53.1 million in 2023.

• Our loan portfolio continues to perform well, with classified loans at 1.56% of total loans as of December 31, 2023, compared to 1.34% as of December 31, 2022.

Non-owner-occupied commercial real estate loans made up $23.7 million, or 73%, of total classified loans as of December 31, 2023.

Non-accrual loans were 0.39% and 0.12% of total loans as of December 31, 2023 and 2022, respectively.

• Loans increased $9.5 million during the year ended December 31, 2024, to $2.083 billion, compared to $2.074 billion at December 31, 2023.

Excluding a $35.7 million loan pool purchase of residential real estate loans, loan originations totaled $152.6 million for the year ended December 31, 2024, compared to $144.1 million for the prior year.

• Classified loans made up 2.17% of total loans as of December 31, 2024, compared to 1.56% as of December 31, 2023.

The Bank continues to proactively identify and manage credit risk within the loan portfolio.

• A $2.6 million provision for credit losses on loans in 2023 brought the allowance for credit losses to 1.21% of total loans, compared to 1.10% as of December 31, 2022 .

The increase was due primarily to adjustments to qualitative risk factors and specific allowances on loans with unique credit risk characteristics not indicative of pooled loans, as discussed below.

This compares to a $63 thousand provision reversal in 2022.

• Non-accrual loans totaled $33.9 million, or 1.63% of the loan portfolio, compared to $8.0 million, or 0.39%, as of December 31, 2024 and 2023, respectively primarily due to three relationships designated as non-accrual in the second and third quarters of 2024.

Of the total non-accrual loans as of December 31, 2024, approximately 56% were paying as agreed, 91% were real estate secured, and all are being closely managed and monitored.

• A $5.6 million provision for credit losses on loans in 2024 including a $5.2 million specific reserve taken on a commercial real estate loan as a result of declining collateral values brought the allowance for credit losses to 1.47% of total loans, compared to 1.21% as of December 31, 2023 .

• Total deposits decreased by $70.1 million to $3.220 billion as of December 31, 2024, from $3.290 billion as of December 31, 2023.

As discussed further below, the decline was primarily due to a combination of outflows related to planned business acti vities, some balance declines associated with loan relationships exited during the year, and a number of customers moving cash into alternative investments to capture higher returns, a portion of which was directed to our own wealth management group.

In addition, we had s ome deposit run-off as a result of regional bank failures and industry disruptions in the first half of the year.

Non-interest bearing deposits c ontinue to remain strong compared to our peers and made up 43.5% of total deposits as of December 31, 2024, compared to 43.8% as of December 31, 2023.

1 unchanged sentence

Estimated uninsured and/or uncollateralized deposits comprised 29% of total deposits as of December 31, 2024.

• Total borrowings decreased by $86.0 million to $26.0 million, compared to $112.0 million at December 31, 2022, as part of the strategic balance sheet restructuring in 2023.

Net available funding sources of $2.0 billion provided 213% coverage of uninsured deposits as of December 31, 2023.

• The tax-equivalent net interest margin was 2.63% for 2023, compared to 3.11% for 2022.

The decrease was primarily attributed to higher deposit and borrowing costs, partially offset by higher yields on loans and investment securities.

• At December 31, 2024, the Bank had no outstanding borrowings compared to $26.0 million at December 31, 2023, as a result of our strategic balance sheet restructuring in 2023 and 2024.

Total available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and total available borrowing capacity, were $1.849 billion, or 57% of total deposits and 197% of estimated uninsured and/or uncollateralized deposits as of December 31, 2024.

• The tax-equivalent net interest margin was 2.63% for 2024, consistent with 2023.

Higher yields on loans increased the margin by 31 basis points, while higher deposit costs resulted in a 64 basis points reduction in the margin.

In addition, the year's balance sheet restructuring activities affected the borrowings, interest-bearing cash and investments factors with impacts of 27, 13 and (7) basis points, respectively.

• All capital ratios were above well-capitalized regulatory requirements.

1 unchanged sentence

Tangible common equity to tangible assets ("TCE ratio") increased to 9.93% as of December 31, 2024, from 9.73% as of December 31, 2023.

While we do not intend to sell our held-to-maturity securities, the TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.80% as of December 31, 2023, compared to 6.15% as of December 31, 2022 (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures ).

While we do not intend to sell our held-to-maturity securities, the TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.85% as of December 31, 2024 (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures ).

• The Board of Directors declared a cash dividend of $0.25 per share on January 23, 2025, which was the 79 th consecutive quarterly dividend paid by Bancorp.

37 unchanged sentences

4,628 241 5.13 % 221,623 11,562 5.15 % 2,295 91 3.90 %

Subordinated debenture 1, 5

— — — % — — — % 534 1,361 251.54 %

Total interest-bearing liabilities 1,842,643 46,613 2.53 % 1,948,434 36,733 1.89 % 1,844,338 2,549 0.14 %

14 unchanged sentences

The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield.

5 2021 interest on the subordinated debenture included $1.3 million in accelerated discount accretion from the early redemption of our last subordinated debenture on March 15, 2021.

6 Average balances and rate consider $13.9 million in FHLB borrowings acquired from AMRB that were redeemed on August 25, 2021.

5 Net loan origination (costs) fees included in interest income totaled $(1.6) million, $(1.3) million, and $1.1 million in 2024, 2023, and 2022, respectively.

3 unchanged sentences

Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances.

Mix variances are attributable to the change in yields or rates multiplied by the change in average balances.

Mix variances are attributable to the change in yields or rates multiplied by the change in average balances including one day more in the year ended 2024.

2024 compared to 2023

11 unchanged sentences

Borrowings and other obligations (11,321) (50) 50 (11,321) 8,697 29 2,745 11,471

Subordinated debenture — — — — (1,361) — (1,361)

Total interest-bearing liabilities (7,341) 15,143 2,078 9,880 8,637 22,855 2,692 34,184

3 unchanged sentences

Net interest income totaled $94.7 million in 2024, compared to $102.8 million in 2023.

The $8.1 million decrease from the prior year was primarily due to higher deposit costs of $21.2 million, partially offset by the reduction of $11.3 million in borrowing costs.

The tax-equivalent net interest margin was 2.63% for 2024, consistent with 2023.

Higher yields on loans increased the margin by 31 basis points, while higher deposit costs resulted in a 64 basis points reduction in the margin.

In addition, the year's balance sheet restructuring activities affected the borrowings, interest-bearing cash and investments factors with impacts of 27, 13 and (7) basis points, respectively.

2023 Compared to 2022

Net interest income totaled $102.8 million in 2023, compared to $127.5 million in 2022.

The $24.7 million decrease from the prior year was primarily due to higher funding costs of $34.2 million, partially offset by higher average yields on earning assets.

5 unchanged sentences

Average investment securities decreased $42.9 million, while their average yield increased 25 basis points, improving the margin by 14 basis points.

2022 Compared to 2021

Net interest income totaled $127.5 million in 2022, compared to $105.0 million in 2021.

The $22.5 million increase from the prior year was primarily due to higher balances in the investment and commercial real estate loan portfolios, which added $18.4 million and $6.1 million, respectively, to net interest income.

Additionally, 2022 incorporated a full year of net interest income from the acquired earning assets of AMRB, compared to five months in 2021.

Average interest-bearing liabilities increased $376.6 million, while the average cost dropped nine basis points, largely due to the extinguishment of subordinated debt that generated $1.4 million of interest expense in 2021.

The tax-equivalent net interest margin decreased six basis points to 3.11% in 2022, from 3.17% in 2021, as the proportion of average investment securities to average total interest-earning assets grew from 26% in 2021 to 44% in 2022, and fee income from PPP loans declined.

Market Interest Rates

2 unchanged sentences

The federal funds rate range remained between 0.0% and 0.25% through the beginning of 2022, putting downward pressure on our asset yields and net interest margin.

Beginning in March 2022, the FOMC began successive increases to the federal funds rate due to evolving inflation risks, international political unrest, and oil and other supply chain disruptions.

As a result of seven rate adjustments during 2022, the federal funds target rate range increased to between 4.25% and 4.50% at year-end 2022 and our net interest margin increased gradually over the course of the year.

In 2023, on each of February 1 st , March 22 nd , May 3 rd , and July 26 th , the FOMC increased the target rate by 25 basis points to a range of 5.25% to 5.50%.

Rising interest rates and first quarter disruptions in the banking industry resulted in rapid increases in the cost of funds through rising deposit costs and increased borrowings, putting pressure on the net interest margin.

Additional rate increases are not widely anticipated in 2024, as Federal Reserve policymakers continue to monitor inflation and economic developments throughout the year.

The FOMC began increasing rates in March 2022, totaling seven rate increases in 2022 and four

additional rate increases in 2023, and ended the year of 2023 at a federal funds target rate range between 5.25% and 5.50%.

Rising interest rates resulted in rapid increases in the cost of funds through rising deposit costs and increased average borrowings, putting pressure on our net interest margin.

Because market interest rates remained high for longer than many market participants anticipated, during the second quarter of 2024, we sold securities with relatively low yields and redeployed the proceeds to pay off borrowings, invest in higher yielding loans and securities, and position the balance sheet for future acquisitions of similar assets.

Primarily due to declining inflation, the Federal Reserve lowered the target for the federal funds rate by 100 basis points, to a range of 4.25% to 4.50% in the later months of 2024.

At the January 2025 meeting, the FOMC left rates unchanged and signaled slower than originally anticipated rate cuts are likely in 2025.

Management and the Board are continuously monitoring and analyzing the impact of market rates on the Company's financial condition and results of operations to enhance performance, safety and soundness and returns to shareholders.

Quantitative and Qualitative Disclosure about Market Risk for further information.

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Provision for (reversal of) credit losses on loans $ 5,550 $ 2,575 $ (63)

The provision in 2024 was due primarily to increases in qualitative risk factors to account for continued uncertainty about inflation and recession risks, and from continued negative trends in adversely graded loans and/or collateral values on our non-owner occupied commercial real estate office and multi-family real estate portfolios including $5.2 million taken in the second quarter due to an increased individual reserve for one non-owner occupied commercial real estate loan totaling $16.7 million that, although current, had experienced a deterioration in the collateral value and, therefore, a material increase in the loan-to-value.

The provision in 2023 was due primarily to adjustments to qualitative risk factors from continued uncertainty about inflation and recession risks, the potential impact of rapidly increasing interest rates and other external factors on both our non-owner-occupied commercial real estate and construction portfolios, loan and collateral concentration risks in our construction and commercial real estate portfolios, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values for our non-owner occupied commercial real estate office and multi-family real estate portfolios.

The allowance for individually evaluated loans increased for a small number of loans that exhibited credit risk characteristics over time that were not indicative of pooled loans in the CECL calculation, including collateral valuation issues caused by persistently higher than average vacancy rates and estimated credit losses from other adjustments to discounted expected cash flows or estimated loss rates.

Other elements of the provision included a $406 thousand loss on the note sale of an owner-occupied agricultural commercial real estate loan to an unrelated third party that was charged to the allowance concurrent with the sale and a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rate , partially offset by the impact of a $45.0 million overall decrease in loans.

The provision reversal in 2022 was largely due to a $55.4 million decrease in applicable loan balances (excludes the $107.7 million decrease in PPP loans for which there was no allowance) and improvements in Moody's Analytics' Baseline Forecast of California unemployment rates since December 31, 2021, which decreased the quantitative "modeled" allowance for credit losses.

These decreas es were partially offset by adjustments to qualitative risk factors to account for the ongoing deterioration in the economic outlook that management believed was not captured in the quantitative portion of the allowance calculation.

The provision reversal in 2021 was primarily due to continued improvements in Moody's Analytics' Baseline Forecast of California unemployment rates at the time, and adjustments to qualitative risk factors due to a decline in the volume of loans downgraded to substandard classification, fewer delinquencies, and the elimination of an allowance related to a commercial real estate loan that had been individually analyzed for potential credit losses in the previous periods and paid off in 2021.

These reversals were partially offset by an increase in the allowance for credit losses related to qualitative risk factor adjustments for recent changes in executive leadership and senior lending positions, and integration of loans from the merger with AMRB.

Non-interest Income

7 unchanged sentences

Service charges on deposit accounts 2,164 2,083 2,007 81 3.9 % 76 3.8 %

Debit card interchange fees, net 1,831 2,051 1,812 (220) (10.7) % 239 13.2 %

Earnings on bank-owned life insurance, net 1,714 1,802 1,229 (88) (4.9) % 573 46.6 %

Debit card interchange fees, net 1,701 1,831 2,051 (130) (7.1) % (220) (10.7) %

Dividends on Federal Home Loan Bank stock 1,478 1,265 1,056 213 16.8 % 209 19.8 %

5 unchanged sentences

2024 Compared to 2023

Non-interest income showed a loss of $21.4 million for 2024, a $26.3 million decrease from income of $5.0 million for 2023.

The decrease in 2024 was primarily due to the $32.5 million net loss on the sale of available-for-sale investment securities in the second quarter related to our balance sheet restructuring.

Excluding losses on sale of securities in both years, non-interest income increased by $299 thousand, which included a $275 thousand year-over-year increase in wealth management and trust services income due to increased assets.

2023 Compared to 2022

Non-interest income totaled $5.0 million in 2023, a $5.9 million decrease from $10.9 million in 2022.

2 unchanged sentences

Decreases were partially offset by $573 thousand higher benefit payments from and earnings on bank-owned life insurance, and $209 thousand from increases in dividends on Federal Home Loan Bank stock.

2022 Compared to 2021

Non-interest income totaled $10.9 million in 2022, a $773 thousand increase from $10.1 million in 2021.

The increase was primarily due to higher fees on deposit balances held in off-balance sheet deposit networks, contributing $504 thousand in additional income, $414 thousand more service charges on deposit accounts, a $366 thousand increase in debit card and merchant interchange fees, $296 thousand higher FHLB dividends, and a combination of smaller increases.

Increases were partially offset by a $965 thousand reduction in bank-owned life insurance, as the prior year included $1.1 million in benefits collected on insurance policies.

Additionally, 2022 incorporated a full year of non-interest income from the AMRB acquisition, compared to five months in 2021.

Non-interest Expense

7 unchanged sentences

Occupancy and equipment 8,242 8,306 7,823 (64) (0.8) % 483 6.2 %

Data processing 4,057 4,649 5,139 (592) (12.7) % (490) (9.5) %

Professional services 5,129 3,598 3,299 1,531 42.6 % 299 9.1 %

Data processing 4,222 4,057 4,649 165 4.1 % (592) (12.7) %

Deposit network fees 3,526 2,783 258 743 26.7 % 2,525 978.7 %

Depreciation and amortization 2,098 1,840 1,740 258 14.0 % 100 5.7 %

Federal Deposit Insurance Corporation insurance 1,863 1,878 1,179 (15) (0.8) % 699 59.3 %

Information technology 1,686 1,569 2,197 117 7.5 % (628) (28.6) %

Amortization of core deposit intangible 1,350 1,489 1,135 (139) (9.3) % 354 31.2 %

Depreciation and amortization 1,466 2,098 1,840 (632) (30.1) % 258 14.0 %

Directors' expense 1,213 1,212 1,107 1 0.1 % 105 9.5 %

Amortization of core deposit intangible 975 1,350 1,489 (375) (27.8) % (139) (9.3) %

Charitable contributions 677 717 709 (40) (5.6) % 8 1.1 %

Other real estate owned 48 359 5 (311) (86.6) % 354 NM

Other real estate owned — 48 359 (48) (100.0) % (311) (86.6) %

Other non-interest expense:

3 unchanged sentences

Total non-interest expense $ 81,818 $ 79,481 $ 75,269 $ 2,337 2.9 % $ 4,212 5.6 %

NM - not meaningful

2024 Compared to 2023

1 unchanged sentence

Significant fluctuations were as follows:

• Professional services expenses increased by $1.5 million, mainly from the legal resolution of a Private Attorneys General Act / putative class action lawsuit of $615 thousand and $354 thousand in the new loan operating system platform and implementation costs.

• Salaries and employee benefits increased by $1.2 million primarily due to severance and salaries paid in relation to the reduction in force in the second quarter, the filling of open positions and the hiring of several key employees and officers, higher insurance costs, and lower deferred loan origination costs.

Increases to salaries and employee benefits were partially offset by a decrease in profit sharing expense mainly from accrual adjustments, a decrease in accrued incentive bonuses, and a decrease in stock-based compensation from changes in award structure and estimated performance award payouts.

• Deposit network fees increased by $743 thousand due both to rate and volume.

• Depreciation and amortization expenses decreased by $632 thousand, mainly from the acceleration of lease-related costs for four branch closures in 2023.

• Amortization of the core deposit intangible decreased by $375 thousand as the Bank of Alameda amortization completed in 2023.

2023 Compared to 2022

Non-interest expenses increased $4.2 million to $79.5 million in 2023 from $75.3 million in 2022.

Significant fluctuations were as follows:

• Deposit network fees increased by $2.5 million as customers sought additional FDIC insurance protection through reciprocal deposit networks.

6 unchanged sentences

• Other real estate owned expenses decreased by $311 thousand due to the write-down in 2022 of the property that was then sold in the third quarter of 2023.

2022 Compared to 2021

Non-interest expenses increased $2.6 million to $75.3 million in 2022 from $72.6 million in 2021.

Significant fluctuations were as follows:

• Information technology expenses increased by $647 thousand due to investments in software and equipment during 2022.

• Total o ccupancy expenses, including depreciation and amortization, increased $626 thousand resulting primarily from merger growth and $212 thousand in accelerated costs related to planned branch closures.

• Other increases in 2022 included core deposit intangible amortization and FDIC insurance, largely attributable to the 2021 AMRB acquisition, a $345 thousand valuation adjustment in other real estate owned expense, and a $490 thousand increase in employment recruiting costs included in other expense.

• Salaries and employee benefits expense remained relatively flat year-over-year.

In 2022, increases in staffing and profit sharing expenses, a reduction in deferred loan origination costs, a nd a combination of smaller items were largely offset by a decrease in supplemental executive retirement plan expense from an adjustment to the discount rate, and a decline in merger-related expenses, as shown in Note 18, Merger, in ITEM 8 of this report.

• Professional services expense decreased by $1.7 million from the prior year, primarily due to higher merger-related costs and additional consulting expenses associated with PPP loan forgiveness application processing in 2021, partially offset by higher audit and accounting fees in 2022.

• Data processing expenses decreased by $490 thousand primarily due to merger-related expenses in 2021, partially offset by an increase in processing costs in 2022 associated with higher volumes for the larger bank.

Provision for Income Taxes

1 unchanged sentence

Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, bank-owned life insurance ("BOLI"), low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards).

The provision for income taxes totaled $6.1 million at an effective tax rate of 23.6% in 2023, compared to $16.9 million at an effective tax rate of 26.6% in 2022 and $11.7 million at an effective tax rate of 26.0% in 2021.

The decrease in the provision for income taxes in 2023, as compared to 2022, reflected lower pre-tax income.

The 300 basis point decrease in the effective tax rate in 2023, as compared to 2022, was primarily due to a larger proportional effect of permanent tax differences on lower pretax income and higher tax-exempt BOLI income.

The benefit for income taxes totaled $5.4 million at an effective tax rate of 39.2% in 2024, compared to the provision of $6.1 million at an effective tax rate of 23.6% in 2023 and $16.9 million at an effective tax rate of 26.6% in 2022.

The reversal in the provision for income taxes in 2024, reflected the impact of the net loss before taxes in the year of $13.8 million compared to net income before taxes of $26.0 million in 2023.

The 15.6% increase in the effective tax rate in 2024, as compared to 2023, was due to the treatment of certain permanent differences while in a loss position, such as in 2024.

The 300 basis point decrease from 2022 to 2023 was primarily due to a larger proportional effect of permanent tax differences on lower pretax income and higher tax-exempt BOLI income.

This decrease was partially offset by a reduction in the tax-exempt interest exclusion (due to a larger IRC Section 291(e) interest expense disallowance), compared to 2022.

The 60 basis point increase in the effective tax rate in 2022 as compared to 2021 was primarily due to lower BOLI income and the smaller proportion of tax-exempt loan and investment securities interest income to pre-tax income in 2022, partially offset by the non-deductible merger expenses and executive compensation in 2021.

We file a consolidated return in the U.S.

23 unchanged sentences

Held-to-maturity:

MBS/CMOs issued by U.S.

CMBS/MBS/CMOs issued by U.S.

government agencies

$ 10,895 2.47 % $ 194,427 3.29 % $ 353,313 2.10 % $ 86,060 2.07 % $ 644,695 $ 560,812 2.46 %

SBA-backed securities — — 1,513 3.16 — — — — 1,513 1,452 3.16

6 unchanged sentences

Available-for-sale:

MBS/CMOs issued by U.S.

CMBS/MBS/CMOs issued by U.S.

government agencies

100,397 4.09 131,820 3.29 54,857 2.90 8,718 2.36 295,792 279,838 3.46

SBA-backed securities — — 331 2.20 — — — — 331 308 2.20

5 unchanged sentences

Corporate bonds — — 6,000 1.15 — — — — 6,000 5,649 1.15

Asset-backed securities — — — — — — — — — — —

Total available-for-sale 100,397 4.09 156,994 2.91 113,140 2.40 48,761 2.66 419,292 387,534 3.02

13 unchanged sentences

Held-to-maturity:

MBS/CMOs issued by U.S.

CMBS/MBS/CMOs issued by U.S.

government agencies

$ — — % $ 139,418 3.41 % $ 462,010 2.23 % $ 83,757 2.1 % $ 685,185 $ 605,934 2.45 %

SBA-backed securities — — 1,853 3.17 — — — — 1,853 1,763 3.17

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Available-for-sale:

MBS/CMOs issued by U.S.

CMBS/MBS/CMOs issued by U.S.

government agencies

677 1.93 261,575 2.05 116,365 2.24 13,720 3.05 392,337 352,472 2.14

SBA-backed securities — — 21,126 2.45 — — — — 21,126 19,471 2.45

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The amortized cost of our investment securities portfolio decreased by $240.2 million, or 15.6%, in 2024.

In 2023, we sold $214.5 million in available-for-sale securities with an average yield of 2.35%, as part of a balance sheet restructuring, including $75.2 million in debentures of government sponsored agencies, $69.6 million in agency collateralized mortgage obligations ("CMOs"), $25.0 million in corporate bonds, $15.4 million in SBA-backed securities, $14.6 million in agency mortgage-backed securities ("MBSs"), $13.2 million in obligations of state and political subdivisions, and $1.4 million in asset-backed securities.

Offset by a $2.8 million pre-tax gain from the sale of our remaining holdings of Visa Inc.

Class B restricted common stock, these sales of available-for-sale securities generated a net pre-tax loss of $5.9 million.

In 2022, we transferred $357.5 million of available-for-sale securities to held-to-maturity.

Refer to Note 2, Investment Securities, to the Consolidated Financial Statements in ITEM 8 of this report for further information.

In 2024, we sold $325.2 million in available-for-sale securities with an average yield of 1.94%, as part of a balance sheet restructuring, including $190.5 million in agency collateralized mortgage obligations ("CMOs"), $65.0 million in debentures of government sponsored agencies, $39.8 million in agency mortgage-backed securities ("MBSs"), $18.4 million in SBA-backed securities, $6.0 million in corporate bonds and $5.5 million in obligations of state and political subdivisions.

The sales of available-for-sale securities generated a net pre-tax loss of $32.5 million.

We consider agency debentures and CMOs issued by U.S.

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federal government.

The debentures, CMOs and MBS issued by U.S.

The debentures, CMBSs, CMOs and MBS issued by U.S.

government sponsored agencies, SBA-backed securities and U.S.

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Total loans, net of allowance for credit losses $ 2,052,600 $ 2,048,548

Loans decreased by $18.8 million in 2023, or 1%, to $2.074 billion as of December 31, 2023, from $2.093 billion as of December 31, 2022.

Loan originations were $144.1 million in 2023, compared to $240.2 million in 2022.

Loans increased by $9.5 million in 2024, or 0.5%, to $2.083 billion as of December 31, 2024, from $2.074 billion as of December 31, 2023.

Organic loan originations were $152.6 million in 2024, compared to $144.1 million in 2023.

Loan purchases totaled $35.7 million in 2024, compared to none in the prior year.

Non-PPP payoffs were $120.2 million in 2024, compared to $107.1 million in 2023.

PPP loan payoffs during 2023 and 2022 were $2.5 million and $107.7 million, respectively.

The majority of the payoffs were a result of asset sales, cash payoffs, project completions, and purposeful relationship exits, all of which showcased the Bank's focus on credit quality and proactive engagement with customers.

It should be noted that only a minimal amount was refinanced.

In additio n, $53.1 million of loan amortization from scheduled repayments, net of credit line utilization, contributed to the decline in loan balances for 2023.

The originations and payoffs noted above, combined with utilization on lines of credit and amortization on existing loans, resulted in a net decrease for this period.

Non-PPP payoffs as a percentage of beginning-of-year loan balances were 5.1% in 2023 and 11.5% in 2022.

Approxim ately 90%, of total loans were secured by real estate as of both December 31, 2023 and 2022.

For additional information on loan concentration risk, see ITEM 1A, Risk Factors.

PPP loan payoffs during 2024 and 2023 were $443 thousand and $2.7 million, respectively.

The majority of the payoffs were a result of cash payoffs and asset sales.

In addition, $57.4 million of loan amortization from scheduled repayments, net of credit line utilization, contributed to the change in loan balances for 2024.

The originations and payoffs noted above, combined with utilization on lines of credit and amortization on existing loans, resulted in a net increase for this period.

Approximately 89% and 90% of total loans were secured by real estate as of December 31, 2024 and 2023, respectively.

For additional inf ormation on loan concentration risk, see ITEM 1A, Risk Factors.

The following table summarizes our commercial real estate loan concentrations by the county in which the property was located as of December 31, 2024 and 2023.

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San Francisco 211,254 13 186,803 12

Napa 178,685 11.5 186,477 12.1

Alameda 187,526 12 156,934 10

Napa 170,492 11 178,685 12

Sacramento 131,857 8 125,483 8

Contra Costa 75,522 5 72,580 5

Placer 40,733 2.6 28,928 1.9

Solano 52,294 3 39,247 2

Placer 41,951 2 40,733 3

San Mateo 41,275 2 35,420 2

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Total $ 1,595,558 100 % $ 1,552,566 100 %

Commercial real estate loans increased by $5.8 million in 2023, compared to a $34.6 million decrease in 2022.

Commercial real estate loans increased by $43.0 million in 2024, compared to a $5.8 million increase in 2023.

The increase in 2024 was comprised of the $54.2 million increase within the non-owner occupied loan portfolio, partially offset by the $11.2 million decrease within the owner-occupied loan portfolio.

The decrease in 2022 wa s primarily due to cash paydowns as part of ongoing deleveraging, refinancing, and asset sales.

Of the commercial real estate loans as of December 31, 2024, 80% were non-owner occupied and 20% were owner-occupied.

Almost the entire commercial real estate loan portfolio is comprised of term loans for which the primary source of repayment is either the cash flow from leasing activities of the real estate collateral or the operating cash flow of the owner occupant.

Non-owner and Owner Occupied Real Estate Loans by Type

Percent of Non-owner Occupied Commercial Real Estate Loans

Percent of Owner-Occupied Commercial Real Estate Loans

County December 31, 2024

December 31, 2023

December 31, 2024

December 31, 2023

27 % 31 % 19 % 19 %

Warehouse & industrial

Total 100 % 100 % 100 % 100 %

Commercial Real Estate Loans by Type and County

Non-owner occupied

Owner-occupied

Warehouse & industrial

County Dec 31, 2024 Dec 31,

Sacramento 20 % 20 % 18 % 18 % 9 % 4 % 6 % 7 % 19 % 19 %

Marin 16 17 12 11 10 15 25 24 22 26

Napa 16 16 4 3 5 6 9 10 21 27

Sonoma 15 15 28 27 11 15 17 17 8 9

Alameda 6 6 16 18 20 14 6 6 6 8

San Francisco 3 3 12 11 30 26 18 19 18 2

Other bay area

16 14 4 4 5 5 15 13 — 4

Other 8 9 6 8 10 15 4 4 6 5

Total 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %

With the heightened market concern about non-owner-occupied commercial real estate, and in particular the office sector, we are providing the following additional information:

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In particular, our office commercial real estate portfolio in the City of San Francisco represents just 3% of our total loan portfolio and 5% of our total non-owner-occupied commercial real estate portfolio.

As of the last measurement period, the weighted average loan-to-value and weighted average debt-service coverage ratios for the entire non-owner-occupied office portfolio were 59% and 1.60x, respectively.

For the thirteen non-owner-occupied office loans in the City of San Francisco, the weighted average loan-to-value and debt-service coverage ratios were 67% and 1.00x, respectively.

As of December 31, 2023, we conducted a review of the refinance risk in our non-owner-occupied commercial real estate portfolio and evaluated 70 loans with commitments of $1.0 million or more, totaling $184.1 million, that mature or reprice in 2024 and 2025.

As a result of our assessment, we determined that the refinance risk on these loans is manageable, with weighted average debt

service coverage ratios ranging from 1.52 to 1.69 times for maturities and from 1.20 to 1.59 times for repricings based on current market interest rates.

As such, we believe the non-owner-occupied commercial real estate portfolio is well-positioned to absorb a higher rate environment at the loans' repricing or maturity dates.

The following table shows an analysis of construction loans by type and county as of December 31, 2024 and 2023.

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San Francisco $ 24,706 66.8 % $ 43,341 43.7 %

Contra Costa 4,682 12.7 1,184 1.2

Marin 2,995 8.1 4,542 4.6

2,326 6.3 — —

2,261 6.1 — —

Alameda — — 32,808 33.1

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San Mateo — — 4,851 4.9

Marin 4,542 4.6 7,784 6.8

Other — 1,066 1.0

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Cons truction loans decreased by $62.2 million in 2024, compared to a decrease of $15.2 million in 2023.

T he decrease in 2023 was primarily du e to $22.2 million in payoffs and $16.9 million in conversions to commercial real estate financing.

These decreases were partially offset by $24.5 million in advances on existing construction loans.

The decrease in 2024 was primarily due to $44.5 million in conversions to commercial real estate financing following completion of construction and $15.4 million in payoffs.

These decreases were partially offset by $11.5 million in new loans and $4.9 million in advances on existing construction loans.

The decrease in 2023 was primarily due to $22.2 million in payoffs and $16.9 million in conversions to commercial real estate financing.

These decreases were partially offset by $37.5 million advanced on existing construction loans and $7.2 million in new financing.

Undisbursed construction loan commitments at December 31, 2023 and 2022 we re $13.9 million an d $43.2 million, respectively.

These decreases were partially offset by $24.5 million in advances on existing construction loans.

Undisbursed construction loan commitments at December 31, 2024 and 2023 were $8.3 million and $13.9 million, respectively.

The following table presents the amortized costs and maturity distribution of our loans by portfolio class as of December 31, 2024 based on their contractual maturity dates.

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The ratio of the allowance for credit losses to total loans was 1.47% at December 31, 2024 and 1.21% at December 31, 2023.

The $2.2 million increase in the allowance for credit losses on loans in 2023 was largely due to adj ustments to qualitative risk factors from continued uncertainty about inflation and recession risks, the potential impact of rapidly increasing interest rates and other external factors, loan and collateral concentration risk, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values.

Other elements of the increased allowance included a $406 thousand loss on the note sale of a loan that was charged to the allowance concurrent with the sale, contributing to the $386 thousand in net charge-offs and the impact of a slight increase in Moody's Analytics' Baseline Forecast of California's unemployment rate, partially offset by the effect of a $45.0 million overall decrease in loans.

The $5.5 million increase in the allowance for credit losses on loans in 2024 was largely due to the specific allowance increase of $6.7 million.

This was mainly due to the increased reserve of $5.2 million for one non-owner occupied commercial real estate loan totaling $16.7 million that, although current, had experienced a deterioration in the collateral value and, therefore, a material increase in the loan-to-value.

For further information, refer to the Provision for Credit Losses section above, and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report.

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Provision for (reversal of) credit losses 5,550 2,575 (63)

Initial allowance for PCD loans — — 1,505

Loans charged-off:

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Commercial and industrial 21 29 22

Commercial, non-owner occupied 8 — —

Construction — 25 33

Home equity — — 50

Installment and other consumer 4 1 —

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Other real estate owned $ — $ —

Repossessed personal properties 1 —

Total non-performing assets $ 33,882 $ 7,992

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Non-Accrual Loans

Non-accrual loans increased by $5.6 million in 2023, primarily due to $7.6 million in loans designated as non-accrual in 2023 comprised mostly of commercial and industrial and non-owner occupied commercial real estate loans.

These increases were partially offset by the payoff of two owner-occupied commercial real estate loans totaling $1.3 million and four home equity loans totaling $421 thousand, the upgrade of a $223 thousand home equity loan and a $91 thousand personal loan to accrual status, as a result of improved financial condition and performance, and $83 thousand in paydowns.

Over 66% of the non-accrual loans as of December 31, 2023 were well-secured by either commercial or residential real estate.

Non-accrual loans decreased by $5.9 million in 2022, primarily due to the payoff of two owner-occupied commercial real estate loans totaling $7.1 million and paydowns and the upgrade of a $695 thousand loan to accrual status as a result of improved financial condition and performance, partially offset by $2.0 million in loans designated as non-accrual in 2022.

Non-accrual loans increased by $25.9 million in 2024, primarily due to three relationships designated as non-accrual in the second and third quarters.

One non-owner occupied commercial real estate loan was due to material declines in collateral value, as mentioned in earlier sections.

Another was a commercial relationship which had a material paydown in the fourth quarter of 2024.

The third relationship was another non-owner occupied commercial real estate loan whose renewal negotiations remain ongoing.

This property became 100% occupied with a conforming debt service coverage in the fourth quarter.

Approximately 91% of the non-accrual loans as of December 31, 2024 were well-secured by either commercial or residential real estate.

Non-accrual loans in 2023 were comprised of mostly of commercial and industrial and non-owner occupied commercial real estate loans.

Over 66% of the non-accrual loans as of December 31, 2023 were well-secured by either commercial or residential real estate.

Criticized and Classified Loans

Loans designated as special mention, which are not considered adversely classified, decreased by $26.3 million in 2024, primarily due to net downgrades of $2.6 million from the pass or watch category and downgrades of $25.0 million to substandard.

Of the downgrades to special mention, $15.3 million was attributed to one recently completed construction loan that will be marketed for sale or paid down to a conforming debt service level.

The remaining balance changes consisted of paydowns, payoffs and upgrades from substandard risk rating.

Loans designated as special mention, which are not considered adversely classified, increased by $75.0 million in 2023, primarily due to downgrades from the watch category to special mention.

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These increases were partially offset by $7.7 million in paydowns and payoffs, $6.0 million in downgrades from special mention to substandard, and $3.8 million in upgrades to a pass risk rating.

Loans designated as special mention decreased by $13.1 million in 2022, primarily due to $30.2 million in upgrades to a pass risk rating, $7.7 million in paydowns and payoffs, and $3.6 million in downgrades from special mention to substandard.

These decreases were partially offset by $27.8 million in downgrades from pass to special mention and $695 thousand in upgrades from substandard to special mention during 2022.

Of the $27.8 million in downgrades to special mention, $22.5 million (or 81%) was well-secured by commercial real estate, and the remaining $5.3 million commercial loans had strong support .

Loans classified as substandard increased by $4.2 million in 2023, primarily due to downgrades from special mention totaling $6.0 million and from pass totaling $3.7 million, partially offset by $4.5 million in paydowns and

payoffs and $939 thousand in upgrades to pass.

Loans classified as substandard increased by $12.8 million in 2024, primarily due to downgrades from special mention totaling $25.0 million and from pass totaling $2.7 million, partially offset by $11.9 million in paydowns and payoffs and $2.8 million in upgrades to pass or special mention.

Of the downgraded loans, $17.1 million (or 82%)

was secured by commercial real estate, $3.5 million was to commercial borrowers, and the remaining $222 thousand were personal loans.

Of the downgraded loans, $7.0 million (or 72%) was secured by commercial real estate, and the remaining $2.7 million was to commercial borrowers.

Loans classified as substandard decreased by $8.1 million in 2022, primarily due to $16.1 million in paydowns and payoffs and $871 thousand in upgrades to special mention or pass, partially offset by downgrades totaling $8.8 million.

Of the downgraded loans, $4.7 million (or 53%) was secured by commercial real estate, and $3.6 million (or 41%) was to commercial borrowers.

In addition, of the $16.1 million in paydowns and payoffs, $2.7 million was from loans downgraded in 2022.

Refer to Note 3 to the Consolidated Financial Statements in ITEM 8 of this report for an allocation of criticized and classified loans by loan portfolio class.

BOLI totaled $71.0 million as of December 31, 2024, compared to $68.1 million at December 31, 2023.

The $1.0 million increase was primarily due to earnings from the BOLI policies.

The $2.9 million increase was primarily due to the purchase of $1.2 million in new BOLI policies and earnings from the BOLI policies.

Interest receivable and other assets totaled $72.3 million and $74.9 million at December 31, 2024 and 2023, respectively.

The $4.9 million decrease was primarily due to an $8.8 million decrease in net deferred tax assets, as discussed below.

The $2.7 million decrease was primarily due to a $3.7 million decrease in net deferred tax assets, as discussed below.

Net deferred tax assets totaled $30.6 million and $34.3 million at December 31, 2024 and 2023, respectively.

Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to temporary differences such as allowances for credit losses and unfunded loan commitments, net operating loss carryforwards, and deferred compensation and salary continuation obligations.

The $8.8 million decrease in 2023 was primarily due to an $8.5 million decrease in deferred tax assets related to changes in unrealized losses on available-for-sale investment securities and an $803 thousand decrease in deferred tax assets related to state franchise tax.

These decreases in net deferred tax assets were partially offset by a $399 thousand decrease in deferred tax liabilities related to core deposit intangibles.

The $3.7 million decrease in 2024 was primarily due to an $8.4 million decrease in deferred tax assets related to changes in unrealized losses on available-for-sale investment securities.

The decreases in net deferred tax assets was partially offset by a $3.2 million increase in deferred tax assets related to net operating loss carryforwards and $1.6 million increase in the allowance for credit losses on loans and unfunded loan commitments.

Management believes deferred tax assets will be realizable due to our expectation that earnings will continue to be at a level adequate to realize such tax benefits.

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We held $16.7 million of FHLB stock recorded at cost in other assets at both December 31, 2024 and 2023.

We received $1.3 million, $1.0 million and $760 thousand in cash dividends in 2023, 2022 and 2021, respectively.

We received $1.5 million, $1.3 million and $1.0 million in cash dividends in 2024, 2023 and 2022, respectively.

For additional information, refer to Note 2 to the Consolidated Financial Statements in ITEM 8 of this report.

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Non-interest bearing deposits declined to 43.5% of total deposits at December 31, 2024, compared to 43.8% at December 31, 2023.

While we saw a decline in deposits overall in 2023, deposits were up $39.5 million since the events that led to the failure of a few regional banks at the end of the first quarter of 2023, and we continue to execute our business model without the utilization of brokered deposits.

In addition to the deposit run-off we experienced as a result of these bank failures, general market disruptions, and the FOMC's monetary policy of rapid interest rate increases, much of the decline, particularly in the fourth quarter, was due to a combination of outflows related to planned business acti vities.

Additionally, some balance declines were associated with loan relationships exited during the year, and we saw some customers move cash into alternative investments to capture higher returns, a portion of which was directed to our own wealth management group.

Given the nature of our customer base, our customers' daily operating balances can fluctuate significantly, which is a primary reason we maintain high levels of on-balance sheet and contingent liquidity.

Although we experienced growth and movement in both money market accounts and time deposits, all activity was a result of relationship pricing, the current rate environment, and customer behaviors, as opposed to offering CD specials or making blanket rate adjustments.

We continued our disciplined and focused approach to relationship management and customer outreach, adding over 5,000 new accounts in 2023.

Deposit outflows included transfers to investment accounts in our wealth management services team and other outflows that did not meet our disciplined pricing strategy given our strong liquidity position.

We continued our disciplined and focused approach to relationship management and customer outreach, adding approximately 4,700 new accounts in 2024.

As of December 31, 2024, 59% of deposit balances were held in business accounts, with average balances of $127 thousand per account.

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The largest depositor represented 1.3% of total deposits, and the combined four largest depositors represented 4.8% of total deposits.

Balances in the reciprocal deposit network program increased by $250.0 million during 2023 to $424.0 million as of December 31, 2023.

Costs associated with network deposits are recorded as non-interest expense and totaled $2.8 million, $258 thousand, and $26 thousand for the years ended December 31, 2023, 2022 and 2021, respectively.

Estimated uninsured and/or uncollateralized deposits decreased to 28% of total deposits as of December 31, 2023, compared to 39% as of December 31, 2022, due primarily to our customers' increased usage of the reciprocal deposit network program, as noted above.

Balances in the reciprocal deposit network program decreased by $19.3 million during 2024 to $404.7 million as of December 31, 2024.

Costs associated with network deposits are recorded as non-interest expense and totaled $3.5 million, $2.8 million, and $258 thousand for the years ended December 31, 2023, 2022 and 2021, respectively.

Estimated uninsured and/or uncollateralized deposits totaled 29% of total deposits as of December 31, 2024, compared to 28% as of December 31, 202 3.

Our liquidity policies require that compensating cash balances be held against concentrations over a certain level.

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Total $ 108,311 $ 58,311

As of December 31, 2023 and 2022, our borrowing capacity with the Federal Home Loan Bank ("FHLB") under secured lines of credit totaled $1.009 billion and $711.6 million, respectively.

The increase in our borrowing capacity at the FHLB resulted from pledging certain held-to-maturity securities to the Securities-Backed Credit Program in February 2023.

Our borrowing capacity with the Federal Reserve Bank of San Francisco ("FRBSF") under a secured line of credit and the Bank Term Funding Program ("BTFP"), which was new in 2023, totaled $334.2 million and $58.7 million as of December 31, 2023 and 2022, respectively.

In addition, as of December 31, 2023 and 2022

we had $135.0 million and $150.0 million, respectively, in unsecured lines of credit with correspondent banks to cover short-term borrowing needs.

As of December 31, 2023, the Bank had $26.0 million outstanding in short-term borrowings under the BTFP facility at an average rate of 4.83%, compared to $112.0 million in FHLB overnight borrowings as of December 31, 2022 at a rate of 4.65%.

Other correspondent bank lines of credit were not utilized as of December 31, 2023 or 2022.

Network Deposits

Our deposit portfolio includes deposits offered through the Promontory Interfinancial Network that are comprised of Certificate of Deposit Account Registry Service ® ("CDARS") balances included in time deposits and Insured Cash Sweep ® ("ICS") balances included in money market deposits.

In addition, we offer deposits through Reich & Tang Deposit Networks, LLC, comprised of Demand Deposit Marketplace SM ("DDM") balances.

Through these two networks we are able to offer our customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits.

When we place funds through CDARS, ICS and DDM, on behalf of a customer, we have the option of receiving matching deposits through the network's reciprocal deposit program, or placing deposits "one-way" for which we receive no matching deposits.

We consider reciprocal deposits to be in-market deposits, as distinguished from traditional out-of-market brokered deposits.

The following table shows the composition of our network deposits at December 31, 2024 and 2023.

(in thousands) December 31, 2024 December 31, 2023

CDARS $ 38,885 $ — $ 46,162 $ 2,164

ICS 240,661 — 245,577 —

DDM 125,153 — 132,276 —

Total network deposits $ 404,699 $ — $ 424,015 $ 2,164

1 Reciprocal deposits are on-balance-sheet while one-way deposits are off-balance-sheet.

As of December 31, 2024 and 2023, our borrowing capacity with the Federal Home Loan Bank ("FHLB") under secured lines of credit totaled $948.1 million and $1.009 billion, respectively.

The Bank had a line of credit through the Discount Window at the Federal Reserve Bank of San Francisco ("FRBSF") totaling $358.0 million as of December 31, 2024, secured by investment securities and residential loans.

As of December 31, 2023, the Bank had a line of credit through the Discount Window totaling $64.0 million, secured by residential loans, and a $270.2 million line under the Federal Reserve's temporary Bank Term Funding Program ("BTFP") based on the par values of pledged investment securities.

I n addition, as of December 31, 2024 and 2023 we had $125.0 million and $135.0 million, respectively, in unsecured lines of credit with correspondent banks to cover short-term borrowing needs.

As of December 31, 2024, the Bank had no outstanding borrowings, compared to $26.0 million outstanding in short-term borrowings under the BTFP facility at an average rate of 4.83% as of December 31, 2023.

Other bank lines of credit were not utilized as of December 31, 2024 or 2023.

For additional information, see Note 7, Borrowings and Other Obligations, in ITEM 8 of this report.

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At December 31, 2024 and 2023, our aggregate payment obligations under both plans totaled $6.0 million and $6.6 million, respectively, and was recorded in interest payable and other liabilities in the consolidated statements of condition.

Decreases in the deferred compensation plans in 2024 mainly resulted from increases in benefit payments to terminated employees.

We have entered into supplemental executive retirement plans ("SERPs") with a select group of executive officers, providing for certain retirement benefits at age 65 and reduced benefits upon early retirement.

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The SERPs are unfunded and non-qualified for tax purposes and subject to Title I of the Employee Retirement Income Security Act of 1974.

Decreases in both the deferred compensation plans and SERP liabilities in 2023 mainly resulted from increases in benefit payments to retired employees.

In addition, we increased the discount rate on the SERP payments to reflect market conditions, which reduced the present value of the SERP obligation.

For additional information, see Note 10 to the Consolidated Financial Statements in ITEM 8 of this report.

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For further discussion of bank capital requirements, refer to the SUPERVISION AND REGULATION section in ITEM 1 of this report.

Bancorp's total risk-based capital ratio increased to 16.89% at December 31, 2023, from 15.90% at December 31, 2022.

Bancorp's tangible common equity to tangible assets ("TCE ratio") increased to 9.73% at December 31, 2023, from 8.21% at December 31, 2022, primarily due to a decrease in unrealized losses on available-for-sale securities and a decrease in tangible assets.

Bancorp's TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.80% as of December 31, 2023, compared to 6.15% (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures ).

The Bank's total risk-based capital ratio increased to 16.62 % at December 31, 2023, from 15.73 % at December 31, 2022, primarily from net income and a decrease in risk-weighted assets, partially offset by $20.0 million in dividends to Bancorp to be used for cash dividends to shareholders and operating costs.

The total risk-based capital ratio for Bancorp was 16.54% at December 31, 2024, compared to 16.89% at December 31, 2023.

The reduction is primarily related to losses realized on securities sales in 2024.

Bancorp's tangible common equity to tangible assets ("TCE ratio") increased to 9.93% at December 31, 2024, from 9.73% at December 31, 2023, primarily due to due to the reduction in total assets .

Bancorp's TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.85% as of December 31, 2024, compared to 7.80% at December 31, 2023 (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures ).

The Bank's total risk-based capital ratio decreased to 16.13% at December 31, 2024, from 16.62% at December 31, 2023 .

Bancorp's share repurchase program and activity are discussed in detail in ITEM 5 and in Note 8 to the Consolidated Financial Statements in ITEM 8 of this report.

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Liquidity and Capital Resources

The goal of liquidity management is to provide adequate funds to meet loan demand and fund operating activities and deposit withdrawals.

We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds, as discussed in Note 7 to the Consolidated Financial Statement in ITEM 8 of this report.

Our Asset Liability Management Committee ("ALCO"), which is comprised of independent Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies.

The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals.

We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as seen in the table below and discussed in Note 7 to the Consolidated Financial Statements in ITEM 8 of this report.

Our Asset Liability Management Committee ("ALCO"), which is comprised of Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies.

The Bank has long-established minimum liquidity requirements that are regularly monitored using metrics and tools similar to those used by larger banks, such as the liquidity coverage ratio, and multi-scenario, long-horizon stress tests.

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Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs.

We also have relationships with third-party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash management strategy, as discussed in Note 6 to the Consolidated Financial Statement in ITEM 8 of this report.

Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and available borrowing capacity, totaled $1.967 billion, or 60% of total deposits, and 213% of estimated uninsured and/or uncollateralized deposits as of December 31, 2023.

The Federal Reserve's BTFP facility offers borrowing capacity based on the par value of securities pledged, making it less sensitive to changes in market rates.

Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and total available borrowing capacity, totaled $1.849 billion, or 57% of total deposits, and 197% of estimated uninsured and/or uncollateralized deposits as of December 31, 2024.

The following table details the components of our contingent liquidity sources as of December 31, 2024.

6 unchanged sentences

FHLB line of credit 948,127 $ — 948.127

FRB line of credit and BTFP facility

FRB line of credit

357,970 — 357.97

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Brokered deposits available through third-party networks are not included above.

We obtain funds from the repayment and maturity of loans, deposit inflows, investment security maturities, sales and paydowns, federal funds purchases, FHLB advances, other borrowings, and cash flow from operations.

Our primary uses of funds are the origination of loans, the purchase of investment securities, withdrawals of deposits, maturity of certificates of deposit, repayment of borrowings, dividends to common stockholders, and operating expenses.

We obtain funds from the repayment and maturity of loans, deposit inflows, investment securities sales, maturities and paydowns, federal funds purchases, FRBSF and FHLB advances, other borrowings, and cash flow from operations.

Although available as a liquidity source, we have not chosen to utilize brokered deposits.

Our primary uses of funds are the origination of loans, the purchase of investment securities and loans, withdrawals of deposits, maturities of certificates of deposit, repayment of borrowings, dividends to common stockholders, share repurchases and operating expenses.

Customer deposits are a significant component of our daily liquidity position.

The attraction and retention of deposits depends on the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength.

The attraction and retention of deposits depend upon the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength.

The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us.

Our cash and cash equivalents decreased by $15.0 million to $30.5 million at December 31, 2023, from $45.4 million at December 31, 2022.

Significant uses of liquidity during 2023 were $283.3 million in withdrawals of deposits, $86.0 million in repayments of short-term borrowings, and $16.1 million in cash dividends paid on common stock to our shareholders.

The most significant sources of liquidity during 2023 were proceeds from principal paydowns, maturities and sales of investment securities totaling $315.1 million, and proceeds from loans collected net of originations totaling $16.9 million.

In addition, $35.7 million in net cash was provided by operating activities.

Our cash and cash equivalents increased by $106.9 million to $137.3 million at December 31, 2024, from $30.5 million at December 31, 2023.

The most significant sources of liquidity during 2024 were proceeds from sales, principal paydowns, calls and maturities of investment securities totaling $370.4 million, and $28.4 million in net cash was provided by operating activities.

Significant uses of liquidity during 2024 were $163.8 million in investment securities purchased, $70.1 million in withdrawals of deposits, $26.0 million in repayments of short-term borrowings, and $9.7 million in purchased loan pool, loan originations, and unfunded loan commitment advances, net of principal collected.

Additionally other uses included $16.2 million in cash dividends paid on common stock to our shareholders, and $4.2 million in common stock repurchases.

Refer to the Consolidated Statement of Cash Flows in this Form 10-K for additional information on our sources and uses of liquidity.

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Over the next twelve months, $230.2 million of time deposits will mature.

We expect to replace these funds with new deposits or excess liquidity.

We expect that a high percentage of these funds will remain with the Bank either through renewals or shifts to other deposit products.

Any outflows can be absorbed by the Bank's excess liquidity.

We believe our emphasis on local deposits, combined with our immediately available funding sources, provides a very stable base for our liquidity needs.

We had outstanding borrowings under our credit facilities of $26.0 million and $112.0 million as of December 31, 2023 and 2022, respectively, as discussed in Note 7 to the Consolidated Financial Statements in ITEM 8 of this report.

We had no outstanding borrowings under our credit facilities as of December 31, 2024, and $26.0 million as of December 31, 2023, as discussed in Note 7 to the Consolidated Financial Statements in ITEM 8 of this report.

Because Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank.

Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period.

The primary uses of funds for Bancorp are shareholder dividends, ordinary operating expenses and stock repurchases.

Bancorp held $7.2 million in cash as of December 31, 2023 .

Manag ement anticipates that there will be sufficient earnings at the Bank to provide dividends to Bancorp to meet its funding requirements for the foreseeable future.

The Bank received approval from the State of California - Department of Financial Protection and Innovation on May 30, 2024, for a dividend of $19.0 million which was paid to Bancorp on June 24, 2024.

The primary uses of funds for Bancorp are shareholder dividends, share repurchases and ordinary operating expenses.

Bancorp held $10.3 million in cash as of December 31, 2024 , which is expected to cover cash needs into the second quarter of 2025 .

Statement Regarding Use of Non-GAAP Financial Measures

Financial results for 2022 and 2021 we re impacted by costs associated with our 2021 acquisition of American River Bankshares, for which non-GAAP financial measures are not repeated in this report.

For additional information regarding the impact of non-GAAP adjustments for 2022 and 2021 performance measures, refer to Form 10-K filed with the Securities and Exchange Commission (" SEC") on March 15, 2023.

Financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures.

Management believes that, given recent industry turmoil, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after-tax impact of unrealized losses on held-to-maturity securities provides useful supplemental information to investors because it reflects the level of capital remaining after a hypothetical liquidation of the entire securities portfolio.

Because there are limits to the usefulness of this measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the SEC, and not to rely on any single financial measure.

A reconciliation of the non-GAAP TCE ratio is presented below.

Management believes that, given industry turmoil that largely began in the first quarter of 2023, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after tax impact of unrealized losses on held-to-maturity securities provides useful supplemental information to investors because it reflects the level of capital remaining after a hypothetical liquidation of the entire securities portfolio.

In addition, management believes that providing selected financial measures excluding the loss on sale of securities discussed above is useful to investors as the strategic short-term loss taken for long-term profitability makes the operational performance difficult to compare to the prior period.

The year 2022 did not have a material loss on sale of securities and was therefore excluded below.

Because there are limits to the usefulness of this or any other non-GAAP measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the Securities and Exchange Commission, and not to rely on any single financial measure.

A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below.

Reconciliation of GAAP and Non-GAAP Financial Measures

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(89,171) (86,500)

Unrealized losses on HTM securities included in AOCI, net of tax 2

TCE, net of unrealized losses on HTM securities (non-GAAP) b $ 278,391 284,803

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(89,171) (86,500)

Unrealized losses on HTM securities included in AOCI, net of tax 2

Total tangible assets, net of unrealized losses on HTM securities (non-GAAP) d $ 3,544,319 $ 3,649,644

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Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP) b / d 7.85 % 7.80 %

1 Net unrealized losses on held-to-maturity securities as of December 31, 2023 and 2022 of $110.4 million and $127.0 million, respectively, as shown in Note 2, net of an estimated $32.6 million and $37.5 million, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%.

Tangible Book Value Per Share

Common shares outstanding

16,089 16,158

Book value per share

$ 27.06 $ 27.17

Tangible book value per share

$ 22.37 $ 22.44

1 Unrealized losses on held-to-maturity securities as of December 31, 2024 and December 31, 2023 of $126.6 million and $122.8 million, respectively, including the unrealized losses that resulted from the transfer of securities from AFS to HTM, net of an estimated $37.4million and $36.3 million, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%.

2 The remaining unrealized losses that resulted from the transfer of securities from AFS to HTM, net of an estimated $3.2 million and $3.7 million, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56% are added back as they are already included in AOCI.

(in thousands, except per share amounts;

Net (loss) income

December 31, 2024 December 31, 2023

Net (loss) income (GAAP)

$ (8,409) $ 19,895

Losses on sale of investment securities from portfolio repositioning 32,542 5,893

Related income tax benefit (9,619) (1,742)

Adjustments, net of taxes 22,923 4,151

Comparable net income (non-GAAP) $ 14,514 $ 24,046

Diluted (loss) earnings per share

Weighted average diluted shares 16,042 16,026

Diluted (loss) earnings per share (GAAP)

$ ( 0.52 ) $ 1.24

Comparable diluted earnings per share (non-GAAP) $ 0.90 $ 1.50

Return on average assets

Average assets $ 3,773,882 $ 4,077,707

Return on average assets (GAAP) (0.22) % 0.49 %

Comparable return on average assets (non-GAAP) 0.38 % 0.59 %

Return on average equity

Average stockholders' equity $ 435,070 $ 423,784

Return on average equity (GAAP) (1.93) % 4.69 %

Comparable return on average equity (non-GAAP) 3.34 % 5.67 %

Efficiency ratio

Non-interest expense $ 81,818 $ 79,481

Net interest income $ 94,660 $ 102,761

Non-interest income (GAAP) $ (21,360) $ 4,989

Losses on sale of investment securities from portfolio repositioning 32,542 5,893

Non-interest income (non-GAAP) $ 11,182 $ 10,882

Efficiency ratio (GAAP) 111.62 % 73.76 %

Comparable efficiency ratio (non-GAAP) 77.30 % 69.94 %

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis