What changed in this filing

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Item 1. Business

2025-02-28 compared with 2024-02-23 · 91 added, 74 removed, 377 unchanged (30% of the section changed)

5 unchanged sentences

Information on our website should not be considered a part of this Annual Report on Form 10-K.

The Company provides a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through seven branch offices, the Internet, and its mobile banking application.

The Bank expects to open a full service branch in Downtown San Francisco in the second half of 2024.

The Company provides a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through eight branch offices.

The Bank opened a full service branch in Downtown San Francisco in September 2024.

The Bank’s deposits are insured in whole or in part by the FDIC.

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We aim to consistently deliver value that meets or exceeds expectations of our shareholders, customers, employees, business partners, and community.

We refer to our mission as “purpose-driven and integrity-centered banking.” As of December 31, 2023, we had total assets of $3.6 billion, total loans held for investment, net of allowance for credit losses, of $3.0 billion, and total deposits of $3.0 billion.

We refer to our mission as “purpose-driven and integrity-centered banking.” At December 31, 2024, we had total assets of $4.1 billion, total loans held for investment of $3.5 billion, and total deposits of $3.6 billion.

In May 2021, the Company completed its IPO, in connection with which the Company terminated its status as a Subchapter S corporation as of May 5, 2021 and became a taxable C Corporation.

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The Company, through the Bank, provides financial services to customers who are predominately small and middle-market businesses, professionals, and individuals primarily in the Northern California region.

Our primary loan products are commercial real estate loans, commercial loans, commercial land and construction loans, and farmland loans.

Our primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts.

Our primary loan products are commercial real estate loans, land development loans, construction loans, and operating lines of credit and our primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts.

Our principal geographic market is the Roseville/Sacramento/Rancho Cordova/Elk Grove area (the “Greater Sacramento Area”).

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We believe that our market growth confirms the quality of the purpose-driven and integrity-centered banking that we strive to deliver to our customers.

During 2023, we hired eight business development officers and two relationship managers as part of our expansion into the San Francisco Bay Area.

We expect to open a full service branch in Downtown San Francisco in the second half of 2024.

During 2024, we continued our expansion into the San Francisco Bay Area, including the opening of a full service branch in Downtown San Francisco in September 2024.

We hired eight business development officers, four relationship managers, three loan officers, one relationship specialist, one treasury solutions specialist, and one branch manager during 2024 as part of our expansion.

Our Products and Services

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This diversity helps reduce our exposure to adverse economic events that affect any single market or industry.

Commercial land and construction loans :

As of December 31, 2024, we had $115.2 million in commercial land and construction loans, representing 3.26% of total loans before deferred fees.

We make loans to established builders to construct residential properties, loans to developers of commercial real estate investment properties and residential developments, and, to a lesser extent, loans to individual clients for construction of single-family homes in our market.

On rare occasions, we also make loans for the acquisition of undeveloped land subject to heightened underwriting requirements.

Construction loans are typically disbursed as construction progresses and carry either fixed or variable interest rates generally based on the borrowers’ ability to repay the loans from the cash flow of their businesses.

The terms of our commercial land and construction loans vary depending on factors such as the type and size of the development and the financial strength of the borrower/guarantor.

Loans are typically structured with an interest-only construction period and mature at the completion of construction.

Residential real estate and construction loans :

As of December 31, 2024, we had $37.3 million in residential real estate and construction loans, representing 1.06% of total loans before deferred fees.

Residential real estate loans are underwritten based upon income, credit history, and collateral.

To monitor and manage residential loan risk, policies and procedures are developed and modified, as needed.

We believe that this activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.

Underwriting standards for home loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

Farmland loans :

As of December 31, 2024, we had $47.2 million in farmland loans, representing 1.34% of total loans before deferred fees.

We are a strong agricultural lender, with both lines of credit and term loans.

Farmland loans are generally made to producers and processors of crops and livestock.

Repayment is primarily from the sale of an agricultural product or service.

Farmland loans are secured by real property and are susceptible to changes in market demand for specific commodities.

This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles, as well as adverse weather conditions.

Commercial loans :

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As of December 31, 2024, our total commercial SBA portfolio held for investment was $42.8 million, representing 1.21% of total loans before deferred fees.

In 2023, we sold 143 SBA loans with government-guaranteed portions totaling $36.5 million.

In 2024, we sold 56 SBA 7(a) loans with government-guaranteed portions totaling approximately $18.3 million.

We participate in the SBA 7(a) program in order to meet the needs of our small business community as well as customers nationwide.

As an approved participant in the SBA Preferred Lender Program, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders.

Pursuant to the Consolidated Appropriations Act, 2021 (the “Consolidated Appropriations Act”), the SBA guaranteed 90% of the principal amount of each qualifying SBA loan originated under the SBA’s 7(a) loan program through October 1, 2021.

The SBA presently guarantees 75% to 90% of the principal amount of qualifying loans originated under the 7(a) loan program.

The guarantee is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender.

As such, prudent underwriting and closing processes are essential to effective utilization of the 7(a) program.

As such, prudent underwriting and closing processes are

essential to effective utilization of the 7(a) program.

We typically sell in the secondary market the SBA-guaranteed portion of the SBA loans we originate.

Commercial land and construction loans :

As of December 31, 2023, we had $78.4 million in commercial land and construction loans, representing 2.53% of total loans before deferred fees.

On rare occasions, we also make loans for the acquisition of undeveloped land subject to heightened underwriting requirements.

The terms of our commercial land and construction loans vary depending on factors such as the type and size of the development and the financial strength of the borrower/guarantor.

Loans are typically structured with an interest-only construction period and mature at the completion of construction.

Farmland loans :

As of December 31, 2023, we had $51.7 million in farmland loans, representing 1.67% of total loans before deferred fees.

We are a strong agricultural lender, with both lines of credit and term loans.

Farmland loans are generally made to producers and processors of crops and livestock.

Repayment is primarily from the sale of an agricultural product or service.

Farmland loans are secured by real property and are susceptible to changes in market demand for specific commodities.

Residential real estate and construction loans :

As of December 31, 2023, we had $41.3 million in residential real estate and construction loans, representing 1.34% of total loans before deferred fees.

Residential real estate loans are underwritten based upon income, credit history, and collateral.

To monitor and manage residential loan risk, policies and procedures are developed and modified, as needed.

We believe that this activity, coupled with relatively small loan amounts that are

spread across many individual borrowers, minimizes risk.

Consumer and other loans :

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As of December 31, 2024, approximately 57.66% of our real estate loans measured by dollar amount were secured by collateral located in California, a majority of which is in Northern California.

Additionally, we have a high concentration of real estate related loans, which represented approximately 92.30% of our loan portfolio at December 31, 2023.

Additionally, we have a high concentration of real estate related loans, which represented approximately 86.41% of total loans before deferred fees at December 31, 2024.

Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, or a decline in real estate values in our primary market in particular, could have an adverse impact on the collectability of these loans.

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Representing 97.30% of our total liabilities as of December 31, 2024, deposits are our primary source of funding for our business operations.

As of December 31, 2023, we held total deposits of $3.0 billion, including $0.8 billion in non-interest-bearing deposits.

As of December 31, 2024, we held total deposits of $3.6 billion, including $922.6 million in non-interest-bearing deposits.

We offer a complete array of deposit products for small and medium-sized businesses, professionals, and individuals, including a variety of checking and savings accounts, time deposits, and money market accounts.

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We emphasize obtaining deposit relationships at loan origination.

We provide a high level of customer

service to our depositors.

We have invested in personnel, business and compliance processes, and technology that enable us to acquire, and efficiently and effectively serve, a wide array of business deposit accounts, while continuing to provide the level of customer service for which we are known.

We provide a high level of customer service to our depositors.

We have invested in personnel, business and compliance processes, and technology that enable us

to acquire, and efficiently and effectively serve, a wide array of business deposit accounts, while continuing to provide the level of customer service for which we are known.

As of December 31, 2024, our 49 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.8 billion, or 50.35% of our total deposits.

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Our profitability depends in large part upon our continued ability to successfully compete with these institutions for lending opportunities, deposit funds, financial products, bankers, and potential acquisition targets.

We conduct business through seven branches in our key market of Northern California.

We expect to open a full service branch in Downtown San Francisco in the second half of 2024.

We conduct business through eight branches in our key market of Northern California.

We opened a full service branch in Downtown San Francisco in September 2024.

Many other commercial and community banks, savings institutions, credit unions, and other financial institutions maintain a physical presence in our primary market area, and some maintain only a virtual presence.

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As of June 30, 2024, total market deposits in the Sacramento-Roseville-Folsom MSA were $92.2 billion, of which $75.4 billion, or approximately 81.77%, is held by five money center banks across 181 branches.

We are the 44th largest insured depository institution in California by deposits as of June 30, 2023.

We are the 43rd largest insured depository institution in California by deposits as of June 30, 2024.

Information Technology Systems

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Among other factors, as an emerging growth company:

• we may present only two years of audited financial statements and discuss only our results of operations for two years in “Management’s Discussion and Analysis of Financial Condition and Results of Operations;”

• we may discuss our results of operations for only two years in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” provided that we reference disclosure where the third year of our results of operations may be found;

• we are exempt from the requirement to provide an opinion from our auditors on the design and operating effectiveness of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”);

• we may choose not to comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and our audited financial statements;

• we are permitted to provide less extensive disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we are not required to include a compensation discussion and analysis and other disclosures regarding our executive compensation in this Annual Report on Form 10-K;

• we are permitted to provide less extensive disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and with which emerging growth companies may comply, which means we are not required to include a compensation discussion and analysis and other disclosures regarding our executive compensation in this Annual Report on Form 10-K;

• we are not required to hold nonbinding advisory votes on executive compensation or golden parachute arrangements.

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Additionally, we equip customers with technology tools designed to reduce their carbon footprint by reducing in-branch customer visits.

We have taken steps designed to help reduce our own carbon footprint by utilizing e-signatures to conduct business to reduce paper consumption and encouraging our employees to work remotely, where possible.

We have taken steps designed to help reduce our own carbon footprint by utilizing e-signatures to conduct business to reduce paper consumption, occupying sustainable facilities when possible, and encouraging our employees to work remotely, where possible.

We recognize that reducing the effects of climate change and helping to drive the transformation to a lower carbon environment are ongoing efforts, and plan to continually seek out opportunities that can positively impact the effect that climate change has on the environment.

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Diversity, Equity, and Inclusion (“DE&I”) is essential in our workplace.

We have a fully engaged Senior Vice President, Chief Operations Officer and Chief DE&I Officer who leads our DE&I efforts.

We have a fully engaged Executive Vice President, Chief Operating Officer who leads our DE&I efforts.

Our Human Resources department is focused on our commitment to DE&I through hiring practices and employee training.

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Federal and state banking laws impose a comprehensive system of supervision, examination, regulation, and enforcement on the operations of insured banks and their holding companies.

As a result, our growth, earnings performance, and operations may be affected by the requirements of federal and state statutes and by the regulations and policies of various

bank regulatory agencies, including the DFPI, the FDIC, the Federal Reserve, and the CFPB.

Supervision and regulation of banks, their holding companies, and affiliates is intended primarily for the protection of depositors and customers, the Deposit Insurance Fund

(the “DIF”) of the FDIC, and the U.S.

banking and financial system, rather than holders of our capital stock.

As a result, our growth, earnings performance, and operations may be affected by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the DFPI, the FDIC, the Federal Reserve, and the CFPB.

Furthermore, tax laws administered by the IRS and state taxing authorities, accounting rules developed by the FASB, securities laws administered by the SEC and state securities authorities, anti-money laundering laws enforced by the Treasury Department, and SBA regulations with respect to small business loans, have an impact on our business.

These statutes, regulations, and policies are continually under the review of the United States Congress and state legislatures, as well as federal and state regulatory agencies, and the nature and extent of future legislative, regulatory, or other developments affecting financial institutions are impossible to predict with any certainty.

Supervision and regulation of banks, their holding companies, and affiliates is intended primarily for the protection of depositors and customers, the Deposit Insurance Fund (the “DIF”) of the FDIC, and the U.S.

banking and financial system, rather than holders of our capital stock.

Any change in the statutes, regulations or regulatory policies applicable to us, including changes in their interpretation, expectations or implementation, could have a material effect on our business and operations.

To this end, due to the recent issuance of certain executive orders by the President of the United States, it may not be clear for a period of time as to what the priorities of the three prudential banking agencies, the OCC, Federal Reserve, and FDIC, may be with respect to their respective supervisory and enforcement matters for banks and bank holding companies during the current administration.

For example, one executive order requires independent agencies, including the Federal Reserve and FDIC, to submit to the White House Office of Management and Budget (“OMB”) major orders proposed by these agencies for OMB’s review.

OMB would also write “performance standards and management objectives” to the heads of independent agencies, and review and adjust their budgets, including the Federal Reserve (excluding with respect to its monetary policy function) and the FDIC.

As a result, it may take longer for the prudential banking agencies to establish their supervisory and enforcement priorities and develop and adopt new rules and regulations, or make changes to existing rules and regulations.

Another executive order requires agency heads to determine whether ongoing enforcement of any regulations identified in their regulatory review is compliant with law and policy of the current administration.

This executive order also provides that to preserve resources and ensure lawful enforcement, agency heads, in consultation with the Director of the OMB, shall, on a case-by-case basis and as appropriate and consistent with applicable law, then direct the termination of all such enforcement proceedings that do not comply with the Constitution, laws, or the policy of the current administration.

It is unclear what impact these orders will have on the supervisory and enforcement activities of the OCC, Federal Reserve, and FDIC.

The following is a summary of material elements of the regulatory and supervisory framework applicable to us and the Bank.

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Provisions of the FDI Act known as the Bank Merger Act impose similar approval standards for an insured depository institution to merge with another insured depository institution or a non-insured institution.

On September 17, 2024, the FDIC finalized changes to its Statement of Policy on Bank Merger Transactions (the “Policy Statement”), which outlines factors that the FDIC will consider when evaluating a proposed bank merger transaction.

Also on September 17, 2024, the United States Department of Justice (the “DOJ”) withdrew its 1995 Bank Merger Guidelines and announced that it will instead evaluate the competitive impact of bank mergers using its 2023 Merger Guidelines that the DOJ applies to mergers in all industries.

Compared to the 1995 Bank Merger Guidelines, the 2023 Merger Guidelines set forth more stringent concentration limits and add several largely qualitative bases on which the DOJ may challenge a merger.

While the effect of these changes for particular transactions remains unclear, both the Policy Statement and the change in the DOJ’s bank merger antitrust policy may make it more difficult and/or costly for us to obtain regulatory approval for an acquisition or otherwise result in more onerous conditions to obtain approval for an acquisition.

The BHC Act, as amended by the interstate banking provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Riegle-Neal Act”), permits us to acquire a bank located in any other state, regardless of state law to the contrary, subject to certain deposit percentage, aging requirements, and other restrictions.

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The Federal Reserve and the FDIC, the primary federal regulators of the Company and Bank, respectively, have substantially similar generally applicable risk-based capital ratio and leverage ratio requirements.

Historically, as a bank holding company with less than $3.0 billion in total consolidated assets and that met certain other criteria, we had been operating under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts bank holding companies with assets of less than $3.0 billion that are not engaged in significant nonbanking activities, do not conduct significant off-balance sheet activities, and do not have a material amount of debt or equity securities registered with the SEC from the Federal Reserve’s generally applicable risk-based capital ratio and leverage ratio requirements.

Because the Company’s total consolidated assets exceeded the $3.0 billion threshold as of September 30, 2022, the Company is no longer subject to this policy statement and its capital adequacy is evaluated relative to the Federal Reserve’s generally applicable capital requirements.

A bank holding company that crosses the $3.0 billion total consolidated assets threshold as of June 30 of a particular year is no longer permitted to file reports as a small holding company beginning the following March.

The Company’s total consolidated assets were in excess of $3.0 billion as of June 30, 2023.

Accordingly, beginning in March 2024, the Company will cease filing financial reports with the Federal Reserve as though it were a small holding company.

Under the generally applicable capital requirements of the Federal Reserve and the FDIC, the Company and the Bank are required to meet a common equity Tier 1 capital to risk-weighted assets ratio of at least 7.00% (a minimum of 4.50% plus a capital conservation buffer of 2.50%), a Tier 1 capital to risk-weighted assets ratio of at least 8.50% (a minimum of 6.00% plus a capital conservation buffer of 2.50%), a total capital to risk-weighted assets ratio of at least 10.50% (a minimum of 8.00% plus a capital conservation buffer of 2.50%), and a Tier 1 leverage ratio of at least 4.00%.

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For purposes of calculating the numerator of the capital ratios, capital, at both the holding company and bank levels, is classified in one of three tiers depending on the “quality” and loss-absorbing features of the capital instrument.

Common equity Tier 1 capital

is predominantly comprised of common stock instruments (including related surplus) and retained earnings, net of treasury stock, and after making necessary capital deductions and adjustments.

Common equity Tier 1 capital is predominantly comprised of common stock instruments (including related surplus) and retained earnings, net of treasury stock, and after making necessary capital deductions and adjustments.

Tier 1 capital is comprised of common equity Tier 1 capital and additional Tier 1 capital, which includes non-cumulative perpetual preferred stock and similar instruments meeting specified eligibility criteria (including related surplus).

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At December 31, 2024, the Bank exceeded its minimum capital requirements with common equity Tier 1 capital, Tier 1 capital, and total capital equal to 12.61%, 12.61%, and 13.59% of its total risk-weighted assets, respectively, and a Tier 1 leverage ratio of 11.50%.

As a result, the Bank was “well-capitalized” for prompt corrective action purposes based on the ratios and guidelines described below.

As a result, the Bank was “well-capitalized” for prompt corrective action purposes based on the ratios and guidelines described above.

Payment of Dividends and Stock Repurchases

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By making these provisions applicable to state non-member banks, the FDI Act and FDIC regulations impose these restrictions on the Bank’s purchases or sales of assets from or to insiders of the Bank and the Company.

In general, extensions of credit to insiders:

(i) may not exceed certain dollar limitations;

(ii) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties;

and (iii) must not involve more than the normal risk of repayment or present other unfavorable features.

Additionally, California law imposes insider lending limits that are similar to the restrictions of the Federal Reserve’s Regulation O.

Sections 23A and 23B of the Federal Reserve Act, which the FDI Act makes applicable to a state non-member bank like ours in the same manner and to the same extent as if it were a member bank, establish parameters for an insured bank to conduct “covered transactions” with its affiliates, generally:

(i) limiting the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount not greater than 10% of the bank’s capital stock and surplus, and limiting the aggregate of all such transactions with all affiliates to an amount not greater than 20% of the bank’s capital stock and surplus and (ii) requiring that all such transactions be on terms substantially the same, or at least as favorable, to the bank or subsidiary as those that would be provided to a non-affiliate.

and (ii) requiring that all such transactions be on terms substantially the same, or at least as favorable, to the bank or subsidiary as those that would be provided to a non-affiliate.

In addition, an insured bank’s loans to affiliates generally must be fully collateralized.

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The commercial real estate guidance provides that further supervisory analysis of an institution’s commercial real estate loan concentrations is warranted when its concentrations exceed either:

(i) total reported loans for construction, land development, and other land of 100% or more of a bank’s total risk-based capital or (ii) total reported loans secured by multifamily and non-farm non-residential properties and loans for construction, land development, and other land of 300% or more of a bank’s total risk-based capital, where the outstanding balance of the institution’s commercial real estate portfolio has also increased by 50% or more during the prior 36 months.

(i) total reported loans for construction, land development, and other land of 100% or more of a bank’s total risk-based capital;

or (ii) total reported loans secured by multifamily and non-farm non-residential properties and loans for construction, land development, and other land of 300% or more of a bank’s total risk-based capital, where the outstanding balance of the institution’s commercial real estate portfolio has also increased by 50% or more during the prior 36 months.

We have exposures to loans secured by commercial real estate due to the nature of our market and the loan needs of both our retail and commercial customers.

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The privacy provisions of these laws may affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

On October 22, 2024, the CFPB released a final rule to implement Section 1033 of the Dodd-Frank Act.

Under the final rule, financial institutions are required, upon request, to make available to a consumer or third party authorized by the consumer certain information the Bank has concerning a consumer financial product or service covered by the rule, such as a credit card or a deposit account.

In issuing this rule, the CFPB said that the rule will move the U.S.

closer to an “open banking” system that will allow consumers to switch banks or other providers more easily.

The final rule also requires, among other things, covered data providers, such as the Bank, to establish a developer interface that satisfies certain performance and data security specifications through which the data provider can receive requests for, and provide, specific types of data covered by the rule in electronic, usable form to authorized third parties directly or through data aggregators.

Under the final rule, the Bank will be prohibited from charging fees for maintaining the developer interface or providing access to such data.

The Bank may also act as an authorized third party to request and access covered data under the final rule from other financial institutions that are covered data providers.

The final rule places data security, authorization, and other obligations on those authorized third parties, including limitations on secondary uses of the data received.

Industry organizations have challenged the final rule in court and the litigation is ongoing.

If the challenge is not successful, as a data provider, the Bank must comply with the rule beginning April 1, 2028.

We are monitoring the status of the litigation and evaluating the impact of this rule.

Under California law, the Bank may open branch offices throughout California with the prior approval of the DFPI.

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The Dodd-Frank Act increased the minimum reserve ratio requirement for the DIF to 1.35% of total estimated insured deposits or the comparable percentage of the deposit assessment base.

Since the outbreak of the COVID-19 pandemic, the amount of total estimated insured deposits has grown very rapidly while the funds in the DIF grew at a normal rate.

As a result, the DIF reserve ratio fell to below the statutory minimum of 1.35%.

The DIF reserve ratio fell to below the statutory minimum of 1.35% during the COVID-19 pandemic.

The FDIC adopted a restoration plan in September 2020, which it amended in June 2022, to restore the DIF reserve ratio to at least 1.35% by September 30, 2028.

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In addition, the FDI Act provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution, including those of its parent bank holding company.

On July 30, 2024, the FDIC issued a proposed rule that would revise the FDIC’s regulations governing the classification and treatment of brokered deposits.

The proposal would require many insured depository institutions to classify a greater amount of their deposits obtained with the involvement of third parties as brokered deposits.

An increase in the amount of brokered deposits on an insured depository institution’s balance sheet could, among other consequences, increase the institution’s deposit insurance assessment costs.

Community Reinvestment Act (“CRA”)

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This option enables a bank to structure its CRA goals and objectives to address the needs of its community consistent with its business strategy, operational focus, capacity, and constraints.

The Bank operated under a CRA Strategic Plan approved by the FDIC for the years 2019-2021 and received a rating of “Satisfactory” at its most recent CRA evaluation, dated as of May 3, 2021.

On October 24, 2023, the federal banking agencies issued a final rule amending the CRA regulations, substantially revising how they evaluate an insured depository institution’s record of satisfying the credit needs of its entire communities, including low- and moderate-income individuals and neighborhoods.

Under the final rule, it may be more challenging and costly for the Bank to achieve an “Outstanding” or “Satisfactory” CRA rating.

Banks with assets of at least $2 billion, including the Bank, will be considered large banks and their retail lending, retail services and products, community development financing, and community development services will be subject to periodic evaluation.

The Bank operated under a CRA Strategic Plan approved by the FDIC for the years 2019 to 2021 and received a rating of “Satisfactory” at its most recent CRA evaluation, dated as of July 22, 2024 and covering activities from 2021 through the evaluation date.

On October 24, 2023, the federal banking agencies issued a final rule amending the CRA regulations, to substantially revise how they evaluate an insured depository institution’s record of satisfying the credit needs of its entire communities, including low- and moderate-income individuals and neighborhoods.

Under the final rule, banks with assets of at least $2 billion, including the Bank, are considered large banks and their retail lending, retail services and products, community development financing, and community development services will be subject to periodic evaluation.

Depending on a large bank’s geographic distribution of lending, the evaluation of retail lending may include assessment areas in which the bank extends loans but does not operate any deposit-taking facilities, in addition to assessment areas in which the bank has deposit-taking facilities.

Additionally, while the final rule retains the option for a large bank to adopt a strategic plan, a strategic plan will generally be required to cover the same tests and geographies as the revised framework applies to other large banks.

Most of the final rule’s new requirements are applicable beginning January 1, 2026.

The remaining new requirements, including data reporting requirements, are applicable on January 1, 2027.

Additionally, while the final rule retains the option for a large bank to adopt a strategic plan, a strategic plan under the final rule will generally be required to cover the same tests and geographies as the revised framework applies to other large banks.

Most of the final rule’s new requirements were scheduled to become applicable beginning January 1, 2026.

The remaining new requirements, including data reporting requirements, were scheduled to become applicable on January 1, 2027.

However, industry organizations have challenged the final rule in court, and on March 29, 2024, the United States District Court for the Northern District of Texas granted an injunction and stay of the final rule.

The final outcome of such challenge is uncertain.

FHLB Membership

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Banking organizations are required to notify their primary federal regulator of significant computer security incidents within 36 hours of determining that such an incident has occurred.

In addition, the SEC recently enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on annual basis material information regarding their cybersecurity risk management, strategy, and governance.

Limitations on Incentive Compensation

In April 2016, the Federal Reserve and other federal financial agencies re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1.0 billion or more in total consolidated assets.

For institutions with at least $1.0 billion but less than $50.0 billion in total consolidated assets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based compensation.

Such institutions would be prohibited from entering into incentive compensation arrangements that encourage inappropriate risks by the institution:

(i) by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits or (ii) that could lead to material financial loss to the institution.

The proposal would also impose certain governance and recordkeeping requirements on institutions covered by the rule.

Whether or when the agencies will finalize the proposal is uncertain.

In addition, the SEC enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on annual basis material information regarding their cybersecurity risk management, strategy, and governance.

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 1. Business