What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2025-02-28 compared with 2024-02-23 · 221 added, 200 removed, 720 unchanged (37% of the section changed)

1 unchanged sentence

The following discussion and analysis presents management’s perspective on our financial condition and results of operations on a consolidated basis.

However, because we conduct all of our material business operations through the Bank, the discussion and analysis relate to activities primarily conducted by the Bank.

This discussion and analysis should be read in conjunction with the audited consolidated financial statements and the accompanying notes presented elsewhere in this

Annual Report on Form 10-K.

However, because we conduct all of our material business operations through our bank subsidiary, Five Star Bank, the discussion and analysis relate to activities primarily conducted by the Bank.

This discussion and analysis should be read in conjunction with the audited consolidated financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K.

Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

3 unchanged sentences

Risk Factors.” We assume no obligation to update any of these forward-looking statements, except to the extent required by law.

Set forth below is a comparison of the results of operations and changes in financial condition for the fiscal years ended December 31, 2024 and December 31, 2023.

For a discussion of our financial results for the fiscal year ended December 31, 2022, see the section entitled “Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023.

Company Overview

Headquartered in the greater Sacramento metropolitan area of California, Five Star Bancorp (“Bancorp” or the “Company”) is a bank holding company that operates through its wholly owned subsidiary, Five Star Bank, a California state-chartered non-member bank.

We provide 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.

We provide 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.

Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy.

1 unchanged sentence

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

We refer to our mission as “purpose-driven and integrity-centered banking.” At 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.

Key Factors Affecting our Business

8 unchanged sentences

Due to elevated levels of inflation and corresponding pressure to raise interest rates, the Federal Reserve announced in January 2022 that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time.

The Federal Open Market Committe e (“FOMC”) has si nce increased the target range eleven times throughout 2022 and 2023.

As of December 31, 2023, the target range for the federal funds rate had been increased to 5.25% to 5.50%, and the FOMC signaled that it may be appropriate to lower interest rates in 2024 as part of a strategy to return inflation to normalized levels.

The Federal Open Market Committee (“FOMC”) then increased the target range eleven times throughout 2022 and 2023.

During 2024, the Federal Reserve decreased the federal funds rate three times.

As of December 31, 2024, the target range for the federal funds rate had been decreased to 4.25% to 4.50%, and the FOMC signaled that current economic data and the interest rate environment are more balanced, projecting two decreases in 2025, as part of a strategy to return inflation to normalized levels.

We anticipate that interest rates may be lowered over the next few years.

7 unchanged sentences

federal and California state income tax purposes in the second quarter of fiscal year 2021.

Prior to such revocation, our earnings were not subject to and we did not

Prior to such revocation, our earnings were not subject to and we did not pay U.S.

federal income tax, and we were not required to make any provision or recognize any liability for U.S.

3 unchanged sentences

Upon the termination of our status as an S Corporation, we commenced paying U.S.

federal income tax and a higher California state income tax on our taxable earnings for each year (including the short year beginning on the date our status as an S Corporation terminated), and our consolidated financial statements reflect a provision for U.S.

federal income tax and a higher California state income tax on our

taxable earnings for each year (including the short year beginning on the date our status as an S Corporation terminated), and our consolidated financial statements reflect a provision for U.S.

federal income tax and a higher California state income tax from that date forward.

20 unchanged sentences

The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C Corporation was recognized in net income in the year ended December 31, 2021.

Allowance for Credit Losses

On January 1, 2023, the Company adopted ASC 326, which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model.

Allowance for Credit Losses ( “ ACL ” )

On January 1, 2023, the Company adopted ASC 326, which replaced the former “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model.

The CECL model applies to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost.

Under ASC 326, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost, with any estimated credit losses recorded through a credit loss expense and an allowance, rather than a write-down of the investment.

Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income.

Changes in fair value that are not credit-related continue to be recorded in other comprehensive income.

Under the CECL model, the calculated allowance for credit losses was $5.3 million higher on January 1, 2023 than the allowance under the incurred loss model.

4 unchanged sentences

We have identified certain policies and estimates as critical to our business operations and the understanding of our past or present consolidated financial condition and results of operations.

These policies and estimates are considered critical because they have a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions, or estimates.

These policies and estimates are considered critical because they have a material impact, or they have the potential to have a

material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions, or estimates.

We believe that the judgments, estimates, and assumptions used in the preparation of our financial statements are reasonable and appropriate, based on the information available at the time they were made.

3 unchanged sentences

We have elected to take advantage of the scaled disclosures and other relief under the JOBS Act, and we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us under the JOBS Act, so long as we qualify as an emerging growth company.

Allowance for Credit Losses

The allowance for credit losses represents the estimated probable credit losses in our loan and investment portfolios and is estimated as of December 31, 2023 using CECL.

The allowance for credit losses as of December 31, 2022 was estimated using the incurred loss model.

The allowance for credit losses is established through a provision for credit losses charged to operations.

Loans and investments are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely.

Subsequent recoveries of previously charged-off amounts, if any, are credited to the allowance for credit losses.

The allowance for credit losses is evaluated on a regular basis by management in consideration of optimistic, moderate, and pessimistic current conditions, and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions specifically impacting each loan type by purpose and by geography, and concentrations within the loan portfolio.

The ACL represents the estimated probable credit losses in our loan and investment portfolios and is estimated as of December 31, 2024 using CECL.

The ACL is established through a provision for credit losses charged to operations.

Loans and investments are charged against the ACL when management believes that the collectability of the principal is unlikely.

Subsequent recoveries of previously charged-off amounts, if any, are credited to the ACL.

The ACL is evaluated on a regular basis by management in consideration of optimistic, moderate, and pessimistic current conditions, and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions specifically impacting each loan type by purpose and by geography, and concentrations within the loan portfolio.

This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

A significant amount of the allowance for credit losses is measured on a collective (pool) basis by loan and investment security type when similar risk characteristics exist.

A significant amount of the ACL is measured on a collective (pool) basis by loan and investment security type when similar risk characteristics exist.

Pools are determined based primarily on regulatory reporting codes as the loans and investment securities within each pool share similar risk characteristics and there is sufficient historical peer loss data from the FFIEC to provide statistically meaningful support in the models developed.

2 unchanged sentences

The prevailing economic conditions factor is estimated based on a range of potential economic conditions and is applied at both the portfolio and individual concentration level based on various factors.

This estimate is subject to significant judgment and could potentially add $1.0 million based on existing loan balances, if not more, to the allowance for credit losses in pessimistic economic conditions.

The concentrations within the loan portfolio factor is estimated based on significant concentrations within the loan portfolio.

This estimate is subject to significant judgment and could potentially add $4.8 million based on existing loan balances, if not more, to the allowance for credit losses based on a pessimistic market outlook for the specifically identified concentrations.

The external factor is estimated based on current external factors, including environmental factors, which could impact the loan portfolio.

This estimate is subject to significant judgment and could potentially add $3.9 million based on existing loan balances, if not more, to the allowance for credit losses based on a pessimistic external factors.

This estimate is subject to significant judgment and could potentially add $2.4 million based on existing loan balances, if not more, to the allowance for credit losses while using severely adverse economic conditions in the estimate.

The concentrations within the loan portfolio factor is estimated based on concentrations at the loan pool level.

This estimate is subject to significant judgment and could potentially add $9.4 million based on existing loan balances, if not more, to the allowance for credit losses while using a severely adverse market outlook for the specifically identified concentrations.

The external factor is estimated based on current external factors, such as environmental factors, which could impact the loan portfolio.

This estimate is subject to significant judgment and could potentially add $6.9 million based on existing loan balances, if not more, to the allowance for credit losses while using severely adverse external factors in the estimate.

During the twelve months ended December 31, 2024, we refined our methodology of measuring the ACL on three pools of loans:

Multifamily, C&I SBA, and CRE Non-Owner Occupied loans.

Within the Multifamily pool, Manufactured Home Community (“MHC”) loans were segregated from traditional Multifamily as we identified a data source to provide sufficient historical peer loss data specific to MHC loans.

This segregation now adjusts for differences in the risk characteristics and performance of MHCs compared to traditional Multifamily properties.

Losses are estimated using a discounted cash flow analysis using individual probability of default and loss given default rates on a loan-by-loan basis.

Applying this adjusted loss rate led to a decrease in the ACL for the MHC pool as of June 30, 2024 of approximately $5.8 million.

During routine monitoring of charge-off activity within the C&I SBA pool, we identified an increased level of charge-offs during the first six months of 2024, reflecting a change in the credit quality of the pool.

In response to this, we increased the expected loss rates to be more in line with net charge-off rates during the first six months of 2024, as this time period reflects what is expected based on our current economic outlook for loans in the C&I SBA pool.

This adjustment reflects our estimate for future loss rates and increased the required reserves related to the C&I SBA pool by approximately

$4.6 million as of June 30, 2024.

Within the CRE Non-Owner Occupied portfolio, RV Park loans were segregated from traditional CRE Non-Owner Occupied as we identified a data source to provide sufficient historical peer loss data specific to RV Park loans.

This segregation now adjusts for differences in the risk characteristics and performance of RV Park loans compared to traditional CRE Non-Owner Occupied properties.

We used calculations of individual probability of default and loss given default on a loan-by-loan basis to derive an estimated loss rate.

Applying this adjusted loss rate led to a decrease in the ACL for the RV Park pool of approximately $3.3 million as of September 30, 2024.

Executive Summary

10 unchanged sentences

Highlights of the financial results are presented in the following tables:

Highlights of Financial Results

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

7 unchanged sentences

Allowance for credit losses to total loans held for investment 1.07 % 1.12 %

Allowance for credit losses to period end nonperforming loans 17.53x 70.27x

Non-accrual loans to period end loans 0.06 % 0.01 %

Allowance for credit losses to nonperforming loans 21.02x 17.53x

Nonperforming loans to total loans held for investment 0.05 % 0.06 %

Capital ratios:

6 unchanged sentences

9.79 % 7.95 %

Highlights of Financial Results (continued)

(dollars in thousands, except share and per share data) For the year ended

6 unchanged sentences

Net income 45,671 47,734

Per common share data:

Earnings per common share:

4 unchanged sentences

$ 18.60 $ 16.56

Shares outstanding data:

Weighted average basic common shares outstanding 20,154,385 17,166,592

27 unchanged sentences

Net interest income is the most significant contributor to our net income.

Net interest income represents interest income from interest-earning assets, such as loans and investments, less interest expense on interest-bearing liabilities, such as deposits, FHLB advances, subordinated notes, and other borrowings, which are used to fund those assets.

Net interest income represents interest income from interest-earning assets, such as loans and investments, less interest expense on interest-bearing liabilities, such as deposits, subordinated notes, and other borrowings, which are used to fund those assets.

In evaluating our net interest income, we measure and monitor yields/rates on our interest-earning assets and interest-bearing liabilities as well as trends in our net interest margin.

3 unchanged sentences

Net interest income increased by $8.8 million, or 7.96%, for the year ended December 31, 2024, compared to the year ended December 31, 2023, while our net interest margin decreased 10 basis points during the same period.

The contraction of our net interest margin was primarily due to increased rates paid on interest-bearing liabilities in excess of increased yields earned on interest-earning assets.

These changes relate to changes in the effective Federal Funds rate in each period.

The increase in net interest income was primarily due to an increase in interest income driven by higher average balances and yields on loans, partially offset by an increase in interest expense due to higher average balances and rates on deposits.

Additional detail relating to net interest margin in each period is provided below.

Average balance sheet, interest, and yield/rate analysis.

The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yield earned or rate paid for each period reported.

Table 3 presents average balance sheet information, interest income, interest expense, and the corresponding average yield earned or rate paid for each period reported.

The average balances are daily averages and include both performing and nonperforming loans.

Average Balances, Interest, and Yield/Rate

(dollars in thousands) For the year ended

3 unchanged sentences

Average Balance Interest Income/Expense Average Yield/Rate Average Balance Interest Income/Expense Average Yield/Rate

Interest-earning deposits with banks 1

Interest-earning deposits in banks 1

$ 218,156 $ 11,080 5.08 % $ 184,103 $ 9,069 4.93 %

23 unchanged sentences

Shareholders’ equity 359,168 267,399

Total liabilities & shareholders’ equity $ 3,320,962 $ 2,845,126

Total liabilities and shareholders’ equity $ 3,698,380 $ 3,320,962

Net interest spread 5

15 unchanged sentences

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average yields/rates.

The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities.

Table 4 shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities.

The effect of changes in volume is determined by multiplying the change in volume by the current period’s average yield/rate.

1 unchanged sentence

Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.

Interest Income and Expense Change Analysis

(dollars in thousands) For the year ended

15 unchanged sentences

Changes in net interest income/margin $ 11,637 $ (2,806) $ 8,831

Net interest income during the year ended December 31, 2023 increased $7.8 million compared to the year ended December 31, 2022.

Net interest margin decreased 33 basis points compared to the prior year.

The increase in net interest income is primarily attributable to an additional $50.9 million in interest income on loans due to increases in interest rates and average balances compared to the prior year.

The average yield on loans increased 77 basis points compared to the prior year, while average balances increased 25.26%.

The increase in interest income was partially offset by an increase in total interest expense of $48.7 million, which is primarily attributable to an additional $46.9 million in deposit interest expense due to increases in interest rates and average balances compared to the prior year.

The cost of interest-bearing deposits increased 206 basis points compared to the prior year, while average balances increased 34.98%.

In addition, the average balance of non-interest-bearing deposits decreased by $138.9 million year-over-year.

Net interest income during the year ended December 31, 2024 increased $8.8 million, or 7.96%, to $119.7 million compared to $110.9 million during the year ended December 31, 2023.

Net interest margin totaled 3.32% for the year ended December 31, 2024, a decrease of 10 basis points compared to the prior year.

The increase in net interest income is primarily attributable to an additional $30.6 million in loan interest income due to a $336.3 million, or 11.41%, increase in the average balance of loans and a 37 basis point improvement in the average yield on loans as compared to the prior year.

The increase in interest income was partially offset by an additional $24.5 million in deposit interest expense due to a $293.4 million, or 10.00%, increase in the average balance of deposits and a 58 basis point increase in the average cost of deposits compared to the prior year.

Provision for Credit Losses

5 unchanged sentences

Under the CECL model, the calculated allowance for credit losses was $5.3 million higher on January 1, 2023 than the allowance under the incurred loss model.

Utilizing CECL may have an impact on our allowance for credit losses going forward and may result in a lack of comparability between the 2022 and 2023 periods.

We recorded a $7.0 million provision for credit losses in the year ended December 31, 2024, compared to a $4.0 million provision for credit losses for the year ended December 31, 2023.

The provision expense declined year-over-year due to the $5.3 million adjustment to the allowance for credit losses recorded in connection with the adoption of CECL.

As such, the provision expense required based on the CECL model was lower for the year ended December 31, 2023, as the adoption true-up entry was recorded on January 1, 2023.

The provision recorded is primarily due to loan growth, loan type mix, and updates in the macroeconomic environment.

The provision for credit losses increased $3.0 million, or 73.75%, primarily due to loan growth as loan originations in the year ended December 31, 2024 were almost double those for the year ended December 31, 2023.

Non-interest Income

Non-interest income is a secondary contributor to our net income.

Non-interest income is a secondary contributor to our net income, following interest income.

Non-interest income consists of service charges on deposit accounts, net gain on sale of securities, gain on sale of loans, loan-related fees, FHLB stock dividends, earnings on BOLI, and other income.

The following table details the components of non-interest income for the periods indicated.

Table 5 details the components of non-interest income for the periods indicated.

Non-interest Income

(dollars in thousands) For the year ended $ Change % Change

10 unchanged sentences

Service charges on deposit accounts.

The increase related to individually immaterial increases in fees earned for services and products to support deposit accounts including, but not limited to, service charges, wire transfer fees, check order fees, and debit card income.

The increase resulted primarily from a $0.2 million increase in wire transfer fees recognized, partially offset by a small decrease in other fees recognized during the year ended December 31, 2024 compared to the year ended December 31, 2023.

Net gain (loss) on sale of securities.

The increase in the net loss on sale of securities resulted from the sale of two municipal securities with a par value of approximately $0.8 million for a loss of approximately $0.2 million during the year ended December 31, 2023, compared to the sale of approximately $1.6 million of municipal securities, resulting in a gain of $5.0 thousand during the year ended December 31, 2022.

The decrease in the net loss on sale of securities resulted from the sale of two municipal securities with a par value of approximately $0.8 million for a loss of approximately $0.2 million during the year ended December 31, 2023, with no sales occurring during the year ended December 31, 2024.

Gain on sale of loans.

The decrease related primarily to an overall decline in the volume of loans sold during the year ended December 31, 2024 compared to the year ended December 31, 2023.

During the year ended December 31, 2023, approximately $36.5 million of loans were sold with an effective yield of 5.35%, as compared to approximately $50.8 million of loans sold with an effective yield of 5.78% during the year ended December 31, 2022.

During the year ended December 31, 2024, 56 SBA 7(a) loans with government guaranteed portions totaling approximately $18.3 million were sold with an effective yield of 6.96%, as compared to approximately $36.5 million of loans sold with an effective yield of 5.35% during the year ended December 31, 2023.

Loan-related fees.

The decrease was primarily a result of:

(i) a decrease of $0.6 million in swap referral fees and (ii) a decrease of $0.2 million in loan fee income earned on various loan types and services.

These decreases were partially offset by:

(i) a $0.2 million increase in rate lock fees earned and (ii) a $0.1 million increase in income earned from the credit card program recognized during the year ended December 31, 2023, compared to the year ended December 31, 2022.

The decrease was primarily a result of a $0.2 million net decrease in income earned from the credit card program, partially offset by a small increase in loan fee income earned on various loan types and services.

FHLB stock dividends .

The increase primarily relates to an increase in the number of FHLB Class B shares held for the year ended December 31, 2023, compared to the year ended December 31, 2022 combined with an overall increase in the annualized dividend rates earned year-over-year.

The increase primarily relates to a 50 basis point increase in the annualized dividend rate earned year-over-year, while the average shares outstanding remained consistent.

Earnings on BOLI .

The increase was primarily due to additional policies purchased between December 31, 2024 and December 31, 2023.

Other income .

The increase resulted primarily from a $1.7 million gain recorded on distributions received on investments in venture-backed funds during the year ended December 31, 2023, compared to a $0.4 million gain recognized during the year ended December 31, 2022.

The decrease resulted primarily from $0.5 million in income received on equity investments in venture-backed funds during the year ended December 31, 2024, as compared to $1.7 million in income received on equity investments in venture-backed funds during the year ended December 31, 2023.

Non-interest Expense

6 unchanged sentences

however, we expect our efficiency ratio will improve going forward due, in part, to our past investment in infrastructure.

The following table details the components of non-interest expense for the periods indicated.

Table 6 details the components of non-interest expense for the periods indicated.

Non-interest Expense

(dollars in thousands) For the year ended $ Change % Change

11 unchanged sentences

The increase was the result of:

(i) a $3.2 million increase in salaries, insurance, and benefits, of which approximately $1.2 million related to 10 new employees hired to support expansion into the San Francisco Bay Area and the remainder of the increase related to increased pay rates and promotions for existing employees;

(ii) a $2.7 million decrease in loan origination costs due to lower production;

and (iii) a $0.3 million increase in bonus expense due to an increase in the base salaries and number of employees eligible for bonuses in 2023.

The increase was partially offset by a $1.8 million decline in commissions expense due to lower production during the year ended December 31, 2023, as compared to the year ended December 31, 2022.

(i) a $3.5 million increase in salaries, benefits, and bonuses, of which approximately $3.3 million related to employees hired to support expansion into the San Francisco Bay Area;

and (ii) a $1.4 million increase in commissions paid, primarily to employees in the San Francisco Bay Area.

The increase was partially offset by a $0.3 million increase in loan origination costs due to higher loan production, net of purchased consumer loans, period-over-period.

Occupancy and equipment .

The increase was the result of a $0.1 million increase in rent expense related to temporary office space to support our expansion into the San Francisco Bay Area during the second half of 2023 and a new office lease to support back office staff beginning during the fourth quarter of 2023.

The increase related to rent expense for the San Francisco branch office and a new office lease to support back office staff during the year ended December 31, 2024, which did not exist for the full year ended December 31, 2023.

Data processing and software .

3 unchanged sentences

and (iii) an increased number of licenses required for new users on our loan origination and documentation system.

FDIC insurance.

The increase related primarily to a final rule adopted by the FDIC to increase initial base deposit insurance assessment rates for insured depository institutions by two basis points, beginning with the first quarterly assessment period of 2023.

FDIC insurance also increased for the year ended December 31, 2023, compared to the year ended December 31, 2022 due to a $266.4 million increase in the assessment base period-over-period.

Professional services.

The increase was due to a $0.5 million increase in audit, IT support, and other consulting fees for services provided for the year ended December 31, 2023, compared to the year ended December 31, 2022.

This was partially offset by a decline of $0.3 million relating to:

(i) $0.2 million of lower legal fees incurred relating to the

subordinated note offering and redemptions completed in 2022, which did not recur in 2023, and (ii) $0.1 million of lower recruiting fees incurred for the year ended December 31, 2023, compared to the year ended December 31, 2022.

Advertising and promotional.

The increase was primarily due to an increased customer base and an increase in the number of Business Development Officers as of December 31, 2023, compared to December 31, 2022.

The increase was due to an increase in audit, IT support, and other consulting fees for services provided for the year ended December 31, 2024 compared to the year ended December 31, 2023.

Other operating expenses .

The increase is primarily related to:

(i) a $0.3 million increase in IntraFi Network fees resulting from an overall increase in balances carried in the network;

(ii) a $0.1 million increase in bank charges due to increased activity;

(iii) a $0.1 million increase in insurance expenses;

and (iv) a $0.1 million net increase in travel, conferences, memberships, and subscription expenses incurred.

These increases were partially offset by $0.3 million of subordinated note issuance costs recognized as an other expense upon redemption of the subordinated notes in December 2022, which did not recur during the year ended December 31, 2023.

The increase is primarily related to a $0.2 million increase in IntraFi Network fees resulting from an overall increase in balances carried in the network, partially offset by a $0.1 million decrease in conference and training expenses.

Provision for Income Taxes

Provision for income taxes increased by $0.2 million, or 0.89%, to $19.1 million for the year ended December 31, 2024, compared to $18.9 million for the year ended December 31, 2023.

This increase is due to an increase in pre-tax income, partially offset by a decline in the effective tax rate for each period, from 28.73% to 28.34% for the years ended December 31, 2022 and December 31, 2023, respectively.

The lower effective tax rate period-over-period related to multi-state tax return filings for the Company since its inception as a C Corporation.

This increase is due to a $0.6 million provision to return true-up recorded during the year ended December 31, 2024, partially offset by a decline in taxable income year-over-year.

The effective tax rate was 29.43% and 28.34% for the years ended December 31, 2024 and December 31, 2023, respectively.

FINANCIAL CONDITION SUMMARY

The following discussion compares our financial condition as of December 31, 2024 to our financial condition as of December 31, 2023.

The following table summarizes selected components of our consolidated balance sheet as of December 31, 2023 and December 31, 2022.

Table 7 summarizes selected components of our consolidated balance sheet as of December 31, 2024 and December 31, 2023.

Selected Components of Consolidated Balance Sheets

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

6 unchanged sentences

Total shareholders’ equity 396,624 285,774

At December 31, 2023, total assets were $3.6 billion, an increase of $366.0 million from $3.2 billion at December 31, 2022, primarily due to increases in total loans held for investment of $290.4 million and cash and cash equivalents of $61.6 million, partially offset by a $8.6 million decrease in investments.

At December 31, 2024, total assets were $4.1 billion, an increase of $460.2 million from $3.6 billion at December 31, 2023, primarily due to a $451.0 million increase in total loans held for investment and a $30.8 million increase in cash and cash equivalents, partially offset by a $10.2 million decrease in investments.

Cash and Cash Equivalents

Total cash and cash equivalents were $352.3 million at December 31, 2024, an increase of $30.8 million from $321.6 million at December 31, 2023.

The increase in cash and cash equivalents was primarily due to increases in deposits of $244.9 million and net income of $47.7 million, partially offset by loan originations, net of repayments, of $284.3 million.

The increase in cash and cash equivalents was primarily due to increases in deposits of $531.1 million, $80.9 million in net proceeds from the 2024 Public Offering (as defined below), and pre-tax income of $64.7 million, partially offset by loan originations, net of repayments, of $442.8 million and a decrease in borrowings of $170.0 million.

Investment Portfolio

2 unchanged sentences

We manage our investment portfolio according to written investment policies approved by our board of directors.

Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk and interest rate risk that is reflective

of the yields obtained on those securities.

Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk and interest rate risk that is reflective of the yields obtained on those securities.

Most of our securities are classified as available-for-sale, although we have one long-term, fixed rate municipal security classified as held-to-maturity.

Our total securities available-for-sale and held-to-maturity amounted to $100.9 million at December 31, 2024 and $111.2 million at December 31, 2023, a decrease of $10.2 million year-over-year.

The decrease was primarily due to principal paydowns of $10.3 million, partially offset by an improvement in the unrealized loss on securities of $2.3 million, primarily in our municipal securities portfolios.

The decrease was primarily due to principal paydowns and amortization of $9.0 million, partially offset by an improvement in the unrealized loss on securities of $0.9 million, primarily in our municipal securities portfolios.

The improvement in the unrealized loss was recognized as a result of interest rate decreases that occurred during the period.

The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of December 31, 2023:

Table 8 presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of the dates shown.

Stated Maturities and Weighted Average Yields - Investment Securities

Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Total

(dollars in thousands) Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield

December 31, 2024

Available-for-sale:

9 unchanged sentences

Total $ 210 6.00 % $ 5,128 3.27 % $ 10,613 2.26 % $ 84,963 2.06 % $ 100,914 2.15 %

The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of December 31, 2022:

Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Total

December 31, 2023

Available-for-sale:

15 unchanged sentences

Our loan portfolio is our largest class of interest-earning assets and typically provides higher yields than other types of interest-earning assets.

Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting.

Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting standards.

As of December 31, 2024 and 2023, our total loans amounted to $3.5 billion and $3.1 billion, respectively.

The following table presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.

Table 9 presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.

Loans Outstanding

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

19 unchanged sentences

The real estate purchased with these loans is generally located in or near our market.

Residential real estate and construction real estate loans consist of loans secured by single-family and multifamily residential properties, which are both owner-occupied and investor-owned.

Farmland loans consist of loans used to purchase, refinance, or improve farmland secured by farming properties themselves.

The farmland is generally located in or near our market.

Commercial loans consist of financing for commercial purposes in various lines of business, including manufacturing, service industry, and professional service areas.

Commercial loans can be secured or unsecured but are generally secured with the assets of the company and/or the personal guaranty of the business owner(s).

Residential real estate and construction real estate loans consist of loans secured by single-family and multifamily residential properties, which are both owner-occupied and investor-owned.

The following tables present the commercial real estate loan balance, associated percentage of commercial real estate concentrations, estimated real estate collateral values, and related loan-to-value (“LTV”) ranges by collateral type as of the dates indicated.

Consumer and other loans consist primarily of loans purchased in a loan purchase program with a non-bank lender, generally made to professionals for the purpose of large personal or household purchases.

The loans are unsecured, fixed

Consumer and other loans also include loans purchased or originated through financing partnerships which are no longer active.

Table 10 presents the commercial real estate loan balance, associated percentage of commercial real estate concentrations, estimated real estate collateral values, and related loan-to-value (“LTV”) ranges by collateral type as of the dates indicated.

Revolving lines of credit with zero balance and 0.00% LTV are excluded from this table.

Collateral values are determined at origination using third-party real estate appraisals or evaluations.

Updated appraisals, which are included in the table below, are obtained for loans that are downgraded to watch or substandard.

Updated appraisals, which are included in the table below, may be obtained for loans that are downgraded to watch or substandard.

Loans over $2.0 million are reviewed annually, at which time an internal assessment of collateral values is completed.

Commercial Real Estate Loans

(dollars in thousands) Loan Balance % of Commercial Real Estate Collateral Value Minimum LTV Maximum LTV

3 unchanged sentences

Retail 283,394 9.92 % 569,677 6.49 % 72.80 %

Multifamily 211,598 7.88 % 427,948 13.12 % 75.00 %

Industrial 224,860 7.87 % 500,307 4.56 % 73.91 %

Faith-based 184,151 6.45 % 492,030 9.35 % 74.67 %

Mini storage 177,854 6.22 % 361,437 16.23 % 69.19 %

Industrial 173,192 6.45 % 417,439 7.48 % 83.26 %

Multifamily 172,592 6.04 % 371,634 14.35 % 75.00 %

Office 145,986 5.11 % 338,474 5.03 % 73.64 %

7 unchanged sentences

Multifamily 211,598 7.88 % 427,948 13.12 % 75.00 %

Industrial 166,403 6.95 % 366,291 10.77 % 75.00 %

Mini storage 158,650 6.63 % 289,820 20.20 % 70.04 %

Faith-based 184,799 6.88 % 488,160 8.33 % 74.54 %

Mini storage 176,380 6.57 % 358,395 16.56 % 70.00 %

Industrial 173,192 6.45 % 417,439 7.48 % 83.26 %

Office 135,928 5.06 % 298,989 9.07 % 73.52 %

4 unchanged sentences

2 Minimum LTV and maximum LTV not shown for aggregated totals, as such values are meaningful only when presented by specific category.

Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed significantly.

Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed materially.

Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 84.09% of loans held for investment at December 31, 2024.

2 unchanged sentences

We recognize that our commercial real estate loan concentration is significant within our balance sheet.

Commercial real estate loan balances as a percentage of risk-based capital were 682.72% and 680.34% as of December 31, 2023 and December 31, 2022, respectively.

Commercial real estate loan balances as a percentage of risk-based capital were 571.91% and 682.72% as of December 31, 2024 and

December 31, 2023, respectively.

We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (e.g., manufactured home communities, self-storage, hospitality, etc.).

All loan sectors were within our established limits as of December 31, 2024.

Additionally, our loans are geographically concentrated with borrowers and collateral properties primarily in California.

Additionally, our loans are geographically concentrated with borrowers and collateralized properties primarily in California.

We believe that our past success is attributable to focusing on products and markets where we have significant expertise.

2 unchanged sentences

We do not expect our product or geographic concentrations to materially change.

The following table sets forth the contractual maturities of our loan portfolio as of December 31, 2023:

Table 11 sets forth the contractual maturities of our loan portfolio as of the dates shown.

Contractual Maturities - Gross Loans

(dollars in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total

December 31, 2024

Commercial $ 35,682 $ 362,077 $ 2,383,655 $ 75,759 $ 2,857,173

8 unchanged sentences

Total $ 110,418 $ 515,529 $ 2,834,820 $ 77,086 $ 3,537,853

The following table sets forth the contractual maturities of our loan portfolio at December 31, 2022:

(dollars in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total

December 31, 2023

Commercial $ 57,443 $ 271,306 $ 2,284,482 $ 72,188 $ 2,685,419

8 unchanged sentences

Total $ 148,866 $ 363,715 $ 2,509,303 $ 73,556 $ 3,095,440

The following table sets forth the sensitivity to interest rate changes of our loan portfolio at December 31, 2023:

Table 12 sets forth the sensitivity to interest rate changes of our loan portfolio as of the dates shown.

Sensitivity to Interest Rates - Gross Loans

(dollars in thousands) Fixed Interest Rates Floating or Adjustable Rates Total

December 31, 2024

Commercial $ 587,825 $ 2,269,348 $ 2,857,173

8 unchanged sentences

Total $ 946,642 $ 2,591,211 $ 3,537,853

The following table sets forth the sensitivity to interest rate changes of our loan portfolio at December 31, 2022:

(dollars in thousands) Fixed Interest Rates Floating or Adjustable Rates Total

December 31, 2023

Commercial $ 570,385 $ 2,115,034 $ 2,685,419

13 unchanged sentences

Our primary objective is to maintain a high level of asset quality in our loan portfolio.

We believe our underwriting practices and policies, established by experienced professionals, appropriately govern the risk profile for our loan portfolio.

We believe our underwriting policies and practices, executed by experienced professionals, appropriately govern the risk profile for our loan portfolio.

These policies are continually evaluated and updated as necessary.

4 unchanged sentences

We design our practices to facilitate the early detection and remediation of problems within our loan portfolio.

Assigned risk classifications are an integral part of management’s assessment of the adequacy of our allowance for credit losses.

Assigned risk classifications are an integral part of management’s assessment of the adequacy of our ACL.

We periodically employ the use of an independent consulting firm to evaluate our underwriting and risk assessment process.

Like other financial

institutions, we are subject to the risk that our loan portfolio will be exposed to increasing pressures from deteriorating borrower credit due to general economic conditions and rising interest rates.

Like other financial institutions, we are subject to

the risk that our loan portfolio will be exposed to increasing pressures from deteriorating borrower credit due to general economic conditions and rising interest rates.

Nonperforming Assets

6 unchanged sentences

Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

During 2023, the Company sold 143 SBA 7(a) loans with government-guaranteed portions totaling $36.5 million.

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

The Company received gross proceeds of $19.6 million on the loans sold in 2024, resulting in a net gain on sale of $1.3 million.

During 2022, the Company sold 172 SBA 7(a) loans with government-guaranteed portions totaling $50.8 million.

During 2023, the Company sold 143 SBA 7(a) loans with government-guaranteed portions totaling approximately $36.5 million.

The Company received gross proceeds of $38.4 million on the loans sold in 2023, resulting in a net gain on sale of $2.0 million.

Non-accrual Loans

The following table provides details of our nonperforming and restructured assets and certain other related information as of the dates presented:

Table 13 provides details of our nonperforming and restructured assets and certain other related information as of the dates presented:

Nonperforming and Restructured Assets

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

1 unchanged sentence

Commercial $ 1,750 $ 1,893

Residential — 175

Secured 48 72

10 unchanged sentences

Nonperforming loans plus performing LMs to loans held for investment 0.05 % 0.06 %

The ratio of nonperforming loans to loans held for investment was 0.06% at December 31, 2023, increasing from 0.01% as of December 31, 2022, as a result of financial challenges experienced by a small subset of our borrowers.

The ratio of the allowance for credit losses to period end non-accrual loans decreased from 7,026.98% as of December 31, 2022 to 1,752.70% as of December 31, 2023.

This decrease was due to:

(i) a 21.28% increase in the allowance for credit losses year-over-year and (ii) a 386.39% increase in non-accrual loans, due to an increase of $1.8 million in commercial real estate non-accrual loans year-over-year.

The ratio of nonperforming loans to loans held for investment was 0.05% at December 31, 2024, decreasing from 0.06% as of December 31, 2023.

The ratio of the allowance for credit losses to period end nonperforming loans increased from 1,752.70% as of December 31, 2023 to 2,101.78% as of December 31, 2024.

This increase was due to:

(i) a 9.76% increase in the allowance for credit losses year-over-year;

and (ii) an 8.50% decrease in nonperforming loans year-over-year.

Potential Problem Loans

We utilize a risk grading system for our loans to aid us in evaluating the overall credit quality of our real estate loan portfolio and assessing the adequacy of our allowance for credit losses.

We utilize a risk grading system for our loans to aid us in evaluating the overall credit quality of our real estate loan portfolio and assessing the adequacy of our ACL.

All loans are grouped into a risk category at the time of origination.

2 unchanged sentences

The banking industry defines loans graded substandard or doubtful as “classified” loans.

Loans by credit quality risk rating were as follows as of the periods indicated:

Table 14 shows loans by credit quality risk rating as of the periods indicated.

Gross Loans Held for Investment by Credit Quality Risk Rating

(dollars in thousands) Pass Watch Substandard Doubtful Total

24 unchanged sentences

Loans designated as watch and substandard, which are not considered adversely classified, increased to $126.0 million at December 31, 2024 from $41.6 million at December 31, 2023.

The increase related primarily to a $17.7 million increase in loans designated as watch for loans which have indicators of deficient loan quality and potential significant issues which are expected to be temporary in nature.

The increase related primarily to an $83.8 million increase in loans designated as watch for loans which have indicators of deficient loan quality and potential significant issues which are expected to be temporary in nature.

There were no loans with doubtful risk grades at December 31, 2024 or December 31, 2023.

Allowance for Credit Losses - Loans

The allowance for credit losses - loans is established through a provision for credit losses charged to operations.

Provisions are charged against the allowance for credit losses - loans when management believes that the collectability of the principal is unlikely.

Subsequent recoveries of previously charged-off amounts, if any, are credited to the allowance for credit losses - loans.

The allowance for credit losses - loans is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

Allowance for Credit Losses

The allowance for credit losses is established through a provision for credit losses charged to operations.

Provisions are charged against the allowance for credit losses when management believes that the collectability of the principal is unlikely.

Subsequent recoveries of previously charged-off amounts, if any, are credited to the allowance for credit losses.

The allowance for credit losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

At December 31, 2023, the Company’s allowance for credit losses - loans was $34.4 million, compared to $28.4 million at December 31, 2022.

The $6.0 million increase in the allowance is due to a $5.3 million adjustment recorded in connection with the adoption of ASC 326 and a $4.0 million provision for credit losses recorded during the year ended December 31, 2023, partially offset by net charge-offs of $3.3 million during the year ended December 31, 2023.

While the entire allowance for credit losses - loans is available to absorb losses from any and all loans, the following table represents management’s allocation of our allowance for credit losses by loan category, and the balance of loans in each category as a percentage of total loans, for the periods indicated.

At December 31, 2024, the Company’s allowance for credit losses was $37.8 million, compared to $34.4 million at December 31, 2023.

The $3.4 million increase in the allowance is due to a $7.5 million provision for credit losses, partially offset by net charge-offs of $4.1 million during the year ended December 31, 2024, mainly attributable to commercial and industrial loans, during the same period.

While the entire allowance for credit losses is available to absorb losses from any and all loans, Table 15 represents management’s allocation of our allowance for credit losses by loan category, and the balance of loans in each category as a percentage of total loans, for the periods indicated.

Allocation of the Allowance for Credit Losses

December 31, 2024 December 31, 2023

12 unchanged sentences

Consumer and other 2,496 7.90 % 378 1.23 %

Unallocated — — % 45 — %

$ 37,791 100.00 % $ 34,431 100.00 %

The ratio of allowance for credit losses to total loans held for investment was 1.07% at December 31, 2024, as compared to 1.12% at December 31, 2023.

The following table provides information on the activity within the allowance for credit losses - loans as of and for the periods indicated:

Table 16 provides information on the activity within the allowance for credit losses as of and for the periods indicated.

Activity Within the Allowance for Credit Losses

As of and for the year ended

3 unchanged sentences

Average loans held for investment $ 3,276,841 $ 2,937,899

Allowance for credit losses - loans $ 28,389 $ 23,243

Allowance for credit losses $ 34,431 $ 28,389

Effect of adoption of ASC 326 — 5,262

5 unchanged sentences

Provision for credit losses 7,450 3,970

Allowance for credit losses - loans $ 34,431 $ 28,389

Allowance for credit losses $ 37,791 $ 34,431

Loans held for investment $ 3,532,686 $ 3,081,719

Allowance for credit losses - loans to loans held for investment 1.12 % 1.02 %

The allowance for credit losses - loans to loans held for investment increased from 1.02% as of December 31, 2022 to 1.12% as of December 31, 2023.

Allowance for credit losses to loans held for investment 1.07 % 1.12 %

The allowance for credit losses to loans held for investment decreased from 1.12% as of December 31, 2023 to 1.07% as of December 31, 2024.

Net charge-offs as a percent of average loans held for investment increased from 0.11% to 0.12% for the years ended December 31, 2023 and December 31, 2024, respectively.

During 2024, total liabilities increased by $349.3 million from $3.3 billion at December 31, 2023 to $3.7 billion at December 31, 2024.

This increase was primarily due to an increase in total deposits of $244.9 million, comprised of increases of $385.0 million in interest-bearing deposits and $70.0 million in FHLB advances, partially offset by a decrease of $140.1 million in non-interest-bearing deposits.

This increase was primarily attributable to an increase in deposits of $531.1 million, partially offset by a decrease in other borrowings of $170.0 million.

The $531.1 million increase in deposits was largely due to increases in money market, time, and non-interest-bearing demand deposits of $242.9 million, $203.6 million, and $91.5 million, respectively, partially offset by decreases in interest-bearing transaction and savings deposits of $5.1 million and $1.8 million, respectively.

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

1 unchanged sentence

Deposit increases were primarily attributable to an increase in the number of new relationships, as well as normal fluctuations in our existing accounts.

Non-interest-bearing deposits decreased by $140.1 million in 2023 to $0.8 billion, and represented 27.46% of total deposits at December 31, 2023, compared to 34.91% of total deposits at December 31, 2022.

Non-interest-bearing deposits increased by $91.5 million in 2024 to $922.6 million, and represented 25.93% of total deposits at December 31, 2024, compared to 27.46% of total deposits at December 31, 2023.

Our loan to deposit ratio was 99.38% at December 31, 2024, compared to 102.19% at December 31, 2023.

The increase in the ratio coincided with growth in our business.

We closely monitor the loan to deposit ratio for purposes of both operational objectives and regulatory capital compliance.

We intend to continue to operate our business with close monitoring of the loan to deposit ratio.

The following tables summarize our deposit composition by average deposits and average rates paid for the periods indicated:

Table 17 summarizes our deposit composition by average deposits and average rates paid for the periods indicated.

Deposit Composition by Average Balances and Average Rates Paid

For the year ended

8 unchanged sentences

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.

The average age on deposit relationships of more than $5.0 million was approximately nine years.

The average age on deposit relationships of more than $5.0 million was approximately 9.13 years.

As of December 31, 2023, our 40 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.5 billion, or 49.80% of our total deposits.

Overall, our large deposit relationships have been relatively consistent over time and have helped to continue to grow our deposit base.

Our large deposit relationships are comprised of the following entity types as of the periods indicated:

Table 18 shows the entity types making up our large deposit relationships at the dates indicated.

Composition of Large Deposit Relationships

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

4 unchanged sentences

Total $ 1,791,429 $ 1,507,258

Our largest single deposit relationship at December 31, 2023 and December 31, 2022 related to a government agency.

The balances for this customer were $260.0 million, or approximately 8.59% of total deposits as of December 31, 2023, and $180.0 million, or 6.47% of total deposits as of December 31, 2022.

As our demand deposits fluctuate during a rising rate environment, we have purchased brokered deposits as needed to supplement liquidity.

Our largest single deposit relationship at December 31, 2024 related to brokered deposits.

The balance for this customer was $300.0 million, or approximately 8.43% of total deposits as of December 31, 2024.

At December 31, 2023, our largest single deposit relationship related to a government agency and had a balance of $260.0 million, or 8.59% of total deposits as of December 31, 2023.

As our demand deposits fluctuate, we have purchased brokered deposits as needed to supplement liquidity.

We do not consider brokered deposits as core deposits, but as another deposit funding source for our loan growth.

The following table sets forth the maturity of time deposits as of December 31, 2023:

Table 19 sets forth the maturity of time deposits as of December 31, 2024.

Scheduled Maturities of Time Deposits

(dollars in thousands) $250,000 or Greater Less than $250,000 Total Uninsured Portion

7 unchanged sentences

From time to time, we utilize short-term collateralized FHLB borrowings to maintain adequate liquidity.

There were borrowings of $170.0 million and $100.0 million outstanding as of December 31, 2023 and 2022, respectively.

There were no borrowings outstanding as of December 31, 2024 and borrowings of $170.0 million outstanding from the FHLB as of December 31, 2023.

In 2022, we issued subordinated notes of $75.0 million.

2 unchanged sentences

The proceeds of the notes qualify as Tier 2 capital for the Company under the regulatory capital rules of the federal banking agencies.

The following table is a summary of our outstanding subordinated notes as of December 31, 2023:

Table 20 is a summary of our outstanding subordinated notes as of December 31, 2024.

Subordinated Notes Outstanding

(dollars in thousands) Issuance Date Amount of Notes Prepayment Right Maturity Date

3 unchanged sentences

Shareholders’ equity totaled $396.6 million at December 31, 2024 and $285.8 million at December 31, 2023.

The increase in shareholders’ equity was primarily a result of net income recognized of $47.7 million and an increase of $1.7 million in accumulated other comprehensive income, partially offset by $12.9 million in cash distributions paid during the year ended December 31, 2023 and a reduction to retained earnings of $4.5 million, net of tax effect, due to the adoption of ASC 326.

The increase in shareholders’ equity was primarily a result of $80.9 million of additional common stock issued and outstanding in 2024 and net income recognized of $45.7 million, partially offset by $16.2 million in cash dividends paid during the period.

Liquidity and Capital Resources

16 unchanged sentences

Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes.

Critical elements of our liquidity risk management include effective corporate governance, consisting of oversight by the board of directors and active involvement by management;

Critical elements of our liquidity risk management include effective corporate governance, consisting of

oversight by the board of directors and active involvement by management;

appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk;

3 unchanged sentences

adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments that can be used to meet liquidity needs in stress situations;

comprehensive contingency funding plans that sufficiently address potential adverse liquidity

events and emergency cash flow requirements;

comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements;

and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity risk management process.

Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds.

Our liquidity requirements are met primarily through our deposits, FHLB advances, and the principal and interest payments we receive on loans and investment securities.

Our liquidity requirements are met primarily through our deposits, Federal Reserve Discount Window advances, FHLB advances, and the principal and interest payments we receive on loans and investment securities.

Cash on hand, cash at third-party banks, investments available-for-sale, and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets.

Other sources of liquidity that are routinely available to us include funds from retail and wholesale deposits, advances from the FHLB, and proceeds from the sale of loans.

Less commonly used sources of funding include borrowings from the Federal Reserve Bank of San Francisco discount window (“Federal Reserve Discount Window”), draws on established federal funds lines from unaffiliated commercial banks, and the issuance of debt or equity securities.

In the first quarter of 2023, the Federal Reserve created the Bank Term Funding Program to provide depository institutions with additional funding, which allows any federally insured deposit institution to pledge its investment portfolio at par as collateral value.

As of December 31, 2023, the Bank had neither used nor established borrowing capacity with the Bank Term Funding Program.

We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary.

Other sources of liquidity that are routinely available to us include funds from retail and wholesale deposits, advances from the FHLB and the Federal Reserve Discount Window, and proceeds from the sale of loans.

Less commonly used sources of funding include borrowings from established federal funds lines from unaffiliated commercial banks, and the issuance of debt or equity securities.

In addition, we have a shelf registration statement on file with the SEC registering $250.0 million for any combination of equity or debt securities, depository shares, warrants, purchase contracts, purchase units, subscription rights, and units in one or more offerings.

Specific information on the terms of and the securities being offered will be provided at the time of any offering thereunder.

Proceeds from any future offerings are expected to be used for corporate purposes or other purposes to be disclosed at the time of such offering.

Specific information on the terms of any securities being offered, including the expected use of proceeds from the sale of such securities, are provided at the time of the offering.

In April 2024, we sold an aggregate of 3,967,500 shares of our common stock at a price of $21.75 per share in a public offering (the “2024 Public Offering”), for net proceeds to us, after deducting underwriting discounts and commissions and offering expenses payable by us, of approximately $80.9 million, to be used for general corporate purposes and to support continued growth, including through investments in the Bank to pursue growth opportunities, and for working capital.

The 2024 Public Offering used approximately $86.3 million of our shelf registration statement on file with the SEC, leaving approximately $163.7 million available for future offerings.

Sources and Uses of Cash

Our executive officers and board of directors review our sources and potential uses of cash in connection with our annual budgeting process.

Generally speaking, our principal funding source is cash from gathering of deposits, and our principal uses of cash include funding of loans, operating expenses, income taxes, and dividend payments, as described below.

As of December 31, 2023, management believes the sources mentioned below will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.

Generally speaking, our principal funding source is cash from deposits, and our principal uses of cash include funding of loans, operating expenses, income taxes, and dividend payments, as described below.

As of December 31, 2024, management believes the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.

In addition, in April 2024, the Company closed the 2024 Public Offering.

The proceeds to the Company, after deducting underwriting discounts and commissions and offering expenses payable by the Company, were approximately $80.9 million, providing additional cash to support the Company’s ongoing operating needs.

Based on our current capital allocation objectives, during 2025, we project spending $0.7 million related to continued build-out of our IT systems and processes and allocating $17.1 million of cash for dividends on our common stock.

7 unchanged sentences

During the year ended December 31, 2024, we had cash outflows of $442.8 million in loan originations and advances, net of principal collected, and $21.7 million in loans originated for sale.

Additionally, we enter into commitments to extend credit in the ordinary course of business, such as commitments to fund new loans and undisbursed construction funds.

While these commitments represent contractual cash requirements, a portion of these commitments to extend credit may expire without being drawn upon.

Additionally, in the ordinary course of business, we enter into commitments to extend credit, such as commitments to fund new loans and undisbursed construction funds.

While these commitments represent contractual cash requirements, a

portion of these commitments to extend credit may expire without being drawn upon.

Therefore, the total commitment amounts do not necessarily represent future cash requirements.

At December 31, 2023, total off-balance sheet commitments totaled $458.9 million.

At December 31, 2024, off-balance sheet commitments totaled $433.6 million.

We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth, and liquid assets.

Deposits are our primary source of funding for our business operations, and the cost of deposits has a significant impact on our net interest income and net interest margin.

Our deposits are primarily made up of money market, interest checking, time, and non-interest-bearing demand deposits.

Our deposits are primarily made up of money market, interest-bearing transaction, time, and non-interest-bearing demand deposits.

Aside from commercial and business clients, a significant portion of our deposits are from municipalities and non-profit organizations.

Cash flows from deposits are impacted by the timing and amount of customer deposits, changes in market rates, and collateral availability.

During the year ended December 31, 2023, we had cash inflows related to an increase in deposits of $244.9 million, primarily as a result of an increase in the number of new relationships, fluctuations in existing accounts, and new certificates of deposit.

Over the next twelve months, approximately $442.5 million of time deposits are expected to mature.

During the year ended December 31, 2024, we had cash inflows related to an increase in deposits of $531.1 million.

During the twelve months following December 31, 2024, approximately $666.9 million of time deposits are expected to mature, which includes $300.0 million of brokered deposits.

In addition, we expect $3.3 million of time deposits to mature through 2029.

As these time deposits mature, some of these deposits may not renew due to general competition.

However, based on our historical runoff experience, we expect the outflow will not be significant and can be replenished through our organic growth in deposits.

We believe our emphasis on local deposits, our recent San Francisco Bay Area expansion, and our liquid investment portfolio, combined with our third-party financing availability, as discussed below, provide a stable funding base.

These deposits may or may not renew due to general competition.

We expect the outflow will not be significant and can be replenished through our organic growth in deposits.

We believe our emphasis on local deposits and our San Francisco Bay Area expansion provide a stable funding base.

At December 31, 2024, cash and cash equivalents represented 9.90% of total deposits.

7 unchanged sentences

Depending on market yield and our liquidity, we may purchase securities as a use of cash in our interest-earning asset portfolio.

During the year ended December 31, 2023, we had cash proceeds from sales, maturities, calls, and prepayments of securities of $10.8 million, partially offset by cash outflows of $1.2 million related to investment securities purchased.

Additionally, at December 31, 2023, securities available-for-sale totaled $108.1 million, of which $104.4 million have been pledged as collateral for borrowings and other commitments.

During the year ended December 31, 2024, we had cash proceeds from sales, maturities, calls and prepayments of securities of $8.4 million.

Additionally, at December 31, 2024, securities available-for-sale totaled $98.2 million, of which $95.1 million has been pledged as collateral for borrowings and other commitments.

Future Contractual Obligations

7 unchanged sentences

Total Liquidity

Total liquidity (consisting of cash and cash equivalents and unused and immediately available borrowing capacity as set forth below) was approximately $1.4 billion as of December 31, 2023.

December 31, 2023 Available

(dollars in thousands) Line of Credit Letters of Credit Issued Borrowings

Total liquidity (consisting of cash and cash equivalents and unused and immediately available borrowing capacity as set forth in Table 21) was approximately $1.9 billion as of December 31, 2024.

Total Liquidity

December 31, 2024

(dollars in thousands) Line of Credit Letters of Credit Issued Borrowings Available

FHLB advances $ 1,212,209 $ 701,500 $ — $ 510,709

5 unchanged sentences

The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary.

At December 31, 2023, the Bank had outstanding borrowings of $170.0 million and a total financing availability of $145.2 million, net of letters of credit issued of $681.5 million.

Federal Reserve Discount Window and Correspondent Bank Lines of Credit

At December 31, 2023, unused and available amounts for borrowing from the Federal Reserve Discount Window and correspondent bank lines of credit were $770.6 million and $175.0 million, respectively.

At December 31, 2024, the Bank had no outstanding FHLB financing borrowings and a total financing availability of $510.7 million, net of letters of credit issued of $701.5 million.

Federal Reserve Discount Window

The Company has the ability to borrow from the Federal Reserve Discount Window when necessary.

At December 31, 2024, the Bank had no outstanding Federal Reserve Discount Window borrowings and a total financing availability of $862.1 million.

Correspondent Bank Lines of Credit

At December 31, 2024, the unused and available amount for borrowing from correspondent bank lines of credit was $175.0 million.

A use of liquidity for the Company is shareholder dividends.

6 unchanged sentences

The impact of inflation is reflected in the increased cost of operations.

Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature.

Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature.

As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation.

1 unchanged sentence

Historical Information

The following table summarizes our consolidated cash flow activities:

Table 22 summarizes our consolidated cash flow activities.

Consolidated Cash Flow Activities

(dollars in thousands) For the year ended December 31, $ Change

3 unchanged sentences

Operating Activities

Net cash provided by operating activities decreased by $7.1 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to lower proceeds from sale of loans and a lower provision for credit losses.

These declines were partially offset by higher net income and lower loans originated for sale.

Net cash provided by operating activities increased by $12.9 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to lower loans originated for sale, higher interest receivable and other assets, and a higher provision for credit losses.

These sources of cash were partially offset by lower proceeds from sale of loans.

Cash provided by operating activities is subject to variability period-over-period as a result of timing differences, including with respect to the collection of receivables and payments of interest expense, accounts payable, and bonuses.

1 unchanged sentence

Investing Activities

Net cash used in investing activities decreased by $557.6 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to lower originations of loans held for investment, net of repayments, and lower maturities, prepayments, and calls of securities available-for-sale.

Net cash used in investing activities increased by $167.5 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to higher originations of loans held for investment, net of repayments, and higher investments in low income housing tax credits.

Financing Activities

Net cash provided by financing activities decreased by $323.7 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, primarily due to lower year-over-year growth in total deposits, lower FHLB advances, and proceeds received from the subordinated note issuance during the year ended December 31, 2022, which did not recur in the year ended December 31, 2023.

Net cash provided by financing activities increased by $123.8 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, primarily due to an increase in deposits and proceeds from the 2024 Public Offering, partially offset by payments on other borrowings.

Capital Adequacy

1 unchanged sentence

Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies.

Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.

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 Small Bank Holding Company Policy Statement, which provides an exemption from the Federal Reserve’s generally applicable risk-based capital ratio and leverage ratio requirements.

Having passed this threshold as of September 30, 2022, we are no longer subject to this policy statement and our capital adequacy is evaluated relative to the Federal Reserve’s generally applicable capital requirements.

Additionally, as of June 30, 2023, the Company’s consolidated assets were in excess of $3.0 billion, and as a consequence, beginning in March 2024, the Company will no longer prepare and file financial reports with the Federal Reserve as a small bank holding company.

Failure to meet minimum capital requirements as set forth in Tables 23 and 24 can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.

Under federal regulations implementing the Basel III framework, the Bank is subject to minimum risk-based and leverage capital requirements.

1 unchanged sentence

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices.

Capital amounts for Bancorp and the Bank, as well as the Bank’s prompt corrective action classification, are also subject to qualitative judgments by the regulators about components of capital, risk weightings, and other factors.

Capital amounts for Bancorp and the Bank, and the Bank’s prompt corrective action classification, are also subject to qualitative judgments by the regulators about components of capital, risk weightings, and other factors.

As of December 31, 2024, both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank qualified as “well-capitalized” under the prompt corrective action framework.

Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.

For all periods presented, the Bank’s ratios exceed the regulatory definition of “well-capitalized” under the regulatory framework for prompt corrective action, and Bancorp’s ratios exceed the minimum ratios that would be required for it to be considered a well-capitalized bank holding company.

The capital adequacy ratios as of December 31, 2023 and December 31, 2022 for Bancorp and the Bank are presented in the following tables.

As of December 31, 2023 and December 31, 2022, Bancorp’s Tier 2 capital included subordinated

notes, which were not included at the Bank level.

For all periods presented, the Bank’s ratios exceed the regulatory definition of “well-capitalized” under the regulatory framework for prompt corrective action, and Bancorp’s ratios exceed the minimum ratios required for it to be considered a well-capitalized bank holding company.

The capital adequacy ratios as of December 31, 2024 and 2023 for Bancorp and the Bank are presented in Tables 23 and 24.

As of December 31, 2024 and 2023, Bancorp’s Tier 2 capital included subordinated notes, which were not included at the Bank level.

Eligible amounts of subordinated notes included in Tier 2 capital will be phased out by 20% per year beginning five years before the maturity date of the notes.

14 unchanged sentences

Capital Ratios for the Bank

(dollars in thousands) Actual Ratio Required for Capital Adequacy Purposes Ratio to be Well-Capitalized under Prompt Corrective Action Provisions

(dollars in thousands) Actual Ratio Required for Capital Adequacy Purposes 1

Ratio to be Well-Capitalized under Prompt Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

14 unchanged sentences

Some of the financial measures discussed herein are non-GAAP financial measures.

as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated statements of income, balance sheets, statements of shareholders’ equity, or statements of cash flows.

In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated statements of income, balance sheets, statements of shareholders’ equity, or statements of cash flows.

Tangible shareholders’ equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets.

11 unchanged sentences

You should understand how we and other companies each calculate non-GAAP financial measures when making comparisons.

Quantitative and Qualitative Disclosure About Market Risk

Not applicable for a smaller reporting company.

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