OP Bancorp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Overview 32 Selected Financial Data 34 Critical Accounting Policies and Estimates 35 Results of Operations 36 Net Income 36 Net Interest Income 37 Provision for Credit Losses 42 Noninterest Income 42 Noninterest Expense 43 Income Taxes 44 Financial Condition 45 Investment Portfolio 45 Loans 46 Loan Servicing 47 Allowance for Credit Losses 47 Nonperforming Assets 49 Deposits and Other Sources of Funds 49 Liquidity and Capital Resources 50 Capital Requirements 51 OVERVIEW The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Part II, Item 1A. Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. OP Bancorp (referred to herein on an unconsolidated basis as "OP Bancorp" and on a consolidated basis as the "Company") is a bank holding company headquartered in Los Angeles, California. Our commercial community banking activities are operated through Open Bank ("Open Bank" or the "Bank"), our wholly owned banking subsidiary, and we do not conduct material business operations other than through the Bank. We offer commercial banking services to small and medium-sized businesses, their owners and retail customers primarily in the Korean-American communities within our primary market areas. Our results of operations depend primarily on our net interest income, which represents the interest we earn on loans and related products, reduced by the interest we pay on deposits and other borrowings. In addition to our net interest income, we derive earnings from fee income we receive in connection with our deposits, and from gains on the sale and service of SBA loans. Our major operating expenses are the salaries and related benefits we pay our management and staff, and the rent we pay on our leased properties. We rely primarily on locally-generated deposits, mostly from the Korean-American market within California, to fund our loan activities. We currently operate nine branches in Los Angeles and Orange Counties in California, one branch in Santa Clara, California, one branch in Carrollton, Texas and one branch near Las Vegas, Nevada. We have five loan production offices in Pleasanton, California, Atlanta, Georgia, Aurora, Colorado, Lynnwood, Washington, and Fairfax, Virginia. 32 Banking Economy and Recent Developments The Board of Governors of the Federal Reserve System ("Federal Reserve") has maintained the Federal Funds Rate range at 4.25% to 4.50%, reflecting a continued pause in its monetary tightening cycle. While inflation has shown signs of moderation, the Federal Reserve has signaled a cautious approach, seeking to balance its dual mandate of achieving maximum employment and price stability. Recent commentary from policymakers indicates the potential for gradual rate cuts later in 2025, contingent upon further evidence of sustained disinflation and softening labor market conditions. The current rate environment continues to influence lending activity, funding costs, and credit risk assessments across the financial sector. Additionally, the volatile and uncertain political climate further complicates the economic outlook, making it increasingly difficult to anticipate the timing and magnitude of future rate adjustments. These factors present ongoing challenges for management in forecasting economic conditions and in effectively pricing both loan products and longer-term deposit offerings. We believe we have responded effectively to the evolving dynamics of the banking environment. Our ability to navigate recent challenges is largely attributable to the continued loyalty of our customers and the dedication and expertise of our employees and management team. The following significant items are of note as of or for the periods presented: As of June 30, 2025 compared to as of December 31, 2024 • Total assets were $2.56 billion, up $197.6 million, or 8%, from $2.37 billion. • Gross loans were $2.07 billion, up $114.7 million, or 6%, from $1.96 billion. • Total deposits were $2.25 billion, up $227.4 million, or 11%, from $2.03 billion. • Shareholders’ equity was $213.7 million, up $8.7 million, or 4%, from $205.0 million. For the three months ended June 30, 2025 compared to three months ended June 30, 2024 • Net interest income increased to $19.7 million, up $3.5 million, or 22%, from $16.2 million. • Net income increased to $6.3 million or $0.42 diluted EPS, up $897 thousand, or 17%, from $5.4 million or $0.36 diluted EPS. For the six months ended June 30, 2025 compared to six months ended June 30, 2024 • Net interest income increased to $37.1 million, up $5.0 million, or 15%, from $32.2 million. • Net income increased to $11.9 million or $0.79 diluted EPS, up $1.2 million, or 12%, from $10.7 million or $0.70 diluted EPS. 33 SELECTED FINANCIAL DATA Three Months Ended June 30, Six Months Ended June 30, ($ in thousands, except share and per share data) 2025 2024 2025 2024 Income Statement Data: Interest income $ 37,665 $ 34,357 $ 72,524 $ 67,270 Interest expense 17,944 18,163 35,385 35,097 Net interest income 19,721 16,194 37,139 32,173 Provision for credit losses 1,206 617 1,942 762 Noninterest income 3,968 4,184 8,784 7,770 Noninterest expense 14,037 12,189 27,851 24,346 Income before income taxes 8,446 7,572 16,130 14,835 Income tax expense 2,113 2,136 4,237 4,173 Net income 6,333 5,436 11,893 10,662 Per Share Data: Basic EPS $ 0.42 $ 0.36 $ 0.79 $ 0.70 Diluted EPS 0.42 0.36 0.79 0.70 Book value per common share, at period-end 14.36 13.23 14.36 13.23 Shares of common stock outstanding, at period-end 14,885,614 14,816,281 14,885,614 14,816,281 Performance Ratios: Return on average assets (1) 1.00 % 0.95 % 0.96 % 0.96 % Return on average equity (1) 11.97 11.23 11.36 11.03 Yield on average total loans (1) 6.56 6.67 6.47 6.68 Yield on average interest-earning assets (1) 6.18 6.29 6.11 6.31 Cost of average interest-bearing liabilities (1) 4.18 4.81 4.24 4.79 Cost of deposits (1) 3.15 3.54 3.19 3.49 Net interest margin (1) 3.23 2.96 3.12 3.01 Efficiency ratio (2) 59.25 59.81 60.65 60.95 (1) Annualized. (2) Represent noninterest expense divided by the sum of net interest income and noninterest income. 34 ($ in thousands) June 30, 2025 December 31, 2024 Balance Sheet Data: Gross loans $ 2,071,580 $ 1,956,852 Loans held-for-sale 20,016 4,581 Allowance for credit losses on loans 26,286 24,796 Total assets 2,563,595 2,366,013 Total deposits 2,254,728 2,027,285 Shareholders’ equity 213,718 204,993 Asset Quality Data: Nonperforming loans to gross loans 0.43 % 0.40 % Allowance for credit losses on loans to nonperforming loans 295 317 Allowance for credit losses on loans to gross loans 1.27 1.27 Balance Sheet and Capital Ratios: Gross loans to total deposits 91.88 % 96.53 % Noninterest-bearing deposits to total deposits 25.09 24.91 Quarterly average equity to average total assets 8.39 8.63 Tier 1 leverage capital ratio 8.96 9.27 Common equity tier 1 capital ratio 11.01 11.35 Tier 1 risk-based capital ratio 11.01 11.35 Total risk-based capital ratio 12.26 12.60 CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no material changes to our critical accounting policies and estimates since those described in our 2024 Annual Report on Form 10-K. Allowance for Credit Losses Credit risk is inherent in the business of making loans. We establish an allowance for credit losses both on loans and off-balance sheet commitments through charges to earnings, which are shown in the statements of operations as the provision for credit losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for credit losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for credit losses and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for credit losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area. The Company employs a modeled approach that takes into account current and future economic conditions to estimate lifetime expected losses on a collective basis. With the adoption of CECL, the Company elected not to consider accrued interest receivable in its estimated credit losses because management writes off uncollectible accrued interest receivable in a timely manner. The Company considers writing off accrued interest amounts once the amounts become 90 days past due to be considered within a timely manner. The Company has elected to write off accrued interest receivable by reversing interest income. The Company uses transition matrices to develop the Probability of Default ("PD") and Loss Given Default ("LGD") approach, incorporating quantitative factors and qualitative considerations in the calculation of the allowance for credit losses for collectively assessed loans. The model provides forecasts of PD and LGD based on national unemployment rates using regression analysis. The Company incorporates future economic conditions using a weighted multiple scenario approach: baseline and adverse. The Company applies a reasonable and supportable period of one year for the baseline scenario and two years for the adverse scenario, after which loss assumptions revert to historical loss information through a one-year reversion period for the baseline scenario and a two-year reversion period for the adverse scenario. We make critical accounting estimates, including the judgments made in the application of significant accounting policies, sensitivity to change, and the likelihood of materially different reported results if different assumptions were used. 35 In order to quantify the credit risk impact of other trends and changes within the loan portfolio, we utilize qualitative adjustments to the modeled estimated loss approaches. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors listed below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the loss rates. This matrix considers the following nine factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council Interagency Policy Statement on the Allowance for Credit Losses, updated to reflect the adoption of CECL: • Changes in lending policies and procedures, including changes in underwriting standards and practices for collection, charge-offs, and recoveries; • Actual and expected changes in national and local economic and business conditions and developments in which the institution operates that affect the collectivity of loans; • Changes in the nature and volume of the loan portfolio; • Changes in the experience, ability, and depth of lending management and staff; • Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans; • Changes in the quality of the credit review function; • Changes in the value of the underlying collateral for loans that are not collateral-dependent; • The existence, growth, and effect of any concentrations of credit, and • The effect of other external factors, such as the regulatory, legal and technological environments; competition; and events such as natural disasters. RESULTS OF OPERATIONS Net Income Three Months Ended June 30, ($ in thousands) 2025 2024 $ Change % Change Interest income $ 37,665 $ 34,357 $ 3,308 10 % Interest expense 17,944 18,163 (219) (1) Net interest income 19,721 16,194 3,527 22 Provision for credit losses 1,206 617 589 95 Noninterest income 3,968 4,184 (216) (5) Noninterest expense 14,037 12,189 1,848 15 Income before income tax expense 8,446 7,572 874 12 Income tax expense 2,113 2,136 (23) (1) Net income $ 6,333 $ 5,436 $ 897 17 % In the second quarter of 2025, we generated net income of $6.3 million, up $897 thousand, or 17%, compared with $5.4 million in the same period a year ago. The increase was primarily driven by higher net interest income, partially offset by increases in noninterest expense and provision for credit losses. 36 Six Months Ended June 30, ($ in thousands) 2025 2024 $ Change % Change Interest income $ 72,524 $ 67,270 $ 5,254 8 % Interest expense 35,385 35,097 288 1 Net interest income 37,139 32,173 4,966 15 Provision for credit losses 1,942 762 1,180 155 Noninterest income 8,784 7,770 1,014 13 Noninterest expense 27,851 24,346 3,505 14 Income before income tax expense 16,130 14,835 1,295 9 Income tax expense 4,237 4,173 64 2 Net income $ 11,893 $ 10,662 $ 1,231 12 % In the first half of 2025, we generated net income of $11.9 million, up $1.2 million, or 12%, compared with $10.7 million for the same period a year ago. The increase was primarily driven by higher net interest income and noninterest income, partially offset by increases in noninterest expense and provision for credit losses. Net Interest Income The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of our total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing ourselves to excessive interest rate risk through our asset and liability policies. We manage interest rate risk by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin also may be affected adversely from time to time when we are required to reverse previously accrued interest on loans that are reclassified as non-accrual. 37 The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields, (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates, (iii) net interest income, (iv) the interest rate spread, and (v) the net interest margin. Three Months Ended June 30, 2025 2024 ($ in thousands) Average Balance Interest Income/Expense Average Yield/Rate (1) Average Balance Interest Income/Expense Average Yield/Rate (1) Interest-earning assets: Interest-bearing deposits in other banks $ 147,874 $ 1,648 4.41 % $ 135,984 $ 1,847 5.37 % Other investments (2) 16,961 317 7.47 16,307 315 7.72 AFS debt securities 180,193 1,437 3.19 195,512 1,590 3.25 CRE 1,028,961 16,013 6.24 910,116 13,742 6.07 SBA 283,130 6,618 9.38 256,987 7,116 11.14 C&I 195,547 3,667 7.52 173,100 3,367 7.82 Home mortgage 587,454 7,962 5.42 501,862 6,348 5.06 Consumer and other 76 3 15.86 1,219 32 10.44 Loans (3) 2,095,168 34,263 6.56 1,843,284 30,605 6.67 Total interest-earning assets 2,440,196 37,665 6.18 2,191,087 34,357 6.29 Noninterest-earning assets 83,394 89,446 Total assets $ 2,523,590 $ 2,280,533 Interest-bearing liabilities: Money market deposits and others $ 408,667 $ 3,586 3.52 % $ 338,554 $ 3,494 4.15 % Time deposits 1,267,363 13,889 4.40 1,102,587 13,849 5.05 Total interest-bearing deposits 1,676,030 17,475 4.18 1,441,141 17,343 4.84 Borrowings 46,707 469 4.04 77,314 820 4.27 Total interest-bearing liabilities 1,722,737 17,944 4.18 1,518,455 18,163 4.81 Noninterest-bearing liabilities: Noninterest-bearing deposits 547,545 529,179 Other noninterest-bearing liabilities 41,624 39,301 Total noninterest-bearing liabilities 589,169 568,480 Shareholders’ equity 211,684 193,598 Total liabilities and shareholders’ equity $ 2,523,590 $ 2,280,533 Net interest income / interest rate spreads $ 19,721 2.00 % $ 16,194 1.48 % Net interest margin 3.23 % 2.96 % Cost of deposits 3.15 % 3.54 % Cost of funds 3.17 % 3.57 % 38 Six Months Ended June 30, 2025 2024 ($ in thousands) Average Balance Interest Income/Expense Average Yield/Rate (1) Average Balance Interest Income/Expense Average Yield/Rate (1) Interest-earning assets: Interest-bearing deposits in other banks $ 136,038 $ 3,020 4.41 % $ 104,515 $ 2,836 5.37 % Other investments (2) 16,716 619 7.40 16,286 637 7.82 AFS debt securities 182,409 2,933 3.22 193,448 3,050 3.15 CRE 1,014,772 30,993 6.16 906,290 27,471 6.10 SBA 274,589 12,825 9.42 257,554 14,329 11.19 C&I 203,781 7,445 7.37 154,018 6,037 7.88 Home mortgage 557,058 14,681 5.27 506,943 12,843 5.07 Consumer and other 154 8 11.27 1,303 67 10.26 Loans (3) 2,050,354 65,952 6.47 1,826,108 60,747 6.68 Total interest-earning assets 2,385,517 72,524 6.11 2,140,357 67,270 6.31 Noninterest-earning assets 80,624 88,516 Total assets $ 2,466,141 $ 2,228,873 Interest-bearing liabilities: Money market deposits and others $ 381,387 $ 6,671 3.53 % $ 352,970 $ 7,434 4.24 % Time deposits 1,237,862 27,412 4.47 1,028,515 25,584 5.00 Total interest-bearing deposits 1,619,249 34,083 4.24 1,381,485 33,018 4.81 Borrowings 62,736 1,302 4.19 92,998 2,079 4.50 Total interest-bearing liabilities 1,681,985 35,385 4.24 1,474,483 35,097 4.79 Noninterest-bearing liabilities: Noninterest-bearing deposits 534,870 521,841 Other noninterest-bearing liabilities 39,829 39,253 Total noninterest-bearing liabilities 574,699 561,094 Shareholders’ equity 209,457 193,296 Total liabilities and shareholders’ equity $ 2,466,141 $ 2,228,873 Net interest income / interest rate spreads $ 37,139 1.87 % $ 32,173 1.52 % Net interest margin 3.12 % 3.01 % Cost of deposits 3.19 % 3.49 % Cost of funds 3.22 % 3.54 % (1) Annualized. (2) Includes FHLB and PCBB stocks, CRA qualified mutual fund and interest-earning time deposits with banks. (3) Include loans held-for-sale. 39 Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume and rate ratably. Three Months Ended June 30, 2025 vs 2024 Increases (Decreases) Due to Change in ($ in thousands) Volume Rate Total Interest-earning assets: Interest-bearing deposits in other banks $ 147 $ (346) $ (199) Other investments 11 (9) 2 AFS debt securities (118) (35) (153) CRE 1,855 416 2,271 SBA 674 (1,172) (498) C&I 475 (175) 300 Home mortgage 1,313 301 1,614 Consumer and other (37) 8 (29) Total loans 4,280 (622) 3,658 Total interest-earning assets 4,320 (1,012) 3,308 Interest-bearing liabilities: Money market deposits and others 717 (625) 92 Time deposits 1,959 (1,919) 40 Total interest-bearing deposits 2,676 (2,544) 132 Borrowings (315) (36) (351) Total interest-bearing liabilities 2,361 (2,580) (219) Net interest income $ 1,959 $ 1,568 $ 3,527 Comparison for the Three Months Ended June 30, 2025 and 2024 Net interest income for the second quarter of 2025 increased year-over-year, primarily driven by higher interest income on loans. Interest income on loans increased $3.7 million, or 12%, primarily due to growth in average loan balances, partially offset by a decline in loan yields, reflecting the impact of of downward repricing on adjustable-rate loans and lower rates on new originations following last year's decreases in the federal funds rate. Interest expense on interest-bearing deposits remained relatively unchanged, as the impact of increase in average interest-bearing deposit balances was almost offset by a decline in interest-bearing deposit costs. The decline in deposit costs reflected the repricing of deposit products in response to the last year's decreases in the federal fund rate. As a result, net interest margin increased 27 basis points, as a 22% increase in net interest income outpaced an 11% increase in average earning assets, primarily driven by a 52 basis point increase in net interest spread. 40 Six Months Ended June 30, 2025 vs 2024 Increases (Decreases) Due to Change in ($ in thousands) Volume Rate Total Interest-earning assets: Interest-bearing deposits in other banks $ 768 $ (584) $ 184 Federal funds sold and other investments 14 (32) (18) AFS debt securities (160) 43 (117) CRE 3,227 295 3,522 SBA 861 (2,365) (1,504) C&I 1,932 (524) 1,408 Home mortgage 1,562 276 1,838 Consumer and other (62) 3 (59) Total loans 7,520 (2,315) 5,205 Total interest-earning assets 8,142 (2,888) 5,254 Interest-bearing liabilities: Money market deposits and others 437 (1,200) (763) Time deposits 4,883 (3,055) 1,828 Total interest-bearing deposits 5,320 (4,255) 1,065 Borrowings (657) (120) (777) Total interest-bearing liabilities 4,663 (4,375) 288 Net interest income $ 3,479 $ 1,487 $ 4,966 Comparison for the Six Months Ended June 30, 2025 and 2024 Net interest income for the first half of 2025 increased year-over-year, primarily driven by higher interest income on loans, partially offset by a modest increase in interest expense on interest-bearing liabilities. Interest income on loans increased $5.2 million, or 9%, largely due to by growth in average loan balances. This increase was partially offset by a decline in loan yields, reflecting the impact of downward repricing on adjustable-rate loans and lower rates on new originations following last year's decreases in the federal funds rate. The decline in loan yields was further impacted by lower non-contractual components, such as reduced discount accretion income and lower interest recognized on nonaccrual loans. Interest expense on interest-bearing liabilities increased slightly $288 thousand, or 1%, primarily due to higher average interest-bearing deposits. However, this was mostly offset by a decline in deposit costs, as interest-bearing deposits repriced downward in response to the prior year's federal fund rate cuts. As a result, net interest margin increased 11 basis points, as a 15% increase in net interest income outpaced an 11% increase in average earning assets, primarily driven by a 35 basis point increase in net interest spread. 41 Provision for Credit Losses Comparison for the Three Months Ended June 30, 2025 and 2024 Provision for credit losses was $1.2 million for the second quarter of 2025, compared with $617 thousand in the same period a year ago. The increase primarily reflected an adjustment to qualitative risk factors, driven by a cautious approach in light of ongoing economic uncertainty. The provision was also impacted by net charge-offs recognized during the quarter and higher historical loss factors, resulting from risk rating downgrades. Comparison for the Six Months Ended June 30, 2025 and 2024 Provision for credit losses was $1.9 million for the first half of 2025, compared with $762 thousand in the same period a year ago, primarily due to persistent economic volatility. This was partially offset by lower historical loss factors, which reduced the quantitative component of the allowance calculation. Noninterest Income While interest income remains the largest single component of total revenues, noninterest income is also an important component. A portion of our noninterest income is associated with SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. Other sources of noninterest income include service charges on deposit. Comparison for the Three Months Ended June 30, 2025 and 2024 The following table presents the components of noninterest income for the second quarters of 2025 and 2024: Three Months Ended June 30, ($ in thousands) 2025 2024 $ Change % Change Noninterest income: Service charges on deposits $ 1,017 $ 793 $ 224 28 % Loan servicing fees, net of amortization 900 575 325 57 Gains on sale of loans 1,441 2,325 (884) (38) Other income 610 491 119 24 Total noninterest income $ 3,968 $ 4,184 $ (216) (5) % Noninterest income for the second quarter of 2025 decreased year-over-year, primarily due to lower gains on sale of loans, partially offset by higher loan servicing fees and service charges on deposits. Service charges on deposit increased $224 thousand, or 28%, primarily driven by higher deposit analysis fees, reflecting continued growth in the number of business customer accounts. Loan servicing fees, net of amortization, increased $325 thousand, or 57%, primarily due to reduced amortization expense of servicing assets, resulting from reduced loan payoff activities. Gains on sale of loans decreased $884 thousand, or 38%, primarily due to a reduced SBA loan sale activity and lower average premium rates. The Bank sold $25.3 million in SBA loans at an average premium of 7.05%, compared to sale of $32.1 million at an average premium rate of 8.58%. 42 Comparison for the Six Months Ended June 30, 2025 and 2024 The following table presents the components of noninterest income for the first halves of 2025 and 2024: Six Months Ended June 30, ($ in thousands) 2025 2024 $ Change % Change Noninterest income: Service charges on deposits $ 2,017 $ 1,405 $ 612 44 % Loan servicing fees, net of amortization 1,907 1,347 560 42 Gains on sale of loans 3,460 4,028 (568) (14) Other income 1,400 990 410 41 Total noninterest income $ 8,784 $ 7,770 $ 1,014 13 % Noninterest income for the first half of 2025 increased year-over-year, primarily due to higher service charges on deposits and loan servicing fees, partially offset by lower gains on sale of loans. Service charges on deposit increased $612 thousand, or 44%, primarily driven by higher deposit analysis fees, reflecting continued growth in the number of business customer accounts. Loan servicing fees, net of amortization, increased $560 thousand, or 42%, primarily due to reduced amortization expense of servicing assets, resulting from reduced loan payoff activities. Gains on sale of loans decreased $568 thousand, or 14%, primarily due to lower average premium rates. The Bank sold $56.4 million in SBA loans at an average premium of 7.62%, compared to sale of $56.9 million at an average premium rate of 8.47%. Noninterest Expense Comparison for the Three Months Ended June 30, 2025 and 2024 The following table presents the components of noninterest expense for the second quarters of 2025 and 2024: Three Months Ended June 30, ($ in thousands) 2025 2024 $ Change % Change Noninterest expense: Salaries and employee benefits $ 9,075 $ 7,568 $ 1,507 20 % Occupancy and equipment 1,584 1,660 (76) (5) Data processing and communication 306 530 (224) (42) Professional fees 418 406 12 3 FDIC insurance and regulatory assessments 506 378 128 34 Promotion and advertising 232 151 81 54 Directors' fees 198 178 20 11 Foundation donation and other contributions 636 539 97 18 Other expenses 1,082 779 303 39 Total noninterest expense $ 14,037 $ 12,189 $ 1,848 15 % Noninterest expense for the second quarter of 2025 increased year-over-year, primarily due to higher salaries and employee benefits and other expenses, as well as increased FDIC insurance and regulatory assessments, partially offset by a reduction in data processing and communication. Salaries and employee benefits for the second quarter of 2025 increased $1.5 million, or 20%, primarily due higher incentive accruals as well as staffing growth and annual merit-based salary adjustments. 43 Data processing and communication for the second quarter of 2025 decreased $224 thousand, or 42%, primarily due to contractual credits received following the conversion to a new core banking system in the fourth quarter of 2024. These savings are expected to continue in future periods, as the new system offers more cost-effective processing capabilities. Management anticipates that data processing and communication expense will remain at a lower run rate, contributing to improved operating efficiency. FDIC insurance and regulatory assessments for the second quarter of 2025 increased $128 thousand, or 34%, primarily due to higher FDIC assessment charges. The increase was largely driven by growth in the Bank's total assets, which expanded the assessment base, along with higher assessment rates. Other expenses for the second quarter of 2025 increased $303 thousand, or 39%, primarily due to higher credit-related and business development expenses. Comparison for the Six Months Ended June 30, 2025 and 2024 The following table presents the components of noninterest expense for the first halves of 2025 and 2024: Six Months Ended June 30, ($ in thousands) 2025 2024 $ Change % Change Noninterest expense: Salaries and employee benefits $ 17,851 $ 15,409 $ 2,442 16 % Occupancy and equipment 3,165 3,315 (150) (5) Data processing and communication 602 1,017 (415) (41) Professional fees 825 801 24 3 FDIC insurance and regulatory assessments 993 752 241 32 Promotion and advertising 388 300 88 29 Directors' fees 378 335 43 13 Foundation donation and other contributions 1,192 1,079 113 10 Other expenses 2,457 1,338 1,119 84 Total noninterest expense $ 27,851 $ 24,346 $ 3,505 14 % Noninterest expense for the first half of 2025 increased year-over-year, primarily due to higher salaries and employee benefits and other expenses, partially offset by a reduction in data processing and communication. Salaries and employee benefits for the first half of 2025 increased $2.4 million, or 16%, primarily due higher staffing levels to support business growth, annual merit-based salary adjustments, and increased incentive accruals. Data processing and communication for the first half of 2025 decreased $415 thousand, or 41%, primarily due to contractual credits received following the conversion to a new core banking system in the fourth quarter of 2024. These savings are expected to continue in future periods, as the new system offers more cost-efficient processing capabilities. Management anticipates that data processing and communication expense will remain at a lower run rate, contributing to improved operating efficiency. Other expenses for the first half of 2025 increased $1.1 million, or 84%, primarily due to higher credit-related and business development expenses. Income Taxes Income tax expense was $2.1 million for both the second quarters of 2025 and 2024, and $4.2 million for both the first halves of 2025 and 2024. The effective income tax rate was 25.0% and 28.2% for the second quarters of 2025 and 2024, respectively, 26.3% and 28.1% for the first halves of 2025 and 2024, respectively. The decreases in the effective tax rate for both periods were primarily driven by the revaluation of deferred tax assets following recent changes in California state tax legislation. Additional contributing factors included revised estimates stemming from the adoption of an enhanced interim state tax apportionment methodology, as well as higher discrete benefits associated with stock-based compensation. 44 We recognized net deferred tax assets of $12.6 million and $14.9 million as of June 30, 2025 and December 31, 2024, respectively. After evaluating all available positive and negative evidence, including recent financial performance, projected future taxable income, and tax planning strategies, we have concluded that it was more- likely-than-not that net deferred tax assets as of June 30, 2025, will be fully realized in future periods. FINANCIAL CONDITION Investment Portfolio The securities portfolio is the second largest component of our interest earning assets, and the structure and composition of this portfolio is important to an analysis of our financial condition. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, because it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and our other funding sources; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans. We classify our debt securities as either AFS or held-to-maturity at the time of purchase. Accounting guidance requires AFS debt securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect changes in the fair value of our available-for-sale securities. All securities in our investment portfolio were classified as AFS debt as of both June 30, 2025 and December 31, 2024. There were no held-to-maturity or trading securities in our investment portfolio as of June 30, 2025 and December 31, 2024. All AFS debt securities are carried at fair value and consist of U.S. government agencies or sponsored agency securities, and tax-exempt municipal securities. The following table summarizes the fair value of the AFS debt securities portfolio as of the dates presented: June 30, 2025 December 31, 2024 ($ in thousands) Amortized Cost Fair Value Net Unrealized Loss Amortized Cost Fair Value Net Unrealized Loss U.S. Government agencies or sponsored agency securities: Residential mortgage-backed securities $ 38,425 $ 34,806 $ (3,619) $ 41,521 $ 37,076 $ (4,445) Residential collateralized mortgage obligations 149,107 134,873 (14,234) 160,187 143,041 (17,146) Municipal securities - tax exempt 5,884 5,321 (563) 5,830 5,792 (38) Total AFS debt securities $ 193,416 $ 175,000 $ (18,416) $ 207,538 $ 185,909 $ (21,629) AFS debt securities decreased $10.9 million, or 6%, to $175.0 million as of June 30, 2025 from $185.9 million as of December 31, 2024, primarily due to a $14.1 million in paydowns of residential mortgage-backed securities and collateralized mortgage obligations, partially offset by a $3.2 million decrease in unrealized loss for the six months ended June 30, 2025. No issuer of the AFS debt securities, other than U.S. Government and its agencies, comprised more than ten percent of our shareholders’ equity as of June 30, 2025 and December 31, 2024. Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. The unrealized losses were primarily attributable to interest rate movement, not credit quality. These securities (Fannie Mae, Ginnie Mae, and Freddie Mac) are guaranteed or sponsored by agencies of the U.S. government, and the issuers of the securities are of high credit quality. We believe that the net unrealized losses presented in the previous tables are temporary and no credit losses are expected. As a result, we expect full collection of the carrying amount of these securities, do not intend to sell the securities in an unrealized loss position, and believe it is more-likely-than-not we will not have to sell these securities prior to recovery of amortized cost. Accordingly, for AFS debt securities, we did not have allowance for credit losses as of June 30, 2025 and December 31, 2024. 45 The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the dates presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. June 30, 2025 Due in One Year or Less Due after One Year Through Five Years Due after Five Years Through Ten Years Due after Ten Years ($ in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield U.S. Government agencies or sponsored agency securities: Residential mortgage-backed securities $ 39 2.35 % $ 740 2.21 % $ 11,813 2.14 % $ 25,833 2.24 % Residential collateralized mortgage obligations — — 94 1.87 1,691 1.46 147,322 3.02 Municipal securities - tax exempt — — — — — — 5,884 5.23 Total AFS debt securities $ 39 2.35 % $ 834 2.17 % $ 13,504 2.05 % $ 179,039 2.98 % Loans Our loans represent the largest portion of our earning assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition. The loan distribution table that follows sets forth our gross loans outstanding, and the percentage distribution in each category as of the dates indicated: June 30, 2025 December 31, 2024 ($ in thousands) Amount % of Total Amount % of Total CRE $ 1,021,431 49 % $ 980,247 50 % SBA—real estate 241,451 12 231,962 12 SBA—non-real estate 21,973 1 21,748 1 C&I 193,359 9 213,097 11 Home mortgage 593,256 29 509,524 26 Consumer and other 110 0 274 0 Gross loans 2,071,580 100 % 1,956,852 100 % Allowance for credit losses (26,286) (24,796) Net Loans (1) $ 2,045,294 $ 1,932,056 (1) Includes net deferred loan costs (fees) and net unamortized premiums (unaccreted discounts) of $398 thousand and $(702) thousand as of June 30, 2025 and December 31, 2024, respectively. Gross loans increased $114.7 million, or 6%, to $2.07 billion as of June 30, 2025 from December 31, 2024. The growth was primarily driven by new loan originations in CRE and home mortgage loans, partially offset by payoffs in both categories and paydowns in CRE loans. Our loan portfolio is concentrated in CRE, which includes unguaranteed balances in SBA loans, home mortgage and commercial (primarily manufacturing, wholesale, and services oriented entities). We do not have any material concentrations by industry or group of industries in the loan portfolio. However, 90% of our gross loans were secured by real property as of June 30, 2025, compared to 88% as of December 31, 2024. Loans Concentration: We have established concentration limits in the loan portfolio for CRE, C&I, and unsecured lending, among others. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending agreements to allow us to react to a borrower’s deteriorating financial condition, should that occur. 46 Loans — CRE: Our CRE loans include both owner-occupied and non-occupied properties. We originate a mix of fixed- and adjustable-rate loans, with adjustable rates tied to the Wall Street Journal prime rate. As of June 30, 2025, our CRE loans totaled $1.02 billion , up from $980.2 million as of December 31, 2024. During the first half of 2025, we originated $109.6 million in new CRE loans. Approximately 79% of the CRE portfolio consisted of fixed-rate loans as of June 30, 2025, compared to 76% as of December 31, 2024. Our policy sets the maximum loan-to-value ("LTV") for CRE at 70%. Our weighted average LTV ratio was 48% as of June 30, 2025, compared to 54% as of December 31, 2024. Loans — SBA : We are designated as an SBA Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or business expansions. SBA loans have maturities up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and may include personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and included in our CRE Concentration Guidance. As of June 30, 2025, our SBA portfolio totaled $263.4 million, up from $253.7 million as of December 31, 2024. Of the total portfolio, $241.5 million was secured by real estate, while $22.0 million was either unsecured or secured by business assets. In comparison, as of December 31, 2024, $232.0 million was secured by real estate and $21.7 million was either unsecured or secured by business assets. Loans — C&I: C&I loans totaled $193.4 million as of June 30, 2025, down from $213.1 million as of December 31, 2024. Loans - Home Mortgage: We originate mainly non-qualified, alternative documentation single-family home mortgage loans (“home mortgage”) primarily through our retail branch network and our correspondent lender network. The primary loan product is a five-year or seven-year hybrid adjustable rate mortgage, which reprices after five years to a selected SOFR plus certain spreads. We also purchase residential mortgage loans from third party mortgage originators based on the review of their underwriting and file quality as opportunities arise. Home mortgage loans totaled $593.3 million as of June 30, 2025, up from $509.5 million as of December 31, 2024. During the first half of 2025, we originated $128.8 million in new home mortgage loans. There were no home mortgage loan purchases from third party mortgage originators during the first half of 2025. Loan Servicing As of June 30, 2025 and December 31, 2024, we serviced $708.0 million and $700.9 million, respectively, of SBA loans for others. For additional information on the servicing assets, see " Note 5 — Serving Assets ". Allowance for Credit Losses The Company maintains its allowance for credit losses at a level it believes is adequate to absorb estimated future credit losses in accordance with GAAP. For further details on the policies, methodologies and significant judgments used in determining the allowance, refer to Item 7. MD&A — Critical Accounting Estimates and Item 8. Financial Statements — Note 1— Business and Basis of Presentation to the consolidated financial statements in the 2024 Annual Report on Form 10-K, as well as Note 3 — Loans and Allowance for Credit Losses on Loans to the consolidated financial statements in this Form 10-Q. The allowance for credit losses on loans was $26.3 million as of June 30, 2025, an increase of $1.5 million from $24.8 million as of December 31, 2024. The increase was primarily driven by loan growth in CRE and home mortgage loan portfolios, as well as higher historical loss factors, resulting from risk rating downgrades. 47 Analysis of the Allowance for Credit Losses The following tables summarize the activity in the allowance for credit losses on loans by loan segments for the three and six months ended June 30, 2025 and 2024: As of and for the Three Months Ended June 30, 2025 2024 ($ in thousands) Beginning Provision (Reversal) Net (Charge-offs) Recoveries Ending Beginning Provision (Reversal) Net (Charge-offs) Recoveries Ending CRE $ 9,010 $ 9 $ (49) $ 8,970 $ 8,044 $ (118) $ — $ 7,926 SBA—real estate 5,381 931 (413) 5,899 2,793 134 — 2,927 SBA—non- real estate 512 (17) 4 499 229 20 4 253 C&I 1,710 (372) 121 1,459 1,663 488 — 2,151 Home mortgage 8,755 704 — 9,459 9,391 108 — 9,499 Consumer — — — — 9 (5) $ — 4 Total $ 25,368 $ 1,255 $ (337) (337) $ 26,286 $ 22,129 $ 627 $ 4 $ 22,760 Gross loans $ 2,071,580 $ 1,870,106 Average gross loans $ 2,076,965 $ 1,832,867 Net (charge-offs) recoveries to average gross loans (1) (0.06) % 0.00 % Allowance for credit losses to gross loans 1.27 % 1.22 % As of and for the Six Months Ended June 30, 2025 2024 ($ in thousands) Beginning Provision (Reversal) Net (Charge-offs) Recoveries Ending Beginning Provision (Reversal) Net (Charge-offs) Recoveries Ending CRE $ 9,290 $ (271) $ (49) $ 8,970 $ 7,915 $ 11 $ — $ 7,926 SBA—real estate 5,557 755 (413) 5,899 1,657 1,336 (66) 2,927 SBA—non- real estate 418 72 9 499 147 91 15 253 C&I 1,844 (477) 92 1,459 1,215 936 — 2,151 Home mortgage 7,684 1,866 (91) 9,459 11,045 (1,544) (2) 9,499 Consumer 3 (3) — — 14 (10) $ — 4 Total $ 24,796 $ 1,942 $ (452) $ 26,286 $ 21,993 $ 820 $ (53) $ 22,760 Gross loans $ 2,071,580 $ 1,870,106 Average gross loans $ 2,036,656 $ 1,815,032 Net (charge-offs) recoveries to average gross loans (1) (0.04) % (0.01) % Allowance for credit losses to gross loans 1.27 % 1.22 % (1) Annualized The following table presents an allocation of the allowance for credit losses on loans by portfolio as of June 30, 2025 and December 31, 2024: June 30, 2025 December 31, 2024 ($ in thousands) Amount % to Total Amount % to Total CRE $ 8,970 34 % $ 9,290 38 % SBA—real estate 5,899 22 5,557 22 SBA—non- real estate 499 2 418 2 C&I 1,459 6 1,844 7 Home mortgage 9,459 36 7,684 31 Consumer — — 3 0 Total $ 26,286 100 % $ 24,796 100 % 48 Nonperforming Assets Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are 90 days past due or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on non-accrual loans is subsequently recognized only to the extent that cash is received, and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable. Nonperforming loans include loans that are 90 days past due and still accruing, loans accounted for on a non-accrual basis, and accruing restructured loans. Nonperforming assets consist of nonperforming loans plus OREO. Nonperforming loans were $8.9 million as of June 30, 2025, compared to $7.8 million as of December 31, 2024. Nonperforming loans excluded the guaranteed portion of SBA loans of $13.9 million and $16.3 million as of June 30, 2025 and December 31, 2024, respectively. Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until being sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. As of both June 30, 2025 and December 31, 2024, OREO totaled $1.2 million, which is secured by a mix-use property in Los Angeles with 90% guaranteed by SBA. The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings. ($ in thousands) June 30, 2025 December 31, 2024 Nonaccrual loans $ 8,916 $ 7,820 Past due loans 90 days or more and still accruing — — Total nonperforming loans (1) 8,916 7,820 OREO 1,237 1,237 Total nonperforming assets $ 10,153 $ 9,057 Nonperforming loans to gross loans 0.43 % 0.40 % Nonperforming assets to total assets 0.40 0.38 Allowance for credit losses on loans to nonperforming loans 295 317 (1) Excludes guaranteed portion of SBA loans of $13.9 million and $16.3 million as of June 30, 2025 and December 31, 2024, respectively. Deposits and Other Sources of Funds We gather deposits primarily through our branch locations. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We dedicate continuing effort into gathering noninterest demand deposits accounts through marketing to our existing and new loan customers, customer referrals, our marketing staff and various involvement with community networks. 49 The following table show the composition of deposits by type as of the dates presented: June 30, 2025 December 31, 2024 ($ in thousands) Amount Percent Amount Percent Noninterest-bearing demand $ 565,683 25 % $ 504,928 25 % Interest-bearing: Money market and others 431,252 19 329,095 16 Time deposits (greater than $250) 643,350 29 565,813 28 Time deposits ($250 or less) 614,443 27 627,449 31 Total interest-bearing 1,689,045 75 1,522,357 75 Total deposits $ 2,254,728 100 % $ 2,027,285 100 % The following tables set forth the maturity of time deposits as of June 30, 2025: Maturity Within: ($ in thousands) Three Months Three to Six Months Six to Twelve Months After Twelve Months Total Time deposits (greater than $250) $ 235,531 $ 146,560 $ 261,259 $ — $ 643,350 Time deposits ($250 or less) 257,458 150,671 204,126 2,188 614,443 Total time deposits $ 492,989 $ 297,231 $ 465,385 $ 2,188 $ 1,257,793 Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and CRE loans. As of June 30, 2025 and December 31, 2024, the Company had maximum borrowing capacity from the FHLB of $727.8 million and $677.0 million, respectively. We had borrowings from FHLB of $50.0 million and $95.0 million as of June 30, 2025 and December 31, 2024, respectively. The Company had estimated uninsured deposits of $1.2 billion, or 51% of total deposits, and $961.7 million, or 47% of total deposits, as of June 30, 2025 and December 31, 2024, respectively. Liquidity and Capital Resources Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, while effectively balancing the related costs. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis. Deposits are the primary funding source for the Bank. Deposits provide a stable source of funding and reduce our reliance on the wholesale funding markets. The following table presents the loan and deposit balances, the loans-to-deposit ratios, and deposits as a percentage of total liabilities as of June 30, 2025 and December 31, 2024: ($ in thousands) June 30, 2025 December 31, 2024 Deposits $ 2,254,728 $ 2,027,285 Deposits as a % of total liabilities 96 % 94 % Loans, net $ 2,045,294 $ 1,932,056 Loans-to-deposits ratio 91 % 95 % 50 In addition to deposits, we have access to various sources of wholesale funding, as well as borrowing capacity at the FHLB, Federal Reserve, and correspondent banks to sustain an adequate liquid asset portfolio, meet daily cash demands and allow management flexibility to execute the business strategy. Economic conditions and the stability of capital markets impact the access to and the cost of wholesale funding. The access to capital markets is also affected by the ratings received from various credit rating agencies. We had $100.0 million of unsecured federal funds lines with no amounts advanced as of both June 30, 2025 and December 31, 2024. In addition, on such dates we had lines of credit from the Federal Reserve discount window of $223.4 million and $215.1 million, respectively. The Federal Reserve discount window lines were collateralized by a pool of CRE loans and C&I loans totaling $309.2 million and $278.9 million as of June 30, 2025 and December 31, 2024, respectively. We had no borrowings outstanding with the Federal Reserve as of June 30, 2025 or December 31, 2024. Our borrowing on these lines of credits is based upon our eligible collateral and thus may fluctuate from time to time. Based on the values of loans pledged as collateral, we had $443.2 million of additional borrowing availability with the FHLB as of June 30, 2025. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts. We maintain ample access to liquidity, including highly liquid assets on our balance sheet and available unused borrowings from other financial institutions. The following table presents our liquid assets and available borrowings as of June 30, 2025 and December 31, 2024: ($ in thousands) June 30, 2025 December 31, 2024 % Change Liquid assets: Cash and cash equivalents $ 205,388 $ 134,943 52 % AFS debt securities 175,000 185,909 (6) Liquid assets $ 380,388 $ 320,852 19 % Liquid assets to total deposits 17 % 16 % Available borrowings: FHLB $ 443,207 $ 401,900 10 % Federal Reserve Bank 223,373 215,115 4 Pacific Coast Bankers Bank 50,000 50,000 — Zions Bank 25,000 25,000 — First Horizon Bank 25,000 25,000 — Total available borrowings $ 766,580 $ 717,015 7 % Total available borrowings to total deposits 34 % 35 % Liquid assets and available borrowings to total deposits 51 % 51 % In addition to contractual obligations, other commitments of us impact liquidity. These include unused commitments to extend credit, standby letters of credit and commercial letters of credit. Since many of these commitments expire without being drawn upon, and each customer must continue to meet the conditions established in the contract, the total amount of these commercial commitments does not necessarily represent the future cash requirements of us. Our liquidity sources have been, and are expected to be, sufficient to meet the cash requirements of our lending activities. Information about our loan commitments, standby letters of credit and commercial letters of credit is provided in Note 9. Commitments and Contingencies to the unaudited consolidated financial statements in this Report. Capital Requirements We are subject to various regulatory capital requirements administered by the federal and state banking regulators, although, as a “smaller bank holding company,” we are not subject to most of these standards at the holding company level. These standards are, however, applicable to the Bank, and failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework 51 for “prompt corrective action”, the Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators regarding components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and various ratios of CET1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.” The table below summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of June 30, 2025 and December 31, 2024. The Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be “well-capitalized” as of the dates reflected in the table below. As of June 30, 2025, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since June 30, 2025 that management believes would change this classification. As of June 30, 2025 Actual (1) Regulatory Capital Ratio Requirements Minimum to be Considered "Well Capitalized" Regulatory Capital Ratio Requirements, including fully phased in Capital Conservation Buffer ($ in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total capital (to risk-weighted assets) Consolidated $ 252,936 12.26 % N/A N/A N/A N/A N/A N/A Bank 250,705 12.15 $ 165,139 8.00 % $ 206,424 10.00 % $ 216,746 10.50 % Tier 1 capital (to risk-weighted assets) Consolidated 227,148 11.01 N/A N/A N/A N/A N/A N/A Bank 224,902 10.90 123,855 6.00 165,139 8.00 175,461 8.50 CET1 capital (to risk-weighted assets) Consolidated 227,148 11.01 N/A N/A N/A N/A N/A N/A Bank 224,902 10.90 92,891 4.50 134,176 6.50 144,497 7.00 Tier 1 leverage (to average assets) Consolidated 227,148 8.96 N/A N/A N/A N/A N/A N/A Bank 224,902 8.87 101,435 4.00 126,793 5.00 101,435 4.00 (1) The capital requirements are only applicable to the Bank, and our ratios are included for comparison purpose. 52 As of December 31, 2024 Actual (1) Regulatory Capital Ratio Requirements Minimum to be Considered "Well Capitalized" Regulatory Capital Ratio Requirements, including fully phased in Capital Conservation Buffer ($ in thousands) Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total capital (to risk-weighted assets) Consolidated $ 244,659 12.60 % N/A N/A N/A N/A N/A N/A Bank 242,966 12.50 $ 155,463 8.00 % $ 194,328 10.00 % $ 204,053 10.50 % Tier 1 capital (to risk-weighted assets) Consolidated 220,390 11.35 N/A N/A N/A N/A N/A N/A Bank 218,675 11.25 116,597 6.00 155,463 8.00 165,186 8.50 CET1 capital (to risk-weighted assets) Consolidated 220,390 11.35 N/A N/A N/A N/A N/A N/A Bank 218,675 11.25 87,448 4.50 126,313 6.50 136,035 7.00 Tier 1 leverage (to average assets) Consolidated 220,390 9.27 N/A N/A N/A N/A N/A N/A Bank 218,675 9.20 95,055 4.00 118,819 5.00 95,055 4.00 (1) The capital requirements are only applicable to the Bank, and our ratios are included for comparison purpose.