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Item 7. Management’s Discussion and Analysis

2025-03-17 compared with 2024-03-12 · 445 added, 426 removed, 611 unchanged (59% of the section changed)

1 unchanged sentence

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of the Company’s audited consolidated financial statements are based upon its audited consolidated financial statements, which have been prepared in accordance with GAAP.

The discussion and analysis of our audited consolidated financial statements are based upon its audited consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles ("GAAP").

The preparation of these audited consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities at the date of our consolidated financial statements.

Actual results may differ from these estimates under different assumptions or conditions.

Allowance for Credit Losses (“ ACL” ) on Loans Held for Investment

The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination.

Allowance for Credit Losses (“ ACL”) - Loans Held for Investment

We account for credit losses on loans in accordance with ASC 326, which requires us to record an estimate of expected lifetime credit losses for loans at the time of origination.

The ACL is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated balance sheets.

Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts.

The use of reasonable and supportable forecasts requires significant judgment, such as utilizing the Federal Open Market Committee's projected unemployment rate as part of the economic forecast and related scenario-weighting based on Management's direct control/influence over specific qualitative factors and internal understanding of level of exposure, as well as determining the appropriate length of the forecast horizon.

Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Any unexpected adverse changes or uncertainties to these factors that are beyond the Company’s control could result in increases in the ACL through additional provision for credit losses.

The use of reasonable and supportable forecasts requires significant judgment, such as utilizing the Federal Open Market Committee's projected unemployment rate as part of the economic forecast, determining the appropriate length of the forecast horizon and determining the appropriate weighting and degree of risk assigned to each of the qualitative factors based on management's direct control or influence over specific qualitative factors and internal understanding of such levels of exposure.

Management estimates the allowance balance required using past loan loss experience, peer loss history, loan prepayment speeds, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

Any unexpected adverse changes or uncertainties to these factors that are beyond our control could result in increases in the ACL through additional provision for credit losses.

A sensitivity analysis of our ACL was performed as of December 31, 2024.

Based on this sensitivity analysis, a positive 25% change in prepayment speed would result in a $968,000, or (2.31)%, decrease to the ACL.

A negative 25% change in prepayment speed would result in a $1.3 million, or 3.08%, increase to the ACL.

Additionally, a one percentage point increase in the unemployment rate would result in a $738,000, or 1.76%, increase to the ACL and a one percentage point decrease in the unemployment rate would result in a $678,000, or (1.62)%, decrease to the ACL.

Based on this sensitivity analysis, a positive 25% change in loan prepayment speeds would result in a $1.4 million, or 2.8%, decrease to the ACL.

Conversely, a negative 25% change in loan prepayment speeds would result in a $1.5 million, or 3.2%, increase to the ACL.

Additionally, a one percentage point increase in the unemployment rate would result in a $966,000, or 2.0%, increase to the ACL and a one percentage point decrease in the unemployment rate would result in a $1.1 million, or 2.2%, decrease to the ACL.

Management reviews the results using the comparison scenario for sensitivity analysis and considered the results when evaluating the qualitative factor adjustments.

On a quarterly basis, we stress test the qualitative factors, which are lending policy, procedures & strategies, economic conditions, changes in nature and volume of the portfolio, credit & lending staff, problem loan trends, loan review results, collateral value, concentrations and regulatory and business environment by creating two scenarios, moderate risk and major risk.

In the Moderate Stress scenario, the status of all nine risk factors were set at “Moderate Risk.” In the Major Stress scenario, the status of all nine risk factors across all pooled loan segments were set at “Major Risk.” Under the Moderate Stress scenario, ACL increased by $3.9 million, or 9.2%, as of December 31, 2023.

In the Moderate Stress scenario, the status of all nine risk factors across all pooled loan segments were set at “Moderate Risk.” In the Major Stress scenario, the status of all nine risk factors across all pooled loan segments were set at “Major Risk.” Under the Moderate Stress scenario, ACL increased by $8.7 million, or 18.0%, as of December 31, 2024.

Under the Major Stress scenario, ACL increased by $23.7 million or 48.8% as of December 31, 2024.

Investment Securities

Effective January 1, 2022, upon the adoption of ASU 2016-13, the Company accounts for credit losses on available for sale (“AFS”) securities in accordance with ASC 326-30.

Debt securities are measured at fair value and subject to impairment testing.

When a debt security is considered impaired, the Company must determine if the decline in fair value has resulted from a credit-related loss or other factors and then, (1) recognize an allowance for credit loss by a charge to earnings for the credit-related component (if any) of the decline in fair value, and (2) recognize in other comprehensive income (loss) any non-credit related components of the fair value change.

If the amount of the amortized cost basis expected to be recovered increases in a future period, the valuation reserve would be reduced, but not more than the amount of the current existing reserve for that security.

Our significant accounting policies are described in greater detail in our 2023 audited financial statements included in Item 8.

Financial Statements and Supplementary Data of this Annual Report, specifically in “Note 2 – Basis of Presentation and Summary of Significant Accounting Policies,” which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations.

For AFS debt securities in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income.

For AFS debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors.

The determination of credit losses when there is a decrease in fair value of an AFS debt security involves significant judgment.

Adverse changes in management’s assessment that concluded a credit impairment on an investment security would result in an increase in impairment charges that would negatively impact our earnings.

Goodwill is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any non-controlling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date.

Goodwill resulting from whole bank acquisitions is not amortized but tested for impairment at least annually.

The Company performs goodwill impairment tests in accordance with ASC 350 “Intangibles- Goodwill and Other.” Fair value of goodwill is based on selection and weighting of valuation methods using management assumptions not limited to discounted cash flow (“DCF”), diversification, market position, customer dependence, access to capital markets, financial risk, growth, and earnings trends.

Consideration of economic conditions is also an important part of the valuation process.

Changes to assumptions, to selection and weighting in the valuation methods and to economic conditions could result in goodwill impairment losses that negatively impact our earnings.

We perform goodwill impairment tests in accordance with ASC 350 “Intangibles-Goodwill and Other.” In evaluating whether it is more likely than not that the fair value of the Company is less than its carrying amount, we assess relevant events and circumstances such as macroeconomic conditions, industry and market considerations, financial performance, our stock price and other relevant entity specific considerations.

As discussed more fully herein, we have not recognized any goodwill impairment.

We file our income taxes on a consolidated basis with our subsidiaries.

The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

Income taxes are accounted for under the asset and liability method.

Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

Deferred tax assets are also recognized for operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates.

The effect of a change in tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date.

The value of deferred tax assets and liabilities are based on many factors including:

estimates of the timing of reversals of temporary differences, the application of federal and state income tax laws, and a determination of the differences between the tax and the financial reporting basis of assets and liabilities.

Actual results could differ from the estimates and interpretations used in determining the current and deferred income tax liabilities.

Under ASC 740, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of the Company's deferred tax assets will not be realized.

The Company's policy is to evaluate the deferred tax assets on a quarterly basis and record a valuation allowance for the Company's deferred tax assets if there is not sufficient positive evidence available to demonstrate utilization of the Company's deferred tax assets.

Initial setup or an increase to deferred tax asset valuation allowance would be charged to income tax expense that would negatively impact our earnings.

A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

Tax effects from an uncertain tax position are recognized in the financial statements only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities.

Interest and penalties related to uncertain tax positions are recorded as part of income tax expense.

Under ASC 740, a valuation allowance is required to be recognized if it is “more likely than not” that all or a portion of our deferred tax assets will not be realized.

Our policy is to evaluate the deferred tax assets on a quarterly basis and record a valuation allowance for the deferred tax assets if there is not sufficient positive evidence available to demonstrate utilization of the deferred tax assets.

An initial setup or an increase to the deferred tax asset valuation allowance would be charged to income tax expense that would negatively impact our earnings.

Our significant accounting policies are described in greater detail in our 2024 audited financial statements included in Item 8.

For the year 2023, we reported net earnings of $42.5 million, compared with $64.3 million for the year 2022.

This represented a decrease of $21.9 million, or 34.0%, over the prior year.

The decrease in net earnings reflected a $30.3 million decrease in net interest income and a $6.2 million increase in non-interest expenses, which was partially offset by a $3.8 million increase in noninterest income, a $1.6 million decrease in the provision for credit losses and a $9.2 million decrease in income tax expense.

At December 31, 2023, total assets were $4.03 billion, an increase of $107.0 million, or 2.7%, from total assets of $3.92 billion at December 31, 2022.

The increase in assets was primarily due to a $347.8 million increase in interest-bearing cash and due from banks, and an increase of $61.6 million in investment securities, partially offset by a decrease of $304.6 million in loans held for investment (“LHFI”).

At December 31, 2023, AFS investment securities totaled $319.0 million inclusive of a pre-tax net unrealized loss of $28.1 million, compared to $256.8 million inclusive of a pre-tax net unrealized loss of $31.3 million at December 31, 2022.

At December 31, 2023, held to maturity (“HTM”) investment securities totaled $5.2 million, compared to $5.7 million as of December 31, 2022.

Net loans (held for investment, net of deferred fees, discounts, and the allowance for loan losses) were $2.99 billion at December 31, 2023, compared to $3.30 billion at December 31, 2022.

Net loans decreased $305.4 million, or 9.3%, from December 31, 2022.

The decrease in net loans was mainly due to decreases of $144.3 million in CRE loans, $95.4 million in C&D loans, $71.1 million in C&I loans, $9.3 million in SBA loans and $8.1 million in other loans, partially offset by a $23.7 million increase in SFR mortgage loans.

Total deposits were $3.17 billion at December 31, 2023, an increase of $197.1 million, or 6.6%, compared to $2.98 billion at December 31, 2022, primarily due to an increase of $438.8 million in time deposits, partially offset by a decrease of $241.7 million of non-maturity deposits.

Noninterest-bearing deposits were $539.6 million at December 31, 2023, a decrease of $259.1 million, or 32.4%, from $798.7 million at December 31, 2022.

Financial Statements and Supplementary Data - Note 2 — Basis of Presentation and Summary of Significant Accounting Policies , which are essential to understanding Management’s Discussion and Analysis of Financial Condition and Results of Operations

For the year ended December 31, 2024, we reported net earnings of $26.7 million, compared with $42.5 million for the year ended December 31, 2023.

This represented a decrease of $15.8 million, or 37.2%, from the prior year due to a $19.9 million decrease in net interest income, and a $6.5 million increase in the provision for credit losses, partially offset by a $1.5 million decrease in noninterest expenses and an $8.8 million decrease in income tax expense.

The decrease in net interest income was attributed mostly to the higher cost of funds as interest expense increased $15.4 million.

At December 31, 2024, total assets were $4.0 billion, a decrease of $33.5 million, or 0.8%, from December 31, 2023.

The decrease was primarily due to a $178.7 million decrease in interest-earning cash and due from banks, partially offset by an increase of $101.2 million in investment securities and an increase of $21.4 million in loans HFI.

At December 31, 2024, available for sale ("AFS") investment securities totaled $420.2 million inclusive of a pre-tax net unrealized loss of $29.2 million, compared to $319.0 million inclusive of a pre-tax net unrealized loss of $28.1 million at December 31, 2023.

At December 31, 2024, held to maturity (“HTM”) investment securities totaled $5.2 million, unchanged from December 31, 2023.

Loans HFI were $3.1 billion at December 31, 2024, compared to $3.0 billion at December 31, 2023.

Loans HFI increased $21.4 million, or 0.7%, from December 31, 2023.

The increase in loans was mainly due to increases of $33.6 million of CRE loans and $6.2 million of SFR mortgage loans, partially offset by decreases of $8.2 million of C&D loans, $4.9 million of other loans, $4.8 million of SBA loans and $511,000 of C&I loans.

Total deposits were $3.1 billion at December 31, 2024, a decrease of $91.0 million, or 2.9%, compared to $3.2 billion at December 31, 2023.

This decrease included a $258.1 million decrease in wholesale deposits, partially offset by an increase in retail time deposits of $113.5 million and non-maturity deposits of $53.7 million.

Noninterest-bearing deposits were $563.0 million at December 31, 2024, an increase of $23.4 million, or 4.3%, from $539.6 million at December 31, 2023.

At December 31, 2024, noninterest-bearing deposits were 18.3% of total deposits, compared to 17.0% at December 31, 2023.

The decrease in noninterest-bearing deposits and consequently the overall mix of deposits was due to a combination of factors including the higher rate environment where customers shifted funds to a higher level of interest-bearing deposits, management’s decision to decrease certain deposit concentration risks and a higher level of wholesale funding to maintain a higher level of liquidity related to the Company’s loan portfolio.

Borrowings, consisting of FHLB advances, long-term debt and subordinated debt, decreased $124.2 million to $284.1 million as of December 31, 2023, compared to $408.3 million as of December 31, 2022.

The Company had no short-term FHLB advances and $150.0 million in long-term FHLB advances at December 31, 2023, compared to $70.0 million in short-term FHLB advances and $150.0 million in long-term FHLB advances at December 31, 2022.

We redeemed all $55.0 million of our outstanding 6.18% fixed-to-floating rate subordinated notes on December 1, 2023 at par.

The subordinated notes had an original maturity date of December 1, 2028 and an effective interest rate of 6.18% as of their redemption date.

The ACL for LHFI was $41.9 million at December 31, 2023, reflecting an increase of $827,000 from $41.1 million at December 31, 2022.

During 2023, there was a $3.9 million provision for credit losses on loans compared to $6.0 million for 2022.

The decrease in the 2023 provision for credit losses was due to a higher level of specific reserves and net charge-offs, offset by the impact of lower total loans held for investment at the end of 2023.

The ACL to LHFI outstanding was 1.38% and 1.23% as of December 31, 2023 and December 31, 2022, respectively.

Shareholders’ equity increased $26.7 million, or 5.5%, to $511.3 million as of December 31, 2023 from $484.6 million at December 31, 2022.

The increase during 2023 was primarily due to net income of $42.5 million and a decrease in net accumulated other comprehensive loss of $2.2 million, partially offset by cash dividends of $12.2 million and common stock repurchases of $6.8 million.

The increase in noninterest-bearing deposits and consequently the overall mix of deposits was due to a combination of factors including market rate decreases, management’s decision to decrease certain deposit concentration risks and a lower level of wholesale funding to maintain a lower level of liquidity related to our loan portfolio.

FHLB advances were $200 million at December 31, 2024, an increase of $50 million from December 31, 2023.

At December 31, 2024, FHLB advances included $150 million with original terms of five years at a weighted average rate of 1.18% and maturity dates in the first quarter of 2025.

A putable advance of $50 million was executed on September 30, 2024 with a four year final maturity with a one-time option for the FHLB to call the debt after a one-year lock out period and prepayment symmetry at a rate of 3.42%.

Long-term debt and subordinated debentures totaled $134.7 million at December 31, 2024, an increase of $600,000 from $134.1 million at December 31, 2023.

The allowance for loan losses ("ALL") was $47.7 million at December 31, 2024, reflecting an increase of $5.8 million from $41.9 million at December 31, 2023.

During 2024, there was a $9.8 million provision for loan losses compared to $3.9 million for 2023.

The increase in the 2024 provision for loan losses was due to a higher level of specific reserves and net charge-offs and increases in nonperforming and classified loans.

The ALL to loans HFI outstanding was 1.56% and 1.38% as of December 31, 2024 and December 31, 2023.

Shareholders’ equity decreased $3.4 million, or 0.7%, to $507.9 million as of December 31, 2024 from $511.3 million at December 31, 2023.

The decrease during 2024 was primarily due to common stock repurchases of $20.7 million, common stock cash dividends paid of $11.7 million and higher net unrealized losses on AFS securities of $745,000, partially offset by net income of $26.7 million and equity compensation activity of $3.2 million.

As a result, book value per share increased 4.3% to $28.66 from $ 27.47 and tangible book value per share increased 4.4% to $24.51 from $23.48.

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Diluted earnings per share are calculated by dividing earnings by the weighted average number of shares adjusted for the dilutive effect of outstanding stock options using the treasury stock method.

Ratio calculated by dividing noninterest expense by the sum of net interest income before provision for credit losses and noninterest income.

Tangible book value per share, return on average tangible common equity, and tangible common equity to tangible assets are non-GAAP financial measures.

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Management's Discussion and Analysis of Financial Condition and Results of Operations generally includes tables with 3-year financial performance, accompanied by narrative for the years ended December 31, 2024 and 2023.

For further discussion of financial results for the years ended December 31, 2022 and 2021 please refer to Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on April 7, 2023.

For further discussion of financial results for the years ended December 31, 2023 and 2022 please refer to 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 filed with the SEC on March 12, 2024.

Results of Operations—Comparison of Results of Operations for the Years Ended December 31, 2024 to December 31, 2023

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In 2024, we generated fully-taxable equivalent net interest income of $99.5 million, a decrease of $19.9 million, or 16.7%, from $119.4 million in 2023.

This decrease was largely due to a $455.3 million increase in the average balance of interest-bearing liabilities, in part due to higher time deposits, and a 225 basis point increase in the average cost of interest-bearing liabilities, partially offset by a 99 basis point increase in the average yield on interest-earning assets and a $55.1 million increase in the average balance of interest-earning assets.

Average noninterest-bearing deposits declined in 2023 due primarily to customers transferring their deposit balances into higher yielding money market accounts and time deposits.

Such transfers were due, in part, to the Federal Reserve raising the federal funds rates by 450 basis points during 2022 and another 100 basis points during 2023, in addition to the ongoing peer competition for deposits.

For the years ended December 31, 2023 and 2022, our net interest margin was 3.16% and 4.02%, respectively.

The decrease in net interest margin was primarily due to a 263 basis point increase in the average rate paid on interest-bearing deposits and a $479.3 million increase in average interest-bearing deposits, partially offset by a 54 basis point increase in the average yield on gross loans, and a $107.6 million increase in average gross loans.

The cost of interest-bearing deposits increased due to increasing market rates and peer bank deposit competition.

The $19.9 million decrease was due to a $15.4 million increase in interest expense and a $4.5 million decrease in interest income.

The decrease in interest income was mostly due to lower interest income on total loans of $9.7 million offset by higher interest income on interest-earning deposits of $4.7 million.

The decrease in loan interest income was mostly due to a lower average total loan balance of $164.3 million.

The increase in cash and investment interest income was attributed to higher average cash balances and a higher investment portfolio yield, offset by a lower average balance of investment securities.

The increase in interest expense was mostly due to a 72 basis point increase in total average interest-bearing deposit rates and higher average interest-bearing deposits of $30.1 million in the year ended December 31, 2024.

The weighted average Federal Funds Rate was 5.15% for the year ended December 31, 2024 compared to 5.03% for the year ended December 31, 2023.

Our net interest margin ("NIM") was 2.70% for the year ended December 31, 2024, a decrease of 46 basis points from 3.16% for the year ended December 31, 2023.

The decrease was due to a 55 basis point increase in the overall cost of funds, partially offset by a 2 basis point increase in the yield on average interest-earning assets.

The yield on average interest-earning assets increased to 5.88% for the year ended December 31, 2024 compared to the prior year due mainly to a 12 basis point increase in the yield on average cash and cash equivalents to 5.53%, and an 18 basis point increase in the investment portfolio yield, offset by the impact of the change in the mix of interest-earning assets.

Average total loan balances decreased $164.3 million year over year and average loans represented 83% of average interest-earning assets during 2024 compared to 85% during 2023.

The overall cost of funds increased to 3.49% in the year ended December 31, 2024 from 2.94% in the year ended December 31, 2023 due to a higher average cost of interest-bearing deposits in response to higher average market interest rates.

The overall funding mix for December 31, 2024 remained relatively unchanged from the prior year with a ratio of average noninterest-bearing deposits to average total funding sources of 16%.

Interest Income .

Total fully taxable equivalent interest income was $216.8 million in 2024 compared to $221.2 million in 2023.

The $40.2 million, or 22.2%, increase in total interest income was mainly due to an increase in the average balance of LHFI of $107.6 million, partially offset by a decrease of $7.4 million in the average balance of securities and a decrease of $45.1 million in the average balance of Federal funds sold, cash equivalents and other investments.

The $4.5 million, or 2.0%, decrease was mainly due to a decrease in the average balance of total loans of $164.3 million, a decrease in the average balance of investment securities of $7.0 million, partially offset by an increase of $80.5 million in the average balance of interest earning cash and cash equivalents.

Interest and fees on total loans was $184.6 million in 2024 compared to $194.3 million in 2023.

The $23.2 million, or 13.5%, increase in interest income on loans was primarily due to a $107.6 million increase in the average balance of total loans outstanding and a 54 basis point increase in the average yield on total loans.

The increase in the average balance of loans outstanding was primarily due to organic loan growth in SFR mortgage loans during 2023.

For the years 2023 and 2022, the average yield on total loans was 6.06% and 5.52%, respectively.

Tax equivalent interest income from our securities portfolio increased $7.9 million, or 128.5%, to $14.1 million in 2023.

The increase in tax equivalent interest income on securities was primarily due to a 240 basis point increase in the average tax equivalent yield of securities due to increases in market interest rates, partially offset by the impact of a $7.4 million, or 2.2%, decrease in the average balance of securities.

Interest income on our federal funds sold, cash equivalents and other investments increased $9.1 million, or 239.5%, to $12.9 million in 2023.

The increase in interest income on these earning assets was primarily due to a 417 basis point increase in average yield of cash equivalents, partially offset by a $45.1 million decrease in the average balance.

The decrease in the average balance resulted from the utilization of these funds to fund higher yielding loans in the rising rate environment.

The $9.7 million, or 5.0%, decrease was primarily due to a $164.3 million decrease in the average balance of total loans outstanding.

The decrease in the average balance of total loans was primarily due to strategic loan sales and moderated loan production.

For the years 2024 and 2023, the average yield on total loans was 6.07% and 6.06%.

Tax equivalent interest income from our securities portfolio increased $304,000, or 2.2%, to $14.4 million in 2024.

The increase was primarily due to an 18 basis point increase in the tax equivalent yield due to increases in market interest rates, partially offset by the impact of a $7.0 million, or 2.1%, decrease in the average balance of securities.

Interest income on our cash and cash equivalents increased $4.7 million, or 40.2%, to $16.4 million in 2024.

The increase was primarily due to an $80.5 million increase in the average balance of cash and cash equivalents combined with a 12 basis point increase in yield.

The increase in the average balance resulted from a decrease in average loan balances, offset partially by a decrease in the average balance of total deposits.

Interest Expense.

Interest expense on interest-bearing liabilities increased $70.4 million, or 224.2%, to $101.9 million in 2023 primarily due to a 225 basis point increase in the average rate on these liabilities and a $455.3 million increase in the average balance of interest-bearing liabilities.

Interest expense on total interest-bearing liabilities increased $15.4 million, or 15.2%, to $117.3 million in 2024 primarily due to a 58 basis point increase in the average rate on these total interest-bearing liabilities, partially offset by a $29.1 million decrease in the average balance of total interest-bearing liabilities.

Our average cost of total deposits was 3.54% for 2024, compared to 2.87% for 2023.

The increase was due to a 263 basis point increase in the average rate paid on interest-bearing deposits due to increases in the market interest rates coupled with peer bank competition for deposits.

Interest expense on total deposits increased to $89.0 million in 2023.

The $70.1 million, or 371.2%, increase in interest expense on total deposits was primarily due to a 263 basis point increase in the average rate paid on total average interest-bearing deposits due to higher rates paid on time deposits, and a $714.8 million increase in the average balance of time deposits.

Average noninterest-bearing deposits decreased $447.8 million to $602.3 million from $1.05 billion in 2022 primarily due to the strategic exit of a single deposit relationship and customers transferring their noninterest-bearing deposit balances into higher yielding money market accounts and time deposits.

The increase was due to a 72 basis point increase in the average rate paid on interest-bearing deposits due to increases in market interest rates coupled with peer bank competition for deposits.

Interest expense on interest-bearing deposits increased to $108.4 million in 2024 compared to $89.0 million in 2023.

The $19.3 million, or 21.7%, increase was primarily due to a 72 basis point increase in the average rate paid on average interest-bearing deposits, and a $42.0 million increase in the average balance of interest-bearing non-maturity deposits, partially offset by an $11.9 million decrease in the average balance of time deposits.

Average noninterest-bearing deposits decreased $70.8 million to $531.5 million from $602.3 million in 2023 as customers looked to higher yielding deposit products in response to higher market interest rates.

Average Balance Sheet, Interest and Yield/Rate Analysis

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Net interest margin is net interest income as a percentage of average interest-earning assets for the period.

The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact net interest income and net interest margin.

The level of interest rates and the volume and mix of interest-earning assets and interest-bearing liabilities impact on net interest income and net interest margin.

The net interest spread is the yield on average interest earning assets minus the cost of average interest-bearing liabilities.

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We manage net interest income through affecting changes in the mix of interest-earning assets as well as the mix of interest-bearing liabilities, changes in the level of interest-bearing liabilities in proportion to interest-earning assets, and in the growth and maturity of earning assets.

See “Analysis of Financial Condition— Capital Resources and Liquidity Management” and Item 7A “ Quantitative and Qualitative Disclosures about Market Risk” included herein.

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years 2023, 2022 and 2021.

Management’s Discussion and Analysis of Financial Condition and Results of Operations— Capital Resources and Liquidity Management and Item 7A.

Quantitative and Qualitative Disclosures About Market Risk included herein.

The following tables present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the periods presented.

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

Interest income on loans includes the effects of discount accretion and net deferred loan origination costs accounted for as yield adjustments.

Interest income on loans includes the effects of premium amortization, discount accretion and amortization of net deferred loan origination costs accounted for as yield adjustments.

Year Ended December 31,

(tax-equivalent basis, dollars in

Interest-earning assets:

Federal funds sold, cash equivalents and other (1)

(dollars in thousands)

Cash and cash equivalents (1)

Available for sale (2)

Held to maturity (2)

Loans held for investment:

Total loans held for investment

Total loans (3)

Total interest-earning assets

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Total cost of funds

Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.

Includes income and average balances for interest-earning time deposits.

Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis.

Includes average loans held for sale of $627,000, $1.3 million and $20.8 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Total loans are net of deferred fees and discounts but exclude the ACL.

Nonaccrual loans are included in the average balance.

Interest income includes purchased discounts of $612,000, $471,000 and $1.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Discounts on purchased loans were $969,000, $1.2 million and $1.7 million as of December 31, 2023, 2022 and 2021, respectively.

The following table summarizes the extent to which changes in (1) interest rates and (2) volume of average interest-earning assets and average interest-bearing liabilities affected by the Company’s net interest income for the periods presented.

Includes average loans held for sale of $1.6 million, $627,000 and $1.3 million for the years ended December 31, 2024, 2023 and 2022.

Average loan balances include nonaccrual loans.

Interest income on loans includes the effects of discount accretion and amortization of net deferred loan origination fees and costs accounted for as yield adjustments.

The total change for each category of interest-earning assets and interest-bearing liabilities is segmented into changes attributable to variations in volume and yield/rate.

4 unchanged sentences

Change due to:

(tax-equivalent basis, dollars in thousands)

Interest Variance

1 unchanged sentence

Interest-earning assets:

Federal funds sold, cash equivalents & other (1)

(dollars in thousands)

Cash and cash equivalents (1)

Available for sale (2)

Held to maturity (2)

Loans held for investment:

Total loans held for investment

Total loans (3)

Total interest-earning assets

9 unchanged sentences

Changes in net interest income

Includes income and average balances for FHLB stock, term federal funds, interest-bearing time deposits and other miscellaneous interest-bearing assets.

Includes income and average balances for interest-earning time deposits and other miscellaneous interest-earning assets.

Interest income and average rates for tax-exempt securities are presented on a tax-equivalent basis.

Includes average loans held for sale of $627,000, $1.3 million and $20.8 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Total loans are net of deferred fees and discounts but exclude the ACL.

Nonaccrual loans are included in the average balance.

Interest income includes purchased discounts of $612,000, $471,000 and $1.1 million for the years ended December 31, 2023, 2022 and 2021, respectively.

Discounts on purchased loans were $969,000, $1.2 million and $1.7 million as of December 31, 2023, 2022 and 2021, respectively.

Includes average balances of loans held for sale of $1.6 million, $627,000 and $1.3 million for the years ended December 31, 2024, 2023 and 2022.

Average loan balances include nonaccrual loans.

Interest income on loans includes the effects of discount accretion and amortization of net deferred loan origination fees and costs accounted for as yield adjustments.

Provision for Credit Losses

The provision for credit losses decreased $1.6 million to $3.4 million in 2023 compared to $4.9 million in 2022.

The provision for credit losses for the year ended December 31, 2023 included a provision for loan losses of $3.9 million, partially offset by a reversal of the reserve for unfunded commitments of $516,000.

The provision for credit losses on loans of $3.9 million was due to a higher level of specific reserves and net charge-offs, offset by the impact of lower total loans held for investment at the end of 2023.

The specific credit losses related to non-performing loans that were individually analyzed totaled $816,000 in 2023 and $48,000 in 2022.

The net charge-offs totaled $3.1 million for 2023 compared to $2,000 for 2022.

The reversal of the reserve for unfunded commitments of $516,000 for the year ended December 31, 2023 was due to lower total unfunded loan commitments.

The provision for credit losses was $9.9 million for the year ended December 31, 2024, an increase of $6.5 million from $3.4 million in 2023.

The provision for credit losses for the year ended December 31, 2024 included a provision for loan losses of $9.8 million and a provision for unfunded commitments of $89,000.

The increase in the 2024 provision for loan losses was primarily due to an increase in specific reserves of $6.1 million, an increase in net charge-offs and increases in nonperforming and classified loans as compared to the prior year.

Specific reserves totaled $6.9 million at December 31, 2024 and $816,000 at December 31, 2023 and net charge-offs totaled $3.9 million for 2024 compared to $3.1 million for 2023.

The increase in specific reserves in 2024 related primarily to two loans with a carrying value of $33.4 million and net exposure of $26.6 million at December 31, 2024.

The net charge-offs in 2024 related primarily to two loan relationships with a carrying value of $11.2 million at December 31, 2024 moved from HFI to HFS, and one HFI loan with a carrying value of $8.8 million at December 31, 2024.

HFS loans totaling $4.6 million were sold in the first quarter of 2025.

Noninterest Income

The following table sets forth the major components of noninterest income for the dates indicated:

The following table presents the major components of noninterest income for the years indicated:

Year Ended December 31,

1 unchanged sentence

2022 Increase (Decrease)

(dollars in thousands)

Noninterest income:

(dollars in thousands)

Service charges, fees and other

3 unchanged sentences

Gain on sale of fixed assets

Gain on sale of OREO

Total noninterest income

Noninterest income increased $3.8 million, or 33.5%, to $15.0 million in 2023 from $11.3 million in 2022.

The increase was primarily attributable to $5.0 million of income recognized from the CDFI ERP award included in other income and a $367,000 increase in loan servicing fees, partially offset by a $1.5 million decrease in gain on sale of loans and a $725,000 decrease in gain on sale of fixed assets.

Noninterest income increased $317,000, or 2.1%, to $15.3 million in 2024 from $15.0 million in 2023.

This increase was mostly due to a $2.8 million recovery of a fully charged off loan acquired in a bank acquisition, a $1.2 million increase in gain on sale of loans and an $883,000 increase in gain on OREO, offset by a decrease in grant income during 2024.

We recognized a $5.0 million Community Development Financial Institution Equitable Recovery Program award during 2023, while we recognized a $259,000 Bank Enterprise Award during 2024, which are included in other income.

Loan servicing income, net of amortization.

Loan servicing income, net of amortization, increased by $367,000 to $2.6 million for 2023 compared to net servicing income of $2.2 million for 2022.

Loan servicing income, net of amortization increased due to higher interest rates, resulting in lower pre-payment speeds which reduced the amortization expense on loans serviced.

The following table presents information on loan servicing income for the years ended December 31, 2023, 2022 and 2021.

Loan servicing income, net of amortization, decreased by $311,000 to $2.3 million for 2024 compared to $2.6 million for 2023.

Loan servicing income, net of amortization decreased due to lower interest rates, resulting in higher pre-payment speeds.

The following table presents information on loan servicing income for the years indicated:

Year Ended December 31,

2022 Increase

2021 Increase

(dollars in thousands)

2023 Increase (Decrease)

2022 Increase (Decrease)

Loan servicing income, net of amortization:

Single-family residential loans serviced

SBA loans serviced

(dollars in thousands)

Single-family residential mortgage loans

As of December 31, 2024, we were servicing SFR mortgage loans for other financial institutions, FHLMC, FNMA and SBA loans.

The decline in the respective servicing portfolios reflects lower amounts of loans sold servicing retained and repayment of loans from 2022 through 2023.

The following table shows the total loans being serviced for others as of the dates indicated:

The decline in the respective servicing portfolios reflects the repayment of underlying loans, which exceeds the additions from loans being sold with servicing retained during 2023 and 2024.

The following table presents the total loans being serviced for others as of the dates indicated:

As of December 31,

2022 Increase

2021 Increase

(dollars in thousands)

2023 Increase (Decrease)

2022 Increase (Decrease)

Loans serviced

Single-family residential loans serviced

SBA loans serviced

Commercial real estate loans serviced

(dollars in thousands)

Single-family residential mortgage loans

Commercial real estate loans

Construction loans

1 unchanged sentence

Gains on sale of loans are comprised primarily of gains on sale of SFR mortgage loans and SBA loans.

Gains on sale of loans totaled $374,000 in 2023, compared to $1.9 million in 2022.

The $1.5 million, or 80.3%, decrease was primarily caused by lower margins for gains on the loans sold combined with a decrease of $20.6 million in the volume of loans sold;

these decreases were primarily due to the increase in interest rates, which resulted in the decreases in FNMA, FHLMC, and non-qualified loan originations and consequently loan sales.

In addition, during 2023, $20.0 million of mortgage loans were sold at par value but reflecting the net deferred costs resulted in a loss of $103,000 with respect to those loans sold.

The following table presents information on loans sold and gain on loans sold for the years ended December 31, 2023, 2022 and 2021.

Gains on sale of loans totaled $1.6 million in 2024, compared to $374,000 in 2023.

The $1.2 million increase was due to a higher volume of loans sold in both categories, and an increase in the margins for gains on the sale of SFR mortgage loans sold.

The following table presents information on loans sold and gain on loans sold for the years indicated:

Year Ended December 31,

5 unchanged sentences

Single-family residential mortgage

SFR mortgage loans sold with servicing rights retained were $24.1 million, $13.3 million, and $46.1 million for the years ended December 31, 2024, 2023 and 2022.

Noninterest Expense

The following table sets forth the major components of our noninterest expense for the years ended December 31, 2023, 2022 and 2021:

The following table presents the major components of our noninterest expense for the years indicated:

Year Ended December 31,

1 unchanged sentence

2022 Increase (Decrease)

(dollars in thousands)

Noninterest expense:

(dollars in thousands)

Salaries and employee benefits

8 unchanged sentences

Total noninterest expense

Noninterest expense increased $6.2 million, or 9.6%, to $70.7 million in 2023 from $64.5 million in 2022.

This increase was primarily due to a $2.8 million increase in legal and other professional expense, a $2.3 million increase in salaries and employee benefits expense due to merit increases to reflect economic inflation and a $1.3 million increase in insurance and regulatory assessments, partially offset by a $446,000 decrease in marketing and business promotion expense due to a decrease in advertising and a $274,000 decrease in directors' fees, included in other expenses.

Salaries and employee benefits expense.

Salaries and employee benefits expense increased $2.3 million due to a decrease in deferred loan salary costs due to lower loan originations, merit increases and increases in health benefit costs, partially offset by decreases in bonuses and commissions.

The number of full-time equivalent employees was 376 at December 31, 2023, 379 at December 31, 2022 and 365 at December 31, 2021.

None of our employees are represented by a labor union, or governed by any collective bargaining agreements.

Occupancy and equipment expense.

Occupancy and equipment expense increased $537,000, or 5.9%, to $9.6 million for 2023 compared to $9.1 million for 2022 due to increases in rent and real estate property taxes.

Data processing expense.

Data processing expense increased $266,000, or 5.3%, to $5.3 million for 2023, compared to $5.1 million for 2022 due to data processing and software license fees.

Legal and professional expense.

Legal and professional expense increased $2.8 million, or 52.3%, to $8.2 million in 2023 compared to $5.4 million in 2022.

This increase was due to an increase in legal expenses related to the Company's voluntary cooperation with the SEC’s requests for information, as disclosed in the Company's Current Report on Form 8-K filed with the SEC on July 24, 2023, which has concluded, an increase in external auditor fees, and higher consulting fees as we engaged outside advisory firms to assist the Company in enhancing the internal controls over financial reporting and other risk management activities, such as enhancing the Bank's BSA compliance program.

Marketing and business promotion expense.

Marketing and business promotion expense decreased $446,000, due to decreases in advertising and CRA donation expenses.

Insurance and regulatory assessments.

Insurance and regulatory assessments increased $1.3 million, or 71.1%, to $3.2 million in 2023 due to a $1.1 million increase in the FDIC assessment and a $178,000 increase in directors and officers’

insurance expense.

Other noninterest expenses.

Other expenses decreased by $535,000, or 15.1%, to $3.0 million primarily due to a $274,000 decrease in director fees and a $168,000 decrease in loan servicing expense.

Noninterest expense decreased $1.5 million, or 2.2%, to $69.2 million in 2024 from $70.7 million in 2023.

This decrease was mostly due to lower legal and professional expenses of $3.7 million due to a previously disclosed internal investigation and lower external auditor fees.

This decrease was partially offset by higher salaries and employee benefits of $1.6 million, data processing expenses of $531,000 and insurance and regulatory assessments of $133,000.

Salaries and employee benefits increased due to merit increases and increases in health and other benefits costs.

Insurance and regulatory assessments increased mostly due to a higher FDIC assessment associated with the consent order issued in October 2023, which remained higher until it was terminated in August 2024.

The noninterest expenses to average assets ratio was 1.76% for the fiscal year 2024 and 2023.

The efficiency ratio was 60.3% for the year ended December 31, 2024, up from 52.6% for the year ended December 31, 2023 due mostly to lower net interest income for 2024.

Income Tax Expense

Income tax expense was $9.0 million in 2024 compared to $17.8 million in 2023, a decrease of $8.8 million, or 49.3%.

The effective tax rate for 2023 was 29.5% and 29.6% for 2022.

Income tax expense included a $3,000 expense for stock options exercised in 2023 and a $587,000 benefit in 2022.

The effective tax rate was 25.3% for 2024 and 29.5% for 2023.

The decrease in the effective tax rate for 2024 was due primarily to higher tax credits as compared to the prior year.

ANALYSIS OF FINANCIAL CONDITION

Total assets were $4.0 billion as of December 31, 2023 and $3.9 billion as of December 31, 2022.

The increase in assets was primarily due to a $347.8 million increase in cash and cash equivalents and a $62.1 million increase in investment securities, partially offset by a $305.4 million decrease in net loans.

The increase in cash and cash equivalents was due to an increase in the balances of time deposits due to Bank-wide promotions of time deposits and wholesale deposits to strengthen our liquidity position and a slowdown in lending.

At December 31, 2024, total assets were $4.0 billion, a $33.5 million decrease compared to December 31, 2023.

The $33.5 million decrease was primarily due to a $173.6 million decrease in cash and cash equivalents, offset by a $101.2 million increase in investment securities and a $24.9 million increase in loans, including loans HFS.

The decrease in cash and cash equivalents was due to a decrease in reliance on wholesale deposits as a result of our stable liquidity position and an increase in lending activity.

Investment Securities.

7 unchanged sentences

Our investment policy is reviewed annually by our board of directors.

Overall investment goals are established by our board of directors, CEO, CFO and members of our Asset Liability Committee (“ALCO”) of our board of directors.

Overall investment goals are established by our board of directors, Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and members of our Asset Liability Committee (“ALCO”) of our board of directors.

Our board of directors has delegated the responsibility of monitoring our investment activities to our ALCO.

1 unchanged sentence

We actively monitor our investments on an ongoing basis to identify any material changes in the securities.

We also review our securities for potential other-than-temporary impairment at least quarterly.

The following table sets forth the book value and percentage of each category of securities at December 31, 2023, 2022 and 2021.

The book value for securities classified as available for sale is equal to fair market value and the book value for securities classified as held to maturity is equal to amortized cost.

We monitor our securities portfolio to ensure it has adequate credit support and consider the lowest credit rating for identification of potential credit impairment.

The following table presents the book value of each category of securities and the percentage each category represents of total of securities as of the years indicated.

The book value for debt securities classified as AFS are reflected at fair market value and the book value for securities classified as HTM are reflected at amortized cost.

December 31, 2024

1 unchanged sentence

December 31, 2022

(dollars in thousands)

Securities, available for sale, at fair value

(dollars in thousands)

Government agency securities

6 unchanged sentences

Corporate debt securities (1)

Municipal securities

Municipal tax-exempt securities

Total securities, available for sale, at fair value

5 unchanged sentences

Comprised of corporate debt securities and individual financial institution subordinated debentures

The tables below set forth the amortized cost and fair value of AFS and HTM securities and the corresponding amounts of gross unrealized gains and losses for the periods presented.

(dollars in thousands)

The tables below set forth investment debt securities AFS and HTM as of the dates indicated:

December 31, 2024

Available for sale

(dollars in thousands)

Government agency securities

5 unchanged sentences

Corporate debt securities

Municipal securities

Municipal tax-exempt securities

Held to maturity

Municipal taxable securities

Municipal securities

Municipal tax-exempt securities

December 31, 2023

Available for sale

(dollars in thousands)

Government agency securities

1 unchanged sentence

Mortgage-backed securities:

Collateralized mortgage obligations:

6 unchanged sentences

Municipal securities

The weighted-average yield on the total investment portfolio at December 31, 2023 was 4.00% with a weighted-average life of 5.1 years.

This compares to a weighted-average yield of 2.55% at December 31, 2022 with a weighted-average life of 5.8 years.

The weighted-average life on the total investment portfolio at December 31, 2024 was 5.0 years compared to a weighted-average life of 5.1 years at December 31, 2023.

The weighted-average life is the average number of years that each dollar of unpaid principal due remains outstanding.

5 unchanged sentences

government agency bonds are callable.

The table below shows the Company’s investment securities’ fair value and weighted average yields by maturity in the following maturity groupings as of December 31, 2023.

The amortized cost and fair value of the investment securities portfolio are shown by expected maturity.

The table below shows our investment securities’ fair value and weighted average yields by maturity in the following maturity groupings as of December 31, 2024.

Weighted-average yields are calculations representing income within each maturity range based on the amortized cost of securities.

The fair value of the investment securities portfolio are shown by expected maturity.

Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

3 unchanged sentences

More than Ten Years

(dollars in thousands)

December 31, 2023

Average Yield

3 unchanged sentences

Average Yield

December 31, 2024

(dollars in thousands)

Government agency securities

8 unchanged sentences

Municipal taxable securities

Municipal securities

Municipal tax-exempt securities

Total held to maturity

The tables below show the Company’s investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2023 and December 31, 2022.

The tables below show our investment securities’ gross unrealized losses and fair value by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2024 and December 31, 2023.

The unrealized losses on these securities were primarily attributed to changes in interest rates.

2 unchanged sentences

However, we have the ability and the intention to hold these securities until their fair values recover to cost or maturity.

A summary of our analysis of these securities and the unrealized losses is described more fully in Note 4 — Investment Securities in the notes to the consolidated financial statements included in this Annual Report.

As such, management does not deem these securities to be impaired under the current expected credit loss model.

A summary of our analysis of these securities and the unrealized losses is described more fully in Item 8.

Financial Statements and Supplementary Data - Note 3 — Investment Securities in the notes to the consolidated financial statements included in this Annual Report.

Less than Twelve Months

Twelve Months or More

(dollars in thousands)

December 31, 2024

Government sponsored agencies

(dollars in thousands)

Government agency securities

SBA securities

8 unchanged sentences

Total held to maturity

The Company held $19.9 million of commercial paper where the recorded value and fair value are equal as of December 31, 2023.

Less than Twelve Months

Twelve Months or More

(dollars in thousands)

December 31, 2023

(dollars in thousands)

Government sponsored agencies

1 unchanged sentence

Mortgage-backed securities:

Collateralized mortgage obligations:

4 unchanged sentences

Total available for sale

Municipal taxable securities

Municipal securities

Total held to maturity

The Company held $9.9 million of commercial paper where the recorded value and fair value are equal as of December 31, 2022.

There was no reserve of credit losses on the HTM securities portfolio as of December 31, 2023 and 2022.

We monitor our securities portfolio to ensure all of our investments have adequate credit support and we consider the lowest credit rating for identification of potential credit impairment.

As of December 31, 2023, we believe there was no impairment.

As of December 31, 2024 and 2023, we determined there was no credit impairment and accordingly there was no ACL on the HTM securities portfolio as of these dates.

In addition, we did not have the current intent to sell securities with a fair value below amortized cost at December 31, 2024, and it is more likely than not that we will not be required to sell such securities prior to the recovery of their amortized cost basis.

1 unchanged sentence

The overall net decreases in fair value during the period were attributable to a combination of changes in interest rates and market conditions.

The loan portfolio is the largest category of our earning assets.

At December 31, 2023, total loans held for investment, net of ALL, totaled $3.0 billion.

Net loans held for investment decreased $305.4 million, or 9.3%, to $3.0 billion at December 31, 2023 as compared to $3.3 billion at December 31, 2022.

The decrease was primarily due to decreases in CRE loans of $144.3 million, C&D loans of $95.4 million, and C&I loans of $71.1 million, partially offset by an increase in SFR mortgage loans of $23.7 million.

SFR mortgage loans represent approximately 50% of our total loans as of December 31, 2023, up from approximately 44% as of the end of 2022.

The following table presents the balance and associated percentage of each major category in our loan portfolio at December 31 for the past five years:

The loan portfolio is the largest category of our earning assets, which is almost entirely held for investment as of December 31, 2024.

Loans HFI totaled $3.1 billion, a net increase of $21.4 million, or 0.7%, as compared to $3.0 billion at December 31, 2023.

Loans HFS totaled $11.2 million at December 31, 2024 compared to $1.9 million at December 31, 2023.

The net increase in loans HFI was primarily due to net increases in CRE loans of $33.6 million and SFR mortgage loans of $6.2 million, partially offset by decreases in C&D loans of $8.2 million, SBA loans of $4.8 million, and other loans of $4.9 million.

The 2024 loan activity included $441.3 million in total originations and $61.5 million in loans sold, mainly SFR mortgages and the guaranteed portion of SBA loans.

SFR mortgage loans represent approximately 48.9% of our total loans as of December 31, 2024, and this ratio is relatively unchanged from 49.1% as of the end of 2023.

The following table presents the balance and associated percentage of each major category in our loan portfolio as of the dates indicated:

As of December 31,

4 unchanged sentences

Commercial and industrial

Total loans HFI

Allowance for loan losses

Total loans, net

Net of discounts on acquired loans and deferred fees and costs

Includes non-farm and non-residential real estate loans, multifamily residential and 1-4 family SFR loans originated for a business purpose

The locations of loans in the Company's total loan portfolio as of December 31, 2023 were as follows:

Total loans HFI, net

Net of premiums (discounts) on acquired loans and deferred (fees) and costs

Includes non-farm and non-residential real estate loans, multifamily residential and SFR loans originated for a business purpose

The following table presents the geographic locations of loans in our loan portfolio, by loan class, as of the date indicated:

As of December 31, 2024

1 unchanged sentence

Commercial real estate

Single-family

residential mortgages

Single-family residential mortgages

Commercial and Industrial

Total loans, net

Total loans HFI

(dollars in thousands)

1 unchanged sentence

The majority of our loan portfolio is based on collateral or businesses in California and New York, which represent 88% of our loan portfolio.

Loans secured by collateral in other states represented approximately 19% of our portfolio and the majority of these loans are secured by CRE with a weighted average LTV of 59% at December 31, 2023.

Commercial and Industrial Loans.

We provide a mix of variable and fixed rate C&I loans.

The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and for international trade financing.

C&I loans include lines of credit with a maturity of one year or less, C&I term loans with maturities of five years or less, shared national credits with maturities of five years or less, mortgage warehouse lines with a maturity of one year or less, bank subordinated debentures with a maturity of 10 years and international trade discounts with a maturity of three months or less.

Substantially all of our C&I loans are collateralized by business assets or by real estate.

We originate commercial and industrial lines of credit, term loans, mortgage warehouse lines and international trade discounts, which totaled $130.1 million as of December 31, 2023 and $201.2 million at December 31, 2022.

This decrease resulted primarily due to decreases in mortgage warehouse lines and a decrease in usages of the credit lines due to increases in market rates of interest.

The interest rate on these loans are generally Wall Street Journal Prime rate based.

Our trade finance unit supplies financial needs to many of our core customers including trade financing needs for many of our commercial and industrial loan customers.

The unit provides international letters of credit, SWIFT, export advice, trade finance discounts and foreign exchange.

Our trade finance has a correspondent relationship with many of the largest banks in China, Taiwan, Vietnam, Hong Kong and Singapore.

All of our international letters of credit, SWIFT, export advice and trade finance discounts are denominated in U.S.

currency, and all foreign exchange is issued through a major bank that is also denominated in U.S.

Loans secured by collateral in other states represented approximately 12% of our portfolio and the majority of these loans are secured by real estate with a weighted average LTV of 55.4% at December 31, 2024.

Construction and Land Development Loans .

C&D loans totaled $173.3 million, or 5.7% of the loan portfolio, at December 31, 2024.

C&D loans decreased $8.2 million, or 4.5%, during 2024 due to a decrease in residential construction loans, offset by an increase in commercial construction loans.

Our C&D loans are comprised of residential construction, commercial construction and land acquisition and development construction.

Interest reserves are generally established on real estate construction loans.

These loans are typically Prime rate based and have maturities of less than 18 months.

At December 31, 2024, $44.6 million in C&D loans were on nonaccrual status, including a $26.4 million loan for a partially complete mixed-use commercial project for which we have established a specific reserve of $4.5 million, a $9.4 million loan for a completed mixed-use project, and $8.8 million for a land development project.

For additional discussion on nonperforming loans, see Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Analysis of Financial Condition – Problem Loans.

The following table shows the categories of our C&D portfolio as of the dates indicated:

As of December 31, 2024

As of December 31, 2023

Increase (Decrease)

(dollars in thousands)

Residential construction

Commercial construction

Land development

Total construction and land development loans

Commercial Real Estate Loans.

CRE loans totaled $1.2 billion, or 39.3%, of the loan portfolio as of December 31, 2024 compared to $1.2 billion, or 38.5% of the loan portfolio as of December 31, 2023.

The CRE portfolio had net growth of $33.6 million, or 2.9%, during 2024 due mostly to a net increase in multi-family residential loans.

CRE loans include owner-occupied and non-occupied commercial real estate, multi-family residential and SFR loans originated for a business purpose.

Except for the multi-family residential loan portfolio, the interest rate for the majority of these loans are Prime rate based and have a maturity of five years or less except for the SFR loans originated for a business purpose which may have a maturity of one year.

The multi-family residential loans generally have interest rates based on the 5 -y ear treasury, 10-year maturity with a five year fixed rate period followed by a five year floating rate period, and have a declining prepayment penalty over the first five years.

At December 31, 2023, approximately 18% of the CRE portfolio consisted of fixed-rate loans.

The total CRE portfolio totaled $1.2 billion as of December 31, 2023 and $1.3 billion as of December 31, 2022, of which $193.4 million and $255.2 million, respectively, are secured by owner occupied properties.

The multi-family residential loan portfolio totaled $573.4 million as of December 31, 2023 and $643.2 million as of December 31, 2022.

The multi-family residential loans generally have interest rates based on the 5

-y ear treasury, 10-year maturity with a five year fixed rate period followed by a five year floating rate period, and have a declining prepayment penalty over the first five years.

The largest sub-set of CRE loans was the multi-family residential loan portfolio, which totaled $605.5 million as of

December 31, 2024 and $573.4 million as of December 31, 2023.

The SFR loan portfolio originated for a business purpose totaled $54.1 million as of December 31, 2024 and $48.7 million as of December 31, 2023.

The following table presents the loan-to-value (LTV) ratios at origination for CRE loans by property type as of December 31, 2023:

(dollars in thousands)

At December 31, 2024, $17.1 million of CRE loans were on nonaccrual status, including $9.7 million classified as HFS, of which $4.6 million was sold in the first quarter of 2025.

For additional discussion on nonperforming loans, see Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Analysis of Financial Condition –

Problem Loans

The following table presents the LTV ratios at origination for CRE loans by property type as of the date indicated:

LTV Distribution

1 unchanged sentence

Non-owner occupied:

(dollars in thousands)

Rent Controlled NY Multifamily

4 unchanged sentences

No loans in the 75% - 85% LTV Distribution

The following table presents the loan-to-value ratios at origination for CRE loans by state as of December 31, 2023:

(dollars in thousands)

The following table presents the LTV ratios at origination for CRE loans by state as of the date indicated:

LTV Distribution

1 unchanged sentence

Non-owner occupied

(dollars in thousands)

Total non-owner occupied

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No loans in the 75% - 85% LTV Distribution

Construction and Land Development Loans .

Our C&D loans are comprised of residential construction, commercial construction and land acquisition and development construction.

Interest reserves are generally established on real estate construction loans.

These loans are typically Prime rate based and have maturities of less than 18 months.

C&D loans decreased $95.4 million, or 34.5%, to $181.5 million at December 31, 2023 as compared to $276.9 million at December 31, 2022.

This decrease was primarily due to decreases in residential construction loans.

As of December 31, 2023 and 2022, our real estate construction loan portfolio was divided among the following categories as shown in the table below.

As of December 31, 2023

As of December 31, 2022

Increase (Decrease)

SFR mortgage loans HFI totaled $1.49 billion, or 48.9% of the loan portfolio, as of December 31, 2024 and increased $6.2 million, or 0.4%, during 2024.

We originate qualified SFR mortgage loans and non-qualified, alternative documentation SFR mortgage loans through wholesale channels and retail channels, including our branch network, to accommodate the needs of the Asian-centric market.

The qualified SFR mortgage loans are 15-year and 30-year conforming mortgages and may be sold directly to FNMA and FHLMC.

We originate non-qualified SFR mortgage loans both to sell and hold for investment.

In addition, our SFR mortgage lending unit originates mortgage warehouse lines of credit to certain correspondent banks.

These loans are included in our C&I loans and totaled zero as of December 31, 2024 and $4.2 million as of December 31, 2023.

During 2024, we originated $183.2 million of SFR mortgage loans including $102.8 million through our retail channel and $80.4 million through our wholesale channels.

These amounts included $22.2 million in FNMA loans, all of which were sold to FNMA.

In addition, we also sold $1.9 million to FHLMC and $23.6 million of SFR mortgage loans during 2024 to other third parties.

For SFR mortgage loans sold to FNMA, FHLMC and to other third parties such as investment funds or other banks, we provide limited representations and warranties and with a repurchase and premium refund for loans that become delinquent in the first 90-days or a premium refund if paid-off in the first 90-days with respect to all loans sold.

In certain loan sales to other banks, loans are sold with no representations or warranties and provide a replacement feature for the first six months if any loans pay off early.

As a condition of the sale for all loans, the buyer must have the loans audited for underwriting and compliance standards.

At December 31, 2024, $11.5 million of SFR mortgage loans were on nonaccrual status, including a $4.1 million loan that was moved to OREO in January 2025 at its year-end carrying value.

For additional discussion on nonperforming loans, see Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Analysis of Financial Condition – Problem Loans .

The following table presents the LTV ratios at origination for SFR mortgage loans by state as of the date indicated:

LTV Distribution

December 31, 2024

(dollars in thousands)

Residential construction

Commercial construction

Land development

Total construction and land development loans

Commercial and Industrial Loans.

C&I loans totaled $

129.6 million, or 4.2% of the loan portfolio, as of

December 31, 2024.

The net decrease in C&I loans was $511,000 due in part to a decrease in mortgage warehouse lines of credit, offset by growth in other C&I loans.

The interest rate on C&I loans are generally based on the Wall Street Journal Prime rate.

We originate both variable rate and fixed rate C&I loans.

The loans are typically made to small- and medium-sized manufacturing, wholesale, retail and service businesses for working capital needs, business expansions and for international trade financing.

C&I loans include lines of credit with a maturity of one year or less, term loans with maturities of five years or less, shared national credits with maturities of five years or less, mortgage warehouse lines with a maturity of one year or less, bank subordinated debentures with a maturity of 10 years and international trade discounts with a maturity of three months or less.

Substantially all of our C&I loans are collateralized by business assets or by real estate.

Our trade finance unit provides financial services and products to our customers, including trade financing needs for many of our commercial and industrial loan customers.

This business unit provides international letters of credit, SWIFT, export advice, trade finance discounts and foreign exchange.

We maintain a correspondent relationship with many of the largest banks in China, Taiwan, Vietnam, Hong Kong and Singapore to support the business needs of our customers.

All of our international letters of credit, SWIFT, export advice and trade finance discounts are denominated in U.S.

currency, and all foreign exchange is issued through a major bank that is also denominated in U.S.

At December 31, 2024, $6.3 million of C&I loans were on nonaccrual status, including a $4.7 million loan that is secured by a personal residence.

For additional discussion on nonperforming loans, see Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Analysis of Financial Condition – Problem Loans .

SBA Guaranteed Loans.

SBA loans totaled $

47.3 million, or 1.5% of the loan portfolio at December 31, 2024 compared to $52.1 million, or 1.8% of the loan portfolio at December 31, 2023.

SBA loans decreased $4.8 million, or 9.2%, due to $31.2 million in originations being more than offset by payoffs and payments of $22.2 million and loan sales of $13.8 million.

Our 2024 originations included $27.5 million of SBA 7A loans and $3.7 million of SBA 504 loans.

We are designated a Preferred Lender under the SBA Preferred Lender Program.

We originate SBA loans through our branch staff, loan officers and through SBA brokers.

We offer mostly SBA 7(a) variable-rate loans.

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Typically, non-real estate secured loans mature in less than 10 years.

Collateral may include inventory, accounts receivable, equipment, and personal guarantees.

We originate SBA loans through our branch staff, loan officers and through SBA brokers.

In 2023, we originated $11.4 million in SBA loans, of which $8.6 million were SBA 7A loans and $2.8 million were SBA 504 loans.

As of December 31, 2023, our SBA portfolio totaled $52.1 million of which $4.7 million was guaranteed by the SBA and $47.4 million was unguaranteed, of which $46.2 million was secured by real estate and $1.2 million was unsecured or secured by business assets.

We monitor the unguaranteed portfolio by type of real estate collateral.

Collateral may also include inventory, accounts receivable, equipment, and includes personal guarantees.

As of December 31, 2024, our SBA portfolio totaled $47.3 million, of which $2.0 million was guaranteed by the SBA and $45.3 million was unguaranteed.

The unguaranteed portion included $39.9 million, which was secured by real estate and $5.4 million was unsecured or secured by business assets.

We monitor the unguaranteed portfolio by type of collateral.

As of December 31, 2024, $23.8 million or 52.6% was secured by hotel/motels;

$3.8 million or 8.1% by gas stations;

$9.4 million or 20.7% by warehouses;

$2.0 million or 4.5% by retail;

and $19.1 million or 40.3% in other real estate types.

$1.8 million or 4.0% by gas stations;

and $8.3 million or 18.2% of other real estate types.

As of December 31, 2024, $27.7 million or 61.2% was located in California;

$3.7 million or 8.1% was located in Texas;

$3.9 million or 8.2% was located in Nevada;

$3.5 million or 7.6% was located in Washington;

$3.2 million or 7.0% was located in Oregon;

and $7.2 million or 16.1% was located in other states.

SBA loans decreased $9.3 million, or 15.2%, to $52.1 million at December 31, 2023 compared to $61.4 million at December 31, 2022.

This decrease was primarily due to SBA loan sales of $3.5 million and net loan payoffs and payments of $17.1 million, partially offset by $11.4 million in loan originations.

SFR real estate loans.

We originate qualified SFR mortgage loans and non-qualified, alternative documentation SFR mortgage loans through correspondent relationships and retail channels, including our branch network, to accommodate the needs of the Asian American market.

The qualified SFR mortgage loans are 15-year and 30-year conforming mortgages, which are generally originated through our branch network and may be sold directly to FNMA and FHLMC.

During 2023, we originated $192.3 million of SFR mortgage loans.

Loans originated through our retail branch network are to our customers, many of whom establish a deposit relationship with us.

During 2023, we originated $78.6 million through our retail channel and $113.7 million through our wholesale and correspondent channel of such loans.

These amounts included $18.2 million in FNMA loans, of which $12.7 million were sold to FNMA.

In addition, we sold $20.0 million of non-qualified mortgage loans at par to another bank as we worked to deleverage the Bank's balance sheet and generate higher levels of liquidity in the current economic environment.

The loans sold to other banks are sold with no representations or warranties and with a replacement feature for the first 90-days if the loan pays off early.

For SFR loans sold to FNMA, FHLMC and to investment funds we provide limited representations and warranties and with a repurchase and premium refund for loans that become delinquent in the first 90-days or a premium refund if paid-off in the first 90-days with respect to all loans sold.

As a condition of the sale, the buyer must have the loans audited for underwriting and compliance standards.

SFR real estate loans held for investment increased $23.7 million, or 1.6%, to $1.49 billion as of December 31, 2023 as compared to $1.46 billion as of December 31, 2022.

There were $1.9 million loans held for sale as of December 31, 2023 compared to none as of December 31, 2022.

In addition, our SFR mortgage lending unit originates mortgage warehouse lines to our correspondents.

These loans are included in our C&I loans and totaled $4.2 million as of December 31, 2023 and $29.3 million as of December 31, 2022.

The loan maturities in the table below are based on contractual maturities as of December 31, 2023.

As is customary in the banking industry, loans that meet underwriting criteria can be renewed by mutual agreement between the borrower and us.

At December 31, 2024, $1.5 million of SBA loans were on nonaccrual status.

For additional discussion on nonperforming loans, see Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations — Analysis of Financial Condition - Problem Loans .

The table below presents the loan HFI portfolio by contractual maturities, based on the loan class and loan pricing characteristics (i.e.

fixed versus floating) as of December 31, 2024.

As is customary in the banking industry, loans that meet our underwriting criteria may be renewed by mutual agreement between the borrower and us.

Because we are unable to estimate the extent to which our borrowers will renew their loans, the table is based on contractual maturities.

As a result, the data shown below should not be viewed as an indication of future cash flows.

(dollars in thousands)

Also, as a result, the data shown below should not be viewed as an indication of future cash flows.

One Year or Less

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Construction & land development

(dollars in thousands)

Floating rate

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Allowance for loan losses

Mortgage loans held for sale

Net loans HFI

Loans held for sale

We use what we believe is a comprehensive methodology to monitor credit quality and prudently manage credit concentration within our loan portfolio.

Our underwriting policies and practices govern the risk profile and credit and geographic concentration for our loan portfolio.

We also have what we believe to be a comprehensive methodology to monitor these credit quality standards, including a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.

Our comprehensive methodology to monitor these credit quality standards includes a risk classification system that identifies potential problem loans based on risk characteristics by loan type as well as the early identification of deterioration at the individual loan level.

Analysis of the Allowance for Loan Losses.

The following table allocates the ALL, or the allowance, by category:

The following table presents the ALL, its corresponding percentage of the loan class balance, and the percentage of loan balance to total loans HFI by loan class as of the dates indicated:

As of December 31,

ALL as a % of Loan Class

% of Total Loans

ALL as a % of Loan Class

% of Total Loans

(dollars in thousands)

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Allowance for loan losses

Represents the percentage of the allowance to total loans in the respective category.

Includes non-farm and non-residential real estate loans, multi-family residential and SFR loans originated for a business purpose.

Allowance for Credit Losses - Loans

The Company accounts for credit losses on loans in accordance with ASC 326, which requires the Company to record an estimate of expected lifetime credit losses for loans at the time of origination.

The ACL for loans is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated balance sheet.

We account for credit losses on loans in accordance with ASC 326, which requires us to record an estimate of expected lifetime credit losses for loans at the time of origination.

The ACL includes the ALL and the reserve for unfunded commitments and is maintained at a level deemed appropriate by management to provide for expected credit losses in the portfolio as of the date of the consolidated balance sheet.

Estimating expected credit losses requires management to use relevant forward-looking information, including the use of reasonable and supportable forecasts.

The measurement of the ACL for loans is performed by collectively evaluating loans with similar risk characteristics.

The Company has elected to utilize a DCF approach for all segments except consumer loans and warehouse mortgage loans, for these a remaining life approach was elected.

The Company’s DCF loss rate methodology incorporates a probability of default, loss given default and exposure at default to derive expected loss within the CECL model, as well as expectations of future economic conditions, using reasonable and supportable forecasts.

The Company uses both internal and external qualitative factors within the CECL model including:

We have elected to utilize a discounted cash flow approach for all segments except consumer loans and warehouse mortgage loans, for these a remaining life approach was elected.

Our discounted cash flow loss rate methodology incorporates a probability of default, loss given default and exposure at default to derive expected loss within the CECL model, as well as expectations of future economic conditions, using reasonable and supportable forecasts.

We use both internal and external qualitative factors within the CECL model including:

lending policies, procedures, and strategies;

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credit and lending personnel experience;

changes in volume and trends in classified loans, delinquencies, and nonaccrual;

changes in volume and trends in classified, delinquent, and nonaccrual loans;

concentration risk;

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and economic conditions.

Management estimates the allowance balance required using past loan loss experience from peers with similar portfolio sizes and geographic locations to the Company, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors.

The Company’s CECL methodology utilizes a four-quarter reasonable and supportable forecast period, and a four-quarter reversion period.

The Company is using the Federal Open Market Committee to obtain forecasts for the unemployment rate, while reverting to a long-run average of each considered economic factor.

Management estimates the ACL balance required using past loan loss experience from peers with similar asset sizes and geographic locations to the Company.

The nature and volume of the portfolio, information about specific borrower situations, changes in credit quality and estimated collateral values, economic conditions, and other factors are also considered.

Our CECL methodology utilizes a four-quarter reasonable and supportable forecast period, and a four-quarter reversion period.

We use the Federal Open Market Committee forecasts for the national unemployment rate, while reverting to historical loss information.

Individual loans considered to be uncollectible are charged off against the ACL.

Factors used in determining the amount and timing of charge-offs on loans include consideration of the loan type, length of delinquency, sufficiency of collateral value, lien priority and the overall financial condition of the borrower.

Collateral value is determined using updated appraisals and/or other market comparable information.

Charge-offs are generally taken on loans once the impairment is determined to be other-than-temporary.

Loans deemed to be collateral-dependent are reviewed individually based on the estimated fair value of the collateral less selling costs.

Collateral value is determined using appraisals and/or other market comparable information.

Charge-offs are generally taken on loans once the impairment is determined to be probable.

Recoveries on loans previously charged off are added to the ACL.

Net charge-offs to average LHFI were 0.10% and 0.00% for the twelve months ended December 31, 2023 and 2022, respectively.

The ACL for loans was $41.9 million at December 31, 2023 compared to $41.1 million at December 31, 2022.

The $827,000 increase in 2023 was primarily due to a provision for credit losses on loans of $3.9 million, partially offset by net charge-offs of $3.1 million.

The following table provides a summary of components of the ACL, provision for credit losses and net charge-offs for the years 2019 to 2023:

Net charge-offs to average loans HFI were 0.13% for the year ended December 31, 2024 and 0.10% for the year ended December 31, 2023.

The ALL was $47.7 million at December 31, 2024, or 1.56% of total loans HFI, compared to $41.9 million, or 1.38% of total loans HFI, at December 31, 2023.

The ACL was $48.5 million at December 31, 2024, or 1.59% of total loans HFI, compared to $42.5 million, or 1.40% of total loans HFI at December 31, 2023.

The $5.9 million increase in the ACL in 2024 was primarily due to a $9.9 million provision for credit losses, offset by net charge-offs of $3.9 million.

The provision for credit losses included a higher level of specific reserves and took into consideration factors including changes in the loan portfolio mix, ongoing uncertainty in the economy related to inflation and the outlook for market interest rates, and credit quality metrics, including a $49.4 million increase in nonperforming loans at December 31, 2024 compared to December 31, 2023.

The increase in the coverage ratio of the ACL to total loans HFI was due to a $6.1 million increase in specific reserves.

Specific reserves totaled $6.9 million, or 0.23% of total loans HFI, at December 31, 2024, compared to $816,000, or 0.03% of total loans HFI, at December 31, 2023.

The following table provides an analysis of the ACL, provision for credit losses and net charge-offs for the periods indicated:

Year Ended December 31,

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Net (charge-offs)/recoveries

Provision for credit losses - loans

Provision for loan losses

Balance, end of period

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Adjusted beginning balance

(Reversal of) reserve for unfunded commitments

Reserve for (reversal of) unfunded commitments

Balance at the end of period

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Allowance for loan losses to total LHFI

Reserve was under the Allowance for Loan Loss (“ALL”) method in accordance with ASC 450 and ASC 310

Allowance for credit losses to total LHFI

Reserve was under the allowance for loan loss method in accordance with ASC 450 and ASC 310

Problem Loans.

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Loans restructured at a rate equal to or greater than that of a new loan with comparable risk at the time the loan is modified may be excluded from restructured loan disclosures in years subsequent to the restructuring if the loans are in compliance with their modified terms.

Real estate acquired by foreclosure or deed in lieu of foreclosure is recorded at fair value at the date of foreclosure, establishing a new cost basis by a charge to the allowance for credit losses, if necessary.

OREO is carried at the lower of the Company's carrying value of the property or its fair value, less estimated carrying costs and costs of disposition.

After an OREO value is established, it is then carried at the lower of our carrying value of the property or its fair value.

Fair value is based on current appraisals less estimated selling costs.

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Operating expenses and related income of such properties and gains and losses on their disposition are included in other operating income and expenses.

The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated.

Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings.

The Company did not have any loans past due 90 days or more but still accruing interest at any of the dates presented.

The balances of nonperforming loans reflect the net investment in these assets.

Gains on transfer of loans to OREO, and gains or losses on their disposition are included in gain (loss) on OREO.

Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest (of which there were none during the years indicated), and modified loans.

The balances of nonperforming loans included in the table below are the net investment in these assets and do not include $6.9 million in specific reserves.

The following table presents the net investment in nonperforming assets by loan class and certain nonperforming asset ratios as of the dates indicated.

As of December 31,

(dollars in thousands)

Accruing troubled debt restructured loans (1) :

(dollars in thousands)

Construction and land development

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Total accruing troubled debt restructured loans

Non-accrual loans:

Nonaccrual loans:

Construction and land development

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Nonperforming assets

Nonperforming loans to total LHFI

Nonperforming loans HFI to total loans HFI

Nonperforming assets to total assets

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Nonperforming assets to tangible common equity and ACL

Prior to the Company’s adoption of ASU 2022-02 on January 1, 2023, the Company, in infrequent situations would modify loans when the borrower was experiencing financial difficulties by making a concession to the borrower.

These concessions would include a reduction of the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses.

These modifications were classified as TDRs and were made for the purpose of alleviating temporary impairments to the borrower’s financial condition.

The $8.1 million increase in nonperforming loans at December 31, 2023 was primarily due to two CRE loans totaling $10.9 million, 12 SFR loans totaling $16.9 million, one SBA loan of $283,000 and three other consumer loans aggregating to $68,000 placed on non-accrual status during 2023.

Offsetting the increases were non-accrual loan payoffs or paydowns of $15.7 million, loans that migrated to accruing status of $1.5 million and net charge-offs of $2.7 million on non-accrual loans.

Our 30-89 day delinquent loans, excluding non-accrual loans, increased to $16.8 million as of December 31, 2023, compared to $15.2 million at December 31, 2022.

From December 31, 2022 to December 31, 2023, the increase in past due loans (excluding non-accrual loans) resulted from increases of $1.5 million in C&I loans, $206,000 in SBA loans, and $543,000 in CRE loans, partially offset by a $688,000 decrease in SFR mortgage loans and a $51,000 decrease in other loans.

We did not recognize any interest income on non-accrual loans during the years ended December 31, 2023 and December 31, 2022 while the loans were in non-accrual status.

Prior to our adoption of ASU 2022-02 on January 1, 2023, loans with a concessionary modification due to a borrower experiencing financial difficulties were classified as TDRs and were made for the purpose of alleviating temporary impairments to the borrower’s financial condition.

Nonperforming loans and nonperforming assets includes $11.2 million of loans held for sale at December 31, 2024.

Nonperforming assets totaled $81.0 million, or 2.03% of total assets, at December 31, 2024, compared to $31.6 million, or 0.79% of total assets, at December 31, 2023.

Nonperforming assets at December 31, 2024 include loans HFS with a total fair value of $11.2 million, which were transferred from HFI during the fourth quarter of 2024 after a $1.8 million charge-off against the ACL.

The $49.4 million increase in nonperforming assets was due to $72.9 million of loans migrating to nonaccrual, partially offset by payoffs and paydowns of $19.1 million, charge-offs of $3.4 million and loans that migrated back to accruing status of $964,000.

The $72.9 million increase in nonperforming assets included the migration of three C&D loans totaling of $46.4 million to nonaccrual status during 2024, including one $26.4 million loan for a partially complete mixed-use commercial project with a specific reserve of $4.5 million at December 31, 2024.

Other increases included (a) one commercial relationship totaling $4.6 million in loans HFS, which was sold in the first quarter of 2025, and (b) one commercial relationship totaling $11.7 million with a $2.3 million specific reserve at December 31, 2024.

Our 30-89 day delinquent loans, excluding nonperforming loans, increased to $22.1 million as of December 31, 2024, compared to $16.8 million at December 31, 2023.

The increase in past due loans was due to $23.7 million in new delinquent loans, offset by $4.2 million in loans that migrated to nonaccrual, $6.9 million in loans that migrated back to current, $7.2 million in loan payoffs or paydowns and $97,000 in past due loan charge-offs.

Delinquent loans at December 31, 2024 included one $11.7 million C&D loan for a completed multi-family project, which was in the process of renewal and was brought current, and paid down $1.5 million in the first quarter of 2025.

We did not recognize any interest income on nonaccrual loans during the years ended December 31, 2024 and December 31, 2023 while the loans were in nonaccrual status.

We utilize an asset risk classification system in compliance with guidelines established by the FDIC as part of our efforts to improve asset quality.

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We use a risk grading system to categorize and determine the credit risk of our loans.

Potential problem loans include loans with a risk grade of 6, which are “special mention,” loans with a risk grade of 7, which are “substandard” loans that are generally not considered to be impaired and loans with a risk grade of 8, which are “doubtful” loans generally considered to be impaired.

These loans generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance.

Potential problem loans include loans with a risk grade of 6, which are “special mention,” loans with a risk grade of 7, which are “substandard” loans and loans with a risk grade of 8, which are “doubtful” loans.

Loans which are risk-rated as Substandard and Doubtful generally require more frequent loan officer contact and receipt of financial data to closely monitor borrower performance and may be impaired requiring specific reserves or charge-offs.

Potential problem loans are managed and monitored regularly through a number of processes, procedures and committees, including oversight by a loan administration committee comprised of executive officers and other members of the Bank’s senior management.

The following table presents the risk categories for total loans by class of loans as of December 31, 2023 and 2022:

The following table presents the risk categories for total loans by class of loans HFI as of the dates indicated:

As of December 31, 2024

(dollars in thousands)

December 31, 2023

Construction and land development

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Commercial and industrial

As of December 31, 2023

(dollars in thousands)

December 31, 2022

Construction and land development

2 unchanged sentences

Commercial and industrial

Special mention loans totaled $65.3 million, or 2.14% of total loans, at December 31, 2024, compared to $32.8 million, or 1.08% of total loans, at December 31, 2023.

The $32.5 million increase was primarily due to additions totaling $67.3 million, offset by downgrades to substandard loans totaling $16.9 million, upgrades to pass-rated loans of $12.6 million and loan payoffs and paydowns totaling $5.1 million.

All special mention loans are paying current.

Substandard loans consisted of $89.1 million in loans HFI and $11.2 million in loans HFS at December 31, 2024, compared to $61.1 million loans HFI at December 31, 2023.

The $39.2 million increase was primarily due to downgrades of C&D loans totaling $58.1 million, including one $26.4 million C&D loan, SFR mortgage loans totaling $7.1 million, C&I loans totaling $3.5 million, CRE loans totaling $3.3 million and SBA loans totaling $2.6 million.

These downgrades were offset by payoffs and paydowns totaling $30.6 million, partial charge-offs totaling $3.8 million and upgrades totaling $778,000.

Of the total substandard loans at December 31, 2024, there were $19.3 million on accrual status, including an $11.7 million C&D loan that was in the process of renewal and included in the 30-89 day delinquent category, as previously described.

Cash and Cash Equivalents.

Cash and cash equivalents increased $347.8 million, or 416.3%, to $431.4 million as of December 31, 2023 as compared to $83.5 million at December 31, 2022.

This increase was primarily due to $243.3 million provided by investing activities, $53.2 million provided by financing activities and $51.3 million provided by cash from operating activities.

During 2023, we maintained a conservative strategy to hold extra liquidity due to the volatility of our deposits.

Cash and cash equivalents decreased $173.6 million, or 40.3%, to $257.7 million as of December 31, 2024 as compared to $431.4 million at December 31, 2023.

This decrease was primarily due to $160.4 million used in investing activities, including $78.7 million in commercial paper with maturities of under 90 days, and $71.7 million used in financing activities, offset by $58.5 million provided by cash from operating activities.

Goodwill and Other Intangible Assets.

Goodwill was $71.5 million at December 31, 2024 and at December 31, 2023.

The Company evaluates goodwill for impairment annually, or more frequently if events and circumstances lead management to believe the value of goodwill may be impaired.

We evaluate goodwill for impairment annually, or more frequently if events and circumstances lead management to believe the value of goodwill may be impaired.

In accordance with ASC 350-20, “Goodwill,” impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value.

A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value.

No impairment of goodwill was recognized during 2023 and 2022.

During the first half of 2023, there were bank failures that caused a significant decline in bank stock prices, including the Company’s stock price.

After evaluating the prolonged decrease in the Company’s market value, management performed a quantitative goodwill impairment analysis as of September 30, 2023, as an acceleration of the Company's annual October 1 analysis.

Given that the Company has concluded that it does not have any separately identifiable segments, the evaluation was performed at the Company-wide level.

We engaged a third-party valuation specialist to assist with the quantitative analysis.

Management estimated the fair value of the Company using both the guideline public company method, also referred to as the “market approach”, and the DCF method, also referred to as the “income approach”.

Based on this quantitative analysis, the fair value of the Company exceeds its carrying amount with a passing amount of 9.6% at September 30, 2023.

In addition, due to changes in the Company’s projections of income in future periods during the fourth quarter of 2023 resulting from the current economic environment, at December 31, 2023, management performed certain calculations and sensitivity analyses related to the quantitative goodwill impairment analysis performed at September 30, 2023 and the current information.

Based on this most recent analysis, management concluded that goodwill was also not impaired at December 31, 2023.

Our other intangible assets, which consist of core deposit intangibles, were $2.8 million at December 31, 2023 and $3.7 million at December 31, 2022.

These core deposit intangible assets are amortized primarily on an accelerated basis over their estimated useful lives, generally over a period of 3 to 10 years.

Total liabilities increased $80.3 million, or 2.3%, to $3.5 billion, at December 31, 2023 from $3.4 billion at December 31, 2022, primarily due to a $197.1 million increase in deposits, partially offset by a $70.0 million decrease in short-term FHLB advances and a $54.4 million decrease in subordinated notes.

We redeemed all $55.0 million of our outstanding 6.18% fixed-to-floating rate subordinated notes on December 1, 2023 at par.

The subordinated notes had an original maturity date of December 1, 2028 and an effective interest rate of 6.18% as of their redemption date.

As an Asian-American business bank that focuses on successful businesses and their owners, many of our depositors choose to leave large deposits with us.

The Bank measures core deposits by reviewing all relationships over $250,000 on a quarterly basis.

We track all deposit relationships over $250,000 on a quarterly basis and consider a relationship to be core if there are any three or more of the following:

(i) relationships with us (as a director or shareholder);

During the fourth quarter of 2024, we performed a qualitative analysis and concluded that it is more likely than not that our fair value exceeds our carrying value at December 31, 2024.

There was no impairment of goodwill recognized during 2024 and 2023.

Our other intangible assets consist of core deposit intangibles and totaled $2.0 million at December 31, 2024 and $2.8 million at December 31, 2023.

These core deposit intangible assets are amortized on an accelerated basis over their estimated useful lives, generally over a period of 3 to 10 years.

Total liabilities decreased $30.2 million, or 0.9%, to $3.5 billion, at December 31, 2024 from $3.5 billion at December 31, 2023, primarily due to a $91.0 million decrease in deposits, partially offset by a $50.0 million increase in FHLB advances.

As an Asian-centric business bank that focuses on successful businesses and their owners, many of our depositors choose to leave large deposits with us.

We evaluate all deposit relationships over $250,000 on a quarterly basis to identify deposits that meet certain criteria, which we then would consider to be part of our core deposit base.

We consider a relationship to be a core deposit relationship if it meets any three or more of the following:

(i) direct relationships with us;

(ii) deposits within our market area;

(iii) additional non-deposit services with us;

(iv) electronic banking services with us;

(v) active demand deposit account with us;

(iii) additional services including loans;

(iv) electronic banking services;

(v) active demand deposit accounts;

(vi) deposits at market interest rates;

3 unchanged sentences

We consider all deposit relationships under $250,000 as a core relationship except for time deposits originated through an internet listing service.

Total deposits increased $197.1 million to $3.2 billion at December 31, 2023 as compared to $3.0 billion at December 31, 2022.

The increase was mainly due to increases in the balances of higher yielding time deposits.

During 2023, noninterest-bearing deposits decreased by $259.1 million due to the Bank's customers pursuing higher rates offered by the Bank's time deposits and interest-bearing non-maturity deposits, which increased by $438.8 million and $17.4 million, respectively.

Based on management's internal analysis, core deposits totaled $2.0 billion at December 31, 2024 and $2.4 billion at December 31, 2023.

Total deposits decreased $91.0 million to $3.1 billion at December 31, 2024 as compared to $3.2 billion at December 31, 2023.

The decrease was mainly due to decreases in the balances of wholesale deposits of $258.1 million offset by increases in retail time deposits, interest-bearing non-maturity deposits of $30.3 million and noninterest-bearing demand deposits of $23.4 million.

As of December 31, 2024, total deposits were comprised of 18.3% noninterest-bearing demand accounts, 21.5% interest-bearing non-maturity deposit accounts and 60.2% of time deposits compared to 17.0% noninterest-bearing demand accounts, 19.9% interest-bearing non-maturity deposit accounts and 63.1% of time deposits as of December 31, 2023.

For time deposits, $1.8 billion, or 99%, mature during 2025 and this includes $709 million that mature within 90 days of December 31, 2024.

The following table presents the composition of our deposit portfolio by account type as of the dates indicated:

4 unchanged sentences

(dollars in thousands)

Noninterest-bearing demand deposits

Interest-bearing deposits:

Noninterest-bearing demand

Interest-bearing:

Time deposits $250,000 and under

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Total deposits

The following table summarizes our average deposit balances and weighted average rates as of the dates indicated:

The following table presents our average deposit balances and weighted average rates for the years indicated:

For the Year Ended

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Total deposits

The following table sets forth the maturity schedule of time deposits over $250,000, wholesale deposits and brokered time deposits as of December 31, 2023:

The following table presents the maturity schedule of time deposits as of December 31, 2024:

Maturity Within:

(dollars in thousands)

After Three to Six Months

Six to 12 Months

After Six to 12 Months

After 12 Months

Time Deposits:

(dollars in thousands)

Time deposits $250,000 and under (1)

Wholesale deposits (1)

Total time deposits $250,000 and under

Time deposits over $250,000 (2)

Total time deposits

Wholesale deposits are defined as time deposits under $250,000 originated through the internet listing service and/or through other deposit originators.

Amounts include $50.0 million and $30.0 million of collateralized state of CA time deposits with maturity dates of February 1, 2024 and February 9, 2024.

The following table sets forth the estimated deposits exceeding the FDIC insurance limit:

Includes wholesale deposits of $125.1 million.

Includes wholesale deposits of $22.4 million.

The following table presents the estimated deposits exceeding the FDIC insurance limit as of the dates indicated:

As of December 31,

(dollars in thousands)

For the Year Ended December 31,

Uninsured deposits

Of the $850.3 million in time deposits over $250,000, the estimated aggregate amount of time deposits in excess of the FDIC insurance limit is $640.1 million at December 31, 2024.

The following table sets forth the maturity distribution of time deposits in amounts of more than $250,000 as of December 31, 2023.

(dollars in thousands)

The following table presents the maturity distribution of time deposits in excess of the FDIC insurance limit of more than $250,000 as of the date indicated:

December 31, 2024

(dollars in thousands)

3 months or less

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Brokered time deposits were $93.2 million at December 31, 2024 and $254.9 million at December 31, 2023.

In addition, we offer deposit products through the Certificate of Deposit Account Registry Service (“CDARS”) and Insured Cash Sweeps (“ICS”) programs where customers are able to achieve FDIC insurance for balances on deposit in excess of the $250,000 FDIC limit.

In addition, we offer deposit products through the CDARS and ICS programs where customers are able to achieve FDIC insurance for balances on deposit in excess of the $250,000 FDIC limit.

Time deposits held through the CDARS program were $130.6 million at December 31, 2024 and $135.7 million at December 31, 2023 and ICS funds totaled $146.1 million at December 31, 2024 and $109.2 million at December 31, 2023.

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In addition to deposits, we have used long- and short-term borrowings, such as federal funds purchased and FHLB long-and short-term advances, as a source of funds to meet the daily liquidity needs of our customers and fund growth in earning assets.

We had no FHLB short-term advances at December 31, 2023 and $70.0 million at December 31, 2022.

In the first quarter of 2020, the Company obtained $150.0 million in long-term FHLB advances with an original term of five years and a maturity date in March 2025.

The average fixed interest rate is 1.18%.

The Company secured this funding in case there was a liquidity issue caused by the COVID-19 pandemic and to obtain an attractive interest rate.

The following table sets forth information on our total FHLB advances during the periods presented:

We had $200 million in FHLB advances at December 31, 2024 and $150 million at December 31, 2023.

Advances totaling $150 million had original terms of five years, maturity dates in the first quarter of 2025, and an average fixed interest rate of 1.18%.

A putable advance of $50 million was executed on September 30, 2024 with a four year final maturity, a one year no-put option (European one time) and prepayment symmetry at a rate of 3.42%.

The following table presents information on our total FHLB advances during the years indicated:

Year Ended December 31,

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Long-term debt consists of subordinated notes.

As of December 31, 2023, the amount of subordinated notes outstanding was $119.1 million as compared to $173.6 million at December 31, 2022.

The $55.0 million decrease was due to the redemption of the 2028 Subordinated Notes as described herein.

In November 2018, the Company issued $55.0 million in fixed-to-floating rate subordinated notes due December 1, 2028 (“the 2028 Subordinated Notes”).

As of December 31, 2024, the amount of subordinated notes outstanding, net of issuance costs, was $119.5 million as compared to $119.1 million at December 31, 2023.

In November 2018, we issued $55.0 million in fixed-to-floating rate subordinated notes due December 1, 2028 (“the 2028 Subordinated Notes”).

The 2028 Subordinated Notes bore a fixed rate of 6.18% for the first five years and reset quarterly to the then-current three-month London Interbank Offered Rate (“LIBOR”) rate plus 315 basis points.

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From and after December 1, 2023, all interest on the 2028 Subordinated Notes ceased to accrue.

In March 2021, the Company issued $120.0 million of 4.00% fixed to floating rate subordinated notes due April 1, 2031 (the “2031 Subordinated Notes”).

The interest rate is fixed through April 1, 2026 and floats at three month Secured Overnight Financing Rate (“SOFR”) plus 329 basis points thereafter.

The Company can redeem the 2031 Subordinated Notes beginning April 1, 2026.

The 2031 Subordinated Notes are considered Tier 2 capital at the Company.

The Company used the net proceeds from these subordinated debt offerings for general corporate purposes, including providing capital to the Bank and maintaining adequate liquidity at Bancorp.

The subordinated notes qualified as Tier 2 capital for Bancorp for regulatory purposes and the portion that Bancorp contributed to the Bank qualified as Tier 1 capital for the Bank.

In March 2021, we issued $120.0 million of 4.00% fixed to floating rate subordinated notes due April 1, 2031 (the “2031 Subordinated Notes”).

The interest rate is fixed through April 1, 2026 and then floats at three month Secured Overnight Financing Rate (“SOFR”) plus 329 basis points thereafter.

The 2031 Subordinated Notes were assigned an investment grade rating of BBB by the KBRA.

Under the terms of our 2031 Subordinated Notes and the related subordinated notes purchase agreements, we were not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the long-term debt.

We can redeem the 2031 Subordinated Notes beginning April 1, 2026 and are considered Tier 2 capital.

We used the net proceeds from these subordinated notes for general corporate purposes, including providing capital to the Bank and maintaining adequate liquidity at Bancorp.

The subordinated notes qualify as Tier 2 capital for the consolidated Company for regulatory purposes and the portion that Bancorp contributed to the Bank is treated as Tier 1 capital for the Bank.

At December 31, 2024, we were in compliance with all covenants under our long-term debt agreement.

Subordinated Debentures.

Subordinated debentures consist of subordinated debentures issued in connection with three separate trust preferred securities and totaled $14.9 million and $14.7 million as of December 31, 2023 and 2022, respectively.

Subordinated debentures consist of subordinated debentures issued in connection with three separate trust preferred securities and totaled $15.2 million and $14.9 million as of December 31, 2024 and 2023.

Under the terms of our subordinated debentures issued in connection with the issuance of trust preferred securities, we are not permitted to declare or pay any dividends on our capital stock if an event of default occurs under the terms of the long-term debt.

In addition, the Company has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years.

In addition, we have the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years.

These subordinated debentures consist of the following and are described in detail after the table below:

December 31, 2023

(dollars in thousands)

Valuation Reserve

Effective Rate

Principal Amount

Unamortized Valuation Reserve

Recorded Value

Stated Rate Description

December 31, 2024 Effective Rate

Stated Maturity

Subordinated debentures

(dollars in thousands)

December 22, 2006

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Represents applicable tenor spread adjustment when the original Libor index was discontinued on June 30, 2023

In 2016, the Company, through the acquisition of TomatoBank, acquired the TFC Trust.

In 2016, we, through the acquisition of TomatoBank, acquired the TFC Trust.

The TFC Trust issued 5,000 units of fixed-to-floating rate capital securities with an aggregate liquidation amount of $5.0 million and all of its common securities with an aggregate liquidation amount of $155,000.

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The unamortized valuation reserve was $1.1 million at December 31, 2024 and $1.2 million at December 31, 2023.

The subordinated debentures have a variable rate of interest equal to three - month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 7.30% as of December 31, 2023, and three-month LIBOR plus 1.65%, which was 6.42% at December 31, 2022.

In October 2018, the Company, through the acquisition of FAIC, acquired the FAIC Trust.

The FAIC Trust issued 7,000 units of fixed-to-floating rate capital securities with an aggregate liquidation amount of $7.0 million and all of its common securities with an aggregate liquidation amount of $217,000.

The subordinated debentures have a variable rate of interest equal to three - month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 6.27% as of December 31, 2024, and 7.30% as of December 31, 2023.

In October 2018, we, through the acquisition of FAIC, acquired the FAIC Trust I.

The FAIC Trust I issued 7,000 units of fixed-to-floating rate capital securities with an aggregate liquidation amount of $7.0 million and all of its common securities with an aggregate liquidation amount of $217,000.

At the close of this acquisition, a $1.2 million valuation reserve was recorded to arrive at it fair market value, which is treated as a yield adjustment and amortized over the life of the security.

The unamortized valuation reserve was $765,000 at December 31, 2024 and $842,000 at December 31, 2023.

The subordinated debentures have a variable rate of interest equal to three - month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 7.90% as of December 31, 2023, and three-month LIBOR plus 2.25%, which was 7.02% at December 31, 2022.

In January 2020, the Company, through the acquisition of PGBH, acquired PGBH Trust.

PGBH Trust issued 5,000 units of fixed-to-floating rate capital securities with an aggregate liquidation amount of $5.0 million and all of its common securities with an aggregate liquidation amount of $155,000.

The subordinated debentures have a variable rate of interest equal to three - month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 6.87% as of December 31, 2024, and 7.90% as of December 31, 2023.

In January 2020, we, through the acquisition of PGBH, acquired PGBH Trust I.

PGBH Trust I issued 5,000 units of fixed-to-floating rate capital securities with an aggregate liquidation amount of $5.0 million and all of its common securities with an aggregate liquidation amount of $155,000.

At the close of this acquisition, a $763,000 valuation reserve was recorded to arrive at its fair market value, which is treated as a yield adjustment and amortized over the life of the security.

The unamortized valuation reserve was $507,000 at December 31, 2024 and $559,000 at December 31, 2023.

The subordinated debentures have a variable rate of interest equal to three - month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 7.75% as of December 31, 2023, and three-month LIBOR plus 2.10%, which was 6.87% at December 31, 2022.

At December 31, 2023, we were in compliance with all covenants under our long-term debt agreements.

The subordinated debentures have a variable rate of interest equal to three - month CME Term SOFR plus applicable tenor spread adjustment of 0.26% plus 1.65%, which was 6.72% as of December 31, 2024, and 7.75% as of December 31, 2023.

At December 31, 2024, we were in compliance with all covenants under our subordinated debenture agreements.

Capital Resources and Liquidity Management

Capital Resources.

Shareholders’ equity is influenced primarily by earnings, dividends, sales and redemptions of common stock and preferred stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized holding gains or losses, net of taxes, on AFS investment securities.

Shareholders’ equity increased $26.7 million, or 5.5%, to $511.3 million as of December 31, 2023 from $484.6 million at December 31, 2022.

The increase during 2023 was primarily due to $42.5 million of net income and a $2.2 million decrease in net accumulated other comprehensive loss, partially offset by $12.2 million of cash dividends and a $6.8 million repurchase of common stock.

Shareholders’ equity decreased $3.4 million, or 0.7%, to $507.9 million as of December 31, 2024 from $511.3 million at December 31, 2023.

As a result of this activity and the accretive common stock repurchases, book value per share increased 4.3% to $28.66 at December 31, 2024 from $27.47 at December 31, 2023 and tangible book value per share increased 4.4% to $24.51 at December 31, 2024 from $23.48 at December 31, 2023.

Liquidity Management.

4 unchanged sentences

Liquid assets include cash, interest-earning deposits in banks, federal funds sold, available for sale securities, term federal funds, purchased receivables and maturing or prepaying balances in our securities and loan portfolios.

Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings.

Other sources of liquidity include the sale of loans, the ability to acquire additional national market noncore deposits, the issuance of additional collateralized borrowings through FHLB advances or the Federal Reserve’s discount window, and the ability to access the capital markets through the issuance of debt securities, preferred securities or common securities.

Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends.

Liquid liabilities include retail deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings.

Other sources of liquidity include the sale of loans, the ability to acquire additional wholesale funding, the issuance of additional collateralized borrowings through FHLB advances or the Federal Reserve’s discount window, and the ability to access the capital markets through the issuance of debt securities, preferred securities or common securities.

Our short-term and long-term liquidity requirements are primarily to fund known and unknown on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends.

These liquidity requirements are met primarily through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, debt financing and increases in customer deposits.

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To the extent we are unable to obtain sufficient liquidity through core deposits, we seek to meet our liquidity needs through wholesale funding or other borrowings on either a short- or long-term basis.

The Company has sufficient capital and does not anticipate any need for additional liquidity as of December 31, 2023.

As of December 31, 2023, we pledged loans of $1.5 billion with the FHLB of San Francisco and based on the values of loans we had $1.0 billion of additional borrowing capacity with the FHLB.

At December 31, 2023 and 2022, there were $150.0 million in FHLB long-term advances outstanding.

At December 31, 2023, we had no FHLB short-term advances outstanding and $70.0 million outstanding at December 31, 2022.

We also maintain relationships in the capital markets with brokers and dealers to issue certificates of deposit.

As of December 31, 2023 and December 31, 2022, we had an aggregate of $92.0 million in unsecured federal funds lines through four different commercial banking relationships, with no amounts advanced against the lines as of such dates.

In addition, we have a secured line of credit from the Federal Reserve Discount Window at December 31, 2023 and December 31, 2022 of $42.3 million and $12.0 million, respectively.

Federal Reserve Discount Window lines were collateralized by a pool of CRE loans totaling $62.8 million and $16.8 million as of December 31, 2023 and December 31, 2022, respectively.

We did not have any borrowings outstanding with the Federal Reserve at December 31, 2023 and December 31, 2022 and our borrowing capacity is limited only by eligible collateral.

Bancorp is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity.

Bancorp’s main source of funding is dividends received from the Bank and RAM.

Our wholesale funding ratio was 10.7% at December 31, 2024 compared to 11.7% at December 31, 2023.

We believe we have sufficient capital and sources of liquidity as of December 31, 2024 for our operations.

We have established secured and unsecured lines of credit.

We may borrow funds from time to time on a term or overnight basis from the FHLB, the Federal Reserve Bank of San Francisco (“FRB”) and other financial institutions as indicated below.

FHLB Secured Line of Credit and Advances.

At December 31, 2024, we had a secured borrowing capacity with the FHLB of $1.1 billion collateralized by pledged residential and commercial loans with a carrying value of $1.4 billion.

At December 31, 2024, we had no overnight advances and $200 million of term advances, of which $150 million matures in the first quarter of 2025 with an average fixed rate of 1.18% and $50 million is a putable advance with a four year final one-time option for the FHLB to call the debt in September 2024 at a rate of 3.42%.

FRB Secured Line of Credit.

At December 31, 2024, the Bank had a secured borrowing capacity with the FRB of $47.2 million collateralized by pledged loans with a carrying value of $62.5 million.

Federal Funds Arrangements with Commercial Bank s.

As of December 31, 2024, the Bank has established unsecured lines of credit with four correspondent banks for an aggregate short-term borrowing capacity of $97.0 million.

There were no amounts outstanding under any of the other borrowing arrangements above as of December 31, 2024, except the FHLB term advances totaling $200 million.

The holding company, or Bancorp, is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity.

Bancorp's main source of funding is dividends declared and paid to Bancorp by the Bank and RAM.

There are statutory, regulatory and debt covenant limitations that affect the ability of the Bank to pay dividends to Bancorp.

Management believes that these limitations will not impact our ability to meet our ongoing short-term cash obligations.

During the year ended December 31, 2023, the Bank paid $85.0 million of dividends to Bancorp and none during the year ended December 31, 2022.

During 2023, Bancorp used its liquidity to redeem $55.0 million subordinated debt, buy back approximately 2% of its then outstanding shares of common stock for $6.8 million, and make $12.2 million in dividend distributions to common stock shareholders in addition to its other operational needs.

At December 31, 2023, Bancorp had $47.1 million in cash, all of which was on deposit at the Bank.

During the year ended December 31, 2024, the Bank paid $20.0 million of dividends to Bancorp and $85.0 million during the year ended December 31, 2023.

We had $11.7 million in cash dividends on common stock throughout the year ended December 31, 2024.

At December 31, 2024, Bancorp had $32.1 million in cash, $30.8 million of which was on deposit at the Bank.

Regulatory Capital Requirements

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Under capital adequacy guidelines and the regulatory framework for “prompt corrective action” (described below), we 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 table below summarizes the minimum capital requirements applicable to us and the Bank pursuant to Basel III regulations as of the dates reflected and assuming the capital conservation buffer has been fully phased-in.

The table below summarizes the minimum capital requirements applicable to us and the Bank pursuant to Basel III regulations including the capital conservation buffer as of the dates reflected.

The minimum capital requirements are only regulatory minimums and banking regulators can impose higher requirements on individual institutions.

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Higher capital levels may also be required if warranted by the particular circumstances or risk profiles of individual banking organizations.

The table below also summarizes the capital requirements applicable to Bancorp and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as Bancorp's and the Bank’s capital ratios as of December 31, 2023 and December 31, 2022.

We exceeded all regulatory capital requirements under Basel III and was considered to be “well-capitalized” as of the dates reflected in the table below:

Capital Ratio

Requirements,

including fully

We exceeded all regulatory capital requirements under Basel III and were considered to be "well-capitalized" at December 31, 2024 and 2023.

The table below presents the capital requirements applicable to Bancorp and the Bank in order to be considered “well-capitalized” from a regulatory perspective, and the capital ratios for the consolidated Company and Bank as of December 31, 2024 and December 31, 2023.

Ratio at December 31, 2024

Ratio at December 31, 2023

Regulatory Capital Ratio Requirements

Regulatory Capital Ratio Requirements, including Capital Conservation Buffer

Minimum Requirement for "Well Capitalized" Depository Institution

Tier 1 Leverage Ratio

2 unchanged sentences

Total Risk-Based Capital Ratio

The common equity tier 1 risk-based ratio, or CET1, is a ratio created by the Basel III regulations beginning January 1, 2015.

Contractual Obligations

3 unchanged sentences

Time deposits

FHLB advances

FHLB term advances

FHLB putable advances (1)

Long-term debt

1 unchanged sentence

Total contractual obligations

Included in the one year column is a $50 million putable advance executed on September 30, 2024 with a four year final maturity and a one-time option for the FHLB to call the debt after a one-year lock out period which expires on 09/29/2025.

Off-Balance Sheet Arrangements

We have limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.

In the ordinary course of business, the Company enters into financial commitments to meet the financing needs of its customers.

In the ordinary course of business, we enter into financial commitments to meet the financing needs of its customers.

These financial commitments include commitments to extend credit, unused lines of credit, commercial and similar letters of credit and standby letters of credit.

1 unchanged sentence

Such off-balance sheet commitments totaled $175.5 million and $190.7 million as of December 31, 2024 and 2023.

The Company’s exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments.

The Company uses the same credit policies in making commitments as it does for loans reflected in the financial statements.

Our exposure to loan loss in the event of nonperformance on these financial commitments is represented by the contractual amount of those instruments.

We use the same credit policies in making commitments as it does for loans reflected in the financial statements.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Since many of the commitments are expected to expire without being drawn upon, the total amounts do not necessarily represent future cash requirements.

The Company evaluates each client’s credit worthiness on a case-by-case basis.

The amount of collateral obtained if deemed necessary by the Company is based on management’s credit evaluation of the customer.

In addition, the Company invests in various affordable housing partnerships and Small Business Investment Company ("SBIC") funds.

Pursuant to these investments, the Company commits to an investment amount to be fulfilled in future periods.

We evaluate each client’s credit worthiness on a case-by-case basis and determine the level of collateral required as necessary to meet our underwriting standards.

In addition, we invest in various affordable housing partnerships and Small Business Investment Company ("SBIC") funds.

Pursuant to these investments, we commit to an investment amount to be fulfilled in future periods.

Such unfunded commitments totaled $5.7 million and $3.3 million as of December 31, 2024 and 2023.

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The following table reconciles shareholders’ equity (on a GAAP basis) to tangible common equity and total assets (on a GAAP basis) to tangible assets, and calculates our tangible book value per share:

(dollars in thousands)

December 31, 2024

1 unchanged sentence

Tangible common equity:

(dollars in thousands)

Total shareholders' equity

11 unchanged sentences

Return on Average Tangible Common Equity.

Management measures return on average tangible common equity (“ROATCE”) to assess the Company’s capital strength and business performance.

Management measures return on average tangible common equity (“ROATCE”) to assess our capital strength and business performance.

Tangible equity excludes goodwill and other intangible assets (excluding mortgage servicing rights), and is reviewed by banking and financial institution regulators when assessing a financial institution’s capital adequacy.

This non-GAAP financial measure should not be considered a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled measures used by other companies.

The following table reconciles return on average tangible common equity to its most comparable GAAP measure:

The following table reconciles ROATCE to its most comparable GAAP measure:

(dollars in thousands)

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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