# OP Bancorp: Form 10-Q for the period ended Sep 30, 2024

- Company: [OP Bancorp](/companies/opbk.md) (CIK 1722010)
- Form: 10-Q
- Filed: 2024-11-14
- Accepted by EDGAR: Nov 14, 2024, 19:35 ET
- Period: 2024-09-30
- Accession: 0001628280-24-047832
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1722010/000162828024047832/opbk-20240930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1722010/000162828024047832/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-07-01 to 2024-09-30 | $889.0k | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2024-01-01 to 2024-09-30 | $2.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Income tax | 3 months, 2024-07-01 to 2024-09-30 | $2.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2024-01-01 to 2024-09-30 | $6.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-07-01 to 2024-09-30 | $5.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2024-01-01 to 2024-09-30 | $16.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.36 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | $1.06 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.36 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $1.06 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 14,812,118 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 14,890,479 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | $26.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $747.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2024-01-01 to 2024-09-30 | $5.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2024-01-01 to 2024-09-30 | $2.7m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-09-30 | $166.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2024-09-30 | $2.39bn | us-gaap:Assets |
| Total liabilities | at 2024-09-30 | $2.18bn | us-gaap:Liabilities |
| Shareholders' equity | at 2024-09-30 | $203.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 78,634 characters.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto contained in this Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Part II, Item 1A. Risk Factors” for a discussion of forward-looking statements and important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

### OVERVIEW

We are a bank holding company headquartered in Los Angeles, California. Our commercial community banking activities are operated through Open Bank, our banking subsidiary, and we do not conduct material business operations other than through the Bank. We offer commercial banking services to small and medium-sized businesses, their owners and retail customers primarily in the Korean-American communities within our primary market areas.

Our results of operations depend primarily on our net interest income. We drive our income from interest received on our loan portfolio, the fee income we receive in connection with our deposits, and the sale and service of SBA loans. Our major operating expenses are the interest we pay on deposits and other borrowings, the salaries and related benefits we pay our management and staff, and the rent we pay on our leased properties. We rely primarily on locally-generated deposits, mostly from the Korean-American market within California, to fund our loan activities. We currently operate eight branches in Los Angeles and Orange Counties in California, one branch in Santa Clara, California, one branch in Carrollton, Texas and one branch near Las Vegas, Nevada. We have five loan production offices in Pleasanton, California, Atlanta, Georgia, Aurora, Colorado, Lynnwood, Washington, and Fairfax, Virginia.

### Banking Economy and Recent Developments

In recent periods, our earnings have been affected by a series of upward adjustments to the “discount rate” for short-term borrowings updated by the Federal Reserve Board Open Markets Committee in response to perceived increases in inflationary pressures. Financial institutions and markets promptly followed these adjustments, significantly increasing interest rate pricing on loans and deposits. While such adjustments are commonplace and tend to affect the banking industry as a whole, the pace and degree of these adjustments were nearly unprecedented, resulting in banks, including the Bank, experiencing substantial pressure on multiple fronts. In particular, banks were forced to increase interest rates paid on deposits in order to meet competitive pressures from other financial institutions, as well as from treasury securities and other investment opportunities that offered greater earning capabilities for those customers. These increases correspondingly increased the Bank’s cost of funds and exerted downward pressure on our net interest margins.

The increases in market interest rates also affected loan pricing, which had multiple effects, including a reduction in borrowing (and thus a reduction in interest paid to banks) by customers that had the ability to avoid or defer additional indebtedness, a decline in the origination of new loans, and an increase in credit risk as borrowers who faced rising interest rates found it more difficult to comply with their loan obligations. The combination of these factors has exerted downward pressure on our fee income, the volume of our interest-earning assets and our net interest income.

More recently, following a prolonged low-interest-rate environment, a series of rapid rate increases by the Federal Reserve resulted in a dramatic loss of value for bonds had been priced during the previous market. Those increases had the effect of rapidly diminishing the value of debt securities and, concomitantly, adversely affected liquidity of many financial institutions. These markets appear to have stabilized substantially; however, the United States continues to confront considerable political and economic uncertainty owing to a relatively volatile election cycle, and it remains difficult to predict or to hedge against future fluctuations. While we do not presently expect that the Federal Reserve will resume significant adjustments, the conditions that led the Federal Reserve to make the recent adjustments remain uncertain and relatively volatile, and thus are highly unpredictable. Moreover, although the U.S. presidential election cycle has concluded as of the date of this report, the implications of these events is quite recent and remains difficult to predict.

We believe we have adapted well to these shifts in the banking economy, and our success in weathering the challenges to date owes to the loyalty of our customers and the dedication of our employees and management. At the same time, these conditions have forced us to redirect our efforts toward liquidity and capital management, thus limiting our growth and our near-term profitability.

The following significant items are of note as of or for the periods presented:

### As of September 30, 2024 compared to as of December 31, 2023

- Total assets were $2.39 billion, an increase of $240.3 million, or 11.2%, from $2.15 billion.
- Gross loans were $1.93 billion, an increase of $165.2 million, or 9.4%, from $1.77 billion.
- Total deposits were $2.06 billion, an increase of $257.0 million, or 14.2%, from $1.81 billion.
- Shareholders’ equity was $203.6 million, an increase of $11.0 million, or 5.7%, from $192.6 million.

### For the three months ended September 30, 2024 compared to three months ended September 30, 2023

- Net interest income decreased to $16.5 million, a decrease of $0.8 million, or 4.7%, from $17.3 million.
- Net income was $5.4 million or $0.36 per diluted common share, an increase of $315 thousand, or 6.2%, from $5.1 million or $0.33 per diluted common share.

### For the nine months ended September 30, 2024 compared to nine months ended September 30, 2023

- Net interest income decreased to $48.7 million, a decrease of $3.8 million, or 7.2%, from $52.5 million.
- Net income was $16.1 million or $1.06 per diluted common share, a decrease of $2.6 million, or 14.1%, from $18.7 million or $1.21 per diluted common share.

### SELECTED FINANCIAL DATA

*($ in thousands, except share and per share data)*

| Income Statement Data: | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Interest income | $35,299 | $31,186 | $102,569 | $89,882 |
| Interest expense | 18,793 | 13,873 | 53,890 | 37,425 |
| Net interest income | 16,506 | 17,313 | 48,679 | 52,457 |
| Provision for credit losses | 448 | 1,359 | 1,210 | 1,021 |
| Noninterest income | 4,240 | 2,601 | 12,010 | 10,501 |
| Noninterest expense | 12,720 | 11,535 | 37,066 | 35,743 |
| Income before income taxes | 7,578 | 7,020 | 22,413 | 26,194 |
| Income tax expense | 2,142 | 1,899 | 6,315 | 7,448 |
| Net income | 5,436 | 5,121 | 16,098 | 18,746 |
| **Per Share Data:** |  |  |  |  |
| Basic income per share | $0.36 | $0.33 | $1.06 | $1.21 |
| Diluted income per share | 0.36 | 0.33 | 1.06 | 1.21 |
| Book value per share | 13.75 | 12.17 | 13.75 | 12.17 |
| Shares of common stock outstanding | 14,811,671 | 15,118,268 | 14,811,671 | 15,118,268 |
| **Performance Ratios:** |  |  |  |  |
| Return on average assets(1) | 0.94% | 1.15% | 0.95% | 1.29% |
| Return on average equity(1) | 10.95 | 13.27 | 11.00 | 15.02 |
| Yield on total loans(1) | 6.66 | 6.34 | 6.68 | 6.22 |
| Yield on average interest-earning assets(1) | 6.30 | 5.94 | 6.30 | 5.83 |
| Cost of average interest-bearing liabilities(1) | 4.82 | 4.01 | 4.80 | 3.79 |
| Cost of deposits(1) | 3.57 | 2.63 | 3.52 | 2.44 |
| Net interest margin(1) | 2.95 | 3.40 | 2.99 | 3.48 |
| Efficiency ratio(2) | 61.31 | 58.97 | 61.08 | 56.24 |

(1) Annualized.

(2) Represent noninterest expense divided by the sum of net interest income and noninterest income.

*($ in thousands)*

| Balance Sheet Data: | As of September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Gross loans | $1,931,007 | $1,765,845 |
| Loans held for sale | 8,160 | 1,795 |
| Allowance for credit losses | 22,960 | 21,993 |
| Total assets | 2,387,980 | 2,147,730 |
| Total deposits | 2,064,603 | 1,807,558 |
| Shareholders’ equity | 203,603 | 192,626 |
| **Asset Quality Data:** |  |  |
| Nonperforming loans to gross loans | 0.19% | 0.34% |
| Allowance for credit losses to nonperforming loans | 634 | 362 |
| Allowance for credit losses to gross loans | 1.19 | 1.25 |
| **Balance Sheet and Capital Ratios:** |  |  |
| Gross loans to deposits | 93.53% | 97.69% |
| Noninterest-bearing deposits to deposits | 27.21 | 28.92 |
| Average equity to average total assets | 8.63 | 8.62 |
| Leverage ratio | 9.30 | 9.57 |
| Common equity tier 1 ratio | 11.57 | 12.52 |
| Tier 1 risk-based capital ratio | 11.57 | 12.52 |
| Total risk-based capital ratio | 12.79 | 13.77 |

### Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates since those described in our Annual Report on Form 10-K for the year ended December 31, 2023.

### Allowance for Credit Losses

Credit risk is inherent in the business of making loans. We establish an allowance for credit losses both on loans and off-balance sheet commitments through charges to earnings, which are shown in the statements of operations as the provision for credit losses. Specifically identifiable and quantifiable known losses are promptly charged off against the allowance. The provision for credit losses is determined by conducting a quarterly evaluation of the adequacy of our allowance for credit losses and charging the shortfall or excess, if any, to the current quarter’s expense. This has the effect of creating variability in the amount and frequency of charges to earnings. The provision for credit losses and level of allowance for each period are dependent upon many factors, including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, management’s assessment of the quality of the loan portfolio, the valuation of problem loans and the general economic conditions in our market area.

The Company employs a modeled approach that takes into account current and future economic conditions to estimate lifetime expected losses on a collective basis. With the adoption of CECL, the Company elected not to consider accrued interest receivable in its estimated credit losses because the Company writes off uncollectible accrued interest receivable in a timely manner. The Company considers writing off accrued interest amounts once the amounts become 90 days past due to be considered within a timely manner. The Company has elected to write off accrued interest receivable by reversing interest income. The Company uses transition matrices to develop the Probability of Default ("PD") and Loss Given Default ("LGD") approach, incorporating quantitative factors and qualitative considerations in the calculation of the allowance for credit losses for collectively assessed loans. The model provides forecasts of PD and LGD based on national unemployment rates using regression analysis. The Company incorporates future economic conditions using a weighted multiple scenario approach: baseline and adverse. The Company applies a reasonable and supportable period of one year for the baseline scenario and two years for the adverse scenario, after which loss assumptions revert to historical loss information through a one-year reversion period for the baseline scenario and a two-year reversion period for the adverse scenario. We make critical accounting estimates, including the judgments made in the application of significant accounting policies, sensitivity to change, and the likelihood of materially different reported results if different assumptions were used.

In order to quantify the credit risk impact of other trends and changes within the loan portfolio, we utilize qualitative adjustments to the modeled estimated loss approaches. The parameters for making adjustments are established under a Credit Risk Matrix that provides different possible scenarios for each of the factors listed below. The Credit Risk Matrix and the possible scenarios enable the Bank to qualitatively adjust the loss rates. This matrix considers the following nine factors, which are patterned after the guidelines provided under the Federal Financial Institutions Examination Council Interagency Policy Statement on the Allowance for Credit Losses, updated to reflect the adoption of CECL:

- Changes in lending policies and procedures, including changes in underwriting standards and practices for collection, charge-offs, and recoveries;
- Actual and expected changes in national and local economic and business conditions and developments in which the institution operates that affect the collectivity of loans;
- Changes in the nature and volume of the loan portfolio;
- Changes in the experience, ability, and depth of lending management and staff;
- Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;
- Changes in the quality of the credit review function;
- Changes in the value of the underlying collateral for loans that are not collateral-dependent;
- The existence, growth, and effect of any concentrations of credit, and
- The effect of other external factors, such as the regulatory, legal and technological environments; competition; and events such as natural disasters.

### RESULTS OF OPERATIONS

### Net Income

We reported net income for the three months ended September 30, 2024 of $5.4 million, an increase of $315 thousand, or 6.2%, compared to net income of $5.1 million for the same period of 2023. The increase was due to a $1.6 million increase in noninterest income and a $911 thousand decrease in provision for credit losses, primarily offset by a $1.2 million increase in noninterest expense and a $807 thousand decrease in net interest income.

*($ in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Interest income | $35,299 | $31,186 | $4,113 | 13.2% |
| Interest expense | 18,793 | 13,873 | 4,920 | 35.5 |
| Net interest income | 16,506 | 17,313 | (807) | (4.7) |
| Provision for credit losses | 448 | 1,359 | (911) | (67.0)% |
| Noninterest income | 4,240 | 2,601 | 1,639 | 63.0 |
| Noninterest expense | 12,720 | 11,535 | 1,185 | 10.3 |
| Income before income tax expense | 7,578 | 7,020 | 558 | 7.9 |
| Income tax expense | 2,142 | 1,899 | 243 | 12.8 |
| Net income | $5,436 | $5,121 | $315 | 6.2% |

We reported net income for the nine months ended September 30, 2024 of $16.1 million, a decrease of $2.6 million, or 14.1%, compared to net income of $18.7 million for the same period of 2023. The decrease was primarily due to a $3.8 million decrease in net interest income and a $1.3 million increase in noninterest expense, offset by a $1.5 million increase in noninterest income and a $1.1 million decrease in income tax expense.

*($ in thousands)*

|  | Nine Months Ended September 30, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Interest income | $102,569 | $89,882 | $12,687 | 14.1% |
| Interest expense | 53,890 | 37,425 | 16,465 | 44.0 |
| Net interest income | 48,679 | 52,457 | (3,778) | (7.2) |
| Provision for credit losses | 1,210 | 1,021 | 189 | 18.5 |
| Noninterest income | 12,010 | 10,501 | 1,509 | 14.4 |
| Noninterest expense | 37,066 | 35,743 | 1,323 | 3.7 |
| Income before income tax expense | 22,413 | 26,194 | (3,781) | (14.4) |
| Income tax expense | 6,315 | 7,448 | (1,133) | (15.2) |
| Net income | $16,098 | $18,746 | $(2,648) | (14.1)% |

### Net Interest Income

The management of interest income and expense is fundamental to our financial performance. Net interest income, the difference between interest income and interest expense, is the largest component of our total revenue. Management closely monitors both total net interest income and the net interest margin (net interest income divided by average earning assets). We seek to maximize net interest income without exposing us to excessive interest rate risk through our asset and liability policies. Interest rate risk is managed by monitoring the pricing, maturity and repricing options of all classes of interest-bearing assets and liabilities. Our net interest margin is also adversely impacted by the reversal of interest on nonaccrual loans and the reinvestment of loan payoffs into lower yielding investment securities and other short-term investments.

The following table presents, for the periods indicated, information about: (i) weighted average balances, the total dollar amount of interest income from interest-earning assets and the resultant average yields, (ii) average balances, the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rates, (iii) net interest income, (iv) the interest rate spread, and (v) the net interest margin.

*($ in thousands)*

| Interest-earning assets: | Three Months Ended September 30, 2024 Average Balance | Interest and Fees | Yield / Rate(1) | 2023 Average Balance | Interest and Fees | Yield / Rate(1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits in other banks | $109,003 | $1,474 | 5.29% | $82,752 | $1,116 | 5.28% |
| Federal funds sold and other investments(2) | 16,432 | 314 | 7.65 | 16,176 | 301 | 7.44 |
| Available-for-sale debt securities | 199,211 | 1,626 | 3.26 | 199,205 | 1,519 | 3.05 |
| Commercial real estate loans | 944,818 | 14,759 | 6.21 | 856,911 | 12,207 | 5.65 |
| SBA loans | 270,282 | 7,107 | 10.46 | 248,960 | 7,303 | 11.64 |
| Commercial and industrial loans | 187,163 | 3,642 | 7.74 | 117,578 | 2,340 | 7.90 |
| Home mortgage loans | 503,148 | 6,364 | 5.06 | 516,465 | 6,393 | 4.95 |
| Consumer & other loans | 541 | 13 | 9.37 | 274 | 7 | 10.01 |
| Loans(3) | 1,905,952 | 31,885 | 6.66 | 1,740,188 | 28,250 | 6.45 |
| Total interest-earning assets | 2,230,598 | 35,299 | 6.30 | 2,038,321 | 31,186 | 6.08 |
| Noninterest-earning assets | 88,747 |  |  | 84,580 |  |  |
| Total assets | $2,319,345 |  |  | $2,122,901 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Money market deposits and others | $343,429 | $3,601 | 4.17% | $352,424 | $3,487 | 3.93% |
| Time deposits | 1,127,078 | 14,320 | 5.05 | 869,675 | 9,519 | 4.34 |
| Total interest-bearing deposits | 1,470,507 | 17,921 | 4.85 | 1,222,099 | 13,006 | 4.22 |
| Borrowings | 80,326 | 872 | 4.32 | 79,891 | 867 | 4.31 |
| Total interest-bearing liabilities | 1,550,833 | 18,793 | 4.82 | 1,301,990 | 13,873 | 4.23 |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Noninterest-bearing deposits | 528,126 |  |  | 599,262 |  |  |
| Other noninterest-bearing liabilities | 41,892 |  |  | 36,620 |  |  |
| Total noninterest-bearing liabilities | 570,018 |  |  | 635,882 |  |  |
| Shareholders’ equity | 198,494 |  |  | 185,029 |  |  |
| Total liabilities and shareholders’ equity | $2,319,345 |  |  | $2,122,901 |  |  |
| Net interest income / interest rate spreads |  | $16,506 | 1.48% |  | $17,313 | 1.85% |
| Net interest margin |  |  | 2.95% |  |  | 3.38% |
| Cost of deposits |  |  | 3.57% |  |  | 2.83% |
| Cost of funds |  |  | 3.60% |  |  | 2.90% |

(1) Annualized.

(2) Includes income and average balances for Federal Home Loan Bank (“FHLB”) and Pacific Coast Bankers Bank stock, CRA qualified mutual fund, term federal funds, interest-earning time deposits and other miscellaneous interest-earning assets.

(3) Average loan balances include non-accrual loans and loans held for sale.

*($ in thousands)*

| Interest-earning assets: | Nine Months Ended September 30, 2024 Average Balance | Interest and Fees | Yield / Rate(1) | 2023 Average Balance | Interest and Fees | Yield / Rate(1) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing deposits in other banks | $106,022 | $4,310 | 5.34% | $78,736 | $2,965 | 4.97% |
| Federal funds sold and other investments(2) | 16,335 | 951 | 7.76 | 14,575 | 721 | 6.59 |
| Available-for-sale debt securities | 195,383 | 4,676 | 3.19 | 206,448 | 4,647 | 3.00 |
| Commercial real estate loans | 918,149 | 42,230 | 6.14 | 845,340 | 35,209 | 5.57 |
| SBA loans | 263,126 | 21,436 | 10.88 | 262,130 | 21,459 | 10.94 |
| Commercial and industrial loans | 164,927 | 9,679 | 7.84 | 117,850 | 6,772 | 7.68 |
| Home mortgage loans | 505,669 | 19,207 | 5.06 | 504,188 | 18,069 | 4.78 |
| Consumer & other loans | 1,046 | 80 | 10.10 | 994 | 40 | 5.40 |
| Loans(3) | 1,852,917 | 92,632 | 6.68 | 1,730,502 | 81,549 | 6.30 |
| Total interest-earning assets | 2,170,657 | 102,569 | 6.30 | 2,030,261 | 89,882 | 5.91 |
| Noninterest-earning assets | 88,594 |  |  | 84,044 |  |  |
| Total assets | $2,259,251 |  |  | $2,114,305 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Money market deposits and others | $349,766 | $11,035 | 4.21% | $373,041 | $9,838 | 3.53% |
| Time deposits | 1,061,609 | 39,904 | 5.02 | 833,603 | 25,470 | 4.09 |
| Total interest-bearing deposits | 1,411,375 | 50,939 | 4.82 | 1,206,644 | 35,308 | 3.91 |
| Borrowings | 88,743 | 2,951 | 4.44 | 63,078 | 2,117 | 4.49 |
| Total interest-bearing liabilities | 1,500,118 | 53,890 | 4.80 | 1,269,722 | 37,425 | 3.94 |
| Noninterest-bearing liabilities: |  |  |  |  |  |  |
| Noninterest-bearing deposits | 523,951 |  |  | 628,569 |  |  |
| Other noninterest-bearing liabilities | 40,141 |  |  | 33,377 |  |  |
| Total noninterest-bearing liabilities | 564,092 |  |  | 661,946 |  |  |
| Shareholders’ equity | 195,041 |  |  | 182,637 |  |  |
| Total liabilities and shareholders’ equity | $2,259,251 |  |  | $2,114,305 |  |  |
| Net interest income / interest rate spreads |  | $48,679 | 1.50% |  | $52,457 | 1.97% |
| Net interest margin |  |  | 2.99% |  |  | 3.45% |
| Cost of deposits |  |  | 3.52% |  |  | 2.57% |
| Cost of funds |  |  | 3.56% |  |  | 2.64% |

(1) Annualized.

(2) Includes income and average balances for Federal Home Loan Bank (“FHLB”) and Pacific Coast Bankers Bank stock, CRA qualified mutual fund, term federal funds, interest-earning time deposits and other miscellaneous interest-earning assets.

(3) Average loan balances include non-accrual loans and loans held for sale.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables set forth the effects of changing rates and volumes on our net interest income during the period shown. Information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). Change applicable to both volume and rate have been allocated to volume and rate ratably.

*($ in thousands)*

| Interest-earning assets: | Three Months Ended September 30, 2024 vs 2023 Increases (Decreases) Due to Change in Volume | Rate | Total |
| --- | ---: | ---: | ---: |
| Interest-bearing deposits in other banks | $354 | $4 | $358 |
| Federal funds sold and other investments | 3 | 10 | 13 |
| Available-for-sale debt securities | 11 | 96 | 107 |
| Commercial real estate loans | 1,294 | 1,258 | 2,552 |
| SBA loans | 584 | (780) | (196) |
| Commercial and industrial loans | 1,393 | (91) | 1,302 |
| Home mortgage loans | (138) | 109 | (29) |
| Consumer & other loans | 7 | (1) | 6 |
| Total loans | 3,140 | 495 | 3,635 |
| Total interest-earning assets | 3,508 | 605 | 4,113 |
| **Interest-bearing liabilities:** |  |  |  |
| Money market deposits and others | (327) | 441 | 114 |
| Time deposits | 3,079 | 1,722 | 4,801 |
| Total interest-bearing deposits | 2,752 | 2,163 | 4,915 |
| Borrowings | 3 | 2 | 5 |
| Total interest-bearing liabilities | 2,755 | 2,165 | 4,920 |
| Net interest income | $753 | $(1,560) | $(807) |

### Comparison for the Three Months Ended September 30, 2024 and 2023

Net interest income decreased $807 thousand, or 4.7%, to $16.5 million for the three months ended September 30, 2024 from $17.3 million for the same period of 2023, primarily due to higher interest expense on interest-bearing deposits, partially offset by higher interest income on loans and higher interest income on interest-bearing deposits in other banks as our deposit costs repriced quicker than our interest-earning asset yields following the Federal Reserve’s rate increases.

Interest expense on interest-bearing deposits increased $4.9 million, or 37.8%, to $17.9 million for the three months ended September 30, 2024, compared with $13.0 million for the same period of 2023. The increase was primarily due to a $248.4 million, or 20.3%, increase in average balance of interest-bearing deposits and an 63 basis point increase in average cost of interest-bearing deposits driven by the Federal Reserve's rate increases.

Interest income on loans increased $3.6 million, or 12.9%, to $31.9 million for the three months ended September 30, 2024, compared with $28.3 million for the same period of 2023, primarily due to a $165.8 million, or 9.5%, increase in average balance of loans and a 21 basis point increase in average yield on loans as a result of the Federal Reserve's rate increase.

Interest income on interest-bearing deposits in other banks increased $358 thousand, or 32.1%, to $1.5 million for the three months ended September 30, 2024, compared with $1.1 million for the same period of 2023. The increase was primarily due to a $26.3 million, or 31.7%, increase in average balance of interest-bearing deposits in other banks.

Net interest margin was 2.95% for the three months ended September 30, 2024, a 43 basis point decrease from 3.38% for the same period of 2023, primarily due to a 37 basis point decrease in net interest spread from the higher increase in average cost of interest-bearing deposits and borrowings compared to the increase in average yield on loans.

*($ in thousands)*

| Interest-earning assets: | Nine Months Ended September 30, 2024 vs 2023 Increases (Decreases) Due to Change in Volume | Rate | Total |
| --- | ---: | ---: | ---: |
| Interest-bearing deposits in other banks | $1,079 | $266 | $1,345 |
| Federal funds sold and other investments | 108 | 122 | 230 |
| Available-for-sale debt securities | (214) | 243 | 29 |
| Commercial real estate loans | 3,207 | 3,814 | 7,021 |
| SBA loans | 117 | (140) | (23) |
| Commercial and industrial loans | 2,816 | 91 | 2,907 |
| Home mortgage loans | 173 | 965 | 1,138 |
| Consumer & other loans | 3 | 37 | 40 |
| Total loans | 6,316 | 4,767 | 11,083 |
| Total interest-earning assets | 7,289 | 5,398 | 12,687 |
| **Interest-bearing liabilities:** |  |  |  |
| Money market deposits and others | (1,505) | 2,702 | 1,197 |
| Time deposits | 7,821 | 6,613 | 14,434 |
| Total interest-bearing deposits | 6,316 | 9,315 | 15,631 |
| Borrowings | 860 | (26) | 834 |
| Total interest-bearing liabilities | 7,176 | 9,289 | 16,465 |
| Net interest income | $113 | $(3,891) | $(3,778) |

### Comparison for the Nine Months Ended September 30, 2024 and 2023

Net interest income decreased $3.8 million, or 7.2%, to $48.7 million for the nine months ended September 30, 2024 from $52.5 million for the same period of 2023, primarily due to higher interest expense on interest-bearing deposits, partially offset by higher interest income on loans and higher interest income on interest-bearing deposits in other banks as our deposit costs repriced quicker than our interest-earning asset yields following the Federal Reserve’s rate increases.

Interest expense on interest-bearing deposits increased $15.6 million to $50.9 million for the nine months ended September 30, 2024, compared with $35.3 million for the same period of 2023. The increase was primarily due to a $204.7 million, or 17.0%, increase in average balance of interest-bearing deposits and a 91 basis point increase in average cost of interest-bearing deposits driven by the Federal Reserve's rate increases.

Interest income on loans increased $11.1 million to $92.6 million for the nine months ended September 30, 2024, compared with $81.5 million for the same period of 2023, primarily due to a $122.4 million, or 7.1%, increase in average balance of loans and a 38 basis point increase in average yield on loans as a result of the Federal Reserve's rate increase.

Interest income on interest-bearing deposits in other banks increased $1.3 million, or 45.4%, to $4.3 million for the nine months ended September 30, 2024, compared with $3.0 million for the same period of 2023. The increase was primarily due to a $27.3 million, or 34.7%, increase in average balance of interest-bearing deposits in other banks and a 37 basis point increase in average yield of interest-bearing deposits in other banks.

Net interest margin was 2.99% for the nine months ended September 30, 2024, a 46 basis point decrease from 3.45% for the same period of 2023, primarily due to a 47 basis point decrease in net interest spread from the higher increase in average cost of interest-bearing deposits and borrowings compared to the increase in average yield on loans.

### Provision for Credit Losses

Total provision for credit losses was $448 thousand for the three months ended September 30, 2024, compared to $1.4 million for the same period of 2023. The provision for credit losses on loans and on off-balance sheet exposure were $234 thousand and $214 thousand, respectively. The provision for credit losses on loans of $234 thousand for three months ended September 30, 2024 was primarily due to a $215 thousand increase in the qualitative reserve driven by declining collateral values for collateral dependent CRE loans and weakening economic and business conditions. The provision for credit losses on off-balance sheet exposure of $214 thousand was primarily due to increases in unfunded commitment balance and utilization of commitment.

Total provision for credit losses was $1.2 million for the nine months ended September 30, 2024, compared to the credit losses of $1.0 million for the same period of 2023. The provision for credit losses on loans and on off-balance sheet exposure were $1.1 million and $156 thousand, respectively. The provision for credit losses on loans of $1.1 million for the nine months ended September 30, 2024 was primarily due to a $1.7 million increase in the quantitative general reserve, partially offset by a $843 thousand decrease in the qualitative reserve. The increase in the quantitative reserve was primarily due to changes in historical loss factors and increases in loan balances. The decrease in the qualitative reserve was due to net improvements in various asset quality metrics and economic conditions compared to those metrics and conditions as of December 31, 2023. The provision for credit losses on off-balance sheet exposure of $156 thousand was primarily due to increases in unfunded commitment balance and utilization of commitment.

### Noninterest Income

While interest income remains the largest single component of total revenues, noninterest income is also an important component. A portion of our noninterest income is associated with SBA lending activity, consisting of gains on the sale of loans sold in the secondary market and servicing income from loans sold with servicing retained. Other sources of noninterest income include service charges on deposit.

### Comparison for the Three Months Ended September 30, 2024 and 2023

The following table sets forth the various components of our noninterest income for the three months ended September 30, 2024 and 2023:

*($ in thousands)*

| Noninterest income: | Three Months Ended September 30, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Service charges on deposits | $889 | $575 | $314 | 54.6% |
| Loan servicing fees, net of amortization | 693 | 468 | 225 | 48.1 |
| Gain on sale of loans | 2,088 | 1,179 | 909 | 77.1 |
| Other income | 570 | 379 | 191 | 50.4 |
| Total noninterest income | $4,240 | $2,601 | $1,639 | 63.0% |

Noninterest income for the three months ended September 30, 2024 was $4.2 million, an increase of $1.6 million, or 63.0%, compared to $2.6 million for the same period of 2023, primarily due to increases in gain on sale of loans, service charges on deposits, and loan servicing fees.

Gain on sale of loans was $2.1 million for the three months ended September 30, 2024, compared to $1.2 million for the same period of 2023, an increase of $909 thousand, or 77.1%. The increase was primarily due to a higher sold amount in SBA loans and a higher average sales premium rate. We sold $35.6 million of SBA loans with an average premium of 7.30% for the three months ended September 30, 2024, compared to a sale of $23.4 million of SBA loans with an average premium of 6.50% in the same period of 2023.

Service charges on deposit was $889 thousand for the three months ended September 30, 2024, compared to $575 thousand for the same period of 2023, an increase of $314 thousand, or 54.6%, primarily due to an increase in deposit analysis fees from an increase in the number of analysis accounts.

Loan servicing fees was $693 thousand for the three months ended September 30, 2024, compared to $468 thousand for the same period of 2023, an increase of $225 thousand, or 48.1%, primarily due to a decrease in servicing fee amortization driven by lower loan payoffs in loan servicing portfolio.

### Comparison for the Nine Months Ended September 30, 2024 and 2023

The following table sets forth the various components of our noninterest income for the nine months ended September 30, 2024 and 2023:

*($ in thousands)*

| Noninterest income: | Nine Months Ended September 30, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Service charges on deposits | $2,294 | $1,566 | $728 | 46.5% |
| Loan servicing fees, net of amortization | 2,040 | 1,909 | 131 | 6.9 |
| Gain on sale of loans | 6,116 | 5,847 | 269 | 4.6 |
| Other income | 1,560 | 1,179 | 381 | 32.3 |
| Total noninterest income | $12,010 | $10,501 | $1,509 | 14.4% |

Noninterest income for the nine months ended September 30, 2024 was $12.0 million, an increase of $1.5 million, or 14.4%, compared to $10.5 million for the same period of 2023, primarily due to increases in service charge on deposits, other income, and gain on sale of loans.

Service charges on deposits was $2.3 million for the nine months ended September 30, 2024, compared to $1,566 thousand for the same period of 2023, an increase of $728 thousand, or 46.5%, primarily due to an increase in deposit analysis fees from an increase in the number of analysis accounts.

Other income was $1.6 million for the nine months ended September 30, 2024, compared to $1.2 million for the same period of 2023, an increase of $381 thousand, or 32.3%, primarily due to an increase of $179 thousand in credit related fees and a decrease of $178 thousand in unrealized loss on the CRA mutual fund.

Gain on sale of loans was $6.1 million for the nine months ended September 30, 2024, compared to $5.8 million for the same period of 2023, an increase of $269 thousand, or 4.6%. The increase was primarily due to a higher average sales premium rate, primarily offset by a lower sold amount in SBA loans. We sold $92.5 million of SBA loans with an average premium of 8.02% for the nine months ended September 30, 2024, compared to a sale of $104.8 million of SBA loans with an average premium of 6.91% in the same period of 2023.

### Noninterest Expense

### Comparison for the Three Months Ended September 30, 2024 and 2023

The following table sets forth the major components of our noninterest expense for the three months ended September 30, 2024 and 2023:

*($ in thousands)*

| Noninterest expense: | Three Months Ended September 30, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $8,031 | $7,014 | $1,017 | 14.5% |
| Occupancy and equipment | 1,676 | 1,706 | (30) | (1.8) |
| Data processing and communication | 634 | 369 | 265 | 71.8 |
| Professional fees | 346 | 440 | (94) | (21.4) |
| FDIC insurance and regulatory assessments | 391 | 333 | 58 | 17.4 |
| Promotion and advertising | 151 | 207 | (56) | (27.1) |
| Directors' fees | 154 | 164 | (10) | (6.1) |
| Foundation donation and other contributions | 549 | 529 | 20 | 3.8 |
| Other expenses | 788 | 773 | 15 | 1.9 |
| Total noninterest expense | $12,720 | $11,535 | $1,185 | 10.3% |

Noninterest expense for the three months ended September 30, 2024 was $12.7 million, compared with $11.5 million for the same period of 2023, a decrease of $1.2 million, or 10.3%, primarily due to decreases in salaries and employee benefits, and data processing and communication, partially offset by a decrease in professional fees.

Salaries and employee benefits for the three months ended September 30, 2024 was $8.0 million, an increase of $1.0 million, or 14.5%, compared with $7.0 million for the same period of 2023. The increase was primarily due to increases in salaries and employee benefits to support our growth and a lower accrual on employee incentives in the third quarter of 2023.

Data processing and communication for the three months ended September 30, 2024 was $634 thousand, an increase of $265 thousand, or 71.8%, compared with $369 thousand for the same period of 2023. The increase was primarily due to an increase from our continued growth and a lower expense in the third quarter of 2023 from a credit received on data processing fees.

Professional fees for the three months ended September 30, 2024 was $346 thousand, a decrease of $94 thousand, or 21.4%, compared with $440 thousand for the same period of 2023, The decrease was primarily due to an accrual adjustments made in the third quarter of 2024.

### Comparison for the Nine Months Ended September 30, 2024 and 2023

The following table sets forth the major components of our noninterest expense for the nine months ended September 30, 2024 and 2023:

*($ in thousands)*

| Noninterest expense: | Nine Months Ended September 30, 2024 | 2023 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $23,440 | $21,947 | $1,493 | 6.8% |
| Occupancy and equipment | 4,991 | 4,874 | 117 | 2.4 |
| Data processing and communication | 1,651 | 1,465 | 186 | 12.7 |
| Professional fees | 1,147 | 1,180 | (33) | (2.8) |
| FDIC insurance and regulatory assessments | 1,143 | 1,220 | (77) | (6.3) |
| Promotion and advertising | 451 | 528 | (77) | (14.6) |
| Directors' fees | 489 | 535 | (46) | (8.6) |
| Foundation donation and other contributions | 1,628 | 1,876 | (248) | (13.2) |
| Other expenses | 2,126 | 2,118 | 8 | 0.4 |
| Total noninterest expense | $37,066 | $35,743 | $1,323 | 3.7% |

Noninterest expense for the nine months ended September 30, 2024 was $37.1 million, an increase of $1.3 million, or 3.7%, compared to $35.7 million for the same period of 2023, primarily due to increases in salaries and employee benefits expense, occupancy and equipment expense and data processing and communication, partially offset by a decrease in foundation donation and other contributions.

Salaries and employee benefits for the nine months ended September 30, 2024 was $23.4 million, an increase of $1,493 thousand, or 6.8%, compared with $21.9 million for the same period of 2023. The increase was primarily due to an increase in the number of employees to support our growth, an increase from employee salary adjustments in 2024, and an increase in employee marketing incentives.

Occupancy and equipment for the nine months ended September 30, 2024 was $5.0 million, an increase of $117 thousand, or 2.4%, compared with $4.9 million for the same period of 2023. The increase was primarily due to the opening of a new full service branch in the third quarter of 2023.

Data processing and communication for the nine months ended September 30, 2024 was $1.7 million, an increase of $186 thousand, or 12.7%, compared with $1.5 million for the same period of 2023, to support our continued growth.

Foundation donations and other contributions for the nine months ended September 30, 2024 was $1.6 million, a decrease of $248 thousand, or 13.2%, compared with $1.9 million for the same period of 2023. The decrease was primarily due to lower donation accruals for Open Stewardship Foundation as a result of lower net income.

### Income Tax Expense

Income tax expense was $2.1 million for the three months ended September 30, 2024, compared to $1.9 million for the same period of 2023, primarily due to a $558 thousand, or 7.9%, increase in income before income tax to $7.6 million for the three months ended September 30, 2024 from $7.0 million for the same period of 2023. Effective tax rates were 28.3% and 27.1% for the three months ended September 30, 2024 and 2023, respectively.

Income tax expense was $6.3 million for the nine months ended September 30, 2024, compared to $7.4 million for the same period of 2023, primarily due to a $3.8 million, or 14.4%, decrease in income before income tax to $22.4 million for the nine months ended September 30, 2024 from $26.2 million for the same period of 2023. Effective tax rates were 28.2% and 28.4% for the nine months ended September 30, 2024 and 2023, respectively.

We recognized net deferred tax assets of $12.3 million and $13.3 million as of September 30, 2024 and December 31, 2023, respectively. After consideration of the matters in the preceding paragraph, we have determined that it is more likely than not that net deferred tax assets as of September 30, 2024 will be fully realized in future years.

### FINANCIAL CONDITION

### Investment Portfolio

The securities portfolio is the second largest component of our interest earning assets, and the structure and composition of this portfolio is important to an analysis of our financial condition. The portfolio serves the following purposes: (i) it provides a source of pledged assets for securing certain deposits and borrowed funds, as may be required by law or by specific agreement with a depositor or lender; (ii) it provides liquidity to even out cash flows from the loan and deposit activities of customers; (iii) it can be used as an interest rate risk management tool, because it provides a large base of assets, the maturity and interest rate characteristics of which can be changed more readily than the loan portfolio to better match changes in the deposit base and our other funding sources; and (iv) it is an alternative interest-earning use of funds when loan demand is weak or when deposits grow more rapidly than loans.

We classify our securities as either available-for-sale or held-to-maturity at the time of purchase. Accounting guidance requires available-for-sale securities to be marked to fair value with an offset to accumulated other comprehensive income (loss), a component of shareholders’ equity. Monthly adjustments are made to reflect changes in the fair value of our available-for-sale securities.

All securities in our investment portfolio were classified as available-for-sale as of September 30, 2024. There were no held-to-maturity or trading securities in our investment portfolio as of September 30, 2024. All available-for-sale securities are carried at fair value and consist of U.S. government agencies or sponsored agency securities and tax-exempt municipal securities.

The following table summarizes the fair value of the available-for-sale securities portfolio as of the dates presented:

*($ in thousands)*

| U.S. Government agencies or sponsored agency securities: | September 30, 2024 Amortized Cost | Fair Value | Unrealized Loss | December 31, 2023 Amortized Cost | Fair Value | Unrealized Loss |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential mortgage-backed securities | $43,472 | $40,161 | $(3,311) | $48,318 | $43,877 | $(4,441) |
| Residential collateralized mortgage obligations | 166,819 | 153,114 | (13,705) | 162,142 | 144,459 | (17,683) |
| Municipal securities - tax exempt | 5,803 | 6,098 | 295 | 5,726 | 5,914 | 188 |
| Total available-for-sale debt securities | $216,094 | $199,373 | $(16,721) | $216,186 | $194,250 | $(21,936) |

Available-for-sale debt securities increased $5.1 million, or 2.6%, to $199.4 million as of September 30, 2024 from $194.3 million as of December 31, 2023, primarily due to a $5.2 million decrease in unrealized loss for the nine months ended September 30, 2024. No issuer of the available-for-sale securities, other than U.S. Government and its agencies, comprised more than ten percent of our shareholders’ equity as of September 30, 2024 and December 31, 2023.

Certain securities have fair values less than amortized cost and, therefore, contain unrealized losses. The unrealized losses were primarily attributable to interest rate movement, not credit quality. These securities (Fannie Mae, Ginnie Mae, and Freddie Mac) are guaranteed or sponsored by agencies of the U.S. government, and the issuers of the securities are of high credit quality. We believe that the net unrealized losses presented in the previous tables are temporary and no credit losses are expected. As a result, we expect full collection of the carrying amount of these securities, do not intend to sell the securities in an unrealized loss position, and believe it is more-likely-than-not we will not have to sell these securities prior to recovery of amortized cost. Accordingly, for available-for-sale debt securities, we did not have allowance for credit losses as of September 30, 2024 and December 31, 2023.

The following table sets forth certain information regarding contractual maturities and the weighted average yields of our investment securities as of the dates presented. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

*($ in thousands)*

| U.S. Government agencies or sponsored agency securities: | September 30, 2024 Due in One Year or Less Amortized Cost | Weighted Average Yield | Due after One Year Through Five Years Amortized Cost | Weighted Average Yield | Due after Five Years Through Ten Years Amortized Cost | Weighted Average Yield | Due after Ten Years Amortized Cost | Weighted Average Yield |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential mortgage-backed securities | $— | —% | $819 | 2.16% | $393 | 2.35% | $42,260 | 2.26% |
| Residential collateralized mortgage obligations | — | — | 157 | 1.79 | 2,215 | 1.44 | 164,447 | 3.09 |
| Municipal securities - tax exempt | — | — | — | — | — | — | 5,803 | 5.18 |
| Total available-for-sale debt securities | $— | —% | $976 | 2.10% | $2,608 | 1.58% | $212,510 | 2.98% |

We have not used interest rate swaps or other derivative instruments to hedge fixed rate loans or securities to otherwise mitigate interest rate risk.

### Loans

Our loans represent the largest portion of our earning assets, substantially greater than the securities portfolio or any other asset category, and the quality and diversification of the loan portfolio is an important consideration when reviewing our financial condition.

The loan distribution table that follows sets forth our gross loans outstanding, and the percentage distribution in each category as of the dates indicated:

*($ in thousands)*

|  | September 30, 2024 Amount | % of Total | December 31, 2023 Amount | % of Total |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate | $966,472 | 50.1% | $885,585 | 50.2% |
| SBA—real estate | 232,209 | 12.0 | 224,695 | 12.7 |
| SBA—non-real estate | 20,170 | 1.0 | 14,997 | 0.8 |
| Commercial and industrial | 212,476 | 11.0 | 120,970 | 6.9 |
| Home mortgage | 499,666 | 25.9 | 518,024 | 29.3 |
| Consumer | 14 | — | 1,574 | 0.1 |
| Gross loans receivable | 1,931,007 | 100.0% | 1,765,845 | 100.0% |
| Allowance for credit losses | (22,960) |  | (21,993) |  |
| Loans receivable, net(1) | $1,908,047 |  | $1,743,852 |  |

(1) Includes net deferred loan costs (fees) and unamortized premiums (unaccreted discounts) of $(260) thousand and $140 thousand as of September 30, 2024 and December 31, 2023, respectively.

Gross loans increased $165.2 million, or 9.4%, to $1.93 billion as of September 30, 2024, compared to $1.77 billion as of December 31, 2023. The increase was primarily attributable to new loan production of $375.4 million, partially offset by loan payoffs and paydowns of $171.4 million.

The following tables presents the contractual loan maturities by loan category and the contractual distribution of loans to changes in interest rates as of September 30, 2024 and December 31, 2023:

*($ in thousands)*

|  | September 30, 2024 Due in One Year or Less Fixed Rate | Adjustable Rate | Due after One Year Through Five Years Fixed Rate | Adjustable Rate | Due after Five Years Fixed Rate | Adjustable Rate | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate | $92,386 | $52,527 | $484,943 | $112,083 | $161,482 | $63,051 | $966,472 |
| SBA—real estate | — | — | — | 67 | 10,371 | 221,771 | 232,209 |
| SBA—non- real estate | — | 143 | — | 3,141 | 3,189 | 13,697 | 20,170 |
| Commercial and industrial | 101,301 | 34,751 | 8,531 | 24,162 | 21,122 | 22,609 | 212,476 |
| Home mortgage | — | — | — | — | 476,242 | 23,424 | 499,666 |
| Consumer | — | 14 | — | — | — | — | 14 |
| Gross loans | $193,687 | $87,435 | $493,474 | $139,453 | $672,406 | $344,552 | $1,931,007 |

*($ in thousands)*

|  | December 31, 2023 Due in One Year or Less Fixed Rate | Adjustable Rate | Due after One Year Through Five Years Fixed Rate | Adjustable Rate | Due after Five Years Fixed Rate | Adjustable Rate | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate | $66,776 | $84,427 | $414,863 | $79,933 | $192,074 | $47,512 | $885,585 |
| SBA—real estate | — | — | — | 25 | — | 224,670 | 224,695 |
| SBA—non- real estate | — | 116 | 1 | 3,535 | — | 11,345 | 14,997 |
| Commercial and industrial | 18,478 | 30,172 | 7,996 | 27,154 | 23,644 | 13,526 | 120,970 |
| Home mortgage | — | — | — | — | 495,425 | 22,599 | 518,024 |
| Consumer | — | 1,574 | — | — | — | — | 1,574 |
| Gross loans | $85,254 | $116,289 | $422,860 | $110,647 | $711,143 | $319,652 | $1,765,845 |

Our loan portfolio is concentrated in commercial real estate, which includes unguaranteed balances in SBA loans, home mortgage and commercial (primarily manufacturing, wholesale, and services oriented entities). We do not have any material concentrations by industry or group of industries in the loan portfolio. However, 88.0% of our gross loans were secured by real property as of September 30, 2024, compared to 92.2% as of December 31, 2023.

***Loans — Commercial Real Estate:*** We have established concentration limits in the loan portfolio for commercial real estate loans, commercial and industrial loans, and unsecured lending, among others. All loan types are within established limits. We use underwriting guidelines to assess the borrowers’ historical cash flow to determine debt service, and we further stress test the debt service under higher interest rate scenarios. Financial and performance covenants are used in commercial lending agreements to allow us to react to a borrower’s deteriorating financial condition, should that occur.

Commercial real estate loans include owner-occupied and non-occupied commercial real estate. We originate both fixed and adjustable rate loans. Adjustable rate loans are based on the *Wall Street Journal* prime rate. Our commercial real estate loan portfolio totaled $966.5 million as of September 30, 2024 compared to $885.6 million as of December 31, 2023. During the nine months ended September 30, 2024, we originated $155.1 million of commercial real estate loans. As of September 30, 2024, approximately 76.4% of the commercial real estate portfolio consisted of fixed-rate loans. Our policy maximum loan-to-value, or LTV, is 70% for commercial real estate loans. As of September 30, 2024, our average loan to value for commercial real estate loans was 50.8%.

***Loans — SBA***: We are designated as an SBA Preferred Lender under the SBA Preferred Lender Program. We offer mostly SBA 7(a) variable-rate loans. We generally sell the 75% guaranteed portion of the SBA loans that we originate. Our SBA loans are typically made to small-sized manufacturing, wholesale, retail, hotel/motel and service businesses for working capital needs or business expansions. SBA loans have maturities up to 25 years. Typically, non-real estate secured loans mature in less than 10 years. Collateral may also include inventory, accounts receivable and equipment, and may include personal guarantees. Our unguaranteed SBA loans collateralized by real estate are monitored by collateral type and included in our commercial real estate Concentration Guidance.

As of September 30, 2024, our SBA portfolio totaled $252.4 million, compared to $239.7 million as of December 31, 2023. We originated $122.8 million for the nine months ended September 30, 2024. We sold SBA loans of $92.5 million with a 8.02% average premium during the nine months ended September 30, 2024.

From our total SBA loan portfolio, $232.2 million is secured by real estate and $20.2 million is unsecured or secured by business assets as of September 30, 2024.

***Loans — Commercial and Industrial:*** Commercial and industrial loans totaled $212.5 million as of September 30, 2024, compared to $121.0 million as of December 31, 2023. We originated $71.2 million for the nine months ended September 30, 2024.

***Loans - Home Mortgage:*** We originate mainly non-qualified, alternative documentation single-family home mortgage loans (“home mortgage”) primarily through our retail branch network and our correspondent lender network. The primary loan product is a five-year or seven-year hybrid adjustable rate mortgage, which reprices after five years to a selected SOFR plus certain spreads. We also purchase residential mortgage loans from third party mortgage originators based on the review of their underwriting and file quality as opportunities arise.

Home mortgage loans totaled $499.7 million as of September 30, 2024, compared to $518.0 million as of December 31, 2023. For the nine months ended September 30, 2024, we originated $26.3 million of home mortgage loans. There was no home mortgage loan purchase from third party mortgage originators for the same period.

### Loan Servicing

As of September 30, 2024 and December 31, 2023, we serviced $694.8 million and $707.4 million, respectively, of SBA loans for others. Activity for loan servicing rights was as follows:

*($ in thousands)*

|  | Three Months Ended September 30, 2024 | 2023 | Nine Months Ended September 30, 2024 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Beginning balance | $11,043 | $12,654 | $11,741 | $12,759 |
| Additions from loans sold with servicing retained | 783 | 505 | 2,081 | 2,474 |
| Amortized to expense | (949) | (1,228) | (2,945) | (3,302) |
| Ending balance | $10,877 | $11,931 | $10,877 | $11,931 |

Loan servicing rights are reported on our Consolidated Balance Sheets and reported net of amortization.

### Allowance for Credit Losses

The allowance for credit losses is sensitive to numerous factors, including unemployment rate forecasts, change in asset quality, prepayment rates, and real estate indices. Given the dynamic relationship between these factors within our model, it is difficult to estimate the impact of any one factor or input on the allowance for credit losses. Changes in the factors and inputs considered may not occur at the same rate and may not be consistent across all geographies or product types. Additionally, changes in factors and input may be discretionally inconsistent, such that improvement in one factor may offset deterioration in others. However, to provide additional context regarding the sensitivity of the allowance for credit losses to changes in key variable, we used the following assumptions in a sensitivity analysis of our allowance for credit losses: unemployment rate forecast based on supervisory severely adverse scenario, 0% prepayment rates, loan risk grade changes of commercial real estate and commercial and industrial loan portfolio in worst case scenario based on our history, and applying a 100% weighting to severely adverse scenario.

The analysis demonstrates the sensitivity to the allowance for credit losses to key quantitative assumptions and it is not intended to estimate changes in the overall allowance for credit losses and it does not capture all the potential unknown variables that could arise in the forecast period, but it provides an approximation of a possible outcome under hypothetical severe conditions.

The Company used the following assumptions in a sensitivity analysis of our allowance for credit losses: unemployment rate forecast based on supervisory severely adverse scenario, 0% prepayment rates, loan risk grade changes of commercial real estate and commercial and industrial loan portfolio in worst case scenario based on the Company history, and applying a 100% weighting to severely adverse scenario. The analysis demonstrates the sensitivity to the allowance for credit losses to key quantitative assumptions and it is not intended to estimate changes in the overall allowance for credit losses and it does not capture all the potential unknown variables that could arise in the forecast period, but it provides an approximation of a possible outcome under hypothetical severe conditions.

Collateral-dependent loans are loans where repayment is expected to be provided solely by the sale of the underlying collateral and there are no other available and reliable sources of repayment. The estimated credit losses for these loans are based on the collateral’s fair value less selling costs. In most cases, the Company records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less selling costs at the time of foreclosure.

The allowance for credit losses was $23.0 million as of September 30, 2024, compared to $22.0 million as of December 31, 2023. Provision of credit losses of $448 thousand was recorded for the three months ended September 30, 2024, compared to $1.4 million for the same period in 2023. Provision of credit losses of $1.2 million was recorded for the nine months ended September 30, 2024, compared to $1.0 million for the same period in 2023.

### Analysis of the Allowance for Credit Losses

The following table provides an analysis of the allowance for credit losses, provision for credit losses and net charge-offs, by category, for the three and nine months ended September 30, 2024 and 2023:

*($ in thousands)*

|  | As of and for the Three Months Ended September 30, 2024 Beginning | Provision (Reversal) | Net (Charge-offs) Recoveries |  | Ending | 2023 Beginning | Provision (Reversal) | Net (Charge-offs) Recoveries | Ending |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate | $7,926 | $1,481 | $— |  | $9,407 | $6,784 | $1,171 | $(457) | $7,498 |
| SBA—real estate | 2,927 | 173 | — |  | 3,100 | 1,218 | 34 | (35) | 1,217 |
| SBA—non- real estate | 253 | 58 | (36) |  | 275 | 55 | 91 | 4 | 150 |
| Commercial and industrial | 2,151 | 8 | — |  | 2,159 | 1,270 | (115) | — | 1,155 |
| Home mortgage | 9,499 | (1,482) | 2 |  | 8,019 | 11,472 | 125 | — | 11,597 |
| Consumer | 4 | (4) | — |  | — | 3 | (3) | $— | — |
| Total | $22,760 | $234 | $(34) | (34) | $22,960 | $20,802 | $1,303 | $(488) | $21,617 |
| Gross loans(1) |  |  |  |  | $1,931,007 |  |  |  | $1,759,525 |
| Average loans(1) |  |  |  |  | $1,891,157 |  |  |  | $1,733,874 |
| Net (charge-offs) recoveries to average gross loans(2) |  |  |  |  | (0.01)% |  |  |  | (0.11)% |
| Allowance for credit losses to gross loans |  |  |  |  | 1.19% |  |  |  | 1.23% |

*($ in thousands)*

|  | As of and for the Nine Months Ended September 30, 2024 Beginning | Provision (Reversal) | Net (Charge-offs) Recoveries | Ending | 2023 Beginning | Impact of CECL Adoption | Provision (Reversal) | Net (Charge-offs) Recoveries | Ending |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial real estate | $7,915 | $1,492 | $— | $9,407 | $6,951 | $875 | $220 | $(548) | $7,498 |
| SBA—real estate | 1,657 | 1,509 | (66) | 3,100 | 1,607 | (238) | (106) | (46) | 1,217 |
| SBA—non- real estate | 147 | 149 | (21) | 275 | 207 | (142) | 84 | 1 | 150 |
| Commercial and industrial | 1,215 | 944 | — | 2,159 | 1,643 | (320) | (168) | — | 1,155 |
| Home mortgage | 11,045 | (3,026) | — | 8,019 | 8,826 | 1,753 | 1,018 | — | 11,597 |
| Consumer | 14 | (14) | — | — | 7 | (4) | (3) | — | — |
| Total | $21,993 | $1,054 | $(87) | $22,960 | $19,241 | $1,924 | $1,045 | $(593) | $21,617 |
| Gross loans(1) |  |  |  | $1,931,007 |  |  |  |  | $1,759,525 |
| Average loans(1) |  |  |  | $1,840,592 |  |  |  |  | $1,709,715 |
| Net (charge-offs) recoveries to average gross loans(2) |  |  |  | (0.01)% |  |  |  |  | (0.05)% |
| Allowance for credit losses to gross loans |  |  |  | 1.19% |  |  |  |  | 1.23% |

(1) Excludes loans held for sale.

(2) Annualized

The following table presents an allocation of the allowance for credit losses by portfolio as of September 30, 2024 and December 31, 2023:

*($ in thousands)*

|  | September 30, 2024 Amount | % to Total | December 31, 2023 Amount | % to Total |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate | $9,407 | 41.0% | $7,915 | 36.0% |
| SBA—real estate | 3,100 | 13.5 | 1,657 | 7.5 |
| SBA—non- real estate | 275 | 1.2 | 147 | 0.7 |
| Commercial and industrial | 2,159 | 9.4 | 1,215 | 5.5 |
| Home mortgage | 8,019 | 34.9 | 11,045 | 50.2 |
| Consumer | — | — | 14 | 0.1 |
| Total | $22,960 | 100.0% | $21,993 | 100.0% |

### Nonperforming Assets

Loans are considered delinquent when principal or interest payments are past due 30 days or more. Delinquent loans may remain on accrual status between 30 days and 90 days past due. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Typically, the accrual of interest on loans is discontinued when principal or interest payments are 90 days past due or when, in the opinion of management, there is a reasonable doubt as to collectability in the normal course of business. When loans are placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on non-accrual loans is subsequently recognized only to the extent that cash is received, and the loan’s principal balance is deemed collectible. Loans are restored to accrual status when loans become well-secured and management believes full collectability of principal and interest is probable.

Nonperforming loans include loans that are 90 days past due and still accruing, loans accounted for on a non-accrual basis, and accruing restructured loans. Nonperforming assets consist of nonperforming loans plus other real estate owned ("OREO").

Nonperforming loans were $3.6 million as of September 30, 2024, compared to $6.1 million as of December 31, 2023. Nonperforming loans excluded the guaranteed portion of SBA loans of $11.1 million and $2.0 million as of September 30, 2024 and December 31, 2023, respectively.

Real estate we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as OREO until being sold, and is initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. As of September 30, 2024, OREO totaled $1.2 million, which is secured by a mix-use property in Los Angeles with 90% guaranteed by SBA. There was no OREO as of December 31, 2023.

The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. Nonperforming loans include non-accrual loans, loans past due 90 days or more and still accruing interest, and loans modified under troubled debt restructurings.

*($ in thousands)*

|  | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Nonaccrual loans | $3,620 | $6,082 |
| Past due loans 90 days or more and still accruing | — | — |
| Total nonperforming loans(1) | 3,620 | 6,082 |
| Other real estate owned | 1,237 | — |
| Total nonperforming assets | $4,857 | $6,082 |
| Nonperforming loans to gross loans | 0.19% | 0.34% |
| Nonperforming assets to total assets | 0.20 | 0.28 |
| Allowance for credit losses to nonperforming loans | 634 | 362 |

(1) Excludes guaranteed portion of SBA loans of $11.1 million and $2.0 million as of September 30, 2024 and December 31, 2023, respectively.

### Deposits and Other Sources of Funds

We gather deposits primarily through our branch locations. We offer a variety of deposit products including demand deposits accounts, interest-bearing products, savings accounts and certificate of deposits. We dedicate continuing effort into gathering noninterest demand deposits accounts through marketing to our existing and new loan customers, customer referrals, our marketing staff and various involvement with community networks.

The following table show the composition of deposits by type as of the dates presented:

*($ in thousands)*

|  | September 30, 2024 Amount | Percent | December 31, 2023 Amount | Percent |
| --- | ---: | ---: | ---: | ---: |
| Noninterest-bearing demand | $561,801 | 27.3% | $522,751 | 28.9% |
| Interest-bearing: |  |  |  |  |
| Money market and others | 343,188 | 16.6 | 399,018 | 22.1 |
| Time deposits (greater than $250) | 564,547 | 27.3 | 433,892 | 24.0 |
| Time deposits ($250 or less) | 595,067 | 28.8 | 451,897 | 25.0 |
| Total interest-bearing | 1,502,802 | 72.7 | 1,284,807 | 71.1 |
| Total deposits | $2,064,603 | 100.0% | $1,807,558 | 100.0% |

The following tables set forth the maturity of time deposits as of September 30, 2024:

*($ in thousands)*

|  | Maturity Within: Three Months | Three to Six Months | Six to Twelve Months | After Twelve Months | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Time deposits (greater than $250) | $205,957 | $189,693 | $167,641 | $1,256 | $564,547 |
| Time deposits ($250 or less) | 261,163 | 124,315 | 189,765 | 19,824 | 595,067 |
| Total time deposits | $467,120 | $314,008 | $357,406 | $21,080 | $1,159,614 |

Other than deposits, we also utilized FHLB advances as a supplementary funding source to finance our operations. The advances from the FHLB are collateralized by residential and commercial real estate loans. As of September 30, 2024 and December 31, 2023, we had maximum borrowing capacity from the FHLB of $650.7 million and $655.9 million, respectively. We had borrowings from FHLB of $75.0 million and $105.0 million as of September 30, 2024 and

December 31, 2023, respectively. The Company had estimated uninsured deposits of $946.4 million, or 45.8% of total deposits, and $781.0 million, or 43.2% of total deposits, as of September 30, 2024 and December 31, 2023, respectively.

### Liquidity and Capital Resources

Liquidity refers to our ability to meet the cash flow requirements of depositors and borrowers, while at the same time meeting our operating, capital and strategic cash flow needs, while effectively balancing the related costs. We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. Our short-term and long-term liquidity requirements are primarily met through cash flow from operations, redeployment of prepaying and maturing balances in our loan and investment portfolios, and increases in customer deposits. Other alternative sources of funds will supplement these primary sources to the extent necessary to meet additional liquidity requirements on either a short-term or long-term basis.

Deposits are the primary funding source for the Bank. Deposits provide a stable source of funding and reduce our reliance on the wholesale funding markets. The following table presents the loan and deposit balances, the loans-to-deposit ratios, and deposits as a percentage of total liabilities as of September 30, 2024 and December 31, 2023:

*($ in thousands)*

|  | September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: |
| Deposits | $2,064,603 | $1,807,558 |
| Deposits as a % of total liabilities | 94.5% | 92.5% |
| Loans, net | $1,908,047 | $1,743,852 |
| Loans-to-deposits ratio | 92.4% | 96.5% |

In addition to deposits, we have access to various sources of wholesale funding, as well as borrowing capacity at the FHLB, Federal Reserve, and correspondent banks to sustain an adequate liquid asset portfolio, meet daily cash demands and allow management flexibility to execute the business strategy. Economic conditions and the stability of capital markets impact the access to and the cost of wholesale funding. The access to capital markets is also affected by the ratings received from various credit rating agencies.

We had $100.0 million of unsecured federal funds lines with no amounts advanced as of September 30, 2024 and December 31, 2023. In addition, on such dates we had lines of credit from the Federal Reserve discount window of $207.8 million and $183.0 million, respectively. The Federal Reserve discount window lines were collateralized by a pool of commercial real estate loans and commercial and industrial loans totaling $278.9 million and $251.0 million as of September 30, 2024 and December 31, 2023, respectively. We did not have any borrowings outstanding with the Federal Reserve as of September 30, 2024 or December 31, 2023, and our borrowing capacity is limited only by eligible collateral.

Based on the values of loans pledged as collateral, we had $397.6 million of additional borrowing availability with the FHLB as of September 30, 2024. We also maintain relationships in the capital markets with brokers to issue certificates of deposit and money market accounts.

We maintain ample access to liquidity, including highly liquid assets on our balance sheet and available unused borrowings from other financial institutions. The following table presents our liquid assets and available borrowings as of September 30, 2024 and December 31, 2023:

*($ in thousands)*

| Liquid assets: | September 30, 2024 | December 31, 2023 | % Change |
| --- | ---: | ---: | ---: |
| Cash and cash equivalents | $166,756 | $91,216 | 82.8% |
| AFS debt securities | 199,373 | 194,250 | 2.6 |
| Liquid assets | $366,129 | $285,466 | 28.3% |
| Liquid assets to total deposits | 17.7% | 15.8% |  |
| Available borrowings: |  |  |  |
| FHLB | $397,617 | $363,615 | 9.4% |
| Federal Reserve Bank | 207,782 | 182,989 | 13.5 |
| Pacific Coast Bankers Bank | 50,000 | 50,000 | — |
| Zions Bank | 25,000 | 25,000 | — |
| First Horizon Bank | 25,000 | 25,000 | — |
| Total available borrowings | $705,399 | $646,604 | 9.1% |
| Total available borrowings to total deposits | 34.2% | 35.8% |  |
| Liquid assets and available borrowings to total deposits | 51.9% | 51.6% |  |

The following tables summarizes short- and long-term material cash requirements as of September 30, 2024, which we believe that we will be able to fund these obligations through cash generated from our operations and available alternative sources of funds:

*($ in thousands)*

|  | Material Cash Requirements Within One Year | One to Three Years | Three to Five Years | After Five Years | Indeterminable maturity(1) | Total |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Deposits(1) | $467,121 | $691,737 | $756 | $— | $904,989 | $2,064,603 |
| Operating lease commitments | 2,087 | 4,563 | 3,402 | 876 | — | 10,928 |
| Advances from FHLB(2) | 75,000 | — | — | — | — | 75,000 |
| Commitments to fund investment for Low Income Housing Tax Credit | 4,864 | 2,978 | 258 | 487 | — | 8,587 |
| Total contractual obligations | $549,072 | $699,278 | $4,416 | $1,363 | $904,989 | $2,159,118 |

(1) Includes deposits with no defined maturity, such as noninterest-bearing demand, savings and money market.

(2) Excludes accrued interest.

In addition to contractual obligations, other commitments of us impact liquidity. These include unused commitments to extend credit, standby letters of credit and commercial letters of credit. Since many of these commitments expire without being drawn upon, and each customer must continue to meet the conditions established in the contract, the total amount of these commercial commitments does not necessarily represent the future cash requirements of us. Our liquidity sources have been, and are expected to be, sufficient to meet the cash requirements of our lending activities. Information about our loan commitments, standby letters of credit and commercial letters of credit is provided in Note 9. Commitments and Contingencies to the unaudited consolidated financial statements in this Report.

### Capital Requirements

We are subject to various regulatory capital requirements administered by the federal and state banking regulators, although, as a “smaller bank holding company,” we are not subject to most of these standards at the holding company level. These standards are, however, applicable to the Bank, and failure to meet regulatory capital requirements may result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for “prompt corrective action”, the Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting policies. The capital amounts and classifications are subject to qualitative judgments by the federal banking regulators regarding components, risk weightings and other factors. Qualitative measures established by regulation to ensure capital adequacy required us to maintain minimum amounts and various ratios of CET1 capital, Tier 1 capital and total capital to risk-weighted assets and of Tier 1 capital to average consolidated assets, referred to as the “leverage ratio.”

The table below also summarizes the capital requirements applicable to us and the Bank in order to be considered “well-capitalized” from a regulatory perspective, as well as our and the Bank’s capital ratios as of September 30, 2024 and December 31, 2023. The Bank exceeded all regulatory capital requirements under the Basel III Capital Rules and were considered to be “well-capitalized” as of the dates reflected in the table below. As of September 30, 2024, the FDIC categorized us as well-capitalized under the prompt corrective action framework. There have been no conditions or events since September 30, 2024 that management believes would change this classification.

*($ in thousands)*

| As of September 30, 2024 Total capital (to risk-weighted assets) | Actual(1) Amount | Ratio | Regulatory Capital Ratio Requirements Amount | Ratio | Minimum to be Considered "Well Capitalized" Amount | Ratio | Regulatory Capital Ratio Requirements, including fully phased in Capital Conservation Buffer Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $240,012 | 12.79% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 238,097 | 12.69 | $150,106 | 8.00% | $187,632 | 10.00% | $197,014 | 10.50% |
| Tier 1 capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |
| Consolidated | 217,123 | 11.57 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 215,208 | 11.47 | 112,579 | 6.00 | 150,106 | 8.00 | 159,487 | 8.50 |
| CET1 capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |
| Consolidated | 217,123 | 11.57 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 215,208 | 11.47 | 84,435 | 4.50 | 121,961 | 6.50 | 131,343 | 7.00 |
| Tier 1 leverage (to average assets) |  |  |  |  |  |  |  |  |
| Consolidated | 217,123 | 9.30 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 215,208 | 9.22 | 93,362 | 4.00 | 116,703 | 5.00 | 93,362 | 4.00 |

(1) The capital requirements are only applicable to the Bank, and our ratios are included for comparison purpose.

*($ in thousands)*

| As of December 31, 2023 Total capital (to risk-weighted assets) | Actual(1) Amount | Ratio | Regulatory Capital Ratio Requirements Amount | Ratio | Minimum to be Considered "Well Capitalized" Amount | Ratio | Regulatory Capital Ratio Requirements, including fully phased in Capital Conservation Buffer Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Consolidated | $229,544 | 13.77% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 227,773 | 13.66 | $133,353 | 8.00% | $166,691 | 10.00% | $175,025 | 10.50% |
| Tier 1 capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |
| Consolidated | 208,707 | 12.52 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 206,936 | 12.41 | 100,014 | 6.00 | 133,353 | 8.00 | 141,687 | 8.50 |
| CET1 capital (to risk-weighted assets) |  |  |  |  |  |  |  |  |
| Consolidated | 208,707 | 12.52 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 206,936 | 12.41 | 75,011 | 4.50 | 108,349 | 6.50 | 116,684 | 7.00 |
| Tier 1 leverage (to average assets) |  |  |  |  |  |  |  |  |
| Consolidated | 208,707 | 9.57 | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | 206,936 | 9.49 | 87,207 | 4.00 | 109,008 | 5.00 | 87,207 | 4.00 |

(1) The capital requirements are only applicable to the Bank, and our ratios are included for comparison purpose.

## Market risk

As filed, 5,782 characters.

Market risk represents the risk of loss due to changes in market values of assets and liabilities. We incur market risk in the normal course of business through exposures to market interest rates, equity prices, and credit spreads. We have identified interest rate risk as our primary source of market risk.

#### Interest Rate Risk

Interest rate risk is the risk to earnings and value arising from changes in market interest rates. Interest rate risk arises from timing differences in the repricing and maturities of interest-earning assets and interest-bearing liabilities (repricing risk), changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers’ ability to prepay home mortgage loans at any time and depositors’ ability to redeem certificates of deposit before maturity (option risk), changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion (yield curve risk), and changes in spread relationships between different yield curves, such as U.S. Treasuries and SOFR (basis risk).

Our board’s asset liability committee, or ALM, establishes broad policy limits with respect to interest rate risk. Our management’s asset liability committee, or ALCO, establishes specific operating guidelines within the parameters of the policies set by the ALM. In general, we seek to minimize the impact of changing interest rates on net interest income and the economic values of assets and liabilities. Our ALCO monitors the level of interest rate risk sensitivity on a quarterly basis to ensure compliance with the ALM-approved risk limits. The policy requires a periodic review of all key assumptions used, such as identifying appropriate interest rate scenarios, setting loan prepayment rates based on historical analysis, and noninterest-bearing and interest-bearing deposit durations based on historical analysis.

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective management of interest rate risk begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk posture given business forecasts, management objectives, market expectations, and policy constraints.

An asset sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate higher net interest income, as rates earned on our interest-earning assets would reprice upward more quickly than rates paid on our interest-bearing liabilities, thus expanding our net interest margin. Conversely, a liability sensitive position refers to a balance sheet position in which an increase in short-term interest rates is expected to generate lower net interest income, as rates paid on our interest-bearing liabilities would reprice upward more quickly than rates earned on our interest-earning assets, thus compressing our net interest margin.

Interest rate risk measurement is calculated and reported to the ALCO and ALM at least quarterly. The information reported includes period-end results and identifies any policy limits exceeded, along with an assessment of the policy limit breach and the action plan and timeline for resolution, mitigation, or assumption of the risk.

#### Evaluation of Interest Rate Risk

We use a net interest income simulation model to measure and evaluate potential changes in our net interest income. We run various hypothetical interest rate scenarios at least quarterly and compare these results against a scenario with no changes in interest rates. We use two approaches to model interest rate risk: Earnings at Risk, or EAR, and Economic Value of Equity, or EVE. Under EAR, net interest income is modeled utilizing various assumptions for assets and liabilities. EVE measures the period end market value of assets minus the market value of liabilities and the change in this value as rates change. EVE is a period end measurement.

Our simulation model incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results such as: (i) the timing of changes in interest rates; (ii) shifts or rotations in the yield curve; (iii) re-pricing characteristics for market-rate-sensitive instruments; (iv) varying loan prepayment speeds for different interest rate scenarios; and (v) the overall growth and mix of assets and liabilities. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset-liability management strategies and manage our interest rate risk.

Potential changes to our net interest income in hypothetical rising and declining rate scenarios calculated as of September 30, 2024 and December 31, 2023 are presented in the following table. The projections assume (1) immediate, parallel shifts downward of the yield curve of 100, 200 and 300 basis points and (2) immediate, parallel shifts upward of the yield curve of 100, 200, and 300 basis points over 12 months.

|  | Net Interest Sensitivity September 30, 2024 | December 31, 2023 | Economic Value of Equity Sensitivity September 30, 2024 | December 31, 2023 |
| --- | ---: | ---: | ---: | ---: |
| +300 basis points | 3.01% | 1.57% | (20.23)% | (41.40)% |
| +200 basis points | 2.51 | 2.39 | (8.93) | (18.75) |
| +100 basis points | 1.38 | 1.54 | (2.31) | (6.32) |
| -100 basis points | (1.20) | (0.97) | 0.60 | 5.58 |
| -200 basis points | 0.19 | (0.14) | (5.19) | 3.41 |
| -300 basis points | 2.94 | 1.77 | (14.74) | (3.47) |

## Controls and procedures

As filed, 2,339 characters.

#### Evaluation of disclosure controls and procedures

The Company’s management, including our President and Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered in this Report. Based on such evaluation, our President and Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

#### Changes in internal control over financial reporting

There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act), during the period covered by this Report, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

#### Limitations on Effectiveness of Controls and Procedures and Internal Control over Financial Reporting

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

## Risk factors

As filed, 11,115 characters.

Readers should consider the matters discussed in the section captioned “Part II, Item 1A. Risk Factors,” set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“Annual Report”), for a list of known risks and uncertainties that could affect our business, results of operations, financial condition and cash flows, and could cause our actual results to vary materially from those expressed in this Report and our other public filings. Except as expressly set forth below, there have been no material changes from the risk factors described in the Company's Annual Report. Other factors besides those described in our Annual Report or discussed elsewhere in our other reports filed with or furnished to the SEC could affect our business or results. Readers should not consider any description of such factors to be a complete set of all potential risks that the Company faces.

***Interruptions, cyberattacks, fraudulent activity or other security breaches may have a material adverse effect on our business.***

Our business is highly dependent on the collection, storage, transmittal, sharing, processing and retention of information about our customers and employees. To accomplish these activities, we rely heavily upon electronic infrastructure that we own or that we obtain via license or other contractual arrangements with third parties. These technologies affect, among other things, our customers’ ability to access and transfer funds, initiate and pay loans and leases, communicate with our customer service teams, and engage in a variety of other activities that form the foundation of modern financial services businesses. Likewise, our employee data and related technologies allow us to communicate with our employees about routine and extraordinary matters, compensate our staff, maintain timekeeping, payroll and benefits records, and comply with an increasingly complex web of labor and employment laws and regulations. The loss, interruption or disruption of these systems may damage our relationships with customers and correspondingly may harm our reputation. Compromises or interruptions in our employment-related systems may cause challenges in our relationships with our employees, upon whom we are heavily dependent in the conduct of our business and the development and maintenance of our relationships with customers and prospective customers.

There have been a number of recent and well-publicized incidents involving various types of cybersecurity lapses, some of which have had substantial adverse impacts upon targeted businesses and on customers of even some of the world’s most prominent cybersecurity and financial services firms. Similarly, extremely sophisticated criminal and nation-state organizations routinely target and exploit information technology networks, data systems, and other critical infrastructure. One of the most prominent recent events resulted in a widespread failure of a large cybersecurity platform, some of the consequences of which are not yet, and may not soon be, fully known or estimable.

We devote significant resources and management focus to ensuring the integrity of our systems against cybercriminals and similar actors, as well as against threats from fires and other natural disasters; power or telecommunications failures; acts of terrorism or wars or other catastrophic events; breaches, physical break-ins or errors resulting in interruptions and unauthorized disclosure of confidential information, through information security and business continuity programs. Likewise, we have made, and we continue to make, substantial investments in systems that are intended to protect against these vulnerabilities, including real-time threat detection and warning, security programs and protocols, backup and alternative-access systems, virus and malware protection programs, and a wide variety of other protective measures.

Notwithstanding these investments, cybersecurity measures are, by their nature, largely reactive, and threats are constantly evolving. We expect that the development of AI-based technologies will accelerate both the number and the sophistication of these threats. We routinely experience attempts to exploit our networks and systems, and we must continue investing in increasingly advanced (and concomitantly expensive) technology to counteract these threats. Further, if our systems cannot timely detect and mitigate vulnerabilities, or cannot promptly respond to threats, we may experience damage to or interruptions in the availability of our computer networks, or we may experience a loss of data, unauthorized use or disclosure of customer information, or a loss of customer funds as a result of unauthorized access to customer accounts. Likewise, breaches of our payroll, benefits, and other employee-related systems may give rise to liability under employment laws and may damage our relationships with our employees.

Disruptions or failures in the physical infrastructure, controls or operating systems that support our businesses and customers, failures of the third parties on which we rely to adequately or appropriately provide their services or perform their responsibilities, or our failure to effectively manage or oversee our third-party relationships, could result in business disruptions, loss of revenue or customers, legal or regulatory proceedings, remediation and other costs, violations of applicable privacy and other laws, reputational damage, customer harm, or other adverse consequences, any of which could materially adversely affect our results of operations or financial condition. Further, new and evolving SEC regulations, as well as federal and state banking and consumer privacy laws and regulations, could require us to provide notices of security breaches. Such disclosures could result in increased regulatory scrutiny, exacerbate our potential legal liability, and result in a loss of confidence in the security of our systems or an adverse perception of our products and services.

The access by unauthorized persons to, or the improper disclosure by us or our third-party vendors of, confidential information regarding our customers or our own proprietary information, software, methodologies and business secrets, failures or disruptions in our communications, information and technology systems, or our failure to adequately address them, could negatively affect our customer relationship management, online banking, accounting or other systems. We cannot assure readers that such breaches, failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely.

Accordingly, any failures or interruptions of our communications, information and technology systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition or results of operations.

***Our cybersecurity investments may create unforeseen implementation challenges that confer unexpected disruptions, unbudgeted costs, or delays in adaptation to crucial threats.***

Enhancements and upgrades to our infrastructure or computer systems may be time-consuming, may entail significant costs, and may themselves create risks associated with implementing new systems and integrating them with existing ones. Due to the complexity and interconnectedness of our systems, the process of enhancing our infrastructure and operating systems, including their security measures and controls, also can create an inherent risk of system disruptions and security issues. Similarly, we may not be able to timely recover critical business processes or operations that have been disrupted, which may further increase any associated costs and consequences of such disruptions. Although we have enterprise incident response processes, business continuity plans and other safeguards in place to help provide operational resiliency, our business operations may be adversely affected by significant and widespread disruption to our physical infrastructure or computer systems that support our businesses and customers.

***Our relatively small size requires us to be heavily reliant upon third-party vendors for cybersecurity expertise. Those vendors may themselves be subject to vulnerabilities, and their failures may be harmful to our business.***

As a smaller bank holding company and a small community bank, we lack the resources available to larger institutions to recruit, train and retain a large staff focused on data security. Instead, like most community banks, we rely heavily on third-party vendors and other service providers for these functions. As financial institutions and technology systems become more interconnected and more complex, any operational incident at a third party, such as a vendor or customer, may increase our operational risks, including from information breaches or loss, breakdowns, disruptions or failures of their own systems or infrastructure, or any deficiencies in the performance of their responsibilities. These risks are increased to the extent we rely on a single-source vendor or provider. If a third-party vendor or service provider is not fully effective in assisting us in protecting our data and systems, we may be held responsible for any resulting failures, and even a failure by a third party could damage or jeopardize our relationships with our customers. Further, a recent and well-publicized cybersecurity incident involving the failure of one of the world’s most sophisticated security platforms resulted in extensive outages of that provider’s customer systems, the effect of which was a cascading failure of several of that firm’s clients’ networks. Such interruptions, occurring as a result of the acts or omissions of one or more of our vendors, could result in liability to our customers, as well as reputational harm and a potential interruption of our business.

***Cybersecurity incidents, failures or lapses could give rise to regulatory harms to the Company or the Bank.***

As cybersecurity threats become increasingly widespread and sophisticated, federal and state banking and privacy regulations are becoming correspondingly complex and prevalent, and the penalties for the actual or suspected violations of such rules are becoming increasingly substantial. Accordingly, we must meet stringent and increasingly costly regulatory requirements regarding our own obligations, as well as our reliance on third-party service providers, and any failure by us or our third-party service providers to comply with applicable laws, rules, regulations, or internal policies could result in the Company or the Bank becoming subject to fines, penalties, or business restrictions, as well as to increased costs to remediate any actual or perceived deficiencies and potentially to legal and other costs associated with defending against such regulatory sanctions.

Filed Nov 14, 2024.
Source: SEC EDGAR, the filing index for accession 0001628280-24-047832. Last ingested by Listed: Oct 24, 2026, 15:07 ET. No prices; not investment advice.