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What changed in FIVE STAR BANCORP's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of FIVE STAR BANCORP's 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+381 added−360 removedSource: 10-K (2025-02-28) vs 10-K (2024-02-23)

Top changes in FIVE STAR BANCORP's 2024 10-K

381 paragraphs added · 360 removed · 310 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

72 edited+29 added−16 removed152 unchanged
Biggest changeAs of December 31, 2023, approximately 57.10% of our real estate loans measured by dollar amount were secured by collateral located in California, a majority of which is in Northern California. Additionally, we have a high concentration of real estate related loans, which represented approximately 92.30% of our loan portfolio at December 31, 2023.
Biggest changeConcentrations of Credit Risk Although we have a diversified loan portfolio, a substantial portion is secured by commercial and residential real estate located in Northern California. As of December 31, 2024, approximately 57.66% of our real estate loans measured by dollar amount were secured by collateral located in California, a majority of which is in Northern California.
In addition, an insured depository institution is generally prohibited from making capital distributions, including paying dividends or paying management fees to a holding company, if the institution would thereafter be undercapitalized.
In addition, an insured depository institution is generally prohibited from making capital distributions, including paying dividends or paying management fees to a holding company, if the institution would thereafter be undercapitalized.
We believe that this activity, coupled with relatively small loan amounts that are 4 spread across many individual borrowers, minimizes risk. Underwriting standards for home loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.
We believe that this activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.
Finally, the FDI Act prohibits an insured depository institution from paying dividends on its capital stock if it is in default of its payment of deposit insurance assessments to the FDIC. Reserve Requirements Federal Reserve rules require depository institutions, such as the Bank, to maintain reserves against their transaction accounts.
Finally, the FDI Act prohibits an insured depository institution from paying dividends on its capital stock if it is in default of its payment of deposit insurance assessments to the FDIC. 15 Reserve Requirements Federal Reserve rules require depository institutions, such as the Bank, to maintain reserves against their transaction accounts.
We obtain most of our deposits from individuals, small and medium-sized businesses, and municipalities in our market. We solicit deposits through our relationship-driven team of dedicated and accessible bankers and through community-focused marketing. We emphasize obtaining deposit relationships at loan origination. We provide a high level of customer 5 service to our depositors.
We obtain most of our deposits from individuals, small and medium-sized businesses, and municipalities in our market. We solicit deposits through our relationship-driven team of dedicated and accessible bankers and through community-focused marketing. We emphasize obtaining deposit relationships at loan origination. We provide a high level of customer service to our depositors.
We have invested in personnel, business and compliance processes, and technology that enable us to acquire, and efficiently and effectively serve, a wide array of business deposit accounts, while continuing to provide the level of customer service for which we are known.
We have invested in personnel, business and compliance processes, and technology that enable us 5 to acquire, and efficiently and effectively serve, a wide array of business deposit accounts, while continuing to provide the level of customer service for which we are known.
Supervision and regulation of banks, their holding companies, and affiliates is intended primarily for the protection of depositors and customers, the Deposit Insurance Fund (the “DIF”) of the FDIC, and the U.S. banking and financial system, rather than holders of our capital stock.
Supervision and regulation of banks, their holding companies, and affiliates is intended primarily for the protection of depositors and customers, the Deposit Insurance Fund 9 (the “DIF”) of the FDIC, and the U.S. banking and financial system, rather than holders of our capital stock.
As a result, our growth, earnings performance, and operations may be affected by the requirements of federal and state statutes and by the regulations and policies of various 9 bank regulatory agencies, including the DFPI, the FDIC, the Federal Reserve, and the CFPB.
As a result, our growth, earnings performance, and operations may be affected by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the DFPI, the FDIC, the Federal Reserve, and the CFPB.
Common equity Tier 1 capital 11 is predominantly comprised of common stock instruments (including related surplus) and retained earnings, net of treasury stock, and after making necessary capital deductions and adjustments.
Common equity Tier 1 capital is predominantly comprised of common stock instruments (including related surplus) and retained earnings, net of treasury stock, and after making necessary capital deductions and adjustments.
As a result, the Bank was “well-capitalized” for prompt corrective action purposes based on the ratios and guidelines described below. Payment of Dividends and Stock Repurchases The Company is limited in its ability to pay dividends or repurchase its stock by the Federal Reserve, including if doing so would be an unsafe or unsound banking practice.
As a result, the Bank was “well-capitalized” for prompt corrective action purposes based on the ratios and guidelines described above. Payment of Dividends and Stock Repurchases The Company is limited in its ability to pay dividends or repurchase its stock by the Federal Reserve, including if doing so would be an unsafe or unsound banking practice.
Human Capital To facilitate talent attraction and retention, we strive to create an inclusive, safe, and healthy workplace with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, and health and welfare programs. Employee Profile As of December 31, 2023, we had 180 full-time employees and five part-time employees.
Human Capital To facilitate talent attraction and retention, we strive to create an inclusive, safe, and healthy workplace with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, and health and welfare programs. Employee Profile As of December 31, 2024, we had 205 full-time employees and five part-time employees.
Among other factors, as an emerging growth company: • we may present only two years of audited financial statements and discuss only our results of operations for two years in “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” • we are exempt from the requirement to provide an opinion from our auditors on the design and operating effectiveness of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”); • we may choose not to comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and our audited financial statements; • we are permitted to provide less extensive disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we are not required to include a compensation discussion and analysis and other disclosures regarding our executive compensation in this Annual Report on Form 10-K; and • we are not required to hold nonbinding advisory votes on executive compensation or golden parachute arrangements.
Among other factors, as an emerging growth company: • we may discuss our results of operations for only two years in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” provided that we reference disclosure where the third year of our results of operations may be found; • we are exempt from the requirement to provide an opinion from our auditors on the design and operating effectiveness of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”); • we may choose not to comply with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and our audited financial statements; • we are permitted to provide less extensive disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies and with which emerging growth companies may comply, which means we are not required to include a compensation discussion and analysis and other disclosures regarding our executive compensation in this Annual Report on Form 10-K; and • we are not required to hold nonbinding advisory votes on executive compensation or golden parachute arrangements.
Based on the FDIC Summary of Deposits as of June 30, 2023, Five Star ranks sixth in the Sacramento-Roseville-Folsom metropolitan statistical area (“MSA”) by deposit market share with deposits of $2.6 billion and four branches.
Based on the FDIC Summary of Deposits as of June 30, 2024, Five Star ranks sixth in the Sacramento-Roseville-Folsom metropolitan statistical area (“MSA”) by deposit market share with deposits of $2.8 billion and four branches.
Additionally, while the final rule retains the option for a large bank to adopt a strategic plan, a strategic plan will generally be required to cover the same tests and geographies as the revised framework applies to other large banks. Most of the final rule’s new requirements are applicable beginning January 1, 2026.
Additionally, while the final rule retains the option for a large bank to adopt a strategic plan, a strategic plan under the final rule will generally be required to cover the same tests and geographies as the revised framework applies to other large banks. Most of the final rule’s new requirements were scheduled to become applicable beginning January 1, 2026.
We have a fully engaged Senior Vice President, Chief Operations Officer and Chief DE&I Officer who leads our DE&I efforts. Our Human Resources department is focused on our commitment to DE&I through hiring practices and employee training.
We have a fully engaged Executive Vice President, Chief Operating Officer who leads our DE&I efforts. Our Human Resources department is focused on our commitment to DE&I through hiring practices and employee training.
We have taken steps designed to help reduce our own carbon footprint by utilizing e-signatures to conduct business to reduce paper consumption and encouraging our employees to work remotely, where possible.
We have taken steps designed to help reduce our own carbon footprint by utilizing e-signatures to conduct business to reduce paper consumption, occupying sustainable facilities when possible, and encouraging our employees to work remotely, where possible.
Residential real estate and construction loans : As of December 31, 2023, we had $41.3 million in residential real estate and construction loans, representing 1.34% of total loans before deferred fees. Residential real estate loans are underwritten based upon income, credit history, and collateral. To monitor and manage residential loan risk, policies and procedures are developed and modified, as needed.
Residential real estate and construction loans : As of December 31, 2024, we had $37.3 million in residential real estate and construction loans, representing 1.06% of total loans before deferred fees. Residential real estate loans are underwritten based upon income, credit history, and collateral. To monitor and manage residential loan risk, policies and procedures are developed and modified, as needed.
Our primary loan products are commercial real estate loans, commercial loans, commercial land and construction loans, and farmland loans. Our primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts. Our principal geographic market is the Roseville/Sacramento/Rancho Cordova/Elk Grove area (the “Greater Sacramento Area”).
Our primary loan products are commercial real estate loans, land development loans, construction loans, and operating lines of credit and our primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts. Our principal geographic market is the Roseville/Sacramento/Rancho Cordova/Elk Grove area (the “Greater Sacramento Area”).
Under the generally applicable capital requirements of the Federal Reserve and the FDIC, the Company and the Bank are required to meet a common equity Tier 1 capital to risk-weighted assets ratio of at least 7.00% (a minimum of 4.50% plus a capital conservation buffer of 2.50%), a Tier 1 capital to risk-weighted assets ratio of at least 8.50% (a minimum of 6.00% plus a capital conservation buffer of 2.50%), a total capital to risk-weighted assets ratio of at least 10.50% (a minimum of 8.00% plus a capital conservation buffer of 2.50%), and a Tier 1 leverage ratio of at least 4.00%.
The Federal Reserve and the FDIC, the primary federal regulators of the Company and Bank, respectively, have substantially similar generally applicable risk-based capital ratio and leverage ratio requirements. 11 Under the generally applicable capital requirements of the Federal Reserve and the FDIC, the Company and the Bank are required to meet a common equity Tier 1 capital to risk-weighted assets ratio of at least 7.00% (a minimum of 4.50% plus a capital conservation buffer of 2.50%), a Tier 1 capital to risk-weighted assets ratio of at least 8.50% (a minimum of 6.00% plus a capital conservation buffer of 2.50%), a total capital to risk-weighted assets ratio of at least 10.50% (a minimum of 8.00% plus a capital conservation buffer of 2.50%), and a Tier 1 leverage ratio of at least 4.00%.
The primary objectives of the investment portfolio are to provide a source of liquidity and provide collateral that can be readily sold or pledged for public deposits or other business purposes. At December 31, 2023, 51.25% and 37.37% of our investment portfolio consisted of mortgage-backed securities and obligations of states and political subdivisions, respectively.
The primary objectives of the investment portfolio are to provide a source of liquidity and provide collateral that can be readily sold or pledged for public deposits or other business purposes. At December 31, 2024, 50.10% and 39.50% of our investment portfolio consisted of mortgage-backed securities and obligations of states and political subdivisions, respectively.
Our profitability depends in large part upon our continued ability to successfully compete with these institutions for lending opportunities, deposit funds, financial products, bankers, and potential acquisition targets. We conduct business through seven branches in our key market of Northern California. We expect to open a full service branch in Downtown San Francisco in the second half of 2024.
Our profitability depends in large part upon our continued ability to successfully compete with these institutions for lending opportunities, deposit funds, financial products, bankers, and potential acquisition targets. We conduct business through eight branches in our key market of Northern California. We opened a full service branch in Downtown San Francisco in September 2024.
Farmland loans : As of December 31, 2023, we had $51.7 million in farmland loans, representing 1.67% of total loans before deferred fees. We are a strong agricultural lender, with both lines of credit and term loans. Farmland loans are generally made to producers and processors of crops and livestock.
Farmland loans : As of December 31, 2024, we had $47.2 million in farmland loans, representing 1.34% of total loans before deferred fees. We are a strong agricultural lender, with both lines of credit and term loans. Farmland loans are generally made to producers and processors of crops and livestock.
As a result, the DIF reserve ratio fell to below the statutory minimum of 1.35%. The FDIC adopted a restoration plan in September 2020, which it amended in June 2022, to restore the DIF reserve ratio to at least 1.35% by September 30, 2028.
The FDIC adopted a restoration plan in September 2020, which it amended in June 2022, to restore the DIF reserve ratio to at least 1.35% by September 30, 2028.
To a lesser extent, we also offer residential real estate and construction loans and consumer loans. 3 Commercial real estate loans : As of December 31, 2023, we had $2.7 billion in total commercial real estate loans, representing 86.76% of total loans before deferred fees.
To a lesser extent, we also offer residential real estate and construction loans and consumer loans. 3 Commercial real estate loans : As of December 31, 2024, we had $2.9 billion in total commercial real estate loans, representing 80.75% of total loans before deferred fees.
The Company and the Bank are also subject to a wide range of consumer protection laws and regulations. 13 California Law California law governs the chartering and regulation of California commercial banks like ours, including organizational and capital requirements, fiduciary powers, investment authority, banking offices and electronic terminals, declaration of dividends, changes of control and mergers, out of state activities, interstate branching and banking, debt offerings, borrowing limits, and limits on loans to one borrower.
California Law California law governs the chartering and regulation of California commercial banks like ours, including organizational and capital requirements, fiduciary powers, investment authority, banking offices and electronic terminals, declaration of dividends, changes of control and mergers, out of state activities, interstate branching and banking, debt offerings, borrowing limits, and limits on loans to one borrower.
Personal and business incomes represent the primary source of repayment for the majority of these loans. Deposit Products Representing 91.52% of our total liabilities as of December 31, 2023, deposits are our primary source of funding for our business operations. As of December 31, 2023, we held total deposits of $3.0 billion, including $0.8 billion in non-interest-bearing deposits.
Personal and business incomes represent the primary source of repayment for the majority of these loans. Deposit Products Representing 97.30% of our total liabilities as of December 31, 2024, deposits are our primary source of funding for our business operations. As of December 31, 2024, we held total deposits of $3.6 billion, including $922.6 million in non-interest-bearing deposits.
Investment Securities As of December 31, 2023, the carrying value of our investment portfolio, which represented 3.09% of total assets, totaled $111.2 million and had an average effective yield of 2.20% and an estimated modified duration of approximately 6.5 years.
Investment Securities As of December 31, 2024, the carrying value of our investment portfolio, which represented 2.49% of total assets, totaled $100.9 million and had an average effective yield of 2.09% and an estimated modified duration of approximately 6.14 years.
The Bank is subject to supervision, examination, enforcement, and reporting requirements under the FDI Act, the California Financial Code, regulations of the FDIC and the DFPI, and certain of the requirements imposed by the Dodd-Frank Act.
The Bank is subject to supervision, examination, enforcement, and reporting requirements under the FDI Act, the California Financial Code, regulations of the FDIC and the DFPI, and certain of the requirements imposed by the Dodd-Frank Act. The Company and the Bank are also subject to a wide range of consumer protection laws and regulations.
Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.
The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.
As of December 31, 2023, our 40 largest deposit relationships, each accounting for more than $10 million, totaled $1.5 billion, or 49.80% of our total deposits. This includes $693.7 million of our total deposits held by municipalities, of which we conduct a monthly review.
As of December 31, 2024, our 49 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.8 billion, or 50.35% of our total deposits. This includes $674.1 million of our total deposits held by municipalities, of which we conduct a monthly review.
The regulatory agencies generally have broad authority to impose restrictions and limitations on the operations of a regulated entity when an agency determines, among other things, that such operations are unsafe or unsound, fail to comply with applicable law, or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies. 12 Anti-Money Laundering Initiatives and Sanctions Compliance The Company and Bank are subject to extensive regulations aimed at combating money laundering and terrorist financing.
The regulatory agencies generally have broad authority to impose restrictions and limitations on the operations of a regulated entity when an agency determines, among other things, that such operations are unsafe or unsound, fail to comply with applicable law, or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.
Information on our website should not be considered a part of this Annual Report on Form 10-K. The Company provides a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through seven branch offices, the Internet, and its mobile banking application.
Information on our website should not be considered a part of this Annual Report on Form 10-K. The Company provides a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through eight branch offices. The Bank opened a full service branch in Downtown San Francisco in September 2024.
At December 31, 2023, the Bank exceeded its minimum capital requirements with common equity Tier 1 capital, Tier 1 capital, and total capital equal to 10.95%, 10.95%, and 11.93% of its total risk-weighted assets, respectively, and a Tier 1 leverage ratio of 10.52%.
At December 31, 2024, the Bank exceeded its minimum capital requirements with common equity Tier 1 capital, Tier 1 capital, and total capital equal to 12.61%, 12.61%, and 13.59% of its total risk-weighted assets, respectively, and a Tier 1 leverage ratio of 11.50%.
We refer to our mission as “purpose-driven and integrity-centered banking.” As of December 31, 2023, we had total assets of $3.6 billion, total loans held for investment, net of allowance for credit losses, of $3.0 billion, and total deposits of $3.0 billion.
We refer to our mission as “purpose-driven and integrity-centered banking.” At December 31, 2024, we had total assets of $4.1 billion, total loans held for investment of $3.5 billion, and total deposits of $3.6 billion.
Before approving any such transaction, the Federal Reserve is required by the BHC Act to consider a number of factors, including the transaction’s competitive impact, the financial and managerial resources and future prospects of the bank holding companies and banks concerned, the convenience and needs of the community to be served, and the effectiveness of the parties in combating money laundering activities.
Before approving any such transaction, the Federal Reserve is required by the BHC Act to consider a number of factors, including the transaction’s competitive impact, the financial and managerial resources and future prospects of the bank holding companies and banks concerned, the convenience and needs of the community to be served, and the effectiveness of the parties in combating money laundering activities. 10 Provisions of the FDI Act known as the Bank Merger Act impose similar approval standards for an insured depository institution to merge with another insured depository institution or a non-insured institution.
Under the final rule, it may be more challenging and costly for the Bank to achieve an “Outstanding” or “Satisfactory” CRA rating. Banks with assets of at least $2 billion, including the Bank, will be considered large banks and their retail lending, retail services and products, community development financing, and community development services will be subject to periodic evaluation.
Under the final rule, banks with assets of at least $2 billion, including the Bank, are considered large banks and their retail lending, retail services and products, community development financing, and community development services will be subject to periodic evaluation.
In addition, a bank holding company is required to consult with the Federal Reserve before redeeming any equity or other capital instrument included in Tier 1 or Tier 2 capital prior to stated maturity if such redemption could have a material effect on the level or composition of the organization’s capital base.
This prior notice requirement does not apply to any bank holding company that meets certain “well-capitalized” and “well-managed” standards and is not the subject of any unresolved supervisory issues. 12 In addition, a bank holding company is required to consult with the Federal Reserve before redeeming any equity or other capital instrument included in Tier 1 or Tier 2 capital prior to stated maturity if such redemption could have a material effect on the level or composition of the organization’s capital base.
Our Management Loan Committee is comprised of our Chief Executive Officer, our Chief Credit Officer, certain other members of management, and select senior loan officers and is primarily responsible for day-to-day implementation and oversight of our loan approval procedures. Our board of directors approves, from time to time, a delegated lending authority to members of the Management Loan Committee.
We have established a Management Loan Committee and a Director Loan Committee. Our Management Loan Committee is comprised of our Chief Executive Officer, our Chief Credit Officer, certain other members of management, and select senior loan officers and is primarily responsible for day-to-day implementation and oversight of our loan approval procedures.
By making these provisions applicable to state non-member banks, the FDI Act and FDIC regulations impose these restrictions on the Bank’s purchases or sales of assets from or to insiders of the Bank and the Company. Additionally, California law imposes insider lending limits that are similar to the restrictions of the Federal Reserve’s Regulation O.
By making these provisions applicable to state non-member banks, the FDI Act and FDIC regulations impose these restrictions on the Bank’s purchases or sales of assets from or to insiders of the Bank and the Company.
We believe that our long-term experience in commercial real estate lending, underwriting policies, internal controls, and other policies currently in place, as well as our loan and credit monitoring and administration procedures, are generally appropriate to managing our concentrations as required under the commercial real estate guidance. 14 Prompt Corrective Action The FDI Act identifies five capital categories for insured depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.
We believe that our long-term experience in commercial real estate lending, underwriting policies, internal controls, and other policies currently in place, as well as our loan and credit monitoring and administration procedures, are generally appropriate to managing our concentrations as required under the commercial real estate guidance.
The remaining new requirements, including data reporting requirements, are applicable on January 1, 2027. FHLB Membership The Bank is a member of the FHLB, which is one of 11 regional Federal Home Loan Banks that administer the home financing credit function of banking institutions.
FHLB Membership The Bank is a member of the FHLB, which is one of 11 regional Federal Home Loan Banks that administer the home financing credit function of banking institutions.
The CAMELS rating system is a supervisory rating system developed to classify a bank’s overall condition by considering capital adequacy, assets, management capability, earnings, liquidity, and sensitivity to market and interest rate risk. 16 Insurance of deposits may be terminated by the FDIC upon a finding that a bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the bank’s federal regulatory agency.
Insurance of deposits may be terminated by the FDIC upon a finding that a bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the bank’s federal regulatory agency.
As of June 30, 2023, total market deposits in the Sacramento-Roseville-Folsom MSA were $94.9 billion, of which $78.3 billion, or approximately 82.5%, is held by five money center banks across 186 branches. We are the 44th largest insured depository institution in California by deposits as of June 30, 2023.
As of June 30, 2024, total market deposits in the Sacramento-Roseville-Folsom MSA were $92.2 billion, of which $75.4 billion, or approximately 81.77%, is held by five money center banks across 181 branches. We are the 43rd largest insured depository institution in California by deposits as of June 30, 2024.
At December 31, 2023, common equity Tier 1 capital, Tier 1 capital, and total capital of the Company on a consolidated basis equaled 9.07%, 9.07%, and 12.30% of its total risk-weighted assets, respectively, and its Tier 1 leverage ratio on a consolidated basis was 8.73%.
At December 31, 2024, common equity Tier 1 capital, Tier 1 capital, and total capital of the Company on a consolidated basis equaled 11.02%, 11.02%, and 13.99% of its total risk-weighted assets, respectively, and its Tier 1 leverage ratio on a consolidated basis was 10.05%.
The amount of interest on reserve balances is calculated by multiplying the IORB rate on a day by the end of day balance maintained in an account on that day. 15 Consumer Protection Laws While consumer lending is not currently a significant focus of our business, we are subject to numerous laws and regulations intended to protect consumers, in addition to those discussed above, when lending or offering deposit products to consumers.
Consumer Protection Laws While consumer lending is not currently a significant focus of our business, we are subject to numerous laws and regulations intended to protect consumers, in addition to those discussed above, when lending or offering deposit products to consumers.
Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy. We are dedicated to serving real estate, agricultural, faith-based, and small to medium-sized enterprises. We aim to consistently deliver value that meets or exceeds expectations of our shareholders, customers, employees, business partners, and community.
We are dedicated to serving real estate, agricultural, faith-based, and small to medium-sized enterprises. We aim to consistently deliver value that meets or exceeds expectations of our shareholders, customers, employees, business partners, and community.
The Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity, or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank subsidiaries. 10 The Gramm-Leach-Bliley Act (the “GLB Act”) allows a bank holding company that satisfies certain criteria to elect to become a financial holding company, which would allow such company to engage in activities that are financial in nature, incidental to such activities, or complementary to such activities.
The Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity, or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank subsidiaries.
SBA loans : As of December 31, 2023, our total commercial SBA portfolio held for investment was $49.2 million, representing 1.59% of total loans before deferred fees. In 2023, we sold 143 SBA loans with government-guaranteed portions totaling $36.5 million.
SBA loans : As of December 31, 2024, our total commercial SBA portfolio held for investment was $42.8 million, representing 1.21% of total loans before deferred fees. In 2024, we sold 56 SBA 7(a) loans with government-guaranteed portions totaling approximately $18.3 million.
Under the banking agencies’ prompt corrective action framework, an insured depository institution is subject to differential regulation corresponding to the capital category within which the institution falls.
Prompt Corrective Action The FDI Act identifies five capital categories for insured depository institutions: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Under the banking agencies’ prompt corrective action framework, an insured depository institution is subject to differential regulation corresponding to the capital category within which the institution falls.
The Board of Governors votes on the level of the IORB rate at each Federal Open Market Committee meeting that is consistent with the announced monetary policy stance.
The Board of Governors votes on the level of the IORB rate at each Federal Open Market Committee meeting that is consistent with the announced monetary policy stance. The amount of interest on reserve balances is calculated by multiplying the IORB rate on a day by the end of day balance maintained in an account on that day.
This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles, as well as adverse weather conditions.
This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles, as well as adverse weather conditions. Commercial loans : As of December 31, 2024, we had $198.1 million in commercial loans, representing 5.60% of total loans before deferred fees.
The legislation also established a new accounting oversight board to enforce auditing standards and restrict the scope of services that accounting firms may provide to their publicly traded company audit clients.
The legislation also established a new accounting oversight board to enforce auditing standards and restrict the scope of services that accounting firms may provide to their publicly traded company audit clients. 13 Supervision and Regulation of the Bank The Bank is a commercial bank chartered under the laws of the state of California and is primarily subject to the supervision, examination, and reporting requirements of the FDIC and the DFPI.
The Dodd-Frank Act increased the minimum reserve ratio requirement for the DIF to 1.35% of total estimated insured deposits or the comparable percentage of the deposit assessment base. Since the outbreak of the COVID-19 pandemic, the amount of total estimated insured deposits has grown very rapidly while the funds in the DIF grew at a normal rate.
The Dodd-Frank Act increased the minimum reserve ratio requirement for the DIF to 1.35% of total estimated insured deposits or the comparable percentage of the deposit assessment base. The DIF reserve ratio fell to below the statutory minimum of 1.35% during the COVID-19 pandemic.
In addition, the SEC recently enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on annual basis material information regarding their cybersecurity risk management, strategy, and governance. 17 Limitations on Incentive Compensation In April 2016, the Federal Reserve and other federal financial agencies re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1.0 billion or more in total consolidated assets.
In addition, the SEC enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on annual basis material information regarding their cybersecurity risk management, strategy, and governance.
United States capital regulations were substantially revised in 2013 as a result of changes in the Dodd-Frank Act and Basel III capital rules. The Federal Reserve and the FDIC, the primary federal regulators of the Company and Bank, respectively, have substantially similar generally applicable risk-based capital ratio and leverage ratio requirements.
United States capital regulations were substantially revised in 2013 as a result of changes in the Dodd-Frank Act and Basel III capital rules.
We believe that our market growth confirms the quality of the purpose-driven and integrity-centered banking that we strive to deliver to our customers. During 2023, we hired eight business development officers and two relationship managers as part of our expansion into the San Francisco Bay Area.
We believe that our market growth confirms the quality of the purpose-driven and integrity-centered banking that we strive to deliver to our customers. During 2024, we continued our expansion into the San Francisco Bay Area, including the opening of a full service branch in Downtown San Francisco in September 2024.
Concentrations in Lending In 2006, the federal bank regulatory agencies released guidance advising financial institutions of the risks posed by commercial real estate lending concentrations and reinforcing that financial institutions should implement sound risk management processes to identify, monitor, and control risks associated with commercial real estate concentrations. Higher allowances for credit losses and capital levels may also be required.
The term “covered transaction” includes the making of loans to the affiliate, purchase of assets from the affiliate, issuance of a guarantee on behalf of the affiliate, and several other types of transactions. 14 Concentrations in Lending In 2006, the federal bank regulatory agencies released guidance advising financial institutions of the risks posed by commercial real estate lending concentrations and reinforcing that financial institutions should implement sound risk management processes to identify, monitor, and control risks associated with commercial real estate concentrations.
On October 24, 2023, the federal banking agencies issued a final rule amending the CRA regulations, substantially revising how they evaluate an insured depository institution’s record of satisfying the credit needs of its entire communities, including low- and moderate-income individuals and neighborhoods.
The Bank operated under a CRA Strategic Plan approved by the FDIC for the years 2019 to 2021 and received a rating of “Satisfactory” at its most recent CRA evaluation, dated as of July 22, 2024 and covering activities from 2021 through the evaluation date. 17 On October 24, 2023, the federal banking agencies issued a final rule amending the CRA regulations, to substantially revise how they evaluate an insured depository institution’s record of satisfying the credit needs of its entire communities, including low- and moderate-income individuals and neighborhoods.
We typically sell in the secondary market the SBA-guaranteed portion of the SBA loans we originate. Commercial land and construction loans : As of December 31, 2023, we had $78.4 million in commercial land and construction loans, representing 2.53% of total loans before deferred fees.
Commercial land and construction loans : As of December 31, 2024, we had $115.2 million in commercial land and construction loans, representing 3.26% of total loans before deferred fees.
Supervision and Regulation of the Company We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”).
It does not describe all of the statutes, regulations, and regulatory policies that apply, nor does it provide complete summaries of the statutes, regulations, and policies referenced therein. Supervision and Regulation of the Company We are a bank holding company registered under the Bank Holding Company Act of 1956, as amended (the “BHC Act”).
The guarantee is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender. As such, prudent underwriting and closing processes are essential to effective utilization of the 7(a) program.
The SBA presently guarantees 75% to 90% of the principal amount of qualifying loans originated under the 7(a) loan program. The guarantee is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper closing and servicing by the lender.
The performance of consumer loans is affected by the local and regional economy as well as the rates of personal bankruptcies, job loss, divorce, and other individual-specific characteristics. We do not expect these consumer and other loans to make up a significant portion of our lending activity.
The terms of consumer loans vary considerably based upon the loan type, nature of collateral, and size of the loan. The performance of consumer loans is affected by the local and regional economy as well as the rates of personal bankruptcies, job loss, divorce, and other individual-specific characteristics.
We periodically set guidelines aimed to maintain stability of our loan-to-deposit ratio, minimize past-due and non-accrual loans, and achieve an optimal loan mix and concentration. We seek well-margined and collateralized loan opportunities to borrowers with extensive professional asset operating experience. Lending Policy and Procedures We have established common documentation, policies, and standards for lending based on the type of loan.
We seek well-margined and collateralized loan opportunities to borrowers with extensive professional asset operating experience. Lending Policy and Procedures We have established common documentation, policies, and standards for lending based on the type of loan. A thorough credit analysis precedes commercial and real estate loan decisions, and we follow well-established and proven procedures when approving consumer loans.
The amount of authority delegated to each member of the committee varies based on years of direct lending experience, responsibility, and performance. The authority limits also vary by collateral type. Concentrations of Credit Risk Although we have a diversified loan portfolio, a substantial portion is secured by commercial and residential real estate located in Northern California.
Our board of directors approves, from time to time, a delegated lending authority to members of the Management Loan Committee. The amount of authority delegated to each member of the committee varies based on years of direct lending experience, responsibility, and performance. The authority limits also vary by collateral type.
Lending Philosophy In keeping with our mission of purpose-driven and integrity-centered banking, we seek credit arrangements that serve our local community and provide attractive risk-adjusted returns to us. We pursue our objectives and are mindful of liquidity, flexibility, and risk considerations by exercising controls on non-interest expenses and close management of our assets and liabilities.
We do not expect these consumer and other loans to make up a significant portion of our lending activity. Lending Philosophy In keeping with our mission of purpose-driven and integrity-centered banking, we seek credit arrangements that serve our local community and provide attractive risk-adjusted returns to us.
The Bank expects to open a full service branch in Downtown San Francisco in the second half of 2024. The Bank’s deposits are insured in whole or in part by the FDIC. The Bank’s loans and deposits are primarily within Northern California, and the Bank’s primary funding source is deposits from customers.
The Bank’s deposits are insured in whole or in part by the FDIC. The Bank’s loans and deposits are primarily within Northern California, and the Bank’s primary funding source is deposits from customers. Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy.
Commercial loans : As of December 31, 2023, we had $189.0 million in commercial loans, representing 6.10% of total loans before deferred fees. Commercial loans are underwritten after evaluating the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking.
Commercial loans are underwritten after evaluating the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.
Consumer loans are underwritten based on the individual borrower’s income, current debt level, past credit history, and the value of any available collateral. The terms of consumer loans vary considerably based upon the loan type, nature of collateral, and size of the loan.
We make a variety of loans in relatively small amounts to individuals for personal purposes, primarily for home repairs and improvements. Consumer loans are underwritten based on the individual borrower’s income, current debt level, past credit history, and the value of any available collateral.
The privacy provisions of these laws may affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Branching Under California law, the Bank may open branch offices throughout California with the prior approval of the DFPI. In addition, with prior DFPI approval, the Bank may acquire branches of existing banks located in California.
We are monitoring the status of the litigation and evaluating the impact of this rule. 16 Branching Under California law, the Bank may open branch offices throughout California with the prior approval of the DFPI. In addition, with prior DFPI approval, the Bank may acquire branches of existing banks located in California.
In addition, an insured bank’s loans to affiliates generally must be fully collateralized. The term “covered transaction” includes the making of loans to the affiliate, purchase of assets from the affiliate, issuance of a guarantee on behalf of the affiliate, and several other types of transactions.
In addition, an insured bank’s loans to affiliates generally must be fully collateralized.
We expect to open a full service branch in Downtown San Francisco in the second half of 2024. Our Products and Services Lending Activities We focus primarily on commercial lending, with an emphasis on commercial real estate.
We hired eight business development officers, four relationship managers, three loan officers, one relationship specialist, one treasury solutions specialist, and one branch manager during 2024 as part of our expansion. Our Products and Services Lending Activities We focus primarily on commercial lending, with an emphasis on commercial real estate.
The following is a summary of material elements of the regulatory and supervisory framework applicable to us and the Bank. It does not describe all of the statutes, regulations, and regulatory policies that apply, nor does it provide complete summaries of the statutes, regulations, and policies referenced therein.
It is unclear what impact these orders will have on the supervisory and enforcement activities of the OCC, Federal Reserve, and FDIC. The following is a summary of material elements of the regulatory and supervisory framework applicable to us and the Bank.
Removed
Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value.
Added
As such, prudent underwriting and closing processes are 4 essential to effective utilization of the 7(a) program. We typically sell in the secondary market the SBA-guaranteed portion of the SBA loans we originate. Consumer and other loans : As of December 31, 2024, we had $279.6 million in consumer and other loans, representing 7.90% of total loans before deferred fees.
Removed
Pursuant to the Consolidated Appropriations Act, 2021 (the “Consolidated Appropriations Act”), the SBA guaranteed 90% of the principal amount of each qualifying SBA loan originated under the SBA’s 7(a) loan program through October 1, 2021. The SBA presently guarantees 75% to 90% of the principal amount of qualifying loans originated under the 7(a) loan program.
Added
We pursue our objectives and are mindful of liquidity, flexibility, and risk considerations by exercising controls on non-interest expenses and close management of our assets and liabilities. We periodically set guidelines aimed to maintain stability of our loan-to-deposit ratio, minimize past-due and non-accrual loans, and achieve an optimal loan mix and concentration.
Removed
Consumer and other loans : As of December 31, 2023, we had $38.2 million in consumer and other loans, representing 1.23% of total loans before deferred fees. We make a variety of loans in relatively small amounts to individuals for personal purposes, primarily for home repairs and improvements.
Added
Additionally, we have a high concentration of real estate related loans, which represented approximately 86.41% of total loans before deferred fees at December 31, 2024.
Removed
A thorough credit analysis precedes commercial and real estate loan decisions, and we follow well-established and proven procedures when approving consumer loans. We have established a Management Loan Committee and a Director Loan Committee.
Added
Any change in the statutes, regulations or regulatory policies applicable to us, including changes in their interpretation, expectations or implementation, could have a material effect on our business and operations.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThese exemptions allow us, among other things, to present only two years of audited financial statements and discuss our results of operations for only two years in related Management’s Discussions and Analyses; not to provide an auditor attestation of our internal control over financial reporting; to take advantage of an extended transition period to comply with the new or revised accounting standards applicable to public companies; to provide reduced disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and certain other disclosure regarding our executive compensation; and not to seek a non-binding advisory vote on executive compensation or golden parachute arrangements.
Biggest changeThese exemptions allow us, among other things, to discuss our results of operations for only two years in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; not to provide an auditor attestation of our internal control over financial reporting; to take advantage of an extended transition period to comply with the new or revised accounting standards applicable to public companies; and not to seek a non-binding advisory vote on executive compensation or golden parachute arrangements. 31 We may take advantage of these exemptions until we are no longer an emerging growth company.
Pursuant to the Consolidated Appropriations Act, the SBA guaranteed 90% of the principal amount of each qualifying SBA loan originated under the SBA’s 7(a) loan program through October 1, 2021. The SBA presently guarantees 75% to 90% of the principal amount of qualifying loans originated under the 7(a) loan program.
Pursuant to the Consolidated Appropriations Act, 2021, the SBA guaranteed 90% of the principal amount of each qualifying SBA loan originated under the SBA’s 7(a) loan program through October 1, 2021. The SBA presently guarantees 75% to 90% of the principal amount of qualifying loans originated under the 7(a) loan program.
The market price of our common stock may continue to fluctuate widely in response to a variety of factors including the risk factors described herein and, among other things: • actual or anticipated variations in quarterly or annual operating results, financial conditions, or credit quality; • changes in business or economic conditions; • changes in accounting standards, policies, guidance, interpretations, or principles; • changes in recommendations or research reports about us or the financial services industry in general published by securities analysts; • the failure of securities analysts to cover, or to continue to cover, us; • changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions; • news reports relating to trends, concerns, and other issues in the financial services industry; • reports related to the impact of natural or man-made disasters in our market; • perceptions in the marketplace regarding us and or our competitors; • sudden increases in the demand for our common stock, including as a result of any “short squeezes”; • significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors; • additional investments from third parties; • additions or departures of key personnel; • future sales or issuance of additional shares of our common stock; 30 • fluctuations in the market price of our common stock and operating results of our competitors; • changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting our business, or enforcement of these laws or regulations; • new technology used, or services offered, by competitors; • additional investments from third parties; or • geopolitical conditions such as acts or threats of terrorism, pandemics, or military conflicts.
The market price of our common stock 30 may continue to fluctuate widely in response to a variety of factors including the risk factors described herein and, among other things: • actual or anticipated variations in quarterly or annual operating results, financial conditions, or credit quality; • changes in business or economic conditions; • changes in accounting standards, policies, guidance, interpretations, or principles; • changes in recommendations or research reports about us or the financial services industry in general published by securities analysts; • the failure of securities analysts to cover, or to continue to cover, us; • changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions; • news reports relating to trends, concerns, and other issues in the financial services industry; • reports related to the impact of natural or man-made disasters in our market; • perceptions in the marketplace regarding us and or our competitors; • sudden increases in the demand for our common stock, including as a result of any “short squeezes”; • significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors; • additional investments from third parties; • additions or departures of key personnel; • future sales or issuance of additional shares of our common stock; • fluctuations in the market price of our common stock and operating results of our competitors; • changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting our business, or enforcement of these laws or regulations; • new technology used, or services offered, by competitors; • additional investments from third parties; or • geopolitical conditions such as acts or threats of terrorism, pandemics, or military conflicts.
Our investment or acquisition activities could be material to our business and involve a number of risks including the following: • investing time and incurring expense associated with identifying and evaluating potential investments or acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business; • the lack of history among our management team in working together on acquisitions and related integration activities; • the time, expense, and difficulty of integrating the operations and personnel of the combined businesses; • unexpected asset quality problems with acquired companies; • inaccurate estimates and judgments used to evaluate credit, operations, management, and market risks with respect to the target institution or assets; • risks of impairment to goodwill or allowance for credit losses of investment securities; • potential exposure to unknown or contingent liabilities of banks and businesses we acquire; • an inability to realize expected synergies or returns on investment; • potential disruption of our ongoing banking business; and • loss of key employees or key customers following our investment or acquisition.
Our investment or acquisition activities could be material to our business and involve a number of risks including the following: • investing time and incurring expense associated with identifying and evaluating potential investments or acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business; • the lack of history among our management team in working together on acquisitions and related integration activities; • the time, expense, and difficulty of integrating the operations and personnel of the combined businesses; • unexpected asset quality problems with acquired companies; • inaccurate estimates and judgments used to evaluate credit, operations, management, and market risks with respect to the target institution or assets; • risks of impairment to goodwill or allowance for credit losses of investment securities; • potential exposure to unknown or contingent liabilities of banks and businesses we acquire; 35 • an inability to realize expected synergies or returns on investment; • potential disruption of our ongoing banking business; and • loss of key employees or key customers following our investment or acquisition.
Although we have historically maintained a high deposit customer retention rate, these deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of our control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, customer perceptions of our financial health and general reputation, and a loss of confidence by 20 customers in us or the banking sector generally, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits.
Although we have historically maintained a high deposit customer retention rate, these deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of our control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, customer perceptions of our financial health and general reputation, and a loss of confidence by customers in us or the banking sector generally, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits.
Deterioration of economic conditions affecting borrowers, new information regarding existing loans, inaccurate management assumptions, identification of additional problem loans, temporary modifications, loan forgiveness, automatic forbearance, and other factors, both within and outside of our control, may result in our experiencing higher levels of nonperforming assets and charge-offs, and incurring credit losses in excess of our current allowance for credit losses, requiring us to make material additions to our allowance for credit losses, which could have an adverse effect on our business, financial condition, and results of operations.
Deterioration of economic conditions affecting borrowers, new information regarding existing loans, inaccurate management assumptions, identification of additional problem loans, temporary modifications, loan forgiveness, automatic forbearance, and other factors, both within and outside of our control, may result in our experiencing higher levels of nonperforming assets and charge-offs, and incurring credit losses in excess of our current allowance for credit losses, 26 requiring us to make material additions to our allowance for credit losses, which could have an adverse effect on our business, financial condition, and results of operations.
The process for determining whether an allowance for credit losses is required involves complex, subjective judgments about the future financial performance and liquidity of the issuer, any collateral underlying the security, and our intent and ability to hold the security 26 for a sufficient period of time to allow for any anticipated recovery in fair value, in order to assess the probability of receiving all contractual principal and interest payments on the security.
The process for determining whether an allowance for credit losses is required involves complex, subjective judgments about the future financial performance and liquidity of the issuer, any collateral underlying the security, and our intent and ability to hold the security for a sufficient period of time to allow for any anticipated recovery in fair value, in order to assess the probability of receiving all contractual principal and interest payments on the security.
Accordingly, charge-offs on commercial real estate loans may be larger as a percentage of the total principal outstanding than those incurred with our residential or consumer loan portfolios. 24 The appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property and OREO may not accurately reflect the net value of the asset.
Accordingly, charge-offs on commercial real estate loans may be larger as a percentage of the total principal outstanding than those incurred with our residential or consumer loan portfolios. The appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property and OREO may not accurately reflect the net value of the asset.
If, as a result of an examination, the Federal Reserve, the FDIC, or the DFPI were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate.
If, as a result of an examination, the Federal Reserve, the FDIC, or the DFPI were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of 28 different remedial actions as they deem appropriate.
A downturn in economic conditions in our market, particularly in the real estate market, heightened competition from other financial services providers, an inability to retain or grow our core deposit base, regulatory and legislative considerations, and failure to attract and retain high-performing talent, among other factors, could limit our ability to grow assets or increase profitability as rapidly as we have in the past.
A downturn in economic conditions in our market, particularly in the real estate market, heightened competition from other financial services providers, an inability to retain or grow our core deposit base, regulatory and legislative considerations, 34 and failure to attract and retain high-performing talent, among other factors, could limit our ability to grow assets or increase profitability as rapidly as we have in the past.
In such event, holders of our common stock will not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution, or winding up of the Company until after all of our obligations to the debt holders are satisfied and holders of subordinated notes and senior equity securities, including preferred shares, if any, have received any payment or distribution due to them.
In such event, holders of our common stock will not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution, or winding up of the Company until after all of our 32 obligations to the debt holders are satisfied and holders of subordinated notes and senior equity securities, including preferred shares, if any, have received any payment or distribution due to them.
Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision making, which could have an adverse effect on our business, financial condition, and results of operations. We may not be able to measure and limit our credit risk adequately, which could adversely affect our profitability.
Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of 21 their outputs could similarly result in suboptimal decision making, which could have an adverse effect on our business, financial condition, and results of operations. We may not be able to measure and limit our credit risk adequately, which could adversely affect our profitability.
In particular, the increase in working from home since outbreak of the COVID-19 pandemic could have adverse effects on our loans for office space, which are dependent for repayment on the successful operation and management of the associated commercial real estate. Our underwriting, review, and monitoring cannot eliminate all the risks related to these loans.
In particular, the increase in working from home since outbreak of the COVID-19 pandemic could have adverse effects on our loans for office space, which are dependent for repayment on the successful 22 operation and management of the associated commercial real estate. Our underwriting, review, and monitoring cannot eliminate all the risks related to these loans.
If a significant amount of these deposits were withdrawn within a short period of time, it could have a negative impact on our short-term liquidity and have an adverse impact on our earnings. We may also be forced, as a result of withdrawals of deposits, to rely more heavily on other, 25 potentially more expensive and less stable, funding sources.
If a significant amount of these deposits were withdrawn within a short period of time, it could have a negative impact on our short-term liquidity and have an adverse impact on our earnings. We may also be forced, as a result of withdrawals of deposits, to rely more heavily on other, potentially more expensive and less stable, funding sources.
Compliance with these rules and regulations has increased, and will continue to increase, our legal and financial compliance costs, will make some activities more difficult, time-consuming, or costly, and will increase demand on our systems and resources, particularly after we are no longer an “emerging growth company” as defined in the JOBS Act.
Compliance with these rules and regulations has increased, and will continue 33 to increase, our legal and financial compliance costs, will make some activities more difficult, time-consuming, or costly, and will increase demand on our systems and resources, particularly after we are no longer an “emerging growth company” as defined in the JOBS Act.
The SEC recently enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance.
The SEC enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance.
We may not be able to identify all significant deficiencies and/or material weaknesses in our internal control over financial reporting in the 33 future, and our failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have an adverse effect on our business, financial condition, and results of operations.
We may not be able to identify all significant deficiencies and/or material weaknesses in our internal control over financial reporting in the future, and our failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have an adverse effect on our business, financial condition, and results of operations.
Additionally, if we record goodwill in connection with any acquisition, our business, financial condition, and results of operations may be adversely affected if that goodwill is determined to be impaired, which would require us to take an impairment charge. 35 Our reputation is critical to our business, and damage to it could have an adverse effect on us.
Additionally, if we record goodwill in connection with any acquisition, our business, financial condition, and results of operations may be adversely affected if that goodwill is determined to be impaired, which would require us to take an impairment charge. Our reputation is critical to our business, and damage to it could have an adverse effect on us.
Based on our regulators’ assessment of the quality of our assets, operations, lending practices, investment practices, capital 27 structure, or other aspects of our business, we may be required to take additional charges or undertake, or refrain from taking, actions that could have an adverse effect on our business, financial condition, and results of operations.
Based on our regulators’ assessment of the quality of our assets, operations, lending practices, investment practices, capital structure, or other aspects of our business, we may be required to take additional charges or undertake, or refrain from taking, actions that could have an adverse effect on our business, financial condition, and results of operations.
Our asset-liability management strategy may not be effective in mitigating exposure to the risks related to changes in market interest rates. We operate in a highly competitive market and face increasing competition from a variety of traditional and new financial services providers. We have many competitors.
Our asset-liability management strategy may not be effective in mitigating exposure to the risks related to changes in market interest rates. 20 We operate in a highly competitive market and face increasing competition from a variety of traditional and new financial services providers. We have many competitors.
As a result, our 21 inability to successfully manage credit risk could have an adverse effect on our business, financial condition, and results of operations. We are exposed to higher credit risk and other risks and costs by our commercial real estate, commercial land and construction, commercial construction, farmland loans and other real estate assets.
As a result, our inability to successfully manage credit risk could have an adverse effect on our business, financial condition, and results of operations. We are exposed to higher credit risk and other risks and costs by our commercial real estate, commercial land and construction, commercial construction, farmland loans and other real estate assets.
Cybersecurity breaches and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in business disruptions, significant liability to us, and damage to our reputation and may discourage current and potential customers from using our internet banking services.
Cybersecurity breaches and other disruptions would jeopardize the security of information stored in and 37 transmitted through our computer systems and network infrastructure, which may result in business disruptions, significant liability to us, and damage to our reputation and may discourage current and potential customers from using our internet banking services.
Our security measures, including firewalls and penetration testing, as well as oversight by our board of directors and Audit Committee as well as management's assessment, identification, and management of cybersecurity risks, may not prevent or detect future potential losses from system failures or cybersecurity breaches, attacks, or other disruptions.
Our security measures, including firewalls and penetration testing, as well as oversight by our board of directors and the Audit Committee as well as management’s assessment, identification, and management of cybersecurity risks, may not prevent or detect future potential losses from system failures or cybersecurity breaches, attacks, or other disruptions.
Cybersecurity risk 37 management is incorporated into our overall enterprise risk management model, which is updated on a quarterly basis and subject to oversight by our board of directors. In the normal course of business, we collect, process, and retain sensitive and confidential information regarding our customers.
Cybersecurity risk management is incorporated into our overall enterprise risk management model, which is updated on a quarterly basis and subject to oversight by our board of directors. In the normal course of business, we collect, process, and retain sensitive and confidential information regarding our customers.
This influence may also have the effect of delaying or preventing changes of control or changes in management or limiting the ability of our 31 other shareholders to approve transactions that they may deem to be in the best interests of our Company. The interests of these insiders could conflict with the interests of our other shareholders, including you.
This influence may also have the effect of delaying or preventing changes of control or changes in management or limiting the ability of our other shareholders to approve transactions that they may deem to be in the best interests of our Company. The interests of these insiders could conflict with the interests of our other shareholders, including you.
If we fail to comply with these new requirements we could incur regulatory fines in addition to other adverse consequences to our reputation, business, financial condition, and results of operations. 38 We may also be subject to liability under various data protection laws.
If we fail to comply with these new requirements we could incur regulatory fines in addition to other adverse consequences to our reputation, business, financial condition, and results of operations. We may also be subject to liability under various data protection laws.
In addition, the accuracy of our consolidated 39 financial statements and related disclosures could be affected if the judgments, assumptions, or estimates used in our critical accounting policies are inaccurate. The nature of our business makes us sensitive to the large body of accounting rules in the United States.
In addition, the accuracy of our consolidated financial statements and related disclosures could be affected if the judgments, assumptions, or estimates used in our critical accounting policies are inaccurate. The nature of our business makes us sensitive to the large body of accounting rules in the United States.
If new federal or state laws or regulations are ultimately enacted that significantly raise the cost 22 of foreclosure or raise outright barriers to foreclosure, they could have an adverse effect on our business, financial condition, and results of operations.
If new federal or state laws or regulations are ultimately enacted that significantly raise the cost of foreclosure or raise outright barriers to foreclosure, they could have an adverse effect on our business, financial condition, and results of operations.
Our failure to sustain our historical rate of growth, adequately manage the factors that have 34 contributed to our growth, or successfully enter new markets could have an adverse effect on our earnings and profitability and, therefore, on our business, financial condition, and results of operations.
Our failure to sustain our historical rate of growth, adequately manage the factors that have contributed to our growth, or successfully enter new markets could have an adverse effect on our earnings and profitability and, therefore, on our business, financial condition, and results of operations.
Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business.
Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to 39 our reputation and divert management attention from the operation of our business.
Although we have historically been able to replace maturing deposits and advances if 23 desired, we may not be able to replace such funds in the future if our financial condition, the financial condition of the FHLB, or market conditions change.
Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if our financial condition, the financial condition of the FHLB, or market conditions change.
We are subject to regulation and supervision by the Federal Reserve, and our Bank is subject to regulation and supervision by the FDIC and the DFPI. Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance costs.
We are subject to regulation and supervision by the Federal Reserve, 27 and our Bank is subject to regulation and supervision by the FDIC and the DFPI. Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance costs.
Accordingly, 32 prospective investors must comply with these requirements, if applicable, in connection with any purchase of shares of our common stock.
Accordingly, prospective investors must comply with these requirements, if applicable, in connection with any purchase of shares of our common stock.
Risk Factor Summary The most significant risks that may have an adverse effect on our business, financial condition, and results of operations are summarized below. • Our business and operations are concentrated in Northern California, and we are sensitive to adverse changes in the local economy. • We operate in a highly competitive market and face increasing competition from traditional and new financial services providers. • We are subject to the various risks associated with our banking business and operations, including, among others, credit, market, liquidity, interest rate, and compliance risks, which may have an adverse effect on our business, financial condition, and results of operations if we are unable to manage such risks. • We may be unable to effectively manage our growth, which could have an adverse effect on our business, financial condition, and results of operations. • We operate in a highly regulated industry, and current regulatory requirements, including stringent capital requirements, consumer protection laws, and anti-money laundering laws, and failure to comply with these requirements and any future legislative and regulatory changes may have an adverse effect on our business, financial condition, and results of operations. • We are subject to laws regarding privacy, information security, and protection of personal information, and any violation of these laws or incidents involving personal, confidential, or proprietary information of individuals, including, among others, system failures or cybersecurity breaches of our network security, could damage our reputation and otherwise adversely affect our business, financial condition, and results of operations. • Our charter documents contain certain provisions, including anti-takeover and exclusive forum provisions, that limit the ability of our shareholders to take certain actions and could delay or discourage takeover attempts that shareholders may consider favorable. 18 Risks Related to Our Business Our business and operations are concentrated in California, specifically Northern California, and we are more sensitive than our more geographically diversified competitors to adverse changes in the local economy.
Risk Factor Summary The most significant risks that may have an adverse effect on our business, financial condition, and results of operations are summarized below. • Our business and operations are concentrated in Northern California, and we are sensitive to adverse changes in the local economy. • We operate in a highly competitive market and face increasing competition from traditional and new financial services providers. 18 • We are subject to the various risks associated with our banking business and operations, including, among others, credit, market, liquidity, interest rate, and compliance risks, which may have an adverse effect on our business, financial condition, and results of operations if we are unable to manage such risks. • We may be unable to effectively manage our growth, which could have an adverse effect on our business, financial condition, and results of operations. • We operate in a highly regulated industry, and current regulatory requirements, including stringent capital requirements, consumer protection laws, and anti-money laundering laws, and failure to comply with these requirements and any future legislative and regulatory changes may have an adverse effect on our business, financial condition, and results of operations. • We are subject to laws regarding privacy, information security, and protection of personal information, and any violation of these laws or incidents involving personal, confidential, or proprietary information of individuals, including, among others, system failures or cybersecurity breaches of our network security, could damage our reputation and otherwise adversely affect our business, financial condition, and results of operations. • Our charter documents contain certain provisions, including anti-takeover and exclusive forum provisions, that limit the ability of our shareholders to take certain actions and could delay or discourage takeover attempts that shareholders may consider favorable.
Unsecured loans generally involve a higher degree of risk of loss than do secure loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses. Because of this lack of collateral, we are limited in our ability to collect on defaulted unsecured loans.
Unsecured loans generally involve a higher degree of risk of loss than do secured loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses. Because of this lack of collateral, we are limited in our ability to collect on defaulted unsecured loans.
As of December 31, 2023, a significant majority of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral, with a majority of these real estate loans concentrated in Northern California.
As of December 31, 2024, a significant majority of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral, with a majority of these real estate loans concentrated in Northern California.
The Federal Reserve has indicated that it expects to lower the target range for the federal funds rate beginning in 2024. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan portfolio, and our cost of funds may not fall as quickly as yields on interest-earning assets.
The Federal Reserve has indicated that it expects to continue to lower the target range for the federal funds rate in 2025. A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan portfolio, and our cost of funds may not fall as quickly as yields on interest-earning assets.
On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all subsequent amendments that modified ASU 2016-13 (collectively, “ASC 326,”), which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model.
On January 1, 2023, the Company adopted ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all subsequent amendments that modified ASU 2016-13 (collectively, “ASC 326,”), which replaced the former “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model.
As of December 31, 2023, significant portions of our interest-bearing liabilities were variable rate, where our variable rate liabilities reprice at a faster rate than our variable rate assets.
As of December 31, 2024, significant portions of our interest-bearing liabilities were variable rate, where our variable rate liabilities reprice at a faster rate than our variable rate assets.
Thus, any borrowing by a bank holding company for the 29 purpose of making a capital injection to a subsidiary bank may become more difficult and expensive relative to other corporate borrowings. We face a risk of no ncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
Thus, any borrowing by a bank holding company for the purpose of making a capital injection to a subsidiary bank may become more difficult and expensive relative to other corporate borrowings. We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
As of December 31, 2023, we had outstanding an aggregate of $73.7 million of subordinated notes, net of debt issuance costs, outstanding, and we did not have any outstanding preferred stock or trust preferred securities. We could incur future debt obligations or issue preferred stock in the future to raise additional capital.
As of December 31, 2024, we had outstanding an aggregate of $73.9 million of subordinated notes, net of debt issuance costs, outstanding, and we did not have any outstanding preferred stock or trust preferred securities. We could incur future debt obligations or issue preferred stock in the future to raise additional capital.
Our stock price has fluctuated from a low of $18.21 to a high of $31.92 between our initial public offering and December 31, 2023. Volatility in the market price of our common stock may negatively impact the price at which our common stock may be sold and may also negatively impact the timing of any sale.
Our stock price has fluctuated from a low of $18.21 to a high of $33.55 between our initial public offering and December 31, 2024. Volatility in the market price of our common stock may negatively impact the price at which our common stock may be sold and may also negatively impact the timing of any sale.
Although we endeavor to maintain our allowance for credit losses at a level adequate to absorb any inherent losses in the loan portfolio, these estimates of credit losses are necessarily subjective, and their accuracy depends on the outcome of future events. At December 31, 2023, the allowance for credit losses was $34.4 million.
Although we endeavor to maintain our allowance for credit losses at a level adequate to absorb any inherent losses in the loan portfolio, these estimates of credit losses are necessarily subjective, and their accuracy depends on the outcome of future events. At December 31, 2024, the allowance for credit losses was $37.8 million.
Under this guidance, an institution that has: (i) total reported loans for construction, land development, and other land which represent 100% or more of the institution’s total risk-based capital or (ii) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital, where the outstanding balance of the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months, is identified as having potential commercial real estate concentration risk.
Under this guidance, an institution that has: (i) total reported loans for construction, land development, and other land which represent 100% or more of the institution’s total risk-based capital; or (ii) total reported loans secured by multifamily and non-farm non-residential properties and loans for construction, land development, and other land of 300% or more of the institution’s total risk-based capital, where the outstanding balance of the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months, is identified as having potential commercial real estate concentration risk.
As of December 31, 2023, approximately more than half of our real estate loans measured by dollar amount were secured by collateral located in California, substantially all of which is in Northern California. Therefore, our success will depend upon the general economic conditions and real estate activity in these areas, which we cannot predict with certainty.
As of December 31, 2024, approximately 57.66% of our real estate loans measured by dollar amount were secured by collateral located in California, substantially all of which is in Northern California. Therefore, our success will depend upon the general economic conditions and real estate activity in these areas, which we cannot predict with certainty.
We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate. As of December 31, 2023, the carrying value of our investment securities portfolio was approximately $111.2 million. As of the same date, 9.48% of our investments were U.S. government agency securities.
We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate. As of December 31, 2024, the carrying value of our investment securities portfolio was approximately $100.9 million. As of the same date, 8.27% of our investments were U.S. government agency securities.
As a result, defaults by, declines in the financial condition of, or even rumors or questions about one or more financial services companies, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or other institutions. These losses could adversely affect our business, financial condition, and results of operations.
As a result, defaults by, declines in the financial condition of, or even rumors or questions about one or more financial services companies, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or other institutions.
We are an “emerging growth company,” as defined in the JOBS Act, and a “smaller reporting company,” as defined in Rule 12b-2 in the Exchange Act, and are able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies, which could make our common stock less attractive to investors and adversely affect the market price of our common stock.
We are an “emerging growth company,” as defined in the JOBS Act and are able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make our common stock less attractive to investors and adversely affect the market price of our common stock. We are an “emerging growth company,” as defined in the JOBS Act.
Curtailment of government-guaranteed loan programs could affect a segment of our business. One component of our business consists of originating and periodically selling U.S. government-guaranteed loans, in particular those guaranteed by the SBA.
Curtailment of government-guaranteed loan programs or changes in federal government funding could affect our business. One component of our business consists of originating and periodically selling U.S. government-guaranteed loans, in particular those guaranteed by the SBA.
It is our policy to determine borrowers’ ability to repay and not to make predatory loans. Nonetheless, the law and related rules create the potential for increased liability with respect to our lending and loan investment activities. Compliance with these laws increases our cost of doing business.
It is our policy to determine borrowers’ ability to repay and not to make predatory loans. Nonetheless, the law and related rules create the potential for increased liability with respect to our lending and loan investment activities.
If general economic conditions negatively impact the markets in which we operate or any of our borrowers are otherwise affected by adverse business developments, our small to medium-sized borrowers may be disproportionately affected and their ability to repay outstanding loans may be negatively affected, resulting in an adverse effect on our business, financial condition, and results of operations.
If general economic conditions negatively impact the markets in which we operate or any of our borrowers are otherwise affected by adverse business developments, our small to medium-sized borrowers may be disproportionately affected and their ability to repay outstanding loans may be negatively affected, resulting in an adverse effect on our business, financial condition, and results of operations. 19 Our business is significantly dependent on the real estate markets in which we operate, as a significant percentage of our loan portfolio is secured by real estate.
At December 31, 2023, our 40 largest deposit relationships, each accounting for more than $10.0 million, amounted to $1.5 billion, or 49.80% of our total deposits. This includes $693.7 million in deposits from municipalities, of which we conduct a monthly review.
At December 31, 2024, our 49 largest deposit relationships, each accounting for more than $10.0 million, amounted to $1.8 billion, or 50.35% of our total deposits. This includes $674.1 million in deposits from municipalities, of which we conduct a monthly review.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various requirements generally applicable to public companies.
For as long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various requirements generally applicable to public companies.
Additionally, consumer protection initiatives or changes in state or federal law may substantially increase the time and expenses associated with the foreclosure process or prevent us from foreclosing at all.
Compliance with these laws increases our cost of doing business. 25 Additionally, consumer protection initiatives or changes in state or federal law may substantially increase the time and expenses associated with the foreclosure process or prevent us from foreclosing at all.
We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. Our early detection and response mechanisms may be thwarted by sophisticated attacks and malware designed to avoid detection.
We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources.
As of December 31, 2023, our 30 largest borrowing relationships ranged from approximately $19.9 million to $71.5 million (including unfunded commitments) and totaled approximately $1.1 billion in total commitments (representing, in the aggregate, 35.49% of our total loans held for investment before deferred fees at that date).
As of December 31, 2024, our 30 largest borrowing relationships ranged from approximately $20.3 million to $284.3 million (including unfunded commitments) and totaled approximately $1.4 billion in total commitments (representing, in the aggregate, 38.68% of our total loans held for investment before deferred fees at that date).
As a result, if our regulators assess that we have not exercised adequate oversight and control over our third-party service providers or that such providers have not performed adequately, we could be subject to administrative penalties, fines, or other forms of regulatory enforcement action as well as requirements for consumer remediation, any of which could have an adverse effect on our business, financial condition, and results of operations. 36 We are subject to laws regarding the privacy, information security, and protection of personal information, and any violation of these laws or other incidents involving personal, confidential, or proprietary information of individuals could damage our reputation and otherwise adversely affect our business.
As a result, if our regulators assess that we have not exercised adequate oversight and control over our third-party service providers or that such providers have not performed adequately, we could be subject to administrative penalties, fines, or other forms of regulatory enforcement action as well as requirements for consumer remediation, any of which could have an adverse effect on our business, financial condition, and results of operations.
Furthermore, third-party service providers, and banking organizations’ relationships with those providers, are subject to demanding regulatory requirements and attention by bank regulators. These regulatory expectations may change, and potentially become more rigorous in certain ways, due to an interagency effort to replace existing guidance on the risk management of third-party relationships with new guidance.
These regulatory expectations may change, and potentially become more rigorous in certain ways, due to an interagency effort to replace existing guidance on the risk management of third-party relationships with new guidance.
Although we sold $36.5 million of loans in the year ended December 31, 2023, we may decide to sell more loans in the future. A secondary market for most types of commercial real estate loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans.
A secondary market for most types of commercial real estate loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans.
We are a bank holding company and are dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted. Additionally, the Federal Reserve may require us to commit capital resources to support the Bank.
Such actions could have an adverse effect on our business, financial condition, and results of operations. 29 We are a bank holding company and are dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted. Additionally, the Federal Reserve may require us to commit capital resources to support the Bank.
Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability. The federal banking agencies have issued guidance regarding concentrations in commercial real estate lending for institutions that are deemed to have particularly high concentrations of commercial real estate loans within their lending portfolios.
The federal banking agencies have issued guidance regarding concentrations in commercial real estate lending for institutions that are deemed to have particularly high concentrations of commercial real estate loans within their lending portfolios.
Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private litigation, including through class action litigation. Such actions could have an adverse effect on our business, financial condition, and results of operations.
Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private litigation, including through class action litigation.
Banking organizations are required to notify their primary federal regulator of significant computer security incidents within 36 hours of determining that such an incident has occurred.
Our early detection and response mechanisms may be thwarted by sophisticated attacks and malware designed to avoid detection. 38 Banking organizations are required to notify their primary federal regulator of significant computer security incidents within 36 hours of determining that such an incident has occurred.
An increase in the level of nonperforming assets increases our risk profile and may affect the capital levels regulators believe are appropriate in light of the ensuing risk profile.
An increase in the level of nonperforming assets increases our risk profile and may affect the capital levels regulators believe are appropriate in light of the ensuing risk profile. Our failure to effectively mitigate these risks could have an adverse effect on our business, financial condition, and results of operations.
If an interruption were to continue for a significant period of time, our business, financial condition, and results of operations could be adversely affected. Even if we are able to replace third-party service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition, and results of operations.
If an interruption were to continue for a significant period of time, our business, financial condition, and results of operations could be adversely affected.
Liquidity is essential to our business, and we monitor our liquidity and manage our liquidity risk at the holding company and bank levels.
Potential losses could adversely affect our business, financial condition, and results of operations. Liquidity risk could impair our ability to fund operations and meet our obligations as they become due. Liquidity is essential to our business, and we monitor our liquidity and manage our liquidity risk at the holding company and bank levels.
The CFPB has proposed rules that would restrict various fees that financial institutions can charge consumers, including credit card late fees and certain insufficient funds (“NSF”) fees. Accordingly, CFPB rulemaking has the potential to have a significant impact on the operations of the Bank.
The CFPB has issued rules that restrict or place conditions on various fees that financial institutions can charge consumers, including credit card late fees and overdraft fees.
Our failure to effectively mitigate these risks could have an adverse effect on our business, financial condition, and results of operations. 19 We are subject to interest rate risk, which could adversely affect our profitability.
We are subject to interest rate risk, which could adversely affect our profitability.
Removed
Our business is significantly dependent on the real estate markets in which we operate, as a significant percentage of our loan portfolio is secured by real estate.
Added
Risks Related to Our Business Our business and operations are concentrated in California, specifically Northern California, and we are more sensitive than our more geographically diversified competitors to adverse changes in the local economy.
Removed
The aggregate principal balance of SBA 7(a) guaranteed portions sold during the year ended December 31, 2023 was $36.5 million, compared to $50.8 million for the year ended December 31, 2022. Liquidity risk could impair our ability to fund operations and meet our obligations as they become due.
Added
The aggregate principal balance of SBA 7(a) guaranteed portions sold during the year ended December 31, 2024 was approximately $18.3 million, compared to approximately $36.5 million for the year ended December 31, 2023. 23 In addition, current or future delays to, reductions of, and/or cancellations of certain federal government payments in connection with cost-saving and government efficiency efforts undertaken by the Trump Administration may lead to increased repayment risk from clients of the Bank who rely on payments from the federal government in conducting their businesses.
Removed
Historically, as a bank holding company with less than $3.0 billion in total consolidated assets and that met certain other criteria, the Company had been operating under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts from the Federal Reserve’s risk-based capital and leverage rules bank holding companies with total consolidated assets of less than $3.0 billion that are not engaged in significant nonbanking activities, do not conduct significant off-balance sheet activities, and do not have a material amount of debt or equity securities registered with the SEC.
Added
These losses could adversely affect our business, financial condition, and results of operations. 24 Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability.
Removed
Because the Company’s total consolidated assets exceeded the $3.0 billion threshold as of September 30, 2022, the 28 Company is no longer subject to this policy statement and its capital adequacy is evaluated relative to the Federal Reserve’s generally applicable capital requirements.
Added
Although we sold 56 SBA 7(a) loans with government-guaranteed portions totaling approximately $18.3 million in the year ended December 31, 2024, we may decide to sell more loans in the future.
Removed
We may take advantage of these exemptions until we are no longer an emerging growth company.
Added
Although these rules have been challenged in court, and leadership of the CFPB during the Trump Administration has taken steps to curtail the CFPB’s regulatory activities, in general CFPB rulemaking has the potential to have a significant impact on the operations of the Bank.
Removed
Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” as defined in Rule 12b-2 in the Exchange Act, which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to provide an auditor attestation of our internal control over financial reporting and reduced disclosure regarding our executive compensation arrangements in our periodic reports and proxy statements.
Added
Even if we are able to replace third-party service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition, and results of operations. 36 Furthermore, third-party service providers, and banking organizations’ relationships with those providers, are subject to demanding regulatory requirements and attention by bank regulators.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeThe CISO has over 10 years of industry experience including management of security and vendor relationships as well as possesses several industry certifications, including certification as a Certified Information Systems Security Professional from the International Information System Security Certification Consortium and as a Certified Information Security Manager from the Information Systems Audit and Control Association.
Biggest changeThe DIS has over 10 years of industry experience and 25 years of information security experience focusing on management of security and vendor relationships. The DIS also possesses several industry certifications, including certification as a Certified in Risk and Information Systems Control and Certified Information Security Manager from the Information System Audit and Control Association.
With the approval of Audit Committee, we also engage third party assessors, consultants, and auditors in connection with the Company’s Information Security Program and in accordance with our Audit Program, including to conduct external and internal penetration testing, independent audits, and risk assessments.
With the approval of the Audit Committee, we also engage third-party assessors, consultants, and auditors in connection with the Company’s Information Security Program and in accordance with our Audit Program, including to conduct external and internal penetration testing, independent audits, and risk assessments.
If an incident occurs, depending on its priority as identified through the procedures described above, management may inform our board of directors and/or Audit Committee sooner than its next quarterly update. See the section entitled “Part I, Item 1. Business—Risk Management” for additional information on the role of our board of directors and its committees in overseeing risk management.
If an incident occurs, depending on its priority as identified through the procedures described above, management may inform our board of directors and/or the Audit Committee sooner than its next quarterly update. See the section entitled “Part I, Item 1. Business—Risk Management” for additional information on the role of our board of directors and its committees in overseeing risk management.
The Information Security Program also includes: (i) an Information Security Incident Response Procedure (the “Incident Response Procedure”), which delineates the processes for reporting, classifying, investigating, planning, containing, eradicating, recovering, documenting, and communicating information security incidents, as well as post-incident activities, and (ii) a Security Monitoring Policy, which establishes the rules and requirements for enabling, logging, alerting, and monitoring real time security alerts and security logs (automated or manual), as well as various condition monitoring tests and reviews, and documentation requirements in connection with security incident identification.
The Information Security Program also includes: (i) an Information Security Incident Response Procedure (the “Incident Response Procedure”), which delineates the processes for reporting, classifying, investigating, planning, containing, eradicating, recovering, documenting, and communicating information security incidents, as well as post-incident activities; and (ii) a Security Monitoring Policy, which establishes the rules and requirements for enabling, logging, alerting, and monitoring real time security alerts and security logs (automated or 40 manual), as well as various condition monitoring tests and reviews, and documentation requirements in connection with security incident identification.
Our Information Security Program mandates that any potential information security incident response begin at the initial internal communication and investigation stage, during which such events undergo initial investigation for validation, including related to the scope and depth of such incident and to ensure that it 40 has not resulted from a false positive.
Our Information Security Program mandates that any potential information security incident response begin at the initial internal communication and investigation stage, during which such events undergo initial investigation for validation, including related to the scope and depth of such incident and to ensure that it has not resulted from a false positive.
The review of these areas is taken into account in order to provide an overall information security conclusion and risk rating for the vendor. In addition, we use a combination of technology, policies, procedures, training, and monitoring to promote security awareness and prevent security incidents.
The review of these areas is taken into account in order to provide an overall information security conclusion and risk rating for the vendor. 41 In addition, we use a combination of technology, policies, procedures, training, and monitoring to promote security awareness and prevent security incidents.
The board of directors of the Company has ultimate oversight of cybersecurity-related risk and activities, including the review and 41 approval of our policies and procedures related to cybersecurity. The Information Security Program is approved on an annual basis.
The board of directors of the Company has ultimate oversight of cybersecurity-related risk and activities, including the review and approval of our policies and procedures related to cybersecurity. The Information Security Program is approved on an annual basis.
Cybersecurity risk management is also incorporated into our overall enterprise risk management model, which is updated on a quarterly basis and subject to oversight by our board of directors. In the ordinary course of business, our board of directors receives quarterly updates from the CISO regarding the Information Security Program and compliance with relevant regulations, as described above.
Cybersecurity risk management is also incorporated into our overall enterprise risk management model, which is updated on a quarterly basis and subject to oversight by our board of directors. In the ordinary course of business, our board of directors receives quarterly updates from the DIS regarding the Information Security Program and compliance with relevant regulations, as described above.
The CISO and the Chief Information Officer (“CIO”) have shared responsibility for overseeing day-to-day operations of the Information Security Program, coordinating or contributing to reviews, audits, risk assessments, and other risk management material, development of departmental policies and procedures for board approval, and periodic updates to our information technology steering committee and/or the full board of directors.
The DIS and the Chief Information Officer (“CIO”) have shared responsibility for overseeing day-to-day operations of the Information Security Program; coordinating or contributing to reviews, audits, risk assessments, and other risk management material; development of departmental policies and procedures for board approval; and periodic updates to our information technology steering committee and/or the full board of directors.
The CISO also provides quarterly reports on the status of our Information Security Program and its compliance with regulatory requirements to our board of directors in connection with our board's general risk management oversight role, as described in further detail below.
The DIS also provides quarterly reports on the status of our Information Security Program and its compliance with regulatory requirements to our board of directors in connection with our board’s general risk management oversight role, as described in further detail below.
Cybersecurity Risk Oversight Our executive management team is responsible for the development of our policies and procedures and for managing any exception to the same. In particular, our CISO oversees information security compliance, as described above.
Cybersecurity Risk Oversight Our executive management team is responsible for the development of our policies and procedures and for managing any exception to the same. In particular, our DIS oversees information security compliance, as described above.
The CIO reports to President and Chief Executive Officer, while the CISO reports to the Chief Regulatory Officer and reports regularly to the Audit Committee. The CIO has 20 years of industry experience including management of technology, security, data analytics, and vendor relationships.
The CIO reports to the President and Chief Executive Officer, while the DIS reports to the Chief Regulatory Officer and reports regularly to the Audit Committee. The CIO has 20 years of industry experience including management of technology, security, data analytics, and vendor relationships.
Our Chief Information Security Officer (“CISO”) coordinates with other members of our executive management team identified in our Information Security Program to document, validate, respond, and manage actual or potential security incidents according to their threat classifications as described above, and report to our board of directors and/or the Audit Committee on an ad hoc basis.
Our Director of Information Security (“DIS”) coordinates with other members of our executive management team identified in our Information Security Program to document, validate, respond to, and manage actual or potential security incidents according to their threat classifications as described above, and report to our board of directors and/or the Audit Committee on an ad hoc basis.
Members of the Audit Committee of our board of directors also attend the meetings of our information technology steering committee on a quarterly basis. Our information technology steering committee consists of members of our board of directors who have relevant experience from their audit and management experience as well as training provided by our management.
Members of the Audit Committee of our board of directors receive presentations as well as minutes of the meetings of our information technology steering committee on a quarterly basis. Our information technology steering committee consists of members of our board of directors who have relevant experience from their audit and management experience as well as training provided by our management.
In addition, the SEC recently enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance.
In addition, the Bank is subject to SEC rules requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy, and governance.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties Our corporate headquarters is located at 3100 Zinfandel Drive, Suite 100, Rancho Cordova, CA 95670. As of December 31, 2023, in addition to our corporate headquarters, which includes our Rancho Cordova branch, we operated six other branch offices in Roseville, Natomas, Redding, Elk Grove, Chico, and Yuba City and one administrative office in Sacramento.
Biggest changeItem 2. Properties Our corporate headquarters is located at 3100 Zinfandel Drive, Suite 100, Rancho Cordova, CA 95670. As of December 31, 2024, in addition to our corporate headquarters, which includes our Rancho Cordova branch, we operated seven other branch offices in Roseville, Natomas, Redding, Elk Grove, Chico, Yuba City, and San Francisco and one administrative office in Sacramento.
We lease our corporate headquarters and all of our other offices. The lease on our corporate headquarters expires in 2026, and the leases on our branch offices and administrative office expire in 2024 through 2032. We believe that these facilities and additional or alternative space available to us are adequate to meet our needs for the foreseeable future.
We lease our corporate headquarters and all of our other offices. The lease on our corporate headquarters expires in 2026, and the leases on our branch offices and administrative office expire in 2026 through 2035. We believe that these facilities and additional or alternative space available to us are adequate to meet our needs for the foreseeable future.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeSecurity Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.” Unregistered Sales of Equity Securities and Use of Proceeds Unregistered Sales of Equity Securities Not applicable. Use of Proceeds Not applicable. Issuer Purchases of Equity Securities None. Item 6. [Reserved]
Biggest changeSecurity Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.” Unregistered Sales of Equity Securities and Use of Proceeds Unregistered Sales of Equity Securities Not applicable. Use of Proceeds Not applicable.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Market Information, Holders of Common Stock, and Dividends The Company’s common stock, no par value per share, is traded on the Nasdaq Global Select Market under the symbol “FSBC.” On February 20, 2024, there were 127 holders of record of the Company’s common stock.
Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Market Information, Holders of Common Stock, and Dividends The Company’s common stock, no par value per share, is traded on the Nasdaq Global Select Market under the symbol “FSBC.” On February 25, 2025, there were 125 holders of record of the Company’s common stock.
As of December 31, 2023, there was $63.0 million available for payment of dividends by the Bank to the Company, under applicable laws and regulations. For a discussion of dividend restrictions on our common stock, or of restrictions on dividends from the Company’s subsidiaries to the Company, see the sections entitled “Part I, Item 1.
As of December 31, 2024, there was $94.6 million available for payment of dividends by the Bank to the Company, under applicable laws and regulations. For a discussion of dividend restrictions on our common stock, or of restrictions on dividends from the Company’s subsidiaries to the Company, see the sections entitled “Part I, Item 1.
Added
Issuer Purchases of Equity Securities None. 43 Stock Performance The following graph presents the cumulative total yearly shareholder return from investing $100 on May 5, 2021, the Company’s IPO date, in each of our common stock, the S&P 500 Index, and the KBW Nasdaq Regional Banking Index. Total return assumes the reinvestment of all dividends.
Added
Period Ending Index May 5, 2021 December 31, 2021 December 31, 2022 December 31, 2023 December 31, 2024 Five Star Bancorp 100.00 125.24 116.25 115.55 137.10 S&P 500 Index 100.00 115.45 94.54 119.40 149.27 KBW Nasdaq Regional Banking Index 100.00 99.86 92.94 92.57 104.79 The stock performance graph and related information shall not be deemed “soliciting material” or to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section, and shall not be deemed to be incorporated by reference into any future filing under the Securities Act of 1933, as amended or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

150 edited+33 added−28 removed71 unchanged
Biggest changeThe following table sets forth the contractual maturities of our loan portfolio as of December 31, 2023: (dollars in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total Real estate: Commercial $ 57,443 $ 271,306 $ 2,284,482 $ 72,188 $ 2,685,419 Commercial land and development 11,406 3,353 792 — 15,551 Commercial construction 27,078 10,377 25,408 — 62,863 Residential construction 11,543 3,913 — — 15,456 Residential 286 5,916 18,735 956 25,893 Farmland 2,835 3,932 44,902 — 51,669 Commercial: Secured 36,844 48,491 90,826 412 176,573 Unsecured 574 10,789 12,487 — 23,850 Consumer and other 857 5,638 31,671 — 38,166 Total $ 148,866 $ 363,715 $ 2,509,303 $ 73,556 $ 3,095,440 The following table sets forth the contractual maturities of our loan portfolio at December 31, 2022: (dollars in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total Real estate: Commercial $ 19,406 $ 227,519 $ 2,083,818 $ 63,931 $ 2,394,674 Commercial land and development 1,611 5,053 813 — 7,477 Commercial construction 1,957 37,510 49,202 — 88,669 Residential construction 594 4,783 1,316 — 6,693 Residential 348 6,635 16,248 999 24,230 Farmland 992 5,685 45,801 — 52,478 Commercial: Secured 36,154 46,814 88,418 3,216 174,602 Unsecured 55 10,347 15,029 — 25,431 Consumer and other 1,321 8,234 19,067 6 28,628 Total $ 62,438 $ 352,580 $ 2,319,712 $ 68,152 $ 2,802,882 59 The following table sets forth the sensitivity to interest rate changes of our loan portfolio at December 31, 2023: (dollars in thousands) Fixed Interest Rates Floating or Adjustable Rates Total Real estate: Commercial $ 570,385 $ 2,115,034 $ 2,685,419 Commercial land and development 10,081 5,470 15,551 Commercial construction — 62,863 62,863 Residential construction 3,913 11,543 15,456 Residential 1,272 24,621 25,893 Farmland 5,848 45,821 51,669 Commercial: Secured 38,029 138,544 176,573 Unsecured 16,343 7,507 23,850 Consumer and other 38,081 85 38,166 Total $ 683,952 $ 2,411,488 $ 3,095,440 The following table sets forth the sensitivity to interest rate changes of our loan portfolio at December 31, 2022: (dollars in thousands) Fixed Interest Rates Floating or Adjustable Rates Total Real estate: Commercial $ 552,206 $ 1,842,468 $ 2,394,674 Commercial land and development 1,514 5,963 7,477 Commercial construction 1,405 87,264 88,669 Residential construction 3,366 3,327 6,693 Residential 1,531 22,699 24,230 Farmland 6,261 46,217 52,478 Commercial: Secured 37,517 137,085 174,602 Unsecured 20,607 4,824 25,431 Consumer and other 28,628 — 28,628 Total $ 653,035 $ 2,149,847 $ 2,802,882 Asset Quality We manage the quality of our loans based upon trends at the overall loan portfolio level as well as within each product type.
Biggest changeTable 11: Contractual Maturities - Gross Loans (dollars in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total December 31, 2024 Real estate: Commercial $ 35,682 $ 362,077 $ 2,383,655 $ 75,759 $ 2,857,173 Commercial land and development 2,433 438 978 — 3,849 Commercial construction 9,378 64,407 37,533 — 111,318 Residential construction 3,310 1,251 — — 4,561 Residential 324 9,486 22,045 919 32,774 Farmland — 6,632 40,609 — 47,241 Commercial: Secured 56,630 46,722 70,035 408 173,795 Unsecured 2,500 10,552 14,506 — 27,558 Consumer and other 161 13,964 265,459 — 279,584 Total $ 110,418 $ 515,529 $ 2,834,820 $ 77,086 $ 3,537,853 December 31, 2023 Real estate: Commercial $ 57,443 $ 271,306 $ 2,284,482 $ 72,188 $ 2,685,419 Commercial land and development 11,406 3,353 792 — 15,551 Commercial construction 27,078 10,377 25,408 — 62,863 Residential construction 11,543 3,913 — — 15,456 Residential 286 5,916 18,735 956 25,893 Farmland 2,835 3,932 44,902 — 51,669 Commercial: Secured 36,844 48,491 90,826 412 176,573 Unsecured 574 10,789 12,487 — 23,850 Consumer and other 857 5,638 31,671 — 38,166 Total $ 148,866 $ 363,715 $ 2,509,303 $ 73,556 $ 3,095,440 58 Table 12 sets forth the sensitivity to interest rate changes of our loan portfolio as of the dates shown.
The allowance for credit losses - loans is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.
The allowance for credit losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.
In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, 71 as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated statements of income, balance sheets, statements of shareholders’ equity, or statements of cash flows.
In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated statements of income, balance sheets, statements of shareholders’ equity, or statements of cash flows.
Under ASC 326, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost, with any estimated credit losses recorded through a credit loss expense and an allowance, rather than a write-down of the investment. Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income.
Under ASC 326, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost, with any estimated credit losses recorded through a credit loss expense and an allowance, rather than a write-down of the investment. Changes in fair value that are not credit-related continue to be recorded in other comprehensive income.
Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk and interest rate risk that is reflective 53 of the yields obtained on those securities. Most of our securities are classified as available-for-sale, although we have one long-term, fixed rate municipal security classified as held-to-maturity.
Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk and interest rate risk that is reflective of the yields obtained on those securities. Most of our securities are classified as available-for-sale, although we have one long-term, fixed rate municipal security classified as held-to-maturity.
Critical elements of our liquidity risk management include effective corporate governance, consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems, including stress tests, that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments that can be used to meet liquidity needs in stress situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity 66 events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity risk management process.
Critical elements of our liquidity risk management include effective corporate governance, consisting of 65 oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems, including stress tests, that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments that can be used to meet liquidity needs in stress situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity risk management process.
Investment security interest is earned on a 30/360 day basis monthly. Yields are not calculated on a tax-equivalent basis. 49 3 Non-accrual loans are included in total loan balances. No adjustment has been made for these loans in the yield calculations. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
Investment security interest is earned on a 30/360 day basis monthly. Yields are not calculated on a tax-equivalent basis. 3 Non-accrual loans are included in total loan balances. No adjustment has been made for these loans in the yield calculations. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.
Additionally, we enter into commitments to extend credit in the ordinary course of business, such as commitments to fund new loans and undisbursed construction funds. While these commitments represent contractual cash requirements, a portion of these commitments to extend credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements.
Additionally, in the ordinary course of business, we enter into commitments to extend credit, such as commitments to fund new loans and undisbursed construction funds. While these commitments represent contractual cash requirements, a 66 portion of these commitments to extend credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements.
Upon the termination of our status as an S Corporation, we commenced paying U.S. federal income tax and a higher California state income tax on our taxable earnings for each year (including the short year beginning on the date our status as an S Corporation terminated), and our consolidated financial statements reflect a provision for U.S. federal income tax and a higher California state income tax from that date forward.
Upon the termination of our status as an S Corporation, we commenced paying U.S. federal income tax and a higher California state income tax on our 45 taxable earnings for each year (including the short year beginning on the date our status as an S Corporation terminated), and our consolidated financial statements reflect a provision for U.S. federal income tax and a higher California state income tax from that date forward.
Prior to such revocation, our earnings were not subject to and we did not 44 pay U.S. federal income tax, and we were not required to make any provision or recognize any liability for U.S. federal income tax in our consolidated financial statements.
Prior to such revocation, our earnings were not subject to and we did not pay U.S. federal income tax, and we were not required to make any provision or recognize any liability for U.S. federal income tax in our consolidated financial statements.
These policies and estimates are considered critical because they have a material impact, or they have the potential to have a material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions, or estimates.
These policies and estimates are considered critical because they have a material impact, or they have the potential to have a 46 material impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions, or estimates.
We believe our underwriting practices and policies, established by experienced professionals, appropriately govern the risk profile for our loan portfolio. These policies are continually evaluated and updated as necessary. All loans are assessed and assigned a risk classification at origination based on underlying characteristics of the transaction, such as collateral cash flow, collateral coverage, and borrower strength.
We believe our underwriting policies and practices, executed by experienced professionals, appropriately govern the risk profile for our loan portfolio. These policies are continually evaluated and updated as necessary. All loans are assessed and assigned a risk classification at origination based on underlying characteristics of the transaction, such as collateral cash flow, collateral coverage, and borrower strength.
As of December 31, 2023, both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank qualified as “well-capitalized” under the prompt corrective action framework. Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.
As of December 31, 2024, both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank qualified as “well-capitalized” under the prompt corrective action framework. Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.
We provide a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through seven branch offices. Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy.
We provide a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through eight branch offices. Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy.
Like other financial 60 institutions, we are subject to the risk that our loan portfolio will be exposed to increasing pressures from deteriorating borrower credit due to general economic conditions and rising interest rates. Nonperforming Assets Our nonperforming assets consist of nonperforming loans and foreclosed real estate, if any.
Like other financial institutions, we are subject to 59 the risk that our loan portfolio will be exposed to increasing pressures from deteriorating borrower credit due to general economic conditions and rising interest rates. Nonperforming Assets Our nonperforming assets consist of nonperforming loans and foreclosed real estate, if any.
As we execute initiatives based on growth, we expect non-interest expense to grow. Non-interest expense has increased throughout the periods presented below; however, we expect our efficiency ratio will improve going forward due, in part, to our past investment in infrastructure. The following table details the components of non-interest expense for the periods indicated.
As we execute initiatives based on growth, we expect non-interest expense to grow. Non-interest expense has increased throughout the periods presented below; however, we expect our efficiency ratio will improve going forward due, in part, to our past investment in infrastructure. Table 6 details the components of non-interest expense for the periods indicated.
As a C Corporation, our net income is calculated by including a provision for U.S. federal income tax and a higher state income tax rate at a combined statutory rate of 29.22%. The termination of our status as an S Corporation may also affect our financial condition and cash flows.
As a C Corporation, our net income is calculated by including a provision for U.S. federal income tax and a higher state income tax rate at a combined statutory rate of 29.11%. The termination of our status as an S Corporation may also affect our financial condition and cash flows.
For callable municipal securities and corporate bonds, weighted average yield is a yield to worst. Weighted average yield for securities held-to-maturity is the stated coupon of the bond. 56 Loan Portfolio Our loan portfolio is our largest class of interest-earning assets and typically provides higher yields than other types of interest-earning assets.
For callable municipal securities and corporate bonds, weighted average yield is a yield to worst. Weighted average yield for securities held-to-maturity is the stated coupon of the bond. 55 Loan Portfolio Our loan portfolio is our largest class of interest-earning assets and typically provides higher yields than other types of interest-earning assets.
While the entire allowance for credit losses - loans is available to absorb losses from any and all loans, the following table represents management’s allocation of our allowance for credit losses by loan category, and the balance of loans in each category as a percentage of total loans, for the periods indicated.
While the entire allowance for credit losses is available to absorb losses from any and all loans, Table 15 represents management’s allocation of our allowance for credit losses by loan category, and the balance of loans in each category as a percentage of total loans, for the periods indicated.
The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the current period’s average yield/rate.
Table 4 shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the current period’s average yield/rate.
Non-interest income consists of service charges on deposit accounts, net gain on sale of securities, gain on sale of loans, loan-related fees, FHLB stock dividends, earnings on BOLI, and other income. The following table details the components of non-interest income for the periods indicated.
Non-interest income consists of service charges on deposit accounts, net gain on sale of securities, gain on sale of loans, loan-related fees, FHLB stock dividends, earnings on BOLI, and other income. Table 5 details the components of non-interest income for the periods indicated.
Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.
Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements as set forth in Tables 23 and 24 can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.
Capital amounts for Bancorp and the Bank, as well as the Bank’s prompt corrective action classification, are also subject to qualitative judgments by the regulators about components of capital, risk weightings, and other factors.
Capital amounts for Bancorp and the Bank, and the Bank’s prompt corrective action classification, are also subject to qualitative judgments by the regulators about components of capital, risk weightings, and other factors.
Assuming continued payment during 2024 at a rate of $0.20 per share, our average total dividend paid each quarter would be approximately $3.5 million based on the number of currently outstanding shares if there are no increases or decreases in the number of shares, and given that unvested RSAs share equally in dividends with outstanding common stock.
Assuming continued payment during 2025 at a rate of $0.20 per share, our average total dividend paid each quarter would be approximately $4.3 million based on the number of currently outstanding shares if there are no increases or decreases in the number of shares, and given that unvested RSAs share equally in dividends with outstanding common stock.
The allowance for credit losses is evaluated on a regular basis by management in consideration of optimistic, moderate, and pessimistic current conditions, and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions specifically impacting each loan type by purpose and by geography, and concentrations within the loan portfolio.
The ACL is evaluated on a regular basis by management in consideration of optimistic, moderate, and pessimistic current conditions, and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions specifically impacting each loan type by purpose and by geography, and concentrations within the loan portfolio.
Cash on hand, cash at third-party banks, investments available-for-sale, and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail and wholesale deposits, advances from the FHLB, and proceeds from the sale of loans.
Cash on hand, cash at third-party banks, investments available-for-sale, and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail and wholesale deposits, advances from the FHLB and the Federal Reserve Discount Window, and proceeds from the sale of loans.
We have net subordinated notes of $73.7 million, all of which are long-term obligations. Finally, we have one significant contract for core processing services.
We have net subordinated notes of $73.9 million, all of which are long-term obligations. Finally, we have one significant contract for core processing services.
Deposits Deposits are our primary source of funding for our business operations, and the cost of deposits has a significant impact on our net interest income and net interest margin. 67 Our deposits are primarily made up of money market, interest checking, time, and non-interest-bearing demand deposits.
Deposits Deposits are our primary source of funding for our business operations, and the cost of deposits has a significant impact on our net interest income and net interest margin. Our deposits are primarily made up of money market, interest-bearing transaction, time, and non-interest-bearing demand deposits.
The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yield earned or rate paid for each period reported. The average balances are daily averages and include both performing and nonperforming loans.
Average balance sheet, interest, and yield/rate analysis. Table 3 presents average balance sheet information, interest income, interest expense, and the corresponding average yield earned or rate paid for each period reported. The average balances are daily averages and include both performing and nonperforming loans.
Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances, and the principal and interest payments we receive on loans and investment securities.
Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, Federal Reserve Discount Window advances, FHLB advances, and the principal and interest payments we receive on loans and investment securities.
The increase related to: (i) increased usage of our digital banking platform; (ii) higher transaction volumes related to the increased number of loan and deposit accounts; and (iii) an increased number of licenses required for new users on our loan origination and documentation system. FDIC insurance.
The increase related to: (i) increased usage of our digital banking platform; (ii) higher transaction volumes related to the increased number of loan and deposit accounts; and (iii) an increased number of licenses required for new users on our loan origination and documentation system. Professional services.
All loan sectors were within our established limits as of December 31, 2023. Additionally, our loans are geographically concentrated with borrowers and collateral properties primarily in California. 58 We believe that our past success is attributable to focusing on products and markets where we have significant expertise.
All loan sectors were within our established limits as of December 31, 2024. Additionally, our loans are geographically concentrated with borrowers and collateralized properties primarily in California. We believe that our past success is attributable to focusing on products and markets where we have significant expertise.
Commercial secured lending represents 5.35% of loans held for investment at December 31, 2023. We sell the guaranteed portion of all SBA 7(a) loans in the secondary market and will continue to do so as long as market conditions continue to be favorable. We recognize that our commercial real estate loan concentration is significant within our balance sheet.
Commercial secured lending represents 4.83% of loans held for investment at December 31, 2024. We sell the guaranteed portion of all SBA 7(a) loans in the secondary market and will continue to do so as long as market conditions continue to be favorable. We recognize that our commercial real estate loan concentration is significant within our balance sheet.
This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. A significant amount of the allowance for credit losses is measured on a collective (pool) basis by loan and investment security type when similar risk characteristics exist.
This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. A significant amount of the ACL is measured on a collective (pool) basis by loan and investment security type when similar risk characteristics exist.
Bancorp paid dividends to its shareholders totaling $12.9 million during the year ended December 31, 2023. We expect to continue our current practice of paying quarterly cash dividends with respect to our common stock, subject to our board of directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice.
Bancorp paid dividends to its shareholders totaling $16.2 million during the year ended December 31, 2024. We expect to continue our current practice of paying quarterly cash dividends with respect to our common stock, subject to our board of directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice.
We design our practices to facilitate the early detection and remediation of problems within our loan portfolio. Assigned risk classifications are an integral part of management’s assessment of the adequacy of our allowance for credit losses. We periodically employ the use of an independent consulting firm to evaluate our underwriting and risk assessment process.
We design our practices to facilitate the early detection and remediation of problems within our loan portfolio. Assigned risk classifications are an integral part of management’s assessment of the adequacy of our ACL. We periodically employ the use of an independent consulting firm to evaluate our underwriting and risk assessment process.
As of December 31, 2022, our 40 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.5 billion, or 52.15% of our total deposits. Overall, our large deposit relationships have been relatively consistent over time and have helped to continue to grow our deposit base.
As of December 31, 2023, our 40 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.5 billion, or 49.80% of our total deposits. Overall, our large deposit relationships have been relatively consistent over time and have helped to continue to grow our deposit base.
Commercial real estate loan balances as a percentage of risk-based capital were 682.72% and 680.34% as of December 31, 2023 and December 31, 2022, respectively. We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (e.g., manufactured home communities, self-storage, hospitality, etc.).
Commercial real estate loan balances as a percentage of risk-based capital were 571.91% and 682.72% as of December 31, 2024 and 57 December 31, 2023, respectively. We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (e.g., manufactured home communities, self-storage, hospitality, etc.).
These declines were partially offset by higher net income and lower loans originated for sale. Cash provided by operating activities is subject to variability period-over-period as a result of timing differences, including with respect to the collection of receivables and payments of interest expense, accounts payable, and bonuses. For additional information about our operating results, see “Results of Operations” above.
These sources of cash were partially offset by lower proceeds from sale of loans. Cash provided by operating activities is subject to variability period-over-period as a result of timing differences, including with respect to the collection of receivables and payments of interest expense, accounts payable, and bonuses. For additional information about our operating results, see “Results of Operations” above.
For the 12-month period ending December 31, 2024, we project that our fixed commitments could potentially include: (i) approximately $458.9 million to fund off-balance sheet commitments outstanding at December 31, 2023; (ii) $6.3 million for IT services, IT support, and compliance expenditures; and (iii) $1.3 million for operating leases.
For the 12-month period ending December 31, 2025, we project that our fixed commitments could potentially include: (i) approximately $433.6 million to fund off-balance sheet commitments outstanding at December 31, 2024; (ii) $7.6 million for IT services, IT support, and compliance expenditures; and (iii) $1.6 million for operating leases.
This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. At December 31, 2023, the Company’s allowance for credit losses - loans was $34.4 million, compared to $28.4 million at December 31, 2022.
This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. At December 31, 2024, the Company’s allowance for credit losses was $37.8 million, compared to $34.4 million at December 31, 2023.
Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting. As of December 31, 2023 and 2022, our total loans amounted to $3.1 billion and $2.8 billion, respectively. The following table presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.
Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting standards. As of December 31, 2024 and 2023, our total loans amounted to $3.5 billion and $3.1 billion, respectively. Table 9 presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.
Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed significantly. Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 89.62% of loans held for investment at December 31, 2023.
Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed materially. Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 84.09% of loans held for investment at December 31, 2024.
Net charge-offs as a percent of average loans held for investment increased from 0.07% to 0.11% for the years ended December 31, 2022 and December 31, 2023, respectively. Liabilities During 2023, total liabilities increased by $333.0 million from $3.0 billion at December 31, 2022 to $3.3 billion at December 31, 2023.
Net charge-offs as a percent of average loans held for investment increased from 0.11% to 0.12% for the years ended December 31, 2023 and December 31, 2024, respectively. Liabilities During 2024, total liabilities increased by $349.3 million from $3.3 billion at December 31, 2023 to $3.7 billion at December 31, 2024.
The increase related primarily to a $17.7 million increase in loans designated as watch for loans which have indicators of deficient loan quality and potential significant issues which are expected to be temporary in nature.
The increase related primarily to an $83.8 million increase in loans designated as watch for loans which have indicators of deficient loan quality and potential significant issues which are expected to be temporary in nature.
Net interest income increased by $7.8 million, or 7.58%, for the year ended December 31, 2023, compared to the year ended December 31, 2022, while our net interest margin decreased 33 basis points during the same period.
Net interest income increased by $8.8 million, or 7.96%, for the year ended December 31, 2024, compared to the year ended December 31, 2023, while our net interest margin decreased 10 basis points during the same period.
Under our operating leases as discussed in Note 15, Commitments and Contingencies, we have a current obligation of $1.3 million and a long-term obligation of $5.0 million. We also have a current obligation of $442.5 million and a long-term obligation of $24.0 million related to time deposits, as discussed in Note 8, Interest-Bearing Deposits.
Under our operating leases as discussed in Note 15, Commitments and Contingencies, we have a current obligation of $1.6 million and a long-term obligation of $6.6 million. We also have a current obligation of $666.9 million and a long-term obligation of $3.3 million related to time deposits, as discussed in Note 8, Interest-Bearing Deposits.
Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. SBA Loans During 2023, the Company sold 143 SBA 7(a) loans with government-guaranteed portions totaling $36.5 million.
Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. SBA Loans During 2024, the Company sold 56 SBA 7(a) loans with government-guaranteed portions totaling approximately $18.3 million.
Cash flows from loans are affected by the timing and amount of customer payments and prepayments, changes in interest rates, the general economic environment, competition, and the political environment. During the year ended December 31, 2023, we had cash outflows of $284.3 million in loan originations and advances, net of principal collected, and $47.9 million in loans originated for sale.
Cash flows from loans are affected by the timing and amount of customer payments and prepayments, changes in interest rates, the general economic environment, competition, and the political environment. During the year ended December 31, 2024, we had cash outflows of $442.8 million in loan originations and advances, net of principal collected, and $21.7 million in loans originated for sale.
Recent Accounting Pronouncements For a discussion of the expected impact of accounting pronouncements recently adopted and accounting pronouncements recently issued but not yet adopted by us as of December 31, 2023, see Note 2, Recently Issued Accounting Standards, in the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K.
Recent Accounting Pronouncements For a discussion of the expected impact of accounting pronouncements recently adopted and accounting pronouncements recently issued but not yet adopted by us as of December 31, 2024, see Note 2, Recently Issued Accounting Standards, in the notes to our audited consolidated financial statements included in this Annual Report on Form 10-K. 70 Non-GAAP Financial Measures Some of the financial measures discussed herein are non-GAAP financial measures.
Allowance for Credit Losses On January 1, 2023, the Company adopted ASC 326, which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model.
Allowance for Credit Losses ( “ ACL ” ) On January 1, 2023, the Company adopted ASC 326, which replaced the former “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model.
This estimate is subject to significant judgment and could potentially add $4.8 million based on existing loan balances, if not more, to the allowance for credit losses based on a pessimistic market outlook for the specifically identified concentrations. The external factor is estimated based on current external factors, including environmental factors, which could impact the loan portfolio.
This estimate is subject to significant judgment and could potentially add $9.4 million based on existing loan balances, if not more, to the allowance for credit losses while using a severely adverse market outlook for the specifically identified concentrations. The external factor is estimated based on current external factors, such as environmental factors, which could impact the loan portfolio.
Gain on sale of loans. The decrease related primarily to an overall decline in the volume of loans sold during the year ended December 31, 2023, compared to the year ended December 31, 2022.
The decrease related primarily to an overall decline in the volume of loans sold during the year ended December 31, 2024 compared to the year ended December 31, 2023.
At December 31, 2023, total off-balance sheet commitments totaled $458.9 million. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth, and liquid assets.
At December 31, 2024, off-balance sheet commitments totaled $433.6 million. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth, and liquid assets.
The following table is a summary of our outstanding subordinated notes as of December 31, 2023: (dollars in thousands) Issuance Date Amount of Notes Prepayment Right Maturity Date Subordinated notes August 2022 $ 75,000 August 17, 2027 September 1, 2032 Fixed at 6.00% through September 1, 2027, then three-month Term SOFR plus 329.0 basis points (8.62% as of December 31, 2023) through maturity Shareholders’ Equity Shareholders’ equity totaled $285.8 million at December 31, 2023 and $252.8 million at December 31, 2022.
Table 20: Subordinated Notes Outstanding (dollars in thousands) Issuance Date Amount of Notes Prepayment Right Maturity Date Subordinated notes August 2022 $ 75,000 August 17, 2027 September 1, 2032 Fixed at 6.00% through September 1, 2027, then three-month Term SOFR plus 329.0 basis points (7.93% as of December 31, 2024) through maturity Shareholders’ Equity Shareholders’ equity totaled $396.6 million at December 31, 2024 and $285.8 million at December 31, 2023.
Our total securities available-for-sale and held-to-maturity amounted to $111.2 million at December 31, 2023 and $119.7 million at December 31, 2022, a decrease of $8.6 million year-over-year. The decrease was primarily due to principal paydowns of $10.3 million, partially offset by an improvement in the unrealized loss on securities of $2.3 million, primarily in our municipal securities portfolios.
Our total securities available-for-sale and held-to-maturity amounted to $100.9 million at December 31, 2024 and $111.2 million at December 31, 2023, a decrease of $10.2 million year-over-year. The decrease was primarily due to principal paydowns and amortization of $9.0 million, partially offset by an improvement in the unrealized loss on securities of $0.9 million, primarily in our municipal securities portfolios.
Based on our current capital allocation objectives, during 2024, we project spending $0.4 million related to continued build-out of our IT systems and processes and allocating $13.8 million of cash for dividends on our common stock.
Based on our current capital allocation objectives, during 2025, we project spending $0.7 million related to continued build-out of our IT systems and processes and allocating $17.1 million of cash for dividends on our common stock.
Due to elevated levels of inflation and corresponding pressure to raise interest rates, the Federal Reserve announced in January 2022 that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time.
Due to elevated levels of inflation and corresponding pressure to raise interest rates, the Federal Reserve announced in January 2022 that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time. The Federal Open Market Committee (“FOMC”) then increased the target range eleven times throughout 2022 and 2023.
Net interest income represents interest income from interest-earning assets, such as loans and investments, less interest expense on interest-bearing liabilities, such as deposits, FHLB advances, subordinated notes, and other borrowings, which are used to fund those assets.
Net Interest Income Net interest income is the most significant contributor to our net income. Net interest income represents interest income from interest-earning assets, such as loans and investments, less interest expense on interest-bearing liabilities, such as deposits, subordinated notes, and other borrowings, which are used to fund those assets.
There were borrowings of $170.0 million and $100.0 million outstanding as of December 31, 2023 and 2022, respectively. 65 In 2022, we issued subordinated notes of $75.0 million. This debt was issued to investors in private placement transactions.
There were no borrowings outstanding as of December 31, 2024 and borrowings of $170.0 million outstanding from the FHLB as of December 31, 2023. In 2022, we issued subordinated notes of $75.0 million. This debt was issued to investors in private placement transactions.
As of December 31, 2023, our 40 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.5 billion, or 49.80% of our total deposits. The average age on deposit relationships of more than $5.0 million was approximately nine years.
As of December 31, 2024, our 49 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.8 billion, or 50.35% of our total deposits. The average age on deposit relationships of more than $5.0 million was approximately 9.13 years.
Additionally, at December 31, 2023, securities available-for-sale totaled $108.1 million, of which $104.4 million have been pledged as collateral for borrowings and other commitments. Future Contractual Obligations Our estimated future obligations as of December 31, 2023 include both current and long-term obligations.
Additionally, at December 31, 2024, securities available-for-sale totaled $98.2 million, of which $95.1 million has been pledged as collateral for borrowings and other commitments. Future Contractual Obligations Our estimated future obligations as of December 31, 2024 include both current and long-term obligations.
We refer to our mission as “purpose-driven and integrity-centered banking.” At December 31, 2023, we had total assets of $3.6 billion, total loans held for investment, net of allowance for credit losses, of $3.0 billion, and total deposits of $3.0 billion.
We refer to our mission as “purpose-driven and integrity-centered banking.” At December 31, 2024, we had total assets of $4.1 billion, total loans held for investment of $3.5 billion, and total deposits of $3.6 billion.
This estimate is subject to significant judgment and could potentially add $1.0 million based on existing loan balances, if not more, to the allowance for credit losses in pessimistic economic conditions. The concentrations within the loan portfolio factor is estimated based on significant concentrations within the loan portfolio.
This estimate is subject to significant judgment and could potentially add $2.4 million based on existing loan balances, if not more, to the allowance for credit losses while using severely adverse economic conditions in the estimate. The concentrations within the loan portfolio factor is estimated based on concentrations at the loan pool level.
We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary. In addition, we have a shelf registration statement on file with the SEC registering $250.0 million for any combination of equity or debt securities, depository shares, warrants, purchase contracts, purchase units, subscription rights, and units in one or more offerings.
In addition, we have a shelf registration statement on file with the SEC registering $250.0 million for any combination of equity or debt securities, depository shares, warrants, purchase contracts, purchase units, subscription rights, and units in one or more offerings.
While the actual obligation is unknown and dependent on certain factors, including volume and activity, when using our 2023 average monthly expense extrapolated over the remaining life of the contract, we estimate that our current obligation under this contract is $0.7 million. We do not have a long-term obligation under this contract until it is renewed.
While the actual obligation is unknown and dependent on certain factors, including volume and activity, when using our 2024 average monthly expense extrapolated over the remaining life of the contract, we estimate that our current obligation under this contract is $0.9 million.
Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods or services.
Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation.
Depending on market yield and our liquidity, we may purchase securities as a use of cash in our interest-earning asset portfolio. During the year ended December 31, 2023, we had cash proceeds from sales, maturities, calls, and prepayments of securities of $10.8 million, partially offset by cash outflows of $1.2 million related to investment securities purchased.
Depending on market yield and our liquidity, we may purchase securities as a use of cash in our interest-earning asset portfolio. During the year ended December 31, 2024, we had cash proceeds from sales, maturities, calls and prepayments of securities of $8.4 million.
Deposit increases were primarily attributable to an increase in the number of new relationships, as well as normal fluctuations in our existing accounts. Non-interest-bearing deposits decreased by $140.1 million in 2023 to $0.8 billion, and represented 27.46% of total deposits at December 31, 2023, compared to 34.91% of total deposits at December 31, 2022.
Deposit increases were primarily attributable to an increase in the number of new relationships, as well as normal fluctuations in our existing accounts. Non-interest-bearing deposits increased by $91.5 million in 2024 to $922.6 million, and represented 25.93% of total deposits at December 31, 2024, compared to 27.46% of total deposits at December 31, 2023.
Provision for Income Taxes Provision for income taxes increased by $0.8 million, or 4.57%, to $18.9 million for the year ended December 31, 2023, compared to $18.1 million for the year ended December 31, 2022.
Provision for Income Taxes Provision for income taxes increased by $0.2 million, or 0.89%, to $19.1 million for the year ended December 31, 2024, compared to $18.9 million for the year ended December 31, 2023.
Less commonly used sources of funding include borrowings from the Federal Reserve Bank of San Francisco discount window (“Federal Reserve Discount Window”), draws on established federal funds lines from unaffiliated commercial banks, and the issuance of debt or equity securities.
Less commonly used sources of funding include borrowings from established federal funds lines from unaffiliated commercial banks, and the issuance of debt or equity securities.
As a result, tangible book value per share is the same as book value per share at the end of each of the periods indicated. 3 Cash dividend payout ratio on common stock is calculated as dividends on common shares divided by basic earnings per common share.
As a result, tangible book value per share is the same as book value per share at the end of each of the periods indicated. 3 Cash dividend payout ratio on common stock is calculated as dividends on common shares divided by basic earnings per common share. 49 RESULTS OF OPERATIONS The following discussion of our results of operations compares the year ended December 31, 2024 to the year ended December 31, 2023.
Commercial land and development and commercial construction loans consist of loans made to fund commercial land acquisition and development and commercial construction, respectively. The real estate purchased with these loans is generally located in or near our market. Commercial loans consist of financing for commercial purposes in various lines of business, including manufacturing, service industry, and professional service areas.
Commercial land and development and commercial construction loans consist of loans made to fund commercial land acquisition and development and commercial construction, respectively. The real estate purchased with these loans is generally located in or near our market.
Our loan to deposit ratio was 102.19% at December 31, 2023, compared to 100.67% at December 31, 2022. The increase in the ratio coincided with growth in our business. We closely monitor the loan to deposit ratio for purposes of both operational objectives and regulatory capital compliance.
Our loan to deposit ratio was 99.38% at December 31, 2024, compared to 102.19% at December 31, 2023. We closely monitor the loan to deposit ratio for purposes of both operational objectives and regulatory capital compliance.
The increase was due to a $0.5 million increase in audit, IT support, and other consulting fees for services provided for the year ended December 31, 2023, compared to the year ended December 31, 2022.
The increase was due to an increase in audit, IT support, and other consulting fees for services provided for the year ended December 31, 2024 compared to the year ended December 31, 2023. 53 Other operating expenses .
Based on our liability sensitivity, a steepened yield curve could have a beneficial impact on our net interest income. Additionally, a continued flat yield curve would be expected to maintain our net interest income.
We anticipate that interest rates may be lowered over the next few years. Based on our liability sensitivity, a steepened yield curve could have a beneficial impact on our net interest income. Additionally, a continued flat yield curve would be expected to maintain our net interest income.
The Company received gross proceeds of $53.7 million on the loans sold in 2022, resulting in a net gain on sale of $2.9 million.
The Company received gross proceeds of $38.4 million on the loans sold in 2023, resulting in a net gain on sale of $2.0 million.
For all periods presented, the Bank’s ratios exceed the regulatory definition of “well-capitalized” under the regulatory framework for prompt corrective action, and Bancorp’s ratios exceed the minimum ratios that would be required for it to be considered a well-capitalized bank holding company.
For all periods presented, the Bank’s ratios exceed the regulatory definition of “well-capitalized” under the regulatory framework for prompt corrective action, and Bancorp’s ratios exceed the minimum ratios required for it to be considered a well-capitalized bank holding company. 69 The capital adequacy ratios as of December 31, 2024 and 2023 for Bancorp and the Bank are presented in Tables 23 and 24.
Aside from commercial and business clients, a significant portion of our deposits are from municipalities and non-profit organizations. Cash flows from deposits are impacted by the timing and amount of customer deposits, changes in market rates, and collateral availability.
Aside from commercial and business clients, a significant portion of our deposits are from municipalities and non-profit organizations. Cash flows from deposits are impacted by the timing and amount of customer deposits, changes in market rates, and collateral availability. During the year ended December 31, 2024, we had cash inflows related to an increase in deposits of $531.1 million.
Assuming the current prepayment speed and interest rate environment, we expect to receive approximately $7.9 million from our securities over the next twelve months. In future periods, we expect to maintain approximately the same level of cash flows from our securities.
Cash proceeds from obligations of states and political subdivisions occur when these securities are called or mature. Assuming the current prepayment speed and interest rate environment, we expect to receive approximately $8.0 million from our securities over the next twelve months. In future periods, we expect to maintain approximately the same level of cash flows from our securities.

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