# Bank of Marin Bancorp (BMRC) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from Bank of Marin Bancorp's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1403475/000140347525000026/bmrc-20241231.htm Accession: 0001403475-25-000026 Filing date: 2025-03-14 Report date: 2024-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/BMRC/ All MD&A years: /company/BMRC/mda/ Previous year: /company/BMRC/mda/fy2023/ (FY 2023) Next year: /company/BMRC/mda/fy2025/ (FY 2025) ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of financial condition as of December 31, 2024 and 2023 and results of operations for each of the years in the three-year period ended December 31, 2024 should be read in conjunction with our consolidated financial statements and related notes thereto, included in Part II ITEM 8 of this report. Forward-Looking Statements The disclosures set forth in this item are qualified by important factors detailed in Part I captioned Forward-Looking Statements and ITEM 1A captioned Risk Factors of this report and other cautionary statements set forth elsewhere in the report. Critical Accounting Estimates Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation and uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. We consider accounting estimates to be critical to our financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain, (ii) management could have applied different assumptions during the reported period, and (iii) changes in the accounting estimate are reasonably likely to occur in the future and could have a material impact on our financial statements. Management has determined the following accounting estimates and related policies to be critical. Allowance for Credit Losses on Loans and Unfunded Commitments The allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis at the balance sheet date to present the net amount of loans expected to be collected. The allowance for losses on unfunded loan commitments is based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience, expected loss severity, and loss rates as determined for pooled funded loans. The allowance for credit losses on unfunded commitments is a liability account included in interest payable and other liabilities. Management estimates these allowances quarterly using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. Credit loss experience among the Bank and peer groups provides the basis for the estimation of expected credit losses. The allowance for credit losses ("ACL") model utilizes a discounted cash flow ("DCF") method to measure the expected credit losses on loans collectively evaluated that are sub-segmented by loan pools with similar credit risk characteristics, which generally correspond to federal regulatory reporting codes. In addition, the DCF method incorporates assumptions for probability of default ("PD"), loss given default ("LGD"), and prepayments and curtailments over the contractual terms of the loans. Under the DCF method, the ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows using the loan's effective rate. Management considers whether adjustments to the quantitative portion of the ACL are needed for differences in segment-specific risk characteristics or to reflect the extent to which it expects current conditions and reasonable and supportable forecasts of economic conditions to differ from the conditions that existed during the historical period included in the development of PD and LGD. Our allowance model is particularly sensitive to forecasted and seasonally-adjusted actual California unemployment rates, which increased to 5.5% at December 31, 2024, from 5.1% at December 31, 2023. The ACL model incorporates a one-year forecast. For periods beyond the forecast horizon, the economic factors revert to historical averages on a straight-line basis over a one-year period through the remaining lives of the loans. We performed a sensitivity analysis as of December 31, 2024, and estimated that a 100 basis point change (e.g., 4.5% to 5.5%) in the forecasted unemployment rates over the next four quarters would result in about a 6% change to our allowance for credit losses on loans. This impact does not consider changes to other assumptions for either the quantitative factors, such as probability of default, loss given default, loan mix or cash flows, prepayment/curtailment rates, and individually analyzed loans, or qualitative factors as discussed in Note 1 - Summary of Significant Accounting 27 Policies. Additionally, because current economic conditions and forecasts can change, as future events are inherently difficult to predict, the estimated credit losses on loans and unfunded commitments could change significantly. While we believe we use the best information available to determine the allowance for credit losses, our results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance. For information regarding critical estimates related to our allowance for credit losses methodology, the provision for credit losses, and risks to asset quality and lending activity, see ITEM 1A - Risk Factors, the Allowance for Credit Losses section in ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 3 - Loans and Allowance for Credit Losses on Loans in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K. Fair Value Measurements We use fair value measurements to record certain financial instruments and to determine fair value disclosures. Available-for-sale securities and interest rate swap agreements are financial instruments recorded at fair value on a recurring basis. Additionally, we record at fair value other financial assets on a nonrecurring basis, such as collateral dependent loans and other real estate owned. These nonrecurring fair value adjustments typically involve write-downs of, or specific reserves against, individual assets. We group our assets and liabilities that are measured at fair value into three levels within the fair value hierarchy, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used in the measurement are observable or unobservable. Observable inputs reflect market-driven or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market data. For financial instruments that trade actively and have quoted market prices or observable market data, there is minimal subjectivity involved in measuring fair value. When observable market prices and data are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. Therefore, when market data is not available, we use valuation techniques that require more management judgment to estimate the appropriate fair value measurement. Fair value is discussed further in Note 1 - Summary of Significant Accounting Policies, and Note 9 - Fair Value of Assets and Liabilities in ITEM 8 - Financial Statements and Supplementary Data of this Form 10-K. 28 Goodwill Goodwill arises from the acquisition method of accounting for business combinations and represents the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is tested annually for impairment, or more often if conditions change and indicate a possible impairment. Significant judgment is used in the assessment of goodwill, both in a qualitative assessment and a quantitative assessment. Assessments of goodwill often require the use of fair value estimates, which are dependent upon various factors, including estimates concerning the Company’s long-term growth prospects and comparability to industry data. Uncertainty and imprecision in estimates can affect the estimated fair value of the reporting unit in a goodwill assessment. Additionally, various events or circumstances could have a negative effect on the estimated fair value of a reporting unit, such as declines in business performance, increases in credit losses, and deterioration in economic or market conditions, which may result in a material impairment charge to earnings in future periods. In both 2024 and 2023, the Company assessed goodwill for impairment by performing a quantitative assessment, which encompassed an income approach and two market approaches (peer metrics and recent transactions). The income approach considered such factors as the estimated future cash flows of our reporting unit based on internal long-term forecasts, assumptions concerning potential synergies and other economic benefits, and a discount rate used to present value such cash flows to determine the fair value. The market approach utilized observable market data from comparable public companies, including price-to-tangible book value ratios, to estimate the Company’s fair value. The market approach also incorporated a control premium to represent the Company’s expectation of a hypothetical acquisition. Management used judgment in the selection of comparable companies and included those with similar business activities, and related operating environments. In addition, the selection and weighting of the various fair value techniques may result in higher or lower estimates of fair value. Judgment is applied in determining the weightings between the income approach and the market approach in determining fair value. The results of these assessments indicated the value of goodwill was not impaired as of our annual impairment testing dates of November 30, 2024 and 2023, and there were no changes to our assessment through December 31, 2024. 29 RESULTS OF OPERATIONS Financial Highlights The following are highlights of our financial condition and results of operations. The data was derived from the audited consolidated financial statements of Bank of Marin Bancorp. [[GREPCENT_TABLE]] [["","","At December 31,"],["(dollars in thousands, except per share data)","","2024","2023"],["Selected financial condition data:"],["Total assets","","$","3,701,335","","$","3,803,903"],["Investment securities","","$","1,266,733","","$","1,477,226"],["Loans, net of allowance for credit losses on loans","","$","2,052,600","","$","2,048,548"],["Deposits","","$","3,220,015","","$","3,290,075"],["Borrowings and other obligations","","$","154","","$","26,298"],["Stockholders' equity","","$","435,407","","$","439,062"],["Book value per share","","$","27.06","","$","27.17"],["Tangible book value per share","","$","22.37","","$","22.44"],["Asset quality ratios:"],["Allowance for credit losses to total loans","","1.47","%","1.21","%"],["Allowance for credit losses to non-accrual loans","","0.90x","3.15x"],["Non-accrual loans to total loans","","1.63","%","0.39","%"],["Classified loans (graded substandard and doubtful) as a percentage of total loans","","2.17","%","1.56","%"],["Capital ratios:"],["Equity to total assets","","11.76","%","11.54","%"],["Tangible common equity to tangible assets","","9.93","%","9.73","%"],["Total capital (to risk-weighted assets)","","16.54","%","16.89","%"],["Tier 1 capital (to risk-weighted assets)","","15.32","%","15.91","%"],["Tier 1 capital (to average assets)","","10.46","%","10.46","%"],["Common equity Tier 1 capital (to risk-weighted assets)","","15.32","%","15.91","%"],["Other data:"],["Loan-to-deposit ratio","","64.70","%","63.03","%"],["Number of branches","","27","27"],["Full-time equivalent employees","","285","329"],["","For the Years Ended December 31,"],["(dollars in thousands, except per share data)","2024","2023","2022"],["Selected operating data:"],["Net interest income","$","94,660","","$","102,761","","$","127,492"],["Provision for (reversal of) credit losses on loans","5,550","","2,575","","(63)"],["Reversal of credit losses on unfunded loan commitments","(233)","","(342)","","(318)"],["Non-interest income","(21,360)","","4,989","","10,905"],["Non-interest expense","81,818","","79,481","","75,269"],["Net (loss) income","(8,409)","","19,895","","46,586"],["Net (loss) income per common share:"],["Basic","$","(0.52)","","$","1.24","","$","2.93"],["Diluted","$","(0.52)","","$","1.24","","$","2.92"],["Performance and other financial ratios:"],["Return on average assets","(0.22)","%","0.49","%","1.08","%"],["Return on average equity","(1.93)","%","4.69","%","11.16","%"],["Tax-equivalent net interest margin","2.63","%","2.63","%","3.11","%"],["Cost of deposits","1.41","%","0.74","%","0.06","%"],["Cost of funds","1.42","%","1.02","%","0.07","%"],["Efficiency ratio","111.62","%","73.76","%","54.39","%"],["Net charge-offs (recoveries)","$","66","","$","386","","$","(23)"],["Net charge-offs (recoveries) to average loans","NM","0.02","%","NM"],["Cash dividend payout ratio on common stock 1","NM","80.65","%","33.45","%"],["Cash dividends per common share","$","1.00","","$","1.00","","$","0.98"],["1 Calculated as cash dividends per common share divided by basic net income per common share."],["NM - Not meaningful."]] [[/GREPCENT_TABLE]] 30 Executive Summary Our annual loss was $8.4 million in 2024, compared to earnings of $19.9 million in 2023. Diluted loss was $(0.52) per share in 2024, compared to earnings of $1.24 per share in 2023. Results for 2024 were significantly impacted by our strategic balance sheet repositioning which included the sale of $325.2 million in low yielding investment securities at a $32.5 million pre-tax loss, the payoff of high cost borrowings and the purchase and origination of higher yielding loans and securities. In addition, we took actions to reduce operating expenses in 2024 which positively impacted our results later in the year. Though the percentage of non-accrual loans increased from the prior year, we continue to proactively identify and manage credit risk within the loan portfolio and there were some improvements in credit quality trends during the fourth quarter. We believe the strength of our balance sheet, higher level of productivity that we are seeing from our banking teams, and positive trends in our net interest margin and operating leverage are key factors that should help mitigate any unforeseen credit quality deterioration that may arise and drive further improvement in our financial performance in the year ahead. The following are highlights of operating and financial performance for the year ended December 31, 2024: •Loans increased $9.5 million during the year ended December 31, 2024, to $2.083 billion, compared to $2.074 billion at December 31, 2023. Excluding a $35.7 million loan pool purchase of residential real estate loans, loan originations totaled $152.6 million for the year ended December 31, 2024, compared to $144.1 million for the prior year. •Classified loans made up 2.17% of total loans as of December 31, 2024, compared to 1.56% as of December 31, 2023. The Bank continues to proactively identify and manage credit risk within the loan portfolio. •Non-accrual loans totaled $33.9 million, or 1.63% of the loan portfolio, compared to $8.0 million, or 0.39%, as of December 31, 2024 and 2023, respectively primarily due to three relationships designated as non-accrual in the second and third quarters of 2024. Of the total non-accrual loans as of December 31, 2024, approximately 56% were paying as agreed, 91% were real estate secured, and all are being closely managed and monitored. •A $5.6 million provision for credit losses on loans in 2024 including a $5.2 million specific reserve taken on a commercial real estate loan as a result of declining collateral values brought the allowance for credit losses to 1.47% of total loans, compared to 1.21% as of December 31, 2023. •Total deposits decreased by $70.1 million to $3.220 billion as of December 31, 2024, from $3.290 billion as of December 31, 2023. Non-interest bearing deposits continue to remain strong compared to our peers and made up 43.5% of total deposits as of December 31, 2024, compared to 43.8% as of December 31, 2023. We believe we are appropriately competitive in regard to deposit pricing, given our relationship banking model, which differentiates Bank of Marin through exceptional service. Estimated uninsured and/or uncollateralized deposits comprised 29% of total deposits as of December 31, 2024. •At December 31, 2024, the Bank had no outstanding borrowings compared to $26.0 million at December 31, 2023, as a result of our strategic balance sheet restructuring in 2023 and 2024. Total available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and total available borrowing capacity, were $1.849 billion, or 57% of total deposits and 197% of estimated uninsured and/or uncollateralized deposits as of December 31, 2024. •The tax-equivalent net interest margin was 2.63% for 2024, consistent with 2023. Higher yields on loans increased the margin by 31 basis points, while higher deposit costs resulted in a 64 basis points reduction in the margin. In addition, the year's balance sheet restructuring activities affected the borrowings, interest-bearing cash and investments factors with impacts of 27, 13 and (7) basis points, respectively. 31 •All capital ratios were above well-capitalized regulatory requirements. Bancorp's total risk-based capital ratio was 16.54% as of December 31, 2024, compared to 16.89% as of December 31, 2023. Tangible common equity to tangible assets ("TCE ratio") increased to 9.93% as of December 31, 2024, from 9.73% as of December 31, 2023. While we do not intend to sell our held-to-maturity securities, the TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.85% as of December 31, 2024 (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures). •The Board of Directors declared a cash dividend of $0.25 per share on January 23, 2025, which was the 79th consecutive quarterly dividend paid by Bancorp. The dividend was paid on February 13, 2025 to shareholders of record at the close of business on February 6, 2025. 32 Net Interest Income Net interest income is the interest earned on loans, investments and other interest-earning assets minus interest expense incurred on deposits and other interest-bearing liabilities. Net interest income is impacted by changes in general market interest rates and by changes in the composition of interest-earning assets and interest-bearing liabilities. Interest rate changes can create fluctuations in net interest income and/or margin due to an imbalance in the timing of repricing or maturity of assets and liabilities. We manage interest rate risk exposure with the goal of minimizing the impact of interest rate volatility on net interest income. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate incurred on total interest-bearing liabilities. Both of these measures are reported on a taxable-equivalent basis. Net interest margin is the higher of the two because it reflects interest income earned on assets funded with non-interest-bearing sources of funds, which include demand deposits and stockholders’ equity. The following table compares interest income, average interest-earning assets, interest expense, and average interest-bearing liabilities for the periods presented. The table also presents net interest income, net interest margin and net interest rate spread for the years indicated. [[GREPCENT_TABLE]] [["Average Statements of Condition and Analysis of Net Interest Income"],["","","Year ended","","Year ended","","Year ended"],["","","December 31, 2024","","December 31, 2023","","December 31, 2022"],["","","","Interest","","","","Interest","","","","Interest"],["","","Average","Income/","Yield/","","Average","Income/","Yield/","","Average","Income/","Yield/"],["(dollars in thousands; unaudited)","Balance","Expense","Rate","","Balance","Expense","Rate","","Balance","Expense","Rate"],["Assets"],["","Interest-earning deposits with banks 1","$","128,752","","$","6,714","","5.13","%","","$","42,864","","$","2,329","","5.36","%","","$","120,395","","$","1,407","","1.15","%"],["","Investment securities 2, 3","1,361,859","","33,349","","2.45","%","","1,753,708","","39,100","","2.23","%","","1,796,628","","35,534","","1.98","%"],["","Loans 1, 3, 4, 5","2,074,971","","101,912","","4.83","%","","2,099,719","","99,018","","4.65","%","","2,175,259","","94,614","","4.29","%"],["","Total interest-earning assets 1","3,565,582","","141,975","","3.92","%","","3,896,291","","140,447","","3.56","%","","4,092,282","","131,555","","3.17","%"],["","Cash and non-interest-bearing due from banks","36,692","","","","","37,868","","","","","53,534"],["","Bank premises and equipment, net","7,310","","","","","8,348","","","","","7,400"],["","Interest receivable and other assets, net","164,298","","","","","135,200","","","","","151,295"],["Total assets","$","3,773,882","","","","","$","4,077,707","","","","","$","4,304,511"],["Liabilities and Stockholders' Equity"],["","Interest-bearing transaction accounts","$","193,456","","$","1,201","","0.62","%","","$","240,524","","$","1,036","","0.43","%","","$","294,682","","$","421","","0.14","%"],["","Savings accounts","227,061","","2,003","","0.88","%","","281,611","","867","","0.31","%","","341,710","","125","","0.04","%"],["","Money market accounts","1,155,016","","33,914","","2.94","%","","1,013,620","","18,553","","1.83","%","","1,065,104","","1,589","","0.15","%"],["","Time accounts, including CDARS","262,482","","9,254","","3.53","%","","191,056","","4,715","","2.47","%","","140,547","","323","","0.23","%"],["","Borrowings and other obligations 1","4,628","","241","","5.13","%","","221,623","","11,562","","5.15","%","","2,295","","91","","3.90","%"],["","Total interest-bearing liabilities","1,842,643","","46,613","","2.53","%","","1,948,434","","36,733","","1.89","%","","1,844,338","","2,549","","0.14","%"],["","Demand accounts","1,448,346","","","","","1,656,047","","","","","1,993,373"],["","Interest payable and other liabilities","47,823","","","","","49,442","","","","","49,456"],["","Stockholders' equity","435,070","","","","","423,784","","","","","417,344"],["Total liabilities & stockholders' equity","$","3,773,882","","","","","$","4,077,707","","","","","$","4,304,511"],["Tax-equivalent net interest income/margin 1,3","","$","95,362","","2.63","%","","","$","103,714","","2.63","%","","","$","129,006","","3.11","%"],["Reported net interest income/margin 1","","$","94,660","","2.61","%","","","$","102,761","","2.60","%","","","$","127,492","","3.07","%"],["Tax-equivalent net interest rate spread","","","1.39","%","","","","1.67","%","","","","3.03","%"],["1 Interest income/expense is divided by actual number of days in the period times 360 days to correspond to stated interest rate terms, where applicable."],["2 Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of stockholders' equity. Investment security interest is earned on 30/360 day basis monthly."],["3 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%."],["4 Average balances on loans outstanding include non-performing loans. The amortized portion of net loan origination fees is included in interest income on loans, representing an adjustment to the yield."],["5 Net loan origination (costs) fees included in interest income totaled $(1.6) million, $(1.3) million, and $1.1 million in 2024, 2023, and 2022, respectively."]] [[/GREPCENT_TABLE]] 33 Analysis of Changes in Net Interest Income The following table presents the effects of changes in average balances (volume) or changes in average rates on tax-equivalent net interest income for the years indicated. Volume variances are equal to the increase or decrease in average balances multiplied by prior period rates. Rate variances are equal to the increase or decrease in rates multiplied by prior period average balances. Mix variances are attributable to the change in yields or rates multiplied by the change in average balances including one day more in the year ended 2024. [[GREPCENT_TABLE]] [["","2024 compared to 2023","2023 compared to 2022"],["(in thousands, unaudited)","Volume","Yield/Rate","Mix","Total","Volume","Yield/Rate","Mix","Total"],["Interest-earning deposits with banks","$","4,667","","$","(100)","","$","(182)","","$","4,385","","$","(906)","","$","5,135","","$","(3,307)","","$","922"],["Investment securities 1","(8,737)","","3,845","","(859)","","(5,751)","","(849)","","4,523","","(108)","","3,566"],["Loans 1","(1,167)","","3,828","","233","","2,894","","(3,286)","","7,966","","(276)","","4,404"],["Total interest-earning assets","(5,237)","","7,573","","(808)","","1,528","","(5,041)","","17,624","","(3,691)","","8,892"],["Interest-bearing transaction accounts","(203)","","453","","(85)","","165","","(77)","","848","","(156)","","615"],["Savings accounts","(168)","","1,610","","(306)","","1,136","","(22)","","926","","(162)","","742"],["Money market accounts","2,588","","11,128","","1,645","","15,361","","(77)","","17,906","","(865)","","16,964"],["Time accounts, including CDARS","1,763","","2,002","","774","","4,539","","116","","3,146","","1,130","","4,392"],["Borrowings and other obligations","(11,321)","","(50)","","50","","(11,321)","","8,697","","29","","2,745","","11,471"],["Total interest-bearing liabilities","(7,341)","","15,143","","2,078","","9,880","","8,637","","22,855","","2,692","","34,184"],["Tax-equivalent net interest income","$","2,104","","$","(7,570)","","$","(2,886)","","$","(8,352)","","$","(13,678)","","$","(5,231)","","$","(6,383)","","$","(25,292)"],["1 Yields and interest income on tax-exempt securities and loans are presented on a taxable-equivalent basis using the federal statutory rate of 21%."]] [[/GREPCENT_TABLE]] 2024 Compared to 2023 Net interest income totaled $94.7 million in 2024, compared to $102.8 million in 2023. The $8.1 million decrease from the prior year was primarily due to higher deposit costs of $21.2 million, partially offset by the reduction of $11.3 million in borrowing costs. The tax-equivalent net interest margin was 2.63% for 2024, consistent with 2023. Higher yields on loans increased the margin by 31 basis points, while higher deposit costs resulted in a 64 basis points reduction in the margin. In addition, the year's balance sheet restructuring activities affected the borrowings, interest-bearing cash and investments factors with impacts of 27, 13 and (7) basis points, respectively. 2023 Compared to 2022 Net interest income totaled $102.8 million in 2023, compared to $127.5 million in 2022. The $24.7 million decrease from the prior year was primarily due to higher funding costs of $34.2 million, partially offset by higher average yields on earning assets. The tax-equivalent net interest margin was 2.63% for 2023, compared to 3.11% for 2022. The decrease was primarily attributed to higher deposit and borrowing costs, partially offset by higher yields on loans and investment securities. Average interest-bearing deposit balances decreased by $115.2 million, while the average rate increased by 133 basis points, decreasing the margin by 58 basis points. Average borrowings and other obligations increased by $219.3 million, while the average cost increased by 125 basis points, decreasing the net interest margin by 29 basis points. Average loan balances decreased by $75.5 million, while the average yield increased by 36 basis points, increasing the margin by 23 basis points. Average investment securities decreased $42.9 million, while their average yield increased 25 basis points, improving the margin by 14 basis points. Market Interest Rates Market interest rates are, in part, based on the target federal funds interest rate (the interest rate banks charge each other for short-term borrowings) implemented by the Federal Reserve Open Market Committee ("FOMC"). In response to the evolving risks to economic activity caused by the COVID-19 pandemic, the FOMC made two emergency federal funds rate cuts totaling 150 basis points in March 2020. The federal funds rate range remained between 0.0% and 0.25% through the beginning of 2022, putting downward pressure on our asset yields and net interest margin. The FOMC began increasing rates in March 2022, totaling seven rate increases in 2022 and four 34 additional rate increases in 2023, and ended the year of 2023 at a federal funds target rate range between 5.25% and 5.50%. Rising interest rates resulted in rapid increases in the cost of funds through rising deposit costs and increased average borrowings, putting pressure on our net interest margin. Because market interest rates remained high for longer than many market participants anticipated, during the second quarter of 2024, we sold securities with relatively low yields and redeployed the proceeds to pay off borrowings, invest in higher yielding loans and securities, and position the balance sheet for future acquisitions of similar assets. Primarily due to declining inflation, the Federal Reserve lowered the target for the federal funds rate by 100 basis points, to a range of 4.25% to 4.50% in the later months of 2024. At the January 2025 meeting, the FOMC left rates unchanged and signaled slower than originally anticipated rate cuts are likely in 2025. Management and the Board are continuously monitoring and analyzing the impact of market rates on the Company's financial condition and results of operations to enhance performance, safety and soundness and returns to shareholders. See ITEM 7A. Quantitative and Qualitative Disclosure about Market Risk for further information. Provision for Credit Losses on Loans Management assesses the adequacy of the allowance for credit losses on loans quarterly based on several factors, including growth or contraction of the loan portfolio, past events, current conditions, and reasonable and supportable forecasts to estimate expected losses over the contractual terms of our loans. The allowance for credit losses on loans is increased by provisions charged to expense and loss recoveries and decreased by loans charged off. The following table shows the activity for the periods presented. [[GREPCENT_TABLE]] [["","Years ended December 31,"],["(dollars in thousands)","2024","2023","2022"],["Provision for (reversal of) credit losses on loans","$","5,550","","$","2,575","","$","(63)"]] [[/GREPCENT_TABLE]] The provision in 2024 was due primarily to increases in qualitative risk factors to account for continued uncertainty about inflation and recession risks, and from continued negative trends in adversely graded loans and/or collateral values on our non-owner occupied commercial real estate office and multi-family real estate portfolios including $5.2 million taken in the second quarter due to an increased individual reserve for one non-owner occupied commercial real estate loan totaling $16.7 million that, although current, had experienced a deterioration in the collateral value and, therefore, a material increase in the loan-to-value. The provision in 2023 was due primarily to adjustments to qualitative risk factors from continued uncertainty about inflation and recession risks, the potential impact of rapidly increasing interest rates and other external factors on both our non-owner-occupied commercial real estate and construction portfolios, loan and collateral concentration risks in our construction and commercial real estate portfolios, heightened portfolio management in light of current economic conditions, and continued negative trends in adversely graded loans and/or collateral values for our non-owner occupied commercial real estate office and multi-family real estate portfolios. The provision reversal in 2022 was largely due to a $55.4 million decrease in applicable loan balances (excludes the $107.7 million decrease in PPP loans for which there was no allowance) and improvements in Moody's Analytics' Baseline Forecast of California unemployment rates since December 31, 2021, which decreased the quantitative "modeled" allowance for credit losses. These decreases were partially offset by adjustments to qualitative risk factors to account for the ongoing deterioration in the economic outlook that management believed was not captured in the quantitative portion of the allowance calculation. 35 Non-interest Income The table below details the components of non-interest income. [[GREPCENT_TABLE]] [["","","2024 compared to 2023","2023 compared to 2022"],["","Years ended December 31,","Amount Increase (Decrease)","Percent Increase (Decrease)","Amount Increase (Decrease)","Percent Increase (Decrease)"],["(dollars in thousands; unaudited)","2024","2023","2022"],["Wealth management and trust services","$","2,420","","$","2,145","","$","2,227","","$","275","","12.8","%","$","(82)","","(3.7)","%"],["Service charges on deposit accounts","2,164","","2,083","","2,007","","81","","3.9","%","76","","3.8","%"],["Earnings on bank-owned life insurance, net","1,714","","1,802","","1,229","","(88)","","(4.9)","%","573","","46.6","%"],["Debit card interchange fees, net","1,701","","1,831","","2,051","","(130)","","(7.1)","%","(220)","","(10.7)","%"],["Dividends on Federal Home Loan Bank stock","1,478","","1,265","","1,056","","213","","16.8","%","209","","19.8","%"],["Merchant interchange fees, net","324","","496","","549","","(172)","","(34.7)","%","(53)","","(9.7)","%"],["Losses on sale of investment securities, net","(32,541)","","(5,893)","","(63)","","(26,648)","","452.2","%","(5,830)","","9,254.0","%"],["Other income","1,380","","1,260","","1,849","","120","","9.5","%","(589)","","(31.9)","%"],["Total non-interest income","$","(21,360)","","$","4,989","","$","10,905","","$","(26,349)","","(528.1)","%","$","(5,916)","","(54.3)","%"]] [[/GREPCENT_TABLE]] 2024 Compared to 2023 Non-interest income showed a loss of $21.4 million for 2024, a $26.3 million decrease from income of $5.0 million for 2023. The decrease in 2024 was primarily due to the $32.5 million net loss on the sale of available-for-sale investment securities in the second quarter related to our balance sheet restructuring. Excluding losses on sale of securities in both years, non-interest income increased by $299 thousand, which included a $275 thousand year-over-year increase in wealth management and trust services income due to increased assets. 2023 Compared to 2022 Non-interest income totaled $5.0 million in 2023, a $5.9 million decrease from $10.9 million in 2022. The decrease in 2023 was primarily due to the $5.9 million net loss on the sale of investment securities mentioned above. Excluding this loss, non-interest income decreased by $86 thousand, which included a $504 thousand decline in deposit network fees earned when deposit balances were brought back on the balance sheet, and a $220 thousand decrease in debit card interchange income. Decreases were partially offset by $573 thousand higher benefit payments from and earnings on bank-owned life insurance, and $209 thousand from increases in dividends on Federal Home Loan Bank stock. 36 Non-interest Expense The table below details the components of non-interest expense. [[GREPCENT_TABLE]] [["","","2024 compared to 2023","2023 compared to 2022"],["","Years ended December 31,","Amount Increase (Decrease)","Percent Increase (Decrease)","Amount Increase (Decrease)","Percent Increase (Decrease)"],["(dollars in thousands; unaudited)","2024","2023","2022"],["Salaries and employee benefits","$","44,683","","$","43,448","","$","42,046","","$","1,235","","2.8","%","$","1,402","","3.3","%"],["Occupancy and equipment","8,242","","8,306","","7,823","","(64)","","(0.8)","%","483","","6.2","%"],["Professional services","5,129","","3,598","","3,299","","1,531","","42.6","%","299","","9.1","%"],["Data processing","4,222","","4,057","","4,649","","165","","4.1","%","(592)","","(12.7)","%"],["Deposit network fees","3,526","","2,783","","258","","743","","26.7","%","2,525","","978.7","%"],["Federal Deposit Insurance Corporation insurance","1,863","","1,878","","1,179","","(15)","","(0.8)","%","699","","59.3","%"],["Information technology","1,686","","1,569","","2,197","","117","","7.5","%","(628)","","(28.6)","%"],["Depreciation and amortization","1,466","","2,098","","1,840","","(632)","","(30.1)","%","258","","14.0","%"],["Directors' expense","1,213","","1,212","","1,107","","1","","0.1","%","105","","9.5","%"],["Amortization of core deposit intangible","975","","1,350","","1,489","","(375)","","(27.8)","%","(139)","","(9.3)","%"],["Charitable contributions","677","","717","","709","","(40)","","(5.6)","%","8","","1.1","%"],["Other real estate owned","\u2014","","48","","359","","(48)","","(100.0)","%","(311)","","(86.6)","%"],["Other non-interest expense:"],["Advertising","1,090","","1,244","","1,070","","(154)","","(12.4)","%","174","","16.3","%"],["Other expense","7,046","","7,173","","7,244","","(127)","","(1.8)","%","(71)","","(1.0)","%"],["Total other non-interest expense","8,136","","8,417","","8,314","","(281)","","(3.3)","%","103","","1.2","%"],["Total non-interest expense","$","81,818","","$","79,481","","$","75,269","","$","2,337","","2.9","%","$","4,212","","5.6","%"]] [[/GREPCENT_TABLE]] 2024 Compared to 2023 Non-interest expenses increased $2.3 million to $81.8 million in 2024 from $79.5 million in 2023. Significant fluctuations were as follows: •Professional services expenses increased by $1.5 million, mainly from the legal resolution of a Private Attorneys General Act / putative class action lawsuit of $615 thousand and $354 thousand in the new loan operating system platform and implementation costs. •Salaries and employee benefits increased by $1.2 million primarily due to severance and salaries paid in relation to the reduction in force in the second quarter, the filling of open positions and the hiring of several key employees and officers, higher insurance costs, and lower deferred loan origination costs. Increases to salaries and employee benefits were partially offset by a decrease in profit sharing expense mainly from accrual adjustments, a decrease in accrued incentive bonuses, and a decrease in stock-based compensation from changes in award structure and estimated performance award payouts. •Deposit network fees increased by $743 thousand due both to rate and volume. •Depreciation and amortization expenses decreased by $632 thousand, mainly from the acceleration of lease-related costs for four branch closures in 2023. •Amortization of the core deposit intangible decreased by $375 thousand as the Bank of Alameda amortization completed in 2023. 2023 Compared to 2022 Non-interest expenses increased $4.2 million to $79.5 million in 2023 from $75.3 million in 2022. Significant fluctuations were as follows: •Deposit network fees increased by $2.5 million as customers sought additional FDIC insurance protection through reciprocal deposit networks. 37 •Salaries and employee benefits increased by $1.4 million primarily due to the filling of open positions and the hiring of several key employees and officers, an increase in SERP-related expenses largely due to new and retired participant adjustments lowering costs for 2022, an increase in deferred officer compensation expense from increased participation and interest rates, higher insurance costs, and lower deferred loan origination costs. Increases to salaries and employee benefits were partially offset by a decrease in profit sharing expense mainly from accrual adjustments and because some contributions in 2023 were made from forfeitures rather than paid in cash, a decrease in accrued incentive bonuses, and a decrease in stock-based compensation from changes in award structure and estimated performance award payout estimates. •FDIC insurance costs increased by $699 thousand due to an increase in the FDIC statutory assessment rate to strengthen the Deposit Insurance Fund. •Occupancy and equipment and depreciation and amortization expenses rose by $483 thousand and $258 thousand, respectively, mainly from the acceleration of lease-related costs for branch closures in the first quarter of 2023 and higher maintenance costs. •Professional services expenses increased by $299 thousand, mainly from consulting fees associated with core systems contract negotiations, systems transformation projects, and internal and external audit costs. •Information technology and data processing expenses decreased by $628 thousand and $592 thousand, respectively, due to our core system contract renegotiation for the current period and because the prior year included data processing expenses largely eliminated after the systems conversion associated with the American River Bankshares merger. •Other real estate owned expenses decreased by $311 thousand due to the write-down in 2022 of the property that was then sold in the third quarter of 2023. Provision for Income Taxes Income tax provisions reflect accruals for taxes at the applicable rates for federal income tax and California franchise tax based upon reported pre-tax income. Provisions also reflect permanent differences between income for tax and financial reporting purposes (such as earnings on tax exempt loans and municipal securities, bank-owned life insurance ("BOLI"), low-income housing tax credits, and stock-based compensation from the exercise of stock options, disqualifying dispositions of incentive stock options and vesting of restricted stock awards). The benefit for income taxes totaled $5.4 million at an effective tax rate of 39.2% in 2024, compared to the provision of $6.1 million at an effective tax rate of 23.6% in 2023 and $16.9 million at an effective tax rate of 26.6% in 2022. The reversal in the provision for income taxes in 2024, reflected the impact of the net loss before taxes in the year of $13.8 million compared to net income before taxes of $26.0 million in 2023. The 15.6% increase in the effective tax rate in 2024, as compared to 2023, was due to the treatment of certain permanent differences while in a loss position, such as in 2024. The 300 basis point decrease from 2022 to 2023 was primarily due to a larger proportional effect of permanent tax differences on lower pretax income and higher tax-exempt BOLI income. This decrease was partially offset by a reduction in the tax-exempt interest exclusion (due to a larger IRC Section 291(e) interest expense disallowance), compared to 2022. We file a consolidated return in the U.S. federal tax jurisdiction and a combined return in the state of California tax jurisdiction. There were no ongoing federal or state income tax examinations at the time of the issuance of this report. As of December 31, 2024 and 2023, neither the Bank nor Bancorp had accruals for interest or penalties related to unrecognized tax benefits. 38 FINANCIAL CONDITION Investment Securities We maintain an investment securities portfolio to provide liquidity and generate earnings on funds that have not been loaned to customers. Management determines the maturities and types of securities to be purchased based on liquidity and interest rate risk position, and the desire to attain a reasonable investment yield balanced with risk exposure. The tables below show the composition of the debt securities portfolio by weighted average life at December 31, 2024 and 2023. Weighted average life takes into account the issuer's right to call or prepay obligations, with or without call or prepayment penalties. The weighted average life of the investment portfolio at December 31, 2024 and 2023 was approximately 5.9 and 6.6 years, respectively. The effective duration of the investment portfolio was 4.8 and 5.2 at December 31, 2024 and 2023, respectively. [[GREPCENT_TABLE]] [["December 31, 2024","Within 1 Year","","1-5 Years","","5-10 Years","","After 10 Years","","Total"],["(dollars in thousands; unaudited)","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","Amortized Cost1","Fair Value","Average Yield2"],["Held-to-maturity:"],["CMBS/MBS/CMOs issued by U.S. government agencies","$","10,895","","2.47","%","","$","194,427","","3.29","%","","$","353,313","","2.10","%","","$","86,060","","2.07","%","","$","644,695","","$","560,812","","2.46","%"],["SBA-backed securities","\u2014","","\u2014","","","1,513","","3.16","","","\u2014","","\u2014","","","\u2014","","\u2014","","","1,513","","1,452","","3.16"],["Debentures of government-sponsored agencies","20,000","","4.25","","","5,000","","5.00","","","83,460","","1.83","","","32,971","","1.85","","","141,431","","118,737","","2.29"],["Obligations of state and political subdivisions - tax-exempt3","3,041","","3.77","","","2,368","","3.64","","","20,067","","3.00","","","5,765","","1.90","","","31,241","","29,057","","2.92"],["Obligations of state and political subdivisions - taxable","\u2014","","\u2014","","","\u2014","","\u2014","","","13,637","","2.03","","","16,682","","2.36","","","30,319","","24,162","","2.21"],["Corporate bonds","15,000","","3.50","","","15,000","","3.75","","","\u2014","","\u2014","","","\u2014","","\u2014","","","30,000","","29,315","","3.63"],["Total held-to-maturity","48,936","","3.59","","","218,308","","3.36","","","470,477","","2.09","","","141,478","","2.05","","","879,199","","763,535","","2.48"],["Available-for-sale:"],["CMBS/MBS/CMOs issued by U.S. government agencies","100,397","","4.09","","","131,820","","3.29","","","54,857","","2.90","","","8,718","","2.36","","","295,792","","279,838","","3.46"],["SBA-backed securities","\u2014","","\u2014","","","331","","2.20","","","\u2014","","\u2014","","","\u2014","","\u2014","","","331","","308","","2.20"],["Debentures of government sponsored agencies","\u2014","","\u2014","","","\u2014","","\u2014","","","8,971","","1.36","","","\u2014","","\u2014","","","8,971","","7,210","","1.36"],["U.S. Treasury securities","\u2014","","\u2014","","","12,020","","0.78","","","\u2014","","\u2014","","","\u2014","","\u2014","","","12,020","","10,815","","0.78"],["Obligations of state and political subdivisions - tax-exempt3","\u2014","","\u2014","","","3,831","","0.68","","","43,581","","2.04","","","40,043","","2.73","","","87,455","","76,199","","2.30"],["Obligations of state and political subdivisions - taxable","\u2014","","\u2014","","","2,992","","1.09","","","5,731","","1.86","","","\u2014","","\u2014","","","8,723","","7,515","","1.60"],["Corporate bonds","\u2014","","\u2014","","","6,000","","1.15","","","\u2014","","\u2014","","","\u2014","","\u2014","","","6,000","","5,649","","1.15"],["Total available-for-sale","100,397","","4.09","","","156,994","","2.91","","","113,140","","2.40","","","48,761","","2.66","","","419,292","","387,534","","3.02"],["Total","$","149,333","","3.93","%","","$","375,302","","3.17","%","","$","583,617","","2.15","%","","$","190,239","","2.21","%","","$","1,298,491","","$","1,151,069","","2.66","%"]] [[/GREPCENT_TABLE]] 39 [[GREPCENT_TABLE]] [["December 31, 2023","Within 1 Year","","1-5 Years","","5-10 Years","","After 10 Years","","Total"],["(dollars in thousands; unaudited)","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","AmortizedCost1","Average Yield2","","Amortized Cost1","Fair Value","Average Yield2"],["Held-to-maturity:"],["CMBS/MBS/CMOs issued by U.S. government agencies","$","\u2014","","\u2014","%","","$","139,418","","3.41","%","","$","462,010","","2.23","%","","$","83,757","","2.1","%","","$","685,185","","$","605,934","","2.45","%"],["SBA-backed securities","\u2014","","\u2014","","","1,853","","3.17","","","\u2014","","\u2014","","","\u2014","","\u2014","","","1,853","","1,763","","3.17"],["Debentures of government-sponsored agencies","\u2014","","\u2014","","","29,994","","4.38","","","83,345","","1.83","","","32,787","","1.85","","","146,126","","124,132","","2.36"],["Obligations of state and political subdivisions - tax-exempt3","\u2014","","\u2014","","","3,070","","3.77","","","2,392","","3.65","","","26,220","","2.74","","","31,682","","29,820","","2.91"],["Obligations of state and political subdivisions - taxable","\u2014","","\u2014","","","\u2014","","\u2014","","","12,473","","1.99","","","17,879","","2.36","","","30,352","","24,377","","2.21"],["Corporate bonds","\u2014","","\u2014","","","30,000","","3.63","","","\u2014","","\u2014","","","\u2014","","\u2014","","","30,000","","28,804","","3.63"],["Total held-to-maturity","\u2014","","\u2014","","","204,335","","3.59","","","560,220","","2.17","","","160,643","","2.19","","","925,198","","814,830","","2.48"],["Available-for-sale:"],["CMBS/MBS/CMOs issued by U.S. government agencies","677","","1.93","","261,575","","2.05","","116,365","","2.24","","13,720","","3.05","","392,337","","352,472","","2.14"],["SBA-backed securities","\u2014","","\u2014","","","21,126","","2.45","","","\u2014","","\u2014","","","\u2014","","\u2014","","","21,126","","19,471","","2.45"],["Debentures of government sponsored agencies","\u2014","","\u2014","","","64,929","","1.22","","8,970","","1.36","","\u2014","","\u2014","","73,899","","66,862","","1.23"],["U.S. Treasury securities","\u2014","","\u2014","","","11,923","","1.00","","","\u2014","","\u2014","","","\u2014","","\u2014","","","11,923","","10,623","","1.00"],["Obligations of state and political subdivisions - tax-exempt3","\u2014","","\u2014","","5,142","","1.59","","14,602","","2.04","","69,382","","2.68","","89,126","","80,720","","2.51"],["Obligations of state and political subdivisions - taxable","100","","3.14","","","3,005","","1.31","","","8,956","","1.74","","","1,015","","1.98","","","13,076","","11,162","","1.67"],["Corporate bonds","\u2014","","\u2014","","11,992","","1.19","","\u2014","","\u2014","","\u2014","","\u2014","","11,992","","10,718","","1.19"],["Asset-backed securities","\u2014","","\u2014","","","\u2014","","\u2014","","","\u2014","","\u2014","","","\u2014","","\u2014","","","\u2014","","\u2014","","\u2014"],["Total available-for-sale","777","","2.08","","","379,692","","1.86","","","148,893","","2.13","","","84,117","","2.73","","","613,479","","552,028","","2.04"],["Total","$","777","","2.08","%","","$","584,027","","2.46","%","","$","709,113","","2.16","%","","$","244,760","","2.37","%","","$","1,538,677","","$","1,366,858","","2.31","%"]] [[/GREPCENT_TABLE]] 1 Book value reflects cost, adjusted for accumulated amortization and accretion. 2 Weighted average calculation is based on amortized cost of securities. 3 Yields on tax-exempt municipal bonds are presented on a taxable equivalent basis, using a federal tax rate of 21%. The amortized cost of our investment securities portfolio decreased by $240.2 million, or 15.6%, in 2024. In 2024, we sold $325.2 million in available-for-sale securities with an average yield of 1.94%, as part of a balance sheet restructuring, including $190.5 million in agency collateralized mortgage obligations ("CMOs"), $65.0 million in debentures of government sponsored agencies, $39.8 million in agency mortgage-backed securities ("MBSs"), $18.4 million in SBA-backed securities, $6.0 million in corporate bonds and $5.5 million in obligations of state and political subdivisions. The sales of available-for-sale securities generated a net pre-tax loss of $32.5 million. We consider agency debentures and CMOs issued by U.S. government sponsored entities to have low credit risk as they carry the credit support of the U.S. federal government. The debentures, CMBSs, CMOs and MBS issued by U.S. government sponsored agencies, SBA-backed securities and U.S. Treasury securities made up 85.1% of the portfolio as of December 31, 2024, compared to 86.6% at December 31, 2023. See the discussion in the section captioned “Securities May Lose Value Due to Credit Quality of the Issuers” in ITEM 1A Risk Factors above. 40 At December 31, 2024 and 2023, distribution of our investment in obligations of state and political subdivisions was as follows: [[GREPCENT_TABLE]] [["","December 31, 2024","December 31, 2023"],["(dollars in thousands; unaudited)","Amortized Cost","Fair Value","Percent of State and Municipal Securities","Amortized Cost","Fair Value","Percent of State and Municipal Securities"],["Within California:"],["General obligation bonds","$","22,913","","$","18,749","","14.5","%","$","24,191","","$","20,009","","14.7","%"],["Revenue bonds","2,060","","1,658","","1.3","","3,507","","2,917","","2.1"],["Tax allocation bonds","\u2014","","\u2014","","\u2014","","\u2014","","\u2014","","\u2014"],["Total within California","24,973","","20,407","","15.8","","27,698","","22,926","","16.8"],["Outside California:"],["General obligation bonds","108,037","","94,748","","68.5","","108,846","","98,139","","66.3"],["Revenue bonds","24,728","","21,778","","15.7","","27,692","","25,014","","16.9"],["Total outside California","132,765","","116,526","","84.2","","136,538","","123,153","","83.2"],["Total obligations of state and political subdivisions","$","157,738","","$","136,933","","100.0","%","$","164,236","","$","146,079","","100.0","%"],["Percent of investment portfolio","12.2%","11.9%","","10.7%","10.7%"]] [[/GREPCENT_TABLE]] The portion of the portfolio outside the state of California is distributed among twelve states. Of the total investment in obligations of state and political subdivisions, the largest concentrations outside California are in Texas (38.4%), Washington (15.7%), and Wisconsin (9.4%). Our investments in obligations issued by municipal issuers in Texas are either guaranteed by the AAA-rated Texas Permanent School Fund ("PSF"), rated AAA without enhancement, or backed by revenue sources from essential services (such as utilities and transportation). Investments in states, municipalities and political subdivisions are subject to an initial pre-purchase credit assessment and ongoing monitoring. Key considerations include: •The soundness of a municipality’s budgetary position and the stability of its tax revenues •Debt profile and level of unfunded liabilities, diversity of revenue sources, taxing authority of the issuer •Local demographics and economics including unemployment data, the largest local taxpayers and employers, income indices, and home values •For revenue bonds, the source and strength of revenue for municipal authorities, including obligors' financial condition and reserve levels, annual debt service and debt coverage ratio, and credit enhancement (such as insurers' strength) •Credit ratings by major credit rating agencies Loans Loans Outstanding by Class and Percent of Total [[GREPCENT_TABLE]] [["","December 31, 2024","","December 31, 2023"],["(in thousands; unaudited)","Amortized Cost","Percent of Total","","Amortized Cost","Percent of Total"],["Commercial and industrial","$","152,263","","7.3","%","","$","153,750","","7.4","%"],["Real estate"],["Commercial owner-occupied","321,962","","15.5","","","333,181","","16.1"],["Commercial non-owner occupied","1,273,596","","61.1","","","1,219,385","","58.8"],["Construction","36,970","","1.8","","","99,164","","4.8"],["Home equity","88,325","","4.2","","","82,087","","4.0"],["Other residential","143,207","","6.9","","","118,508","","5.7"],["Installment and other consumer","66,933","","3.2","","","67,645","","3.2"],["Total loans, at amortized cost","2,083,256","","100.0","%","","2,073,720","","100.0","%"],["Allowance for credit losses on loans","(30,656)","","","","(25,172)"],["Total loans, net of allowance for credit losses","$","2,052,600","","","","$","2,048,548"]] [[/GREPCENT_TABLE]] 41 Loans increased by $9.5 million in 2024, or 0.5%, to $2.083 billion as of December 31, 2024, from $2.074 billion as of December 31, 2023. Organic loan originations were $152.6 million in 2024, compared to $144.1 million in 2023. Loan purchases totaled $35.7 million in 2024, compared to none in the prior year. Non-PPP payoffs were $120.2 million in 2024, compared to $107.1 million in 2023. PPP loan payoffs during 2024 and 2023 were $443 thousand and $2.7 million, respectively. The majority of the payoffs were a result of cash payoffs and asset sales. In addition, $57.4 million of loan amortization from scheduled repayments, net of credit line utilization, contributed to the change in loan balances for 2024. The originations and payoffs noted above, combined with utilization on lines of credit and amortization on existing loans, resulted in a net increase for this period. Approximately 89% and 90% of total loans were secured by real estate as of December 31, 2024 and 2023, respectively. For additional information on loan concentration risk, see ITEM 1A, Risk Factors. The following table summarizes our commercial real estate loan concentrations by the county in which the property was located as of December 31, 2024 and 2023. Commercial Real Estate Loans Outstanding by County [[GREPCENT_TABLE]] [["(dollars in thousands; unaudited)","December 31, 2024","","December 31, 2023"],["County","Amount","Percent of Commercial Real Estate Loans","","Amount","Percent of Commercial Real Estate Loans"],["Marin","$","303,255","","19","%","","$","317,862","","20","%"],["Sonoma","245,510","","15","","","256,516","","16"],["San Francisco","211,254","","13","","","186,803","","12"],["Alameda","187,526","","12","","","156,934","","10"],["Napa","170,492","","11","","","178,685","","12"],["Sacramento","131,857","","8","","","125,483","","8"],["Contra Costa","75,522","","5","","","72,580","","5"],["Solano","52,294","","3","","","39,247","","2"],["Placer","41,951","","2","","","40,733","","3"],["San Mateo","41,275","","2","","","35,420","","2"],["Santa Clara","23,610","","2","","","24,086","","2"],["San Joaquin","14,933","","1","","","15,261","","1"],["El Dorado","8,460","","1","","","11,257","","1"],["Other","87,619","","6","","","91,699","","6"],["Total","$","1,595,558","","100","%","","$","1,552,566","","100","%"]] [[/GREPCENT_TABLE]] Commercial real estate loans increased by $43.0 million in 2024, compared to a $5.8 million increase in 2023. The increase in 2024 was comprised of the $54.2 million increase within the non-owner occupied loan portfolio, partially offset by the $11.2 million decrease within the owner-occupied loan portfolio. Of the commercial real estate loans as of December 31, 2024, 80% were non-owner occupied and 20% were owner-occupied. Almost the entire commercial real estate loan portfolio is comprised of term loans for which the primary source of repayment is either the cash flow from leasing activities of the real estate collateral or the operating cash flow of the owner occupant. 42 Non-owner and Owner Occupied Real Estate Loans by Type [[GREPCENT_TABLE]] [["(unaudited)","Percent of Non-owner Occupied Commercial Real Estate Loans","","Percent of Owner-Occupied Commercial Real Estate Loans"],["County","December 31, 2024","December 31, 2023","","December 31, 2024","December 31, 2023"],["Office","27","%","31","%","","19","%","19","%"],["Retail","20","","21","","","7","","7"],["Multi-family","16","","12","","","\u2014","","\u2014"],["Warehouse & industrial","11","","12","","","23","","23"],["Mixed use","9","","7","","","2","","3"],["School","\u2014","","\u2014","","","15","","15"],["Wine","\u2014","","\u2014","","","10","","11"],["Church","\u2014","","\u2014","","","6","","6"],["Gas/auto","\u2014","","\u2014","","","8","","4"],["Health club","\u2014","","\u2014","","","4","","2"],["Other","17","","17","","","6","","10"],["Total","100","%","100","%","","100","%","100","%"]] [[/GREPCENT_TABLE]] Commercial Real Estate Loans by Type and County [[GREPCENT_TABLE]] [["","Non-owner occupied","","Owner-occupied"],["(unaudited)","Retail","","Warehouse & industrial","","Multi-family","","Office","","Office"],["County","Dec 31, 2024","Dec 31, 2023","","Dec 31 2024","Dec 31 2023","","Dec 31, 2024","Dec 31, 2023","","Dec 31, 2024","Dec 31, 2023","","Dec 31, 2024","Dec 31, 2023"],["Sacramento","20","%","20","%","","18","%","18","%","","9","%","4","%","","6","%","7","%","","19","%","19","%"],["Marin","16","","17","","","12","","11","","","10","","15","","","25","","24","","","22","","26"],["Napa","16","","16","","","4","","3","","","5","","6","","","9","","10","","","21","","27"],["Sonoma","15","","15","","","28","","27","","","11","","15","","","17","","17","","","8","","9"],["Alameda","6","","6","","","16","","18","","","20","","14","","","6","","6","","","6","","8"],["San Francisco","3","","3","","","12","","11","","","30","","26","","","18","","19","","","18","","2"],["Other bay area","16","","14","","","4","","4","","","5","","5","","","15","","13","","","\u2014","","4"],["Other","8","","9","","","6","","8","","","10","","15","","","4","","4","","","6","","5"],["Total","100","%","100","%","","100","%","100","%","","100","%","100","%","","100","%","100","%","","100","%","100","%"]] [[/GREPCENT_TABLE]] With the heightened market concern about non-owner-occupied commercial real estate, and in particular the office sector, we are providing the following additional information: We continue to maintain diversity among property types and within our geographic footprint. In particular, our office commercial real estate portfolio in the City of San Francisco represents just 3% of our total loan portfolio and 5% of our total non-owner-occupied commercial real estate portfolio. The following table shows an analysis of construction loans by type and county as of December 31, 2024 and 2023. Construction Loans Outstanding by Type and County [[GREPCENT_TABLE]] [["(dollars in thousands; unaudited)","December 31, 2024","","December 31, 2023"],["Loan Type","Amount","Percent of Construction Loans","","Amount","Percent of Construction Loans"],["Apartments and multifamily","$","19,057","","51.5","%","","$","45,390","","45.8","%"],["Commercial real estate","2,261","","6.1","","","26,042","","26.3"],["1-4 Single family residential","15,652","","42.4","","","26,666","","26.9"],["Land - unimproved","\u2014","","\u2014","","","1,066","","1.0"],["Total","$","36,970","","100.0","%","","$","99,164","","100.0","%"]] [[/GREPCENT_TABLE]] 43 [[GREPCENT_TABLE]] [["(dollars in thousands; unaudited)","December 31, 2024","","December 31, 2023"],["County","Amount","Percent of Construction Loans","","Amount","Percent of Construction Loans"],["San Francisco","$","24,706","","66.8","%","","$","43,341","","43.7","%"],["Contra Costa","4,682","","12.7","","","1,184","","1.2"],["Marin","2,995","","8.1","","","4,542","","4.6"],["Napa","2,326","","6.3","","","\u2014","","\u2014"],["Placer","2,261","","6.1","","","\u2014","","\u2014"],["Alameda","\u2014","","\u2014","","","32,808","","33.1"],["Solano","\u2014","","\u2014","","","11,372","","11.5"],["San Mateo","\u2014","","\u2014","","","4,851","","4.9"],["Other","","\u2014","","","1,066","","1.0"],["Total","$","36,970","","100.0","%","","$","99,164","","100.0","%"]] [[/GREPCENT_TABLE]] Construction loans decreased by $62.2 million in 2024, compared to a decrease of $15.2 million in 2023. The decrease in 2024 was primarily due to $44.5 million in conversions to commercial real estate financing following completion of construction and $15.4 million in payoffs. These decreases were partially offset by $11.5 million in new loans and $4.9 million in advances on existing construction loans. The decrease in 2023 was primarily due to $22.2 million in payoffs and $16.9 million in conversions to commercial real estate financing. These decreases were partially offset by $24.5 million in advances on existing construction loans. Undisbursed construction loan commitments at December 31, 2024 and 2023 were $8.3 million and $13.9 million, respectively. The following table presents the amortized costs and maturity distribution of our loans by portfolio class as of December 31, 2024 based on their contractual maturity dates. Maturities do not include scheduled payments or potential prepayments. Loan Maturity Distribution [[GREPCENT_TABLE]] [["","Due within 1 year","Due after 1 through 5 years","Due after 5 through 15 years","Due after 15 years","Total"],["(in thousands; unaudited)"],["Commercial and industrial","$","65,993","","$","65,470","","$","19,138","","$","1,662","","$","152,263"],["Real estate"],["Commercial owner-occupied","20,838","","99,983","","194,192","","6,949","","321,962"],["Commercial non-owner occupied","123,131","","480,700","","652,490","","17,275","","1,273,596"],["Construction 1","31,032","","5,938","","\u2014","","\u2014","","36,970"],["Home equity","4,251","","22,247","","61,106","","721","","88,325"],["Other residential","\u2014","","199","","1,455","","141,553","","143,207"],["Installment and other consumer loans","2,615","","8,637","","55,586","","95","","66,933"],["Total","$","247,860","","$","683,174","","$","983,967","","$","168,255","","$","2,083,256"]] [[/GREPCENT_TABLE]] 1 Construction loans that mature after 5 years are structured to convert to permanent financing after the initial construction period. The following table shows the mix of variable-rate loans and fixed-rate loans due after one year by portfolio class as of December 31, 2024. The large majority of variable-rate loans are tied to independent indices, such as the Prime Rate or a Treasury Constant Maturity Rate. Most loans with original terms of more than five years have provisions for the fixed rates to reset, or convert to variable rates, after three, five or seven years. These loans are included in the variable-rate balances below. 44 Loan Interest Rate Sensitivity - Due After One Year [[GREPCENT_TABLE]] [["(in thousands; unaudited)","Fixed","Variable","Total"],["Commercial and industrial","$","62,598","","$","23,672","","$","86,270"],["Real estate"],["Commercial owner-occupied","170,803","","130,321","","301,124"],["Commercial non-owner occupied","718,343","","432,122","","1,150,465"],["Construction","5,365","","573","","5,938"],["Home equity","540","","83,534","","84,074"],["Other residential","31,689","","111,518","","143,207"],["Installment and other consumer loans","46,416","","17,902","","64,318"],["Total","$","1,035,754","","$","799,642","","$","1,835,396"]] [[/GREPCENT_TABLE]] Allowance for Credit Losses on Loans The allowance for credit losses on loans is calculated in accordance with ASC 326 based on management's best estimate of current expected credit losses over the loans' contractual terms, adjusted for estimated prepayments where applicable. The contractual terms exclude anticipated extensions, renewals and modifications. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. All specifically identifiable and quantifiable losses are charged off against the allowance. The ultimate adequacy of the allowance depends on a variety of complex factors, some of which may be beyond management's control, such as volatility in the real estate market, changes in interest rates and economic and political environments. Based on the current conditions of the loan portfolio and reasonable and supportable forecasts, management believes that the $30.7 million allowance for credit losses at December 31, 2024 was adequate to absorb expected credit losses in our loan portfolio. For additional information on our allowance for credit losses methodology, refer to Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report. The ratio of the allowance for credit losses to total loans was 1.47% at December 31, 2024 and 1.21% at December 31, 2023. The $5.5 million increase in the allowance for credit losses on loans in 2024 was largely due to the specific allowance increase of $6.7 million. This was mainly due to the increased reserve of $5.2 million for one non-owner occupied commercial real estate loan totaling $16.7 million that, although current, had experienced a deterioration in the collateral value and, therefore, a material increase in the loan-to-value. For further information, refer to the Provision for Credit Losses section above, and Notes 1 and 3 to the Consolidated Financial Statements in ITEM 8 of this report. The following table presents the allowance for credit losses on loans by loan portfolio class in accordance with the methodology described in Note 1 to the Consolidated Financial Statements in ITEM 8 of this report, as well as the percentage of total loans in each of the same loan portfolio classes as of December 31, 2024 and 2023. 45 [[GREPCENT_TABLE]] [["Allocation of the Allowance for Credit Losses"],["(dollars in thousands; unaudited)","Commercial and industrial","Commercial real estate, owner-occupied","Commercial real estate, non-owner occupied","Construction","Home equity","Other residential","Installment and other consumer","Unallocated","Total"],["December 31, 2024"],["Modeled expected credit losses","$","759","","$","1,241","","$","7,632","","$","41","","$","620","","$","1,133","","$","625","","$","\u2014","","$","12,051"],["Qualitative adjustments","672","","1,120","","6,528","","597","","64","","8","","268","","1,255","","10,512"],["Specific allocations","145","","\u2014","","7,933","","\u2014","","\u2014","","\u2014","","15","","\u2014","","8,093"],["Total","$","1,576","","$","2,361","","$","22,093","","$","638","","$","684","","$","1,141","","$","908","","$","1,255","","$","30,656"],["Loans as a percent of total loans","7.3","%","15.5","%","61.1","%","1.8","%","4.2","%","6.9","%","3.2","%","N/A","100.0","%"],["December 31, 2023"],["Modeled expected credit losses","$","897","","$","1,270","","$","7,380","","$","185","","$","482","","$","619","","$","634","","$","\u2014","","$","11,467"],["Qualitative adjustments","622","","1,205","","6,327","","1,647","","70","","33","","342","","2,038","","12,284"],["Specific allocations","193","","1","","1,226","","\u2014","","\u2014","","1","","\u2014","","\u2014","","1,421"],["Total","$","1,712","","$","2,476","","$","14,933","","$","1,832","","$","552","","$","653","","$","976","","$","2,038","","$","25,172"],["Loans as a percent of total loans","7.4","%","16.1","%","58.8","%","4.8","%","4.0","%","5.7","%","3.2","%","N/A","100.0","%"]] [[/GREPCENT_TABLE]] The table below shows the activity in the allowance for credit losses for each of the three years presented below. Allowance for Credit Losses on Loans Rollforward [[GREPCENT_TABLE]] [["(dollars in thousands; unaudited)","2024","2023","2022"],["Beginning balance","$","25,172","","$","22,983","","$","23,023"],["Provision for (reversal of) credit losses","5,550","","2,575","","(63)"],["Loans charged-off:"],["Commercial and industrial","(41)","","(11)","","(9)"],["Real estate:"],["Commercial real estate, owner-occupied","\u2014","","(406)","","\u2014"],["Installment and other consumer","(58)","","(24)","","(23)"],["Total loans charged-off","(99)","","(441)","","(32)"],["Loans recovered:"],["Commercial and industrial","21","","29","","22"],["Real estate:"],["Commercial, non-owner occupied","8","","\u2014","","\u2014"],["Construction","\u2014","","25","","33"],["Installment and other consumer","4","","1","","\u2014"],["Total loans recovered","33","","55","","55"],["Net loans (charged-off) recovered","(66)","","(386)","","23"],["Ending balance","$","30,656","","$","25,172","","$","22,983"],["Total loans, at amortized cost","$","2,083,256","","$","2,073,720","","$","2,092,546"],["Average total loans outstanding during year","$","2,074,971","","$","2,099,719","","$","2,175,259"],["Ratio of allowance for credit losses to total loans at end of year","1.47","%","1.21","%","1.10","%"],["Net charge-offs (recoveries) to average loans","NM","0.02","%","NM"]] [[/GREPCENT_TABLE]] NM - Not meaningful. 46 The following table shows non-performing assets as of December 31, 2024 and 2023. Non-Performing Assets [[GREPCENT_TABLE]] [["(dollars in thousands; unaudited)","December 31, 2024","December 31, 2023"],["Non-accrual loans:"],["Commercial and industrial","$","2,845","","$","4,008"],["Real estate:"],["Commercial, owner-occupied","1,537","","434"],["Commercial, non-owner occupied","28,525","","3,081"],["Home equity","752","","469"],["Installment and other consumer","222","","\u2014"],["Total non-accrual loans","$","33,881","","$","7,992"],["Other real estate owned","$","\u2014","","$","\u2014"],["Repossessed personal properties","1","","\u2014"],["Total non-performing assets","$","33,882","","$","7,992"],["Criticized and classified loans:"],["Special mention","$","108,916","","$","135,171"],["Substandard","$","45,104","","$","32,324"],["Doubtful","$","\u2014","","$","\u2014"],["Allowance for credit losses to non-accrual loans","0.90x","3.15x"],["Non-accrual loans to total loans","1.63","%","0.39","%"],["Non-performing assets to total assets","0.92","%","0.21","%"]] [[/GREPCENT_TABLE]] Non-Accrual Loans Non-accrual loans increased by $25.9 million in 2024, primarily due to three relationships designated as non-accrual in the second and third quarters. One non-owner occupied commercial real estate loan was due to material declines in collateral value, as mentioned in earlier sections. Another was a commercial relationship which had a material paydown in the fourth quarter of 2024. The third relationship was another non-owner occupied commercial real estate loan whose renewal negotiations remain ongoing. This property became 100% occupied with a conforming debt service coverage in the fourth quarter. Approximately 91% of the non-accrual loans as of December 31, 2024 were well-secured by either commercial or residential real estate. Non-accrual loans in 2023 were comprised of mostly of commercial and industrial and non-owner occupied commercial real estate loans. Over 66% of the non-accrual loans as of December 31, 2023 were well-secured by either commercial or residential real estate. Criticized and Classified Loans Loans designated as special mention, which are not considered adversely classified, decreased by $26.3 million in 2024, primarily due to net downgrades of $2.6 million from the pass or watch category and downgrades of $25.0 million to substandard. Of the downgrades to special mention, $15.3 million was attributed to one recently completed construction loan that will be marketed for sale or paid down to a conforming debt service level. The remaining balance changes consisted of paydowns, payoffs and upgrades from substandard risk rating. Loans designated as special mention, which are not considered adversely classified, increased by $75.0 million in 2023, primarily due to downgrades from the watch category to special mention. The majority of the downgrades from watch to special mention were not necessarily due to worsening conditions or deterioration in the borrowers' financial condition but to a lack of meaningful improvement over the most recent quarters. Of the $92.5 million in downgrades to special mention in 2023, $83.2 million (or 90%) were collateralized by real estate. These increases were partially offset by $7.7 million in paydowns and payoffs, $6.0 million in downgrades from special mention to substandard, and $3.8 million in upgrades to a pass risk rating. Loans classified as substandard increased by $12.8 million in 2024, primarily due to downgrades from special mention totaling $25.0 million and from pass totaling $2.7 million, partially offset by $11.9 million in paydowns and payoffs and $2.8 million in upgrades to pass or special mention. Of the downgraded loans, $17.1 million (or 82%) 47 was secured by commercial real estate, $3.5 million was to commercial borrowers, and the remaining $222 thousand were personal loans. Loans classified as substandard increased by $4.2 million in 2023, primarily due to downgrades from special mention totaling $6.0 million and from pass totaling $3.7 million, partially offset by $4.5 million in paydowns and payoffs and $939 thousand in upgrades to pass. Of the downgraded loans, $7.0 million (or 72%) was secured by commercial real estate, and the remaining $2.7 million was to commercial borrowers. Refer to Note 3 to the Consolidated Financial Statements in ITEM 8 of this report for an allocation of criticized and classified loans by loan portfolio class. Other Assets BOLI totaled $71.0 million as of December 31, 2024, compared to $68.1 million at December 31, 2023. The $2.9 million increase was primarily due to the purchase of $1.2 million in new BOLI policies and earnings from the BOLI policies. Interest receivable and other assets totaled $72.3 million and $74.9 million at December 31, 2024 and 2023, respectively. The $2.7 million decrease was primarily due to a $3.7 million decrease in net deferred tax assets, as discussed below. Net deferred tax assets totaled $30.6 million and $34.3 million at December 31, 2024 and 2023, respectively. Deferred tax assets consist primarily of tax benefits expected to be realized in future periods related to temporary differences such as allowances for credit losses and unfunded loan commitments, net operating loss carryforwards, and deferred compensation and salary continuation obligations. The $3.7 million decrease in 2024 was primarily due to an $8.4 million decrease in deferred tax assets related to changes in unrealized losses on available-for-sale investment securities. The decreases in net deferred tax assets was partially offset by a $3.2 million increase in deferred tax assets related to net operating loss carryforwards and $1.6 million increase in the allowance for credit losses on loans and unfunded loan commitments. Management believes deferred tax assets will be realizable due to our expectation that earnings will continue to be at a level adequate to realize such tax benefits. Therefore, no valuation allowance was established as of December 31, 2024 or 2023. For additional information, refer to Note 11 to the Consolidated Financial Statements in ITEM 8 of this report. We held $16.7 million of FHLB stock recorded at cost in other assets at both December 31, 2024 and 2023. We received $1.5 million, $1.3 million and $1.0 million in cash dividends in 2024, 2023 and 2022, respectively. For additional information, refer to Note 2 to the Consolidated Financial Statements in ITEM 8 of this report. Deposits Deposits decreased by $70.1 million, to $3.220 billion at December 31, 2024, compared to $3.290 billion at December 31, 2023. Non-interest bearing deposits declined to 43.5% of total deposits at December 31, 2024, compared to 43.8% at December 31, 2023. Deposit outflows included transfers to investment accounts in our wealth management services team and other outflows that did not meet our disciplined pricing strategy given our strong liquidity position. We continued our disciplined and focused approach to relationship management and customer outreach, adding approximately 4,700 new accounts in 2024. As of December 31, 2024, 59% of deposit balances were held in business accounts, with average balances of $127 thousand per account. The remaining 41% were consumer accounts, with average balances of $40 thousand per account. The largest depositor represented 1.3% of total deposits, and the combined four largest depositors represented 4.8% of total deposits. Balances in the reciprocal deposit network program decreased by $19.3 million during 2024 to $404.7 million as of December 31, 2024. Costs associated with network deposits are recorded as non-interest expense and totaled $3.5 million, $2.8 million, and $258 thousand for the years ended December 31, 2023, 2022 and 2021, respectively. Estimated uninsured and/or uncollateralized deposits totaled 29% of total deposits as of December 31, 2024, compared to 28% as of December 31, 2023. 48 Our liquidity policies require that compensating cash balances be held against concentrations over a certain level. See ITEM 1A, Risk Factors, for a discussion of potential risks associated with concentrations and volatility due to the activity of our large deposit customers. Distribution of Average Deposits The table below shows the relative composition of our average deposits for 2024 and 2023. For average rates paid on deposits, refer to the Average Statements of Condition and Analysis of Net Interest Income table in ITEM 7- Management's Discussion and Analysis of Financial Condition and Results of Operations. [[GREPCENT_TABLE]] [["","For the year ended December 31,"],["","2024","","2023"],["(in thousands; unaudited)","Average Amount","Percent of Total","","Average Amount","Percent of Total"],["Non-interest bearing","$","1,448,346","","44.1","%","","$","1,656,047","","49.0","%"],["Interest-bearing transaction","193,456","","5.9","","","240,524","","7.1"],["Savings","227,061","","6.9","","","281,611","","8.3"],["Money market 1","1,155,016","","35.1","","","1,013,620","","30.0"],["Time deposits, including CDARS","262,482","","8.0","","","191,056","","5.6"],["Total average deposits","$","3,286,361","","100.0","%","","$","3,382,858","","100.0","%"]] [[/GREPCENT_TABLE]] 1 Money market balances include Insured Cash Sweep® ("ICS") in both 2024 and 2023. Demand Deposit Marketplace SM ("DDM") and ICS balances are discussed in Note 6 to the Consolidated Financial Statements in ITEM 8 of this report. Maturities of Uninsured Time Deposits The following table shows time deposits by account that are in excess of $250,000 by time remaining to maturity at December 31, 2024. [[GREPCENT_TABLE]] [["","December 31, 2024"],["(in thousands; unaudited)","Total","Uninsured Portion"],["Three months or less","$","48,329","","$","26,829"],["Over three months through six months","39,264","","21,264"],["Over six months through twelve months","17,769","","8,519"],["Over twelve months","2,949","","1,699"],["Total","$","108,311","","$","58,311"]] [[/GREPCENT_TABLE]] Network Deposits Our deposit portfolio includes deposits offered through the Promontory Interfinancial Network that are comprised of Certificate of Deposit Account Registry Service® ("CDARS") balances included in time deposits and Insured Cash Sweep® ("ICS") balances included in money market deposits. In addition, we offer deposits through Reich & Tang Deposit Networks, LLC, comprised of Demand Deposit MarketplaceSM ("DDM") balances. Through these two networks we are able to offer our customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When we place funds through CDARS, ICS and DDM, on behalf of a customer, we have the option of receiving matching deposits through the network's reciprocal deposit program, or placing deposits "one-way" for which we receive no matching deposits. We consider reciprocal deposits to be in-market deposits, as distinguished from traditional out-of-market brokered deposits. The following table shows the composition of our network deposits at December 31, 2024 and 2023. [[GREPCENT_TABLE]] [["(in thousands)","December 31, 2024","December 31, 2023"],["","Reciprocal 1","One-Way 1","Reciprocal 1","One-Way 1"],["CDARS","$","38,885","","$","\u2014","","$","46,162","","$","2,164"],["ICS","240,661","","\u2014","","245,577","","\u2014"],["DDM","125,153","","\u2014","","132,276","","\u2014"],["Total network deposits","$","404,699","","$","\u2014","","$","424,015","","$","2,164"],["1 Reciprocal deposits are on-balance-sheet while one-way deposits are off-balance-sheet."]] [[/GREPCENT_TABLE]] Borrowings 49 As of December 31, 2024 and 2023, our borrowing capacity with the Federal Home Loan Bank ("FHLB") under secured lines of credit totaled $948.1 million and $1.009 billion, respectively. The Bank had a line of credit through the Discount Window at the Federal Reserve Bank of San Francisco ("FRBSF") totaling $358.0 million as of December 31, 2024, secured by investment securities and residential loans. As of December 31, 2023, the Bank had a line of credit through the Discount Window totaling $64.0 million, secured by residential loans, and a $270.2 million line under the Federal Reserve's temporary Bank Term Funding Program ("BTFP") based on the par values of pledged investment securities. In addition, as of December 31, 2024 and 2023 we had $125.0 million and $135.0 million, respectively, in unsecured lines of credit with correspondent banks to cover short-term borrowing needs. As of December 31, 2024, the Bank had no outstanding borrowings, compared to $26.0 million outstanding in short-term borrowings under the BTFP facility at an average rate of 4.83% as of December 31, 2023. Other bank lines of credit were not utilized as of December 31, 2024 or 2023. For additional information, see Note 7, Borrowings and Other Obligations, in ITEM 8 of this report. Deferred Compensation Obligations We maintain a non-qualified, unfunded deferred compensation plan for certain key management personnel. Under this plan, participating employees may defer compensation, which will entitle them to receive certain payments for up to, but not exceeding, fifteen years commencing upon retirement, death, disability or termination of employment. A similar Deferred Director Fee Plan entitles participating members of the Board of Directors to receive payments as elected by the participant upon separation from service, death, disability or termination of service. At December 31, 2024 and 2023, our aggregate payment obligations under both plans totaled $6.0 million and $6.6 million, respectively, and was recorded in interest payable and other liabilities in the consolidated statements of condition. Decreases in the deferred compensation plans in 2024 mainly resulted from increases in benefit payments to terminated employees. We have entered into supplemental executive retirement plans ("SERPs") with a select group of executive officers, providing for certain retirement benefits at age 65 and reduced benefits upon early retirement.  The annual amount of benefits in either pre-retirement scenario is based on a vesting schedule unique to each executive. The SERP also provides for lump sum benefits in the event of a change in control followed by the termination of the executive. Payments under the SERPs are expected to be funded by income from bank-owned life insurance policies. On December 31, 2024 and 2023, our liabilities under the SERPs totaled $4.6 million and $4.5 million, respectively, and were recorded in interest payable and other liabilities in the consolidated statements of condition. The SERPs are unfunded and non-qualified for tax purposes and subject to Title I of the Employee Retirement Income Security Act of 1974. For additional information, see Note 10 to the Consolidated Financial Statements in ITEM 8 of this report. Capital Adequacy As discussed in Note 15 to the Consolidated Financial Statements in ITEM 8 of this report, the Bank's capital ratios were above regulatory guidelines to be considered "well capitalized" and Bancorp's ratios exceeded the required minimum ratios for capital adequacy purposes. For further discussion of bank capital requirements, refer to the SUPERVISION AND REGULATION section in ITEM 1 of this report. The total risk-based capital ratio for Bancorp was 16.54% at December 31, 2024, compared to 16.89% at December 31, 2023. The reduction is primarily related to losses realized on securities sales in 2024. 50 Bancorp's tangible common equity to tangible assets ("TCE ratio") increased to 9.93% at December 31, 2024, from 9.73% at December 31, 2023, primarily due to due to the reduction in total assets. Bancorp's TCE ratio, net of after-tax unrealized losses on held-to-maturity securities as if the losses were realized, was 7.85% as of December 31, 2024, compared to 7.80% at December 31, 2023 (refer to the discussion and reconciliation of this non-GAAP financial measure in the section below entitled Statement Regarding Use of Non-GAAP Financial Measures). The Bank's total risk-based capital ratio decreased to 16.13% at December 31, 2024, from 16.62% at December 31, 2023. Bancorp's share repurchase program and activity are discussed in detail in ITEM 5 and in Note 8 to the Consolidated Financial Statements in ITEM 8 of this report. We expect to maintain strong capital levels and do not expect that we will be required to raise additional capital in 2025. Our anticipated sources of capital in 2025 include future earnings and shares issued under the stock-based compensation program. Liquidity and Capital Resources The goal of liquidity management is to provide adequate funds to meet loan demand and to fund operating activities and deposit withdrawals. We accomplish this goal by maintaining an appropriate level of liquid assets and formal lines of credit with the FHLB, FRBSF and correspondent banks that enable us to borrow funds as seen in the table below and discussed in Note 7 to the Consolidated Financial Statements in ITEM 8 of this report. Our Asset Liability Management Committee ("ALCO"), which is comprised of Bank directors and the Bank's Chief Executive Officer, is responsible for approving and monitoring our liquidity targets and strategies. The Bank has long-established minimum liquidity requirements that are regularly monitored using metrics and tools similar to those used by larger banks, such as the liquidity coverage ratio, and multi-scenario, long-horizon stress tests. Our contingency funding plan provides for early detection of potential liquidity issues in the market or the Bank and institutes prompt responses that may prevent or alleviate a liquidity crisis. Management monitors liquidity daily and regularly adjusts our position based on current and future liquidity needs. We also have relationships with third-party deposit networks and can adjust the placement of our deposits via reciprocal or one-way sales as part of our cash management strategy, as discussed in Note 6 to the Consolidated Financial Statements in ITEM 8 of this report. Net available funding sources, including unrestricted cash, unencumbered available-for-sale securities, and total available borrowing capacity, totaled $1.849 billion, or 57% of total deposits, and 197% of estimated uninsured and/or uncollateralized deposits as of December 31, 2024. The following table details the components of our contingent liquidity sources as of December 31, 2024. [[GREPCENT_TABLE]] [["(in thousands)","Total Available","Amount Used","Net Availability"],["Internal Sources"],["Unrestricted cash 1","$","111,128","","N/A","$","111.128"],["Unencumbered securities at market value","306,773","","N/A","306.773"],["External Sources"],["FHLB line of credit","948,127","","$","\u2014","","948.127"],["FRB line of credit","357,970","","\u2014","","357.97"],["Lines of credit at correspondent banks","125,000","","\u2014","","125"],["Total Liquidity","$","1,848.998","","$","\u2014","","$","1,848.998"]] [[/GREPCENT_TABLE]] 1 Excludes cash items in transit as of December 31, 2024. Note: Brokered deposits available through third-party networks are not included above. We obtain funds from the repayment and maturity of loans, deposit inflows, investment securities sales, maturities and paydowns, federal funds purchases, FRBSF and FHLB advances, other borrowings, and cash flow from operations.  Although available as a liquidity source, we have not chosen to utilize brokered deposits. Our primary uses of funds are the origination of loans, the purchase of investment securities and loans, withdrawals of deposits, maturities of certificates of deposit, repayment of borrowings, dividends to common stockholders, share repurchases and operating expenses. Customer deposits are a significant component of our daily liquidity position. The attraction and retention of deposits depend upon the variety and effectiveness of our customer account products, service and convenience, rates paid to customers, and our financial strength. The cash cycles and unique business activities of some of our large commercial depositors may cause short-term fluctuations in their deposit balances held with us. 51 Our cash and cash equivalents increased by $106.9 million to $137.3 million at December 31, 2024, from $30.5 million at December 31, 2023. The most significant sources of liquidity during 2024 were proceeds from sales, principal paydowns, calls and maturities of investment securities totaling $370.4 million, and $28.4 million in net cash was provided by operating activities. Significant uses of liquidity during 2024 were $163.8 million in investment securities purchased, $70.1 million in withdrawals of deposits, $26.0 million in repayments of short-term borrowings, and $9.7 million in purchased loan pool, loan originations, and unfunded loan commitment advances, net of principal collected. Additionally other uses included $16.2 million in cash dividends paid on common stock to our shareholders, and $4.2 million in common stock repurchases. Refer to the Consolidated Statement of Cash Flows in this Form 10-K for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position, as detailed in this report, and contingent funding sources are adequate to support our operational needs. Unfunded credit commitments, as discussed in Note 16 to the Consolidated Financial Statements in ITEM 8 of this report, totaled $460.7 million at December 31, 2024. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, principal paydowns of investment securities, and liquid assets. Over the next twelve months, $230.2 million of time deposits will mature. We expect that a high percentage of these funds will remain with the Bank either through renewals or shifts to other deposit products. Any outflows can be absorbed by the Bank's excess liquidity. We believe our emphasis on local deposits, combined with our immediately available funding sources, provides a very stable base for our liquidity needs. We had no outstanding borrowings under our credit facilities as of December 31, 2024, and $26.0 million as of December 31, 2023, as discussed in Note 7 to the Consolidated Financial Statements in ITEM 8 of this report. Because Bancorp is a holding company and does not conduct regular banking operations, its primary sources of liquidity are dividends from the Bank. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net profits from the previous three fiscal years less the amount of dividends paid during that period. The Bank received approval from the State of California - Department of Financial Protection and Innovation on May 30, 2024, for a dividend of $19.0 million which was paid to Bancorp on June 24, 2024. The primary uses of funds for Bancorp are shareholder dividends, share repurchases and ordinary operating expenses.  Bancorp held $10.3 million in cash as of December 31, 2024, which is expected to cover cash needs into the second quarter of 2025. Statement Regarding Use of Non-GAAP Financial Measures Financial results are presented in accordance with GAAP and with reference to certain non-GAAP financial measures. Management believes that, given industry turmoil that largely began in the first quarter of 2023, the presentation of Bancorp's non-GAAP TCE ratio reflecting the after tax impact of unrealized losses on held-to-maturity securities provides useful supplemental information to investors because it reflects the level of capital remaining after a hypothetical liquidation of the entire securities portfolio. In addition, management believes that providing selected financial measures excluding the loss on sale of securities discussed above is useful to investors as the strategic short-term loss taken for long-term profitability makes the operational performance difficult to compare to the prior period. The year 2022 did not have a material loss on sale of securities and was therefore excluded below. Because there are limits to the usefulness of this or any other non-GAAP measure to investors, Bancorp encourages readers to consider its annual and quarterly consolidated financial statements and notes related thereto in their entirety, as filed with the Securities and Exchange Commission, and not to rely on any single financial measure. A reconciliation of the GAAP financial measures to comparable non-GAAP financial measures is presented below. 52 Reconciliation of GAAP and Non-GAAP Financial Measures [[GREPCENT_TABLE]] [["(in thousands, unaudited)","","December 31, 2024","December 31, 2023"],["Tangible Common Equity - Bancorp"],["Total stockholders' equity","","$","435,407","","439,062"],["Goodwill and core deposit intangible","","(75,546)","","(76,520)"],["Total TCE","a","359,861","","362,542"],["Unrealized losses on HTM securities, net of tax1","","(89,171)","","(86,500)"],["Unrealized losses on HTM securities included in AOCI, net of tax2","","7,701","","8,761"],["TCE, net of unrealized losses on HTM securities (non-GAAP)","b","$","278,391","","284,803"],["Total assets","","$","3,701,335","","3,803,903"],["Goodwill and core deposit intangible","","(75,546)","","(76,520)"],["Total tangible assets","c","3,625,789","","3,727,383"],["Unrealized losses on HTM securities, net of tax1","","(89,171)","","(86,500)"],["Unrealized losses on HTM securities included in AOCI, net of tax2","","7,701","","8,761"],["Total tangible assets, net of unrealized losses on HTM securities (non-GAAP)","d","$","3,544,319","","$","3,649,644"],["Bancorp TCE ratio","a / c","9.93","%","9.73","%"],["Bancorp TCE ratio, net of unrealized losses on HTM securities (non-GAAP)","b / d","7.85","%","7.80","%"],["Tangible Book Value Per Share"],["Common shares outstanding","e","16,089","","16,158"],["Book value per share","","$","27.06","","$","27.17"],["Tangible book value per share","a / e","$","22.37","","$","22.44"],["1 Unrealized losses on held-to-maturity securities as of December 31, 2024 and December 31, 2023 of $126.6 million and $122.8 million, respectively, including the unrealized losses that resulted from the transfer of securities from AFS to HTM, net of an estimated $37.4million and $36.3 million, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56%. 2 The remaining unrealized losses that resulted from the transfer of securities from AFS to HTM, net of an estimated $3.2 million and $3.7 million, respectively, in deferred tax benefits based on a blended state and federal statutory tax rate of 29.56% are added back as they are already included in AOCI."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(in thousands, except per share amounts; unaudited)","","","Years ended"],["Net (loss) income","","","","December 31, 2024","December 31, 2023"],["Net (loss) income (GAAP)","","","","$","(8,409)","","$","19,895"],["Adjustments:"],["Losses on sale of investment securities from portfolio repositioning","","","","32,542","","5,893"],["Related income tax benefit","","","","(9,619)","","(1,742)"],["Adjustments, net of taxes","","","","22,923","","4,151"],["Comparable net income (non-GAAP)","","","","$","14,514","","$","24,046"],["Diluted (loss) earnings per share"],["Weighted average diluted shares","","","","16,042","","16,026"],["Diluted (loss) earnings per share (GAAP)","","","","$","(0.52)","","$","1.24"],["Comparable diluted earnings per share (non-GAAP)","","","","$","0.90","","$","1.50"],["Return on average assets"],["Average assets","","","","$","3,773,882","","$","4,077,707"],["Return on average assets (GAAP)","","","","(0.22)","%","0.49","%"],["Comparable return on average assets (non-GAAP)","","","","0.38","%","0.59","%"],["Return on average equity"],["Average stockholders' equity","","","","$","435,070","","$","423,784"],["Return on average equity (GAAP)","","","","(1.93)","%","4.69","%"],["Comparable return on average equity (non-GAAP)","","","","3.34","%","5.67","%"],["Efficiency ratio"],["Non-interest expense","","","","$","81,818","","$","79,481"],["Net interest income","","","","$","94,660","","$","102,761"],["Non-interest income (GAAP)","","","","$","(21,360)","","$","4,989"],["Losses on sale of investment securities from portfolio repositioning","","","","32,542","","5,893"],["Non-interest income (non-GAAP)","","","","$","11,182","","$","10,882"],["Efficiency ratio (GAAP)","","","","111.62","%","73.76","%"],["Comparable efficiency ratio (non-GAAP)","","","","77.30","%","69.94","%"]] [[/GREPCENT_TABLE]] 53