EDGAR 10-K Filing

Company CIK: 1137547
Filing Year: 2025
Filename: 1137547_10-K_2025_0001137547-25-000039.json

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ITEM 1. BUSINESS
Item 1 - Business
General
United Security Bancshares is a California corporation incorporated in March 2001 and is registered with the Board of Governors of the Federal Reserve System (FRB) as a bank holding company under the Bank Holding Company Act of 1956, as amended (BHCA). The common stock of United Security Bancshares is listed on Nasdaq under the symbol “UBFO.”
United Security Bank was chartered under the laws of the State of California in 1987 as a commercial bank. On June 12, 2001, United Security Bank reorganized into the bank holding company form of ownership and thereby became the wholly-owned subsidiary of United Security Bancshares and each share of United Security Bank stock was exchanged for a share of United Security Bancshares stock on a one-for-one basis. The principal business of United Security Bancshares is to serve as the holding company for United Security Bank.
References to the “Bank” refer to United Security Bank together with its wholly-owned subsidiary, York Monterey Properties. References to “we,” “us,” or the “Company” refer to United Security Bancshares together with its subsidiaries on a consolidated basis. References to the “Holding Company,” refer to United Security Bancshares, the parent company, on a stand-alone basis.
United Security Bank
The Bank is a California state-chartered bank headquartered in Fresno, California. At December 31, 2024, the Bank operates three branches (including its main office), one construction lending office, and one commercial lending office in Fresno, California and one branch each in Oakhurst, Caruthers, San Joaquin, Firebaugh, Coalinga, Bakersfield, Taft, Campbell, Mendota, and Fowler, California. The Bank has Interactive Teller Machines (ITMs) at all branch locations and nine off-site ITMs at non-branch locations. In addition, the Holding Company and the Bank have administrative headquarters located at 2126 Inyo Street, Fresno, California, 93721.
York Monterey Properties, Inc.
York Monterey Properties, Inc. (YMP) was incorporated in California on April 17, 2019, for the purpose of holding specific parcels of real estate acquired by the Bank through, or in lieu of, foreclosures in Monterey County. These properties exceeded the 10-year regulatory holding period for other real estate owned, or “OREO.” YMP was funded with a $250,000 cash investment and the transfer of those parcels by the Bank to YMP. In December 2021, $805,000 in additional funding was transferred to YMP to fund estimated expenses over a five-year period. As of December 31, 2024, these properties are included within the consolidated balance sheets as part of “other real estate owned.”
USB Capital Trust II
During July 2007, the Company formed USB Capital Trust II as a wholly-owned special purpose entity for the purpose of issuing Trust Preferred Securities. USB Capital Trust II is a Variable Interest Entity and a deconsolidated entity pursuant to current accounting standards related to variable interest entities. On July 23, 2007, USB Capital Trust II issued $15 million in Trust Preferred Securities. These securities have a thirty-year maturity and bear a floating rate of interest (repricing quarterly) of 1.29% over the forward 3-month SOFR rate. Interest is payable quarterly.
Concurrent with the issuance of the Trust Preferred Securities, USB Capital Trust II used the proceeds of the Trust Preferred Securities offering to purchase a like amount of junior subordinated debentures (TRUPs) issued by the Company. The Company pays interest on the junior subordinated debentures to USB Capital Trust II, which represents the sole source of dividend distributions to the holders of the Trust Preferred Securities. During 2015, $3.0 million of the $15.0 million principal balance of the subordinated debentures related to the Trust Preferred Securities was purchased by the Bank and subsequently purchased by the Company from the Bank. The Company redeemed the $3.0 million in par value of the subordinated debentures, resulting in a remaining contractual principal balance of $12.0 million since year-end 2015. The Company may redeem the junior subordinated debentures at any time at par.
The following discussion of services should be read in conjunction with “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Bank Services
The Bank offers a full range of commercial banking services primarily to the business and professional community and individuals located in Fresno, Madera, Kern, and Santa Clara Counties, including a variety of deposit instruments including personal and business checking accounts and savings accounts, interest-bearing negotiable order of withdrawal (NOW) accounts, money market accounts, and time certificates of deposit. Most deposits are comprised of accounts from individuals and from small- and medium-sized, business-related sources.
The Bank also offers a full complement of lending products, including real estate loans, real estate construction loans, commercial and industrial loans, agricultural loans, and installment loans.
Real estate mortgage loans are secured by deeds of trust primarily on commercial property. The repayment of real estate mortgage loans generally is from the cash flow of the borrower. Commercial and industrial loans are diversified by industry. Loans may be originated in the Bank’s market area, purchased, or participated with other financial institutions outside the market area. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral. The remainder are unsecured. However, extensions of credit are predicated on the financial capacity of the borrower to repay. Repayment of commercial loans is generally from the cash flow of the borrower. Real estate construction loans consist of loans to residential and commercial contractors, which are secured by single-family residential or multi-family properties. All real estate loans have established equity requirements. The repayment of real estate construction loans is generally from long-term mortgages with other lending institutions. Agricultural loans are generally secured by land, equipment, inventory, and receivables. Repayment of agricultural loans is generally from the expected cash flow of the borrower.
While the Bank has a high concentration of commercial real estate loans, it is not in the business of making residential mortgage loans to individuals. The residential mortgage loan portfolio is primarily comprised of purchased fixed-rate 30-year residential mortgage pools. The Bank does not originate, or have in the loan portfolio, any subprime, Alt-A, or option adjustable-rate loans. The Bank does originate interest-only loans which are generally revolving lines of credit to commercial and agricultural businesses or for real estate development where the borrowers business may be seasonal or cash flows may be restricted until the completion of the project.
Loan participations are purchased from and sold to other financial institutions. The underwriting standards for loan participations and purchases are the same as non-participated loans, and are subject to the same limitations, collateral requirements, and borrower requirements.
In the normal course of business, the Bank makes various loan commitments, including granting customers collateralized and uncollateralized lines of credit, and incurs certain contingent liabilities. Due to the nature of the business of the Bank’s customers, there is no absolute predictability to the utilization of unused loan commitments, including collateralized and uncollateralized lines of credit, and, therefore, it is not possible to forecast the extent to which these commitments will be exercised within the current year. While no assurance can be provided, it is not believed that any such utilization will constitute a material liquidity demand.
In addition to the loan and deposit services discussed above, the Bank also offers a wide range of specialized services designed to attract and service the needs of commercial customers and account holders. These services include online banking, mobile banking, safe deposit boxes, wire transfers, ITM services, payroll direct deposit, cashier’s checks, and cash management services. While the Bank does not operate a trust department, arrangements with correspondent banks for trust services can be requested.
Competition and Market Share
The banking business in California as well as the Bank’s market area is highly competitive with respect to both loans and deposits. The Bank competes for loans and deposits with other commercial banks, savings and loan associations, money market funds, credit unions, and other financial institutions. The Bank competes for loans and deposits by offering competitive interest rates and by seeking to provide a higher level of personalized service than is generally offered by larger competitors. Regulatory restrictions on interstate bank branching and acquisitions and on the provision of certain financial services, such as securities underwriting and insurance, have been reduced or eliminated. The availability of online and mobile banking services continues to expand. Changes in laws and regulations governing the financial services industry cannot be predicted; however, past legislation has served to intensify the competitive environment. Many of the major commercial banks operating in the
Bank’s market areas offer certain services, such as trust and wealth management services, which the Bank does not offer directly. In addition, banks with larger capitalization have larger lending limits and are thereby able to serve larger customers.
The Bank’s primary market areas are Fresno, Madera, Santa Clara, and Kern County, California. There are 53 FDIC-insured financial institutions competing for business in those areas. The following table sets forth information regarding deposit market share and ranking by county as of June 30, 2024, which is the most current information available.
Rank Share
Fresno County 9th 4.18%
Madera County 5th 8.48%
Kern County 14th 0.66%
Santa Clara County 39th 0.01%
Total of Fresno, Madera, Kern, and Santa Clara Counties 18th 0.53%
Supervision and Regulation
Banking is a complex, highly regulated industry. Federal and state laws and the regulations of the federal and state bank regulatory agencies govern most aspects of a bank’s business, including capital adequacy ratios, reserves against deposits, limitations on the nature and amount of loans which may be made, the location of branch offices, borrowings, and dividends. The primary goals of banking laws and regulations are to maintain a safe and sound banking system, to protect depositors and the FDIC’s insurance fund, and to facilitate the conduct of sound monetary policy. In furtherance of these goals, Congress and the States have created several largely autonomous regulatory agencies and enacted numerous laws that govern banks, bank holding companies, and the financial services industry. Consequently, the growth and earnings performance of the Company and the Bank can be affected not only by management decisions and general economic conditions, but also by the requirements of applicable state and federal statutes, regulations, and the policies of various governmental regulatory authorities, including:
•The Federal Deposit Insurance Corporation, or FDIC,
•The California Department of Financial Protection and Innovation, or DFPI,
•The Federal Reserve Board, or FRB.
Changes in applicable law or regulations, and in their application by the regulatory agencies, whether as the result of changes in the political climate or otherwise, cannot be predicted and may have a material effect on the business, operations, and financial results of the Company or the Bank.
Described below are elements of selected laws and regulations applicable to the Company and/or the Bank. The descriptions are not intended to be complete and are qualified in their entirety by reference to the full text of the statutes and regulations described.
Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”),which was enacted in 2010, significantly revised and expanded the rulemaking, supervisory and enforcement authority of the federal bank regulatory agencies. The numerous rules and regulations being promulgated pursuant to the Dodd-Frank Act are impacting banks’ operations and compliance costs. Provisions of the Dodd-Frank Act include:
•revisions in the deposit insurance assessment base for FDIC insurance and the permanent increase in deposit insurance coverage to $250,000;
•reduced interchange fees on debit card transactions;
•interest payments on business checking accounts;
•the removal of barriers to interstate branching; and
•required disclosure and shareholder advisory votes on executive compensation.
Other provisions of the Dodd-Frank Act include:
•Capital Requirements. The Dodd-Frank Act: increased the minimum Tier 1 capital ratio from 4.00% to 6.00% of risk-weighted assets; created a new category and required 4.50% of risk-weighted assets ratio for “common equity Tier 1” as a subset of Tier 1 capital limited to common equity; established a minimum non-risk-based leverage
ratio set at 4.00%, eliminating a 3.00% exception for higher rated banks; changed the permitted composition of Tier 1 capital to exclude trust preferred securities (unless issued prior to May 19, 2010 by a bank holding company with less than $15 billion in assets), mortgage servicing rights and certain deferred tax assets and included unrealized gains and losses on available for sale debt and equity securities; added an additional capital conservation buffer of 2.5% of risk-weighted assets over each of the required capital ratios, which must be met to avoid limitations on the ability to pay dividends, repurchase shares or pay discretionary bonuses; changed the risk weights of certain assets for purposes of calculating the risk-based capital ratios for high volatility commercial real estate acquisition, development and construction loans, certain past due non-residential mortgage loans and certain mortgage-backed and other securities exposures.
•Deposit Insurance. The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund to 1.35% of insured deposits and eliminates the requirement that the FDIC pay dividends to insured depository institutions when the reserve ratio exceeds certain thresholds.
•Corporate Governance. The Dodd-Frank Act directed the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1.0 billion.
•Interstate Branching. The Dodd-Frank Act authorized national and state banks to establish branches in other states to the same extent as a bank chartered by that state would be permitted to branch.
•Consumer Financial Protection Bureau. The Dodd-Frank Act created an independent federal agency called the Consumer Financial Protection Bureau (CFPB), which has been granted broad rulemaking, supervisory, and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the Consumer Financial Privacy provisions of the GLBA, and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets. Smaller institutions are subject to rules promulgated by the CFPB but are still examined and supervised by their federal banking regulators for consumer compliance purposes. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act authorized the CFPB to establish certain minimum standards for the origination of residential mortgages including a determination of the borrower’s ability to repay. In addition, the Dodd-Frank Act allows borrowers to raise certain defenses to foreclosure if they receive any loan other than a “qualified mortgage” as defined by the CFPB. The Dodd- Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
•Final Volcker Rule. In December 2013, the federal bank regulatory agencies adopted final rules that implemented a part of the Dodd-Frank Act commonly referred to as the “Volcker Rule.” The final rules were amended in October 2019. Under these rules and subject to certain exceptions, banking entities, including the Bank, are restricted from engaging in activities that are considered proprietary trading and from sponsoring or investing in certain entities, including hedge or private equity funds that are considered “covered funds.” Banks that do not have significant trading activities, such as the Bank, will be assumed to operate under a presumption of compliance.
The Dodd-Frank Act also resulted in the creation of a new systemic risk oversight body, the Financial Stability Oversight Council to oversee and coordinate the efforts of the primary U.S financial regulatory agencies in establishing regulations to address financial stability matters.
The Dodd-Frank Act was enacted under the administration of former President Barack Obama. In 2018, the subsequent administration, under President Donald Trump, rolled back key pieces of the Dodd-Frank Act as part of its efforts to loosen regulatory restrictions on financial institutions including, but not limited to, easing the “Volker Rule,” stress tests, and other constraints on financial institutions. In response to the banking crisis of 2023, the Biden administration expressed a commitment to reemphasize restrictions on financial institutions which were loosened during the previous administration. However, due to a divided congress, Biden was unable to pass legislation strengthening banking regulations. Under the new Trump administration, it is believed that banking regulations may be loosened further. Less than a month into his term, he took steps to further lessen the Consumer Financial Protection Bureau (CFPB), a key provision of the Dodd-Frank Act, and has indicated further deregulation is in order. The Company cannot predict which provisions of the Dodd-Frank Act will be repealed, put in to effect, delayed, or enforced and, therefore, cannot predict the effect, if any, that the Dodd-Frank Act and regulations promulgated thereunder or actions initiated by the Biden administration will have on its future results of operations and financial condition.
The Company
General
The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended, and is registered with, and regulated and examined by, the Board of Governors of the Federal Reserve System, or FRB. The Company is subject to regulation by the Securities and Exchange Commission (SEC) and to the disclosure and regulatory requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, as the Company lists its common stock on Nasdaq, it is subject to the listing standards and rules of Nasdaq.
Dodd-Frank Act
The Dodd-Frank Act codified existing FRB policy requiring the Company to act as a source of financial strength to the Bank, and to commit resources to support the Bank in circumstances where it might not otherwise do so. However, because the Gramm-Leach-Bliley Act (GLBA) provides for functional regulation of financial holding company activities by various regulators, the GLBA prohibits the FRB from requiring payment by a holding company to a depository institution if the functional regulator of the depository institution objects to the payment. In those cases, the FRB could instead require the divestiture of the depository institution and impose operating restrictions pending the divestiture. As a result of the Dodd-Frank Act, non-bank subsidiaries of a holding company that engage in activities permissible for an insured depository institution must be examined and regulated in a manner that are at least as stringent as if the activities were conducted by the lead depository institution of the holding company.
Bank Holding Company Liquidity
As a legal entity, separate and distinct from the Bank, the Company must rely on its own resources to pay its operating expenses and dividends to its shareholders. In addition to raising capital on its own behalf or borrowing from external sources, the Company may also obtain funds from dividends paid by, and fees charged for services provided to, the Bank. However, statutory and regulatory constraints on the Bank may restrict or totally preclude the payment of dividends by the Bank to the Company.
Transactions with Affiliates and Insiders
The Company and any subsidiaries it may purchase or organize are deemed to be affiliates of the Bank within the meaning of Sections 23A and 23B of the Federal Reserve Act, and the FRB’s Regulation W. Under Sections 23A and 23B and Regulation W, loans by the Bank to affiliates, investments by them in affiliates’ stock, and taking affiliates’ stock as collateral for loans to any borrower is limited to 10% of the Bank’s capital, in the case of any one affiliate, and is limited to 20% of the Bank’s capital, in the case of all affiliates. In addition, transactions between the Bank and any affiliates must be on terms and conditions that are consistent with safe and sound banking practices and substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving non-affiliates. In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and a bank subsidiary’s other affiliates from borrowing from the bank subsidiary unless the loans are secured by marketable collateral of designated amounts.
The Company and the Bank are also subject to certain restrictions with respect to engaging in the underwriting, public sale and distribution of securities.
The Federal Reserve Act and FRB Regulation O place limitations and conditions on loans or extensions of credit to a bank or bank holding company’s executive officers, directors and principal shareholders; any company controlled by any such executive officer, director or shareholder; or any political or campaign committee controlled by such executive officer, director or principal shareholder. Additionally, such loans or extensions of credit must comply with loan-to-one-borrower limits; require prior full board approval when aggregate extensions of credit to the person exceed specified amounts; must be made on substantially the same and follow credit-underwriting procedures no less stringent than those prevailing at the time for comparable transactions with non-insiders; must not involve more than the normal risk of repayment, or present other unfavorable features; and must not exceed the bank’s unimpaired capital and unimpaired surplus in the aggregate.
Limitations on Business and Investment Activities
Under the BHCA, a bank holding company must obtain the FRB’s approval before: (i) directly or indirectly acquiring more than 5% ownership or control of any voting shares of another bank or bank holding company; (ii) acquiring all or substantially all of the assets of another bank; (iii) or merging or consolidating with another bank holding company.
The FRB may allow a bank holding company to acquire banks located in any state of the United States without regard to whether the acquisition is prohibited by the law of the state in which the target bank is located. In approving interstate acquisitions however, the FRB must give effect to applicable state laws limiting the aggregate amount of deposits that may be held by the acquiring bank holding company and its insured depository institutions in the state in which the target bank is located, provided that those limits do not discriminate against out-of-state depository institutions or their holding companies, and state laws which require that the target bank have been in existence for a minimum period of time, not to exceed five years, before being acquired by an out-of-state bank holding company.
In addition to owning or managing banks, bank holding companies may own subsidiaries engaged in certain businesses that the FRB has determined to be “so closely related to banking as to be a proper incident thereto.” The Holding Company, therefore, is permitted to engage in a variety of banking-related businesses.
Additionally, qualifying bank holding companies making an appropriate election to the FRB may engage in a full range of financial activities, including insurance, securities, and merchant banking. The Company has not elected to qualify for these financial services.
Federal law prohibits a bank holding company and any subsidiary banks from engaging in certain tie-in arrangements in connection with the extension of credit. Thus, for example, the Bank may not extend credit, lease or sell property, or furnish any services, or fix or vary the consideration for any of the foregoing on the condition that:
•the customer must obtain or provide some additional credit, property, or services from or to the Bank other than a loan, discount, deposit or trust services;
•the customer must obtain or provide some additional credit, property, or service from or to the Company or any subsidiaries; or
•the customer must not obtain some other credit, property, or services from competitors, except reasonable requirements to assure soundness of credit extended.
Capital Adequacy
Bank holding companies must maintain minimum levels of capital under the FRB’s risk-based capital adequacy guidelines. If capital falls below minimum guideline levels, a bank holding company, among other things, may be denied approval to acquire or establish additional banks or non-bank businesses.
The FRB’s risk-based capital adequacy guidelines, discussed in more detail below in the section entitled “The Bank - Capital Standards,” assign various risk percentages or weights to different categories of assets and capital is measured as a percentage of risk-weighted assets. Under the terms of the guidelines, bank holding companies are expected to meet capital adequacy guidelines based both on total risk-weighted assets and on total assets, without regard to risk weights.
The risk-based guidelines are minimum requirements. Higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual organizations. For example, the FRB’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Moreover, any banking organization experiencing or anticipating significant growth or expansion into new activities, particularly under the expanded powers under the GLBA, would be expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
Limitations on Dividend Payments
As applicable to the Company, California Corporations Code Section 500 provides that neither the Company nor any of its subsidiaries shall make a distribution to the Company’s shareholders unless the board of directors has determined in good faith that either:
•The amount of retained earnings of the Company immediately prior to the distribution equals or exceeds the sum of (A) the amount of the proposed distribution plus (B) the preferential dividends arrears amount; or
•Immediately after the distribution, the value of the Company’s assets would equal or exceed the sum of its total liabilities plus the preferential rights amount.
Additionally, the FRB’s policy regarding dividends provides that a bank holding company should not pay cash dividends exceeding its net income for the past year or which can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The FRB also possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations.
Securities Registration and Listing
The Company’s common stock is registered with the SEC under the Exchange Act and, as a result, is subject to the information, proxy solicitation, insider trading, corporate governance, and other disclosure requirements and restrictions of the Exchange Act, as well as the Securities Act, both administered by the SEC. The Company is required to file annual, quarterly and other current reports with the SEC. The SEC maintains an Internet site, http://www.sec.gov, where SEC filings may be accessed. The SEC filings are also available on the Bank’s website at http://investors.unitedsecuritybank.com/Docs.
The Company’s common stock is listed on Nasdaq and trades under the symbol “UBFO.” The Company is subject to Nasdaq standards for listed companies. Nasdaq has adopted corporate governance rules, which are intended to allow shareholders and investors to more easily and efficiently monitor the performance of companies and their directors.
The Bank
General
As a California state-chartered bank and a member of the FRB, the Bank is subject to regulation, supervision and regular examination by the FRB and the DFPI. The Bank is subject to California laws insofar as they are not preempted by federal banking law. Deposits of the Bank are insured by the FDIC up to the applicable limits in an amount up to $250,000 per customer and, as such, the Bank is subject to the applicable provisions of the Federal Deposit Insurance Act and the regulations of the FDIC. As a consequence of the extensive regulation of commercial banking activities in California and the United States, the Bank’s business is particularly susceptible to changes in California and federal legislation and regulation, which may have the effect of increasing the cost of doing business, limiting permissible activities or increasing competition.
Capital Standards
Federal regulations require FDIC-insured depository institutions, including the Bank, to maintain adequate capital based on the size, asset composition, and complexity of the institution. Generally, FDIC-insured depository institutions must maintain several minimum capital ratios: a common equity tier 1 capital to risk-based assets ratio; a tier 1 capital to risk-based assets ratio; a total capital to risk-based assets; and a tier 1 capital to total assets leverage ratio. These ratios involve complex calculations of various categories of capital and various categories of assets. Failure to meet minimum capital requirements can initiate certain mandates and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the institution’s financial condition and results of operations.
Effective January 1, 2020, pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act, enacted in May 2018, the Federal regulatory agencies adopted simplified capital requirements for certain qualifying “community” banking organizations. Depository institutions and depository institution holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than nine percent, are eligible to opt into the community bank leverage ratio framework. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than nine percent are considered to have satisfied the applicable risk-based and leverage capital requirements in the agencies’ capital rules and are considered to have met the “well capitalized” ratio requirements. Institutions that cease meeting the qualifying criteria have two calendar quarters within which to re-qualify, so long as the institution maintains a leverage ratio of greater than eight percent during the grace period.
The Company and the Bank met the criteria and adopted the community bank leverage ratio framework during 2020.
As of December 31, 2024, the Company and the Bank were “well capitalized” under the applicable standards. The actual capitalization ratios for the Bank and the Company as of December 31, 2024 can be found at “Note 22 - Regulatory Matters” to
the consolidated financial statements.
Prompt Corrective Action
The Federal Deposit Insurance Corporation Improvement Act (FDICIA) requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios. Pursuant to FDICIA, the FRB promulgated regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios:
Under the regulations, a bank shall be deemed to be:
•“well capitalized” if it has a total risk-based capital ratio of 10% or more, has a Tier 1 risk-based capital ratio of 8% or more, has a common equity Tier 1 capital ratio of 6.5% or more, has a Tier 1 leverage capital ratio of 5% or more, and is not subject to specified requirements to meet and maintain a specific capital level for any capital measure;
•“adequately capitalized” if it has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 6% or more and a leverage capital ratio of 4% or more (3% under certain circumstances) and does not meet the definition of “well capitalized”;
•“undercapitalized” if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4%, or a leverage capital ratio that is less than 4% (3% under certain circumstances);
•“significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage capital ratio that is less than 3%; and
•“critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2%.
A bank’s category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.
While these benchmarks have not changed, due to market turbulence, the regulators have strongly encouraged and, in many instances, required, banks and bank holding companies to achieve and maintain higher ratios as a matter of safety and soundness.
Banks are prohibited from paying dividends or management fees to controlling persons or entities if, after making the payment, the bank would be “undercapitalized,” that is, the bank fails to meet the required minimum level for any relevant capital measure. Asset growth and branching restrictions apply to “undercapitalized” banks. Banks classified as “undercapitalized” are required to submit acceptable capital plans guaranteed by its holding company, if any. Broad regulatory authority was granted with respect to “significantly undercapitalized” banks, including forced mergers, growth restrictions, ordering new elections for directors, forcing divestiture by its holding company, if any, requiring management changes, and prohibiting the payment of bonuses to senior management. Even more severe restrictions are applicable to “critically undercapitalized” banks. Restrictions for these banks include the appointment of a receiver or conservator. All of the federal banking agencies have promulgated substantially similar regulations to implement this system of prompt corrective action.
A bank, based upon its capital levels, that is classified as “well capitalized,” “adequately capitalized” or “undercapitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for a hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. Further, a bank that otherwise meets the capital levels to be categorized as “well capitalized,” will be deemed to be “adequately capitalized,” if the bank is subject to a written agreement requiring that the bank maintain specific capital levels. At each successive lower capital category, an insured bank is subject to more restrictions. The federal banking agencies, however, may not treat an institution as “critically undercapitalized” unless its capital ratios actually warrant such treatment.
Banking organizations that meet the criteria and have adopted the community bank leverage ratio framework, such as the Company and the Bank, are deemed to be “well capitalized” for “prompt corrective action” purposes.
In addition to measures taken under the prompt corrective action provisions, commercial banking organizations, such as the Bank, may be subject to potential enforcement actions by the federal or state banking agencies for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance for deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, and the issuance of removal and prohibition orders against institution-affiliated parties.
Brokered Deposit Restrictions
While well-capitalized institutions are not subject to limitations on brokered deposits, adequately-capitalized institutions must obtain an FDIC waiver prior to accepting, renewing, or rolling over brokered deposits and are subject to restrictions on the rates paid on such deposits. Undercapitalized institutions are generally not permitted to accept, renew, or roll over brokered deposits. As of December 31, 2024, the Bank was deemed to be “well-capitalized” and, therefore, eligible to accept brokered deposits.
Limitations on Dividend Payments
California law restricts the amount available for cash dividends the Bank may pay to the Company. Under California law, funds available for cash dividend payments by a bank are restricted to the lesser of: (1) retained earnings; or (2) the bank’s net income for its last three fiscal years (less any distributions to shareholders made during such period). Cash dividends may also be paid out of the greater of: (i) net income for a bank’s last preceding fiscal year; (ii) a bank’s retained earnings; or (iii) net income for a bank’s current fiscal year, upon the prior approval of the DFPI. If the DFPI finds that the stockholders’ equity of a bank is not adequate or that the payment of a dividend would be unsafe or unsound for the bank, the DFPI may order the bank not to pay any dividends.
Premiums for Deposit Insurance
The FDIC insures deposits up to $250,000 per qualified account. The FDIC utilizes a risk-based assessment system to set quarterly insurance premium assessments which categorizes banks into four risk categories based on capital levels and supervisory “CAMELS” ratings and names them Risk Categories I, II, III and IV. The CAMELS rating system is based upon an evaluation of the six critical elements of an institution’s operations: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to risk. This rating system is designed to take into account and reflect all significant financial and operational factors financial institution examiners assess in their evaluation of an institution’s performance.
The Federal Deposit Insurance Act required the FDIC to maintain a reserve ratio of the FDIC’s deposit insurance fund at not less than 1.35% of insured deposits and to adopt a restoration plan to achieve the statutory minimum within eight years if the ratio falls below 1.35%. During 2020 the reserve ratio fell below 1.35% to 1.30% due to extraordinary growth in insured deposits and, accordingly, in September 2020, the FDIC adopted a restoration plan providing for FDIC monitoring deposit balance trends, potential losses, and other factors that affect the reserve ratio, while maintaining the current schedule of assessment rates for all insured institutions. Under the restoration plan, the FDIC is to provide updates at least semi-annually. In setting the assessments, the FDIC is required to offset the effect of the higher reserve ratio against insured depository institutions with total consolidated assets of less than $10 billion. Assessments are based on the average consolidated total assets less average tangible equity capital of a financial institution rather than on its insured deposits. The semi-annual update as of March 31, 2022, showed a decline of four basis points to 1.23%. As a result, on October 20, 2022, the FDIC adopted an amendment to the restoration plan resulting in a uniform increase in the base deposit insurance assessment of two basis points beginning with the first quarter of 2023 in order to meet the requirement of 1.35% by September 30, 2028. On November 16, 2023, the FDIC adopted a final rule to implement a special assessment to recover the loss to the Deposit Insurance Fund associated with protecting uninsured depositors following the closure of Silicon Valley Bank and Signature Bank. Under the final rule, the assessment base for an insured depository institution will be equal to the institution’s estimated uninsured deposits as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits.
The FDIC is authorized to terminate a depository institution’s deposit insurance upon a finding by the FDIC that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency. The termination of deposit insurance would result in the forced closure of the Bank which would have a material adverse effect on the Company’s business, financial condition, and results of operations.
Safety and Soundness Standards
The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and benefits. In addition, the federal banking agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide nine standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating.
Federal Home Loan Bank System
The Bank is a member of the Federal Home Loan Bank of San Francisco (FHLB-SF). Among other benefits, each Federal Home Loan Bank (FHLB) serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. The FHLB-SF utilizes a single class of stock with a par value of $100 per share, which may be issued, exchanged, redeemed and repurchased only at par value. As an FHLB member, the Bank is required to own FHLB -SF capital stock in an amount equal to the greater of:
•a membership stock requirement with an initial cap of $25 million (100% of “membership asset value” as defined), or
•an activity-based stock requirement (based on percentage of outstanding advances).
The FHLB - SF capital stock is redeemable with five year’s written notice, subject to certain conditions. At December 31, 2024, the Bank owned 67,374 shares of the FHLB-SF capital stock valued at $6,737,400.
Federal Reserve Bank
The FRB no longer requires depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts and non-personal time deposits.
As a member of the Federal Reserve Bank, the Bank is required to subscribe to the stock of the Federal Reserve Bank of San Francisco in an amount equal to 6% of the Bank’s capital and surplus of which 3% must be paid in and 3% is subject to call by the Board of Governors of the Federal Reserve System. Capital stock shares may not be transferred or hypothecated. The capital stock of the Federal Reserve Bank is divided into shares of $100 each.
At December 31, 2024, the Bank owned 38,908 shares of FRB-SF stock with paid-in capital totaling $1,945,400.
Consumer Regulation
The Company is subject to a number of federal and state consumer protection laws that extensively govern relationships with customers. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Service Members Civil Relief Act, and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal bank regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate, and civil money penalties. Failure to comply with consumer protection regulations may result in the failure to obtain required bank regulatory approval for merger or acquisition transactions or other transactions where approval is not required.
The CFPB has broad rulemaking, supervisory, and enforcement powers under various federal consumer financial protection laws. The CFPB is also authorized to engage in consumer financial education, track consumer complaints, request data, and promote the availability of financial services to underserved consumers and communities. The CFPB has broad supervisory, examination, and enforcement authority over various consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations and to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB also has the authority to obtain cease and desist orders providing for affirmative relief or monetary penalties. State regulation of financial products and potential enforcement actions could also adversely affect business, financial condition, or results of operations. For example, on November 29, 2021, the DFPI proposed rules under the California Consumer Financial Protection Law to allow the DFPI to require businesses that provide financial products such as debt settlement, student debt relief, education financing, and wage-based advances to register with the DFPI and provide records to facilitate the oversight of the registrants in their interaction with consumers in California. The DFPI’s expanding its authority to have an increased emphasis on consumer protection that may be viewed as an effort to create a state-run equivalent of the CFPB.
USA PATRIOT Act
The PATRIOT Act, designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications for depository institutions, brokers, dealers, and other businesses involved in the transfer of money. The PATRIOT Act, as implemented by various federal regulatory agencies, requires the Company and the Bank to establish and implement policies and procedures with respect to, among other matters, anti-money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers and prospective customers. The PATRIOT Act and its underlying regulations permit information sharing for counter-terrorist purposes between federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB, the FDIC and other federal banking agencies to evaluate the effectiveness of an applicant in combating money laundering activities when considering a bank holding company acquisition and/or a bank merger.
The Bank regularly evaluates and continues to enhance the systems and procedures to continue to comply with the PATRIOT Act and other anti-money laundering initiatives. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, strategic, and reputational consequences for the institution and result in material fines and sanctions.
ANTI-MONEY LAUNDERING ACT OF 2020
The Anti-Money Laundering Act of 2020 (AML Act) was enacted effective January 1, 2021 and presents the most comprehensive revisions and enhancements to anti-money laundering and counter terrorism laws since the Currency and Foreign Transactions Reporting Act of 1970 and the USA PATRIOT Act of 2001 (BSA). The impact of the new legislation will not be fully known until required regulations are adopted and implemented, but the AML Act represents significant changes and reaffirms and broadens the government’s oversight and commitment to addressing the illicit activities and financing of terrorism.
Many of the provisions of the AML Act deal with the operations of the federal agencies primarily responsible for addressing terrorism financing and the safeguarding of the national security of the United States, such as the U.S. Treasury and its Financial Crimes Enforcement Network (FinCEN), including the requirement for FinCEN to engage anti-money laundering (AML) and terrorist financing investigations experts and the requirement to facilitate information sharing with other federal and state and even foreign law enforcement agencies. On June 30, 2021, FinCEN issued the first government-wide priorities for anti-money laundering and countering the financing of terrorism to encourage banks to incorporate the priorities into their risk-based BSA compliance programs. The priorities identified were:
•(i) corruption;
•(ii) cybercrime and cybersecurity;
•(iii) terrorist financing;
•(iv) fraud;
•(v) transnational crime organizations;
•(vi) drug trafficking;
•(vii) human trafficking; and
•(viii) proliferation financing through support networks.
The AML Act also expands the reach of federal AML laws by extending their applicability to a broader range of industries, such as entities involved in futures, precious metals, precious stones and jewels, antiquities, and cryptocurrency. On September 24, 2021, FinCEN issued proposed rules to include a person engaged in the trade of antiquities under the definition of “financial institution” subjecting such person to regulations prescribed by the Secretary of the Treasury.
The AML Act aims to balance the burdens imposed by reporting on financial institutions and the benefits derived by Federal law enforcement agencies. The AML Act requires a review of currency transaction and suspicious activity reports submitted by financial institutions to determine to what extent the reporting can be streamlined and made more useful. Included is the obligation to review the dollar thresholds for reporting currency transactions and to establish automated processes for filing simple, non-complex categories of reports. It calls for greater integration between financial institution systems and the electronic filing system to allow for automatic population of report fields and the submission of transaction data.
Other provisions of the AML Act enhance enforcement. The Act provides protection for financial institutions keeping open a customer’s account or transaction at the request of a federal law enforcement agency or at the request of a state or local agency with the concurrence of FinCEN and increases civil penalties for financial institutions and persons violating the recordkeeping and reporting obligations. Persons found to have committed repeated “egregious violations” may be barred from serving on boards of directors of financial institutions and fined in an amount that is equal to the profit gained by such person by reason of such violation. If that person is a partner, director, officer or employee of a financial institution, that person may be ordered to
repay any bonus paid to that person, irrespective of the amount of the bonus or how it was calculated. New criminal penalties have been created for concealing from or misrepresenting to a financial institution any material facts concerning:
•(i) the ownership or control of assets involved in a monetary transaction involving a senior foreign political figure in amounts exceeding $1 million; or
•(ii) the source of funds in a monetary transaction involving an entity found to be a primary money laundering concern.
The AML Act also authorize the Treasury to pay whistleblower awards leading to fines or forfeitures of at least $50,000 up to the lower of $150,000 or 25% of the fine or forfeiture and allows for the payment to whistleblowers of up to 30% of the fine or forfeiture.
One of the most significant portions of the AML Act is The Corporate Transparency Act (CTA), which will requires the reporting of certain information regarding “beneficial owners” of “reporting companies” to a confidential FinCEN database. Reporting companies are defined as any corporation, limited liability company or other entity formed in the U.S. under the laws of a state or Indian Tribe or registered as a foreign entity to do business in the U.S., other than those specifically excluded, such as:
•(i) companies reporting or with a class of securities registered with the SEC under the Securities Act of 1934;
•(ii) banks, bank holding companies, and credit unions;
•(iii) money transmitters, registered broker-dealers, registered investment advisors, and investment companies;
•(iv) public utilities and insurance companies;
•(v) 503(c)(3) entities;
•(vi) entities that employ more than 20 employees, have reported gross receipts or sales to the Internal Revenue Service in excess of $5.0 million in the prior year, and have an operating presence in the U.S.; and
•(vii) certain “inactive” entities.
A beneficial owner is any individual who directly, or indirectly exercises substantial control over an entity or owns or controls 25% or more of the ownership interest of an entity. The reporting company is required to provide FinCEN with the legal name, date of birth, current resident or business address, and an acceptable identification number of the beneficial owner. In 2022, FinCEN issued a final rule requiring the reporting of beneficial ownership information by entities “created” or “doing business” in the United States before January 1, 2024, beginning January 1, 2025. Recently, the Trump administration through the Treasury Department indicated it would not seek enforcement of the required beneficial ownership reporting.
Under the CTA, the Treasury is to minimize the burden on reporting companies and ensure the information deposited in the database is maintained in the strictest confidence and made available for inspection or disclosure by FinCEN only for the purposes set forth in the AML Act and only to:
•(i) federal agencies engaged in national security, intelligence or law enforcement;
•(ii) state, local or Tribal law enforcement agencies, subject to authorization by a court of competent jurisdiction;
•(iii) financial institutions subject to customer due diligence requirements with the consent of the reporting company;
•(iv) requests by a federal or other appropriate regulatory agency;
•(v) certain Treasury officials for tax administration purposes;
•(vi) authorized federal agencies on behalf of a properly recognized foreign authority.
During 2022, FinCEN issued proposed regulations for a pilot program to permit financial institutions to share suspicious activity information with their foreign branches, subsidiaries and affiliates to combat illicit finance risks under the AML Act.
The foregoing is only a summary of selected provisions of the AML Act. Given that regulations implementing the new AML Act are being proposed but have not yet been adopted or implemented, the Company cannot determine at this time the effect, if any, the AML Act will have on the Company’s future results of operations or financial condition.
Office of Foreign Assets Control (“OFAC”) Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, designated nationals, and others. These rules are based on their administration by OFAC. The OFAC-administered sanctions targeting designated countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g.,
property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal, strategic, and reputational consequences, and result in civil money penalties on the Company and the Bank.
Community Reinvestment Act
The Community Reinvestment Act (CRA) generally requires the Bank to identify the communities it serves and to make loans and investments, offer products, make donations in, and provide services designed to meet the credit needs of these communities. The CRA also requires the Bank to maintain comprehensive records of its CRA activities to demonstrate how we are meeting the credit needs of the Bank’s communities. These documents are subject to periodic examination by the FRB. During these examinations, the FRB rates such institutions’ compliance with CRA as “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” The CRA requires the FRB to take into account the record of a bank in meeting the credit needs of all of the communities served, including low- and moderate-income neighborhoods, in determining such rating. Failure of an institution to receive at least a “Satisfactory” rating could inhibit such institution or its holding company from undertaking certain activities, including acquisitions. The Bank received a CRA rating of “Satisfactory” as of its most recent examination. In the case of a bank holding company, such as the Company, when applying to acquire a bank, savings association, or a bank holding company, the FRB will assess the CRA record of each depository institution of the applicant bank holding company in considering the application.
On October 24, 2023, the FRB and FDIC released a joint final rule to amend the CRA with the following objectives: promoting greater access to credit, investment, and banking services in low- and moderate-income (LMI) communities; adjusting to industry changes, such as the rise of internet and mobile banking; ensuring clearer and more consistent CRA regulations; and customizing CRA evaluations and data collection based on bank size and type. In March 2024, bank regulators issued an interim final rule to delay the effective date of certain provisions from April 1, 2024, to January 1, 2026. The Company continues to monitor challenges to the CRA regulations raised by various trade groups and stakeholders, as it relates to the Bank.
Customer Information Privacy and Cybersecurity
The FRB and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal, and non-public customer information. These guidelines require each financial institution, under the supervision and ongoing oversight of its board of directors or an appropriate committee thereof, to create, implement, and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazard to the security or integrity of such information, and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. We have adopted a customer information security program to comply with these requirements.
In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.
In July 2023, the SEC adopted new rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incidents by public companies. There are two main components:
•Material cybersecurity incidents must be filed on Form 8-K within four business days of a determination that a cybersecurity incident is material.
•Annual disclosure of cybersecurity risk management, strategy, and governance must be disclosed on Form 10-K. The Company’s cybersecurity disclosure can be found in Item 1C. Cybersecurity.
Privacy
The GLBA and the California Financial Information Privacy Act require financial institutions to implement policies and
procedures regarding the disclosure of non-public personal information about consumers to non-affiliated third parties. In general, the statutes require disclosures to consumers on policies and procedures regarding the disclosure of such non-public personal information and, except as otherwise required by law, prohibit disclosing such information except as provided in the Bank’s policies and procedures. We have implemented privacy policies addressing these restrictions that are distributed regularly to all existing and new customers of the Bank.
Bank Merger Act
The Bank Merger Act grants the FDIC and other bank regulatory agencies the authority to review and approve or deny proposed bank mergers. It is part of the broader regulatory framework designed to ensure that such transactions do not harm competition, financial stability, or public interest. Understanding the regulatory framework of the Bank Merger Act ensures that the Company and the Bank are prepared for any potential changes in the competitive landscape, including shifts in market dynamics or new entrants that could arise from future mergers in the industry.
In September 2024, the FDIC issued a final statement of policy outlining its approach to reviewing Bank Merger Act applications for FDIC-supervised institutions, including the Bank. This policy establishes higher expectations for the statutory factors the FDIC must consider when evaluating such applications. Additionally, in September 2024, the DOJ withdrew its 1995 Bank Merger Guidelines and introduced the 2024 Banking Addendum, clarifying that it will evaluate competition concerns related to bank and bank holding company mergers using the 2023 Merger Guidelines and the 2024 Banking Addendum. This analysis may involve considering theories of harm and relevant markets not addressed by the 1995 guidelines, which primarily focused on deposit and branch concentrations. Recently, the FDIC board of directors approved a proposal to revoke that policy statement, reverting on an interim basis to guidelines published in 2008 for consideration of bank mergers, and indicated the FDIC was conducting a broader reevaluation of its bank merger review process. The proposed revocation is currently open for public comment until April 10, 2025.
Other Aspects of Banking Law
The Bank is subject to federal statutory and regulatory provisions covering, among other things, security procedures, management interlocks, funds availability and truth-in-savings. There are also a variety of federal statutes that regulate acquisitions of control and the formation of bank holding companies, and the activities beyond owning banks that are permissible.
Moreover, additional initiatives may be proposed or introduced before Congress, the California Legislature, and other government bodies in the future which, if enacted, may further alter the structure, regulation, and competitive relationship among financial institutions and may subject the bank holding companies and banks to increased supervision and disclosure, compliance costs and reporting requirements. In addition, the various bank regulatory agencies often adopt new rules and regulations and policies to implement and enforce existing legislation. Bank regulatory agencies have been very aggressive in responding to concerns and trends identified in examinations, and this has resulted in the increased issuance of enforcement actions to financial institutions requiring action to address credit quality, liquidity and risk management, capital adequacy, compliance with the Bank Secrecy Act, as well as other safety and soundness concerns.
It cannot be predicted whether, or in what form, any such legislation or regulatory changes in policy may be enacted or the extent to which the Bank’s businesses would be affected thereby. In addition, the outcome of examinations, any litigation, or any investigations initiated by state or federal authorities may result in necessary changes in the Bank’s operations and increased compliance costs.
Human Capital
The Company employed 114 full-time equivalent staff as of December 31, 2024. The employees are not represented by a collective bargaining unit, and the Company believes its relationship with its employees is good.
The Company’s ability to attract, retain, and develop employees is a key to its success. We provide competitive pay that is consistent with the employee’s position and experience. Annual increases in compensation are based on merit, which is documented throughout internal systems and communicated at the time of review and upon promotion or transfer. Certain employees participate in the Company’s performance-based incentive programs, which may include additional bonus and incentive compensation and equity-based awards. Certain benefits are subject to eligibility, vesting, and performance requirements. Employee performance is measured formally at least annually.
Our employees’ health, wellness, and safety are a priority to the Company. Employees receive a comprehensive benefits package that includes paid time off, sick time, Company matching contributions of 100% up to 4% of salary contributions to a
qualified retirement plan, and other health and wellness benefits including participation in Company paid or subsidized medical, dental, term-life, accidental death and dismemberment, long-term disability insurance, and employee assistance programs.
The Company’s code of ethics prohibits discrimination or harassment. The Company requires all employees to agree to the code of ethics and participate in harassment prevention training annually.
Available Information
The Company files periodic reports and other reports under the Securities Exchange Act of 1934 with the Securities and Exchange Commission. These reports, as well as the Company’s Code of Ethics, are posted and are available at no cost on the Company’s website at http://www.unitedsecuritybank.com as soon as reasonably practical after the Company files such reports with the SEC. The Company’s periodic and other reports filed with the SEC are also available at the SEC’s website (http://www.sec.gov).

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ITEM 1A. RISK FACTORS
Item 1A - Risk Factors
Not required for smaller reporting companies.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B - Unresolved Staff Comments
The Company had no unresolved staff comments at December 31, 2024.

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ITEM 2. PROPERTIES
Item 2 - Properties
The Company provides traditional banking services through 13 branches and two loan production offices located primarily throughout California’s Central Valley. Bank branches are located in Fresno, Madera, Kern, and Santa Clara Counties. The Company also has nine remote ITM locations. Both loan production offices are housed at branch facilities in Fresno County. The administration building is located in Fresno, California, and does not provide branch services.
At December 31, 2024, the Company held leases for seven of the branches and the nine remote ITM locations, and owned the remaining six branches. The Company also owns its headquarters in Fresno, California. Most of the leases have renewal options and, in management’s opinions, all properties are adequately covered by insurance. The Company considers its existing facilities to be sufficient for current and future use. Please see “Note 5 - Premises and equipment” and “Note 9 - Leases” in the “Notes to Consolidated Financial Statements” for further detail.

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ITEM 3. LEGAL PROCEEDINGS
Item 3 - Legal Proceedings
From time to time, the Company is party to claims and legal proceedings arising in the ordinary course of business. At this time, the Company is not aware of any pending legal proceedings to which it is a party or of which any of its property is the subject, nor is the Company aware of any such proceedings known to be contemplated by governmental entities, which proceedings will have a material adverse effect on the financial condition or results of operations of the Company.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4 - Mine Safety Disclosures
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5 - Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Trading History
The Company’s common stock trades on The Nasdaq Global Select Market and is traded under the symbol UBFO. At December 31, 2024, there were approximately 502 record holders of common stock. This does not reflect the number of persons or entities who hold their stock in nominee or street name through various brokerage firms.
The following table sets forth the high and low closing sales prices by quarter for the common stock, for the years ended December 31, 2024, and 2023.
Closing Prices
Quarter High Low Volume
4th Quarter 2024 $ 10.31 $ 8.14 1,587,500
3rd Quarter 2024 $ 8.91 $ 7.07 2,016,700
2nd Quarter 2024 $ 7.53 $ 7.12 661,000
1st Quarter 2024 $ 8.28 $ 7.15 971,000
4th Quarter 2023 $ 8.65 $ 7.10 1,587,900
3rd Quarter 2023 $ 7.61 $ 6.46 1,456,200
2nd Quarter 2023 $ 6.87 $ 5.52 1,308,300
1st Quarter 2023 $ 8.32 $ 6.16 1,978,100
Dividends
The Company’s shareholders are entitled to dividends when and if declared by the Board of Directors out of funds legally available therefore. Dividends paid to shareholders are subject to restrictions set forth in the California General Corporation Law, which provides that a California corporation may make a distribution, including paying dividends on its capital stock, from retained earnings to the extent that the retained earnings exceed (a) the amount of the proposed distribution plus (b) the amount, if any, of dividends in arrears on shares with preferential dividend rights. Alternatively, a California corporation may make a distribution, if, immediately after the distribution, the value of its assets equals or exceeds the sum of (a) its total liabilities plus (b) the liquidation preference of any shares which have a preference upon dissolution over the rights of shareholders receiving the distribution. As a bank holding company without significant assets other than its equity position in the Bank, the ability to pay dividends to shareholders depends primarily upon dividends received from the Bank. Such dividends paid by the Bank to the Company are subject to certain limitations. See “Item 7 - Management’s Discussion and Analysis of Financial and Results of Operations - Liquidity and Capital Resources - Capital and Dividends.”
Cash dividends declared during 2024 and 2023 are as follows:
2024 2023
Date Declared Date Paid Dividend Amount Date Declared Date Paid Dividend Amount
March 26, 2024 April 22, 2024 $0.12 March 28, 2023 April 21, 2023 $0.11
June 25, 2024 July 23, 2024 $0.12 June 27, 2023 July 24, 2023 $0.12
September 24, 2024 October 23, 2024 $0.12 September 26, 2023 October 25, 2023 $0.12
December 17, 2024 January 17, 2025 $0.12 December 18, 2023 January 19, 2021 $0.12
The amount and payment of dividends to our shareholders are set by the Board of Directors with numerous factors being taken into consideration including but not limited to earnings, financial condition, and the need for capital for expanded growth and general economic conditions. No assurance can be given that cash or stock dividends will be paid in the future.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under equity compensation plans as of December 31, 2024. All of our equity compensation plans have been approved by the shareholders.
Plan Category Number of securities to be issued upon exercise of outstanding options,warrants and rights (column (a)) Weighted-average exercise price of outstanding options, warrants and rights Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders 75,000 (1) $ 9.54 205,085
Equity compensation plans not approved by security holders N/A N/A N/A
Total 75,000 $ 9.54 205,085
Under the United Security Bancshares 2015 Equity Incentive Award Plan (2015 Plan), we are authorized to issue restricted stock awards and units. Restricted stock awards and restricted stock units are not included in the total in column (a). At December 31, 2024, there were 15,538 unvested restricted stock awards and 145,453 shares of restricted stock units issued and outstanding.
A complete description of the above plans is included in “Item 8 - Note 12 - Stock-Based Compensation to the Consolidated Financial Statements,” and is hereby incorporated by reference.
Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities
On September 1, 2023, the Company issued 169 fully vested shares of its common stock to a former non-employee director in lieu of cash compensation for directors’ fees. This grant reflects director compensation for a portion of the second quarter of 2023. The number of shares received in lieu of cash was calculated based on the closing price of the Company’s common stock on September 1, 2023, which was $7.21 per share. The shares of common stock issued to the former non-employee director
contain a Rule 144 restrictive legend and are exempt from registration in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended, as a transaction by an issuer not involving a public offering.
We believed that Section 4(a)(2) was available because: (i) the issuance did not involve underwriters, underwriting discounts, or commissions, (ii) the shares issued are restricted stock with transfer restrictions, (iii) no sales were made by general solicitation or advertising, and (iv) the sales were made to an accredited investor.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On April 25, 2017, the Company’s Board of Directors approved the repurchase of up to $3 million of the outstanding common stock of the Company. The duration of the program is open-ended and the timing of purchases will depend on market conditions. The Company did not repurchase any common shares under the stock repurchase plan during the years ended December 31, 2024, and 2023.

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ITEM 6. SELECTED FINANCIAL DATA
Item 6 - [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company’s financial condition and results of operations should be read together with the consolidated financial statements and related notes included in this report.
Overview
The Company
United Security Bancshares, a California corporation, is a bank holding company registered under the BHCA with corporate headquarters located in Fresno, California. The principal business of United Security Bancshares is to serve as the holding company for its wholly-owned subsidiary, United Security Bank. References to the “Bank” refer to United Security Bank together with its wholly-owned subsidiary, York Monterey Properties, Inc. References to the “Company” refer to United Security Bancshares together with its subsidiaries on a consolidated basis. References to the “Holding Company” refer to United Security Bancshares, the parent company, on a stand-alone basis. The Bank currently has 13 banking branches, which provide banking services in Fresno, Madera, Kern, and Santa Clara counties in the state of California. In addition to full-service branches, the Bank has several stand-alone ITM machines within its geographic footprint.
Executive Summary
During 2024, the Company focused on its strategy of serving the banking needs of its customers and retaining deposit balances in a competitive deposit rate environment.
2024 Financial Summary and 2023 Comparison
▪Net interest margin decreased to 4.26% at December 31, 2024 compared to 4.29% at December 31, 2023.
▪Annualized average cost of deposits was 0.96% for the year ended December 31, 2024, compared to 0.64% for the year ended December 31, 2023.
▪Net income decreased to $14.8 million for the year ended December 31, 2024 compared to $19.8 million during the year ended December 31, 2023.
▪Interest and fees on loans increased $1.1 million to $55.2 million for the year ended December 31, 2024.
▪Interest expense increased 25.73% to $13.9 million, as a result of increases in deposit interest expense offset by decreases in short-term borrowing costs, compared to $11.1 million for the year ended December 31, 2023.
▪The total fair value of the junior subordinated debentures (TRUPs) changed by $368,000 during the year ended December 31, 2024. A loss of $614,000 was recorded through the income statement and a gain of $246,000 was recorded through accumulated other comprehensive income. The total fair value of TRUPs changed by $270,000 during the year ended December 31, 2023. A gain of $274,000 was recorded through the income statement and a loss of $544,000 was recorded through accumulated other comprehensive income.
▪The Company recorded a provision for credit losses of $3.0 million for the year ended December 31, 2024, compared to a provision for credit losses of $1.5 million for the previous year.
▪Noninterest expense increased 8.96% to $28.3 million, compared to $26.0 million for the year ended December 31, 2023.
▪Annualized return on average assets (“ROAA”) decreased to 1.22%, compared to 1.57% for the year ended December 31, 2023.
▪Annualized return on average equity (“ROAE”) decreased to 11.52%, compared to 17.05% for the year ended December 31, 2023.
▪Total loans, net of unearned fees, increased 0.9% to $928.5 million, compared to $920.0 million at December 31, 2023.
▪Total deposits increased 5.3% to $1.06 billion, compared to $1.00 billion at December 31, 2023.
Current Trends Affecting Results of Operations and Financial Position
The Company’s overall operations are impacted by a number of factors, including not only interest rates and margin spreads, which impact the results of operations, but also the composition of the Company’s balance sheet. One of the primary strategic goals of the Company is to maintain a mix of assets that will generate a reasonable rate of return without undue risk, and to finance those assets with a low-cost and stable source of funds. Liquidity and capital resources must also be considered in the planning process to mitigate risk and allow for growth.
Because the Bank primarily conducts banking operations in California’s Central Valley, its operations and cash flows are subject to changes in the economic condition of the Central Valley. Our business results are dependent in large part upon the business activity, population, income levels, deposits, and real estate activity in the Central Valley, and declines in economic conditions can have adverse material effects upon the Bank. In addition, the Central Valley remains largely dependent on agriculture. A downturn in agriculture and agricultural-related business could indirectly and adversely affect the Company as many borrowers and customers are involved in, or are impacted to some extent by, the agricultural industry. While a great number of our borrowers are not directly involved in agriculture, they would likely be impacted by difficulties in the agricultural industry since many jobs in our market areas are ancillary to the regular production, processing, marketing, and sale of agricultural commodities. The agricultural industry has been affected by declines in prices and changes in yields of various crops and other agricultural commodities. Weaker prices could reduce the cash flows generated by farms and the value of agricultural land in our local markets and thereby increase the risk of default by our borrowers or reduce the foreclosure value of agricultural land and equipment that serve as collateral for our loans. In particular, farm income has seen recent declines and, in line with the downturn in farm income, farmland prices are coming under pressure. Additionally, the Trump administration’s potential for abrupt policy shifts, and in particular impacts on the market from tariffs (and threats thereof), may cause fluctuations in market conditions, impacting our investment portfolio, lending activities, and overall financial performance, and those of our borrowers. Such impacts may be exacerbated in the agriculture industry, which could directly impact the financial health and operations of our borrowers.
The state of California periodically experiences severe droughts resulting in significantly reduced water allocations for farmers in the Central Valley. Due to these water issues, the impact on businesses and consumers located in the Company’s market areas is not possible to quantify. In response, the California state legislature passed the Sustainable Groundwater Management Act with the purpose of promoting better local and regional management of groundwater use and sustainable groundwater management in California by 2042. The local districts began to develop, prepare, and implement the Groundwater Sustainability Plans in 2020. The effect of such plans on Central Valley agriculture, if any, is still unknown.
The Company’s earnings are impacted by monetary and fiscal policies of the United States government and its agencies. The FRB has, and is likely to continue to have, an important impact on the operating results of depository institutions through its power to implement national monetary policy, among other things, to curb inflation or combat a recession. The FRB affects the levels of bank loans, investments and deposits through its control over the issuance of United States government securities, its regulation of the discount rate applicable to member banks, and its influence over reserve requirements to which member banks are subject. Due to declines in inflation rates during 2024, the FOMC lowered interest rates three times beginning in September 2024 for a total reduction of 100 basis points. The FRB December 2024 statement regarding further interest rate cuts for 2025 indicated that rates would likely be cut at a slower pace due to revised inflation forecasts and downward revisions to the unemployment rate.
Inflation may negatively affect the market value of investment securities and lead to increased interest expense on deposits and higher costs for borrowings as well as increased labor costs due to higher wages. Additionally, increased inflation levels could lead to higher oil and gas prices, which may negatively impact the net operating income of borrowers and affect their ability to repay their loans.
Elevated inflation and expectations for elevated future inflation can adversely impact economic growth, consumer and business confidence, and our financial condition and results. In addition, elevated inflation may cause unexpected changes in monetary policies and actions which may adversely affect consumer confidence, the economy, and our financial condition and results.
Supply chain constraints and a tightening of labor markets could potentially exacerbate inflation and sustain it at elevated levels, even as growth slows. The risk of sustained high inflation would likely be accompanied by monetary policy tightening with potential negative effects on various elevated asset classes.
The Company continually evaluates its strategic business plan as economic and market factors change in its market area. Balance sheet management, enhancing revenue sources, and maintaining market share will continue to be of primary importance.
Results of Operations
The following table sets forth selected historical consolidated financial information for each of the years in the three-year period ended December 31, 2024. The selected financial data should be read in conjunction with the consolidated financial statements as of December 31, 2024 and 2023, and the related Notes to Consolidated Financial Statements contained in “Item 8 - Financial Statements and Supplementary Data.”
For the Years Ended December 31,
(In thousands, except per-share data and ratios) 2024 2023 2022
Summary of Year-to-Date Earnings:
Interest income $ 60,751 $ 60,377 $ 49,257
Interest expense 13,901 11,056 3,195
Net interest income 46,850 49,321 46,062
Provision for credit losses 2,963 1,460 1,802
Net interest income after provision for credit losses 43,887 47,861 44,260
Noninterest income 4,713 5,569 1,838
Noninterest expense 28,280 25,954 24,039
Income before provision for income taxes 20,320 27,476 22,059
Provision for income taxes 5,537 7,680 6,373
Net income $ 14,783 $ 19,796 $ 15,686
Per Share Data:
Net income - Basic $ 0.86 $ 1.16 $ 0.92
Net income - Diluted $ 0.86 $ 1.16 $ 0.92
Weighted average common shares outstanding - Basic 17,188,384 17,114,214 17,040,241
Weighted average common shares shares outstanding - Diluted 17,199,817 17,125,186 17,061,833
Book value per share $ 7.51 $ 7.14 $ 6.59
Financial Position at Year End:
Total assets $ 1,211,718 $ 1,211,045 $ 1,299,193
Total net loans 912,416 904,384 969,996
Total deposits 1,057,622 1,004,477 1,165,484
Total shareholders’ equity 130,362 122,542 112,463
Selected Financial Ratios:
Return on average assets 1.22 % 1.57 % 1.16 %
Return on average equity 11.52 % 17.05 % 13.75 %
Average equity to average assets 10.60 % 9.20 % 8.46 %
Net interest margin (1) 4.26 % 4.29 % 3.69 %
Allowance for credit losses as a percentage of total nonperforming assets 93.29 % 95.15 % 52.16 %
Net charge-offs to net loans 0.28 % 0.25 % 0.39 %
Loan-to-deposit ratio 87.79 % 91.59 % 84.10 %
Net charge-offs to average loans 0.28 % 0.24 % 0.10 %
Nonaccrual loans to total loans 1.31 % 1.24 % 1.48 %
Allowance for credit losses as a percentage of nonaccrual loans 131.55 % 136.77 % 70.01 %
Allowance for credit losses as a percentage of period-end loans 1.72 % 1.70 % 1.04 %
Dividend payout ratio 56.35 % 40.67 % 47.82 %
(1) Fully taxable-equivalent
Net income for the year ended December 31, 2024 was $14.8 million, or $0.86 per basic and diluted share, compared to $19.8 million, or $1.16 per basic and diluted share, for the year ended December 31, 2023. The decrease of $5.0 million between December 31, 2023 and December 31, 2024 is primarily the result of increases in interest paid on deposits and increases in the provision for credit losses, offset by increases in loan and fee income. The decrease is also due to the change in fair value of TRUPS resulting from a gain of $274,000 recorded for the year ended December 31, 2023 compared to a loss of $614,000
recorded for the year ended December 31, 2024. Interest income increased by $374,000, or 0.6%, between December 31, 2023 and December 31, 2024. The provision for income taxes decreased by $2.1 million, or 27.9%.
Return on average assets was 1.22% for the year ended December 31, 2024 compared to 1.57% for the year ended December 31, 2023. Return on average equity was 11.52% for the year ended December 31, 2024 compared to 17.05% for the year ended December 31, 2023.
The lower return on average assets experienced by the Company between 2024 and 2023 was the result of decreases in income due to the higher interest rates reflected in interest expenses and a decrease in average assets. Decreases in the return on average equity were the result of decreases in net income outpacing growth in shareholder’s equity. The growth in equity is affected by our dividend payout ratio as well as changes in accumulated other comprehensive income.
Net Interest Income
Net interest income, the most significant component of earnings, is the difference between the interest and fees received on earning assets and the interest paid on interest-bearing liabilities. Earning assets consist primarily of loans and, to a lesser extent, investments in securities issued by federal, state and local authorities, and corporations, as well as interest-bearing deposits and overnight investments in federal funds loaned to other financial institutions. These earning assets are funded by a combination of interest-bearing and noninterest-bearing liabilities, primarily customer deposits, and may include short-term and long-term borrowings.
Net interest income before the provision for credit losses was $46.9 million for the year ended December 31, 2024, representing a decrease of $2.5 million, or 5.0%, compared to net interest income before the provision for credit losses of $49.3 million for the year ended December 31, 2023. Market rate increases reflected in increased deposit expenses, partially offset by increased loan interest income, led to decreases in the net interest margin, as shown in the table below. The net interest margin decreased to 4.26% for the year ended December 31, 2024, compared to 4.29% for the year ended December 31, 2023.
Distribution of Average Assets, Liabilities and Shareholders’ Equity:
The following table summarizes the distribution of average assets, liabilities and shareholders’ equity, as well as interest income and yields earned on average interest-earning assets and interest expense and rates paid on average interest-bearing liabilities, presented on a tax-equivalent basis for the years indicated:
2024 2023
(Dollars in thousands) Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
Assets:
Interest-earning assets:
Loans and leases (1) (2) $ 925,993 $ 55,236 5.97 % $ 942,135 $ 54,183 5.75 %
Investment securities (at fair value) 168,740 5,209 3.09 % 201,958 5,870 2.91 %
Interest-bearing deposits in FRB 5,901 306 5.19 % 6,187 324 5.24 %
Total interest-earning assets 1,100,634 $ 60,751 5.52 % 1,150,280 $ 60,377 5.25 %
Allowance for credit losses (15,727) (15,759)
Noninterest-earning assets:
Nonaccrual loans 11,906 13,300
Cash and due from banks 33,457 34,811
Premises and equipment, net 8,986 9,390
Accrued interest receivable 7,267 7,329
Other real estate owned 4,582 4,582
Other assets 59,879 60,927
Total average assets $ 1,210,984 $ 1,264,860
Liabilities and Shareholders’ Equity:
Interest-bearing liabilities:
NOW accounts $ 125,295 $ 746 0.60 % $ 137,007 $ 307 0.22 %
Money market accounts 321,776 6,541 2.03 % 311,654 4,244 1.36 %
Savings accounts 116,900 129 0.11 % 119,312 132 0.11 %
Time deposits 75,756 2,163 2.86 % 83,126 2,075 2.50 %
Other borrowings 62,212 3,506 5.64 % 63,183 3,499 5.54 %
Junior subordinated debentures 12,464 816 6.55 % 12,464 799 6.41 %
Total interest-bearing liabilities 714,403 $ 13,901 1.95 % 726,746 $ 11,056 1.52 %
Noninterest-bearing liabilities:
Noninterest-bearing checking 358,212 410,673
Accrued interest payable 388 274
Other liabilities 9,677 10,770
Total average liabilities 1,082,680 1,148,463
Total average shareholders’ equity 128,304 116,397
Total average liabilities and shareholders’ equity $ 1,210,984 $ 1,264,860
Interest income as a percentage of average earning assets 5.52 % 5.25 %
Interest expense as a percentage of average earning assets 1.26 % 0.96 %
Net interest margin 4.26 % 4.29 %
(1) Loan interest income includes loan costs of approximately $903 for the year ended December 31, 2024 and loan costs of approximately $297 for the year ended December 31, 2023.
(2) Average loans do not include nonaccrual loans but do include interest income recovered from previously charged-off loans.
The prime rate decreased from 8.50% for the year ended 2023 to 7.50% for the year ended 2024. Future increases or decreases will affect rates for both interest income and expense and the resultant net interest margin.
Both net interest income and net interest margin are affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume change.” Both are also affected by changes in yields on interest-earning assets and rates paid on interest-bearing liabilities, referred to as “rate change.” The following table sets forth the changes in interest income and interest expense for each major category of interest-earning asset and interest-bearing liability, and the amount of change attributable to volume and rate changes for the years ended December 31, 2024, and 2023.
Rate and Volume Analysis:
2024 compared to 2023
(In thousands) Total Rate Volume
Increase (decrease) in interest income:
Loans $ 1,053 $ 1,992 (939)
Investment securities (661) 348 (1,009)
Interest-bearing deposits in FRB (18) (3) (15)
Total interest income 374 2,337 (1,963)
Increase (decrease) in interest expense:
Interest-bearing demand accounts 2,737 2,753 (16)
Savings accounts (3) - (3)
Time deposits 86 280 (194)
Other borrowings 7 61 (54)
Subordinated debentures 18 18 -
Total interest expense 2,845 3,112 (267)
Decrease in net interest income $ (2,471) $ (775) (1,696)
The net interest margin decreased in 2024 due to increases in deposit costs, partially offset by increases in loan portfolio yields and investment securities yields. The increase in deposit costs was primarily a result of the higher rates paid on purchased brokered deposits. The increases in loan yields are a result of the repricing of variable-rate loans and higher rates on loan originations. Investment yields increased due to increases in rates on floating-rate investment securities. The yield on the loan portfolio was 6.0% for the year ended December 31, 2024, compared to 5.8% for the year ended December 31, 2023. For the year ended December 31, 2024, total interest income increased approximately $374,000, or 0.6%, compared to the year ended December 31, 2023, reflective of increases of $1.1 million in loan interest income, offset by decreases of $661,000 in investment income. Average interest-earning assets decreased approximately $49.6 million between 2024 and 2023 while the rate on interest-earning assets increased 27.0 basis points between the two periods. The decrease in average earning assets between 2024 and 2023 was the result of decreases of $33.2 million in investment securities due to maturities and paydowns, and decreases of $17.5 million in loans.
For the year ended December 31, 2024, total interest expense increased approximately $2.8 million, or 25.7%, compared to the year ended December 31, 2023, due to increased expenses on deposits and short-term borrowings. Between the two periods, average interest-bearing liabilities decreased by $12.3 million, while the average rates paid on these liabilities increased by 43 basis points. At December 31, 2024, the Company held $100.3 million in brokered deposits. These brokered deposits were purchased in order to reduce short-term borrowings, fund loan growth, and offset deposit runoff as part of the Bank’s cash management strategy. The Company held no brokered deposits at December 31, 2023.
The following table summarizes the year-to-date averages of the components of interest-earning assets as a percentage of total interest-earning assets, and the components of interest-bearing liabilities as a percentage of total interest-bearing liabilities:
Year-to-Date Average
Loans 84.13 % 82.11 %
Investment securities available for sale 15.33 % 17.36 %
Interest-bearing deposits in FRB 0.54 % 0.53 %
Total earning assets 100.00 % 100.00 %
NOW accounts 17.55 % 18.90 %
Money market accounts 45.04 % 42.98 %
Savings accounts 16.36 % 16.46 %
Time deposits 10.60 % 11.46 %
Other borrowings 8.71 % 8.71 %
Subordinated debentures 1.74 % 1.49 %
Total interest-bearing liabilities 100.00 % 100.00 %
Provision for Credit Losses
Provisions for credit losses are determined on the basis of management’s periodic credit review of the loan portfolio, consideration of past loan loss experience, current and future economic conditions, and other pertinent factors. After reviewing these factors, management, at times, makes adjustments in order to maintain an allowance for credit losses adequate for the coverage of estimated losses inherent in the loan portfolio. Based on the condition of the loan portfolio, management believes the allowance is appropriate to cover risk elements in the loan portfolio.
For the year ended December 31, 2024, a $3.0 million provision was made to the allowance for credit losses. A provision totaling $1.5 million was made for the year ended December 31, 2023.
The allowance for credit losses increased to 1.72% of total loans at December 31, 2024, compared to 1.70% at December 31, 2023. The provisions of $3.0 million recorded in 2024 and $1.5 million recorded in 2023, were primarily the result of both charge-offs within the student loan portfolio and adjustments in qualitative factors related to economic uncertainties. For further discussion, refer to “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Asset Quality and Allowance for Credit Losses.”
Noninterest Income
The following table summarizes significant components of noninterest income for the years indicated:
(In thousands) 2024 % of Total 2023 % of Total
Customer service fees $ 2,918 61.91 % $ 2,918 52.40 %
Increase in cash surrender value of bank-owned life insurance 551 11.69 % 557 10.00 %
Gain on proceeds from bank-owned life insurance 573 12.16 % 907 16.29 %
(Loss) gain on fair value of junior subordinated debentures (614) (13.03) % 274 4.92 %
Gain on sale of assets 11 0.23 % - - %
Other 1,274 27.04 % 913 16.39 %
Total $ 4,713 100.00 % $ 5,569 100.00 %
Noninterest income consists primarily of fees and commissions earned on services provided to banking customers, fair value adjustments to the value of TRUPs, and, to a lesser extent, loss on sales of Company assets and other miscellaneous income.
Noninterest income for the year ended December 31, 2024 decreased $856,000, or 15.4%, when compared to 2023. Customer service fees, the primary component of noninterest income, totaled $2.9 million for both periods. The decrease in noninterest income of $856,000 between the two periods is primarily the result of changes in the fair value of TRUPs. A loss of $614,000
was recorded during the year ended 2024 compared to a gain of $274,000 recorded during 2023. The change in the fair value of TRUPs was primarily caused by fluctuations in the SOFR yield curve. Gains on proceeds from bank-owned life insurance totaled $573,000 for the year ended December 31, 2024 and $907,000 for the year ended December 31, 2023. Included in other income are increases of $228,000 in miscellaneous income and $140,000 in dividends from FHLB.
Noninterest Expense
The following table sets forth the components of total noninterest expense in dollars and as a percentage of average earning assets for the years ended December 31, 2024, and 2023:
2024 2023
(Dollars in thousands) Amount % of
Average
Earning Assets Amount % of
Average
Earning Assets
Salaries and employee benefits $ 13,884 1.26 % $ 13,157 1.14 %
Occupancy expense 3,686 0.33 % 3,739 0.33 %
Data processing 1,114 0.10 % 784 0.07 %
Professional fees 5,265 0.48 % 4,366 0.38 %
Regulatory assessments 697 0.06 % 727 0.06 %
Director fees 436 0.04 % 438 0.04 %
Other 3,198 0.29 % 2,743 0.24 %
Total $ 28,280 2.57 % $ 25,954 2.26 %
Noninterest expense increased $2.3 million, or 9.0%, between the years ended December 31, 2024, and 2023. The net increase in noninterest expense between the comparative periods is primarily the result of increases in salaries and employee benefits, professional fees, and data processing expense. The increase in salaries and employee benefits for the year are related to increased salary expense, stock compensation expense, and group insurance costs. Increases in professional fees are related to increases in service contracts and legal expenses while increases in data processing expenses are related to core processing expenses.
Income Taxes
The provision for income taxes is impacted to some degree by permanent taxable differences between income reported for book purposes and income reported for tax purposes, as well as certain tax credits which are not reflected in the statements of operations and comprehensive income. As pretax income or loss amounts become greater, the impact of these differences becomes less significant and is reflected as a variance in the effective tax rate for the periods presented. In general, the permanent differences and tax credits affecting tax expense have a positive impact and tend to reduce the effective tax rates shown in the statements of income and comprehensive income. The effective tax rate for the year ended December 31, 2024, was 27.2% compared to 28.0% for the year ended December 31, 2023. The decrease in the tax rate between the two periods is due to a permanent adjustment related to salary accruals.
Financial Condition
The following table sets forth key financial data as of and for the years ended:
December 31,
(dollars in thousands) 2024 2023 $ Change % Change
Due from Federal Reserve Bank (FRB) $ 24,411 $ 207 $ 24,204 11692.8 %
Loans, net of unearned income $ 912,416 $ 904,384 $ 8,032 1.0 %
Investment securities $ 160,708 $ 184,620 $ (23,912) (13.0) %
Total assets $ 1,211,718 $ 1,211,045 $ 673 0.1 %
Total deposits $ 1,057,622 $ 1,004,477 $ 53,145 5.3 %
Total liabilities $ 1,081,356 $ 1,088,503 $ (7,147) (0.7) %
Average interest-earning assets $ 1,100,634 $ 1,150,280 $ (49,646) (4.3) %
Average interest-bearing liabilities $ 714,403 $ 726,746 $ (12,343) (1.7) %
Net loans increased due to organic growth and credit line draws. Investment securities decreased due to principal repayments and treasury-security maturities. Both overnight interest-bearing deposits in the Federal Reserve Bank and federal funds sold and total deposits increased due to increases in interest-bearing deposits. Included in the increase in interest-bearing deposits are $100.3 million in purchased brokered deposits.
Loans
The Company’s primary business is that of acquiring deposits and making loans, with the loan portfolio representing the largest component of earning assets. Gross loans totaled $930.2 million at December 31, 2024, an increase of $8.9 million, or 1.0%, from $921.3 million at December 31, 2023. During 2024, average loans decreased 1.9% compared to the year ended December 31, 2023. Average loans totaled $937.9 million and $955.4 million for the years ended December 31, 2024 and 2023, respectively.
The following table sets forth the amounts of loans, net of unearned income, outstanding by category and the category percentages as of the year-end dates indicated:
2024 2023
(In thousands) Dollar Amount % of Loans Dollar Amount % of Loans Change
Commercial and industrial $ 63,715 6.9 % $ 53,347 5.8 % $ 10,368
Real estate mortgage 666,694 71.8 % 646,709 70.3 % $ 19,985
Real estate construction & development 111,145 12.0 % 127,944 13.9 % $ (16,799)
Agricultural 49,462 5.3 % 49,795 5.4 % $ (333)
Installment and student loans 37,446 4.0 % 42,247 4.6 % $ (4,801)
Total loans $ 928,462 100.0 % $ 920,042 100.0 % $ 8,420
Loan volume continues to be highest in what has historically been the Bank’s primary lending emphasis: real estate mortgage and construction lending. Total loans increased 0.9% during 2024. Real estate construction and development loans decreased 13.1%, commercial and industrial loans increased 19.4%, agricultural loans decreased 0.7%, installment loans decreased 11.4%, and real estate mortgage loans increased 3.1%.
The real estate mortgage loan portfolio, totaling $666.7 million at December 31, 2024, consists of commercial real estate, residential mortgages, and home equity loans. Commercial real estate loans have remained a significant percentage of total loans over the past year, amounting for 45.2% and 42.0% of the total loan portfolio at December 31, 2024 and December 31, 2023, respectively. Commercial real estate balances increased to $419.4 million at December 31, 2024 from $386.1 million at December 31, 2023. Commercial real estate loans are generally a mix of short- to medium-term, fixed- and floating-rate instruments and are mainly secured by commercial income and multi-family residential properties. Residential mortgage loans are generally 30-year amortizing loans with an average life of six to eight years. These loans totaled $247.2 million, or 26.6%, of the portfolio at December 31, 2024, and $260.5 million, or 28.3%, of the portfolio at December 31, 2023. Real estate
mortgage loans in total increased $20.0 million, or 3.1%, during 2024. The home equity loan portfolio totaled $24,000 at December 31, 2024, and $36,000 at December 31, 2023.
Real estate construction and development loans, representing 12.0% and 13.9% of total loans at December 31, 2024 and December 31, 2023, respectively, consist of loans for residential and commercial construction projects, as well as land acquisition and development, or land held for future development. Loans in this category are secured by real estate including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment of construction loans generally comes from long-term mortgages with other lending institutions obtained at project completion or from the sale of the constructed homes to individuals.
Purchased loan participations totaled $3.6 million at December 31, 2024 compared to $9.2 million at December 31, 2023. Loan participations sold increased from $4.16 million, or 0.5%, of the portfolio at December 31, 2023, to $4.21 million, or 0.5%, at December 31, 2024.
At December 31, 2024, approximately 48.8% of commercial and industrial loans have floating rates and, although some may be secured by real estate, many are secured by accounts receivable, inventory, and other business assets. Construction loans are generally short-term, floating-rate obligations, which consist of both residential and commercial projects. Agricultural loans, are primarily short-term, floating-rate loans for crop financing.
Included in installment loans at December 31, 2024 are $33.9 million in unsecured student loans made to medical and pharmacy school students in the U.S. and Caribbean, all of whom are U.S. citizens. Student loans decreased $4.6 million from the balance of $38.5 million reported at December 31, 2023, due to paydowns, consolidations with other lenders, and charge-offs. The outstanding balance of student loans for students who are either in school or a grace period and have not begun repayment totaled $792,000 at December 31, 2024. Accrued interest on student loans that are in school or a grace period totaled $575,000 at December 31, 2024. At December 31, 2024, there were 690 loans within repayment, deferment, and forbearance which represented $19.6 million, $10.0 million, and $3.5 million in outstanding balances, respectively. Student loans have not been purchased or originated since 2019.
Repayment of the unsecured student loans is premised on the medical and pharmacy students graduating and becoming high-income earners. Under program guidelines, repayment terms can vary per borrower; however, repayment occurs on average within 10 to 20 years. Additional repayment capacity is provided by non-student, co-borrowers for roughly one-third of the portfolio. The average student loan balance per borrower as of December 31, 2024, was approximately $113,200. Loan interest rates are variable and currently range from 6.00% to 12.875%.
At December 31, 2024, $19.6 million of student loans were in repayment compared to $20.8 million as of December 31, 2023. Accrued interest on student loans totaled $3.6 million and $3.5 million as of December 31, 2024, and 2023, respectively. At December 31, 2024, the reserve against the student loan portfolio totaled $7.0 million. During the year ended December 31, 2024, $328,000 in accrued interest receivable was reversed, due to charge-offs of $2.8 million. At December 31, 2023, the reserve totaled $6.3 million and $252,000 in accrued interest was reversed due to charge-offs of $2.6 million.
The following table sets forth the Bank’s student loan portfolio activity from December 31, 2023 and December 31, 2024:
(In thousands)
Balance as of December 31, 2022
$ 42,131
Capitalized Interest 3,712
Payments Received (1,660)
Loan Consolidations/Payoffs (3,102)
Loans Charged-off (2,588)
Balance as of December 31, 2023
38,493
Capitalized Interest 2,611
Payments Received (1,301)
Loan Consolidations/Payoffs (3,072)
Loans Charged-off (2,842)
Balance as of December 31, 2024
$ 33,889
Student Loan Finance Corporation (ZuntaFi) is the third-party servicer for the student loan portfolio. ZuntaFi provides servicing for the student loan portfolio, including application administration, processing, approval, documenting, funding, and collection of current and charged off balances. They also provide file custodial responsibilities. Except in cases where applicants/loans do not meet program requirements, or extreme delinquency, ZuntaFi provides complete program management. ZuntaFi is paid a monthly servicing fee based on the principal balance outstanding. This servicing fee is presented as part of professional fees within noninterest expense.
The following table sets forth the maturities of the Bank’s loan portfolio, net of unearned fees, at December 31, 2024. Amounts presented are shown by maturity dates rather than repricing periods:
(In thousands) Due in one year or less Due between one to five years Due between five to 15 years Due after 15 years Total
Commercial and agricultural $ 60,829 $ 44,194 $ 8,152 $ - $ 113,175
Real estate construction & development 76,638 31,884 2,623 - 111,145
Real estate - mortgage 26,302 264,205 145,163 231,025 666,695
All other loans 1,120 2,438 33,889 - 37,447
Total loans $ 164,889 $ 342,721 $ 189,827 $ 231,025 $ 928,462
For the years ended December 31, 2024 and 2023, the average yield on loans was 6.0% and 5.8%, respectively. Rate floors are occasionally used to mitigate interest rate risk if interest rates fall, as well as to compensate for additional credit risk under current market conditions. The loan portfolio is generally comprised of short-term or floating-rate loans that adjust in alignment to changes in market rates of interest.
At December 31, 2024 and 2023, approximately 29.4% and 31.7%, respectively, of the loan portfolio consisted of floating-rate instruments, with the majority of those tied to the prime rate.
The following table sets forth the contractual maturities of the Bank’s fixed- and floating-rate loans at December 31, 2024. Amounts presented are shown by maturity dates rather than repricing periods, and do not consider renewals or prepayments of loans:
(In thousands) Due in one year or less Due between one to five years Due between five to 15 years Due after 15 years Total
Loans with fixed rates:
Commercial and industrial $ 8,019 $ 22,005 $ 2,611 $ - $ 32,635
Real estate mortgage 26,073 231,683 59,567 221,640 538,963
Real estate construction & development 43,724 17,755 2,623 - 64,102
Agricultural 7,764 10,264 3,424 - 21,452
Installment and student loans 506 2,436 - - 2,942
Total loans with fixed rates 86,086 284,143 68,225 221,640 660,094
Loans with variable rates:
Commercial and industrial 22,941 8,079 60 - 31,080
Real estate mortgage 229 32,521 85,596 9,385 127,731
Real estate construction & development 32,914 14,129 - - 47,043
Agricultural 22,105 3,848 2,057 - 28,010
Installment and student loans 614 - 33,890 - 34,504
Total loans with variable rates 78,803 58,577 121,603 9,385 268,368
Total Loans $ 164,889 $ 342,720 $ 189,828 $ 231,025 $ 928,462
Securities
The following table sets forth certain information regarding carrying values and percentage of total carrying value of available-for-sale securities for the years indicated:
December 31, 2024 December 31, 2023
(In thousands) Carrying Value Percent of Total Carrying Value Percent of Total
Available-for-sale:
U.S. Government agencies $ 2,644 1.7 % $ 6,156 3.4 %
U.S. Government sponsored entities and agencies collateralized by mortgage obligations 78,881 50.1 % 88,184 48.6 %
Corporate bonds 33,490 21.3 % 32,123 17.7 %
Municipal bonds 42,367 26.9 % 42,365 23.4 %
U.S. Treasury securities - - % 12,438 6.9 %
Total available-for-sale $ 157,382 100.0 % $ 181,266 100.0 %
As of December 31, 2024, and 2023, there were no securities classified as held-to-maturity.
The contractual maturities of investment securities as well as yields based on carrying value of those securities at December 31, 2024 are shown below. Actual cash flows may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.
One year or less Between one to five years Between five to 10 years After 10 years Total
(Dollars in thousands) Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1) Amount Yield (1)
Available-for-sale:
U.S. Government agencies $ - - % $ 1,096 5.47 % $ 1,467 5.63 % $ - - % $ 2,563 5.56 %
U.S. Government sponsored entities & agencies collateralized by mortgage obligations - - % 3,482 3.47 % 2,548 2.41 % 72,930 2.66 % 78,960 2.69 %
Corporate bonds 5,266 4.34 % 18,263 3.88 % 9,961 4.13 % - - % 33,490 4.03 %
Municipal bonds 98 1.16 % 9,890 1.43 % 32,381 1.83 % - - % 42,369 1.74 %
Total amortized cost $ 5,364 4.28 % $ 32,731 3.15 % $ 46,357 2.48 % $ 72,930 2.66 % $ 157,382 2.77 %
(1) Weighted average yields are not computed on a tax-equivalent basis
At December 31, 2024, and 2023, available-for-sale securities with an amortized cost of approximately $90.7 million and $94.3 million, respectively (fair value of $77.8 million and $82.9 million, respectively) were pledged as collateral for public funds and FHLB borrowings.
During the year ended December 31, 2024, the Company recognized unrealized losses of $28,000 related to marketable equity securities within the consolidated statements of income, compared to unrealized gains of $39,000 during the year ended December 31, 2023.
Deposits
The Bank attracts commercial deposits primarily from local businesses and professionals, as well as retail checking accounts, savings accounts, and time deposits. Core deposits, consisting of all deposits other than time deposits of $250,000 or more and brokered deposits, continue to provide the foundation for the Bank’s principal sources of funding and liquidity. Core deposits amounted to 87.4% and 97.6% of the total deposit portfolio at December 31, 2024, and 2023, respectively. The Bank held $100.3 million in brokered deposits at December 31, 2024. These brokered deposits were purchased in order to reduce short-term borrowings, fund loan growth, and offset deposit runoff as part of the Bank’s cash management strategy. The Bank held no brokered deposits at December 31, 2023.
The following table sets forth the year-end amounts of deposits and balances as a percentage of total deposits by category for the years indicated:
December 31,
(In thousands) 2024 2023 Change
Noninterest-bearing deposits $ 360,152 34.05 % $ 403,225 40.14 % $ (43,073)
Interest-bearing deposits:
NOW and money market accounts 504,466 47.70 % 406,857 40.50 % $ 97,609
Savings accounts 114,648 10.84 % 122,547 12.20 % $ (7,899)
Time deposits:
Under $250,000 45,141 4.27 % 48,098 4.79 % $ (2,957)
$250,000 and over 33,215 3.14 % 23,750 2.36 % $ 9,465
Total interest-bearing deposits 697,470 65.95 % 601,252 59.86 % $ 96,218
Total deposits $ 1,057,622 100.00 % $ 1,004,477 100.00 % $ 53,145
The Bank’s deposit base consists of two major components represented by noninterest-bearing (demand) deposits and interest-bearing deposits. Interest-bearing deposits consist of time certificates, NOW and money market accounts, and savings deposits. During the year ended December 31, 2024, total time deposits increased 9.1%, NOW and money market deposits increased 24.0%, noninterest-bearing deposits decreased 10.7%, and savings accounts decreased 6.4%. The $100.3 million in purchased brokered deposits are included in NOW and money market account totals.
On a year-to-date average basis, total deposits decreased $63.8 million, or 6.0%, between the years ended December 31, 2023 and December 31, 2024. Interest-bearing deposits decreased by $11.4 million, or 1.7%, and noninterest-bearing deposits decreased $52.5 million, or 12.8%, during 2024. On average, time deposit balances decreased 8.9%, NOW accounts decreased 8.5%, money market accounts increased 3.2%, and savings accounts decreased 2.0% between December 31, 2023, and December 31, 2024.
The following table sets forth the average deposits and average rates paid on those deposits for the years ended December 31, 2024, and 2023:
2024 2023
(Dollars in thousands) Average Balance Yield Average Balance Yield
Interest-bearing deposits:
NOW and money market accounts $ 447,071 1.63 % $ 448,661 1.01 %
Savings 116,900 0.11 % 119,312 0.11 %
Time deposits 75,756 2.86 % 83,126 2.50 %
Total interest-bearing deposits 639,727 651,099
Noninterest-bearing deposits 358,212 410,673
Total deposits $ 997,939 $ 1,061,772
The following table set forth estimated total deposits exceeding the FDIC insurance limits for the years indicated:
December 31,
(Dollars in thousands) 2024 2023
Uninsured deposits $ 524,116 $ 523,971
The following table set forth estimated time deposits exceeding the FDIC insurance limits for the years indicated:
December 31, 2024
(Dollars in thousands) Three months of less Over three months through six months Over six months through 12 months Over 12 months Total
Uninsured time deposits (1)
$ 2,142 $ 7,946 $ 2,201 $ 10,002 $ 22,291
December 31, 2023
(Dollars in thousands) Three months of less Over three months through six months Over six months through 12 months Over 12 months Total
Uninsured time deposits (1)
$ 1,379 $ 1,186 $ 1,891 $ 6,792 $ 11,248
(1) Represents amount over insurance limit
Short-Term Borrowings
The Bank has access to short-term borrowings which may consist of federal funds purchased, discount window borrowings, securities sold under agreements to repurchase (“repurchase agreements”), and Federal Home Loan Bank (FHLB) advances as alternatives to retail deposit funds. Collateralized and uncollateralized lines of credit have been established with several correspondent banks. The FRB discount window, as well as a securities dealer, may also be accessed as needed.
Funds may be borrowed in the future as part of the Company’s asset/liability strategy, and may be used to acquire assets as deemed appropriate by management for investment purposes or for capital utilization purposes. Federal funds purchased represent temporary overnight borrowings from correspondent banks and are generally unsecured. Repurchase agreements are collateralized by mortgage backed securities and securities of U.S. Government agencies, and generally have maturities of one to six months, but may have longer maturities if deemed appropriate. FHLB advances are collateralized by investments in securities and certain qualifying mortgage loans and typically have maturities of one to three months. Additionally, borrowings collateralized by pledged loans may be secured from the Federal Reserve Bank of San Francisco (FRB). Credit lines are subject to periodic review by the credit lines grantors relative to the Company’s financial statements. Lines of credit may be modified or revoked at any time.
Lines of credit with the FRB of $499.1 million and $463.5 million, as well as FHLB lines of credit totaling $135.6 million and $128.9 million were available at December 31, 2024, and 2023, respectively. In addition, the Company maintains a $50 million uncollateralized line of credit with Pacific Coast Bankers Bank, a $20 million uncollateralized line of credit with Zion’s Bank, and a $20 million uncollateralized line of credit with US Bank. At December 31, 2024, the Bank held no short-term borrowings. At December 31, 2023, short-term borrowings totaled $62.0 million and were comprised of a $60.0 million secured, short-term loan from FHLB and an unsecured, overnight borrowing of $2.0 million from PCBB. These lines of credit generally have interest rates tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or SOFR.
Asset Quality and Allowance for Credit Losses
Lending money is the principal business activity, and ensuring appropriate evaluation, diversification, and control of credit risks is a primary management responsibility. Losses are implicit in lending activities and the amount of such losses will vary, depending on the risk characteristics of the loan portfolio as affected by local economic conditions and the financial experience of borrowers.
The Company adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), effective January 1, 2023, and utilizes a current expected credit loss (CECL) methodology which relies on segmenting the loan portfolio into pools with similar risks, tracking the performance of the pools over time, and using the data to determine pool loss experience. The allowance for credit losses on most loans is measured on a collective (pool) basis for loans with similar characteristics. The Company estimates the appropriate level of allowance for credit losses for collateral-dependent loans by evaluating them separately. A loan is evaluated individually when it does not share similar risk characteristics with the pool being evaluated. The Company also uses the CECL model to calculate the allowance for credit losses on off-balance sheet credit exposures, such as undrawn amounts on lines of credit. While the allowance for credit losses on loans is reported as a contra-asset, the allowance for credit losses on off-balance sheet credit exposure is reported as a liability.
The eight segments of the loan portfolio are as follows (subtotals are provided as needed to allow the reader to reconcile the amounts to loan classifications reported elsewhere in this report):
Loan Segments for Allowance for Credit Loss Analysis December 31,
(In thousands) 2024 2023
Commercial and business loans $ 63,653 $ 53,273
Government program loans 62 74
Total commercial and industrial 63,715 53,347
Real estate - mortgage:
Commercial real estate 419,422 386,134
Residential mortgages 247,248 260,539
Home improvement and home equity loans 24 36
Total real estate mortgage 666,694 646,709
Real estate construction and development 111,145 127,944
Agricultural 49,462 49,795
Installment and student loans 37,446 42,247
Total loans $ 928,462 $ 920,042
Individually-Evaluated Loans and Specific Reserves:
The following table summarizes the components of individually-evaluated loans and their related specific reserves:
December 31, 2024 December 31, 2023
(In thousands) Balance Allowance Balance Allowance
Real estate construction and development $ 12,185 $ - $ 11,390 $ -
Agricultural 390 - 451 14
Total individually-evaluated loans $ 12,575 $ - $ 11,841 $ 14
Individually-evaluated loans increased $734,000 to $12.6 million at December 31, 2024 compared to $11.8 million at December 31, 2023, and included three real estate construction and development loans and one agricultural loan. There was no reserve for individually-evaluated loans at December 31, 2024, due to the value of the collateral securing those loans. Included in the balance of specific reserves at December 31, 2023, was $14,000 allocated to one agricultural loan.
Collateral-Dependent Loans
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral.
The following table presents the recorded investment in collateral-dependent loans by type of loan:
December 31, 2024 December 31, 2023
(Dollars in thousands) Amount Number of Collateral-Dependent Loans Amount Number of Collateral-Dependent Loans
Real estate construction and development loans $ 12,185 3 $ 11,390 3
Agricultural loans 390 1 390 1
Total $ 12,575 4 $ 11,780 4
Credit Quality Indicators for Outstanding Student Loans:
The following table summarizes the credit quality indicators for outstanding student loans as of:
December 31, 2024 December 31, 2023
(In thousands, except number of loans) Number of Loans Principal Amount Accrued Interest Number of Loans Principal Amount Accrued Interest
School 26 $ 692 $ 512 44 $ 1,242 $ 734
Grace 3 100 63 18 473 296
Repayment 406 19,647 324 444 20,833 289
Deferment 219 9,954 2,593 237 10,163 2,022
Forbearance 65 3,496 133 98 5,782 133
Total 719 $ 33,889 $ 3,625 841 $ 38,493 $ 3,474
Included in installment loans are $33.9 million and $38.5 million in student loans at December 31, 2024 and December 31, 2023, respectively, made to medical and pharmacy school students. As of December 31, 2024, and December 31, 2023, the reserve against the student loan portfolio totaled $7.0 million and $6.3 million, respectively. Loan interest rates on the student loan portfolio range from 6.00% to 12.875% and 6.00% to 13.25% at December 31, 2024, and December 31, 2023, respectively.
The following table provides a summary of the Company’s allowance for credit losses, provisions made to that allowance, and charge-off and recovery activity affecting the allowance for the years indicated:
December 31,
(Dollars in thousands) 2024 2023
Total loans, net of deferred loan fees, outstanding at end of period before deducting allowances for credit losses $ 928,462 $ 920,042
Average net loans outstanding during period 925,993 942,135
Balance of allowance at beginning of period 15,658 16,549
Loans charged off:
Installment and student loans (2,862) (2,588)
Recoveries of loans previously charged off:
Real estate 6 55
Commercial, industrial & agricultural 1 2
Installment and student loans 224 210
Total loan recoveries 231 267
Net loans charged off (2,631) (2,321)
Provision charged to operating expense 3,019 1,430
Balance of allowance for credit losses at end of period (1) $ 16,046 $ 15,658
Net loan charge-offs to total average loans 0.28 % 0.25 %
Net loan charge-offs to loans at end of period 0.29 % 0.26 %
Allowance for credit losses to total loans at end of period 1.72 % 1.71 %
Net loan charge-offs to allowance for credit losses 16.40 % 14.82 %
Net loan charge-offs to provision for credit losses 87.15 % 162.31 %
(1) Includes a reversal of provision made to unfunded commitments of $56,000 for the year ended December 31, 2024 and a provision made to unfunded commitments of $30,000 for the year ended December 31, 2023.
Loan charge-offs increased $274,000 during the year ended December 31, 2024, compared to the year ended December 31, 2023. Loan recoveries decreased $36,000 during the same period. Student loan charge-offs totaled $2.8 million and $2.6 million for the years ended 2024 and 2023, respectively.
The following provides a summary of the Company’s net charge-offs as a percentage of average loan balances in each category for the years indicated:
December 31,
2024 2023
(Dollars in thousands) Net Charge-offs (Recoveries) Average Loan Balance Percentage Net Charge-offs (Recoveries) Average Loan Balance Percentage
Commercial and industrial (1) 56,411 <0.01% (2) 48,973 <0.01%
Real estate mortgages (6) 666,891 <0.01% (55) 668,691 (0.01) %
Real estate construction & development - 117,364 - - 138,373 -
Agricultural - 56,206 - % - 54,934 -
Installment and student loans 2,638 41,027 6.43 % 2,378 44,464 5.35 %
Total 2,631 937,899 0.28 % 2,321 955,435 0.24 %
Management believes that the 1.72% credit loss allowance to total loans at December 31, 2024 is adequate to absorb expected losses in the loan portfolio. There is no guarantee, however, against economic conditions or other circumstances materializing which could adversely affect the Company’s service areas resulting in increased losses in the loan portfolio not captured by the current allowance for credit losses.
The following table sets forth the allowance for credit loss and total loan percentages by category for the years ended:
December 31,
2024 2023
(Dollars in thousands) Allowance
for Credit Losses % Total Loans (1)
Allowance
for Credit Losses % Total Loans (1)
Commercial and industrial $ 2,839 6.9 % $ 1,903 5.8 %
Real estate - mortgage 2,634 71.8 % 2,524 70.3 %
Real estate construction and development 2,504 12.0 % 3,614 13.9 %
Agricultural 1,028 5.3 % 1,250 5.4 %
Installment and student loans 7,041 4.0 % 6,367 4.6 %
Total $ 16,046 100.0 % $ 15,658 100.0 %
(1) Represents percentage of loans in category to total loans
During 2024, reserve allocations as a percentage of loans increased for commercial and industrial loans and real estate mortgage loans. Reserve allocations for real estate construction and development loans, agricultural loans, and installment and student loans decreased due to decreases in loan balances while reserve allocations for commercial and industrial loan and real estate mortgage loans increased due to increases in those balances. Since 2023, the credit loss allowance has been determined under the “Current Expected Credit Losses” model (CECL). CECL is a forward-looking measure which applies prospective loss rates based on both historical loss patterns and reasonable, supportable forecasts on loan pools based on loans sharing similar characteristics.
During 2023, reserve allocations as a percentage of loans increased for all categories. This was primarily due to adjustments related to the adoption of CECL, offset by decreases in past due and nonaccrual loans and decreases in loan balances as a whole. Increases in installment loan allowances were related to both the CECL adjustment and charge-offs within the student loan portfolio.
The following table sets forth nonperforming assets as of the dates indicated:
December 31,
(Dollars in thousands) 2024 2023
Nonaccrual loans $ 12,198 $ 11,448
Loans, past due 90 days or more, still accruing 421 426
Total non-performing loans 12,619 11,874
Other real estate owned 4,582 4,582
Total non-performing assets $ 17,201 $ 16,456
Non-performing loans to total gross loans 1.36 % 1.29 %
Non-performing assets to total assets 1.42 % 1.36 %
Allowance for credit losses to nonperforming loans 127.16 % 131.87 %
The accrual of interest income on loans is discontinued when reasonable doubt exists with respect to the timely collectability of interest or principal due to the inability of the borrower to comply with the terms of the loan agreement. With the exception of student loans, loans are typically placed on nonaccrual status when the payment of principal or interest is 90 days past due, or earlier if warranted. Interest collected thereafter is credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan. Exceptions may be granted to this policy if the loans are well-secured and in the process of collection.
Non-performing assets at December 31, 2024 increased $745,000 between December 31, 2024 and December 31, 2023, due primarily to increases of $750,000 in nonaccrual loans.
The loan portfolio increased from $920.0 million at December 31, 2023, to $928.5 million at December 31, 2024. Non-performing assets increased from $16.5 million at December 31, 2023, to $17.2 million at December 31, 2024. Non-accrual loans, accruing loans past due 90 days, and OREO are included in non-performing loans.
The following table summarizes various components of the loan portfolio for the years ended:
December 31,
(Dollars in thousands) 2024 2023
Provision for credit losses during period $ 2,963 $ 1,460
Allowance as % of nonaccrual loans 131.55 % 136.77 %
Non-performing loans as % total loans 1.36 % 1.29 %
Allowance as % of total loans 1.72 % 1.70 %
In determining the adequacy of the underlying collateral related to these loans, management monitors trends within specific geographical areas, loan-to-value ratios, appraisals, and other credit issues related to specific loans.
Management continues to monitor and reduce the level of problem assets by working with borrowers to identify options, such as loan modifications, which may help borrowers facing difficulties. Net loan charge-offs during the year ended December 31, 2024, totaled $2.6 million, compared to $2.3 million for the year ended December 31, 2023. Charge-offs related to the student loan portfolio totaled $2.8 million for the year ended December 31, 2024, and $2.6 million for the year ended December 31, 2023, and were partially offset by recoveries within the portfolio. The percentage of net charge-offs to average loans was 0.28%, for the year ended December 31, 2024 and 0.25% for the year ended December 31, 2023.
The following table summarizes the non-accrual loans by loan category for the years ended:
December 31,
(In thousands) 2024 2023 Change
Real estate - construction 12,198 11,403 795
Agricultural - 45 (45)
Total $ 12,198 $ 11,448 $ 750
Loans past due more than 30 days receive management attention and are monitored for increased risk. As of December 31, 2024, and 2023, loans past due more than 30 days totaled $15.8 million and $13.0 million, respectively.
Other than the non-performing loans described above, there were no loans at December 31, 2024, where the known credit problems of a borrower made doubtful their ability to comply with present loan repayment terms.
Liquidity and Capital Resources
The Company’s asset/liability management, liquidity strategy, and capital planning are guided by policies, formulated and monitored by the Asset/Liability Committee (ALCO) and Management, to provide adequate liquidity and maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities.
Liquidity
Liquidity management may be described as the ability to maintain sufficient cash flows to fulfill both on- and off-balance sheet financial obligations, including loan funding commitments and customer deposit withdrawals, without straining the Company’s equity structure. To maintain an adequate liquidity position, the Company relies on, in addition to cash and cash equivalents, cash inflows from deposits and short-term borrowings, repayments of principal on loans and investments, and net interest income received. The Company’s principal cash outflows are for loan origination, purchases of investment securities, depositor withdrawals, and payment of operating expenses.
The Company’s liquid asset base, which generally consists of cash and due from banks, federal funds sold, and investment securities, is maintained at levels deemed sufficient to provide the cash necessary to fund loan growth, unfunded loan commitments, and deposit runoff. Included in this framework is the objective of maximizing the yield on earning assets. This is generally achieved by maintaining a high percentage of earning assets in loans and investment securities, which are higher yielding assets compared to cash.
The following table sets forth asset balances for the period ended:
December 31,
2024 2023
(Dollars in thousands) Balance % Total Assets Balance % Total Assets
Cash and cash equivalents $ 56,211 4.6 % $ 40,784 3.4 %
Loans, net of unearned income 928,462 76.6 % 920,042 76.0 %
Unpledged investment securities 79,623 6.6 % 98,394 8.1 %
At December 31, 2024, the loan-to-deposit ratio was 87.8% compared to 91.6% at December 31, 2023.
Liabilities used to fund liquidity sources include core and non-core deposits as well as short-term borrowings. Core deposits comprised approximately 87.4% of total deposits at December 31, 2024, and 97.6% at December 31, 2023. At December 31, 2024, there were no short-term borrowings. At December 31, 2023, short-term borrowings totaled $62.0 million, including a term-loan of $60.0 million at FHLB and an overnight borrowing of $2.0 million at PCBB. At December 31, 2024, unused lines of credit with the Federal Home Loan Bank, Pacific Coast Banker’s Bank, Zion’s Bank, US Bank and the Federal Reserve Bank totaling $724.7 million were collateralized in part by investment securities and certain qualifying loans in the Company’s loan portfolio. The carrying value of securities and loans pledged on these used and unused borrowing lines totaled $847.861 million at December 31, 2024. Credit lines totaling $672.4 million were partially collateralized by pledged securities and qualifying loans of $840.2 million at December 31, 2023. For a further detail of the Company’s borrowing arrangements, see “Note 8 - Short-Term Borrowings/Other Borrowings,” in the consolidated financial statements.
Cash and cash equivalents increased $15.4 million during the year ended December 31, 2024, and increased $2.2 million during the year ended December 31, 2023.
(In thousands) 2024 2023
Cash and cash equivalents at beginning of year: $ 40,784 $ 38,595
Cash flows from operating activities: 19,635 21,376
Cash flows from investing activities: 12,953 87,583
Cash flows from financing activities: (17,161) (106,770)
Cash and cash equivalents at end of year: $ 56,211 $ 40,784
Net cash inflows from operations decresaed to $19.6 million during the year ended December 31, 2024, compared to $21.4 million for the year ended December 31, 2023. The Company experienced net cash inflows from investing activities totaling $13.0 million during the year ended December 31, 2024 and net cash inflows of $87.6 million during the year ended December 31, 2023, respectively. For the year ended December 31, 2024, net cash outflows from financing activities totaled $17.2 million, a reduction of $89.6 million compared to the outflows of $106.8 million reported at December 31, 2023. This decrease was the result of a decrease of $62.0 million in short-term borrowings and increases of $46.6 million in demand deposits and savings accounts. Net cash inflows from investing activities for both periods were primarily the result of principal paydowns on securities, treasury security maturities, and proceeds from bank-owned life insurance. For the year ended December 31, 2023, net cash outflows from financing activities totaling $106.8 million were due primarily to decreases in demand deposits, NOW and money market accounts, and savings accounts.
Liquidity risk arises from the possibility that the Company may not be able to satisfy current or future financial commitments or may become unduly reliant on alternative funding sources. The Company maintains a liquidity risk management policy and contingency funding plan to address and manage this risk. The policy identifies the primary sources of liquidity, sets wholesale funding limits, establishes procedures for monitoring and measuring liquidity, and establishes minimum liquidity requirements in compliance with regulatory guidance. Liquidity is continually monitored and reported on a monthly basis to the Board of Directors. Additionally, the Company performs liquidity stress testing in accordance with industry practices to ensure cash flow requirements are met under stressed scenarios.
The liquidity of the Holding Company is separate from the Bank and is primarily dependent on the payment of cash dividends by the Bank, subject to limitations imposed by the Financial Code of the State of California and federal and state banking regulations. During the year ended December 31, 2024, the Bank paid $9.3 million in cash dividends to the Holding Company. During the year ended December 31, 2023, the Bank paid $8.5 million in cash dividends to the Holding Company.
Capital and Dividends
The Company and the Bank are subject to various regulatory capital requirements adopted by the Board of Governors of the Federal Reserve System (the “Board of Governors”). Failure to meet minimum capital requirements can initiate certain mandates and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
The Company has adopted a capital plan that includes guidelines and trigger points to ensure sufficient capital is maintained at the Bank and the Company, and that capital ratios are maintained at a level deemed appropriate under regulatory guidelines given the level of classified assets, concentrations of credit, allowance for credit losses, current and projected growth, and projected retained earnings. The capital plan also contains contingency strategies to obtain additional capital as required to fulfill future capital requirements for both the Bank, as a separate legal entity, and the Company on a consolidated basis. The capital plan includes a target for the Bank to maintain a ratio of tangible shareholders’ equity to total tangible assets equal to or greater than 9%. The Bank’s ratio of tangible shareholders’ equity to total tangible assets was 12.7% and 12.2% at December 31, 2024, and 2023, respectively.
The Company’s equity capital totaled $130.4 million at December 31, 2024, compared to $122.5 million at December 31, 2023. During the year ended December 31, 2024, the Company paid $8.3 million in cash dividends to shareholders.
For a more detailed discussion of regulatory capital requirements and dividends, see “Note 22 - Regulatory Matters” to the consolidated financial statements, as well as under the captions “Supervision and Regulation - The Company - Capital Adequacy” and “Supervision and Regulation - The Bank - Capital Standards” set forth in Part I, Item I., of this Annual Report.
As of December 31, 2024, the Company and the Bank meet all capital adequacy requirements to which they are subject. Management believes that, under the current regulations, both will continue to meet their minimum capital requirements in the foreseeable future.
Reserve Balances
The FRB no longer requires depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts and non-personal time deposits. At December 31, 2024 and December 31, 2023, the Bank was not subject to a reserve requirement.
Critical Accounting Estimates and Policies
In preparing the consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Our most significant accounting policies and estimates and their related application are discussed below.
Allowance for Credit Losses
The allowance for credit losses (ACL) represents the estimated probable credit losses in our loan and investment portfolios and is estimated as of December 31, 2024, using CECL. The Company’s method for assessing the appropriateness of the ACL includes specific allowances for individually-analyzed loans, formula allowance factors for pools of credits, and qualitative considerations which include, among other things, current and forecast economic and environmental factors. Allowance factors for loan pools are based on historical loss experience by product type.
Management estimates the ACL balance using relevant information from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Historical credit loss experience provides the basis for the estimation of expected credit losses, which captures loan balances as of a point in time to form a cohort, and then tracks the respective losses generated by that cohort of loans over the remaining life. The Company has identified and accumulated loan cohort historical loss data beginning with the first quarter of 2006 and through the current period. Adjustments to historical loss information are made using qualitative adjustments for differences in relevant current and forecasted loan-specific risk characteristics, such as the historical timing of losses relative to the loan origination.
A significant amount of the allowance for credit losses is measured on a collective (pool) basis by loan and investment security type when similar risk characteristics exist. Pools are determined based primarily on regulatory reporting codes as the loans and investment securities within each pool share similar risk characteristics and there is sufficient historical peer loss data from the FFIEC to provide statistically meaningful support in the models developed for pools where the Company has limited historical loss experience. Reserves for credit losses identified on a pooled basis are then adjusted for qualitative factors to reflect current conditions. The most significant components of qualitative factors used to estimate the ACL are adjustments relating to prevailing economic conditions, concentrations within the loan portfolio, internal factors, and external factors. These estimates are subject to significant judgment and could potentially significantly increase or decrease the ACL.
Certain loans are not included in pools of loans that are collectively evaluated. The segregation of these loans is based on the results from an analysis of individually identified credits that meet management’s criteria for individual evaluation. These loans are first reviewed individually to determine if such loans have a unique risk profile that would warrant individual evaluation. When management has concluded that it is probable that the borrower will be unable to pay all amounts due under the original contractual terms, the loan is removed from collectively evaluated loan pools. The loan is reviewed and evaluated individually by management for loss potential by evaluating sources of repayment, including collateral, as applicable. A specified allowance for credit losses is established when necessary.
Because current economic conditions and forecasts can change and future events make it inherently difficult to predict the anticipated amount of estimated credit losses on loans, management’s determination of the appropriateness of the ACL could change significantly. It is difficult to estimate how potential changes in any one economic factor or input might affect the overall allowance. A wide variety of factors and inputs are considered in estimating the allowance and changes in those factors and inputs may not occur at the same rate and may not be consistent across all product types. Additionally, changes in factors and inputs may move inversely in relation to one another, such that improvement in one factor or input may offset deterioration
in another. Thus, as a result of the significant size of the loan portfolio, the numerous assumptions in the model, and the high degree of potential change in such assumptions, there is a high degree of subjectivity in the reported amounts. Management believes the ACL is adequate as of December 31, 2024.
Fair Value of Junior Subordinated Debentures (TRUPs)
The Company’s junior subordinated debentures (TRUPs) are measured at fair value. The accounting standards related to fair value measurements define how applicable assets and liabilities are to be valued and require expanded disclosures in regard to financial instruments carried at fair value. The fair value measurement accounting standard establishes a hierarchical disclosure framework associated with the level of pricing observability utilized in measuring financial instruments at fair value. The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Financial instruments with readily available actively quoted prices, or whose fair value can be measured from actively quoted prices of related financial instruments, generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments that are traded infrequently or not quoted in an active market will generally have little or no pricing observability and a higher degree of subjectivity. Pricing observability is impacted by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market, and the characteristics specific to the transaction. Determining fair values under the accounting standards may include judgments related to measurement factors that may vary from actual transactions executed in the marketplace. For example, fluctuations in financial market interest rates can have a significant impact on the fair value determination, as well as the Company’s selection of bond credit ratings used in pricing modeling. Fair value adjustments related to TRUPs resulted in a recorded loss of $368,000 for the year ended December 31, 2024, and a recorded loss of $270,000 for the year ended December 31, 2023. (See Notes 10 and 15 of the Notes to Consolidated Financial Statements for additional information about financial instruments carried at fair value.)
Other Accounting Policies and Estimates that are Not Considered Critical
On an ongoing basis, the Company evaluates its estimates, including those that may materially affect the financial statements and are related to investments, fair value measurements, retirement plans, and intangible assets. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company’s policies related to these estimates can be found in Note 1 of the Notes to Consolidated Financial Statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A - Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8 - Financial Statements and Supplementary Data
Index to Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm (PCAOB ID: 659)
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
United Security Bancshares
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of United Security Bancshares and Subsidiaries (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2024 and 2023, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses on Loans
As described in Notes 1 and 3 to the consolidated financial statements, the Company’s measurement of expected credit losses on loans is based on relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. Historical credit loss experience provides the basis for the estimation of expected credit losses, which captures loan balances as of a point in time to form a cohort, and then tracks the respective losses generated by that cohort of loans over the remaining life. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company’s historical loss experience from 2006 to 2024, which is adjusted for certain qualitative factors to reflect the extent to which management expects current conditions and reasonable and supportable forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The Company’s allowance for credit losses on loans was $16,046,000 as of December 31, 2024.
We identified the auditing of qualitative adjustments to the allowance for credit losses on loans as a critical audit matter. Estimation of the lifetime expected credit losses for loans, particularly as it relates to the qualitative factors, requires significant
management judgment. Auditing management’s judgments and assumptions involved significant audit effort as well as especially challenging and subjective auditor judgment when performing audit procedures and evaluating the results of those procedures.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. Our audit procedures related to allowance for credit losses on loans, including the qualitative adjustments included the following, among others:
•Evaluating the appropriateness of the methodology used.
•Evaluating the reasonableness of the qualitative adjustments used by management by comparing the qualitative adjustments to the relevant internal and external data, including historical trends.
•Developed an independent expectation of qualitative adjustments and evaluated differences.
•Testing the mathematical accuracy of the computation, including testing completeness and accuracy of the internal data used and evaluating the relevance and reliability of the external data used in the calculation, the historical loss rates and qualitative adjustments determined by management and used in the calculation.
/s/ Moss Adams LLP
San Francisco, California
March 20, 2025
We have served as the Company’s auditor since 1999.
United Security Bancshares and Subsidiaries
Consolidated Balance Sheets
December 31, 2024, and 2023
(In thousands except share data) December 31, 2024 December 31, 2023
Assets
Cash and cash equivalents $ 56,211 $ 40,784
Investment securities (at fair value)
Available-for-sale (AFS) debt securities net of allowance for credit losses of $0 (amortized cost of $179,753 and $204,390, respectively)
157,382 181,266
Marketable equity securities 3,326 3,354
Total investment securities 160,708 184,620
Loans 930,244 921,341
Unearned fees and unamortized loan origination costs - net (1,782) (1,299)
Allowance for credit losses - loans (16,046) (15,658)
Net loans 912,416 904,384
Premises and equipment - net 8,668 9,098
Accrued interest receivable 8,104 7,928
Other real estate owned (“OREO”) 4,582 4,582
Goodwill 4,488 4,488
Deferred tax assets - net 14,419 14,055
Cash surrender value of life insurance - net 20,692 21,954
Investment in limited partnerships 4,275 3,200
Operating lease right-of-use assets 3,069 1,338
Other assets 14,086 14,614
Total assets $ 1,211,718 $ 1,211,045
Liabilities & Shareholders’ Equity
Liabilities
Deposits
Noninterest-bearing $ 360,152 $ 403,225
Interest-bearing 697,470 601,252
Total deposits 1,057,622 1,004,477
Short-term borrowings - 62,000
Operating lease liabilities 3,161 1,437
Other liabilities 9,001 9,376
Junior subordinated debentures (at fair value) 11,572 11,213
Total liabilities 1,081,356 1,088,503
Commitments and contingencies (Note 14)
Shareholders’ Equity
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,364,894 at December 31, 2024 and 17,167,895 at December 31, 2023
61,267 60,585
Retained earnings 83,447 76,995
Accumulated other comprehensive loss, net of tax (14,352) (15,038)
Total shareholders’ equity 130,362 122,542
Total liabilities and shareholders’ equity $ 1,211,718 $ 1,211,045
See accompanying notes to consolidated financial statements.
United Security Bancshares and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2024, and 2023
(In thousands except share and per-share data) 2024 2023
Interest Income:
Interest and fees on loans $ 55,236 $ 54,183
Interest on investment securities 5,209 5,870
Interest on deposits in FRB 306 324
Total interest income 60,751 60,377
Interest Expense:
Interest on deposits 9,578 6,758
Interest on other borrowed funds 4,323 4,298
Total interest expense 13,901 11,056
Net Interest Income 46,850 49,321
Provision for credit losses 2,963 1,460
Net Interest Income after Provision for Credit Losses 43,887 47,861
Noninterest Income:
Customer service fees 2,918 2,918
Increase in cash surrender value of bank-owned life insurance 551 557
Gain on proceeds from bank-owned life insurance 573 907
(Loss) gain on fair value of junior subordinated debentures (614) 274
Gain on sale of assets 11 -
Other 1,274 913
Total noninterest income 4,713 5,569
Noninterest Expense:
Salaries and employee benefits 13,884 13,157
Occupancy expense 3,686 3,739
Data processing 1,114 784
Professional fees 5,265 4,366
Regulatory assessments 697 727
Director fees 436 438
Other 3,198 2,743
Total noninterest expense 28,280 25,954
Income before provision for taxes 20,320 27,476
Provision for income taxes 5,537 7,680
Net income $ 14,783 $ 19,796
Net income per common share
Basic $ 0.86 $ 1.16
Diluted $ 0.86 $ 1.16
Weighted average common shares outstanding
Basic 17,188,384 17,114,214
Diluted 17,199,817 17,125,186
See accompanying notes to consolidated financial statements.
United Security Bancshares and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2024, and 2023
(In thousands) 2024 2023
Net Income $ 14,783 $ 19,796
Unrealized holding gains on AFS debt securities 753 3,941
Unrealized (loss) gain on unrecognized post-retirement costs (24) 88
Unrealized gain (loss) on junior subordinated debentures 245 (544)
Other comprehensive income, before tax 974 3,485
Tax expense related to AFS debt securities (223) (1,165)
Tax benefit (expense) related to unrecognized post-retirement costs 7 (24)
Tax (expense) benefit related to junior subordinated debentures (72) 161
Total other comprehensive income 686 2,457
Comprehensive income $ 15,469 $ 22,253
See accompanying notes to consolidated financial statements.
United Security Bancshares and Subsidiaries
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2024, and 2023
Common Stock Accumulated Other Comprehensive Loss
(In thousands, except share data) Number of Shares Amount Retained Earnings Total
Balance December 31, 2022 (1)
17,067,253 $ 60,030 $ 69,928 $ (17,495) $ 112,463
Other comprehensive income
- - - 2,457 2,457
Dividends on common stock ($0.35 per share)
- - (5,992) - (5,992)
Dividends payable ($0.12 per share)
- - (2,059) - (2,059)
Restricted stock units released 57,185 - - - -
RSU tax withholdings - (29) - - (29)
Restricted stock award granted 14,435 - - - -
Stock options exercised 29,022 106 106
Stock-based compensation expense - 478 - - 478
Current Expected Credit Loss (CECL) adoption adjustment, net of tax (4,678) (4,678)
Net income - - 19,796 - 19,796
Balance December 31, 2023 (2)
17,167,895 60,585 76,995 (15,038) 122,542
Other comprehensive income - - - 686 686
Dividends on common stock ($0.36 per share)
- - (6,248) - (6,248)
Dividends payable ($0.12 per share)
- - (2,083) - (2,083)
Restricted stock units released 28,710 - - - -
RSU tax withholdings - (10) - - (10)
Restricted stock award granted 168,289 - - - -
Stock-based compensation expense - 692 - - 692
Net income - - 14,783 - 14,783
Balance December 31, 2024 (3)
17,364,894 $ 61,267 $ 83,447 $ (14,352) $ 130,362
(1) Excludes 13,974 unvested restricted shares
(2) Excludes 21,435 unvested restricted shares
(3) Excludes 160,991 unvested restricted shares
See accompanying notes to consolidated financial statements.
United Security Bancshares and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2024, and 2023
(In thousands) 2024 2023
Cash Flows From Operating Activities:
Net Income $ 14,783 $ 19,796
Adjustments to reconcile net income to cash provided by operating activities:
Provision for credit losses 2,963 1,460
Depreciation and amortization 1,469 1,459
Amortization of operating lease right-of-use assets 646 646
Amortization of premium/discount on investment securities, net 417 499
Operating lease payments
(650) (656)
(Increase) decrease in accrued interest receivable (176) 561
Increase in accrued interest payable 4 45
Decrease (increase) in unearned fees and unamortized loan origination costs, net 483 (295)
Decrease (increase) in income taxes receivable 1,272 (1,755)
Stock-based compensation expense and tax benefit 692 478
Benefit for deferred income taxes (472) (297)
(Decrease) increase in accounts payable and accrued liabilities (368) 727
Loss (gain) on marketable equity securities 28 (39)
Loss (gain) on fair value option of junior subordinated debentures 614 (274)
Gain on proceeds from bank-owned life insurance
(573) (907)
Increase in cash surrender value of bank-owned life insurance (551) (557)
Gain on sale of assets (11) -
Net decrease (increase) in other assets (935) 485
Net cash provided by operating activities 19,635 21,376
Cash Flows From Investing Activities:
Purchases of FHLB stock, FRB stock, and other securities (16) (1,438)
Maturities and calls on available-for-sale securities 15,609 17,600
Principal payments on available-for-sale securities 8,611 12,121
Net (increase) decrease in loans (11,534) 58,085
Proceeds from bank-owned life insurance 2,397 2,402
Capital expenditures of premises and equipment (1,039) (787)
Investment in limited partnerships (1,075) (400)
Net cash provided by investing activities 12,953 87,583
Cash Flows From Financing Activities:
Increase (decrease) in demand deposit and savings accounts 46,638 (174,805)
Net increase in time deposits 6,508 13,799
Net (decrease) increase is short-term borrowings (62,000) 62,000
Proceeds from exercise of stock options - 106
Dividends on common stock (8,307) (7,870)
Net cash used in financing activities (17,161) (106,770)
Net increase in cash and cash equivalents 15,427 2,189
Cash and cash equivalents at beginning of year 40,784 38,595
Cash and cash equivalents at end of year $ 56,211 $ 40,784
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
1.Organization and Summary of Significant Accounting and Reporting Policies
Basis of Presentation - The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, with rules and regulations of the Securities and Exchange Commission (SEC), and with prevailing practices within the banking industry. The consolidated financial statements include the accounts of United Security Bancshares, and its wholly-owned subsidiaries, United Security Bank and subsidiary (the “Bank”) and USB Capital Trust II (the “Trust”). The Trust is deconsolidated pursuant to Accounting Standards Codification (ASC) 810. As a result, the Trust Preferred Securities are not presented on the Company’s consolidated financial statements as equity, but instead they are presented as junior subordinated debentures (TRUPs) and are presented as a separate liability category (see Note 10 to the Company’s consolidated financial statements). Intercompany accounts and transactions have been eliminated in consolidation. In the following notes, references to the Bank are references to United Security Bank. References to the Company are references to United Security Bancshares (including the Bank). United Security Bancshares operates as one business segment providing banking services to commercial establishments and individuals primarily in the San Joaquin Valley, and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County. The Company’s participation loans with other financial institutions are primarily in the state of California.
Nature of Operations - United Security Bancshares is a bank holding company, incorporated in the state of California for the purpose of acquiring all the capital stock of the Bank through a holding company reorganization (the “Reorganization”) of the Bank. United Security Bancshares has provided the Company greater operating and financial flexibility and has permitted expansion into a broader range of financial services and other business activities.
The Bank was founded in 1987 and currently operates 13 branches, one commercial lending office, one consumer lending office, and one construction lending office in an area from eastern Madera County to western Fresno County, as well as Taft and Bakersfield in Kern County, and Campbell in Santa Clara County. The Bank’s primary source of revenue is interest income from loans to customers, who are predominantly small- and middle-market businesses and individuals. The Bank engages in a full complement of lending activities, including real estate mortgage, commercial and industrial, real estate construction, agricultural, and consumer loans, with particular emphasis on short- and medium-term obligations.
The Bank offers a wide range of deposit instruments. These include personal and business checking accounts and savings accounts, interest-bearing negotiable order of withdrawal (NOW) accounts, money market accounts and time certificates of deposit. Most of the Bank’s deposits are attracted from small- and medium-sized business-related sources and from individuals.
The Bank also offers a wide range of specialized services designed to attract and service the needs of commercial customers and account holders. These services include cashiers checks, foreign drafts, and person-to-person and bank-to-bank transfers for consumer customers. In addition, the Bank offers internet banking services to its commercial and retail customers. The Bank does not operate a trust department; however, it makes arrangements with its correspondent bank to offer trust services to its customers upon request.
The Bank’s wholly-owned subsidiary, York Monterey Properties, Inc. (YMP), was incorporated in California on April 17, 2019, for the purpose of holding specific parcels of real estate acquired by the Bank through, or in lieu of, loan foreclosures in Monterey County. These properties exceeded the 10-year holding period for other real estate owned, or “OREO.” YMP was funded with a $250,000 cash investment and the transfer of those parcels by the Bank to YMP. As of December 31, 2024, and 2023, these properties are included within the consolidated balance sheets as part of OREO.
Use of Estimates in the Preparation of Financial Statements - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for credit losses and fair value of TRUPs.
Subsequent events - The Company has evaluated events and transactions for potential recognition or disclosure through the day the consolidated financial statements were issued.
Significant Accounting Policies - The Company follows accounting standards set by the Financial Accounting Standards Board, commonly referred to as “FASB.” FASB sets generally accepted accounting principles (GAAP) that the Company follows to ensure the consistent reporting of its consolidated financial condition, consolidated results of operations, and consolidated cash flows. References to GAAP issued by FASB in these footnotes are to FASB Accounting Standards Codification, sometimes referred to as the Codification, or ASC. The following is a summary of significant policies:
a.Cash and cash equivalents - Cash and cash equivalents include cash on hand and amounts due from correspondent banks. At times throughout the year, balances can exceed FDIC insurance limits. Generally, federal funds sold and repurchase agreements are sold for one-day periods. The Bank did not have any repurchase agreements during 2024 or 2023. All cash and cash equivalents have maturities when purchased of three months or less.
b.Investment Securities - Debt securities classified as available-for-sale are reported at fair value, with unrealized gains and losses excluded from net income and reported, net of tax, as a separate component of comprehensive income (loss) and shareholders’ equity. Debt securities classified as held-to-maturity are carried at amortized cost. Gains and losses on disposition are reported using the specific identification method for the adjusted basis of the securities sold. Premiums and discounts are recognized in interest income using the interest method over the period to maturity.
The Company periodically reviews its investment portfolio on an individual security basis. Securities that are to be held for indefinite periods of time are classified as available-for-sale. Those include, but are not limited to, securities that management intends to use as part of its asset/liability management strategy, as well as those which may be sold in response to changes in interest rates, changes in prepayments, or other factors. Securities which the Company has the ability and intent to hold to maturity are classified as held-to-maturity. There were no securities classified as held-to-maturity as of December 31, 2024 and 2023.
Available-for-sale debt securities in an unrealized loss position are evaluated when the amortized cost of a security exceeds its fair value. If it is determined that it will be necessary to sell a security before the fair value increases to the amortized cost, the amortized cost will be written down to fair value through income. At that point, any previously recorded allowance for credit loss (ACL) would be written off and any additional impairment would be recognized through earnings. If it is believed that the Company will not be required to sell a security before the fair value recovers, a determination will be made as to whether or not the decline in fair value is the result of a credit loss or noncredit factors such as changes in current market rates. If it is determined that the decline is due to a credit loss, the amount recognized as the credit loss will be determined using a discounted cash flow approach. Cash flows expected to be collected would be discounted at the effective interest rate established at acquisition. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses would be recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
Changes in the allowance for credit losses on investments are recorded as credit loss expense (or reversal). Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
Marketable equity securities are reported at fair value with gains and losses included in noninterest income on the Consolidated Statements of Income.
c.Loans - Interest income on loans is credited to income as earned and is calculated by using the simple interest method on the daily balance of the principal amounts outstanding. With the exception of student loans, loans are typically placed on non-accrual status when principal or interest is past due for 90 days and/or when management believes the collection of amounts due is doubtful. Student loans are typically placed on non-accrual status when principal or interest is past due for 120 days. For loans placed on nonaccrual status, the accrued and unpaid interest receivable may be reversed based upon management’s assessment of collectability, and interest is thereafter credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan.
Nonrefundable fees and related direct costs associated with the origination or purchase of loans are deferred and netted against outstanding loan balances. The net deferred fees and costs are generally amortized into interest income over the loan’s term using the simple interest method. Other credit-related fees, such as standby letters of credit fees and loan placement fees, are recognized as noninterest income during the period the related service is performed.
d.Allowance for credit losses on loans and reserve for unfunded loan commitments - The Company adopted ASU 2016-13, effective January 1, 2023, and utilizes the CECL cohort methodology analysis which relies on segmenting the loan
portfolio into pools with similar risks, tracking the performance of the pools over time, and using the data to determine pool loss experience. Management estimates the allowance for credit loss balance using relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The cumulative loss rate used as the basis for the estimate of credit losses is comprised of the Company’s historical loss experience from 2006 to 2024.
Unfunded loan commitment reserves are included in other liabilities in the consolidated balance sheets. Provisions for unfunded loan commitments are included in provision for credit losses in the consolidated statements of income.
The Company analyzes risk characteristics inherent in each loan portfolio segment as part of the quarterly review of the adequacy of the allowance for loan losses. The following summarizes some of the key risk characteristics for the ten segments of the loan portfolio (Consumer loans include three segments):
Commercial and business loans - Commercial loans are subject to the effects of economic cycles and tend to exhibit increased risk as economic conditions deteriorate, or if an economic downturn is prolonged. The Company considers this segment to be one of higher risk given the size of individual loans and the balance in the overall portfolio.
Government program loans - This is a relatively small part of the Company’s loan portfolio, but has historically had a high percentage of loans that have migrated from pass to substandard given their vulnerability to economic cycles.
Commercial real estate loans - This segment is considered to have more risk in part because of the vulnerability of commercial businesses to economic cycles as well as the exposure to fluctuations in real estate prices because most of these loans are secured by real estate. Losses in this segment have however been historically low because most of the loans are real-estate secured, and the bank maintains appropriate loan-to-value ratios.
Residential mortgages - This segment is considered to have low risk factors based on the Company’s experience and peer statistics. These loans are secured by first deeds of trust.
Home improvement and home equity loans - Because of their junior lien position, these loans have an inherently higher risk level.
Real estate construction and development loans -This segment of loans is considered to have a higher risk profile due to construction and market value issues in conjunction with normal credit risks.
Agricultural loans - This segment is considered to have risks associated with weather, insects, and marketing issues. In addition, concentrations in certain crops or certain agricultural areas can increase risk. Additionally, California may experience severe droughts, which can significantly harm the business of customers and the credit quality of the loans to those customers. Water resources and related issues affecting customers are closely monitored. Signs of deterioration within the loan portfolio are also monitored in an effort to manage credit quality and work with borrowers where possible to mitigate any losses.
Installment and student loans - This segment, which includes consumer loans, student loans, overdrafts, and overdraft protection lines, is considered higher risk because most of the loans are unsecured. Additionally, in the case of student loans, there are increased risks associated with liquidity due to the time lag between funding of a student loan and eventual repayment.
e.Nonaccrual loans - Commercial, construction and commercial real estate loans are placed on non-accrual status under the following circumstances:
•When there is doubt regarding the full repayment of interest and principal.
•When principal and/or interest on the loan has been in default for a period of 90 days or more, unless the asset is both well secured and in the process of collection that will result in repayment in the near future.
•When the loan is identified as having loss elements and/or is risk rated “8” Doubtful.
When loans are placed on nonaccrual status, the accrual of interest for financial statement purposes is discontinued. Previously accrued but unpaid interest is reversed and charged against interest income. Student loans past due more than 90-days are not placed on nonaccrual status, but are charged-off once 120-days past due. See “Note 4- Student Loans” for specific information on the student loan portfolio.
When a loan is placed on non-accrual status and subsequent payments of interest (and principal) are received, the interest received may be accounted for in two separate ways.
Cost recovery method: If the loan is in doubt as to full collection, the interest received in subsequent payments is reversed out of interest income and treated as a reduction of principal for financial reporting purposes.
Cash basis: This method is only used if the recorded investment or total contractual amount is expected to be fully collectible, under which circumstances the subsequent payments of interest is credited to interest income as received.
Loans on non-accrual status may be returned to accruing status when all delinquent principal and/or interest has been brought current, there is no identified element of loss (on the contractual amount of the loan), and current and continued satisfactory performance is expected. Repayment ability is generally demonstrated through the timely receipt of at least six monthly payments on a loan with monthly amortization.
f.Individually-evaluated loans - When a financial asset does not share similar risk characteristics with the pool being evaluated, it is evaluated individually.
g.Collateral-dependent loans - A loan is deemed collateral-dependent when either, it enters foreclosure, or it is determined that the borrower is experiencing financial difficulties. Repayment of these loans is expected to be provided substantially through the operation or sale of the collateral.
h.Bank-owned life insurance and company-owned life insurance policies - The Company owns bank-owned life insurance policies (BOLI) and company-owned life insurance policies (COLI) on certain officers, including those covered under the salary continuation plan, with a portion of the post-retirement benefit available to the officers’ beneficiaries. The initial net cash surrender value of BOLI and COLI policies is equivalent to the premium paid, and adds income through non-taxable increases in cash surrender value, net of the cost of insurance, plus any death benefits ultimately received by the Company.
i.Off-balance sheet financial instruments - In order to meet the needs of its customers, the Company offers financial instruments including commitments to extend credit and standby letters of credit (SBLC). SBLCs are used to guarantee financing arrangements or performance with third parties.
j.Premises and equipment - Premises and equipment are carried at cost less accumulated depreciation. Depreciation expense is computed principally on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are as follows:
Buildings 31 years Furniture and equipment 3 -7 years
k.Other-real-estate-owned - Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value of the property, less estimated costs to sell. The excess, if any, of the loan amount over the fair value is charged to the allowance for credit losses. Subsequent declines in the fair value of other-real-estate-owned, along with related revenue and expenses from operations, are charged to noninterest expense.
l.Investment in Limited Partnerships - The Bank owns interests in local area limited partnerships which provide private capital for small- to mid-sized businesses. The investments are accounted for under the cost method.
m.Goodwill - Goodwill amounts resulting from acquisitions are considered to have an indefinite life and are not amortized. At December 31, 2024, and 2023, the Company reported goodwill totaling $4.5 million. The Company did not recognize any impairment charges on goodwill during 2024 or 2023.
n.Income taxes - Deferred income taxes result from the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities using the liability method, and are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Estimates are based on the enacted tax rate of the applicable period.
o.Net income per common share - Basic income per common share is computed based on the weighted average number of common shares outstanding. Diluted income per share includes the effect of stock options and other potentially dilutive securities using the treasury stock method. If applicable, net income per common share is retroactively adjusted for all stock dividends declared.
p.Cash flow reporting - For purposes of reporting cash flows, cash and cash equivalents includes cash on hand, noninterest-bearing amounts due from banks, federal funds sold and securities purchased under agreements to resell. Federal funds and securities purchased under agreements to resell are generally sold for a one-day periods. Net cash flows are reported for interest-bearing deposits with other banks, loans to customers, deposits held for customers, and short-term borrowings.
q.Transfers of financial assets - Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain the taking advantage of that right, beyond a trivial benefit) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase before maturity.
r.Stock based compensation - The Company maintains a stock-based employee compensation plan, which is described more fully in “Note 12 - Stock Based Compensation.” All share-based payments to employees, including grants of employee stock options and restricted stock units and awards, are recognized in the consolidated financial statements based on the grant date fair value of the award. The fair value is amortized over the requisite service period (generally the vesting period).
s.Federal Home Loan Bank stock and Federal Reserve Bank stock - As a member of the Federal Home Loan Bank of San Francisco (FHLB), the Company is required to maintain an investment in the capital stock of the FHLB. In addition, as a member of the Federal Reserve Bank of San Francisco (FRB), the Company is required to maintain an investment in capital stock of the FRB. The investments in both the FHLB and the FRB are carried at cost in the accompanying consolidated balance sheets, are included in other assets, and are subject to certain redemption requirements by the FHLB and FRB. Stock redemptions are at the discretion of the FHLB and FRB.
While technically these are considered equity securities, there is no market for the FHLB or FRB stock; therefore, the shares are considered restricted investment securities. Management periodically evaluates the stock for other-than-temporary impairment through an assessment of the ultimate recoverability of cost rather than the recognition of temporary declines in value. The determination of the ultimate recoverability of cost is based upon (i) the significance and length of time of any decline in net assets of the FHLB or FRB compared to the capital stock amount of the FHLB or FRB, (ii commitments by the FHLB or FRB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB or FRB, (iii) the impact of legislative and regulatory changes on institutions, and (iv) the liquidity position of the FHLB or FRB.
t.Comprehensive income (loss) - Comprehensive income (loss) is comprised of net income and other comprehensive income (loss). Other comprehensive income (loss) includes items recorded directly to equity, such as unrealized gains and losses on securities available-for-sale, unrecognized costs of salary continuation defined benefit plans, and unrealized gains and losses on trust preferred securities related to instrument-specific credit risk. Comprehensive income (loss) is presented in the “Consolidated Statements of Other Comprehensive Income.”
u.Segment reporting - The Company’s operations are solely in the financial services industry and provides its customers traditional banking and other financial services. The Company operates primarily in California’s San Joaquin Valley. Management’s operating decisions and performance assessment are based on an ongoing review of the Company’s consolidated financial results. The Company is considered one operating segment for financial reporting purposes.
v.Revenue from contracts with customers - The Company records revenue from contracts with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers” (Topic 606). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. The Company’s primary sources of revenue are derived from interest earned on loans, investment securities, and other financial instruments that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the “Consolidated Statements of Income” is not warranted. The Company, in general, satisfies its performance obligations on its contracts with customers as services are rendered. Transaction prices are typically fixed and are charged either on a periodic basis or as activity warrants. Contracts evaluated under the scope of Topic 606 are primarily related to service charges, fees on deposit accounts, debit card fees, ITM processing fees, and other service charges, commissions and fees. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 to the determination of the amount and timing of revenue from contracts with customers.
w.Leases - The Company recognizes lease assets and lease liabilities on the consolidated balance sheet. Disclosures related to key lease components and leasing arrangements are included within the footnotes. The Company combines lease and associated non-lease components by class of underlying asset in contract that meet certain criteria. The lease and related non-lease components have the same timing and pattern of transfer, and the lease component, when accounted for on a stand-alone basis, is classified as an operating lease.
x.Recently Issued Accounting Standards -
In March 2020, FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848).” This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. The ASU was effective for all entities as of March 12, 2020 through December 31, 2022. In December 2022, FASB issued ASU 2022-06, “Deferral of the Sunset Date of Topic 848.” This ASU amends ASU 2020-04 by extending the sunset provision for use of LIBOR as a reference rate until December 31, 2024, due to an extension of the intended cessation of USD LIBOR. During 2023, the Company chose to use the “Secured Overnight Financing Rate,” or SOFR, as a replacement for LIBOR. This change resulted in minimal impact to TRUPs and floating rate loans tied to LIBOR.
In March 2022, FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures. This ASU provides new guidance on the treatment of troubled debt restructurings (TDRs) in relation to the adoption of the CECL model for the accounting for credit losses (see note above regarding ASU 2016-13). Previous accounting guidance related to troubled debt restructurings is eliminated and new disclosure requirements are adopted in regard to loan refinancing and restructurings made to borrowers experiencing financial difficulties under the assumption that the CECL model will capture credit losses related to troubled debt restructurings. New disclosures regarding gross write-offs for financing receivables by year of origination are also included in the update. This update has been adopted as of January 1, 2023. The Bank will no longer report troubled debt restructurings or classify loans as such. TDRs previously recognized have been incorporated into the CECL methodology as it applies to loan loss reserves as of January 1, 2023.
In November 2023, FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” This ASU requires public entities with a single reportable unit to meet all existing disclosures previously required of entities with multiple segments as well as additional disclosures mandated by the Update. Entities are now required to disclose the measures of profit and loss used by their chief operating decision maker (CODM) to assess segment performance and to provide enhanced disclosures regarding segment expenses. On an annual basis, the CODM’s title and position must be disclosed in addition to a description of how the CODM uses the reported measures to make decisions. Significant segment expenses will be reported on an interim and annual basis. The Company adopted this standard on December 31, 2024, and has provided the additional disclosures required in “The Notes to Consolidated Financial Statements.” Please see “Note 19 - Segment Information.”
y.Subsequent events - Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.
2.Investment Securities
Following is a comparison of the amortized cost and approximate fair value of available-for-sale debt securities at December 31, 2024, and December 31, 2023:
(In thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (Carrying Amount)
December 31, 2024
Securities available for sale:
U.S. Government agencies $ 2,666 $ - $ (22) $ 2,644
U.S. Government sponsored entities and agencies collateralized by mortgage obligations 92,121 4 (13,244) 78,881
Municipal bonds 50,082 - (7,715) 42,367
Corporate bonds 34,884 34 (1,428) 33,490
Total securities available for sale $ 179,753 $ 38 $ (22,409) $ 157,382
December 31, 2023
Securities available for sale:
U.S. Government agencies $ 6,197 $ 4 $ (45) $ 6,156
U.S. Government sponsored entities and agencies collateralized by mortgage obligations 100,487 4 (12,307) 88,184
Municipal bonds 50,382 - (8,017) 42,365
Corporate bonds 34,814 24 (2,715) 32,123
U.S. Treasury securities 12,510 - (72) 12,438
Total securities available for sale $ 204,390 $ 32 $ (23,156) $ 181,266
At December 31, 2024, and at December 31, 2023, an allowance for credit losses was neither required nor recorded for any investment securities.
No proceeds or gross realized gains or losses from sales of available-for-sale debt securities were recorded for the years ended December 31, 2024, and 2023. During the years ended December 31, 2024 and December 31, 2023, the Company sold no equity securities.
As market interest rates or risks associated with a security’s issuer continue to change and impact the actual or perceived values of investment securities, the Company may determine that selling these securities and using the proceeds to purchase securities that better suit the Company’s current risk profile is appropriate and beneficial to the Company. There were no losses recorded due to credit-related factors for the periods ended December 31, 2024 or December 31, 2023.
The amortized cost and fair value of securities available for sale at December 31, 2024, by contractual maturity, are shown below:
December 31, 2024
(In thousands) Amortized Cost Fair Value (Carrying Amount)
Due in one year or less $ 5,417 $ 5,364
Due after one year through five years 30,808 29,307
Due after five years through ten years 51,407 43,830
Due after ten years 5 5
U.S. Government sponsored entities & agencies collateralized by mortgage obligations 92,116 78,876
$ 179,753 $ 157,382
Actual cash flows may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties. Contractual maturities on collateralized mortgage obligations cannot be anticipated due to allowed paydowns.
At December 31, 2024, and 2023, available-for-sale debt securities with an amortized cost of approximately $90.7 million and $94.3 million (fair value of $77.8 million and $82.9 million, respectively) were pledged as collateral for FHLB borrowings, securitized deposits, and public funds balances.
The following summarizes available-for-sale debt securities in an unrealized loss position for which a credit loss has not been recorded at December 31, 2024, and 2023:
Less than 12 Months 12 Months or More Total
(In thousands) Fair Value (Carrying Amount) Unrealized Losses Fair Value (Carrying Amount) Unrealized Losses Fair Value (Carrying Amount) Unrealized Losses
December 31, 2024
Securities available for sale:
U.S. Government agencies $ - $ - $ 2,644 $ (22) $ 2,644 $ (22)
U.S. Government sponsored entities and agencies collateralized by mortgage obligations 1,640 (6) 76,686 (13,238) 78,326 (13,244)
Municipal bonds 2,509 (501) 39,858 (7,214) 42,367 (7,715)
Corporate bonds 2,791 (28) 24,696 (1,400) 27,487 (1,428)
Total available-for-sale $ 6,940 $ (535) $ 143,884 $ (21,874) $ 150,824 $ (22,409)
December 31, 2023
Securities available for sale:
U.S. Government agencies $ - $ - $ 4,064 $ (45) $ 4,064 $ (45)
U.S. Government sponsored entities and agencies collateralized by mortgage obligations - - 87,904 (12,307) 87,904 (12,307)
Municipal bonds - - 42,365 (8,017) 42,365 (8,017)
Corporate bonds - - 27,286 (2,715) 27,286 (2,715)
U.S. Treasury securities - - 12,438 (72) 12,438 (72)
Total available-for-sale $ - $ - $ 174,057 $ (23,156) $ 174,057 $ (23,156)
The following summarizes the number of available-for-sale debt securities in an unrealized loss position for which a credit loss has not been recorded at December 31, 2024, and 2023
December 31,
2024 2023
Securities available for sale:
U.S. Government agencies 5 4
U.S. Government sponsored entities and agencies collateralized by mortgage obligations 41 46
Municipal bonds 46 45
Corporate bonds 8 8
U.S. Treasury securities - 2
Total available-for-sale 100 105
Management has evaluated each available-for-sale investment security in an unrealized loss position to determine if it would be required to sell the security before the fair value increases to amortized cost and whether any unrealized losses are due to credit losses or noncredit factors such as current market rates, which would not require the establishment of an allowance for credit losses. At December 31, 2024, the decline in fair value of the available-for-sale securities is attributed to changes in interest rates and not credit quality. The interest rate increases of 2022 and 2023 led to large decreases in bond prices and increases in yields. The reductions in interest rates during 2024 have led to some price increases but have not returned bonds to their previous values. Because the Company does not intend to sell these securities, and because it is more likely than not that it will
not be required to sell these securities before their anticipated recovery, the Company does not consider it necessary to provide an allowance for any available-for-sale security at December 31, 2024.
During the year ended December 31, 2024, the Company recognized $28,000 in unrealized losses related to one marketable equity security compared to unrealized gains of $39,000 recognized during the year ended December 31, 2023.
The Company had no held-to-maturity securities at December 31, 2024 and December 31, 2023.
3. Loans
Loans, net of unearned fees and unamortized loan origination costs, are comprised of the following:
December 31,
2024 2023
(In thousands) Loan Balance % of Total Loans Loan Balance % of Total Loans
Commercial and business loans $ 63,653 6.9 % $ 53,273 5.8 %
Government program loans 62 <0.01 % 74 <0.01 %
Total commercial and industrial 63,715 6.9 % 53,347 5.8 %
Real estate - mortgage:
Commercial real estate 419,422 45.2 % 386,134 42.0 %
Residential mortgages 247,248 26.6 % 260,539 28.3 %
Home improvement and home equity loans 24 <0.01 % 36 <0.01 %
Total real estate mortgage 666,694 71.8 % 646,709 70.3 %
Real estate construction and development 111,145 12.0 % 127,944 13.9 %
Agricultural 49,462 5.3 % 49,795 5.4 %
Installment and student loans 37,446 4.0 % 42,247 4.6 %
Total loans $ 928,462 100.0 % $ 920,042 100.0 %
The Company’s loans are predominantly in the San Joaquin Valley, and the greater Oakhurst/East Madera County area, as well as the Campbell area of Santa Clara County. The Company’s participation loans with other financial institutions are primarily in the state of California.
Commercial and industrial loans are generally made to support the ongoing operations of small- and medium-sized commercial businesses. Commercial and industrial loans have a high degree of industry diversification and provide working capital, financing for the purchase of manufacturing plants and equipment, or funding for growth and general expansion of businesses. A substantial portion of commercial and industrial loans are secured by accounts receivable, inventory, leases, or other collateral, including real estate. While the remainder are unsecured, those extensions of credit are predicated upon the financial capacity of the borrower. Repayment of commercial and industrial loans generally comes from the cash flow of the borrower.
Real estate mortgage loans are secured by trust deeds on primarily commercial property and by trust deeds on single family residences. Repayment of real estate mortgage loans is generally from the cash flow of the borrower.
•Commercial real estate mortgage loans comprise the largest segment of this loan category and are available on all types of income producing and commercial properties, including: office buildings and shopping centers, apartments and motels, owner-occupied buildings, manufacturing facilities, and other properties. Commercial real estate mortgage loans can also be used to refinance existing debt. Commercial real estate loans typically receive payment from the borrower’s business operations, rental income associated with the real property, or personal assets.
•Residential mortgage loans are provided to individuals to finance or refinance single-family residences. Residential mortgages are not a primary business line offered by the Company, and a majority are conventional mortgages that were purchased as a pool.
•Home improvement and home equity loans comprise a relatively small portion of total real estate mortgage loans. Home equity loans are generally secured by junior trust deeds, but may be secured by 1st trust deeds.
Real estate construction and development loans consist of loans for residential and commercial construction projects, as well as land acquisition and development, or land held for future development. Loans in this category are secured by real estate including improved and unimproved land, as well as single-family residential, multi-family residential, and commercial properties in various stages of completion. All real estate loans have established equity requirements. Repayment on construction loans generally comes from long-term mortgages with other lending institutions obtained at completion of the project or from the sale of the constructed homes to individuals.
Agricultural loans are generally secured by land, equipment, inventory and receivables. Repayment is from the cash flow of the borrower.
Installment loans consist primarily of student loans as well as loans to individuals for household, family, and other personal expenditures such as credit cards, automobiles or other consumer items. See “Note 4 - Student Loans” for specific information on the student loan portfolio.
In the normal course of business, the Company is party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. At December 31, 2024, and 2023, these financial instruments include commitments to extend credit of $204.0 million and $183.5 million, respectively, and standby letters of credit of $29.2 million and $2.9 million, respectively. These instruments involve elements of credit risk in excess of the amount recognized on the consolidated balance sheet. The contract amounts of these instruments reflect the extent of the involvement the Company has in off-balance sheet financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Company applies the same credit policies as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer, as long as there is no violation of any condition established in the contract. Substantially all of these commitments are at floating interest rates based on the prime rate. Commitments generally have fixed expiration dates. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if necessary, is based on management’s credit evaluation. Collateral held varies but includes accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties.
Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
Loans to directors, officers, principal shareholders and their affiliates are summarized below:
(In thousands) 2024 2023
Aggregate amount outstanding, beginning of year $ 3,039 $ 3,610
New loans or advances during year 400 825
Repayments during year (758) (1,396)
Aggregate amount outstanding, end of year $ 2,681 $ 3,039
Undisbursed commitments, end of year $ 1,803 $ 1,525
Key terms and conditions for loans to directors, officers, principal shareholders and their affiliates do not differ from those of other borrowers.
Past Due Loans
The Company monitors delinquent and potentially problematic loans on an ongoing basis through weekly reports to the loan committee and monthly reports to the Board of Directors.
The following is a summary of delinquent loans, net of unearned fees and loan origination costs, at December 31, 2024, (in thousands):
December 31, 2024 Loans
30-60 Days Past Due Loans
61-89 Days Past Due Loans
90 or More
Days Past Due Total Past Due Loans Current Loans Total Loans Accruing
Loans 90 or
More Days Past Due
Commercial and business loans $ - $ - $ - $ - $ 63,653 $ 63,653 $ -
Government program loans - - - - 62 62 -
Total commercial and industrial - - - - 63,715 63,715 -
Commercial real estate loans - - - - 419,422 419,422 -
Residential mortgages 214 - - 214 247,034 247,248 -
Home improvement and home equity loans - - - - 24 24 -
Total real estate mortgage 214 - - 214 666,480 666,694 -
Real estate construction and development loans - - 12,185 12,185 98,960 111,145 -
Agricultural loans - - - - 49,462 49,462 -
Installment and student loans 1,625 1,373 421 3,419 34,027 37,446 421
Total loans $ 1,839 $ 1,373 $ 12,606 $ 15,818 $ 912,644 $ 928,462 $ 421
The following is a summary of delinquent loans, net of unearned fees and loan origination costs, at December 31, 2023, (in thousands):
December 31, 2023 Loans 30-60 Days Past Due Loans 61-89 Days Past Due Loans 90 or More Days Past Due Total Past Due Loans Current Loans Total Loans Accruing Loans 90 or More Days Past Due
Commercial and business loans $ - $ - $ - $ - $ 53,273 $ 53,273 $ -
Government program loans - - - - 74 74 -
Total commercial and industrial - - - - 53,347 53,347 -
Commercial real estate loans - - - - 386,134 386,134 -
Residential mortgages - - - - 260,539 260,539 -
Home improvement and home equity loans - - - - 36 36 -
Total real estate mortgage - - - - 646,709 646,709 -
Real estate construction and development loans - - 11,390 11,390 116,554 127,944 -
Agricultural loans - - 45 45 49,750 49,795 -
Installment and student loans 791 328 426 1,545 40,702 42,247 426
Total loans $ 791 $ 328 $ 11,861 $ 12,980 $ 907,062 $ 920,042 $ 426
Nonaccrual Loans
The following table presents the amortized costs of loans on nonaccrual status and accruing loans more than 90 days past due: December 31, 2024, and 2023:
December 31, 2024 December 31, 2023
(In thousands) Nonaccrual Loans With No Allowance For Credit Losses Total Nonaccrual Loans Accruing Loans 90 or More Days Past Due Nonaccrual Loans With No Allowance For Credit Losses Total Nonaccrual Loans Accruing Loans 90 or More Days Past Due
Real estate construction and development loans 12,198 12,198 - 11,403 11,403 -
Agricultural loans - - - - 45 -
Installment and student loans - - 421 - - 426
Total $ 12,198 $ 12,198 $ 421 $ 11,403 $ 11,448 $ 426
There were no remaining undisbursed commitments to extend credit on nonaccrual loans at December 31, 2024, and 2023.
Credit Quality Indicators
As part of its credit monitoring program, the Company utilizes a risk rating system which quantifies the risk the Company estimates it has assumed during the life of a loan. The system rates the strength of the borrower and the facility or transaction, and is designed to provide a program for risk management and early detection of problems.
For each new credit approval, credit extension, renewal, or modification of existing credit facilities, the Company assigns risk ratings utilizing the rating scale identified in this policy. In addition, on an on-going basis, loans and credit facilities are reviewed for internal and external influences which might impact the credit facility and warrant a change in the risk rating. Each loan credit facility is given a risk rating that takes into account factors that materially affect credit quality.
When assigning risk ratings, the Company evaluates two risk rating approaches, a facility rating and a borrower rating as follows:
Facility Rating:
The facility rating is determined by the analysis of positive and negative factors that may indicate that the quality of a particular loan or credit arrangement requires that it be rated differently from the risk rating assigned to the borrower. The Company assesses the risk impact of these factors:
Collateral - The rating may be affected by the type and quality of the collateral, the degree of coverage, the economic life of the collateral, liquidation value, and the Company’s ability to dispose of the collateral.
Guarantees - The value of third party support arrangements varies widely. Unconditional guarantees from persons with demonstrable ability to perform are more substantial than that of closely-related persons to the borrower who offer only modest support.
Unusual Terms - Credit may be extended on terms that subject the Company to a higher level of risk than indicated in the rating of the borrower.
Borrower Rating:
The borrower rating is a measure of loss possibility based on the historical, current and anticipated financial characteristics of the borrower in the current risk environment. To determine the rating, the Company considers at least the following factors:
- Quality of management
- Liquidity
- Leverage/capitalization
- Profit margins/earnings trend
- Adequacy of financial records
- Alternative funding sources
- Geographic risk
- Industry risk
- Cash flow risk
- Accounting practices
- Asset protection
- Extraordinary risks
The Company assigns risk ratings to loans other than consumer loans and other homogeneous loan pools based on the following scale. The risk ratings are used when determining borrower ratings as well as facility ratings. When the borrower rating and the facility ratings differ, the lowest rating applied is:
- Grades 1 and 2 - These grades include loans which are given to high-quality borrowers with high credit quality and sound financial strength. Key financial ratios are generally above industry averages and the borrower’s strong earnings history or net worth. These may be secured by deposit accounts or high-grade investment securities.
- Grade 3 - This grade includes loans to borrowers with solid credit quality with minimal risk. The borrower’s balance sheet and financial ratios are generally in line with industry averages, and the borrower has historically demonstrated the ability to manage economic adversity. Real estate and asset-based loans assigned this risk rating must have characteristics which place them well above the minimum underwriting requirements for those departments. Asset-based borrowers assigned this rating must exhibit extremely favorable leverage and cash flow characteristics, and consistently demonstrate a high level of unused borrowing capacity.
- Grades 4 and 5 - These include “pass” grade loans to borrowers of acceptable credit quality and risk. The borrower’s balance sheet and financial ratios may be below industry averages, but above the lowest industry quartile. Leverage is above and liquidity is below industry averages. Inadequacies evident in financial performance and/or management sufficiency are offset by readily available features of support, such as adequate collateral, or good guarantors having the liquid assets and/or cash flow capacity to repay the debt. While the borrower may have recognized a loss over three or four years, recent earnings trends, while perhaps somewhat cyclical, are improving and cash flows are adequate to cover debt service and fixed obligations. Real estate and asset-borrowers who fully comply with all underwriting standards and perform according to projections would be assigned this rating. These also include grade 5 loans which are “leveraged” or on management’s “watch list.” While still considered pass loans (loans given a grade 5), the borrower’s financial condition, cash flow, or operations evidence more than average risk and short term weaknesses. These loans warrant a higher than average level of monitoring, supervision, and attention from the Company, but do not reflect credit weakness trends that weaken or inadequately protect the Company’s credit position. Loans with a grade rating of 5 are not normally acceptable as new credits unless they are adequately secured or carry substantial endorsers/guarantors.
- Grade 6 - This grade includes “special mention” loans which are loans that are currently protected but are potentially weak. This generally is an interim grade classification and these loans will usually be upgraded to an “acceptable” rating or downgraded to a “substandard” rating within a reasonable time period. Weaknesses in special mention loans may, if not checked or corrected, weaken the asset or inadequately protect the Company’s credit position at some future date. Special mention loans are often loans which exhibit weaknesses inherent in the loan origination and loan servicing, and may have some technical deficiencies. The main theme in special mention credits is the distinct probability that the classification will deteriorate to a more adverse class if the noted deficiencies are not addressed by the loan officer or loan management.
- Grade 7 - This grade includes “substandard” loans which are inadequately supported by the current sound net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that may impair the regular liquidation of the debt. When a loan has been downgraded to “substandard,” there exists a distinct possibility that the Company will sustain a loss if the deficiencies are not corrected.
- Grade 8 - This grade includes “doubtful” loans which exhibit the same characteristics as the “substandard” loans. Additionally, loan weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until its more exact status can be determined. Pending factors include a
proposed merger, acquisition, or liquidation procedures, capital injection, perfecting liens on additional collateral, and refinancing plans.
- Grade 9 - This grade includes loans classified “loss” which are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off the asset even though partial recovery may be achieved in the future.
The following table presents loans by class, net of unearned fees and loan origination costs, by risk rating and period indicated as of December 31, 2024:
Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2024
Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans
(In thousands) 2024 2023 2022 2021 2020 Prior Total
Commercial and business
Pass $ 2,374 $ 3,640 $ 2,076 $ 341 $ 408 $ 764 $ 29,349 $ - $ 38,952
Special Mention - 2,000 - - - - - - 2,000
Substandard - - 68 - 6,989 - 15,644 - 22,701
Total $ 2,374 $ 5,640 $ 2,144 $ 341 $ 7,397 $ 764 $ 44,993 $ - $ 63,653
Current period gross charge-offs
$ - $ - $ - $ - $ - $ - $ - $ - $ -
Government program
Pass $ - $ - $ - $ - $ 2 $ 60 $ - $ - $ 62
Special Mention - - - - - - - - -
Substandard - - - - - - - - -
Total $ - $ - $ - $ - $ 2 $ 60 $ - $ - $ 62
Current period gross charge-offs
$ - $ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate
Pass $ 78,889 $ 32,794 $ 80,121 $ 31,376 $ 37,480 $ 151,066 $ 1,491 $ - $ 413,217
Special Mention - - - - 5,653 - - - 5,653
Substandard - - - 552 - - - - 552
Total $ 78,889 $ 32,794 $ 80,121 $ 31,928 $ 43,133 $ 151,066 $ 1,491 $ - $ 419,422
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Residential mortgages
Not graded $ - $ - $ 23,929 $ 196,340 $ 2,480 $ 6,226 $ - $ - $ 228,975
Pass 4,824 3,969 1,926 4,320 1,580 1,654 - - 18,273
Special Mention - - - - - - - - -
Substandard - - - - - - - - -
Total $ 4,824 $ 3,969 $ 25,855 $ 200,660 $ 4,060 $ 7,880 $ - $ - $ 247,248
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Home improvement and home equity
Not graded $ - $ - $ - $ - $ - $ 24 $ - $ - $ 24
Pass - - - - - - - - -
Special Mention - - - - - - - - -
Substandard - - - - - - - - -
Total $ - $ - $ - $ - $ - $ 24 $ - $ - $ 24
Current period gross charge-offs
$ - $ - $ - $ - $ - $ - $ - $ - $ -
Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2024
Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans
(In thousands) 2024 2023 2022 2021 2020 Prior Total
Real estate construction and development
Pass $ 13,761 $ 15,743 $ 8,004 $ - $ 32,389 $ 2,473 $ 26,577 $ - $ 98,947
Special Mention - - - - - - - - -
Substandard - - - - 3,524 8,674 - - 12,198
Total $ 13,761 $ 15,743 $ 8,004 $ - $ 35,913 $ 11,147 $ 26,577 $ - $ 111,145
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Agricultural
Pass $ 3,097 $ 2,115 $ 3,990 $ 490 $ 2,861 $ 11,586 $ 22,705 $ - $ 46,844
Special Mention - - 1,503 - 440 285 - - 2,228
Substandard - - - - - - 390 - 390
Total $ 3,097 $ 2,115 $ 5,493 $ 490 $ 3,301 $ 11,871 $ 23,095 $ - $ 49,462
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Installment and student loans
Not graded $ 440 $ 1,607 $ 103 $ 99 $ 8 $ 34,162 $ 606 $ - $ 37,025
Pass - - - - - - - - -
Special Mention - - - - - - - - -
Substandard - - - - - 421 - - 421
Total $ 440 $ 1,607 $ 103 $ 99 $ 8 $ 34,583 $ 606 $ - $ 37,446
Current period gross charge-offs $ - $ 20 $ - $ - $ - $ 2,842 $ - $ - $ 2,862
Total loans outstanding (risk rating):
Not graded $ 440 $ 1,607 $ 24,032 $ 196,439 $ 2,488 $ 40,412 $ 606 $ - $ 266,024
Pass 102,945 58,261 96,117 36,527 74,720 167,603 80,122 - 616,295
Special Mention - 2,000 1,503 - 6,093 285 - - 9,881
Substandard - - 68 552 10,513 9,095 16,034 - 36,262
Grand total loans $ 103,385 $ 61,868 $ 121,720 $ 233,518 $ 93,814 $ 217,395 $ 96,762 $ - $ 928,462
Current period gross charge-offs $ - $ 20 $ - $ - $ - $ 2,842 $ - $ - $ 2,862
The following table presents loans by class, net of deferred fees, by risk rating and period indicated as of December 31, 2023:
Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2023
Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans
(In thousands) 2023 2022 2021 2020 2019 Prior Total
Commercial and business
Pass $ 5,989 $ 5,066 $ 1,594 $ 810 $ 6 $ 939 $ 38,869 $ - $ 53,273
Special Mention - - - - - - - - -
Substandard - - - - - - - - -
Total $ 5,989 $ 5,066 $ 1,594 $ 810 $ 6 $ 939 $ 38,869 $ - $ 53,273
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Government program
Pass $ - $ - $ - $ 8 $ - $ 66 $ - $ - $ 74
Special Mention - - - - - - - - -
Substandard - - - - - - - - -
Total $ - $ - $ - $ 8 $ - $ 66 $ - $ - $ 74
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Commercial real estate
Pass $ 40,929 $ 81,823 $ 52,019 $ 39,155 $ 60,626 $ 105,285 $ 501 $ - $ 380,338
Special Mention - - - 5,796 - - - - 5,796
Substandard - - - - - - - - -
Total $ 40,929 $ 81,823 $ 52,019 $ 44,951 $ 60,626 $ 105,285 $ 501 $ - $ 386,134
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Residential mortgages
Not graded $ - $ 24,835 $ 206,257 $ 2,260 $ - $ 8,969 $ - $ - $ 242,321
Pass 4,189 1,925 5,253 1,579 3,494 1,778 - - 18,218
Special Mention - - - - - - - - -
Substandard - - - - - - - - -
Total $ 4,189 $ 26,760 $ 211,510 $ 3,839 $ 3,494 $ 10,747 $ - $ - $ 260,539
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Home improvement and home equity
Not graded $ - $ - $ - $ - $ - $ 32 $ - $ - $ 32
Pass - - - - - 4 - - 4
Special Mention - - - - - - - - -
Substandard - - - - - - - - -
Total $ - $ - $ - $ - $ - $ 36 $ - $ - $ 36
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2023
Revolving Loans Amortized Cost Basis Revolving Loans Converted to Term Loans
(In thousands) 2023 2022 2021 2020 2019 Prior Total
Real estate construction and development
Pass $ 27,951 $ 9,571 $ - $ 31,308 $ - $ 3,978 $ 43,734 $ - $ 116,542
Special Mention - - - - - - - - -
Substandard - - - 3,524 - 7,878 - - 11,402
Total $ 27,951 $ 9,571 $ - $ 34,832 $ - $ 11,856 $ 43,734 $ - $ 127,944
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Agricultural
Pass $ 2,086 $ 4,163 $ 457 $ 2,958 $ 1,592 $ 12,574 $ 22,556 $ - $ 46,386
Special Mention - 2,105 - 513 - 356 - - 2,974
Substandard - - - - - 45 390 - 435
Total $ 2,086 $ 6,268 $ 457 $ 3,471 $ 1,592 $ 12,975 $ 22,946 $ - $ 49,795
Current period gross charge-offs $ - $ - $ - $ - $ - $ - $ - $ - $ -
Installment and student loans
Not graded $ 708 $ 250 $ 142 $ 74 $ 483 $ 38,519 $ 472 $ - $ 40,648
Pass 1,173 - - - - - - - 1,173
Special Mention - - - - - - - - -
Substandard - - - - - 426 - - 426
Total $ 1,881 $ 250 $ 142 $ 74 $ 483 $ 38,945 $ 472 $ - $ 42,247
Current period gross charge-offs $ - $ - $ - $ - $ - $ 2,588 $ - $ - $ 2,588
Total loans outstanding (risk rating):
Not graded $ 708 $ 25,085 $ 206,399 $ 2,334 $ 483 $ 47,520 $ 472 $ - $ 283,001
Pass 82,317 102,548 59,323 75,818 65,718 124,624 105,660 - 616,008
Special Mention - 2,105 - 6,309 - 356 - - 8,770
Substandard - - - 3,524 - 8,349 390 - 12,263
Grand total loans $ 83,025 $ 129,738 $ 265,722 $ 87,985 $ 66,201 $ 180,849 $ 106,522 $ - $ 920,042
Current period gross charge-offs $ - $ - $ - $ - $ - $ 2,588 $ - $ - $ 2,588
Allowance for Credit Losses on Loans
The following summarizes the activity in the allowance for credit losses by loan category for the years ended December 31, 2024, and 2023 (in thousands).
December 31, 2024 Commercial and Industrial Real Estate Mortgage Real Estate Construction Development Agricultural Installment & Student Loans Total
Beginning balance $ 1,903 $ 2,524 $ 3,614 $ 1,250 $ 6,367 $ 15,658
Provision for (reversal of) credit losses (1)
935 104 (1,110) (222) 3,312 3,019
Charge-offs - - - - (2,862) (2,862)
Recoveries 1 6 - - 224 231
Ending balance $ 2,839 $ 2,634 $ 2,504 $ 1,028 $ 7,041 $ 16,046
(1) Excludes a $56,000 reversal of provision for unfunded loan commitments during the year.
December 31, 2023 Commercial and Industrial Real Estate Mortgage Real Estate Construction and Development Agricultural Installment & Student Loans Unallocated Total
Beginning balance $ 955 $ 1,363 $ 3,409 $ 525 $ 2,898 $ 1,032 $ 10,182
CECL Adjustment 1,336 2,359 720 1,025 1,959 (1,032) 6,367
Provision for (reversal of) credit losses (1)
(390) (1,253) (515) (300) 3,888 - 1,430
Charge-offs - - - - (2,588) - (2,588)
Recoveries 2 55 - - 210 - 267
Ending balance $ 1,903 $ 2,524 $ 3,614 $ 1,250 $ 6,367 $ - $ 15,658
(1) Excludes a $30,000 provision for unfunded loan commitments during the year.
Collateral-Dependent Loans
The following table presents the recorded investment in collateral-dependent loans by type of loan:
December 31, 2024 December 31, 2023
(Dollars in thousands) Amount Number of Collateral-Dependent Loans Amount Number of Collateral-Dependent Loans
Real estate construction and development loans $ 12,185 3 $ 11,390 3
Agricultural loans 390 1 390 1
Total $ 12,575 4 $ 11,780 4
At December 31, 2024, two of the real estate and construction and development loans were secured by land and one was secured by a multifamily property, and the agricultural loan was secured by farmland. At December 31, 2023, two of the real estate construction and development loans were secured by land and one was secured by a multifamily property, and agricultural loan was secured by farmland.
Reserve for Unfunded Commitments
The allowance for off-balance sheet credit exposure relates to commitments to extend credit, letters of credit, and undisbursed funds on lines of credit. The Company evaluates credit risk associated with the off-balance sheet loan commitments in the same manner as it evaluates credit risk within the loan portfolio. There was a reversal of provision of $56,000 for unfunded loan commitments made during the year ended December 31, 2024, decreasing the liability balance to $780,000. For the year ended December 31, 2023, there was a provision of $30,000 made for unfunded loan commitments. The balance for unfunded loan commitments totaled $835,000 at December 31, 2023. The reserve for the unfunded loan commitments is a liability on the Company’s consolidated financial statements and is included in other liabilities.
Loan Modifications
Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness, term extension, and other-than-insignificant payment delay or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged off against the allowance for credit losses. There were no loan modifications at December 31, 2023.
The following tables present loan modifications made to borrowers experiencing financial difficulties for the period indicated:
December 31, 2024
(In thousands) Principal Forgiveness Term Extension Interest Rate Reduction Payment Delay Total % of Loans Outstanding
Commercial and business loans $ - $ 6,989 $ - $ - 0.75%
The following table presents the financial effects of loan modifications made to borrower experiencing financial difficulties:
December 31, 2024
(In thousands) 12 months term extension
Commercial and business loans 6,989
4.Student Loans
Included in installment loans are $33.9 million and $38.5 million in student loans at December 31, 2024, and 2023, made to medical and pharmacy school students. Upon graduation the loan is automatically placed in a grace period of six months. This may be extended up to 48 months for graduates enrolling in internship, medical residency, or fellowship. As approved, the student may receive additional deferment for hardship or administrative reasons in the form of forbearance for a maximum of 36 months throughout the life of the loan. Student loans have not been originated or purchased since 2019.
As of December 31, 2024 and 2023, the allowance for credit losses for the student loan portfolio was $7.0 million and $6.3 million, respectively. At December 31, 2024, and 2023, student loans totaling $421,000 and $426,000 were included in the substandard category, respectively.
The following tables summarize the credit quality indicators for outstanding student loans as of December 31, 2024 and December 31, 2023:
December 31, 2024 December 31, 2023
(Dollars in thousands) Number of Loans Principal Amount Accrued Interest Number of Loans Principal Amount Accrued Interest
School 26 $ 692 $ 512 44 $ 1,242 $ 734
Grace 3 100 63 18 473 296
Repayment 406 19,647 324 444 20,833 289
Deferment 219 9,954 2,593 237 10,163 2,022
Forbearance 65 3,496 133 98 5,782 133
Total 719 $ 33,889 $ 3,625 841 $ 38,493 $ 3,474
School - The time in which the borrower is still actively in school at least half time. No payments are expected during this stage, though the borrower may begin immediate payments.
Grace - A six month period of time granted to the borrower immediately upon graduation, or withdrawal from school. Interest continues to accrue. Upon completion of the six month grace period the loan is transferred to repayment status. This status may also represent a borrower activated to military duty during their time in school. The borrower must return to at least half-time status within six-months of the active duty end-date in order to return to in-school status.
Repayment - The time in which the borrower is no longer actively in school at least half time, and has not received an approved grace, deferment, or forbearance. Regular payment is expected from these borrowers under an allotted payment plan.
Deferment - May be granted up to 48 months for borrowers who have begun the repayment period on their loans but are (1) actively enrolled in an eligible school at least half time, or (2) are actively enrolled in an approved and verifiable medical residency, internship, or fellowship program.
Forbearance - The period of time during which the borrower may postpone making principal and interest payments due to hardship or administrative reasons. Interest continues to accrue on loans during periods of authorized forbearance. If the borrower is delinquent at the time the forbearance is granted, accrued and unpaid interest from the date of delinquency, if any, will be capitalized at the end of the forbearance period. The loan-term will not change and payments may be increased to allow the loan to pay off in the required time frame. A forbearance that results in and insignificant payment delay is not considered a concessionary change in terms, provided the borrower affirms the obligation. Forbearance is not an uncommon status designation; this designation is standard industry practice, and is consistent with a student’s migration to the medical profession. However, additional risk is associated with this designation.
Student Loan Aging
Student loans are generally charged off at the end of the month during which an account becomes 120 days contractually past due. Accrued but unpaid interest related to charged off student loans is reversed and charged against interest income. For the year ended December 31, 2024, $328,000 in accrued interest receivable was reversed due to charge-offs of $2.8 million within the student loan portfolio. For the year ended December 31, 2023, $252,000 in accrued interest receivable was reversed due to charge-offs of $2.6 million within the student loan portfolio.
The following tables summarize the student loan aging for loans in repayment and forbearance as of December 31, 2024 and December 31, 2023:
December 31, 2024 December 31, 2023
(Dollars in thousands) Number of Borrowers Principal Amount Number of Borrowers Principal Amount
Current or less than 31 days 185 $ 19,737 221 $ 25,070
31 - 60 days 9 1,625 6 791
61 - 90 days 7 1,360 2 328
Greater than 90 days 2 421 3 426
Total 203 $ 23,143 232 $ 26,615
5.Premises and Equipment
The components of premises and equipment are as follows:
(In thousands) December 31, 2024 December 31, 2023
Land $ 968 $ 968
Buildings and improvements 17,186 16,502
Furniture and equipment 11,392 11,105
29,546 28,575
Less accumulated depreciation and amortization (20,878) (19,477)
Total $ 8,668 $ 9,098
The depreciation and amortization expense on Company premises and equipment totaled $1.47 million and $1.46 million, for the years ended December 31, 2024, and 2023, respectively, and is included in occupancy expense in the accompanying consolidated statements of income.
6.Investment in Limited Partnerships
The Bank owns interests in two local-area limited partnerships that provide private capital for small- and medium-sized businesses. This capital is typically used for financing later-stage growth, strategic acquisitions, ownership transitions, recapitalizations, or mezzanine capital. At December 31, 2024 and 2023, the total investment in these limited partnerships was $4.3 million, and $3.2 million, respectively, and was accounted for under the cost method. No income was received from the partnerships during the years ended December 31, 2024 and 2023. Remaining unfunded commitments as of December 31, 2024, and 2023, totaled $2.2 million and $800,000, respectively.
7.Deposits
Deposits include the following:
(In thousands) December 31, 2024 December 31, 2023
Noninterest-bearing deposits $ 360,152 $ 403,225
Interest-bearing deposits:
NOW and money market accounts 504,466 406,857
Savings accounts 114,648 122,547
Time deposits:
Under $250,000 45,141 48,098
$250,000 and over 33,215 23,750
Total interest-bearing deposits 697,470 601,252
Total deposits $ 1,057,622 $ 1,004,477
The scheduled maturities of all certificates of deposit and other time deposits are as follows:
(In thousands) December 31, 2024 December 31, 2023
One year or less $ 56,246 $ 44,887
More than one year, but less than or equal to two years 21,600 26,046
More than two years, but less than or equal to three years 112 611
More than three years, but less than or equal to four years 272 86
More than four years, but less than or equal to five years 126 218
Greater than five years - -
$ 78,356 $ 71,848
Deposit balances representing overdrafts reclassified as loan balances totaled $178,000 and $387,000 as of December 31, 2024, and 2023, respectively.
Deposits of directors, officers and other related parties to the Bank totaled $11.5 million and $10.3 million at December 31, 2024, and 2023, respectively. The rates paid on these deposits were similar to those customarily paid to the Bank’s customers in the normal course of business.
At December 31, 2024, the Bank held $100.3 million in brokered deposits. There were no brokered deposits held at December 31, 2023.
8.Short-term Borrowings/Other Borrowings
The Bank maintains lines of credit with the Federal Reserve Bank, the Federal Home Loan Bank, and corespondent banks which may be drawn upon, as needed, to cover short-term financial obligations, or for investment or capital utilization purposes.
The following table sets forth the Bank’s outstanding and available credit lines for the periods indicated:
(In thousands) December 31, 2024 December 31, 2023
Unsecured credit lines:
Credit limit $ 90,000 $ 80,000
Balance outstanding - 2,000
Federal Home Loan Bank:
Credit limit 135,634 128,935
Balance outstanding - 60,000
Collateral pledged 230,001 232,144
Federal Reserve Bank:
Credit limit 499,069 463,501
Balance outstanding - -
Collateral pledged 617,860 608,045
At December 31, 2024, the Company’s available lines of credit totaled $724.7 million. All lines of credit are on an “as available” basis and can be revoked by the grantor at any time. These lines of credit have interest rates that are generally tied to the Federal Funds rate or are indexed to short-term U.S. Treasury rates or SOFR. FHLB and FRB advances are collateralized by loans and investment securities. At December 31, 2024, $228.1 million in loans and $1.9 million in investment securities were pledged as collateral for FHLB advances. Additionally, $614.2 million in loans and $3.7 million in investment securities were pledged at December 31, 2024, as collateral for advances with the Federal Reserve Bank.
At December 31, 2023, the Company’s available lines of credit totaled $672.4 million. As of December 31, 2023, $230.1 million in loans and $2.1 million in investment securities were pledged as collateral for FHLB advances. Additionally, $604.0 million in loans and $4.1 million in investment securities were pledged as collateral at the Federal Reserve Bank.
At December 31, 2024, the Company held no borrowings. At December 31, 2023, the Company held secured borrowings of $60.0 million at FHLB and overnight unsecured borrowings of $2.0 million at PCBB.
9. Leases
The Company leases land and premises for its branch banking offices, administration facilities, and ITMs. The initial terms of these leases expire at various dates through 2044. Under the provisions of most of these leases, the Company has the option to extend the leases beyond their original terms at rental rates adjusted for changes reported in certain economic indices or as reflected by market conditions. Lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will exercise that option. As of December 31, 2024, the Company had 14 operating leases and no financing leases.
Upon adoption of ASC Topic 842, Leases, the Bank chose to apply the incremental borrowing rate in its determination of the lease liability. The incremental borrowing rate approximates the Bank’s current rates for fully secured loans where the amount and terms applied are similar to the amount and terms of the lease.
Operating lease expenses for the years ended December 31, 2024 and 2023, totaled $762,000 and $711,000, respectively.
Supplemental balance sheet information related to leases is as follows:
(In thousands) December 31, 2024 December 31, 2023
Operating cash flows used in operating leases $ 766 $ 720
Right-of-use assets obtained in exchange for new operating lease liabilities 2,374 -
Weighted-average remaining lease terms in years for operating leases 8.65 4.23
Weighted-average discount rate for operating leases 5.06 % 5.09 %
Maturities of lease liabilities are as follows as of December 31, 2024 (in thousands):
Years Ending December 31, Lease Liabilities
2025 $ 718
2026 499
2027 428
2028 424
2029 339
Thereafter 1,558
Total undiscounted cash flows 3,966
Less: present value discount (805)
Present value of net future minimum lease payments $ 3,161
10.Junior Subordinated Debt/Trust Preferred Securities
The contractual principal balance of the Company’s debentures relating to its trust preferred securities is $12.0 million as of December 31, 2024 and 2023. The Company may redeem the junior subordinated debentures (TRUPs) at any time at par.
The Company accounts for its TRUPs issued under USB Capital Trust II at fair value. The Company believes the election of fair value accounting for the TRUPs better reflects the true economic value of the debt instrument on the consolidated balance sheet. As of December 31, 2024, the rate paid on TRUPS issued under USB Capital Trust II is 3-month SOFR plus 129 basis points, and is adjusted quarterly.
At December 31, 2024, the Company performed a fair value measurement analysis on TRUPS using a cash flow model approach to determine the present value of those cash flows. The cash flow model utilizes the forward 3-month SOFR curve to estimate future quarterly interest payments due over remaining life of the debt instrument. These cash flows are discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for additional credit and liquidity risks associated with TRUPs. The 6.40% discount rate used represents what a market participant would consider under the circumstances based on current market assumptions. At December 31, 2024, and December 31, 2023, the total cumulative gain recorded on the debt was $1.1 million and $1.5 million, respectively.
(In thousands) December 31, 2024 December 31, 2023
Net fair value calculation loss $ (368) $ (270)
Other comprehensive income gain (loss) 245 (544)
Recognized (loss) gain on fair value (614) 274
Cumulative gain recorded 1,093 1,461
Discount rate 6.40 % 6.14 %
The net fair value calculation performed as of December 31, 2024 resulted in a pretax loss adjustment of $368,000 for the year ended December 31, 2024, compared to a pretax loss adjustment of $270,000 for the year ended December 31, 2023.
For the year ended December 31, 2024, the $368,000 fair value loss adjustment was separately presented as a $614,000 loss recognized on the consolidated statements of income, and a $245,000 gain associated with the instrument-specific credit risk recognized in other comprehensive income. For the year ended December 31, 2023, the $270,000 fair value loss adjustment was separately presented as a $274,000 gain recognized on the consolidated statements of income, and a $544,000 loss associated with the instrument-specific credit risk recognized in other comprehensive income. The Company calculated the change in the discounted cash flows based on updated market credit spreads for the periods ended.
11.Deferred Taxes
The tax effects of significant items comprising the Company’s net deferred tax assets (liabilities) are as follows:
December 31,
(In thousands) 2024 2023
Deferred tax assets:
Credit losses not currently deductible $ 5,127 $ 4,985
Deferred compensation 1,692 1,757
Depreciation 278 92
Accrued reserves 248 -
Write-down on other real estate owned 291 291
Unrealized gain on retirement obligation 63 56
Deferred loss ASC 825 - fair value option 354 159
Unrealized loss on available for sale securities 6,613 6,835
Interest on nonaccrual loans 1,733 1,513
Lease liability 1,006 458
Other 751 848
Total deferred tax assets 18,156 16,994
Deferred tax liabilities:
State tax (636) (596)
FHLB dividend (46) (46)
Loss on limited partnership investments (841) (650)
Fair value adjustments for purchase accounting (93) (93)
Unrealized loss on TRUPs (471) (579)
Deferred loan costs (567) (414)
Prepaid expenses (106) (135)
Right-of-use asset (977) (426)
Total deferred tax liabilities (3,737) (2,939)
Net deferred tax assets $ 14,419 $ 14,055
The Company periodically evaluates its deferred tax assets to determine whether a valuation allowance is required based upon a determination that some or all of the deferred assets may not be ultimately realized. The Company did not record a valuation allowance at December 31, 2024, or December 31, 2023.
Income tax expense for the years ended December 31, consist of the following:
(In thousands) Federal State Total
Current $ 3,769 $ 2,240 $ 6,009
Deferred (295) (177) (472)
$ 3,474 $ 2,063 $ 5,537
Current $ 5,103 $ 2,874 $ 7,977
Deferred (238) (59) (297)
$ 4,865 $ 2,815 $ 7,680
A reconciliation of the statutory federal income tax rate to the effective income tax rate is as follows:
Year Ended December 31,
2024 2023
Statutory federal income tax rate 21.0 % 21.0 %
State franchise tax, net of federal income tax benefit 8.0 8.1
Other (1.7) (1.1)
Effective income tax rate 27.3 % 28.0 %
The Company periodically reviews its tax positions under the accounting standards related to uncertainty in income taxes, which defines the criteria that an individual tax position would have to meet for some or all of the income tax benefit to be recognized in a taxable entity’s financial statements. Under the guidelines, an entity should recognize the financial statement benefit of a tax position if it determines that it is more likely than not that the position will be sustained on examination. The term “more likely than not” means a likelihood of more than 50 percent. In assessing whether the more-likely-than-not criterion is met, the entity should assume that the tax position will be reviewed by the applicable taxing authority and all available information is known to the taxing authority. As of December 31, 2024, and 2023, the Company has no uncertain tax positions.
The Company and its subsidiary file income tax returns in the U.S federal jurisdiction and California. There are no filings in foreign jurisdictions. The Company is no longer subject to income tax examinations by taxing authorities for years before 2021 and 2020 for Federal and California jurisdictions, respectively.
The Company’s policy is to recognize any interest or penalties related to uncertain tax positions in income tax expense. Interest and penalties recognized during the periods ended December 31, 2024 and December 31, 2023 were insignificant.
12.Stock Based Compensation
Options and restricted stock units and awards have been granted to directors, officers and key employees at an exercise price equal to estimated fair value at the date of grant as determined by the Board of Directors. All options, units, and awards granted are service awards, and are based solely upon fulfilling a requisite service period (the vesting period). At December 31, 2024, the Company had one shareholder approved stock based compensation plan.
In May 2015, the Company adopted the United Security Bancshares 2015 Equity Incentive Award Plan (2015 Plan). The 2015 Plan provides for the granting of up to 758,000 shares of authorized and unissued shares of common stock in the form of stock options, restricted stock units, and restricted stock awards. The 2015 Plan requires that the exercise price may not be less than the fair value of the stock at the date the option is granted, and that the option price must be paid in-full at the time it is exercised.
The options granted (incentive stock options for employees and non-qualified stock options for Directors) have an exercise price at the prevailing market price on the date of grant. All options granted are exercisable 20% each year commencing one year after the date of grant and expire ten years after the date of grant. Restricted stock units are granted at the prevailing market price of the Company’s stock, subject to time-based vesting. Restricted stock awards are subject to forfeiture if employment terminates prior to vesting. The cost of these awards is recognized over the vesting period of the awards based on the fair value of the common stock on the date of the grant.
Under the 2015 Plan, 235,991 granted stock instruments are outstanding as of December 31, 2024, of which 57,000 are exercisable. Of the 235,991 granted stock instruments, 15,538 are restricted stock units, 145,453 are restricted stock awards, and 75,000 are nonqualified stock options.
At December 31, 2024, there were 205,085 shares available for future issuance under equity compensation plans.
A summary of the status of the Company’s stock option plan and changes during the year are presented below:
Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value
Options outstanding December 31, 2022
119,022 $ 8.07
Granted during the year - -
Exercised during the year (29,022) 3.68
Forfeited during the year (15,000) 9.25
Options outstanding December 31, 2023
75,000 9.54 5.50 $ 7,200
Granted during the year - -
Exercised during the year - -
Forfeited during the year - -
Options outstanding December 31, 2024
75,000 $ 9.54 4.49 $ 65,250
As of December 31, 2024, and 2023 there was $53,000 and $78,000, respectively, of total unrecognized compensation expense related to non-vested stock options. Non-vested stock options totaled 18,000 shares at December 31, 2024, with a weighted average remaining vesting period of approximately 2.07 years. Non-vested stock options totaled 24,000 at December 31, 2023. The aggregate intrinsic value of the non-vested stock options was $32,580 at December 31, 2024 and $5,760 at December 31, 2023.
Included in total outstanding options at December 31, 2024, were 57,000 exercisable shares at a weighted average price of $9.97, a weighted average remaining contract term of 3.68, and intrinsic value of 32,670.
A summary of the status of the Company’s stock option values and activity is presented below:
December 31, 2024 December 31, 2023
Weighted average grant-date fair value per share of stock options granted $ - $ -
Weighted average fair value of stock options vested $ 26,000 $ 26,000
Total intrinsic value of stock options exercised $ - $ 85,000
The Bank determines fair value of stock options at grant date using the Black-Scholes-Merton pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock and the expected dividend yield and the risk-free interest rate over the expected life of the option.
The expected term of options granted is derived from management’s experience, which is based upon historical data on employee exercise and post-vesting behavior. The risk free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatility is based on the historical volatility of the Bank’s stock over a period commensurate with the expected term of the options. The Company believes that historical volatility is indicative of expectations about its future volatility over the expected term of the options. The Bank expenses the fair value of the option on a straight-line basis over the vesting period for each separate service period portion of the award.
The Black-Scholes-Merton option valuation model requires the input of highly subjective assumptions, including the expected life of the stock based award and stock price volatility. The assumptions listed above represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if other assumptions had been used, the Bank’s recorded stock-based compensation expense could have been materially different from that previously reported in proforma disclosures.
A summary of the status of the Company’s restricted stock units and changes during the year are presented below:
Shares Weighted Average Grant-Date Fair Value
Non-vested units at December 31, 2022
13,974 $ 8.29
Granted during the year 52,477 $ 7.53
Vested during the year (59,451) $ 7.68
Forfeited during the year - $ -
Non-vested units at December 31, 2023
7,000 $ 7.79
Granted during the year 15,733 9.15
Vested during the year (6,172) 9.10
Forfeited during the year (1,023) 7.46
Non-vested units at December 31, 2024
15,538 $ 8.67
As of December 31, 2024, there was $122,898 of total unrecognized compensation expense related to restricted stock units. This cost is expected to be recognized over a weighted-average period of approximately 1.91 years. As of December 31, 2023, there was $40,000 of total unrecognized compensation expense related to restricted stock units. The Company determines fair value of restricted stock units based on the quoted stock price as of the grant date.
A summary of the status of the Company’s restricted stock awards and changes during the year are presented below:
Shares Weighted Average Grant-Date Fair Value
Non-vested awards at December 31, 2022
-
Granted during the year 14,435 7.99
Vested during the year -
Forfeited during the year -
Non-vested awards at December 31, 2023
14,435 $ 7.99
Granted during the year 191,795 8.24
Vested during the year (60,777) 8.26
Forfeited during the year - -
Non-vested awards at December 31, 2024
145,453 8.21
As of December 31, 2024, there was $1.1 million of total unrecognized compensation expense related to restricted stock awards. This cost is expected to be recognized over a weighted-average period of approximately 6.88 years. At December 31, 2023, there was $113,000 of total unrecognized compensation expense related to restricted stock awards. The Company determines fair value of restricted stock awards based on the quoted stock price as of the grant date.
Included in salaries and employee benefits for the years ended December 31, 2024, and 2023 are $381,000 and $141,000 of stock-based compensation, respectively. Director’s fees totaling $311,000 and $337,000 for the same periods, respectively, are also included in stock-based compensation as reflected in the Consolidated Statement of Changes in Shareholders’ Equity. The related tax benefit on share-based compensation recorded in the provision for income taxes was not material to any year.
13.Employee Benefit Plans
401K Plan
The Company has a Cash or Deferred 401(k) Stock Ownership Plan (the “401(k) Plan”) organized under Section 401(k) of the U.S. Code. Employees of the Company are eligible to participate in the 401(k) Plan upon the first day of the month after their date of hire. Under the terms of the plan, the participants may elect to make contributions to the 401(k) Plan as determined by the Board of Directors. Participants are automatically vested 100% in all employee contributions. Participants may direct the investment of their contributions to the 401(k) Plan in any of several authorized investment vehicles. The Company contributes
funds to the Plan up to 4% of the employees’ eligible annual compensation. Company contributions are 100% vested at the time of contribution. The Company made matching contributions of $312,000 and $282,000 to the 401(k) Plan for the years ended December 31, 2024, and 2023, respectively.
Salary Continuation Plan
The Company has an unfunded, non-qualified Salary Continuation Plan for certain current and prior senior executive officers and certain other key officers of the Company, which provides additional compensation benefits upon retirement for a period of at least 15 years. Future compensation under the Plan is earned by the employees for services rendered through retirement and vests over a period of 12 to 32 years. As of December 31, 2024, the Company maintained a total of 12 Salary Continuation agreements.
The Company’s current benefit liability is determined based upon vesting and the present value of the benefits at a corresponding discount rate. The discount rate used is an equivalent rate for high-quality investment-grade bonds with lives matching those of the service periods remaining for the salary continuation contracts, which averages approximately 20 years. At December 31, 2024, and 2023, $4.4 million and $4.3 million, respectively, had been accrued to date, based on a discounted cash flow using an average discount rate of 4.92% and 5.30%, respectively, and is included in other liabilities on the consolidated balance sheets. Salary continuation expense is included in salaries and benefits expense, and totaled $306,000 and $314,000 for the years ended December 31, 2024, and 2023, respectively.
Included within the 12 total Salary Continuation agreements are four separate agreements with officers of the Bank. The accrual for this salary continuation liability is based on the anticipated years of service and vesting schedules provided under each individual agreement. The four policies are considered individual contracts, and the Company applies guidance contained in ASC Topic 710. Additionally, the Company purchased company owned life insurance (COLI) and bank owned life insurance policies (BOLI) in connection with these salary continuation agreements. The COLI policy premiums were paid over a seven year period and the BOLI policy premiums were paid in whole upon the purchase of the policies. There was no premium expense for the years ended December 31, 2024 and December 31, 2023.
There were eight Salary Continuation agreements established prior to 2015. Per the guidance in ASC Topic 715 “Compensation,” the Company records in accumulated other comprehensive (loss) income the amounts that have not yet been recognized as components of net periodic benefit costs. These unrecognized costs arise from changes in the estimated interest rates used in the calculation of net liabilities under the Plan. As of December 31, 2024, and 2023, the Company had approximately $147,000 and $130,000, respectively in unrecognized net periodic benefit costs arising from changes in interest rates used in calculating the current post-retirement liability required under the Plan. This amount represents the difference between the plan liabilities calculated under net present value calculations, and the net plan liabilities actually recorded on the Company’s books at December 31, 2024, and 2023.
Officer Supplemental Life Insurance Plan
The Company owns Bank-owned life insurance policies (BOLI) and Company-owned life insurance policies (COLI) on certain officers, including those covered under the Salary Continuation Plan above, with a portion of the post-retirement benefit available to the officers’ beneficiaries. The BOLI and COLI initial net cash surrender value is equal to the premium paid. Non-taxable increases in the cash surrender value, net of the cost of insurance, plus any death benefits ultimately received by the Company, are recorded as income. The cash surrender value of the policies totaled $20.7 million and $22.0 million at December 31, 2024, and 2023, and are included on the consolidated balance sheet as cash surrender value of life insurance. Income, net of expense, totaled $551,000 and $557,000 for the years ended December 31, 2024, and 2023, respectively. As the Salary Continuation Plan remains unfunded, it is the Company’s intention to utilize the policy proceeds to settle Plan obligations. Under Internal Revenue Service regulations, the life insurance policies are the property of the Company and are available, if necessary, to satisfy the Company’s creditors.
14.Commitments and Contingent Liabilities
Financial Instruments with Off-Balance Sheet Risk: The Company is party to financial instruments with off-balance sheet risk which arise in the normal course of business. These instruments may contain elements of credit risk, interest rate risk and liquidity risk, and include commitments to extend credit and standby letters of credit. The credit risk associated with these instruments is essentially the same as that involved in extending credit to customers and is represented by the contractual amount indicated in the table below:
December 31,
(In thousands) 2024 2023
Commitments to extend credit $ 204,033 $ 183,537
Standby letters of credit 29,174 2,940
Commitments to extend credit are agreements to lend to a customer, as long as there are no violation of any conditions established in the contract. Substantially all of these commitments are at floating interest rates based on the prime rate, and most have fixed expiration dates. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained is based on management’s credit evaluation and may include accounts receivable, inventory, leases, property, plant and equipment, residential real estate, and income-producing properties. Many of the commitments are expected to expire without being drawn upon and, as a result, the total commitment amounts do not necessarily represent future cash requirements of the Company.
Standby letters of credit are generally unsecured and are issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Company’s letters of credit are short-term guarantees and generally have terms from less than one month to approximately three years. At December 31, 2024, the maximum potential amount of future undiscounted payments the Company could be required to make under outstanding standby letters of credit totaled $29.2 million.
Remaining unfunded commitments for the investment in limited partnership as of December 31, 2024 and 2023, totaled $2.2 million and $800,000, respectively.
In the ordinary course of business, the Company becomes involved in litigation arising out of its normal business activities. Management, after consultation with legal counsel, believes that the ultimate liability, if any, resulting from the disposition of such claims would not be material to the financial position of the Company.
15. Fair Value Measurements and Disclosure
The following summary disclosures are made in accordance with the guidance provided by ASC Topic 825 “Fair Value Measurements and Disclosures” which requires the disclosure of fair value information for both on- and off-balance sheet financial instruments where it is practicable to estimate that value.
GAAP guidance clarifies the definition of fair value, describes methods used to appropriately measure fair value in accordance with generally accepted accounting principles and expands fair value disclosure requirements. This guidance applies whenever other accounting pronouncements require or permit fair value measurements.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
•Level 1 inputs are unadjusted quoted prices in active markets (as defined) for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
•Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
•Level 3 inputs are unobservable inputs for the asset or liability, and reflect the reporting entity’s assumptions regarding the pricing of an asset or liability by a market participant (including assumptions about risk).
The table below is a summary of fair value estimates for financial instruments and the level of the fair value hierarchy within which the fair value measurements are categorized at the periods indicated:
December 31, 2024
(In thousands) Carrying Amount Estimated Fair Value Quoted Prices In Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3
Financial Assets:
Investment securities $ 157,382 $ 157,382 $ - $ 157,382 $ -
Marketable equity securities 3,326 3,326 3,326 - -
Loans, net 912,416 874,105 - - 874,105
Financial Liabilities:
Time deposits 78,356 77,981 - - 77,981
Junior subordinated debentures 11,572 11,572 - - 11,572
December 31, 2023
(In thousands) Carrying Amount Estimated Fair Value Quoted Prices In Active Markets for Identical Assets Level 1 Significant Other Observable Inputs Level 2 Significant Unobservable Inputs Level 3
Financial Assets:
Investment securities $ 181,266 $ 181,266 $ 12,438 $ 168,828 $ -
Marketable equity securities 3,354 3,354 3,354 - -
Loans, net 904,384 871,681 - - 871,681
Financial Liabilities:
Time deposits 71,848 71,414 - - 71,414
Short-term borrowings 62,000 62,000 62,000 - -
Junior subordinated debentures 11,213 11,213 - - 11,213
The Company performs fair value measurements on certain assets and liabilities as the result of the application of current accounting guidelines. Some fair value measurements, such as investment securities and TRUPs are performed on a recurring basis, while others, such as impairment of loans, other real estate owned, goodwill and other intangibles, are performed on a nonrecurring basis.
•Level 1 financial assets consist of money market funds and highly liquid mutual funds for which fair values are based on quoted market prices.
•Level 2 financial assets include highly liquid debt instruments of U.S. Government agencies, collateralized mortgage obligations, corporate debt instruments, and debt obligations of states and political subdivisions, whose fair values are obtained from readily-available pricing sources for the identical or similar underlying security that may, or may not, be actively traded.
•Level 3 financial assets include certain instruments where the assumptions may be made by the Company or third parties about assumptions that market participants would use in pricing the asset or liability.
The Company recognizes transfers between Level 1, 2, and 3 when a change in circumstances warrants a transfer. There were no transfers in or out of Level 1 and Level 2 fair value measurements during the year ended December 31, 2024.
The following methods and assumptions were used in estimating the fair values of financial instruments measured at fair value on a recurring and non-recurring basis:
Investment Securities - Available-for-sale and marketable equity security values are based on open-market price quotes obtained from reputable third-party brokers. Market pricing is based upon specific CUSIP identification for each individual security. To the extent there are observable prices in the market, the mid-point of the bid/ask price is used to determine the fair value of individual securities. If that data is not available for the last 30 days, a Level 2-type matrix pricing-approach, based on
comparable securities in the market, is utilized. Level 2 pricing may include the use of a forward spread from the last observable trade or may use a proxy bond, such as a TBA mortgage, to determine the price for the security being valued. Changes in fair market value are recorded through other-accumulated-comprehensive-income as an unrecognized gain or loss on fair value.
Loans - Fair values of loans are estimated as follows: Fixed and variable loans are valued using discounted cash flow analysis, which takes into account various factors, including the type of loan, expected credit losses, and prepayment expectations. The cash flows from the loans are discounted to their present value by using a combination of current market rates, liquidity spreads, and the underlying index rates and margins on variable-rate loans. This process results in a Level 3 classification for the valuations.
Individually-Evaluated Loans - Fair value measurements for individually-evaluated loans are performed pursuant to authoritative accounting guidance and are based upon either collateral values supported by third party appraisals or observed market prices. Collateral-dependent loans are measured for impairment using the fair value of the collateral. There were no individually-evaluated loans measured at fair value as of December 31, 2024, or December 31, 2023.
Other Real Estate Owned - Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. No OREO properties were measured at fair value as of December 31, 2024, or December 31, 2023.
Time Deposits - The fair value is calculated by applying the current SOFR/SWAP curve rate to the discounted value of contractual cash flows.
Short-Term Borrowings - The fair value is calculated by applying rates currently available for debt with similar terms and remaining maturities to the existing debt.
Junior Subordinated Debentures - The fair value of junior subordinated debentures (TRUPs) is based on a discounted cash flow model utilizing observable market rates and credit characteristics for similar debt instruments. In its analysis, the Company uses characteristics that market participants would generally use, and considers factors specific to the liability and the principal, or most advantageous, market for the liability. Cash flows are discounted at a rate which incorporates a current market rate for similar-term debt instruments, adjusted for credit and liquidity risks associated with similar debt and circumstances unique to the Company. The Company believes that the subjective nature of these inputs, credit concerns in the capital markets, and inactivity in the trust preferred markets, limit the observability of market spreads, requiring TRUPs to be classified at a Level 3 fair value.
The following table provides a description of the valuation technique, unobservable input, and qualitative information about the unobservable inputs for the Company’s liabilities classified as Level 3 and measured at fair value on a recurring basis at December 31, 2024, and 2023:
December 31, 2024 December 31, 2023
Financial Instrument Valuation Technique Unobservable Input Weighted Average Financial Instrument Valuation Technique Unobservable Input Weighted Average
Junior Subordinated Debentures Discounted cash flow Market credit risk adjusted spreads 6.40% Junior Subordinated Debentures Discounted cash flow Market credit risk adjusted spreads 6.14%
Management believes that the credit risk-adjusted spread utilized in the fair value measurement of TRUPs is indicative of the nonperformance risk premium a willing market participant would require under current, inactive market conditions. Management attributes the change in fair value of TRUPs to market changes in the nonperformance expectations and pricing of this type of debt. Generally, an increase in the credit risk adjusted spread and/or a decrease in the forward three-month SOFR curve will result in a positive fair value adjustment and a decrease in the fair value measurement. Conversely, a decrease in the credit risk adjusted spread and/or an increase in the forward three-month SOFR curve will result in a negative fair value adjustment and an increase in the fair value measurement. The increase in discount rate between the periods ended December 31, 2024, and December 31, 2023, is primarily due to increases in rates for similar debt instruments.
The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring as of December 31, 2024:
(In thousands) December 31, 2024 Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3)
Assets:
AFS Securities:
U.S. Government agencies $ 2,644 $ - $ 2,644 $ -
U.S. Government collateralized mortgage obligations 78,881 - 78,881 -
Municipal bonds 42,367 - 42,367 -
Corporate bonds 33,490 - 33,490 -
Total AFS securities 157,382 - 157,382 -
Marketable equity securities 3,326 3,326 - -
Total assets $ 160,708 $ 3,326 $ 157,382 $ -
Liabilities:
Junior subordinated debentures $ 11,572 $ - $ - $ 11,572
Total liabilities $ 11,572 $ - $ - $ 11,572
There were no non-recurring fair value adjustments at December 31, 2024.
The following tables summarize the Company’s assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2023:
(In thousands) December 31, 2023 Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Assets:
AFS Securities:
U.S. Government agencies $ 6,156 $ - $ 6,156 $ -
U.S. Government collateralized mortgage obligations 88,184 - 88,184 -
Municipal bonds 42,365 - 42,365 -
U.S. Treasury securities 12,438 - 12,438 -
Corporate bonds 32,122 - 32,122 -
Total AFS securities 181,265 - 181,265 -
Marketable equity securities 3,354 3,354 - -
Total assets $ 184,619 $ 3,354 $ 181,265 $ -
Liabilities:
Junior subordinated debentures $ 11,213 $ - $ - $ 11,213
Total liabilities $ 11,213 $ - $ - $ 11,213
There were no non-recurring fair value adjustments at December 31, 2023.
The following tables provide a reconciliation of liabilities at fair value using significant unobservable inputs (Level 3) on a recurring basis during the years ended:
Junior Subordinated Debentures (in thousands)
December 31, 2024 December 31, 2023
Beginning balance $ 11,213 $ 10,883
Total (gains) losses included in earnings 614 (274)
Total gains (losses) included in other comprehensive income (245) 544
Capitalized interest (10) 60
Ending balance $ 11,572 $ 11,213
The amount of total losses (gains) for the period included in earnings attributable to the change in unrealized gains or losses relating to liabilities still held at the reporting date $ 614 $ (274)
16.Supplemental Cash Flows Disclosures
Year Ended December 31,
(In thousands)
2024 2023
Cash paid during the period for:
Interest $ 13,897 $ 11,010
Income Taxes 6,450 9,732
Noncash activities:
Recognition of ROU asset 2,374 -
Unrealized gains (losses) on junior subordinated debentures, net of tax 173 (544)
Unrealized gains on available for sale securities, net of tax 530 3,941
Unrealized (losses) gains on unrecognized post-retirement costs, net of tax (17) 88
Cash dividend declared 2,083 2,059
17.Earnings Per Common Share
The following table provides a reconciliation of the numerator and the denominator of the basic net income per share computation with the numerator and the denominator of the diluted net income per share computation.
Year Ended December 31,
(In thousands, except share and per share data) 2024 2023
Net income available to common shareholders $ 14,783 $ 19,796
Weighted average shares outstanding 17,188,384 17,114,214
Add: dilutive effect of stock options and unvested restricted stock 11,433 10,972
Weighted average shares outstanding adjusted for potential dilution 17,199,817 17,125,186
Basic earnings per share $ 0.86 $ 1.16
Diluted earnings per share $ 0.86 $ 1.16
Weighted average anti-dilutive shares excluded from earnings per share calculation 97,000 91,000
Dilutive income per share includes the effect of stock options, unvested restricted stock units, and other potentially dilutive securities using the treasury stock method. There is only one form of outstanding common stock. Holders of unvested restricted stock units do not receive dividends while holders of unvested restricted stock awards do receive dividends.
18.Accumulated Other Comprehensive Income
The components of accumulated other comprehensive loss, included in shareholders’ equity, are as follows for the years ended:
December 31, 2024
December 31, 2023
(in thousands) Net unrealized loss on available for sale securities Unfunded status of the supplemental retirement plans Net unrealized gain on junior subordinated debentures Net unrealized loss on available for sale securities Unfunded status of the supplemental retirement plans Net unrealized gain on junior subordinated debentures
Beginning balance $ (16,290) $ (130) $ 1,382 $ (19,066) $ (194) $ 1,765
Current period comprehensive (loss) income, net of tax 530 (17) 173 $ 2,776 $ 64 $ (383)
Ending balance $ (15,760) $ (147) $ 1,555 $ (16,290) $ (130) $ 1,382
Accumulated other comprehensive loss $ (14,352) $ (15,038)
19. Segment Information
The Company’s reportable segment is determined by the Chief Executive Officer, who is the designated chief operating decision maker, based upon information provided about the Company’s products and services offered, primarily banking operations. The segment is also distinguished by the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business, such as branches, which are then aggregated if operating performance, product and services, and customers are similar. The chief operating decision maker will evaluate the financial performance of the Company’s business components by evaluating revenue streams, significant expenses, and budget to actual results in assessing the Company’s segment and in the determination of resource allocations. The chief operating decision maker uses revenue streams to evaluate product pricing and uses significant expenses to assess performance and evaluate return on assets. The chief operating decision maker uses consolidated net income to benchmark the Company against its competitors. The benchmarking analysis coupled with monitoring of budget to actual results are used in assessment performance and in establishing compensation. Loans, investments, and deposits provide the revenues in the banking operation. Interest expense, provisions for credit losses, and payroll provide the significant expenses in the banking operation. All operations are domestic.
Accounting policies for segments are the same as those described in “Note 1 - Organization and Summary of Significant Accounting and Reporting Policies.” Segment performance is evaluated using consolidated net income. Information reported internally for performance assessment by the chief operating decision maker follows, inclusive of reconciliations of significant segment totals to the financial statements.
Detailed information related to the Company’s banking segment is as follows:
Banking Segment
(In thousands) 2024 2023
Interest income $ 60,751 $ 60,377
Noninterest income 4,713 5,569
Total revenue 65,464 65,946
Less:
Interest expense 13,901 11,056
Less:
Provision for credit losses 2,963 1,460
Salaries and employee benefits 13,884 13,157
Provision for income taxes
5,537 7,680
Occupancy Expense 3,686 3,739
Depreciation 1,469 1,459
Amortization 1,063 1,145
Other expenses (1) 8,178 6,454
Banking segment net income $ 14,783 $ 19,796
Reconciliation of assets:
Banking segment assets $ 1,211,718 $ 1,211,045
Total consolidated assets $ 1,211,718 $ 1,211,045
(1) Other segment items include professional fees, regulatory assessments, director fees and data processing fees.
20.Investment in York Monterey Properties
The Bank wholly-owns the subsidiary, York Monterey Properties, Inc. (“Properties”), organized as a California corporation. The Bank capitalized the subsidiary through the transfer of eight unimproved lots at a historical cost of $5.3 million comprised of approximately 186.97 acres in the York Highlands subdivision of the Monterra Ranch residential development in Monterey County, California, together with cash contributions. The Bank transferred the properties to York Monterey Properties, Inc., in order to maintain ownership beyond the ten-year regulatory holding period applicable to a state bank. The Bank acquired five of the lots through a non-judicial foreclosure on or about May 29, 2009. In addition, the Bank purchased three of the lots from another bank. The Bank has continuously held the Properties since the date of foreclosure and acquisition until the time of transfer. At the time of transfer, the Properties had reached the end of the ten-year regulatory holding period limit.
As of December 31, 2024, and 2023, the Bank’s investment in York Monterey Properties, Inc. totaled $5.0 million. York Monterey Properties, Inc. is included within the consolidated financial statements of the Company, with $4.6 million of the total investment recognized within the balance of OREO on the consolidated balance sheets. Please see “Note 24 - Subsequent Events” for additional information.
21. Parent Company Only Financial Statements
The following are the condensed financial statements of United Security Bancshares and should be read in conjunction with the consolidated financial statements:
United Security Bancshares - (parent only)
Balance Sheets - December 31, 2024, and 2023
(In thousands) 2024 2023
Assets
Cash and equivalents $ 2,584 $ 2,902
Investment in bank subsidiary 139,845 131,810
Other assets 1,588 1,102
Total assets $ 144,017 $ 135,814
Liabilities & Shareholders’ Equity
Liabilities:
Junior subordinated debentures (at fair value) $ 11,572 $ 11,213
Dividends declared 2,083 2,059
Total liabilities 13,655 13,272
Shareholders’ Equity:
Common stock, no par value; 20,000,000 shares authorized; issued and outstanding: 17,364,894 at December 31, 2024 and 17,167,895 at December 31, 2023
61,267 60,585
Retained earnings 83,447 76,995
Accumulated other comprehensive loss, net of tax (14,352) (15,038)
Total shareholders’ equity 130,362 122,542
Total liabilities and shareholders’ equity $ 144,017 $ 135,814
United Security Bancshares - (parent only) Years ended December 31,
Income Statements
(In thousands) 2024 2023
Income
(Loss) gain on fair value of junior subordinated debentures $ (614) $ 274
Dividends from subsidiary 9,311 8,451
Total income 8,697 8,725
Expense
Interest expense 816 799
Other expense 511 460
Total expense 1,327 1,259
Income before taxes and equity in undistributed income of subsidiary 7,370 7,466
Benefit for income taxes (574) (291)
Equity in undistributed income of subsidiary 6,839 12,039
Net Income $ 14,783 $ 19,796
United Security Bancshares - (parent only) Years ended December 31,
Statement of Cash Flows
(In thousands) 2024 2023
Cash Flows From Operating Activities
Net income $ 14,783 $ 19,796
Adjustments to reconcile net income to cash provided by operating activities:
Equity in undistributed income of subsidiary (6,839) (12,039)
Benefit for deferred income taxes (130) (70)
Loss (gain) on fair value of junior subordinated debentures 614 (274)
(Increase) decrease in income tax receivable (394) 200
Net decrease in other assets (46) 800
Net cash provided by operating activities 7,988 8,413
Cash Flows From Financing Activities
Dividends paid (8,306) (8,451)
Net cash used in financing activities (8,306) (8,451)
Net decrease in cash and cash equivalents (318) (38)
Cash and cash equivalents at beginning of year 2,902 2,940
Cash and cash equivalents at end of year $ 2,584 $ 2,902
22. Regulatory Matters
Capital Adequacy
The Company and Bank are subject to various regulatory capital requirements adopted by the Board of Governors of the Federal Reserve System and the FDIC. Failure to meet minimum capital requirements can initiate certain mandates and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework, the consolidated Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
The Basel III Capital Rules, a comprehensive capital framework for U.S. banking organizations, includes quantitative measures designed to ensure capital adequacy. The Basel III Rules require the Company and the Bank to maintain:
•(i) a minimum common equity Tier 1 ratio minimum of 4.50 percent plus a 2.50 percent “capital conservation buffer,”
•(ii) Tier 1 risk-based capital minimum of 6.00 percent plus the capital conservation buffer,
•(iii) total risk-based capital ratio minimum of 8.00 percent plus the capital conservation buffer and,
•(iv) Tier 1 leverage capital ratio minimum of 4.00 percent.
The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Failure to meet minimum capital requirements may result in certain actions by regulators that could have a direct material effect on the consolidated financial statements.
Community Bank Leverage Ratio: The federal banking agencies published a final rule on November 13, 2019, that provided a simplified measure of capital adequacy for qualifying community banking organizations. A qualifying community banking organization that opts into the community bank leverage ratio framework and maintains a leverage ratio greater than nine percent will be considered to have met the minimum capital requirements, the capital ratio requirements for the well capitalized category under the Prompt Corrective Action framework, and any other capital or leverage requirements to which the qualifying banking organization is subject. A qualifying community banking organization with a leverage ratio of greater than nine percent may opt into the community bank leverage ratio framework if it has average consolidated total assets of less than $10 billion, has off-balance-sheet exposures of 25% or less of total consolidated assets, and has total trading assets and trading liabilities of five percent or less of total consolidated assets. Further, the bank must not be an advance approaches banking organization.
The final rule became effective January 1, 2020, and was adopted by the Bank on September 30, 2020. As of December 31, 2024, and December 31, 2023, the Company and Bank met all capital adequacy requirements to which they were subject.
The following table shows the Company’s and the Bank’s regulatory capital and regulatory capital ratios at December 31, 2024, and 2023, compared to the applicable capital adequacy guidelines:
Actual Minimum requirement for Community Bank Leverage Ratio (1)
(In thousands) Amount Ratio Amount Ratio
As of December 31, 2024 (Company):
Tier 1 Leverage (to Average Assets) $153,673 12.57% $110,011 9.00%
As of December 31, 2024 (Bank):
Tier 1 Leverage (to Average Assets) 153,601 12.59% 109,829 9.00%
As of December 31, 2023 (Company):
Tier 1 Leverage (to Average Assets) 147,350 11.82% 112,035 9.00%
As of December 31, 2023 (Bank):
Tier 1 Leverage (to Average Assets) 147,249 11.83% 112,152 9.00%
(1) If the subsidiary bank’s leverage ratio exceeds the minimum ratio under the Community Bank Leverage Ratio Framework, it is deemed to be “well capitalized” under all other regulatory capital requirements. The Company may revert back to the regulatory framework for “Prompt Corrective Action” if the subsidiary bank’s leverage ratio falls below the minimum under the Community Bank Leverage Ratio Framework.
23. Related Party Transactions
During 2022, a member of the Board of Directors was hired to act as Chief Information Officer (CIO) on an interim basis, for which the director was paid a consulting fee of $200,000. As a result, the director is currently not considered an independent director.
24. Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Nonrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Management has reviewed events occurring through the date the financial statements were issued and determined that there was one subsequent event requiring additional disclosure regarding OREO balances related to the investment in York Monterey Properties, Inc. On January 14, 2025, the Bank foreclosed on nonaccrual loans related to the York Monterey Properties subdivision totaling $3.2 million and transferred the amount to OREO. This was not reflected in the $4.6 million balance at December 31, 2024. Please see “Note 19 - Investment in York Monterey Properties” for additional information.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
The Company’s management, with the participation of the President and Chief Executive Officer and the Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2024, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation, the Company’s management has determined that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits is accumulated and communicated to management, including the President and Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as of December 31, 2024. Based on this evaluation, the Company’s management concluded that the Company’s internal control over financial reporting is effective as of December 31, 2024.
There were no changes in the Company’s internal control over financial reporting that occurred during the fourth quarter of 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10 - Directors, Executive Officers, and Corporate Governance
Pursuant to Instruction G, the information required by this item is hereby incorporated herein by reference from the captions entitled “Election of Directors and Executive Officers,” “Corporate Governance Principles and Board Matters,” “Delinquent Section 16(a) Report,” and “Other Practices, Policies, and Guidelines,” set forth in the Company’s definitive Proxy Statement for its 2025 Annual Meeting of Shareholders (“Proxy Statement”).

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ITEM 11. EXECUTIVE COMPENSATION
Item 11 - Executive Compensation
Pursuant to General Instruction G, the information required by this item is hereby incorporated herein by reference from the captions entitled “Executive Compensation” and “Director Compensation” set forth in the Company’s definitive Proxy Statement.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Pursuant to General Instruction G, the information required by this item is hereby incorporated herein by reference from the caption entitled “Shareholdings of Certain Beneficial Owners and Management” set forth in the Company’s definitive Proxy Statement.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13 - Certain Relationships and Related Transactions, and Director Independence
Pursuant to General Instruction G, the information required by this item is hereby incorporated herein by reference from the captions entitled “Certain Transactions” and “Corporate Governance Principles” set forth in the Company’s definitive Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14 - Principal Accounting Fees and Services
Pursuant to General Instruction G, the information required by this item is hereby incorporated herein by reference from the caption entitled “Independent Accountant Fees and Services” set forth in the Company’s definitive Proxy Statement.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15 - Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
The following Consolidated Financial Statements are set forth in “Item 8. Financial Statements and Supplementary Data” of this Report.
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets - December 31, 2024, and 2023
Consolidated Statements of Income - Years Ended December 31, 2024, and 2023
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2024, and 2023
Consolidated Statements of Changes in Shareholders’ Equity - Years Ended December 31, 2024, and 2023
Consolidated Statements of Cash Flows - Years Ended December 31, 2024, and 2023
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or not required or because the information is included in the financial statements or notes thereto or is not material.
(a)(3) Exhibits
3.1
Articles of Incorporation of Registrant (1)
3.1.1
Amended Articles of Incorporation (filed herewith)
3.2
Bylaws of Registrant (1)
4.1
Specimen common stock certificate of United Security Bancshares (1)
10.1
Amended and Restated Executive Salary Continuation Agreement for Dennis Woods (2)
10.2
Amended and Restated Employment Agreement for Dennis R. Woods (5)
10.3
Amended and Restated Executive Salary Continuation Agreement for David Eytcheson (2)
10.4
Amended and Restated Change in Control Agreement for David Eytcheson (5)
10.5
USB 2005 Stock Option Plan (3)
10.6
United Security Bancshares 2015 Equity Incentive Award Plan (4)
10.7
Executive Salary Continuation Agreement for William Yarbenet (5)
10.8
Employment Agreement for William Yarbenet (5)
10.9
Change in Control Agreement for Robert Oberg (6)
10.10
Executive Salary Continuation Agreement for Robert Oberg (6)
10.11
Information Technology Engagement Letter with Mahmood, LLC, Dated June 29, 2022
10.12
Employment Agreement for David Kinross (7)
10.13
Employment Agreement for Porsche Saunders
10.14
Change in Control Agreement for Porsche Saunders (filed herewith)
11.1
Computation of earnings per share. See Note 17 to Consolidated Financial Statements set forth in “Item 8. Financial Statements and Supplementary Data” of this Report.
19.1
Insider Trading Policy (filed herewith)
21.1
Subsidiaries of the Company (filed herewith)
23.1
Consent of Moss Adams LLP, Independent Registered Public Accounting Firm (filed herewith)
31.1
Certification of the Chief Executive Officer of United Security Bancshares pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2
Certification of the Chief Financial Officer of United Security Bancshares pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1
Certification of the Chief Executive Officer of United Security Bancshares pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.2
Certification of the Chief Financial Officer of United Security Bancshares pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith)
97.1
Clawback Policy, dated November 28, 2023 (8)
101 Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of December 31, 2022 and 2021, (ii) the Consolidated Statements of Income for the years ended December 31, 2022 and 2021, (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2022 and 2021, (iv) the Consolidated Statement of Changes in Shareholders’ Equity for the years ended December 31, 2022 and 2021, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021, and (vi) the Notes to Consolidated Financial Statements. (Pursuant to Rule 406T of Regulation S-T, this information is deemed furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.) (Filed herewith).
(1) Previously filed on April 4, 2001 as an exhibit to the Company’s filing on Form S-4 (file number 333-58256).
(2) Previously filed on March 17, 2008 as an exhibit to the Company’s filing on Form 10-K for the year ended December 31, 2007 (file number 000-32897).
(3) Previously filed on April 18, 2005 as Exhibit B to the Company’s 2005 Schedule 14A Definitive Proxy (file number 000-32897).
(4) Previously filed on April 13, 2015 as Appendix A to the Company’s 2015 Schedule 14A Definitive Proxy (file number 000-32897).
(5) Previously filed on March 2, 2018 as an exhibit to the Company’s filing on Form 10-K for the year ended December 31, 2017 (file number 000-32897).
(6) Previously filed on March 1, 2019 as an exhibit to the Company’s filing on Form 10-K for the year ended December 31, 2018 (file number 000-32897).
(7) Previously filed on November 1, 2022 as an exhibit to the Company’s filing on Form 8-K (file number 000-32897).
(8) Previously filed on March 26, 2024 as an exhibit to the Company’s filing on Form 10-K (file number 000-32897).
(b) Exhibits filed:
See Exhibit Index under Item 15(a)(3) above for the list of exhibits required to be filed by Item 601 of Regulation S-K with this Report.
(c) Financial statement schedules filed:
See Item 15(a)(2) above.