BLUE RIDGE BANKSHARES, INC. (BRBS) FY 2024 MD&A

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following presents management’s discussion and analysis of the Company’s consolidated financial condition and the results of the Company’s operations. This discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto presented in Item 8, Financial Statements and Supplementary Information, of this Form 10-K.

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Cautionary Note About Forward-Looking Statements

The Company makes certain forward-looking statements in this Form 10-K that are subject to risks and uncertainties. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of management’s beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate, or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. The Company cautions that the forward-looking statements are based largely on management’s expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond the its control. Actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.

The following factors, among others, could cause the Company’s financial performance to differ materially from that expressed in such forward-looking statements:

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the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations;

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the effects of, and changes in, the macroeconomic environment and financial market conditions, including monetary and fiscal policies, interest rates and inflation;

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the impact of, and the ability to comply with, the terms of the Consent Order, as defined below, with the OCC, including the heightened capital requirements and other restrictions therein, and other regulatory directives;

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the imposition of additional regulatory actions or restrictions for noncompliance with the Consent Order or otherwise;

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the Company’s involvement in, and the outcome of, any litigation, legal proceedings, or enforcement actions that may be instituted against the Company;

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reputational risk and potential adverse reactions of the Company’s customers, suppliers, employees, or other business partners;

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the Company’s ability to manage its fintech relationships, including implementing enhanced controls and procedures, complying with the OCC directives and applicable laws and regulations, and managing the wind down of these partnerships;

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the quality and composition of the Company’s loan and investment portfolios, including changes in the level of the Company’s nonperforming assets and charge-offs;

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the Company’s management of risks inherent in its loan portfolio, the credit quality of its borrowers, and the risk of a prolonged downturn in the real estate market, which could impair the value of the Company’s collateral and its ability to sell collateral upon any foreclosure;

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the ability to maintain adequate liquidity by growing and retaining deposits and secondary funding sources, especially if the Company's or its industry's reputation become damaged;

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the ability to maintain capital levels adequate to support the Company's business and to comply with the Consent Order directives;

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the ability of the Company to implement cost-saving initiatives and efficiency measures, as well as increase earning assets, in order to yield acceptable levels of profitability;

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the ability to generate sufficient future taxable income for the Company to realize its deferred tax assets, including the net operating loss carryforward;

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the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

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changes in consumer spending and savings habits;

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the willingness of users to substitute competitors’ products and services for the Company’s products and services;

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the impact of unanticipated outflows of deposits;

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technological and social media changes;

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potential exposure to fraud, negligence, computer theft, and cyber-crime;

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adverse developments in the financial industry generally, such as recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer and client behavior;

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changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;

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the impact of changes in financial services policies, laws, and regulations, including laws, regulations and policies concerning taxes, banking, securities, real estate and insurance, the application thereof by bank regulatory bodies, and the three branches of the federal government;

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the effect of changes in accounting standards, policies, and practices as may be adopted from time to time;

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estimates of the fair value and other accounting values, subject to impairment assessments, of certain of the Company’s assets and liabilities;

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geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;

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the occurrence or continuation of widespread health emergencies or pandemics, significant natural disasters, severe weather conditions, floods, and other catastrophic events;

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other risks and factors identified in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections and elsewhere in this Form 10-K and in filings the Company makes from time to time with the SEC.

The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this Form 10-K, including those discussed in the section entitled “Risk Factors” in Item 1A above. If one or more of the factors affecting forward-looking information and statements proves incorrect, then actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-K. Therefore, the Company cautions you not to place undue reliance on its forward-looking information and statements. The Company will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how these risks and uncertainties will affect it.

Critical Accounting Policies and Estimates

General

The accounting principles the Company applies under GAAP are complex and require management to apply significant judgment to various accounting, reporting, and disclosure matters. Management must use assumptions, judgments, and estimates when applying these principles where precise measurements are not possible or practical. The Company views these policies as critical because they are highly dependent upon subjective or complex judgments, assumptions, and estimates. Changes in such judgments, assumptions, and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from initial estimates.

Allowance for Credit Losses ("ACL")

The allowance for credit losses represents management’s best estimate of credit losses over the remaining life of the loan portfolio. Loans are charged-off against the ACL when management believes the loan balance is no longer collectible. Subsequent recoveries of previously charged-off amounts (recoveries) are recorded as increases to the ACL. The provision for credit losses is an amount sufficient to bring the ACL to an estimated balance that management considers adequate to absorb lifetime expected losses in the Company’s held for investment loan portfolio. The ACL is a valuation account that is

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deducted from the loans’ recorded investment to present the net amount expected to be collected on the loans. In accordance with Accounting Standards Codification ("ASC") 326, Credit Losses, the Company elected to exclude accrued interest from the recorded investment basis in its determination of the ACL for loans held for investment, and instead reverses accrued but unpaid interest through interest income in the period in which the loan is placed on nonaccrual status.

Management’s determination of the adequacy of the ACL under ASC 326 is based on an evaluation of the composition of the loan portfolio, current economic conditions, historical loan loss experience, reasonable and supportable forecasts, and other risk factors. The Company uses a third-party model in estimating the ACL on a quarterly basis. Loans with similar risk characteristics are collectively assessed within pools (or segments). Loss estimates within the collectively assessed population are based on a combination of pooled assumptions and loan-level characteristics. The Company determined that using federal call codes is generally an appropriate loan segmentation methodology, as it is generally based on risk characteristics of a loan's underlying collateral. Using federal call codes also allows the Company to utilize publicly-available external information when developing its estimate of the ACL. The discounted cash flow ("DCF") method is the primary credit loss estimation methodology used by the Company and involves estimating future cash flows for each individual loan and discounting them back to their present value using the loan's contractual interest rate, which is adjusted for any net deferred fees, costs, premiums, or discounts existing at the loan's origination or acquisition date (also referred to as the effective interest rate). The DCF method also considers factors such as loan term, prepayment or curtailment assumptions, accrual status, and other relevant economic factors that could affect future cash flows. By discounting the cash flows, this method incorporates the time value of money and reflects the credit risk inherent in the loan.

In applying future economic forecasts, the Company utilizes a forecast period of one year and then reverts to the mean of historical loss rates on a straight-line basis over the following one-year period. The Company considers economic forecasts of national gross domestic product and unemployment rates from the Federal Open Market Committee to inform the model for loss estimation. Historical loss rates used in the quantitative model are derived using both the Bank’s and peer bank data obtained from publicly-available sources (i.e., federal call reports). The Bank’s peer group utilized is comprised of financial institutions of relatively similar size (i.e., $1 - $5 billion of total assets) and in similar markets. Management also considers qualitative adjustments when estimating loan losses to take into account the model’s quantitative limitations. Qualitative adjustments to quantitative loss factors, either negative or positive, may include considerations of trends in delinquencies, changes in volume and terms of loans, effects of changes in lending policy, experience and depth of management, regional and local economic trends and conditions, concentrations of credit, and loan review results.

For collectively evaluated loans not assessed using the DCF method, the Company applies the remaining life method. This approach uses the Company's historical loss rate, adjusted for current and future expectations, and factors in the remaining average life of the loan segment. It is used exclusively for loan segments where developing a DCF model was not feasible.

For those loans that do not share similar risk characteristics, the Company evaluates the ACL needs on an individual (or loan-by-loan) basis. This population of individually evaluated loans (or loan relationships with the same primary source of repayment) is determined on a quarterly basis and is based on whether (1) the risk grade of the loan is substandard or worse and the balance exceeds $500,000, (2) the risk grade of the loan is special mention and the balance exceeds $1,000,000, or (3) the loan’s terms differ significantly from other pooled loans. Measurement of credit loss is based on the expected future cash flows of an individually evaluated loan, discounted at the loan’s effective interest rate, or measured on an observable market value, if one exists, or the estimated market value of the collateral underlying the loan discounted for estimated costs to sell the collateral for collateral-dependent loans. In limited circumstances, the collateral value for a collateral-dependent loan may be based on the enterprise value of a company. The enterprise value method involves assessing the borrower’s ability to repay the loan by estimating the total value of its business, including both debt and equity. This approach is typically used where the recoverable value is based on the fair value of the company as a going concern, adjusted for the priority of the Company's claim. If the net value applying these measures is less than the loan’s amortized cost, a specific reserve is recorded in the ACL and charged-off in the period when management believes the loan balance is no longer collectible.

Credit losses are an inherent part of the Company’s business. The Company has an ACL management "work group", which includes executive and senior management of the accounting and credit administration teams, who approve the key methodologies and assumptions, as well as the final ACL. While management uses available information at the time of estimation to determine expected lifetime credit losses on loans, future changes in the ACL may be necessary based on changes in portfolio composition, portfolio credit quality, changes in underlying facts for individually evaluated loans, and/or changes in current and forecasted economic conditions. In addition, bank regulatory agencies and the Company's independent auditors periodically review its ACL and may require an increase in the ACL or the recognition of further loan charge-offs, based on judgments that are different than those of management. Additional provisions for such losses, if necessary, would be recorded as a charge to earnings.

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Mortgage Servicing Rights ("MSR") Assets

MSR assets represent the economic value associated with servicing a mortgage loan during the life of the loan. The Company retains servicing rights on mortgages originated and sold to the secondary market. The assets are separate from the underlying mortgage and may be retained or sold by the Company when the related mortgage is sold. Under ASC 860, Transfers and Servicing, MSR assets are initially recognized at fair value and subsequently accounted for using either the amortization method or the fair value measurement method. Beginning January 1, 2022, the Company elected the fair value measurement method for accounting for MSR assets; prior to this, MSR assets were recorded under the amortization method. This change in accounting method, which was an irrevocable election, was prospective in nature and resulted in an after-tax difference in carrying values of its MSR assets under the two methods at the beginning of 2022. Consequently, a positive $3.5 million cumulative effect adjustment was recorded to stockholders’ equity as of January 1, 2022. MSR assets and servicing income are reported on the Company’s consolidated balance sheets and consolidated statements of operations, respectively.

In the second half of 2024, the Company sold substantially all of its MSR assets consisting of $1.94 billion in unpaid principal loan balances of underlying mortgages, at a loss of $3.6 million. This loss includes transaction-related costs and an estimated recourse reserve for potential putbacks, estimated transition costs, and a portion of the proceeds withheld for documentation review.

As of December 31, 2024, the Company's MSR asset portfolio was $386 thousand, which consisted of $33.9 million in unpaid principal loan balances of underlying mortgages.

Income Taxes

Income taxes are accounted for using the balance sheet method in accordance with ASC 740, Accounting for Income Taxes. Per ASC 740, the objective is to (a) recognize the amount of taxes payable or refundable for the current year, and (b) defer tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or federal income tax returns. Deferred tax assets and liabilities are determined based on the tax effects of the temporary differences between the book (i.e., financial statement) and tax bases of the various balance sheet assets and liabilities, and give current recognition to changes in tax rates and laws. Temporary differences are reversed in the period in which an amount or amounts become taxable or deductible.

A deferred tax liability is recognized for all temporary differences that will result in future taxable income; a deferred tax asset is recognized for all temporary differences that will result in future tax deductions, potentially reduced by a valuation allowance. A valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized. In making this assessment, all sources of taxable income available to realize the deferred tax asset are considered including future releases of existing temporary differences, tax planning strategies, and future taxable income exclusive of reversing temporary differences and carryforwards. The predictability that future taxable income, exclusive of reversing temporary differences, will occur is the most subjective of these four sources. Additionally, cumulative losses in recent years, if any, are considered negative evidence that may be difficult to overcome to support a conclusion that future taxable income, exclusive of reversing temporary differences and carryforwards, is sufficient to realize a deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. The evaluation of the recoverability of deferred tax assets requires management to make significant judgments regarding the releases of temporary differences and future profitability, among other items.

When the Company’s federal tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would ultimately be sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely to be realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties, if any, associated with unrecognized tax benefits are classified as additional income taxes in the consolidated statements of operations.

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Equity Investments

The Company has made equity investments in a fintech company and limited partnerships, which are being accounted for as equity securities under ASC 321, Investments – Equity Investments. Few of these equity investments have readily-determinable fair values and most are reported at cost, less impairment, if any. The Company reports such investments at fair value if observable market transactions have occurred in similar securities, resulting in a new carrying value that is evaluated for indication of impairment no less than quarterly. These investments, inclusive of the fair value adjustments, totaled $4.8 million and $12.9 million as of December 31, 2024 and 2023, respectively, and are included in other equity investments on the Company's consolidated balance sheets. Other equity investments are also periodically evaluated for impairment using information obtained either directly from the investee, a third-party broker, or a third-party valuation firm. If an impairment has been identified, the carrying value of the investment is written down to its estimated fair market value through a charge to earnings.

Five Year Summary of Selected Financial Data

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

For the year ended December 31, 2024, the Company reported a net loss of $15.4 million compared to a net loss of $51.8 million for 2023. Basic and diluted loss per share were ($0.31) for 2024 compared to ($2.73) for 2023. The net loss of $51.8 million for the year ended December 31, 2023 included an after-tax goodwill impairment charge of $26.8 million and a $4.7 million after-tax settlement reserve for the the previously disclosed Employee Stock Ownership Plan ("ESOP") litigation assumed in the 2019 acquisition of Virginia Community Bankshares, Inc. ("VCB"). After-tax regulatory remediation expenses for 2024 and 2023 were $3.6 million and $8.1 million, respectively.

Net Interest Income. Net interest income is the excess of interest earned on loans, investments, and other interest-earning assets over the interest paid on deposits and borrowings and is the Company’s primary revenue source. Net interest income is thereby affected by overall balance sheet size, changes in interest rates, and changes in the mix of investments, loans, deposits, and borrowings.

The following table presents the average balance sheets for each of the years ended December 31, 2024 and 2023. In addition, the amounts of interest earned on interest-earning assets, with related taxable equivalent yields, and interest expense on interest-bearing liabilities, with related rates, are presented.

(1) Computed on a fully taxable equivalent basis assuming a 22.32% and 22.65% income tax rate for the years ended December 31, 2024 and 2023, respectively.

(2) Includes deferred loan fees/costs.

(3) Nonaccrual loans have been included in the computations of average loan balances.

(4) Includes accretion of fair value adjustments (discounts) on acquired loans of $1.1 million and $2.6 million for the years ended December 31, 2024 and 2023, respectively.

(5) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $0.3 million and $0.8 million for the years ended December 31, 2024 and 2023, respectively.

(6) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $100 thousand for both years ended December 31, 2024 and 2023.

(7) Net interest margin is net interest income divided by average interest-earning assets.

(8) Cost of funds is total interest expense divided by total interest-bearing liabilities and non interest-bearing demand deposits.

(9) Net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities.

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The following table presents the changes in interest income and interest expense due to changes in average assets and liability balances and changes in rates earned on assets and paid on liabilities for the periods stated.

Average interest-earning assets were $2.85 billion for the year ended December 31, 2024 compared to $3.03 billion for the same period of 2023, a $188.1 million decrease. This decrease was primarily attributable to lower average balances of loans held for investment and securities, which decreased $190.7 million and $36.5 million, respectively, partially offset by higher average balances of interest-earning deposits in other banks. The Company selectively reduced its loan portfolio, primarily loans outside of the Bank's geographic market, in order to meet the liquidity needs to exit fintech BaaS depository operations. Total interest income (on a taxable equivalent basis) decreased by $8.7 million to $160.4 million for the year ended December 31, 2024 compared to the year ended 2023. This decrease was primarily due to lower average balances of loans held for investment. Interest income in 2024 and 2023 included accretion of fair value adjustments (discounts) on acquired loans of $1.1 million and $2.6 million, respectively.

Average interest-bearing liabilities were $2.20 billion for the year ended December 31, 2024 compared to $2.31 billion for the same period of 2023, a $114.0 million decrease. Of this decrease, $50.3 million was attributable to lower average balances of FHLB advances, while $45.0 million was attributable to lower average balances of interest-bearing deposits, primarily due to a decline in fintech BaaS deposits. Average fintech-related deposit balances were $260.0 million and $653.2 million for the years ended December 31, 2024 and December 31, 2023, respectively. Interest expense increased by $5.7 million to $81.7 million for the year ended December 31, 2024 compared to the 2023 period. Higher interest expense was primarily attributable to higher rates paid on interest-bearing deposits, primarily time deposits, partially offset by a decline in deposits related to the Bank's fintech operations. These changes reflect the balance sheet repositioning that facilitated the exit of fintech BaaS depository operations and towards a more traditional community bank model. The interest rates for the majority of the fintech-related accounts are index-priced, with the index being the federal funds rate. The cost of fintech-related deposits was 3.86% in 2024, while the cost of deposits of customers in the Bank's primary markets (also excluding brokered deposits) was 3.15% in the same period. Brokered time deposits also contributed to the higher interest expense in the 2024 period in the amount of $23.9 million. The cost of average interest-bearing liabilities increased to 3.72% in 2024 from 3.29% in 2023, while the cost of funds increased to 3.04% in 2024 from 2.56% in 2023. Interest expense in the 2024 and 2023 periods included the amortization of fair value adjustments (premium) on assumed time deposits of $0.3 million and $0.8 million, respectively, which was a reduction to interest expense.

Net interest income (on a taxable equivalent basis) was $78.7 million for the year ended December 31, 2024 compared to $93.1 million for the year ended December 31, 2023, while net interest margin was 2.77% and 3.07% for the same respective periods. Accretion and amortization of purchase accounting adjustments had a 5 basis point and 12 basis point positive effect on net interest margin for the same respective periods. The decrease in net interest income in 2024 was primarily due to lower average balances of loans held for investment and higher rates on deposits, primarily time deposits. The Company anticipates that future net interest income and net interest margin will be positively affected as it anticipates loan balance declines to stabilize with new and renewed loans at higher market rates and a further reduction in higher cost brokered deposits.

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(Recovery of ) Provision for Credit Losses. The Company recorded a recovery of credit losses of $5.1 million for the year ended December 31, 2024 compared to a provision for credit losses of $22.3 million for the year ended December 31, 2023, a decrease of $27.4 million. The recovery of credit losses in 2024 was primarily attributable to an $8.4 million recovery from the sale of a specialty finance loan reserved for in 2023 and 2022 and lower reserve needs due to loan portfolio balance reductions, partially offset by higher specific reserves for certain purchased loans. Provision for credit losses in 2023 was primarily composed of specific reserves on the previously reported group of specialty finance loans, partially offset by a credit to provision for credit losses on unfunded commitments, as the Company actively worked to reduce these balances.

Noninterest Income. The following table provides detail for noninterest income and changes for the periods stated.

Lower noninterest income in 2024 compared to 2023 was primarily attributable to a $8.5 million non-cash, negative fair value adjustment of an equity investment the Company holds in a fintech company. Lower gain on sale of guaranteed government loans in 2024 compared to 2023 was attributable to the exit of the majority of the Company's guaranteed government lending team in the second quarter of 2024, which aligns with the Company’s enhanced focus on lending opportunities within its core geographic market.

The decline in residential mortgage banking income was primarily attributable to lower mortgage volumes sold into the secondary market in 2024 ($221.3 million) compared to 2023 ($315.5 million). Also contributing to the decline in noninterest income was the sale of MSR assets, which resulted in a loss on sale of $3.6 million, while fair value adjustments to MSR assets was a positive $619 thousand in 2024 compared to a negative $2.8 million in 2023. Fair value adjustments are primarily driven by market interest rates and related assumptions. Partially offsetting the negative $2.8 million fair value adjustment on MSR assets in 2023 was the retention of new MSR assets.

The decline in other noninterest income in 2024 compared to 2023 was primarily attributable to a decline in income from fintech BaaS deposit partnerships and a decline in income from Small Business Investment Company ("SBIC") investments as the Company sold all of its SBIC investments in 2024. In 2023, SBIC income and fintech BaaS deposit income were partially offset by the $553 thousand loss on sale of the LenderSelect Mortgage Group. The Company reported in January 2025 plans to exit its indirect fintech lending partnerships and, as a result, anticipates a decline in noninterest income beginning in 2025 from these sources. These partnerships generated $2.9 million and $3.0 million of noninterest income in 2024 and 2023, respectively.

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Noninterest Expense. The following table provides detail for noninterest expense and changes for the periods stated.

Excluding the goodwill impairment charge, the VCB ESOP litigation settlement charge, and regulatory remediation expenses, noninterest expense decreased $5.5 million, or 4.8%, for 2024 compared to 2023. Lower legal and regulatory filings expenses in 2024 was primarily the result of reduced legal costs associated with the VCB ESOP litigation, which were incurred in 2023. Lower other contractual services and regulatory remediation expenses in 2024 were due to the reduction in the use of third-party resources in the BSA/AML area, as the Bank completed certain requirements under the Consent Order and exited its fintech BaaS depository operations. Higher audit fees in 2024 were primarily due to outsourced internal audits and assessments related to fintech operations. While salaries and employee benefits expenses remained flat in 2024 from 2023, full-time equivalent employees ("FTEs") as of December 31, 2024 and December 31, 2023, were 442 and 513, respectively. The Company anticipates that due to the transition to a more traditional community banking model, operational efficiency initiatives, and as regulatory directives are met, salaries and employee benefits expenses will decline in subsequent periods. Additionally, the Company expects overall noninterest expenses to decrease as it addresses the findings in the Consent Order.

Income Tax Expense. For the year ended December 31, 2024, the Company recorded an income tax benefit of $1.1 million (effective income tax rate of 6.8%) compared to income tax benefit of $7.1 million (effective income tax rate of 12.0%) for the same period of 2023. The effective income tax rate in the 2024 period was primarily attributable to the surrender of the majority of the Company's investment in bank owned life insurance, which resulted in a taxable gain and nondeductible penalties. The effective income tax rate in the 2023 period was primarily attributable to the $26.8 million goodwill impairment charge, which was not tax deductible.

Analysis of Financial Condition

Loan Portfolio. The Company makes loans to commercial entities and to individuals. Loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan and the creditworthiness of the borrower. Credit risk tends to be geographically concentrated in that a majority of the loans are to borrowers located in the markets served by the Company. All loans are underwritten within specific lending policy guidelines that are designed to maximize the Company’s profitability within an acceptable level of business risk.

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The following table presents the Company’s loan portfolio by category of loan and the percentage of loans in each category to total loans as of the dates stated.

The following table presents the Company’s portfolio of commercial real estate mortgages by property type as of the dates stated.

The current lending environment for commercial real estate (“CRE”) loans has heightened risk due to a higher interest rate environment. Potential negative impacts include higher debt service burdens for floating rate loans and fixed rate loans that mature and require renewal or refinancing. As these loans mature, they may be repriced at significantly higher interest rates, leading to increased debt service costs that can strain borrowers' ability to meet payment obligations. In some cases, the higher cost of refinancing may lead to loan defaults, particularly if property cash flows have not increased proportionally.

Additionally, collateral values overall may be impaired by higher capitalization rates, further complicating refinancing efforts and increasing credit risk to the Bank. Certain CRE collateral types have experienced declining occupancy, demand, and rental rates, which could potentially lead to material declines in property level economics and further weaken borrowers' ability to service their debt.

In response to the heightened risk, earlier in 2024, the Bank’s credit policy and risk committee conducted a targeted review of certain of the Bank’s loan types, including office loans, to confirm its internal risk ratings. In addition, the Bank’s credit administration department led by its Chief Credit Officer performs a periodic analysis of emerging trends by geography where the Bank has the largest concentrations by CRE property type. The analysis includes all real estate property types and geographic markets represented in the loan portfolio. This analysis is provided to the board of directors to assess whether the CRE lending strategy and risk appetite continue to be appropriate, considering changes in local market conditions and the Bank’s exposure to collateral type concentrations. Also, concentration limits by real estate collateral type are approved and monitored by the board of directors. As of December 31, 2024, all limits are in compliance.

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The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed) as of December 31, 2024.

Allowance for Credit Losses. In determining the adequacy of the Company’s ACL, management makes estimates based on facts available at the time the ACL is determined. Such estimation requires significant judgment at the time made. Management believes that the Company’s ACL was adequate as of December 31, 2024 and December 31, 2023. There can be no assurance, however, that adjustments to the ACL will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy, on a national basis or in the Company’s market area, and changes in the circumstances of particular borrowers are criteria, among others, that could increase the level of the ACL required, resulting in charges to the provision for credit losses for loans. In addition, bank regulatory agencies periodically review the Bank's ACL and may, on occasion, require an increase in the ACL or the recognition of further loan charge-offs, based on their judgment of the facts at the time of their review that may differ than that of management.

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The following tables present an analysis of the change in the ACL by loan type as of the dates and for the periods stated.

In the second quarter of 2024, the Company executed an agreement to sell a nonperforming specialty finance loan (reported as commercial and industrial) to a third party, reclassifying the loan from loans held for investment to loans held for sale in the same period at its estimated fair value. Upon reclassification, the Company recorded a charge-off of $9.4 million, which was provisioned for in prior years. In the third quarter of 2024, the sale was completed upon the receipt of all contractual amounts due and pursuant to the note sale agreement, and the Company recorded an $8.4 million recovery of credit losses.

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The adoption of ASC 326 on January 1, 2023 resulted in a $7.4 million increase in the ACL. Provision for credit losses in the 2023 period was primarily attributable to specific reserves for specialty finance loans that were originated in 2022. The Company ceased making loans identified as specialty finance in late 2022. As of December 31, 2024 and 2023, carrying values of specialty finance loans totaled $0 and $34.2 million, respectively, with specific reserves of $0 and $9.6 million, respectively, as of the same dates. Net loan charge-offs were $10.0 million for the year ended December 31, 2024, compared to $27.0 million for the year ended December 31, 2023. The decline in net charge-offs in 2024 compared to 2023 was primarily due to $19.5 million in specialty finance loan charge-offs recorded in 2023 compared to $1.0 million in 2024. Net charge-offs of the nonguaranteed portion of government-guaranteed loans totaled $2.0 million and $1.1 million for 2024 and 2023, respectively.

The ACL includes specific reserves for individually evaluated loans and a general allowance applicable to all loan categories; however, management has allocated the ACL by loan type to provide an indication of the relative risk characteristics of the loan portfolio. The allocation is an estimate and should not be interpreted as an indication that charge-offs will occur in these amounts or that the allocation indicates future trends, and does not restrict the usage of the general allowance for any specific loan or category. The following table presents the allocation of the ACL by loan category and the percentage of loans in each category to total loans as of the dates stated.

Nonperforming Assets. The following table presents a summary of nonperforming assets and various measures as of the dates stated.

Nonperforming loans, which include nonaccrual loans and loans past due 90 days and still accruing interest, decreased $37.6 million from prior year end, to $25.4 million as of December 31, 2024. This decline primarily reflects the sale of the

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previously noted specialty finance loan, which had a $32.8 million carrying value and specific reserve of $9.6 million at December 31, 2023. The decline in nonperforming loans positively affected the asset quality measures above.

Loans are generally placed into nonaccrual status when they are past due 90 days or more as to either principal or interest or when, in the opinion of management, the collection of principal and/or interest is in doubt. A loan remains in nonaccrual status until the loan is current as to payment of both principal and interest or past due less than 90 days and the borrower demonstrates the ability to pay and remain current. When cash payments are received, they are applied to principal first, then to accrued interest. It is the Company's policy not to record interest income on nonaccrual loans until principal has become current. In certain instances, accruing loans that are past due 90 days or more as to principal or interest may not be placed on nonaccrual status, if the Company determines that the loans are well-secured and are in the process of collection.

OREO includes properties that have been substantively repossessed or acquired in complete or partial satisfaction of debt. Such properties, which are held for resale, are initially stated at fair value, including a reduction for the estimated selling expenses, which becomes the carrying value. In subsequent periods, such properties are stated at the lower of the restated carrying value or fair value.

Investment Securities. The investment portfolio is used as a source of interest income, credit risk diversification, and liquidity, as well as to manage interest rate sensitivity and provide collateral for short-term borrowings. Securities in the investment portfolio classified as securities available for sale may be sold in response to changes in market interest rates, securities’ prepayment risk, liquidity needs, and other similar factors, and are carried at estimated fair value. The fair value of the Company’s investment securities available for sale was $312.0 million and $321.1 million at December 31, 2024 and 2023, respectively. Primarily as a result of market interest rates in the year ended December 31, 2024, the Company’s portfolio of securities available for sale had a net unrealized loss of approximately $55.5 million as of the same date. Of the unrealized loss in the portfolio at December 31, 2024, approximately 81.0% was related to securities backed by U.S. government agencies.

Securities in the investment portfolio may be classified as held to maturity, if the Company has the ability and intent to hold them to maturity, in which case they would be carried at amortized cost. The Company did not hold any investment securities classified as held to maturity as of December 31, 2024 or December 31, 2023.

As of December 31, 2024 and 2023, the majority of the investment securities portfolio consisted of securities rated investment grade by a leading rating agency. Investment grade securities are judged to have a low risk of default, to be of the best quality and carry the smallest degree of investment risk. At December 31, 2024 and 2023, securities with a fair value of $268.9 million and $35.8 million, respectively, were pledged to secure the Bank's borrowing facility with the FHLB. As of December 31, 2024, the Company had pledged securities with a fair value of $16.3 million as collateral for the FRB Discount Window, and as of December 31, 2023, the Company had pledged $260.9 million as collateral for the FRB Bank Term Funding Program (“BTFP”).

The Company reviews its available for sale investment securities portfolio for potential credit losses at least quarterly. At December 31, 2024 and 2023, the majority of securities in an unrealized loss position were of investment grade; however, a portion did not have a third-party investment grade available (securities with fair values of of $29.3 million and $20.5 million, respectively). These securities were primarily subordinated debt instruments issued by bank holding companies and are classified as corporate bonds. Investment securities with unrealized losses are generally a result of pricing changes due to changes in the interest rate environment since purchase and not as a result of permanent credit impairment. Contractual cash flows for mortgage backed and U.S. Treasury and agencies securities are guaranteed and/or funded by the U.S. government. Municipal securities with unrealized losses showed no indication that the contractual cash flows will not be received when due. The Company does not intend to sell nor does it believe that it will be required to sell, any of its impaired securities prior to the recovery of the amortized cost. No ACL has been recognized for investment securities as of December 31, 2024 and 2023.

Restricted equity investments consisted of stock in the FHLB (carrying basis $9.4 million and $12.3 million at December 31, 2024 and 2023, respectively), FRB stock (carrying basis of $9.4 million and $5.9 million at December 31, 2024 and 2023, respectively), and stock in the Company’s correspondent bank (carrying basis of $468 thousand at both December 31, 2024 and 2023). Restricted equity investments are carried at cost.

The Company also has various other equity investments, including an investment in a fintech company and limited partnerships, totaling $4.8 million and $12.9 million as of December 31, 2024 and 2023, respectively. The Company reports such investments at fair value if observable market transactions have occurred in similar securities, resulting in a new carrying value that is evaluated for impairment no less than quarterly. These impairment analyses may include quantitative

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and/or qualitative information obtained either directly from the investee, a third-party broker, or a third-party valuation firm. If a potential impairment has been identified, the carrying value of the investment would be written down to its estimated fair market value through a charge to earnings. In the second quarter of 2024, the Company identified potential impairment triggers related to one of its investments, mainly due to regulatory pressures on banks partnering with fintech companies in the BaaS sector. These pressures led some fintech companies to announce cost-saving measures and at least one to seek bankruptcy protection. As a result, the Company engaged a third-party valuation firm to value the Company's investment in a fintech company. This valuation resulted in an $8.5 million impairment charge, recorded in fair value adjustments of other equity investments, to adjust the investment to its estimated fair market in the second quarter of 2024.

The following table presents the composition of the Company’s available for sale securities portfolio, at amortized cost, as of the dates stated.

The following table presents the amortized cost of the investment portfolio by contractual maturities, as well as the weighted average yields, for each of the maturity ranges as of and for the periods stated. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

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Deposits. The principal sources of funds for the Company are deposits, including transaction accounts (demand deposits and money market accounts), time deposits, and savings accounts, of customers in the Company’s primary geographic market area. Such customers provide the Bank a source of fee income and cross-marketing opportunities and are generally a lower cost source of funding for the Bank.

In prior years, deposits sourced from fintech partnerships (“fintech-related deposits”) were a significant source of deposits for the Company. Prior to 2024, deposits sourced from fintech BaaS providers comprised a significant portion of the Company’s fintech-related deposits. In the fourth quarter of 2024, the Company completed the exit of its fintech BaaS deposit operations, eliminating its exposure to fintech BaaS deposits and reducing its fintech-related deposit exposure to approximately 1.0% of deposits as of December 31, 2024, consisting of corporate accounts of a few companies in the fintech sector. As of December 31, 2023, fintech-related deposits comprised 18.2% of total deposits.

Brokered deposit balances are sourced through intermediaries and are an unsecured source of funding for the Bank. Brokered deposits were added throughout 2023 and early 2024 to enhance liquidity in light of financial industry events that began in March 2023 and in anticipation of the exit of the Company's fintech BaaS deposit operations. Brokered deposits represented approximately 18.5% and 20.1% of total deposits as of December 31, 2024 and 2023, respectively, and were all time deposits at December 31, 2024. The Bank has a liquidity management program, with oversight of the Bank’s asset and liability committee (the “ALCO”) that sets forth guidelines for the desired maximum level of brokered deposits, which is 20.0% of total deposits. As noted, the Company issued brokered deposits as part of its liquidity management plan, and as a result, the Company's brokered deposit levels have approximated the high-end of the guideline at December 31, 2024. In recent quarters, the Company has reduced levels of brokered deposits and expects to continue to reduce levels in future periods to a level of 10.0% or less of total deposits. As certain brokered deposits have multiple-year terms, the Company expects brokered deposits to be a funding source for several years. The ALCO monitors brokered deposit concentrations as part of its liquidity risk management program.

The Bank is prohibited from accepting, renewing, or rolling over any brokered deposits, except in compliance with certain applicable restrictions under federal law, while subject to the Consent Order. In response and pursuant to 12 USC 1831f, 12 CFR 337.6(c) and 12 CFR 303.243(a), the Bank submitted to the FDIC an application for a waiver of the prohibition on the acceptance, renewal, or rollover of brokered deposits by an adequately capitalized insured depository institution. During the third quarter of 2024, the Bank received approval from the FDIC allowing the Bank to accept, renew, and rollover brokered deposits for a six-month period and in the amount of maturities during this period. In late fourth quarter of 2024, the Bank received a six-month extension of this approval.

Total deposits decreased $386.6 million from $2.57 billion as of December 31, 2023 to $2.18 billion as of December 31, 2024, as:

•
Deposits, excluding fintech-related and brokered deposits, increased $170.9 million from approximately $1.58 billion as of December 31, 2023 to approximately $1.76 billion as of December 31, 2024;

•
Brokered deposits decreased $113.0 million from approximately $515.5 million, or 20.1% of total deposits, as of December 31, 2023 to approximately $402.5 million, or 18.5% of total deposits, as of December 31, 2024; and

•
Fintech-related deposits decreased $444.5 million from approximately $465.9 million as of December 31, 2023 to approximately $21.3 million as of December 31, 2024. Of the decline, fintech BaaS deposits decreased $370.7 million from December 31, 2023.

The following table presents the composition of deposits as of the dates stated.

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Estimated uninsured deposits totaled approximately $399.3 million as of December 31, 2024, or 18.0% of total deposits, compared to $573.9 million, or 22.3% of total deposits, as of December 31, 2023. Excluding fintech BaaS deposits, estimated uninsured deposits were 18.1% and 18.2% of total deposits as of December 31, 2024 and 2023, respectively. Uninsured deposit amounts are based on estimates as of the reported date.

The following table presents a summary of average deposits and the weighted average rate paid for the periods stated.

The following table presents maturities of time deposits for certificates of deposits $250 thousand or greater as of the dates stated.

Borrowings. The Company uses short-term and long-term borrowings from various sources, including FHLB advances and FRB advances, to fund assets and operations. The following table presents information on the balances and interest rates on borrowings as of and for the periods stated.

The Bank has a $65.0 million FRB advance pursuant to the BTFP, which was secured by qualifying investment portfolio securities. Effective March 11, 2024, the Federal Reserve terminated the BTFP. During the second quarter of 2024, the Company repaid its BTFP advance upon its maturity and unpledged all collateralized securities.

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FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Company’s residential, multifamily, and commercial real estate mortgage loan portfolios, as well as selected investment portfolio securities. FRB advances through the FRB Discount Window are secured by qualifying pledged construction and commercial and industrial loans, as well as selected investment portfolio securities. Total borrowings as of December 31, 2024 were $150.0 million compared to $275.0 million as of December 31, 2023, a decrease of $125.0 million. With available liquidity, the Company reduced its borrowings, while executing the exit of fintech BaaS deposit operations.

Subordinated notes, net, totaled $39.8 million and $39.9 million as of December 31, 2024 and 2023, respectively. The Company's subordinated notes are comprised of a $25 million issuance in October 2019 maturing October 15, 2029 (the “2029 Notes”) and a $15 million issuance in May 2020 maturing June 1, 2030 (the “2030 Note”). The fixed rates on these subordinated notes transition to variable rates based on the Secured Overnight Funding Rate ("SOFR") roughly five years from issue date. The 2029 Notes can be paid off in whole or in part without penalty at any time and the 2030 Note can be paid off in whole or in part, without penalty, at any time after its initial reset date. Due to the Consent Order, the Company must obtain approval to redeem its subordinated notes.

The 2029 Notes bore interest at 5.625% per annum, through October 14, 2024, payable semi-annually in arrears. As of December 31, 2024, the 2029 Notes bore an annual interest rate of 8.98%. On October 15, 2024, the rate on the 2029 Notes began to reset quarterly to the current three-month CME Term SOFR interest rate, which was 4.65%, plus 433.5 basis points at initial reset. The effective interest rate on the 2029 Notes was 5.92% for the year ended December 31, 2024.

The 2030 Note bears an interest rate of 6.0% per annum until June 1, 2025, at which date the rate will reset quarterly to the current three-month CME Term SOFR interest rate plus 587 basis points. Interest on the 2030 Note is payable semi-annually in arrears. The effective interest rate on the 2030 Note was 6.08% for the year ended December 31, 2024.

Liquidity. Liquidity is essential to the Company’s business. The Company’s liquidity could be impaired by unforeseen outflows of cash, including deposits, or the inability to access the capital and/or wholesale funding markets. This situation may arise due to circumstances that the Company may be unable to control, such as general market disruption, negative views about the Company or the financial services industry generally, or an operational problem that affects the Company or a third party. The Company’s ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the markets in which they operate or other events.

Deposits are the primary source of the Company’s liquidity. Cash flows from amortizing or maturing assets also provide funding to meet the liquidity needs of the Company. Deposits are sourced from the Bank’s customers and, as needed, through brokered deposit markets. The brokered deposit markets are accessed through brokers or through the IntraFi Network (“IntraFi”), of which the Bank is a member. IntraFi facilitates the Bank attaining brokered deposits via an on-line marketplace. The Bank also utilizes IntraFi's reciprocal deposit services to offer its high-value customers access to FDIC insurance through IntraFi's network of banks.

The Company has established a formal liquidity contingency plan that provides guidelines for liquidity management. Pursuant to the Company’s liquidity contingency plan, liquidity needs are forecasted based on anticipated changes in the balance sheet. In this forecast, the Company expects to maintain a liquidity cushion. Management then stress tests the Company’s liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established and are reviewed by the Bank's ALCO. Management also monitors the Company’s liquidity position on a day-to-day basis through daily cash monitoring and short- and long-term cash flow forecasting and believes its sources of liquidity are adequate to conduct the business of the Company.

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The following table presents information on the available sources of liquidity as of the period stated.

Managing the Company's liquidity position through the exit of fintech BaaS deposit operations has required significant liquidity oversight. Management has utilized proceeds from the Private Placements, loan portfolio amortization and prepayments, in-market deposit growth, and selected asset sales and surrenders to offset the outflow of fintech BaaS deposits. As of December 31, 2024, the Company had substantially completed the orderly wind down of these operations. Fintech BaaS deposits have declined $370.7 million since December 31, 2023.

Uninsured deposits at December 31, 2024 were $399.3 million or 18.0% of total deposits. In the unlikely event that uninsured deposit balances leave the Bank over a short period of time, management could more than satisfy the demand with cash on-hand and FHLB borrowing capacity.

Capital. Capital adequacy is an important measure of financial stability and performance. The Company’s objectives are to maintain a level of capitalization that is sufficient to support the Company's strategic objectives.

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. A financial institution's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Banks must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios for all ratios except the Tier 1 leverage ratio. If a banking organization dips into its capital conservation buffer, it is subject to limitations on certain activities, including payment of dividends, share repurchases, and discretionary compensation to certain officers. Additionally, regulators may place certain restrictions on dividends paid by banks. The total amount of dividends which may be paid at any date is generally limited to retained earnings of banks.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized; although, these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

The Consent Order requires the Bank to achieve and maintain minimum capital requirements that are higher than those required for capital adequacy purposes. Specifically, the Bank is required to maintain a leverage ratio of 10.0% and a total capital ratio of 13.0%. As of December 31, 2024, the Bank met these minimum capital ratios. Until such levels are maintained and the minimum required ratios are lifted, the Bank is deemed to be less than well capitalized, thus adequately capitalized.

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Because the Bank may not be deemed to be “well capitalized” while subject to the Consent Order, it could be required to pay higher insurance premiums to the FDIC, obtain approval prior to acquiring branches or opening new lines of business, and be subject to increased regulatory scrutiny such as limitations on asset growth.

As previously noted, the Company adopted CECL effective January 1, 2023. Federal and state banking regulations allow financial institutions to irrevocably elect to phase-in the after-tax cumulative effect adjustment at adoption to retained earnings (“CECL Transitional Amount”) over a three-year period. The three-year phase-in of the CECL Transitional Amount to regulatory capital is 25%, 50%, and 25% in 2023, 2024, and 2025, respectively. The Bank made this irrevocable election effective with its first quarter 2023 call report.

The following tables present the capital ratios to which banks are subject to be adequately and well capitalized, as well as the capital and capital ratios for the Bank as of the dates stated. Adequately capitalized ratios include the conversation buffer, if applicable. The following table also includes the capital adequacy ratios to which bank holding companies are subject. On January 1, 2024, the Company became subject to these ratios. Also presented are the minimum capital ratios set forth in the Consent Order for the Bank with the corresponding capital amounts for both the leverage ratio and the total capital ratio as of both December 31, 2024 and 2023. The CECL Transitional Amount was $8.1 million, of which $4.1 million and $2.0 million reduced the regulatory capital amounts and capital ratios as of December 31, 2024 and 2023, respectively.

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Off-Balance Sheet Activities

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 and involve the same credit risk and evaluation as making a loan to a customer. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis, in a manner similar to that if underwriting a loan. As of December 31, 2024 and December 31, 2023, the Company had outstanding loan commitments of $283.2 million and $480.8 million, respectively. The majority of the decline in 2024 was attributable to lower loan commitments for construction and commercial and industrial borrowers, as the Company actively worked to reduce these commitments. Of the December 31, 2024 and 2023 balances, $108.4 million and $113.5 million, respectively, were unconditionally cancelable at the sole discretion of the Company as of the same respective dates.

Conditional commitments are issued by the Company in the form of financial stand-by letters of credit, which guarantee payment to the underlying beneficiary (i.e., third party) if the customer fails to meet its designated financial obligation. As of December 31, 2024 and 2023, commitments under outstanding financial stand-by letters of credit totaled $12.5 million and $12.6 million, respectively. The credit risk of issuing stand-by letters of credit can be greater than the risk involved in extending loans to customers.

As of December 31, 2024 and 2023, the Company recorded a recovery of credit losses for unfunded commitments of $2.2 million and $2.4 million, respectively, which was primarily attributable to lower balances of loan commitments. As of December 31, 2024, the reserve for unfunded commitments to borrowers was $924 thousand compared to $3.1 million as of the same period in 2023. The unfunded commitments reserve is included in other liabilities on the consolidated balance sheets.

As of December 31, 2024, the Company recorded a recourse reserve of $1.8 million for estimated putbacks and transition costs as part of the sale of a significant portion of its MSR portfolio in the same period. This amount is included in the loss on sale of MSR assets and other liabilities on the consolidated statement of operations and consolidated balance sheet, respectively. The putbacks relate to industry-standard items, including prepayments or early delinquencies of the underlying mortgages, as well as any deficiencies in the underlying documentation, all of which are subject to term limits per the sales agreements.

The Company holds interests in various partnerships and limited liability companies. Pursuant to these investments, the Company commits to an investment amount that may be fulfilled in future periods. At December 31, 2024, the Company had future commitments outstanding totaling $7.1 million related to these investments.

Interest Rate Risk Management

As a financial institution, the Company is exposed to various business risks, including interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the repricing and cash flows of interest-earning assets and interest-bearing liabilities, changes in the expected cash flows of assets and liabilities arising from embedded options, such as borrowers' ability to prepay loans and depositors' ability to redeem certificates of deposit before maturity, changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion, and changes in spread relationships between different yield curves, such as U.S. Treasuries and other market-based index rates. The Company’s goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that the Bank maintains. The Company manages interest rate risk through the ALCO comprised of members of management. The ALCO is responsible for monitoring the Company’s interest rate risk in conjunction with liquidity and capital management, pursuant to policy guidelines approved by the board of directors.

The Company employs an independent firm to model its interest rate sensitivity that uses a net interest income simulation model as its primary tool to measure interest rate sensitivity. Assumptions for modeling are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how management expects rates to change on non-maturity deposits, such as interest checking, money market checking, savings accounts, as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates, and the developed assumptions, the model produces an expected level of net interest

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income assuming that market rates remain unchanged. This is considered the base case. The model then simulates what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two-year period and include rapid rate changes of down 100 basis points to 400 basis points and up 100 basis points to 400 basis points. The results of these simulations are then compared to the base case.

The following tables present the estimated change in net interest income under various rate change scenarios as of the dates presented. The scenarios assume rate changes occur instantaneous and in a parallel manner, which means the changes are the same on all points of the rate curve. Estimated changes set forth below are dependent on material assumptions, such as those previously discussed.

The change in the results of interest rate scenarios from December 31, 2023 to December 31, 2024 is primarily the result of the decrease in the Bank’s fintech BaaS deposits. A significant portion of fintech BaaS deposits bore interest rates that adjusted with changes in the federal funds rate making them highly sensitive to instantaneous interest rate changes. As noted in the 2023 table above, an instantaneous increase in interest rates would result in liabilities repricing faster than interest-earning assets, resulting in the Bank being liability-sensitive.

Stress testing the balance sheet and net interest income using instantaneous parallel rate shock movements in the yield curve is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve. In addition, instantaneous parallel rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk and track the movement of the Company’s interest rate risk position over a historical time frame for comparison purposes.

The asset and liability repricing characteristics of the Company’s assets and liabilities will have a significant impact on its future interest rate risk profile.

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