The following discussion and analysis should be read in conjunction with our consolidated financial statements and the accompanying notes included elsewhere in this report, and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2025. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under sections entitled “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and elsewhere in this report, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements except as required by law. The following discussion presents management's perspective on our results of operations and financial condition on a consolidated basis. However, because we conduct all of our material business operations through our bank subsidiary, Avidbank, the discussion and analysis relate to activities primarily conducted by the Bank. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our 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,” “strive,” “intend,” “plan” or words or phrases of similar meaning. We caution that the forward-looking statements are based largely on our 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 our control. Such forward-looking statements are based on various assumptions (some of which may be beyond our control) and are subject to risks and uncertainties, which change over time, and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to: ● uncertain market conditions and economic trends nationally, regionally and particularly in the Bay Area (which we define as the counties of Alameda, Contra Costa, Marin, Monterey, Napa, San Francisco, San Mateo, Santa Clara, Santa Cruz, Solano and Sonoma) and California; ● economic conditions affecting the venture capital and private equity industries, including any decline in overall portfolio company investment, merger and acquisition activity and other liquidity events affecting venture and private equity fund and their portfolio companies; ● risks related to the concentration of our business in California, and specifically within the Bay Area, including risks associated with any downturn in the real estate sector; ● the effects of a prolonged government shutdown; ● the occurrence of significant natural disasters, including fires and earthquakes, geopolitical events, and acts of war or terrorism; ● the effects of natural or man-made disasters, including the effects of pandemic viruses; ● changes in market interest rates that affect the pricing of our loans and deposits and our net interest income; ● risks related to our strategic focus on lending to small to medium-sized businesses; ● the sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses and the value of loan collateral and securities; ● our ability to attract and retain executive officers and key employees, including their client and community relationships; ● our ability to successfully manage any chief executive officer transition; ● adverse changes in the financial performance and/or condition of our borrowers and, as a result, increased loan delinquency rates, deterioration in asset quality and losses in our loan portfolio; 30 Table of Contents ● the costs of and effects of legal and regulatory developments, including legal proceedings and lawsuits we are or may become subject to; ● the results of regulatory examinations or reviews and the effect of and our ability to comply with, any regulations or regulatory orders or actions we are or may become subject to; ● our level of nonperforming assets and the costs associated with resolving problem loans; ● our ability to maintain adequate liquidity and to raise necessary capital to fund our growth strategy and operations or to meet increased minimum regulatory capital levels; ● the effects of increased competition from a wide variety of local, regional, national and other providers of financial services; ● technological changes and developments; ● negative trends in our market capitalization and adverse changes in the price of our common stock; ● risks associated with unauthorized access, cyber-crime and other threats to data security; ● the effects of any strategic transactions we may make or evaluate, and the costs associated with any potential or actual strategic transaction; ● our ability to comply with various governmental and regulatory requirements applicable to financial institutions, including supervisory actions by federal and state banking agencies; ● the impact of recent and future legislative and regulatory changes, including changes in banking, accounting, securities and tax laws and regulations and their application by our regulators, and economic stimulus programs; ● governmental monetary and fiscal policies, including the policies of the Federal Reserve and policies related to tariffs; ● our ability to implement, maintain and improve effective internal controls; ● our use of the net proceeds from our completed public offering; ● our success at managing any of the risks involved in the foregoing items; and ● other factors that are discussed in the sections entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in our Annual Report on Form 10-K for the year ended December 31, 2025. The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this report, including those discussed in the section entitled “Risk Factors” herein and in our Annual Report on Form 10-K for the year ended December 31, 2025. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this report. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We disclaim any duty to revise or update the forward-looking statements, whether written or oral, to reflect actual results or changes in the factors affecting the forward-looking statements, except as specifically required by law. Company Overview We are a bank holding company headquartered in San Jose, California that operates through our wholly owned banking subsidiary, Avidbank, or the Bank, a California state-chartered bank. We are registered under the Bank Holding Company Act of 1956, as amended. The Company was incorporated under the laws of the State of California in 2007 for the principal purpose of engaging in activities permitted for a bank holding company. As a bank holding company, the Company is authorized to engage in the activities permitted under the Bank Holding Company Act of 1956, as amended, and the regulations thereunder. We own 100% of the issued and outstanding common shares of Avidbank. We specialize in commercial and industrial lending, venture lending, structured finance, asset-based lending, sponsor finance, fund finance, real estate construction and commercial real estate lending. We recently established a Small Business Administration lending division to enhance our commercial banking suite of products and services. In addition to providing products and services, the Bank emphasizes the establishment of long-standing relationships with its customers and regularly modifies the products and services it offers to meet the unique demands of its customers. Our mission is to collaborate with our customers to meet their banking needs whether individual or business. We aim to consistently deliver value that exceeds our clients’ expectations. 31 Table of Contents Key Factors Affecting Our Business Interest Rates Net interest income is the most significant contributor to our net income and is the difference between the interest and fees earned on interest-earning assets and the interest expense incurred in connection with interest-bearing liabilities. Net interest income is primarily a function of the average balances and yields of these interest-earning assets and interest-bearing liabilities. These factors are influenced by internal considerations such as product mix and risk appetite as well as external influences such as economic conditions, competition for loans and deposits and market interest rates. The cost of our deposits and short-term borrowings is primarily based on short-term interest rates, which are largely driven by the Federal Reserve’s actions and market competition. The yields generated by our loans and securities are typically affected by short-term and long-term interest rates, which are driven by market competition and market rates often impacted by the Federal Reserve’s actions and economic conditions. The level of net interest income is influenced by movements in such interest rates and the pace at which such movements occur. Non-interest Income Non-interest income is also a contributor to our net income. Non-interest income consists primarily of service charges on deposit accounts, foreign exchange income, earnings on bank-owned life insurance, our net gains on the sale of debt securities and other fee income including warrant and success fee income, and other miscellaneous fees. Non-interest Expense Non-interest expense includes salaries and employee benefits, occupancy and equipment, data processing, professional fees, FDIC insurance assessments, legal and professional fees, and other expenses. In evaluating our level of non-interest expense, we closely monitor our efficiency ratio. The efficiency ratio is calculated by dividing non-interest expense by net interest income plus non-interest income. We continue to seek to identify ways to streamline our business and operate more efficiently. Credit Quality Our loan policies and underwriting practices have historically resulted in low levels of charge-offs and non-performing assets. Based upon selective deal origination and strong portfolio management, we intend to maintain the credit quality of our loan portfolio. However, credit trends in the markets in which we operate are largely impacted by economic conditions beyond our control. Negative trends affecting our clients’ performance could adversely impact our financial condition. Competition The industry and businesses in which we operate are highly competitive. We may see increased competition through more aggressive interest rates, underwriting standards, product offerings and structure. While we seek to maintain an appropriate return on our investments, we anticipate that we will experience continued pressure on our net interest margins as we operate in this competitive environment. 32 Table of Contents Economic Conditions Our business and financial performance are affected by economic conditions generally in the United States and more directly in the Bay Area and California where we primarily operate. The economic factors that are most relevant to our business and our financial performance include, but are not limited to, real estate values, interest rates, gross domestic product and unemployment rates. Regulatory Trends We operate in a highly regulated environment and nearly all of our operations are subject to extensive regulation and supervision. Regulators appointed by President Trump and his administration, Congress, the State of California and the Department of Financial Protection and Innovation (“DFPI”) may revise the laws and regulations applicable to us, may impose new laws and regulations, increase the level of scrutiny of our business in the supervisory process, and pursue additional enforcement actions against financial institutions. Future legislative and regulatory changes such as these may increase our costs and have an adverse effect on our business, financial condition and results of operations. The legislative and regulatory trends that will affect us in the future are impossible to predict with any certainty. Results of Operations Highlights We reported net income for the three months ended June 30, 2026 of $7.6 million, or $0.71 per diluted share, compared to net income of $5.8 million, or $0.75 per diluted share, for the same period in 2025. Net income increased while earnings per share decreased primarily due to the additional 3 million shares issued in connection with the initial public offering (“IPO”) completed in August 2025. In the third and fourth quarters of 2025, we repositioned the securities portfolio and sold $274.7 million in available-for-sale securities for a loss of $62.4 million and purchased $205.4 million in available-for-sale securities with an average purchase yield of 4.57%. We paid off existing short-term borrowings at the time using proceeds from the IPO and securities sales. The following provides highlights of our financial results for the three and six months ended June 30, 2026: ● Period-end loans, net of deferred fees, increased $75.7 million, or 7% annualized, compared to December 31, 2025. ● Period-end deposits increased $135.9 million, or 13% annualized, compared to December 31, 2025. ● Return on average assets was 1.20% compared to 1.00% in the second quarter of 2025. For the six months ended June 30, 2026, return on average assets was 1.33% compared to 0.98% for the same period in 2025. Excluding the expense of $2.6 million from the settlement of outstanding litigation and the gain of approximately $1.3 million on death benefit proceeds from bank-owned life insurance, adjusted return on average assets (non-GAAP) improved to 1.28% in the second quarter of 2026 compared to 1.00% in the second quarter of 2025. For the six months ended June 30, 2026, adjusted return on average assets (non-GAAP) improved to 1.37% compared to 0.98% for the same period in 2025. ● Net interest margin expanded to 4.26% in the second quarter of 2026, compared to 3.60% in the second quarter of 2025. For the six months ended June 30, 2026, net interest margin was 4.32% compared to 3.56% for the same period in 2025. ● Book value per share was $26.97 as of June 30, 2026, an increase of $1.31, or 10% annualized, from December 31, 2025. ● Nonperforming loans to total loans decreased to 0.65% as of June 30, 2026 from 1.14% as of December 31, 2025. ● Net charge-offs to average loans was 0.35% compared to 0% in the second quarter of 2025. For the six months ended June 30, 2026, net charge-offs to average loans was 0.43% compared to (0.01)% for the same period in 2025. 33 Table of Contents Consolidated Financial Highlights Three Months Ended Six Months Ended (In thousands, except share and per share data) June 30, 2026 June 30, 2025 June 30, 2026 June 30, 2025 INCOME HIGHLIGHTS Net income $ 7,647 $ 5,797 $ 16,668 $ 11,233 Net income - adjusted (2) 8,197 5,797 17,218 11,233 PER SHARE DATA Basic earnings per share $ 0.72 $ 0.77 $ 1.57 $ 1.50 Diluted earnings per share 0.71 0.75 1.55 1.46 Diluted earnings per share – adjusted (2) 0.76 0.75 1.60 1.46 Book value per share 26.97 25.80 26.97 25.80 PERFORMANCE MEASURES Return on average assets (1) 1.20 % 1.00 % 1.33 % 0.98 % Return on average assets – adjusted (1) (2) 1.28 % 1.00 % 1.37 % 0.98 % Return on average equity (1) 10.40 % 11.59 % 11.55 % 11.54 % Return on average equity – adjusted (1) (2) 11.15 % 11.59 % 11.93 % 11.54 % Net interest margin (1) 4.26 % 3.60 % 4.32 % 3.56 % Efficiency ratio 55.41 % 57.77 % 52.96 % 60.10 % Efficiency ratio – adjusted (2) 48.73 % 57.77 % 49.54 % 60.10 % Average loans to average deposits 99.32 % 95.69 % 99.64 % 97.08 % CAPITAL Tier 1 leverage ratio 11.50 % 10.53 % 11.50 % 10.53 % Common equity tier 1 capital ratio 11.35 % 11.02 % 11.35 % 11.02 % Tier 1 risk-based capital ratio 11.35 % 11.02 % 11.35 % 11.02 % Total risk-based capital ratio 12.79 % 12.76 % 12.79 % 12.76 % Common equity ratio 11.13 % 8.55 % 11.13 % 8.55 % SHARES OUTSTANDING Number of common shares outstanding 10,982,764 7,923,946 10,982,764 7,923,946 Average common shares outstanding - basic 10,607,949 7,534,264 10,604,445 7,511,285 Average common shares outstanding - diluted 10,776,924 7,686,385 10,775,066 7,684,976 ASSET QUALITY Total allowance for credit losses-loans and unfunded commitments to total loans 1.09 % 1.15 % 1.09 % 1.15 % Allowance for credit losses on loans to total loans 0.97 % 1.03 % 0.97 % 1.03 % Non-performing assets to total assets 0.54 % 0.06 % 0.54 % 0.06 % Non-performing loans to total loans 0.65 % 0.07 % 0.65 % 0.07 % Net charge-offs to average loans (1) 0.35 % 0.00 % 0.43 % (0.01 )% AVERAGE BALANCES Loans, net of deferred fees $ 2,195,164 $ 1,887,263 $ 2,173,049 $ 1,873,068 Debt securities available-for-sale 219,942 293,640 218,234 295,024 Total assets 2,565,538 2,322,264 2,535,245 2,306,188 Deposits 2,210,267 1,972,215 2,180,827 1,929,342 Shareholders' equity 294,826 200,608 291,030 196,273 PERIOD-END BALANCES Loans, net of deferred fees $ 2,224,119 $ 1,911,718 $ 2,224,119 $ 1,911,718 Debt securities available-for-sale 232,196 292,808 232,196 292,808 Total assets 2,660,440 2,392,129 2,660,440 2,392,129 Deposits 2,321,948 2,002,781 2,321,948 2,002,781 Shareholders' equity 296,185 204,419 296,185 204,419 (1) Annualized for each period presented. (2) A non-GAAP performance measure. We provide detailed reconciliations in the “Non-GAAP Performance and Financial Measures Reconciliation” table. 34 Table of Contents Explanation and Reconciliation of the Company’s Use of Non-GAAP Performance and Financial Measures This report on Form 10-Q contains certain non-GAAP (“Generally Accepted Accounting Principles”) financial measures in addition to results presented in accordance with GAAP. The table below provides reconciliations between GAAP and adjusted financial measures including fully taxable equivalent net interest income and fully taxable equivalent net interest margin. Management has presented these non-GAAP financial measures because we believe that these measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP. However, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those we use for the non-GAAP financial measures we disclose but may calculate them differently. You should understand how we and other companies each calculate their non-GAAP financial measures when making comparisons. Management believes that adjusted net income, adjusted diluted earnings per share, adjusted return on average assets, adjusted return on average equity, adjusted efficiency ratio and taxable equivalent net interest income are reasonable measures to understand the Company’s core operating performance and are important to many investors who are interested in understanding our profitability prospects from our core operations. In addition, management reviews yields on certain asset categories and the net interest margin of the Company on a fully taxable equivalent basis. The non-GAAP taxable equivalent net interest income adjustment facilitates performance comparisons between taxable and tax-exempt assets by increasing the tax-exempt income by an amount equivalent to the Federal income taxes that would have been paid if this income were taxable at the Company's 21% Federal statutory rate. 35 Table of Contents Three Months Ended Six Months Ended (In thousands) June 30, 2026 June 30, 2025 June 30, 2026 June 30, 2025 Non-GAAP adjusted net income reconciliation Net income - GAAP $ 7,647 $ 5,797 $ 16,668 $ 11,233 Settlement of litigation 2,637 - 2,637 - BOLI death benefit income (1,338 ) - (1,338 ) - Tax effect of adjustments (749 ) - (749 ) - Net income - adjusted (non-GAAP) $ 8,197 $ 5,797 $ 17,218 $ 11,233 Non-GAAP adjusted diluted earnings per share reconciliation Diluted earnings per share - GAAP $ 0.71 $ 0.75 $ 1.55 $ 1.46 Settlement of litigation, net of income tax 0.17 - 0.17 - BOLI death benefit income (0.12 ) - (0.12 ) - Diluted earnings per share - adjusted (non-GAAP) $ 0.76 $ 0.75 $ 1.60 $ 1.46 Average common shares – diluted – adjusted 10,776,924 7,686,385 10,775,066 7,684,976 Non-GAAP adjusted return on average assets reconciliation Net income - GAAP $ 7,647 $ 5,797 $ 16,668 $ 11,233 Average total assets 2,565,538 2,322,264 2,535,245 2,306,188 Return on average assets - GAAP (1) 1.20 % 1.00 % 1.33 % 0.98 % Net income - adjusted (non-GAAP) $ 8,197 $ 5,797 $ 17,218 $ 11,233 Average total assets 2,565,538 2,322,264 2,535,245 2,306,188 Return on average assets- adjusted (non-GAAP) (1) 1.28 % 1.00 % 1.37 % 0.98 % Non-GAAP adjusted return on average equity reconciliation Net income - GAAP $ 7,647 $ 5,797 $ 16,668 $ 11,233 Average total equity 294,826 200,608 291,030 196,273 Return on average equity - GAAP (1) 10.40 % 11.59 % 11.55 % 11.54 % Net income - adjusted (non-GAAP) $ 8,197 $ 5,797 $ 17,218 $ 11,233 Average total equity 294,826 200,608 291,030 196,273 Return on average equity - adjusted (non-GAAP) (1) 11.15 % 11.59 % 11.93 % 11.54 % Non-GAAP adjusted efficiency ratio reconciliation Noninterest expense $ 16,473 $ 12,609 $ 30,556 $ 25,451 Net interest income 26,681 20,290 53,181 39,642 Noninterest income 3,050 1,538 4,517 2,709 Efficiency ratio - GAAP 55.41 % 57.77 % 52.96 % 60.10 % Noninterest expense $ 16,473 $ 12,609 $ 30,556 $ 25,451 Settlement of litigation 2,637 - 2,637 - Non-interest expense – adjusted 13,836 12,609 27,919 25,451 Net interest income 26,681 20,290 53,181 39,642 Noninterest income 3,050 1,538 4,517 2,709 BOLI death benefit income (1,338 ) - (1,338 ) - Loss on sale of securities - - - - Adjusted noninterest income 1,712 1,538 3,179 2,709 Efficiency ratio - adjusted (non-GAAP) 48.73 % 57.77 % 49.54 % 60.10 % Non-GAAP taxable equivalent net interest income reconciliation Net interest income - GAAP $ 26,681 $ 20,290 $ 53,181 $ 39,642 Taxable equivalent adjustment 8 8 16 16 Net interest income - taxable equivalent (non-GAAP) $ 26,689 $ 20,298 $ 53,197 $ 39,658 Non-GAAP taxable equivalent net interest margin reconciliation Net interest margin - GAAP 4.26 % 3.60 % 4.32 % 3.56 % Impact of taxable equivalent adjustment - - - - Net interest margin - taxable equivalent (non-GAAP) 4.26 % 3.60 % 4.32 % 3.56 % (1) Annualized for the periods presented. 36 Table of Contents Net Interest Income The following table shows the composition of average earning assets and average funding sources, average yields and rates, and the net interest margin (on a taxable equivalent basis, a non-GAAP measure) for the three months ended June 30, 2026 and 2025: Distribution, Yield and Rate Analysis of Net Income Three Months Ended June 30, 2026 June 30, 2025 Average Yield/ Average Yield/ (In thousands; except ratios) Balance Interest Rate(5) Balance Interest Rate(5) ASSETS Interest-earning assets: Loans, net of deferred fees (1) $ 2,195,164 $ 36,484 6.67 % $ 1,887,263 $ 32,967 7.01 % Interest-earning deposits 91,304 864 3.80 % 73,552 793 4.32 % Debt securities Taxable debt securities 217,311 2,529 4.67 % 291,074 1,672 2.30 % Non-taxable debt securities (2) 2,631 38 5.79 % 2,566 39 6.10 % Total debt securities 219,942 2,567 4.68 % 293,640 1,711 2.34 % FHLB stock 8,409 20 0.95 % 8,409 181 8.63 % Total interest-earning assets 2,514,819 39,935 6.37 % 2,262,864 35,652 6.32 % Non-interest-earning assets: Cash and due from financial institutions 16,004 10,120 All other assets (3) 34,715 49,280 TOTAL ASSETS $ 2,565,538 $ 2,322,264 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Deposits Interest-bearing demand deposits $ 1,055,578 $ 8,368 3.18 % $ 1,038,372 $ 9,483 3.66 % Money market and savings 509,766 3,427 2.70 % 398,438 3,094 3.11 % Time deposits 35,454 285 3.22 % 47,398 400 3.38 % Non-reciprocal brokered deposits 56,810 560 3.95 % 62,853 692 4.42 % Total interest-bearing deposits 1,657,608 12,640 3.06 % 1,547,061 13,669 3.54 % Short-term borrowings 20,703 196 3.80 % 108,374 1,242 4.60 % Subordinated debentures, net 22,000 410 7.48 % 22,000 443 8.08 % Total interest-bearing liabilities 1,700,311 13,246 3.12 % 1,677,435 15,354 3.67 % Non-interest-bearing liabilities: Demand deposits 552,659 425,154 Accrued expenses and other liabilities 17,742 19,067 Shareholders' equity 294,826 200,608 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,565,538 $ 2,322,264 Net interest spread 3.25 % 2.65 % Net interest income and margin (4) $ 26,689 4.26 % $ 20,298 3.60 % Non-taxable equivalent net interest margin 4.26 % 3.60 % Cost of deposits $ 2,210,267 $ 12,640 2.29 % $ 1,972,215 $ 13,669 2.78 % (1) Non-performing loans are included in average loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of deferred fees / (costs) of $260 thousand and $314 thousand for the three months ended June 30, 2026 and June 30, 2025, respectively. (2) Interest income on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 21%, reflecting the statutory federal income tax rate. (3) Including average allowance for credit losses on loans of $20.5 million and $19.1 million, respectively. (4) Net interest margin is net interest income divided by total interest-earning assets. (5) Annualized for the periods presented. 37 Table of Contents Net interest income, the primary difference between interest earned on loans and investments and interest paid on deposits and borrowings, is the principal component of our earnings. Net interest income is affected by changes in the nature and volume of interest-earning assets and interest-bearing liabilities held during the period, the rates earned on such assets and the rates paid on interest-bearing liabilities. The securities repositioning and repayment of short-term borrowings completed in 2025 continued to benefit earnings during 2026 through a higher-yielding investment portfolio and lower funding costs. Net interest income on a taxable equivalent basis for the three months ended June 30, 2026, was $26.7 million, an increase of $6.4 million, or 31%, compared to $20.3 million for the three months ended June 30, 2025. The increase in net interest income was primarily driven by higher average loan balances, higher yields on securities and lower average short-term borrowings. Average interest-earning assets for the three months ended June 30, 2026 increased $252.0 million compared to the same period in 2025, which included increases of $307.9 million in average total loans and $17.8 million in average balances in interest-earning deposits, partially offset by a $73.7 million decrease in average debt securities. Average interest-bearing liabilities increased $22.9 million for the three months ended June 30, 2026, compared to the same period in 2025, primarily due to a $111.3 million increase in average money market and savings and a $17.2 million increase in average interest-bearing demand deposits, partially offset by decreases of $87.7 million in average short-term borrowings, $11.9 million in average time deposits and $6.0 million in average non-reciprocal brokered deposits. Average non-interest-bearing deposits for the three months ended June 30, 2026, increased to $552.7 million from $425.2 million for the same period in 2025. Net interest margin for the three months ended June 30, 2026, was 4.26% compared to 3.60% for the same period in 2025. The increase was primarily driven by higher yields on securities, lower cost of deposits and lower rates and balances on short-term borrowings. The yield on total average loans of 6.67% for the three months ended June 30, 2026, declined 34 basis points compared to the same period in 2025, primarily driven by reductions in the Prime rate. The yield on securities increased to 4.68% during the three months ended June 30, 2026, compared to 2.34% for the same period in 2025 due to the repositioning of our securities portfolio during 2025. The yield on interest-earning assets increased to 6.37% for the three months ended June 30, 2026, compared to 6.32% for the same period in 2025, primarily due to higher average loan balances, higher average interest-earning deposits and higher yields on our debt securities portfolio following the balance sheet restructuring. The average cost of total deposits decreased to 2.29% for the three months ended June 30, 2026, from 2.78% for the same period in 2025, and total funding costs, including all deposits, short-term borrowings and subordinated debentures, decreased to 3.12% for the three months ended June 30, 2026, compared to 3.67% for the same period in 2025, primarily driven by the reduction in the Federal Funds rate. The average rate paid for short-term borrowings for the three months ended June 30, 2026, was 3.80% compared to 4.60% for the same period in 2025. Our short-term borrowings typically consist of overnight borrowings. 38 Table of Contents Six Months Ended June 30, 2026 June 30, 2025 Average Yield/ Average Yield/ (In thousands; except ratios) Balance Interest Rate(6) Balance Interest Rate(6) ASSETS Interest-earning assets: Loans, net of deferred fees (1) $ 2,173,049 $ 71,913 6.67 % $ 1,873,068 $ 64,852 6.98 % Interest-earning deposits 85,116 1,581 3.75 % 68,989 1,499 4.38 % Debt securities Taxable debt securities 215,575 4,964 4.64 % 292,398 3,391 2.34 % Non-taxable debt securities (2) 2,659 77 5.84 % 2,626 77 5.91 % Total debt securities 218,234 5,041 4.66 % 295,024 3,468 2.37 % FHLB stock (5) 8,409 446 10.70 % 8,409 366 8.78 % Total interest-earning assets 2,484,808 78,981 6.41 % 2,245,490 70,185 6.30 % Non-interest-earning assets: Cash and due from financial institutions 14,539 11,478 All other assets (3) 35,898 49,220 TOTAL ASSETS $ 2,535,245 $ 2,306,188 LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing liabilities: Deposits Interest-bearing demand deposits $ 1,061,520 $ 16,628 3.16 % $ 997,907 $ 18,013 3.64 % Money market and savings 513,533 6,816 2.68 % 391,972 5,965 3.07 % Time deposits 31,543 492 3.15 % 53,805 958 3.59 % Non-reciprocal brokered deposits 30,833 603 3.94 % 70,154 1,560 4.48 % Total interest-bearing deposits 1,637,429 24,539 3.02 % 1,513,838 26,496 3.53 % Short-term borrowings 23,088 436 3.81 % 139,072 3,153 4.57 % Subordinated debentures, net 21,999 809 7.42 % 22,000 878 8.05 % Total interest-bearing liabilities 1,682,516 25,784 3.09 % 1,674,910 30,527 3.68 % Non-interest-bearing liabilities: Demand deposits 543,398 415,504 Accrued expenses and other liabilities 18,301 19,501 Shareholders' equity 291,030 196,273 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,535,245 $ 2,306,188 Net interest spread 3.32 % 2.62 % Net interest income and margin (4) $ 53,197 4.32 % $ 39,658 3.56 % Non-taxable equivalent net interest margin 4.32 % 3.56 % Cost of deposits $ 2,180,827 $ 24,539 2.27 % $ 1,929,342 $ 26,496 2.77 % (1) Non-performing loans are included in average loan balances. No adjustment has been made for these loans in the calculation of yields. Interest income on loans includes amortization of deferred fees / (costs) of $512 thousand and $810 thousand for the six months ended June 30, 2026 and June 30, 2025, respectively. (2) Interest income on tax-exempt securities has been increased to reflect comparable interest on taxable securities. The rate used was 21%, reflecting the statutory federal income tax rate. (3) Including average allowance for credit losses on loans of $21.2 million and $19.5 million, respectively. (4) Net interest margin is net interest income divided by total interest-earning assets. (5) Includes a special FHLB dividend totaling $241 thousand for the six months ended June 30, 2026. (6) Annualized for the periods presented. Net interest income on a taxable equivalent basis for the six months ended June 30, 2026, was $53.2 million, an increase of $13.5 million, or 34%, compared to $39.7 million for the six months ended June 30, 2025. The increase in net interest income was primarily due to higher average loan balances, higher yields on securities and lower average short-term borrowings. 39 Table of Contents Average interest-earning assets for the six months ended June 30, 2026, increased $239.3 million compared to the same period in 2025, which included increases of $300.0 million in average total loans and $16.1 million in average balances in interest-earning deposits, partially offset by a $76.8 million decrease in average debt securities. Average interest-bearing liabilities increased $7.6 million for the six months ended June 30, 2026, compared to the same period in 2025, primarily due to a $121.6 million increase in average money market and savings, a $63.6 million increase in average interest-bearing demand deposits, partially offset by decreases of $116.0 million in average short-term borrowings, $39.3 million in average non-reciprocal brokered deposits and $22.3 million in average time deposits. Average non-interest-bearing deposits for the six months ended June 30, 2026, increased to $543.4 million from $415.5 million for the same period in 2025. Net interest margin for the six months ended June 30, 2026, was 4.32% compared to 3.56% for the same period in 2025. The increase was primarily driven by higher yields on securities, lower cost of deposits and lower rates and balances on short-term borrowings. Also contributing to the increase in net interest margin was the receipt of a special FHLB dividend totaling $241 thousand during the six months ended June 30, 2026. The FHLB dividend contributed 4 basis points to net interest margin for the six months ended June 30, 2026. Also positively impacting net interest margin during the first six months of 2026 was the sale of low-yielding securities as part of the repositioning of our available-for-sale securities portfolio that took place during 2025. The yield on total average loans of 6.67% for the six months ended June 30, 2026, declined 31 basis points compared to the same period in 2025, primarily driven by reductions in the Prime rate. The yield on securities increased to 4.66% during the six months ended June 30, 2026, compared to 2.37% for the same period in 2025 due to the repositioning of our securities portfolio during 2025. The yield on interest-earning assets increased to 6.41% for the six months ended June 30, 2026, compared to 6.30% for the same period in 2025. The average cost of total deposits decreased to 2.27% for the six months ended June 30, 2026, from 2.77% for the same period in 2025, and total funding costs, including all deposits, short-term borrowings and subordinated debentures, decreased to 3.09% for the six months ended June 30, 2026, compared to 3.68% for the same period in 2025. The average rate paid for short-term borrowings for the six months ended June 30, 2026, was 3.81% compared to 4.57% for the same period in 2025. Our short-term borrowings typically consist of overnight borrowings. The following table shows the effect of the interest differential of volume and rate changes for the three and six months ended June 30, 2026 compared to the same period in 2025. The change in interest due to both rate and volume has been allocated in proportion to the relationship of absolute dollar amounts of change in each. For the Three Months Ended For the Six Months Ended June 30, 2026 June 30, 2026 2026 vs. 2025 2026 vs. 2025 Increase (Decrease) Increase (Decrease) Due to Change in: Due to Change in: Average Average Net Average Average Net (In thousands) Volume Rate Change Volume Rate Change Interest income: Loans, net of deferred fees $ 5,117 $ (1,600 ) $ 3,517 $ 9,927 $ (2,866 ) $ 7,061 Interest-earning deposits 168 (97 ) 71 300 (218 ) 82 Debt securities (860 ) 1,716 856 (1,774 ) 3,347 1,573 FHLB stock - (161 ) (161 ) - 80 80 Interest expense: Deposits Interest-bearing demand deposits 136 (1,251 ) (1,115 ) 996 (2,381 ) (1,385 ) Money market and savings 748 (415 ) 333 1,613 (762 ) 851 Time deposits (96 ) (19 ) (115 ) (347 ) (119 ) (466 ) Non-reciprocal brokered deposits (60 ) (72 ) (132 ) (769 ) (188 ) (957 ) Short-term borrowings (830 ) (216 ) (1,046 ) (2,190 ) (527 ) (2,717 ) Subordinated debentures - (33 ) (33 ) - (69 ) (69 ) Net interest income $ 4,527 $ 1,864 $ 6,391 $ 9,150 $ 4,389 $ 13,539 40 Table of Contents Provision for Credit Losses Management considers a number of factors in determining the required level of the allowance for credit losses and the provision required to achieve what is believed to be an appropriate reserve level, including historical loss experience, loan growth, credit risk rating trends, non-performing loan levels, delinquencies, loan portfolio concentrations, economic forecasts, and market trends. The provision for credit losses represents management’s determination of the amount necessary to be charged against the current period’s earnings to maintain the allowance for credit losses at a level that it considered adequate in relation to the estimated lifetime losses expected in the loan portfolio. The provision for credit losses was $2.8 million for the three months ended June 30, 2026, compared to $925 thousand for the three months ended June 30, 2025. For the six months ended June 30, 2026, provision for credit losses was $4.2 million, an increase of $3.3 million compared to the six months ended June 30, 2025. The provision was higher in the second quarter of 2026 compared to the same period of 2025 and was higher for the first six months of 2026 compared to the six months ended June 30, 2025, primarily due to higher loan balances and a $1.9 million partial charge-off of one non-performing construction loan. The allowance for credit losses, including loans and unfunded commitments, as a percentage of outstanding loans was 1.09% and 1.15% as of June 30, 2026 and 2025, respectively. See further discussion of the Provision for Credit Losses and Allowance for Credit Losses in “Financial Condition—Allowance for Credit Losses.” The following table details the components of the Company's provision for credit losses for the three and six months ended June 30, 2026 and 2025. Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2026 2025 2026 2025 Provision for credit losses Provision for credit losses on loans $ 2,461 $ 891 $ 3,894 $ 891 Provision for unfunded commitments 328 34 340 34 Total provision for credit losses $ 2,789 $ 925 $ 4,234 $ 925 Non-interest Income Non-interest income increased $1.5 million, or 98%, and $1.8 million, 67%, respectively, for the three and six months ended June 30, 2026, compared to the same periods of 2025. The increase was primarily driven by income of approximately $1.3 million on BOLI death benefits received during the second quarter of 2026 as well as higher foreign exchange income, higher other investment income and higher other income. Partially offsetting the increase was a decrease in warrant and success fee income. The following table reflects the major components of the Company’s non-interest income for the three and six months ended June 30, 2026 and 2025: Three Months Ended June 30, Increase/(Decrease) Six Months Ended June 30, Increase/(Decrease) (In thousands) 2026 2025 Amount Percent(2) 2026 2025 Amount Percent(2) Service charges and fees $ 851 $ 840 $ 11 1 % $ 1,672 $ 1,602 $ 70 4 % Foreign exchange income 340 196 144 73 703 416 287 69 Bank-owned life insurance income (1) 1,497 93 1,404 NM 1,603 183 1,420 NM Credit card income 113 150 (37 ) (25 ) 214 197 17 9 Warrant and success fee income 64 273 (209 ) (77 ) 67 273 (206 ) (75 ) Other investment income 79 (23 ) 102 NM 57 24 33 NM Other income 106 9 97 NM 201 14 187 NM Total non-interest income $ 3,050 $ 1,538 $ 1,512 98 % $ 4,517 $ 2,709 $ 1,808 67 % (1) Includes $1.3 million in income related to BOLI death benefits for the three and six months ended June 30, 2026. (2) NM - Comparisons from positive to negative values or to zero values are considered not meaningful. 41 Table of Contents Service charges and bank fees for the three and six months ended June 30, 2026, increased $11 thousand, or 1%, and $70 thousand, or 4%, respectively, from the same periods in 2025, primarily due to an increase in the number of client relationships. During the three and six months ended June 30, 2026, foreign exchange income increased $144 thousand, or 73%, and $287 thousand, or 69%, respectively, compared to the same periods in 2025 as a result of the volume of transaction commissions. Foreign exchange income represents commissions earned on foreign exchange transactions, net of related commissions charged by our correspondent bank partners. Income from bank-owned life insurance for the three and six months ended June 30, 2026, increased $1.4 million during both periods compared to the same periods in 2025 primarily driven by income of approximately $1.3 million on death benefit proceeds received during the second quarter of 2026. Credit card income for the three months ended June 30, 2026, decreased $37 thousand, or 25%, due to a vendor contract payout in the second quarter of the prior year and increased $17 thousand, or 9%, for the six months ended June 30, 2026, primarily due to an increase in credit card interchange fee income. Warrant and success fee income decreased $209 thousand, or 77%, and $206 thousand, or 75%, respectively, for the three and six months ended June 30, 2026. Refer to Note 13 — Derivative Financial Instruments for additional discussion of warrants. Other investment income for the three and six months ended June 30, 2026, increased $102 thousand and $33 thousand, respectively, compared to the same periods in 2025 primarily due to fair value marks on fund investments. Other income increased $97 thousand and $187 thousand for the three and six months ended June 30, 2026, respectively, compared to the same periods in 2025 primarily driven by an increase in letter of credit fee income. Non-interest Expense For the three months ended June 30, 2026, non-interest expense increased by $3.9 million, or 31%, to $16.5 million compared to the same period in 2025.The increase was primarily driven by a charge of $2.6 million for the settlement of outstanding litigation, higher salaries and employee benefits expense, increased legal and professional fees and higher directors' fees and expenses. During the six months ended June 30, 2026, non-interest expense increased by $5.1 million, or 20%, to $30.6 million compared to the same period in 2025. The increase was primarily driven by a charge of $2.6 million for the settlement of outstanding litigation, higher salaries and employee benefits expense, increased legal and professional fees, higher data processing expense and higher directors' fees and expenses, partially offset by a decrease in occupancy and equipment expense. The following table reflects the major components of the Company’s non-interest expense for the three and six months ended June 30, 2026 and 2025: Three Months Ended June 30, Increase/(Decrease) Six Months Ended June 30, Increase/(Decrease) (In thousands) 2026 2025 Amount Percent 2026 2025 Amount Percent Salaries and employee benefits $ 9,563 $ 8,978 $ 585 7 % $ 19,117 $ 18,075 $ 1,042 6 % Legal and professional fees 897 715 182 25 2,086 1,226 860 70 Data processing 787 759 28 4 1,586 1,374 212 15 Occupancy and equipment 777 759 18 2 1,567 1,755 (188 ) (11 ) Regulatory assessments 515 420 95 23 1,082 964 118 12 Directors' fees and expenses 306 182 124 68 532 331 201 61 Correspondent bank charges 203 114 89 78 403 284 119 42 Advertising and marketing 97 69 28 41 213 196 17 9 Travel and meals 160 132 28 21 280 239 41 17 Business software and subscriptions 353 330 23 7 698 683 15 2 Settlement of litigation 2,637 - 2,637 NM 2,637 - 2,637 NM Other expense 178 151 27 18 355 324 31 10 Total non-interest expense $ 16,473 $ 12,609 $ 3,864 31 % $ 30,556 $ 25,451 $ 5,105 20 % (1) NM - Comparisons from positive to negative values or to zero values are considered not meaningful. 42 Table of Contents Salaries and employee benefits expense for the three and six months ended June 30, 2026, was $9.6 million, an increase of $585 thousand, or 7%, and $19.1 million, an increase of $1.0 million, or 6%, compared to the same periods in 2025. The increases were primarily driven by increased investment in personnel across the entire Bank, partially offset by higher capitalized loan origination costs. Full-time equivalent headcount totaled 162 as of June 30, 2026 compared to 149 as of June 30, 2025. Legal and professional fees were $897 thousand and $2.1 million for the three and six months ended June 30, 2026, an increase of $182 thousand, or 25%, and $860 thousand, or 70%, respectively, compared to the same periods in 2025. The increases were driven by higher credit-related legal and professional fees. Data processing expense was $787 thousand and $1.6 million for the three and six months ended June 30, 2026, an increase of $28 thousand, or 4%, and $212 thousand, or 15%, respectively, compared to the same periods in 2025. The increases were due to higher transaction volume. Occupancy and equipment expense totaled $777 thousand and $1.6 million for the three and six months ended June 30, 2026, reflecting an increase of $18 thousand, or 2%, from the same period in 2025. For the six months ended June 30, 2026, occupancy and equipment expense decreased $188 thousand, or 11%, compared to the same period in 2025 due to lower rent expense at one of our loan production offices. Regulatory assessments totaled $515 thousand and $1.1 million for the three and six months ended June 30, 2026, an increase of $95 thousand, or 23%, and $118 thousand, or 12%, respectively, compared to the same periods in 2025 resulting from asset growth and an increase in assessment rates. Directors' fees and expenses totaled $306 thousand and $532 thousand for the three and six months ended June 30, 2026, an increase of $124 thousand, or 68%, and $201 thousand, or 61%, respectively, compared to the same periods in 2025 resulting from the increased number of Directors compared to the same periods in 2025. Correspondent bank charges totaled $203 thousand and $403 thousand for the three and six months ended June 30, 2026, an increase of $89 thousand, or 78%, and $119 thousand, or 42%, respectively, compared to the same periods in 2025 due to higher transaction volume. Settlement of litigation expense totaled $2.6 million for the three and six months ended June 30, 2026. Outstanding litigation was settled during the second quarter of 2026, and the Company recognized litigation charges of $2.6 million in connection with the settlement. Additional information regarding the settlement is included in Note 9 — Commitments and Contingencies. Income Taxes We monitor and evaluate the potential impact of current events on the estimates used to establish income tax expenses and income tax liabilities. Periodically, we evaluate our income tax positions based on current tax law and positions taken by various tax auditors within the jurisdictions where we are required to file income tax returns. Income tax expense was $2.8 million and $2.5 million for the three months ended June 30, 2026 and 2025, respectively. The effective tax rate for the three months ended June 30, 2026 and 2025, was 27.0% and 30.1%, respectively. The decrease compared to the second quarter of 2025 was primarily due to the recognition of approximately $1.3 million in tax-exempt BOLI death benefit proceeds. For the six months ended June 30, 2026 and 2025, income tax expense was $6.2 million and $4.7 million, respectively. The effective tax rate for the six months ended June 30, 2026 and 2025, was 27.2% and 29.7%, respectively. The decrease compared to the same period of 2025 was primarily due to the receipt of tax-exempt income on BOLI death benefit proceeds and from state tax impacts from changes in California law requiring financial institutions to apportion business income using a single sales factor for tax years beginning on or after January 1, 2025. As a result, the second quarter of 2025 included $153 thousand in additional tax expense related to the write-down of deferred tax assets. In addition, the first quarter of 2026 included approximately $514 thousand in discrete tax benefits related to the vesting of equity awards. Financial Condition Total assets of the Company were $2.66 billion as of June 30, 2026 and $2.57 billion as of December 31, 2025. Loans, net of deferred fees increased $75.7 million compared to December 31, 2025, and debt securities increased $14.0 million over the same period. Partially offsetting the increase were decreases in the cash surrender value of BOLI policies and other assets. 43 Table of Contents Loans As of June 30, 2026, loans, net of deferred fees, totaled $2.22 billion compared to $2.15 billion as of December 31, 2025. The increase from December 31, 2025, was primarily due to the increase in commercial and industrial loans and commercial real estate loans, partially offset by a decrease in construction loans. The loan portfolio was comprised of approximately 50% and 49% of commercial and industrial loans as of June 30, 2026 and December 31, 2025, respectively. Commercial real estate loans comprised 41% of our loans as of June 30, 2026 compared to 40% as of December 31, 2025. The loan portfolio information presented in this section should be read in conjunction with Note 3 — Loans and Note 4 — Allowance for Credit Losses on Loans of the consolidated financial statements. The following table reflects the composition of the Company’s loan portfolio and the percentage distribution of each major loan type as of the dates indicated: June 30, 2026 December 31, 2025 (In thousands) Amount % of Loans Amount % of Loans Commercial and industrial $ 1,111,610 50 % $ 1,049,530 49 % Construction 164,200 7 % 196,243 9 % Residential real estate 38,007 2 % 45,669 2 % Commercial real estate 909,932 41 % 854,342 40 % Consumer 370 0 % 2,655 0 % Total outstanding loans, net of deferred fees 2,224,119 2,148,439 Allowance for credit losses on loans (21,501 ) (22,261 ) Total loans, net of allowance for credit losses on loans $ 2,202,618 $ 2,126,178 The following table shows the maturity distribution for total loans outstanding as of June 30, 2026: Contractual Loan Maturities as of June 30, 2026 After One After Five Year Years After One Year Through Through Fifteen (In thousands) or Less Five Years Fifteen Years Years Total Commercial and industrial $ 349,015 $ 640,019 $ 122,576 $ - $ 1,111,610 Construction 129,435 34,765 - - 164,200 Residential real estate 3,085 23,062 11,860 - 38,007 Commercial real estate 77,281 199,694 632,957 - 909,932 Consumer 174 196 - - 370 Total loans, net of deferred fees $ 558,990 $ 897,736 $ 767,393 $ - $ 2,224,119 The principal balances of loans are indicated by both fixed and variable rate categories as of June 30, 2026 in the table below: June 30, 2026 Fixed Adjustable Floating (In thousands) Interest Rates Interest Rates Interest Rates Total Commercial and industrial $ 110,768 $ 59 $ 1,000,783 $ 1,111,610 Construction 20,553 - 143,647 164,200 Residential real estate 2,147 7,318 28,542 38,007 Commercial real estate 331,291 566,505 12,136 909,932 Consumer 368 - 2 370 Total loans, net of deferred fees $ 465,127 $ 573,882 $ 1,185,110 $ 2,224,119 44 Table of Contents Commercial and industrial loans consist of financing for commercial purposes in various lines of businesses, including manufacturing, service industry and professional service areas. Commercial and industrial loans can be secured or unsecured but are generally secured with the assets of the company and/or the personal guarantee of the business owners. Sponsor Finance loans are backed by well-known institutional funds/sponsors that have stepped up in distressed scenarios to provide follow-on capital and right-size bank debt. Our Venture Lending Division provides banking services to emerging growth technology companies that have received an infusion of equity capital from institutional investors such as venture capital and private equity firms. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture firms or others, or in some cases, a successful sale to a third party, public offering or other form of liquidity event. Asset-Based Lending creates lending solutions that are designed to provide capital against assets such as accounts receivable and inventory. Our Corporate Banking division specializes in delivering customized commercial & industrial lending solutions to small to mid-sized privately held businesses across a wide range of industries in the Bay Area. These loans are primarily used for funding operations, expansions and acquisitions. The following table presents the various product types of commercial and industrial loans as of June 30, 2026 and December 31, 2025: June 30, 2026 December 31, 2025 (In thousands) Amount % of Total Loans Amount % of Total Loans Venture $ 323,476 15 % $ 273,887 13 % Sponsor finance 295,685 13 % 303,303 14 % Asset-based lending (ABL) 206,605 9 % 177,736 8 % Corporate Banking 164,456 7 % 150,896 7 % Capital Call Lines (1) 59,751 3 % 86,008 4 % Other 61,637 3 % 57,700 3 % Total commercial and industrial loans, net of deferred fees $ 1,111,610 50 % $ 1,049,530 49 % (1) Represents loans to non-depository financial institutions, primarily capital call loans to private equity funds. As of June 30, 2026 and December 31, 2025, we had $909.9 million and $854.3 million, respectively, in commercial real estate loans representing 41% and 40% respectively, of our total loans. Our commercial real estate loans consist of commercial, multi-family and mixed-use property loans for investors and owner-users. Our commercial real estate loans are typically secured by multi-family, hotel/motel, retail, industrial, warehouse or other commercial properties. As of June 30, 2026 and December 31, 2025, 19% and 20%, respectively, of our commercial real estate loans were for non-owner-occupied purposes. All commercial real estate loans were collateralized by properties in California as of June 30, 2026 and December 31, 2025. The following table presents the components of commercial real estate loans as of the dates indicated: June 30, 2026 December 31, 2025 (In thousands) Amount % of Total Loans Amount % of Total Loans Office $ 143,136 6 % $ 147,708 7 % Retail 101,776 5 % 86,309 4 % Hotel/motel 77,629 3 % 78,566 4 % Industrial 62,023 3 % 68,408 3 % Warehouse 16,581 1 % 16,611 1 % Other 30,629 1 % 26,505 1 % Total non-owner-occupied $ 431,774 19 % $ 424,107 20 % Multi-family 280,787 13 % 265,105 12 % Owner-occupied 197,371 9 % 165,130 8 % Total commercial real estate, net of deferred fees $ 909,932 41 % $ 854,342 40 % 45 Table of Contents Non-performing Assets Non-performing assets are comprised of loans on non-accrual status, loans 90 days or more past due and still accruing interest, and other real estate owned. We had no loans 90 days or more past due and still accruing interest and no other real estate owned as of June 30, 2026 or December 31, 2025. A loan is placed on nonaccrual status if there is concern that principal and interest may not be fully collected or if the loan has been past due for a period of 90 days or more, unless the obligation is both well-secured and in process of legal collection. When loans are placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Income on non-accrual loans is subsequently recognized only to the extent that cash is received, and the loan’s principal balance is deemed collectible. Loans are returned to accrual status when they are brought current with respect to principal and interest payments and future payments are reasonably assured. Additionally, assets that have been restructured due to the borrower’s financial difficulties may also be classified as non-performing if the restructuring does not restore the asset to a performing status. The following table presents information regarding the Company’s non-performing assets at the dates indicated: June 30, December 31, (In thousands) 2026 2025 Non-accrual loans Commercial and industrial $ - $ 5,088 Construction 14,448 19,414 Residential real estate - - Commercial real estate - - Consumer - - Loans over 90 days past due and still accruing - - Total non-performing loans 14,448 24,502 Other real estate owned - - Total non-performing assets $ 14,448 $ 24,502 Non-performing assets to total assets 0.54 % 0.95 % Non-performing loans to total loans 0.65 % 1.14 % Non-performing loans to total loans were 0.65% as of June 30, 2026, a decrease of 49 basis points from 1.14% as of December 31, 2025. The decrease during the six months ended June 30, 2026, was primarily due to the payoff of a $3.1 million well-collateralized construction loan that was non-performing, the charge-off of two commercial and industrial loans totaling $3.2 million and the partial charge-off of one construction loan totaling $1.9 million. Allowance for Credit Losses The allowance for credit losses (“ACL”) represents an amount that is intended to absorb the lifetime expected credit losses that may be sustained on outstanding loans at the balance sheet date. Additional information regarding the ACL evaluation can be found in Note 4 — Allowance for Credit Losses on Loans to our consolidated financial statements for the three and six months ended June 30, 2026 and 2025. The decrease in the ACL compared to December 31, 2025 was primarily due to the payoff of a $3.1 million construction loan that was non-performing and the charge-off of two commercial and industrial loans totaling $3.2 million and the partial charge-off of one non-performing construction loan totaling $1.9 million. The individual reserve on the two commercial and industrial loans prior to them being charged-off was $1.2 million each. The estimate for expected credit losses is based on an evaluation of the various factors, including, but not limited to, size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions, and prepayment experience as related to credit contractual term information. The ACL is generally measured on a collective (pool) basis when similar risk characteristics exist and is typically recorded upon the initial recognition of a financial asset. 46 Table of Contents The ACL may be adjusted by charge-offs, net of recoveries of previous losses, and may be increased or decreased by a provision for or recapture of credit losses, which is recorded in the consolidated statements of operations. Management estimates the allowance balance using various information sources, both internal and external, relating to past events, current conditions, and reasonable and supportable forecasts. During 2026, Management transitioned from FOMC economic forecasts based on publicly available economic data to forecasts sourced from Moody's Analytics. The change did not materially alter the Company's ACL methodology but provides a consistent source of economic assumptions used in estimated expected credit losses. Historical credit loss experience typically provides a basis for the estimation of expected credit losses. Adjustments to historical loss information may be made for differences in current loan-specific risk characteristics and changes in environmental conditions. Expected credit losses are typically estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. The contractual term generally excludes expected extensions, renewals, and modifications. Additional information regarding our ACL policy is included in the section titled “Critical Accounting Policies and Estimates”. For loans that do not share risk characteristics with a pool of other loans, expected credit losses are measured on an individual loan basis. Management individually evaluates the expected credit loss for certain loans, such as those that are collateral-dependent, or are identified as having risk characteristics dissimilar to those of the established loan pools. For loans considered collateral-dependent, the Company has adopted a practical expedient to the ACL, which allows recording an ACL based on the fair value of the collateral rather than by estimating expected losses over the life of the loan. While the ACL on loans follows these guidelines, and management believes the allowance is appropriate based on current information, the judgmental nature of the calculation could lead to fluctuations due to ongoing evaluations of the loan portfolio. These evaluations may be influenced by economic conditions in our local area, changes in asset quality, or loan portfolio growth, among other factors which could potentially require additional provisions for the allowance for credit losses. The quality of the loan portfolio and the adequacy of the allowance are subject to review by our internal and external auditors as well as our regulators. Potential Problem Loans We assign a risk rating to all loans and periodically perform detailed reviews of all such loans exhibiting variances in expected payment and/or financial performance to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by us and by our regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. We individually rate loans based on internal credit risk ratings using numerous factors, including thorough analysis of historical and expected cash flows, loan-to-value (“LTV”) ratios, collateral, collection experience, and other internal metrics. The risk ratings can be grouped into six major categories, defined as follows: Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management’s close attention. Special Mention – A special mention loan has potential weaknesses deserving management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Special Mention loans are not adversely classified, and we believe do not expose us to sufficient risk to warrant adverse classification. Substandard – A substandard loan is not adequately protected by the current net worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses jeopardizing the liquidation of the loan. Well-defined weaknesses include the potential for: lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project’s failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Substandard - Non-accrual – These loans are typically on nonaccrual and have many of the same weaknesses as substandard loans. Doubtful - Non-accrual – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Loss – Loans classified as loss are considered uncollectible and charged off immediately. During the six months ended June 30, 2026, loans risk rated as special mention increased $37.2 million. The increase is primarily due to a non-owner-occupied real estate relationship with 3 loans totaling $29.0 million with very low LTVs. 47 Table of Contents The following table provides information on the activity within the allowance for credit losses on loans as of and for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, (In thousands) 2026 2025 2026 2025 Allowance for credit losses on loans, beginning of period $ 20,938 $ 18,722 $ 22,261 $ 18,679 Provision for credit losses on loans 2,461 891 3,894 891 Charge-offs Commercial and industrial (26 ) - (3,197 ) - Construction (1,875 ) - (1,875 ) - Residential real estate - - - - Commercial real estate - - - - Consumer - - - - Total charge-offs (1,901 ) - (5,072 ) - Recoveries Commercial and industrial 3 11 418 54 Construction - - - - Residential real estate - - - - Commercial real estate - - - - Consumer - - - - Total recoveries 3 11 418 54 Net charge-offs (1,898 ) 11 (4,654 ) 54 Allowance for credit losses on loans, end of period $ 21,501 $ 19,624 $ 21,501 $ 19,624 Average loans, net of deferred fees 2,195,164 1,887,263 2,173,049 1,873,068 Loans at the end of period, net of deferred fees 2,224,119 1,911,718 2,224,119 1,911,718 Net charge-offs to average loans (1) 0.35 % 0.00 % 0.43 % (0.01 )% Allowance for credit losses on loans to total loans 0.97 % 1.03 % 0.97 % 1.03 % Allowance for credit losses on loans to non-performing loans 148.82 % 1451.48 % 148.82 % 1451.48 % Non-performing loans to total loans 0.65 % 0.07 % 0.65 % 0.07 % (1) Charge-off ratios are annualized for the periods presented. Provision for credit losses on loans was $2.5 million and $3.9 million for the three and six months ended June 30, 2026, respectively, compared to $891 thousand for both the three and six months ended June 30, 2025, primarily due to higher loan balances, the charge-off of two commercial and industrial loans totaling $3.2 million and a $1.9 million partial charge-off of one non-performing construction loan. The following table presents the allocation of the allowance for credit losses as of the dates indicated: June 30, 2026 December 31, 2025 (In thousands) Amount % of Loans Amount % of Loans Commercial and industrial $ 14,596 0.66 % $ 15,612 0.73 % Construction 1,560 0.07 % 1,972 0.09 % Residential real estate 437 0.02 % 494 0.02 % Commercial real estate 4,906 0.22 % 4,150 0.19 % Consumer 2 0.00 % 33 0.01 % Total $ 21,501 0.97 % $ 22,261 1.04 % 48 Table of Contents Credit Quality Indicators We assign a risk rating to all loans and periodically perform detailed reviews of any such loans exhibiting variances in expected payment and/or financial performance to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by us and by our regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan. We individually rate loans based on internal credit risk ratings using numerous factors, including thorough analysis of historical and expected cash flows, rating agency information, LTV (loan-to-value) ratios, collateral, collection experience, and other internal metrics. Additional information on our risk ratings can be found in Note 1 — Summary of Significant Accounting Policies to our consolidated financial statements for the year ended December 31, 2025. Debt Securities Debt securities available-for-sale totaled $232.2 million as of June 30, 2026, compared to $218.2 million as of December 31, 2025. Available-for-sale securities are reported at their aggregate fair value, and unrealized gains and losses are included as a component of other comprehensive income, net of deferred taxes. As of June 30, 2026, debt securities available-for-sale had a net unrealized loss of $2.8 million compared to a net unrealized loss of $328 thousand as of December 31, 2025. Market changes in interest rates and credit spreads will result in temporary unrealized gains or losses as the market price of securities fluctuates. Management evaluated all available-for-sale securities in an unrealized loss position as of June 30, 2026 and December 31, 2025, and concluded no impairment existed at the balance sheet dates. Our investments provide a source of liquidity as they can be pledged to support borrowed funds or can be liquidated to generate cash proceeds. The investment portfolio is also a resource to us in managing interest rate risk, as the maturity and interest rate characteristics of this asset class can be changed to match changes in the loan and deposit portfolios. We consider available-for-sale security interest rate sensitivity as part of total interest rate risk management. For further discussion, see the sub-section entitled “Interest Rate Sensitivity and Market Risk.” The majority of our available-for-sale investment portfolio is comprised of mortgage-backed securities (MBSs) that are either issued or guaranteed by U.S. government agencies or government-sponsored enterprises (GSEs). The following table reflects the amortized cost and fair market values for the total portfolio of investments in our securities portfolio June 30, 2026 and December 31, 2025. As of the dates indicated, none of our debt securities were classified as held-to-maturity. June 30, 2026 December 31, 2025 (In thousands) Amortized Cost Fair Value Amortized Cost Fair Value Available-for-sale securities U.S. Treasury securities and obligations of U.S. government agencies $ 424 $ 403 $ 478 $ 458 Commercial mortgage-backed securities 16,025 15,853 5,454 5,430 Residential mortgage-backed securities 213,786 211,214 207,847 207,552 U.S. states and political subdivisions 4,712 4,726 4,709 4,720 Total available-for-sale securities $ 234,947 $ 232,196 $ 218,488 $ 218,160 As of June 30, 2026, the weighted average life of the Bank’s securities was 4.8 years, and the effective duration was 3.6 years, compared to a weighted average life of 4.8 years and effective duration of 3.5 years as of December 31, 2025. 49 Table of Contents The following table presents the amortized cost of securities by contractual maturity of investment securities and weighted-average yields. Yields on state and political subdivision securities are shown on a tax equivalent basis, assuming a 21% federal income tax rate. The composition and maturity/repricing distribution of the securities portfolio is subject to change depending on rate sensitivity, capital and liquidity needs. June 30, 2026 Due after one year through Due after five years through Due less than one year five years ten years Due after ten years Total Amortized WA Amortized WA Amortized WA Amortized WA Amortized WA (In thousands) Cost Yield (1) Cost Yield (1) Cost Yield (1) Cost Yield (1) Cost Yield (1) U.S. Treasury securities and obligations of U.S. government agencies $ - - $ - - $ 424 2.38 % $ - - $ 424 2.38 % Commercial mortgage-backed securities - - 1,009 3.73 - - 15,016 5.01 16,025 4.92 Residential mortgage-backed securities - - - - - - 213,786 4.55 213,786 4.55 U.S. states and political subdivisions - - - - - - 4,712 5.71 4,712 5.71 Total available-for-sale securities $ - - $ 1,009 3.73 % $ 424 2.38 % $ 233,514 4.60 % $ 234,947 4.64 % (1) Weighted average yields are computed based on the amortized cost of the individual underlying securities. Deposits Our deposits are primarily generated through our bankers’ commercial banking relationships. Many of our business clients maintain liquid balances in their demand deposit accounts and use the Bank’s treasury management services. We participate in reciprocal deposit networks to provide our clients with access to FDIC insurance beyond the standard maximum deposit insurance amount at a single insured depository institution. A reciprocal position means that we receive an equal amount of network deposits for our enrolled accounts, and those deposits are reflected on our balance sheet. If we elect to receive reciprocal deposits, we are required to pay a fee equal to our reciprocal deposits balances multiplied by an annualized rate. The reciprocal deposit placement fee represents an additional cost that is not incurred with traditional deposit accounts and is factored into our overall cost of deposits. Our participation in the reciprocal deposit network is subject to certain terms and conditions, and there can be no assurances that we will be able to participate in the network in the future. See "Risk Factors —We participate in reciprocal deposit networks to provide additional FDIC deposit insurance coverage to support our clients and to efficiently manage our balance sheet and liquidity position” in our Annual Report on Form 10-K for the year ended December 31, 2025. In particular, under FDIC regulations, qualifying reciprocal deposits which do not exceed 20% of the liabilities of the Bank may be excluded from being classified as brokered deposits. As of June 30, 2026 and December 31, 2025, our total reciprocal deposits totaled $982.0 million and $929.8 million, respectively. As a result, as of June 30, 2026 and December 31, 2025, an additional $513.0 million and $475.4 million of our deposits, respectively, were considered brokered deposits by the FDIC due to being in excess of the general 20% cap. As of June 30, 2026 and December 31, 2025, approximately 25% and 26%, respectively, of our deposits were in non-interest-bearing demand deposits. The balance of our deposits as of June 30, 2026 and December 31, 2025, were held in interest-bearing checking, savings and money market accounts, time and non-reciprocal brokered deposits. Approximately 71% and 73% of total deposits were held in interest-bearing checking, money market and savings deposit accounts as of June 30, 2026 and December 31, 2025, respectively, which provide our clients with interest and liquidity. Time and non-reciprocal brokered deposits comprised the remaining 4% and 1% of our deposits as of June 30, 2026 and December 31, 2025, respectively. 50 Table of Contents Information concerning average balances and rates paid on deposits by deposit type is contained in the Distribution, Yield and Rate Analysis of Net Income table located in the previous section entitled “Results of Operations—Net Interest Income.” The following table provides a comparative distribution of our deposits by outstanding balance as well as by percentage of total deposits at the dates indicated. June 30, 2026 (In thousands) Balance % of Total Non-interest-bearing demand $ 568,509 25 % Interest-bearing checking 1,115,263 48 % Money market and savings 538,399 23 % Time 34,311 1 % Non-reciprocal brokered (1) 65,466 3 % Total deposits $ 2,321,948 100 % December 31, 2025 (In thousands) Balance % of Total Non-interest-bearing demand $ 556,972 26 % Interest-bearing checking 1,069,272 49 % Money market and savings 532,149 24 % Time 27,680 1 % Non-reciprocal brokered (1) - 0 % Total deposits $ 2,186,073 100 % (1) FDIC regulations impose a general cap on reciprocal deposits that may be exempt from brokered deposits classification equal to 20% of the Bank's total liabilities. As of June 30, 2026 and December 31, 2025, an additional $513.0 million and $475.4 million of our deposits were considered brokered deposits by the FDIC due to being in excess of the general cap, respectively. As of June 30, 2026, the Company had one deposit relationship, a software company in our Venture Lending division, that exceeded 5% of total deposits totaling $133.4 million. As of December 31, 2025, the Company had two deposit relationships, one a 1031 exchange intermediary service and the other a software company in our Venture Lending division, that exceeded 5% of total deposits. Totaling $228.7 million, together they represented 10% of total deposits as of December 31, 2025. FDIC deposit insurance covers $250,000 per depositor (subject to the rules and regulations of the FDIC), per FDIC-insured bank, for each account ownership category. We estimate total uninsured deposits were $918.5 million and $915.5 million as of June 30, 2026 and December 31, 2025, respectively, representing approximately 40% and 42% of our total deposit portfolio as of June 30, 2026 and December 31, 2025, respectively. The following table sets forth the scheduled maturities of time deposits as of June 30, 2026. June 30, 2026 Greater Than Less than (or Equal To) (In thousands) $250,000 $250,000 Total Remaining maturity: Three months or less $ 1,781 $ 12,149 $ 13,930 Over three through six months 2,674 11,033 13,707 Over six through twelve months 468 2,773 3,241 Over twelve months 15 3,418 3,433 $ 4,938 $ 29,373 $ 34,311 51 Table of Contents Borrowings The Bank has several supplementary funding sources, including a secured line of credit with the Federal Home Loan Bank of San Francisco (“FHLB”) and various available unsecured lines of credit with correspondent banks. The Bank's wholesale funding was 2% of total assets as of both June 30, 2026 and December 31, 2025. The following table summarizes our borrowings as of the periods indicated. (In thousands) June 30, 2026 December 31, 2025 Federal funds lines of credit $ - $ 60,000 Federal Home Loan Bank advances - - Subordinated notes, net 22,000 22,000 Total $ 22,000 $ 82,000 Other Short-Term Borrowings The Company had unsecured Federal Funds lines of credit from correspondent banks totaling $229.0 million as of June 30, 2026 and $206.0 million as of December 31, 2025, with outstanding balances of $0 and $60.0 million as of June 30, 2026 and December 31, 2025, respectively. The Company has a short-term borrowing arrangement with the Federal Reserve Bank through the Discount Window with a borrowing capacity of $977.5 million and $853.9 million as of June 30, 2026 and December 31, 2025, respectively. There were no borrowings outstanding under this arrangement as of June 30, 2026 and December 31, 2025. Federal Home Loan Bank Advances The Bank has a secured line of credit with the FHLB, which requires the Bank to pledge collateral to establish credit availability. The Bank has historically pledged multi-family and commercial real estate loans within the Bank’s loan portfolio to establish credit availability. As of June 30, 2026, the secured line of credit had no outstanding balance and $550.7 million in remaining borrowing capacity. As of December 31, 2025, the secured line of credit had no outstanding balance and $530.0 million in remaining borrowing capacity. Long-Term Debt On December 20, 2019, the Company issued $22.0 million in ten-year, fixed-to-floating rate subordinated notes to certain qualified institutional buyers and institutional accredited investors. The subordinated notes have a maturity date of December 30, 2029, and are currently redeemable, subject to certain conditions. The subordinated notes bear interest at the rate of 5.0% per annum, payable semiannually for the first five years of the term, and then quarterly at a variable rate based on the then current 3-month Secured Overnight Financing Rate plus 359.5 basis points. The interest rate as of June 30, 2026 was 7.33%. The indebtedness evidenced by the subordinated notes, including principal and interest, is unsecured and subordinate and junior to general and secured creditors and depositors. On the statement of financial condition, the subordinated notes are carried net of debt issuance costs, and these were fully amortized as of December 31, 2024. Liquidity and Capital Resources Liquidity Management Liquidity refers to our capacity to meet cash and collateral obligations in a timely manner. Maintaining appropriate levels of liquidity depends on our ability to address both expected and unexpected cash flows and collateral needs while aiming to avoid adverse effects on our daily operations or the financial condition of the Bank. Effective liquidity management is considered essential to our business model, as deposits, which can generally be withdrawn on demand, form a primary source of our funding. The liquidity ratio is typically calculated as the sum of our cash and cash equivalents plus unpledged securities classified as investment grade divided by total liabilities. Based on this calculation method, as of June 30, 2026 and December 31, 2025, our reported liquidity ratios were 16.2% and 15.9%, respectively. 52 Table of Contents We maintain secured lines of credit with the FHLB and the Federal Reserve Discount Window, for which we can borrow up to the allowable amount of pledged collateral. As of June 30, 2026, we had remaining borrowing capacity totaling $550.7 million and $977.5 million with the FHLB and Federal Reserve, respectively. The Bank maintains unsecured lines of credit with correspondent banks that provide combined availability of $229.0 million and $206.0 million as of June 30, 2026 and December 31, 2025. There were no outstanding balances on these unsecured lines of credit as of June 30, 2026. Outstanding balances on these unsecured lines of credit as of December 31, 2025, totaled $60.0 million. In addition to these sources of liquidity, we also utilize One-way deposits. One-way deposits involve receiving deposits from other banks’ clients through the network. This mechanism can provide an additional source of liquidity by allowing us to increase our deposits without reciprocating. There were no outstanding One-way deposits as of June 30, 2026 or December 31, 2025. As an intermediate source of liquidity, we may sell AFS securities or allow AFS securities to mature without reinvestment in the securities portfolio. As of June 30, 2026 and December 31, 2025, our AFS securities portfolio had a fair value of $232.2 million and $218.2 million, respectively, and an amortized cost of $234.9 million and $218.5 million, respectively. In the event liquidity is needed from the bond portfolio, management will take into consideration a number of factors when determining which investments to sell including the marketability of the bonds, current prices and estimated losses. Our liquidity management framework distinguishes between primary liquidity sources, which are expected to fund routine balance sheet needs under normal operating conditions, and secondary liquidity sources, which provide additional capacity during periods of asset growth, deposit volatility, or market stress. Our primary sources of liquidity mainly consist of customer deposits and cash balances due from other financial institutions, such as the Federal Reserve. Overnight unsecured borrowed funds are also intentionally used by management to routinely supplement deposits and fund asset growth under normal operating conditions. Secondary sources of liquidity include unencumbered investment securities, brokered deposits and other borrowed funds such as FHLB advances and the FRB discount window. Non-reciprocal brokered deposits are used as a supplemental funding source to support loan growth, manage balance sheet liquidity, and maintain funding diversification. These deposits generally have contractual maturities and predictable repricing characteristics, which can aid in cash flow planning and interest rate risk management. Management does not rely on brokered deposits as a primary source of day‑to‑day liquidity but utilizes them opportunistically to complement customer deposit funding, particularly when core deposit growth does not fully align with asset growth or when market conditions make such funding cost‑effective. As of June 30, 2026, non-reciprocal brokered deposits totaled $65.5 million, representing 3% of total deposits, compared to $0 as of December 31, 2025. Liquidity Risk Management Liquidity risk refers to the potential that the Bank’s financial condition or overall safety and soundness could be adversely affected by a real or perceived inability to meet contractual obligations. This risk category includes potential challenges in managing unplanned decreases or changes in funding sources. Liquidity risk management involves efforts to identify, measure, monitor and control liquidity events. The Bank’s Asset/Liability Committee (ALCO) of the Board typically reviews the current liquidity position and projected liquidity scenarios, including stressed scenarios, at its quarterly meetings. The ALCO seeks to ensure that measurement systems are designed to identify and quantify the Bank’s liquidity exposure, and that reporting systems and practices are intended to communicate relevant information about the level and sources of that exposure. Management is responsible for implementing board-approved policies, strategies, and procedures, and for monitoring liquidity on both a daily and long-term basis. For additional information on liquidity risk management, see the section titled, "Risk Framework — Liquidity Risk" found elsewhere in this Form 10-Q. Capital Resources Capital adequacy is generally considered an important indicator of financial stability and performance. Our objectives include maintaining capitalization at levels that we believe are sufficient to support asset growth and to promote confidence among our depositors, investors, and regulators. We recognize that robust capital management practices are integral to addressing various financial and operational challenges, which may include managing credit risk, liquidity risk, balance sheet growth, new products, regulatory changes and competitive pressures. Our Board of Directors reviews our capital position on an ongoing basis to ensure it is adequate, including but not limited to, the need for raising additional capital (whether in the form of debt and/or equity), replacing existing capital, redeeming outstanding capital (including redemption of our outstanding subordinated notes and issuance of new subordinated notes), or returning capital to our shareholders whether through dividends and/or share repurchases. 53 Table of Contents The Company announced a stock repurchase program on November 25, 2020, authorizing the repurchase of up to 5% or 307,780 shares of the Company’s then outstanding common stock. The program has no expiration date. Under the stock repurchase program, the Company may, from time to time, repurchase shares of its outstanding common stock in the open market, in privately-negotiated transactions, or otherwise, subject to applicable laws and regulations. The Company did not repurchase any shares of its common stock during the three months ended June 30, 2026 under this repurchase program. During the six months ended June 30, 2026, the Company repurchased 25,000 shares of its common stock for $693 thousand at an average price of $27.69 per share under the publicly announced stock repurchase program. The extent to which the Company repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements, availability of funds, and other relevant considerations, as determined by the Company. The Company may, at its discretion, begin, suspend or terminate repurchases at any time prior to the program's expiration, without any prior notice. An aggregate of 257,433 shares remain available for repurchase under the Company’s stock repurchase program. There is no obligation on the part of the Company to repurchase any shares of its common stock and there can be no assurance that any future share repurchases will be made. Shareholders’ equity as of June 30, 2026, was $296.2 million, an increase of $15.2 million, or 5%, compared to $281.0 million as of December 31, 2025. The increase included an increase in retained earnings of $16.7 million, partially offset by an increase in unrealized losses on AFS securities in accumulated other comprehensive loss of $1.8 million. Book value per share as of June 30, 2026 and December 31, 2025, was $26.97 and $25.66, respectively. Because total assets on a consolidated basis are less than $3.0 billion, we are not subject to the consolidated capital requirements imposed by federal regulations. However, the Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Certain regulatory measurements of capital adequacy are “risk-based,” meaning they utilize a formula that considers the individual risk profile of the financial institution’s assets. For example, certain assets, such as cash at the Federal Reserve and investments in U.S. Treasury securities, are deemed to carry zero risk by the regulators because of explicit or implied federal government guarantees. As of June 30, 2026 and December 31, 2025, respectively, 8.2% and 8.0% of the Bank’s total assets were invested in such zero-risk assets. The tier 1 leverage ratio, another regulatory capital measurement, does not consider the riskiness of assets. The leverage ratio is computed as tier 1 capital divided by total average assets for the relevant quarter. Accumulated other comprehensive income, which includes unrealized gains and losses on securities available-for-sale and unrealized gains and losses on derivatives qualifying as cash flow hedges, is excluded in the calculation of regulatory capital ratios. The Bank’s capital level is characterized as “well capitalized” for regulatory purposes. A summary of the Company’s consolidated and Bank’s regulatory capital ratios are presented for the periods indicated below: Consolidated June 30, 2026 December 31, 2025 (In thousands) Amount Ratio Amount Ratio Total risk-based capital ratio $ 332,342 12.79 % $ 313,481 12.57 % Tier 1 risk-based capital ratio 294,950 11.35 % 275,669 11.05 % Common equity tier 1 capital ratio 294,950 11.35 % 275,669 11.05 % Tier 1 leverage ratio 294,950 11.50 % 275,669 11.23 % Bank June 30, 2026 December 31, 2025 (In thousands) Amount Ratio Amount Ratio Total risk-based capital ratio $ 330,796 12.77 % $ 309,703 12.45 % Tier 1 risk-based capital ratio 306,604 11.83 % 285,091 11.46 % Common equity tier 1 capital ratio 306,604 11.83 % 285,091 11.46 % Tier 1 leverage ratio 306,604 11.99 % 285,091 11.65 % Off-Balance Sheet Arrangements In the normal course of business, we enter into various transactions that are not included in our consolidated statements of financial condition in accordance with GAAP. These transactions, including commitments to extend credit, letters of credit, and overdraft protection, are issued to meet client financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments. The total commitment amounts do not necessarily represent future cash requirements. 54 Table of Contents The following is a summary of our off-balance sheet commitments outstanding as of the dates indicated. The Bank has some commitments that are unconditionally cancellable at our discretion, and these amounts are not included in the table below: (In thousands) June 30, 2026 December 31, 2025 Commitments to extend credit $ 764,992 $ 688,115 Standby letters of credit 23,105 19,168 Based on historical experience, many of the commitments and letters of credit will expire unfunded. Through our various sources of liquidity, we believe we will be able to fund these obligations as they arise. We evaluate each client’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate. We estimate expected credit losses over the contractual period in which we are exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by us. The allowance for credit losses on unfunded commitments is adjusted through provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The estimate utilizes the same factors and assumptions as the allowance for credit losses on loans and is applied at the same collective segment level. Contractual Obligations The following table presents, as of June 30, 2026, our significant contractual obligations to third parties on debt and lease agreements and service obligations: June 30, 2026 After One After Two One Year Year Through Years Through After (In thousands) or Less Two Years Five Years Five years Total Time deposits (1) $ 30,879 $ 1,258 $ 2,174 $ - $ 34,311 Subordinated debentures (1) - - 22,000 - 22,000 Operating leases, net 1,349 3,270 1,210 - 5,829 Significant contracts (2) 1,404 2,723 1,362 - 5,489 Total $ 33,632 $ 7,251 $ 26,746 $ - $ 67,629 (1) Amounts exclude interest. (2) We have a significant, long-term contract for core processing services. Actual obligation is dependent on certain factors including volume and activity. For purposes of this disclosure, future obligations are estimated using 2026 expenses extrapolated over the remaining contract life. We believe that we will be able to meet our contractual obligations as they come due. Adequate cash levels are expected through profitability, repayments from loans and securities, deposit gathering activity and access to borrowing sources. Risk Framework We have established a risk appetite framework as part of our overall risk management policies to define the type and amount of risk we are willing to accept, while balancing the needs of all stakeholders. The risk appetite framework is developed in accordance with industry practice and regulatory expectations. It is reviewed and approved annually by the Risk Oversight Committee and the Audit Committee and ratified by the Board. The framework covers seven (7) major risk categories: (i) operational risk; (ii) strategic risk; (iii) credit risk; (iv) liquidity risk; (v) technology risk; (vi) compliance risk (vii) interest rate sensitivity risk. Operational Risk Operational risk is the risk to earnings or capital arising from problems in people, processes, systems and external events. This risk is significant within any bank and is interconnected with other risk categories in most activities throughout the Company. It arises daily throughout the Company as transactions are processed. It pervades all divisions, departments and centers and is inherent in all products and services we offer. 55 Table of Contents In general, operational risk by major area is categorized as high, medium or low by the Company. The audit plan ensures that high risk areas are reviewed annually. We utilize internal auditors and independent audit firms to test key controls of operational processes and to audit information systems, compliance management programs, and loan programs. We believe the key to managing operational risk is in the design, documentation and implementation of well-defined policies, procedures and controls. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, but not absolute, assurances of the effectiveness of these systems and controls, and that the objectives of these controls have been met. Strategic Risk Strategic risk is the risk of loss or foregone opportunities due to a failure in strategies caused by external and internal factors adversely influencing the outcome or execution of strategies. Strategic risks are identified as part of the strategic planning process. Offsite strategic planning sessions, with members of the Board of Directors and executive officers, are held annually. The strategic review consists of an economic assessment, competitive analysis, industry outlook and risk and regulatory review and includes participation from outside parties. Credit Risk Credit risk is the risk arising from an obligor’s failure to meet the terms of any contract with the Bank or otherwise perform as agreed. Credit risk exists anytime bank funds are extended, committed, invested or otherwise exposed through actual or implied contractual arrangements, whether reflected on or off the balance sheet and rises in conjunction with a broad array of bank activities. The bank serves its clients through separate lending divisions and can face challenges from a variety of factors including higher interest rates, a slowdown in the economy, lower valuations for commercial real estate and a challenging environment for venture-backed businesses. The bank has established concentration levels with each loan product to help manage diversification, and the Board measures the concentrations relative to total risk-based capital regularly. These limits are reassessed periodically to reflect current economic conditions. The bank has also established regular monitoring and portfolio review of credit clients to evaluate and assess the risk associated with its credits. The bank engages in an established underwriting process in accordance with its credit policies, assessing the credit risk and matching the risk to an appropriate credit structure. The bank regularly stress tests its loan portfolio utilizing macroeconomic scenarios based on current conditions as well as historical data. Credit approvals are governed by the Bank’s credit approval policy and consider the size of the credit, the aggregate indebtedness owed to the Bank by the borrower, and the loan risk rating. Credit policies are approved by the Credit Committee of the Board and ratified by the full Board. In addition, the Bank has adopted robust monitoring and portfolio reviews to identify risks and address loans which may become criticized or classified or otherwise become identified as problem loans. The Special Assets Committee (SAC) includes our Chief Executive Officer, Chief Credit Officer, Chief Legal Officer and other credit officers. The SAC reviews criticized and classified loans, and loans requiring close monitoring on a semi-monthly basis. Liquidity Risk Our objective in managing liquidity is to maintain a balance between sources and uses of funds in order to economically meet the cash requirements of clients for loans and deposit withdrawals and participate in lending and investment opportunities as they arise. We monitor our liquidity position in relation to changes in loan and deposit balances on a daily basis to assure maximum utilization, maintenance of an adequate level of readily marketable assets and access to short-term funding sources. The high-profile regional bank failures in the first half of 2023 drove several precautionary actions to ensure adequate liquidity including securing multiple additional funding sources and pledges of additional collateral to ensure that we could meet our liquidity needs. The Bank also introduced a fully insured reciprocal deposit program to maintain deposits and offer clients deposit insurance in the amount they requested. The Bank actively monitors and manages the Bank’s current and forecasted liquidity position, expected fund inflows and outflows, large depositor trends, contingency funding sources and other metrics. The Company maintains policies regarding liquidity levels, and ratios are presented to the ALCO quarterly. Management has also established early warning indicators to anticipate significant liquidity stress. If any of these indicators are triggered, we maintain action plans and responsibilities for each liquidity scenario and report this to ALCO. 56 Table of Contents Deposits have historically provided us with a sizable source of relatively stable and low-cost funds but are subject to competitive pressure in our market. A portion of our deposits are granular, long-tenured, and relationship-based. In addition to deposit funding, we also have access to a variety of other short-term and long-term funding sources, which include proceeds from maturities of our loans and investment securities, as well as secondary funding sources available to meet our liquidity needs such as the FHLB, secured repurchase agreements, brokered deposits, and the Federal Reserve Discount Window. Our loan-to-deposit ratio as of June 30, 2026 and December 31, 2025, was 95.8% and 98.3%, respectively. As of June 30, 2026 and December 31, 2025, the Company had cash of $159.9 million and $154.6 million, respectively, and total other liquidity sources, including available borrowing capacity and unpledged debt securities of approximately $2.0 billion and $1.80 billion, respectively. Total available sources of liquidity as a percentage of uninsured and uncollateralized deposits were approximately 233% and 213%, respectively. Technology Risk Technology risk threatens our ability to secure data, maintain system availability, and meet business, client, and regulatory requirements. As we grow, our technology infrastructure must scale to support increasing transaction volumes and evolving client needs while mitigating cybersecurity threats, including social engineering and AI-driven attacks. To strengthen our defenses, we are transitioning from implementing and following the Cybersecurity Assessment Tool (CAT) to the NIST Cybersecurity Framework (CSF) 2.0 and enhancing our Business Impact Analysis (BIA). We employ a layered security approach, including firewalls, intrusion detection, multi-factor authentication, encryption, and regular penetration testing. We conduct bi-weekly vulnerability scans and third-party security assessments to help identify and address risks. Our information security policies align with regulatory requirements from the Federal Reserve, FDIC, and DFPI. In addition, we conduct annual Gramm-Leach-Bliley Act (GLBA) risk assessments to ensure compliance. Vendor security is one of our priorities. We strive to conduct rigorous assessments for all vendors and annual reviews of critical and high-risk providers. We collect Service Organization Controls (SOC) reports and other security documentation from vendors and service providers and have confidentiality agreements in place to prevent external sharing. Our Information Security Officer provides regular updates to our IT Steering and Risk Oversight Committee, and significant findings are escalated to our board of directors. As an FDIC-regulated community bank, we believe we comply with extensive cybersecurity and risk management regulations. We share detailed reports only with regulators and auditors. We remain committed to protecting client information, ensuring regulatory compliance, and strengthening our technology infrastructure against evolving cybersecurity threats. Compliance Risk Compliance risk is the risk to earnings or capital arising from violations of, or non-conformance with, laws, rules, regulations, prescribed practices or ethical standards. Compliance risk also arises in situations where the laws or rules governing certain products or activities of the Bank’s clients may be ambiguous or untested. Compliance risk exposes us to fines, civil money penalties, payment of damages, and the voiding of contracts. Compliance risk can also lead to a diminished reputation, reduced business value, limited business opportunities, lessened expansion potential, and lack of contract enforceability. The Company utilizes independent external firms to conduct compliance audits as a means of identifying weaknesses in the compliance program. There is no single or primary source of compliance risk. It is inherent in every activity. Frequently, it blends into operational risk. A portion of this risk is sometimes referred to as legal risk. This is not limited solely to risk from failure to comply with consumer protection laws; it encompasses all laws and regulations, as well as prudent ethical standards and contractual obligations. It also includes the exposure to litigation from all aspects of banking, traditional and non-traditional. Our risk management policies and codes of ethical conduct are key components in controlling compliance risk. An integral part of controlling this risk is the proper training and development of employees and board members. We seek to provide our employees with adequate training commensurate to their job functions to ensure compliance with banking laws and regulations. Our risk management policies and programs include a risk-based audit program aimed at identifying internal control deficiencies and weaknesses including inconsistencies with established policies and bank laws and regulations. We have in-depth internal audits supplemented by independent external firms, and periodic monitoring performed by our risk management personnel. Annually, an Audit Plan for the Company is developed and presented for approval to the Audit Committee. 57 Table of Contents Our risk management team conducts periodic monitoring of our compliance efforts with a special focus on those areas that expose us to compliance risk. The purpose of the periodic monitoring is to verify whether our employees are adhering to established policies and procedures. Any material exceptions or violations identified are brought forward to the appropriate department head, the Risk Oversight Committee, the Audit Committee and the Board as warranted. We recognize that client complaints can often identify weaknesses in our compliance program which could expose us to risk. Therefore, we attempt to ensure that all complaints are given prompt attention. Interest Rate Sensitivity and Market Risk Our business activities include attracting deposits and using those deposits to invest in cash, securities, and loans. These activities involve interest rate risk, which arises from factors such as timing and volume differences in the repricing of our rate-sensitive assets and liabilities, changes in credit spreads, fluctuations in the general level of market interest rates, and shifts in the shape and level of market yield curves. Changes in interest rates affect our current and future earnings by impacting our net interest income and the level of other interest-sensitive income and operating expenses. Interest rate fluctuations also influence the underlying economic value of our assets, liabilities and off-balance sheet items. This is because the present value of future cash flows, and in some cases the cash flows themselves, may change when interest rates vary. Interest rate risk is generally considered a significant market risk for financial institutions. We have developed an interest rate risk policy that aims to provide management with guidelines for managing interest rate risk. We have also established a system for monitoring our net interest rate sensitivity position. However, it’s important to note that despite these measures, significant changes in interest rates could potentially impact our earnings, liquidity and capital positions. As of June 30, 2026, our ALCO is composed of our Chief Executive Officer and at least two independent directors and meets at least quarterly to manage interest rate risk in accordance with policies approved by the Bank’s board of directors. Members of management from various departments also participate in the ALCO meetings, including the Chief Financial Officer, Treasurer, and Chief Revenue Officer. The board of directors receives quarterly interest rate risk measurement results. The ALCO monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals. We use interest rate risk models and rate shock simulations to assess the interest rate risk (“IRR”) sensitivity of net interest income and the economic value of equity over a variety of parallel and non-parallel rate scenarios. Many assumptions are used to calculate the impact of interest rate fluctuations on our net interest income, such as asset prepayments, non-maturity deposit price sensitivity and decay rates, and rate drivers. Due to the inherent use of estimates and assumptions in the model, our actual results may, and most likely will, differ from our simulated results. Management reviews the assumptions on an as-needed basis and at least annually through a thorough examination. Key changes are presented to the ALCO. The table below summarizes the results of our IRR analysis in simulating the change in net interest income over a 12-month horizon as of the indicated dates. This scenario assumes that the parallel shift in interest rates occurs immediately. Estimated Change in Net Interest Income Change in interest rates (basis points) June 30, 2026 December 31, 2025 +400 17.95 % 16.65 % +300 13.36 12.37 +200 8.73 8.01 +100 4.23 3.76 -100 (1.97 ) (1.41 ) -200 (2.16 ) (1.35 ) -300 (1.71 ) (0.19 ) -400 0.65 0.86 58 Table of Contents We expect net interest income to benefit from an increase in interest rates as the rates on interest earning assets reprice at a faster pace than the rate on interest bearing liabilities. As rates decrease, net interest income is negatively impacted as the rates on interest earning assets reprice lower at a faster pace than the rates on interest bearing liabilities. The decrease in net interest income is offset by the benefits from the floor rates on our floating rate loans. As of June 30, 2026, approximately 14% of our floating rate loans were at their floor rate. As rates decrease, a larger percentage of the coupon on our floating rate loans will be at the floor rate. If rates decrease 100 basis points, 66% of our floating rate loans will be at their floor rate, and if rates decrease 400 basis points, 85% will be at their floor rate. Critical Accounting Policies and Estimates The Company’s consolidated financial statements are prepared in accordance with GAAP and follow general practices within the financial services industry. It is management’s opinion that accounting estimates covering certain aspects of the Company’s business have more significance than others due to the relative importance of those areas to overall performance, or the level of subjectivity required in making such estimates. We believe that the estimates most susceptible to significant change in the near term relate to determining the allowance for credit losses on loans. See Note 1 – Basis of Presentation to our consolidated financial statements included in the Company's Form 10-K for the year ended December 31, 2025 for all our accounting policies, including these identified critical accounting estimates. Pursuant to the JOBS Act, as an emerging growth company, we can elect to opt out of the extended transition period for adopting any new or revised accounting standards. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we may adopt the standard on the application date for private companies. We have elected to take advantage of the scaled disclosures and other relief under the JOBS Act, and we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us under the JOBS Act, so long as we qualify as an emerging growth company. We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our consolidated financial statements to those judgments and assumptions, are critical to an understanding of our consolidated financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are reasonable and appropriate. Allowance for Credit Losses on Loans The allowance for credit losses on loans is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed and recoveries are credited to the allowance when received. The Company may also account for expected recoveries should information of an anticipated recovery become available. In the case of actual or expected recoveries, amounts may not exceed the aggregate of amounts previously charged off. Management utilizes relevant available information, from internal and external sources, relating to past events, current conditions, historical loss experience, and reasonable and supportable forecasts. The allowance is calculated using a discounted cash flow methodology applied at the loan level. The Company uses Moody's Analytics Unemployment Rate and the GDP Annual Rate to obtain various forecast scenarios to determine the loan portfolio’s quantitative portion of expected credit loss. The Company has elected to forecast the first four quarters of the credit loss estimate and revert on a straight-line basis over eight quarters. Adjustments to historical loss information are made when management determines historical data are not likely reflective of the current portfolio such as limited data sets or lack of default or loss history. These adjustments include factors such as differences in underwriting standards, local economic conditions, portfolio mix, credit quality, concentrations, collateral or other relevant factors. Management may selectively apply external market data to subjectively adjust the Company’s own loss history including index or peer data. The Company utilizes an external vendor model as well as internally developed tools and non-statistical estimation approaches. Accrued interest receivable is excluded from the estimate of credit losses for loans. 59 Table of Contents The allowance for credit losses on loans is measured on a collective (pool) basis when similar risk characteristics exist. Management segments the loans into pools by product groupings with similar risk characteristics in estimating credit losses, and the loans are reported by portfolio segment. These portfolio segments for reporting include commercial and industrial, construction, residential real estate, commercial real estate and consumer loans. The general reserve component of the allowance for credit losses also consists of reserve factors based on management’s assessment of the following for each portfolio segment: (1) inherent credit risk, (2) historical losses and (3) other qualitative factors. Management estimates an allowance based upon loans outstanding as well as unfunded commitments. These reserve factors are inherently subjective and are driven by the repayment risk associated with each category described below: Commercial and Industrial ● Commercial and industrial loans consist of working capital and term loans which are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators which are closely correlated to the credit quality of these loans. ● Asset-based loans are generally made against accounts receivable and inventory to companies generating consistent sales without yet having reached consistent profitability. As such, these loans are more collateral focused and are primarily subject to the risks of collecting and liquidating the collateral. ● Sponsor finance loans are made to companies based upon their cash flow and often have risks associated with merger and acquisition activities. Additional risks for this loan category include insufficient levels of collateral in the form of accounts receivable, inventory or equipment. Declines in general economic conditions and other events can cause cash flows to fall to levels insufficient to service debt. ● Venture loans are made to companies with modest or negative cash flows and no established record of profitable operations. Repayment of these loans may be dependent upon receipt by borrowers of additional equity financing from venture firms or others, or in some cases, a successful sale to a third party, public offering or other form of liquidity event. Declines in venture capital financing activity, as well as mergers and acquisitions and initial public offerings – may impact the financial health of some of our clients. ● Our venture loans are typically originated by examining and evaluating the quality of the investor syndicate, experience of the company’s senior management team, strength of relationships with management and investors, projected liquidity, performance to plan, size of addressable market, strength of product and intellectual property, if any. The loan terms vary depending on the borrowers’ business, credit rating, and financial position. We provide working capital, revolving lines of credit, as well as term loans, which typically include an interest-only draw period typically up to 24 months followed by an amortization period typically up to 36 months. We also attempt to negotiate the receipt of a de minimis amount of equity warrants or a success fee at loan originations and renewals. Once a loan is originated, we collect financial reporting monthly to monitor performance and compliance with any covenants and assess the likelihood of additional equity financing. Particularly, through our proactive loan monitoring and risk assessing process, we closely review the borrowers’ liquidity and cash balances on a regular basis and evaluate their ability for loan repayment and the need for new funding. Construction ● Construction loans, including land and development loans are comprised of loans collateralized by land or real estate. The primary source of repayment is the eventual sale or refinance of the completed project. Risk arises from the necessity to complete projects within specified cost and timelines. Trends in the construction industry significantly impact the credit quality of these loans, as demand drives construction activity. In addition, trends in real estate values significantly impact the credit quality of these loans, as property values determine the economic viability of construction projects. 60 Table of Contents Commercial real estate ● Non-owner-occupied commercial real estate loans are collateralized by real estate where the owner is not the primary tenant. Adverse economic developments, or an overbuilt market, impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations. Another common risk for this loan category includes a lack of a suitable alternative use for the property. ● Owner-occupied commercial real estate loans are collateralized by real estate where the owner is the primary tenant. These loans are generally underwritten to existing cash flows of operating businesses. Debt coverage is provided by business cash flows and economic trends influenced by unemployment rates and other key economic indicators which are closely correlated to the credit quality of these loans. Residential real estate ● Residential real estate loans are typically home equity lines of credit secured by residential real estate. These are not typical mortgage loans and may have a variety of reasons for the borrowing including providing funding to a business or paying for large personal expenditures. The degree of risk in home equity loans depends primarily on the loan amount in relation to collateral value, the interest rate and the borrower’s ability to repay in an orderly fashion. Risks common to home equity lines of credit are general economic conditions, including an increase in unemployment rates, and declining real estate values that reduce or eliminate the borrower’s home equity. Consumer ● Consumer loans are primarily loans to individuals that may be unsecured or secured by collateral other than real estate. The unsecured loans are generally revolving personal lines of credit to established clients. The high quality of the clients who are offered these products has historically caused this loan product to have less risk of loss than commercial loan products. Risks common to consumer loans include unemployment and changes in local economic conditions as well as the inability to monitor collateral consisting of personal property. Loans that do not share risk characteristics are evaluated on an individual basis. Also, loans evaluated individually are not included in the collective evaluation. When management determines that foreclosure is probable or when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral, adjusted for selling costs as appropriate.