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Item 8. Financial Statements and Supplementary Data

2023-02-24 compared with 2022-02-25 · 1033 added, 1500 removed, 393 unchanged (87% of the section changed)

Financial Statements and

Supplementary Data

of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of

Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (Moss Adams LLP;

PCAOB ID# 659 )

Consolidated Balance Sheets as of December 31, 2022 and 2021

Consolidated Statements of Income for the years ended December 31, 2022 and 2021

Consolidated Statements of Comprehensive Income for the years ended December 31, 2022 and 2021

Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2022 and 2021

Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Five Star Bancorp and Subsidiary

on the Consolidated Financial Statements

have audited the accompanying consolidated balance sheets of Five Star Bancorp and Subsidiary (the Company), as of December 31,

2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders equity, and cash flows

for the years then ended, and the related notes (collectively referred to as the consolidated financial statements).

our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the

Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for the years then ended,

in conformity with accounting principles generally accepted in the United States of America.

consolidated financial statements are the responsibility of the Companys management.

Our responsibility is to express an opinion

on the Companys consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public

Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company

in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission

and the PCAOB.

conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain

reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance

with the standards of the PCAOB.

As part of our audits, we are required to obtain an understanding of internal control over financial

reporting, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial

reporting in accordance with the standards of the PCAOB.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Five Star Bancorp (and subsidiary) (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Change in Accounting Principle

As discussed in Notes 1 and 15 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2022 due to the adoption of Accounting Standards Update No.

2016-02, which established Accounting Standards Codification Topic 842, Leases .

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB.

Accordingly, we express no such opinion.

audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether

due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence

regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles

used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

/s/ Moss Adams LLP

San Francisco, California

Firm ID is 659

We have served as the

Company’s auditor since 2010.

Portland, Oregon

February 24, 2023

We have served as the Company’s auditor since 2010.

FIVE STAR BANCORP AND SUBSIDIARY

1 unchanged sentence

December 31, 2022 and 2021

thousands, except share data)

(in thousands, except share data)

Cash and due from financial institutions $ 32,561 $ 136,074

5 unchanged sentences

Loans held for sale 9,416 10,671

Loans held for investment, net of allowance for loan losses of $ 23,243 and $ 22,189 at December 31, 2021 and 2020, respectively

Loans held for investment 2,791,326 1,934,460

Allowance for loan losses ( 28,389 ) ( 23,243 )

Loans held for investment, net of allowance for loan losses 2,762,937 1,911,217

Federal Home Loan Bank of San Francisco (“FHLB”) stock 10,890 6,723

Operating leases, right-of-use asset (“ROUA”) 3,981 —

Premises and equipment, net 1,605 1,773

1 unchanged sentence

Interest receivable and other assets 34,077 21,628

TOTAL ASSETS $ 3,227,159 $ 2,556,761

LIABILITIES AND SHAREHOLDERS’ EQUITY

3 unchanged sentences

Subordinated notes, net 73,606 28,386

FHLB advances 100,000 —

Operating lease liability 4,243 —

Interest payable and other liabilities 14,481 7,439

9 unchanged sentences

17,224,848 shares issued and outstanding at December 31, 2021

219,543 218,444

Retained earnings 46,736 17,168

Accumulated other comprehensive (loss) income, net

Accumulated other comprehensive loss, net ( 13,454 ) ( 566 )

Total shareholders’ equity 252,825 235,046

Liabilities and Shareholders Equity

See accompanying notes to consolidated

financial statements.

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 3,227,159 $ 2,556,761

See accompanying notes to consolidated financial statements.

FIVE STAR BANCORP AND SUBSIDIARY

STATEMENTS OF INCOME

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2022 and 2021

5 unchanged sentences

Interest-bearing deposits in other banks 3,696 547

Interest and dividend income

117,918 81,583

Interest expense

Deposits 10,923 2,199

FHLB advances 185 —

Subordinated notes 3,740 1,773

Interest expense

Net interest income

103,070 77,611

Provision for loan losses 6,700 1,700

Net interest income after provision for loan losses

96,370 75,911

Non-interest income

5 unchanged sentences

Earnings on BOLI 412 237

Noninterest Income

Other 586 135

Non-interest expense

7 unchanged sentences

Other operating expenses 6,436 4,949

Noninterest expense

40,669 36,043

Income before provision for income taxes

62,858 47,148

Provision for income taxes

Basic earnings per share

Diluted earnings per share

See accompanying notes to consolidated

financial statements.

$ 44,801 $ 42,441

Basic earnings per common share $ 2.61 $ 2.83

Diluted earnings per common share $ 2.61 $ 2.83

See accompanying notes to consolidated financial statements.

FIVE STAR BANCORP AND SUBSIDIARY

2 unchanged sentences

(in thousands)

Net unrealized holding (loss) gain on securities available-for-sale during the period

Net income $ 44,801 $ 42,441

Net unrealized holding loss on securities available-for-sale during the period ( 18,291 ) ( 1,475 )

Reclassification adjustment for net realized gains included in net income ( 5 ) ( 724 )

Income tax (benefit) expense related to other comprehensive (loss) income

Other comprehensive (loss) income

Income tax benefit related to net unrealized loss and reclassification adjustment ( 5,408 ) ( 288 )

Other comprehensive loss ( 12,888 ) ( 1,911 )

Total comprehensive income $ 31,913 $ 40,530

See accompanying notes to consolidated

financial statements.

See accompanying notes to consolidated financial statements.

FIVE STAR BANCORP AND SUBSIDIARY

2 unchanged sentences

(in thousands, except share and per share data)

Comprehensive

Common Stock Retained Earnings

Accumulated Other Comprehensive Income (Loss),

Shares Amount

Balance at December 31, 2020 11,000,273 $ 110,082 $ 22,348 $ 1,345 $ 133,775

Other comprehensive income

Net income — — 42,441 — 42,441

Other comprehensive loss — — — ( 1,911 ) ( 1,911 )

Stock offering 6,054,750 111,243 — — 111,243

Stock issued under stock

Stock issued under stock award plans 132,707 — — — —

Stock compensation expense — 594 — — 594

Director stock compensation

Common stock issued

Cash dividends paid

($ 2.63 per share)

Director stock compensation expense 41,640 846 — — 846

Stock forfeitures ( 4,522 ) — — — —

Reclassification of retained deficit — ( 4,321 ) 4,321 — —

Cash dividends paid ($ 4.55 per share)

— — ( 51,942 ) — ( 51,942 )

Balance at December 31, 2021 17,224,848 $ 218,444 $ 17,168 $ ( 566 ) $ 235,046

Net income — $ — $ 44,801 $ — $ 44,801

Other comprehensive loss — — — ( 12,888 ) ( 12,888 )

Stock offering

Stock issued under stock

Stock issued under stock award plans 23,639 — — — —

Stock compensation expense — 652 — — 652

Director stock compensation

Director stock compensation expense — 447 — — 447

Stock forfeitures ( 6,561 ) — — — —

Reclassification of retained

Cash dividends paid

($ 4.55 per share)

Cumulative effect of adoption of Accounting Standards Codification (“ASC”) 842 on retained earnings — — 68 — 68

Cash dividends paid ($ 1.05 per share)

— — ( 15,301 ) — ( 15,301 )

Balance at December 31, 2022 17,241,926 $ 219,543 $ 46,736 $ ( 13,454 ) $ 252,825

See accompanying notes to consolidated

financial statements.

See accompanying notes to consolidated financial statements.

FIVE STAR BANCORP AND SUBSIDIARY

3 unchanged sentences

Cash flows from operating activities:

Net income $ 44,801 $ 42,441

Adjustments to reconcile net income to net cash provided by operating activities:

3 unchanged sentences

Proceeds from sale of loans 53,691 43,024

Net gain on sale of securities

Net gain on sale of securities available-for-sale ( 5 ) ( 724 )

Earnings on BOLI ( 412 ) ( 237 )

5 unchanged sentences

Depreciation and amortization 649 607

Deferred taxes

Decrease in operating lease liability ( 978 ) —

Amortization of operating lease ROUA 987 —

Deferred tax provision ( 1,942 ) ( 4,001 )

Extinguishment of redeemed subordinated note issuance costs 302 —

Net changes in:

6 unchanged sentences

Purchases of securities available-for-sale ( 2,642 ) ( 99,686 )

Increase (decrease) in time deposits in banks

Net change in time deposits in banks 4,615 9,241

Loan originations, net of repayments ( 848,283 ) ( 426,882 )

5 unchanged sentences

Net change in deposits 496,114 501,889

Proceeds from issuance of common stock

FHLB repayment

Proceeds from issuance of stock — 111,243

FHLB advances 100,000 —

Cash dividends paid ( 15,301 ) ( 51,942 )

Proceeds from subordinated note issuance 75,000 —

Subordinated note issuance costs ( 1,454 ) —

Subordinated note redemption ( 28,750 ) —

Net cash provided by financing activities 625,609 561,190

7 unchanged sentences

Transfer from loans held for investment to loans held for sale $ 10,671 $ 4,820

Unrealized (loss) gain on securities

Unrealized loss on securities $ ( 18,291 ) $ ( 2,199 )

Operating lease liabilities recorded in conjunction with adoption of ASC 842 $ 5,221 $ —

ROUA recorded in conjunction with adoption of ASC 842 $ 4,974 $ —

Cumulative effect of adoption of ASC 842 on retained earnings $ 68 $ —

Disposal of premises and equipment $ — $ 515

Reclassification of retained deficit $ — $ 4,321

See accompanying notes to consolidated

financial statements.

CONSOLIDATED FINANCIAL STATEMENTS

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Basis of Presentation

Operations and Principles of Consolidation

Five Star Bank

(the “Bank”) was chartered on October 26, 1999 and began operations on December 20, 1999.

Five Star Bancorp (“Bancorp”

or the “Company”) was incorporated on September 16, 2002 and subsequently obtained approval from the Board of Governors

of the Federal Reserve System (the “Federal Reserve”) to be a bank holding company in connection with its acquisition

The Company became the sole shareholder of the Bank on June 2, 2003 in a statutory merger, pursuant to which each

outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.

through the Bank, provides a broad range of banking products and services to customers who are predominately small and medium-sized

businesses, professionals, and individuals primarily in the Northern California region.

Its primary loan products are commercial

real estate loans, land development loans, construction loans, and operating lines of credit.

Its primary deposit products are

checking accounts, savings accounts, money market accounts, and term certificate accounts.

The Bank currently has seven branch

offices in Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, and Yuba City, and two loan production offices in Santa

Rosa and Sacramento.

terminated its status as a Subchapter S corporation as of May 5, 2021, in connection with the Company’s Initial Public Offering

(“IPO”) and became a taxable C Corporation.

Nature of Operations and Principles of Consolidation

Five Star Bank (the “Bank”) was chartered on October 26, 1999 and began operations on December 20, 1999.

Five Star Bancorp (“Bancorp” or the “Company”) was incorporated on September 16, 2002 and subsequently obtained approval from the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to be a bank holding company in connection with its acquisition of the Bank.

The Company became the sole shareholder of the Bank on June 2, 2003 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.

The Company, through the Bank, provides a broad range of banking products and services to customers who are predominantly small and medium-sized businesses, professionals, and individuals primarily in the Northern California region.

The Company's primary loan products are commercial real estate loans, land development loans, construction loans, and operating lines of credit, and its primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts.

The Bank currently has seven branch offices in Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, and Yuba City, and one loan production office in Sacramento.

The Company terminated its status as a Subchapter S corporation as of May 5, 2021, in connection with the Company’s Initial Public Offering (“IPO”) and became a taxable C Corporation.

Prior to that date, as an S Corporation, the Company had no U.S.

income tax expense.

publicly filed a Registration Statement on Form S-1 with the U.S.

Securities and Exchange Commission (“SEC”) in connection

with its IPO (the “Registration Statement”), which was declared effective by the SEC on May 4, 2021.

In connection

with the IPO, the Company issued 6,054,750 shares of common stock, no par value, which included 789,750 shares sold pursuant to

the underwriters’ exercise of their option to purchase additional shares.

The securities were sold to the public at a price

of $ 20.00 per share and began trading on the Nasdaq Global Select Market on May 5, 2021.

On May 7, 2021, the closing date of the IPO,

the Company received total net proceeds of $ 111,243,000 .

The net proceeds less other related expenses, including audit fees, legal

fees, listing fees, and other expenses, totaled $ 109,082,000 .

Financial Statement Presentation and Consolidation

The accompanying

consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United

States of America (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”)

Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to

Regulation S-X.

The consolidated

financial statements include Five Star Bancorp and its wholly owned subsidiary, Five Star Bank.

All significant intercompany transactions

and balances are eliminated in consolidation.

While the Company’s

chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance

is evaluated on a Company-wide basis.

federal income tax expense.

The Company publicly filed a Registration Statement on Form S-1 with the U.S.

Securities and Exchange Commission (“SEC”) in connection with its IPO (the “Registration Statement”), which was declared effective by the SEC on May 4, 2021.

In connection with the IPO, the Company issued 6,054,750 shares of common stock, no par value, which included 789,750 shares sold pursuant to the underwriters’ exercise of their option to purchase additional shares.

The securities were sold to the public at a price of $ 20.00 per share and began trading on the Nasdaq Global Select Market on May 5, 2021.

On May 7, 2021, the closing date of the IPO, the Company received total net proceeds of $ 111,243,000 .

The net proceeds less other related expenses, including audit fees, legal fees, listing fees, and other expenses, totaled $ 109,082,000 .

Basis of Financial Statement Presentation and Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”), including Accounting Standards Updates (“ASU”) and the rules and regulations of the SEC, including the instructions to Regulation S-X.

The consolidated financial statements include Five Star Bancorp and its wholly owned subsidiary, Five Star Bank.

All significant intercompany transactions and balances are eliminated in consolidation.

While the Company’s chief decision-makers monitor the revenue streams of the various products and services, operations are managed, and financial performance is evaluated, on a Company-wide basis.

Discrete financial information is not available other than on a Company-wide basis.

all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

The Company’s

accounting and reporting policies conform to GAAP and to general practices within the banking industry.

qualifies as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, and a smaller reporting

company, and, as such, may take advantage of specified reduced reporting requirements and is relieved of other significant requirements

that are otherwise generally applicable to other public companies.

Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.

The Company qualifies as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, and a smaller reporting company, and, as such, may take advantage of specified reduced reporting requirements and is relieved of other significant requirements that are otherwise generally applicable to other public companies.

Use of Estimates

Management is

required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent

assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses

during the reporting period.

These estimates and assumptions affect the amounts reported in the consolidated financial statements

and the disclosures provided, and actual results could differ.

The allowance for loan losses is the most significant accounting

estimate reflected in the Company’s consolidated financial statements.

Other estimates include fair value measurements,

valuation of servicing assets, and deferred tax asset valuation.

Cash Equivalents

Company defines cash and cash equivalents as cash, due from financial institutions, interest-bearing deposits in banks with short term

original maturities, and federal funds sold.

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.

These estimates and assumptions affect the amounts reported in the

consolidated financial statements and the disclosures provided, and actual results could differ.

The allowance for loan losses is the most significant accounting estimate reflected in the Company’s consolidated financial statements.

Other estimates include fair value measurements, valuation of servicing assets, and deferred tax asset valuation.

Cash and Cash Equivalents

The Company defines cash and cash equivalents as cash, due from financial institutions, interest-bearing deposits in banks with short term original maturities, and federal funds sold.

Generally, federal funds are sold for one-day periods, if at all.

At times throughout the

year, balances can exceed FDIC insurance limits.

The Company has not experienced any historical losses associated with balances maintained

with financial institutions in excess of FDIC insurance limits, and management continues to monitor the financial condition of the major

financial institutions where these funds are held.

Available-for-Sale

Available-for-sale

securities consist of bonds, notes, and debentures not classified as trading securities or held-to-maturity securities.

are classified as available-for-sale if the Company intends and has the ability to hold those securities for a period of time,

but not necessarily to maturity.

Any decision to sell a security classified as available-for-sale would be based on various factors,

including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory

capital considerations, and other similar factors.

At times throughout the year, balances can exceed FDIC insurance limits.

The Company has not experienced any historical losses associated with balances maintained with financial institutions in excess of FDIC insurance limits, and management continues to monitor the financial condition of the major financial institutions where these funds are held.

Securities Available-for-Sale

Available-for-sale securities consist of bonds, notes, and debentures not classified as trading securities or held-to-maturity securities.

Securities are classified as available-for-sale if the Company intends and has the ability to hold those securities for a period of time, but not necessarily to maturity.

Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors.

Securities available-for-sale are carried at fair value.

Unrealized holding

gains or losses are included in other comprehensive income as a separate component of shareholders’ equity, net of tax.

Unrealized holding gains or losses are included in other comprehensive income as a separate component of shareholders’ equity, net of tax.

Realized gains or losses, determined based on the cost of specific securities sold, are included in earnings.

Premiums are amortized

over the life of the security, or if a callable bond, over the earliest call date, and discounts are accreted over the life of

the related investment security as an adjustment to interest income using the effective interest method.

Interest income is recognized

with fair values that are less than amortized cost are considered impaired.

Impairment may result from either a decline in the

financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates, or both.

At each consolidated financial statement date, management assesses each investment to determine if impaired investments are temporarily

impaired or if the impairment is other-than-temporary.

Various factors are considered in the assessment, including the nature

of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings, and other credit-related

factors such as third-party guarantees and volatility of the security’s fair value.

This assessment also includes a determination

as to whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to

sell the security before recovery of its amortized cost basis less any current-period credit losses.

If the Company intends to

sell a security or if it is more likely than not that the Company will be required to sell the security before recovery, an other-than-temporary

impairment (“OTTI”) write-down is recognized in earnings equal to the entire difference between the security’s

amortized cost basis and its fair value.

For debt securities that are considered to be OTTI and that the Company does not intend

to sell and will not be required to sell prior to recovery of the amortized cost basis, the amount of impairment is separated

into the amount that is credit-related (credit loss component) and the amount due to all other factors.

The credit loss component

is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the present

value of its expected future cash flows.

The remaining difference between the security’s fair value and the present value

of the future expected cash flows is deemed to be due to factors that are not credit-related and is recognized in other comprehensive

Held-to-Maturity

Securities are

classified as held-to-maturity if the Company has both the intent and ability to hold those securities to maturity regardless

of changes in market conditions, liquidity needs, or changes in general economic conditions.

These securities are carried at cost

adjusted for amortization of premium to the earliest callable call date and accretion of discount, computed by the effective interest

method over the life of the related investment.

Allowance for Loan Losses

Loans are reported

at the principal amount outstanding, net of deferred loan fees and costs and the allowance for loan losses.

Interest on loans

is accrued daily based on the principal outstanding.

Loan fees, net

of certain direct costs of origination, are deferred and recognized in interest income using the level-yield method without anticipating

During the years ended December 31, 2021 and 2020, salaries and employee benefits totaling $ 5,198,000 and $ 3,194,000 ,

respectively, were deferred as loan origination costs.

Loans on which

the accrual of interest has been discontinued are designated as non-accrual loans.

Accrual of interest on loans is discontinued

either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually

past due by 90 days or more with respect to interest or principal.

When a loan is placed on non-accrual status, all interest previously

accrued, but not collected, is reversed against current period interest income.

Income on such loans is then recognized only to

the extent that cash is received and where the future collection of principal is probable.

Interest accruals are resumed on such

loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management,

the loans are estimated to be fully collectible as to both principal and interest.

The allowance

for loan losses represents the estimated probable incurred loan losses in the Company’s loan portfolio.

The allowance for

loan losses is established through a provision for loan losses charged to operations.

Loans are charged against the allowance

for loan losses when management believes that the collectability of the principal is unlikely.

Subsequent recoveries of previously

charged off amounts, if any, are credited to the allowance for loan losses.

The allowance

for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability

of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect

the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information

becomes available.

Premiums are amortized over the life of the security or, if a callable bond, over the earliest call date, and discounts are accreted over the life of the related investment security as an adjustment to interest income using the effective interest method.

Interest income is recognized when earned.

Investments with fair values that are less than amortized cost are considered impaired.

Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates, or both.

At each consolidated financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other-than-temporary.

Various factors are considered in the assessment, including the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings, and other credit-related factors such as third-party guarantees and volatility of the security’s fair value.

This assessment also includes a determination as to whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses.

If the Company intends to sell a security or if it is more likely than not that the Company will be required to sell the security before recovery, an other-than-temporary impairment (“OTTI”) write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value.

For debt securities that are considered to be OTTI and that the Company does not intend to sell and will not be required to sell prior to recovery of the amortized cost basis, the amount of impairment is separated into the amount that is credit-related (credit loss component) and the amount due to all other factors.

The credit loss component is recognized in earnings and is calculated as the difference between the security’s amortized cost basis and the present value of its expected future cash flows.

The remaining difference between the security’s fair value and the present value of the future expected cash flows is deemed to be due to factors that are not credit-related and is recognized in other comprehensive income.

Securities Held-to-Maturity

Securities are classified as held-to-maturity if the Company has both the intent and ability to hold those securities to maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions.

These securities are carried at cost adjusted for amortization of premium to the earliest callable call date and accretion of discount, computed by the effective interest method over the life of the related investment.

Loans and Allowance for Loan Losses

Loans are reported at the principal amount outstanding, net of deferred loan fees and costs and the allowance for loan losses.

Interest on loans is accrued daily based on the principal outstanding.

Loan fees, net of certain direct costs of origination, are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

During the years ended December 31, 2022 and 2021, salaries and employee benefits totaling $ 6,155,000 and $ 5,198,000 , respectively, were deferred as loan origination costs.

Loans on which the accrual of interest has been discontinued are designated as non-accrual loans.

Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal.

When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income.

Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable.

Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

The allowance for loan losses represents the estimated probable incurred loan losses in the Company’s loan portfolio.

The allowance for loan losses is established through a provision for loan losses charged to operations.

Loans are charged against the allowance for loan losses when management believes that the collectability of the principal is unlikely.

Subsequent recoveries of previously charged-off amounts, if any, are credited to the allowance for loan losses.

The allowance for loan losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions.

This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

The Audit Committee of the board of directors reviews the adequacy of the allowance at least quarterly.

The allowance

The allowance consists of:

(i) specific allowances for individually identified impaired loans (ASC 310-10, Receivables );

allowances for pools of loans (ASC 450-20, Contingencies – Loss Contingencies ), which incorporate quantitative (e.g.,

historical loan loss rates) and qualitative risk factors (e.g., portfolio growth and trends, credit concentrations, economic and

regulatory factors, etc.);

(ii) general allowances for pools of loans (ASC 450-20, Contingencies – Loss Contingencies ), which incorporate quantitative (e.g., historical loan loss rates) and qualitative risk factors (e.g., portfolio growth and trends, credit concentrations, economic and regulatory factors, etc.);

and (iii) unallocated allowances, if any.

The first component,

specific allowances, results from the analysis of identified problem credits and the evaluation of sources of repayment, including

collateral, as applicable.

Through management’s ongoing credit monitoring process, individual loans are identified that

have conditions indicating the borrower may be unable to pay all amounts due in accordance with contractual terms.

are evaluated for impairment individually by management.

Management considers an originated loan to be impaired when it is probable

that collection of all amounts due according to the contractual terms of the loan agreement is unlikely.

Loans that experience

insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance

of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the facts and circumstances

surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior

payment record, and the amount of the shortfall in relation to the principal and interest owed.

Interest income is recognized

on impaired loans in the same manner as non-accrual loans.

When the fair

value of the impaired loan is less than the recorded investment in the loan, the difference is recorded as an impairment through

the establishment of a specific allowance.

For loans determined to be impaired, the extent of the impairment is measured based

on the present value of expected future cash flows discounted at the loan’s effective interest rate at origination, based

on the loan’s observable market price, or based on the fair value of the collateral if the loan is collateral dependent

or if foreclosure is imminent.

Generally, with problem credits that are collateral dependent, management obtains appraisals of

the collateral at least annually.

Appraisals may be obtained more frequently if management believes the collateral value is subject

to market volatility, if a specific event has occurred to the collateral, or if the Company believes foreclosure is imminent.

The second component,

general allowances, is an estimate of the probable inherent losses in each loan pool with similar risk characteristics.

This analysis

encompasses the entire loan portfolio, excluding individually identified impaired loans.

The model determines general allowances

by loan segment based on quantitative (loss history) and qualitative risk factors.

The third component,

unallocated allowances, is maintained to cover other uncertainties that could affect management’s estimate of probable losses.

The unallocated allowances reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies

for estimating specific and general losses in the portfolio.

While management believes the best information available is used

to determine the allowance for loan losses, the results of operations could be significantly affected if circumstances differ

substantially from the assumptions used in determining the allowance.

A decline in local and national economic conditions, or

significant changes in other assumptions, could result in a material increase in the allowance for loan losses and may adversely

affect the Company’s financial condition and results of operations.

While the Company believes the estimates and assumptions

used in the determination of the adequacy of the allowance for loan losses are reasonable, there can be no assurance that such

estimates and assumptions will not be proved incorrect in the future, that the actual amounts of future provisions will not exceed

the amounts of past provisions, or that any increased provisions that may be required will not adversely impact the financial

condition and results of operations of the Company.

considers a loan to be a troubled debt restructure (“TDR”) when the Company has granted a concession and the borrower

is experiencing financial difficulty.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation

is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without

the modification.

The first component, specific allowances, results from the analysis of identified problem credits and the evaluation of sources of repayment, including collateral, as applicable.

Through management’s ongoing credit monitoring process, individual loans are identified that have conditions indicating the borrower may be unable to pay all amounts due in accordance with contractual terms.

These loans are evaluated for impairment individually by management.

Management considers an originated loan to be impaired when it is probable that collection of all amounts due according to the contractual terms of the loan agreement is unlikely.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the facts and circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Interest income is recognized on impaired loans in the same manner as non-accrual loans.

When the fair value of the impaired loan is less than the recorded investment in the loan, the difference is recorded as an impairment through the establishment of a specific allowance.

For loans determined to be impaired, the extent of the impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate at origination, based on the loan’s observable market price, or based on the fair value of the collateral if the loan is collateral dependent or if foreclosure is imminent.

Generally, with problem credits that are collateral dependent, management obtains appraisals of the collateral at least annually.

Appraisals may be obtained more frequently if management believes the collateral value is subject to market volatility, if a specific event has occurred to the collateral, or if the Company believes foreclosure is imminent.

The second component, general allowances, is an estimate of the probable inherent losses in each loan pool with similar risk characteristics.

This analysis encompasses the entire loan portfolio, excluding individually identified impaired loans.

The model determines general allowances by loan segment based on quantitative (loss history) and qualitative risk factors.

The third component, unallocated allowances, is maintained to cover other uncertainties that could affect management’s estimate of probable losses.

The unallocated allowances reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

While management believes the best information available is used to determine the allowance for loan losses, the results of operations could be significantly affected if circumstances differ substantially from the assumptions used in determining the allowance.

A decline in local and national economic conditions, or significant changes in other assumptions, could result in a material increase in the allowance for loan losses and may adversely affect the Company’s financial condition and results of

While the Company believes the estimates and assumptions used in the determination of the adequacy of the allowance for loan losses are reasonable, there can be no assurance that such estimates and assumptions will not be proved incorrect in the future, that the actual amounts of future provisions will not exceed the amounts of past provisions, or that any increased provisions that may be required will not adversely impact the financial condition and results of operations of the Company.

The Company considers a loan to be a troubled debt restructure (“TDR”) when the Company has granted a concession and the borrower is experiencing financial difficulty.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification.

This evaluation is performed under the Company’s internal underwriting policy.

A TDR loan generally is

kept on non-accrual status until, among other criteria, the borrower has paid for six consecutive months with no payment defaults,

at which time the TDR may be placed back on accrual status.

In conjunction

with the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as well as the revised interagency

guidance issued in April 2020, the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions

Working With Customers Affected by the Coronavirus (Revised),” banks have been provided the option, for loans meeting specific

criteria, to temporarily suspend certain requirements under GAAP related to TDRs for a limited time to account for the effects

A TDR loan is generally kept on non-accrual status until, among other criteria, the borrower has paid for six consecutive months with no payment defaults, at which time the TDR may be placed back on accrual status.

When a loan is modified, it is measured based upon the present value of future cash flows discounted at the effective interest rate of the original loan agreement or the fair value of collateral less selling costs if the loan is collateral dependent.

If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off of the loan.

In conjunction with the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as well as the revised interagency guidance issued in April 2020, the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised),” banks have been provided the option, for loans meeting specific criteria, to temporarily suspend certain requirements under GAAP related to TDRs for a limited time to account for the effects of COVID-19.

As a result, the Company has not recognized eligible COVID-19 loan modifications as TDRs.

The CARES Act, as amended

by the Consolidated Appropriations Act, specified that COVID-19 related loan modifications executed between March 1, 2020 and

the earlier of:

The CARES Act, as amended by the Consolidated Appropriations Act, specified that COVID-19-related loan modifications executed between March 1, 2020 and the earlier of:

(i) 60 days after the date of termination of the national emergency declared by the President;

and (ii) January

1, 2022, on loans that were current as of December 31, 2019 are not TDRs.

Additionally, loans qualifying for these modifications

are not required to be reported as delinquent, non-accrual, impaired, or criticized solely as a result of a COVID-19 loan modification.

Loan Bank Stock

Loan Bank stock represents the Company’s investment in the stock of the Federal Home Loan Bank of San Francisco (“FHLB”)

and is carried at par value.

While technically these are considered equity securities, there is no market for the FHLB stock.

and (ii) January 1, 2022, on loans that were current as of December 31, 2019 are not TDRs.

Additionally, loans qualifying for these modifications are not required to be reported as delinquent, non-accrual, impaired, or criticized solely as a result of a COVID-19-related loan modification.

Federal Home Loan Bank Stock

Federal Home Loan Bank stock represents the Company’s investment in the stock of the Federal Home Loan Bank of San Francisco (“FHLB”) and is carried at par value.

While technically these are considered equity securities, there is no market for FHLB stock.

Therefore, the shares are considered as other investment securities.

Management periodically

evaluates FHLB stock for OTTI.

Management’s determination of whether these investments are impaired is based on its assessment

of the ultimate recoverability of cost rather than by recognizing temporary declines in value.

The determination of whether a

decline affects the ultimate recoverability of cost is influenced by criteria such as:

(i) the significance of any decline in

net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted;

(ii) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the

operating performance of the FHLB;

(iii) the impact of legislative and regulatory changes on institutions and, accordingly, the

customer base of the FHLB;

Management periodically evaluates FHLB stock for OTTI.

Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value.

The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as:

(i) the significance of any decline in net assets of the FHLB, as compared to the capital stock amount for the FHLB and the length of time this situation has persisted;

(ii) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB;

(iii) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB;

and (iv) the liquidity position of the FHLB.

Both cash and stock dividends are reported as non-interest

and Equipment

equipment are stated at cost less accumulated depreciation and amortization.

Depreciation and amortization are provided for in

amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using a straight-line

Both cash and stock dividends are reported as non-interest income.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization.

Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using a straight-line basis.

The normal estimated lives used in determining depreciation are as follows:

of Useful Life of Premises and Equipment

Leasehold improvements

are amortized over the lesser of the useful life of the asset or the remaining term of the lease.

The straight-line method of

depreciation is followed for all assets for financial reporting purposes, but accelerated methods are used for tax purposes.

are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts,

and any resulting gain or loss is recognized in income for the period.

The cost of maintenance and repairs is charged to expense

estate properties acquired through, or in lieu of, loan foreclosure, are classified as other real estate owned (OREO),

are to be sold and are initially recorded at fair value of the property at the date of foreclosure less estimated selling costs.

write-downs in value are recorded against the allowance for loan losses.

Subsequent to foreclosure, valuations are periodically performed,

and any revisions in the estimate of fair value are reported as adjustments to the carrying value of the real estate, provided the adjusted

carrying amount does not exceed the original amount at foreclosure.

Equipment 3 - 12 years

Furniture and fixtures 5 - 10 years

Leasehold improvements 5 - 15 years

Automobiles 3 - 5 years

Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining term of the lease.

The straight-line method of depreciation is followed for all assets for financial reporting purposes, but accelerated methods are used for tax purposes.

When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period.

The cost of maintenance and repairs is charged to expense as incurred.

Other Real Estate

Real estate properties acquired through, or in lieu of, loan foreclosure, are classified as other real estate owned (“OREO”), are to be sold, and are initially recorded at fair value of the property at the date of foreclosure less estimated selling costs.

Any write-downs in value are recorded against the allowance for loan losses.

Subsequent to foreclosure, valuations are periodically performed, and any revisions in the estimate of fair value are reported as adjustments to the carrying value of the real estate, provided the adjusted carrying amount does not exceed the original amount at foreclosure.

Subsequent valuation adjustments are recognized as OREO write-downs.

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During 2022 and 2021, the Bank did not foreclose on any loans.

BOLI is recorded

at the amount that can be realized under the insurance contract at the consolidated balance sheet date, which is the cash surrender

value adjusted for other charges or other amounts due that are probable at settlement.

Increases in contract value are recorded

as non-interest income, and insurance proceeds received are recorded as a reduction of the contract value.

Premises, equipment,

and other long-term assets are reviewed for impairment when events indicate that their carrying amount may not be recoverable

from future undiscounted cash flows.

BOLI is recorded at the amount that can be realized under the insurance contract at the consolidated balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement.

Increases in contract value are recorded as non-interest income, and insurance proceeds received are recorded as a reduction of the contract value.

Long-Term Assets

Premises, equipment, and other long-term assets are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows.

If impaired, the assets are adjusted to reflect their fair value.

Equity Investments

Equity investments

with readily determinable fair values are carried at fair value, with changes in fair value reported in net income.

The Company records an ROUA on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration.

The Company records a lease liability on the consolidated balance sheets for the present value of future payment commitments.

All of the Company’s leases are comprised of operating leases in which the Company is the lessee of real estate property for branches and operations.

The Company elected not to include short-term leases (i.e., leases with initial terms of 12 months or less) within the ROUA and lease liability.

Equity Investments

without readily determinable fair values are carried at cost, less impairment, if any, and adjusted for changes resulting from

observable price changes in orderly transactions for the identical or similar investment.

Loss Contingencies

Equity investments with readily determinable fair values are carried at fair value, with changes in fair value reported in net income.

Equity investments without readily determinable fair values are carried at cost, less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for the identical or similar investment.

Loss Contingencies

including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood

of loss is probable, and an amount or range of loss can be reasonably estimated.

of Financial Assets

an entire financial asset, a group of financial assets, or a participating interest in an entire financial asset, are accounted

for as sales when control has been relinquished.

Control is deemed to be surrendered when the assets have been isolated from the

Company, the transferee obtains the right (free of more than trivial conditions that constrain it from taking advantage of that

right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred

assets through an agreement to repurchase them before their maturity.

the loan portfolio are loans guaranteed by the Small Business Administration (“SBA”), the Farm Service Agency (“FSA”),

the Federal Agriculture Mortgage Corporation (“Farmer Mac”) and the United States Department of Agriculture (“USDA”),

of which the guaranteed portion is expected to be sold in the secondary market in exchange for a one-time premium.

the guaranteed portion of the loan is sold, the unguaranteed portion and related right to service the entire loan is retained

with the Company, to earn future servicing income.

The loans held for sale are accounted for at the lower of cost or fair value,

using the aggregate method.

Government guaranteed loans held for sale totaled $ 10,671,000 and $ 4,820,000 at December 31, 2021

and 2020, respectively.

rights acquired through the origination of loans, which are subsequently sold with servicing rights retained, are recognized as separate

assets or liabilities.

Servicing assets and liabilities are initially recorded at fair value and are subsequently amortized in proportion

to, and over the period of, the related net servicing income or expense.

The amortized assets are assessed for impairment or increased

obligations at the loan level, based on the fair value on a periodic basis.

Loan Commitments

and Related Financial Instruments

Financial instruments

include off-balance-sheet credit instruments, such as commitments to make loans, and financial standby letters of credit issued

to meet customer financing needs.

The face amount for these items represents the exposure to loss, before considering customer

collateral or ability to repay.

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Transfers of Financial Assets

Transfers of an entire financial asset, a group of financial assets, or a participating interest in an entire financial asset are accounted for as sales when control has been relinquished.

Control is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of more than trivial conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Included in the loan portfolio are loans guaranteed by the Small Business Administration (the “SBA”), the Farm Service Agency, the Federal Agriculture Mortgage Corporation, and the United States Department of Agriculture, of which the guaranteed portion is expected to be sold in the secondary market in exchange for a one-time premium.

At the time the guaranteed portion of the loan is sold, the unguaranteed portion and related right to service the entire loan is retained with the Company, to earn future servicing income.

The loans held for sale are accounted for at the lower of cost or fair value, using the aggregate method.

Government-guaranteed loans held for sale totaled $ 9,416,000 and $ 10,671,000 at December 31, 2022 and 2021, respectively.

Servicing rights acquired through the origination of loans, which are subsequently sold with servicing rights retained, are recognized as separate assets or liabilities.

Servicing assets and liabilities are initially recorded at fair value and are subsequently amortized in proportion to, and over the period of, the related net servicing income or expense.

The amortized assets are assessed for impairment or increased obligations at the loan level, based on the fair value on a periodic basis.

Loan Commitments and Related Financial Instruments

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and financial standby letters of credit issued to meet customer financing needs.

The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay.

Such financial instruments are recorded when they are funded.

records an allowance for loan losses on unfunded loan commitments at the consolidated balance sheet date based on estimates of

the probability that these commitments will be drawn upon according to historical utilization experience of the different types

of commitments and historical loss rates determined for pooled funded loans.

Reserves for unfunded commitments are included as

a component of Interest payable and other liabilities on the consolidated balance sheets.

cost is recognized for stock options and restricted stock awards (“RSAs”) issued to executives, directors, and employees,

based on the fair value of these awards at the date of grant.

A Black-Scholes model is utilized to estimate the grant date fair

value of stock options, while the fair value of the Company’s common stock at the date of grant is used for RSAs.

cost is recognized over the required service period, generally defined as the vesting period.

For awards with graded vesting,

compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Executive Retirement Plan

entered into a non-qualified retirement plan for the Chief Executive Officer based on a continuation of employment.

value of annual post-retirement payments is allocated to expense over the years of required service.

has historically elected to be taxed for U.

The Company records an allowance for loan losses on unfunded loan commitments at the consolidated balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and historical loss rates determined for pooled funded loans.

Reserves for unfunded commitments are included as a component of Interest payable and other liabilities on the consolidated balance sheets.

Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards (“RSAs”) issued to executives, directors, and employees, based on the fair value of these awards at the date of grant.

A Black-Scholes model is utilized to estimate the grant date fair value of stock options, while the fair value of the Company’s common stock at the date of grant is used for RSAs.

Compensation cost is recognized over the required service period, generally defined as the vesting period.

For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Supplemental Executive Retirement Plan

The Bank has entered into a non-qualified retirement plan for the Chief Executive Officer based on a continuation of employment.

The present value of annual post-retirement payments is allocated to expense over the years of required service.

The Company has historically elected to be taxed for U.

federal income tax purposes as an S Corporation.

In conjunction with the IPO, the

Company filed consents from the requisite amount of shareholders to revoke its S Corporation election with the Internal Revenue

Service (the “IRS”), resulting in the commencement of taxation as a C Corporation for U.S.

federal and California

state income tax purposes in the second quarter of fiscal year 2021.

Upon termination of the Company’s S Corporation status,

the Company commenced paying U.S.

federal income tax and a higher California state income tax on taxable earnings for each year

(including the short year beginning on the date the Company’s status as an S Corporation terminated).

of the termination of S Corporation status, deferred tax assets and liabilities were recognized for the future tax consequences

attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective

Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in

which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of

the change in tax rates resulting from becoming a C Corporation was recognized in net income in the year ended December 31, 2021.

files its income taxes on a consolidated basis with its subsidiary.

The allocation of income tax expense represents each entity’s

proportionate share of the consolidated provision for income taxes.

Income tax expense

is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax

bases of assets and liabilities computed using enacted tax rates.

A valuation allowance, if needed, reduces deferred tax assets

to the amount expected to be realized.

accounts for uncertain tax positions in accordance with FASB ASC Topic No.

In conjunction with the IPO, the Company filed consents from the requisite amount of shareholders to revoke its S Corporation election with the Internal Revenue Service (the “IRS”), resulting in the commencement of taxation as a C Corporation for U.S.

federal and California state income tax purposes in the second quarter of fiscal year 2021.

Upon termination of the Company’s S Corporation status, the Company commenced paying U.S.

federal income tax and a higher California state income tax on taxable earnings for each year (including the short year beginning on the date the Company’s status as an S Corporation terminated).

As a result of the termination of S Corporation status, deferred tax assets and liabilities were recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.

Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C Corporation was recognized in net income in the year ended December 31, 2022.

The Company files its income taxes on a consolidated basis with its subsidiary.

The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes.

Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities.

Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities computed using enacted tax rates.

A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

The Company accounts for uncertain tax positions in accordance with FASB ASC Topic No.

740, Accounting for Uncertainty in Income Taxes .

tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained

in a tax examination, with a tax examination being presumed to occur.

The amount recognized is the largest amount of tax benefit

that has a likelihood greater than 50% of being realized on examination.

For tax positions not meeting the “more likely

than not” test, no tax benefit is recorded.

All derivative

instruments are recorded at fair value.

If derivative instruments are designated as hedges of fair values, both the change in

the fair value of the hedge and the hedged item are included in current earnings.

Fair value adjustments related to cash flow

hedges, if any, are recorded in other comprehensive income or loss and reclassified to earnings when the hedged transaction is

reflected in earnings.

Comprehensive

Income or Loss

Comprehensive

income or loss consists of net income and other comprehensive income or loss.

Other comprehensive income or loss includes unrealized

gains and losses on securities available-for-sale, net of tax, which are also recognized as separate components of shareholders’

Per Share (“EPS”)

net income divided by the weighted average number of common shares outstanding during the period less average unvested RSAs.

EPS includes the dilutive effect of additional potential common shares related to unvested RSAs using the treasury stock method.

A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur.

The amount recognized is the largest amount of tax benefit that has a likelihood greater than 50% of being realized on examination.

For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

All derivative instruments are recorded at fair value.

If derivative instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings.

Fair value adjustments related to cash flow hedges, if any, are recorded in other comprehensive income or loss and reclassified to earnings when the hedged transaction is reflected in earnings.

Comprehensive Income or Loss

Comprehensive income or loss consists of net income and other comprehensive income or loss.

Other comprehensive income or loss includes unrealized gains and losses on securities available-for-sale, net of tax, which are also recognized as separate components of shareholders’ equity.

Earnings Per Common Share (“EPS”)

Basic EPS is net income divided by the weighted average number of common shares outstanding during the period less average unvested RSAs.

Diluted EPS includes the dilutive effect of additional potential common shares related to unvested RSAs using the treasury stock method.

During the years ended December 31, 2022 and 2021, there were no outstanding stock options.

The Company has two forms of outstanding

common stock:

The Company has two forms of outstanding common stock:

common stock and unvested RSAs.

Following the Company’s IPO, holders of unvested RSAs receive non-forfeitable

dividends at the same rate as common shareholders and they both share equally in undistributed earnings;

therefore the RSAs are

considered participating securities.

However, under the two-class method, the difference in EPS is not significant for these participating

of Earning Per Share

Following the Company’s IPO, holders of unvested RSAs receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings;

therefore the RSAs are considered participating securities.

However, under the two-class method, the difference in EPS is not significant for these participating securities.

(in thousands, except share and per share data) 2022 2021

Net income $ 44,801 $ 42,441

Weighted average basic common shares outstanding 17,128,282 14,972,637

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Income per common share:

Anti-dilutive

shares, which are excluded from the dilutive EPS calculation, were deemed to be immaterial.

ended December 31, 2020, pro forma EPS is calculated by applying a C Corporation effective tax rate of 29.56% to net income before

provision for income taxes and using the determined pro forma net income balance to calculate EPS.

For the year ended December

31, 2021, pro forma EPS is calculated by applying an effective tax rate of 19.80%, which is the actual effective tax rate, excluding

the effects of the discrete deferred tax adjustment of $4,638,000, as discussed in Note 11, Income Taxes.

The following reconciliation

table provides a detailed calculation of pro forma EPS:

Schedule of Pro forma Earning Per Share

Basic EPS $ 2.61 $ 2.83

Diluted EPS $ 2.61 $ 2.83

Anti-dilutive shares, which are excluded from the dilutive EPS calculation, were deemed to be immaterial.

For the year ended December 31, 2021, pro forma EPS is calculated by applying an effective tax rate of 19.80 %, which is the actual effective tax rate, excluding the effects of the discrete deferred tax adjustment of $ 4,638,000 , as discussed in Note 11, Income Taxes.

For the year ended December 31, 2022, pro forma EPS is actual EPS, given that the Company was

a C Corporation for the entirety of the year.

The following reconciliation table provides a detailed calculation of pro forma EPS:

(in thousands, except share and per share data) 2022 2021

6 unchanged sentences

Income per common share:

The subordinated

notes are recorded at par with related debt issuance costs reported as a direct reduction from the carrying amount.

Issuance costs

are amortized over the remaining maturity of the notes and reflected in interest expense.

Value of Financial Instruments

The consolidated

financial statements include various estimated fair value information as of December 31, 2021 and 2020.

Such information, which

pertains to the Company’s financial instruments, does not purport to represent the aggregate net fair value of the Company.

Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely

among different financial institutions, and are subject to change.

Value Measurements

uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

The Company bases the fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date.

Securities available-for-sale, and derivatives, if any, are recorded

at fair value on a recurring basis.

Additionally,

from time to time, the Company may be required to record certain assets at fair value on a non-recurring basis, such as loans

held for sale, certain collateral dependent impaired loans held for investment and held-to-maturity securities that are other-than-temporarily

These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of

lower of cost or fair value accounting.

Accounting standards

require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Basic EPS $ 2.61 $ 2.53

Diluted EPS $ 2.61 $ 2.52

Subordinated Notes

The subordinated notes are recorded at par with related debt issuance costs reported as a direct reduction from the carrying amount.

Issuance costs are amortized over the remaining maturity of the notes and reflected in interest expense.

Fair Value of Financial Instruments

The consolidated financial statements include various estimated fair value information as of December 31, 2022 and 2021.

Such information, which pertains to the Company’s financial instruments, does not purport to represent the aggregate net fair value of the Company.

Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions, and are subject to change.

Fair Value Measurements

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.

The Company bases the fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Securities available-for-sale and derivatives, if any, are recorded at fair value on a recurring basis.

Additionally, from time to time, the Company may be required to record certain assets at fair value on a non-recurring basis, such as loans held for sale, certain collateral dependent impaired loans held for investment, and held-to-maturity securities that are other-than-temporarily impaired.

These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower of cost or fair value accounting.

Accounting standards require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access

as of the measurement date.

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities,

quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market

Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants

would use in pricing an asset or liability.

The fair values

of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix

pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on

quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted

securities (Level 2 inputs).

a result, if other assumptions had been used, the Companys recorded earnings or disclosures could have been materially different

from those reflected in these consolidated financial statements.

Company has evaluated events and transactions subsequent to December 31, 2021 for recognition or disclosure.

Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

As a result, if other assumptions had been used, the Company’s recorded earnings or disclosures could have been materially different from those reflected in these consolidated financial statements.

Subsequent Events

The Company has evaluated events and transactions subsequent to December 31, 2022 for recognition or disclosure.

Additional detail can be found in Note 19, Subsequent Events.

Reclassifications

Certain amounts reported in previous

consolidated financial statements have been reclassified to conform to current year presentation.

These reclassifications did

not affect previously reported amounts of net income, total assets, or total shareholders’ equity.

Recently Issued Accounting

The following

reflect recent accounting standards that are pending adoption by the Company.

As discussed in Note 1, Basis of Presentation, the

Company qualifies as an emerging growth company, and as such, has elected to use the extended transition period for complying

with new or revised accounting standards and is not subject to the new or revised accounting standards applicable to public companies

during the extended transition period.

The accounting standards discussed below reflect effective dates for the Company as an

emerging growth company with the extended transition period.

Standards Not Yet Adopted

February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842) .

The amendments in this ASU intend to increase transparency

and comparability among organizations by recognizing an asset, which represents the right to use the asset for the lease term, and a

lease liability, which is a lessees obligation to make lease payments measured on a discounted basis.

This ASU generally applies

to leasing arrangements exceeding a twelve-month term.

As amended by ASU 2020-05, Revenue from Contracts with Customers (Topic 606)

and Leases (Topic 842):

Effective Dates for Certain Entities, ASU 2016-02 is effective for annual periods, including interim periods

within those annual periods beginning after December 15, 2021 and requires a modified retrospective method of adoption.

2018, the FASB issued two amendments to ASU 2016-02:

2018-10, Codification Improvements to Topic 842, Leases , which

provides various corrections and clarifications to ASU 2016-02;

2018-11, Leases (Topic 842):

Targeted Improvements ,

which provides a new optional transition method and provides a lessor with practical expedients for separating lease and non-lease components

In July 2021, the FASB issued ASU No.

2021-05, Leases (Topic 842):

Lessors- Certain Leases with Variable Lease Payments ,

which amends ASU 2016-02 and requires a lessor to classify a lease with variable lease payments that do not depend on an index or rate

as an operating lease on the commencement date of the lease if specified criteria are met.

Entities will apply a modified retrospective

approach at either the beginning of the earliest period presented or at the beginning of the period of adoption through a cumulative-effect

adjustment to retained earnings.

The Company estimates that the adoption of this standard will result in an increase in assets of approximately

$5,200,000, with a corresponding increase in liabilities, to recognize the present value of its lease obligations in accordance with

the standard.

The Company does not expect this to have a material impact on the Companys results of operations or cash flows.

In June 2016,

the FASB issued ASU No.

Certain amounts reported in previous consolidated financial statements have been reclassified to conform to current year presentation.

These reclassifications did not affect previously reported amounts of net income, total assets, or total shareholders’ equity.

Recently Issued Accounting Standards

The following reflect recent accounting standards that have been adopted or are pending adoption by the Company.

As discussed in Note 1, Basis of Presentation, the Company qualifies as an emerging growth company, and as such, has elected to use the extended transition period for complying with new or revised accounting standards and is not subject to the new or revised accounting standards applicable to public companies during the extended transition period.

The accounting standards discussed below indicate effective dates for the Company as an emerging growth company with the extended transition period.

On January 1, 2023, the Company adopted ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses

on Financial Instruments .

The standard will replace the “incurred loss” model with a “current expected credit

loss” (“CECL”) model.

The CECL model will apply to estimated credit losses on loans receivable, held-to-maturity

debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost.

The CECL model is based

on lifetime expected losses, rather than incurred losses, and requires the recognition of credit loss expense in the consolidated

statement of income and a related allowance for credit losses on the consolidated statement of condition at the time of origination

or purchase of a loan receivable or held-to-maturity debt security.

Likewise, subsequent changes in this estimate are recorded

through credit loss expense and related allowance.

The CECL model requires the use of not only relevant historical experience

and current conditions, but reasonable and supportable forecasts of future events and circumstances, incorporating a broad range

of information in developing credit loss estimates, which could result in significant changes to both the timing and amount of

credit loss expense and allowance.

Under ASU 2016-13, available-for-sale debt securities are evaluated for impairment if fair

value is less than amortized cost, with any estimated credit losses recorded through a credit loss expense and an allowance, rather

than a write-down of the investment.

Changes in fair value that are not credit-related will continue to be recorded in other comprehensive

The ASU also expands the disclosure requirements regarding assumptions, models, and methods for estimating the allowance

for loan losses.

In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit

quality indicator, disaggregated by the year of origination.

ASU 2016-13 is effective for the Company for fiscal years beginning

after December 15, 2022, including interim periods within those fiscal years.

Entities will apply a modified retrospective approach

through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance

is effective.

While the Company believes the change from an incurred loss model to a CECL model has the potential to increase

the allowance for loan losses at the adoption date, the Company cannot reasonably quantify the impact of the adoption of the amendments

to its financial condition or results of operations at this time due to the complexity and extensive changes resulting from these

The Company is working with its third-party vendor to identify data gaps and determine the appropriate methodologies

and resources to utilize in preparation for its transition to the new accounting standard, including but not limited to the use

of certain tools to forecast future economic conditions that affect the cash flows of loans over their lifetime.

In August 2017,

the FASB issued ASU No.

2017-12, Derivatives and Hedging (Topic 815):

Targeted Improvements to Accounting for Hedging Activities.

The primary objective of the amendments in this update is to simplify the application of hedge accounting.

More specifically,

the amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships

through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of

hedge results.

Furthermore, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components

and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements.

Additionally, amendments in this update require an entity to present the earnings effect of the hedging instrument in the same

income statement line item in which the earnings effect of the hedged item is reported.

Hedge ineffectiveness is no longer separately

measured and reported.

The amendments in this update will be effective for fiscal years beginning after December 15, 2020 and

interim periods within fiscal years beginning after December 15, 2021.

Early adoption is permitted in any interim period.

impact of adopting this ASU is expected to be immaterial to the Company’s consolidated financial statements.

March 2020, the FASB issued ASU No.

Measurement of Credit Losses on Financial Instruments , which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model.

The CECL model will apply to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost.

Under ASU 2016-13, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost, with any estimated credit losses recorded through a credit loss expense and an allowance, rather than a write-down of the investment.

Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income.

The Company will adopt this standard using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

A prospective transition approach is required for debt securities for which an OTTI had been recognized before the effective date.

The Company currently intends to phase the impact of Topic 326 into regulatory capital over three years in accordance with a final ruling effective April 2019 adopted by the Federal Reserve and other U.S.

banking agencies.

Accounting Standards Issued But Not Yet Adopted

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848) .

The amendments in this ASU are elective and

provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of)

reference rate reform.

The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging

relationships, and other transactions that reference the London Inter-Bank Offered Rate (LIBOR) or another reference rate

expected to be discontinued because of reference rate reform.

Additionally, in January 2021, the FASB issued ASU No.

2021-01, Reference

Rate Reform (Topic 848), which refines the scope of ASC 848 and clarifies its guidance, permitting entities to elect certain optional

expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest

rates used for discounting cash flows, computing variation margin settlements, and calculating price alignment interest in connection

with reference rate reform activities under way in global financial markets.

The amendments in these ASUs may be elected as of March

12, 2020 through December 31, 2022.

LIBOR administrators have indicated that certain LIBOR settings will continue to be published through

June 30, 2023.

An entity may choose to elect the amendments in these updates at an interim period subsequent to March 12, 2020, with

adoption methods varying based on transaction type.

The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform.

The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform.

In January 2021, the FASB issued ASU No.

2021-01, Reference Rate Reform (Topic 848), which refines the scope of ASC 848 and clarifies its guidance, permitting entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and calculating price alignment interest in connection with reference rate reform activities under way in global financial markets.

The amendments in these ASUs may be elected as of March 12, 2020 through December 31, 2022.

LIBOR administrators have indicated that certain LIBOR settings will continue to be published through June 30, 2023.

An entity may choose to elect the amendments in these updates at an interim period subsequent to March 12, 2020, with adoption methods varying based on transaction type.

In December 2022, the FASB issued ASU No.

2022-06, which defers from December 31, 2022 to December 31, 2024 when an entity can no longer apply relief in Topic 848 .

This was done as the relief permitted until December 31, 2022 would not cover the period until June 30, 2023 when certain LIBOR settings would continue to be published through.

The Company has not elected to apply these amendments;

however, the Company is assessing

the applicability of the ASUs and continues to monitor guidance for reference rate reform from FASB and its impact on the Companys

consolidated financial statements.

The Company’s

investment securities portfolio includes obligations of states and political subdivisions, securities issued by U.S.

federal government

agencies such as the Government National Mortgage Association (the “GNMA”) and the SBA, and securities issued by U.S.

government-sponsored enterprises (“GSEs”), such as the Federal National Mortgage Association (the “FNMA”),

the Federal Home Loan Mortgage Corporation (the “FHLMC”), and the FHLB.

The Company also invests in residential and

commercial mortgage-backed securities, collateralized mortgage obligations issued or guaranteed by the GSEs, and corporate bonds,

as reflected in the following tables.

the amortized cost and fair value related to securities held-to-maturity as of December 31, 2021 and 2020 is presented below.

of Securities Held-To-Maturity

Gross Unrealized

(in thousands)

Amortized Cost

however, the Company is assessing the applicability of these ASUs and continues to monitor guidance for reference rate reform from the FASB and its impact on the Company’s consolidated financial statements.

Investment Securities

The Company’s investment securities portfolio includes obligations of states and political subdivisions, securities issued by U.S.

federal government agencies such as the Government National Mortgage Association (the “GNMA”) and the SBA, and securities issued by U.S.

government-sponsored enterprises (“GSEs”), such as the Federal National Mortgage Association (the “FNMA”), the Federal Home Loan Mortgage Corporation (the “FHLMC”), and the FHLB.

The Company also invests in residential and commercial mortgage-backed securities, collateralized mortgage obligations issued or guaranteed by the GSEs, and corporate bonds, as reflected in the following tables.

A summary of the amortized cost and fair value related to securities held-to-maturity as of December 31, 2022 and 2021 is presented below.

(in thousands) Amortized Cost Gross Unrealized Fair Value

Gains (Losses)

Obligations of states and political subdivisions 3,756 — ( 324 ) 3,432

2 unchanged sentences

Total held-to-maturity $ 4,946 $ 251 $ — $ 5,197

securities issued by states and political subdivisions, for OTTI purposes, management considers:

For securities issued by states and political subdivisions, for OTTI purposes, management considers:

(i) issuer and/or guarantor credit ratings;

(ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity;

(iii) whether issuers

continue to make timely principal and interest payments under the contractual terms of the securities;

(iv) internal credit review of

the financial information;

and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause,

or are pre-refunded by the issuers.

the amortized cost and fair value related to securities available-for-sale as of December 31, 2021 and 2020 is presented below.

of Securities Available-for-Sale

Gross Unrealized

(in thousands)

Amortized Cost

(iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities;

(iv) internal credit review of the financial information;

and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers.

A summary of the amortized cost and fair value related to securities available-for-sale as of December 31, 2022 and 2021 is presented below.

(in thousands) Amortized Cost Gross Unrealized Fair Value

Gains (Losses)

government agencies $ 14,317 $ 81 $ ( 225 ) $ 14,173

8 unchanged sentences

Collateralized mortgage obligations 537 3 — 540

Corporate bonds 2,000 — ( 65 ) 1,935

Total available-for-sale $ 149,610 $ 682 $ ( 1,485 ) $ 148,807

The amortized

cost and fair value of investment debt securities by contractual maturity at December 31, 2021 and 2020 are shown below.

maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations

with or without call or prepayment penalties.

of Investment Securities by Contractual Maturity

Held-to-Maturity

Available-for-Sale

Held-to-Maturity

Available-for-Sale

The amortized cost and fair value of investment debt securities by contractual maturity at December 31, 2022 and 2021 are shown below.

Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.

(in thousands) 2022 2021

Amortized Cost

Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale

Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value

Within one year $ 417 $ 381 $ 501 $ 501 $ 491 $ 516 $ — $ —

7 unchanged sentences

Corporate bonds — — 2,000 1,723 — — 2,000 1,935

Sales proceeds of investment securities

and gross realized gains and/or losses are shown in the following table:

of Investment Securities Available-for-Sale Gross Realized Gain and Losses

Total $ 3,756 $ 3,432 $ 135,087 $ 115,988 $ 4,946 $ 5,197 $ 149,610 $ 148,807

Sales proceeds of investment securities and gross realized gains and/or losses are shown in the following table:

(in thousands) 2022 2021

2 unchanged sentences

Gross realized gains 5 724

Pledged investment

securities are shown in the following table:

Pledged investment securities are shown in the following table:

(in thousands) 2022 2021

Pledged to the State of California:

Secure deposits of public funds and borrowings

Securing deposits of public funds and borrowings $ 40,465 $ 63,363

Total pledged investment securities $ 40,465 $ 63,363

The following

table details the gross unrealized losses and fair values aggregated by investment category and length of time that individual

available-for-sale securities have been in a continuous unrealized loss position at December 31, 2021 and 2020:

< 12 continuous months

≥ 12 continuous months

Total securities

The following table details the gross unrealized losses and fair values aggregated by investment category and length of time that individual available-for-sale securities have been in a continuous unrealized loss position at December 31, 2022 and 2021:

(in thousands) < 12 continuous months 12 continuous months or more Total securities

in a loss position

(in thousands)

Unrealized Loss

Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss

government agencies $ 3,090 $ ( 125 ) $ 8,392 $ ( 100 ) $ 11,482 $ ( 225 )

1 unchanged sentence

Obligations of states and political subdivisions 24,707 ( 4,097 ) 11,670 ( 2,721 ) 36,377 ( 6,818 )

Collateralized mortgage obligations 395 ( 41 ) — — 395 ( 41 )

Corporate bonds — — 1,723 ( 277 ) 1,723 ( 277 )

3 unchanged sentences

Obligations of states and political subdivisions 14,014 ( 112 ) 407 ( 8 ) 14,421 ( 120 )

Corporate bonds 1,935 ( 65 ) — — 1,935 ( 65 )

Total temporarily impaired securities $ 89,921 $ ( 1,223 ) $ 15,206 $ ( 262 ) $ 105,127 $ ( 1,485 )

There were 91

and 31 securities in unrealized loss positions at December 31, 2021 and 2020, respectively, which were all classified as available-for-sale.

As of December 31, 2021, the investment portfolio included 16 investment securities that had been in a continuous loss position

for twelve months or more and 75 investment securities that had been in a loss position for less than twelve months.

periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment

is temporary or other than temporary and has determined that no investment security is OTTI.

The unrealized losses are due primarily

to interest rate changes.

The Company does not intend, and it is more likely than not that the Company will not be required, to

sell the securities before the earlier of the forecasted recovery or the maturity of the underlying debt security.

There were no

held-to-maturity securities in a continuous loss position at December 31, 2021 or 2020.

issued or guaranteed by government agencies such as the GNMA and the SBA or GSEs under conservatorship such as the FNMA and the

FHLMC are guaranteed or sponsored by agencies of the U.S.

There were 152 and 91 available-for-sale securities in unrealized loss positions at December 31, 2022 and 2021, respectively.

As of December 31, 2022, the investment portfolio included 62 investment securities that had been in a continuous loss position for twelve months or more and 90 investment securities that had been in a loss position for less than twelve months.

The Company periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary and has determined that no investment security is OTTI.

The unrealized losses are due primarily to interest rate changes.

The Company does not intend, and it is more likely than not that the Company will not be required, to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying debt security.

There was one held-to-maturity security in a continuous unrealized loss position at December 31, 2022.

This security was in an unrealized loss position for less than twelve months.

There were no held-to-maturity securities in a continuous loss position for more than twelve months.

Obligations issued or guaranteed by government agencies such as the GNMA and the SBA or GSEs under conservatorship such as the FNMA and the FHLMC are guaranteed or sponsored by agencies of the U.S.

government and have strong credit profiles.

The Company therefore expects

to receive all contractual interest payments on time and believes the risk of credit losses on these securities is remote.

The Company’s

investment in obligations of states and political subdivisions are deemed credit worthy after management’s comprehensive

analysis of the issuers’ latest financial information, credit ratings by major credit agencies, and/or credit enhancements.

Non-Marketable

Securities Included in Other Assets

As a member of the FHLB, the Company is required to maintain a minimum investment in FHLB capital stock determined

by the board of directors of the FHLB.

The minimum investment requirements can increase in the event the Company increases its

total asset size or borrowings with the FHLB.

Shares cannot be purchased or sold except between the FHLB and its members at the

$100 per share par value.

The Company therefore expects to receive all contractual interest payments on time and believes the risk of credit losses on these securities is remote.

The Company’s investment in obligations of states and political subdivisions are deemed credit worthy after management’s comprehensive analysis of the issuers’ latest financial information, credit ratings by major credit agencies, and/or credit enhancements.

Non-Marketable Securities Included in Other Assets

FHLB capital stock :

As a member of the FHLB, the Company is required to maintain a minimum investment in FHLB capital stock determined by the board of directors of the FHLB.

The minimum investment requirements can increase in the event the Company increases its total asset size or borrowings with the FHLB.

Shares cannot be purchased or sold except between the FHLB and its members at the $ 100 per share par value.

The Company held $ 10,890,000 and $ 6,723,000 of FHLB stock at December 31, 2022 and 2021, respectively.

The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member

banks and do not have a readily determinable market value.

Based on management’s analysis of the FHLB’s financial

condition and certain qualitative factors, management determined that the FHLB stock was not impaired at December 31, 2021 and

For the years ended December 31, 2021 and 2020, cash dividends received on FHLB capital stock in the amount of $ 372,000 and

$ 321,000 , respectively, were recorded as non-interest income on the consolidated statements of income.

and Allowance for Loan Losses

The following

table presents the balance of each major product type within the Company’s portfolio as of the dates indicated.

of Loan Portfolio

The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and do not have a readily determinable market value.

Based on management’s analysis of the FHLB’s financial condition and certain qualitative factors, management determined that the FHLB stock was not impaired at December 31, 2022 and 2021.

For the years ended December 31, 2022 and 2021, cash dividends received on FHLB capital stock in the amount of $ 546,000 and $ 372,000 , respectively, were recorded as non-interest income on the consolidated statements of income.

Loans and Allowance for Loan Losses

The following table presents the balance of each major product type within the Company’s portfolio as of the dates indicated.

(in thousands) 2022 2021

Commercial $ 2,394,674 $ 1,586,232

Commercial land and development 7,477 7,376

1 unchanged sentence

Residential construction 6,693 7,388

Residential 24,230 28,562

Farmland 52,478 54,805

Secured 165,186 137,062

Unsecured 25,431 21,136

Paycheck Protection Program (“PPP”) — 22,124

Consumer and other 28,628 17,167

Subtotal 2,793,466 1,936,066

Net deferred loan fees 2,140 1,606

Allowance for loan losses 28,389 23,243

Total loans, net

for Loan Losses

Management has

an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent

in the loan portfolio.

For purposes of determining the allowance for loan losses, the Bank has segmented certain loans in the

portfolio by product type.

Loans held for investment, net of allowance for loan losses $ 2,762,937 $ 1,911,217

Allowance for Loan Losses

Management has an established methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio.

For purposes of determining the allowance for loan losses, the Bank has segmented certain loans in the portfolio by product type.

Loans are segmented into the following pools:

commercial, real estate, and consumer.

The Company further

sub-divides these segments into classes based on the associated risks within those segments.

Commercial loans are divided into

the following two classes:

unsecured and secured loans.

commercial, real

estate, and consumer.

The Company further subdivides these segments into classes based on the associated risks within those segments.

Commercial loans are divided into the following two classes:

secured and unsecured loans.

Real estate loans are divided into the following six classes:

real estate, commercial land and development, commercial construction, residential construction, residential real estate, and

For each class of loans, management exercises significant judgment to determine the estimation method that fits the

credit risk characteristics of its portfolio segment.

uses an internally developed model in this process.

Management must use judgment in establishing additional input metrics for

the modeling processes.

The models and assumptions used to determine the allowance are independently validated and reviewed, at

least annually, to ensure that their theoretical foundation, assumptions, data integrity, computational processes, reporting practices,

and end-user controls are appropriate and properly documented.

and PPP Loans

the CARES Act, which was passed in March 2020, the Company funded over 1,500 loans to eligible small businesses and non-profit

organizations who participated in the PPP administered by the SBA.

PPP loans have terms of two or five years and earn interest

In addition, the Bank received a fee of 1.00% to 5.00% from the SBA depending on the loan amount, which was netted with

loan origination costs and amortized into interest income under the effective yield method over the contractual life of the loan.

commercial real estate, commercial land and development, commercial construction, residential construction, residential real estate, and farmland.

For each class of loans, management exercises significant judgment to determine the estimation method that fits the credit risk characteristics of its portfolio segment.

The Company uses an internally developed model in this process.

Management must use judgment in establishing additional input metrics for the modeling processes.

The models and assumptions used to determine the allowance are independently validated and reviewed, at least annually, to ensure that their theoretical foundation, assumptions, data integrity, computational processes, reporting practices, and end-user controls are appropriate and properly documented.

CARES Act and PPP Loans

Pursuant to the CARES Act, which was passed in March 2020, the Company funded over 1,500 loans to eligible small businesses and non-profit organizations who participated in the PPP administered by the SBA.

PPP loans have terms of two or five years and earn interest at 1.00 %.

In addition, the Bank received a fee of 1.00 % to 5.00 % from the SBA depending on the loan amount, which was netted with loan origination costs and amortized into interest income under the effective yield method over the contractual life of the loan.

The recognition of fees and costs is accelerated when the loan is forgiven by the SBA and/or paid off prior to maturity.

are fully guaranteed by the SBA and are expected to be forgiven by the SBA if they meet the requirements of the program.

of PPP loans at December 31, 2021 and 2020 was $ 22,124,000 and $ 147,965,000 , respectively.

The CARES Act

also required the SBA to make payments on new and existing 7(a) loans for a period of six months.

These were not deferments but

rather full payments of principal and interest for which the borrower will not be responsible for in the future.

As of December

31, 2021 and 2020, the principal outstanding on loans receiving one or more of these payments under the CARES Act was $ 46,601,000

and $ 51,237,000 , respectively.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably

and prudently expand its business.

Underwriting standards are designed to promote relationship banking rather than transactional

Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s

management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed.

Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral

provided by the borrower.

The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans

may fluctuate in value.

Most commercial loans are secured by the assets being financed or other business assets such as accounts

receivable or inventory and may incorporate a personal guarantee;

PPP loans are fully guaranteed by the SBA and are expected to be forgiven by the SBA if they meet the requirements of the program.

There were no PPP loans outstanding at December 31, 2022.

The balance of PPP loans at December 31, 2021 was $ 22,124,000 .

The CARES Act also required the SBA to make payments on new and existing 7(a) loans for up to six months.

These were not deferments but rather full payments of principal and interest that the borrower will not be responsible for in the future.

As of December 31, 2022 and 2021, the principal outstanding on loans that received one or more of these payments under the CARES Act was $ 1,649,000 and $ 46,601,000 , respectively.

Commercial loans :

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business.

Underwriting standards are designed to promote relationship banking rather than transactional banking.

Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed.

Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower.

The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value.

Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee;

however, some short-term loans may be made on an unsecured basis.

In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially

dependent on the ability of the borrower to collect amounts due from its customers.

In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Real estate loans :

Real estate loans are subject to underwriting standards and processes similar to commercial loans.

These loans are

viewed primarily as cash flow loans and secondarily as loans secured by real estate.

Commercial real estate lending typically

involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation

of the property securing the loan or the business conducted on the property securing the loan.

Commercial real estate loans may

be more adversely affected than other loans by conditions in the real estate market or in the general economy.

The properties

securing the Company’s commercial real estate portfolio are diverse in terms of type.

This diversity helps reduce the Company’s

exposure to adverse economic events that affect any single market or industry.

Management monitors and evaluates commercial real

estate loans based on collateral, geography, and risk grade criteria.

With respect to construction loans that the Company may originate from time to time, the Company generally requires

the borrower to have had an existing relationship with the Company and have a proven record of success.

Construction loans are

underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates,

and financial analysis of the developers and property owners.

Construction loans are generally based upon estimates of costs and

value associated with the complete project.

These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate.

Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan.

Commercial real estate loans may be more adversely affected than other loans by conditions in the real estate market or in the general economy.

The properties securing the Company’s commercial real estate portfolio are diverse in terms of type.

This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry.

Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria.

Construction loans :

With respect to construction loans that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success.

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners.

Construction loans are generally based upon estimates of costs and value associated with the completed project.

These estimates may be inaccurate.

Construction loans often involve the disbursement

of substantial funds with repayment substantially dependent on the ultimate success of the project.

Sources of repayment for these

types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim

loan commitment from the Company until permanent financing is obtained.

These loans are closely monitored by on-site inspections

and are generally considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive

to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term

real estate loans :

Residential real estate loans are underwritten based upon the borrower’s income, credit history,

and collateral.

Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the ultimate success of the project.

Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company

until permanent financing is obtained.

These loans are closely monitored using on-site inspections and are generally considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.

Residential real estate loans :

Residential real estate loans are underwritten based upon the borrower’s income, credit history, and collateral.

To monitor and manage residential loan risk, policies and procedures are developed and modified, as needed.

activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.

standards for home loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value

percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.

Underwriting standards for home loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

Farmland loans :

Farmland loans are generally made to producers and processors of crops and livestock.

Repayment is primarily from the

sale of an agricultural product or service.

Farmland loans are secured by real property and are susceptible to changes in

market demand for specific commodities.

This may be exacerbated by, among other things, industry changes, changes in the

individual financial capacity of the business owner, general economic conditions, and changes in business cycles, as well as adverse

weather conditions.

The Company purchased consumer loans underwritten utilizing credit scoring analysis to supplement the underwriting

Repayment is primarily from the sale of an agricultural product or service.

Farmland loans are secured by real property and are susceptible to changes in market demand for specific commodities.

This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles, as well as adverse weather conditions.

Consumer loans :

The Company purchased consumer loans underwritten utilizing credit scoring analysis to supplement the underwriting process.

To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed.

This activity,

coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.

Underwriting standards

for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value

percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk.

Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

Concentrations

The Company’s

customers are primarily located in the Greater Sacramento and North Valley regions of California.

As of December 31, 2021, approximately

90% of the Company’s loans were real estate related, 9% were commercial, and less than 1% were consumer.

Credit Quality

has established a loan risk rating system to measure and monitor the quality of the loan portfolio.

All loans are assigned a risk

rating from the inception of the loan until the loan is paid off.

The Company’s customers are primarily located in the Greater Sacramento and North Valley regions of California.

As of December 31, 2022, approximately 92 % of the Company’s loans were real estate related, 7 % were commercial, and 1 % were consumer.

Credit Quality Indicators

The Company has established a loan risk rating system to measure and monitor the quality of the loan portfolio.

All loans are assigned a risk rating from the inception of the loan until the loan is paid off.

The primary loan grades are as follows:

Loans rated pass :

These are loans to borrowers with satisfactory financial support, repayment capacity, and credit strength.

in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise.

Loans in this category must have an identifiable and stable source of repayment and meet the Company’s policy regarding

debt service coverage ratios.

These borrowers are capable of sustaining normal economic, market, or operational setbacks without

significant financial impacts.

Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise.

Loans in this category must have an identifiable and stable source of repayment and meet the Company’s policy regarding debt service coverage ratios.

These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts.

Financial ratios and trends are acceptable.

Negative external industry factors are generally not

The loan may be secured, unsecured, or supported by non-real estate collateral for which the value is more difficult

to determine and/or marketability is more uncertain.

These are loans which have deficient loan quality and potentially significant issues, but losses do not appear to be

imminent, and the issues are expected to be temporary in nature.

Negative external industry factors are generally not present.

The loan may be secured, unsecured, or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain.

Loans rated watch :

These are loans which have deficient loan quality and potentially significant issues, but losses do not appear to be imminent, and the issues are expected to be temporary in nature.

The significant issues are typically:

(i) a history of losses

or events that threaten the borrower’s viability;

(i) a history of losses or events that threaten the borrower’s viability;

(ii) a property with significant depreciation and/or marketability concerns;

or (iii) poor or deteriorating credit, occasional late payments, and/or limited reserves but loan is generally kept current.

left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s

credit position at some future date.

substandard :

These are loans which are inadequately protected by the current net worth and paying capacity of the obligor

or of the collateral pledged (if any).

Loans so classified exhibit a well-defined weakness or weaknesses that jeopardize the liquidation

Loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are

not corrected.

The substandard loan category includes loans that management has determined not to be impaired, as well as loans

that are impaired.

or (iii) poor or deteriorating credit, occasional late payments, and/or limited reserves but the loan is generally kept current.

If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date.

Loans rated substandard :

These are loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged (if any).

Loans so classified exhibit a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.

Loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.

The substandard loan category includes loans that management has determined not to be impaired, as well as loans that are impaired.

Loans rated doubtful :

These are loans for which the collection or liquidation of the entire debt is highly questionable or improbable.

Typically, the possibility of loss is extremely high.

The losses on these loans are deferred until all pending factors have been

The following

table summarizes the credit quality indicators related to the Company’s loans by class as of December 31, 2021:

Schedule of Loan by credit quality

(in thousands)

The losses on these loans are deferred until all pending factors have been addressed.

The following table summarizes the credit quality indicators related to the Company’s loans by class as of December 31, 2022:

(in thousands) Pass Watch Substandard Doubtful Total

Commercial $ 2,379,766 $ 14,802 $ 106 $ — $ 2,394,674

Commercial land and development 7,477 — — — 7,477

1 unchanged sentence

Residential construction 6,693 — — — 6,693

The following

table summarizes the credit quality indicators related to the Company’s loans by class as of December 31, 2020:

(in thousands)

Residential 24,055 — 175 — 24,230

Farmland 52,478 — — — 52,478

Secured 163,879 1,184 123 — 165,186

Unsecured 25,431 — — — 25,431

Consumer 28,602 — 26 — 28,628

Total $ 2,771,150 $ 21,886 $ 430 $ — $ 2,793,466

The following table summarizes the credit quality indicators related to the Company’s loans by class as of December 31, 2021:

(in thousands) Pass Watch Substandard Doubtful Total

Commercial $ 1,575,006 $ 1,970 $ 9,256 $ — $ 1,586,232

Commercial land and development 7,376 — — — 7,376

1 unchanged sentence

Residential construction 7,388 — — — 7,388

Management regularly

reviews the Company’s loans for accuracy of risk grades whenever new information is received.

Borrowers are generally required

to submit financial information at regular intervals.

Typically, commercial borrowers with lines of credit are required to submit

financial information with reporting intervals ranging from monthly to annually depending on credit size, risk, and complexity.

In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to

submit rent rolls or property income statements annually.

Management monitors construction loans monthly and reviews other consumer

loans based on delinquency.

Management also reviews loans graded “watch” or worse, regardless of loan type, no less

than quarterly.

The age analysis of past due loans

by class as of December 31, 2021 consisted of the following:

of Age Analysis of Past Due Loan

(in thousands)

Greater Than 90 Days

Total Past Due

Total Loans Receivable

Residential 28,384 — 178 — 28,562

Farmland 54,805 — — — 54,805

Secured 135,131 751 1,180 — 137,062

Unsecured 21,136 — — — 21,136

PPP 22,124 — — — 22,124

Consumer 17,167 — — — 17,167

Total $ 1,916,805 $ 8,647 $ 10,614 $ — $ 1,936,066

Management regularly reviews the Company’s loans for accuracy of risk grades whenever new information is received.

Borrowers are generally required to submit financial information at regular intervals.

Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk, and complexity.

In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually.

Management monitors construction loans monthly and reviews consumer loans based on delinquency.

Management also reviews loans graded “watch” or worse, regardless of loan type, no less than quarterly.

The age analysis of past due loans by class as of December 31, 2022 consisted of the following:

(in thousands) Past Due

Days Greater Than

90 Days Total Past

Due Current Total Loans

Commercial $ — $ — $ — $ 2,394,674 $ 2,394,674

Commercial land and development — — — 7,477 7,477

1 unchanged sentence

Residential construction — — — 6,693 6,693

Residential — — — 24,230 24,230

Farmland — — — 52,478 52,478

Secured — — — 165,186 165,186

Unsecured — — — 25,431 25,431

Consumer and other 194 — 194 28,434 28,628

There were no loans between 60-89

days past due, nor any loans greater than 90 days past due and still accruing as of December 31, 2021.

The age analysis of past due loans

by class as of December 31, 2020 consisted of the following:

(in thousands)

Greater Than 90 Days

Total Past Due

Total Loans Receivable

Total $ 194 $ — $ 194 $ 2,793,272 $ 2,793,466

There were no loans between 60-89 days past due, no r any loans greater than 90 days past due and still accruing as of December 31, 2022.

The age analysis of past due loans by class as of December 31, 2021 consisted of the following:

(in thousands) Past Due

Days Greater Than 90 Days Total Past

Due Current Total Loans

Commercial $ — $ — $ — $ 1,586,232 $ 1,586,232

Commercial land and development — — — 7,376 7,376

1 unchanged sentence

Residential construction — — — 7,388 7,388

Residential — — — 28,562 28,562

Farmland — — — 54,805 54,805

Secured — — — 137,062 137,062

Unsecured — — — 21,136 21,136

PPP — — — 22,124 22,124

Consumer and other 334 — 334 16,833 17,167

There were no

loans between 60-89 days past due nor any loans greater than 90 days past due and still accruing as of December 31, 2020.

related to impaired loans as of December 31, 2021 and 2020 consisted of the following:

of Impaired Loans by class of Loans

(in thousands)

Total $ 334 $ — $ 334 $ 1,935,732 $ 1,936,066

There were no loans between 60-89 days past due no r any loans greater than 90 days past due and still accruing as of December 31, 2021.

Impaired Loans

Information related to impaired loans as of December 31, 2022 and 2021 consisted of the following:

December 31, 2022 December 31, 2021

(in thousands) Recorded

Investment Unpaid

Balance Related

Allowance Recorded

Investment Unpaid

Balance Related

With no related allowance recorded:

Commercial $ 106 $ 106 $ — $ 122 $ 122 $ —

Residential 175 175 — 178 178 —

Secured — — — 116 116 —

281 281 — 416 416 —

With an allowance recorded:

Secured 123 123 123 172 172 172

123 123 123 172 172 172

Total by category:

Commercial 106 106 — 122 122 —

Residential 175 175 — 178 178 —

Secured 123 123 123 288 288 172

Total impaired loans $ 404 $ 404 $ 123 $ 588 $ 588 $ 172

At December 31, 2022, one collateral dependent loan was in the process of foreclosure:

a commercial term loan secured by a single family residence with an unpaid principal balance of $ 175,000 and no related allowance.

No collateral dependent loans were in process of foreclosure at December 31, 2021.

In addition, the weighted average loan-to-value of impaired, collateral dependent loans was approximately 82.42 % and 70.67 % at December 31, 2022 and 2021, respectively.

Information related to impaired loans for the years ended December 31, 2022 and 2021 consisted of the following:

Years ended December 31,

(in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized

With no related allowance recorded:

Commercial $ 113 $ — $ 129 $ —

Residential 176 — 181 —

Secured 28 — 120 —

Consumer and other 8 — — —

With an allowance recorded:

Secured 348 — 78 —

Consumer and other 2 — 9 —

Total by category:

Commercial 113 — 129 —

Residential 176 — 181 —

Secured 376 — 198 —

Consumer and other 10 — 9 —

Total impaired loans $ 675 $ — $ 517 $ —

No collateral

dependent loans were in process of foreclosure at December 31, 2021 or 2020.

In addition, the weighted average loan-to-value of

impaired, collateral dependent loans was approximately 70.67% and 50.51% at December 31, 2021 and 2020, respectively.

Non-accrual loans, segregated by

class, are as follows as of December 31, 2021 and 2020:

of Nonaccural Loans, segregated by class

Non-accrual loans, segregated by class, are as follows as of December 31, 2022 and 2021:

(in thousands) 2022 2021

Commercial $ 106 $ 122

Residential 175 178

Secured 123 288

Total non-accrual loans $ 404 $ 588

The amount of

foregone interest income related to non-accrual loans was $ 33,000 and $ 35,000 for the years ended December 31, 2021 and 2020,

respectively.

The amount of foregone interest income related to non-accrual loans was $ 39,000 and $ 33,000 for the years ended December 31, 2022 and 2021, respectively.

Troubled Debt Restructuring

Companys loan portfolio may include certain loans that have been modified in a TDR, which are loans for which concessions in terms

have been granted because of the borrowers financial difficulties.

These concessions typically result from the Companys

loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance,

or other actions.

Certain TDRs are placed on non-accrual status at the time of restructure and may only be returned to accruing status

after considering the borrowers sustained repayment performance for a reasonable period, generally six months.

is modified, it is measured based upon the present value of future cash flows discounted at the effective interest rate of the

original loan agreement or the fair value of collateral less selling costs if the loan is collateral dependent.

If the value of

the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a

charge-off of the loan.

There were no

loans outstanding with a TDR designation at December 31, 2021 or 2020.

The CARES Act,

as amended, specified that to be eligible not to be considered a TDR, a loan modification must be (i) related to the COVID-19

The Company’s loan portfolio may include certain loans that have been modified in a TDR, which are loans for which concessions in terms have been granted because of the borrowers’ financial difficulties.

These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.

Certain TDRs are placed on non-accrual status at the time of

restructure and may only be returned to accruing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

There was one loan outstanding with a TDR designation at December 31, 2022:

a nonaccrual, commercial secured loan which had not defaulted with an outstanding balance of $ 29,000 and reserves covering the amount of the outstanding balance.

There were no loans outstanding with a TDR designation at December 31, 2021.

The CARES Act, as amended, specified that to be eligible not to be considered a TDR, a loan modification must be:

(i) related to the COVID-19 pandemic;

(ii) executed on a loan that was not more than 30 days past due as of December 31, 2019;

and (iii) executed between

March 1, 2020, and the earlier of:

and (iii) executed between March 1, 2020 and the earlier of:

(i) 60 days after the date of termination of the federal national emergency;

or (ii) January 1, 2022.

The Company elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria,

which would otherwise be designated TDRs under existing GAAP.

As of December 31, 2021, six borrowing relationships with six loans

totaling $12,156,000 were continuing to benefit from payment relief.

The Company accrues and recognizes interest income on loans

under payment relief based on the original contractual interest rates.

When payments resume at the end of the relief period, the

payments will generally be applied to accrued interest due until accrued interest is fully paid.

The following table discloses activity

in the allowance for loan losses for the periods presented.

Schedule of activity in the allowance for loan losses

Provision (recapture)

Ending balance

Beginning balance

Provision (recapture)

Ending balance

The following

table summarizes the allocation of the allowance for loan losses by impairment methodology for the periods presented.

(in thousands)

Ending allowance balance allocated

Loans individually

evaluated for impairment

collectively evaluated for impairment

Ending balance

Ending balance individually

evaluated for impairment

balance collectively evaluated for impairment

Ending balance

Ending allowance balance

allocated to:

Loans individually evaluated

for impairment

Loans collectively evaluated

for impairment

Ending balance

Ending balance individually

evaluated for impairment

Ending balance collectively

evaluated for impairment

Ending balance

The Company elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated TDRs under existing GAAP.

As of December 31, 2022, no borrowing relationships were continuing to benefit from payment relief.

The Company accrued and recognized interest income on loans under payment relief based on the original contractual interest rates.

When payments resumed at the end of the relief period, the payments were generally applied to accrued interest due until accrued interest was fully paid.

The following table discloses activity in the allowance for loan losses for the year ended December 31, 2022.

(in thousands) Beginning Balance Charge-offs Recoveries Provision (Benefit) Ending Balance

Commercial $ 12,869 $ — $ — $ 6,347 $ 19,216

Commercial land and development 50 — — 4 54

Commercial construction 371 — — 274 645

Residential construction 50 — — ( 1 ) 49

Residential 192 — — ( 17 ) 175

Farmland 645 — — ( 1 ) 644

Secured 6,859 ( 1,690 ) 204 1,725 7,098

Unsecured 207 ( 2 ) — ( 89 ) 116

PPP — ( 21 ) 21 — —

Consumer and other 889 ( 906 ) 840 ( 476 ) 347

Unallocated 1,111 — — ( 1,066 ) 45

Total $ 23,243 $ ( 2,619 ) $ 1,065 $ 6,700 $ 28,389

The following table discloses activity in the allowance for loan losses for the year ended December 31, 2021.

(in thousands) Beginning Balance Charge-offs Recoveries Provision (Benefit) Ending Balance

Commercial $ 9,358 $ — $ — $ 3,511 $ 12,869

Commercial land and development 77 — — ( 27 ) 50

Commercial construction 821 — — ( 450 ) 371

Residential construction 87 — — ( 37 ) 50

Residential 220 — — ( 28 ) 192

Farmland 615 — — 30 645

Secured 9,476 ( 822 ) 263 ( 2,058 ) 6,859

Unsecured 179 — — 28 207

Consumer and other 632 ( 321 ) 234 344 889

Unallocated 724 — — 387 1,111

Total $ 22,189 $ ( 1,143 ) $ 497 $ 1,700 $ 23,243

The following table summarizes the allocation of the allowance for loan losses by impairment methodology as of December 31, 2022.

Ending allowance balance allocated to:

Ending balance of:

(in thousands) Loans individually evaluated for impairment Loans collectively evaluated for impairment Total loans Loans individually evaluated for impairment Loans collectively evaluated for impairment Total loans

Commercial $ — $ 19,216 $ 19,216 $ 106 $ 2,394,568 $ 2,394,674

Commercial land and development — 54 54 — 7,477 7,477

Commercial construction — 645 645 — 88,669 88,669

Residential construction — 49 49 — 6,693 6,693

Residential — 175 175 175 24,055 24,230

Farmland — 644 644 — 52,478 52,478

Secured 123 6,975 7,098 123 165,063 165,186

Unsecured — 116 116 — 25,431 25,431

Consumer and other — 347 347 — 28,628 28,628

Unallocated — 45 45 — — —

Total $ 123 $ 28,266 $ 28,389 $ 404 $ 2,793,062 $ 2,793,466

The following table summarizes the allocation of the allowance for loan losses by impairment methodology as of December 31, 2021.

Ending allowance balance allocated to:

Ending balance of:

Commercial $ — $ 12,869 $ 12,869 $ 122 $ 1,586,110 $ 1,586,232

Commercial land and development — 50 50 — 7,376 7,376

Commercial construction — 371 371 — 54,214 54,214

Residential construction — 50 50 — 7,388 7,388

Residential — 192 192 178 28,384 28,562

Farmland — 645 645 — 54,805 54,805

Secured 172 6,687 6,859 288 136,774 137,062

Unsecured — 207 207 — 21,136 21,136

PPP — — — — 22,124 22,124

Consumer and other — 889 889 — 17,167 17,167

Unallocated — 1,111 1,111 — — —

Total $ 172 $ 23,071 $ 23,243 $ 588 $ 1,935,478 $ 1,936,066

Pledged Loans

The Company’s

FHLB line of credit is secured under terms of a collateral agreement by a pledge of certain qualifying loans with unpaid principal

balances of $ 941,160,000 and $ 1,093,513,000 at December 31, 2021 and 2020, respectively.

In addition, the Company pledges eligible

Tenants in Common loans, which totaled $ 33,391,000 and $ 61,635,000 at December 31, 2021 and 2020, respectively, to secure its

borrowing capacity with the Federal Reserve Bank of San Francisco.

See Note 9, Long Term Debt and Other Borrowings, for further

discussion of these borrowings.

Premises and Equipment,

Premises and equipment, net, were

as follows as of December 31, 2021 and 2020:

Schedule of Premises and Equipment

The Company’s FHLB line of credit is secured under terms of a collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $ 1,627,056,000 and $ 941,160,000 at December 31, 2022 and 2021, respectively.

In addition, the Company pledges eligible tenants in common loans, which totaled $ 41,934,000 and $ 33,391,000 at December 31, 2022 and 2021, respectively, to secure its borrowing capacity with the Federal Reserve Bank of San Francisco.

See Note 9, Long Term Debt and Other Borrowings, for further discussion of these borrowings.

Premises and Equipment, Net

Premises and equipment, net, were as follows as of December 31, 2022 and 2021:

(in thousands) 2022 2021

1 unchanged sentence

Tenant improvements 1,994 1,973

Premises and Equipment, Gross

Accumulated depreciation and amortization 4,151 3,514

Premises and equipment, net $ 1,605 $ 1,773

Depreciation expense for occupancy,

furniture, fixtures, and equipment was $ 607,000 and $ 461,000 for the years ended December 31, 2021 and 2020, respectively.

Depreciation expense for occupancy, furniture, fixtures, and equipment was $ 649,000 and $ 607,000 for the years ended December 31, 2022 and 2021, respectively.

Bank-owned Life Insurance

owns life insurance policies on the lives of certain current and former officers designated by the board of directors to fund

our employee benefit programs.

Death benefits provided under the specific terms of these insurance policies are estimated to be

$ 26,956,000 at December 31, 2021.

The benefits to employees’ beneficiaries are limited to each employee’s active service

The investment in BOLI policies is reported at their cash surrender value, net of surrender charges, of $ 11,203,000 and

$ 8,662,000 at December 31, 2021 and 2020, respectively.

The cash surrender value includes both the original premiums paid for

the life insurance policies and the accumulated accretion of policy income since inception of the policies, net of mortality costs

and other fees.

Income of $ 237,000 and $ 220,000 was recognized on these life insurance policies for the years ended December 31,

2021 and 2020, respectively.

Receivable and Other Assets

Interest receivable

and other assets consisted of the following as of December 31, 2021 and 2020:

The Company owns life insurance policies on the lives of certain current and former officers designated by the board of directors to fund our employee benefit programs.

Death benefits provided under the specific terms of these insurance policies are estimated to be $ 32,931,000 at December 31, 2022.

The benefits to employees’ beneficiaries are limited to each employee’s active service period.

The investment in BOLI policies is reported at their cash surrender value, net of surrender charges, of $ 14,669,000 and $ 11,203,000 at December 31, 2022 and 2021, respectively.

The cash surrender value

includes both the original premiums paid for the life insurance policies and the accumulated accretion of policy income since inception of the policies, net of mortality costs and other fees.

Income of $ 412,000 and $ 237,000 was recognized on these life insurance policies for the years ended December 31, 2022 and 2021, respectively.

Interest Receivable and Other Assets

Interest receivable and other assets consisted of the following as of December 31, 2022 and 2021:

(in thousands) 2022 2021

2 unchanged sentences

Servicing assets 2,286 2,215

Interest Receivable and Other Assets

Servicing assets

represent the assets related to servicing loans for others, including collecting payments, maintaining escrow accounts, disbursing

payments to investors, and conducting foreclosure proceedings.

Loan servicing income is recorded on the accrual basis and includes

servicing fees from investors and certain charges collected from borrowers.

The Company serviced loans with unpaid principal balances

of $194,649,000 and $187,834,000 as of December 31, 2021 and 2020, respectively, on behalf of others.

Interest-Bearing

Interest-bearing

deposits consisted of the following as of December 31, 2021 and 2020:

of Interest-bearing deposits

Other assets 18,657 8,340

$ 34,077 $ 21,628

Servicing assets represent the assets related to servicing loans for others, including collecting payments, maintaining escrow accounts, disbursing payments to investors, and conducting foreclosure proceedings.

The Company serviced loans with unpaid principal balances of $ 192,880,000 and $ 194,649,000 as of December 31, 2022 and 2021, respectively, on behalf of others.

Interest-Bearing Deposits

Interest-bearing deposits consisted of the following as of December 31, 2022 and 2021:

(in thousands) 2022 2021

Interest checking accounts

Time, $250 or more

Interest-bearing transaction accounts $ 240,131 $ 278,406

Savings accounts 154,581 88,536

Money market accounts 1,073,532 912,558

Time accounts, $ 250 or more

198,159 77,868

Other time accounts 144,355 26,404

Total interest-bearing deposits $ 1,810,758 $ 1,383,772

Time deposits

totaled $ 104,272,000 and $ 47,602,000 as of December 31, 2021 and 2020, respectively.

As of December 31, 2021, scheduled maturities

of time deposits for the next five years were as follows:

of Maturities of Time Deposits

Time deposits totaled $ 342,514,000 and $ 104,272,000 as of December 31, 2022 and 2021, respectively.

There were $ 124,993,000 of brokered time deposits as of December 31, 2022 and no brokered time deposits as of December 31, 2021.

As of December 31, 2022, scheduled maturities of time deposits for the next five years were as follows:

(in thousands)

2023 $ 339,306

Total time deposits $ 342,514

Total deposits

include deposits offered through the IntraFi Network (formerly Promontory Interfinancial Network) that are comprised of Certificate

of Deposit Account Registry Service® (“CDARS”) balances included in time deposits and Insured Cash Sweep®

(“ICS”) balances included in money market deposits.

Through this network the Company offers customers access to Federal

Deposit Insurance Corporation (“FDIC”) insured deposit products in aggregate amounts exceeding current insurance limits.

When funds are deposited through CDARS and ICS on behalf of a customer, the Company has the option of receiving matching deposits

through the network’s reciprocal deposit program or placing deposits “one-way,” for which the Company receives

no matching deposits.

The Company considers the reciprocal deposits to be in-market deposits as distinguished from traditional

out-of-market brokered deposits.

Total deposits include deposits offered through the IntraFi Network (formerly Promontory Interfinancial Network) that are comprised of Certificate of Deposit Account Registry Service® (“CDARS”) balances included in time deposits and Insured Cash Sweep® (“ICS”) balances included in money market deposits.

Through this network, the Company offers customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits.

When funds are deposited through CDARS and ICS on behalf of a customer, the Company has the option of receiving matching deposits through the network’s reciprocal deposit program or placing deposits “one-way,” for which the Company receives no matching deposits.

The Company considers the reciprocal deposits to be in-market deposits, as distinguished from

traditional out-of-market brokered deposits.

There were no one-way deposits at December 31, 2022 and 2021.

The composition of network deposits

as of December 31, 2021 and 2020 was as follows:

of Composition of Network Deposits

The composition of network deposits as of December 31, 2022 and 2021 was as follows:

(in thousands) 2022 2021

CDARS $ 13,248 $ 22,411

ICS 272,719 307,636

Total network deposits $ 285,967 $ 330,047

Interest expense

recognized on interest-bearing deposits for the years ended December 31, 2021 and 2020 consisted of the following:

Interest expense recognized on interest-bearing deposits for the years ended December 31, 2022 and 2021 consisted of the following:

(in thousands) 2022 2021

Interest checking accounts

Time, $250 or more

Interest-bearing transaction accounts $ 425 $ 155

Savings accounts 376 74

Money market accounts 6,477 1,797

Time accounts, $ 250 or more

Other time accounts 841 131

Total interest expense on interest-bearing deposits $ 10,923 $ 2,199

Term Debt and Other Borrowings

On November 8, 2019, the Company completed a private placement of $ 3,750,000 of fixed-to-floating rate subordinated

notes to certain qualified investors.

All of the debt was purchased by four existing members of the board of directors or their

The notes were used for general corporate purposes, for capital management, and to support future growth.

The subordinated

notes have a maturity date of September 15, 2027 and bear interest, payable semi-annually, at the rate of 5.50% per annum until

September 15, 2022.

On that date, the interest rate will be adjusted to float at a rate equal to the three-month LIBOR rate plus

354.4 basis points (3.75% as of December 31, 2021) until maturity.

The notes include a right of prepayment, on or after September

30, 2022 and, in certain limited circumstances, before that date.

The indebtedness evidenced by the subordinated notes, including

principal and interest, is unsecured and subordinate and junior in right to payment to general and secured creditors and depositors

of the Company.

has $25,000,000 in principal of fixed-to-floating rate subordinated notes to certain qualified investors, of which $8,000,000

is owned by an entity that is controlled by a member of the board of directors and three principal shareholders.

The notes were

used for general corporate purposes, for capital management, and to support future growth.

The subordinated notes have a maturity

date of September 15, 2027 and bear interest, payable semi-annually, at the rate of 6.00% per annum until September 15, 2022.

On that date, the interest rate will be adjusted to float at a rate equal to the three-month LIBOR rate plus 404.4 basis points

(4.25% as of December 31, 2021) until maturity.

The notes include a right of prepayment, on or after September 28, 2022 and, in

certain limited circumstances, before that date.

The indebtedness evidenced by the subordinated notes, including principal and

interest, is unsecured and subordinate and junior in right to payment to general and secured creditors and depositors of the Company.

The subordinated

notes have been structured to qualify as Tier 2 capital for regulatory capital purposes.

Debt issuance costs incurred in conjunction

with the notes were $ 642,000 , of which $ 280,000 has been amortized through December 31, 2021.

The Company reflects debt issuance

costs as a direct deduction from the face of the note.

The debt issuance costs are amortized into interest expense through the

maturity period.

At December 31, 2021 and 2020, the Company’s subordinated debt carrying value was $ 28,386,000 and $ 28,320,000 ,

respectively.

Long Term Debt and Other Borrowings

Subordinated notes :

On August 17, 2022, the Company completed a private placement of $ 75,000,000 of fixed-to-floating rate subordinated notes to certain qualified investors, of which $ 19,250,000 was purchased by existing or former members of the board of directors and their affiliates.

The notes will be used for capital management and general corporate purposes, including, without limitation, the redemption of previously existing subordinated notes.

The subordinated notes have a maturity date of September 1, 2032 and bear interest, payable semi-annually, at the rate of 6.00 % per annum until September 1, 2027.

On that date, the interest rate will be adjusted to float at a rate equal to the three-month Secured Overnight Financing Rate plus 329.0 basis points ( 8.03 % as of December 31, 2022) until maturity.

The notes include a right of prepayment, on or after August 17, 2027 or, in certain limited circumstances, before that date.

The indebtedness evidenced by the subordinated notes, including principal and interest, is unsecured and subordinate and junior in right to payment to general and secured creditors and depositors of the Company.

On November 5, 2022, the Company exercised its right of redemption on subordinated notes issued in two series:

$ 3,750,000 aggregate principal amount originally issued in 2019, and $ 25,000,000 aggregate principal amount originally issued in 2017.

On December 15, 2022, the subordinated notes were redeemed for cash by the Company at 100 % of their principal amount, plus accrued and unpaid interest, in accordance with the subordinated note purchase agreements applicable to each series.

Remaining unamortized deferred financing costs associated with such notes were expensed and included in other operating expenses on the consolidated statements of income.

The subordinated notes have been structured to qualify as Tier 2 capital for regulatory capital purposes.

Debt issuance costs incurred in conjunction with the notes were $ 1,454,000 , of which $ 61,000 has been amortized through December 31, 2022.

The Company reflects debt issuance costs as a direct deduction from the face of the note.

The debt issuance costs are amortized into interest expense through the maturity period.

At December 31, 2022 and 2021, the Company’s subordinated debt carrying value was $ 73,606,000 and $ 28,386,000 , respectively.

Other borrowings :

The Company has an agreement with the FHLB that granted the FHLB a blanket lien on all loans receivable (except for construction and

agricultural loans) as collateral for a borrowing line.

Based on the dollar volume of qualifying loan collateral, the Company had a total

financing availability of $ 696,285,000

at December 31, 2021 and $ 519,274,000

at December 31, 2020.

At December 31, 2021 and 2020, the Company had no outstanding borrowings.

As of December 31, 2021 and 2020, the Company had letters of credit issued on its behalf totaling $ 420,500,000

and $ 293,500,000 ,

respectively, as discussed below.

As of December

31, 2021, letters of credit totaling $ 80,500,000 were pledged to secure State of California deposits and $ 340,000,000 were pledged

to secure local agency deposits.

As of December 31, 2020, letters of credit totaling $ 13,500,000 were pledged to secure State

of California deposits and $ 280,000,000 were pledged to secure local agency deposits.

The letters of credit issued reduced the

Company’s available borrowing capacity to $ 275,785,000 and $ 284,810,000 as of December 31, 2021 and 2020, respectively.

At December 31, 2021,

the Company had five unsecured federal funds lines of credit totaling $150,000,000 with five of its correspondent banks, respectively.

At December 31, 2020, the Company had three unsecured federal funds lines of credit totaling $ 75,000,000

with three of its correspondent banks, respectively.

There were no amounts outstanding at

December 31, 2021 and 2020.

31, 2021 and 2020, the Company had the ability to borrow from the Federal Reserve Discount Window .

At December 31, 2021 and 2020,

the borrowing capacity under this arrangement was $ 16,999,000 and $ 25,881,000 , respectively.

There were no amounts outstanding

at December 31, 2021 and 2020.

The borrowing line is secured by liens on the Company’s construction and agricultural loan

The Company has an agreement with the FHLB that granted the FHLB a blanket lien on all loans receivable (except for construction and agricultural loans) as collateral for a borrowing line.

Based on the dollar volume of qualifying loan collateral, the Company had a total financing availability of $ 1,002,838,000 at December 31, 2022 and $ 696,285,000 at December 31, 2021.

At December 31, 2022, the Company had outstanding borrowings of $ 100,000,000 and no borrowings outstanding at December 31, 2021.

As of December 31, 2022 and 2021, the Company had letters of credit issued on its behalf totaling $ 686,500,000 and $ 420,500,000 , respectively, as discussed below.

As of December 31, 2022, letters of credit totaling $ 206,500,000 were pledged to secure State of California deposits and $ 480,000,000 were pledged to secure local agency deposits.

As of December 31, 2021, letters of credit totaling $ 80,500,000 were pledged to secure State of California deposits and $ 340,000,000 were pledged to secure local agency

The letters of credit issued and outstanding borrowings reduced the Company’s available borrowing capacity to $ 216,338,000 and $ 275,785,000 as of December 31, 2022 and 2021, respectively.

At December 31, 2022, the Company had seven unsecured federal funds lines of credit totaling $ 190,000,000 with seven of its correspondent banks, respectively.

At December 31, 2021, the Company had five unsecured federal funds lines of credit totaling $ 150,000,000 with five of its correspondent banks, respectively.

There were no amounts outstanding at December 31, 2022 and 2021.

At December 31, 2022 and 2021, the Company had the ability to borrow from the Federal Reserve Discount Window.

At December 31, 2022 and 2021, the borrowing capacity under this arrangement was $ 21,868,000 and $ 16,999,000 , respectively.

There were no amounts outstanding at December 31, 2022 and 2021.

The borrowing line is secured by liens on the Company’s construction and agricultural loan portfolios.

401(k) Benefit Plan

A 401(k) benefit

plan covers substantially all employees and allows voluntary employee contributions up to the lesser of 80% of compensation or

the annually adjusted IRS dollar limit.

These voluntary contributions are matched equal to 100% of the first 3% of the employee’s

compensation contributed and 50% of contributions exceeding 3% of eligible compensation, not to exceed 5% of the total eligible

compensation.

A 401(k) benefit plan covers substantially all employees and allows voluntary employee contributions up to the lesser of 80% of compensation or the annually adjusted IRS dollar limit.

These voluntary contributions are matched equal to 100 % of the first 3 % of the employee’s compensation contributed and 50 % of contributions exceeding 3 % of eligible compensation, not to exceed 5 % of the total eligible compensation.

The employees’ voluntary contributions and the Company’s matching contributions are 100 % vested immediately.

The expense related to matching employees’ contributions for 2022 and 2021 was $ 634,000 and $ 593,000 , respectively.

Company terminated its status as a Subchapter S corporation as of May 5, 2021, in connection with its IPO and became a taxable C Corporation.

The Company terminated its status as a Subchapter S corporation as of May 5, 2021, in connection with its IPO and became a taxable C Corporation.

Prior to that date, as an S Corporation, the Company had no U.S.

federal income tax expense.

As such, any periods prior to May 5, 2021

will only reflect an effective state income tax rate and corresponding tax expense.

In conjunction

with the termination of the Subchapter S corporation status, the C Corporation deferred tax assets and liabilities were estimated

for future tax consequences attributable to differences between the financial statement carrying amounts of the Company’s

existing assets and liabilities and their respective tax bases.

The deferred tax assets and liabilities were measured using tax

rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C Corporation was recognized

as a $4,638,000 increase to the net deferred tax asset to $ 5,370,000

and a reduction to the provision for income taxes of $ 4,638,000

during the year ended December 31, 2021.

The provision for income tax for

the years ended December 31, 2021 and 2020 differs from the statutory federal rate of 21.00% due to the following items, which

relate primarily to the Company’s conversion from an S Corporation to a C Corporation:

As such, any periods prior to May 5, 2021 will only reflect an effective state income tax rate and corresponding tax expense.

In conjunction with the termination of the Subchapter S corporation status, the C Corporation deferred tax assets and liabilities were estimated for future tax consequences attributable to differences between the financial statement carrying amounts of the Company’s existing assets and liabilities and their respective tax bases.

The deferred tax assets and liabilities were measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C Corporation was recognized as a $ 4,638,000 increase to the net deferred tax asset to $ 5,370,000 and a reduction to the provision for income taxes of $ 4,638,000 during the year ended December 31, 2021.

The provision for income tax for the years ended December 31, 2022 and 2021 differs from the statutory federal rate of 21.00% due to the following items, which relate primarily to the Company’s conversion from an S Corporation to a C Corporation for the year ended December 31, 2021:

(in thousands) 2022 2021

3 unchanged sentences

Benefit of S Corporation status — ( 4,884 )

State taxes 5,381 4,045

Deferred tax asset adjustment — ( 4,638 )

Other ( 524 ) 283

Provision for income taxes $ 18,057 $ 4,707

the year ended December 31, 2021, the Companys effective tax rate differed from the statutory California tax rate of 3.50% used

prior to May 5, 2021 and the statutory federal and state tax rate, net of federal benefit, of 29.56% used May 5, 2021 and after, as the

effective tax rate primarily represents the weighted average rate between the S Corporation tax rate of 3.50% and the C Corporation tax

rate of 29.56% based on the number of days the Company was each type of corporation during 2021.

components of the consolidated provision for income taxes are as follows:

For the year ended December 31, 2021, the Company’s effective tax rate differed from the statutory California tax rate of 3.50% used prior to May 5, 2021 and the statutory federal and state tax rate, net of federal benefit, of 29.56 % used May 5, 2021 and after, as the effective tax rate primarily represents the weighted average rate between the S Corporation tax rate of 3.50% and the C Corporation tax rate of 29.56% based on the number of days the Company was each type of corporation during 2021.

The components of the consolidated provision for income taxes are as follows:

(in thousands) 2022 2021

Current tax expense

Federal $ 13,167 $ 6,178

State 6,837 2,530

Deferred tax benefit

Federal ( 1,762 ) ( 3,561 )

State ( 185 ) ( 440 )

( 1,947 ) ( 4,001 )

Provision for income taxes $ 18,057 $ 4,707

Deferred tax assets and liabilities

were due to the following as of December 31, 2021 and 2020:

Deferred tax assets and liabilities were due to the following as of December 31, 2022 and 2021:

(in thousands) 2022 2021

4 unchanged sentences

Net unrealized loss on securities available-for-sale 5,647 237

Accrual to cash adjustment

Deferred tax assets

State tax 1,044 —

Right of use liability 1,351 —

Other 749 562

Deferred tax liabilities:

Deferred loan fees ( 4,006 ) ( 2,927 )

Net unrealized gain on securities available-for-sale

Deferred tax liabilities

State tax — ( 379 )

Depreciation ( 405 ) ( 419 )

ROUA ( 1,268 ) —

Other ( 537 ) ( 228 )

( 6,216 ) ( 3,953 )

Net deferred tax asset $ 12,273 $ 4,916

No deferred tax asset valuation allowance

was established during 2021 or 2020, as management believes it is more likely than not the Company will realize the benefits of

these deductible differences as of December 31, 2021 and 2020.

unrecognized tax benefits were outstanding as of December 31, 2021 or 2020.

No deferred tax asset valuation allowance was established during 2022 or 2021, as management believes it is more likely than not the Company will realize the benefits of these deductible differences as of December 31, 2022 and 2021.

No unrecognized tax benefits were outstanding as of December 31, 2022 or 2021.

The Company files tax returns in the U.S.

federal and California

state jurisdictions.

The Company is no longer subject to examinations for years before 2017.

There were no interest or penalties

in 2021 and 2020.

federal and California state jurisdictions.

The Company is no longer subject to examinations for federal and state tax purposes for the years before 2018 and 2017, respectively.

There were no interest or penalties in 2022 and 2021.

It is the Company’s policy to record such accruals in its income taxes accounts.

2021, the Company paid approximately $27,000,000 to shareholders of record as of May 3, 2021, for the Accumulated Adjustments Account

(AAA) payout under the Companys Tax Sharing Agreement.

During 2021, the Company paid approximately $ 26,967,000 to shareholders of record as of May 3, 2021, for the Accumulated Adjustments Account (“AAA”) payout under the Company’s Tax Sharing Agreement.

The AAA represents previously taxed, but undistributed, earnings.

As of December 31, 2021, the balance of the Companys AAA was estimated to be approximately $4,877,000 and is subject to adjustment

upon completion of the 2021 tax return, which could be material.

The balance in the AAA account represents the remaining amount of previously

taxed but undistributed earnings of the Company.

Upon completion of the 2022 tax return, the Company paid $ 4,953,000 on March 17, 2022 to shareholders of record as of May 3, 2021, which covered the remaining amount in the AAA account.

Related Party Transactions

During the normal

course of business, the Company may enter into transactions with related parties, including directors, executive officers, principal

shareholders, and their businesses or affiliates.

In accordance with applicable regulations and Bank policies, these loans are

granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time

for comparable transactions with persons not related to the Company.

Likewise, these transactions do not involve more than the

normal risk of collectability or present other unfavorable features.

The following is a summary of loans to related parties in

2021 and 2020:

Schedule of Related Party Transactions

During the normal course of business, the Company may enter into transactions with related parties, including directors, executive officers, principal shareholders, and their businesses or affiliates.

In accordance with applicable regulations and Bank policies, these loans are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to the Company.

Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features.

The following is a summary of loans to related parties in 2022 and 2021:

(in thousands) 2022 2021

Beginning balance $ 9,418 $ 2,048

New loans or advance

Loans issued in prior years to new related parties

New loans or advances 340 7,828

Repayments ( 3,146 ) ( 458 )

Transfers out 1

Ending balance $ 6,250 $ 9,418

31, 2021 and 2020, deposits from related parties (directors, executive officers, and principal shareholders) totaled $ 32,410,000

and $ 42,466,000 , respectively.

Property management fees totaling $ 12,000 and $ 27,000 in 2021 and 2020, respectively, were paid

to an entity owned by some of the Company’s directors.

2021, nine of the Companys directors were each granted 4,500 fully vested shares of the Companys stock for the payment

of director fees in addition to their standard cash compensation, totaling 40,500 shares with a combined fair value of $810,000, and

one director was granted 1,140 fully vested shares of the Companys stock, with a fair value of $36,000, upon retirement.

Additionally,

during 2021, ten directors purchased a total of 190,071 shares for $3,985,000.

During 2020, eight of the Companys directors were

each granted 2,000 fully vested shares of the Companys stock for the payment of director fees in addition to their standard cash

compensation, totaling 16,000 shares with a combined fair value of $252,000.

Additionally, during 2020, two new directors purchased 50,000

shares for $900,000.

Additional transactions

with related parties are described in Note 15, Commitments and Contingencies.

1 As a result of a change in employment with the Company, a loan balance belonging to a previously related party was transferred out of the classification of related party loans.

The change was not the result of any disagreement with the Company or due to any matter relating to its operations, policies, or practices.

At December 31, 2022 and 2021, deposits from related parties (directors, executive officers, and principal shareholders) totaled $ 51,960,000 and $ 32,410,000 , respectively.

Property management fees totaling $ 1,000 and $ 12,000 in 2022 and 2021, respectively, were paid to an entity owned by certain members of the Company’s board of directors.

The Company leases a loan production office from a partnership comprised of certain shareholders and members of the board of directors, which is further described in Note 15, Commitments and Contingencies.

Equity Incentive Plan

In April 2021, the Company’s

board of directors and shareholders approved the Five Star Bancorp 2021 Equity Incentive Plan (the “Equity Incentive Plan”).

The Equity Incentive Plan provides for the grant of stock options, stock appreciation rights, performance awards, restricted stock,

restricted stock units, and other stock-based awards that the Compensation Committee determines are consistent with the purpose

of the Equity Incentive Plan and the interests of the Company.

Awards may be granted to the Company’s executives and other

key employees, directors, and other service providers, and are designed to align the interests of the Equity Incentive Plan’s

participants with the interests of our shareholders.

The stock options granted under the Equity Incentive Plan may be either non-statutory

stock options or incentive stock options.

In April 2021, the Company’s board of directors and shareholders approved the Five Star Bancorp 2021 Equity Incentive Plan (the “Equity Incentive Plan”).

The Equity Incentive Plan provides for the grant of stock options, stock appreciation rights, performance awards, restricted stock, restricted stock units, and other stock-based awards that the Compensation Committee determines are consistent with the purpose of the Equity Incentive Plan and the interests of the Company.

Awards may be granted to the Company’s executives and other key employees, directors, and other service providers, and are designed to align the interests of the Equity Incentive Plan’s participants with the interests of our shareholders.

The stock options granted under the Equity Incentive Plan may be either non-statutory stock options or incentive stock options.

There were no stock options outstanding at December 31, 2022 or 2021, respectively.

The total number of shares of our

common stock reserved and available for grant and issuance pursuant to the Equity Incentive Plan will not exceed 1,700,000 shares.

The total number of shares of our common stock reserved and available for grant and issuance pursuant to the Equity Incentive Plan will not exceed 1,700,000 shares, less RSAs granted, plus any RSAs that become available upon forfeiture.

Each of these shares may be issued as an incentive stock option.

The Equity Incentive Plan does not contain an “evergreen”

provision pursuant to which shares authorized for issuance may be automatically replenished.

The Company’s

stock-based compensation consists of RSAs granted under its historical stock-based incentive arrangement (the “Historical

Incentive Plan”) and RSAs issued under the Equity Incentive Plan.

The Historical Incentive Plan consisted of RSAs for certain

executive officers of the Company.

The arrangement provided that these executive officers would receive shares of restricted common

stock of the Company that vested over three years, with the number of shares granted based upon achieving certain performance

These objectives included, but were not limited to, net income adjusted for the provision for loan losses, deposit

growth, efficiency ratio, net interest margin, and asset quality.

Compensation expense for RSAs granted under the Historical Incentive

Plan is recognized over the service period, which is equal to the vesting period of the shares based on the fair value of the

shares at issue date.

In connection

with its IPO in May 2021, the Company granted RSAs under the Equity Incentive Plan to employees, officers, executives, and non-employee

Shares granted to non-employee directors vested immediately upon grant, while shares granted to employees, officers,

and executives vest ratably over three, five, or seven years (as defined in the respective agreements).

All RSAs were granted

at the fair value of common stock at the time of the award.

The RSAs are considered fixed awards as the number of shares and fair

value are known at the date of grant and the fair value at the grant date is amortized over the service period.

granted 174,347 and 11,398 restricted shares during the years ended December 31, 2021 and 2020, respectively.

In addition, 4,522

and no restricted shares were forfeited during the years ended December 31, 2021 and 2020, respectively.

Non-cash stock compensation

expense recognized for the years ended December 31, 2021 and 2020 was $1,440,000 and $568,000, respectively.

2021, the Company granted a total of 41,640 fully vested shares to members of the board of directors as compensation for their service.

In 2020, the Company granted 2,000 fully vested shares to the Chief Executive Officer for service as a member of the board of directors

and 1,250 fully vested shares to another officer as a discretionary grant.

31, 2021 and 2020, respectively, there were 127,751 and 11,568 unvested restricted shares.

As of December 31, 2021, there was

approximately $2,204,000 of unrecognized compensation expense related to the 127,751 unvested restricted shares.

The holders of

unvested RSAs are entitled to dividends on the same per-share ratio as holders of common stock.

Tax benefits for dividends paid

on unvested RSAs are recorded as tax benefits in the consolidated statements of income with a corresponding decrease to current

taxes payable.

The impact of tax benefits for dividends paid on unvested restricted stock on the Company’s consolidated

statements of income for the years ended December 31, 2021 and 2020 was immaterial.

The following

table summarizes information about unvested restricted shares :

Average Grant

Date Fair Value

Average Grant

Date Fair Value

At December 31, 2022, 1,519,826 shares remained available for issuance pursuant to grant awards under the Plan.

The Equity Incentive Plan does not contain an “evergreen” provision pursuant to which shares authorized for issuance may be automatically replenished.

Stock-Based Compensation

The Company’s stock-based compensation consists of RSAs granted under its historical stock-based incentive arrangement (the “Historical Incentive Plan”) and RSAs issued under the Equity Incentive Plan.

The Historical Incentive Plan consisted of RSAs for certain executive officers of the Company.

The arrangement provided that these executive officers would receive shares of restricted common stock of the Company that vested over three years , with the number of shares granted based upon achieving certain performance objectives.

These objectives included, but were not limited to, net income adjusted for the provision for loan losses, deposit growth, efficiency ratio, net interest margin, and asset quality.

Compensation expense for RSAs granted under the Historical Incentive Plan is recognized over the service period, which is equal to the vesting period of the shares based on the fair value of the shares at issue date.

In connection with its IPO in May 2021, the Company granted RSAs under the Equity Incentive Plan to employees, officers, executives, and non-employee directors.

Shares granted to non-employee directors vested immediately upon grant, while shares granted to employees, officers, and executives vest ratably over three , five , or seven years (as defined in the respective agreements).

Since the completion of the IPO, the Company has granted RSAs under the Equity Incentive Plan to executives and directors, which vest annually over three years and monthly over one year, respectively.

All RSAs were granted at the fair value of common stock at the time of the award.

The RSAs are considered fixed awards as the number of shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the service period.

Non-cash stock compensation expense recognized for the years ended December 31, 2022 and 2021 was $ 1,099,000 and $ 1,440,000 , respectively.

In 2022, the Company granted as compensation to members of the board of directors a total of 15,156 shares scheduled to vest monthly in equal installments over one year contingent on continued service.

In 2021, the Company granted a total of 41,640 fully vested shares to members of the board of directors as compensation for their service.

As of December 31, 2022, there was approximately $ 1,642,000 of unrecognized compensation expense related to the 96,826 unvested restricted shares.

Additionally, as of December 31, 2022, the weighed-average term remaining on the unvested restricted shares was 3.53 years.

The holders of unvested RSAs are entitled to dividends at the same per-share ratio as holders of common stock.

Tax benefits for dividends paid on unvested RSAs are recorded as tax benefits in the consolidated statements of income with a corresponding decrease to current taxes payable.

The impact of tax benefits for dividends paid on unvested restricted stock on the Company’s consolidated statements of income for the years ended December 31, 2022 and 2021 was immaterial.

The following table summarizes information about unvested restricted shares:

Shares Weighted

Fair Value Shares Weighted

Beginning of the period balance 127,751 $ 19.95 11,568 $ 21.25

4 unchanged sentences

Shareholders’ Equity

During the year

ended December 31, 2021, the Company declared cash dividends on its common shares totaling $ 24,975,000 .

May 20, 2021, as a result of the Company’s conversion to a C Corporation, the board of directors declared an aggregate distribution

of $ 26,967,000 for the AAA payout, which is described in further detail in Note 11, Income Taxes, and the Company reclassified

the resulting retained deficit related to S Corporation activities to common stock.

During the year ended December 31, 2022, the Company declared cash dividends on its common shares totaling $ 15,301,000 .

Of those total dividends, during 2022, $ 4,953,000 was paid out for certain shareholders affected by the Company's termination of its S corporation status.

This distribution was for the remaining balance on the Company's federal AAA for previously taxed, but undistributed, earnings.

Commitments and Contingencies

Instruments with Off-Balance Sheet Risk

Some financial

instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer

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.

Financial Instruments with Off-Balance Sheet Risk

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer 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.

Substantially all of these

commitments are at variable interest rates, based on an index, and have fixed expiration dates.

sheet risk to loan loss exists up to the face amount of these instruments, although material losses are not anticipated.

uses the same credit policies in making commitments to originate loans and lines of credit as it does for on-balance sheet instruments,

including obtaining collateral at exercise of the commitment.

The contractual amount of unfunded loan commitments and standby

letters of credit not reflected in the consolidated balance sheets are as follows:

of Unfunded Loan Commitments and Standby Letter of Credit

Substantially all of these commitments are at variable interest rates, based on an index, and have fixed expiration dates.

Off-balance sheet risk to loan loss exists up to the face amount of these instruments, although material losses are not anticipated.

The Company uses the same credit policies in making commitments to originate loans and lines of credit as it

does for on-balance sheet instruments, including obtaining collateral at exercise of the commitment.

The contractual amounts of unfunded loan commitments and standby letters of credit not reflected in the consolidated balance sheets were as follows:

(in thousands) 2022 2021

4 unchanged sentences

Undisbursed agricultural real estate loans 1,068 3,427

Other 1,868 3,764

Total commitments and standby letters of credit $ 329,148 $ 248,877

Company records an allowance for loan losses on unfunded loan commitments at the consolidated balance sheet date based on estimates of

the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments

and historical loss rates determined for pooled funded loans.

The allowance for loan losses on unfunded commitments totaled $100,000

as of December 31, 2021 and 2020, which is recorded in interest payable and other liabilities in the consolidated balance sheets.

Concentrations

of credit risk :

The Company grants real estate mortgage, real estate construction, commercial, and consumer loans to customers

primarily in Northern California.

Although the Company has a diversified loan portfolio, a substantial portion is secured by commercial

and residential real estate.

In management’s

judgment, a concentration of loans exists in real estate related loans, which represented approximately 89.31% of the Company’s

loan portfolio at December 31, 2021 and 79.23% of the Company’s loan portfolio at December 31, 2020.

Although management

believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general,

or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on

the collectability of these loans.

Personal and business incomes represent the primary source of repayment for the majority of

The allowance for loan losses on unfunded commitments totaled $ 125,000 and $ 100,000 as of December 31, 2022 and 2021, respectively, which is recorded in interest payable and other liabilities in the consolidated balance sheets.

Concentrations of credit risk :

The Company grants real estate mortgage, real estate construction, commercial, and consumer loans to customers primarily in Northern California.

Although the Company has a diversified loan portfolio, a substantial portion is secured by commercial and residential real estate.

In management’s judgment, a concentration of loans exists in real estate related loans, which represented approximately 91.84 % of the Company’s loan portfolio at December 31, 2022 and 89.31 % of the Company’s loan portfolio at December 31, 2021.

Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectability of these loans.

Personal and business incomes represent the primary source of repayment for the majority of these loans.

Deposit concentrations :

At December 31, 2021, the Company had 64 deposit relationships that exceeded $5,000,000 each, totaling $ 1,166,728,000 , or approximately

51.04 % of total deposits.

The Company’s largest single deposit relationship at December 31, 2021 totaled $ 154,988,000 , or

approximately 6.78 % of total deposits.

Management maintains the Company’s liquidity position and lines of credit with correspondent

banks to mitigate the risk of large withdrawals by the Company’s large depositors.

Correspondent

banking agreements :

The Company maintains funds on deposit with other FDIC-insured financial institutions under correspondent

banking agreements.

Uninsured deposits through these agreements totaled $ 147,219,000 and $ 118,003,000 at December 31, 2021 and

2020, respectively.

leases office space for its banking operations under non-cancelable operating leases of various terms.

The leases expire at various

dates through 2032 and provide for renewal options from zero to five years.

In the normal course of business, it is expected that

these leases will be renewed or replaced by leases on other properties.

One of the leases provides for increases in future minimum

annual rental payments based on defined increases in the Consumer Price Index, while the remaining leases include pre-defined

rental increases over the term of the lease.

has a sublease agreement for space adjacent to the Redding location.

At December 31, 2022, the Company had 90 deposit relationships that exceeded $ 5,000,000 each, totaling $ 1,804,400,000 , or approximately 64.86 % of total deposits.

The Company’s largest single deposit relationship at December 31, 2022 totaled $ 180,000,000 , or approximately 6.47 % of total deposits.

Management maintains the Company’s liquidity position and lines of credit with correspondent banks to mitigate the risk of large withdrawals by the Company’s large depositors.

Correspondent banking agreements :

The Company maintains funds on deposit with other FDIC-insured financial institutions under correspondent banking agreements.

Uninsured deposits through these agreements totaled $ 16,163,000 and $ 147,219,000 at December 31, 2022 and 2021, respectively.

The Company leases office space for its banking operations under non-cancelable operating leases of various terms.

The leases expire at dates through 2032 and provide for renewal options from less than one to five years .

In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.

One of the leases provides for increases in future minimum annual rental payments based on defined increases in the Consumer Price Index, while the remaining leases include predefined rental increases over the term of the lease.

The Company has a sublease agreement for space adjacent to the Redding location.

The sublease has renewal terms extended to December 31, 2023.

leases its Sacramento loan production office from a partnership comprised of some of the Company’s shareholders and certain

members of the board of directors.

The Company leases its Sacramento loan production office from a partnership comprised of certain shareholders and members of the Company's board of directors.

The Sacramento loan production office lease extends through April 2023.

Additionally, the Company

leased its Natomas branch from the same partnership of related parties until July 13, 2021, at which time ownership of the property

was transferred to an unrelated third-party landlord.

Rent expense paid to the partnership was $ 140,000 and $ 225,000 for the years

ended December 31, 2021 and 2020, respectively, under these leases.

The following

table shows the future minimum lease payments and weighted average remaining lease terms under the Company’s operating lease

arrangements as of December 31, 2021.

of Future Minimum Lease Payment and Weighted Average Remaining Lease

(in thousands)

Weighted average remaining term (in years)

is subject to legal proceedings and claims which arise in the ordinary course of business.

In the opinion of management, the amount

of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of

operations of the Company.

Additionally, the Company leased its Natomas branch from the same partnership of related parties until July 13, 2021, at which time ownership of the property was transferred to an unrelated third-party landlord.

Rent expense paid to the partnership was $ 30,000 and $ 140,000 for the years ended December 31, 2022 and 2021, respectively, under these leases.

The Company adopted ASU 2016-02, Leases (Topic 842) as of January 1, 2022, which requires the Company to record an ROUA on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration.

The Company is also required to record a lease liability on the consolidated balance sheets for the present value of future payment commitments.

All of the Company’s leases are comprised of operating leases in which the Company is the lessee of real estate property for branches and operations.

The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less) within the ROUA and lease liability.

Known or determinable adjustments to the required minimum future lease payments were included in the calculation of the Company’s ROUA and lease liability.

Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, if any, such as changes in the Consumer Price Index, are included as variable lease costs.

Additionally, expected variable payments for common area maintenance, taxes, and insurance were unknown and not determinable at lease commencement and, therefore, were not included in the determination of the Company’s ROUA and lease liability.

The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments.

The Company’s lease agreements often include one or more options to renew at the Company’s discretion.

If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROUA and lease liability.

ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable.

As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term.

For operating leases existing prior to January 1, 2022, the rate for the remaining lease term as of January 1, 2022 was used.

The lease liability is reduced based on the discounted present value of remaining payments as of each reporting period.

The ROUA value is measured using the lease liability as adjusted for prepaid or accrued lease payments and remaining lease incentives, unamortized direct costs, and impairment, if any.

As of December 31, 2022, the Company's ROUA and lease liability were $ 3,981,000 and $ 4,243,000 , respectively.

The following table presents the components of lease expense for the year ended December 31, 2022:

(in thousands) Twelve months ended December 31, 2022

Operating lease expense $ 1,129

Sublease income ( 21 )

Total lease expense $ 1,108

Prior to the adoption of ASU 2016-02, rent expense under operating leases was $ 1,064,000 for the year ended December 31, 2021, partially offset by rent income of $ 21,000 during the same period.

The following table presents the weighted average operating lease term and discount rate at December 31, 2022:

Weighted average remaining lease term (in years) 5.38 years

Weighted average discount rate 2.18 %

The following table shows the future minimum lease payments under the Company’s operating lease arrangements as of December 31, 2022.

(in thousands) December 31, 2022

Thereafter 784

Total expected operating lease payments 4,533

Discount for present value of expected cash flows ( 290 )

Lease liability at December 31, 2022

Prior to the adoption of ASC 842, the Company accounted for operating leases under ASC 840.

For comparability purposes in the year of adoption, undiscounted future minimum lease payments under the predecessor standard of ASC 840 as of December 31, 2021 are provided below.

(in thousands) December 31, 2021

Thereafter 1,094

Total minimum lease payments $ 5,385

Litigation Matters

The Company is subject to legal proceedings and claims which arise in the ordinary course of business.

In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company.

Capital Requirements and Restrictions on Retained Earnings

and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies.

to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators

that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

Under capital

adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital

guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated

under regulatory accounting practices.

amounts and the Bank’s prompt corrective action classifications are also subject to qualitative judgments by the regulators

about components, risk weightings, and other factors.

Prompt corrective action provisions are generally not applicable to bank

holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank

to maintain minimum amounts and ratios (set forth in the below table) of total capital, Tier 1 capital, and common equity Tier

1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets.

The Company operates

under the Small Bank Holding Company Policy Statement, and, accordingly, is exempt from the Federal Reserve’s generally

applicable risk-based capital ratio and leverage ratio requirements.

The Bank is required to meet a common equity Tier 1 capital

to risk-weighted assets ratio of at least 7.00% (a minimum of 4.50% plus a capital conservation buffer of 2.50%), a Tier 1 capital

to risk-weighted assets ratio of at least 8.50% (a minimum of 6.00% plus a capital conservation buffer of 2.50%), a total capital

to risk-weighted assets ratio of at least 10.50% (a minimum of 8.00% plus a capital conservation buffer of 2.50%), and a Tier

1 leverage ratio of at least 4.00%.

Management believes that, as of December 31, 2021, the Company and the Bank met all capital

adequacy requirements to which they are subject.

As of December

31, 2021, the Bank was categorized as “well-capitalized” under the regulatory framework for prompt corrective action.

To be categorized as well-capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage

ratios as set forth in the below table.

There are no conditions or events since that notification that management believes have

changed the Bank’s category.

The principal

source of cash for the Company is dividends from the Bank.

Dividends from the Bank to the Company are restricted under California

law to the lesser of:

(a) the Bank’s retained earnings;

or (b) the Bank’s net income for the latest three fiscal years,

less dividends previously declared during that period.

As of December 31, 2021 and 2020, the maximum amount available for dividend

distribution under this restriction was approximately $15,464,000 and $15,624,000, respectively.

If a proposed dividend exceeds

the limit, the Bank may still pay a dividend to the Holding Company if it obtains approval from the California Department of Financial

Protection and Innovation and the dividend does not exceed the greater of:

The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and the Bank’s prompt corrective action classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Prompt corrective action provisions are generally not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the below table) of total capital, Tier 1 capital, and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets.

Historically, as a bank holding company with less than $ 3.0 billion in total consolidated assets and that met certain other criteria, we had been operating under the Small Bank Holding Company Policy Statement, which provides an exemption from the Board of Governors of the Federal Reserve System’s generally applicable risk-based capital ratio and leverage ratio requirements.

Because the Company's total consolidated assets exceeded the $ 3.0 billion threshold as of

September 30, 2022, the Company is no longer subject to this policy statement and its capital adequacy will be evaluated relative to the Federal Reserve's generally applicable capital requirements.

A bank holding company that crosses the $ 3.0 billion total consolidated assets threshold as of June 30 of a particular year is no longer permitted to file reports as a small holding company beginning the following March.

The Company's total consolidated assets were not in excess of $ 3.0 billion as of June 30, 2022, and so the Company has accordingly prepared and filed financial reports with the Federal Reserve as a small bank holding company.

If the Company's total consolidated assets remain in excess of $ 3.0 billion as of June 30, 2023, starting in March 2024, the Company will cease filing financial reports with the Federal Reserve as though it were a small holding company.

The Company and Bank are required to meet a common equity Tier 1 capital to risk-weighted assets ratio of at least 7.00 % (a minimum of 4.50 % plus a capital conservation buffer of 2.50 %), a Tier 1 capital to risk-weighted assets ratio of at least 8.50 % (a minimum of 6.00 % plus a capital conservation buffer of 2.50 %), a total capital to risk-weighted assets ratio of at least 10.50 % (a minimum of 8.00 % plus a capital conservation buffer of 2.50 %), and a Tier 1 leverage ratio of at least 4.00 %.

Management believes that, as of December 31, 2022, the Company and the Bank met all capital adequacy requirements to which they are subject.

As of December 31, 2022, the Bank was categorized as “well-capitalized” under the regulatory framework for prompt corrective action.

To be categorized as well-capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the below table.

There are no conditions or events since that notification that management believes have changed the Bank’s category.

The principal source of cash for the Company is dividends from the Bank.

Dividends from the Bank to the Company are restricted under California law to the lesser of:

(i) the Bank’s retained earnings;

or (ii) the Bank’s net income for the latest three fiscal years, less dividends previously declared during that period.

As of December 31, 2022 and 2021, the maximum amount available for dividend distribution under this restriction was approximately $ 33,867,000 and $ 15,464,000 , respectively.

If a proposed dividend exceeds the limit, the Bank may still pay a dividend to the Holding Company if it obtains approval from the California Department of Financial Protection and Innovation and the dividend does not exceed the greater of:

(i) the retained earnings of the Bank;

income of the Bank for its last fiscal year;

(ii) the net income of the Bank for its last fiscal year;

or (iii) the net income of the Bank for its current fiscal year.

The Company’s

and the Bank’s actual capital amounts and ratios as of December 31, 2021 and 2020 are presented in the following table:

Ratios for Bancorp

Adequacy Purposes 1

Capitalized under Prompt

Corrective Action

in thousands)

capital (to risk-weighted assets)

1 capital (to risk-weighted assets)

equity tier 1 capital (to risk-weighted assets)

capital (to risk-weighted assets)

1 capital (to risk-weighted assets)

equity tier 1 capital (to risk-weighted assets)

Ratios for the Bank

The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2022 and 2021 are presented in the following tables.

As of December 31, 2022 and 2021, Bancorp's Tier 2 capital included subordinated debt, which was not included at the bank level.

Capital Ratios for Bancorp

(dollars in thousands)

Actual Ratio Required for Capital

Adequacy Purposes 1

Capitalized under Prompt

Corrective Action

in thousands)

capital (to risk-weighted assets)

1 capital (to risk-weighted assets)

equity tier 1 capital (to risk-weighted assets)

capital (to risk-weighted assets)

1 capital (to risk-weighted assets)

equity tier 1 capital (to risk-weighted assets)

Presented as if Bancorp

were subject to Basel III capital requirements.

The Company operates under the Small Bank Holding Company Policy Statement

and therefore is not currently subject to generally applicable capital adequacy requirements.

Fair Value of Assets

and Liabilities

following table summarizes the Companys assets and liabilities that were carried at fair value on a recurring basis.

of Fair Value Assets and Liabilities on Recurring Basis

(in thousands)

Quoted Prices in

Active Markets for

Identical Assets

in Fair Value Recorded

Ratio to be Well-

Capitalized under

Prompt Corrective

Action Provisions

Amount Ratio Amount Ratio Amount Ratio

December 31, 2022

Total capital (to risk-weighted assets) $ 366,113 12.46 % $ 235,065 8.00 % N/A N/A

Tier 1 capital (to risk-weighted assets) $ 263,993 8.99 % $ 176,191 6.00 % N/A N/A

Common equity tier 1 capital (to risk-weighted assets) $ 263,993 8.99 % $ 132,144 4.50 % N/A N/A

Tier 1 leverage $ 263,993 8.60 % $ 122,788 4.00 % N/A N/A

December 31, 2021

Total capital (to risk-weighted assets) $ 285,128 13.98 % $ 163,177 8.00 % N/A N/A

Tier 1 capital (to risk-weighted assets) $ 233,397 11.44 % $ 122,382 6.00 % N/A N/A

Common equity tier 1 capital (to risk-weighted assets) $ 233,397 11.44 % $ 91,787 4.50 % N/A N/A

Tier 1 leverage $ 233,397 9.47 % $ 98,600 4.00 % N/A N/A

Capital Ratios for the Bank

(dollars in thousands)

Actual Ratio Required for Capital

Adequacy Purposes Ratio to be Well-

Capitalized under

Prompt Corrective

Action Provisions

Amount Ratio Amount Ratio Amount Ratio

December 31, 2022

Total capital (to risk-weighted assets) $ 356,301 12.14 % $ 234,795 8.00 % $ 293,494 10.00 %

Tier 1 capital (to risk-weighted assets) $ 327,788 11.17 % $ 176,072 6.00 % $ 234,763 8.00 %

Common equity tier 1 capital (to risk-weighted assets) $ 327,788 11.17 % $ 132,054 4.50 % $ 190,745 6.50 %

Tier 1 leverage $ 327,788 10.69 % $ 122,652 4.00 % $ 153,315 5.00 %

December 31, 2021

Total capital (to risk-weighted assets) $ 279,152 13.69 % $ 163,078 8.00 % $ 203,848 10.00 %

Tier 1 capital (to risk-weighted assets) $ 255,807 12.55 % $ 122,309 6.00 % $ 163,078 8.00 %

Common equity tier 1 capital (to risk-weighted assets) $ 255,807 12.55 % $ 91,731 4.50 % $ 132,501 6.50 %

Tier 1 leverage $ 255,807 10.38 % $ 98,555 4.00 % $ 123,193 5.00 %

Prior to September 30, 2022, Bancorp operated under the Small Bank Holding Company Policy Statement and therefore, was not subject to Basel III capital adequacy requirements.

The listed capital adequacy ratios exclude capital conservation buffers.

Fair Value of Assets and Liabilities

The following table summarizes the Company’s assets and liabilities that were carried at fair value on a recurring basis.

(in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets

(Level 1) Significant Other Observable Inputs

(Level 2) Significant Unobservable Inputs

(Level 3) Measurement Categories:

Changes in Fair Value Recorded In 1

Securities available-for-sale:

government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds

Derivatives – interest rate swap

government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds $ 115,988 $ — $ 115,988 $ — OCI

Derivatives – interest rate swap 16 — 16 — NI

Securities available-for-sale:

government agencies, mortgage-backed securities, obligations of states and political subdivisions, and collateralized mortgage obligations

Derivatives – interest rate swap

Other comprehensive

income (“OCI”) or net income (“NI”).

Available-for-sale

securities are recorded at fair value on a recurring basis.

When available, quoted market prices (Level 1) are used to determine

the fair value of available-for-sale securities.

If quoted market prices are not available, management obtains pricing information

from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently

sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability

of default, loss severity, and credit spreads (Level 2).

government agencies, mortgage-backed securities, obligations of states and political subdivisions, and collateralized mortgage obligations $ 148,807 $ — $ 148,807 $ — OCI

Derivatives – interest rate swap 92 — 92 — NI

1 Other comprehensive income (“OCI”) or net income (“NI”).

Available-for-sale securities are recorded at fair value on a recurring basis.

When available, quoted market prices (Level 1 inputs) are used to determine the fair value of available-for-sale securities.

If quoted market prices are not available, management obtains pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity, and credit spreads (Level 2 inputs).

Level 2 securities include U.S.

agencies or government-sponsored agencies’

debt securities, mortgage-backed securities, government agency issued bonds, privately issued collateralized mortgage obligations,

and corporate bonds.

As of December 31, 2021 and 2020, there were no Level 1 or Level 3 securities and no transfers between Level

1 and Level 2 classifications for assets or liabilities measured at fair value on a recurring basis.

The Company’s investment portfolio

service bureau has developed a model for pricing available-for-sale debt securities.

Information such as historical and current

performance of the underlying collateral, deferral/default rates, collateral coverage ratios, break-even yield calculations, cash

flow projections, liquidity, and credit premiums required by a market participant, as well as financial trend analysis with respect

to the individual issuing financial institutions and insurance companies, are utilized in determining individual security valuations.

Due to current market conditions, as well as the limited trading activity of the securities, the market value of the securities

is highly sensitive to assumption changes and market volatility.

The Company’s derivative is

comprised of an interest rate swap for a structured lending arrangement and is reported at fair value utilizing Level 2 inputs.

The Company obtains fair values from financial institutions that utilize internal models with observable market data inputs to

estimate the values of these instruments (Level 2 inputs).

The fair value of collateral dependent

impaired loans and other real estate is generally based on recent real estate appraisals.

These appraisals may utilize a single

valuation approach or a combination of approaches including comparable sales and the income approach.

Adjustments are routinely

made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.

Management also incorporates assumptions regarding market trends or other relevant factors and selling and commission costs ranging

from 5.00% to 7.00%.

Such adjustments and assumptions are typically significant and result in a Level 3 classification of the

inputs for determining fair value.

Certain financial

assets may be measured at fair value on a non-recurring basis.

These assets are subject to fair value adjustments that result

from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans

that are collateral dependent and OREO.

As of December 31, 2021 and 2020, the Company did not carry any assets measured at fair

value on a non-recurring basis.

Disclosures about Fair Value of

Financial Instruments

The table below

is a summary of fair value estimates for financial instruments as of December 31, 2021 and 2020.

These estimates are made at a

specific point in time based on relevant market data and information about the financial instruments.

These estimates do not reflect

any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument

for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.

addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair

value estimates and have not been considered in any of these estimates.

Because no market

exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding

current economic conditions, risk characteristics of various financial instruments, and other factors.

These estimates are subjective

in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

in assumptions could significantly affect the fair values presented.

The carrying amounts in the following table are recorded

in the consolidated balance sheets under the indicated captions.

Further, management has not disclosed the fair value of financial

instruments specifically excluded from disclosure requirements such as BOLI.

of fair value estimates for financial instruments

December 31, 2021

December 31, 2020

(in thousands)

agencies’ or government-sponsored agencies’ debt securities, mortgage-backed securities, government agency issued bonds, privately issued collateralized mortgage obligations, and corporate bonds.

Level 3 securities are based on unobservable inputs that are supported by little or no market activity.

In addition, values use discounted cash flow models and may include significant management judgment and estimation.

As of December 31, 2022 and 2021, there were no Level 1 available-for-sale securities and no transfers between Level 1 and Level 2 classifications for assets or liabilities measured at fair value on a recurring basis.

The Company’s investment portfolio service bureau has developed a model for pricing available-for-sale debt securities.

Information such as historical and current performance of the underlying collateral, deferral/default rates, collateral coverage ratios, break-even yield calculations, cash flow projections, liquidity, and credit premiums required by a market participant, as well as financial trend analysis with respect to the individual issuing financial institutions and insurance companies, are utilized in determining individual security valuations.

Due to current market conditions, as well as the limited trading activity of the securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

The Company’s derivative is comprised of an interest rate swap for a structured lending arrangement and is reported at fair value utilizing Level 2 inputs.

The Company obtains fair values from financial institutions that utilize internal models with observable market data inputs to estimate the values of these instruments (Level 2 inputs).

The fair value of collateral dependent impaired loans and other real estate is generally based on recent real estate appraisals.

These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.

Management also incorporates assumptions regarding market trends or other relevant factors and selling and commission costs ranging from 5.00 % to 7.00 %.

Such adjustments and assumptions are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Certain financial assets may be measured at fair value on a non-recurring basis.

These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as impaired loans that are collateral dependent and OREO.

As of December 31, 2022 and 2021, the Company did not carry any assets measured at fair value on a non-recurring basis.

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of December 31, 2022 and 2021.

These estimates are made at a specific point in time based on relevant market data and information about the financial instruments.

These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments.

In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors.

These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.

Changes in assumptions could significantly affect the fair values presented.

The carrying amounts in the following table are recorded in the consolidated balance sheets under the indicated captions.

Further, management has not disclosed the fair value of financial instruments specifically excluded from disclosure requirements, such as BOLI.

(in thousands) December 31, 2022 December 31, 2021

Value Fair Value

Hierarchy Carrying

Value Fair Value

Financial assets:

Cash and cash equivalents

Time deposits in banks

Securities available-for-sale

Securities held-to-maturity

Loans held for sale

Loans held for investment

FHLB stock and other investments

Interest receivable

Interest rate swap

Cash and cash equivalents $ 259,991 $ 259,991 Level 1 $ 425,329 $ 425,329 Level 1

Time deposits in banks 9,849 9,849 Level 1 14,464 14,464 Level 1

Securities available-for-sale 115,988 115,988 Level 2 148,807 148,807 Level 2

Securities held-to-maturity 3,756 3,432 Level 3 4,946 5,197 Level 3

Loans held for sale 9,416 9,785 Level 2 10,671 11,217 Level 2

Loans held for investment, net of allowance for loan losses 2,762,937 2,570,176 Level 3 1,911,217 1,893,431 Level 3

FHLB stock and other investments 16,570 N/A N/A 12,464 N/A N/A

Interest receivable 7,454 7,454 Level 2 5,332 5,332 Level 2

Interest rate swap 16 16 Level 2 92 92 Level 2

Financial liabilities:

Interest payable

Interest rate swap

Subordinated notes

The following

methods and assumptions were used by the Company to estimate the fair value of its financial instruments at December 31, 2021

cash equivalents and time deposits in banks :

The carrying amount is estimated to be fair value due to the liquid nature of

the assets and their short-term maturities.

See discussion above for the methods and assumptions used by the Company to estimate the fair value of investment

For loans held for sale, the fair value is based on what secondary markets are currently offering for portfolios

with similar characteristics.

for investment :

For variable rate loans that reprice frequently with no significant change in credit risk, fair values are

based on carrying values.

Fair values for other loans are estimated using discounted cash flow analyses, which use interest rates

being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness without considering

widening credit spreads due to market illiquidity, which approximates the exit price notion.

The allowance for loan losses is

considered to be a reasonable estimate of loan discount for credit quality concerns.

receivable and payable :

Deposits 2,782,004 2,562,600 Level 2 2,285,890 2,210,555 Level 2

Interest payable 1,568 1,568 Level 2 23 23 Level 2

Interest rate swap 16 16 Level 2 92 92 Level 2

Subordinated notes 73,606 72,273 Level 3 28,386 28,386 Level 3

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at December 31, 2022 and 2021:

Cash and cash equivalents and time deposits in banks :

The carrying amount is estimated to be fair value due to the liquid nature of the assets and their short-term maturities.

Investment securities :

See discussion above for the methods and assumptions used by the Company to estimate the fair value of investment securities.

Loans held for sale :

For loans held for sale, the fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.

Loans held for investment, net of allowance for loan losses :

For variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values.

Fair values for other loans are estimated using discounted cash flow analyses, which use interest rates being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness without considering widening credit spreads due to market illiquidity, which approximates the exit price notion.

The allowance for loan losses is considered to be a reasonable estimate of loan discount for credit quality concerns.

Interest receivable and payable :

For interest receivable and payable, the carrying amount is estimated to be fair value.

- interest rate swap :

See above for a discussion of the methods and assumptions used by the Company to estimate the fair value

of derivatives.

The fair values

for demand deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying

Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow analysis that uses interest

rates being offered at each reporting date by the Company for certificates with similar remaining maturities.

For variable rate

time deposits, cost approximates fair value.

to extend credit :

Derivatives - interest rate swap :

See above for a discussion of the methods and assumptions used by the Company to estimate the fair value of derivatives.

The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date, as represented by their carrying amount.

Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow analysis that uses interest rates being offered at each reporting date by the Company for certificates with similar remaining maturities.

For variable rate time deposits, cost approximates fair value.

Commitments to extend credit :

Commitments to extend credit are primarily for adjustable rate loans.

For these commitments, there are no

differences between the committed amounts and their fair values.

Commitments to fund fixed rate loans are at rates which approximate

fair value at each reporting date.

The fair value is estimated by discounting the future cash flow using the current 3-month LIBOR rate.

The Company’s

subordinated notes are not registered securities and were issued through private placements, resulting in a Level 3 classification.

For these commitments, there are no differences between the committed amounts and their fair values.

Commitments to fund fixed rate loans are at rates which approximate fair value at each reporting date.

Subordinated notes :

The fair value is estimated by discounting the future cash flow using the current three-month LIBOR.

The Company’s subordinated notes are not registered securities and were issued through private placements, resulting in a Level 3 classification.

The notes are recorded at carrying value.

5 unchanged sentences

Investment in banking subsidiary 316,620 257,456

Other assets 3,090 922

Total assets $ 328,398 $ 264,014

LIABILITIES AND SHAREHOLDERS’ EQUITY

11 unchanged sentences

Equity in undistributed banking subsidiary income 32,982 19,331

STATEMENTS OF CASH FLOWS

Net income $ 44,801 $ 42,441

CONDENSED STATEMENTS OF CASH FLOWS

Years ended December 31, 2022 and 2021

1 unchanged sentence

Cash flows from operating activities:

Net income $ 44,801 $ 42,441

Adjustments to reconcile net income to net cash provided by operating activities:

Stock compensation expense 652 594

Stock issued to directors

Director stock compensation expense 447 846

Equity in undistributed banking subsidiary income ( 32,984 ) ( 19,331 )

Amortization of subordinated notes issuance costs 122 66

Extinguishment of redeemed subordinated note issuance costs 302 —

Change in other assets ( 2,168 ) ( 631 )

7 unchanged sentences

Cash dividends paid ( 15,301 ) ( 51,942 )

Proceeds from subordinated note issuance 75,000 —

Subordinated note issuance costs ( 1,454 ) —

Subordinated note redemption ( 28,750 ) —

Net cash provided by financing activities 29,495 59,301

3 unchanged sentences

Subsequent Events

On January 20,

2022, the board of directors declared a $ 0.15 per common share dividend for shareholders of record as of February 7, 2022 , which

was paid on February 14, 2022 in the amount of $ 2,587,000 .

Changes in and Disagreements

with Accountants on Accounting and Financial Disclosure

On January 19, 2023, the board of directors declared a $ 0.15 per common share dividend for shareholders of record as of February 6, 2023, which was paid on February 13, 2023 in the amount of $ 2,589,000 .

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data