What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-09 compared with 2023-05-10 · 424 added, 263 removed, 678 unchanged (50% of the section changed)

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• changes in the U.S.

economy, including an economic slowdown, inflation, deflation, housing prices, employment levels, rate of growth, and general business conditions, including uncertainty regarding the federal government's debt limit or a prolonged shutdown of the federal government;

economy, including an economic slowdown, inflation, deflation, housing prices, employment levels, rate of growth, and general business conditions;

• uncertain market conditions and economic trends nationally, regionally, and particularly in Northern California and California;

• the impacts related to or resulting from recent bank failures and other economic and industry volatility, including potential increased regulatory requirements and costs and potential impacts to macroeconomic conditions;

• the impacts related to or resulting from recent bank failures and other economic and industry volatility, including increased regulatory requirements and costs and potential impacts to macroeconomic conditions;

• the impact of recent and future legislative and regulatory changes, including changes in banking, securities, and tax laws and regulations and their application by our regulators, and economic stimulus programs;

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• other factors that are discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” of our 2022 Annual Report on Form 10-K, and other filings we may make with the SEC, copies of which are available from us at no charge.

The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” of our 2022 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the three months ended March 31, 2023, and other filings we may make with the SEC, copies of which are available from us at no charge.

New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

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We aim to consistently deliver value that meets or exceeds the expectations of our shareholders, customers, employees, business partners, and community.

We refer to our mission as “purpose-driven and integrity-centered banking.” At March 31, 2023, we had total assets of $3.4 billion, total loans held for investment, net of allowance for credit losses, of $2.8 billion, and total deposits of $2.9 billion.

We refer to our mission as “purpose-driven and integrity-centered banking.” At June 30, 2023, we had total assets of $3.4 billion, total loans held for investment, net of allowance for credit losses, of $2.9 billion, and total deposits of $2.9 billion.

Critical Accounting Estimates

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Our most significant accounting policies and our critical accounting estimates are described in greater detail in Note 1, Basis of Presentation, in our audited consolidated financial statements and Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates included in the 2022 Annual Report on Form 10-K.

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates included in our 2022 Annual Report on Form 10-K.

We have identified accounting policies and estimates that, due to the difficult, subjective, or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our unaudited consolidated financial statements to those judgments and assumptions, are critical to an understanding of our consolidated financial condition and results of operations.

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Executive Summary

Net income for the three months ended March 31, 2023 totaled $13.2 million, compared to net income of $9.9 million for the three months ended March 31, 2022.

The following are highlights of our operating and financial performance for the periods presented:

Total deposits increased by $138.4 million from $2.8 billion at December 31, 2022 to $2.9 billion at March 31, 2023.

Deposit increases were primarily attributable to an increase in the number of new deposit relationships, as well as normal fluctuations in some of our large existing accounts.

Non-interest-bearing deposits decreased by $134.6 million in the first three months of 2023 to $836.7 million, and represented 28.65% of total deposits at March 31, 2023, compared to 34.91% of total deposits at December 31, 2022.

Our loan to deposit ratio was 98.66% at March 31, 2023, compared to 100.67% at December 31, 2022.

Total assets were $3.4 billion at March 31, 2023, representing a $170.1 million, or 5.27%, increase compared to $3.2 billion at December 31, 2022.

Total loans held for investment were $2.9 billion at March 31, 2023, compared to $2.8 billion at December 31, 2022, an increase of $78.5 million, or 2.81%.

The increase was primarily attributable to a $47.8 million increase in commercial real estate loans, a $9.7 million increase in commercial construction loans, an $8.3 million increase in commercial secured loans, and an $8.0 million increase in commercial land and development loans.

• Non-accrual Loans.

Credit quality remains strong, with non-accrual loans representing $0.4 million, or 0.01% of total loans held for investment, at March 31, 2023, compared to $0.4 million, or 0.01% of total loans held for investment, at December 31, 2022.

The ratio of allowance for credit losses to total loans held for investment, or total loans at period end, was 1.19% at March 31, 2023 and 1.02% at December 31, 2022.

Net income for the three and six months ended June 30, 2023 totaled $12.7 million and $25.9 million, respectively, compared to net income of $10.0 million and $19.8 million for the three and six months ended June 30, 2022, respectively.

The following are highlights of our operating and financial performance, and financial condition for the dates and periods presented:

Total deposits increased by $147.7 million from $2.8 billion at December 31, 2022 to $2.9 billion at June 30, 2023.

Non-brokered deposits increased by $162.7 million in the first six months of 2023 to $2.8 billion.

Non-interest-bearing deposits decreased by $137.5 million in the first six months of 2023 to $833.7 million, and represented 28.46% of total deposits at June 30, 2023, as compared to 34.91% of total deposits at December 31, 2022.

Total deposit increases were primarily attributable to an increase in the number of new deposit relationships, as well as normal fluctuations in some of our large existing accounts.

Our loan to deposit ratio was 100.21% at June 30, 2023, as compared to 100.67% at December 31, 2022.

Total assets were $3.4 billion at June 30, 2023, representing a $175.5 million, or 5.44%, increase compared to $3.2 billion at December 31, 2022.

Total loans held for investment were $2.9 billion at June 30, 2023, compared to $2.8 billion at December 31, 2022, an increase of $136.1 million, or 4.88%.

The increase was primarily attributable to increases of $118.1 million in commercial real estate loans, $11.8 million in commercial construction loans, and $7.7 million in commercial land and development loans.

• Credit Quality.

Credit quality remains strong, with non-accrual loans representing $0.3 million, or 0.01% of total loans held for investment, at June 30, 2023, as compared to $0.4 million, or 0.01% of total loans held for investment, at December 31, 2022.

The ratio of allowance for credit losses to total loans held for investment, or total loans at period end, was 1.16% at June 30, 2023 and 1.02% at December 31, 2022.

• ROAA and ROAE.

ROAA and ROAE were 1.65% and 20.94%, respectively, for the three months ended March 31, 2023, as compared to ROAA of 1.53% and ROAE of 17.07% for the three months ended March 31, 2022.

ROAA and ROAE were 1.55% and 19.29%, respectively, for the three months ended June 30, 2023, as compared to ROAA of 1.45% and ROAE of 17.20% for the three months ended June 30, 2022.

ROAA and ROAE were 1.60% and 20.09%, respectively, for the six months ended June 30, 2023, as compared to ROAA of 1.49% and ROAE of 17.07% for the six months ended June 30, 2022.

• Net Interest Margin.

Net interest margin was 3.75% for the three months ended March 31, 2023, and 3.60% for the three months ended March 31, 2022.

The increase in net interest margin for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily attributable to interest income resulting from yields earned and loan growth quarter over quarter, which more than offset increases to interest expense from rates paid and deposit growth.

Net interest margin was 3.45% and 3.59% for the three and six months ended June 30, 2023, respectively, and 3.71% and 3.65% for the three and six months ended June 30, 2022, respectively.

The decrease in net interest margin for the both the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022 was primarily due to an increase on deposit costs more than offsetting increases in yields on earning assets as the effective Federal Funds rate increased from 1.58% at June 30, 2022 to 5.08% at June 30, 2023.

• Efficiency Ratio.

Efficiency ratio was 36.43% for the three months ended March 31, 2023, down from 39.82% for the corresponding period of 2022.

The decrease was primarily attributable to the change in net interest income more than offsetting the change in non-interest expense period-over-period.

Efficiency ratio was 39.41% for the three months ended June 30, 2023, up from 38.53% for the corresponding period of 2022.

Additionally, efficiency ratio was 37.92% for the six months ended June 30, 2023, down from 39.14% for the corresponding period of 2022.

• Capital Ratios .

All capital ratios were above well-capitalized regulatory thresholds as of March 31, 2023.

The total risk-based capital ratio for the Company was 12.50% at March 31, 2023, compared to 12.46% at December 31, 2022.

The Tier 1 leverage ratio was 8.53% at March 31, 2023, compared to 8.60% at December 31, 2022.

All capital ratios were above well-capitalized regulatory thresholds as of June 30, 2023.

The total risk-based capital ratio for the Company was 12.43% at June 30, 2023, compared to 12.46% at December 31, 2022.

The Tier 1 leverage ratio was 8.66% at June 30, 2023, as compared to 8.60% at December 31, 2022.

For additional information about the regulatory capital requirements applicable to the Company and the Bank, see the section entitled “—Financial Condition Summary—Capital Adequacy” below.

The board of directors declared a cash dividend of $0.15 per share on January 19, 2023.

Highlights of the financial results are presented in the following tables:

(dollars in thousands) March 31, 2023 December 31, 2022

The board of directors declared a cash dividend of $0.20 per share on April 20, 2023.

Highlights of our financial results are presented in the following tables:

(dollars in thousands) June 30,

2023 December 31, 2022

Selected financial condition data:

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7.91 % 7.83 %

For the three months ended

(dollars in thousands, except per share data) March 31,

2023 March 31,

For the three months ended For the six months ended

(dollars in thousands, except per share data) June 30,

2023 June 30,

2022 June 30,

2023 June 30,

Selected operating data:

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Net income 12,729 9,953 25,890 19,815

Per common share data:

Earnings per common share:

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Diluted $ 0.74 $ 0.58 $ 1.51 $ 1.15

Book value per share $ 15.60 $ 13.52 $ 15.60 $ 13.52

Tangible book value per share 2

$ 15.60 $ 13.52 $ 15.60 $ 13.52

Performance and other financial ratios:

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See the section entitled “Non-GAAP Financial Measures” for a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measure.

Tangible shareholders’ equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets.

Tangible shareholders’ equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided

by total assets less goodwill and other intangible assets.

The most directly comparable GAAP financial measure is total shareholders’ equity to total assets.

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As a result, tangible shareholders’ equity to tangible assets is the same as total shareholders’ equity to total assets at the end of each of the periods indicated.

2 Tangible book value per share is defined as total shareholders’ equity less goodwill and other intangible assets, divided by the outstanding number of common shares at the end of the period.

Tangible book value is considered a non-GAAP financial measure.

The most directly comparable GAAP financial measure is book value per share.

We had no goodwill or other intangible assets at the end of any period indicated.

As a result, tangible book value per share is the same as book value per share at the end of each of the periods indicated.

3 Cash dividend payout ratio on common stock is calculated as dividends on common shares divided by basic earnings per common share.

RESULTS OF OPERATIONS

The following discussion of our results of operations compares the three months ended March 31, 2023 to the three months ended March 31, 2022.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023.

The following discussion of our results of operations compares the three and six months ended June 30, 2023 to the three and six months ended June 30, 2022.

The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2023.

Net Interest Income

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Changes in market interest rates and competition in our market typically have the largest impact on periodic changes in our net interest margin.

Our net interest margin of 3.75% for the three months ended March 31, 2023 increased from 3.60% for the three months ended March 31, 2022.

The increase was primarily due to a 142 basis point increase in the average yield on interest-earning assets, which increased from 3.76% for the three months ended March 31, 2022 to 5.18% for the three months ended March 31, 2023, partially offset by a 193 basis point increase in average rates paid on interest-bearing liabilities, which increased from 0.28% for the three months ended March 31, 2022 to 2.21% for the three months ended March 31, 2023.

Three months ended June 30, 2023 compared to three months ended June 30, 2022

Net interest income increased by $3.1 million, or 12.43%, to $27.6 million for the three months ended June 30, 2023 from $24.5 million for the three months ended June 30, 2022.

Our net interest margin of 3.45% for the three months ended June 30, 2023 decreased from 3.71% for the three months ended June 30, 2022.

The contraction of our net interest margin was primarily due to the increased rates paid on interest-bearing liabilities more than offsetting the increased yields earned on interest-earning assets, relating to a change in effective Federal Funds rate from 1.58% at June 30, 2022 to 5.08% at June 30, 2023.

Average balance sheet, interest, and yield/rate analysis.

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For the three months ended

March 31, 2023

June 30, 2023

For the three months ended

March 31, 2022

(dollars in thousands) Average

Balance Interest

Expense Average

Balance Interest

Expense Average

June 30, 2022

(dollars in thousands) Average Balance Interest Income/Expense Average Yield/Rate Average Balance Interest Income/Expense Average Yield/Rate

Interest-earning deposits with banks 1

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Interest-bearing transaction accounts 1

$ 290,404 $ 825 1.14 % $ 255,665 $ 66 0.10 %

Savings accounts 1

139,522 758 2.18 % 96,867 38 0.16 %

Money market accounts 1

1,283,353 8,136 2.54 % 981,366 679 0.28 %

Time accounts 1

370,864 4,250 4.60 % 174,991 238 0.55 %

Subordinated debt and other borrowings 1

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Yields are not calculated on a tax-equivalent basis.

3 Average loan balance includes both loans held for investment and loans held for sale.

3 Non-accrual loans are included in total loan balances.

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For the three months ended

March 31, 2023 compared to

the three months ended March 31, 2022

(dollars in thousands) Volume Yield/Rate Total

June 30, 2023 compared to

the three months ended June 30, 2022

(dollars in thousands) Volume Yield/Rate Total Increase (Decrease)

Interest-earning deposits with banks $ (1,413) $ 3,113 $ 1,700

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Factors affecting interest income and yields

Interest income increased by $17.4 million, or 76.25%, to $40.3 million for the three months ended March 31, 2023 from $22.9 million for the corresponding period of 2022 due to the following:

The average yields on interest-earning assets were 5.18% and 3.76% for the three months ended March 31, 2023 and March 31, 2022, respectively.

The increase in yields period-over-period was primarily due to increased rates earned on loans held for investment and sale originated in the current environment of rising rates, and increases in yields earned on interest-earning deposits with banks.

Average interest-earning assets increased by approximately $690.1 million period-over-period, driven by new loan originations which drove increases in the average daily balances of loans for the three months ended March 31, 2023.

Interest income increased by $16.8 million, or 64.59%, to $42.8 million for the three months ended June 30, 2023 from $26.0 million for the corresponding period of 2022 due to the following:

The average yields on interest-earning assets were 5.35% and 3.93% for the three months ended June 30, 2023 and June 30, 2022, respectively.

The increase in yield period-over-period was primarily due to increased yields earned on the loan portfolio from new originations and repricing on variable rate loans, combined with increases in yields earned on interest-earning deposits with banks, coinciding with the rise in the effective Federal Funds rate from 1.58% to 5.08% between June 30, 2022 and June 30, 2023.

Average interest-earning assets increased by approximately $555.7 million period-over-period, primarily driven by new loan originations which drove increases in the average daily balances of loans for the three months ended June 30, 2023, partially offset by a decrease in interest-earning deposits held at other banks.

Factors affecting interest expense and rates

Interest expense increased by $10.2 million, or 1,029.86%, to $11.2 million for the three months ended March 31, 2023 from $1.0 million for the same period of 2022 due to the following:

The average costs of interest-bearing liabilities were 2.21% and 0.28% for the three months ended March 31, 2023 and March 31, 2022, respectively.

The increase in cost period-over-period was due to increases in the rates paid on interest-bearing deposit accounts, with the most significant increases in time and money market accounts.

The average cost of subordinated debt and other borrowings decreased from 6.33% to 5.76% for the three months ended March 31, 2022 and March 31, 2023, respectively, due to a reduction of interest expenses as a percentage of the average balance during the three months ended March 31, 2023.

Additionally, the cost of funds increased from 0.17% for the quarter ended March 31, 2022 to 1.53% for the quarter ended March 31, 2023.

Average interest-bearing liabilities increased by $603.7 million period-over-period, primarily driven by increases in average balances for interest-bearing deposit accounts, with the most substantial average balance increases in time accounts.

Average subordinated debt and other borrowings increased by $97.3 million period-over-period, consisting of FHLB advances which did not occur during the three months ended March 31, 2022, combined with an increase in the average balance of subordinated debt.

Interest expense increased by $13.7 million, or 935.03%, to $15.2 million for the three months ended June 30, 2023 from $1.5 million for the same period of 2022 due to the following:

The average costs of interest-bearing liabilities were 2.82% and 0.38% for the three months ended June 30, 2023 and June 30, 2022, respectively.

The increase in cost period-over-period was primarily due to increases in the rates paid on interest-bearing deposit accounts, coinciding with the rise in the effective Federal Funds rate from 1.58% to 5.08% between June 30, 2022 and June 30, 2023.

The average cost of subordinated debt and other borrowings increased from 6.07% to 6.23% for the three months ended June 30, 2022 and June 30, 2023, respectively, as the weighted average rate on subordinated notes outstanding was higher for the three months ended June 30, 2023 than for the three months ended June 30, 2022.

Additionally, the cost of funds increased from 0.24% for the three months ended June 30, 2022 to 2.04% for the three months ended June 30, 2023.

Average interest-bearing liabilities increased by $625.8 million period-over-period, primarily driven by increases in average balances of money market and time accounts of $302.0 million and $195.9 million, respectively, for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Six months ended June 30, 2023 compared to six months ended June 30, 2022

Net interest income increased by $10.3 million, or 22.22%, to $56.7 million for the six months ended June 30, 2023 from $46.4 million for the six months ended June 30, 2022.

Our net interest margin of 3.59% for the six months ended June 30,

2023 was consistent with net interest margin of 3.65% for the six months ended June 30, 2022.

Additional detail relating to net interest margin in each period is provided below.

Average balance sheet, interest, and yield/rate analysis.

The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yield earned and rates paid for each period reported.

The average balances are daily averages and include both performing and nonperforming loans.

For the six months ended

June 30, 2023

For the six months ended

June 30, 2022

(In thousands) Average Balance Interest Income/Expense Average Yield/Rate Average Balance Interest Income/Expense Average Yield/Rate

Interest-earning deposits with banks 1

$ 190,040 $ 4,385 4.65 % $ 316,590 $ 710 0.45 %

Investment securities 1,2

117,780 1,296 2.22 % 140,857 1,169 1.67 %

Loans held for investment and sale 1,3

2,875,439 77,423 5.43 % 2,102,382 46,991 4.51 %

Total interest-earning assets 1

3,183,259 83,104 5.26 % 2,559,829 48,870 3.85 %

Interest receivable and other assets, net 72,368 124,565

Total assets $ 3,255,627 $ 2,684,394

Liabilities and shareholders’ equity

Interest-bearing transaction accounts 1

$ 332,101 $ 1,258 0.76 % $ 265,962 $ 136 0.10 %

Savings accounts 1

147,321 1,303 1.78 % 93,842 63 0.14 %

Money market accounts 1

1,188,148 13,572 2.30 % 951,012 1,046 0.22 %

Time accounts 1

336,044 7,214 4.33 % 151,454 321 0.43 %

Subordinated debt and other borrowings 1

102,973 3,031 5.94 % 29,005 892 6.20 %

Total interest-bearing liabilities 2,106,587 26,378 2.53 % 1,491,275 2,458 0.33 %

Demand accounts 865,004 945,511

Interest payable and other liabilities 24,202 13,551

Shareholders’ equity 259,834 234,057

Total liabilities and shareholders’ equity $ 3,255,627 $ 2,684,394

Net interest spread 4

2.73 % 3.52 %

Net interest income/margin 5

$ 56,726 3.59 % $ 46,412 3.65 %

1 Interest income/expense is divided by the actual number of days in the period multiplied by the actual number of days in the year to correspond to stated interest rate terms, where applicable.

2 Yields on available-for-sale securities are calculated based on fair value.

Investment security interest is earned on 30/360 day basis monthly.

Yields are not calculated on a tax-equivalent basis.

3 Non-accrual loans are included in total loan balances.

No adjustment has been made for these loans in the yield calculations.

Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

4 Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

5 Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets, then annualized based on the number of days in the given period.

Analysis of changes in interest income and expenses.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average yields/rates.

The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities.

The effect of changes in volume is determined by multiplying the change in volume by the current period’s average yield/rate.

The effect of rate changes is calculated by

multiplying the change in average yield/rate by the previous period’s volume.

Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.

For the six months ended

June 30, 2023 compared to

the six months ended June 30, 2022

(In thousands) Volume Yield/Rate Total Increase (Decrease)

Interest-earning deposits with banks $ (2,929) $ 6,604 $ 3,675

Investment securities (253) 380 127

Loans held for investment and sale 20,797 9,635 30,432

Total interest-earning assets 17,615 16,619 34,234

Interest-bearing transaction accounts 250 872 1,122

Savings accounts 473 767 1,240

Money market accounts 2,706 9,820 12,526

Time accounts 3,957 2,936 6,893

Subordinated debt and other borrowings 2,177 (38) 2,139

Total interest-bearing liabilities 9,563 14,357 23,920

Changes in net interest income/margin $ 8,052 $ 2,262 $ 10,314

Total interest income increased by $34.2 million, or 70.05%, to $83.1 million for the six months ended June 30, 2023 from $48.9 million for the corresponding period of 2022 due to the following:

The average yields on interest-earning assets were 5.26% and 3.85% for the six months ended June 30, 2023 and June 30, 2022, respectively.

The increase in yield period-over-period was primarily due to increased yields earned on the loan portfolio from new originations and repricing on variable rate loans, combined with increases in yields earned on interest-earning deposits with banks, coinciding with the rise in the effective Federal Funds rate from 0.07% at December 31, 2021 to 5.08% at June 30, 2023.

Average interest-earning assets increased by approximately $623.4 million period-over-period, primarily driven by new loan originations, leading to an increase of approximately $773.1 million period-over-period in average loans held for investment and sale, partially offset by a decrease of approximately $126.6 million period-over-period in average interest-earning deposits with banks.

Total interest expense increased by $23.9 million, or 973.15%, to $26.4 million for the six months ended June 30, 2023 from $2.5 million for the same period of 2022 due to the following:

The average costs of interest-bearing liabilities were 2.53% and 0.33% for the six months ended June 30, 2023 and June 30, 2022, respectively.

The increase in cost period-over-period was primarily due to increases in rates paid on all types of interest-bearing deposit accounts, with the most significant changes due to increases on time and money market accounts.

Rate increases across all interest-bearing deposit account types coincided with rise in the effective Federal Funds rate from 0.07% at December 31, 2021 to 5.08% at June 30, 2023.

The rate paid on the new subordinated debt issuance remained relatively consistent with prior issuances.

Additionally, the cost of funds increased from 0.20% for the six months ended June 30, 2022 to 1.79% for the six months ended June 30, 2023.

Average interest-bearing liabilities increased by $615.3 million, or 41.26%, period-over-period, primarily driven by increases in average balances on all types of interest-bearing deposit accounts, with the most significant changes due to increases in time and money market accounts, as well as an increase period-over-period in subordinated debt and other borrowings due to the issuance of $75.0 million in aggregate principal amount of subordinated notes, partially offset by repayment of $28.8 million to existing tranches of subordinated debt.

Provision for Credit Losses

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The provision for credit losses is charged against earnings in order to maintain our allowance for credit losses, which reflects management’s best estimate of forecasted life of loan losses in our loan portfolio at the balance sheet date.

We recorded a $0.9 million provision for credit losses in the first quarter of 2023, compared to a $1.0 million provision for credit losses recorded for the same period of 2022.

The decrease of $0.1 million was primarily due to a decline in loan growth during the first quarter of 2023.

This decline was partially offset by provisions required for loans designated as watch and substandard, which increased from $17.0 million as of March 31, 2022 to $24.6 million as of March 31, 2023.

Beginning January 1, 2023, we adopted ASC 326, which replaced the former “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model.

1 unchanged sentence

Under the CECL model, the calculated allowance for credit losses was $5.3 million higher on January 1, 2023 than the allowance under the incurred loss model.

Utilizing CECL may have an impact on our allowance for credit losses going forward and resulted in a lack of comparability between the 2022 and 2023 quarterly periods.

Utilizing CECL may have an impact on our allowance for credit losses going forward and resulted in a lack of comparability between the 2022 and 2023 periods.

Three months ended June 30, 2023 compared to three months ended June 30, 2022

We recorded a $1.3 million provision for credit losses in the second quarter of 2023, as compared to a $2.3 million provision for credit losses recorded for the same period of 2022.

As explained above, utilizing CECL may result in a lack of comparability between the 2022 and 2023 periods.

The provision recorded is primarily due to loan growth, loan product mix, and updates to the macroeconomic environment.

Six months ended June 30, 2023 compared to six months ended June 30, 2022

We recorded a $2.2 million provision for credit losses in the first six months of 2023, as compared to a $3.2 million provision for credit losses for the same period of 2022.

As explained above, utilizing CECL may result in a lack of comparability between the 2022 and 2023 periods.

The provision recorded is primarily due to loan growth, loan product mix, and updates to the macroeconomic environment.

Non-interest Income

1 unchanged sentence

Non-interest income consists of service charges on deposit accounts, net gain on sale of securities, gain on sale of loans, loan-related fees, FHLB stock dividends, earnings on BOLI, and other income.

The following table details the components of non-interest income for the periods indicated for the three months ended March 31, 2023 compared to three months ended March 31, 2022.

Three months ended June 30, 2023 compared to three months ended June 30, 2022

The following table details the components of non-interest income for the periods indicated.

For the three months ended

(dollars in thousands) March 31, 2023

March 31, 2022

(dollars in thousands) June 30, 2023

June 30, 2022

$ Change % Change

Service charges on deposit accounts $ 135 $ 130 $ 5 3.85 %

Gain on sale of loans 641 831 (190) (22.86) %

Loan-related fees 389 757 (368) (48.61) %

FHLB stock dividends 189 99 90 90.91 %

Earnings on BOLI 126 101 25 24.75 %

Other income 1,340 41 1,299 3,168.29 %

Total non-interest income $ 2,820 $ 1,959 $ 861 43.95 %

Gain on sale of loans.

The decrease in gain on sale of loans related primarily to an overall decline in the volume of loans sold during the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

During the three months ended June 30, 2023, approximately $10.9 million of loans were sold with an effective yield of 5.89%, as compared to approximately $17.9 million of loans sold with an effective yield of 4.64% during the three months ended June 30, 2022.

Loan-related fees.

The decrease in loan-related fees was primarily a result of $0.1 million of swap referral fees recognized during the three months ended June 30, 2023, as compared to $0.4 million of swap referral fees recognized during the three months ended June 30, 2022.

FHLB stock dividends.

The increase in FHLB stock dividends was primarily due to increased yields on dividends between June 30, 2022 and June 30, 2023, corresponding with the rise in the effective Federal Funds rate over the same period.

Other income.

The increase in other income resulted primarily from a $1.3 million gain recorded for distributions received from venture-backed fund investments during the three months ended June 30, 2023 which did not occur during the three months ended June 30, 2022.

Six months ended June 30, 2023 compared to six months ended June 30, 2022

The following table details the components of non-interest income for the periods indicated.

For the six months ended

(In thousands) June 30, 2023

June 30, 2022

$ Change % Change

Service charges on deposit accounts $ 252 $ 238 $ 14 5.88 %

Net gain on sale of securities — 5 (5) (100.00) %

6 unchanged sentences

Gain on sale of loans.

The decrease in gain on sale of loans related primarily to an overall decline in the effective yields on loans sold during the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

During the three months ended March 31, 2023, approximately $12.7 million of loans were sold with an effective yield of 4.72%, as compared to approximately $11.7 million of loans sold with an effective yield of 7.84% during the three months ended March 31, 2022.

The decrease in gain on sale of loans related primarily to an overall decline in the volume and yields on loans sold during the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

During the six months ended June 30, 2023, approximately $23.6 million of loans were sold with an effective yield of 5.26%, as compared to approximately $25.7 million of loans sold with an effective yield of 6.80% during the six months ended June 30, 2022.

Loan-related fees .

The decrease in loan-related fees was primarily a result of $0.3 million of swap referral fees recognized during the three months ended March 31, 2022 which did not recur in the three months ended March 31, 2023.

The decrease in loan-related fees primarily related to $0.1 million of swap referral fees recognized during the six months ended June 30, 2023, as compared to $0.7 million recognized in the six months ended June 30, 2022.

FHLB stock dividends.

Other income.

The decrease in other income resulted primarily from a $0.3 million gain recorded on a distribution received on an investment in a venture-backed fund during the three months ended March 31, 2022 which did not recur during the three months ended March 31, 2023.

The increase in other income resulted primarily from a $1.3 million gain recorded for distributions received from venture-backed fund investments during the six months ended June 30, 2023 which did not occur during the six months ended June 30, 2022.

Non-interest Expense

1 unchanged sentence

In evaluating our level of non-interest expense, we closely monitor the Company’s efficiency ratio, which is calculated as non-interest expense divided by the sum of net interest income and non-interest income.

We constantly seek to identify ways to streamline our business and operate more efficiently, to reduce our non-interest expense over time as a percentage of our revenue, while continuing to achieve growth in total loans and assets.

We constantly seek to identify ways to streamline our business and operate more efficiently in order to reduce our non-interest expense over time as a percentage of our revenue, while continuing to achieve growth in total loans and assets.

Over the past several years, we have invested significant resources in personnel, technology, and infrastructure.

2 unchanged sentences

however, we expect our efficiency ratio will improve going forward due, in part, to our past investment in infrastructure.

The following table details the components of non-interest expense for three months ended March 31, 2023 compared to three months ended March 31, 2022.

Three months ended June 30, 2023 compared to three months ended June 30, 2022

The following table details the components of non-interest expense for the periods indicated.

For the three months ended

(dollars in thousands) March 31, 2023

March 31, 2022

(dollars in thousands) June 30, 2023

June 30, 2022

$ Change % Change

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The increase in salaries and employee benefits was primarily a result of:

(i) a $0.7 million increase in salaries, insurance, and benefits as a result of a 7.10% increase in headcount and recognition of employer taxes and 401(k) contributions recorded for bonuses and commissions paid during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022;

(ii) a $0.7 million decrease in loan origination costs due to lower loan production;

and (iii) a $0.3 million increase in estimated bonus expense based on increased headcount and salaries.

These increases were partially offset by $0.7 million of lower commission expenses due to lower loan production during the three months ended March 31, 2023, as compared to the three months ended March 31, 2022.

(i) a $0.6 million increase in salaries, insurance, and benefits as a result of a 7.56% increase in headcount and (ii) a $0.5 million decrease in loan origination costs due to lower loan production during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022.

These increases were partially offset by $0.2 million of lower commission expenses due to lower loan production during the three months ended June 30, 2023, as compared to the three months ended June 30, 2022.

Data processing and software.

Data processing and software expenses increased, primarily due to:

The increase in data processing and software costs was primarily due to:

(i) increased usage of our digital banking platform;

(ii) higher transaction volumes related to the increased number of loan and deposit accounts;

and (iii) increased number of licenses required for new users on our loan origination and documentation system.

and (iii) an increased number of licenses required for new users on our loan origination and documentation system.

FDIC insurance.

The increase in FDIC insurance related primarily to a final rule adopted by the FDIC to increase initial base deposit insurance assessment rates for insured depository institutions by two basis points, beginning with the first quarterly assessment period in 2023.

FDIC insurance also increased for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 due to a $539.7 million increase in the assessment base period-over-period.

The increase related primarily to a final rule adopted by the FDIC to increase initial base deposit insurance assessment rates for insured depository institutions by two basis points, beginning with the first quarterly assessment period of 2023.

FDIC insurance also increased for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, due to a $482.8 million increase in the assessment base period-over-period.

Advertising and promotional.

The increase in advertising and promotional costs was primarily due to a $0.2 million increase in business development expenses incurred in relation to an increased customer base and an increase in the number of Business Development Officers from 21 as of June 30, 2022 to 23 as of June 30, 2023.

Other operating expenses.

The increase in other operating expenses was primarily due to an overall increase in travel, conference fees, and professional membership fees during the three months June 30, 2023, as compared to the three months ended June 30, 2022.

Six months ended June 30, 2023 compared to six months ended June 30, 2022

The following table details the components of non-interest expense for the periods indicated.

For the six months ended

(In thousands) June 30, 2023

June 30, 2022

$ Change % Change

Salaries and employee benefits $ 13,039 $ 11,228 $ 1,811 16.13 %

Occupancy and equipment 1,074 1,033 41 3.97 %

Data processing and software 1,885 1,455 430 29.55 %

FDIC insurance 812 410 402 98.05 %

Professional services 1,217 1,122 95 8.47 %

Advertising and promotional 1,151 828 323 39.01 %

Loan-related expenses 579 667 (88) (13.19) %

Other operating expenses 3,340 3,037 303 9.98 %

Total non-interest expense $ 23,097 $ 19,780 $ 3,317 16.77 %

Salaries and employee benefits.

The increase in salaries and employee benefits was primarily a result of:

(i) a $1.3 million increase in salaries, insurance, and benefits as a result of a 7.56% increase in headcount;

(ii) a $1.1 million decrease in loan origination costs due to lower loan production period-over-period;

and (iii) a $0.3 million increase in bonus expense during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

These increases were partially offset by a reduction of $0.9 million of commission expenses for the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

Data processing and software.

The increase in data processing and software was primarily due to:

(i) increased usage of our digital banking platform;

(ii) higher transaction volumes related to the increased number of loan and deposit accounts;

and (iii) an increased number of licenses required for new users on our loan origination and documentation system.

FDIC insurance.

FDIC insurance also increased for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, due to a $482.8 million increase in the assessment base period-over-period.

Advertising and promotional.

The increase in advertising and promotional costs was primarily due to a $0.3 million increase in business development expenses incurred in relation to an increased customer base and a 9.52% increase in the number of Business Development Officers from 21 as of June 30, 2022 to 23 as of June 30, 2023.

Other operating expenses.

The increase in other operating expenses was primarily due to a $0.2 million increase in travel, conference fees, and professional membership fees during the six months ended June 30, 2023, as compared to the six months ended June 30, 2022.

Provision for Income Taxes

The provision for income tax was $5.3 million for the three months ended March 31, 2023, compared to $3.7 million for the three months ended March 31, 2022.

Additionally, the provision for income taxes for the three months ended March 31, 2022 included a provision to tax return true-up of approximately $0.3 million relating to the 2021 tax return filed in 2022, which did not recur during the three months ended March 31, 2023.

Effective income tax rates for the three months ended March 31, 2023 and 2022 were 28.86% and 27.07%, respectively.

Differences between the Company’s effective tax rate and federal and state blended statutory rates are due to certain items, such as tax-exempt income from municipal securities, earnings on BOLI, non-deductible expenses, vesting of stock awards, and benefits from tax credits as compared to pre-tax income.

Three months ended June 30, 2023 compared to three months ended June 30, 2022

The provision for income tax was $4.4 million for the three months ended June 30, 2023, compared to $4.1 million for the three months ended June 30, 2022.

The increase was primarily due to an overall increase in pre-tax income period-over-period, which was partially offset by a $0.5 million state tax benefit recorded during the three months ended June 30, 2023 relating to an overall reduction in the state tax blended rate for the Company since its transition to a C Corporation.

The effective income tax rates for the three months ended June 30, 2023 and 2022 were 25.86% and 29.07%, respectively.

Six months ended June 30, 2023 compared to six months ended June 30, 2022

The provision for income taxes was $9.8 million for the six months ended June 30, 2023, compared to $7.7 million for the six months ended June 30, 2022.

The increase was primarily due to an overall increase in pre-tax income period-over-period, which was partially offset by a $0.5 million state tax benefit recorded during the six months ended June 30, 2023

relating to an overall reduction in the state tax blended rate for the Company since its transition to a C Corporation.

The effective tax rates for the six months ended June 30, 2023 and 2022 were 27.42% and 28.09%, respectively.

FINANCIAL CONDITION SUMMARY

The following discussion compares our financial condition as of March 31, 2023 to our financial condition as of December 31, 2022.

The following table summarizes selected components of our unaudited consolidated balance sheets as of March 31, 2023 and December 31, 2022.

(in thousands) March 31,

The following discussion compares our financial condition as of June 30, 2023 to our financial condition as of December 31, 2022.

The following table summarizes selected components of our unaudited consolidated balance sheets as of June 30, 2023 and December 31, 2022.

(in thousands) June 30,

Total assets $ 3,402,701 $ 3,227,159

5 unchanged sentences

Total shareholders’ equity 269,140 252,825

At March 31, 2023, total assets were $3.4 billion, an increase of $170.1 million from $3.2 billion at December 31, 2022, primarily due to an increase in cash and cash equivalents of $87.9 million and in loans held for investment of $78.5 million.

At June 30, 2023, total assets were $3.4 billion, an increase of $175.5 million from $3.2 billion at December 31, 2022, primarily due to increases in cash and cash equivalents of $40.1 million and loans held for investment of $136.1 million.

Cash and Cash Equivalents

Total cash and cash equivalents were $347.9 million at March 31, 2023, an increase of $87.9 million from $260.0 million at December 31, 2022.

The increase in cash and cash equivalents was primarily due to an increase in deposits of $138.4 million and an increase in FHLB advances of $20.0 million, partially offset by loan originations, net of repayments, of $69.5 million.

Total cash and cash equivalents were $300.1 million at June 30, 2023, an increase of $40.1 million from $260.0 million at December 31, 2022.

The increase in cash and cash equivalents was primarily due to an increase in deposits of $147.7 million and net income of $25.9 million, partially offset by loan originations, net of repayments, of $128.8 million.

Investment Portfolio

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Most of our securities are classified as available-for-sale, although we have one long-term, fixed rate municipal security classified as held-to-maturity.

Our total securities available-for-sale and held-to-maturity amounted to $118.7 million at March 31, 2023 and $119.7 million at December 31, 2022, representing a decrease of $1.0 million period-over-period.

The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $2.9 million, partially offset by an unrealized gain on securitie s of $2.1 million, with the remainder of the change due to amortization on premiums .

For the quarter, other comprehensive income increased by $1.5 million, primarily from our mortgage-backed and municipal securities portfolios, resulting in tax-effected increases from each of those portfolios of $0.7 million and $0.8 million, respectively.

This unrealized gain was attributable to interest rate changes that occurred during the period.

Our total securities available-for-sale and held-to-maturity amounted to $114.3 million at June 30, 2023 and $119.7 million at December 31, 2022, representing a decrease of $5.4 million period-over-period.

The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $5.5 million, partially offset by an unrealized gain on securities of $0.7 million, with the remainder of the change due to amortization on premiums.

For the three months ended June 30, 2023, other comprehensive loss was $1.0 million, primarily due to rate changes and other market conditions on securities.

The following table presents the carrying value of our investment portfolio as of the dates indicated:

March 31, 2023

June 30, 2023

December 31, 2022

(dollars in thousands) Carrying

Value % of Total Carrying

Value % of Total

(dollars in thousands) Carrying Value % of Total Carrying Value % of Total

Available-for-sale (at fair value):

8 unchanged sentences

Total $ 114,280 100.00 % $ 119,744 100.00 %

The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of March 31, 2023:

Due in one year

or less Due after one

year through five years Due after five

years through ten years Due after ten years Total

(dollars in thousands) Carrying

Value Weighted

Yield Carrying

Value Weighted

Yield Carrying

Value Weighted

Yield Carrying

Value Weighted

Yield Carrying

Value Weighted

The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of June 30, 2023:

Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Total

(dollars in thousands) Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield

Available-for-sale:

9 unchanged sentences

The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of December 31, 2022:

Due in one year

or less Due after one

year through five years Due after five

years through ten years Due after ten years Total

Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Total

(dollars in thousands) Carrying

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Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting.

As of March 31, 2023 and December 31, 2022, our total loans amounted to $2.9 billion and $2.8 billion, respectively.

As of June 30, 2023 and December 31, 2022, our total loans amounted to $2.9 billion and $2.8 billion, respectively.

The following table presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.

March 31, 2023

June 30, 2023

December 31, 2022

27 unchanged sentences

Loans over $2.0 million are reviewed annually, at which time an internal assessment of collateral values is completed.

(dollars in thousands) Loan Balance % of

Real Estate Collateral

Value Minimum

March 31, 2023

(dollars in thousands) Loan Balance % of Commercial Real Estate Collateral Value Minimum LTV Maximum LTV

June 30, 2023

Manufactured home community $ 746,665 29.72 % $ 1,299,605 16.95 % 74.41 %

3 unchanged sentences

Industrial 174,518 6.95 % 417,111 9.19 % 75.00 %

Mini storage 157,339 6.44 % 305,885 19.15 % 70.00 %

Faith-based 170,987 6.80 % 443,383 1.20 % 74.92 %

Mini storage 158,539 6.31 % 322,574 16.71 % 70.00 %

Office 133,563 5.32 % 290,399 3.07 % 73.97 %

1 unchanged sentence

339,452 13.50 % 703,344 4.00 % 152.64 %

Total $ 2,442,520 100.00 % $ 4,778,238 2.43 % 152.76 %

$ 2,512,741 100.00 % $ 4,936,416

December 31, 2022

9 unchanged sentences

343,403 14.34 % 704,984 — % 152.96 %

Total $ 2,394,674 100.00 % $ 4,685,333 — % 152.96 %

$ 2,394,674 100.00 % $ 4,685,333

1 Types of collateral in the “all other types” category are those that individually make up less than 5.00% commercial real estate concentration and include hospitality properties, auto dealerships, car washes, assisted living communities, country clubs, gas stations/convenience stores, medical offices, special purpose properties, mortuaries, restaurants, and schools.

2 Minimum LTV and Maximum LTV not shown for aggregated totals, as such values are meaningful only when presented by specific category.

Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed significantly.

Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 89.08% of loans held for investment at March 31, 2023.

Commercial secured lending represents 6.05% of loans held for investment at March 31, 2023.

Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 89.79% of loans held for investment at June 30, 2023.

Commercial secured lending represents 5.43% of loans held for investment at June 30, 2023.

We sell the guaranteed portion of all SBA 7(a) loans in the secondary market and will continue to do so as long as market conditions continue to be favorable.

We recognize that our commercial real estate loan concentration is significant within our balance sheet.

Commercial real estate loan balances as a percentage of risk-based capital were 673.90% and 680.34% as of March 31, 2023 and December 31, 2022, respectively.

Commercial real estate loan balances as a percentage of risk-based capital were 675.66% and 680.34% as of June 30, 2023 and December 31, 2022, respectively.

We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (e.g., manufactured home communities, self-storage, hospitality, etc.).

All loan sectors were within our established limits as of March 31, 2023.

All loan sectors were within our established limits as of June 30, 2023.

Additionally, our loans are geographically concentrated with borrowers and collateral properties primarily in California.

3 unchanged sentences

We do not expect our product or geographic concentrations to materially change.

The following table sets forth the contractual maturities of our loan portfolio as of March 31, 2023:

(in thousands) Due in 1

year or less Due after 1

5 years Due after 5

years through

15 years Due after

15 years Total

The following table sets forth the contractual maturities of our loan portfolio as of June 30, 2023:

(in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total

Commercial $ 39,367 $ 206,609 $ 2,201,094 $ 65,671 $ 2,512,741

9 unchanged sentences

The following table sets forth the contractual maturities of our loan portfolio as of December 31, 2022:

(in thousands) Due in 1

year or less Due after 1

5 years Due after 5

years through

15 years Due after

15 years Total

(in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total

Commercial $ 19,406 $ 227,519 $ 2,083,818 $ 63,931 $ 2,394,674

8 unchanged sentences

Total $ 62,438 $ 352,580 $ 2,319,712 $ 68,152 $ 2,802,882

The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of March 31, 2023:

The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of June 30, 2023:

(in thousands) Fixed Interest Rates Floating or Adjustable Rates Total

45 unchanged sentences

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.

During the three months ended March 31, 2023, the Company sold 55 SBA 7(a) loans with government guaranteed portions totaling $12.7 million.

The Company received gross proceeds of $13.3 million on the loans sold during the three months ended March 31, 2023, resulting in the recognition of net gains on sale of $0.6 million during the same period.

During the three and six months ended June 30, 2023, the Company sold 46 and 101 SBA 7(a) loans, respectively, with government guaranteed portions totaling $10.9 million and $23.6 million, respectively.

The Company received gross proceeds of $11.5 million and $24.8 million on the loans sold during the three and six months ended June 30, 2023, respectively, resulting in the recognition of net gains on sale of $0.6 million and $1.2 million, respectively, during the same periods.

Non-accrual Loans

The following table provides details of our nonperforming and restructured assets and certain other related information as of the dates presented:

(dollars in thousands) March 31, 2023 December 31, 2022

(dollars in thousands) June 30, 2023 December 31, 2022

Non-accrual loans:

2 unchanged sentences

Secured 112 123

Consumer and other 23 —

Total non-accrual loans 287 404

7 unchanged sentences

Nonperforming loans to loans held for investment 0.01 % 0.01 %

0.01 % 0.01 %

Nonperforming assets to total assets 0.01 % 0.01 %

Nonperforming loans plus performing LMs to loans held for investment 0.01 % 0.01 %

0.01 % 0.01 %

1 Loans held for investment are equivalent to total loans outstanding at period end.

The ratio of nonperforming loans to loans held for investment remained consistent at 0.01% as of December 31, 2022 and March 31, 2023.

The ratio of nonperforming loans to loans held for investment remained consistent at 0.01% as of December 31, 2022 and June 30, 2023.

Potential Problem Loans

6 unchanged sentences

(in thousands) Pass Watch Substandard Doubtful Total

March 31, 2023

June 30, 2023

Commercial $ 2,495,583 $ 17,158 $ — $ — $ 2,512,741

19 unchanged sentences

Total $ 2,771,150 $ 21,886 $ 430 $ — $ 2,793,466

Loans designated as watch and substandard, which are not considered adversely classified, increased to $24.6 million at March 31, 2023 from $22.3 million at December 31, 2022.

Loans designated as watch increased while loans designated substandard decreased period-over-period due to additional commercial real estate loans designated as watch at March 31, 2023, partly offset by an improvement in the risk grade of some commercial real estate loans designated as watch at December 31, 2022.

This resulted in an increase in the reserve overall.

There were no loans with doubtful risk grades at March 31, 2023 or December 31, 2022.

Allowance for Credit Losses

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

Loans are charged against the allowance for credit 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 credit losses.

The allowance for credit 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.

Loans designated as watch and substandard, which are not considered adversely classified, increased to $24.4 million at June 30, 2023 from $22.3 million at December 31, 2022.

There were no loans with doubtful risk grades at June 30, 2023 or December 31, 2022.

Allowance for Credit Losses - Loans

The allowance for credit losses - loans is established through a provision for credit losses charged to operations.

Provisions are charged against the allowance for credit losses - loans 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 credit losses - loans.

The allowance for credit losses - loans 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.

At March 31, 2023, the Company’s allowance for credit losses was $34.2 million, as compared to $28.4 million at December 31, 2022.

The $5.8 million increase in the allowance is due to a $5.3 million adjustment recorded in connection with the adoption of ASC 326 and a $0.9 million provision for credit losses recorded during the three months ended March 31, 2023, partially offset by net charge-offs of $0.4 million during the same period.

While the entire allowance for credit losses is available to absorb losses from any and all loans, the following table represents management’s allocation of our allowance for credit losses by loan category, and the percentage of the allowance for credit losses in each category, for the periods indicated.

March 31, 2023

At June 30, 2023, the Company’s allowance for credit losses - loans was $34.0 million, as compared to $28.4 million at December 31, 2022.

The $5.6 million increase in the allowance is due to a $5.3 million adjustment recorded in connection with the adoption of ASC 326 and a $1.8 million provision for credit losses recorded during the six months ended June 30, 2023, partially offset by net charge-offs of $1.5 million during the same period.

While the entire allowance for credit losses - loans is available to absorb losses from any and all loans, the following table represents management’s allocation of our allowance for credit losses by loan category, and the percentage of the allowance for credit losses in each category, for the periods indicated.

June 30, 2023

December 31, 2022

11 unchanged sentences

Total allowance for credit losses $ 33,984 100.00 % $ 28,389 100.00 %

The ratio of allowance for credit losses to total loans held for investment was 1.19% at March 31, 2023, compared to 1.02% at December 31, 2022.

Nonperforming loans totaled $0.4 million, or 0.01% of total loans held for investment, at both March 31, 2023 and December 31, 2022.

The following table provides information on the activity within the allowance for credit losses as of and for the periods indicated:

The ratio of allowance for credit losses to total loans held for investment was 1.16% at June 30, 2023, as compared to 1.02% at December 31, 2022.

The ratio of nonperforming loans to total loans held for investment remained consistent at 0.01% at both June 30, 2023 and December 31, 2022.

The following table provides information on the activity within the allowance for credit losses - loans as of and for the periods indicated:

As of and for the three months ended

March 31, 2023

March 31, 2022

(dollars in thousands) Activity % of

Average Loans Held for Investment Activity % of

June 30, 2023

June 30, 2022

(dollars in thousands) Activity % of Average Loans Held for Investment Activity % of Average Loans Held for Investment

Average loans held for investment $ 2,904,194 $ 2,217,426

Allowance for credit losses - loans $ 34,172 $ 23,904

Net (charge-offs) recoveries:

Secured (1,077) (0.04) % (233) (0.01) %

PPP — — % (21) — %

Consumer and other (31) — % (114) (0.01) %

Net charge-offs (1,108) (0.04) % (368) (0.02) %

Provision for credit losses 920 2,250

Allowance for credit losses - loans $ 33,984 $ 25,786

Loans held for investment $ 2,927,411 $ 2,380,511

Allowance for credit losses - loans to loans held for investment 1.16 % 1.08 %

As of and for the six months ended

June 30, 2023

June 30, 2022

(In thousands) Activity % of Average Loans Held for Investment Activity % of Average Loans Held for Investment

Average loans held for investment $ 2,865,323 $ 2,093,891

Allowance for credit losses (beginning of period) $ 28,389 $ 23,243

Allowance for credit losses - loans $ 28,389 $ 23,243

Effect of adoption of ASC 326 5,262 —

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Secured (1,472) (0.05) % (497) (0.02) %

PPP — — % (21) — %

Consumer and other (15) — % (139) (0.01) %

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Provision for credit losses 1,820 3,200

Allowance for credit losses (end of period) $ 34,172 $ 23,904

Allowance for credit losses - loans $ 33,984 $ 25,786

Loans held for investment $ 2,927,411 $ 2,380,511

Allowance for credit losses to loans held for investment 1.19 % 1.15 %

During the first three months of 2023, total liabilities increased by $162.3 million from $3.0 billion as of December 31, 2022 to $3.1 billion as of March 31, 2023.

This increase was primarily due to an increase in total deposits of $138.4 million, comprised of an increase of $273.0 million in interest-bearing deposits, partially offset by a decrease of $134.6 million in non-interest-bearing deposits, as well as increases in FHLB advances of $20.0 million.

Representing 93.11% of our total liabilities as of March 31, 2023, deposits are our primary source of funding for our business operations.

Total deposits increased by $138.4 million, or 4.97%, to $2.9 billion at March 31, 2023 from $2.8 billion at December 31, 2022.

Allowance for credit losses - loans to loans held for investment 1.16 % 1.08 %

The allowance for credit losses - loans to loans held for investment increased from 1.08% as of June 30, 2022 to 1.16% as of June 30, 2023.

Net charge-offs as a percent of average loans held for investment increased from 0.02% to 0.04% for the three months ended June 30, 2022 and June 30, 2023, respectively.

Net charge-offs as a percent of average loans held for investment increased from 0.03% to 0.05% for the six months ended June 30, 2022 and June 30, 2023, respectively.

During the first six months of 2023, total liabilities increased by $159.2 million from $3.0 billion as of December 31, 2022 to $3.1 billion as of June 30, 2023.

This increase was primarily due to an increase in total deposits of $147.7 million, comprised of an increase of $285.3 million in interest-bearing deposits, partially offset by a decrease of $137.5 million in non-interest-bearing deposits.

Representing 93.50% of our total liabilities as of June 30, 2023, deposits are our primary source of funding for our business operations.

Total deposits increased by $147.7 million, or 5.31%, to $2.9 billion at June 30, 2023 from $2.8 billion at December 31, 2022.

Deposit increases were primarily attributable to an increase in the number of new relationships, as well as normal fluctuations in some of our larger accounts.

Non-interest-bearing deposits decreased by $134.6 million from December 31, 2022 to $836.7 million and represented 28.65% of total deposits at March 31, 2023, compared to 34.91% of total deposits at December 31, 2022.

Our loan to deposit ratio was 98.66% at March 31, 2023, as compared to 100.67% at December 31, 2022.

We intend to continue to operate our business with a loan to deposit ratio within the range of these levels.

Non-interest-bearing deposits decreased by $137.5 million from December 31, 2022 to $833.7 million at June 30, 2023, representing 28.46% of total deposits at that date, as compared to 34.91% of total deposits at December 31, 2022.

Our loan to deposit ratio was 100.21% at June 30, 2023, as compared to 100.67% at December 31, 2022.

We intend to continue to operate our business with close monitoring of the loan to deposit ratio.

The following tables summarize our deposit composition by average deposits and average rates paid for the periods indicated:

For the three months ended

March 31, 2023

March 31, 2022

(dollars in thousands) Average Amount Average

Rate Paid % of Total Deposits Average

Amount Average

Rate Paid % of Total Deposits

June 30, 2023

June 30, 2022

(dollars in thousands) Average Amount Average Rate Paid % of Total Deposits Average Amount Average Rate Paid % of Total Deposits

Interest-bearing transaction accounts $ 290,404 1.14 % 9.97 % $ 255,665 0.10 % 10.32 %

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Total deposits $ 2,912,891 1.92 % 100.00 % $ 2,477,942 0.17 % 100.00 %

Uninsured and uncollateralized deposits totaled $1.0 billion and $1.2 billion at March 31, 2023 and December 31, 2022, respectively.

As of March 31, 2023, our 40 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.6 billion, or 54.40% of our total deposits.

The average age on deposit relationships of more than $10.0 million was 10.6 years.

For the six months ended

June 30, 2023

June 30, 2022

(In thousands) Average Amount Average Rate Paid % of Total Deposits Average Amount Average Rate Paid % of Total Deposits

Interest-bearing transaction accounts $ 332,101 0.76 % 11.58 % $ 265,962 0.10 % 11.05 %

Money market and savings accounts 1,335,469 2.24 % 46.56 % 1,044,854 0.21 % 43.39 %

Time accounts 336,044 4.33 % 11.71 % 151,454 0.43 % 6.29 %

Demand accounts 865,004 — % 30.15 % 945,511 — % 39.27 %

Total deposits $ 2,868,618 1.64 % 100.00 % $ 2,407,781 0.13 % 100.00 %

Uninsured and uncollateralized deposits totaled $1.0 billion and $1.2 billion at June 30, 2023 and December 31, 2022, respectively.

As of June 30, 2023, our 36 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.5 billion, or 49.56% of our total deposits.

The average age on deposit relationships of more than $5.0 million was approximately 9 years.

As of December 31, 2022, our 40 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.5 billion, or 52.15% of our total deposits.

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Our large deposit relationships are comprised of the following entity types as of the periods indicated:

(in thousands) March 31, 2023

(in thousands) June 30, 2023

December 31, 2022

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Total $ 1,452,110 $ 1,450,878

Our largest single deposit relationship at March 31, 2023 related to a non-profit association that supports hospitals and health systems.

Our largest single deposit relationship at June 30, 2023 related to a non-profit association that supports hospitals and health systems.

The balances for this customer were $210.0 million, or approximately 7.17% of total deposits, as of that date.

At December 31, 2022, our largest single deposit relationship related to a government agency and had balances of $180.0 million, or 6.47% of total deposits as of that date.

The following table sets forth the maturity of time deposits as of March 31, 2023:

(in thousands) $250,000

or Greater Less

than $250,000 Total Uninsured

The following table sets forth the maturity of time deposits as of June 30, 2023:

(in thousands) $250,000 or Greater Less than $250,000 Total Uninsured Portion

Remaining maturity:

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From time to time, we utilize short-term collateralized FHLB borrowings to maintain adequate liquidity.

There were borrowings of $120.0 million outstanding as of March 31, 2023 and borrowings of $100.0 million outstanding as of December 31, 2022.

There were borrowings of $100.0 million outstanding as of June 30, 2023 and as of December 31, 2022.

In 2022, we issued subordinated notes of $75.0 million.

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The proceeds of the notes qualify as Tier 2 capital for the Company under the regulatory capital rules of the federal banking agencies.

The following table is a summary of our outstanding subordinated notes as of March 31, 2023:

The following table is a summary of our outstanding subordinated notes as of June 30, 2023:

(in thousands) Issuance Date Amount of Notes Prepayment Right Maturity Date

Subordinated notes August 2022 $ 75,000 August 17, 2027 September 1, 2032

Fixed at 6.00% through September 1, 2027, then three-month Term SOFR plus 329.0 basis points (8.18% as of March 31, 2023) through maturity

Fixed at 6.00% through September 1, 2027, then three-month Term SOFR plus 329.0 basis points (8.59% as of June 30, 2023) through maturity

Shareholders’ Equity

Shareholders’ equity totaled $260.7 million at March 31, 2023 and $252.8 million at December 31, 2022.

The increase in shareholders’ equity was primarily attributable to net income recognized of $13.2 million and $1.5 million in other comprehensive income, partially offset by a decrease of $4.5 million to retained earnings, net of tax effect, relating to the adoption of ASC 326 on January 1, 2023 and $2.6 million in cash distributions paid during the three months ended March 31, 2023.

Shareholders’ equity totaled $269.1 million at June 30, 2023 and $252.8 million at December 31, 2022.

The increase in shareholders’ equity was primarily attributable to net income recognized of $25.9 million and a $0.5 million increase in accumulated other comprehensive income, partially offset by a decrease of $4.5 million to retained earnings, net of tax effect, relating to the adoption of ASC 326 on January 1, 2023 and $6.0 million in cash dividends paid during the six months ended June 30, 2023.

Liquidity and Capital Resources

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Management has established a comprehensive process for identifying, measuring, monitoring, and controlling liquidity risk.

Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management

Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes.

Critical elements of our liquidity risk management include effective corporate governance, consisting of oversight by the board of directors and active involvement by management;

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Generally speaking, our principal funding source is cash from deposits, and our principal uses of cash include funding of loans, operating expenses, income taxes, and dividend payments, as described below.

As of March 31, 2023, management believes the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.

As of June 30, 2023, management believes the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.

Loans are a significant use of cash in daily operations, and a source of cash as customers make payments on their loans or as loans are sold to other financial institutions.

Cash flows from loans are affected by the timing and amount of customer payments and prepayments, changes in interest rates, the general economic environment, competition, and the political environment.

During the three months ended March 31, 2023, we had cash outflows of $69.5 million in loan originations and advances, net of principal collected, and $24.0 million in loans originated for sale.

During the six months ended June 30, 2023, we had cash outflows of $128.8 million in loan originations and advances, net of principal collected, and $32.1 million in loans originated for sale.

Additionally, we enter into commitments to extend credit in the ordinary course of business, such as commitments to fund new loans and undisbursed construction funds.

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Therefore, the total commitment amounts do not necessarily represent future cash requirements.

At March 31, 2023, total off-balance sheet commitments totaled $335.1 million.

At June 30, 2023, total off-balance sheet commitments totaled $450.3 million.

We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth, and liquid assets.

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Our deposits are primarily made up of money market, interest checking, time deposits, and non-interest-bearing demand deposits.

Aside from commercial and business clients, a significant portion of our deposits are from municipalities and

non-profit organizations.

Aside from commercial and business clients, a significant portion of our deposits are from municipalities and non-profit organizations.

Cash flows from deposits are impacted by the timing and amount of customer deposits, changes in market rates, and collateral availability.

During the three months ended March 31, 2023, we had significant cash inflows related to an increase in deposits of $138.4 million, primarily as a result of an increase in the number of new relationships and fluctuations in existing accounts.

Over the next twelve months, approximately $337.5 million of time deposits are expected to mature.

During the six months ended June 30, 2023, we had cash inflows related to an increase in deposits of $147.7 million, primarily as a result of an increase in the number of new relationships and fluctuations in existing accounts.

During the twelve months following June 30, 2023, approximately $353.6 million of time deposits are expected to mature.

These deposits may not renew due to general competition.

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We believe our emphasis on local deposits, combined with our liquid investment portfolio, provides a stable funding base.

At March 31, 2023, cash and cash equivalents represented 11.91% of total deposits.

At June 30, 2023, cash and cash equivalents represented 10.24% of total deposits.

Investment Securities

Our investment securities totaled $118.7 million at March 31, 2023.

Our investment securities totaled $114.3 million at June 30, 2023.

Mortgage-backed securities and obligations of states and political subdivisions comprised 50.82% and 33.67% of our investment portfolio, respectively.

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Cash proceeds from obligations of states and political subdivisions occur when these securities are called or mature.

Assuming the current prepayment speed and interest rate environment, we expect to receive approximately $8.2 million from our securities over the next 12 months.

Assuming the current prepayment speed and interest rate environment, we expect to receive approximately $7.5 million from our securities over the twelve months following June 30, 2023.

In future periods, we expect to maintain approximately the same level of cash flows from our securities.

Depending on market yield and our liquidity, we may purchase securities as a use of cash in our interest-earning asset portfolio.

During the three months ended March 31, 2023, we had cash proceeds from sales, maturities, calls, and prepayments of securities of $2.9 million.

Additionally, at March 31, 2023, securities available-for-sale totaled $115.1 million, of which $93.9 million have been pledged as collateral for borrowings and other commitments.

During the six months ended June 30, 2023, we had cash proceeds from sales, maturities, calls, and prepayments of securities of $5.5 million.

Additionally, at June 30, 2023, securities available-for-sale totaled $110.8 million, of which $109.9 million has been pledged as collateral for borrowings and other commitments.

FHLB Financing

The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary.

At March 31, 2023, the Bank had outstanding borrowings of $120.0 million and a total financing availability of $278.1 million, net of letters of credit issued of $666.5 million.

At June 30, 2023, the Bank had outstanding borrowings of $100.0 million and a total financing availability of $342.6 million, net of letters of credit issued of $606.5 million.

Federal Reserve Discount Window and Correspondent Bank Lines of Credit

At March 31, 2023, unused and available amounts for borrowing from the Federal Reserve discount window and correspondent bank lines of credit were $76.7 million and $190.0 million, respectively.

At June 30, 2023, unused and available amounts for borrowing from the Federal Reserve Discount Window and correspondent bank lines of credit were $72.8 million and $175.0 million, respectively.

Total Liquidity

Total liquidity (consisting of cash and cash equivalents and unused and available borrowing capacity as set forth below) was approximately $892.7 million as of March 31, 2023 .

March 31, 2023 Available

(in thousands) Line of Credit Borrowings

Total liquidity (consisting of cash and cash equivalents and unused and immediately available borrowing capacity as set forth below) was approximately $890.6 million as of June 30, 2023 .

June 30, 2023 Available

(in thousands) Line of Credit Letters of Credit Issued Borrowings

FHLB advances

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Future Contractual Obligations

Our estimated future contractual obligations as of March 31, 2023 include both current and long-term obligations.

Our estimated future contractual obligations as of June 30, 2023 include both current and long-term obligations.

Under our operating leases, we have an operating lease liability of $5.3 million.

We also have a current obligation of $331.8 million and a long-term obligation of $40.8 million related to time deposits, as discussed in Note 5, Interest-Bearing

We have a current obligation of $299.5 million and a long-term obligation of $78.4 million related to time deposits, as discussed in Note 5, Interest-Bearing Deposits.

We have net subordinated notes of $73.7 million, all of which are long-term obligations.

We also had contractual obligations on unfunded loan commitments and standby letters of credit totaling $335.1 million.

The Company paid dividends to its shareholders totaling $2.6 million during the three months ended March 31, 2023.

We also have contractual obligations on unfunded loan commitments and standby letters of credit totaling $450.3 million.

The Company paid dividends to its shareholders totaling $3.5 million during the three months ended June 30, 2023.

We expect to continue our current practice of paying quarterly cash dividends with respect to our common stock, subject to our board of directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice.

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The impact of inflation is reflected in the increased cost of operations.

Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature.

Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature.

As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation.

2 unchanged sentences

The following table summarizes our consolidated cash flow activities:

Three months ended March 31,

Six months ended June 30,

(in thousands) 2023 2022 $ Change

3 unchanged sentences

Operating Activities

Net cash provided by operating activities decreased by $2.8 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

Net cash provided by operating activities increased by $14.3 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.

Cash provided by operating activities is subject to variability period-over-period as a result of timing differences, including with respect to the collection of receivables and payments of interest expense, accounts payable, and bonuses.

Investing Activities

Net cash used in investing activities decreased by $65.0 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to decreased loan origination growth.

Net cash used in investing activities decreased by $304.0 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to decreased loan origination growth.

Financing Activities

Net cash provided by financing activities decreased by $53.8 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022, primarily due to decreased deposit growth.

Net cash provided by financing activities decreased by $123.6 million for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022, primarily due to decreased deposit growth.

Capital Adequacy

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Having passed this threshold as of September 30, 2022, we are no longer subject to this policy statement and our capital adequacy is evaluated relative to the Federal Reserve’s generally applicable capital requirements.

Bancorp's total consolidated assets were not in excess of $3.0 billion as of June 30, 2022, and so it has 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, then starting in March 2024, the Company will cease filing financial reports with the Federal Reserve as though it were a small holding company.

Additionally, as of June 30, 2023, the Company’s consolidated assets are in excess of $3.0 billion, and as a consequence, beginning in March 2024, the Company will no longer prepare and file financial reports with the Federal Reserve as a small bank holding company and will be subject to capital ratio requirements for bank holding companies.

Under federal regulations implementing the Basel III framework, the Bank is subject to minimum risk-based and leverage capital requirements.

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Capital amounts for Bancorp and the Bank, and the Bank’s prompt corrective action classification, are also subject to qualitative judgments by the regulators about components of capital, risk weightings, and other factors.

As of March 31, 2023, both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank qualified as “well-capitalized” under the prompt corrective action framework.

As of June 30, 2023, both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank qualified as “well-capitalized” under the prompt corrective action framework.

Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.

For all periods presented, the Bank’s ratios exceed the regulatory definition of “well-capitalized” under the regulatory framework for prompt corrective action, and Bancorp’s ratios exceed the minimum ratios that would be required for it to be considered a well-capitalized bank holding company.

The capital adequacy ratios as of March 31, 2023 and December 31, 2022 for Bancorp and the Bank are presented in the following tables.

As of March 31, 2023 and December 31, 2022, Bancorp’s Tier 2 capital included subordinated debt, which was not included at the Bank level.

The capital adequacy ratios as of June 30, 2023 and December 31, 2022 for Bancorp and the Bank are presented in the following tables.

As of June 30, 2023 and December 31, 2022, Bancorp’s Tier 2 capital included subordinated debt, which was not included at the Bank level.

Eligible amounts of subordinated debt included in Tier 2 capital will be phased out by 20% per year beginning five years before the maturity date of the notes.

Capital Ratios for Bancorp Actual Ratio

Required for Capital

Adequacy Purposes 1

Required for Capital Adequacy Purposes 1

Ratio to be Well-Capitalized under Prompt Corrective Action Provisions

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Amount Ratio Amount Ratio

March 31, 2023

June 30, 2023

Total capital (to risk-weighted assets) $ 389,020 12.43 % $ 250,375 8.00 % N/A N/A

8 unchanged sentences

Capital Ratios for the Bank Actual Ratio

Required for Capital

Adequacy Purposes Ratio to be Well-Capitalized under Prompt Corrective Action Provisions

Required for Capital Adequacy Purposes Ratio to be Well-Capitalized under Prompt Corrective Action Provisions

(dollars in thousands) Amount Ratio

Amount Ratio Amount Ratio

March 31, 2023

June 30, 2023

Total capital (to risk-weighted assets) $ 377,490 12.08 % $ 249,993 8.00 % $ 312,492 10.00 %

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Some of the financial measures discussed herein are non-GAAP financial measures.

In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated statements of income, balance sheets, statements of shareholders’ equity, or statements of cash flows.

In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes

amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated statements of income, balance sheets, statements of shareholders’ equity, or statements of cash flows.

Tangible shareholders’ equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets.

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As a result, tangible shareholders’ equity to tangible assets is the same as total shareholders’ equity to total assets at the end of each of the periods indicated.

Tangible book value per share is defined as total shareholders’ equity less goodwill and other intangible assets, divided by the outstanding number of common shares at the end of the period.

The most directly comparable GAAP financial measure is book value per share.

We had no goodwill or other intangible assets at the end of any period indicated.

As a result, tangible book value per share is the same as book value per share at the end of each of the periods indicated.

We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations, and cash flows computed in accordance with GAAP.

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Potential Regulatory Reform in Response to Recent Bank Failures

The recent failures of Silicon Valley Bank (Santa Clara, California), Signature Bank (New York, New York), and First Republic Bank (San Francisco, California) in March and April of this year may lead to regulatory changes and initiatives that could impact the Company.

For example, the FDIC has stated that it plans to impose a special deposit insurance assessment on banks in order to recover losses that the FDIC's Deposit Insurance Fund incurred to support uninsured depositors of these institutions.

In addition, President Biden has encouraged the federal banking agencies to adopt various reforms, including the completion of an incentive compensation rule for bank executives pursuant to Section 956 of the Dodd-Frank Act, in response to these failures.

On April 28, 2023, the Federal Reserve and the FDIC issued reports on the potential causes of failures of Silicon Valley Bank and Signature Bank, respectively.

Among the changes discussed, the Federal Reserve and the FDIC highlighted potential changes needed to supervisory approaches for banks of all sizes as well

as to regulatory requirements.

Currently, it is unclear what actions federal regulatory agencies will take as a result of these failures.

The recent failures of Silicon Valley Bank (Santa Clara, California), Signature Bank (New York, New York), and First Republic Bank (San Francisco, California) in March and May, 2023, may lead to regulatory changes and initiatives that could impact the Company.

For example, President Biden has encouraged the federal banking agencies to adopt various reforms, including the completion of an incentive compensation rule for bank executives pursuant to Section 956 of the Dodd-Frank Act, in response to these bank failures.

On April 28, 2023, the Federal Reserve and the FDIC issued reports on the failures of Silicon Valley Bank and Signature Bank, respectively, identifying potential causes that the federal banking agencies may seek to address through changes to their supervisory and regulatory policies.

Additionally, agency officials, including the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, have called for changes to the manner in which banks’ capital, interest rate, and liquidity risks are supervised and regulated.

The extent of final actions to be taken by the regulatory agencies in response to these bank failures, including the potential changes discussed by the Vice Chair or highlighted in the Federal Reserve and FDIC reports, remains unclear.

Bank Term Funding Program

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agency mortgage-backed securities.

At March 31, 2023, the Company had not participated in the BTFP.

At June 30, 2023, the Company had neither used nor established borrowing capacity with the BTFP.

Small Business Lending Data Collection Rule

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The Company is evaluating the impact of the new rule.

The rule is scheduled to take effect on August 29, 2023, and requires compliance by October 1, 2024, April 1, 2025, or January 1, 2026, depending on the number of covered small business loans that a covered lender originates.

Third Party Risk Management Guidance

On June 6, 2023, the FDIC, the Federal Reserve, and the OCC issued final guidance providing sound principles that support a risk-based approach to third-party risk management.

The Company is evaluating the impact of this guidance on its practices.

Glossary of Acronyms, Abbreviations, and Terms

The terms identified below are used in various sections of this Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 and the unaudited Consolidated Financial Statements and Notes to the Financial Statements in Item 1 of this Form 10-Q.

2022 Annual Report on Form 10-K Company’s Annual Report on Form 10-K for the year ended December 31, 2022

2022 Annual Report on Form 10-K

Company’s Annual Report on Form 10-K for the year ended December 31, 2022

Federal Reserve Board of Governors of the Federal Reserve System

ACL Allowance for Credit Losses FRB Federal Reserve Bank of San Francisco

ASC Accounting Standards Codification GAAP Generally Accepted Accounting Principles in the U.S.

ASU Accounting Standards Update GNMA Government National Mortgage Association

AFS Available-for-Sale GSE Government sponsored entity

Bancorp Five Star Bancorp and its subsidiary HTM Held-to-Maturity

Bank Five Star Bank ICS Insured Cash Sweep®

ACL Allowance for Credit Losses GAAP Generally Accepted Accounting Principles in the U.S.

ASC Accounting Standards Codification GNMA Government National Mortgage Association

ASU Accounting Standards Update GSE Government Sponsored Entity

AFS Available-for-Sale ICS Insured Cash Sweep®

Bancorp Five Star Bancorp and its subsidiary IPO Initial Public Offering

Bank Five Star Bank LM Loan modification made to borrower experiencing financial difficulty

Basel III A capital framework and rules for U.S.

banking organizations IPO Initial Public Offering

BOLI Bank-Owned Life Insurance LM Modifications to loans to borrowers experiencing financial difficulty

CDARS Certificate of Deposit Account Registry Service® NI Net income

CECL Current expected credit loss model for recognition of credit losses under ASC 326 NIM Net Interest Margin

C&I Commercial & Industrial OCI Other comprehensive income

banking organizations NI Net Income

BOLI Bank-Owned Life Insurance NIM Net Interest Margin

CDARS Certificate of Deposit Account Registry Service® OCC The Office of the Comptroller of the Currency

CECL Current expected credit loss model for recognition of credit losses under ASC 326 OCI Other Comprehensive Income

C&I Commercial & Industrial PPP Paycheck Protection Program

CRE Commercial Real Estate ROAA Return on Average Assets, annualized

9 unchanged sentences

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-Q

Item 2. Management’s Discussion and Analysis