What changed in this filing

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Item 1. Financial Statements

2023-11-08 compared with 2023-08-09 · 149 added, 164 removed, 818 unchanged (28% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts) June 30,

2023 December 31,

(in thousands, except share amounts) September 30, 2023 December 31, 2022

Cash and due from financial institutions $ 26,744 $ 32,561

2 unchanged sentences

Time deposits in banks 6,971 9,849

Securities available-for-sale, at fair value 110,794 115,988

Securities held-to-maturity, at amortized cost (fair value of $ 3,208 and $ 3,432 at June 30, 2023 and December 31, 2022, respectively)

Securities available-for-sale, at fair value, net of allowance for credit losses of $ 0 at September 30, 2023 and December 31, 2022 (amortized cost of $ 126,703 and $ 135,087 at September 30, 2023 and December 31, 2022, respectively)

104,086 115,988

Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ 20 at September 30, 2023 and $ 0 at December 31, 2022 (fair value of $ 2,811 and $ 3,432 at September 30, 2023 and December 31, 2022, respectively)

Loans held for sale 9,326 9,416

21 unchanged sentences

10,000,000 shares authorized;

zero issued and outstanding at June 30, 2023 and December 31, 2022

zero issued and outstanding at September 30, 2023 and December 31, 2022

Common stock, no par value;

100,000,000 shares authorized;

17,257,357 shares issued and outstanding at June 30, 2023;

17,257,357 shares issued and outstanding at September 30, 2023;

17,241,926 shares issued and outstanding at December 31, 2022

12 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except per share amounts) 2023 2022 2023 2022

45 unchanged sentences

Three Months Ended

June 30, Six Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2023 2022 2023 2022

$ 11,045 $ 11,704 $ 36,935 $ 31,519

Unrealized (loss) gain on securities:

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

Unrealized (losses) on securities:

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

( 4,195 ) ( 4,718 ) ( 3,516 ) ( 22,005 )

Reclassification adjustment for net realized gains included in net income

Income tax (benefit) expense related to items of other comprehensive income

Reclassification adjustment for net realized (losses) included in net income

Income tax (benefit) related to items of other comprehensive income

( 1,240 ) ( 1,395 ) ( 1,039 ) ( 6,506 )

Other comprehensive (loss) income

Other comprehensive (loss)

( 2,955 ) ( 3,323 ) ( 2,477 ) ( 15,504 )

4 unchanged sentences

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three Months Ended June 30, 2023 and 2022

For the Three Months Ended September 30, 2023 and 2022

Common Stock Retained Earnings

Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity

Accumulated Other Comprehensive Loss

Total Shareholders’ Equity

(in thousands, except per share amounts) Shares Amount

Balance at March 31, 2022 17,246,199 $ 218,721 $ 19,558 $ ( 7,218 ) $ 231,061

Balance at June 30, 2022 17,245,983 $ 219,023 $ 26,924 $ ( 12,747 ) $ 233,200

Net income — — 11,704 — 11,704

Other comprehensive loss — — — ( 3,323 ) ( 3,323 )

Stock issued under stock award plans, net 1,438 — — — —

Stock compensation expense — 263 — — 263

Stock forfeitures ( 1,654 ) — — — —

Cash dividends paid ($ 0.15 per share)

— — ( 2,586 ) — ( 2,586 )

Balance at September 30, 2022 17,245,983 $ 219,286 $ 36,042 $ ( 16,070 ) $ 239,258

Balance at June 30, 2023 17,257,357 $ 220,021 $ 62,095 $ ( 12,976 ) $ 269,140

Balance at March 31, 2023 17,258,904 $ 219,785 $ 52,817 $ ( 11,946 ) $ 260,656

Net income — — 11,045 — 11,045

1 unchanged sentence

Stock compensation expense — 245 — — 245

Stock forfeitures ( 1,547 ) — — — —

Cash dividends paid ($ 0.20 per share)

— — ( 3,451 ) — ( 3,451 )

Balance at June 30, 2023 17,257,357 $ 220,021 $ 62,095 $ ( 12,976 ) $ 269,140

Balance at September 30, 2023 17,257,357 $ 220,266 $ 69,689 $ ( 15,931 ) $ 274,024

See accompanying notes to the unaudited consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Six Months Ended June 30, 2023 and 2022

For the Nine Months Ended September 30, 2023 and 2022

Common Stock Retained Earnings

Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity

Accumulated Other Comprehensive Loss

Total Shareholders’ Equity

(in thousands, except per share amounts) Shares Amount

8 unchanged sentences

— — ( 12,713 ) — ( 12,713 )

Balance at June 30, 2022 17,245,983 $ 219,023 $ 26,924 $ ( 12,747 ) $ 233,200

Balance at September 30, 2022 17,245,983 $ 219,286 $ 36,042 $ ( 16,070 ) $ 239,258

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

1 unchanged sentence

Net income — — 36,935 — 36,935

Other comprehensive income — — — 478 478

Other comprehensive loss — — — ( 2,477 ) ( 2,477 )

Stock issued under stock award plans 16,978 — — — —

3 unchanged sentences

— — ( 9,491 ) — ( 9,491 )

Balance at June 30, 2023 17,257,357 $ 220,021 $ 62,095 $ ( 12,976 ) $ 269,140

Balance at September 30, 2023 17,257,357 $ 220,266 $ 69,689 $ ( 15,931 ) $ 274,024

See accompanying notes to unaudited consolidated financial statements.

1 unchanged sentence

CONSOLIDATED STATEMENTS OF CASH FLOWS

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2023 2022

32 unchanged sentences

Net change in deposits 250,206 328,442

FHLB advances — 60,000

FHLB advances (payments) ( 10,000 ) 105,000

Cash dividends paid ( 9,491 ) ( 12,713 )

Proceeds from subordinated note issuance — 75,000

Subordinated note issuance costs — ( 1,454 )

Net cash provided by financing activities 230,715 494,275

7 unchanged sentences

Transfer from loans held for sale to loans held for investment $ 9,416 $ 10,671

Unrealized gain (loss) on securities 679 ( 17,287 )

Unrealized loss on securities ( 3,516 ) ( 22,005 )

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

2 unchanged sentences

ROUA acquired ( 1,534 ) —

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

Cumulative effect of adoption of ASC 326 on retained earnings ( 4,491 ) —

Cumulative effect of adoption of ASC 842 on retained earnings, net of tax — 68

Cumulative effect of adoption of ASC 326 on retained earnings, net of tax ( 4,491 ) —

See accompanying notes to the unaudited consolidated financial statements.

12 unchanged sentences

These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2022, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”), which was filed with the SEC on February 24, 2023.

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

The unaudited consolidated financial statements include Bancorp and its wholly owned subsidiary, the Bank.

All significant intercompany transactions and balances are eliminated in consolidation.

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 any other interim period or for the year ending December 31, 2023.

The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2023.

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

6 unchanged sentences

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

The Company will remain an Emerging Growth Company for five years after its IPO date, unless one of the following

The Company will remain an Emerging Growth Company for five years after its IPO date of May 5, 2021, unless one of the following occurs:

(i) total annual gross revenues are $1.235 billion or more;

(ii) the Company issues more than $1 billion in non-convertible debt;

(ii) the Company issues more than

$1 billion in non-convertible debt;

or (iii) the Company becomes a large accelerated filer with a public float of more than $0.7 billion.

1 unchanged sentence

The Company’s significant accounting policies are included in Note 1, Basis of Presentation on the 2022 Annual Report on Form 10-K.

There have been no changes to these significant accounting policies during the first six months of 2023 other than adoption of ASU No.

There have been no changes to these significant accounting policies during the first nine months of 2023 other than adoption of ASU No.

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

43 unchanged sentences

• Volume – changes in the nature and volume of the portfolio and in the terms of the loans;

• Economic – changes in international, national, regional, and local economic and business conditions and developments that affect the collectibility of the portfolio, including the condition of various market segments;

• Economic – changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

• Policy – changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

24 unchanged sentences

Changes in the allowance for credit losses, if any, are recognized as a provision for (or reversal of) credit losses.

As of June 30, 2023, the Company’s portfolio of AFS debt securities is comprised primarily of debt, mortgage-backed securities, and collateralized mortgage obligations issued by the U.S.

As of September 30, 2023, the Company’s portfolio of AFS debt securities is comprised primarily of debt, mortgage-backed securities, and collateralized mortgage obligations issued by the U.S.

government, its agencies, or government-sponsored enterprises, which are either explicitly or implicitly guaranteed by the U.S.

The remainder of the portfolio is primarily comprised of

obligations of state and political subdivisions, which are generally rated as high grade.

The remainder of the portfolio is primarily

comprised of obligations of state and political subdivisions, which are generally rated as high grade.

The history of minimal credit losses from these issuers indicates that expectation of non-payment of the amortized cost basis is zero.

6 unchanged sentences

The Company’s process for determining the estimate of credit loss on held-to-maturity debt securities is substantially similar to what it is on loans, with segmenting not being applicable.

As the amount of held-to-maturity debt securities that the Company carries is limited and given the determination that expected credit loss was immaterial, an immaterial amount was recognized in allowance for credit loss upon adoption and no credit loss expense was recorded for the three and six months ended June 30, 2023.

As the amount of held-to-maturity debt securities that the Company carries is limited and given the determination that expected credit loss was immaterial, an immaterial amount was recognized in the ACL upon adoption and no credit loss expense was recorded for the three and nine months ended September 30, 2023.

TDRs and Other Loan Modifications

3 unchanged sentences

New guidance with respect to recognition, measurement, and disclosures of loans for borrowers experiencing financial difficulties supersedes guidance on TDRs.

As of June 30, 2023, the amount of loans modified for borrowers due to experiencing financial difficulties under criteria of principal forgiveness, interest rate reduction, other-than-insignificant payment delay, or term extension was immaterial.

As of September 30, 2023, the amount of loans modified for borrowers due to experiencing financial difficulties under criteria of principal forgiveness, interest rate reduction, other-than-insignificant payment delay, or term extension was immaterial.

(f) Recently Issued Accounting Standards

33 unchanged sentences

The following table summarizes the Company’s assets and liabilities that were required to be recorded at fair value on a recurring basis.

(in thousands) Carrying

Value Quoted Prices in Active Markets for Identical Assets

(in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets

(Level 1) Significant Other Observable Inputs

2 unchanged sentences

Changes in Fair Value Recorded In

June 30, 2023

September 30, 2023

Securities available-for-sale:

14 unchanged sentences

In addition, values use discounted cash flow models and may include significant management judgment and estimation.

As of June 30, 2023 and December 31, 2022, there were no Level 1 available-for-sale securities and no transfers between Level 1 and Level 2 classifications for assets or liabilities measured at fair value on a recurring basis.

As of September 30, 2023 and December 31, 2022, there were no Level 1 available-for-sale securities and no transfers between Level 1 and Level 2 classifications for assets or liabilities measured at fair value on a recurring basis.

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date.

4 unchanged sentences

These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as collateral dependent loans and other real estate owned.

As of June 30, 2023 and December 31, 2022, the carrying amount of assets measured at fair value on a non-recurring basis was immaterial to the Company.

As of September 30, 2023 and December 31, 2022, the carrying amount of assets measured at fair value on a non-recurring basis was immaterial to the Company.

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of June 30, 2023 and December 31, 2022.

The table below is a summary of fair value estimates for financial instruments as of September 30, 2023 and December 31, 2022.

The carrying amounts in the following table are recorded in the consolidated balance sheets under the indicated captions.

Further, management has not disclosed the fair value of financial instruments specifically excluded from disclosure requirements, such as BOLI.

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

(in thousands) Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy

12 unchanged sentences

Subordinated notes 73,713 72,632 Level 3 73,606 72,273 Level 3

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at June 30, 2023 and December 31, 2022:

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at September 30, 2023 and December 31, 2022:

Cash and cash equivalents and time deposits in banks :

2 unchanged sentences

See discussion above for the methods and assumptions used by the Company to estimate the fair value of investment securities.

Fair value of held-to-maturity securities is based on observable market data, such as interest rates and yield curves (observable at commonly quoted intervals) as provided by an independent third party.

Fair value of held-to-maturity securities is estimated by calculating the net present value of future cash flows based on observable market data, such as interest rates and yield curves (observable at commonly quoted intervals) as provided by an independent third party.

Loans held for sale :

17 unchanged sentences

federal government agencies, such as the SBA, and securities issued by U.S.

GSEs, such as FNMA, FHLMC, and FHLB.

GSEs, such as the FNMA, the FHLMC, and the FHLB.

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

A summary of the amortized cost and fair value related to securities held-to-maturity as of June 30, 2023 and December 31, 2022 is presented below.

(in thousands) Amortized

Cost Gross Unrealized Fair

A summary of the amortized cost and fair value related to securities held-to-maturity as of September 30, 2023 and December 31, 2022 is presented below.

(in thousands) Amortized Cost Gross Unrealized Fair Value

Gains (Losses)

June 30, 2023

September 30, 2023

Obligations of states and political subdivisions $ 3,104 $ — $ ( 293 ) $ 2,811

11 unchanged sentences

Refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, for further detail.

A summary of the amortized cost and fair value related to securities available-for-sale as of June 30, 2023 and December 31, 2022 is presented below.

(in thousands) Amortized

Cost Gross Unrealized Fair

A summary of the amortized cost and fair value related to securities available-for-sale as of September 30, 2023 and December 31, 2022 is presented below.

(in thousands) Amortized Cost Gross Unrealized Fair Value

Gains (Losses)

June 30, 2023

September 30, 2023

government agencies $ 11,281 $ 110 $ ( 182 ) $ 11,209

11 unchanged sentences

Total available-for-sale $ 135,087 $ 103 $ ( 19,202 ) $ 115,988

The amortized cost and fair value of investment securities by contractual maturity at June 30, 2023 and December 31, 2022 are shown below.

The amortized cost and fair value of investment securities by contractual maturity at September 30, 2023 and December 31, 2022 are shown below.

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

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

(in thousands) September 30, 2023 December 31, 2022

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

11 unchanged sentences

Sales of investment securities and gross gains and losses are shown in the following table:

(in thousands) For the three months ended For the six months ended

2023 June 30,

2022 June 30,

2023 June 30,

(in thousands) For the three months ended For the nine months ended

September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

Available-for-sale:

2 unchanged sentences

Pledged investment securities are shown in the following table:

(in thousands) June 30,

2023 December 31,

(in thousands) September 30, 2023 December 31, 2022

The State of California, securing deposits of public funds and borrowings $ 54,076 $ 40,465

1 unchanged sentence

Total pledged investment securities $ 103,204 $ 40,465

The following table details the gross unrealized losses and fair values aggregated by investment category and length of time that individual available-for-sale securities have been in a continuous unrealized loss position at June 30, 2023 and December 31, 2022:

Less than 12 months 12 months or more Total securities

in a loss position

Less than 12 months 12 months or more Total securities in a loss position

(in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss

June 30, 2023

September 30, 2023

government agencies $ 839 $ ( 19 ) $ 7,455 $ ( 163 ) $ 8,294 $ ( 182 )

11 unchanged sentences

$ 32,552 $ ( 4,733 ) $ 78,693 $ ( 14,469 ) $ 111,245 $ ( 19,202 )

There were 153 and 152 available-for-sale securities in unrealized loss positions at June 30, 2023 and December 31, 2022, respectively.

As of June 30, 2023, the investment portfolio included 148 investment securities that had been in a continuous loss position for twelve months or more and five investment securities that had been in a loss position for less than twelve months.

There was one held-to-maturity security in a continuous unrealized loss position at June 30, 2023, which had been in a continuous loss position for more than twelve months.

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

There were 154 and 152 available-for-sale securities in unrealized loss positions at September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023, the investment portfolio included 148 investment securities that had been in a continuous loss position for twelve months or more and six investment securities that had been in a loss position for less than twelve months.

There was one held-to-maturity security in a continuous unrealized loss position at September 30, 2023, which had been in a continuous loss position for more than twelve months.

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

government and have strong credit profiles.

6 unchanged sentences

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

The Company held $ 15.0 million and $ 10.9 million of FHLB stock at June 30, 2023 and December 31, 2022, respectively.

The Company held $ 15.0 million and $ 10.9 million of FHLB stock at September 30, 2023 and December 31, 2022, respectively.

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

Based on management’s analysis of the FHLB’s financial condition and certain qualitative factors, management determined that the FHLB stock was not impaired at June 30, 2023 and December 31, 2022.

On April 27, 2023, the FHLB announced a cash dividend for the first quarter of 2023 at an annualized dividend rate of 7.00 %, which was paid on May 11, 2023.

Cash dividends received on FHLB capital stock amounted to $ 0.2 million and $ 0.1 million for the three months ended June 30, 2023 and 2022, respectively, and $ 0.4 million and $ 0.2 million for the six months ended June 30, 2023 and 2022, respectively, and were recorded as non-interest income on the unaudited consolidated statements of income.

Based on management’s analysis of the FHLB’s financial condition and certain qualitative factors, management determined that the FHLB stock was not impaired at September 30, 2023 and December 31, 2022.

On July 27, 2023, the FHLB announced a cash dividend for the second quarter of 2023 at an annualized dividend rate of 7.75 %, which was paid on August 10, 2023.

Cash dividends received on FHLB capital stock amounted to $ 0.3 million and $ 0.2 million for the three months ended September 30, 2023 and 2022, respectively, and $ 0.7 million and $ 0.4 million for the nine months ended September 30, 2023 and 2022, respectively, and were recorded as non-interest income on the unaudited consolidated statements of income.

Loans and Allowance for Credit Losses

2 unchanged sentences

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

(in thousands) June 30,

2023 December 31,

(in thousands) September 30, 2023 December 31, 2022

Commercial $ 2,599,616 $ 2,394,674

9 unchanged sentences

Net deferred loan fees

( 2,265 ) ( 2,140 )

Allowance for credit losses

( 34,028 ) ( 28,389 )

Loans held for investment, net of allowance for credit losses $ 2,975,902 $ 2,762,937

48 unchanged sentences

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

These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts.

Financial ratios and trends are acceptable.

These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts and their financial ratios and trends are acceptable.

Negative external industry factors are generally not present.

15 unchanged sentences

The losses on these loans are deferred until all pending factors have been addressed.

The amortized cost basis of the Company’s loans by origination year, where origination is defined as the later of origination or renewal date, and credit quality indicator as of June 30, 2023 was as follows (disclosure not comparative due to adoption of ASC 326 on January 1, 2023 – refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, for further details):

The amortized cost basis of the Company’s loans by origination year, where origination is defined as the later of origination or renewal date, and credit quality indicator as of September 30, 2023 was as follows (disclosure not comparative due to adoption of ASC 326 on January 1, 2023 – refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, for further details):

Amortized Cost Basis by Origination Year

62 unchanged sentences

Management also reviews loans graded “watch” or worse, regardless of loan type, no less than quarterly.

The age analysis of past due loans by class as of June 30, 2023 consisted of the following:

The age analysis of past due loans by class as of September 30, 2023 consisted of the following:

(in thousands) Past Due

10 unchanged sentences

Total $ 156 $ — $ — $ 156 $ 3,009,774 $ 3,009,930

There were no loans greater than 90 days past due and still accruing as of June 30, 2023.

There were no loans greater than 90 days past due and still accruing interest income as of September 30, 2023.

The age analysis of past due loans by class as of December 31, 2022 consisted of the following:

11 unchanged sentences

Total $ 194 $ 175 $ — $ 369 $ 2,790,957 $ 2,791,326

There were no loans greater than 90 days past due and still accruing as of December 31, 2022.

One collateral dependent loan was in process of foreclosure at June 30, 2023:

a commercial term loan secured by a single family residence with an unpaid principal balance of $ 175.0 thousand and no related allowance.

Non-accrual loans, segregated by class, were as follows as of June 30, 2023 and December 31, 2022:

(in thousands) June 30,

2023 December 31,

There were no loans greater than 90 days past due and still accruing interest income as of December 31, 2022.

No collateral dependent loans were in process of foreclosure at September 30, 2023.

Non-accrual loans, segregated by class, were as follows as of September 30, 2023 and December 31, 2022:

(in thousands) September 30, 2023 December 31, 2022

Commercial $ 1,923 $ 106

2 unchanged sentences

Total non-accrual loans $ 2,002 $ 404

No interest income was recognized on non-accrual loans in the three and six months ended June 30, 2023 or June 30, 2022.

Non-accrual real estate loans did not have an allowance for credit losses as of June 30, 2023.

No interest income was recognized on non-accrual loans in the three and nine months ended September 30, 2023 or September 30, 2022.

Non-accrual real estate loans did not have an allowance for credit losses as of September 30, 2023.

Interest income can be recognized on non-accrual loans in cases where resolution occurs through a sale or full payment is received on the non-accrual loan.

The amount of foregone interest income related to non-accrual loans was $ 26.1 thousand and $ 35.3 thousand for the three and six months ended June 30, 2023, respectively, compared to $ 6.9 thousand and $ 25.1 thousand for the three and six months ended June 30, 2022, respectively.

The amount of foregone interest income related to non-accrual loans was $ 27.1 thousand and $ 62.3 thousand for the three and nine months ended September 30, 2023, respectively, compared to $ 6.9 thousand and $ 32.0 thousand for the three and nine months ended September 30, 2022, respectively.

Allowance for Credit Losses

The following table discloses activity in the allowance for credit losses for the three months ended June 30, 2023.

The following table discloses activity in the allowance for credit losses for the three months ended September 30, 2023.

(in thousands) Beginning Balance Charge-offs Recoveries Provision (Benefit) Ending Balance

9 unchanged sentences

Total $ 33,984 $ ( 1,432 ) $ 426 $ 1,050 $ 34,028

The following table discloses activity in the allowance for credit losses for the three months ended June 30, 2022.

The following table discloses activity in the allowance for credit losses for the three months ended September 30, 2022.

(in thousands) Beginning Balance Charge-offs Recoveries Provision (Benefit) Ending Balance

11 unchanged sentences

Total $ 25,786 $ ( 530 ) $ 332 $ 2,250 $ 27,838

The following table discloses activity in the allowance for credit losses for the six months ended June 30, 2023.

The following table discloses activity in the allowance for credit losses for the nine months ended September 30, 2023.

(in thousands) Beginning Balance Effect of Adoption of ASC 326 Charge-offs Recoveries Provision (Benefit) Ending Balance

10 unchanged sentences

Total $ 28,389 $ 5,262 $ ( 3,565 ) $ 1,072 $ 2,870 $ 34,028

The following table discloses activity in the allowance for credit losses for the six months ended June 30, 2022.

The following table discloses activity in the allowance for credit losses for the nine months ended September 30, 2022.

(in thousands) Beginning Balance Charge-offs Recoveries Provision (Benefit) Ending Balance

15 unchanged sentences

Prior to adoption of ASC 326, provisions for unfunded loan commitments were included in “Other operating expenses” in the unaudited consolidated statements of income.

Three months ended Six months ended

(in thousands) June 30,

2023 June 30,

2022 June 30,

2023 June 30,

Three months ended Nine months ended

(in thousands) September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

Balance at beginning of period $ 1,547 $ 125 $ 125 $ 102

3 unchanged sentences

Pledged Loans

The Company’s FHLB line of credit is secured under terms of a collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $ 1.7 billion and $ 1.6 billion at June 30, 2023 and December 31, 2022, respectively.

In addition, the Company pledges eligible tenants in common loans, which totaled $ 42.0 million and $ 41.9 million at June 30, 2023 and December 31, 2022, respectively, to secure its borrowing capacity with the Federal Reserve Bank of San Francisco.

In addition, the Company pledges eligible tenants in common loans, which totaled $ 39.3 million and $ 41.9 million at September 30, 2023 and December 31, 2022, respectively, to secure its borrowing capacity with the Federal Reserve Bank of San Francisco.

See Note 6, Long Term Debt and Other Borrowings, for further discussion of these borrowings.

Interest-Bearing Deposits

Interest-bearing deposits consisted of the following as of June 30, 2023 and December 31, 2022:

(in thousands) June 30,

2023 December 31,

Interest-bearing deposits consisted of the following as of September 30, 2023 and December 31, 2022:

(in thousands) September 30, 2023 December 31, 2022

Interest-bearing transaction accounts $ 297,678 $ 242,632

4 unchanged sentences

Other time accounts 96,611 144,355

Total time deposits

427,524 342,514

Total interest-bearing deposits $ 2,198,776 $ 1,813,255

Time deposits totaled $ 377.9 million and $ 342.5 million as of June 30, 2023 and December 31, 2022, respectively.

As of June 30, 2023, scheduled maturities of time deposits for the next five years were as follows:

Time deposits totaled $ 427.5 million and $ 342.5 million as of September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023, scheduled maturities of time deposits for the next five years were as follows:

(in thousands)

5 unchanged sentences

The Company considers the reciprocal deposits to be in-market deposits, as distinguished from traditional out-of-market brokered deposits.

There were no one-way deposits at June 30, 2023 and December 31, 2022.

The composition of network deposits as of June 30, 2023 and December 31, 2022 was as follows:

(in thousands) June 30,

2023 December 31,

There were no one-way deposits at September 30, 2023 and December 31, 2022.

The composition of network deposits as of September 30, 2023 and December 31, 2022 was as follows:

(in thousands) September 30, 2023 December 31, 2022

CDARS $ 15,542 $ 13,248

1 unchanged sentence

Total network deposits $ 705,525 $ 285,967

Interest expense recognized on interest-bearing deposits for periods ended June 30, 2023 and 2022 consisted of the following:

Three months ended Six months ended

(in thousands) June 30,

2023 June 30,

2022 June 30,

2023 June 30,

Interest expense recognized on interest-bearing deposits for periods ended September 30, 2023 and 2022 consisted of the following:

Three months ended Nine months ended

(in thousands) September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

Interest-bearing transaction accounts $ 972 $ 115 $ 2,230 $ 251

10 unchanged sentences

The subordinated notes have a maturity date of September 1, 2032 and bear interest, payable semi-annually, at the rate of 6.00 % per annum until September 1, 2027.

On that date, the interest rate will be adjusted to float at a rate equal to the three-month Term SOFR plus 329.0 basis points ( 8.59 % as of June 30, 2023) until maturity.

On that date, the interest rate will be adjusted to float at a rate equal to the three-month Term SOFR plus 329.0 basis points ( 8.70 % as of September 30, 2023) until maturity.

The notes include a right of prepayment, on or after August 17, 2027 or, in certain limited circumstances, before that date.

2 unchanged sentences

Eligible amounts will be phased out by 20% per year beginning five years before the maturity date of the notes.

Debt issuance costs incurred in conjunction with the notes were $ 1.5 million, of which $ 0.1 million has been amortized as of June 30, 2023.

Debt issuance costs incurred in conjunction with the notes were $ 1.5 million, of which $ 0.2 million has been amortized as of September 30, 2023.

The Company reflects debt issuance costs as a direct deduction from the face of the note.

The debt issuance costs are amortized into interest expense through the maturity period.

At June 30, 2023 and December 31, 2022, the Company’s subordinated debt outstanding was $ 73.7 million and $ 73.6 million, respectively.

At September 30, 2023 and December 31, 2022, the Company’s subordinated debt outstanding was $ 73.7 million and $ 73.6 million, respectively.

Other borrowings :

The Company entered into an agreement with the FHLB which granted the FHLB a blanket lien on all loans receivable (except for construction and agricultural loans) as collateral for a borrowing line.

Based on the dollar volume of qualifying loan collateral, the Company had a total financing availability of $ 1.0 billion at June 30, 2023 and $ 1.0 billion at December 31, 2022.

At June 30, 2023 and December 31, 2022, the Company had $ 100.0 million and $ 100.0 million of outstanding borrowings, respectively.

As of June 30, 2023 and December 31, 2022, the Company had letters of credit (“LCs”) issued on its behalf totaling $ 606.5 million and $ 686.5 million, respectively, as discussed below.

At June 30, 2023 and December 31, 2022, LCs totaling $ 186.5 million and $ 206.5 million, respectively, were pledged to secure State of California deposits, and LCs totaling $ 420.0 million and $ 480.0 million, respectively, were pledged to secure local agency deposits.

The LCs issued reduced the Company’s available borrowing capacity to $ 342.6 million and $ 216.3 million as of June 30, 2023 and December 31, 2022, respectively.

At June 30, 2023, the Company had five unsecured federal funds lines of credit with its correspondent banks totaling $ 175.0 million.

Based on the dollar volume of qualifying loan collateral, the Company had a total financing availability of $ 1.1 billion at September 30, 2023 and $ 1.0 billion at December 31, 2022.

At September 30, 2023 and December 31, 2022, the Company had $ 90.0 million and $ 100.0 million of outstanding borrowings, respectively.

As of September 30, 2023 and December 31, 2022, the

Company had letters of credit (“LCs”) issued on its behalf totaling $ 671.5 million and $ 686.5 million, respectively, as discussed below.

At September 30, 2023 and December 31, 2022, LCs totaling $ 261.5 million and $ 206.5 million, respectively, were pledged to secure State of California deposits, and LCs totaling $ 410.0 million and $ 480.0 million, respectively, were pledged to secure local agency deposits.

The LCs issued reduced the Company’s available borrowing capacity to $ 292.1 million and $ 216.3 million as of September 30, 2023 and December 31, 2022, respectively.

At September 30, 2023, the Company had five unsecured federal funds lines of credit with its correspondent banks totaling $ 175.0 million.

At December 31, 2022, the Company had seven unsecured federal funds lines of credit with its correspondent banks totaling $ 190.0 million.

There were no amounts outstanding at June 30, 2023 and December 31, 2022.

At June 30, 2023 and December 31, 2022, the Company had the ability to borrow from the Federal Reserve Discount Window.

At June 30, 2023 and December 31, 2022, the borrowing capacity under this arrangement was $ 72.8 million and $ 21.9 million, respectively.

There were no amounts outstanding at June 30, 2023 and December 31, 2022.

There were no amounts outstanding at September 30, 2023 and December 31, 2022.

At September 30, 2023 and December 31, 2022, the Company had the ability to borrow from the Federal Reserve Discount Window.

At September 30, 2023 and December 31, 2022, the borrowing capacity under this arrangement was $ 69.0 million and $ 21.9 million, respectively.

There were no amounts outstanding at September 30, 2023 and December 31, 2022.

The borrowing line is secured by liens on the Company’s construction and agricultural loan portfolios and certain available-for-sale securities.

6 unchanged sentences

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

Three months ended Six months ended

(in thousands, except share count and earnings per common share) June 30,

2023 June 30,

2022 June 30,

2023 June 30,

Three months ended Nine months ended

(in thousands, except share count and earnings per common share) September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

Net income $ 11,045 $ 11,704 $ 36,935 $ 31,519

5 unchanged sentences

Diluted EPS 0.64 0.68 2.15 1.84

The Company did not have any anti-dilutive shares at June 30, 2023 or June 30, 2022.

The Company did not have any anti-dilutive shares at September 30, 2023 or September 30, 2022.

(b) Dividends

On April 20, 2023, the board of directors declared a $ 0.20 per common share dividend, totaling $ 3.5 million.

On July 20, 2023, the board of directors declared a $ 0.20 per common share dividend, totaling $ 3.5 million.

1 unchanged sentence

The Historical Incentive Plan consisted of RSAs for certain executive officers of the Company.

The arrangement provided that these executive officers would receive shares of restricted common stock of the Company that vested over three years , with the number of shares granted based upon achieving certain performance objectives.

arrangement provided that these executive officers would receive shares of restricted common stock of the Company that vested over three years , with the number of shares granted based upon achieving certain performance objectives.

These objectives included, but were not limited to, net income adjusted for the provision for credit losses, deposit growth, efficiency ratio, net interest margin, and asset quality.

Compensation expense for RSAs granted under the Historical

Incentive Plan is recognized over the service period, which is equal to the vesting period of the shares based on the fair value of the shares at issue date.

Compensation expense for RSAs granted under the Historical Incentive Plan is recognized over the service period, which is equal to the vesting period of the shares based on the fair value of the shares at issue date.

In connection with its IPO in May 2021, the Company granted RSAs under the Equity Incentive Plan to certain employees, officers, executives, and non-employee directors.

3 unchanged sentences

The RSAs are considered fixed awards, as the number of shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the service period.

Non-cash stock compensation expense recognized for the three months ended June 30, 2023 and 2022 was $ 0.2 million and $ 0.3 million, respectively.

Non-cash stock compensation expense recognized for the six months ended June 30, 2023 and 2022 was $ 0.5 million and $ 0.6 million, respectively.

At June 30, 2023 and 2022, there were 82,324 and 107,824 unvested restricted shares, respectively.

As of June 30, 2023, there was approximately $ 1.6 million of unrecognized compensation expense related to the 82,324 unvested restricted shares.

Non-cash stock compensation expense recognized for the three months ended September 30, 2023 and 2022 was $ 0.2 million and $ 0.3 million, respectively.

Non-cash stock compensation expense recognized for the nine months ended September 30, 2023 and 2022 was $ 0.7 million and $ 0.8 million, respectively.

At September 30, 2023 and 2022, there were 82,324 and 104,348 unvested restricted shares, respectively.

As of September 30, 2023, there was approximately $ 1.4 million of unrecognized compensation expense related to the 82,324 unvested restricted shares.

The holders of unvested RSAs are entitled to dividends at the same per-share ratio as holders of common stock.

Tax benefits for dividends paid on unvested RSAs are recorded as tax benefits in the consolidated statements of income with a corresponding decrease to current taxes payable.

Such tax benefits are expected to be recognized over the weighted average term remaining on the unvested restricted shares of 2.92 years as of June 30, 2023.

The impact of tax benefits for dividends paid on unvested restricted stock on the Company’s unaudited consolidated statements of income for the three and six months ended June 30, 2023 and 2022 was immaterial.

Such tax benefits are expected to be recognized over the weighted average term remaining on the unvested restricted shares of 2.67 years as of September 30, 2023.

The impact of tax benefits for dividends paid on unvested restricted stock on the Company’s unaudited consolidated statements of income for the three and nine months ended September 30, 2023 and 2022 was immaterial.

The following table summarizes activity related to restricted shares for the periods indicated:

For the three months ended June 30,

For the six months ended June 30,

For the three months ended September 30,

For the nine months ended September 30,

2023 2022 2023 2022

12 unchanged sentences

Off-balance sheet risk to loan loss exists up to the face amount of these instruments, although material losses are not anticipated.

The Company uses the same credit policies in making commitments to originate loans and lines of credit as it does for on-balance sheet instruments, including obtaining collateral at exercise of the commitment.

The contractual

amounts of unfunded loan commitments and standby letters of credit not reflected in the unaudited consolidated balance sheets were as follows:

(in thousands) June 30,

2023 December 31,

The Company uses the same credit policies in making commitments to originate loans and lines of credit as it

does for on-balance sheet instruments, including obtaining collateral at exercise of the commitment.

The contractual amounts of unfunded loan commitments and standby letters of credit not reflected in the unaudited consolidated balance sheets were as follows:

(in thousands) September 30, 2023 December 31, 2022

Commercial lines of credit $ 173,603 $ 147,021

7 unchanged sentences

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

The allowance for credit losses on unfunded commitments totaled $ 1.5 million as of June 30, 2023 and $ 0.1 million as of December 31, 2022, which is recorded in “Interest payable and other liabilities” in the unaudited consolidated balance sheets.

The allowance for credit losses on unfunded commitments totaled $ 1.5 million as of September 30, 2023 and $ 0.1 million as of December 31, 2022, which is recorded in “Interest payable and other liabilities” in the unaudited consolidated balance sheets.

Concentrations of credit risk :

1 unchanged sentence

Although the Company has a diversified loan portfolio, a substantial portion is secured by commercial and residential real estate.

In management’s judgment, a concentration of loans exists in real estate related loans, which represented approximately 92.44 % of the Company’s loan portfolio at June 30, 2023 and 91.84 % of the Company’s loan portfolio at December 31, 2022.

In management’s judgment, a concentration of loans exists in real estate related loans, which represented approximately 92.71 % of the Company’s loan portfolio at September 30, 2023 and 91.84 % of the Company’s loan portfolio at December 31, 2022.

Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectability of these loans.

1 unchanged sentence

Deposit concentrations :

At June 30, 2023, the Company had 86 deposit relationships that exceeded $ 5.0 million each, totaling $ 1.8 billion, or approximately 61.78 % of total deposits.

The Company’s largest single deposit relationship at June 30, 2023 totaled $ 210.0 million, or approximately 7.17 % of total deposits.

At September 30, 2023, the Company had 86 deposit relationships that exceeded $ 5.0 million each, totaling $ 1.9 billion, or approximately 61.64 % of total deposits.

The Company’s largest single deposit relationship at September 30, 2023 totaled $ 250.0 million, or approximately 8.24 % of total deposits.

Management maintains the Company’s liquidity position and lines of credit with correspondent banks to mitigate the risk of large withdrawals by this group of large depositors.

4 unchanged sentences

The Company maintains funds on deposit with other FDIC-insured financial institutions under correspondent banking agreements.

Uninsured deposits through these agreements totaled $ 24.1 million and $ 16.2 million at June 30, 2023 and December 31, 2022, respectively.

Uninsured deposits through these agreements totaled $ 22.1 million and $ 16.2 million at September 30, 2023 and December 31, 2022, respectively.

Litigation Matters

2 unchanged sentences

Subsequent Events

On July 20, 2023, the Board of Directors of the Company authorized a cash dividend of $ 0.20 per common share, payable on August 14, 2023 to shareholders of record on August 7, 2023.

On October 19, 2023, the Board of Directors of the Company authorized a cash dividend of $ 0.20 per common share, payable on November 13, 2023 to shareholders of record as of November 6, 2023.

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 1. Financial Statements