What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-08 compared with 2023-08-09 · 260 added, 254 removed, 848 unchanged (38% of the section changed)

34 unchanged sentences

• 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 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.

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 Reports on Form 10-Q for the three months ended March 31, 2023 and June 30, 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 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.

We refer to our mission as “purpose-driven and integrity-centered banking.” At September 30, 2023, we had total assets of $3.5 billion, total loans held for investment, net of allowance for credit losses, of $3.0 billion, and total deposits of $3.0 billion.

Critical Accounting Estimates

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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.

We believe that the judgments, estimates, and assumptions used in the

preparation of our financial statements are reasonable and appropriate, based on the information available at the time they were made.

financial condition and results of operations.

We believe that the judgments, estimates, and assumptions used in the preparation of our financial statements are reasonable and appropriate, based on the information available at the time they were made.

However, actual results may differ from those estimates, and these differences may be material.

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Executive Summary

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.

Net income for the three and nine months ended September 30, 2023 totaled $11.0 million and $36.9 million, respectively, compared to net income of $11.7 million and $31.5 million for the three and nine months ended September 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 deposits increased by $250.2 million from $2.8 billion at December 31, 2022 to $3.0 billion at September 30, 2023.

Non-brokered deposits increased by $300.2 million in the first nine months of 2023 to $3.0 billion.

Non-interest-bearing deposits decreased by $135.3 million in the first nine months of 2023 to $833.4 million, and represented 27.49% of total deposits at September 30, 2023, as compared to 34.82% 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.

Our loan to deposit ratio was 99.57% at September 30, 2023, as compared to 100.67% at December 31, 2022.

Total assets were $3.5 billion at September 30, 2023, representing a $277.9 million, or 8.61%, increase compared to $3.2 billion at December 31, 2022.

Total loans held for investment were $3.0 billion at September 30, 2023, compared to $2.8 billion at December 31, 2022, an increase of $218.6 million, or 7.83%.

The increase was primarily attributable to increases of $204.9 million in commercial real estate loans, $8.0 million in commercial land and development loans, $7.2 million in residential construction loans, and $6.7 million in commercial construction 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 1.55% 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.

Credit quality remains strong, with non-accrual loans representing $2.0 million, or 0.07% of total loans held for investment, at September 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 1.13% at September 30, 2023 and 1.02% at December 31, 2022.

• Net Interest Margin.

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.

Net interest margin was 3.31% and 3.50% for the three and nine months ended September 30, 2023, respectively, and 3.86% and 3.73% for the three and nine months ended September 30, 2022, respectively.

The decrease in net interest margin for the both the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022 was primarily due to an increase in deposit costs more than offsetting increases in yields on earning assets, as the effective Federal Funds rate increased from 3.08% at September 30, 2022 to 5.33% at September 30, 2023.

• Efficiency Ratio.

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.

Efficiency ratio was 41.63% for the three months ended September 30, 2023, up from 35.13% for the corresponding period of 2022.

Additionally, efficiency ratio was 39.11% for the nine months ended September 30, 2023, up from 37.68% for the corresponding period of 2022.

• Capital Ratios .

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.

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

The total risk-based capital ratio for the Company was 12.37% at September 30, 2023, compared to 12.46% at December 31, 2022.

The Tier 1 leverage ratio was 8.58% at September 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 $0.20 per share on April 20, 2023.

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

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

(dollars in thousands) June 30,

2023 December 31, 2022

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

Selected financial condition data:

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7.82 % 7.83 %

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,

For the three months ended For the nine months ended

(dollars in thousands, except per share data) September 30, 2023 September 30, 2022 September 30, 2023 September 30, 2022

Selected operating data:

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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.

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

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 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.

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RESULTS OF OPERATIONS

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.

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

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 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.

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.

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

Net interest income remained consistent at $27.5 million for the three months ended September 30, 2023 and September 30, 2022 and our net interest margin of 3.31% for the three months ended September 30, 2023 decreased from 3.86% for the three months ended September 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.

These changes related to the change in the effective Federal Funds rate from 3.08% at September 30, 2022 to 5.33% at September 30, 2023.

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 or rates paid for each period reported.

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

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

For the three months ended

June 30, 2023

September 30, 2023

For the three months ended

June 30, 2022

September 30, 2022

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

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Interest receivable and other assets, net 4

77,757 78,112

Total assets $ 3,370,802 $ 2,909,492

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

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

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

Yields are not calculated on a tax-equivalent basis.

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

Allowance for credit losses is not included in total loan balances.

4 Allowance for credit losses is included in interest receivable and other assets, net.

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

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For the three months ended

June 30, 2023 compared to

the three months ended June 30, 2022

September 30, 2023 compared to

the three months ended September 30, 2022

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

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Changes in net interest income/margin $ 1,395 $ (1,442) $ (47)

Factors affecting interest income and yields

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 $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.

Net interest income decreased $47.0 thousand, and net interest margin decreased 55 basis points for the three months ended September 30, 2023 compared to the same quarter of the prior year.

The decrease in net interest income is primarily attributable to an additional $13.6 million in deposit interest expense due to increases in interest rates and average balances as compared to the same quarter of the prior year.

The cost of interest-bearing deposits increased 228 basis points as compared to the same quarter of the prior year, while average balances increased 40.06%.

In addition, the average balance of non-interest-bearing deposits decreased by $216.0 million as compared to the same quarter of the prior year.

The increase in deposit interest expense was partially offset by an increase in total interest income of $13.5 million, as compared to the same quarter of the prior year.

Average loan yields increased 82 basis points as compared to the same quarter of the prior year, while average balances increased 19.55%.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

Net interest income increased by $10.3 million, or 13.89%, for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, while our net interest margin decreased 23 basis points during the same period.

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 changes in the effective Federal Funds rate in each period.

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 following table presents average balance sheet information, interest income, interest expense, and the corresponding average yield earned or rate 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

For the nine months ended

September 30, 2023

For the nine months ended

September 30, 2022

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

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Interest receivable and other assets, net 4

74,184 108,803

Total assets $ 3,294,441 $ 2,760,822

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

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

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

Yields are not calculated on a tax-equivalent basis.

2 unchanged sentences

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

Allowance for credit losses is not included in total loan balances.

4 Allowance for credit losses is included in interest receivable and other assets, net.

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

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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.

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

For the nine months ended

September 30, 2023 compared to

the nine months ended September 30, 2022

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

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Changes in net interest income/margin $ 9,404 $ 863 $ 10,267

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.

Net interest income increased by 13.89%, while net interest margin decreased 23 basis points for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

The increase in net interest income is primarily attributable to an additional $42.4 million in interest income on loans due to increases in interest rates and average balances as compared to the same period of the prior year.

The average yield on loans increased 88 basis points as compared to the same period of the prior year, while average balances increased $676.4 million, or 30.27%.

The cost of interest-bearing deposits increased 219 basis points as compared to the same period of the prior year due to increases in interest rates and an increase in average balances of $566.6 million, or 38.04%.

In addition, the average balance of non-interest-bearing deposits decreased by $126.3 million, or 12.91%, as compared to the same period of the prior year.

While the increase in total interest income more than offset the increase in total interest expense, net interest income relative to interest-earning assets decreased as compared to the same period of the prior year.

Provision for Credit Losses

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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 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.

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

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

We recorded a $1.1 million provision for credit losses in the third 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.

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

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

We recorded a $3.2 million provision for credit losses in the first nine months of 2023, as compared to a $5.5 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.

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

Non-interest Income

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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.

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

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

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

For the three months ended

(dollars in thousands) June 30, 2023

June 30, 2022

(dollars in thousands) September 30, 2023

September 30, 2022

$ Change % Change

7 unchanged sentences

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.

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 September 30, 2023, as compared to the three months ended September 30, 2022.

During the three months ended September 30, 2023, approximately $7.0 million of loans were sold with an effective yield of 5.63%, as compared to approximately $10.5 million of loans sold with an effective yield of 5.20% during the three months ended September 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 increase in FHLB stock dividends was primarily due to increased yields from dividends received of 7.75% for the three months ended September 30, 2023, as compared to 6.00% for the three months ended September 30, 2022.

Nine months ended September 30, 2023 compared to nine months ended September 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

For the nine months ended

(In thousands) September 30, 2023

September 30, 2022

$ Change % Change

8 unchanged sentences

Gain on sale of loans.

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.

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

During the nine months ended September 30, 2023, approximately $30.6 million of loans were sold with an effective yield of 5.34%, as compared to approximately $36.3 million of loans sold with an effective yield of 6.33% during the nine months ended September 30, 2022.

Loan-related fees .

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.

The decrease in loan-related fees primarily related to $0.1 million of swap referral fees recognized during the nine months ended September 30, 2023, as compared to $0.8 million recognized in the nine months ended September 30, 2022.

FHLB stock dividends.

The increase in FHLB stock dividends was primarily due to increased yields on dividends received combined with an increase in the number of FHLB shares outstanding between September 30, 2022 and September 30, 2023.

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 six months ended June 30, 2023 which did not occur during the six months ended June 30, 2022.

The increase in other income resulted primarily from a $1.3 million gain recorded for distributions received from venture-backed fund investments during the nine months ended September 30, 2023 compared to a $0.3 million gain recorded during the nine months ended September 30, 2022.

Non-interest Expense

6 unchanged sentences

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

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

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

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

For the three months ended

(dollars in thousands) June 30, 2023

June 30, 2022

(dollars in thousands) September 30, 2023

September 30, 2022

$ Change % Change

10 unchanged sentences

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

(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.

(i) a $0.8 million increase in salaries, insurance, and benefits as a result of a 8.72% increase in headcount during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022 and (ii) a $0.8 million decrease in loan origination costs due to lower loan production period-over-period.

These increases were partially offset by $0.4 million of lower commission expenses due to lower loan production during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

Data processing and software.

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

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

(i) increased usage of our digital banking platform;

3 unchanged sentences

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.

FDIC insurance also increased for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, due to a $320.8 million increase in the assessment base period-over-period.

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 increase in other operating expenses was primarily due to a $0.1 million increase in IntraFi Network fees resulting from an overall increase in balances carried in the network.

The remainder of the increase related to an overall increase in travel, conference fees, and professional membership fees during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.

Nine months ended September 30, 2023 compared to nine months ended September 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

For the nine months ended

(In thousands) September 30, 2023

September 30, 2022

$ Change % Change

12 unchanged sentences

(ii) a $1.9 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.

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

These increases were partially offset by a reduction of $1.4 million of commission expenses for the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

Data processing and software.

5 unchanged sentences

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.

FDIC insurance also increased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, due to a $320.8 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.

The increase in advertising and promotional costs was primarily due to an increased customer base and a 28.57% increase in the number of Business Development Officers from 21 as of September 30, 2022 to 27 as of September 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.

The increase in other operating expenses was primarily due to a $0.2 million increase in travel and a $0.2 million increase in IntraFi Network fees resulting from an overall increase in balances carried in the network during the nine months ended September 30, 2023, as compared to the nine months ended September 30, 2022.

Provision for Income Taxes

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.

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

The provision for income taxes was $4.8 million for the three months ended September 30, 2023, compared to $4.8 million for the three months ended September 30, 2022.

There was a decline in the provision due to an overall decrease in pre-tax income period-over-period, which was partially offset by a $0.2 million adjustment to the provision recorded during the three months ended September 30, 2023 to true-up the year-to-date effective tax rate.

The effective income tax rates for the three months ended September 30, 2023 and 2022 were 30.07% and 29.21%, respectively.

Nine months ended September 30, 2023 compared to nine months ended September 30, 2022

The provision for income taxes was $14.5 million for the nine months ended September 30, 2023, compared to $12.6 million for the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2023 and 2022 were 28.23% and 28.51%, respectively.

FINANCIAL CONDITION SUMMARY

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,

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

(in thousands) September 30, 2023

December 31, 2022

Total assets $ 3,505,040 $ 3,227,159

5 unchanged sentences

Total shareholders’ equity 274,024 252,825

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.

At September 30, 2023, total assets were $3.5 billion, an increase of $277.9 million from $3.2 billion at December 31, 2022, primarily due to increases in cash and cash equivalents of $63.6 million and loans held for investment of $218.6 million.

Cash and Cash Equivalents

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.

Total cash and cash equivalents were $323.5 million at September 30, 2023, an increase of $63.5 million from $260.0 million at December 31, 2022.

The increase in cash and cash equivalents was primarily due to increases in deposits of $250.2 million and net income of $36.9 million, partially offset by loan originations, net of repayments, of $212.1 million.

Investment Portfolio

4 unchanged sentences

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 $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.

Our total securities available-for-sale and held-to-maturity amounted to $107.2 million at September 30, 2023 and $119.7 million at December 31, 2022, representing a decrease of $12.5 million period-over-period.

The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $8.1 million and an unrealized loss on securities of $3.5 million, with the remainder of the change due to amortization of premiums.

For the three months ended September 30, 2023, other comprehensive loss was $3.0 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:

June 30, 2023

September 30, 2023

December 31, 2022

10 unchanged sentences

Total $ 107,190 100.00 % $ 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 June 30, 2023:

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 September 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

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

As of September 30, 2023 and December 31, 2022, our total loans amounted to $3.0 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.

June 30, 2023

September 30, 2023

December 31, 2022

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

June 30, 2023

September 30, 2023

Manufactured home community $ 784,780 30.19 % $ 1,372,955 16.87 % 82.73 %

2 unchanged sentences

Multifamily 211,302 8.13 % 426,282 13.39 % 75.00 %

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

Faith-based 178,020 6.85 % 469,562 8.37 % 78.98 %

Industrial 173,036 6.66 % 416,343 8.71 % 83.62 %

Mini storage 157,724 6.07 % 322,569 16.64 % 70.00 %

15 unchanged sentences

$ 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.

1 Types of collateral in the “all other types” category are those that individually make up less than 5.00% of the commercial real estate concentration.

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 89.79% of loans held for investment at June 30, 2023.

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

Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 90.05% of loans held for investment at September 30, 2023.

Commercial secured lending represents 5.23% of loans held for investment at September 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 675.66% and 680.34% as of June 30, 2023 and December 31, 2022, respectively.

Commercial real estate loan balances as a percentage of risk-based capital were 682.70% and 680.34% as of September 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 June 30, 2023.

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

The following table sets forth the contractual maturities of our loan portfolio as of September 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

21 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 June 30, 2023:

The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of September 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 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.

During the three and nine months ended September 30, 2023, the Company sold 24 and 125 SBA 7(a) loans, respectively, with government guaranteed portions totaling $7.0 million and $30.6 million, respectively.

The Company received gross proceeds of $7.4 million and $32.2 million on the loans sold during the three and nine months ended September 30, 2023, respectively, resulting in the recognition of net gains on sale of $0.4 million and $1.6 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) June 30, 2023 December 31, 2022

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

Non-accrual loans:

13 unchanged sentences

Nonperforming loans plus performing LMs to loans held for investment 0.07 % 0.01 %

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

The ratio of nonperforming loans to loans held for investment was 0.07% at September 30, 2023, increasing from 0.01% at December 31, 2022, as a result of financial challenges experienced by a small subset of our borrowers.

Potential Problem Loans

6 unchanged sentences

(in thousands) Pass Watch Substandard Doubtful Total

June 30, 2023

September 30, 2023

Commercial $ 2,571,154 $ 26,539 $ 1,923 $ — $ 2,599,616

6 unchanged sentences

Unsecured 23,997 — — — 23,997

Consumer 31,433 — 22 — 31,455

Consumer and other

29,568 15 21 — 29,604

Total $ 2,976,599 $ 33,573 $ 2,023 $ — $ 3,012,195

8 unchanged sentences

Unsecured 25,431 — — — 25,431

Consumer 28,602 — 26 — 28,628

Consumer and other

28,602 — 26 — 28,628

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

Loans designated as watch and substandard, which are not considered adversely classified, increased to $24.4 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.

Loans designated as watch and substandard, which are not considered adversely classified, increased to $35.6 million at September 30, 2023 from $22.3 million at December 31, 2022.

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

Allowance for Credit Losses - Loans

4 unchanged sentences

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

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.

At September 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 $2.9 million provision for credit losses recorded during the nine months ended September 30, 2023, partially offset by net charge-offs of $2.5 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

September 30, 2023

December 31, 2022

11 unchanged sentences

Total allowance for credit losses $ 34,028 100.00 % $ 28,389 100.00 %

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 ratio of the allowance for credit losses to total loans held for investment was 1.13% at September 30, 2023, as compared to 1.02% at 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

June 30, 2023

June 30, 2022

September 30, 2023

September 30, 2022

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

3 unchanged sentences

Secured (1,026) (0.03) % (278) (0.01) %

Unsecured — — % (2) — %

PPP — — % 21 — %

5 unchanged sentences

Allowance for credit losses - loans to loans held for investment 1.13 % 1.08 %

As of and for the six months ended

June 30, 2023

June 30, 2022

As of and for the nine months ended

September 30, 2023

September 30, 2022

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

4 unchanged sentences

Secured (2,498) (0.09) % (776) (0.03) %

PPP — — % (21) — %

Unsecured — — % (2) — %

Consumer and other 5 — % (77) — %

4 unchanged sentences

Allowance for credit losses - loans to loans held for investment 1.13 % 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.

The allowance for credit losses - loans to loans held for investment increased from 1.08% as of September 30, 2022 to 1.13% as of September 30, 2023.

Net charge-offs as a percent of average loans held for investment increased from 0.01% to 0.03% for the three months ended September 30, 2022 and September 30, 2023, respectively.

Net charge-offs as a percent of average loans held for investment increased from 0.04% to 0.09% for the nine months ended September 30, 2022 and September 30, 2023, respectively.

During the first nine months of 2023, total liabilities increased by $256.7 million from $3.0 billion as of December 31, 2022 to $3.2 billion as of September 30, 2023.

This increase was primarily due to an increase in total deposits of $250.2 million, comprised of an increase of $385.5 million in interest-bearing deposits, partially offset by a decrease of $135.3 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.

Representing 93.85% of our total liabilities as of September 30, 2023, deposits are our primary source of funding for our business operations.

Total deposits increased by $250.2 million, or 8.99%, to $3.0 billion at September 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 $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.

Non-interest-bearing deposits decreased by $135.3 million from December 31, 2022 to $833.4 million at September 30, 2023, representing 27.49% of total deposits at that date, as compared to 34.82% of total deposits at December 31, 2022.

Our loan to deposit ratio was 99.57% at September 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:

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

For the three months ended

June 30, 2023

June 30, 2022

September 30, 2023

September 30, 2022

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

4 unchanged sentences

Total deposits $ 2,984,208 2.18 % 100.00 % $ 2,582,666 0.43 % 100.00 %

For the six months ended

June 30, 2023

June 30, 2022

For the nine months ended

September 30, 2023

September 30, 2022

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

4 unchanged sentences

Total deposits $ 2,907,571 1.83 % 100.00 % $ 2,467,291 0.24 % 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.

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

As of September 30, 2023, our 42 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.6 billion, or 51.37% of our total deposits.

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

2 unchanged sentences

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

(in thousands) June 30, 2023

(in thousands) September 30, 2023

December 31, 2022

4 unchanged sentences

Total $ 1,557,674 $ 1,450,878

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

Our largest single deposit relationship at September 30, 2023 related to a government agency.

The balances for this customer were $250.0 million, or approximately 8.24% 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 June 30, 2023:

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

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

7 unchanged sentences

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

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

There were borrowings of $90.0 million and $100.0 million outstanding as of September 30, 2023 and December 31, 2022, respectively.

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

2 unchanged sentences

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 June 30, 2023:

The following table is a summary of our outstanding subordinated notes as of September 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 (8.59% as of June 30, 2023) through maturity

Fixed at 6.00% through September 1, 2027, then three-month Term SOFR plus 329.0 basis points (8.70% as of September 30, 2023) through maturity

Shareholders’ Equity

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.

Shareholders’ equity totaled $274.0 million at September 30, 2023 and $252.8 million at December 31, 2022.

The increase in shareholders’ equity was primarily attributable to net income recognized of $36.9 million, partially offset by:

(i) a $2.5 million increase in accumulated other comprehensive loss;

(ii) a decrease of $4.5 million in retained earnings, net of tax effect, relating to the adoption of ASC 326 on January 1, 2023;

and (iii) $9.5 million in cash dividends paid during the nine months ended September 30, 2023.

Liquidity and Capital Resources

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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 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.

As of September 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 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.

During the nine months ended September 30, 2023, we had cash outflows of $212.1 million in loan originations and advances, net of principal collected, and $39.9 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 June 30, 2023, total off-balance sheet commitments totaled $450.3 million.

At September 30, 2023, total off-balance sheet commitments totaled $401.9 million.

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

Deposits are our primary source of funding for our business operations, and the cost of deposits has a significant impact on our net interest income and net interest margin.

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

Our deposits are primarily made up of money market, interest checking, time, 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.

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

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.

During the nine months ended September 30, 2023, we had cash inflows related to an increase in deposits of $250.2 million, primarily as a result of an increase in the number of new relationships and fluctuations in existing accounts.

During the twelve months following September 30, 2023, approximately $405.0 million of time deposits are expected to mature.

These deposits may not renew due to general competition.

However, based on our historical runoff experience, we expect the outflow will not be significant and can be replenished through our organic growth in deposits.

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

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

We believe our emphasis on local deposits, our recent San Francisco Bay area expansion, and our liquid investment portfolio provide a stable funding base.

At September 30, 2023, cash and cash equivalents represented 10.67% of total deposits.

Investment Securities

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

Our investment securities totaled $107.2 million at September 30, 2023.

Mortgage-backed securities and obligations of states and political subdivisions comprised 50.81% and 33.91% 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 $7.5 million from our securities over the twelve months following June 30, 2023.

Assuming the current prepayment speed and interest rate environment, we expect to receive approximately $7.3 million from our securities over the twelve months following September 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 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.

During the nine months ended September 30, 2023, we had cash proceeds from sales, maturities, calls, and prepayments of securities of $8.1 million.

Additionally, at September 30, 2023, securities available-for-sale totaled $104.1 million, of which $103.2 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 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.

At September 30, 2023, the Bank had outstanding borrowings of $90.0 million and a total financing availability of $292.1 million, net of letters of credit issued of $671.5 million.

Federal Reserve Discount Window and Correspondent Bank Lines of Credit

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.

At September 30, 2023, unused and available amounts for borrowing from the Federal Reserve Discount Window and correspondent bank lines of credit were $69.0 million and $175.0 million, respectively.

Total Liquidity

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

Total liquidity (consisting of cash and cash equivalents and unused and immediately available borrowing capacity as set forth below) was approximately $859.7 million as of September 30, 2023 .

September 30, 2023 Available

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

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Future Contractual Obligations

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

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

Under our operating leases, we have an operating lease liability of $5.0 million.

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We also have contractual obligations on unfunded loan commitments and standby letters of credit totaling $401.9 million.

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

The Company paid dividends to its shareholders totaling $3.5 million during the three months ended September 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 following table summarizes our consolidated cash flow activities:

Six months ended June 30,

Nine months ended September 30,

(in thousands) 2023 2022 $ Change

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Operating Activities

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.

Net cash provided by operating activities increased by $13.0 million for the nine months ended September 30, 2023 as compared to the nine months ended September 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 $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.

Net cash used in investing activities decreased by $421.7 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to decreased loan origination growth.

Financing Activities

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.

Net cash provided by financing activities decreased by $263.6 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to decreased deposit growth and lower borrowings.

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.

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.

Additionally, as of June 30, 2023, the Company’s consolidated assets were 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 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.

As of September 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 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.

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

As of September 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.

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Amount Ratio Amount Ratio

June 30, 2023

September 30, 2023

Total capital (to risk-weighted assets) $ 397,021 12.37 % $ 254,093 8.00 % N/A N/A

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Amount Ratio Amount Ratio

June 30, 2023

September 30, 2023

Total capital (to risk-weighted assets) $ 383,511 11.97 % $ 256,314 8.00 % $ 320,393 10.00 %

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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 May, 2023, may lead to regulatory changes and initiatives that could impact the Company.

The 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.

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agency mortgage-backed securities.

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

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

Small Business Lending Data Collection Rule

On March 30, 2023, the Consumer Financial Protection Bureau finalized a rule under Section 1071 of the Dodd-Frank Act requiring lenders to collect and report data regarding small business lending activity.

On March 30, 2023, the Consumer Financial Protection Bureau (the “CFPB”) finalized a rule under Section 1071 of the Dodd-Frank Act requiring lenders to collect and report data regarding small business lending activity.

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.

The rule took 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.

In October 2023, the U.S.

District Court for the Southern District of Texas issued a nationwide preliminary injunction enjoining the CFPB from enforcing and implementing the rule.

Third Party Risk Management Guidance

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

Community Reinvestment Act Reform

On October 24, 2023, the Agencies released a final rule revising the framework that the Agencies use to evaluate banks’ records of community reinvestment under the Community Reinvestment Act (the “CRA”).

Under the revised framework, banks with assets of at least $2 billion, such as the Bank, are considered large banks and will have their retail lending, retail services and products, community development financing, and community development services subject to periodic evaluation.

Depending on a large bank’s geographic distribution of lending, the evaluation of retail lending may include assessment areas in which the bank extends loans but does not operate any deposit-taking facilities, in addition to assessment areas in which the bank has deposit-taking facilities.

The rule becomes effective April 1, 2024.

Most provisions of the final rule will apply beginning January 1, 2026, and the remaining provisions will apply beginning January 1, 2027.

The Company is evaluating the impact of the final rule.

Glossary of Acronyms, Abbreviations, and Terms

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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 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

FNMA Federal National Mortgage Association

ACL Allowance for Credit Losses Federal Reserve Board of Governors of the Federal Reserve System

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 ICS Insured Cash Sweep®

Bank Five Star Bank IPO Initial Public Offering

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

banking organizations NI Net Income

BOLI Bank-Owned Life Insurance NIM Net Interest Margin

banking organizations LM Loan modification made to borrower experiencing financial difficulty

BOLI Bank-Owned Life Insurance NI Net Income

Bank Term Funding Program

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

EPS Earnings per Share ROAE Return on Average Equity, annualized

FASB Financial Accounting Standards Board ROUA Right-of-Use Asset

FDIC Federal Deposit Insurance Corporation SBA U.S.

CECL Current Expected Credit Loss model for recognition of credit losses under ASC 326

OCI Other Comprehensive Income

Consumer Financial Protection Bureau

PPP Paycheck Protection Program

Community Reinvestment Act

Restricted Stock Award

Chicago Mercantile Exchange

ROAA Return on Average Assets, annualized

CRE Commercial Real Estate ROAE Return on Average Equity, annualized

C&I Commercial & Industrial ROUA Right-of-Use Asset

EPS Earnings per Share SBA U.S.

Small Business Administration

FHLB Federal Home Loan Bank of San Francisco SEC Securities and Exchange Commission

FHLMC Federal Home Loan Mortgage Corporation SOFR Secured Overnight Financing Rate

FNMA Federal National Mortgage Association TDR Troubled Debt Restructuring

FASB Financial Accounting Standards Board SEC Securities and Exchange Commission

FDIC Federal Deposit Insurance Corporation SOFR Secured Overnight Financing Rate

FHLB Federal Home Loan Bank of San Francisco TDR Troubled Debt Restructuring

FHLMC Federal Home Loan Mortgage Corporation

Quantitative and Qualitative Disclosures About Market Risk

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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