FIVE STAR BANCORP 10-Q

ITEM 1. Financial Statements FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts) September 30, 2023 December 31, 2022 ASSETS Cash and due from financial institutions $ 26,744 $ 32,561 Interest-bearing deposits in banks 296,804 227,430 Cash and cash equivalents 323,548 259,991 Time deposits in banks 6,971 9,849 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) 3,104 3,756 Loans held for sale 9,326 9,416 Loans held for investment 3,009,930 2,791,326 Allowance for credit losses - loans ( 34,028 ) ( 28,389 ) Loans held for investment, net of allowance for credit losses 2,975,902 2,762,937 FHLB stock 15,000 10,890 Operating leases, right-of-use asset, net 4,799 3,981 Premises and equipment, net 1,564 1,605 Bank-owned life insurance 17,023 14,669 Interest receivable and other assets 43,717 34,077 Total assets $ 3,505,040 $ 3,227,159 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest-bearing $ 833,434 $ 968,749 Interest-bearing 2,198,776 1,813,255 Total deposits 3,032,210 2,782,004 Borrowings: FHLB advances 90,000 100,000 Subordinated debt, net 73,713 73,606 Operating lease liability 5,043 4,243 Interest payable and other liabilities 30,050 14,481 Total liabilities 3,231,016 2,974,334 Commitments and contingencies (Note 8) Shareholders’ equity Preferred stock, no par value; 10,000,000 shares authorized; 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 September 30, 2023; 17,241,926 shares issued and outstanding at December 31, 2022 220,266 219,543 Retained earnings 69,689 46,736 Accumulated other comprehensive loss, net ( 15,931 ) ( 13,454 ) Total shareholders’ equity 274,024 252,825 Total liabilities and shareholders ’ equity $ 3,505,040 $ 3,227,159 See accompanying notes to the unaudited consolidated financial statements. 1 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except per share amounts) 2023 2022 2023 2022 Interest and fee income: Loans, including fees $ 41,861 $ 29,886 $ 119,284 $ 76,877 Taxable securities 472 439 1,401 1,252 Nontaxable securities 181 176 548 532 Interest-bearing deposits in other banks 2,584 1,145 6,969 1,855 Total interest and fee income 45,098 31,646 128,202 80,516 Interest expense: Deposits 16,386 2,817 39,733 4,383 FHLB advances 75 47 783 52 Subordinated debt 1,161 1,259 3,484 2,146 Total interest expense 17,622 4,123 44,000 6,581 Net interest income 27,476 27,523 84,202 73,935 Provision for credit losses 1,050 2,250 3,200 5,450 Net interest income after provision for credit losses 26,426 25,273 81,002 68,485 Non-interest income: Service charges on deposit accounts 158 132 410 370 Net gain on sale of securities available-for-sale — — — 5 Gain on sale of loans 396 548 1,635 2,297 Loan-related fees 355 447 1,052 1,800 FHLB stock dividends 274 152 656 353 Earnings on BOLI 127 102 355 293 Other 74 52 1,467 438 Total non-interest income 1,384 1,433 5,575 5,556 Non-interest expense: Salaries and employee benefits 6,876 5,645 19,915 16,873 Occupancy and equipment 561 515 1,635 1,548 Data processing and software 1,020 797 2,905 2,252 FDIC insurance 375 195 1,187 605 Professional services 700 792 1,917 1,914 Advertising and promotional 535 512 1,686 1,340 Loan-related expenses 345 262 924 929 Other operating expenses 1,603 1,454 4,943 4,491 Total non-interest expense 12,015 10,172 35,112 29,952 Income before provision for income taxes 15,795 16,534 51,465 44,089 Provision for income taxes 4,750 4,830 14,530 12,570 Net income $ 11,045 $ 11,704 $ 36,935 $ 31,519 Basic earnings per common share $ 0.64 $ 0.68 $ 2.15 $ 1.84 Diluted earnings per common share $ 0.64 $ 0.68 $ 2.15 $ 1.84 See accompanying notes to unaudited consolidated financial statements. 2 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Net income $ 11,045 $ 11,704 $ 36,935 $ 31,519 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 (losses) included in net income — — — ( 5 ) Income tax (benefit) related to items of other comprehensive income ( 1,240 ) ( 1,395 ) ( 1,039 ) ( 6,506 ) Other comprehensive (loss) ( 2,955 ) ( 3,323 ) ( 2,477 ) ( 15,504 ) Total comprehensive income $ 8,090 $ 8,381 $ 34,458 $ 16,015 See accompanying notes to the unaudited consolidated financial statements. 3 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the Three Months Ended September 30, 2023 and 2022 (Unaudited) Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity (in thousands, except per share amounts) Shares Amount 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 compensation expense — 263 — — 263 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 Net income — — 11,045 — 11,045 Other comprehensive loss — — — ( 2,955 ) ( 2,955 ) Stock compensation expense — 245 — — 245 Cash dividends paid ($ 0.20 per share) — — ( 3,451 ) — ( 3,451 ) 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. 4 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the Nine Months Ended September 30, 2023 and 2022 (Unaudited) Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity (in thousands, except per share amounts) Shares Amount Balance at December 31, 2021 17,224,848 $ 218,444 $ 17,168 $ ( 566 ) $ 235,046 Cumulative effect of adoption of ASC 842 on retained earnings — — 68 — 68 Net income — — 31,519 — 31,519 Other comprehensive loss — — — ( 15,504 ) ( 15,504 ) Stock issued under stock award plans 23,639 — — — — Stock compensation expense — 842 — — 842 Stock forfeitures ( 2,504 ) — — — — Cash dividends paid ($ 0.90 per share) — — ( 12,713 ) — ( 12,713 ) 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 Cumulative effect of adoption of ASC 326 on retained earnings — — ( 4,491 ) — ( 4,491 ) Net income — — 36,935 — 36,935 Other comprehensive loss — — — ( 2,477 ) ( 2,477 ) Stock issued under stock award plans 16,978 — — — — Stock compensation expense — 723 — — 723 Stock forfeitures ( 1,547 ) — — — — Cash dividends paid ($ 0.55 per share) — — ( 9,491 ) — ( 9,491 ) Balance at September 30, 2023 17,257,357 $ 220,266 $ 69,689 $ ( 15,931 ) $ 274,024 See accompanying notes to unaudited consolidated financial statements. 5 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended September 30, (in thousands) 2023 2022 Cash flows from operating activities: Net income $ 36,935 $ 31,519 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 3,200 5,450 Depreciation and amortization 1,227 1,226 Amortization of deferred loan fees and costs 125 338 Amortization of premiums and discounts on securities 886 962 Amortization of subordinated debt issuance costs 107 96 Stock compensation expense 723 842 Earnings on BOLI ( 355 ) ( 293 ) Deferred tax provision 79 13 Loans originated for sale ( 39,915 ) ( 44,993 ) Gain on sale of loans ( 1,635 ) ( 2,297 ) Proceeds from sale of loans 32,224 36,275 Net gain on sale of securities available-for-sale — ( 5 ) Decrease in operating lease liability ( 714 ) ( 729 ) Cost method of investment-related gain ( 1,274 ) — Net changes in: Interest receivable and other assets ( 5,523 ) ( 3,240 ) Interest payable and other liabilities 14,457 2,342 Net cash provided by operating activities 40,547 27,506 Cash flows from investing activities: Proceeds from sale of securities available-for-sale — 1,623 Maturities, prepayments, and calls of securities available-for-sale 8,134 13,052 Purchases of securities available-for-sale — ( 1,641 ) Net change in time deposits in banks 2,878 4,248 Loan originations, net of repayments ( 212,137 ) ( 639,040 ) Purchase of premises and equipment ( 470 ) ( 406 ) Purchase of FHLB stock ( 4,110 ) ( 4,223 ) Purchase of BOLI ( 2,000 ) ( 3,054 ) Net cash used in investing activities ( 207,705 ) ( 629,441 ) Cash flows from financing activities: Net change in deposits 250,206 328,442 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 Net change in cash and cash equivalents 63,557 ( 107,660 ) Cash and cash equivalents at beginning of period 259,991 425,329 Cash and cash equivalents at end of period $ 323,548 $ 317,669 Supplemental disclosure of cash flow information: Interest paid $ 43,817 $ 3,057 Income taxes paid 1,480 5,200 6 Supplemental disclosure of noncash items: Transfer from loans held for sale to loans held for investment $ 9,416 $ 10,671 Unrealized loss on securities ( 3,516 ) ( 22,005 ) Operating lease liabilities recorded in conjunction with adoption of ASC 842 — 5,221 ROUA recorded in conjunction with adoption of ASC 842 — 4,974 Operating lease liabilities exchanged for ROUA 1,513 — ROUA acquired ( 1,534 ) — 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. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Basis of Presentation and Summary of Significant Accounting Policies (a) Organization Five Star Bank (the “Bank”) was chartered on October 26, 1999 and began operations on December 20, 1999. Five Star Bancorp (“Bancorp” or the “Company”) was incorporated on September 16, 2002 and subsequently obtained approval from the Federal Reserve to be a bank holding company in connection with its acquisition of the Bank. The Company became the sole shareholder of the Bank on June 2, 2003 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company. The Company, through the Bank, provides financial services to customers who are predominately small and middle-market businesses, professionals, and individuals residing in the Northern California region. The Company’s primary loan products are commercial real estate loans, land development loans, construction loans, and operating lines of credit, and its primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts. The Bank currently has seven branch offices in Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, and Yuba City, and one loan production office in Sacramento. (b) Basis of Financial Statement Presentation and Consolidation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) ASC and the rules and regulations of the SEC, including the instructions to Regulation S-X. These interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the interim periods presented. 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 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 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. Certain amounts reported in previous consolidated financial statements have been reclassified to conform to current period presentation. These reclassifications did not affect previously reported amounts of net income, total assets, or total shareholders’ equity. (c) Segments While the Company’s chief decision-makers monitor the revenue streams of the various products and services, operations are managed, and financial performance is evaluated, on a Company-wide basis. Discrete financial information is not available other than on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. (d) Emerging Growth Company 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 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 8 $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. (e) Significant Accounting Policies 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 nine months of 2023 other than adoption of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all subsequent amendments that modified ASU 2016-13 (collectively, “ASC 326”) as discussed below in this Note, which impacted the following policies: Allowance for Credit Losses (“ACL”) The ACL is a valuation account that offsets the amortized cost basis of loans receivable and certain other financial assets, including unfunded loan commitments and held-to-maturity debt securities. Under ASC 326, amortized cost basis is the basis on which the ACL is determined. Amortized cost basis on loans receivable is principal outstanding, net of any purchase premiums and discounts, and net of any deferred loan fees and costs. Credit losses are charged off when management believes that the collectability of at least some portion of outstanding principal is unlikely. These charge-offs are recorded as a reversal to, thereby reducing, the allowance for credit losses. Subsequent recoveries of previously charged-off amounts, if any, are recorded as a provision to, thereby increasing, the allowance for credit losses. The allowance for credit losses is maintained at a level to absorb expected credit losses over the contractual life, including consideration of prepayments. Determining the adequacy of the allowance is complex and requires judgments that are inherently subjective, as it requires estimates that are susceptible to revision as additional information becomes available. While the Company has determined an allowance for credit losses it considers appropriate, there can be no assurance that the allowance will be sufficient to absorb future losses. The Company’s process for determining expected lifetime credit losses entails a loan-level, model-based approach and considers a broad range of information, including historical loss experience, current conditions, and reasonable and supportable forecasts. Credit loss is estimated for all loans. Accordingly, the Company has stratified the full loan population into segments sharing similar characteristics to perform the evaluation of the credit loss collectively. The Company can also further stratify loans of similar types, risk attributes, and methods for credit risk monitoring. The Company has determined pools based primarily on regulatory reporting codes as the loans within each pool share similar risk characteristics and there is sufficient historical peer loss data from the Federal Financial Institutions Examination Council to provide statistically meaningful support in the models developed. The Company further stratified the C&I portfolio into traditional C&I loans and SBA loans, as the loans in these pools have different repayment structures and credit risk characteristics. The Company also stratified C&I loans and consumer loans that do not require reserves, as the Company has third party agreements in place to cover loan losses. The Company has identified the following pools subject to an estimate of credit loss: (1) 1-4 Family Construction; (2) Other Construction; (3) Farmland; (4) Revolving Secured by 1-4 Family; (5) Residential Secured by First Liens; (6) Residential Secured by Junior Liens; (7) Multifamily; (8) CRE Owner Occupied; (9) CRE Non-Owner Occupied; (10) Agriculture; (11) C&I; (12) C&I SBA; (13) Consumer; and (14) Municipal. The Company has determined, given its limited loss experience, that peer data and other external data to support loss history provides the best basis for its assessment of expected credit losses. The Company believes that the use of peer loss data from 2008 to 2019 presents loss histories that appropriately reflect a full economic cycle, reflects asset-specific risk characteristics at each pool level identified, and includes a historical look-back period that is objective and reflective of future expected credit losses. Loss data from 2020 to 2021 was excluded from the data set to exclude pandemic-related data in the models. The method for determining the estimate of lifetime credit losses includes, among other things, the following main components: (i) the use of Probability of Default (“PD”) and Loss Given Default (“LGD”) assumptions under a Discounted Cash Flow model; (ii) a multi-scenario macroeconomic forecast; (iii) an initial and reasonable and supportable forecast period of one year for all loan segments; and (iv) a reversion period of one year using a linear transition method to historical loss rates. 9 Given the inherent limitations of a quantitative-only model, qualitative adjustments are included to factor in data points not captured from a quantitative analysis alone. Qualitative criteria that can be considered includes, among other things, the following: • Concentrations – the existence and effect of any concentrations of credit, and changes in the level of such concentrations; • 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 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; • Quality – changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; and • External – the effect of other external factors, such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s loan portfolio. Management reviews current information on a quarterly basis to assess the forecasted future economic impact for purposes of evaluating the adequacy of the ACL. The forecasted direction and magnitude of change with respect to future economic conditions is then assessed against the estimate in the model. Any changes resulting from the quarterly assessment are recorded in “Provision for credit losses” in the unaudited consolidated statements of income. Accrued Interest Accrued interest receivable is excluded from amortized cost of all financial instrument types and included in “Interest receivable and other assets” in the unaudited consolidated balance sheets. Accrued interest receivable is not subject to an estimate for credit loss, as the Company has a policy to charge off accrued interest deemed uncollectible in a timely manner. When a loan is placed on non-accrual status, which occurs within 90 days of a borrower becoming delinquent, interest previously accrued but not collected is reversed against current period income. Individually Assessed Loans If an individual loan’s characteristics have deteriorated to below a range of the overall pool, the loan would be individually assessed. Individually assessed loans are measured for credit loss based on one of the following methods: (i) present value of future expected cash flows, discounted at the loan’s effective interest rate; (ii) amount by which carrying value of the loan exceeds the loan’s observable market price; or (iii) the fair value of the collateral, less estimated selling costs, if the loan is collateral dependent. The Company applies the practical expedient and defines collateral dependent loans as those where the borrower is experiencing financial difficulty and on which payment is expected to be provided substantially through the operation or sale of the collateral. Available-for-sale (“AFS” ) Debt Securities Unrealized credit losses are recognized through an allowance for credit losses instead of an adjustment to amortized cost basis, eliminating the other-than-temporary impairment concept. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of amortized cost basis. If either criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For AFS debt securities that do not meet the above conditions, the Company evaluates at the individual security level whether the decrease in fair value has resulted from credit factors or non-credit factors. If assessment determines that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, then a credit loss would be recognized, limited to the amount by which the fair value is less than the amortized cost basis. All other changes in fair value of an AFS debt security are recognized in other comprehensive income, net of applicable taxes. Changes in the allowance for credit losses, if any, are recognized as a provision for (or reversal of) credit losses. 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. government. The remainder of the portfolio is primarily 10 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. As such, the Company determined that the unrealized loss positions in AFS securities were not due to credit losses, but instead related to changes in interest rates and general market conditions and therefore, no credit loss expense was recognized. Loan Commitments Loan commitments not unconditionally cancellable are subject to an estimate of credit loss under the CECL model. The Company’s process for determining the estimate of credit loss on loan commitments is the same as it is on loans. Unfunded loan commitment reserves are included in “Interest payable and other liabilities” in the unaudited consolidated balance sheets. Held-to-Maturity Debt Securities 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 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 In accordance with the adoption of ASC 326, which includes ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , accounting guidance for TDRs for creditors has been eliminated. New guidance with respect to recognition, measurement, and disclosures of loans for borrowers experiencing financial difficulties supersedes guidance on TDRs. 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 The following information reflects recent accounting standards that have been adopted or are pending adoption by the Company. The Company qualifies as an emerging growth company and, as such, has elected to use the extended transition period for complying with new or revised accounting standards and is not subject to the new or revised accounting standards applicable to public companies during the extended transition period. The accounting standards discussed below indicate effective dates for the Company as an emerging growth company using the extended transition period. Accounting Standards Adopted On January 1, 2023, the Company adopted ASC 326, which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model. The CECL model applies to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost. Under ASC 326, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost, with any estimated credit losses recorded through a credit loss expense and an allowance, rather than a write-down of the investment. Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income. The Company adopted this standard using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance was effective for financial assets measured at amortized cost. For certain new disclosures required under ASC 326, such as credit quality indicators by year of origination, we have not restated comparative financial information before January 1, 2023 to conform under ASC 326. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature and reason for the change, which is solely due to adoption of ASC 326. On January 1, 2023, the Company also adopted ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which had no material impact. 11 The following table reflects the cumulative-effect adjustments the Company recorded on January 1, 2023 for the adoption of ASC 326. January 1, 2023 (in thousands) Pre-ASC 326 Adoption Impact of ASC 326 Adoption Post-ASC 326 Adoption Assets: Allowance for Credit Losses $ ( 28,389 ) $ ( 5,282 ) $ ( 33,671 ) Deferred Tax Asset (Interest receivable and other assets) 12,273 1,883 14,156 Liabilities: Reserve for Unfunded Commitments (Interest payable and other liabilities) ( 125 ) ( 1,092 ) ( 1,217 ) Shareholders’ Equity: Retained Earnings ( 46,736 ) 4,491 ( 42,245 ) Accounting Standards Issued But Not Yet Adopted For the fiscal year beginning January 1, 2023, there have been no new accounting standards issued but not yet adopted that are expected to be material to the Company. There are also no accounting standards issued before January 1, 2023 yet to be adopted. Note 2: Fair Value of Assets and Liabilities Fair Value Hierarchy and Fair Value Measurement Accounting standards require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 : Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. Level 2 : Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3 : Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). 12 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 (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Measurement Categories: Changes in Fair Value Recorded In September 30, 2023 Assets: Securities available-for-sale: U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds $ 104,086 $ — $ 104,086 $ — OCI Derivatives – interest rate swap 5 — 5 — NI Liabilities: Derivatives – interest rate swap 5 — 5 — NI December 31, 2022 Assets: Securities available-for-sale: U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds $ 115,988 $ — $ 115,988 $ — OCI Derivatives – interest rate swap 16 — 16 — NI Liabilities: Derivatives – interest rate swap 16 — 16 — NI Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1 inputs) are used to determine the fair value of available-for-sale securities. If quoted market prices are not available, management obtains pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity, and credit spreads (Level 2 inputs). Level 2 securities include U.S. agencies’ or government-sponsored agencies’ debt securities, mortgage-backed securities, government agency-issued bonds, privately issued collateralized mortgage obligations, and corporate bonds. Level 3 securities are based on unobservable inputs that are supported by little or no market activity. In addition, values use discounted cash flow models and may include significant management judgment and estimation. As of 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. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both the Company’s credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to the Company. Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as collateral dependent loans and other real estate owned. 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. 13 Disclosures about Fair Value of Financial Instruments 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. September 30, 2023 December 31, 2022 (in thousands) Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy Financial assets: Cash and cash equivalents $ 323,548 $ 323,548 Level 1 $ 259,991 $ 259,991 Level 1 Time deposits in banks 6,971 6,971 Level 1 9,849 9,849 Level 1 Securities available-for-sale 104,086 104,086 Level 2 115,988 115,988 Level 2 Securities held-to-maturity 3,104 2,811 Level 3 3,756 3,432 Level 3 Loans held for sale 9,326 10,286 Level 2 9,416 9,785 Level 2 Loans held for investment, net of allowance for credit losses 2,975,902 2,773,007 Level 3 2,762,937 2,570,176 Level 3 FHLB stock and other investments 21,693 N/A N/A 16,570 N/A N/A Interest rate swap 5 5 Level 2 16 16 Level 2 Financial liabilities: Interest rate swap $ 5 $ 5 Level 2 $ 16 $ 16 Level 2 FHLB advances 90,000 90,000 Level 2 100,000 100,000 Level 2 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 September 30, 2023 and December 31, 2022: Cash and cash equivalents and time deposits in banks : The carrying amount is estimated to be fair value due to the liquid nature of the assets and their short-term maturities. Investment securities : See discussion above for the methods and assumptions used by the Company to estimate the fair value of investment securities. 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 : For loans held for sale, the fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. Loans held for investment, net of allowance for credit losses : For variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, which use interest rates being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness without considering widening credit spreads due to market illiquidity, which approximates the exit price notion. The allowance for credit losses is considered to be a reasonable estimate of loan discount for credit quality concerns. FHLB stock and other investments : 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. Derivatives - interest rate swap : See above for a discussion of the methods and assumptions used by the Company to estimate the fair value of derivatives. FHLB advances : For FHLB advances, the carrying amount is estimated to be fair value. 14 Subordinated notes : The fair value is estimated by discounting the future cash flow using the current three-month CME Term SOFR. The Company’s subordinated notes are not registered securities and were issued through private placements, resulting in a Level 3 classification. The notes are recorded at carrying value. Note 3: Investment Securities The Company’s investment securities portfolio includes obligations of states and political subdivisions, securities issued by U.S. federal government agencies, such as the SBA, and securities issued by U.S. 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 September 30, 2023 and December 31, 2022 is presented below. (in thousands) Amortized Cost Gross Unrealized Fair Value Gains (Losses) September 30, 2023 Obligations of states and political subdivisions $ 3,104 $ — $ ( 293 ) $ 2,811 Total held-to-maturity $ 3,104 $ — $ ( 293 ) $ 2,811 December 31, 2022 Obligations of states and political subdivisions $ 3,756 $ — $ ( 324 ) $ 3,432 Total held-to-maturity $ 3,756 $ — $ ( 324 ) $ 3,432 For securities issued by states and political subdivisions, for purposes of evaluating whether to recognize credit loss expense, management considers: (i) issuer and/or guarantor credit ratings; (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity; (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities; (iv) internal credit review of the financial information; and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. The Company adopted ASC 326 on January 1, 2023, which affects accounting of credit loss expense on held-to-maturity and available-for-sale securities. Refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, for further detail. 15 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) September 30, 2023 U.S. government agencies $ 11,281 $ 110 $ ( 182 ) $ 11,209 Mortgage-backed securities 68,715 — ( 14,252 ) 54,463 Obligations of states and political subdivisions 44,325 — ( 7,974 ) 36,351 Collateralized mortgage obligations 382 — ( 45 ) 337 Corporate bonds 2,000 — ( 274 ) 1,726 Total available-for-sale $ 126,703 $ 110 $ ( 22,727 ) $ 104,086 December 31, 2022 U.S. government agencies $ 14,317 $ 81 $ ( 225 ) $ 14,173 Mortgage-backed securities 73,111 1 ( 11,841 ) 61,271 Obligations of states and political subdivisions 45,223 21 ( 6,818 ) 38,426 Collateralized mortgage obligations 436 — ( 41 ) 395 Corporate bonds 2,000 — ( 277 ) 1,723 Total available-for-sale $ 135,087 $ 103 $ ( 19,202 ) $ 115,988 16 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) September 30, 2023 December 31, 2022 Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 304 $ 275 $ — $ — $ 417 $ 381 $ 501 $ 501 After one but within five years 935 847 397 355 1,015 927 — — After five years through ten years 1,365 1,236 6,424 5,510 1,470 1,343 5,320 4,761 After ten years 500 453 37,504 30,486 854 781 39,402 33,164 Investment securities not due at a single maturity date: U.S. government agencies — — 11,281 11,209 — — 14,317 14,173 Mortgage-backed securities — — 68,715 54,463 — — 73,111 61,271 Collateralized mortgage obligations — — 382 337 — — 436 395 Corporate bonds — — 2,000 1,726 — — 2,000 1,723 Total $ 3,104 $ 2,811 $ 126,703 $ 104,086 $ 3,756 $ 3,432 $ 135,087 $ 115,988 17 Sales of investment securities and gross gains and losses are shown in the following table: (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: Sales proceeds $ — $ — $ — $ 1,623 Gross realized gains — — — 5 Pledged investment securities are shown in the following table: (in thousands) September 30, 2023 December 31, 2022 Pledged to: The State of California, securing deposits of public funds and borrowings $ 54,076 $ 40,465 The Federal Reserve Discount Window, increasing borrowing capacity 49,128 — 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 September 30, 2023 and December 31, 2022: 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 September 30, 2023 U.S. government agencies $ 839 $ ( 19 ) $ 7,455 $ ( 163 ) $ 8,294 $ ( 182 ) Mortgage-backed securities 214 ( 2 ) 54,249 ( 14,250 ) 54,463 ( 14,252 ) Obligations of states and political subdivisions 1,486 ( 34 ) 34,864 ( 7,940 ) 36,350 ( 7,974 ) Collateralized mortgage obligations — — 337 ( 45 ) 337 ( 45 ) Corporate bonds — — 1,726 ( 274 ) 1,726 ( 274 ) $ 2,539 $ ( 55 ) $ 98,631 $ ( 22,672 ) $ 101,170 $ ( 22,727 ) December 31, 2022 U.S. government agencies $ 3,090 $ ( 125 ) $ 8,392 $ ( 100 ) $ 11,482 $ ( 225 ) Mortgage-backed securities 4,360 ( 470 ) 56,908 ( 11,371 ) 61,268 ( 11,841 ) Obligations of states and political subdivisions 24,707 ( 4,097 ) 11,670 ( 2,721 ) 36,377 ( 6,818 ) Collateralized mortgage obligations 395 ( 41 ) — — 395 ( 41 ) Corporate bonds — — 1,723 ( 277 ) 1,723 ( 277 ) $ 32,552 $ ( 4,733 ) $ 78,693 $ ( 14,469 ) $ 111,245 $ ( 19,202 ) 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. 18 Obligations issued or guaranteed by government agencies such as the GNMA and the SBA or GSEs under conservatorship such as the FNMA and the FHLMC, are guaranteed or sponsored by agencies of the U.S. government and have strong credit profiles. The Company therefore expects to receive all contractual interest payments on time and believes the risk of credit losses on these securities is remote. The Company’s investment in obligations of states and political subdivisions are deemed credit worthy after management’s comprehensive analysis of the issuers’ latest financial information, credit ratings by major credit agencies, and/or credit enhancements. Non-Marketable Securities Included in Other Assets FHLB capital stock : As a member of the FHLB, the Company is required to maintain a minimum investment in FHLB capital stock determined by the board of directors of the FHLB. The minimum investment requirements can increase in the event the Company increases its total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $ 100 per share par value. The Company held $ 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 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. 19 Note 4: Loans and Allowance for Credit Losses The Company’s loan portfolio is its largest class of earning assets and typically provides higher yields than other types of earning assets. Associated with the higher yields is an inherent amount of credit risk which the Company attempts to mitigate through strong underwriting practices. The following table presents the balance of each major product type within the Company’s portfolio as of the dates indicated. (in thousands) September 30, 2023 December 31, 2022 Real estate: Commercial $ 2,599,616 $ 2,394,674 Commercial land and development 15,482 7,477 Commercial construction 95,352 88,669 Residential construction 13,922 6,693 Residential 25,028 24,230 Farmland 51,921 52,478 Commercial: Secured 157,273 165,186 Unsecured 23,997 25,431 Consumer and other 29,604 28,628 Subtotal 3,012,195 2,793,466 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 Underwriting Commercial loans : Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily, on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Real estate loans : Real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected than other loans by conditions in the real estate market or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. Construction loans : With respect to construction loans that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent 20 on the ultimate success of the project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored using on-site inspections and are generally considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing. Residential real estate loans : Residential real estate loans are underwritten based upon the borrower’s income, credit history, and collateral. To monitor and manage residential loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements. Farmland loans : Farmland loans are generally made to producers and processors of crops and livestock. Repayment is primarily from the sale of an agricultural product or service. Farmland loans are secured by real property and are susceptible to changes in market demand for specific commodities. This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles, as well as adverse weather conditions. Consumer loans : The Company purchased consumer loans underwritten utilizing credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements. Credit Quality Indicators The Company has established a loan risk rating system to measure and monitor the quality of the loan portfolio. All loans are assigned a risk rating from the inception of the loan until the loan is paid off. The primary loan grades are as follows: Loans rated pass : These are loans to borrowers with satisfactory financial support, repayment capacity, and credit strength. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Company’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts and their financial ratios and trends are acceptable. Negative external industry factors are generally not present. The loan may be secured, unsecured, or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. Loans rated watch : These are loans which have deficient loan quality and potentially significant issues, but losses do not appear to be imminent, and the issues are expected to be temporary in nature. The significant issues are typically: (i) a history of losses or events that threaten the borrower’s viability; (ii) a property with significant depreciation and/or marketability concerns; or (iii) poor or deteriorating credit, occasional late payments, and/or limited reserves but the loan is generally kept current. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans rated substandard : These are loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged (if any). Loans so classified exhibit a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. Loans rated doubtful : These are loans for which the collection or liquidation of the entire debt is highly questionable or improbable. Typically, the possibility of loss is extremely high. The losses on these loans are deferred until all pending factors have been addressed. 21 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 (in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total Real estate: Commercial Pass $ 251,745 $ 987,248 $ 712,268 $ 239,894 $ 124,560 $ 248,634 $ 4,144 $ — $ 2,568,493 Watch — 2,722 5,691 7,132 5,364 5,614 — — 26,523 Substandard — — — — — 1,920 — — 1,920 Doubtful — — — — — — — — — Total 251,745 989,970 717,959 247,026 129,924 256,168 4,144 — 2,596,936 Commercial land and development Pass 10,376 4,141 — 186 — 752 — — 15,455 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 10,376 4,141 — 186 — 752 — — 15,455 Commercial construction Pass 2,692 33,946 41,889 10,530 — — — — 89,057 Watch — — — — — 5,897 — — 5,897 Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 2,692 33,946 41,889 10,530 — 5,897 — — 94,954 Residential construction Pass — 8,162 5,750 — — — — — 13,912 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total — 8,162 5,750 — — — — — 13,912 Residential Pass 3,606 3,998 6,292 2,298 1,187 6,085 1,591 — 25,057 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 3,606 3,998 6,292 2,298 1,187 6,085 1,591 — 25,057 Farmland Pass 1,887 8,044 12,767 8,015 12,581 8,600 4 — 51,898 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 1,887 8,044 12,767 8,015 12,581 8,600 4 — 51,898 Commercial: Secured Pass 20,091 44,970 18,656 13,206 10,668 11,384 37,613 — 156,588 Watch — — 37 31 157 896 — — 1,121 Substandard — — — — 49 30 — — 79 Doubtful — — — — — — — — — Total 20,091 44,970 18,693 13,237 10,874 12,310 37,613 — 157,788 22 Amortized Cost Basis by Origination Year (in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total Commercial: Unsecured Pass 3,081 3,869 5,068 6,157 2,339 20 3,475 — 24,009 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 3,081 3,869 5,068 6,157 2,339 20 3,475 — 24,009 Consumer and other Pass 7,977 12,585 8,997 5 — 320 — — 29,884 Watch — 16 — — — — — — 16 Substandard — 21 — — — — — — 21 Doubtful — — — — — — — — — Total 7,977 12,622 8,997 5 — 320 — — 29,921 Total Pass 301,455 1,106,963 811,687 280,291 151,335 275,795 46,827 — 2,974,353 Watch — 2,738 5,728 7,163 5,521 12,407 — — 33,557 Substandard — 21 — — 49 1,950 — — 2,020 Doubtful — — — — — — — — — Total $ 301,455 $ 1,109,722 $ 817,415 $ 287,454 $ 156,905 $ 290,152 $ 46,827 $ — $ 3,009,930 Management regularly reviews the Company’s loans for accuracy of risk grades whenever new information is received. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk, and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. Management monitors construction loans monthly and reviews consumer loans based on delinquency. Management also reviews loans graded “watch” or worse, regardless of loan type, no less than quarterly. The age analysis of past due loans by class as of September 30, 2023 consisted of the following: (in thousands) Past Due 30-59 Days 60-89 Days Greater Than 90 Days Total Past Due Current Total Loans Receivable Real estate: Commercial $ — $ — $ — $ — $ 2,596,936 $ 2,596,936 Commercial land and development — — — — 15,455 15,455 Commercial construction — — — — 94,954 94,954 Residential construction — — — — 13,912 13,912 Residential — — — — 25,057 25,057 Farmland — — — — 51,898 51,898 Commercial: Secured — — — — 157,788 157,788 Unsecured — — — — 24,009 24,009 Consumer and other 156 — — 156 29,765 29,921 Total $ 156 $ — $ — $ 156 $ 3,009,774 $ 3,009,930 There were no loans greater than 90 days past due and still accruing interest income as of September 30, 2023. 23 The age analysis of past due loans by class as of December 31, 2022 consisted of the following: (in thousands) Past Due Total Past Due Current Total Loans Receivable 30-59 Days 60-89 Days Greater Than 90 Days Real estate: Commercial $ — $ — $ — $ — $ 2,392,053 $ 2,392,053 Commercial land and development — — — — 7,447 7,447 Commercial construction — — — — 88,314 88,314 Residential construction — — — — 6,693 6,693 Residential — 175 — 175 24,088 24,263 Farmland — — — — 52,446 52,446 Commercial: Secured — — — — 165,609 165,609 Unsecured — — — — 25,488 25,488 Consumer and other 194 — — 194 28,819 29,013 Total $ 194 $ 175 $ — $ 369 $ 2,790,957 $ 2,791,326 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 Real estate: Commercial $ 1,923 $ 106 Residential — 175 Commercial: Secured 79 123 Total non-accrual loans $ 2,002 $ 404 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 $ 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. 24 Allowance for Credit Losses 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 Real estate: Commercial $ 27,553 $ — $ — $ 348 $ 27,901 Commercial land and development 184 — — 14 198 Commercial construction 1,212 — — 8 1,220 Residential construction 217 — — ( 102 ) 115 Residential 152 — — ( 1 ) 151 Farmland 236 — — 157 393 Commercial: Secured 3,751 ( 1,245 ) 219 736 3,461 Unsecured 209 — — 4 213 Consumer and other 470 ( 187 ) 207 ( 114 ) 376 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 September 30, 2022. (in thousands) Beginning Balance Charge-offs Recoveries Provision (Benefit) Ending Balance Real estate: Commercial $ 16,621 $ — $ — $ 1,688 $ 18,309 Commercial land and development 68 — — 30 98 Commercial construction 508 — — 38 546 Residential construction 51 — — ( 10 ) 41 Residential 188 — — ( 13 ) 175 Farmland 616 — — 48 664 Commercial: Secured 6,284 ( 346 ) 68 356 6,362 Unsecured 265 ( 2 ) — 15 278 PPP — — 21 ( 21 ) — Consumer and other 537 ( 182 ) 243 ( 62 ) 536 Unallocated 648 — — 181 829 Total $ 25,786 $ ( 530 ) $ 332 $ 2,250 $ 27,838 25 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 Real estate: Commercial $ 19,216 $ 7,606 $ — $ — $ 1,079 $ 27,901 Commercial land and development 54 74 — — 70 198 Commercial construction 645 882 — — ( 307 ) 1,220 Residential construction 49 81 — — ( 15 ) 115 Residential 175 3 — — ( 27 ) 151 Farmland 644 ( 396 ) — — 145 393 Commercial: Secured 7,098 ( 3,060 ) ( 2,856 ) 358 1,921 3,461 Unsecured 116 37 — — 60 213 Consumer and other 347 80 ( 709 ) 714 ( 56 ) 376 Unallocated 45 ( 45 ) — — — — 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 nine months ended September 30, 2022. (in thousands) Beginning Balance Charge-offs Recoveries Provision (Benefit) Ending Balance Real estate: Commercial $ 12,869 $ — $ — $ 5,440 $ 18,309 Commercial land and development 50 — — 48 98 Commercial construction 371 — — 175 546 Residential construction 50 — — ( 9 ) 41 Residential 192 — — ( 17 ) 175 Farmland 645 — — 19 664 Commercial: Secured 6,859 ( 928 ) 152 279 6,362 Unsecured 207 ( 2 ) — 73 278 PPP — ( 21 ) 21 — — Consumer and other 889 ( 508 ) 431 ( 276 ) 536 Unallocated 1,111 — — ( 282 ) 829 Total $ 23,243 $ ( 1,459 ) $ 604 $ 5,450 $ 27,838 26 Unfunded Loan Commitment Reserves Unfunded loan commitment reserves are included in “Interest payable and other liabilities” in the unaudited consolidated balance sheets. Provisions for unfunded loan commitments are included in “Provision for credit losses” in the unaudited consolidated statements of income. 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 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 Effect of adoption of ASC 326 — — 1,092 — Provision — — 330 23 Balance at end of period $ 1,547 $ 125 $ 1,547 $ 125 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 September 30, 2023 and December 31, 2022, respectively. 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. Note 5: Interest-Bearing Deposits 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 Savings accounts 138,029 154,581 Money market accounts 1,335,545 1,073,528 Time accounts, more than $ 250 330,913 198,159 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 $ 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) 2023 $ 218,703 2024 186,345 2025 21,135 2026 1,341 2027 — Total time deposits $ 427,524 27 Total deposits include deposits offered through the IntraFi Network (formerly Promontory Interfinancial Network) that are comprised of Certificate of Deposit Account Registry Service® (“CDARS”) balances included in time deposits and Insured Cash Sweep® (“ICS”) balances included in money market and interest checking deposits. Through this network, the Company offers customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When funds are deposited through CDARS and ICS on behalf of a customer, the Company has the option of receiving matching deposits through the network’s reciprocal deposit program or placing deposits “one-way,” for which the Company receives no matching deposits. The Company considers the reciprocal deposits to be in-market deposits, as distinguished from traditional out-of-market brokered deposits. There were no one-way deposits at 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 ICS 689,983 272,719 Total network deposits $ 705,525 $ 285,967 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 Savings accounts 880 65 2,182 128 Money market accounts 9,536 1,779 23,108 2,825 Time accounts, $ 250 or more 3,865 789 8,462 1,074 Other time accounts 1,133 69 3,751 105 Total interest expense on interest-bearing deposits $ 16,386 $ 2,817 $ 39,733 $ 4,383 Note 6: Long Term Debt and Other Borrowings Subordinated notes : On August 17, 2022, the Company completed a private placement of $ 75.0 million of fixed-to-floating rate subordinated notes to certain qualified investors, of which $ 19.3 million was purchased by existing or former members of the board of directors and their affiliates. The notes will be used for capital management and general corporate purposes, including, without limitation, the redemption of existing subordinated notes. The subordinated notes have a maturity date of September 1, 2032 and bear interest, payable semi-annually, at the rate of 6.00 % per annum until September 1, 2027. On that date, the interest rate will be adjusted to float at a rate equal to the three-month 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. The indebtedness evidenced by the subordinated notes, including principal and interest, is unsecured and subordinate and junior in right to payment to general and secured creditors and depositors of the Company. The subordinated notes have been structured to qualify as Tier 2 capital for the Company for regulatory capital purposes. 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 $ 0.2 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 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 $ 1.1 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 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. Note 7: Shareholders’ Equity (a) EPS Basic EPS is net income divided by the weighted average number of common shares outstanding during the period less average unvested restricted stock awards (“RSAs”). Diluted EPS includes the dilutive effect of additional potential common shares related to unvested RSAs using the treasury stock method. The Company has two forms of outstanding common stock: common stock and unvested RSAs. Holders of unvested RSAs receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings, and therefore the RSAs are considered participating securities. However, under the two-class method, the difference in EPS is not significant for these participating securities. 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 Basic weighted average common shares outstanding 17,175,034 17,140,435 17,163,609 17,123,016 Add: Dilutive effects of assumed vesting of restricted stock 19,791 28,012 22,626 37,794 Total dilutive weighted average common shares outstanding 17,194,825 17,168,447 17,186,235 17,160,810 Earnings per common share: Basic EPS $ 0.64 $ 0.68 $ 2.15 $ 1.84 Diluted EPS 0.64 0.68 2.15 1.84 The Company did not have any anti-dilutive shares at September 30, 2023 or September 30, 2022. (b) Dividends On July 20, 2023, the board of directors declared a $ 0.20 per common share dividend, totaling $ 3.5 million. (c) Stock-Based Incentive Arrangement The Company’s stock-based compensation consists of RSAs granted under its historical stock-based incentive arrangement (the “Historical Incentive Plan”) and RSAs issued under the Five Star Bancorp 2021 Equity Incentive Plan (the “Equity Incentive Plan”). The Historical Incentive Plan consisted of RSAs for certain executive officers of the Company. The 28 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. 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. Shares granted to non-employee directors vested immediately upon grant, while shares granted to certain employees, officers, and executives vest ratably over three , five , or seven years (as defined in the respective agreements). Since the completion of the IPO, the Company has granted RSAs under the Equity Incentive Plan to executives and directors, which vest annually over three years and over one year , respectively. All RSAs were granted at the fair value of common stock at the time of the award. The RSAs are considered fixed awards, as the number of shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the service period. Non-cash stock compensation expense recognized for the 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 2.67 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 September 30, For the nine months ended September 30, 2023 2022 2023 2022 Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Beginning of the period balance 82,324 $ 21.75 107,824 $ 20.88 96,826 $ 20.34 127,751 $ 19.95 Shares granted — — — — 16,978 28.52 23,639 28.29 Shares vested — — ( 3,476 ) 28.50 ( 29,933 ) 20.78 ( 44,538 ) 22.65 Shares forfeited — — — — ( 1,547 ) 26.95 ( 2,504 ) 22.50 End of the period balance 82,324 $ 21.75 104,348 $ 20.62 82,324 $ 21.75 104,348 $ 20.62 Note 8: Commitments and Contingencies Financial Instruments with Off-Balance Sheet Risk Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Substantially all of these commitments are at variable interest rates, based on an index, and have fixed expiration dates. 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 29 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 Undisbursed construction loans 98,901 80,726 Undisbursed commercial real estate loans 94,537 79,121 Agricultural lines of credit 24,839 10,399 Undisbursed residential real estate loans 6,377 8,945 Undisbursed agricultural real estate loans 1,200 1,068 Other 2,477 1,868 Total commitments and standby letters of credit $ 401,934 $ 329,148 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 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 : The Company grants real estate mortgage, real estate construction, commercial, and consumer loans to customers primarily in Northern California. Although the Company has a diversified loan portfolio, a substantial portion is secured by commercial and residential real estate. In management’s judgment, a concentration of loans exists in real estate related loans, which represented approximately 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. Personal and business incomes represent the primary source of repayment for the majority of these loans. Deposit concentrations : 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. Contingencies : The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company. Correspondent banking agreements : The Company maintains funds on deposit with other FDIC-insured financial institutions under correspondent banking agreements. Uninsured deposits through these agreements totaled $ 22.1 million and $ 16.2 million at September 30, 2023 and December 31, 2022, respectively. Litigation Matters The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company. Note 9: Subsequent Events 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. 30