What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-23 compared with 2023-02-24 · 432 added, 484 removed, 942 unchanged (49% of the section changed)

3 unchanged sentences

PCAOB ID# 659 )

Consolidated Balance Sheets as of December 31, 2022 and 2021

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

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

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

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

Consolidated B alance Sh eet s as of December 31, 2023 and 2022

Consolidated Statements of Incom e for the years ended December 31, 2023 and 2022

Consolidated Statements of Comprehensive Incom e for the years ended December 31, 2023 and 2022

Consolidated Statements of Changes in Shareholders’ Equit y for the years ended December 31, 2023 and 2022

Consolidated Statements of Cash Flow s for the years ended December 31, 2023 and 2022

Notes to Consolidated Financial Statements

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Change in Accounting Principle

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

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

As discussed in Notes 1, 2, 3 and 4 to the consolidated financial statements, the Company changed its method of accounting for the allowance for credit losses as of January 1, 2023 due to the adoption of Accounting Standards Update No.

2016-13, which established Accounting Standards Codification Topic 326, Financial Instruments - Credit Losses .

Basis for Opinion

19 unchanged sentences

December 31, 2023 and 2022

(in thousands, except share data)

(in thousands, except share amounts)

Cash and due from financial institutions $ 26,986 $ 32,561

2 unchanged sentences

Time deposits in banks 5,858 9,849

Securities available-for-sale, at fair value 115,988 148,807

Securities held-to-maturity, at amortized cost (fair value of $ 3,432 and $ 5,197 at December 31, 2022 and 2021, respectively)

Securities available-for-sale, at fair value, net of allowance for credit losses of $ 0 at December 31, 2023 and 2022 (amortized cost of $ 124,788 and $ 135,087 at December 31, 2023 and 2022, respectively)

108,083 115,988

Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ 20 at December 31, 2023 and $ 0 at December 31, 2022 (fair value of $ 2,913 and $ 3,432 at December 31, 2023 and 2022, respectively)

Loans held for sale 11,464 9,416

Loans held for investment 3,081,719 2,791,326

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

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

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

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

Allowance for credit losses - loans ( 34,431 ) ( 28,389 )

Loans held for investment, net of allowance for credit losses 3,047,288 2,762,937

FHLB stock 15,000 10,890

Operating leases, right-of-use asset, net 5,284 3,981

Premises and equipment, net 1,623 1,605

Bank-owned life insurance (“BOLI”) 14,669 11,203

Bank-owned life insurance 17,180 14,669

Interest receivable and other assets 56,692 34,077

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Total deposits 3,026,896 2,782,004

Subordinated notes, net 73,606 28,386

FHLB advances 170,000 100,000

Subordinated notes, net 73,749 73,606

Operating lease liability 5,603 4,243

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Years ended December 31, 2023 and 2022

(in thousands, except per share data)

Interest and dividend income

(in thousands, except per share amounts)

Interest and fee income:

Loans, including fees $ 162,713 $ 111,795

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Interest-bearing deposits in other banks 9,069 3,696

117,918 81,583

Total interest and fee income 174,382 117,918

Interest expense:

2 unchanged sentences

Subordinated notes 4,646 3,740

Total interest expense 63,502 14,848

Net interest income

110,880 103,070

Provision for loan losses 6,700 1,700

Net interest income after provision for loan losses

Provision for credit losses 4,000 6,700

Net interest income after provision for credit losses

106,880 96,370

1 unchanged sentence

Service charges on deposit accounts 575 467

Net gain on sale of securities 5 724

Net gain (loss) on sale of securities

Gain on sale of loans 1,952 2,934

3 unchanged sentences

Other 1,952 586

Total non-interest income 7,511 7,157

Non-interest expense:

2 unchanged sentences

Data processing and software 4,015 3,091

Federal Deposit Insurance Corporation (“FDIC”) insurance 850 700

FDIC insurance 1,557 850

Professional services 2,575 2,467

2 unchanged sentences

Other operating expenses 6,718 6,436

40,669 36,043

Total non-interest expense 47,775 40,669

Income before provision for income taxes

2 unchanged sentences

18,882 18,057

$ 47,734 $ 44,801

Basic earnings per common share $ 2.78 $ 2.61

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(in thousands)

Net income $ 44,801 $ 42,441

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

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

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

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

$ 47,734 $ 44,801

Unrealized gain (loss) on securities:

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

2,228 ( 18,291 )

Reclassification for net (gain) loss on sale of securities included in net income

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

708 ( 5,408 )

Other comprehensive income (loss)

1,687 ( 12,888 )

Total comprehensive income

$ 49,421 $ 31,913

See accompanying notes to consolidated financial statements.

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Years ended December 31, 2023 and 2022

(in thousands, except share and per share data)

Common Stock Retained Earnings

Accumulated Other Comprehensive Income (Loss),

(in thousands, except share and per share amounts)

Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income

Total Shareholders’ Equity

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 — — 44,801 — 44,801

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

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

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

Stock compensation expense — 1,099 — — 1,099

Director stock compensation expense 41,640 846 — — 846

Stock forfeitures ( 6,561 ) — — — —

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

Cash dividends paid ($ 1.05 per share)

1 unchanged sentence

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 — — 47,734 — 47,734

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

Other comprehensive income — — — 1,687 1,687

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

Stock compensation expense — 962 — — 962

Director stock compensation expense — 447 — — 447

Stock forfeitures ( 1,915 ) — — — —

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

Cash dividends paid ($ 0.75 per share)

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

Provision for loan losses 6,700 1,700

Provision for credit losses 4,000 6,700

Depreciation and amortization 1,612 1,636

Amortization of deferred loan fees and costs 117 534

Amortization of premiums and discounts on securities 1,152 1,267

Amortization of subordinated note issuance costs 144 122

Stock compensation expense 962 1,099

Earnings on BOLI ( 510 ) ( 412 )

Deferred tax provision ( 897 ) ( 1,942 )

Loans originated for sale ( 47,922 ) ( 60,173 )

1 unchanged sentence

Proceeds from sale of loans 38,410 53,691

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

Earnings on BOLI ( 412 ) ( 237 )

Stock compensation expense 652 594

Director stock compensation expense 447 846

Change in deferred loan fees 534 ( 1,689 )

Amortization and accretion of security premiums and discounts 1,267 1,561

Amortization of subordinated notes issuance costs 122 66

Depreciation and amortization 649 607

Net loss (gain) on sale of securities available-for-sale 167 ( 5 )

Decrease in operating lease liability ( 900 ) ( 978 )

Amortization of operating lease ROUA 987 —

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

Extinguishment of redeemed subordinated note issuance costs — 302

Investment-related gain on cost method investments ( 1,683 ) —

Net changes in:

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Purchases of securities available-for-sale ( 1,151 ) ( 2,642 )

Capital call for venture-backed investment ( 1,407 ) —

Proceeds received from venture-backed investment 1,915 —

Low income housing credits ( 2,341 ) —

Net change in time deposits in banks 3,991 4,615

6 unchanged sentences

Net change in deposits 244,892 496,114

Proceeds from issuance of stock — 111,243

FHLB advances 70,000 100,000

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Supplemental disclosure of noncash investing and financing activities:

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

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

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

Unrealized gain (loss) on securities 2,228 ( 18,291 )

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

Operating lease liabilities recorded for new operating leases 2,260 —

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

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

Disposal of premises and equipment $ — $ 515

Reclassification of retained deficit $ — $ 4,321

ROUA recorded for new operating leases ( 2,243 ) —

Commitment for low income housing tax credits ( 13,612 ) —

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 consolidated financial statements.

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

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

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

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

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

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

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

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

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

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

federal income tax expense.

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

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

The Company publicly filed a Registration Statement on Form S-1 with the SEC in connection with its IPO, which was declared effective by the SEC on May 4, 2021.

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

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Basis of Financial Statement Presentation and Consolidation

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

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

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

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

All significant intercompany transactions and balances are eliminated in consolidation.

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

These estimates and assumptions affect the amounts reported in the

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

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

These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ.

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

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

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Interest income is recognized when earned.

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

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

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

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

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

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

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

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

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

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 available-for-sale 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 available-for-sale 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 available-for-sale 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.

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.

Securities Held-to-Maturity

1 unchanged sentence

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

Loans and Allowance for Loan Losses

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

Estimated credit losses are recorded under 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”) through a credit loss expense and an allowance.

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.

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

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

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

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

When a loan is placed on

non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income.

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

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

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

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

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

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

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

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

The 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 FFIEC 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 credit 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;

(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 and beyond 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 and Loss Given Default 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.

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;

• 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.

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

The allowance consists of:

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

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

and (iii) unallocated allowances, if any.

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

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

These loans are evaluated for impairment individually by management.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Accrued interest receivable is excluded from amortized cost of all financial instrument types and included in “Interest receivable and other assets” in the 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.

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.

Troubled Debt Restructurings (“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.

Under ASU No.

2022-02, the Company is required to evaluate whether a loan modification represents a new loan or a continuation of an existing loan.

The amendment enhanced existing disclosure requirements and introduced new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty under criteria of principal forgiveness, interest rate reduction, other-than-insignificant payment delay, or term extension.

Federal Home Loan Bank Stock

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

Federal Home Loan Bank stock represents the Company’s investment in the stock of the FHLB and is carried at par value.

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

Therefore, the shares are considered as other investment securities.

Management periodically evaluates FHLB stock for OTTI.

Management periodically evaluates FHLB stock for impairment.

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

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Other Real Estate

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Such financial instruments are recorded when they are funded.

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

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

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.

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

Stock-Based Compensation

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

The Company has historically elected to be taxed for U.

federal income tax purposes as an S Corporation.

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

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

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

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

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

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

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

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

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

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

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

carrying amounts and tax bases of assets and liabilities computed using enacted tax rates.

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

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

Earnings Per Common Share (“EPS”)

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

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common stock and unvested RSAs.

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

therefore the RSAs are considered participating securities.

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.

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

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

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

a C Corporation for the entirety of the year.

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

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

Net income before provision for income taxes - GAAP $ 62,858 $ 47,148

Actual/pro forma provision for income taxes 18,057 9,335

Actual/pro forma net income 44,801 37,813

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

Dilutive effects of assumed vesting of restricted stock 37,328 22,576

Weighted average diluted common shares outstanding 17,165,610 14,995,213

Income per common share:

Basic EPS $ 2.61 $ 2.53

Diluted EPS $ 2.61 $ 2.52

Subordinated Notes

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

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

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

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

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

Reclassifications

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

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

Recently Issued Accounting Standards

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

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

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

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

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

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

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

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

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

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

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

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

banking agencies.

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, the Company has 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.

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

Allowance for Credit Losses - Loans

$ ( 28,389 ) $ ( 5,262 ) $ ( 33,651 )

Allowance for Credit Losses - HTM Securities

— ( 20 ) ( 20 )

Deferred Tax Asset (Interest receivable and other assets) 12,273 1,883 14,156

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

In March 2020, the FASB issued ASU No.

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

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

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

In January 2021, the FASB issued ASU No.

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

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

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

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

In October 2023, the FASB issued ASU No.

2023-06, Disclosure Improvements (“ASU 2023-06”), amending disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification (the “Codification”).

ASU 2023-06 was issued in response to the SEC’s initiative to update and simplify disclosure requirements.

The SEC identified 27 disclosure requirements that were incremental to those in the Codification and referred them to the FASB for potential incorporation into U.S.

To avoid duplication, the SEC intended to eliminate those disclosure requirements from existing SEC regulations as the FASB incorporated them into the relevant Codification subtopics.

ASU 2023-06 adds 14 of the 27 identified disclosure or presentation requirements to the Codification.

ASU 2023-06 is to be applied prospectively, and early adoption is prohibited.

For reporting entities subject to the SEC’s existing disclosure requirements, the effective dates of ASU 2023-06 will be the date on which the SEC’s removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective.

If by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the Codification and will not become effective for any entities.

ASU 2023-06 is not expected to have a significant impact on the Company's consolidated financial statements.

In November 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic 280) - Improvement to Reportable Segment Disclosures (“ASU 2023-07”), amending disclosure requirements related to segment reporting primarily through enhanced disclosure about significant segment expenses and by requiring disclosure of segment information on an annual and interim basis.

ASU 2023-07 is effective January 1, 2024 and is not expected to have a significant impact on the Company's consolidated financial statements.

In December 2023, the FASB issued ASU No.

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

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

The Company has not elected to apply these amendments;

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

2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures (“ASU 2023-09”), which enhances the transparency and decision usefulness of income tax disclosures.

ASU 2023-09 will require disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid.

Entities will also be required to disclose income/(loss) from continuing operations before income tax expense/(benefit) disaggregated between domestic and foreign, as well as income tax expense/(benefit) from continuing operations disaggregated by federal, state and foreign.

ASU 2023-09 is effective January 1, 2025 and is not expected to have a significant impact on the Company's consolidated financial statements.

Investment Securities

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

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

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

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

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 GSEs, and corporate bonds, as reflected in the following tables.

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

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Total held-to-maturity $ 3,756 $ — $ ( 324 ) $ 3,432

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

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;

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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, for further detail.

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

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Gains (Losses)

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

government agency securities

$ 10,548 $ 142 $ ( 149 ) $ 10,541

Mortgage-backed securities 68,585 7 ( 11,619 ) 56,973

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Total available-for-sale $ 124,788 $ 161 $ ( 16,866 ) $ 108,083

government agencies $ 19,824 $ 60 $ ( 202 ) $ 19,682

government agency securities

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

Mortgage-backed securities 73,111 1 ( 11,841 ) 61,271

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

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

The amortized cost and fair value of investment securities by contractual maturity at December 31, 2023 and 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.

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Investment securities not due at a single maturity date:

government agencies — — 14,317 14,173 — — 19,824 19,682

government agency securities

— — 10,548 10,541 — — 14,317 14,173

Mortgage-backed securities — — 68,585 56,973 — — 73,111 61,271

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Total $ 3,077 $ 2,913 $ 124,788 $ 108,083 $ 3,756 $ 3,432 $ 135,087 $ 115,988

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

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

(in thousands) 2023 2022

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Sales proceeds $ 737 $ 1,623

Gross realized gains 5 724

Gross realized (losses) gains ( 167 ) 5

Pledged investment securities are shown in the following table:

(in thousands) 2023 2022

Pledged to the State of California:

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

The State of California, securing deposits of public funds and borrowings $ 55,435 $ 40,465

The Federal Reserve Discount Window, increasing borrowing capacity 48,964 —

Total pledged investment securities $ 104,399 $ 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 December 31, 2023 and 2022:

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

(in thousands) Less than 12 months 12 months or more Total securities

in a loss position

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

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

Fair Value Unrealized (Loss)

government agency securities

$ 1,130 $ ( 14 ) $ 7,081 $ ( 135 ) $ 8,211 $ ( 149 )

Mortgage-backed securities — — 55,609 ( 11,619 ) 55,609 ( 11,619 )

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Total temporarily impaired securities $ 1,130 $ ( 14 ) $ 101,730 $ ( 16,852 ) $ 102,860 $ ( 16,866 )

government agencies $ — $ — $ 13,399 $ ( 202 ) $ 13,399 $ ( 202 )

government agency securities

$ 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 )

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There were 149 and 152 available-for-sale securities in unrealized loss positions at December 31, 2023 and 2022, respectively.

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

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

The unrealized losses are due primarily to interest rate changes.

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

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

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

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

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

As of December 31, 2023, the investment portfolio included 146 investment securities that had been in a continuous loss position for twelve months or more and three 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 December 31, 2023, which had been in a continuous loss position for more than twelve months.

Obligations issued or guaranteed by government agencies such as the Government National Mortgage Association 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.

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

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

Loans and Allowance for Loan Losses

For the years ended December 31, 2023 and 2022, cash dividends received on FHLB capital stock in the amount of $ 970,000 and $ 546,000 , respectively, were recorded as non-interest income in the consolidated statements of income.

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.

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Unsecured 23,850 25,431

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

Consumer and other 38,166 28,628

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Net deferred loan fees ( 2,257 ) ( 2,140 )

Allowance for loan losses 28,389 23,243

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

Allowance for Loan Losses

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

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

Loans are segmented into the following pools:

commercial, real

estate, and consumer.

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

Commercial loans are divided into the following two classes:

secured and unsecured loans.

Real estate loans are divided into the following six classes:

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

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

The Company uses an internally developed model in this process.

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

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

CARES Act and PPP Loans

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

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

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

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

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

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

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

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

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

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

Allowance for credit losses - loans

( 34,431 ) ( 28,389 )

Loans held for investment, net of allowance for credit losses $ 3,047,288 $ 2,762,937

Commercial loans :

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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;

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.

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

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

until permanent financing is obtained.

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.

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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.

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

management expertise.

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

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

Financial ratios and trends are acceptable.

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.

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Loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.

The substandard loan category includes loans that management has determined not to be impaired, as well as loans that are impaired.

Loans rated doubtful :

2 unchanged sentences

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

The following table summarizes the credit quality indicators related to the Company’s loans by class as of December 31, 2022:

(in thousands) Pass Watch Substandard Doubtful Total

Commercial $ 2,379,766 $ 14,802 $ 106 $ — $ 2,394,674

Commercial land and development 7,477 — — — 7,477

Commercial construction 82,769 5,900 — — 88,669

Residential construction 6,693 — — — 6,693

Residential 24,055 — 175 — 24,230

Farmland 52,478 — — — 52,478

Secured 163,879 1,184 123 — 165,186

Unsecured 25,431 — — — 25,431

Consumer 28,602 — 26 — 28,628

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 December 31, 2023 was as follows (disclosure not comparative due to adoption of ASC 326 on January 1, 2023 – refer to Note 1, Basis of Presentation, for further details):

Amortized Cost Basis by Origination Year

(in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total

Pass $ 329,876 $ 992,181 $ 714,965 $ 238,655 $ 128,424 $ 247,030 $ 4,685 $ — $ 2,655,816

Watch — 8,534 6,274 4,727 574 4,896 — — 25,005

Substandard — — — — — 1,890 — — 1,890

Doubtful — — — — — — — — —

Total 329,876 1,000,715 721,239 243,382 128,998 253,816 4,685 — 2,682,711

The following table summarizes the credit quality indicators related to the Company’s loans by class as of December 31, 2021:

(in thousands) Pass Watch Substandard Doubtful Total

Commercial $ 1,575,006 $ 1,970 $ 9,256 $ — $ 1,586,232

Commercial land and development

Pass 11,388 3,229 — 184 — 733 — — 15,534

Watch — — — — — — — — —

Substandard — — — — — — — — —

Doubtful — — — — — — — — —

Total 11,388 3,229 — 184 — 733 — — 15,534

Commercial construction

Pass 9,074 32,154 4,189 11,230 — 5,897 — — 62,544

Watch — — — — — — — — —

Substandard — — — — — — — — —

Doubtful — — — — — — — — —

Total 9,074 32,154 4,189 11,230 — 5,897 — — 62,544

Residential construction

Residential 28,384 — 178 — 28,562

Farmland 54,805 — — — 54,805

Secured 135,131 751 1,180 — 137,062

Unsecured 21,136 — — — 21,136

PPP 22,124 — — — 22,124

Consumer 17,167 — — — 17,167

Pass 2,412 9,128 3,912 — — — — — 15,452

Watch — — — — — — — — —

Substandard — — — — — — — — —

Doubtful — — — — — — — — —

Total 2,412 9,128 3,912 — — — — — 15,452

Amortized Cost Basis by Origination Year

(in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total

Pass 4,838 3,964 6,244 2,279 1,182 5,995 1,420 — 25,922

Watch — — — — — — — — —

Substandard — — — — — — — — —

Doubtful — — — — — — — — —

Total 4,838 3,964 6,244 2,279 1,182 5,995 1,420 — 25,922

Pass 2,311 8,037 12,678 7,860 12,365 8,391 4 — 51,646

Watch — — — — — — — — —

Substandard — — — — — — — — —

Doubtful — — — — — — — — —

Total 2,311 8,037 12,678 7,860 12,365 8,391 4 — 51,646

Pass 25,299 28,879 14,304 12,164 9,918 10,363 50,020 — 150,947

Watch 189 8,802 2,705 63 154 941 1,727 — 14,581

Substandard — — — — 45 27 — — 72

Doubtful — — — — — — — — —

Total 25,488 37,681 17,009 12,227 10,117 11,331 51,747 — 165,600

Pass 3,891 3,782 4,902 5,963 2,240 7 3,072 — 23,857

Watch — — — — — — — — —

Substandard — — — — — — — — —

Doubtful — — — — — — — — —

Total 3,891 3,782 4,902 5,963 2,240 7 3,072 — 23,857

Consumer and other

Pass 18,489 11,359 8,264 6 — 307 — — 38,425

Watch — 16 — — — — — — 16

Substandard — 12 — — — — — — 12

Doubtful — — — — — — — — —

Total 18,489 11,387 8,264 6 — 307 — — 38,453

Pass 407,578 1,092,713 769,458 278,341 154,129 278,723 59,201 — 3,040,143

Watch 189 17,352 8,979 4,790 728 5,837 1,727 — 39,602

Substandard — 12 — — 45 1,917 — — 1,974

Doubtful — — — — — — — — —

Total $ 407,767 $ 1,110,077 $ 778,437 $ 283,131 $ 154,902 $ 286,477 $ 60,928 $ — $ 3,081,719

Management regularly reviews the Company’s loans for accuracy of risk grades whenever new information is received.

6 unchanged sentences

(in thousands) Past Due

Days Greater Than

90 Days Total Past

Due Current Total Loans

30-59 Days 60-89 Days Greater Than 90 Days Total Past Due Current Total Loans Receivable

Commercial $ — $ — $ — $ — $ 2,682,711 $ 2,682,711

8 unchanged sentences

Total $ 76 $ — $ — $ 76 $ 3,081,643 $ 3,081,719

There were no loans between 60-89 days past due, no r any loans greater than 90 days past due and still accruing as of December 31, 2022.

There were no loans greater than 90 days past due and still accruing interest income as of December 31, 2023.

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

(in thousands) Past Due

Days Greater Than 90 Days Total Past

Due Current Total Loans

30-59 Days 60-89 Days Greater Than 90 Days Total Past Due Current Total Loans Receivable

Commercial $ — $ — $ — $ — $ 2,392,053 $ 2,392,053

6 unchanged sentences

Unsecured — — — — 25,488 25,488

PPP — — — 22,124 22,124

Consumer and other 194 — — 194 28,819 29,013

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

There were no loans between 60-89 days past due no r any loans greater than 90 days past due and still accruing as of December 31, 2021.

Impaired Loans

Information related to impaired loans as of December 31, 2022 and 2021 consisted of the following:

December 31, 2022 December 31, 2021

(in thousands) Recorded

Investment Unpaid

Balance Related

Allowance Recorded

Investment Unpaid

Balance Related

With no related allowance recorded:

Commercial $ 106 $ 106 $ — $ 122 $ 122 $ —

Residential 175 175 — 178 178 —

Secured — — — 116 116 —

281 281 — 416 416 —

With an allowance recorded:

Secured 123 123 123 172 172 172

123 123 123 172 172 172

Total by category:

Commercial 106 106 — 122 122 —

Residential 175 175 — 178 178 —

Secured 123 123 123 288 288 172

Total impaired loans $ 404 $ 404 $ 123 $ 588 $ 588 $ 172

At December 31, 2022, one collateral dependent loan was in the process of foreclosure:

a commercial term loan secured by a single family residence with an unpaid principal balance of $ 175,000 and no related allowance.

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 December 31, 2023.

In addition, the weighted average loan-to-value of impaired, collateral dependent loans was approximately 82.42 % and 70.67 % at December 31, 2022 and 2021, respectively.

Information related to impaired loans for the years ended December 31, 2022 and 2021 consisted of the following:

Years ended December 31,

(in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized

With no related allowance recorded:

Commercial $ 113 $ — $ 129 $ —

Residential 176 — 181 —

Secured 28 — 120 —

Consumer and other 8 — — —

With an allowance recorded:

Secured 348 — 78 —

Consumer and other 2 — 9 —

Total by category:

Commercial 113 — 129 —

Residential 176 — 181 —

Secured 376 — 198 —

Consumer and other 10 — 9 —

Total impaired loans $ 675 $ — $ 517 $ —

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

4 unchanged sentences

Total non-accrual loans $ 1,965 $ 404

No interest income was recognized on non-accrual loans in the years ended December 31, 2023 and 2022.

Non-accrual real estate loans did not have an allowance for credit losses as of December 31, 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 $ 95,000 and $ 39,000 for the years ended December 31, 2023 and 2022, respectively.

Troubled Debt Restructuring

The Company’s loan portfolio may include certain loans that have been modified in a TDR, which are loans for which concessions in terms have been granted because of the borrowers’ financial difficulties.

These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.

Certain TDRs are placed on non-accrual status at the time of

restructure and may only be returned to accruing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

There was one loan outstanding with a TDR designation at December 31, 2022:

a nonaccrual, commercial secured loan which had not defaulted with an outstanding balance of $ 29,000 and reserves covering the amount of the outstanding balance.

There were no loans outstanding with a TDR designation at December 31, 2021.

The CARES Act, as amended, specified that to be eligible not to be considered a TDR, a loan modification must be:

(i) related to the COVID-19 pandemic;

(ii) executed on a loan that was not more than 30 days past due as of December 31, 2019;

and (iii) executed between March 1, 2020 and the earlier of:

(i) 60 days after the date of termination of the federal national emergency;

or (ii) January 1, 2022.

The Company elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated TDRs under existing GAAP.

As of December 31, 2022, no borrowing relationships were continuing to benefit from payment relief.

The Company accrued and recognized interest income on loans under payment relief based on the original contractual interest rates.

When payments resumed at the end of the relief period, the payments were generally applied to accrued interest due until accrued interest was fully paid.

The following table discloses activity in the allowance for loan losses for the year ended December 31, 2022.

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

Allowance for Credit Losses - Loans

The following table discloses activity in the allowance for credit losses - loans for the year ended December 31, 2023.

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

Commercial $ 19,216 $ 7,606 $ — $ — $ 2,193 $ 29,015

6 unchanged sentences

Unsecured 116 37 ( 6 ) — 42 189

PPP — ( 21 ) 21 — —

Consumer and other 347 80 ( 1,106 ) 995 62 378

1 unchanged sentence

Total $ 28,389 $ 5,262 $ ( 4,608 ) $ 1,418 $ 3,970 $ 34,431

The following table discloses activity in the allowance for loan losses for the year ended December 31, 2021.

The following table discloses activity in the allowance for credit losses - loans for the year ended December 31, 2022.

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

7 unchanged sentences

Unsecured 207 ( 2 ) — ( 89 ) 116

Consumer and other 632 ( 321 ) 234 344 889

Unallocated 724 — — 387 1,111

Total $ 22,189 $ ( 1,143 ) $ 497 $ 1,700 $ 23,243

The following table summarizes the allocation of the allowance for loan losses by impairment methodology as of December 31, 2022.

Ending allowance balance allocated to:

Ending balance of:

(in thousands) Loans individually evaluated for impairment Loans collectively evaluated for impairment Total loans Loans individually evaluated for impairment Loans collectively evaluated for impairment Total loans

Commercial $ — $ 19,216 $ 19,216 $ 106 $ 2,394,568 $ 2,394,674

Commercial land and development — 54 54 — 7,477 7,477

Commercial construction — 645 645 — 88,669 88,669

Residential construction — 49 49 — 6,693 6,693

Residential — 175 175 175 24,055 24,230

Farmland — 644 644 — 52,478 52,478

Secured 123 6,975 7,098 123 165,063 165,186

Unsecured — 116 116 — 25,431 25,431

Consumer and other — 347 347 — 28,628 28,628

Unallocated — 45 45 — — —

Total $ 123 $ 28,266 $ 28,389 $ 404 $ 2,793,062 $ 2,793,466

The following table summarizes the allocation of the allowance for loan losses by impairment methodology as of December 31, 2021.

Ending allowance balance allocated to:

Ending balance of:

Commercial $ — $ 12,869 $ 12,869 $ 122 $ 1,586,110 $ 1,586,232

Commercial land and development — 50 50 — 7,376 7,376

Commercial construction — 371 371 — 54,214 54,214

Residential construction — 50 50 — 7,388 7,388

Residential — 192 192 178 28,384 28,562

Farmland — 645 645 — 54,805 54,805

Secured 172 6,687 6,859 288 136,774 137,062

Unsecured — 207 207 — 21,136 21,136

PPP — ( 21 ) 21 — —

2 unchanged sentences

Total $ 23,243 $ ( 2,619 ) $ 1,065 $ 6,700 $ 28,389

Unfunded Loan Commitment Reserves

Unfunded loan commitment reserves are included in “Interest payable and other liabilities” in the consolidated balance sheets.

Provisions for unfunded loan commitments are included in “Provision for credit losses” in the consolidated statements of income.

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

(in thousands) 2023 2022

Balance at January 1 $ 125 $ 100

Effect of adoption of ASC 326 1,092 —

Provision 30 25

Balance at December 31 $ 1,247 $ 125

Pledged Loans

7 unchanged sentences

Tenant improvements 2,125 1,994

Bank automobiles 123 —

Accumulated depreciation and amortization

( 4,736 ) ( 4,151 )

Premises and equipment, net $ 1,623 $ 1,605

1 unchanged sentence

Bank-owned Life Insurance

The Company owns life insurance policies on the lives of certain current and former officers designated by the board of directors to fund our employee benefit programs.

The Company owns life insurance policies on the lives of certain current and former officers designated by the board of directors to fund its employee benefit programs.

Death benefits provided under the specific terms of these insurance policies are estimated to be $ 37,494,000 at December 31, 2023.

1 unchanged sentence

The investment in BOLI policies is reported at their cash surrender value, net of surrender charges, of $ 17,180,000 and $ 14,669,000 at December 31, 2023 and 2022, respectively.

The cash surrender value

includes both the original premiums paid for the life insurance policies and the accumulated accretion of policy income since inception of the policies, net of mortality costs and other fees.

The cash surrender value includes both the original premiums paid for the life insurance policies and the accumulated accretion of policy income since inception of the policies, net of mortality costs and other fees.

Income of $ 510,000 and $ 412,000 was recognized on these life insurance policies for the years ended December 31, 2023 and 2022, respectively.

5 unchanged sentences

Servicing assets 2,161 2,286

Low income housing tax credits

Other assets 25,148 18,657

Interest receivable and other assets

$ 56,692 $ 34,077

10 unchanged sentences

Other time accounts 121,878 144,355

Total time deposits 466,572 342,514

Total interest-bearing deposits $ 2,195,795 $ 1,810,758

Time deposits totaled $ 466,572,000 and $ 342,514,000 as of December 31, 2023 and 2022, respectively.

There were $ 124,993,000 of brokered time deposits as of December 31, 2022 and no brokered time deposits as of December 31, 2021.

There were $ 100,128,000 of brokered time deposits as of December 31, 2023 and $ 124,993,000 of brokered time deposits as of

December 31, 2022.

As of December 31, 2023, scheduled maturities of time deposits for the next five years were as follows:

2 unchanged sentences

Total time deposits $ 466,572

Total deposits include deposits offered through the IntraFi Network (formerly Promontory Interfinancial Network) that are comprised of Certificate of Deposit Account Registry Service® (“CDARS”) balances included in time deposits and Insured Cash Sweep® (“ICS”) balances included in money market deposits.

Through this network, the Company offers customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits.

When funds are deposited through CDARS and ICS on behalf of a customer, the Company has the option of receiving matching deposits through the network’s reciprocal deposit program or placing deposits “one-way,” for which the Company receives no matching deposits.

The Company considers the reciprocal deposits to be in-market deposits, as distinguished from

traditional out-of-market brokered deposits.

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

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

15 unchanged sentences

On August 17, 2022, the Company completed a private placement of $ 75,000,000 of fixed-to-floating rate subordinated notes to certain qualified investors, of which $ 19,250,000 was purchased by existing or former members of the board of directors and their affiliates.

The notes will be used for capital management and general corporate purposes, including, without limitation, the redemption of previously existing subordinated notes.

The 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 Secured Overnight Financing Rate plus 329.0 basis points ( 8.03 % as of December 31, 2022) until maturity.

On that date, the interest rate will be adjusted to float at a rate equal to the three-month Term SOFR plus 329.0 basis points ( 8.62 % as of December 31, 2023) until maturity.

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

2 unchanged sentences

$ 3,750,000 aggregate principal amount originally issued in 2019 and $ 25,000,000 aggregate principal amount originally issued in 2017.

On December 15, 2022, the subordinated notes were redeemed for cash by the Company at 100 % of their principal amount, plus accrued and unpaid interest, in accordance with the subordinated note purchase agreements applicable to each series.

Remaining unamortized deferred financing costs associated with such notes were expensed and included in other operating expenses on the consolidated statements of income.

The subordinated notes have been structured to qualify as Tier 2 capital for regulatory capital purposes.

applicable to each series.

Remaining unamortized deferred financing costs associated with such notes were expensed and included in “Other operating expenses” in the consolidated statements of income.

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 $ 1,454,000 , of which $ 205,000 has been amortized through December 31, 2023.

1 unchanged sentence

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

At December 31, 2022 and 2021, the Company’s subordinated debt carrying value was $ 73,606,000 and $ 28,386,000 , respectively.

At December 31, 2023 and 2022, the carrying value of the Company’s subordinated notes was $ 73,749,000 and $ 73,606,000 , respectively.

Other borrowings :

1 unchanged sentence

Based on the dollar volume of qualifying loan collateral, the Company had a total financing availability of $ 996,712,000 at December 31, 2023 and $ 1,002,838,000 at December 31, 2022.

At December 31, 2022, the Company had outstanding borrowings of $ 100,000,000 and no borrowings outstanding at December 31, 2021.

The Company had $ 170,000,000 and $ 100,000,000 of borrowings outstanding at December 31, 2023 and 2022, respectively.

As of December 31, 2023 and 2022, the Company had letters of credit issued on its behalf totaling $ 681,500,000 and $ 686,500,000 , respectively, as discussed below.

As of December 31, 2023, letters of credit totaling $ 271,500,000 were pledged to secure State of California deposits and $ 410,000,000 were pledged to secure local agency deposits.

As of December 31, 2021, letters of credit totaling $ 80,500,000 were pledged to secure State of California deposits and $ 340,000,000 were pledged to secure local agency

As of December 31, 2022, letters of credit totaling $ 206,500,000 were pledged to secure State of California deposits and $ 480,000,000 were pledged to secure local agency deposits.

The letters of credit issued and outstanding borrowings reduced the Company’s available borrowing capacity to $ 145,212,000 and $ 216,338,000 as of December 31, 2023 and 2022, respectively.

At December 31, 2022, the Company had seven unsecured federal funds lines of credit totaling $ 190,000,000 with seven of its correspondent banks, respectively.

At December 31, 2023, the Company had five unsecured federal funds lines of credit totaling $ 175,000,000 with five of its correspondent banks, respectively.

At December 31, 2022, the Company had seven unsecured federal funds lines of credit totaling $ 190,000,000 with seven of its correspondent banks, respectively.

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

2 unchanged sentences

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

The borrowing line is secured by liens on the Company’s construction and agricultural loan portfolios.

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

401(k) Benefit Plan

3 unchanged sentences

The expense related to matching employees’ contributions for 2023 and 2022 was $ 787,000 and $ 634,000 , respectively.

The Company terminated its status as a Subchapter S corporation as of May 5, 2021, in connection with its IPO and became a taxable C Corporation.

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

federal income tax expense.

As such, any periods prior to May 5, 2021 will only reflect an effective state income tax rate and corresponding tax expense.

In conjunction with the termination of the Subchapter S corporation status, the C Corporation deferred tax assets and liabilities were estimated for future tax consequences attributable to differences between the financial statement carrying amounts of the Company’s existing assets and liabilities and their respective tax bases.

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

The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C Corporation was recognized as a $ 4,638,000 increase to the net deferred tax asset to $ 5,370,000 and a reduction to the provision for income taxes of $ 4,638,000 during the year ended December 31, 2021.

The provision for income tax for the years ended December 31, 2022 and 2021 differs from the statutory federal rate of 21.00% due to the following items, which relate primarily to the Company’s conversion from an S Corporation to a C Corporation for the year ended December 31, 2021:

The provision for income tax for the years ended December 31, 2023 and 2022 differs from the statutory federal rate of 21.00% due to the following items:

(in thousands) 2023 2022

2 unchanged sentences

Increase (decrease) resulting from:

Benefit of S Corporation status — ( 4,884 )

State taxes 5,048 5,381

Deferred tax asset adjustment — ( 4,638 )

Other ( 155 ) ( 524 )

Provision for income taxes $ 18,882 $ 18,057

For the year ended December 31, 2021, the Company’s effective tax rate differed from the statutory California tax rate of 3.50% used prior to May 5, 2021 and the statutory federal and state tax rate, net of federal benefit, of 29.56 % used May 5, 2021 and after, as the effective tax rate primarily represents the weighted average rate between the S Corporation tax rate of 3.50% and the C Corporation tax rate of 29.56% based on the number of days the Company was each type of corporation during 2021.

The components of the consolidated provision for income taxes are as follows:

3 unchanged sentences

State 6,439 6,837

Total current tax expense

19,673 20,004

Deferred tax benefit:

1 unchanged sentence

State ( 50 ) ( 185 )

Total deferred tax benefit

( 791 ) ( 1,947 )

10 unchanged sentences

Other 1,891 749

Total deferred tax assets

20,871 18,489

Deferred tax liabilities:

Deferred loan fees ( 4,063 ) ( 4,006 )

State tax — ( 379 )

Depreciation ( 411 ) ( 405 )

1 unchanged sentence

Other ( 416 ) ( 537 )

Total deferred tax liabilities

( 6,538 ) ( 6,216 )

1 unchanged sentence

No deferred tax asset valuation allowance was established during 2023 or 2022, as management believes it is more likely than not the Company will realize the benefits of these deductible differences as of December 31, 2023 and 2022.

The Company recognized as components of tax expense, taxable losses and amortization expense relating to investments in Qualified Affordable Housing Projects for the periods indicated:

(in thousands) 2023 2022

Taxable loss - decrease in tax expense

$ ( 1,626 ) $ —

Amortization - increase in tax expense 291 —

The total capital contributed, net of amortization, for the Low Income Housing Tax Credit Funds was $ 2,050,000 as of December 31, 2023.

As of December 31, 2023, the Company has committed to make additional capital contributions to the Low Income Housing Tax Credit Funds in the amount of $ 13,612,000 and these contributions are expected to be made in 2024.

No unrecognized tax benefits were outstanding as of December 31, 2023 or 2022.

The Company files tax returns in the U.S.

federal and California state jurisdictions.

federal and state jurisdictions where the Company has material nexus.

The Company is no longer subject to examinations for federal and state tax purposes for the years before 2019 and 2018, respectively.

There were no interest or penalties in 2023 and 2022.

It is the Company’s policy to record such accruals in its income taxes accounts.

During 2021, the Company paid approximately $ 26,967,000 to shareholders of record as of May 3, 2021, for the Accumulated Adjustments Account (“AAA”) payout under the Company’s Tax Sharing Agreement.

It is the Company’s policy to record such accruals in its income tax accounts.

During 2022, the Company paid approximately $ 4,953,000 on March 17, 2022 to shareholders of record as of May 3, 2021, for the final payout of the AAA under the Company’s Tax Sharing Agreement in connection with the Company’s conversion to a C Corporation as of May 5, 2021.

The AAA represents previously taxed, but undistributed, earnings.

Upon completion of the 2022 tax return, the Company paid $ 4,953,000 on March 17, 2022 to shareholders of record as of May 3, 2021, which covered the remaining amount in the AAA account.

Related Party Transactions

12 unchanged sentences

At December 31, 2023 and 2022, deposits from related parties (directors, executive officers, and principal shareholders) totaled $ 37,201,000 and $ 51,960,000 , respectively.

Property management fees totaling $ 1,000 and $ 12,000 in 2022 and 2021, respectively, were paid to an entity owned by certain members of the Company’s board of directors.

The Company leases a loan production office from a partnership comprised of certain shareholders and members of the board of directors, which is further described in Note 15, Commitments and Contingencies.

The Company leases an administrative office from a partnership comprised of certain shareholders and members of the board of directors, which is further described in Note 15, Commitments and Contingencies.

Property management fees totaling $ 1,000 in 2023 and 2022 were paid to the entity that owns this property.

Equity Incentive Plan

1 unchanged sentence

The Equity Incentive Plan provides for the grant of stock options, stock appreciation rights, performance awards, restricted stock, restricted stock units, and other stock-based awards that the Compensation Committee determines are consistent with the purpose of the Equity Incentive Plan and the interests of the Company.

Awards may be granted to the Company’s executives and other key employees, directors, and other service providers, and are designed to align the interests of the Equity Incentive Plan’s participants with the interests of our shareholders.

Awards may be granted to the Company’s executives and other key employees, directors, and other service providers and are designed to align the interests of the Equity Incentive Plan’s participants with the interests of the Company’s shareholders.

The stock options granted under the Equity Incentive Plan may be either non-statutory stock options or incentive stock options.

There were no stock options outstanding at December 31, 2023 or 2022, respectively.

The total number of shares of our common stock reserved and available for grant and issuance pursuant to the Equity Incentive Plan will not exceed 1,700,000 shares, less RSAs granted, plus any RSAs that become available upon forfeiture.

The total number of shares of the Company’s common stock reserved and available for grant and issuance pursuant to the Equity Incentive Plan will not exceed 1,700,000 shares, less RSAs granted, plus any RSAs that become available upon forfeiture.

Each of these shares may be issued as an incentive stock option.

5 unchanged sentences

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

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

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 employees, officers, executives, and non-employee directors.

Shares granted to non-employee directors vested immediately upon grant, while shares granted to employees, officers, and executives vest ratably over three , five , or seven years (as defined in the respective agreements).

Since the completion of the IPO, the Company has granted RSAs under the Equity Incentive Plan to executives and directors, which vest annually over three years and monthly over one year, respectively.

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 certain 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.

1 unchanged sentence

Non-cash stock compensation expense recognized for the years ended December 31, 2023 and 2022 was $ 962,000 and $ 1,099,000 , respectively.

In 2023, the Company granted as compensation to members of the board of directors a total of 13,882 shares scheduled to cliff vest as of December 31, 2023 contingent on continued service.

In 2022, the Company granted as compensation to members of the board of directors a total of 15,156 shares scheduled to vest monthly in equal installments over one year contingent on continued service.

In 2021, the Company granted a total of 41,640 fully vested shares to members of the board of directors as compensation for their service.

As of December 31, 2023, there was approximately $ 1,103,000 of unrecognized compensation expense related to the 69,338 unvested restricted shares.

Additionally, as of December 31, 2022, the weighed-average term remaining on the unvested restricted shares was 3.53 years.

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

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

Such tax benefits are expected to be recognized over the weighted average term remaining on the unvested restricted shares of 2.88 years as of December 31, 2023.

The impact of tax benefits for dividends paid on unvested restricted stock on the Company’s consolidated statements of income for the years ended December 31, 2023 and 2022 was immaterial.

The following table summarizes information about unvested restricted shares:

Shares Weighted

Fair Value Shares Weighted

Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value

Beginning of the period balance 96,826 $ 20.34 127,751 $ 19.95

5 unchanged sentences

During the year ended December 31, 2023, the Company declared cash dividends on its common shares totaling $ 12,943,000 .

During the year ended December 31, 2022, the Company declared cash dividends on its common shares totaling $ 15,301,000 .

Of those total dividends, during 2022, $ 4,953,000 was paid out for certain shareholders affected by the Company’s termination of its S corporation status.

4 unchanged sentences

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.

Commitments may expire without being

Substantially all of these commitments are at variable interest rates, based on an index, and have fixed expiration dates.

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

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

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

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

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

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

1 unchanged sentence

Commercial lines of credit $ 181,855 $ 147,021

Undisbursed construction loans 80,726 46,584

Undisbursed commercial real estate loans 107,712 79,121

Undisbursed construction loans 134,828 80,726

Agricultural lines of credit 24,635 10,399

Undisbursed residential real estate loans 6,538 8,945

Undisbursed agricultural real estate loans 1,200 1,068

1 unchanged sentence

Total commitments and standby letters of credit $ 458,887 $ 329,148

The allowance for loan losses on unfunded commitments totaled $ 125,000 and $ 100,000 as of December 31, 2022 and 2021, respectively, which is recorded in interest payable and other liabilities in the consolidated balance sheets.

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 $ 1,247,000 and $ 125,000 as of December 31, 2023 and 2022, respectively, which is recorded in “Interest payable and other liabilities” in the consolidated balance sheets.

Concentrations of credit risk :

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The Company’s largest single deposit relationship at December 31, 2023 totaled $ 260,000,000 , or approximately 8.59 % of total deposits.

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

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.

Correspondent banking agreements :

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In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.

One of the leases provides for increases in future minimum annual rental payments based on defined increases in the Consumer Price Index, while the remaining leases include predefined rental increases over the term of the lease.

All leases include predefined rental increases over the term of the lease.

The Company has a sublease agreement for space adjacent to the Redding location.

The sublease has renewal terms extended to December 31, 2024.

The Company leases its Sacramento loan production office from a partnership comprised of certain shareholders and members of the Company's board of directors.

The Sacramento loan production office lease extends through April 2023.

Additionally, the Company leased its Natomas branch from the same partnership of related parties until July 13, 2021, at which time ownership of the property was transferred to an unrelated third-party landlord.

Rent expense paid to the partnership was $ 30,000 and $ 140,000 for the years ended December 31, 2022 and 2021, respectively, under these leases.

The Company adopted ASU 2016-02, Leases (Topic 842) as of January 1, 2022, which requires the Company to record an ROUA on the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration.

The Company is also required to record a lease liability on the consolidated balance sheets for the present value of future payment commitments.

The Company leases its Sacramento administrative office from a partnership comprised of certain shareholders and members of the Company’s board of directors.

The Sacramento administrative office lease extends through May 2026.

Rent expense paid to the partnership was $ 28,000 and $ 30,000 for the years ended December 31, 2023 and 2022, respectively, under this lease.

The Company leases a temporary administrative office in San Francisco from an entity affiliated with a member of our board of directors.

Rent expense paid to this entity was $ 19,000 for the year ended December 31, 2023.

The Company adopted ASU 2016-02, Leases (Topic 842) as of January 1, 2022, which requires the Company to record an ROUA in the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration.

The Company is also required to record a lease liability in the consolidated balance sheets for the present value of future payment commitments.

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

1 unchanged sentence

Known or determinable adjustments to the required minimum future lease payments were included in the calculation of the Company’s ROUA and lease liability.

Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, if any, such as changes in the Consumer Price Index, are included as variable lease costs.

Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, if any, are included as variable lease costs.

Additionally, expected variable payments for common area maintenance, taxes, and insurance were unknown and not determinable at lease commencement and, therefore, were not included in the determination of the Company’s ROUA and lease liability.

13 unchanged sentences

Total lease expense $ 1,239

Prior to the adoption of ASU 2016-02, rent expense under operating leases was $ 1,064,000 for the year ended December 31, 2021, partially offset by rent income of $ 21,000 during the same period.

The following table presents the weighted average operating lease term and discount rate at December 31, 2023:

Weighted average remaining lease term (in years) 5.38 years

December 31, 2023

Weighted average remaining lease term

Weighted average discount rate 4.11 %

5 unchanged sentences

Lease liability at December 31, 2023

Prior to the adoption of ASC 842, the Company accounted for operating leases under ASC 840.

For comparability purposes in the year of adoption, undiscounted future minimum lease payments under the predecessor standard of ASC 840 as of December 31, 2021 are provided below.

(in thousands) December 31, 2021

Thereafter 1,094

Total minimum lease payments $ 5,385

Litigation Matters

3 unchanged sentences

The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

2 unchanged sentences

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the below table) of total capital, Tier 1 capital, and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets.

Historically, as a bank holding company with less than $ 3.0 billion in total consolidated assets and that met certain other criteria, we had been operating under the Small Bank Holding Company Policy Statement, which provides an exemption from the Board of Governors of the Federal Reserve System’s generally applicable risk-based capital ratio and leverage ratio requirements.

Because the Company's total consolidated assets exceeded the $ 3.0 billion threshold as of

September 30, 2022, the Company is no longer subject to this policy statement and its capital adequacy will be evaluated relative to the Federal Reserve's generally applicable capital requirements.

A bank holding company that crosses the $ 3.0 billion total consolidated assets threshold as of June 30 of a particular year is no longer permitted to file reports as a small holding company beginning the following March.

The Company's total consolidated assets were not in excess of $ 3.0 billion as of June 30, 2022, and so the Company has accordingly prepared and filed financial reports with the Federal Reserve as a small bank holding company.

If the Company's total consolidated assets remain in excess of $ 3.0 billion as of June 30, 2023, starting in March 2024, the Company will cease filing financial reports with the Federal Reserve as though it were a small holding company.

Historically, as a bank holding company with less than $ 3.0 billion in total consolidated assets and that met certain other criteria, the Company had been operating under the Small Bank Holding Company Policy Statement, which provides an exemption from the Federal Reserve’s generally applicable risk-based capital ratio and leverage ratio requirements.

Having passed this threshold as of September 30, 2022, the Company is no longer subject to this policy statement and its 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 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.

The Company and Bank are required to meet a common equity Tier 1 capital to risk-weighted assets ratio of at least 7.00 % (a minimum of 4.50 % plus a capital conservation buffer of 2.50 %), a Tier 1 capital to risk-weighted assets ratio of at least 8.50 % (a minimum of 6.00 % plus a capital conservation buffer of 2.50 %), a total capital to risk-weighted assets ratio of at least 10.50 % (a minimum of 8.00 % plus a capital conservation buffer of 2.50 %), and a Tier 1 leverage ratio of at least 4.00 %.

2 unchanged sentences

To be categorized as “well-capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the below table.

There are no conditions or events since that notification that management believes have changed the Bank’s category.

There are no conditions or events since that categorization that management believes have changed the Bank’s category.

The principal source of cash for the Company is dividends from the Bank.

Dividends from the Bank to the Company are restricted under California law to the lesser of:

(i) the Bank’s retained earnings;

or (ii) the Bank’s net income for the latest three fiscal years, less dividends previously declared during that period.

(i) the Bank’s retained earnings or (ii) the Bank’s net income for the latest three fiscal years, less dividends previously declared during that period.

As of December 31, 2023 and 2022, the maximum amount available for dividend distribution under this restriction was approximately $ 62,951,000 and $ 33,867,000 , respectively.

If a proposed dividend exceeds the limit, the Bank may still pay a dividend to the Holding Company if it obtains approval from the California Department of Financial Protection and Innovation and the dividend does not exceed the greater of:

If a proposed dividend exceeds the limit, the Bank may still pay a dividend to the Holding Company if it obtains approval from the DFPI and the dividend does not exceed the greater of:

(i) the retained earnings of the Bank;

2 unchanged sentences

The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2023 and 2022 are presented in the following tables.

As of December 31, 2022 and 2021, Bancorp's Tier 2 capital included subordinated debt, which was not included at the bank level.

As of December 31, 2023 and 2022, Bancorp’s Tier 2 capital included subordinated notes, which were not included at the bank level.

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

Capital Ratios for Bancorp

(dollars in thousands)

Actual Ratio Required for Capital

Adequacy Purposes 1

Ratio to be Well-

Capitalized under

Prompt Corrective

Action Provisions

Actual Ratio Required for Capital Adequacy Purposes 1

Ratio to be Well-Capitalized under Prompt Corrective Action Provisions

Amount Ratio Amount Ratio Amount Ratio

11 unchanged sentences

(dollars in thousands)

Actual Ratio Required for Capital

Adequacy Purposes Ratio to be Well-

Capitalized under

Prompt Corrective

Action Provisions

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

Amount Ratio Amount Ratio Amount Ratio

9 unchanged sentences

Tier 1 leverage $ 327,788 10.69 % $ 122,652 4.00 % $ 153,315 5.00 %

Prior to September 30, 2022, Bancorp operated under the Small Bank Holding Company Policy Statement and therefore, was not subject to Basel III capital adequacy requirements.

The listed capital adequacy ratios exclude capital conservation buffers.

Fair Value of Assets and Liabilities

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

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

4 unchanged sentences

Securities available-for-sale:

government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds $ 115,988 $ — $ 115,988 $ — OCI

government agency securities, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds

$ 108,083 $ — $ 108,083 $ — OCI

Derivatives – interest rate swap 10 — 10 — NI

1 unchanged sentence

Securities available-for-sale:

government agencies, mortgage-backed securities, obligations of states and political subdivisions, and collateralized mortgage obligations $ 148,807 $ — $ 148,807 $ — OCI

government agency securities, 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

1 Other comprehensive income (“OCI”) or net income (“NI”).

Available-for-sale securities are recorded at fair value on a recurring basis.

9 unchanged sentences

Due to current market conditions, as well as the limited trading activity of the securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

The Company’s derivative is comprised of an interest rate swap for a structured lending arrangement and is reported at fair value utilizing Level 2 inputs.

The Company obtains fair values from financial institutions that utilize internal models with observable market data inputs to estimate the values of these instruments (Level 2 inputs).

The Company’s 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.

The fair value of collateral dependent impaired loans and other real estate is generally based on recent real estate appraisals.

4 unchanged sentences

Certain financial assets may be measured at fair value on a non-recurring basis.

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

As of December 31, 2022 and 2021, the Company did not carry any assets measured at fair value on a non-recurring basis.

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 OREO.

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

Disclosures about Fair Value of Financial Instruments

9 unchanged sentences

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

Value Fair Value

Hierarchy Carrying

Value Fair Value

Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy

Financial assets:

4 unchanged sentences

Loans held for sale 11,464 12,626 Level 2 9,416 9,785 Level 2

Loans held for investment, net of allowance for loan losses 2,762,937 2,570,176 Level 3 1,911,217 1,893,431 Level 3

Loans held for investment, net of allowance for credit losses 3,047,288 2,891,925 Level 3 2,762,937 2,570,176 Level 3

FHLB stock and other investments 21,801 N/A N/A 16,570 N/A N/A

Interest receivable 7,454 7,454 Level 2 5,332 5,332 Level 2

Interest rate swap 10 10 Level 2 16 16 Level 2

Financial liabilities:

Deposits 2,782,004 2,562,600 Level 2 2,285,890 2,210,555 Level 2

Interest payable 1,568 1,568 Level 2 23 23 Level 2

Interest rate swap $ 10 $ 10 Level 2 $ 16 $ 16 Level 2

FHLB advances 170,000 170,000 Level 2 100,000 100,000 Level 2

Subordinated notes 73,749 72,693 Level 3 73,606 72,273 Level 3

4 unchanged sentences

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

Fair value of held-to-maturity securities is 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 loan losses :

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 loan losses is considered to be a reasonable estimate of loan discount for credit quality concerns.

Interest receivable and payable :

For interest receivable and payable, the carrying amount is estimated to be fair value.

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.

The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date, as represented by their carrying amount.

Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow analysis that uses interest rates being offered at each reporting date by the Company for certificates with similar remaining maturities.

For variable rate time deposits, cost approximates fair value.

FHLB advances :

For FHLB advances, the carrying amount is estimated to be fair value.

Commitments to extend credit :

3 unchanged sentences

Subordinated notes :

The fair value is estimated by discounting the future cash flow using the current three-month LIBOR.

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.

29 unchanged sentences

Stock compensation expense 962 1,099

Director stock compensation expense 447 846

Equity in undistributed banking subsidiary income ( 32,993 ) ( 32,984 )

Amortization of subordinated notes issuance costs 122 66

Amortization of subordinated note issuance costs 144 122

Extinguishment of redeemed subordinated note issuance costs — 302

6 unchanged sentences

Cash flows from financing activities:

Proceeds from sale of stock — 111,243

Cash dividends paid ( 12,943 ) ( 15,301 )

10 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data