What changed in this filing

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Item 1. Financial Statements

2024-05-08 compared with 2023-11-08 · 280 added, 351 removed, 616 unchanged (51% of the section changed)

2 unchanged sentences

CONSOLIDATED BALANCE SHEETS

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

(in thousands, except share amounts) March 31, 2024 December 31, 2023

Cash and due from financial institutions $ 29,750 $ 26,986

2 unchanged sentences

Time deposits in banks 5,878 5,858

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

Securities available-for-sale, at fair value, net of allowance for credit losses of $ 0 at March 31, 2024 and December 31, 2023 (amortized cost of $ 122,667 and $ 124,788 at March 31, 2024 and December 31, 2023, respectively)

105,006 108,083

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

Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ 20 at March 31, 2024 and December 31, 2023 (fair value of $ 2,828 and $ 2,913 at March 31, 2024 and December 31, 2023, respectively)

Loans held for sale 10,243 11,464

12 unchanged sentences

Total deposits 2,955,772 3,026,896

FHLB advances 90,000 100,000

Subordinated debt, net 73,713 73,606

Subordinated notes, net 73,786 73,749

Other borrowings 120,000 170,000

Operating lease liability 7,320 5,603

5 unchanged sentences

10,000,000 shares authorized;

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

zero issued and outstanding at March 31, 2024 and December 31, 2023

Common stock, no par value;

100,000,000 shares authorized;

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

17,353,251 shares issued and outstanding at March 31, 2024;

17,256,989 shares issued and outstanding at December 31, 2023

2 unchanged sentences

84,216 77,036

Accumulated other comprehensive loss, net

Accumulated other comprehensive loss, net of taxes

( 12,440 ) ( 11,767 )

7 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands, except per share amounts) 2024 2023

3 unchanged sentences

Nontaxable securities 176 184

Interest-bearing deposits in other banks 2,584 1,145 6,969 1,855

Interest-bearing deposits in banks

Total interest and fee income 47,541 40,311

1 unchanged sentence

Deposits 19,511 9,378

FHLB advances 75 47 783 52

Subordinated debt 1,161 1,259 3,484 2,146

Subordinated notes 1,161 1,161

Other borrowings 125 624

Total interest expense 20,797 11,163

6 unchanged sentences

Service charges on deposit accounts 188 117

Net gain on sale of securities available-for-sale — — — 5

Gain on sale of loans 369 598

2 unchanged sentences

Earnings on BOLI 142 102

Other 74 52 1,467 438

Total non-interest income 1,833 1,371

13 unchanged sentences

$ 10,631 $ 13,161

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

Basic earnings per common share $ 0.62 $ 0.77

4 unchanged sentences

Three Months Ended

September 30, Nine Months Ended

September 30,

(in thousands) 2024 2023

$ 10,631 $ 13,161

Unrealized (losses) on securities:

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

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

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

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

Unrealized (loss) gain on securities:

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

( 955 ) 2,140

Other comprehensive (loss)

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

Other comprehensive (loss) income

( 673 ) 1,508

4 unchanged sentences

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three Months Ended September 30, 2023 and 2022

Common Stock Retained Earnings

Accumulated Other Comprehensive Loss

Total Shareholders’ Equity

(in thousands, except per share amounts) Shares Amount

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

Net income — — 11,704 — 11,704

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

Stock compensation expense — 263 — — 263

Cash dividends paid ($ 0.15 per share)

— — ( 2,586 ) — ( 2,586 )

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

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

Net income — — 11,045 — 11,045

Other comprehensive loss — — — ( 2,955 ) ( 2,955 )

Stock compensation expense — 245 — — 245

Cash dividends paid ($ 0.20 per share)

— — ( 3,451 ) — ( 3,451 )

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

See accompanying notes to the unaudited consolidated financial statements.

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2023 and 2022

For the Three Months Ended March 31, 2024 and 2023

Common Stock Retained Earnings

5 unchanged sentences

Net income — — 13,161 — 13,161

Other comprehensive loss — — — ( 15,504 ) ( 15,504 )

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

Other comprehensive income — — — 1,508 1,508

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

Stock compensation expense — 242 — — 242

Stock forfeitures ( 2,504 ) — — — —

Cash dividends paid ($ 0.15 per share)

— — ( 2,589 ) — ( 2,589 )

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

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

Balance at December 31, 2023 17,256,989 $ 220,505 $ 77,036 $ ( 11,767 ) $ 285,774

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

Net income — — 10,631 — 10,631

Other comprehensive loss — — — ( 673 ) ( 673 )

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

Stock issued under stock award plans, net 96,380 — — — —

Stock compensation expense — 299 — — 299

2 unchanged sentences

— — ( 3,451 ) — ( 3,451 )

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

See accompanying notes to unaudited consolidated financial statements.

Balance at March 31, 2024 17,353,251 $ 220,804 $ 84,216 $ ( 12,440 ) $ 292,580

See accompanying notes to the unaudited consolidated financial statements.

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2024 2023

6 unchanged sentences

Amortization of premiums and discounts on securities 246 313

Amortization of subordinated debt issuance costs 107 96

Amortization of subordinated note issuance costs 36 34

Stock compensation expense 299 242

3 unchanged sentences

Gain on sale of loans ( 369 ) ( 598 )

Proceeds from sale of loans 32,224 36,275

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

Decrease in operating lease liability ( 714 ) ( 729 )

Cost method of investment-related gain ( 1,274 ) —

Gross proceeds from sale of loans 5,580 13,289

Gain on partial sale of equity investment 300 —

Net changes in:

1 unchanged sentence

Interest payable and other liabilities ( 3,941 ) 1,580

Operating lease liability ( 241 ) ( 233 )

Net cash provided by operating activities 247 694

Cash flows from investing activities:

Proceeds from sale of securities available-for-sale — 1,623

Maturities, prepayments, and calls of securities available-for-sale 1,953 2,899

Purchases of securities available-for-sale — ( 1,641 )

Capital call for equity investment ( 1,000 ) —

Proceeds received from equity investment 300 —

Net change in time deposits in banks ( 20 ) 232

1 unchanged sentence

Purchase of premises and equipment ( 108 ) ( 240 )

Purchase of FHLB stock ( 4,110 ) ( 4,223 )

Purchase of BOLI ( 1,550 ) ( 2,000 )

2 unchanged sentences

Net change in deposits ( 71,124 ) 138,402

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

(Payments) advances on other borrowings ( 50,000 ) 20,000

Cash dividends paid ( 3,451 ) ( 2,589 )

Proceeds from subordinated note issuance — 75,000

Subordinated note issuance costs — ( 1,454 )

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

Net cash (used in) provided by financing activities ( 124,575 ) 155,813

Net change in cash and cash equivalents ( 136,251 ) 87,948

6 unchanged sentences

Transfer from loans held for sale to loans held for investment 11,464 9,416

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

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

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

Unrealized (loss) gain on securities ( 955 ) 2,140

Operating lease liabilities exchanged for ROUA 1,958 1,423

ROUA acquired ( 1,958 ) ( 1,444 )

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

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

See accompanying notes to the unaudited consolidated financial statements.

7 unchanged sentences

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

(b) Basis of Financial Statement Presentation and Consolidation

4 unchanged sentences

All significant intercompany transactions and balances are eliminated in consolidation.

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

The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2024.

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

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

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

While the Company’s chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis.

5 unchanged sentences

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

(ii) the Company issues more than

$1 billion in non-convertible debt;

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

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

(e) Significant Accounting Policies

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

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

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

Measurement of Credit Losses on Financial Instruments and all subsequent amendments that modified ASU 2016-13 (collectively, “ASC 326”) as discussed below in this Note, which impacted the following policies:

Allowance for Credit Losses (“ACL”)

The ACL is a valuation account that offsets the amortized cost basis of loans receivable and certain other financial assets, including unfunded loan commitments and held-to-maturity debt securities.

Under ASC 326, amortized cost basis is the basis on which the ACL is determined.

Amortized cost basis on loans receivable is principal outstanding, net of any purchase premiums and discounts, and net of any deferred loan fees and costs.

Credit losses are charged off when management believes that the collectability of at least some portion of outstanding principal is unlikely.

These charge-offs are recorded as a reversal to, thereby reducing, the allowance for credit losses.

Subsequent recoveries of previously charged-off amounts, if any, are recorded as a provision to, thereby increasing, the allowance for credit losses.

The allowance for credit losses is maintained at a level to absorb expected credit losses over the contractual life, including consideration of prepayments.

Determining the adequacy of the allowance is complex and requires judgments that are inherently subjective, as it requires estimates that are susceptible to revision as additional information becomes available.

While the Company has determined an allowance for credit losses it considers appropriate, there can be no assurance that the allowance will be sufficient to absorb future losses.

The Company’s process for determining expected lifetime credit losses entails a loan-level, model-based approach and considers a broad range of information, including historical loss experience, current conditions, and reasonable and supportable forecasts.

Credit loss is estimated for all loans.

Accordingly, the Company has stratified the full loan population into segments sharing similar characteristics to perform the evaluation of the credit loss collectively.

The Company can also further stratify loans of similar types, risk attributes, and methods for credit risk monitoring.

The Company has determined pools based primarily on regulatory reporting codes as the loans within each pool share similar risk characteristics and there is sufficient historical peer loss data from the Federal Financial Institutions Examination Council to provide statistically meaningful support in the models developed.

The Company further stratified the C&I portfolio into traditional C&I loans and SBA loans, as the loans in these pools have different repayment structures and credit risk characteristics.

The Company also stratified C&I loans and consumer loans that do not require reserves, as the Company has third party agreements in place to cover loan losses.

The Company has identified the following pools subject to an estimate of credit loss:

(1) 1-4 Family Construction;

(2) Other Construction;

(3) Farmland;

(4) Revolving Secured by 1-4 Family;

(5) Residential Secured by First Liens;

(6) Residential Secured by Junior Liens;

(7) Multifamily;

(8) CRE Owner Occupied;

(9) CRE Non-Owner Occupied;

(10) Agriculture;

(12) C&I SBA;

(13) Consumer;

and (14) Municipal.

The Company has determined, given its limited loss experience, that peer data and other external data to support loss history provides the best basis for its assessment of expected credit losses.

The Company believes that the use of peer loss data from 2008 to 2019 presents loss histories that appropriately reflect a full economic cycle, reflects asset-specific risk characteristics at each pool level identified, and includes a historical look-back period that is objective and reflective of future expected credit losses.

Loss data from 2020 to 2021 was excluded from the data set to exclude pandemic-related data in the models.

The method for determining the estimate of lifetime credit losses includes, among other things, the following main components:

(i) the use of Probability of Default (“PD”) and Loss Given Default (“LGD”) assumptions under a Discounted Cash Flow model;

(ii) a multi-scenario macroeconomic forecast;

(iii) an initial and reasonable and supportable forecast period of one year for all loan segments;

and (iv) a reversion period of one year using a linear transition method to historical loss rates.

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.

Accrued Interest

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

Accrued interest receivable is not subject to an estimate for credit loss, as the Company has a policy to charge off accrued interest deemed uncollectible in a timely manner.

When a loan is placed on non-accrual status, which occurs within 90 days of a borrower becoming delinquent, interest previously accrued but not collected is reversed against current period income.

Individually Assessed Loans

If an individual loan’s characteristics have deteriorated to below a range of the overall pool, the loan would be individually assessed.

Individually assessed loans are measured for credit loss based on one of the following methods:

(i) present value of future expected cash flows, discounted at the loan’s effective interest rate;

(ii) amount by which carrying value of the loan exceeds the loan’s observable market price;

or (iii) the fair value of the collateral, less estimated selling costs, if the loan is collateral dependent.

The Company applies the practical expedient and defines collateral dependent loans as those where the borrower is experiencing financial difficulty and on which payment is expected to be provided substantially through the operation or sale of the collateral.

Available-for-sale (“AFS” ) Debt Securities

Unrealized credit losses are recognized through an allowance for credit losses instead of an adjustment to amortized cost basis, eliminating the other-than-temporary impairment concept.

For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of amortized cost basis.

If either criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings.

For AFS debt securities that do not meet the above conditions, the Company evaluates at the individual security level whether the decrease in fair value has resulted from credit factors or non-credit factors.

If assessment determines that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, then a credit loss would be recognized, limited to the amount by which the fair value is less than the amortized cost basis.

All other changes in fair value of an AFS debt security are recognized in other comprehensive income, net of applicable taxes.

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

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

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

The remainder of the portfolio is primarily

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

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

As such, the Company determined that the unrealized loss positions in AFS securities were not due to credit losses, but instead related to changes in interest rates and general market conditions and therefore, no credit loss expense was recognized.

Loan Commitments

Loan commitments not unconditionally cancellable are subject to an estimate of credit loss under the CECL model.

The Company’s process for determining the estimate of credit loss on loan commitments is the same as it is on loans.

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

Held-to-Maturity Debt Securities

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

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

TDRs and Other Loan Modifications

In accordance with the adoption of ASC 326, which includes ASU No.

2022-02, Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures , accounting guidance for TDRs for creditors has been eliminated.

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

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

The Company’s significant accounting policies are included in Note 1, Basis of Presentation in the notes to our audited consolidated financial statements included in the 2023 Annual Report on Form 10-K.

(f) Recently Issued Accounting Standards

2 unchanged sentences

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

Accounting Standards Adopted

On January 1, 2023, the Company adopted ASC 326, which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model.

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

Under ASC 326, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost, with any estimated credit losses recorded through a credit loss expense and an allowance, rather than a write-down of the investment.

Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income.

The Company adopted this standard using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance was effective for financial assets measured at amortized cost.

For certain new disclosures required under ASC 326, such as credit quality indicators by year of origination, we have not restated comparative financial information before January 1, 2023 to conform under ASC 326.

This adoption method is considered a change in accounting principle requiring additional disclosure of the nature and reason for the change, which is solely due to adoption of ASC 326.

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

2022-02, Financial Instruments-Credit Losses (Topic 326):

Troubled Debt Restructurings and Vintage Disclosures, which had no material impact.

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 $ ( 28,389 ) $ ( 5,282 ) $ ( 33,671 )

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 Adopted in 2024

In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323):

Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (“ASU 2023-02”).

Under current GAAP, an entity can only elect to apply the proportional amortization method to investments in low income housing tax credit (“LIHTC”) structures.

The amendments in ASU 2023-02 allow entities to elect to account for equity investments made primarily for the purpose of receiving income tax credits using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, if certain conditions are met.

ASU 2023-02 provides amendments to paragraph ASC 323-740-25-1, which sets forth the conditions needed to apply the proportional amortization method.

The amendments make certain limited changes to those conditions to clarify their application to a broader group of tax credit investment programs.

However, the conditions in substance remain consistent with current GAAP.

The amendments in ASU 2023-02 also eliminate certain LIHTC-specific guidance to align the accounting more closely with the accounting for other equity investments in tax credit structures and require that the delayed equity contribution guidance in paragraph ASC 323-740-25-3 apply only to tax equity investments accounted for using the proportional amortization method.

The Company adopted ASU 2023-02 on January 1, 2024, which did not have a significant impact on the Company’s consolidated financial statements.

Accounting Standards Issued But Not Yet Adopted

For the fiscal year beginning January 1, 2023, there have been no new accounting standards issued but not yet adopted that are expected to be material to the Company.

There are also no accounting standards issued before January 1, 2023 yet to be adopted.

In October 2023, the FASB issued ASU No.

2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”), amending disclosure or presentation requirements related to various subtopics in the FASB’s ASC.

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 ASC and referred them to the FASB for potential incorporation into GAAP.

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

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

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 ASC 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) - Improvements 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 for interim periods beginning after December 15, 2024.

The key amendments:

(i) require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (the “CODM”) and included within each reported measure of segment profit or loss;

(ii) require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition;

(iii) require that a public entity provide all annual disclosures about a reportable segment’s profit or loss currently required by GAAP in interim periods as well;

(iv) clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, an entity may report one or more of those additional measures of segment profit;

(v) require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the

reported measure of segment profit or loss in assessing segment performance and deciding how to allocate resources;

and (vi) require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures.

The requirements of this standard for such entities will apply beginning with the Company’s annual report for the year ending December 31, 2024.

The Company has one reportable segment and ASU 2023-07 is not expected to have a significant impact on the Company’s consolidated financial statements.

In December 2023, the FASB issued ASU No.

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.

In March 2024, the FASB issued ASU 2024-02, Codification Improvements - Amendments to Remove References to the Concepts Statements (“ASU 2024-02”).

ASU 2024-02 contains amendments to the ASC that remove references to various Concepts Statements.

In most instances, the references are extraneous and not required to understand or apply the guidance.

In other instances, the references were used in prior Statements to provide guidance in certain topical areas.

FASB Concepts Statements are nonauthoritative.

Removing all references to Concepts Statements in the guidance is intended to simplify the ASC and draw a distinction between authoritative and nonauthoritative literature.

ASU 2024-02 is effective January 1, 2025 and is not expected to have a significant impact on the Company’s consolidated financial statements.

Fair Value of Assets and Liabilities

12 unchanged sentences

Changes in Fair Value Recorded In

September 30, 2023

March 31, 2024

Securities available-for-sale:

government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds $ 104,086 $ — $ 104,086 $ — OCI

government agency securities, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds $ 105,006 $ — $ 105,006 $ — OCI

Derivatives – interest rate swap 6 — 6 — NI

2 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

Derivatives – interest rate swap 10 — 10 — NI

7 unchanged sentences

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

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

As of March 31, 2024 and December 31, 2023, there were no Level 1 available-for-sale securities and no transfers between Level 1 and Level 2 classifications for assets or liabilities measured at fair value on a recurring basis.

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

4 unchanged sentences

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

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

As of March 31, 2024 and December 31, 2023, the carrying amount of assets measured at fair value on a non-recurring basis was immaterial to the Company.

Disclosures about Fair Value of Financial Instruments

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

The table below is a summary of fair value estimates for financial instruments as of March 31, 2024 and December 31, 2023.

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

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

September 30, 2023 December 31, 2022

March 31, 2024 December 31, 2023

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

10 unchanged sentences

Interest rate swap $ 6 $ 6 Level 2 $ 10 $ 10 Level 2

FHLB advances 90,000 90,000 Level 2 100,000 100,000 Level 2

Time deposits

288,168 287,246 Level 2 466,572 465,205 Level 2

Subordinated notes 73,786 72,740 Level 3 73,749 72,693 Level 3

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

Other borrowings 120,000 120,000 Level 2 170,000 170,000 Level 2

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at March 31, 2024 and December 31, 2023:

Cash and cash equivalents and time deposits in banks :

4 unchanged sentences

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.

The fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.

Loans held for investment, net of allowance for credit losses :

6 unchanged sentences

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

FHLB advances :

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

Commitments to extend credit :

These are primarily for adjustable rate loans and there are no differences between the committed amounts and their fair values.

Commitments to fund fixed rate loans are at rates which approximate fair value at each reporting date.

Time deposits :

The fair value is estimated using a discounted cash flow analysis that uses interest rates offered at each reporting date by the Company for certificates with similar remaining maturities, resulting in a Level 2 classification.

Subordinated notes :

2 unchanged sentences

The notes are recorded at carrying value.

Other borrowings :

The carrying amount is estimated to be fair value.

Investment Securities

2 unchanged sentences

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

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

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

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 March 31, 2024 and December 31, 2023 is presented below.

(in thousands) Amortized Cost Gross Unrealized Fair Value

Gains (Losses)

September 30, 2023

March 31, 2024

Obligations of states and political subdivisions $ 3,000 $ — $ ( 172 ) $ 2,828

9 unchanged sentences

and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers.

The Company adopted ASC 326 on January 1, 2023, which affects accounting of credit loss expense on held-to-maturity and available-for-sale securities.

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

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

A summary of the amortized cost and fair value related to securities available-for-sale as of March 31, 2024 and December 31, 2023 is presented below.

(in thousands) Amortized Cost Gross Unrealized Fair Value

Gains (Losses)

September 30, 2023

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

March 31, 2024

government agency securities $ 9,912 $ 148 $ ( 131 ) $ 9,929

Mortgage-backed securities 67,246 2 ( 12,303 ) 54,945

4 unchanged sentences

December 31, 2023

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

3 unchanged sentences

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

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

The amortized cost and fair value of investment securities by contractual maturity at March 31, 2024 and December 31, 2023 are shown below.

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

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

(in thousands) March 31, 2024 December 31, 2023

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

5 unchanged sentences

Investment securities not due at a single maturity date:

government agencies — — 11,281 11,209 — — 14,317 14,173

government agency securities — — 9,912 9,929 — — 10,548 10,541

Mortgage-backed securities — — 67,246 54,945 — — 68,585 56,973

2 unchanged sentences

Total $ 3,000 $ 2,828 $ 122,667 $ 105,006 $ 3,077 $ 2,913 $ 124,788 $ 108,083

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

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

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

Available-for-sale:

Sales proceeds $ — $ — $ — $ 1,623

Gross realized gains — — — 5

There were no purchases or sales of investment securities during the three months ended March 31, 2024 and March 31, 2023.

Pledged investment securities are shown in the following table:

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

(in thousands) March 31, 2024 December 31, 2023

The State of California, securing deposits of public funds and borrowings $ 53,418 $ 55,435

1 unchanged sentence

Total pledged investment securities $ 101,357 $ 104,399

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

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

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

September 30, 2023

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

March 31, 2024

government agency securities $ 1,926 $ ( 6 ) $ 5,761 $ ( 125 ) $ 7,687 $ ( 131 )

Mortgage-backed securities 1 — 53,592 ( 12,303 ) 53,593 ( 12,303 )

2 unchanged sentences

Corporate bonds — — 1,792 ( 208 ) 1,792 ( 208 )

Total temporarily impaired securities

$ 1,927 $ ( 6 ) $ 97,963 $ ( 17,811 ) $ 99,890 $ ( 17,817 )

December 31, 2023

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

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

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

2 unchanged sentences

Corporate bonds — — 1,778 ( 222 ) 1,778 ( 222 )

Total temporarily impaired securities

$ 1,130 $ ( 14 ) $ 101,730 $ ( 16,852 ) $ 102,860 $ ( 16,866 )

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

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

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

There were 150 and 149 available-for-sale securities in unrealized loss positions at March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024, the investment portfolio included 144 investment securities that had been in a continuous loss position for twelve months or more and six investment securities that had been in a loss position for less than twelve months.

There was one held-to-maturity security in a continuous unrealized loss position at March 31, 2024 and 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 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.

7 unchanged sentences

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

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

The Company held $ 15.0 million of FHLB stock at March 31, 2024 and December 31, 2023.

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

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

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

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

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 March 31, 2024 and December 31, 2023.

Loans and Allowance for Credit Losses

2 unchanged sentences

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

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

(in thousands) March 31, 2024 December 31, 2023

Commercial $ 2,687,456 $ 2,685,419

9 unchanged sentences

Net deferred loan fees ( 2,130 ) ( 2,257 )

( 2,265 ) ( 2,140 )

Allowance for credit losses

Loans held for investment

3,104,130 3,081,719

Allowance for credit losses - loans ( 34,653 ) ( 34,431 )

Loans held for investment, net of allowance for credit losses $ 3,069,477 $ 3,047,288

18 unchanged sentences

With respect to construction loans that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success.

Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners.

Construction loans may be underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners.

Construction loans are generally based upon estimates of costs and value associated with the completed project.

These estimates may be inaccurate.

Construction loans often involve the disbursement of substantial funds with repayment substantially dependent

on the ultimate success of the project.

These estimates may be

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.

27 unchanged sentences

Loans rated watch :

These are loans which have deficient loan quality and potentially significant issues, but losses do not appear to be imminent, and the issues are expected to be temporary in nature.

These are loans which have deficient loan quality and potentially significant issues, but losses do not appear to be imminent, and the issues may be temporary in nature.

The significant issues are typically:

11 unchanged sentences

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

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

Amortized Cost Basis by Origination Year

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 the period indicated was as follows:

Amortized Cost Basis by Origination Year as of March 31, 2024

(in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Revolving Converted to Term Total

37 unchanged sentences

Total 1,394 27,843 36,157 14,684 11,425 20,103 32,233 — 143,839

Amortized Cost Basis by Origination Year

Amortized Cost Basis by Origination Year as of March 31, 2024

(in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Revolving Converted to Term Total

15 unchanged sentences

Total $ 110,292 $ 425,925 $ 1,084,982 $ 735,964 $ 280,206 $ 423,574 $ 43,187 $ — $ 3,104,130

Amortized Cost Basis by Origination Year as of December 31, 2023

(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

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

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 as of December 31, 2023

(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.

Borrowers are generally required to submit financial information at regular intervals.

Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals ranging from monthly to annually depending on credit size, risk, and complexity.

Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals generally ranging from monthly to annually depending on credit size, risk, and complexity.

In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually.

1 unchanged sentence

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

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

The age analysis of past due loans by class as of March 31, 2024 consisted of the following:

(in thousands) Past Due

10 unchanged sentences

Total $ 276 $ — $ — $ 276 $ 3,103,854 $ 3,104,130

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

There were no loans greater than 90 days past due and still accruing interest income as of March 31, 2024.

The age analysis of past due loans by class as of December 31, 2023 consisted of the following:

12 unchanged sentences

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

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

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

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

No collateral dependent loans were in process of foreclosure at March 31, 2024 or December 31, 2023.

Non-accrual loans, segregated by class, were as follows as of March 31, 2024 and December 31, 2023:

(in thousands) March 31, 2024 December 31, 2023

Commercial $ 1,852 $ 1,893

Residential — 175

Secured 66 72

Total non-accrual loans $ 1,918 $ 1,965

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

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

No interest income was recognized on non-accrual loans in the three months ended March 31, 2024 or March 31, 2023.

Non-accrual real estate loans did not have an allowance for credit losses as of March 31, 2024.

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

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

Allowance for Credit Losses

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

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

Commercial $ 27,553 $ — $ — $ 348 $ 27,901

Commercial land and development 184 — — 14 198

Commercial construction 1,212 — — 8 1,220

Residential construction 217 — — ( 102 ) 115

Residential 152 — — ( 1 ) 151

Farmland 236 — — 157 393

Secured 3,751 ( 1,245 ) 219 736 3,461

Unsecured 209 — — 4 213

Consumer and other 470 ( 187 ) 207 ( 114 ) 376

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

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

The amount of foregone interest income related to non-accrual loans was $ 39.2 thousand for the three months ended March 31, 2024, as compared to $ 9.1 thousand for the three months ended March 31, 2023.

Allowance for Credit Losses - Loans

The following table discloses activity in the allowance for credit losses - loans for the three months ended March 31, 2024.

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

7 unchanged sentences

Unsecured 189 ( 34 ) — 104 259

PPP — — 21 ( 21 ) —

Consumer and other 378 ( 71 ) 93 260 660

Unallocated 648 — — 181 829

Total $ 34,431 $ ( 1,103 ) $ 275 $ 1,050 $ 34,653

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

The following table discloses activity in the allowance for credit losses - loans for the three months ended March 31, 2023.

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

10 unchanged sentences

Total $ 28,389 $ 5,262 $ ( 872 ) $ 493 $ 900 $ 34,172

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

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

Commercial $ 12,869 $ — $ — $ 5,440 $ 18,309

Commercial land and development 50 — — 48 98

Commercial construction 371 — — 175 546

Residential construction 50 — — ( 9 ) 41

Residential 192 — — ( 17 ) 175

Farmland 645 — — 19 664

Secured 6,859 ( 928 ) 152 279 6,362

Unsecured 207 ( 2 ) — 73 278

PPP — ( 21 ) 21 — —

Consumer and other 889 ( 508 ) 431 ( 276 ) 536

Unallocated 1,111 — — ( 282 ) 829

Total $ 23,243 $ ( 1,459 ) $ 604 $ 5,450 $ 27,838

Unfunded Loan Commitment Reserves

1 unchanged sentence

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

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

Three months ended Nine months ended

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

Three months ended

(in thousands) March 31, 2024 March 31, 2023

Balance at beginning of period $ 1,247 $ 125

3 unchanged sentences

Pledged Loans

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

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

The Company’s FHLB line of credit is secured under terms of a collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $ 1.7 billion at March 31, 2024 and December 31, 2023.

In addition, the Company pledges eligible tenants in common loans, which totaled $ 1.2 billion at March 31, 2024 and December 31, 2023, to secure its borrowing capacity with the Federal Reserve Discount Window.

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

Interest-Bearing Deposits

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

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

Interest-bearing deposits consisted of the following as of March 31, 2024 and December 31, 2023:

(in thousands) March 31, 2024 December 31, 2023

Interest-bearing transaction accounts $ 295,799 $ 320,356

1 unchanged sentence

Money market accounts 1,433,000 1,282,369

Time accounts, more than $ 250

Time accounts, $ 250 or more

221,976 344,694

Other time accounts 66,192 121,878

Total time deposits

427,524 342,514

Total interest-bearing deposits $ 2,138,384 $ 2,195,795

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

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

Time deposits totaled $ 288.2 million and $ 466.6 million as of March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024, scheduled maturities of time deposits for the next five years were as follows:

(in thousands)

1 unchanged sentence

Total time deposits $ 288,168

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

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

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

1 unchanged sentence

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

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

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

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

There were no one-way deposits at March 31, 2024 and December 31, 2023.

The composition of network deposits as of March 31, 2024 and December 31, 2023 was as follows:

(in thousands) March 31, 2024 December 31, 2023

CDARS $ 18,387 $ 16,325

1 unchanged sentence

Total network deposits $ 629,491 $ 636,524

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

Three months ended Nine months ended

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

Interest expense recognized on interest-bearing deposits for periods ended March 31, 2024 and 2023 consisted of the following:

Three months ended

(in thousands) March 31, 2024 March 31, 2023

Interest-bearing transaction accounts $ 1,126 $ 430

2 unchanged sentences

Time accounts, $ 250 or more

3,865 789 8,462 1,074

Other time accounts 1,545 1,001

5 unchanged sentences

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

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

On that date, the interest rate will be adjusted to float at a rate equal to the three-month Term SOFR plus 329.0 basis points ( 8.58 % as of March 31, 2024) until maturity.

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

2 unchanged sentences

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

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

Debt issuance costs incurred in conjunction with the notes were $ 1.5 million, of which $ 0.2 million has been amortized as of March 31, 2024.

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

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

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

At March 31, 2024 and December 31, 2023, the carrying value of the Company’s subordinated notes outstanding was $ 73.8 million and $ 73.7 million, respectively.

Other borrowings :

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company entered into an agreement with the FHLB which granted the FHLB a blanket lien on certain loans receivable as collateral for a borrowing line.

The Company’s total financing availability is based on the dollar volume of qualifying loan collateral.

The Company’s total financing availability with the FHLB is decreased by outstanding borrowings and letters of credit (“LCs”) issued on behalf of the Company, as follows:

(in thousands) March 31, 2024 December 31, 2023

Total financing ability from the FHLB

$ 1,002,910 $ 996,712

outstanding borrowings

20,000 170,000

LCs pledged to secure State of California deposits

146,500 271,500

LCs pledged to secure local agency deposits

425,000 410,000

Total LCs issued

571,500 681,500

Available borrowing capacity with the FHLB

$ 411,410 $ 145,212

At March 31, 2024 and December 31, 2023, the Company had a borrowing line available from the Federal Reserve Discount Window.

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

The Company’s financing availability with the Federal Reserve Discount Window is as follows:

(in thousands) March 31, 2024 December 31, 2023

Total financing ability from the Federal Reserve Discount Window

$ 807,143 $ 770,572

outstanding borrowings

Available borrowing capacity with the Federal Reserve Discount Window

$ 707,143 $ 770,572

At March 31, 2024 and December 31, 2023, the Company had five unsecured federal funds lines of credit with its correspondent banks totaling $ 175.0 million.

There were no amounts outstanding at March 31, 2024 and December 31, 2023.

Shareholders’ Equity

5 unchanged sentences

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

Three months ended Nine months ended

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

Three months ended

(in thousands, except share count and earnings per common share) March 31, 2024 March 31, 2023

Net income $ 10,631 $ 13,161

5 unchanged sentences

Diluted EPS $ 0.62 $ 0.77

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

The Company did not have any anti-dilutive shares at March 31, 2024 or March 31, 2023.

(b) Dividends

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

On January 18, 2024, the board of directors declared a $ 0.20 per common share dividend, totaling $ 3.5 million.

1 unchanged sentence

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

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.

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 credit losses, deposit growth, efficiency ratio, net interest margin, and asset quality.

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

Compensation expense for RSAs granted under the Historical

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

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

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

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

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.

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

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

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

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

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

Non-cash stock compensation expense recognized for the three months ended March 31, 2024 and 2023 was $ 0.3 million and $ 0.2 million, respectively.

At March 31, 2024 and 2023, there were 162,348 and 108,363 unvested restricted shares, respectively.

As of March 31, 2024, there was approximately $ 2.9 million of unrecognized compensation expense related to the 162,348 unvested restricted shares.

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

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

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

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

Such tax benefits are expected to be recognized over the weighted average term remaining on the unvested restricted shares of 3.37 years as of March 31, 2024.

The impact of tax benefits for dividends paid on unvested restricted stock on the Company’s unaudited consolidated statements of income for the three months ended March 31, 2024 and 2023 was immaterial.

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

For the three months ended September 30,

For the nine months ended September 30,

2023 2022 2023 2022

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

For the three months ended March 31,

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

Beginning of the period balance 69,338 $ 20.53 96,826 $ 20.34

10 unchanged sentences

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

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

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

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

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

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

The contractual

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

(in thousands) March 31, 2024 December 31, 2023

Commercial lines of credit $ 189,207 $ 181,855

7 unchanged sentences

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

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

The allowance for credit losses on unfunded commitments totaled $ 1.1 million as of March 31, 2024 and $ 1.2 million as of December 31, 2023, which is recorded in “Interest payable and other liabilities” in the unaudited consolidated balance sheets.

Concentrations of credit risk :

1 unchanged sentence

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

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

In management’s judgment, a concentration of loans exists in real estate related loans, which represented approximately 91.86 % of the Company’s loan portfolio at March 31, 2024 and 92.30 % of the Company’s loan portfolio at December 31, 2023.

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

1 unchanged sentence

Deposit concentrations :

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

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

At March 31, 2024, the Company had 92 deposit relationships that exceeded $ 5.0 million each, totaling $ 1.7 billion, or approximately 57.63 % of total deposits.

The Company’s largest single deposit relationship at March 31, 2024 totaled $ 200.9 million, or approximately 6.80 % of total deposits.

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

4 unchanged sentences

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

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

Uninsured deposits through these agreements totaled approximately $ 24.7 million and $ 22.3 million at March 31, 2024 and December 31, 2023, respectively.

Litigation Matters

2 unchanged sentences

Subsequent Events

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

On April 18, 2024, the Board of Directors of the Company authorized a cash dividend of $ 0.20 per common share, payable on May 13, 2024 to shareholders of record as of May 6, 2024.

On March 28, 2024, the Company entered into an underwriting agreement with Keefe, Bruyette & Woods, Inc., as representative of the several underwriters named in Schedule I thereto (the “Underwriters”), to issue and sell up to 3,967,500 shares of common stock, including up to 517,500 shares that could be purchased by the Underwriters pursuant to a 30-day option granted to the Underwriters by the Company, at a public offering price of $ 21.75 per share (the “2024 Public Offering”).

On April 2, 2024, the Company closed the 2024 Public Offering and issued 3,450,000 shares of its common stock, and on April 10, 2024, the Company issued an additional 517,500 shares of its common stock to the Underwriters, pursuant to the Underwriters’ full exercise of their option to purchase additional shares.

When combined with the shares sold in the closing that occurred on April 2, 2024, the Company sold an aggregate of 3,967,500 shares of its common stock at a public offering price of $ 21.75 per share.

The net proceeds to the Company, after deducting underwriting discounts, commissions, and estimated offering expenses of approximately $ 0.7 million, were approximately $ 80.8 million.

The Company has a shelf registration statement on file with the SEC registering $ 250.0 million for any combination of equity or debt securities, depository shares, warrants, purchase contracts, purchase units, subscription rights, and units in one or more offerings.

The 2024 Public Offering used $ 86.3 million of the Company’s shelf registration statement on file with the SEC.

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

What changed 10-Q

Item 1. Financial Statements