What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-08 · 239 added, 441 removed, 667 unchanged (50% of the section changed)

19 unchanged sentences

• uncertain market conditions and economic trends nationally, regionally, and particularly in Northern California and California;

• the impacts related to or resulting from recent bank failures and other economic and industry volatility, including increased regulatory requirements and costs and potential impacts to macroeconomic conditions;

• the soundness of other financial institutions and the impacts related to or resulting from bank failures and other economic and industry volatility, including increased regulatory requirements and costs and potential impacts to macroeconomic conditions;

• the impact of recent and future legislative and regulatory changes, including changes in banking, securities, and tax laws and regulations and their application by our regulators, and economic stimulus programs;

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• risks related to our strategic focus on lending to small to medium-sized businesses;

• the sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses and the value of loan collateral and securities;

• the sufficiency of the assumptions and estimates we make in establishing reserves for potential credit losses and the value of loan collateral and securities;

• our level of nonperforming assets and the costs associated with resolving problem loans, if any, and complying with government-imposed foreclosure moratoriums;

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• governmental monetary and fiscal policies, including the policies of the Federal Reserve;

• risks associated with unauthorized access, cyber-crime, and other threats to data security;

• our ability to implement, maintain, and improve effective internal controls;

• risks associated with unauthorized access, cybersecurity breaches, cyber-crime, and other threats and disruptions to data security;

• our ability to implement, maintain, and improve effective risk management framework, disclosure controls and procedures, and internal controls over financial reporting;

• our ability to adopt and successfully integrate new initiatives or technologies into our business in a strategic manner;

• our ability to attract and retain executive officers and key employees and their customer and community relationships;

• the occurrence or impact of climate change or natural or man-made disasters or calamities, such as wildfires, droughts, and earthquakes;

• the impact of any future U.S.

federal government shutdown and uncertainty regarding the U.S.

federal government’s debt limit and credit rating;

• the occurrence or impact of climate change or natural or man-made disasters or calamities, such as wildfires, droughts, mudslides, floods, and earthquakes, and particularly in Northern California and California;

• changes in and impact of local, regional, and global business, economic, and political conditions and geopolitical events, such as pandemics, civil unrest, wars, and acts of terrorism;

• other factors that are discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” of our 2022 Annual Report on Form 10-K and our Quarterly Reports on Form 10-Q for the three months ended March 31, 2023 and June 30, 2023, and other filings we may make with the SEC, copies of which are available from us at no charge.

The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” of our 2023 Annual Report on Form 10-K and other filings we may make with the SEC, copies of which are available from us at no charge.

New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us.

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Headquartered in the greater Sacramento metropolitan area of California, Five Star Bancorp is a bank holding company that operates through its wholly owned subsidiary, Five Star Bank, a California state-chartered non-member bank.

We provide a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through seven branch offices and one loan production office.

We provide a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through seven branch offices.

Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy.

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We aim to consistently deliver value that meets or exceeds the expectations of our shareholders, customers, employees, business partners, and community.

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

We refer to our mission as “purpose-driven and integrity-centered banking.” At March 31, 2024, we had total assets of $3.5 billion, total loans held for investment, net of allowance for credit losses, of $3.1 billion, and total deposits of $3.0 billion.

Critical Accounting Estimates

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However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the interim periods presented.

These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as filed in our 2022 Annual Report on Form 10-K and the notes thereto.

These unaudited consolidated financial statements have been prepared on

a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as filed in our 2023 Annual Report on Form 10-K and the notes thereto.

Our most significant accounting policies and our critical accounting estimates are described in greater detail in Note 1, Basis of Presentation, in our audited consolidated financial statements and Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates included in our 2023 Annual Report on Form 10-K.

We have identified accounting policies and estimates that, due to the difficult, subjective, or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our unaudited consolidated financial statements to those judgments and assumptions, are critical to an understanding of our consolidated

financial condition and results of operations.

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

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Executive Summary

Net income for the three and nine months ended September 30, 2023 totaled $11.0 million and $36.9 million, respectively, compared to net income of $11.7 million and $31.5 million for the three and nine months ended September 30, 2022, respectively.

Net income for the three months ended March 31, 2024 totaled $10.6 million, as compared to net income of $13.2 million for the three months ended March 31, 2023.

The following are highlights of our operating and financial performance, and financial condition for the dates and periods presented:

Total deposits increased by $250.2 million from $2.8 billion at December 31, 2022 to $3.0 billion at September 30, 2023.

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

Non-interest-bearing deposits decreased by $135.3 million in the first nine months of 2023 to $833.4 million, and represented 27.49% of total deposits at September 30, 2023, as compared to 34.82% of total deposits at December 31, 2022.

Total deposit increases were primarily attributable to an increase in the number of new deposit relationships, as well as normal fluctuations in some of our large existing accounts.

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

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

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

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

Total deposits decreased by $71.1 million from $3.03 billion at December 31, 2023 to $2.96 billion at March 31, 2024, primarily due to significant decreases in wholesale deposits, which the Company defines as brokered deposits and public time deposits.

In the first three months of 2024, brokered deposits and public time deposits decreased by $58.1 million and $125.0 million, respectively.

Non-interest-bearing deposits decreased by $13.7 million in the first three months of 2024 to $817.4 million, and represented 27.65% of total deposits at March 31, 2024, as compared to 27.46% of total deposits at December 31, 2023.

Non-wholesale deposits increased by $112.0 million in the first three months of 2024.

Our loan to deposit ratio was 105.37% at March 31, 2024, as compared to 102.19% at December 31, 2023.

Total assets were $3.5 billion at March 31, 2024, representing a $116.8 million, or 3.25%, decrease compared to $3.6 billion at December 31, 2023.

Total loans held for investment were $3.10 billion at March 31, 2024, as compared to $3.08 billion at December 31, 2023, an increase of $22.4 million, or 0.73%.

The increase was primarily attributable to increases of $35.8 million in consumer and other loans, $2.8 million in residential loans, and $2.7 million in residential construction loans, partially offset by a $21.8 million decrease in commercial secured loans.

• Credit Quality.

Credit quality remains strong, with non-accrual loans representing $2.0 million, or 0.07% of total loans held for investment, at September 30, 2023, as compared to $0.4 million, or 0.01% of total loans held for investment, at December 31, 2022.

The ratio of allowance for credit losses to total loans held for investment, or total loans at period end, was 1.13% at September 30, 2023 and 1.02% at December 31, 2022.

Credit quality remains strong, with non-accrual loans representing $1.9 million, or 0.06% of total loans held for investment, at March 31, 2024, as compared to $2.0 million, or 0.06% of total loans held for investment, at December 31, 2023.

The ratio of the allowance for credit losses to total loans held for investment was 1.12% at March 31, 2024 and December 31, 2023.

• Net Interest Margin.

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

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

Net interest margin was 3.14% for the three months ended March 31, 2024, and 3.75% for the three months ended March 31, 2023.

The decrease in net interest margin period-over-period was primarily due to an increase in deposit costs exceeding increases in yields on earning assets, as the effective Federal Funds rate increased from 4.83% at March 31, 2023 to 5.33% at March 31, 2024.

• Efficiency Ratio.

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

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

Efficiency ratio was 44.50% for the three months ended March 31, 2024, up from 36.43% for the corresponding period of 2023 due to the Company’s expansion into the San Francisco Bay Area beginning in the second quarter of 2023.

• Capital Ratios .

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

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

The Tier 1 leverage ratio was 8.58% at September 30, 2023, as compared to 8.60% at December 31, 2022.

All capital ratios were above well-capitalized regulatory thresholds as of March 31, 2024.

The total risk-based capital ratio for the Company was 12.34% at March 31, 2024, as compared to 12.30% at December 31, 2023.

The Tier 1 leverage ratio was 8.63% at March 31, 2024, as compared to 8.73% at December 31, 2023.

For additional information about the regulatory capital requirements applicable to the Company and the Bank, see the section entitled “—Financial Condition Summary—Capital Adequacy” below.

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

The board of directors declared a cash dividend of $0.20 per share on January 18, 2024.

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

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

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

Selected financial condition data:

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8.42 % 7.95 %

For the three months ended For the nine months ended

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

For the three months ended

(dollars in thousands, except per share data) March 31, 2024 March 31, 2023

Selected operating data:

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1 Tangible shareholders’ equity to tangible assets is considered a non-GAAP financial measure.

See the section entitled “Non-GAAP Financial Measures” for a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measure.

Tangible shareholders’ equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided

by total assets less goodwill and other intangible assets.

See the section entitled “Non-GAAP Financial Measures” for a reconciliation of our non-GAAP financial measures to the most directly

comparable GAAP financial measure.

Tangible shareholders’ equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets.

The most directly comparable GAAP financial measure is total shareholders’ equity to total assets.

We had no goodwill or other intangible assets as of any of the dates indicated.

We had no goodwill or other intangible assets at the end of any period indicated.

As a result, tangible shareholders’ equity to tangible assets is the same as total shareholders’ equity to total assets at the end of each of the periods indicated.

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

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

See the section entitled “Non-GAAP Financial Measures” for a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measure.

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RESULTS OF OPERATIONS

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

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

The following discussion of our results of operations compares the three months ended March 31, 2024 to the three months ended March 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 the year ending December 31, 2024.

Net Interest Income

Net interest income is the most significant contributor to our net income.

Net interest income represents interest income from interest-earning assets, such as loans and investments, less interest expense on interest-bearing liabilities, such as deposits, FHLB advances, subordinated notes, and other borrowings, which are used to fund those assets.

Net interest income represents interest income from interest-earning assets, such as loans and investments, less interest expense on interest-bearing liabilities, such as deposits, subordinated notes, and other borrowings, which are used to fund those assets.

In evaluating our net interest income, we measure and monitor yields on our interest-earning assets and interest-bearing liabilities as well as trends in our net interest margin.

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Changes in market interest rates and competition in our market typically have the largest impact on periodic changes in our net interest margin.

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

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

The contraction of our net interest margin was primarily due to the increased rates paid on interest-bearing liabilities more than offsetting the increased yields earned on interest-earning assets.

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

Net interest income decreased $2.4 million to $26.7 million for the three months ended March 31, 2024 compared to March 31, 2023 and our net interest margin of 3.14% for the three months ended March 31, 2024 decreased from 3.75% for the three months ended March 31, 2023.

The decrease in net interest income and contraction of our net interest margin was primarily due to higher rates paid on interest-bearing liabilities, which exceeded higher yields earned on interest-earning assets.

These changes related to the change in the effective Federal Funds rate from 4.83% at March 31, 2023 to 5.33% at March 31, 2024.

Additional detail relating to net interest margin in each period is provided below.

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For the three months ended

September 30, 2023

March 31, 2024

For the three months ended

September 30, 2022

March 31, 2023

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

Interest-earning deposits with banks 1

Interest-earning deposits in banks 1

$ 233,002 $ 3,102 5.35 % $ 200,541 $ 2,167 4.38 %

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429,586 5,369 5.03 % 300,952 2,964 3.99 %

Subordinated debt and other borrowings 1

Subordinated notes and other borrowings 1

82,775 1,286 6.25 % 125,691 1,785 5.76 %

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For the three months ended

September 30, 2023 compared to

the three months ended September 30, 2022

March 31, 2024 compared to

the three months ended March 31, 2023

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

Interest-earning deposits with banks $ (149) $ 1,588 $ 1,439

Investment securities (85) 123 38

Loans held for investment and sale 6,846 5,129 11,975

Total interest-earning assets 6,612 6,840 13,452

Interest-bearing transaction accounts 270 587 857

Savings accounts 207 608 815

Money market accounts 2,244 5,512 7,756

Time accounts 2,388 1,753 4,141

Subordinated debt and other borrowings 108 (178) (70)

Total interest-bearing liabilities 5,217 8,282 13,499

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

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

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

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

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

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

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

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

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

The contraction of our net interest margin was primarily due to the increased rates paid on interest-bearing liabilities more than offsetting the increased yields earned on interest-earning assets, relating to changes in the effective Federal Funds rate in each period.

Additional detail relating to net interest margin in each period is provided below.

Average balance sheet, interest, and yield/rate analysis.

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

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

For the nine months ended

September 30, 2023

For the nine months ended

September 30, 2022

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

Interest-earning deposits with banks 1

$ 192,976 $ 6,969 4.83 % $ 280,994 $ 1,855 0.88 %

Investment securities 1,2

115,884 1,949 2.25 % 136,067 1,784 1.75 %

Loans held for investment and sale 1,3

2,911,397 119,284 5.48 % 2,234,958 76,877 4.60 %

Total interest-earning assets 1

3,220,257 128,202 5.32 % 2,652,019 80,516 4.06 %

Interest receivable and other assets, net 4

74,184 108,803

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

Liabilities and shareholders’ equity

Interest-bearing transaction accounts 1

$ 320,013 $ 2,230 0.93 % $ 248,540 $ 251 0.14 %

Savings accounts 1

143,142 2,182 2.04 % 96,986 128 0.18 %

Money market accounts 1

1,235,375 23,108 2.50 % 972,959 2,825 0.39 %

Time accounts 1

357,433 12,213 4.57 % 170,912 1,179 0.92 %

Subordinated debt and other borrowings 1

94,923 4,267 6.01 % 43,562 2,198 6.75 %

Total interest-bearing liabilities 2,150,886 44,000 2.74 % 1,532,959 6,581 0.57 %

Demand accounts 851,608 977,894

Interest payable and other liabilities 27,883 13,936

Shareholders’ equity 264,064 236,033

Total liabilities and shareholders’ equity $ 3,294,441 $ 2,760,822

Net interest spread 5

2.58 % 3.49 %

Net interest income/margin 6

Interest-earning deposits in banks

$ 446 $ 489 $ 935

1 Interest income/expense is divided by the actual number of days in the period multiplied by the actual number of days in the year to correspond to stated interest rate terms, where applicable.

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

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

Yields are not calculated on a tax-equivalent basis.

3 Non-accrual loans are included in total loan balances.

No adjustment has been made for these loans in the yield calculations.

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

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

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

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

6 Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets, then annualized based on the number of days in the given period.

Analysis of changes in interest income and expenses.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average yields/rates.

The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities.

The effect of changes in volume is determined by multiplying the change in volume by the current period’s average yield/rate.

The effect of rate changes is calculated by multiplying the change in average yield/rate by the previous period’s volume.

Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.

For the nine months ended

September 30, 2023 compared to

the nine months ended September 30, 2022

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

Interest-earning deposits with banks $ (3,179) $ 8,293 $ 5,114

Investment securities (59) 62 3

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Time accounts 1,630 775 2,405

Subordinated debt and other borrowings 2,309 (240) 2,069

Subordinated notes and other borrowings (651) 152 (499)

Total interest-bearing liabilities 3,255 6,379 9,634

Changes in net interest income/margin $ 826 $ (3,230) $ (2,404)

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

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

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

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

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

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

Net interest income decreased $2.4 million and net interest margin decreased 61 basis points for the three months ended March 31, 2024 compared to the same quarter of the prior year.

The decrease in net interest income is primarily attributable to an additional $10.1 million in deposit interest expense due to increases in interest rates and average balances compared to the same quarter of the prior year.

The cost of interest-bearing deposits increased 148 basis points compared to the same quarter of the prior year, while average balances increased 17.78%.

In addition, the average balance of non-interest-bearing deposits decreased by $59.4 million compared to the same quarter of the prior year.

The increase in deposit interest expense was partially offset by an increase in total interest income of $7.2 million compared to the same quarter of the prior year.

Average loan yields increased 35 basis points compared to the same quarter of the prior year, while average balances increased 8.68%.

Provision for Credit Losses

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The provision for credit losses is charged against earnings in order to maintain our allowance for credit losses, which reflects management’s best estimate of forecasted life of loan losses in our loan portfolio at the balance sheet date.

Beginning January 1, 2023, we adopted ASC 326, which replaced the former “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model.

The CECL allowance model calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions.

Under the CECL model, the calculated allowance for credit losses was $5.3 million higher on January 1, 2023 than the allowance under the incurred loss model.

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

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

We recorded a $1.1 million provision for credit losses in the third quarter of 2023, as compared to a $2.3 million provision for credit losses recorded for the same period of 2022.

As explained above, utilizing CECL may result in a lack of comparability between the 2022 and 2023 periods.

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

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

We recorded a $3.2 million provision for credit losses in the first nine months of 2023, as compared to a $5.5 million provision for credit losses for the same period of 2022.

As explained above, utilizing CECL may result in a lack of comparability between the 2022 and 2023 periods.

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

We recorded a $0.9 million provision for credit losses in the first quarter of 2024 and in the same period of 2023.

The provision recorded during the three months ended March 31, 2024 was the net effect of charge-offs, recoveries, increases in quantitative reserves, and reductions in reserves for qualitative factors.

Non-interest Income

Non-interest income is a secondary contributor to our net income.

Non-interest income is a secondary contributor to our net income, following interest income.

Non-interest income consists of service charges on deposit accounts, net gain on sale of securities, gain on sale of loans, loan-related fees, FHLB stock dividends, earnings on BOLI, and other income.

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

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

For the three months ended

(dollars in thousands) September 30, 2023

September 30, 2022

$ Change % Change

Service charges on deposit accounts $ 158 $ 132 $ 26 19.70 %

Gain on sale of loans 396 548 (152) (27.74) %

Loan-related fees 355 447 (92) (20.58) %

FHLB stock dividends 274 152 122 80.26 %

Earnings on BOLI 127 102 25 24.51 %

Other income 74 52 22 42.31 %

Total non-interest income $ 1,384 $ 1,433 $ (49) (3.42) %

Gain on sale of loans.

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

During the three months ended September 30, 2023, approximately $7.0 million of loans were sold with an effective yield of 5.63%, as compared to approximately $10.5 million of loans sold with an effective yield of 5.20% during the three months ended September 30, 2022.

FHLB stock dividends.

The increase in FHLB stock dividends was primarily due to increased yields from dividends received of 7.75% for the three months ended September 30, 2023, as compared to 6.00% for the three months ended September 30, 2022.

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

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

For the nine months ended

(In thousands) September 30, 2023

September 30, 2022

(dollars in thousands) March 31, 2024

March 31, 2023

$ Change % Change

Service charges on deposit accounts $ 188 $ 117 $ 71 60.68 %

Net gain on sale of securities — 5 (5) (100.00) %

Gain on sale of loans 369 598 (229) (38.29) %

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Gain on sale of loans.

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

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

The decrease related primarily to an overall decline in the volume of loans sold, partially offset by an improvement in the effective yield of loans sold during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023.

During the three months ended March 31, 2024, approximately $5.2 million of loans were sold with an effective yield of 7.08%, as compared to approximately $12.7 million of loans sold with an effective yield of 4.72% during the three months ended March 31, 2023.

Loan-related fees.

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

The increase related to the recognition of $0.1 million of swap referral fees during the three months ended March 31, 2024, which did not occur during the three months ended March 31, 2023.

FHLB stock dividends.

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

The increase related to a higher annualized dividend rate and total average shares outstanding from 7.00% and 108,901 shares for the three months ended March 31, 2023 to 8.75% and 150,000 for the three months ended March 31, 2024.

Other income.

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

The increase related to a $0.3 million gain recorded for distributions received on equity investments in venture-backed funds during the three months ended March 31, 2024, which did not occur during the three months ended March 31, 2023.

Non-interest Expense

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

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

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

For the three months ended

(dollars in thousands) September 30, 2023

September 30, 2022

(dollars in thousands) March 31, 2024

March 31, 2023

$ Change % Change

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Salaries and employee benefits.

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

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

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

Data processing and software.

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

(i) increased usage of our digital banking platform;

(ii) higher transaction volumes related to the increased number of loan and deposit accounts;

and (iii) an increased number of licenses required for new users on our loan origination and documentation system.

FDIC insurance.

The increase related primarily to a final rule adopted by the FDIC to increase initial base deposit insurance assessment rates for insured depository institutions by two basis points, beginning with the first quarterly assessment period of 2023.

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

Other operating expenses.

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

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

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

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

For the nine months ended

(In thousands) September 30, 2023

September 30, 2022

$ Change % Change

Salaries and employee benefits $ 19,915 $ 16,873 $ 3,042 18.03 %

The increase during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023.

related primarily to:

(i) a $0.6 million increase in salaries and benefits for new employees hired since June 2023 to support expansion into the San Francisco Bay Area;

(ii) a $0.2 million increase in commissions earned, largely due to commissions paid to the San Francisco Bay Area team, which did not exist during the three months ended March 31, 2023;

and (iii) a $0.1 million decrease in loan origination costs due to lower loan production period-over-period.

Occupancy and equipment.

Data processing and software 2,905 2,252 653 29.00 %

FDIC insurance 1,187 605 582 96.20 %

Professional services 1,917 1,914 3 0.16 %

Advertising and promotional 1,686 1,340 346 25.82 %

Loan-related expenses 924 929 (5) (0.54) %

Other operating expenses 4,943 4,491 452 10.06 %

Total non-interest expense $ 35,112 $ 29,952 $ 5,160 17.23 %

Salaries and employee benefits.

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

(i) a $2.1 million increase in salaries, insurance, and benefits as a result of a 8.72% increase in headcount;

(ii) a $1.9 million decrease in loan origination costs due to lower loan production period-over-period;

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

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

The $0.1 million increase related to rent expense for temporary office space to support the San Francisco Bay Area expansion during the three months ended March 31, 2024, which did not exist during the three months ended March 31, 2023.

Data processing and software.

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

The increase was primarily due to:

(i) increased usage of our digital banking platform;

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and (iii) an increased number of licenses required for new users on our loan origination and documentation system.

FDIC insurance.

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

Advertising and promotional.

The increase in advertising and promotional costs was primarily due to an increased customer base and a 28.57% increase in the number of Business Development Officers from 21 as of September 30, 2022 to 27 as of September 30, 2023.

Other operating expenses.

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

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

Provision for Income Taxes

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

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

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

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

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

The provision for income taxes was $14.5 million for the nine months ended September 30, 2023, compared to $12.6 million for the nine months ended September 30, 2022.

The increase was primarily due to an overall increase in pre-tax

income period-over-period, which was partially offset by a $0.5 million state tax benefit recorded during the nine months ended September 30, 2023 relating to an overall reduction in the state tax blended rate for the Company since its transition to a C Corporation.

The effective tax rates for the nine months ended September 30, 2023 and 2022 were 28.23% and 28.51%, respectively.

The provision for income taxes was $4.3 million for the three months ended March 31, 2024, as compared to $5.3 million for the three months ended March 31, 2023.

There was a decline in the provision due to an overall decrease in taxable income.

The effective income tax rates for the three months ended March 31, 2024 and 2023 were 28.94% and 28.86%, respectively.

FINANCIAL CONDITION SUMMARY

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

The following table summarizes selected components of our unaudited consolidated balance sheets as of September 30, 2023 and December 31, 2022.

(in thousands) September 30, 2023

The following discussion compares our financial condition as of March 31, 2024 to our financial condition as of December 31, 2023.

The following table summarizes selected components of our unaudited consolidated balance sheets as of March 31, 2024 and December 31, 2023.

(dollars in thousands) March 31, 2024

December 31, 2023

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Total shareholders’ equity $ 292,580 $ 285,774

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

At March 31, 2024, total assets were $3.5 billion, a decrease of $116.8 million from $3.6 billion at December 31, 2023, primarily due to a $136.3 million decrease in cash and cash equivalents, partially offset by a $22.4 million increase in total loans held for investment.

Cash and Cash Equivalents

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

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

Total cash and cash equivalents were $185.3 million at March 31, 2024, a decrease of $136.3 million from $321.6 million at December 31, 2023.

The decrease in cash and cash equivalents was primarily due to decreases in deposits of $71.1 million, a decrease in borrowings of $50.0 million, and $27.0 million in loan originations, net of repayments, partially offset by income before provision for income taxes of $15.0 million.

Investment Portfolio

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We manage our investment portfolio according to written investment policies approved by our board of directors.

Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk and interest rate risk that is reflective of the yields obtained on those securities.

Our investment strategy is designed to maximize earnings while maintaining liquidity with minimal credit and interest rate risk.

Most of our securities are classified as available-for-sale, although we have one long-term, fixed rate municipal security classified as held-to-maturity.

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

Our total securities available-for-sale and held-to-maturity amounted to $108.0 million at March 31, 2024 and $111.2 million at December 31, 2023, representing a decrease of $3.2 million period-over-period.

The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $2.0 million and an unrealized loss on securities of $1.0 million, with the remainder of the change due to amortization of premiums.

For the three months ended September 30, 2023, other comprehensive loss was $3.0 million, primarily due to rate changes and other market conditions on securities.

For the three months ended March 31, 2024, other comprehensive loss was $0.7 million, primarily due to rate changes and other market conditions on securities.

The following table presents the carrying value of our investment portfolio as of the dates indicated:

September 30, 2023

March 31, 2024

December 31, 2023

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Available-for-sale (at fair value):

government agencies $ 11,209 10.46 % $ 14,173 11.84 %

government agency securities $ 9,929 9.19 % $ 10,541 9.48 %

Mortgage-backed securities 54,945 50.87 % 56,973 51.25 %

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Total $ 108,006 100.00 % $ 111,160 100.00 %

The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of September 30, 2023:

The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of March 31, 2024:

Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Total

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Available-for-sale:

government agencies $ — — % $ 805 3.45 % $ 2,181 5.34 % $ 8,223 5.44 % $ 11,209 5.28 %

government agency securities $ — — % $ 836 3.72 % $ 1,660 5.37 % $ 7,433 6.64 % $ 9,929 6.18 %

Mortgage-backed securities — — % — — % 580 2.74 % 54,365 1.77 % 54,945 1.78 %

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Available-for-sale:

government agencies $ — — % $ 849 1.98 % $ 2,625 3.61 % $ 10,699 2.90 % $ 14,173 2.98 %

government agency securities $ — — % $ 800 3.44 % $ 2,010 5.36 % $ 7,731 5.77 % $ 10,541 5.51 %

Mortgage-backed securities — — % — — % 609 2.74 % 56,364 1.76 % 56,973 1.77 %

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Our loan portfolio is our largest class of interest-earning assets and typically provides higher yields than other types of interest-earning assets.

Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting.

As of September 30, 2023 and December 31, 2022, our total loans amounted to $3.0 billion and $2.8 billion, respectively.

Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting standards.

As of March 31, 2024 and December 31, 2023, our total loans amounted to $3.11 billion and $3.09 billion, respectively.

The following table presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.

September 30, 2023

March 31, 2024

December 31, 2023

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Collateral values are determined at origination using third-party real estate appraisals or evaluations.

Updated appraisals, which are included in the table below, are obtained for loans that are downgraded to watch or substandard.

Updated appraisals, which are included in the table below, may be obtained for loans that are downgraded to watch or substandard.

Loans over $2.0 million are reviewed annually, at which time an internal assessment of collateral values is completed.

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

September 30, 2023

March 31, 2024

Manufactured home community $ 847,510 31.54 % $ 1,502,434 14.47 % 74.52 %

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Retail 273,063 10.16 % 542,916 6.79 % 73.76 %

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

Faith-based 185,545 6.90 % 491,049 8.30 % 74.50 %

Industrial 185,377 6.90 % 452,425 7.14 % 82.90 %

Multifamily 177,860 6.62 % 371,684 12.84 % 75.00 %

Mini storage 177,256 6.60 % 360,832 16.48 % 75.38 %

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Multifamily 211,598 7.88 % 427,948 13.12 % 75.00 %

Industrial 166,403 6.95 % 366,291 10.77 % 75.00 %

Mini storage 158,650 6.63 % 289,820 20.20 % 70.04 %

Faith-based 184,799 6.88 % 488,160 8.33 % 74.54 %

Mini storage 176,380 6.57 % 358,395 16.56 % 70.00 %

Industrial 173,192 6.45 % 417,439 7.48 % 83.26 %

Office 135,928 5.06 % 298,989 9.07 % 73.52 %

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2 Minimum LTV and maximum LTV not shown for aggregated totals, as such values are meaningful only when presented by specific category.

Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed significantly.

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

Commercial secured lending represents 5.23% of loans held for investment at September 30, 2023.

Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed materially.

Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 88.97% of loans held for investment at March 31, 2024.

Commercial secured lending represents 4.63% of loans held for investment at March 31, 2024.

We sell the guaranteed portion of all SBA 7(a) loans in the secondary market and will continue to do so as long as market conditions continue to be favorable.

We recognize that our commercial real estate loan concentration is significant within our balance sheet.

Commercial real estate loan balances as a percentage of risk-based capital were 682.70% and 680.34% as of September 30, 2023 and December 31, 2022, respectively.

Commercial real estate loan balances as a percentage of risk-based capital were 669.49% and 682.72% as of March 31, 2024 and December 31, 2023, respectively.

We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (e.g., manufactured home communities, self-storage, hospitality, etc.).

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

Additionally, our loans are geographically concentrated with borrowers and collateral properties primarily in California.

All loan sectors were within our established limits as of March 31, 2024.

Additionally, our loans are geographically concentrated with borrowers and collateralized properties primarily in California.

We believe that our past success is attributable to focusing on products and markets where we have significant expertise.

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We do not expect our product or geographic concentrations to materially change.

The following table sets forth the contractual maturities of our loan portfolio as of September 30, 2023:

(in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total

The following table sets forth the contractual maturities of our loan portfolio as of March 31, 2024:

(dollars in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total

Commercial $ 30,322 $ 289,132 $ 2,292,288 $ 75,714 $ 2,687,456

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The following table sets forth the contractual maturities of our loan portfolio as of December 31, 2023:

(in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total

(dollars in thousands) Due in 1 year or less Due after 1 year through 5 years Due after 5 years through 15 years Due after 15 years Total

Commercial $ 57,443 $ 271,306 $ 2,284,482 $ 72,188 $ 2,685,419

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Total $ 148,866 $ 363,715 $ 2,509,303 $ 73,556 $ 3,095,440

The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of September 30, 2023:

(in thousands) Fixed Interest Rates Floating or Adjustable Rates Total

The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of March 31, 2024:

(dollars in thousands) Fixed Interest Rates Floating or Adjustable Rates Total

Commercial $ 578,389 $ 2,109,067 $ 2,687,456

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The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of December 31, 2023:

(in thousands) Fixed Interest Rates Floating or Adjustable Rates Total

(dollars in thousands) Fixed Interest Rates Floating or Adjustable Rates Total

Commercial $ 570,385 $ 2,115,034 $ 2,685,419

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Our primary objective is to maintain a high level of asset quality in our loan portfolio.

We believe our underwriting practices and policies, established by experienced professionals, appropriately govern the risk profile for our loan portfolio.

We believe our underwriting policies and practices, executed by experienced professionals, appropriately govern the risk profile for our loan portfolio.

These policies are continually evaluated and updated as necessary.

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

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

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

During the three months ended March 31, 2024, the Company sold 18 SBA 7(a) loans with government-guaranteed portions totaling $5.2 million.

The Company received gross proceeds of $5.6 million on the loans sold during the three months ended March 31, 2024, resulting in the recognition of net gains on sale of $0.4 million during the same period.

Non-accrual Loans

The following table provides details of our nonperforming and restructured assets and certain other related information as of the dates presented:

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

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

Non-accrual loans:

Commercial $ 1,852 $ 1,893

Residential — 175

Secured 66 72

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Nonperforming loans plus performing LMs to loans held for investment 0.06 % 0.06 %

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

The ratio of nonperforming loans to loans held for investment was 0.06% at March 31, 2024 and December 31, 2023.

Potential Problem Loans

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The following table shows our levels of classified loans as of the periods indicated:

(in thousands) Pass Watch Substandard Doubtful Total

September 30, 2023

(dollars in thousands) Pass Watch Substandard Doubtful Total

March 31, 2024

Commercial $ 2,648,303 $ 37,301 $ 1,852 $ — $ 2,687,456

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Total $ 3,042,376 $ 39,624 $ 1,976 $ — $ 3,083,976

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

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

Loans designated as watch and substandard, which are not considered adversely classified, increased to $53.9 million at March 31, 2024 from $41.6 million at December 31, 2023.

There were no loans with doubtful risk grades at March 31, 2024 or December 31, 2023.

Allowance for Credit Losses - Loans

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

At September 30, 2023, the Company’s allowance for credit losses - loans was $34.0 million, as compared to $28.4 million at December 31, 2022.

The $5.6 million increase in the allowance is due to a $5.3 million adjustment recorded in connection with the adoption of ASC 326 and a $2.9 million provision for credit losses recorded during the nine months ended September 30, 2023, partially offset by net charge-offs of $2.5 million during the same period.

While the entire allowance for credit losses - loans is available to absorb losses from any and all loans, the following table represents management’s allocation of our allowance for credit losses by loan category, and the percentage of the allowance for credit losses in each category, for the periods indicated.

September 30, 2023

At March 31, 2024, the Company’s allowance for credit losses - loans was $34.7 million, as compared to $34.4 million at December 31, 2023.

The $0.3 million increase in the allowance is due to a $1.1 million provision for credit losses recorded during the three months ended March 31, 2024, partially offset by net charge-offs of $0.8 million during the same period.

While the entire allowance for credit losses - loans is available to absorb losses from any and all loans, the following table represents management’s allocation of our allowance for credit losses by loan category, and the balance of loans in each category as a percentage of total loans, for the periods indicated.

March 31, 2024

December 31, 2023

(in thousands) Amount % of Total Amount % of Total

(dollars in thousands) Allowance for Credit Losses % of Loans to Total Loans Allowance for Credit Losses % of Loans to Total Loans

Commercial $ 28,895 86.23 % $ 29,015 86.76 %

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Consumer and other 660 2.37 % 378 1.23 %

Unallocated — — % 45 0.16 %

Total allowance for credit losses $ 34,653 100.00 % $ 34,431 100.00 %

The ratio of the allowance for credit losses to total loans held for investment was 1.13% at September 30, 2023, as compared to 1.02% at December 31, 2022.

The ratio of the allowance for credit losses to total loans held for investment was 1.12% at March 31, 2024 and December 31, 2023.

The following table provides information on the activity within the allowance for credit losses - loans as of and for the periods indicated:

As of and for the three months ended

September 30, 2023

September 30, 2022

March 31, 2024

March 31, 2023

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

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Allowance for credit losses - loans $ 34,431 $ 28,389

Net (charge-offs) recoveries:

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

Unsecured — — % (2) — %

PPP — — % 21 — %

Consumer and other 20 — % 61 — %

Net charge-offs (1,006) (0.03) % (198) (0.01) %

Provision for credit losses 1,050 2,250

Allowance for credit losses - loans $ 34,028 $ 27,838

Loans held for investment $ 3,009,930 $ 2,582,978

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

As of and for the nine months ended

September 30, 2023

September 30, 2022

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

Average loans held for investment $ 2,901,893 $ 2,225,609

Allowance for credit losses - loans $ 28,389 $ 23,243

Effect of adoption of ASC 326 — 5,262

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Allowance for credit losses - loans to loans held for investment 1.12 % 1.19 %

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

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

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

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

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

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

Total deposits increased by $250.2 million, or 8.99%, to $3.0 billion at September 30, 2023 from $2.8 billion at December 31, 2022.

Deposit increases were primarily attributable to an increase in the number of new relationships, as well as normal fluctuations in some of our larger accounts.

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

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

The allowance for credit losses - loans to loans held for investment decreased from 1.19% as of March 31, 2023 to 1.12% as of March 31, 2024.

Net charge-offs as a percent of average loans held for investment increased to 0.03% for the three months ended March 31, 2024 from 0.01% for the three months ended March 31, 2023.

During the first three months of 2024, total liabilities decreased by $123.6 million from $3.3 billion as of December 31, 2023 to $3.2 billion as of March 31, 2024.

This decrease was primarily due to a decrease in total deposits of $71.1 million, comprised of a decrease of $57.4 million in interest-bearing deposits and a decrease of $13.7 million in non-interest-bearing deposits.

Of the $57.4 million decrease in interest-bearing deposits, brokered deposits decreased by $58.1 million and public time deposits decreased by $125.0 million.

Both decreases were offset by an increase in non-wholesale deposits of $112.0 million.

Representing 92.84% of our total liabilities as of March 31, 2024, deposits are our primary source of funding for our business operations.

Total deposits decreased by $71.1 million, or 2.35%, to $2.96 billion at March 31, 2024 from $3.03 billion at December 31, 2023.

Deposit decreases were primarily attributable to decreases in public time and brokered deposits.

Non-interest-bearing deposits decreased by $13.7 million from December 31, 2023 to $817.4 million at March 31, 2024, representing 27.65% of total deposits at that date, as compared to 27.46% of total deposits at December 31, 2023.

Our loan to deposit ratio was 105.37% at March 31, 2024, as compared to 102.19% at December 31, 2023.

We intend to continue to operate our business with close monitoring of the loan to deposit ratio.

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

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

For the three months ended

September 30, 2023

September 30, 2022

March 31, 2024

March 31, 2023

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

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Total deposits $ 3,106,841 2.53 % 100.00 % $ 2,824,391 1.35 % 100.00 %

For the nine months ended

September 30, 2023

September 30, 2022

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

Interest-bearing transaction accounts $ 320,013 0.93 % 11.01 % $ 248,540 0.14 % 10.07 %

Money market and savings accounts 1,378,517 2.45 % 47.41 % 1,069,945 0.37 % 43.37 %

Time accounts 357,433 4.57 % 12.29 % 170,912 0.92 % 6.93 %

Demand accounts 851,608 — % 29.29 % 977,894 — % 39.63 %

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

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

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

Uninsured and uncollateralized deposits totaled $1.1 billion and $1.0 billion at March 31, 2024 and December 31, 2023, respectively.

As of March 31, 2024, our 37 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.3 billion, or 45.41% of our total deposits.

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

As of December 31, 2023, our 40 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.5 billion, or 49.80% of our total deposits.

Overall, our large deposit relationships have been relatively consistent over time and have helped to continue to grow our deposit base.

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

(in thousands) September 30, 2023

(dollars in thousands) March 31, 2024

December 31, 2023

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Total $ 1,342,219 $ 1,507,258

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

The balances for this customer were $250.0 million, or approximately 8.24% of total deposits as of that date.

At December 31, 2022, our largest single deposit relationship related to a government agency and had balances of $180.0 million, or 6.47% of total deposits as of that date.

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

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

Our largest single deposit relationship at March 31, 2024 related to a non-profit entity.

The balance for this customer was $200.9 million, or approximately 6.80% of total deposits as of that date.

At December 31, 2023, our largest single deposit relationship related to a government agency and had a balance of $260.0 million, or 8.59% of total deposits as of that date.

The following table sets forth the maturity of time deposits as of March 31, 2024:

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

Remaining maturity:

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

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

There were borrowings of $20.0 million and $170.0 million outstanding from the FHLB as of March 31, 2024 and December 31, 2023, respectively.

There were borrowings of $100.0 million outstanding from the Federal Reserve Discount Window as of March 31, 2024 and no borrowings outstanding from the Federal Reserve Discount Window as of December 31, 2023.

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

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The proceeds of the notes qualify as Tier 2 capital for the Company under the regulatory capital rules of the federal banking agencies.

The following table is a summary of our outstanding subordinated notes as of September 30, 2023:

(in thousands) Issuance Date Amount of Notes Prepayment Right Maturity Date

The following table is a summary of our outstanding subordinated notes as of March 31, 2024:

(dollars in thousands) Issuance Date Amount of Notes Prepayment Right Maturity Date

Subordinated notes August 2022 $ 75,000 August 17, 2027 September 1, 2032

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

Fixed at 6.00% through September 1, 2027, then three-month Term SOFR plus 329.0 basis points (8.58% as of March 31, 2024) through maturity

Shareholders’ Equity

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

Shareholders’ equity totaled $292.6 million at March 31, 2024 and $285.8 million at December 31, 2023.

The increase in shareholders’ equity was primarily attributable to net income recognized of $10.6 million, partially offset by:

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

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

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

(i) $3.5 million in cash dividends;

and (ii) a $0.7 million increase in accumulated other comprehensive loss during the three months ended March 31, 2024.

Liquidity and Capital Resources

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Changes in economic conditions or exposure to borrower credit quality, capital markets, and operational, legal, or reputational risks could also affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity management.

The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its subordinated debt.

The Company’s main source of cash flow is dividends declared and paid to it by the Bank.

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adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments that can be used to meet liquidity needs in stress situations;

comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements;

comprehensive contingency funding plans that sufficiently address potential adverse liquidity

events and emergency cash flow requirements;

and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity risk management process.

Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds.

Our liquidity requirements are met primarily through our deposits, FHLB advances, and the principal and interest payments we receive on loans and investment securities.

Our liquidity requirements are met primarily through our deposits, Federal Reserve Discount Window advances, FHLB advances, and the principal and interest payments we receive on loans and investment securities.

Cash on hand, cash at third-party banks, investments available-for-sale, and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets.

Other sources of liquidity that are routinely available to us include funds from retail and wholesale deposits, advances from the FHLB, and proceeds from the sale of loans.

Less commonly used sources of funding include borrowings from the Federal Reserve Discount Window, draws on established federal funds lines from unaffiliated commercial banks, and the issuance of debt or equity securities.

Other sources of liquidity that are routinely available to us include funds from retail and wholesale deposits, advances from the FHLB and Federal Reserve Discount Window, and proceeds from the sale of loans.

Less commonly used sources of funding include borrowings from established federal funds lines from unaffiliated commercial banks, and the issuance of debt or equity securities.

We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary.

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Generally speaking, our principal funding source is cash from deposits, and our principal uses of cash include funding of loans, operating expenses, income taxes, and dividend payments, as described below.

As of September 30, 2023, management believes the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.

As of March 31, 2024, management believes the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.

In addition, in April 2024, the Company closed the 2024 Public Offering and sold an aggregate of 3,967,500 shares of its common stock at a public offering price of $21.75 per share.

The proceeds to the Company, after deducting underwriting discounts and commissions but before deducting offering expenses payable by the Company, were approximately $81.5 million, providing additional cash to support the Company’s ongoing operating needs.

Loans are a significant use of cash in daily operations, and a source of cash as customers make payments on their loans or as loans are sold to other financial institutions.

Cash flows from loans are affected by the timing and amount of customer payments and prepayments, changes in interest rates, the general economic environment, competition, and the political environment.

During the nine months ended September 30, 2023, we had cash outflows of $212.1 million in loan originations and advances, net of principal collected, and $39.9 million in loans originated for sale.

During the three months ended March 31, 2024, we had cash outflows of $11.5 million in loan originations and advances, net of principal collected, and $15.5 million in loans originated for sale.

Additionally, we enter into commitments to extend credit in the ordinary course of business, such as commitments to fund new loans and undisbursed construction funds.

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Therefore, the total commitment amounts do not necessarily represent future cash requirements.

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

At March 31, 2024, off-balance sheet commitments totaled $453.5 million.

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

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

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

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

These deposits may not renew due to general competition.

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

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

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

During the three months ended March 31, 2024, we had cash outflows related to a decrease in deposits of $71.1 million, primarily as a result of decreases in wholesale funding.

During the twelve months following March 31, 2024, approximately $284.9 million of time deposits are expected to mature.

These deposits may or may not renew due to general competition.

We expect the outflow will not be significant and can be replenished through our organic growth in deposits.

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

At March 31, 2024, cash and cash equivalents represented 6.27% of total deposits.

Investment Securities

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

Our investment securities totaled $108.0 million at March 31, 2024.

Mortgage-backed securities and obligations of states and political subdivisions comprised 50.87% and 35.20% of our investment portfolio, respectively.

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Cash proceeds from obligations of states and political subdivisions occur when these securities are called or mature.

Assuming the current prepayment speed and interest rate environment, we expect to receive approximately $7.3 million from our securities over the twelve months following September 30, 2023.

Assuming the current prepayment speed and interest rate environment, we expect to receive approximately $7.7 million from our securities over the twelve months following March 31, 2024.

In future periods, we expect to maintain approximately the same level of cash flows from our securities.

Depending on market yield and our liquidity, we may purchase securities as a use of cash in our interest-earning asset portfolio.

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

Additionally, at September 30, 2023, securities available-for-sale totaled $104.1 million, of which $103.2 million has been pledged as collateral for borrowings and other commitments.

During the three months ended March 31, 2024, we had cash proceeds from sales, maturities, calls, and prepayments of securities of $2.0 million.

Additionally, at March 31, 2024, securities available-for-sale totaled $105.0 million, of which $101.4 million has been pledged as collateral for borrowings and other commitments.

FHLB Financing

The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary.

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

Federal Reserve Discount Window and Correspondent Bank Lines of Credit

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

At March 31, 2024, the Bank had outstanding borrowings of $20.0 million and a total financing availability of $411.4 million, net of letters of credit issued of $571.5 million.

Federal Reserve Discount Window

The Company has the ability to borrow from the Federal Reserve Discount Window when necessary.

At March 31, 2024, the Bank had outstanding borrowings of $100.0 million and a total financing availability of $707.1 million.

Correspondent Bank Lines of Credit

At March 31, 2024, the unused and available amount for borrowing from correspondent bank lines of credit was $175.0 million.

Total Liquidity

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

September 30, 2023 Available

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

Total liquidity (consisting of cash and cash equivalents and unused and immediately available borrowing capacity as set forth below) was approximately $1.5 billion as of March 31, 2024.

March 31, 2024 Available

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

FHLB advances

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Future Contractual Obligations

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

Our estimated future contractual obligations as of March 31, 2024 include both current and long-term obligations.

Under our operating leases, we have an operating lease liability of $7.3 million.

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We also have contractual obligations on unfunded loan commitments and standby letters of credit totaling $453.5 million.

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

The Company paid dividends to its shareholders totaling $3.5 million during the three months ended March 31, 2024.

We expect to continue our current practice of paying quarterly cash dividends with respect to our common stock, subject to our board of directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice.

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The following table summarizes our consolidated cash flow activities:

Nine months ended September 30,

(in thousands) 2023 2022 $ Change

Three months ended March 31,

(dollars in thousands) 2024 2023 $ Change

Net cash provided by operating activities $ 247 $ 694 $ (447)

Net cash used in investing activities $ (11,923) $ (68,559) $ 56,636

Net cash provided by financing activities 230,715 494,275 (263,560)

Net cash (used in) provided by financing activities $ (124,575) $ 155,813 $ (280,388)

Operating Activities

Net cash provided by operating activities increased by $13.0 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Net cash provided by operating activities decreased by $0.4 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Cash provided by operating activities is subject to variability period-over-period as a result of timing differences, including with respect to the collection of receivables and payments of interest expense, accounts payable, and bonuses.

Investing Activities

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

Net cash used in investing activities decreased by $56.6 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to decreased loan originations.

Financing Activities

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

Net cash (used in) provided by financing activities decreased by $280.4 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to a decline in deposits and lower borrowings.

Capital Adequacy

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Having passed this threshold as of September 30, 2022, we are no longer subject to this policy statement and our capital adequacy is evaluated relative to the Federal Reserve’s generally applicable capital requirements.

Additionally, as of June 30, 2023, the Company’s consolidated assets were in excess of $3.0 billion, and as a consequence, beginning in March 2024, the Company will no longer prepare and file financial reports with the Federal Reserve as a small bank holding company and will be subject to capital ratio requirements for bank holding companies.

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 no longer prepares and files financial reports with the Federal Reserve as a small bank holding company and is subject to capital ratio requirements for bank holding companies.

Under federal regulations implementing the Basel III framework, the Bank is subject to minimum risk-based and leverage capital requirements.

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Capital amounts for Bancorp and the Bank, and the Bank’s prompt corrective action classification, are also subject to qualitative judgments by the regulators about components of capital, risk weightings, and other factors.

As of September 30, 2023, both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank qualified as “well-capitalized” under the prompt corrective action framework.

As of March 31, 2024, both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank qualified as “well-capitalized” under the prompt corrective action framework.

Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs.

For all periods presented, the Bank’s ratios exceed the regulatory definition of “well-capitalized” under the regulatory framework for prompt corrective action, and Bancorp’s ratios exceed the minimum ratios that would be required for it to be considered a well-capitalized bank holding company.

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

As of September 30, 2023 and December 31, 2022, Bancorp’s Tier 2 capital included subordinated debt, which was not included at the Bank level.

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

For all periods presented, the Bank’s ratios exceed the regulatory definition of “well-capitalized” under the regulatory framework for prompt corrective action, and Bancorp’s ratios exceed the minimum ratios required for it to be considered a well-capitalized bank holding company.

The capital adequacy ratios as of March 31, 2024 and December 31, 2023 for Bancorp and the Bank are presented in the following tables.

As of March 31, 2024 and December 31, 2023, 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 Actual Ratio

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Amount Ratio Amount Ratio

September 30, 2023

March 31, 2024

Total capital (to risk-weighted assets) $ 412,503 12.34 % $ 264,002 8.00 % N/A N/A

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Amount Ratio Amount Ratio

September 30, 2023

March 31, 2024

Total capital (to risk-weighted assets) $ 398,228 11.94 % $ 266,911 8.00 % $ 333,639 10.00 %

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Some of the financial measures discussed herein are non-GAAP financial measures.

In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes

amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated statements of income, balance sheets, statements of shareholders’ equity, or statements of cash flows.

In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated statements of income, balance sheets, statements of shareholders’ equity, or statements of cash flows.

Tangible shareholders’ equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets.

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We had no goodwill or other intangible assets at the end of any period indicated.

As a result, tangible shareholders’ equity to tangible assets is the same as total shareholders’ equity to total assets at the end of each of the periods indicated.

result, tangible shareholders’ equity to tangible assets is the same as total shareholders’ equity to total assets at the end of each of the periods indicated.

Tangible book value per share is defined as total shareholders’ equity less goodwill and other intangible assets, divided by the outstanding number of common shares at the end of the period.

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Recent Legislative and Regulatory Developments

Potential Regulatory Reform in Response to Recent Bank Failures

The failures of Silicon Valley Bank (Santa Clara, California), Signature Bank (New York, New York), and First Republic Bank (San Francisco, California) in March and May, 2023, may lead to regulatory changes and initiatives that could impact the Company.

For example, President Biden has encouraged the federal banking agencies to adopt various reforms, including the completion of an incentive compensation rule for bank executives pursuant to Section 956 of the Dodd-Frank Act, in response to these bank failures.

On April 28, 2023, the Federal Reserve and the FDIC issued reports on the failures of Silicon Valley Bank and Signature Bank, respectively, identifying potential causes that the federal banking agencies may seek to address through changes to their supervisory and regulatory policies.

Additionally, agency officials, including the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, have called for changes to the manner in which banks’ capital, interest rate, and liquidity risks are supervised and regulated.

The extent of final actions to be taken by the regulatory agencies in response to these bank failures, including the potential changes discussed by the Vice Chair or highlighted in the Federal Reserve and FDIC reports, remains unclear.

Bank Term Funding Program

The Federal Reserve created the Bank Term Funding Program (the “BTFP”) in response to recent concerns over liquidity in the banking sector.

This program provides funding to eligible depository institutions to help ensure that banks can meet the needs of all depositors.

The BTFP offers one-year loans to banks pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S.

Treasury securities, U.S.

agency securities, and U.S.

agency mortgage-backed securities.

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

Small Business Lending Data Collection Rule

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

The Company is evaluating the impact of the new rule.

The rule took effect on August 29, 2023, and requires compliance by October 1, 2024, April 1, 2025, or January 1, 2026, depending on the number of covered small business loans that a covered lender originates.

In October 2023, the U.S.

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

Third Party Risk Management Guidance

On June 6, 2023, the FDIC, the Federal Reserve, and the OCC issued final guidance providing sound principles that support a risk-based approach to third-party risk management.

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

Community Reinvestment Act Reform

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

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

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

The rule becomes effective April 1, 2024.

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

The Company is evaluating the impact of the final rule.

Bank Merger Review

On March 21, 2024, the FDIC published proposed revisions to its Statement of Policy on Bank Merger Transactions that may change the way the FDIC reviews bank merger applications.

While the Federal Reserve has not issued a similar proposal, Federal Reserve Vice Chair for Supervision Michael Barr has stated that the Federal Reserve is working with the U.S.

Department of Justice to update guidelines setting forth standards for the review of the competitive impact of a bank merger transaction.

These pending regulatory revisions create uncertainty regarding the standards that the agencies may apply to their review of bank mergers and may make it more difficult and/or costly to obtain regulatory approval of a bank merger, or otherwise result in more burdensome conditions in approval orders than the agencies have previously imposed.

Additionally, the agencies may begin to apply new standards in practice before they formally finalize changes to their merger policies.

As a result, these new standards may limit banking organizations’ ability to grow through an acquisition or make it more costly or less beneficial for them to do so.

Glossary of Acronyms, Abbreviations, and Terms

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Company’s Annual Report on Form 10-K for the year ended December 31, 2023

FNMA Federal National Mortgage Association

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

ASC Accounting Standards Codification GAAP Generally Accepted Accounting Principles in the U.S.

ASU Accounting Standards Update GNMA Government National Mortgage Association

AFS Available-for-Sale GSE Government Sponsored Entity

Bancorp Five Star Bancorp and its subsidiary ICS Insured Cash Sweep®

Bank Five Star Bank IPO Initial Public Offering

GNMA Government National Mortgage Association

ASC Accounting Standards Codification GSE Government Sponsored Entity

ASU Accounting Standards Update ICS Insured Cash Sweep®

Bancorp Five Star Bancorp and its subsidiary IPO Initial Public Offering

Bank Five Star Bank LM Loan modification made to borrower experiencing financial difficulty

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

banking organizations LM Loan modification made to borrower experiencing financial difficulty

banking organizations EVE

Economic Value of Equity

BOLI Bank-Owned Life Insurance NI Net Income

Bank Term Funding Program

NIM Net Interest Margin

CDARS Certificate of Deposit Account Registry Service® OCC The Office of the Comptroller of the Currency

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

OCI Other Comprehensive Income

Consumer Financial Protection Bureau

PPP Paycheck Protection Program

Community Reinvestment Act

Restricted Stock Award

Chicago Mercantile Exchange

ROAA Return on Average Assets, annualized

CRE Commercial Real Estate ROAE Return on Average Equity, annualized

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

EPS Earnings per Share SBA U.S.

CDARS Certificate of Deposit Account Registry Service® NII Net Interest Income

CME Chicago Mercantile Exchange OCI Other Comprehensive Income

EPS Earnings per Share RSA Restricted Stock Award

FASB Financial Accounting Standards Board ROAA Return on Average Assets, annualized

FDIC Federal Deposit Insurance Corporation ROAE Return on Average Equity, annualized

Federal Reserve Board of Governors of the Federal Reserve System ROUA Right-of-Use Asset

FHLB Federal Home Loan Bank of San Francisco SBA U.S.

Small Business Administration

FASB Financial Accounting Standards Board SEC Securities and Exchange Commission

FDIC Federal Deposit Insurance Corporation SOFR Secured Overnight Financing Rate

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

FHLMC Federal Home Loan Mortgage Corporation

Quantitative and Qualitative Disclosures About Market Risk

Not applicable for a smaller reporting company.

FHLMC Federal Home Loan Mortgage Corporation SEC Securities and Exchange Commission

FNMA Federal National Mortgage Association SOFR Secured Overnight Financing Rate

GAAP Generally Accepted Accounting Principles in the U.S.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis