FIVE STAR BANCORP 10-Q

ITEM 1. Financial Statements FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts) March 31, 2024 December 31, 2023 ASSETS Cash and due from financial institutions $ 29,750 $ 26,986 Interest-bearing deposits in banks 155,575 294,590 Cash and cash equivalents 185,325 321,576 Time deposits in banks 5,878 5,858 Securities available-for-sale, at fair value, net of allowance for credit losses of $ 0 at March 31, 2024 and December 31, 2023 (amortized cost of $ 122,667 and $ 124,788 at March 31, 2024 and December 31, 2023, respectively) 105,006 108,083 Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ 20 at March 31, 2024 and December 31, 2023 (fair value of $ 2,828 and $ 2,913 at March 31, 2024 and December 31, 2023, respectively) 3,000 3,077 Loans held for sale 10,243 11,464 Loans held for investment 3,104,130 3,081,719 Allowance for credit losses - loans ( 34,653 ) ( 34,431 ) Loans held for investment, net of allowance for credit losses 3,069,477 3,047,288 FHLB stock 15,000 15,000 Operating leases, right-of-use asset, net 6,932 5,284 Premises and equipment, net 1,569 1,623 Bank-owned life insurance 18,872 17,180 Interest receivable and other assets 55,058 56,692 Total assets $ 3,476,360 $ 3,593,125 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest-bearing $ 817,388 $ 831,101 Interest-bearing 2,138,384 2,195,795 Total deposits 2,955,772 3,026,896 Borrowings: Subordinated notes, net 73,786 73,749 Other borrowings 120,000 170,000 Operating lease liability 7,320 5,603 Interest payable and other liabilities 26,902 31,103 Total liabilities 3,183,780 3,307,351 Commitments and contingencies (Note 8) Shareholders’ equity: Preferred stock, no par value; 10,000,000 shares authorized; zero issued and outstanding at March 31, 2024 and December 31, 2023 — — Common stock, no par value; 100,000,000 shares authorized; 17,353,251 shares issued and outstanding at March 31, 2024; 17,256,989 shares issued and outstanding at December 31, 2023 220,804 220,505 Retained earnings 84,216 77,036 Accumulated other comprehensive loss, net of taxes ( 12,440 ) ( 11,767 ) Total shareholders’ equity 292,580 285,774 Total liabilities and shareholders ’ equity $ 3,476,360 $ 3,593,125 See accompanying notes to the unaudited consolidated financial statements. 1 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended March 31, (in thousands, except per share amounts) 2024 2023 Interest and fee income: Loans, including fees $ 43,786 $ 37,494 Taxable securities 477 466 Nontaxable securities 176 184 Interest-bearing deposits in banks 3,102 2,167 Total interest and fee income 47,541 40,311 Interest expense: Deposits 19,511 9,378 Subordinated notes 1,161 1,161 Other borrowings 125 624 Total interest expense 20,797 11,163 Net interest income 26,744 29,148 Provision for credit losses 900 900 Net interest income after provision for credit losses 25,844 28,248 Non-interest income: Service charges on deposit accounts 188 117 Gain on sale of loans 369 598 Loan-related fees 429 308 FHLB stock dividends 332 193 Earnings on BOLI 142 102 Other 373 53 Total non-interest income 1,833 1,371 Non-interest expense: Salaries and employee benefits 7,577 6,618 Occupancy and equipment 626 523 Data processing and software 1,157 872 FDIC insurance 400 402 Professional services 707 631 Advertising and promotional 460 418 Loan-related expenses 297 255 Other operating expenses 1,492 1,399 Total non-interest expense 12,716 11,118 Income before provision for income taxes 14,961 18,501 Provision for income taxes 4,330 5,340 Net income $ 10,631 $ 13,161 Basic earnings per common share $ 0.62 $ 0.77 Diluted earnings per common share $ 0.62 $ 0.77 See accompanying notes to unaudited consolidated financial statements. 2 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended March 31, (in thousands) 2024 2023 Net income $ 10,631 $ 13,161 Unrealized (loss) gain on securities: Net unrealized holding (loss) gain on securities available-for-sale during the period ( 955 ) 2,140 Less: Income tax (benefit) expense related to items of other comprehensive (loss) income ( 282 ) 632 Other comprehensive (loss) income ( 673 ) 1,508 Total comprehensive income $ 9,958 $ 14,669 See accompanying notes to the unaudited consolidated financial statements. 3 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the Three Months Ended March 31, 2024 and 2023 (Unaudited) Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders’ Equity (in thousands, except per share amounts) Shares Amount Balance at December 31, 2022 17,241,926 $ 219,543 $ 46,736 $ ( 13,454 ) $ 252,825 Cumulative effect of adoption of ASC 326 on retained earnings — — ( 4,491 ) — ( 4,491 ) Net income — — 13,161 — 13,161 Other comprehensive income — — — 1,508 1,508 Stock issued under stock award plans, net 16,978 — — — — Stock compensation expense — 242 — — 242 Cash dividends paid ($ 0.15 per share) — — ( 2,589 ) — ( 2,589 ) Balance at March 31, 2023 17,258,904 $ 219,785 $ 52,817 $ ( 11,946 ) $ 260,656 Balance at December 31, 2023 17,256,989 $ 220,505 $ 77,036 $ ( 11,767 ) $ 285,774 Net income — — 10,631 — 10,631 Other comprehensive loss — — — ( 673 ) ( 673 ) Stock issued under stock award plans, net 96,380 — — — — Stock compensation expense — 299 — — 299 Stock forfeitures ( 118 ) — — — — Cash dividends paid ($ 0.20 per share) — — ( 3,451 ) — ( 3,451 ) Balance at March 31, 2024 17,353,251 $ 220,804 $ 84,216 $ ( 12,440 ) $ 292,580 See accompanying notes to the unaudited consolidated financial statements. 4 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, (in thousands) 2024 2023 Cash flows from operating activities: Net income $ 10,631 $ 13,161 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 900 900 Depreciation and amortization 472 419 Amortization of deferred loan fees and costs ( 127 ) ( 36 ) Amortization of premiums and discounts on securities 246 313 Amortization of subordinated note issuance costs 36 34 Stock compensation expense 299 242 Earnings on BOLI ( 142 ) ( 102 ) Deferred tax provision 6 62 Loans originated for sale ( 15,453 ) ( 24,006 ) Gain on sale of loans ( 369 ) ( 598 ) Gross proceeds from sale of loans 5,580 13,289 Gain on partial sale of equity investment 300 — Net changes in: Interest receivable and other assets 2,050 ( 4,331 ) Interest payable and other liabilities ( 3,941 ) 1,580 Operating lease liability ( 241 ) ( 233 ) Net cash provided by operating activities 247 694 Cash flows from investing activities: Maturities, prepayments, and calls of securities available-for-sale 1,953 2,899 Capital call for equity investment ( 1,000 ) — Proceeds received from equity investment 300 — Net change in time deposits in banks ( 20 ) 232 Loan originations, net of repayments ( 11,498 ) ( 69,450 ) Purchase of premises and equipment ( 108 ) ( 240 ) Purchase of BOLI ( 1,550 ) ( 2,000 ) Net cash used in investing activities ( 11,923 ) ( 68,559 ) Cash flows from financing activities: Net change in deposits ( 71,124 ) 138,402 (Payments) advances on other borrowings ( 50,000 ) 20,000 Cash dividends paid ( 3,451 ) ( 2,589 ) Net cash (used in) provided by financing activities ( 124,575 ) 155,813 Net change in cash and cash equivalents ( 136,251 ) 87,948 Cash and cash equivalents at beginning of period 321,576 259,991 Cash and cash equivalents at end of period $ 185,325 $ 347,939 Supplemental disclosure of cash flow information: Interest paid $ 22,568 $ 471 Income taxes paid 144 — Supplemental disclosure of noncash items: Transfer from loans held for sale to loans held for investment 11,464 9,416 Unrealized (loss) gain on securities ( 955 ) 2,140 Operating lease liabilities exchanged for ROUA 1,958 1,423 ROUA acquired ( 1,958 ) ( 1,444 ) See accompanying notes to the unaudited consolidated financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1: Basis of Presentation and Summary of Significant Accounting Policies (a) Organization Five Star Bank (the “Bank”) was chartered on October 26, 1999 and began operations on December 20, 1999. Five Star Bancorp (“Bancorp” or the “Company”) was incorporated on September 16, 2002 and subsequently obtained approval from the Federal Reserve to be a bank holding company in connection with its acquisition of the Bank. The Company became the sole shareholder of the Bank on June 2, 2003 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company. The Company, through the Bank, provides financial services to customers who are predominately small and middle-market businesses, professionals, and individuals residing in the Northern California region. The Company’s primary loan products are commercial real estate loans, land development loans, construction loans, and operating lines of credit, and its primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts. The Bank currently has seven branch offices in Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, and Yuba City. (b) Basis of Financial Statement Presentation and Consolidation The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) ASC and the rules and regulations of the SEC, including the instructions to Regulation S-X. These interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2023, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report on Form 10-K”), which was filed with the SEC on February 23, 2024. The unaudited consolidated financial statements include Bancorp and its wholly owned subsidiary, the Bank. All significant intercompany transactions and balances are eliminated in consolidation. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2024. The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry. (c) Segments While the Company’s chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Discrete financial information is not available other than on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment. (d) Emerging Growth Company The Company qualifies as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, and, as such, may take advantage of specified reduced reporting requirements and deferred accounting standards adoption dates, and is relieved of other significant requirements that are otherwise generally applicable to other public companies. The Company will remain an emerging growth company for five years after its IPO date of May 5, 2021, unless one of the following occurs: (i) total annual gross revenues are $1.235 billion or more; (ii) the Company issues more than $1 billion in non-convertible debt; or (iii) the Company becomes a large accelerated filer with a public float of more than $0.7 billion. 6 (e) Significant Accounting Policies The Company’s significant accounting policies are included in Note 1, Basis of Presentation in the notes to our audited consolidated financial statements included in the 2023 Annual Report on Form 10-K. (f) Recently Issued Accounting Standards The following information reflects recent accounting standards that have been adopted or are pending adoption by the Company. The Company qualifies as an emerging growth company and, as such, has elected to use the extended transition period for complying with new or revised accounting standards and is not subject to the new or revised accounting standards applicable to public companies during the extended transition period. The accounting standards discussed below indicate effective dates for the Company as an emerging growth company using the extended transition period. Accounting Standards Adopted in 2024 In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (“ASU 2023-02”). Under current GAAP, an entity can only elect to apply the proportional amortization method to investments in low income housing tax credit (“LIHTC”) structures. The amendments in ASU 2023-02 allow entities to elect to account for equity investments made primarily for the purpose of receiving income tax credits using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, if certain conditions are met. ASU 2023-02 provides amendments to paragraph ASC 323-740-25-1, which sets forth the conditions needed to apply the proportional amortization method. The amendments make certain limited changes to those conditions to clarify their application to a broader group of tax credit investment programs. However, the conditions in substance remain consistent with current GAAP. The amendments in ASU 2023-02 also eliminate certain LIHTC-specific guidance to align the accounting more closely with the accounting for other equity investments in tax credit structures and require that the delayed equity contribution guidance in paragraph ASC 323-740-25-3 apply only to tax equity investments accounted for using the proportional amortization method. The Company adopted ASU 2023-02 on January 1, 2024, which did not have a significant impact on the Company’s consolidated financial statements. Accounting Standards Issued But Not Yet Adopted In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”), amending disclosure or presentation requirements related to various subtopics in the FASB’s ASC. ASU 2023-06 was issued in response to the SEC’s initiative to update and simplify disclosure requirements. The SEC identified 27 disclosure requirements that were incremental to those in the ASC and referred them to the FASB for potential incorporation into GAAP. To avoid duplication, the SEC intended to eliminate those disclosure requirements from existing SEC regulations as the FASB incorporated them into the relevant ASC subtopics. ASU 2023-06 adds 14 of the 27 identified disclosure or presentation requirements to the ASC. ASU 2023-06 is to be applied prospectively, and early adoption is prohibited. For reporting entities subject to the SEC’s existing disclosure requirements, the effective dates of ASU 2023-06 will be the date on which the SEC’s removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective. If by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the ASC and will not become effective for any entities. ASU 2023-06 is not expected to have a significant impact on the Company’s consolidated financial statements. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures (“ASU 2023-07”), amending disclosure requirements related to segment reporting primarily through enhanced disclosure about significant segment expenses and by requiring disclosure of segment information on an annual and interim basis. ASU 2023-07 is effective January 1, 2024 and for interim periods beginning after December 15, 2024. The key amendments: (i) require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (the “CODM”) and included within each reported measure of segment profit or loss; (ii) require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition; (iii) require that a public entity provide all annual disclosures about a reportable segment’s profit or loss currently required by GAAP in interim periods as well; (iv) clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, an entity may report one or more of those additional measures of segment profit; (v) require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the 7 reported measure of segment profit or loss in assessing segment performance and deciding how to allocate resources; and (vi) require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures. The requirements of this standard for such entities will apply beginning with the Company’s annual report for the year ending December 31, 2024. The Company has one reportable segment and ASU 2023-07 is not expected to have a significant impact on the Company’s consolidated financial statements. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures (“ASU 2023-09”), which enhances the transparency and decision usefulness of income tax disclosures. ASU 2023-09 will require disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. Entities will also be required to disclose income/(loss) from continuing operations before income tax expense/(benefit) disaggregated between domestic and foreign, as well as income tax expense/(benefit) from continuing operations disaggregated by federal, state, and foreign. ASU 2023-09 is effective January 1, 2025 and is not expected to have a significant impact on the Company’s consolidated financial statements. In March 2024, the FASB issued ASU 2024-02, Codification Improvements - Amendments to Remove References to the Concepts Statements (“ASU 2024-02”). ASU 2024-02 contains amendments to the ASC that remove references to various Concepts Statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior Statements to provide guidance in certain topical areas. FASB Concepts Statements are nonauthoritative. Removing all references to Concepts Statements in the guidance is intended to simplify the ASC and draw a distinction between authoritative and nonauthoritative literature. ASU 2024-02 is effective January 1, 2025 and is not expected to have a significant impact on the Company’s consolidated financial statements. Note 2: Fair Value of Assets and Liabilities Fair Value Hierarchy and Fair Value Measurement Accounting standards require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1 : Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. Level 2 : Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3 : Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). 8 The following table summarizes the Company’s assets and liabilities that were required to be recorded at fair value on a recurring basis. (in thousands) Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Measurement Categories: Changes in Fair Value Recorded In March 31, 2024 Assets: Securities available-for-sale: U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds $ 105,006 $ — $ 105,006 $ — OCI Derivatives – interest rate swap 6 — 6 — NI Liabilities: Derivatives – interest rate swap 6 — 6 — NI December 31, 2023 Assets: Securities available-for-sale: U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds $ 108,083 $ — $ 108,083 $ — OCI Derivatives – interest rate swap 10 — 10 — NI Liabilities: Derivatives – interest rate swap 10 — 10 — NI Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1 inputs) are used to determine the fair value of available-for-sale securities. If quoted market prices are not available, management obtains pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity, and credit spreads (Level 2 inputs). Level 2 securities include U.S. agencies’ or government-sponsored agencies’ debt securities, mortgage-backed securities, government agency-issued bonds, privately issued collateralized mortgage obligations, and corporate bonds. Level 3 securities are based on unobservable inputs that are supported by little or no market activity. In addition, values use discounted cash flow models and may include significant management judgment and estimation. As of March 31, 2024 and December 31, 2023, there were no Level 1 available-for-sale securities and no transfers between Level 1 and Level 2 classifications for assets or liabilities measured at fair value on a recurring basis. On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both the Company’s credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to the Company. Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as collateral dependent loans and other real estate owned. As of March 31, 2024 and December 31, 2023, the carrying amount of assets measured at fair value on a non-recurring basis was immaterial to the Company. 9 Disclosures about Fair Value of Financial Instruments The table below is a summary of fair value estimates for financial instruments as of March 31, 2024 and December 31, 2023. The carrying amounts in the following table are recorded in the consolidated balance sheets under the indicated captions. Further, management has not disclosed the fair value of financial instruments specifically excluded from disclosure requirements, such as BOLI. March 31, 2024 December 31, 2023 (in thousands) Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy Financial assets: Cash and cash equivalents $ 185,325 $ 185,325 Level 1 $ 321,576 $ 321,576 Level 1 Time deposits in banks 5,878 5,878 Level 1 5,858 5,858 Level 1 Securities available-for-sale 105,006 105,006 Level 2 108,083 108,083 Level 2 Securities held-to-maturity 3,000 2,828 Level 3 3,077 2,913 Level 3 Loans held for sale 10,243 11,357 Level 2 11,464 12,626 Level 2 Loans held for investment, net of allowance for credit losses 3,069,477 2,920,533 Level 3 3,047,288 2,891,925 Level 3 FHLB stock and other investments 22,801 N/A N/A 21,801 N/A N/A Interest rate swap 6 6 Level 2 10 10 Level 2 Financial liabilities: Interest rate swap $ 6 $ 6 Level 2 $ 10 $ 10 Level 2 Time deposits 288,168 287,246 Level 2 466,572 465,205 Level 2 Subordinated notes 73,786 72,740 Level 3 73,749 72,693 Level 3 Other borrowings 120,000 120,000 Level 2 170,000 170,000 Level 2 The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at March 31, 2024 and December 31, 2023: Cash and cash equivalents and time deposits in banks : The carrying amount is estimated to be fair value due to the liquid nature of the assets and their short-term maturities. Investment securities : See discussion above for the methods and assumptions used by the Company to estimate the fair value of investment securities. Fair value of held-to-maturity securities is estimated by calculating the net present value of future cash flows based on observable market data, such as interest rates and yield curves (observable at commonly quoted intervals) as provided by an independent third party. Loans held for sale : The fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. Loans held for investment, net of allowance for credit losses : For variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, which use interest rates being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness without considering widening credit spreads due to market illiquidity, which approximates the exit price notion. The allowance for credit losses is considered to be a reasonable estimate of loan discount for credit quality concerns. FHLB stock and other investments : Carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and do not have a readily determinable market value. Derivatives - interest rate swap : See above for a discussion of the methods and assumptions used by the Company to estimate the fair value of derivatives. 10 Commitments to extend credit : These are primarily for adjustable rate loans and there are no differences between the committed amounts and their fair values. Commitments to fund fixed rate loans are at rates which approximate fair value at each reporting date. Time deposits : The fair value is estimated using a discounted cash flow analysis that uses interest rates offered at each reporting date by the Company for certificates with similar remaining maturities, resulting in a Level 2 classification. Subordinated notes : The fair value is estimated by discounting the future cash flow using the current three-month CME Term SOFR. The Company’s subordinated notes are not registered securities and were issued through private placements, resulting in a Level 3 classification. The notes are recorded at carrying value. Other borrowings : The carrying amount is estimated to be fair value. Note 3: Investment Securities The Company’s investment securities portfolio includes obligations of states and political subdivisions, securities issued by U.S. federal government agencies, such as the SBA, and securities issued by U.S. GSEs, such as the FNMA, the FHLMC, and the FHLB. The Company also invests in residential and commercial mortgage-backed securities, collateralized mortgage obligations issued or guaranteed by GSEs, and corporate bonds, as reflected in the following tables. A summary of the amortized cost and fair value related to securities held-to-maturity as of March 31, 2024 and December 31, 2023 is presented below. (in thousands) Amortized Cost Gross Unrealized Fair Value Gains (Losses) March 31, 2024 Obligations of states and political subdivisions $ 3,000 $ — $ ( 172 ) $ 2,828 Total held-to-maturity $ 3,000 $ — $ ( 172 ) $ 2,828 December 31, 2023 Obligations of states and political subdivisions $ 3,077 $ — $ ( 164 ) $ 2,913 Total held-to-maturity $ 3,077 $ — $ ( 164 ) $ 2,913 For securities issued by states and political subdivisions, for purposes of evaluating whether to recognize credit loss expense, management considers: (i) issuer and/or guarantor credit ratings; (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity; (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities; (iv) internal credit review of the financial information; and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. 11 A summary of the amortized cost and fair value related to securities available-for-sale as of March 31, 2024 and December 31, 2023 is presented below. (in thousands) Amortized Cost Gross Unrealized Fair Value Gains (Losses) March 31, 2024 U.S. government agency securities $ 9,912 $ 148 $ ( 131 ) $ 9,929 Mortgage-backed securities 67,246 2 ( 12,303 ) 54,945 Obligations of states and political subdivisions 43,158 6 ( 5,141 ) 38,023 Collateralized mortgage obligations 351 — ( 34 ) 317 Corporate bonds 2,000 — ( 208 ) 1,792 Total available-for-sale $ 122,667 $ 156 $ ( 17,817 ) $ 105,006 December 31, 2023 U.S. government agency securities $ 10,548 $ 142 $ ( 149 ) $ 10,541 Mortgage-backed securities 68,585 7 ( 11,619 ) 56,973 Obligations of states and political subdivisions 43,288 12 ( 4,841 ) 38,459 Collateralized mortgage obligations 367 — ( 35 ) 332 Corporate bonds 2,000 — ( 222 ) 1,778 Total available-for-sale $ 124,788 $ 161 $ ( 16,866 ) $ 108,083 12 The amortized cost and fair value of investment securities by contractual maturity at March 31, 2024 and December 31, 2023 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties. (in thousands) March 31, 2024 December 31, 2023 Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Within one year $ 245 $ 231 $ — $ — $ 277 $ 263 $ — $ — After one but within five years 920 867 391 362 935 885 394 367 After five years through ten years 1,340 1,263 7,692 6,908 1,365 1,292 6,407 5,838 After ten years 495 467 35,075 30,753 500 473 36,487 32,254 Investment securities not due at a single maturity date: U.S. government agency securities — — 9,912 9,929 — — 10,548 10,541 Mortgage-backed securities — — 67,246 54,945 — — 68,585 56,973 Collateralized mortgage obligations — — 351 317 — — 367 332 Corporate bonds — — 2,000 1,792 — — 2,000 1,778 Total $ 3,000 $ 2,828 $ 122,667 $ 105,006 $ 3,077 $ 2,913 $ 124,788 $ 108,083 13 There were no purchases or sales of investment securities during the three months ended March 31, 2024 and March 31, 2023. Pledged investment securities are shown in the following table: (in thousands) March 31, 2024 December 31, 2023 Pledged to: The State of California, securing deposits of public funds and borrowings $ 53,418 $ 55,435 The Federal Reserve Discount Window, increasing borrowing capacity 47,939 48,964 Total pledged investment securities $ 101,357 $ 104,399 The following table details the gross unrealized losses and fair values aggregated by investment category and length of time that individual available-for-sale securities have been in a continuous unrealized loss position at March 31, 2024 and December 31, 2023: Less than 12 months 12 months or more Total securities in a loss position (in thousands) Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss March 31, 2024 U.S. government agency securities $ 1,926 $ ( 6 ) $ 5,761 $ ( 125 ) $ 7,687 $ ( 131 ) Mortgage-backed securities 1 — 53,592 ( 12,303 ) 53,593 ( 12,303 ) Obligations of states and political subdivisions — — 36,501 ( 5,141 ) 36,501 ( 5,141 ) Collateralized mortgage obligations — — 317 ( 34 ) 317 ( 34 ) Corporate bonds — — 1,792 ( 208 ) 1,792 ( 208 ) Total temporarily impaired securities $ 1,927 $ ( 6 ) $ 97,963 $ ( 17,811 ) $ 99,890 $ ( 17,817 ) December 31, 2023 U.S. government agency securities $ 1,130 $ ( 14 ) $ 7,081 $ ( 135 ) $ 8,211 $ ( 149 ) Mortgage-backed securities — — 55,609 ( 11,619 ) 55,609 ( 11,619 ) Obligations of states and political subdivisions — — 36,930 ( 4,841 ) 36,930 ( 4,841 ) Collateralized mortgage obligations — — 332 ( 35 ) 332 ( 35 ) Corporate bonds — — 1,778 ( 222 ) 1,778 ( 222 ) Total temporarily impaired securities $ 1,130 $ ( 14 ) $ 101,730 $ ( 16,852 ) $ 102,860 $ ( 16,866 ) There were 150 and 149 available-for-sale securities in unrealized loss positions at March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, the investment portfolio included 144 investment securities that had been in a continuous loss position for twelve months or more and six investment securities that had been in a loss position for less than twelve months. There was one held-to-maturity security in a continuous unrealized loss position at March 31, 2024 and December 31, 2023, which had been in a continuous loss position for more than twelve months. Obligations issued or guaranteed by government agencies such as the GNMA and the SBA or GSEs under conservatorship such as the FNMA and the FHLMC, are guaranteed or sponsored by agencies of the U.S. government and have strong credit profiles. The Company therefore expects to receive all contractual interest payments on time and believes the risk of credit losses on these securities is remote. 14 The Company’s investment in obligations of states and political subdivisions are deemed credit worthy after management’s comprehensive analysis of the issuers’ latest financial information, credit ratings by major credit agencies, and/or credit enhancements. Non-Marketable Securities Included in Other Assets FHLB capital stock : As a member of the FHLB, the Company is required to maintain a minimum investment in FHLB capital stock determined by the board of directors of the FHLB. The minimum investment requirements can increase in the event the Company increases its total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $ 100 per share par value. The Company held $ 15.0 million of FHLB stock at March 31, 2024 and December 31, 2023. The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and do not have a readily determinable market value. Based on management’s analysis of the FHLB’s financial condition and certain qualitative factors, management determined that the FHLB stock was not impaired at March 31, 2024 and December 31, 2023. 15 Note 4: Loans and Allowance for Credit Losses The Company’s loan portfolio is its largest class of earning assets and typically provides higher yields than other types of earning assets. Associated with the higher yields is an inherent amount of credit risk which the Company attempts to mitigate through strong underwriting practices. The following table presents the balance of each major product type within the Company’s portfolio as of the dates indicated. (in thousands) March 31, 2024 December 31, 2023 Real estate: Commercial $ 2,687,456 $ 2,685,419 Commercial land and development 14,678 15,551 Commercial construction 62,513 62,863 Residential construction 18,141 15,456 Residential 28,685 25,893 Farmland 51,422 51,669 Commercial: Secured 143,273 165,109 Unsecured 26,175 23,850 Consumer and other 73,917 38,166 Subtotal 3,106,260 3,083,976 Net deferred loan fees ( 2,130 ) ( 2,257 ) Loans held for investment 3,104,130 3,081,719 Allowance for credit losses - loans ( 34,653 ) ( 34,431 ) Loans held for investment, net of allowance for credit losses $ 3,069,477 $ 3,047,288 Underwriting Commercial loans : Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Real estate loans : Real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected than other loans by conditions in the real estate market or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. Construction loans : With respect to construction loans that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans may be underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be 16 inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the ultimate success of the project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored using on-site inspections and are generally considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing. Residential real estate loans : Residential real estate loans are underwritten based upon the borrower’s income, credit history, and collateral. To monitor and manage residential loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements. Farmland loans : Farmland loans are generally made to producers and processors of crops and livestock. Repayment is primarily from the sale of an agricultural product or service. Farmland loans are secured by real property and are susceptible to changes in market demand for specific commodities. This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles, as well as adverse weather conditions. Consumer loans : The Company purchased consumer loans underwritten utilizing credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements. Credit Quality Indicators The Company has established a loan risk rating system to measure and monitor the quality of the loan portfolio. All loans are assigned a risk rating from the inception of the loan until the loan is paid off. The primary loan grades are as follows: Loans rated pass : These are loans to borrowers with satisfactory financial support, repayment capacity, and credit strength. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Company’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts and their financial ratios and trends are acceptable. Negative external industry factors are generally not present. The loan may be secured, unsecured, or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain. Loans rated watch : These are loans which have deficient loan quality and potentially significant issues, but losses do not appear to be imminent, and the issues may be temporary in nature. The significant issues are typically: (i) a history of losses or events that threaten the borrower’s viability; (ii) a property with significant depreciation and/or marketability concerns; or (iii) poor or deteriorating credit, occasional late payments, and/or limited reserves but the loan is generally kept current. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Loans rated substandard : These are loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged (if any). Loans so classified exhibit a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected. Loans rated doubtful : These are loans for which the collection or liquidation of the entire debt is highly questionable or improbable. Typically, the possibility of loss is extremely high. The losses on these loans are deferred until all pending factors have been addressed. 17 The amortized cost basis of the Company’s loans by origination year, where origination is defined as the later of origination or renewal date, and credit quality indicator as of the period indicated was as follows: Amortized Cost Basis by Origination Year as of March 31, 2024 (in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Revolving Converted to Term Total Real estate: Commercial Pass $ 71,988 $ 329,126 $ 971,602 $ 670,590 $ 236,866 $ 360,603 $ 4,850 $ — $ 2,645,625 Watch — — 11,517 15,855 4,699 5,178 — — 37,249 Substandard — — — — — 1,849 — — 1,849 Doubtful — — — — — — — — — Total 71,988 329,126 983,119 686,445 241,565 367,630 4,850 — 2,684,723 Commercial land and development Pass 1,663 9,899 2,217 — 183 714 — — 14,676 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 1,663 9,899 2,217 — 183 714 — — 14,676 Commercial construction Pass 110 7,124 37,899 — 11,230 5,897 — — 62,260 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 110 7,124 37,899 — 11,230 5,897 — — 62,260 Residential construction Pass 14,229 — — 3,913 — — — — 18,142 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 14,229 — — 3,913 — — — — 18,142 Residential Pass 3,203 4,828 3,896 6,195 2,259 6,925 1,409 — 28,715 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 3,203 4,828 3,896 6,195 2,259 6,925 1,409 — 28,715 Farmland Pass 690 2,302 8,030 12,669 7,826 19,884 3 — 51,404 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 690 2,302 8,030 12,669 7,826 19,884 3 — 51,404 Commercial: Secured Pass 1,394 27,663 26,760 12,033 11,387 18,864 31,061 — 129,162 Watch — 180 9,397 2,651 38 1,173 1,172 — 14,611 Substandard — — — — — 66 — — 66 Doubtful — — — — — — — — — Total 1,394 27,843 36,157 14,684 11,425 20,103 32,233 — 143,839 18 Amortized Cost Basis by Origination Year as of March 31, 2024 (in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Revolving Converted to Term Total Commercial: Unsecured Pass 958 4,890 3,321 4,471 5,717 2,142 4,692 — 26,191 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 958 4,890 3,321 4,471 5,717 2,142 4,692 — 26,191 Consumer and other Pass 16,057 39,913 10,317 7,587 1 279 — — 74,154 Watch — — 15 — — — — — 15 Substandard — — 11 — — — — — 11 Doubtful — — — — — — — — — Total 16,057 39,913 10,343 7,587 1 279 — — 74,180 Total Pass 110,292 425,745 1,064,042 717,458 275,469 415,308 42,015 — 3,050,329 Watch — 180 20,929 18,506 4,737 6,351 1,172 — 51,875 Substandard — — 11 — — 1,915 — — 1,926 Doubtful — — — — — — — — — Total $ 110,292 $ 425,925 $ 1,084,982 $ 735,964 $ 280,206 $ 423,574 $ 43,187 $ — $ 3,104,130 Amortized Cost Basis by Origination Year as of December 31, 2023 (in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total Real estate: Commercial Pass $ 329,876 $ 992,181 $ 714,965 $ 238,655 $ 128,424 $ 247,030 $ 4,685 $ — $ 2,655,816 Watch — 8,534 6,274 4,727 574 4,896 — — 25,005 Substandard — — — — — 1,890 — — 1,890 Doubtful — — — — — — — — — Total 329,876 1,000,715 721,239 243,382 128,998 253,816 4,685 — 2,682,711 Commercial land and development Pass 11,388 3,229 — 184 — 733 — — 15,534 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 11,388 3,229 — 184 — 733 — — 15,534 Commercial construction Pass 9,074 32,154 4,189 11,230 — 5,897 — — 62,544 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 9,074 32,154 4,189 11,230 — 5,897 — — 62,544 Residential construction Pass 2,412 9,128 3,912 — — — — — 15,452 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 2,412 9,128 3,912 — — — — — 15,452 19 Amortized Cost Basis by Origination Year as of December 31, 2023 (in thousands) 2023 2022 2021 2020 2019 Prior Revolving Loans Revolving Converted to Term Total Real estate: Residential Pass 4,838 3,964 6,244 2,279 1,182 5,995 1,420 — 25,922 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 4,838 3,964 6,244 2,279 1,182 5,995 1,420 — 25,922 Farmland Pass 2,311 8,037 12,678 7,860 12,365 8,391 4 — 51,646 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 2,311 8,037 12,678 7,860 12,365 8,391 4 — 51,646 Commercial: Secured Pass 25,299 28,879 14,304 12,164 9,918 10,363 50,020 — 150,947 Watch 189 8,802 2,705 63 154 941 1,727 — 14,581 Substandard — — — — 45 27 — — 72 Doubtful — — — — — — — — — Total 25,488 37,681 17,009 12,227 10,117 11,331 51,747 — 165,600 Unsecured Pass 3,891 3,782 4,902 5,963 2,240 7 3,072 — 23,857 Watch — — — — — — — — — Substandard — — — — — — — — — Doubtful — — — — — — — — — Total 3,891 3,782 4,902 5,963 2,240 7 3,072 — 23,857 Consumer and other Pass 18,489 11,359 8,264 6 — 307 — — 38,425 Watch — 16 — — — — — — 16 Substandard — 12 — — — — — — 12 Doubtful — — — — — — — — — Total 18,489 11,387 8,264 6 — 307 — — 38,453 Total Pass 407,578 1,092,713 769,458 278,341 154,129 278,723 59,201 — 3,040,143 Watch 189 17,352 8,979 4,790 728 5,837 1,727 — 39,602 Substandard — 12 — — 45 1,917 — — 1,974 Doubtful — — — — — — — — — Total $ 407,767 $ 1,110,077 $ 778,437 $ 283,131 $ 154,902 $ 286,477 $ 60,928 $ — $ 3,081,719 Management regularly reviews the Company’s loans for accuracy of risk grades whenever new information is received. Borrowers are generally required to submit financial information at regular intervals. Typically, commercial borrowers with lines of credit are required to submit financial information with reporting intervals generally ranging from monthly to annually depending on credit size, risk, and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. Management monitors construction loans monthly and reviews consumer loans based on delinquency. Management also reviews loans graded “watch” or worse, regardless of loan type, no less than quarterly. 20 The age analysis of past due loans by class as of March 31, 2024 consisted of the following: (in thousands) Past Due 30-59 Days 60-89 Days Greater Than 90 Days Total Past Due Current Total Loans Receivable Real estate: Commercial $ — $ — $ — $ — $ 2,684,723 $ 2,684,723 Commercial land and development — — — — 14,676 14,676 Commercial construction — — — — 62,260 62,260 Residential construction — — — — 18,142 18,142 Residential — — — — 28,715 28,715 Farmland — — — — 51,404 51,404 Commercial: Secured 182 — — 182 143,657 143,839 Unsecured — — — — 26,191 26,191 Consumer and other 94 — — 94 74,086 74,180 Total $ 276 $ — $ — $ 276 $ 3,103,854 $ 3,104,130 There were no loans greater than 90 days past due and still accruing interest income as of March 31, 2024. The age analysis of past due loans by class as of December 31, 2023 consisted of the following: (in thousands) Past Due Total Past Due Current Total Loans Receivable 30-59 Days 60-89 Days Greater Than 90 Days Real estate: Commercial $ — $ — $ — $ — $ 2,682,711 $ 2,682,711 Commercial land and development — — — — 15,534 15,534 Commercial construction — — — — 62,544 62,544 Residential construction — — — — 15,452 15,452 Residential — — — — 25,922 25,922 Farmland — — — — 51,646 51,646 Commercial: Secured — — — — 165,600 165,600 Unsecured — — — — 23,857 23,857 Consumer and other 76 — — 76 38,377 38,453 Total $ 76 $ — $ — $ 76 $ 3,081,643 $ 3,081,719 There were no loans greater than 90 days past due and still accruing interest income as of December 31, 2023. No collateral dependent loans were in process of foreclosure at March 31, 2024 or December 31, 2023. 21 Non-accrual loans, segregated by class, were as follows as of March 31, 2024 and December 31, 2023: (in thousands) March 31, 2024 December 31, 2023 Real estate: Commercial $ 1,852 $ 1,893 Commercial: Secured 66 72 Total non-accrual loans $ 1,918 $ 1,965 No interest income was recognized on non-accrual loans in the three months ended March 31, 2024 or March 31, 2023. Non-accrual real estate loans did not have an allowance for credit losses as of March 31, 2024. Interest income can be recognized on non-accrual loans in cases where resolution occurs through a sale or full payment is received on the non-accrual loan. The amount of foregone interest income related to non-accrual loans was $ 39.2 thousand for the three months ended March 31, 2024, as compared to $ 9.1 thousand for the three months ended March 31, 2023. Allowance for Credit Losses - Loans The following table discloses activity in the allowance for credit losses - loans for the three months ended March 31, 2024. (in thousands) Beginning Balance Charge-offs Recoveries Provision (Benefit) Ending Balance Real estate: Commercial $ 29,015 $ — $ — $ ( 120 ) $ 28,895 Commercial land and development 178 — — ( 14 ) 164 Commercial construction 718 — — ( 21 ) 697 Residential construction 89 — — 25 114 Residential 151 — — 13 164 Farmland 399 — — 39 438 Commercial: Secured 3,314 ( 998 ) 182 764 3,262 Unsecured 189 ( 34 ) — 104 259 Consumer and other 378 ( 71 ) 93 260 660 Total $ 34,431 $ ( 1,103 ) $ 275 $ 1,050 $ 34,653 22 The following table discloses activity in the allowance for credit losses - loans for the three months ended March 31, 2023. (in thousands) Beginning Balance Effect of Adoption of ASC 326 Charge-offs Recoveries Provision (Benefit) Ending Balance Real estate: Commercial $ 19,216 $ 7,606 $ — $ — $ 24 $ 26,846 Commercial land and development 54 74 — — 96 224 Commercial construction 645 882 — — ( 104 ) 1,423 Residential construction 49 81 — — 43 173 Residential 175 3 — — 1 179 Farmland 644 ( 396 ) — — ( 31 ) 217 Commercial: Secured 7,098 ( 3,060 ) ( 488 ) 92 573 4,215 Unsecured 116 37 — — ( 3 ) 150 Consumer and other 347 80 ( 384 ) 401 ( 44 ) 400 Unallocated 45 ( 45 ) — — 345 345 Total $ 28,389 $ 5,262 $ ( 872 ) $ 493 $ 900 $ 34,172 Unfunded Loan Commitment Reserves Unfunded loan commitment reserves are included in “Interest payable and other liabilities” in the unaudited consolidated balance sheets. Provisions for unfunded loan commitments are included in “Provision for credit losses” in the unaudited consolidated statements of income. Three months ended (in thousands) March 31, 2024 March 31, 2023 Balance at beginning of period $ 1,247 $ 125 Effect of adoption of ASC 326 — 1,092 Provision ( 150 ) — Balance at end of period $ 1,097 $ 1,217 Pledged Loans The Company’s FHLB line of credit is secured under terms of a collateral agreement by a pledge of certain qualifying loans with unpaid principal balances of $ 1.7 billion at March 31, 2024 and December 31, 2023. In addition, the Company pledges eligible tenants in common loans, which totaled $ 1.2 billion at March 31, 2024 and December 31, 2023, to secure its borrowing capacity with the Federal Reserve Discount Window. See Note 6, Long Term Debt and Other Borrowings, for further discussion of these borrowings. 23 Note 5: Interest-Bearing Deposits Interest-bearing deposits consisted of the following as of March 31, 2024 and December 31, 2023: (in thousands) March 31, 2024 December 31, 2023 Interest-bearing transaction accounts $ 295,799 $ 320,356 Savings accounts 121,417 126,498 Money market accounts 1,433,000 1,282,369 Time accounts, $ 250 or more 221,976 344,694 Other time accounts 66,192 121,878 Total interest-bearing deposits $ 2,138,384 $ 2,195,795 Time deposits totaled $ 288.2 million and $ 466.6 million as of March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, scheduled maturities of time deposits for the next five years were as follows: (in thousands) 2024 $ 256,125 2025 30,546 2026 1,361 2027 — 2028 136 Total time deposits $ 288,168 Total deposits include deposits offered through the IntraFi Network that are comprised of Certificate of Deposit Account Registry Service® (“CDARS”) balances included in time deposits and Insured Cash Sweep® (“ICS”) balances included in money market and interest checking deposits. Through this network, the Company offers customers access to FDIC-insured deposit products in aggregate amounts exceeding current insurance limits. When funds are deposited through CDARS and ICS on behalf of a customer, the Company has the option of receiving matching deposits through the network’s reciprocal deposit program or placing deposits “one-way,” for which the Company receives no matching deposits. The Company considers the reciprocal deposits to be in-market deposits, as distinguished from traditional out-of-market brokered deposits. There were no one-way deposits at March 31, 2024 and December 31, 2023. The composition of network deposits as of March 31, 2024 and December 31, 2023 was as follows: (in thousands) March 31, 2024 December 31, 2023 CDARS $ 18,387 $ 16,325 ICS 611,104 620,199 Total network deposits $ 629,491 $ 636,524 24 Interest expense recognized on interest-bearing deposits for periods ended March 31, 2024 and 2023 consisted of the following: Three months ended (in thousands) March 31, 2024 March 31, 2023 Interest-bearing transaction accounts $ 1,126 $ 430 Savings accounts 861 545 Money market accounts 12,155 5,439 Time accounts, $ 250 or more 3,824 1,963 Other time accounts 1,545 1,001 Total interest expense on interest-bearing deposits $ 19,511 $ 9,378 Note 6: Long Term Debt and Other Borrowings Subordinated notes : On August 17, 2022, the Company completed a private placement of $ 75.0 million of fixed-to-floating rate subordinated notes to certain qualified investors, of which $ 19.3 million was purchased by existing or former members of the board of directors and their affiliates. The notes will be used for capital management and general corporate purposes, including, without limitation, the redemption of existing subordinated notes. The subordinated notes have a maturity date of September 1, 2032 and bear interest, payable semi-annually, at the rate of 6.00 % per annum until September 1, 2027. On that date, the interest rate will be adjusted to float at a rate equal to the three-month Term SOFR plus 329.0 basis points ( 8.58 % as of March 31, 2024) until maturity. The notes include a right of prepayment, on or after August 17, 2027 or, in certain limited circumstances, before that date. The indebtedness evidenced by the subordinated notes, including principal and interest, is unsecured and subordinate and junior in right to payment to general and secured creditors and depositors of the Company. The subordinated notes have been structured to qualify as Tier 2 capital for the Company for regulatory capital purposes. Eligible amounts will be phased out by 20% per year beginning five years before the maturity date of the notes. Debt issuance costs incurred in conjunction with the notes were $ 1.5 million, of which $ 0.2 million has been amortized as of March 31, 2024. The Company reflects debt issuance costs as a direct deduction from the face of the note. The debt issuance costs are amortized into interest expense through the maturity period. At March 31, 2024 and December 31, 2023, the carrying value of the Company’s subordinated notes outstanding was $ 73.8 million and $ 73.7 million, respectively. Other borrowings : The Company entered into an agreement with the FHLB which granted the FHLB a blanket lien on certain loans receivable as collateral for a borrowing line. The Company’s total financing availability is based on the dollar volume of qualifying loan collateral. The Company’s total financing availability with the FHLB is decreased by outstanding borrowings and letters of credit (“LCs”) issued on behalf of the Company, as follows: (in thousands) March 31, 2024 December 31, 2023 Total financing ability from the FHLB $ 1,002,910 $ 996,712 Less: outstanding borrowings 20,000 170,000 Less: LCs pledged to secure State of California deposits 146,500 271,500 Less: LCs pledged to secure local agency deposits 425,000 410,000 Total LCs issued 571,500 681,500 Available borrowing capacity with the FHLB $ 411,410 $ 145,212 At March 31, 2024 and December 31, 2023, the Company had a borrowing line available from the Federal Reserve Discount Window. The borrowing line is secured by certain liens on the Company’s loans and certain available-for-sale securities. The Company’s financing availability with the Federal Reserve Discount Window is as follows: (in thousands) March 31, 2024 December 31, 2023 Total financing ability from the Federal Reserve Discount Window $ 807,143 $ 770,572 Less: outstanding borrowings 100,000 — Available borrowing capacity with the Federal Reserve Discount Window $ 707,143 $ 770,572 At March 31, 2024 and December 31, 2023, the Company had five unsecured federal funds lines of credit with its correspondent banks totaling $ 175.0 million. There were no amounts outstanding at March 31, 2024 and December 31, 2023. Note 7: Shareholders’ Equity (a) EPS Basic EPS is net income divided by the weighted average number of common shares outstanding during the period less average unvested restricted stock awards (“RSAs”). Diluted EPS includes the dilutive effect of additional potential common shares related to unvested RSAs using the treasury stock method. The Company has two forms of outstanding common stock: common stock and unvested RSAs. Holders of unvested RSAs receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings, and therefore the RSAs are considered participating securities. However, under the two-class method, the difference in EPS is not significant for these participating securities. Three months ended (in thousands, except share count and earnings per common share) March 31, 2024 March 31, 2023 Net income $ 10,631 $ 13,161 Basic weighted average common shares outstanding 17,190,867 17,150,174 Add: Dilutive effects of assumed vesting of restricted stock 82,127 44,710 Total dilutive weighted average common shares outstanding 17,272,994 17,194,884 Earnings per common share: Basic EPS $ 0.62 $ 0.77 Diluted EPS $ 0.62 $ 0.77 The Company did not have any anti-dilutive shares at March 31, 2024 or March 31, 2023. (b) Dividends On January 18, 2024, the board of directors declared a $ 0.20 per common share dividend, totaling $ 3.5 million. (c) Stock-Based Incentive Arrangement The Company’s stock-based compensation consists of RSAs granted under its historical stock-based incentive arrangement (the “Historical Incentive Plan”) and RSAs issued under the Five Star Bancorp 2021 Equity Incentive Plan (the “Equity Incentive Plan”). The Historical Incentive Plan consisted of RSAs for certain executive officers of the Company. The arrangement provided that these executive officers would receive shares of restricted common stock of the Company that vested over three years , with the number of shares granted based upon achieving certain performance objectives. These objectives included, but were not limited to, net income adjusted for the provision for credit losses, deposit growth, efficiency ratio, net interest margin, and asset quality. Compensation expense for RSAs granted under the Historical 25 Incentive Plan is recognized over the service period, which is equal to the vesting period of the shares based on the fair value of the shares at issue date. In connection with its IPO in May 2021, the Company granted RSAs under the Equity Incentive Plan to certain employees, officers, executives, and non-employee directors. Shares granted to non-employee directors vested immediately upon grant, while shares granted to certain employees, officers, and executives vest ratably over three , five , or seven years (as defined in the respective agreements). Since the completion of the IPO, the Company has granted RSAs under the Equity Incentive Plan to certain executives and directors, which vest annually over three years and over one year , respectively. All RSAs were granted at the fair value of common stock at the time of the award. The RSAs are considered fixed awards, as the number of shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the service period. Non-cash stock compensation expense recognized for the three months ended March 31, 2024 and 2023 was $ 0.3 million and $ 0.2 million, respectively. At March 31, 2024 and 2023, there were 162,348 and 108,363 unvested restricted shares, respectively. As of March 31, 2024, there was approximately $ 2.9 million of unrecognized compensation expense related to the 162,348 unvested restricted shares. The holders of unvested RSAs are entitled to dividends at the same per-share ratio as holders of common stock. Tax benefits for dividends paid on unvested RSAs are recorded as tax benefits in the consolidated statements of income with a corresponding decrease to current taxes payable. Such tax benefits are expected to be recognized over the weighted average term remaining on the unvested restricted shares of 3.37 years as of March 31, 2024. The impact of tax benefits for dividends paid on unvested restricted stock on the Company’s unaudited consolidated statements of income for the three months ended March 31, 2024 and 2023 was immaterial. The following table summarizes activity related to restricted shares for the periods indicated: For the three months ended March 31, 2024 2023 Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Beginning of the period balance 69,338 $ 20.53 96,826 $ 20.34 Shares granted 96,380 21.97 16,978 28.52 Shares vested ( 3,252 ) 28.51 ( 5,441 ) 24.28 Shares forfeited ( 118 ) 20.00 — — End of the period balance 162,348 $ 21.22 108,363 $ 21.43 Note 8: Commitments and Contingencies Financial Instruments with Off-Balance Sheet Risk Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Substantially all of these commitments are at variable interest rates, based on an index, and have fixed expiration dates. Off-balance sheet risk to loan loss exists up to the face amount of these instruments, although material losses are not anticipated. The Company uses the same credit policies in making commitments to originate loans and lines of credit as it does for on-balance sheet instruments, including obtaining collateral at exercise of the commitment. The contractual 26 amounts of unfunded loan commitments and standby letters of credit not reflected in the unaudited consolidated balance sheets were as follows: (in thousands) March 31, 2024 December 31, 2023 Commercial lines of credit $ 189,207 $ 181,855 Undisbursed construction loans 123,602 134,828 Undisbursed commercial real estate loans 105,633 107,712 Agricultural lines of credit 28,085 24,635 Undisbursed residential real estate loans 3,904 6,538 Undisbursed agricultural real estate loans 1,200 1,200 Other 1,866 2,119 Total commitments and standby letters of credit $ 453,497 $ 458,887 The Company records an allowance for credit losses on unfunded loan commitments at the consolidated balance sheet date based on estimates of the probability that these commitments will be drawn upon according to historical utilization experience of the different types of commitments and historical loss rates determined for pooled funded loans. The allowance for credit losses on unfunded commitments totaled $ 1.1 million as of March 31, 2024 and $ 1.2 million as of December 31, 2023, which is recorded in “Interest payable and other liabilities” in the unaudited consolidated balance sheets. Concentrations of credit risk : The Company grants real estate mortgage, real estate construction, commercial, and consumer loans to customers primarily in Northern California. Although the Company has a diversified loan portfolio, a substantial portion is secured by commercial and residential real estate. In management’s judgment, a concentration of loans exists in real estate related loans, which represented approximately 91.86 % of the Company’s loan portfolio at March 31, 2024 and 92.30 % of the Company’s loan portfolio at December 31, 2023. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectability of these loans. Personal and business incomes represent the primary source of repayment for the majority of these loans. Deposit concentrations : At March 31, 2024, the Company had 92 deposit relationships that exceeded $ 5.0 million each, totaling $ 1.7 billion, or approximately 57.63 % of total deposits. The Company’s largest single deposit relationship at March 31, 2024 totaled $ 200.9 million, or approximately 6.80 % of total deposits. Management maintains the Company’s liquidity position and lines of credit with correspondent banks to mitigate the risk of large withdrawals by this group of large depositors. Contingencies : The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company. Correspondent banking agreements : The Company maintains funds on deposit with other FDIC-insured financial institutions under correspondent banking agreements. Uninsured deposits through these agreements totaled approximately $ 24.7 million and $ 22.3 million at March 31, 2024 and December 31, 2023, respectively. Litigation Matters The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company. Note 9: Subsequent Events On April 18, 2024, the Board of Directors of the Company authorized a cash dividend of $ 0.20 per common share, payable on May 13, 2024 to shareholders of record as of May 6, 2024. 27 On March 28, 2024, the Company entered into an underwriting agreement with Keefe, Bruyette & Woods, Inc., as representative of the several underwriters named in Schedule I thereto (the “Underwriters”), to issue and sell up to 3,967,500 shares of common stock, including up to 517,500 shares that could be purchased by the Underwriters pursuant to a 30-day option granted to the Underwriters by the Company, at a public offering price of $ 21.75 per share (the “2024 Public Offering”). On April 2, 2024, the Company closed the 2024 Public Offering and issued 3,450,000 shares of its common stock, and on April 10, 2024, the Company issued an additional 517,500 shares of its common stock to the Underwriters, pursuant to the Underwriters’ full exercise of their option to purchase additional shares. When combined with the shares sold in the closing that occurred on April 2, 2024, the Company sold an aggregate of 3,967,500 shares of its common stock at a public offering price of $ 21.75 per share. The net proceeds to the Company, after deducting underwriting discounts, commissions, and estimated offering expenses of approximately $ 0.7 million, were approximately $ 80.8 million. The Company has a shelf registration statement on file with the SEC registering $ 250.0 million for any combination of equity or debt securities, depository shares, warrants, purchase contracts, purchase units, subscription rights, and units in one or more offerings. The 2024 Public Offering used $ 86.3 million of the Company’s shelf registration statement on file with the SEC. 28