FIVE STAR BANCORP 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion presents management’s perspective on our results of operations and financial condition on a consolidated basis. However, because we conduct all of our material business operations through our bank subsidiary, Five Star Bank (the “Bank”), the discussion and analysis relates to activities primarily conducted by the Bank. Management’s discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related unaudited consolidated financial statements and accompanying notes in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and accompanying notes included in the 2023 Annual Report on Form 10-K, which was filed with the SEC on February 23, 2024. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances. Unless otherwise indicated, references in this report to “we,” “our,” “us,” “the Company,” or “Bancorp” refer to Five Star Bancorp and our consolidated subsidiary. All references to “the Bank” refer to Five Star Bank, our wholly owned subsidiary. Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of our beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Such forward-looking statements are based on various assumptions (some of which may be beyond our control) and are subject to risks and uncertainties, which change over time, and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to: • risks related to the concentration of our business in California, and specifically within Northern California, including risks associated with any downturn in the real estate sector; • changes in market interest rates that affect the pricing of our loans and deposits, our net interest income, and our borrowers’ ability to repay loans; • changes in the U.S. economy, including an economic slowdown, inflation, deflation, housing prices, employment levels, rate of growth, and general business conditions; • uncertain market conditions and economic trends nationally, regionally, and particularly in Northern California and California; • 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; • the effects of increased competition from a wide variety of local, regional, national, and other providers of financial and investment services; • the risks associated with our loan portfolios, and specifically with our commercial real estate loans; • our ability to maintain adequate liquidity and to maintain capital necessary to fund our growth strategy and operations and to satisfy minimum regulatory capital levels; • 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 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; 29 • our ability to comply with various governmental and regulatory requirements applicable to financial institutions, including supervisory actions by federal and state banking agencies; • governmental monetary and fiscal policies, including the policies of the Federal Reserve; • 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 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; and • 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 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. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We disclaim any duty to revise or update the forward-looking statements, whether written or oral, to reflect actual results or changes in the factors affecting the forward-looking statements, except as specifically required by law. Company Overview 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. Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy. We are dedicated to serving real estate, agricultural, faith-based, and small to medium-sized enterprises. 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 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 The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Quarterly Reports on Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity, and cash flows in conformity with GAAP as contained within the FASB’s ASC and the rules and regulations of the SEC, including the instructions to Regulation S-X. 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 30 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. However, actual results may differ from those estimates, and these differences may be material. There have been no significant changes concerning our critical accounting estimates as described in our 2023 Annual Report on Form 10-K. Pursuant to the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), as an emerging growth company, we can elect to opt out of the extended transition period for adopting any new or revised accounting standards. We have elected not to opt out of the extended transition period, which means that when a standard is issued or revised and it has different application dates for public and private companies, we may adopt the standard on the application date for private companies. We have elected to take advantage of the scaled disclosures and other relief under the JOBS Act, and we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us under the JOBS Act, so long as we qualify as an emerging growth company. 31 Executive Summary 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: • Deposits. 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. • Assets. 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. • Loans. 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 $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 3.14% 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 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 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. • Dividends. The board of directors declared a cash dividend of $0.20 per share on January 18, 2024. 32 Highlights of our financial results are presented in the following tables: (dollars in thousands) March 31, 2024 December 31, 2023 Selected financial condition data: Total assets $ 3,476,360 $ 3,593,125 Total loans held for investment $ 3,104,130 $ 3,081,719 Total deposits $ 2,955,772 $ 3,026,896 Total subordinated notes, net $ 73,786 $ 73,749 Total shareholders’ equity $ 292,580 $ 285,774 Asset quality ratios: Allowance for credit losses to total loans held for investment 1.12 % 1.12 % Allowance for credit losses to nonperforming loans 1,806.73 % 1,752.70 % Nonperforming loans to total loans held for investment 0.06 % 0.06 % Capital ratios: Total capital (to risk-weighted assets) 12.34 % 12.30 % Tier 1 capital (to risk-weighted assets) 9.13 % 9.07 % Common equity Tier 1 capital (to risk-weighted assets) 9.13 % 9.07 % Tier 1 leverage 8.63 % 8.73 % Total shareholders’ equity to total assets 8.42 % 7.95 % Tangible shareholders’ equity to tangible assets 1 8.42 % 7.95 % For the three months ended (dollars in thousands, except per share data) March 31, 2024 March 31, 2023 Selected operating data: Net interest income $ 26,744 $ 29,148 Provision for credit losses $ 900 $ 900 Non-interest income $ 1,833 $ 1,371 Non-interest expense $ 12,716 $ 11,118 Net income $ 10,631 $ 13,161 Per common share data: Earnings per common share: Basic $ 0.62 $ 0.77 Diluted $ 0.62 $ 0.77 Book value per share $ 16.86 $ 15.10 Tangible book value per share 2 $ 16.86 $ 15.10 Performance and other financial ratios: ROAA 1.22 % 1.65 % ROAE 14.84 % 20.94 % Net interest margin 3.14 % 3.75 % Cost of funds 2.62 % 1.53 % Efficiency ratio 44.50 % 36.43 % Cash dividend payout ratio on common stock 3 32.26 % 19.48 % 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 33 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 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 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. 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. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets at the end of any period indicated. As a result, tangible book value per share is the same as book value per share at the end of each of the periods indicated. 3 Cash dividend payout ratio on common stock is calculated as dividends on common shares divided by basic earnings per common share. 34 RESULTS OF OPERATIONS 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, 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. Net interest margin is a ratio calculated as net interest income divided by total interest-earning assets for the same period. We manage our earning assets and funding sources in order to maximize this margin while limiting credit risk and interest rate sensitivity to our established risk appetite levels. Changes in market interest rates and competition in our market typically have the largest impact on periodic changes in our net interest margin. 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. 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 three months ended March 31, 2024 For the three months ended March 31, 2023 (dollars in thousands) Average Balance Interest Income/Expense Average Yield/Rate Average Balance Interest Income/Expense Average Yield/Rate Assets Interest-earning deposits in banks 1 $ 233,002 $ 3,102 5.35 % $ 200,541 $ 2,167 4.38 % Investment securities 1,2 109,177 653 2.41 % 119,489 650 2.21 % Loans held for investment and sale 1,3 3,082,290 43,786 5.71 % 2,836,070 37,494 5.36 % Total interest-earning assets 1 3,424,469 47,541 5.58 % 3,156,100 40,311 5.18 % Interest receivable and other assets, net 4 93,983 69,253 Total assets $ 3,518,452 $ 3,225,353 Liabilities and shareholders’ equity Interest-bearing transaction accounts 1 $ 300,325 $ 1,126 1.51 % $ 379,593 $ 433 0.46 % Savings accounts 1 124,561 861 2.78 % 155,233 545 1.42 % Money market accounts 1 1,410,264 12,155 3.47 % 1,087,122 5,436 2.03 % Time accounts 1 429,586 5,369 5.03 % 300,952 2,964 3.99 % Subordinated notes and other borrowings 1 82,775 1,286 6.25 % 125,691 1,785 5.76 % Total interest-bearing liabilities 2,347,511 20,797 3.56 % 2,048,591 11,163 2.21 % Demand accounts 842,105 901,491 Interest payable and other liabilities 40,730 20,344 Shareholders’ equity 288,106 254,927 Total liabilities and shareholders’ equity $ 3,518,452 $ 3,225,353 Net interest spread 5 2.02 % 2.97 % Net interest income/margin 6 $ 26,744 3.14 % $ 29,148 3.75 % 35 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 three months ended March 31, 2024 compared to the three months ended March 31, 2023 (dollars in thousands) Volume Yield/Rate Total Increase (Decrease) Interest-earning deposits in banks $ 446 $ 489 $ 935 Investment securities (59) 62 3 Loans held for investment and sale 3,694 2,598 6,292 Total interest-earning assets 4,081 3,149 7,230 Interest-bearing transaction accounts (282) 975 693 Savings accounts (218) 534 316 Money market accounts 2,776 3,943 6,719 Time accounts 1,630 775 2,405 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 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%. 36 Provision for Credit Losses The provision for credit losses is based on management’s assessment of the adequacy of our allowance for credit losses. Factors impacting the provision include inherent risk characteristics in our loan portfolio, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of the change in collateral values, and the funding probability on unfunded lending commitments. 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. 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, 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. The following table details the components of non-interest income for the periods indicated. For the three months ended (dollars in thousands) March 31, 2024 March 31, 2023 $ Change % Change Service charges on deposit accounts $ 188 $ 117 $ 71 60.68 % Gain on sale of loans 369 598 (229) (38.29) % Loan-related fees 429 308 121 39.29 % FHLB stock dividends 332 193 139 72.02 % Earnings on BOLI 142 102 40 39.22 % Other income 373 53 320 603.77 % Total non-interest income $ 1,833 $ 1,371 $ 462 33.70 % Gain on sale of loans. 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 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 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 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. 37 Non-interest Expense Non-interest expense includes salaries and employee benefits, occupancy and equipment, data processing and software, FDIC insurance, professional services, advertising and promotional, loan-related expenses, and other operating expenses. In evaluating our level of non-interest expense, we closely monitor the Company’s efficiency ratio, which is calculated as non-interest expense divided by the sum of net interest income and non-interest income. We constantly seek to identify ways to streamline our business and operate more efficiently in order to reduce our non-interest expense over time as a percentage of our revenue, while continuing to achieve growth in total loans and assets. Over the past several years, we have invested significant resources in personnel, technology, and infrastructure. As we execute initiatives based on growth, we expect non-interest expense to grow. Non-interest expense has increased throughout the periods presented below; however, we expect our efficiency ratio will improve going forward due, in part, to our past investment in infrastructure. The following table details the components of non-interest expense for the periods indicated. For the three months ended (dollars in thousands) March 31, 2024 March 31, 2023 $ Change % Change Salaries and employee benefits $ 7,577 $ 6,618 $ 959 14.49 % Occupancy and equipment 626 523 103 19.69 % Data processing and software 1,157 872 285 32.68 % FDIC insurance 400 402 (2) (0.50) % Professional services 707 631 76 12.04 % Advertising and promotional 460 418 42 10.05 % Loan-related expenses 297 255 42 16.47 % Other operating expenses 1,492 1,399 93 6.65 % Total non-interest expense $ 12,716 $ 11,118 $ 1,598 14.37 % Salaries and employee benefits. 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. 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 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. Other operating expenses. 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 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. 38 FINANCIAL CONDITION SUMMARY 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 Total assets $ 3,476,360 $ 3,593,125 Cash and cash equivalents $ 185,325 $ 321,576 Total investments $ 108,006 $ 111,160 Loans held for investment $ 3,104,130 $ 3,081,719 Total deposits $ 2,955,772 $ 3,026,896 Subordinated notes, net $ 73,786 $ 73,749 Total shareholders’ equity $ 292,580 $ 285,774 Total Assets 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 $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 Our investment portfolio is primarily comprised of U.S. government agency securities, mortgage-backed securities, and obligations of states and political subdivisions, which are high-quality liquid investments. We manage our investment portfolio according to written investment policies approved by our board of directors. 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 $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 March 31, 2024, other comprehensive loss was $0.7 million, primarily due to rate changes and other market conditions on securities. 39 The following table presents the carrying value of our investment portfolio as of the dates indicated: As of March 31, 2024 December 31, 2023 (dollars in thousands) Carrying Value % of Total Carrying Value % of Total Available-for-sale (at fair value): U.S. government agency securities $ 9,929 9.19 % $ 10,541 9.48 % Mortgage-backed securities 54,945 50.87 % 56,973 51.25 % Obligations of states and political subdivisions 38,023 35.20 % 38,459 34.60 % Collateralized mortgage obligations 317 0.29 % 332 0.30 % Corporate bonds 1,792 1.67 % 1,778 1.60 % Total available-for-sale 105,006 97.22 % 108,083 97.23 % Held-to-maturity (at amortized cost): Obligations of states and political subdivisions 3,000 2.78 % 3,077 2.77 % Total $ 108,006 100.00 % $ 111,160 100.00 % 40 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 (dollars in thousands) Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Available-for-sale: U.S. 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 % Obligations of states and political subdivisions — — % 362 0.84 % 6,908 1.66 % 30,753 1.77 % 38,023 1.74 % Collateralized mortgage obligations — — % — — % 317 1.76 % — — % 317 1.76 % Corporate bonds — — % 1,792 1.25 % — — % — — % 1,792 1.25 % Total available-for-sale — — % 2,990 1.89 % 9,465 2.38 % 92,551 2.16 % 105,006 2.17 % Held-to-maturity: Obligations of states and political subdivisions 245 6.00 % 920 6.00 % 1,340 6.00 % 495 6.00 % 3,000 6.00 % Total $ 245 6.00 % $ 3,910 2.86 % $ 10,805 2.83 % $ 93,046 2.18 % $ 108,006 2.28 % 41 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 December 31, 2023: 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 (dollars in thousands) Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Carrying Value Weighted Average Yield Available-for-sale: U.S. 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 % Obligations of states and political subdivisions — — % 367 0.84 % 5,838 1.71 % 32,254 1.76 % 38,459 1.74 % Collateralized mortgage obligations — — % — — % 332 1.76 % — — % 332 1.76 % Corporate bonds — — % 1,778 1.25 % — — % — — % 1,778 1.25 % Total available-for-sale — — % 2,945 1.79 % 8,789 2.62 % 96,349 2.08 % 108,083 2.12 % Held-to-maturity: Obligations of states and political subdivisions 277 6.00 % 935 6.00 % 1,365 6.00 % 500 6.00 % 3,077 6.00 % Total $ 277 6.00 % $ 3,880 2.81 % $ 10,154 3.07 % $ 96,849 2.10 % $ 111,160 2.22 % Weighted average yield for securities available-for-sale is the projected yield to maturity given current cash flow projections for U.S. government agency securities, mortgage-backed securities, and collateralized mortgage obligations. For callable municipal securities and corporate bonds, weighted average yield is a yield to worst. Weighted average yield for securities held-to-maturity is the stated coupon of the bond. 42 Loan Portfolio 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 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. As of March 31, 2024 December 31, 2023 (dollars in thousands) Amount % of Loans Amount % of Loans Loans held for investment: Real estate: Commercial $ 2,687,456 86.23 % $ 2,685,419 86.76 % Commercial land and development 14,678 0.47 % 15,551 0.50 % Commercial construction 62,513 2.01 % 62,863 2.03 % Residential construction 18,141 0.58 % 15,456 0.50 % Residential 28,685 0.92 % 25,893 0.84 % Farmland 51,422 1.65 % 51,669 1.67 % Commercial: Secured 143,273 4.60 % 165,109 5.33 % Unsecured 26,175 0.84 % 23,850 0.77 % Consumer and other 73,917 2.37 % 38,166 1.23 % Loans held for investment, gross 3,106,260 99.67 % 3,083,976 99.63 % Loans held for sale: Commercial 10,243 0.33 % 11,464 0.37 % Total loans, gross 3,116,503 100.00 % 3,095,440 100.00 % Net deferred loan fees (2,130) (2,257) Total loans $ 3,114,373 $ 3,093,183 Commercial real estate loans consist of term loans secured by a mortgage lien on the real property, such as office and industrial buildings, manufactured home communities, self-storage facilities, hospitality properties, faith-based properties, retail shopping centers, and apartment buildings, as well as commercial real estate construction loans that are offered to builders and developers. Commercial land and development and commercial construction loans consist of loans made to fund commercial land acquisition and development and commercial construction, respectively. The real estate purchased with these loans is generally located in or near our market. Commercial loans consist of financing for commercial purposes in various lines of business, including manufacturing, service industry, and professional service areas. Commercial loans can be secured or unsecured but are generally secured with the assets of the company and/or the personal guaranty of the business owner(s). Residential real estate and construction real estate loans consist of loans secured by single-family and multifamily residential properties, which are both owner-occupied and investor-owned. 43 The following tables present the commercial real estate loan balance, associated percentage of commercial real estate concentrations, estimated real estate collateral values, and related loan-to-value (“LTV”) ranges by collateral type as of the dates indicated. Revolving lines of credit with zero balance and 0.00% LTV are excluded from this table. Collateral values are determined at origination using third-party real estate appraisals or evaluations. 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 March 31, 2024 Manufactured home community $ 847,510 31.54 % $ 1,502,434 14.47 % 74.52 % RV Park 345,398 12.85 % 603,311 18.24 % 75.00 % Retail 273,063 10.16 % 542,916 6.79 % 73.76 % 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 % Office 134,469 5.00 % 300,469 5.80 % 73.13 % All other types 1 360,978 13.43 % 738,991 3.36 % 152.17 % Total 2 $ 2,687,456 100.00 % $ 5,364,111 December 31, 2023 Manufactured home community $ 813,687 30.30 % $ 1,430,224 16.80 % 74.52 % RV Park 343,817 12.80 % 599,691 18.29 % 75.00 % Retail 273,100 10.17 % 540,660 6.89 % 74.07 % Multifamily 211,598 7.88 % 427,948 13.12 % 75.00 % 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 % All other types 1 372,918 13.89 % 756,541 4.00 % 152.33 % Total 2 $ 2,685,419 100.00 % $ 5,318,047 1 Types of collateral in the “all other types” category are those that individually make up less than 5.00% of the commercial real estate concentration. 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 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. 44 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 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 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. Given our concentrations, we have established strong risk management practices, including risk-based lending standards, self-established product and geographical limits, annual evaluations of income property loans, and semi-annual top-down and bottom-up stress testing. We expect to continue growing our loan portfolio. 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 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 Real estate: Commercial $ 30,322 $ 289,132 $ 2,292,288 $ 75,714 $ 2,687,456 Commercial land and development 11,372 2,310 996 — 14,678 Commercial construction 30,330 10,263 21,920 — 62,513 Residential construction 14,228 3,913 — — 18,141 Residential 269 6,494 20,974 948 28,685 Farmland 2,140 4,701 44,581 — 51,422 Commercial: Secured 32,098 33,547 87,460 411 153,516 Unsecured 4,502 8,514 13,159 — 26,175 Consumer and other 562 6,555 66,800 — 73,917 Total $ 125,823 $ 365,429 $ 2,548,178 $ 77,073 $ 3,116,503 The following table sets forth the contractual maturities of our loan portfolio as of December 31, 2023: (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 Real estate: Commercial $ 57,443 $ 271,306 $ 2,284,482 $ 72,188 $ 2,685,419 Commercial land and development 11,406 3,353 792 — 15,551 Commercial construction 27,078 10,377 25,408 — 62,863 Residential construction 11,543 3,913 — — 15,456 Residential 286 5,916 18,735 956 25,893 Farmland 2,835 3,932 44,902 — 51,669 Commercial: Secured 36,844 48,491 90,826 412 176,573 Unsecured 574 10,789 12,487 — 23,850 Consumer and other 857 5,638 31,671 — 38,166 Total $ 148,866 $ 363,715 $ 2,509,303 $ 73,556 $ 3,095,440 45 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 Real estate: Commercial $ 578,389 $ 2,109,067 $ 2,687,456 Commercial land and development 10,068 4,610 14,678 Commercial construction — 62,513 62,513 Residential construction 3,913 14,228 18,141 Residential 1,179 27,506 28,685 Farmland 5,298 46,124 51,422 Commercial: Secured 37,823 115,693 153,516 Unsecured 17,155 9,020 26,175 Consumer and other 73,874 43 73,917 Total $ 727,699 $ 2,388,804 $ 3,116,503 The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of December 31, 2023: (dollars in thousands) Fixed Interest Rates Floating or Adjustable Rates Total Real estate: Commercial $ 570,385 $ 2,115,034 $ 2,685,419 Commercial land and development 10,081 5,470 15,551 Commercial construction — 62,863 62,863 Residential construction 3,913 11,543 15,456 Residential 1,272 24,621 25,893 Farmland 5,848 45,821 51,669 Commercial: Secured 38,029 138,544 176,573 Unsecured 16,343 7,507 23,850 Consumer and other 38,081 85 38,166 Total $ 683,952 $ 2,411,488 $ 3,095,440 Asset Quality We manage the quality of our loans based upon trends at the overall loan portfolio level, as well as within each product type. We measure and monitor key factors that include the level and trend of classified, delinquent, non-accrual, and nonperforming assets, collateral coverage, credit scores, and debt service coverage, where applicable. These metrics directly impact our evaluation of the adequacy of our allowance for credit losses. Our primary objective is to maintain a high level of asset quality in 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. All loans are assessed and assigned a risk classification at origination based on underlying characteristics of the transaction, such as collateral cash flow, collateral coverage, and borrower strength. We believe that we have a comprehensive methodology to proactively monitor our credit quality after the origination process. Particular emphasis is placed on our commercial portfolio, where risk assessments are reevaluated as a result of reviewing commercial property operating statements and borrower financials. On an ongoing basis, we also monitor payment performance, delinquencies, and tax and property insurance compliance. We design our practices to facilitate the early detection and remediation of problems within our loan portfolio. Assigned risk classifications are an integral part of management’s assessment of the adequacy of our allowance for credit losses. We periodically employ the 46 use of an independent consulting firm to evaluate our underwriting and risk assessment process. Like other financial institutions, we are subject to the risk that our loan portfolio will be exposed to increasing pressures from deteriorating borrower credit due to general economic conditions and rising interest rates. Nonperforming Assets Our nonperforming assets consist of nonperforming loans and foreclosed real estate, if any. Nonperforming loans consist of non-accrual loans and loans contractually past due by 90 days or more and still accruing. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. SBA Loans 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: As of (dollars in thousands) March 31, 2024 December 31, 2023 Non-accrual loans: Real estate: Commercial $ 1,852 $ 1,893 Commercial: Secured 66 72 Total non-accrual loans 1,918 1,965 Loans past due 90 days or more and still accruing: Total loans past due and still accruing — — Total nonperforming loans 1,918 1,965 Real estate owned — — Total nonperforming assets $ 1,918 $ 1,965 Performing LMs (not included above) $ — $ — Allowance for credit losses to period end nonperforming loans 1,806.73 % 1,752.70 % Nonperforming loans to loans held for investment 0.06 % 0.06 % Nonperforming assets to total assets 0.06 % 0.05 % 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 0.06% at March 31, 2024 and December 31, 2023. 47 Potential Problem Loans We utilize a risk grading system for our loans to aid us in evaluating the overall credit quality of our real estate loan portfolio and assessing the adequacy of our allowance for credit losses. All loans are grouped into a risk category at the time of origination. Commercial real estate loans over $2.0 million are reevaluated at least annually for proper classification in conjunction with our review of property and borrower financial information. All loans are reevaluated for proper risk grading as new information such as payment patterns, collateral condition, and other relevant information comes to our attention. The banking industry defines loans graded substandard or doubtful as “classified” loans. The following table shows our levels of classified loans as of the periods indicated: (dollars in thousands) Pass Watch Substandard Doubtful Total March 31, 2024 Real estate: Commercial $ 2,648,303 $ 37,301 $ 1,852 $ — $ 2,687,456 Commercial land and development 14,678 — — — 14,678 Commercial construction 62,513 — — — 62,513 Residential construction 18,141 — — — 18,141 Residential 28,685 — — — 28,685 Farmland 51,422 — — — 51,422 Commercial: Secured 128,595 14,612 66 — 143,273 Unsecured 26,175 — — — 26,175 Consumer and other 73,891 15 11 — 73,917 Total $ 3,052,403 $ 51,928 $ 1,929 $ — $ 3,106,260 December 31, 2023 Real estate: Commercial $ 2,658,504 $ 25,023 $ 1,892 $ — $ 2,685,419 Commercial land and development 15,551 — — — 15,551 Commercial construction 62,863 — — — 62,863 Residential construction 15,456 — — — 15,456 Residential 25,893 — — — 25,893 Farmland 51,669 — — — 51,669 Commercial: Secured 150,451 14,586 72 — 165,109 Unsecured 23,850 — — — 23,850 Consumer and other 38,139 15 12 — 38,166 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 $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 The allowance for credit losses - loans is established through a provision for credit losses charged to operations. Provisions are charged against the allowance for credit losses - loans when management believes that the collectability of the principal is unlikely. Subsequent recoveries of previously charged-off amounts, if any, are credited to the allowance for credit losses - loans. 48 The allowance for credit losses - loans is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. 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 (dollars in thousands) Allowance for Credit Losses % of Loans to Total Loans Allowance for Credit Losses % of Loans to Total Loans Real estate: Commercial $ 28,895 86.23 % $ 29,015 86.76 % Commercial land and development 164 0.47 % 178 0.50 % Commercial construction 697 2.01 % 718 2.03 % Residential construction 114 0.58 % 89 0.50 % Residential 164 0.92 % 151 0.84 % Farmland 438 1.65 % 399 1.67 % Commercial: Secured 3,262 4.93 % 3,314 5.70 % Unsecured 259 0.84 % 189 0.77 % Consumer and other 660 2.37 % 378 1.23 % 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 1.12% at March 31, 2024 and December 31, 2023. 49 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 March 31, 2024 March 31, 2023 (dollars in thousands) Activity % of Average Loans Held for Investment Activity % of Average Loans Held for Investment Average loans held for investment $ 3,069,466 $ 2,826,035 Allowance for credit losses - loans $ 34,431 $ 28,389 Effect of adoption of ASC 326 — 5,262 Net (charge-offs) recoveries: Commercial: Secured (816) (0.03) % (396) (0.01) % Unsecured (34) — % — — % Consumer and other 22 — % 17 — % Net charge-offs (828) (0.03) % (379) (0.01) % Provision for credit losses 1,050 900 Allowance for credit losses - loans $ 34,653 $ 34,172 Loans held for investment $ 3,104,130 $ 2,869,848 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 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. Liabilities 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. Deposits 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. 50 The following table summarizes our deposit composition by average deposit balances and average rates paid for the periods indicated: For the three months ended 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 Interest-bearing transaction accounts $ 300,325 1.51 % 9.67 % $ 379,593 0.46 % 13.44 % Money market and savings accounts 1,534,825 3.41 % 49.40 % 1,242,355 1.95 % 43.98 % Time accounts 429,586 5.03 % 13.83 % 300,952 3.99 % 10.66 % Demand accounts 842,105 — % 27.10 % 901,491 — % 31.92 % Total deposits $ 3,106,841 2.53 % 100.00 % $ 2,824,391 1.35 % 100.00 % 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. Our large deposit relationships are comprised of the following entity types as of the periods indicated: (dollars in thousands) March 31, 2024 December 31, 2023 Municipalities $ 581,859 $ 693,685 Non-profits 220,827 188,252 Businesses 497,543 525,193 Brokered deposits 41,990 100,128 Total $ 1,342,219 $ 1,507,258 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: Three months or less $ 108,021 $ 17,036 $ 125,057 $ 104,271 Over three through six months 81,391 43,715 125,106 77,641 Over six through twelve months 30,407 4,372 34,779 25,157 Over twelve months 2,157 1,069 3,226 1,157 Total $ 221,976 $ 66,192 $ 288,168 $ 208,226 FHLB Advances and Other Borrowings From time to time, we utilize short-term collateralized FHLB borrowings to maintain adequate liquidity. 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. 51 In 2022, we issued subordinated notes of $75.0 million. This debt was issued to investors in private placement transactions. See Note 6, Long Term Debt and Other Borrowings, in the notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding these subordinated notes. 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 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 (8.58% as of March 31, 2024) through maturity Shareholders’ Equity 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) $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 Liquidity Management We manage liquidity based upon factors that include the level of diversification of our funding sources, the composition of our deposit types, the availability of unused funding sources, our off-balance sheet obligations, the amount of cash and liquid securities we hold, and the availability of assets to be readily converted into cash without undue loss. As the primary federal regulator of the Bank, the FDIC evaluates our liquidity on a stand-alone basis pursuant to applicable guidance and policies. Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities, and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds, and the ability to convert assets into cash. 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 notes. The Company’s main source of cash flow is dividends declared and paid to it by the Bank. There are statutory and regulatory limitations that affect the ability of the Bank to pay dividends to the Company, including various legal and regulatory provisions that limit the amount of dividends the Bank can pay to the Company without regulatory approval. Under the California Financial Code, payment of a dividend from the Bank to the Company without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net income from the previous three fiscal years less the amount of dividends paid during that period. We believe that these limitations will not impact our ability to meet our ongoing short-term cash obligations. For contingency purposes, the Company maintains a minimum level of cash to fund one year’s projected operating cash flow needs plus two years’ subordinated notes debt service. We continually monitor our liquidity position in order to meet all reasonably foreseeable short-term, long-term, and strategic liquidity demands. Management has established a comprehensive process for identifying, measuring, monitoring, and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include effective corporate governance, consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems, including stress tests, that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; 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 52 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, 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 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. In addition, we have 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. Specific information on the terms of and the securities being offered will be provided at the time of the offering. Proceeds from any future offerings are expected to be used for corporate purposes or other purposes to be disclosed at the time of the offering. Sources and Uses of Cash Our executive officers and board of directors review our sources and potential uses of cash in connection with our annual budgeting process. 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 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 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 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. While these commitments represent contractual cash requirements, a portion of these commitments to extend credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. 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. Deposits Deposits are our primary source of funding for our business operations, and the cost of deposits has a significant impact on our net interest income and net interest margin. Our deposits are primarily made up of money market, interest checking, time, and non-interest-bearing demand deposits. Aside from commercial and business clients, a significant portion of our deposits are from municipalities and non-profit organizations. Cash flows from deposits are impacted by the timing and amount of customer deposits, changes in market rates, and collateral availability. 53 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 $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. Cash proceeds from mortgage-backed securities result from payments of principal and interest by borrowers. 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 $7.7 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 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 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 $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 $ 1,002,910 $ 571,500 $ 20,000 $ 411,410 Federal Reserve Discount Window 807,143 — 100,000 707,143 Correspondent bank lines of credit 175,000 — — 175,000 Cash and cash equivalents — — — 185,325 Total $ 1,985,053 $ 571,500 $ 120,000 $ 1,478,878 54 Future Contractual 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. We have a current obligation of $284.9 million and a long-term obligation of $3.2 million related to time deposits, as discussed in Note 5, Interest-Bearing Deposits. We have net subordinated notes of $73.8 million, all of which are long-term obligations. We also have contractual obligations on unfunded loan commitments and standby letters of credit totaling $453.5 million. Dividends 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. We believe our quarterly dividend rate per share, as approved by our board of directors, enables us to balance our multiple objectives of managing our business and returning a portion of our earnings to our shareholders. Assuming continued payment during the rest of 2024 at a rate of $0.20 per share, our average total dividend paid each quarter would be approximately $4.3 million based on the number of currently outstanding shares if there are no increases or decreases in the number of shares, and given that unvested RSAs share equally in dividends with outstanding common stock. Impact of Inflation Our unaudited consolidated financial statements and related notes have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods or services. Historical Information The following table summarizes our consolidated cash flow activities: 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 (used in) provided by financing activities $ (124,575) $ 155,813 $ (280,388) Operating Activities 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 $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 (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. 55 Capital Adequacy We manage our capital by tracking our level and quality of capital with consideration given to our overall financial condition, our asset quality, our level of allowance for credit losses, our geographic and industry concentrations, and other risk factors on our balance sheet, including interest rate sensitivity. Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our unaudited consolidated financial statements. Historically, as a bank holding company with less than $3.0 billion in total consolidated assets and that met certain other criteria, we had been operating under the Small Bank Holding Company Policy Statement, which provides an exemption from the Federal Reserve’s generally applicable risk-based capital ratio and leverage ratio requirements. 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 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. The Bank also is subject to regulatory thresholds that must be met for an insured depository institution to be classified as “well-capitalized” under the prompt corrective action framework. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices. 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 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 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, 56 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 Required for Capital Adequacy Purposes 1 Ratio to be Well-Capitalized under Prompt Corrective Action Provisions (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio March 31, 2024 Total capital (to risk-weighted assets) $ 412,503 12.34 % $ 264,002 8.00 % N/A N/A Tier 1 capital (to risk-weighted assets) $ 305,192 9.13 % $ 200,544 6.00 % N/A N/A Common equity tier 1 capital (to risk-weighted assets) $ 305,192 9.13 % $ 150,408 4.50 % N/A N/A Tier 1 leverage $ 305,192 8.63 % $ 141,459 4.00 % N/A N/A December 31, 2023 Total capital (to risk-weighted assets) $ 404,829 12.30 % $ 259,090 8.00 % N/A N/A Tier 1 capital (to risk-weighted assets) $ 298,749 9.07 % $ 197,534 6.00 % N/A N/A Common equity tier 1 capital (to risk-weighted assets) $ 298,749 9.07 % $ 148,150 4.50 % N/A N/A Tier 1 leverage $ 298,749 8.73 % $ 136,953 4.00 % N/A N/A Capital Ratios for the Bank Actual Ratio Required for Capital Adequacy Purposes Ratio to be Well-Capitalized under Prompt Corrective Action Provisions (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio March 31, 2024 Total capital (to risk-weighted assets) $ 398,228 11.94 % $ 266,911 8.00 % $ 333,639 10.00 % Tier 1 capital (to risk-weighted assets) $ 364,702 10.93 % $ 200,183 6.00 % $ 266,911 8.00 % Common equity tier 1 capital (to risk-weighted assets) $ 364,702 10.93 % $ 150,137 4.50 % $ 216,865 6.50 % Tier 1 leverage $ 364,702 10.33 % $ 141,236 4.00 % $ 176,545 5.00 % December 31, 2023 Total capital (to risk-weighted assets) $ 392,114 11.93 % $ 262,947 8.00 % $ 328,684 10.00 % Tier 1 capital (to risk-weighted assets) $ 359,783 10.95 % $ 197,211 6.00 % $ 262,947 8.00 % Common equity tier 1 capital (to risk-weighted assets) $ 359,783 10.95 % $ 147,908 4.50 % $ 213,645 6.50 % Tier 1 leverage $ 359,783 10.52 % $ 136,757 4.00 % $ 170,946 5.00 % 1 The listed capital adequacy ratios exclude capital conservation buffers. Non-GAAP Financial Measures 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. 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 at the end of any period indicated. As a 57 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. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets at the end of any period indicated. As a result, tangible book value per share is the same as book value per share at the end of each of the periods indicated. We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations, and cash flows computed in accordance with GAAP. However, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those we use for the non-GAAP financial measures we disclose, but may calculate them differently. You should understand how we and other companies each calculate our non-GAAP financial measures when making comparisons. Recent Legislative and Regulatory Developments 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. 58 Glossary of Acronyms, Abbreviations, and Terms The terms identified below are used in various sections of this Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 and the unaudited Consolidated Financial Statements and Notes to the Financial Statements in Item 1 of this Form 10-Q. 2023 Annual Report on Form 10-K Company’s Annual Report on Form 10-K for the year ended December 31, 2023 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 EVE Economic Value of Equity BOLI Bank-Owned Life Insurance NI Net Income 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 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. 59