FIVE STAR BANCORP 10-Q

ITEM 1. Financial Statements FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share amounts) June 30, 2024 December 31, 2023 ASSETS Cash and due from financial institutions $ 28,572 $ 26,986 Interest-bearing deposits in banks 161,787 294,590 Cash and cash equivalents 190,359 321,576 Time deposits in banks 4,097 5,858 Securities available-for-sale, at fair value, net of allowance for credit losses of $ 0 at June 30, 2024 and December 31, 2023 (amortized cost of $ 120,569 and $ 124,788 at June 30, 2024 and December 31, 2023, respectively) 103,204 108,083 Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ 20 at June 30, 2024 and December 31, 2023 (fair value of $ 2,801 and $ 2,913 at June 30, 2024 and December 31, 2023, respectively) 2,973 3,077 Loans held for sale 5,322 11,464 Loans held for investment 3,266,291 3,081,719 Allowance for credit losses ( 35,406 ) ( 34,431 ) Loans held for investment, net of allowance for credit losses 3,230,885 3,047,288 FHLB stock 15,000 15,000 Operating leases, right-of-use asset, net 6,630 5,284 Premises and equipment, net 1,610 1,623 Bank-owned life insurance 19,030 17,180 Interest receivable and other assets 55,107 56,692 Total assets $ 3,634,217 $ 3,593,125 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest-bearing $ 825,733 $ 831,101 Interest-bearing 2,323,898 2,195,795 Total deposits 3,149,631 3,026,896 Borrowings: Subordinated notes, net 73,822 73,749 Other borrowings — 170,000 Operating lease liability 7,077 5,603 Interest payable and other liabilities 23,217 31,103 Total liabilities 3,253,747 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 June 30, 2024 and December 31, 2023 — — Common stock, no par value; 100,000,000 shares authorized; 21,319,583 shares issued and outstanding at June 30, 2024; 17,256,989 shares issued and outstanding at December 31, 2023 301,968 220,505 Retained earnings 90,734 77,036 Accumulated other comprehensive loss, net of taxes ( 12,232 ) ( 11,767 ) Total shareholders’ equity 380,470 285,774 Total liabilities and shareholders ’ equity $ 3,634,217 $ 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 June 30, Six Months Ended June 30, (in thousands, except per share amounts) 2024 2023 2024 2023 Interest and fee income: Loans, including fees $ 46,362 $ 39,929 $ 90,148 $ 77,423 Taxable securities 474 463 951 929 Nontaxable securities 176 183 352 367 Interest-bearing deposits in banks 1,986 2,218 5,088 4,385 Total interest and fee income 48,998 42,793 96,539 83,104 Interest expense: Deposits 18,717 13,969 38,228 23,347 Subordinated notes 1,162 1,162 2,323 2,323 Other borrowings 27 84 152 708 Total interest expense 19,906 15,215 40,703 26,378 Net interest income 29,092 27,578 55,836 56,726 Provision for credit losses 2,000 1,250 2,900 2,150 Net interest income after provision for credit losses 27,092 26,328 52,936 54,576 Non-interest income: Service charges on deposit accounts 189 135 377 252 Gain on sale of loans 449 641 818 1,239 Loan-related fees 370 389 799 697 FHLB stock dividends 329 189 661 382 Earnings on BOLI 158 126 300 228 Other 78 1,340 451 1,393 Total non-interest income 1,573 2,820 3,406 4,191 Non-interest expense: Salaries and employee benefits 7,803 6,421 15,380 13,039 Occupancy and equipment 646 551 1,272 1,074 Data processing and software 1,235 1,013 2,392 1,885 FDIC insurance 390 410 790 812 Professional services 767 586 1,474 1,217 Advertising and promotional 615 733 1,075 1,151 Loan-related expenses 297 324 594 579 Other operating expenses 1,760 1,941 3,252 3,340 Total non-interest expense 13,513 11,979 26,229 23,097 Income before provision for income taxes 15,152 17,169 30,113 35,670 Provision for income taxes 4,370 4,440 8,700 9,780 Net income $ 10,782 $ 12,729 $ 21,413 $ 25,890 Basic earnings per common share $ 0.51 $ 0.74 $ 1.12 $ 1.51 Diluted earnings per common share $ 0.51 $ 0.74 $ 1.12 $ 1.51 See accompanying notes to unaudited consolidated financial statements. 2 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2024 2023 2024 2023 Net income $ 10,782 $ 12,729 $ 21,413 $ 25,890 Unrealized gain (loss) on securities: Net unrealized holding gain (loss) on securities available-for-sale during the period 295 ( 1,462 ) ( 660 ) 679 Less: Income tax expense (benefit) related to items of other comprehensive income (loss) 87 ( 432 ) ( 195 ) 201 Other comprehensive income (loss) 208 ( 1,030 ) ( 465 ) 478 Total comprehensive income $ 10,990 $ 11,699 $ 20,948 $ 26,368 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 June 30, 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 March 31, 2023 17,258,904 $ 219,785 $ 52,817 $ ( 11,946 ) $ 260,656 Net income — — 12,729 — 12,729 Other comprehensive loss — — — ( 1,030 ) ( 1,030 ) Stock compensation expense — 236 — — 236 Stock forfeitures ( 1,547 ) — — — — Cash dividends paid ($ 0.20 per share) — — ( 3,451 ) — ( 3,451 ) Balance at June 30, 2023 17,257,357 $ 220,021 $ 62,095 $ ( 12,976 ) $ 269,140 Balance at March 31, 2024 17,353,251 $ 220,804 $ 84,216 $ ( 12,440 ) $ 292,580 Net income — — 10,782 — 10,782 Other comprehensive income — — — 208 208 Common stock issued 3,967,500 80,870 — — 80,870 Stock compensation expense — 294 — — 294 Stock forfeitures ( 1,168 ) — — — — Cash dividends paid ($ 0.20 per share) — — ( 4,264 ) — ( 4,264 ) Balance at June 30, 2024 21,319,583 $ 301,968 $ 90,734 $ ( 12,232 ) $ 380,470 See accompanying notes to the unaudited consolidated financial statements. 4 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY For the Six Months Ended June 30, 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 — — 25,890 — 25,890 Other comprehensive income — — — 478 478 Stock issued under stock award plans 16,978 — — — — Stock compensation expense — 478 — — 478 Stock forfeitures ( 1,547 ) — — — — Cash dividends paid ($ 0.35 per share) — — ( 6,040 ) — ( 6,040 ) Balance at June 30, 2023 17,257,357 $ 220,021 $ 62,095 $ ( 12,976 ) $ 269,140 Balance at December 31, 2023 17,256,989 $ 220,505 $ 77,036 $ ( 11,767 ) $ 285,774 Net income — — 21,413 — 21,413 Other comprehensive loss — — — ( 465 ) ( 465 ) Common stock issued 3,967,500 80,870 — — 80,870 Stock issued under stock award plans 96,380 — — — — Stock compensation expense — 593 — — 593 Stock forfeitures ( 1,286 ) — — — — Cash dividends paid ($ 0.40 per share) — — ( 7,715 ) — ( 7,715 ) Balance at June 30, 2024 21,319,583 $ 301,968 $ 90,734 $ ( 12,232 ) $ 380,470 See accompanying notes to unaudited consolidated financial statements. 5 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, (in thousands) 2024 2023 Cash flows from operating activities: Net income $ 21,413 $ 25,890 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 2,900 2,150 Depreciation and amortization 938 824 Amortization of deferred loan fees and costs 9 270 Amortization of premiums and discounts on securities 478 612 Amortization of subordinated note issuance costs 73 71 Stock compensation expense 593 478 Earnings on BOLI ( 300 ) ( 228 ) Deferred tax provision 15 70 Loans originated for sale ( 17,414 ) ( 32,126 ) Gain on sale of loans ( 818 ) ( 1,239 ) Gross proceeds from sale of loans 12,909 24,806 Gain on partial sale of equity investment ( 300 ) ( 1,274 ) Net changes in: Interest receivable and other assets 4,067 ( 3,478 ) Interest payable and other liabilities ( 7,808 ) 9,277 Operating lease liability ( 484 ) ( 482 ) Net cash provided by operating activities 16,271 25,621 Cash flows from investing activities: Maturities, prepayments, and calls of securities available-for-sale 3,844 5,512 Capital call for equity investment ( 1,269 ) — Proceeds received from equity investment 300 — Low income housing tax credits ( 1,160 ) — Net change in time deposits in banks 1,761 2,506 Loan originations, net of repayments ( 174,992 ) ( 128,757 ) Purchase of premises and equipment ( 312 ) ( 335 ) Purchase of FHLB stock — ( 4,110 ) Purchase of BOLI ( 1,550 ) ( 2,000 ) Net cash used in investing activities ( 173,378 ) ( 127,184 ) Cash flows from financing activities: Net change in deposits 122,735 147,735 Proceeds from issuance of stock, net of issuance costs 80,870 — Payments on other borrowings ( 170,000 ) — Cash dividends paid ( 7,715 ) ( 6,040 ) Net cash provided by financing activities 25,890 141,695 Net change in cash and cash equivalents ( 131,217 ) 40,132 Cash and cash equivalents at beginning of period 321,576 259,991 Cash and cash equivalents at end of period $ 190,359 $ 300,123 Supplemental disclosure of cash flow information: Interest paid $ 41,904 $ 2,716 Income taxes paid 9,391 686 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 ( 660 ) 679 Operating lease liabilities exchanged for ROUA 1,958 1,513 ROUA acquired ( 1,958 ) ( 1,534 ) See accompanying notes to the unaudited consolidated financial statements. 6 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 and six months ended June 30, 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 $1.0 billion in non-convertible debt; or (iii) the Company becomes a large accelerated filer with a public float of more than $0.7 billion. 7 (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 8 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. (g) Allowance for Credit Losses (“ACL”) The ACL is a valuation account that offsets the amortized cost basis of loans receivable and certain other financial assets, including unfunded loan commitments and held-to-maturity debt securities. Under ASC 326, amortized cost basis is the basis on which the ACL is determined. Amortized cost basis on loans receivable is principal outstanding, net of any purchase premiums and discounts, and net of any deferred loan fees and costs. Credit losses are charged off when management believes that the collectability of at least some portion of outstanding principal is unlikely. These charge-offs are recorded as a reversal to, thereby reducing, the allowance for credit losses. Subsequent recoveries of previously charged-off amounts, if any, are recorded as a provision to, thereby increasing, the allowance for credit losses. The allowance for credit losses is maintained at a level to absorb expected credit losses over the contractual life, including consideration of prepayments. Determining the adequacy of the allowance is complex and requires judgments that are inherently subjective, as it requires estimates that are susceptible to revision as additional information becomes available. While the Company has determined an allowance for credit losses it considers appropriate, there can be no assurance that the allowance will be sufficient to absorb future losses. The Company’s process for determining expected lifetime credit losses entails a loan-level, model-based approach and considers a broad range of information, including historical loss experience, current conditions, and reasonable and supportable forecasts. Credit loss is estimated for all loans. Accordingly, the Company has stratified the full loan population into segments sharing similar characteristics to perform the evaluation of the credit loss collectively. The Company can also further stratify loans of similar types, risk attributes, and methods for credit risk monitoring. The Company has determined loan pools based primarily on regulatory reporting codes, as the loans within each pool share similar risk characteristics and there is sufficient historical peer loss data from the FFIEC to provide statistically meaningful support in the models developed. The Company further stratified the C&I portfolio into traditional C&I loans and SBA loans, as the loans in these pools have different repayment structures and credit risk characteristics. The Company also stratified C&I loans and consumer loans that do not require reserves, as the Company has third-party agreements in place to cover credit losses. The Company has identified the following pools subject to an estimate of credit loss: (1) 1-4 Family Construction; (2) Other Construction; (3) Farmland; (4) Revolving Secured by 1-4 Family; (5) Residential Secured by First Liens; (6) Residential Secured by Junior Liens; (7) Multifamily; (8) CRE Owner Occupied; (9) CRE Non-Owner Occupied; (10) Agriculture; (11) C&I; (12) C&I SBA; (13) Consumer; and (14) Municipal. With the exception of the C&I SBA pool, the Company has determined, given its limited loss experience, that peer data and other external data to support loss history provides the best basis for its assessment of expected credit losses. The Company believes that the use of peer loss data from 2008 to 2019 presents loss histories that appropriately reflect a full economic cycle, reflects asset-specific risk characteristics at each pool level identified, and includes a historical look-back 9 period that is objective and reflective of future expected credit losses. Loss data from 2020 and beyond was excluded from the data set to exclude pandemic-related data from the model. During the three months ended June 30, 2024, the Company segregated the Manufactured Home Community (“MHC”) loans from the Multifamily pool as the Company identified a data source to provide sufficient historical peer loss data specific to MHC loans. This segregation now adjusts for differences in the risk characteristics and performance of MHCs compared to standard Multifamily properties. The Company used calculations of individual probability of default and loss given default on a loan-by-loan basis to derive an estimated loss rate. This adjustment reduced the required reserves related to MHC pool by approximately $ 5.8 million. The Company’s routine monitoring of charge-off activity identified an increased level of charge-offs in the C&I SBA pool during the first six months of 2024, reflecting a change in the credit quality of the pool. In response, the Company increased the expected loss rates of the C&I SBA pool during the three months ended June 30, 2024 to be more in line with net charge-off rates during the first six months of 2024. This adjustment reflects the Company’s estimate for future loss rates and increased the required reserves related to the C&I SBA pool by approximately $ 4.6 million. The method for determining the estimate of lifetime credit losses includes, among other things, the following main components: (i) the use of probability of default and loss given default assumptions under a discounted cash flow model; (ii) a multi-scenario macroeconomic forecast; (iii) an initial and reasonable and supportable forecast period of one year for all loan segments; and (iv) a reversion period of one year using a linear transition method to historical loss rates. Given the inherent limitations of a quantitative-only model, qualitative adjustments are included to factor in data points not captured from a quantitative analysis alone. Qualitative criteria that can be considered includes, among other things, the following: • Concentrations – the existence and effect of any concentrations of credit, and changes in the level of such concentrations; • Volume – changes in the nature and volume of the portfolio and in the terms of the loans; • Economic – changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; • Policy – changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; • Quality – changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; and • External – the effect of other external factors, such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s loan portfolio. Management reviews current information on a quarterly basis to assess the forecasted future economic impact for purposes of evaluating the adequacy of the ACL. The forecasted direction and magnitude of change with respect to future economic conditions is then assessed against the estimate in the model. Any changes resulting from the quarterly assessment are recorded in “Provision for credit losses” in the unaudited consolidated statements of income. The Audit Committee of the board of directors reviews the adequacy of the allowance at least quarterly. Accrued interest receivable is excluded from amortized cost of all financial instrument types and included in “Interest receivable and other assets” in the consolidated balance sheets. Accrued interest receivable is not subject to an estimate for credit loss, as the Company has a policy to charge off accrued interest deemed uncollectible in a timely manner. When a loan is placed on non-accrual status, which occurs within 90 days of a borrower becoming delinquent, interest previously accrued but not collected is reversed against current period income. If an individual loan’s characteristics have deteriorated to below a range of the overall pool, the loan would be individually assessed. Individually assessed loans are measured for credit loss based on one of the following methods: (i) present value of future expected cash flows, discounted at the loan’s effective interest rate; (ii) amount by which carrying value of the loan exceeds the loan’s observable market price; or (iii) the fair value of the collateral, less estimated selling costs, if the loan is collateral dependent. The Company applies the practical expedient and defines collateral dependent loans as those where the borrower is experiencing financial difficulty and on which payment is expected to be provided substantially through the operation or sale of the collateral. 10 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). Table 2.1 summarizes the Company’s assets and liabilities required to be recorded at fair value on a recurring basis. Table 2.1: 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 June 30, 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 $ 103,204 $ — $ 103,204 $ — OCI Derivatives – interest rate swap 5 — 5 — NI Liabilities: Derivatives – interest rate swap 5 — 5 — 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, 11 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 June 30, 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 June 30, 2024 and December 31, 2023, the carrying amount of assets measured at fair value on a non-recurring basis was immaterial to the Company. Disclosures about Fair Value of Financial Instruments Table 2.2 is a summary of fair value estimates for financial instruments as of June 30, 2024 and December 31, 2023. The carrying amounts in Table 2.2 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. Table 2.2: Fair Value Estimates for Financial Instruments June 30, 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 $ 190,359 $ 190,359 Level 1 $ 321,576 $ 321,576 Level 1 Time deposits in banks 4,097 4,097 Level 1 5,858 5,858 Level 1 Securities available-for-sale 103,204 103,204 Level 2 108,083 108,083 Level 2 Securities held-to-maturity 2,973 2,801 Level 3 3,077 2,913 Level 3 Loans held for sale 5,322 5,907 Level 2 11,464 12,626 Level 2 Loans held for investment, net of allowance for credit losses 3,230,885 3,081,250 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 5 5 Level 2 10 10 Level 2 Financial liabilities: Interest rate swap $ 5 $ 5 Level 2 $ 10 $ 10 Level 2 Time deposits 333,431 332,557 Level 2 466,572 465,205 Level 2 Subordinated notes 73,822 72,772 Level 3 73,749 72,693 Level 3 Other borrowings — — Level 2 170,000 170,000 Level 2 The Company used the following methods and assumptions to estimate the fair value of its financial instruments at June 30, 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. 12 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. 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 Tables 3.1 and 3.2. A summary of the amortized cost and fair value related to securities held-to-maturity as of June 30, 2024 and December 31, 2023 is presented in Table 3.1. Table 3.1: Securities Held-to-Maturity (in thousands) Amortized Cost Gross Unrealized Fair Value Gains (Losses) June 30, 2024 Obligations of states and political subdivisions $ 2,973 $ — $ ( 172 ) $ 2,801 Total held-to-maturity $ 2,973 $ — $ ( 172 ) $ 2,801 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 13 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. A summary of the amortized cost and fair value related to securities available-for-sale as of June 30, 2024 and December 31, 2023 is presented in Table 3.2. Securities available-for-sale did not have an allowance for credit losses as of June 30, 2024 or December 31, 2023. Table 3.2: Securities Available-for-Sale (in thousands) Amortized Cost Gross Unrealized Fair Value Gains (Losses) June 30, 2024 U.S. government agency securities $ 9,494 $ 144 $ ( 109 ) $ 9,529 Mortgage-backed securities 65,712 3 ( 11,695 ) 54,020 Obligations of states and political subdivisions 43,027 2 ( 5,500 ) 37,529 Collateralized mortgage obligations 336 — ( 31 ) 305 Corporate bonds 2,000 — ( 179 ) 1,821 Total available-for-sale $ 120,569 $ 149 $ ( 17,514 ) $ 103,204 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 14 The amortized cost and fair value of investment securities by contractual maturity at June 30, 2024 and December 31, 2023 are shown in Table 3.3. 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. Table 3.3: Contractual Maturities - Investment Securities (in thousands) June 30, 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 $ 218 $ 205 $ — $ — $ 277 $ 263 $ — $ — After one but within five years 920 867 806 736 935 885 394 367 After five years through ten years 1,340 1,263 8,511 7,459 1,365 1,292 6,407 5,838 After ten years 495 466 33,710 29,334 500 473 36,487 32,254 Investment securities not due at a single maturity date: U.S. government agency securities — — 9,494 9,529 — — 10,548 10,541 Mortgage-backed securities — — 65,712 54,020 — — 68,585 56,973 Collateralized mortgage obligations — — 336 305 — — 367 332 Corporate bonds — — 2,000 1,821 — — 2,000 1,778 Total $ 2,973 $ 2,801 $ 120,569 $ 103,204 $ 3,077 $ 2,913 $ 124,788 $ 108,083 15 There were no purchases or sales of investment securities during the three and six months ended June 30, 2024 and June 30, 2023. Pledged investment securities are shown in Table 3.4. Table 3.4: Pledged Investment Securities (in thousands) June 30, 2024 December 31, 2023 Pledged to: The State of California, securing deposits of public funds and borrowings $ 52,687 $ 55,435 The Federal Reserve Discount Window, increasing borrowing capacity 47,094 48,964 Total pledged investment securities $ 99,781 $ 104,399 Table 3.5 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 June 30, 2024 and December 31, 2023. Table 3.5: Securities Available-for-Sale in Continuous Unrealized Loss Positions (in thousands) Less than 12 months 12 months or more Total securities in a loss position Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss June 30, 2024 U.S. government agency securities $ 199 $ ( 1 ) $ 5,549 $ ( 108 ) $ 5,748 $ ( 109 ) Mortgage-backed securities 1,013 ( 2 ) 52,686 ( 11,693 ) 53,699 ( 11,695 ) Obligations of states and political subdivisions 512 — 36,016 ( 5,500 ) 36,528 ( 5,500 ) Collateralized mortgage obligations — — 304 ( 31 ) 304 ( 31 ) Corporate bonds — — 1,821 ( 179 ) 1,821 ( 179 ) Total temporarily impaired securities $ 1,724 $ ( 3 ) $ 96,376 $ ( 17,511 ) $ 98,100 $ ( 17,514 ) 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 147 and 149 available-for-sale securities in unrealized loss positions at June 30, 2024 and December 31, 2023, respectively. As of June 30, 2024, the investment portfolio included 143 investment securities that had been in a continuous loss position for twelve months or more and four 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 June 30, 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. 16 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 June 30, 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 June 30, 2024 and December 31, 2023. 17 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. Table 4.1 presents the balance of each major product type within the Company’s portfolio as of the dates indicated. Table 4.1: Loans Outstanding (in thousands) June 30, 2024 December 31, 2023 Real estate: Commercial $ 2,774,001 $ 2,685,419 Commercial land and development 4,766 15,551 Commercial construction 72,444 62,863 Residential construction 9,011 15,456 Residential 29,641 25,893 Farmland 48,852 51,669 Commercial: Secured 154,080 165,109 Unsecured 23,198 23,850 Consumer and other 152,564 38,166 Subtotal 3,268,557 3,083,976 Net deferred loan fees ( 2,266 ) ( 2,257 ) Loans held for investment 3,266,291 3,081,719 Allowance for credit losses ( 35,406 ) ( 34,431 ) Loans held for investment, net of allowance for credit losses $ 3,230,885 $ 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 18 generally based upon estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the ultimate success of the project. 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. 19 Table 4.2 presents 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 periods indicated. Table 4.2: Loans by Risk Category and Vintage Amortized Cost Basis by Origination Year as of June 30, 2024 (in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Revolving Converted to Term Total Real estate: Commercial Pass $ 250,845 $ 323,243 $ 934,312 $ 651,701 $ 231,487 $ 330,193 $ 4,879 $ — $ 2,726,660 Watch 644 — 17,734 19,363 4,670 340 — — 42,751 Substandard — — — — — 1,818 — — 1,818 Total 251,489 323,243 952,046 671,064 236,157 332,351 4,879 — 2,771,229 Commercial land and development Pass 1,636 1,000 1,259 — 182 695 — — 4,772 Total 1,636 1,000 1,259 — 182 695 — — 4,772 Commercial construction Pass 2,982 28,518 23,512 — 11,231 5,897 — — 72,140 Total 2,982 28,518 23,512 — 11,231 5,897 — — 72,140 Residential construction Pass 5,099 — — 3,914 — — — — 9,013 Total 5,099 — — 3,914 — — — — 9,013 Residential Pass 5,686 4,814 2,911 6,148 2,240 6,559 1,308 — 29,666 Total 5,686 4,814 2,911 6,148 2,240 6,559 1,308 — 29,666 Farmland Pass 900 2,074 7,114 11,761 7,129 18,552 — — 47,530 Watch — — 799 — — — — 502 1,301 Total 900 2,074 7,913 11,761 7,129 18,552 — 502 48,831 Commercial: Secured Pass 10,976 24,789 24,675 11,212 10,608 17,313 41,113 — 140,686 Watch — 193 9,661 2,591 97 1,338 — — 13,880 Substandard — — — — — 60 — — 60 Total 10,976 24,982 34,336 13,803 10,705 18,711 41,113 — 154,626 Unsecured Pass 2,394 4,782 3,292 4,260 5,322 1,883 1,280 — 23,213 Total 2,394 4,782 3,292 4,260 5,322 1,883 1,280 — 23,213 Consumer and other Pass 98,048 38,134 9,468 6,874 2 250 — — 152,776 Watch — — 15 — — — — — 15 Substandard — — 10 — — — — — 10 Total 98,048 38,134 9,493 6,874 2 250 — — 152,801 Total Pass 378,566 427,354 1,006,543 695,870 268,201 381,342 48,580 — 3,206,456 Watch 644 193 28,209 21,954 4,767 1,678 — 502 57,947 Substandard — — 10 — — 1,878 — — 1,888 Total $ 379,210 $ 427,547 $ 1,034,762 $ 717,824 $ 272,968 $ 384,898 $ 48,580 $ 502 $ 3,266,291 20 Table 4.2: Loans by Risk Category and Vintage (continued) 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 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 Total 11,388 3,229 — 184 — 733 — — 15,534 Commercial construction Pass 9,074 32,154 4,189 11,230 — 5,897 — — 62,544 Total 9,074 32,154 4,189 11,230 — 5,897 — — 62,544 Residential construction Pass 2,412 9,128 3,912 — — — — — 15,452 Total 2,412 9,128 3,912 — — — — — 15,452 Residential Pass 4,838 3,964 6,244 2,279 1,182 5,995 1,420 — 25,922 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 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 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 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 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 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. 21 Table 4.3 shows the age analysis of past due loans by class as of the dates shown. Table 4.3: Age Analysis of Past Due Loans by Class (in thousands) Past Due 30-59 Days 60-89 Days Greater Than 90 Days Total Past Due Current Total Loans Receivable June 30, 2024 Real estate: Commercial $ — $ — $ — $ — $ 2,771,229 $ 2,771,229 Commercial land and development — — — — 4,772 4,772 Commercial construction — — — — 72,140 72,140 Residential construction — — — — 9,013 9,013 Residential — — — — 29,666 29,666 Farmland — — — — 48,831 48,831 Commercial: Secured 549 — — 549 154,077 154,626 Unsecured — — — — 23,213 23,213 Consumer and other 80 — — 80 152,721 152,801 Total $ 629 $ — $ — $ 629 $ 3,265,662 $ 3,266,291 December 31, 2023 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 June 30, 2024 or December 31, 2023. No collateral dependent loans were in process of foreclosure at June 30, 2024 or December 31, 2023. 22 Non-accrual loans, segregated by class, as of June 30, 2024 and December 31, 2023 are shown in Table 4.4. Table 4.4: Nonaccrual Loans (in thousands) June 30, 2024 December 31, 2023 Real estate: Commercial $ 1,821 $ 1,893 Commercial: Secured 60 72 Total non-accrual loans $ 1,881 $ 1,965 No interest income was recognized on non-accrual loans in the three and six months ended June 30, 2024 or June 30, 2023. Non-accrual real estate loans did not have an allowance for credit losses as of June 30, 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 $ 38.2 thousand and $ 77.4 thousand for the three and six months ended June 30, 2024, respectively, as compared to $ 26.1 thousand and $ 35.3 thousand for the three and six months ended June 30, 2023, respectively. Allowance for Credit Losses Table 4.5 discloses activity in the allowance for credit losses for the periods indicated. Table 4.5: Allowance for Credit Losses (in thousands) Beginning Balance Effect of Adoption of ASC 326 Charge-offs Recoveries Provision (Benefit) Ending Balance Three months ended June 30, 2024 Real estate: Commercial $ 28,895 $ — $ — $ — $ ( 4,187 ) $ 24,708 Commercial land and development 164 — — — ( 92 ) 72 Commercial construction 697 — — — 400 1,097 Residential construction 114 — — — ( 14 ) 100 Residential 164 — — — 31 195 Farmland 438 — — — ( 36 ) 402 Commercial: Secured 3,262 — ( 1,239 ) 57 5,306 7,386 Unsecured 259 — ( 36 ) — ( 9 ) 214 Consumer and other 660 — ( 72 ) 93 551 1,232 Total $ 34,653 $ — $ ( 1,347 ) $ 150 $ 1,950 $ 35,406 23 Table 4.5: Allowance for Credit Losses (continued) (in thousands) Beginning Balance Effect of Adoption of ASC 326 Charge-offs Recoveries Provision (Benefit) Ending Balance Three months ended June 30, 2023 Real estate: Commercial $ 27,119 $ — $ — $ — $ 434 $ 27,553 Commercial land and development 226 — — — ( 42 ) 184 Commercial construction 1,438 — — — ( 226 ) 1,212 Residential construction 175 — — — 42 217 Residential 181 — — — ( 29 ) 152 Farmland 219 — — — 17 236 Commercial: Secured 4,258 — ( 1,124 ) 47 570 3,751 Unsecured 152 — — — 57 209 Consumer and other 404 — ( 137 ) 106 97 470 Total $ 34,172 $ — $ ( 1,261 ) $ 153 $ 920 $ 33,984 Six months ended June 30, 2024 Real estate: Commercial $ 29,015 $ — $ — $ — $ ( 4,307 ) $ 24,708 Commercial land and development 178 — — — ( 106 ) 72 Commercial construction 718 — — — 379 1,097 Residential construction 89 — — — 11 100 Residential 151 — — — 44 195 Farmland 399 — — — 3 402 Commercial: Secured 3,314 — ( 2,237 ) 239 6,070 7,386 Unsecured 189 — ( 70 ) — 95 214 Consumer and other 378 — ( 143 ) 186 811 1,232 Total $ 34,431 $ — $ ( 2,450 ) $ 425 $ 3,000 $ 35,406 Six months ended June 30, 2023 Real estate: Commercial $ 19,216 $ 7,606 $ — $ — $ 731 $ 27,553 Commercial land and development 54 74 — — 56 184 Commercial construction 645 882 — — ( 315 ) 1,212 Residential construction 49 81 — — 87 217 Residential 175 3 — — ( 26 ) 152 Farmland 644 ( 396 ) — — ( 12 ) 236 Commercial: Secured 7,098 ( 3,060 ) ( 1,611 ) 139 1,185 3,751 Unsecured 116 37 — — 56 209 Consumer and other 347 80 ( 522 ) 507 58 470 Unallocated 45 ( 45 ) — — — — Total $ 28,389 $ 5,262 $ ( 2,133 ) $ 646 $ 1,820 $ 33,984 24 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. Table 4.6: Unfunded Loan Commitment Reserves Three months ended Six months ended (in thousands) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Balance at beginning of period $ 1,097 $ 1,217 $ 1,247 $ 125 Effect of adoption of ASC 326 — — — 1,092 Provision 50 330 ( 100 ) 330 Balance at end of period $ 1,147 $ 1,547 $ 1,147 $ 1,547 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 $ 1.6 billion and $ 1.7 billion at June 30, 2024 and December 31, 2023, respectively. In addition, the Company pledges eligible tenants in common loans, which totaled $ 1.2 billion at June 30, 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. Note 5: Interest-Bearing Deposits Table 5.1 shows the composition of interest-bearing deposits as of June 30, 2024 and December 31, 2023. Table 5.1: Interest-Bearing Deposits (in thousands) June 30, 2024 December 31, 2023 Interest-bearing transaction accounts $ 299,815 $ 320,356 Savings accounts 126,532 126,498 Money market accounts 1,564,120 1,282,369 Time accounts, $ 250 or more 192,344 344,694 Other time accounts 141,087 121,878 Total interest-bearing deposits $ 2,323,898 $ 2,195,795 Time deposits totaled $ 333.4 million and $ 466.6 million as of June 30, 2024 and December 31, 2023, respectively. Scheduled maturities of time deposits as of June 30, 2024 for the next five years are shown in Table 5.2. Table 5.2: Scheduled Maturities of Time Deposits (in thousands) 2024 $ 285,068 2025 46,561 2026 1,566 2027 100 2028 136 Total time deposits $ 333,431 25 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 June 30, 2024 and December 31, 2023. The composition of network deposits as of June 30, 2024 and December 31, 2023 is shown in Table 5.3. Table 5.3: Network Deposits (in thousands) June 30, 2024 December 31, 2023 CDARS $ 17,397 $ 16,325 ICS 682,875 620,199 Total network deposits $ 700,272 $ 636,524 Table 5.4 presents interest expense recognized on interest-bearing deposits for the periods ended June 30, 2024 and 2023. Table 5.4: Interest Expense Recognized on Interest-Bearing Deposits Three months ended Six months ended (in thousands) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Interest-bearing transaction accounts $ 1,104 $ 825 $ 2,230 $ 1,258 Savings accounts 856 758 1,718 1,303 Money market accounts 13,388 8,136 25,543 13,572 Time accounts, $ 250 or more 2,412 2,634 6,235 4,597 Other time accounts 957 1,616 2,502 2,617 Total interest expense on interest-bearing deposits $ 18,717 $ 13,969 $ 38,228 $ 23,347 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 ( 8.60 % as of June 30, 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 $ 0.3 million has been amortized as of June 30, 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 June 30, 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 shown in Table 6.1. Table 6.1: Financing Availability with the FHLB (in thousands) June 30, 2024 December 31, 2023 Total financing ability from the FHLB $ 1,004,397 $ 996,712 Less: outstanding borrowings — 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 $ 432,897 $ 145,212 At June 30, 2024 and December 31, 2023, the Company had the ability to borrow from the Federal Reserve Discount Window. At June 30, 2024 and December 31, 2023, the borrowing capacity under this arrangement was $ 829.2 million and $ 770.6 million, respectively. There were no amounts outstanding at June 30, 2024 and December 31, 2023. The borrowing line is secured by certain liens on the Company’s loans and certain available-for-sale securities. At June 30, 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 June 30, 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. Table 7.1: EPS Three months ended Six months ended (in thousands, except share count and earnings per common share) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Net income $ 10,782 $ 12,729 $ 21,413 $ 25,890 Basic weighted average common shares outstanding 21,039,798 17,165,344 19,115,333 17,157,801 Add: Dilutive effects of assumed vesting of restricted stock 18,287 3,651 50,207 24,067 Total dilutive weighted average common shares outstanding 21,058,085 17,168,995 19,165,540 17,181,868 Earnings per common share: Basic EPS $ 0.51 $ 0.74 $ 1.12 $ 1.51 Diluted EPS $ 0.51 $ 0.74 1.12 1.51 The Company did not have any anti-dilutive shares at June 30, 2024 or June 30, 2023. (b) Dividends On April 18, 2024, the board of directors declared a $ 0.20 per common share dividend, totaling $ 4.3 million. 26 (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 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, which vest ratably over three or five years (as defined in the respective agreements), and to directors, which vest over one year . 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 June 30, 2024 and 2023 was $ 0.3 million and $ 0.2 million, respectively. Non-cash stock compensation expense recognized for the six months ended June 30, 2024 and 2023 was $ 0.6 million and $ 0.5 million, respectively. At June 30, 2024 and 2023, there were 137,457 and 82,324 unvested restricted shares, respectively. As of June 30, 2024, there was approximately $ 2.6 million of unrecognized compensation expense related to the 137,457 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 3.39 years as of June 30, 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 and six months ended June 30, 2024 and 2023 was immaterial. Table 7.2 summarizes activity related to restricted shares for the periods indicated. Table 7.2: Restricted Share Activity For the three months ended June 30, For the six months ended June 30, 2024 2023 2024 2023 Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Shares Weighted Average Grant Date Fair Value Beginning of the period balance 162,348 $ 21.22 108,363 $ 21.43 69,338 $ 20.53 96,826 $ 20.34 Shares granted — — — — 96,380 21.97 16,978 28.52 Shares vested ( 23,723 ) 20.00 ( 24,492 ) 20.00 ( 26,975 ) 21.03 ( 29,933 ) 20.78 Shares forfeited ( 1,168 ) 21.69 ( 1,547 ) 26.95 ( 1,286 ) 21.54 ( 1,547 ) 26.95 End of the period balance 137,457 $ 21.43 82,324 $ 21.75 137,457 $ 21.43 82,324 $ 21.75 27 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 amounts of unfunded loan commitments and standby letters of credit not reflected in the unaudited consolidated balance sheets at the dates indicated are presented in Table 8.1. Table 8.1: Unfunded Loan Commitments and Standby Letters of Credit (in thousands) June 30, 2024 December 31, 2023 Commercial lines of credit $ 196,210 $ 181,855 Undisbursed construction loans 120,579 134,828 Undisbursed commercial real estate loans 101,160 107,712 Agricultural lines of credit 24,918 24,635 Undisbursed residential real estate loans 4,455 6,538 Undisbursed agricultural real estate loans — 1,200 Other 1,988 2,119 Total commitments and standby letters of credit $ 449,310 $ 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 June 30, 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 89.76 % of the Company’s loan portfolio at June 30, 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 June 30, 2024, the Company had 99 deposit relationships that exceeded $ 5.0 million each, totaling $ 1.9 billion, or approximately 59.53 % of total deposits. The Company’s largest single deposit relationship at June 30, 2024 totaled $ 227.7 million, or approximately 7.23 % 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. 28 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 $ 23.7 million and $ 22.3 million at June 30, 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 July 18, 2024, the board of directors of the Company declared a cash dividend of $ 0.20 per common share, payable on August 12, 2024 to shareholders of record as of August 5, 2024. 29