What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2024-11-07 compared with 2024-08-06 · 221 added, 229 removed, 876 unchanged (34% of the section changed)

39 unchanged sentences

• 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, our Quarterly Report on Form 10-Q for the three months ended March 31, 2024, and other filings we may make with the SEC, copies of which are available from us at no charge.

The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” of our 2023 Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for the three months ended March 31, 2024 and June 30, 2024, 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.

4 unchanged sentences

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.

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

1 unchanged sentence

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 June 30, 2024, we had total assets of $3.6 billion, total loans held for investment, net of allowance for credit losses, of $3.2 billion, and total deposits of $3.1 billion.

We refer to our mission as “purpose-driven and integrity-centered banking.” At September 30, 2024, we had total assets of $3.9 billion, total loans held for investment of $3.5 billion, and total deposits of $3.4 billion.

Critical Accounting Estimates

13 unchanged sentences

Allowance for Credit Losses (“ACL”)

The ACL represents the estimated probable credit losses in our loan and investment portfolios and is estimated as of June 30, 2024 using CECL.

The ACL represents the estimated probable credit losses in our loan and investment portfolios and is estimated as of September 30, 2024 using CECL.

The ACL is established through a provision for credit losses charged to operations.

6 unchanged sentences

Reserves for credit losses identified on a pooled basis are then adjusted for qualitative and other environmental factors to reflect current conditions.

During the three months ended June 30, 2024, we refined our methodology of measuring the ACL on two pools of loans:

Multifamily and C&I SBA.

Within the Multifamily pool, the MHC loans were segregated from traditional Multifamily as we 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 MHC loans compared to traditional Multifamily properties.

During the three months ended September 30, 2024, we refined our methodology of measuring the ACL on CRE Non-Owner Occupied loans.

Within the CRE Non-Owner Occupied portfolio, RV Park loans were segregated from traditional CRE Non-Owner Occupied loans as we identified a data source to provide sufficient historical peer loss data specific to RV Park loans.

This segregation now adjusts for differences in the risk characteristics and performance of RV Park loans compared to traditional CRE Non-Owner Occupied properties.

We used calculations of individual probability of default and loss given default on a loan-by-loan basis to derive an estimated loss rate.

Applying this adjusted loss rate led to a decrease in the ACL for the Multifamily pool as of June 30, 2024 of approximately $5.8 million.

During routine monitoring of charge-off activity within the C&I SBA pool, we identified an increased level of charge-offs during the first six months of 2024, reflecting a change in the credit quality of the pool.

In response to this, we increased the expected loss rates be more in line with net charge-off rates during the first six months of 2024, as this time period reflects what is expected based on our current economic outlook for loans in the C&I SBA pool.

This adjustment reflects our estimate for future loss rates and increased the required reserves related to the C&I SBA pool by approximately $4.6 million.

Applying this adjusted loss rate led to a decrease in the ACL for the RV Park pool of approximately $3.3 million as of September 30, 2024.

Executive Summary

Net income for the three and six months ended June 30, 2024 totaled $10.8 million and $21.4 million, respectively, as compared to net income of $12.7 million and $25.9 million for the three and six months ended June 30, 2023, respectively.

Net income for the three and nine months ended September 30, 2024 totaled $10.9 million and $32.4 million, respectively, as compared to net income of $11.0 million and $36.9 million for the three and nine months ended September 30, 2023, respectively.

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

Total deposits increased by $122.7 million from $3.03 billion at December 31, 2023 to $3.15 billion at June 30, 2024.

Non-wholesale deposits increased by $230.4 million in the first six months of 2024 to $2.90 billion.

Wholesale deposits, which the Company defines as brokered deposits and public time deposits, decreased by $107.6 million in the first six months of 2024 to $252.5 million.

Non-interest-bearing deposits decreased by $5.4 million in the first six months of 2024 to $825.7 million, and represented 26.22% of total deposits at June 30, 2024, as compared to 27.46% of total deposits at December 31, 2023.

Our loan to deposit ratio was 103.87% at June 30, 2024, as compared to 102.19% at December 31, 2023.

Total assets were $3.63 billion at June 30, 2024, representing a $41.1 million, or 1.14%, increase compared to $3.59 billion at December 31, 2023.

Total loans held for investment were $3.27 billion at June 30, 2024, as compared to $3.08 billion at December 31, 2023, an increase of $184.6 million, or 5.99%.

The increase was primarily attributable to increases of $114.4 million in consumer and other loans and $88.6 million in commercial real estate loans, partially offset by decreases in commercial secured and commercial land and development loans of $11.0 million and $10.8 million, respectively.

Total deposits increased by $373.1 million from $3.0 billion at December 31, 2023 to $3.4 billion at September 30, 2024.

Non-wholesale deposits increased by $323.3 million in the first nine months of 2024 to $3.0 billion.

Wholesale deposits, which the Company defines as brokered deposits and public time deposits, increased by $49.8 million in the first nine months of 2024 to $409.9 million.

Non-interest-bearing deposits increased by $75.8 million in the first nine months of 2024 to $906.9 million, and represented 26.67% of total deposits at September 30, 2024, as compared to 27.46% of total deposits at December 31, 2023.

Our loan to deposit ratio was 101.87% at September 30, 2024, as compared to 102.19% at December 31, 2023.

Total assets were $3.9 billion at September 30, 2024, representing a $293.9 million, or 8.18%, increase compared to $3.6 billion at December 31, 2023.

Total loans held for investment were $3.5 billion at September 30, 2024, as compared to $3.1 billion at December 31, 2023, an increase of $378.8 million, or 12.29%.

The increase was primarily attributable to increases of $232.6 million in consumer and other loans, $127.2 million in commercial real estate loans, and $30.0 million in commercial construction loans, partially offset by decreases in residential construction and commercial land and development loans of $12.0 million and $10.8 million, respectively.

• Credit Quality.

Credit quality remains strong, with non-accrual loans representing $1.9 million, or 0.06% of total loans held for investment, at June 30, 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 1.08% at June 30, 2024 and 1.12% December 31, 2023.

Credit quality remains strong, with non-accrual loans representing $1.8 million, or 0.05% of total loans held for investment, at September 30, 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 1.09% at September 30, 2024 and 1.12% December 31, 2023.

• Net Interest Margin.

Net interest margin was 3.39% and 3.27%, respectively, for the three and six months ended June 30, 2024, and 3.45% and 3.59%, respectively, for the three and six months ended June 30, 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 5.08% at June 30, 2023 to 5.33% at June 30, 2024.

Net interest margin was 3.37% and 3.30%, respectively, for the three and nine months ended September 30, 2024, and 3.31% and 3.50%, respectively, for the three and nine months ended September 30, 2023.

The increase in net interest margin for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was primarily due to higher yields on new and repriced loans, partially offset by an increase in interest expense due to larger average deposit balances at higher rates.

The decrease in net interest margin between the nine months ended September 30, 2024 and 2023 was primarily due to increases in deposit costs.

• Efficiency Ratio.

Efficiency ratio was 44.07% for the three months ended June 30, 2024, up from 39.41% for the corresponding period of 2023 due to the Company’s expansion into the San Francisco Bay Area beginning late in the second quarter of 2023.

Efficiency ratio was 43.37% for the three months ended September 30, 2024, up from 41.63% for the corresponding period of 2023, mainly due to increased expenses for employees hired since September 2023 to support expansion into the San Francisco Bay Area.

• Capital Ratios .

All capital ratios were above well-capitalized regulatory thresholds as of June 30, 2024 and reflect additional common stock of approximately $80.9 million issued through the public offering that closed in April 2024.

The total risk-based capital ratio for the Company was 14.38% at June 30, 2024, as compared to 12.30% at December 31, 2023.

The Tier 1 leverage ratio was 11.05% at June 30, 2024, as compared to 8.73% at December 31, 2023.

All capital ratios were above well-capitalized regulatory thresholds as of September 30, 2024.

The total risk-based capital ratio for the Company was 13.94% at September 30, 2024, as compared to 12.30% at December 31, 2023.

The Tier 1 leverage ratio was 10.83% at September 30, 2024, as compared to 8.73% at December 31, 2023.

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

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

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

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

Highlights of Financial Results

(dollars in thousands) June 30, 2024 December 31, 2023

(dollars in thousands) September 30, 2024 December 31, 2023

Selected financial condition data:

17 unchanged sentences

Highlights of Financial Results (continued)

For the three months ended For the six months ended

(dollars in thousands, except per share data) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023

For the three months ended For the nine months ended

(dollars in thousands, except per share data) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023

Selected operating data:

33 unchanged sentences

RESULTS OF OPERATIONS

The following discussion of our results of operations compares the three and six months ended June 30, 2024 to the three and six months ended June 30, 2023.

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 the year ending December 31, 2024.

The following discussion of our results of operations compares the three and nine months ended September 30, 2024 to the three and nine months ended September 30, 2023.

The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024.

Net Interest Income

5 unchanged sentences

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

Three months ended June 30, 2024 compared to three months ended June 30, 2023

Net interest income increased $1.5 million to $29.1 million for the three months ended June 30, 2024 compared to June 30, 2023 while our net interest margin of 3.39% for the three months ended June 30, 2024 decreased from 3.45% for the three months ended June 30, 2023.

The increase in net interest income was primarily due to loan growth at higher yields, partially offset by deposit growth at higher rates.

These changes related to the change in the effective Federal Funds rate from 5.08% at June 30, 2023 to 5.33% at June 30, 2024.

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Net interest income increased $2.9 million to $30.4 million for the three months ended September 30, 2024 compared to September 30, 2023 and our net interest margin of 3.37% for the three months ended September 30, 2024 increased from 3.31% for the three months ended September 30, 2023.

The increase was primarily due to an increase in interest income driven by higher yields on new and repriced loans, partially offset by an increase in interest expense due to larger average deposit balances at higher rates.

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

4 unchanged sentences

For the three months ended

June 30, 2024

September 30, 2024

For the three months ended

June 30, 2023

September 30, 2023

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

49 unchanged sentences

For the three months ended

June 30, 2024 compared to

the three months ended June 30, 2023

September 30, 2024 compared to

the three months ended September 30, 2023

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

11 unchanged sentences

Changes in net interest income/margin $ 3,239 $ (329) $ 2,910

Net interest income increased $1.5 million while net interest margin decreased 6 basis points for the three months ended June 30, 2024 compared to the same quarter of the prior year.

The increase in net interest income is primarily attributable to loan growth at higher yields, partially offset by deposit growth at higher interest rates.

Interest income increased by $6.2 million, as compared to the same quarter of the prior year.

Net interest income increased $2.9 million and net interest margin increased six basis points for the three months ended September 30, 2024 compared to the same quarter of the prior year.

The increase in net interest income is primarily attributable to higher yields on new and repriced loans, partially offset by larger average deposit balances at higher interest rates.

Interest income increased by $7.6 million compared to the same quarter of the prior year.

The average yield on loans increased 41 basis points compared to the same quarter of the prior year due to increases in interest rates and an increase in average balances of $371.9 million, or 12.47%.

The increase in interest income was partially offset by an additional $4.7 million in interest expense compared to the same quarter of the prior year.

The average cost of total deposits, including wholesale deposits, increased 55 basis points compared to the same quarter of the prior year, due to increases in interest rates and an increase in average balances of $137.0 million, or 4.70%.

Average cost of wholesale deposits, individually, increased 23 basis points compared to the same quarter of the prior year, while average balances decreased 29.52%.

In addition, the average balance of non-interest-bearing deposits decreased by $11.1 million compared to the same quarter of the prior year.

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

Six months ended June 30, 2024 compared to six months ended June 30, 2023

Net interest income decreased $0.9 million, or 1.57%, to $55.8 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, and our net interest margin of 3.27% for the six months ended June 30, 2024 decreased 32 basis points when compared to the same period in 2023.

The decrease was primarily due to deposit growth at higher rates exceeding loan growth at higher yields.

These changes related to the change in the effective Federal Funds rate from 5.08% at June 30, 2023 to 5.33% at June 30, 2024.

The average cost of total deposits increased 45 basis points compared to the same quarter of the prior year, due to increases in interest rates and an increase in average balances of $200.6 million, or 6.72%.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Net interest income increased $2.0 million, or 2.40%, to $86.2 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, while our net interest margin of 3.30% for the nine months ended September 30, 2024 decreased 20 basis points when compared to the same period in 2023.

The increase in net interest income was primarily due to an increase in interest income driven by higher yields on new and repriced loans, partially offset by an increase in interest expense due to larger average deposit balances at higher rates.

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

3 unchanged sentences

Average Balances, Interest, and Yield/Rate

(dollars in thousands) For the six months ended

June 30, 2024

For the six months ended

June 30, 2023

(dollars in thousands) For the nine months ended

September 30, 2024

For the nine months ended

September 30, 2023

Average Balance Interest Income/Expense Average Yield/Rate Average Balance Interest Income/Expense Average Yield/Rate

48 unchanged sentences

Interest Income and Expense Change Analysis

(In thousands) For the six months ended

June 30, 2024 compared to

the six months ended June 30, 2023

(In thousands) For the nine months ended

September 30, 2024 compared to

the nine months ended September 30, 2023

Volume Yield/Rate Total Increase (Decrease)

11 unchanged sentences

Changes in net interest income/margin $ 6,794 $ (4,774) $ 2,020

Net interest income decreased $0.9 million and net interest margin decreased 32 basis points for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

The decrease in net interest income is primarily attributable to deposit growth at higher interest rates that exceeded loan growth at higher yields.

Interest expense increased by $14.3 million compared to the same period of the prior year.

Net interest income increased $2.0 million, while net interest margin decreased 20 basis points for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Interest income increased by $21.0 million compared to the same period of the prior year.

The average yield on loans increased 36 basis points compared to the same period of the prior year due to an increase in average balances of $300.5 million, or 10.32%, and increased interest rates on new and repriced loans.

The increase in interest income was partially offset by an additional $19.0 million in interest expense compared to the same period of the prior year.

The cost of interest-bearing deposits increased 90 basis points compared to the same period of the prior year due to increases in interest rates and an increase in average balances of $220.5 million, or 10.73%.

In addition, the average balance of non-interest-bearing deposits decreased by $14.0 million, or 1.64%, compared to the same period of the prior year.

The increase in interest expense was partially offset by an additional $13.4 million in interest income compared to the same period of the prior year.

The average yield on loans increased 34 basis points compared to the same period of the prior year due to increases in interest rates and an increase in average balances of $264.7 million, or 9.20%.

Provision for Credit Losses

2 unchanged sentences

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.

Three months ended June 30, 2024 compared to three months ended June 30, 2023

We recorded a $2.0 million provision for credit losses in the second quarter of 2024, as compared to a $1.3 million provision for credit losses for the same period of 2023.

The provision recorded during the three months ended June 30, 2024 was the net effect of charge-offs and recoveries, and net increases in quantitative and qualitative reserves.

Six months ended June 30, 2024 compared to six months ended June 30, 2023

We recorded a $2.9 million provision for credit losses in the first six months of 2024, as compared to a $2.2 million provision for credit losses for the same period of 2023.

The provision recorded during the first six months of 2024 was the net effect of charge-offs and recoveries, and net increases in quantitative and qualitative reserves.

Three months ended September 30, 2024 compared to three months ended September 30, 2023

We recorded a $2.8 million provision for credit losses in the third quarter of 2024, as compared to a $1.1 million provision for credit losses for the same period of 2023.

The provision recorded during the three months ended September 30, 2024 reflects loan growth and continued risks associated with general economic forecasts.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

We recorded a $5.7 million provision for credit losses in the first nine months of 2024, as compared to a $3.2 million provision for credit losses for the same period of 2023.

The provision recorded during the first nine months of 2024 reflects loan growth and continued risks associated with general economic forecasts.

Non-interest Income

1 unchanged sentence

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

Three months ended June 30, 2024 compared to three months ended June 30, 2023

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Table 7 details the components of non-interest income for the periods indicated.

1 unchanged sentence

For the three months ended

(dollars in thousands) June 30, 2024

June 30, 2023

(dollars in thousands) September 30, 2024

September 30, 2023

$ Change % Change

8 unchanged sentences

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 June 30, 2024, approximately $6.8 million of loans were sold with an effective yield of 6.60%, as compared to approximately $10.9 million of loans sold with an effective yield of 5.89% during the three months ended June 30, 2023.

FHLB stock dividends.

The increase related to increases in the annualized dividend rate and total average shares outstanding to 8.75% and 150,000 for the three months ended June 30, 2024 from 7.00% and 108,901 shares for the three months ended June 30, 2023.

Other income.

The decrease related to a $1.3 million gain from distributions received on equity investments in venture-backed funds during the three months ended June 30, 2023, which did not occur during the three months ended June 30, 2024.

Six months ended June 30, 2024 compared to six months ended June 30, 2023

During the three months ended September 30, 2024, approximately $4.4 million of loans were sold with an effective yield of 7.03%, as compared to approximately $7.0 million of loans sold with an effective yield of 5.63% during the three months ended September 30, 2023.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Table 8 details the components of non-interest income for the periods indicated.

Non-interest Income

For the six months ended

(dollars in thousands) June 30, 2024

June 30, 2023

For the nine months ended

(dollars in thousands) September 30, 2024

September 30, 2023

$ Change % Change

7 unchanged sentences

Service charges on deposit accounts .

The increase resulted primarily from a $0.1 million increase in wire transfer fees recognized during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

The increase resulted primarily from a $0.1 million increase in wire transfer fees recognized during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

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 six months ended June 30, 2024 compared to the six months ended June 30, 2023.

During the six months ended June 30, 2024, approximately $12.0 million of loans were sold with an effective yield of 6.81%, as compared to approximately $23.6 million of loans sold with an effective yield of 5.26% during the six months ended June 30, 2023.

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 period over period.

During the nine months ended September 30, 2024, approximately $16.4 million of loans were sold with an effective yield of 6.87%, as compared to approximately $30.6 million of loans sold with an effective yield of 5.34% during the nine months ended September 30, 2023.

Loan-related fees .

The increase primarily related to an increase of $0.1 million in swap referral fees recognized during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.

The increase primarily related to an increase of $0.1 million in swap referral fees recognized during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023.

FHLB stock dividends.

The increase was primarily due to increased yields on dividends received, combined with an increase in the average number of FHLB shares outstanding between June 30, 2023 and June 30, 2024.

The increase was primarily due to increased yields on dividends received, combined with an increase in the average number of FHLB shares outstanding between September 30, 2023 and September 30, 2024.

Earnings on BOLI.

The increase was primarily due to additional policies purchased between September 30, 2023 and September 30, 2024.

Other income.

The decrease resulted primarily from the difference between a $1.3 million gain recorded for distributions received on equity investments in venture-backed funds during the six months ended June 30, 2023 compared to a $0.3 million gain recorded during the six months ended June 30, 2024.

The decrease resulted primarily from the difference between a $1.3 million gain from distributions received on equity investments in venture-backed funds during the nine months ended September 30, 2023 compared to a $0.2 million gain during the nine months ended September 30, 2024.

Non-interest Expense

6 unchanged sentences

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

Three months ended June 30, 2024 compared to three months ended June 30, 2023

Three months ended September 30, 2024 compared to three months ended September 30, 2023

Table 9 details the components of non-interest expense for the periods indicated.

1 unchanged sentence

For the three months ended

(dollars in thousands) June 30, 2024

June 30, 2023

(dollars in thousands) September 30, 2024

September 30, 2023

$ Change % Change

10 unchanged sentences

The increase related primarily to:

(i) a $0.9 million increase in salaries, benefits, and bonus expense for new employees hired since June 2023 to support expansion into the San Francisco Bay Area;

(ii) a $0.3 million increase in commissions earned, largely due to commissions paid to the San Francisco Bay Area team, which did not occur during the three months ended June 30, 2023;

and (iii) a $0.2 million decrease in loan origination costs due to lower loan originations, net of purchased consumer loans, period-over-period.

(i) a $1.0 million increase in salaries, benefits, and bonus expense, mainly for employees hired since September 2023 to support expansion into the San Francisco Bay Area;

and (ii) a $0.2 million increase in commissions paid, primarily to new employees in the San Francisco Bay Area.

This was partially offset by a $0.1 million increase in loan origination costs due to a higher number of loan originations, net of purchased consumer loans, period-over-period.

Data processing and software.

4 unchanged sentences

Professional services.

The increase was primarily due to:

(i) a $0.1 million increase of audit fees for 2024 audits;

and (ii) a $0.1 million increase in IT consulting services due to an overall increase in service charges.

Advertising and promotional.

The decrease related primarily to an overall decline in sponsorships and donations made, as fewer events were sponsored and attended compared to the three months ended June 30, 2023.

The increase was primarily due to a $0.1 million increase in fees for 2024 audits and examinations.

Other operating expenses.

The decrease was primarily due to a $0.2 million decrease in travel, conference fees, and professional membership fees, as compared to the three months ended June 30, 2023.

Six months ended June 30, 2024 compared to six months ended June 30, 2023

The increase was primarily due to $0.1 million in operational losses on deposit accounts.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

Table 10 details the components of non-interest expense for the periods indicated.

Non-interest Expense

For the six months ended

(dollars in thousands) June 30, 2024

June 30, 2023

For the nine months ended

(dollars in thousands) September 30, 2024

September 30, 2023

$ Change % Change

10 unchanged sentences

The increase was primarily a result of:

(i) a $1.9 million increase in salaries, benefits, and bonus expense for new employees hired since June 2023 to support expansion into the San Francisco Bay Area, partially offset by a $0.4 million decrease in salaries, benefits, and bonus expense related to a 6.67% decrease in headcount outside of the San Francisco Bay Area;

(ii) a $0.3 million decrease in loan origination costs due to lower loan originations, net of purchased consumer loans, period-over-period;

and (iii) a $0.5 million increase in commission expense.

(i) a $2.5 million increase in salaries, benefits, and bonus expense for new employees hired since September 2023 to support expansion into the San Francisco Bay Area;

(ii) a $0.7 million increase in commission expense, primarily due to commissions paid to new employees in the San Francisco Bay Area;

and (iii) a $0.2 million decrease in loan origination costs due to fewer loan originations, net of purchased consumer loans, period-over-period.

Occupancy and equipment.

The increase related to rent expense for temporary office space to support the San Francisco Bay Area expansion during the six months ended June 30, 2024, which did not exist during the six months ended June 30, 2023.

The increase related to rent expense for the San Francisco branch office during the nine months ended September 30, 2024, which did not exist for the nine months ended September 30, 2023.

Data processing and software.

6 unchanged sentences

(i) a $0.3 million increase of audit fees for 2024 audits;

and (ii) a $0.1 million increase in IT consulting services due to an overall increase in service charges.

and (ii) a $0.2 million increase in IT consulting services due to an overall increase in service charges and product enhancements to existing platforms.

Provision for Income Taxes

Three months ended June 30, 2024 compared to three months ended June 30, 2023

The provision for income taxes was $4.4 million for the three months ended June 30, 2024, a $0.1 million decrease from the three months ended June 30, 2023.

The decrease was primarily driven by a $0.5 million state tax benefit recorded during the three months ended June 30, 2023 relating to an overall reduction in the state tax blended rate for the Company since its transition to a C Corporation, which did not occur during the three months ended June 30, 2024.

The effective tax rates for the three months ended June 30, 2024 and 2023 were 28.84% and 25.86%, respectively.

Six months ended June 30, 2024 compared to six months ended June 30, 2023

The provision for income taxes was $8.7 million for the six months ended June 30, 2024, as compared to $9.8 million for the six months ended June 30, 2023.

The decrease was primarily due to an overall decrease in pre-tax income period-over-period, partially offset by a $0.5 million state tax benefit recorded during the six months ended June 30, 2023 relating to an overall reduction in the state tax blended rate for the Company since its transition to a C Corporation.

No such benefit was recorded during the six months ended June 30, 2024.

The effective tax rates for the six months ended June 30, 2024 and 2023 were 28.89% and 27.42%, respectively.

Three months ended September 30, 2024 compared to three months ended September 30, 2023

The provision for income taxes was $4.3 million for the three months ended September 30, 2024, a $0.5 million decrease from the three months ended September 30, 2023.

This decline was primarily driven by an overall decrease in pre-tax income combined with a $0.2 million adjustment to the provision during the three months ended September 30, 2023 to true-up the year-to-date effective tax rate, which did not occur during the three months ended September 30, 2024.

The effective tax rates for the three months ended September 30, 2024 and 2023 were 28.21% and 30.07%, respectively.

Nine months ended September 30, 2024 compared to nine months ended September 30, 2023

The provision for income taxes was $13.0 million for the nine months ended September 30, 2024, as compared to $14.5 million for the nine months ended September 30, 2023.

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

No such benefit was recorded during the nine months ended September 30, 2024.

The effective tax rates for the nine months ended September 30, 2024 and 2023 were 28.66% and 28.23%, respectively.

FINANCIAL CONDITION SUMMARY

The following discussion compares our financial condition as of June 30, 2024 to our financial condition as of December 31, 2023.

Table 11 summarizes selected components of our unaudited consolidated balance sheets as of June 30, 2024 and December 31, 2023.

The following discussion compares our financial condition as of September 30, 2024 to our financial condition as of December 31, 2023.

Table 11 summarizes selected components of our unaudited consolidated balance sheets as of September 30, 2024 and December 31, 2023.

Selected Components of Consolidated Balance Sheets (Unaudited)

(dollars in thousands) June 30, 2024

(dollars in thousands) September 30, 2024

December 31, 2023

6 unchanged sentences

Total shareholders’ equity $ 389,930 $ 285,774

At June 30, 2024, total assets were $3.63 billion, an increase of $41.1 million from $3.59 billion at December 31, 2023, primarily due to a $184.6 million increase in total loans held for investment, partially offset by a $131.2 million decrease in cash and cash equivalents.

The $184.6 million increase in total loans held for investment included a purchase of loans within the consumer concentration of the loan portfolio, representing $73.3 million.

At September 30, 2024, total assets were $3.9 billion, an increase of $293.9 million from $3.6 billion at December 31, 2023, primarily due to a $378.8 million increase in total loans held for investment, partially offset by a $70.7 million decrease in cash and cash equivalents.

The $378.8 million increase in total loans held for investment included $254.7 million in purchases of loans within the consumer concentration of the loan portfolio.

Cash and Cash Equivalents

Total cash and cash equivalents were $190.4 million at June 30, 2024, a decrease of $131.2 million from $321.6 million at December 31, 2023.

The decrease in cash and cash equivalents was primarily due to a decrease in borrowings of $170.0 million and $192.4 million in loan originations, net of repayments, partially offset by increases in deposits of $122.7 million and pre-tax income of $30.1 million.

Total cash and cash equivalents were $250.9 million at September 30, 2024, a decrease of $70.7 million from $321.6 million at December 31, 2023.

The decrease in cash and cash equivalents was primarily due to a decrease in borrowings of $170.0 million and $389.1 million in loan originations, net of repayments, partially offset by an increase in deposits of $373.1 million, $80.9 million in net proceeds from the 2024 Public Offering (as defined below), and pre-tax income of $45.4 million.

Investment Portfolio

4 unchanged sentences

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 $106.2 million at June 30, 2024 and $111.2 million at December 31, 2023, representing a decrease of $5.0 million period-over-period.

The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $3.8 million and an unrealized loss on securities of $0.7 million, with the remainder of the change due to amortization of premiums.

For the six months ended June 30, 2024, other comprehensive loss was $0.5 million, primarily due to rate changes and other market conditions on securities.

Our total securities available-for-sale and held-to-maturity amounted to $107.0 million at September 30, 2024 and $111.2 million at December 31, 2023, representing a decrease of $4.2 million period-over-period.

The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $6.4 million and an unrealized gain on securities of $2.9 million, with the remainder of the change due to amortization of premiums.

For the nine months ended September 30, 2024, other comprehensive gain was $2.0 million, primarily due to rate changes and other market conditions on securities.

Table 12 presents the carrying value of our investment portfolio as of the dates indicated.

Carrying Value of Investment Securities

June 30, 2024

September 30, 2024

December 31, 2023

14 unchanged sentences

(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

June 30, 2024

September 30, 2024

Available-for-sale:

26 unchanged sentences

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

As of June 30, 2024 and December 31, 2023, our total loans amounted to $3.27 billion and $3.09 billion, respectively.

As of September 30, 2024 and December 31, 2023, our total loans amounted to $3.5 billion and $3.1 billion, respectively.

Table 14 presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.

Loans Outstanding

June 30, 2024

September 30, 2024

December 31, 2023

29 unchanged sentences

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

June 30, 2024

September 30, 2024

Manufactured home community $ 897,854 31.92 % $ 1,599,597 14.32 % 74.52 %

3 unchanged sentences

Faith-based 181,677 6.46 % 485,421 9.40 % 73.95 %

Multifamily 179,419 6.47 % 375,105 14.50 % 75.00 %

Mini storage 170,254 6.05 % 347,632 16.32 % 69.73 %

Multifamily 166,383 5.92 % 358,612 14.43 % 75.00 %

All other types 1

16 unchanged sentences

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 87.20% of loans held for investment at June 30, 2024.

Commercial secured lending represents 4.73% of loans held for investment at June 30, 2024.

Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 84.01% of loans held for investment at September 30, 2024.

Commercial secured lending represents 4.99% of loans held for investment at September 30, 2024.

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

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

Commercial real estate loan balances as a percentage of risk-based capital were 568.36% and 682.72% as of June 30, 2024 and December 31, 2023, respectively.

Commercial real estate loan balances as a percentage of risk-based capital were 569.86% and 682.72% as of September 30, 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 June 30, 2024.

All loan sectors were within our established limits as of September 30, 2024.

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

6 unchanged sentences

(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

June 30, 2024

September 30, 2024

Commercial $ 37,386 $ 326,867 $ 2,371,848 $ 76,499 $ 2,812,600

22 unchanged sentences

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

June 30, 2024

September 30, 2024

Commercial $ 579,686 $ 2,232,914 $ 2,812,600

43 unchanged sentences

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

During the three and six months ended June 30, 2024, the Company sold 22 and 40 SBA 7(a) loans, respectively, with government-guaranteed portions totaling $6.8 million and $12.0 million, respectively.

The Company received gross proceeds of $7.2 million and $12.8 million on the loans sold during the three and six months ended June 30, 2024, respectively, resulting in the recognition of net gains on sale of $0.4 million and $0.8 million during the respective periods.

During the three and nine months ended September 30, 2024, the Company sold 10 and 50 SBA 7(a) loans, respectively, with government-guaranteed portions totaling $4.4 million and $16.4 million, respectively.

The Company received gross proceeds of $4.7 million and $17.5 million on the loans sold during the three and nine months ended September 30, 2024, respectively, resulting in the recognition of net gains on sale of $0.3 million and $1.1 million during the respective periods.

Non-accrual Loans

1 unchanged sentence

Nonperforming and Restructured Assets

(dollars in thousands) June 30, 2024 December 31, 2023

(dollars in thousands) September 30, 2024 December 31, 2023

Non-accrual loans:

12 unchanged sentences

Nonperforming loans plus performing LMs to loans held for investment 0.05 % 0.06 %

The ratio of nonperforming loans to loans held for investment was 0.06% at June 30, 2024 and December 31, 2023.

The ratio of nonperforming loans to loans held for investment was 0.05% at September 30, 2024, decreasing from 0.06% at December 31, 2023.

Potential Problem Loans

7 unchanged sentences

(dollars in thousands) Pass Watch Substandard Doubtful Total

June 30, 2024

September 30, 2024

Commercial $ 2,734,952 $ 75,861 $ 1,787 $ — $ 2,812,600

19 unchanged sentences

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 $59.9 million at June 30, 2024 from $41.6 million at December 31, 2023.

There were no loans with doubtful risk grades at June 30, 2024 or December 31, 2023.

Loans designated as watch and substandard, which are not considered adversely classified, increased to $92.7 million at September 30, 2024 from $41.6 million at December 31, 2023.

There were no loans with doubtful risk grades at September 30, 2024 or December 31, 2023.

Allowance for Credit Losses

4 unchanged sentences

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

At June 30, 2024, the Company’s allowance for credit losses was $35.4 million, as compared to $34.4 million at December 31, 2023.

The $1.0 million increase in the allowance is due to a $3.0 million provision for credit losses recorded during the six months ended June 30, 2024, partially offset by net charge-offs of $2.0 million, mainly attributable to commercial and industrial loans, during the same period.

At September 30, 2024, the Company’s allowance for credit losses was $37.6 million, as compared to $34.4 million at December 31, 2023.

The $3.2 million increase in the allowance is due to a $6.0 million provision for credit losses recorded during the nine months ended September 30, 2024, partially offset by net charge-offs of $2.8 million, mainly attributable to commercial and industrial loans, during the same period.

While the entire allowance for credit losses is available to absorb losses from any and all loans, Table 20 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.

Allocation of the Allowance for Credit Losses

June 30, 2024

September 30, 2024

December 31, 2023

10 unchanged sentences

Total allowance for credit losses $ 37,583 100.00 % $ 34,431 100.00 %

The ratio of the allowance for credit losses to total loans held for investment was 1.08% at June 30, 2024, as compared to 1.12% at December 31, 2023.

The ratio of the allowance for credit losses to total loans held for investment was 1.09% at September 30, 2024, as compared to 1.12% at December 31, 2023.

Activity Within the Allowance for Credit Losses

As of and for the three months ended

As of and for the six months ended

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

As of and for the nine months ended

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

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

11 unchanged sentences

Allowance for credit losses to loans held for investment 1.09 % 1.13 % 1.09 % 1.13 %

The ratio of the allowance for credit losses to loans held for investment decreased from 1.16% as of June 30, 2023 to 1.08% as of June 30, 2024.

Net charge-offs as a percent of average loans held for investment remained at 0.04% for the three months ended June 30, 2023 and June 30, 2024, respectively.

Net charge-offs as a percent of average loans held for investment increased from 0.05% to 0.06% for the six months ended June 30, 2023 and June 30, 2024, respectively.

During the first six months of 2024, total liabilities decreased by $53.6 million from $3.31 billion as of December 31, 2023 to $3.25 billion as of June 30, 2024.

This decrease was primarily due to a decrease in borrowings of $170.0 million, partially offset by an increase in total deposits of $122.7 million, comprised of an increase of $128.1 million in interest-bearing deposits and a decrease of $5.4 million in non-interest-bearing deposits.

Of the $128.1 million increase in interest-bearing deposits, brokered deposits increased by $16.9 million and public time deposits decreased by $124.5 million.

Public time deposit decreases were offset by an increase in non-wholesale deposits of $230.4 million.

Representing 96.80% of our total liabilities as of June 30, 2024, deposits are our primary source of funding for our business operations.

Total deposits increased by $122.7 million, or 4.05%, to $3.15 billion at June 30, 2024 from $3.03 billion at December 31, 2023.

Deposit increases were primarily attributable to increase in relationship deposits.

Non-interest-bearing deposits decreased by $5.4 million from December 31, 2023 to $825.7 million at June 30, 2024, representing 26.22% of total deposits at that date, as compared to 27.46% of total deposits at December 31, 2023.

Our loan to deposit ratio was 103.87% at June 30, 2024, as compared to 102.19% at December 31, 2023.

The ratio of the allowance for credit losses to loans held for investment decreased from 1.13% as of September 30, 2023 to 1.09% as of September 30, 2024.

Net charge-offs as a percent of average loans held for investment decreased from 0.03% to 0.02% for the three months ended September 30, 2023 and September 30, 2024, respectively.

Net charge-offs as a percent of average loans held for investment remained at 0.09% for the nine months ended September 30, 2023 and September 30, 2024, respectively.

During the first nine months of 2024, total liabilities increased by $189.7 million from $3.3 billion as of December 31, 2023 to $3.5 billion as of September 30, 2024.

This increase was primarily due to an increase in total deposits of $373.1 million, comprised of an increase of $297.2 million in interest-bearing deposits and an increase of $75.8 million in non-interest-bearing deposits, partially offset by a decrease in borrowings of $170.0 million.

The $297.2 million increase in interest-bearing deposits included an increase in non-wholesale deposits of $323.3 million, an increase in brokered deposits of $174.8 million, and a decrease in public time deposits of $125.0 million.

Representing 97.22% of our total liabilities as of September 30, 2024, deposits are our primary source of funding for our business operations.

Total deposits increased by $373.1 million, or 12.33%, to $3.4 billion at September 30, 2024 from $3.0 billion at December 31, 2023.

The increase was primarily attributable to increases in existing deposit relationships.

Non-interest-bearing deposits increased by $75.8 million from December 31, 2023 to $906.9 million at September 30, 2024, representing 26.67% of total deposits at that date, as compared to 27.46% of total deposits at December 31, 2023.

Our loan to deposit ratio was 101.87% at September 30, 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.

2 unchanged sentences

For the three months ended

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

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

4 unchanged sentences

Total deposits $ 3,184,795 2.63 % 100.00 % $ 2,984,208 2.18 % 100.00 %

For the six months ended

June 30, 2024

June 30, 2023

For the nine months ended

September 30, 2024

September 30, 2023

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

4 unchanged sentences

Total deposits $ 3,114,111 2.54 % 100.00 % $ 2,907,571 1.83 % 100.00 %

Uninsured and uncollateralized deposits totaled $1.1 billion and $1.0 billion at June 30, 2024 and December 31, 2023, respectively.

As of June 30, 2024, our 42 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.5 billion, or 47.18% of our total deposits.

Uninsured and uncollateralized deposits totaled $1.2 billion and $1.0 billion at September 30, 2024 and December 31, 2023, respectively.

As of September 30, 2024, our 42 largest deposit relationships, each accounting for more than $10.0 million, totaled $1.7 billion, or 48.53% of our total deposits.

The average age on deposit relationships of more than $5.0 million was approximately 8.89 years.

2 unchanged sentences

Composition of Large Deposit Relationships

(dollars in thousands) June 30, 2024

(dollars in thousands) September 30, 2024

December 31, 2023

4 unchanged sentences

Total $ 1,650,114 $ 1,507,258

Our largest single deposit relationship at June 30, 2024 related to a non-profit entity.

Our largest single deposit relationship at September 30, 2024 related to brokered deposits.

The balance for this customer was $275.0 million, or approximately 8.09% 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.

Table 24 sets forth the maturity of time deposits as of June 30, 2024.

Table 24 sets forth the maturity of time deposits as of September 30, 2024.

Scheduled Maturities of Time Deposits

8 unchanged sentences

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

There were no borrowings outstanding from the FHLB as of June 30, 2024 and borrowings of $170.0 million outstanding from the FHLB as of December 31, 2023.

There were no borrowings outstanding as of September 30, 2024 and borrowings of $170.0 million outstanding from the FHLB as of December 31, 2023.

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

2 unchanged sentences

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

Table 25 is a summary of our outstanding subordinated notes as of June 30, 2024.

Table 25 is a summary of our outstanding subordinated notes as of September 30, 2024.

Subordinated Notes Outstanding

1 unchanged sentence

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 (8.60% as of June 30, 2024) through maturity

Fixed at 6.00% through September 1, 2027, then three-month Term SOFR plus 329.0 basis points (7.93% as of September 30, 2024) through maturity

Shareholders’ Equity

Shareholders’ equity totaled $380.5 million at June 30, 2024 and $285.8 million at December 31, 2023.

The increase in shareholders’ equity was primarily a result of $80.9 million of additional common stock issued and outstanding in 2024 and net income recognized of $21.4 million, partially offset by:

(i) $7.7 million in cash dividends;

and (ii) a $0.5 million increase in accumulated other comprehensive loss during the six months ended June 30, 2024.

Shareholders’ equity totaled $389.9 million at September 30, 2024 and $285.8 million at December 31, 2023.

The increase in shareholders’ equity was primarily a result of $80.9 million of additional common stock issued and outstanding in 2024, net income recognized of $32.4 million, and a $2.0 million increase in accumulated other comprehensive income, partially offset by $12.0 million in cash dividends paid during the nine months ended September 30, 2024.

Liquidity and Capital Resources

37 unchanged sentences

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 June 30, 2024, management believes the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.

As of September 30, 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.

2 unchanged sentences

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 six months ended June 30, 2024, we had cash outflows of $175.0 million in loan originations and advances, net of principal collected, and $17.4 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.

During the nine months ended September 30, 2024, we had cash outflows of $369.7 million in loan originations and advances, net of principal collected, and $19.4 million in loans originated for sale.

Additionally, in the ordinary course of business, we enter into commitments to extend credit, 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 June 30, 2024, off-balance sheet commitments totaled $449.3 million.

At September 30, 2024, off-balance sheet commitments totaled $428.6 million.

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

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.

Our deposits are primarily made up of money market, interest-bearing transaction, 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.

During the six months ended June 30, 2024, we had cash inflows related to an increase in deposits of $122.7 million.

During the twelve months following June 30, 2024, approximately $330.2 million of time deposits are expected to mature.

During the nine months ended September 30, 2024, we had cash inflows of $373.1 million related to an increase in deposits.

During the twelve months following September 30, 2024, approximately $486.3 million of time deposits are expected to mature, which includes $274.9 million of brokered deposits.

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

1 unchanged sentence

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

At June 30, 2024, cash and cash equivalents represented 6.04% of total deposits.

At September 30, 2024, cash and cash equivalents represented 7.38% of total deposits.

Investment Securities

Our investment securities totaled $106.2 million at June 30, 2024.

Our investment securities totaled $107.0 million at September 30, 2024.

Mortgage-backed securities and obligations of states and political subdivisions comprised 51.17% and 35.98% of our investment portfolio, respectively.

1 unchanged sentence

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 June 30, 2024.

Assuming the current prepayment speed and interest rate environment, we expect to receive approximately $8.9 million from our securities over the twelve months following September 30, 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 six months ended June 30, 2024, we had cash proceeds from sales, maturities, calls, and prepayments of securities of $3.8 million.

Additionally, at June 30, 2024, securities available-for-sale totaled $103.2 million, of which $99.8 million has been pledged as collateral for borrowings and other commitments.

During the nine months ended September 30, 2024, we had cash proceeds from sales, maturities, calls, and prepayments of securities of $6.4 million.

Additionally, at September 30, 2024, securities available-for-sale totaled $104.2 million, of which $100.8 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 June 30, 2024, the Bank had no outstanding borrowings and a total financing availability of $432.9 million, net of letters of credit issued of $571.5 million.

At September 30, 2024, the Bank had no outstanding borrowings and a total financing availability of $555.9 million, net of letters of credit issued of $567.5 million.

Federal Reserve Discount Window

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

At June 30, 2024, the Bank had no outstanding borrowings and a total financing availability of $829.2 million.

At September 30, 2024, the Bank had no outstanding borrowings and a total financing availability of $858.3 million.

Correspondent Bank Lines of Credit

At June 30, 2024, the unused and available amount for borrowing from correspondent bank lines of credit was $175.0 million.

At September 30, 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 in Table 26) was approximately $1.6 billion as of June 30, 2024.

Total liquidity (consisting of cash and cash equivalents and unused and immediately available borrowing capacity as set forth in Table 26) was approximately $1.8 billion as of September 30, 2024.

Total Liquidity

June 30, 2024 Available

September 30, 2024 Available

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

6 unchanged sentences

Future Contractual Obligations

Our estimated future contractual obligations as of June 30, 2024 include both current and long-term obligations.

Our estimated future contractual obligations as of September 30, 2024 include both current and long-term obligations.

Under our operating leases, we have an operating lease liability of $7.1 million.

2 unchanged sentences

We also have contractual obligations on unfunded loan commitments and standby letters of credit totaling $428.6 million.

The Company paid dividends to its shareholders totaling $4.3 million during the three months ended June 30, 2024.

The Company paid dividends to its shareholders totaling $4.3 million during the three months ended September 30, 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.

10 unchanged sentences

Consolidated Cash Flow Activities

Six months ended June 30,

Nine months ended September 30,

(dollars in thousands) 2024 2023 $ Change

3 unchanged sentences

Operating Activities

Net cash provided by operating activities decreased by $9.4 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Net cash provided by operating activities decreased by $6.8 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 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 increased by $46.2 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily due to loan originations, including purchased consumer loans.

Net cash used in investing activities increased by $168.8 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily due to a higher number of loan originations, including purchased consumer loans.

Financing Activities

Net cash provided by financing activities decreased by $115.8 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily due to lower borrowings, partially offset by proceeds from the 2024 Public Offering.

Net cash provided by financing activities increased by $41.3 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily due to deposit growth and proceeds from the 2024 Public Offering, partially offset by lower borrowings.

Capital Adequacy

2 unchanged sentences

Failure to meet minimum capital requirements as set forth in Tables 28 and 29 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.

Historically, as a bank holding company which had 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.

4 unchanged sentences

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 June 30, 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.

As of September 30, 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 June 30, 2024 and December 31, 2023 for Bancorp and the Bank are presented in Tables 28 and 29.

As of June 30, 2024 and December 31, 2023, Bancorp’s Tier 2 capital included subordinated notes, which were not included at the Bank level.

The capital adequacy ratios as of September 30, 2024 and December 31, 2023 for Bancorp and the Bank are presented in Tables 28 and 29.

As of September 30, 2024 and December 31, 2023, Bancorp’s Tier 2 capital included subordinated notes, which were not included at the Bank level.

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

4 unchanged sentences

Amount Ratio Amount Ratio

June 30, 2024

September 30, 2024

Total capital (to risk-weighted assets) $ 510,170 13.94 % $ 326,509 8.00 % N/A N/A

11 unchanged sentences

Amount Ratio Amount Ratio

June 30, 2024

September 30, 2024

Total capital (to risk-weighted assets) $ 494,761 13.52 % $ 292,819 8.00 % $ 366,023 10.00 %

25 unchanged sentences

Recent Legislative and Regulatory Developments

There have been no material changes to the legislative and regulatory disclosures previously disclosed in the Company’s 2023 Annual Report on Form 10-K, previously filed with the SEC.

On September 17, 2024, the FDIC finalized changes to its Statement of Policy on Bank Merger Transactions (the “Policy Statement”), which outlines factors that the FDIC will consider when evaluating a proposed bank merger transaction.

Also on September 17, 2024, the United States Department of Justice (the “DOJ”) withdrew its 1995 Bank Merger Guidelines and announced that it will instead evaluate the competitive impact of bank mergers using its 2023 Merger Guidelines that the DOJ applies to mergers in all industries.

Compared to the 1995 Bank Merger Guidelines, the 2023 Merger Guidelines

set forth more stringent concentration limits and add several largely qualitative bases on which the DOJ may challenge a merger.

While the effect of these changes for particular transactions remains unclear, both the Policy Statement and the change in the DOJ’s bank merger antitrust policy may make it more difficult and/or costly for us to obtain regulatory approval for an acquisition or otherwise result in more onerous conditions to obtain approval for an acquisition.

On July 30, 2024, the FDIC issued a proposed rule that would revise the FDIC’s regulations governing the classification and treatment of brokered deposits.

The proposal would, among other changes, broaden the definition of deposit broker to include agents that place or facilitate the placement of third-party deposits at only one insured depository institution and agents that receive a fee or other remuneration in exchange for the placement of deposits.

In addition, the proposal would narrow the exception to the definition of deposit broker for agents whose primary purpose is not the placement of funds with depository institutions.

While we are evaluating the potential impact of the proposed rule, if the rule is finalized as proposed, the Bank may be required to classify a greater amount of its deposits obtained through the involvement of third parties as brokered deposits.

An increase in the amount of brokered deposits on the Bank’s balance sheet could, among other consequences, increase the Bank’s deposit insurance assessment costs.

Glossary of Acronyms, Abbreviations, and Terms

2 unchanged sentences

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

FHLMC Federal Home Loan Mortgage Corporation

FHLB Federal Home Loan Bank of San Francisco

Allowance for Credit Losses

FNMA Federal National Mortgage Association

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

ASU Accounting Standards Update GNMA Government National Mortgage Association

Bancorp Five Star Bancorp and its subsidiary GSE Government Sponsored Entity

Bank Five Star Bank ICS Insured Cash Sweep®

FHLMC Federal Home Loan Mortgage Corporation

ASC Accounting Standards Codification FNMA Federal National Mortgage Association

ASU Accounting Standards Update GAAP Generally Accepted Accounting Principles in the U.S.

Bancorp Five Star Bancorp and its subsidiary GNMA Government National Mortgage Association

Bank Five Star Bank GSE Government Sponsored Entity

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

1 unchanged sentence

BOLI Bank-Owned Life Insurance LM Loan modification made to borrower experiencing financial difficulty

CDARS Certificate of Deposit Account Registry Service® EVE Economic Value of Equity

Current Expected Credit Loss

6 unchanged sentences

EPS Earnings per Share ROAA Return on Average Assets, annualized

FASB Financial Accounting Standards Board ROAE Return on Average Equity, annualized

FDIC Federal Deposit Insurance Corporation ROUA Right-of-Use Asset

Federal Reserve Board of Governors of the Federal Reserve System SBA U.S.

EVE Economic Value of Equity ROAE Return on Average Equity, annualized

FASB Financial Accounting Standards Board ROUA Right-of-Use Asset

FDIC Federal Deposit Insurance Corporation SBA U.S.

Small Business Administration

Federal Reserve Board of Governors of the Federal Reserve System SEC Securities and Exchange Commission

Federal Financial Institutions Examination Council

SEC Securities and Exchange Commission

FHLB Federal Home Loan Bank of San Francisco SOFR Secured Overnight Financing Rate

SOFR Secured Overnight Financing Rate

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis