FIVE STAR BANCORP 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (Moss Adams LLP; PCAOB ID# 659 ) 74 Consolidated Balance Sheets as of December 31, 2024 and 2023 75 Consolidated Statements of Income for the years ended December 31, 2024, 2023, and 2022 76 Consolidated Statements of Comprehensive Income for the years ended December 31, 2024, 2023, and 2022 77 Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2024, 2023, and 2022 78 Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023, and 2022 79 Notes to Consolidated Financial Statements 81 73 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Five Star Bancorp and Subsidiary Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Five Star Bancorp (and subsidiary) (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2024, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2024 and 2023, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity with accounting principles generally accepted in the United States of America. Change in Accounting Principle As discussed in Notes 1, 2, 3 and 4 to the consolidated financial statements, the Company changed its method of accounting for the allowance for credit losses as of January 1, 2023, due to the adoption of Accounting Standards Update No. 2016-13, which established Accounting Standards Codification Topic 326, Financial Instruments - Credit Losses . Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Moss Adams LLP Everett, Washington February 28, 2025 We have served as the Company’s auditor since 2010. 74 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 2024 and 2023 (in thousands, except share amounts) 2024 2023 ASSETS Cash and due from financial institutions $ 33,882 $ 26,986 Interest-bearing deposits in banks 318,461 294,590 Cash and cash equivalents 352,343 321,576 Time deposits in banks 4,121 5,858 Securities available-for-sale, at fair value, net of allowance for credit losses of $ 0 at December 31, 2024 and 2023 (amortized cost of $ 115,757 and $ 124,788 at December 31, 2024 and 2023, respectively) 98,194 108,083 Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $ 20 at December 31, 2024 and 2023 (fair value of $ 2,353 and $ 2,913 at December 31, 2024 and 2023, respectively) 2,720 3,077 Loans held for sale 3,247 11,464 Loans held for investment 3,532,686 3,081,719 Allowance for credit losses ( 37,791 ) ( 34,431 ) Loans held for investment, net of allowance for credit losses 3,494,895 3,047,288 FHLB stock 15,000 15,000 Operating leases, right-of-use asset, net 6,245 5,284 Premises and equipment, net 1,584 1,623 Bank-owned life insurance 19,375 17,180 Interest receivable and other assets 55,554 56,692 Total assets $ 4,053,278 $ 3,593,125 LIABILITIES AND SHAREHOLDERS’ EQUITY Deposits: Non-interest-bearing $ 922,629 $ 831,101 Interest-bearing 2,635,365 2,195,795 Total deposits 3,557,994 3,026,896 Borrowings: Subordinated notes, net 73,895 73,749 Other borrowings — 170,000 Operating lease liability 6,857 5,603 Interest payable and other liabilities 17,908 31,103 Total liabilities 3,656,654 3,307,351 Commitments and contingencies (Note 15) Shareholders’ equity: Preferred stock, no par value; 10,000,000 shares authorized; zero issued and outstanding at December 31, 2024 and 2023 — — Common stock, no par value; 100,000,000 shares authorized; 21,319,083 shares issued and outstanding at December 31, 2024; 17,256,989 shares issued and outstanding at December 31, 2023 302,531 220,505 Retained earnings 106,464 77,036 Accumulated other comprehensive loss, net of taxes ( 12,371 ) ( 11,767 ) Total shareholders’ equity 396,624 285,774 Total liabilities and shareholders’ equity $ 4,053,278 $ 3,593,125 See accompanying notes to consolidated financial statements. 75 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME Years ended December 31, 2024, 2023, and 2022 (in thousands, except per share amounts) 2024 2023 2022 Interest and fee income: Loans, including fees $ 193,341 $ 162,713 $ 111,795 Taxable securities 1,830 1,876 1,714 Nontaxable securities 700 724 713 Interest-bearing deposits in banks 11,080 9,069 3,696 Total interest and fee income 206,951 174,382 117,918 Interest expense: Deposits 82,398 57,861 10,923 Subordinated notes 4,646 4,646 3,740 Other borrowings 196 995 185 Total interest expense 87,240 63,502 14,848 Net interest income 119,711 110,880 103,070 Provision for credit losses 6,950 4,000 6,700 Net interest income after provision for credit losses 112,761 106,880 96,370 Non-interest income: Service charges on deposit accounts 721 575 467 Net gain (loss) on sale of securities — ( 167 ) 5 Gain on sale of loans 1,274 1,952 2,934 Loan-related fees 1,605 1,719 2,207 FHLB stock dividends 1,320 970 546 Earnings on BOLI 644 510 412 Other 889 1,952 586 Total non-interest income 6,453 7,511 7,157 Non-interest expense: Salaries and employee benefits 31,709 27,097 22,571 Occupancy and equipment 2,547 2,218 2,059 Data processing and software 5,088 4,015 3,091 FDIC insurance 1,635 1,557 850 Professional services 3,078 2,575 2,467 Advertising and promotional 2,411 2,403 1,908 Loan-related expenses 1,207 1,192 1,287 Other operating expenses 6,818 6,718 6,436 Total non-interest expense 54,493 47,775 40,669 Income before provision for income taxes 64,721 66,616 62,858 Provision for income taxes 19,050 18,882 18,057 Net income $ 45,671 $ 47,734 $ 44,801 Basic earnings per common share $ 2.26 $ 2.78 $ 2.61 Diluted earnings per common share $ 2.26 $ 2.78 $ 2.61 See accompanying notes to consolidated financial statements. 76 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2024, 2023, and 2022 (in thousands) 2024 2023 2022 Net income $ 45,671 $ 47,734 $ 44,801 Unrealized (loss) gain on securities: Net unrealized holding (loss) gain on securities available-for-sale during the period ( 858 ) 2,228 ( 18,291 ) Reclassification for net loss (gain) on sale of securities included in net income — 167 ( 5 ) Less: Income tax (benefit) expense related to items of other comprehensive (loss) income ( 254 ) 708 ( 5,408 ) Other comprehensive (loss) income ( 604 ) 1,687 ( 12,888 ) Total comprehensive income $ 45,067 $ 49,421 $ 31,913 See accompanying notes to consolidated financial statements. 77 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Years ended December 31, 2024, 2023, and 2022 (in thousands, except share and per share amounts) Common Stock Retained Earnings Accumulated Other Comprehensive (Loss) Income Total Shareholders’ Equity Shares Amount Balance at December 31, 2021 17,224,848 $ 218,444 $ 17,168 $ ( 566 ) $ 235,046 Cumulative effect of adoption of ASC 842 on retained earnings — — 68 — 68 Net income — — 44,801 — 44,801 Other comprehensive loss — — — ( 12,888 ) ( 12,888 ) Stock issued under stock award plans 23,639 — — — — Stock compensation expense — 1,099 — — 1,099 Stock forfeitures ( 6,561 ) — — — — Cash dividends paid ($ 1.05 per share) — — ( 15,301 ) — ( 15,301 ) 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 — — 47,734 — 47,734 Other comprehensive income — — — 1,687 1,687 Stock issued under stock award plans 16,978 — — — — Stock compensation expense — 962 — — 962 Stock forfeitures ( 1,915 ) — — — — Cash dividends paid ($ 0.75 per share) — — ( 12,943 ) — ( 12,943 ) Balance at December 31, 2023 17,256,989 $ 220,505 $ 77,036 $ ( 11,767 ) $ 285,774 Net income — — 45,671 — 45,671 Other comprehensive loss — — — ( 604 ) ( 604 ) Stock issued under stock award plans 96,380 — — — — Stock compensation expense — 1,156 — — 1,156 Stock forfeitures ( 1,786 ) — — — — Common stock issued 3,967,500 80,870 — — 80,870 Cash dividends paid ($ 0.80 per share) — — ( 16,243 ) — ( 16,243 ) Balance at December 31, 2024 21,319,083 $ 302,531 $ 106,464 $ ( 12,371 ) $ 396,624 See accompanying notes to consolidated financial statements. 78 FIVE STAR BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2024, 2023, and 2022 (in thousands) 2024 2023 2022 Cash flows from operating activities: Net income $ 45,671 $ 47,734 $ 44,801 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 6,950 4,000 6,700 Depreciation and amortization 1,877 1,612 1,636 Amortization of deferred loan fees and costs ( 337 ) 117 534 Amortization of premiums and discounts on securities 943 1,152 1,267 Amortization of subordinated note issuance costs 146 144 122 Amortization of low income housing tax credits 1,050 291 — Stock compensation expense 1,156 962 1,099 Earnings on BOLI ( 644 ) ( 510 ) ( 412 ) Deferred tax provision ( 243 ) ( 897 ) ( 1,942 ) Loans originated for sale ( 21,654 ) ( 47,922 ) ( 60,173 ) Gain on sale of loans ( 1,274 ) ( 1,952 ) ( 2,934 ) Gross proceeds from sale of loans 19,682 38,410 53,691 Net loss (gain) on sale of securities available-for-sale — 167 ( 5 ) Extinguishment of redeemed subordinated note issuance costs — — 302 Gain on partial sale of equity investment ( 545 ) ( 1,683 ) — Net changes in: Interest receivable and other assets 2,535 ( 3,708 ) ( 5,096 ) Interest payable and other liabilities ( 2,611 ) 1,897 7,363 Operating lease liability ( 916 ) ( 900 ) ( 978 ) Net cash provided by operating activities 51,786 38,914 45,975 Cash flows from investing activities: Proceeds from sale of securities available-for-sale — 737 1,623 Maturities, prepayments, and calls of securities available-for-sale 8,445 10,056 15,523 Purchases of securities available-for-sale — ( 1,151 ) ( 2,642 ) Capital call for equity investment ( 2,908 ) ( 1,407 ) — Proceeds received from equity investment 1,056 1,915 — Low income housing tax credits ( 10,052 ) ( 2,341 ) — Net change in time deposits in banks 1,737 3,991 4,615 Loan originations, net of repayments ( 442,843 ) ( 284,314 ) ( 848,283 ) Purchase of premises and equipment ( 628 ) ( 653 ) ( 481 ) Purchase of FHLB stock — ( 4,110 ) ( 4,223 ) Purchase of BOLI ( 1,551 ) ( 2,001 ) ( 3,054 ) Net cash used in investing activities ( 446,744 ) ( 279,278 ) ( 836,922 ) Cash flows from financing activities: Net change in deposits 531,098 244,892 496,114 Proceeds from issuance of stock, net of issuance costs 80,870 — — (Payments) advances on other borrowings ( 170,000 ) 70,000 100,000 Cash dividends paid ( 16,243 ) ( 12,943 ) ( 15,301 ) Proceeds from subordinated note issuance — — 75,000 Subordinated note issuance costs — — ( 1,454 ) Subordinated note redemption — — ( 28,750 ) Net cash provided by financing activities 425,725 301,949 625,609 Net change in cash and cash equivalents 30,767 61,585 ( 165,338 ) Cash and cash equivalents at beginning of period 321,576 259,991 425,329 Cash and cash equivalents at end of period $ 352,343 $ 321,576 $ 259,991 79 (in thousands) 2024 2023 2022 Supplemental disclosure of cash flow information: Interest paid $ 87,113 $ 61,854 $ 1,345 Income taxes paid 16,884 19,969 5,200 Supplemental disclosure of noncash items: Transfer from loans held for sale to loans held for investment 11,464 9,416 10,671 Unrealized (loss) gain on securities ( 858 ) 2,228 ( 18,291 ) Operating lease liabilities recorded in conjunction with adoption of ASC 842 — — 5,221 Operating lease liabilities exchanged for ROUA 2,170 2,260 — ROUA recorded in conjunction with adoption of ASC 842 — — 4,974 ROUA acquired ( 2,170 ) ( 2,243 ) — Net change in commitment for low income housing tax credits 531 ( 13,612 ) — Cumulative effect of adoption of ASC 842 on retained earnings, net of tax — — 68 Cumulative effect of adoption of ASC 326 on retained earnings, net of tax — ( 4,491 ) — See accompanying notes to consolidated financial statements. 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Presentation Nature of Operations and Principles of Consolidation Five Star Bank was chartered on October 26, 1999 and began operations on December 20, 1999. Five Star Bancorp was incorporated on September 16, 2002 and subsequently obtained approval from the Federal Reserve to become 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 a broad range of banking products and services to customers who are predominately small and medium-sized businesses, professionals, and individuals primarily 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 eight branch offices in Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, Yuba City, and San Francisco. The Company terminated its status as a Subchapter S corporation as of May 5, 2021, in connection with the Company’s IPO and became a taxable C Corporation. Prior to that date, as an S Corporation, the Company had no U.S. federal income tax expense. The Company publicly filed a Registration Statement on Form S-1 with the SEC in connection with its IPO, which was declared effective by the SEC on May 4, 2021. In connection with the IPO, the Company issued 6,054,750 shares of common stock, no par value, which included 789,750 shares sold pursuant to the underwriters’ exercise of their option to purchase additional shares. The securities were sold to the public at a price of $ 20.00 per share and began trading on the Nasdaq Global Select Market on May 5, 2021. On May 7, 2021, the closing date of the IPO, the Company received total net proceeds of $ 111,243,000 . The net proceeds less other related expenses, including audit fees, legal fees, listing fees, and other expenses, totaled $ 109,082,000 . Basis of Financial Statement Presentation and Consolidation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as contained within the FASB’s ASC, including ASU, and the rules and regulations of the SEC, including the instructions to Regulation S-X. The consolidated financial statements include Bancorp and its wholly owned subsidiary, the Bank. All significant intercompany transactions and balances are eliminated in consolidation. The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry. 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. Segments The Company has one reportable operating segment: banking. The banking segment derives its revenues through the Bank, which provides a broad range of banking products and services to customers who are predominantly small to medium-sized businesses, professionals, and individuals primarily in Northern California. The Company manages the business activities on a consolidated basis. The Company’s chief operating decision maker (“CODM”) is its Chief Executive Officer, who reviews financial information presented on a consolidated basis. The CODM assesses performance for the operating segment and decides how to allocate resources based on net income that also is reported on the income statement as consolidated net income. The measure of segment assets is reported on the balance sheet as total consolidated assets. These financial metrics are used by the CODM to make key operating decisions, such as determination of the rate at which the Company seeks to grow, loan and deposit pricing, and the allocation of budget for non-interest expenses. Net income is 81 used to monitor budget versus actual results. Discrete financial information is not available other than on a Company-wide basis. Use of Estimates Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the consolidated financial statements and the disclosures provided, and actual results could differ. The ACL is the most significant accounting estimate reflected in the Company’s consolidated financial statements. Other estimates include fair value measurements, valuation of servicing assets, and deferred tax asset valuation. Cash and Cash Equivalents The Company defines cash and cash equivalents as cash, due from financial institutions, interest-bearing deposits in banks with short-term original maturities, and federal funds sold. Generally, federal funds are sold for one-day periods, if at all. At times throughout the year, balances can exceed FDIC insurance limits. The Company has not experienced any historical losses associated with balances maintained with financial institutions in excess of FDIC insurance limits, and management continues to monitor the financial condition of the major financial institutions where these funds are held. Securities Available-for-Sale Available-for-sale securities consist of bonds, notes, and debentures not classified as trading securities or held-to-maturity securities. Securities are classified as available-for-sale if the Company intends and has the ability to hold those securities for a period of time, but not necessarily to maturity. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of assets and liabilities, liquidity needs, regulatory capital considerations, and other similar factors. Securities available-for-sale are carried at fair value. Unrealized holding gains or losses are included in other comprehensive income as a separate component of shareholders’ equity, net of tax. Realized gains or losses, determined based on the cost of specific securities sold, are included in earnings. Premiums are amortized over the life of the security or, if a callable bond, over the earliest call date, and discounts are accreted over the life of the related investment security as an adjustment to interest income using the effective interest method. Interest income is recognized when earned. Unrealized credit losses are recognized through an allowance for credit losses instead of an adjustment to amortized cost basis, eliminating the other-than-temporary impairment concept. For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of amortized cost basis. If either criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For available-for-sale debt securities that do not meet the above conditions, the Company evaluates at the individual security level whether the decrease in fair value has resulted from credit factors or non-credit factors. If assessment determines that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, then a credit loss would be recognized, limited to the amount by which the fair value is less than the amortized cost basis. All other changes in fair value of an available-for-sale debt security are recognized in other comprehensive income, net of applicable taxes. Changes in the allowance for credit losses, if any, are recognized as a provision for (or reversal of) credit losses. 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. Securities Held-to-Maturity Securities are classified as held-to-maturity if the Company has both the intent and ability to hold those securities to maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium to the earliest callable call date and accretion of discount, computed by the effective interest method over the life of the related investment. Estimated credit losses are recorded under ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all subsequent amendments that modified ASU 2016-13 (collectively, “ASC 326”) through a credit loss expense and an allowance. 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. 82 Loans Loans are reported at the principal amount outstanding, net of deferred loan fees and costs and the allowance for credit losses. Interest on loans is accrued daily based on the principal outstanding. Loan fees, net of certain direct costs of origination, are deferred and recognized in interest income using the level-yield method without anticipating prepayments. During the years ended December 31, 2024, 2023, and 2022, salaries and employee benefits totaling $ 3,719,000 , $ 3,461,000 , and $ 6,155,000 , respectively, were deferred as loan origination costs. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. 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 following portfolios as the loans in these pools have different repayment structures and credit risk characteristics: Multifamily portfolio into traditional Multifamily loans and Manufactured Home Community (“MHC”) loans, CRE Non-Owner Occupied portfolio into traditional CRE Non-Owner Occupied loans and RV Park loans, and C&I portfolio into traditional C&I loans and SBA loans. 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 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) Multifamily MHC; (9) CRE Owner Occupied; (10) CRE Non-Owner Occupied; (11) CRE Non-Owner Occupied RV Park; (12) Agriculture; (13) C&I; (14) C&I SBA; (15) Consumer; and (16) 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 March 31, 2004 through December 31, 2019 and January 31, 2022 through March 31, 2024 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 period that is objective and reflective of 83 future expected credit losses. Loss data from 2020 and 2021 was excluded from the data set to exclude pandemic-related data from the model. 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. Troubled Debt Restructurings (“TDRs”) and Other Loan Modifications In accordance with the adoption of ASC 326, which includes ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , accounting guidance for TDRs for creditors has been eliminated. New guidance with respect to recognition, measurement, and disclosures of loans for borrowers experiencing financial difficulties supersedes guidance on TDRs. Under ASU No. 2022-02, the Company is required to evaluate whether a loan modification represents a new loan or a continuation of an existing loan. The amendment enhanced existing disclosure requirements and introduced new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty under criteria of principal forgiveness, interest rate reduction, other-than-insignificant payment delay, or term extension. 84 Federal Home Loan Bank Stock Federal Home Loan Bank stock represents the Company’s investment in the stock of the FHLB and is carried at par value. While technically these are considered equity securities, there is no market for FHLB stock. Therefore, the shares are considered as other investment securities. Management periodically evaluates FHLB stock for impairment. Management’s determination of whether these investments are impaired is based on its assessment of the ultimate recoverability of cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of cost is influenced by criteria such as: (i) the significance of any decline in net assets of the FHLB, as compared to the capital stock amount for the FHLB and the length of time this situation has persisted; (ii) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB; (iii) the impact of legislative and regulatory changes on institutions and, accordingly, the customer base of the FHLB; and (iv) the liquidity position of the FHLB. Both cash and stock dividends are reported as non-interest income. Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using a straight-line basis. Table 1.1 presents the normal estimated lives used in determining depreciation and amortization. Table 1.1: Normal Estimated Lives - Premises and Equipment Equipment 3 - 12 years Furniture and fixtures 5 - 10 years Leasehold improvements 5 - 15 years Automobiles 3 - 5 years Leasehold improvements are amortized over the lesser of the useful life of the asset or the remaining term of the lease. The straight-line method of depreciation is followed for all assets for financial reporting purposes, but accelerated methods are used for tax purposes. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred. Other Real Estate Real estate properties acquired through, or in lieu of, loan foreclosure, are classified as OREO, are to be sold, and are initially recorded at fair value of the property at the date of foreclosure less estimated selling costs. Any write-downs in value are recorded against the allowance for credit losses. Subsequent to foreclosure, valuations are periodically performed, and any revisions in the estimate of fair value are reported as adjustments to the carrying value of the real estate, provided the adjusted carrying amount does not exceed the original amount at foreclosure. Subsequent valuation adjustments are recognized as OREO write-downs. Revenues and expenses incurred from OREO property management are recorded in non-interest income and non-interest expense, respectively. During 2024, 2023, and 2022, the Bank did not foreclose on any loans. BOLI BOLI is recorded at the amount that can be realized under the insurance contract at the consolidated balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Increases in contract value are recorded as non-interest income, and insurance proceeds received are recorded as a reduction of the contract value. Long-Term Assets Premises, equipment, and other long-term assets are reviewed for impairment when events indicate that their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are adjusted to reflect their fair value. 85 Leases The Company records a ROUA in the consolidated balance sheets for those leases that convey rights to control use of identified assets for a period of time in exchange for consideration. The Company records a lease liability in the consolidated balance sheets for the present value of future payment commitments. All of the Company’s leases are comprised of operating leases in which the Company is the lessee of real estate property for branches and operations. The Company elected not to include short-term leases (i.e., leases with initial terms of 12 months or less) within the ROUA and lease liability. Known or determinable adjustments to the required minimum future lease payments are included in the calculation of the Company’s ROUA and lease liability. Adjustments to the required minimum future lease payments that are variable and will not be determinable until a future period, if any, are included as variable lease costs. Additionally, when expected variable payments for common area maintenance, taxes, and insurance are unknown and not determinable at lease commencement, they are not included in the determination of the Company’s ROUA and lease liability. The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROUA and lease liability. ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. The lease liability is reduced based on the discounted present value of remaining payments as of each reporting period. The ROUA value is measured using the lease liability as adjusted for prepaid or accrued lease payments and remaining lease incentives, unamortized direct costs, and impairment, if any. Equity Investments Equity investments with readily determinable fair values are carried at fair value, with changes in fair value reported in net income. Equity investments without readily determinable fair values are carried at cost, less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for the identical or similar investment. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Transfers of Financial Assets Transfers of an entire financial asset, a group of financial assets, or a participating interest in an entire financial asset are accounted for as sales when control has been relinquished. Control is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of more than trivial conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Included in the loan portfolio are loans guaranteed by the SBA, the Farm Service Agency, the Federal Agriculture Mortgage Corporation, and the United States Department of Agriculture, of which the guaranteed portion is expected to be sold in the secondary market in exchange for a one-time premium. At the time the guaranteed portion of the loan is sold, the unguaranteed portion and related right to service the entire loan is retained with the Company, to earn future servicing income. The loans held for sale are accounted for at the lower of cost or fair value, using the aggregate method. Government-guaranteed loans held for sale totaled $ 3,247,000 and $ 11,464,000 at December 31, 2024 and 2023, respectively. Servicing rights acquired through the origination of loans, which are subsequently sold with servicing rights retained, are recognized as separate assets or liabilities. Servicing assets and liabilities are initially recorded at fair value and are subsequently amortized in proportion to, and over the period of, the related net servicing income or expense. The amortized assets are assessed for impairment or increased obligations at the loan level, based on the fair value on a periodic basis. Loan Commitments and Related Financial Instruments Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and financial standby letters of credit issued to meet customer financing needs. The face amount for these items represents the exposure 86 to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded. Loan commitments not unconditionally cancellable are subject to an estimate of credit loss under the CECL model. The Company’s process for determining the estimate of credit loss on loan commitments is the same as it is on loans. Reserves for unfunded commitments are included as a component of “Interest payable and other liabilities” in the consolidated balance sheets. Stock-Based Compensation Compensation cost is recognized for stock options and RSAs issued to executives, directors, and employees, based on the fair value of these awards at the date of grant. A Black-Scholes model is utilized to estimate the grant date fair value of stock options, while the fair value of the Company’s common stock at the date of grant is used for RSAs. Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. Supplemental Executive Retirement Plan The Bank has entered into a non-qualified retirement plan for the Chief Executive Officer based on a continuation of employment. The present value of annual post-retirement payments is allocated to expense over the years of required service. Income Taxes The Company files its income taxes on a consolidated basis with its subsidiary. The allocation of income tax expense represents each entity’s proportionate share of the consolidated provision for income taxes. Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities computed using enacted tax rates. A valuation allowance is evaluated at least annually and, as needed, reduces deferred tax assets to the amount expected to be realized. The Company accounts for uncertain tax positions in accordance with FASB ASC Topic No. 740, Accounting for Uncertainty in Income Taxes . A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that has a likelihood greater than 50% of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Derivatives All derivative instruments are recorded at fair value. If derivative instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges, if any, are recorded in other comprehensive income or loss and reclassified to earnings when the hedged transaction is reflected in earnings. Comprehensive Income or Loss Comprehensive income or loss consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available-for-sale, net of tax, which are also recognized as separate components of shareholders’ equity. EPS Basic EPS is net income divided by the weighted average number of common shares outstanding during the period less average unvested RSAs. Diluted EPS includes the dilutive effect of additional potential common shares related to unvested RSAs using the treasury stock method. During the years ended December 31, 2024 and 2023, there were no outstanding stock options. 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 87 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 1.2: EPS (in thousands, except share and per share data) 2024 2023 2022 Net income $ 45,671 $ 47,734 $ 44,801 Weighted average basic common shares outstanding 20,154,385 17,166,592 17,128,282 Add: Dilutive effects of assumed vesting of restricted stock 51,055 21,377 37,328 Weighted average diluted common shares outstanding 20,205,440 17,187,969 17,165,610 Income per common share: Basic EPS $ 2.26 $ 2.78 $ 2.61 Diluted EPS $ 2.26 $ 2.78 $ 2.61 Anti-dilutive shares, which are excluded from the dilutive EPS calculation, were deemed to be immaterial. Subordinated Notes The subordinated notes are recorded at par with related debt issuance costs reported as a direct reduction from the carrying amount. Issuance costs are amortized over the remaining maturity of the notes and reflected in interest expense. Fair Value of Financial Instruments The consolidated financial statements include various estimated fair value information as of December 31, 2024 and 2023. Such information, which pertains to the Company’s financial instruments, does not purport to represent the aggregate net fair value of the Company. Further, the fair value estimates are based on various assumptions, methodologies, and subjective considerations, which vary widely among different financial institutions, and are subject to change. Fair Value Measurements The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The Company bases the fair values on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Securities available-for-sale and derivatives, if any, are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record certain assets at fair value on a non-recurring basis, such as loans held for sale and certain collateral dependent impaired loans held for investment. These non-recurring fair value adjustments typically involve write-downs of individual assets due to application of lower of cost or fair value accounting. 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). 88 As a result, if other assumptions had been used, the Company’s recorded earnings or disclosures could have been materially different from those reflected in these consolidated financial statements. Subsequent Events The Company has evaluated events and transactions subsequent to December 31, 2024 for recognition or disclosure. Additional detail can be found in Note 19, Subsequent Events . Note 2: Recently Issued Accounting Standards The following information reflects recent accounting standards that have been adopted or are pending adoption by the Company. As discussed in Note 1, Basis of Presentation, the Company qualifies as an emerging growth company and as such, has elected not to opt out of 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 On January 1, 2023, the Company adopted ASC 326, which replaced the former “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the CECL model. The CECL model applies to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost. Under ASC 326, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost, with any estimated credit losses recorded through a credit loss expense and an allowance, rather than a write-down of the investment. Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income. The Company adopted this standard using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance was effective for financial assets measured at amortized cost. For certain new disclosures required under ASC 326, such as credit quality indicators by year of origination, the Company has not restated comparative financial information before January 1, 2023 to conform under ASC 326. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature and reason for the change, which is solely due to adoption of ASC 326. On January 1, 2023, the Company also adopted ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which had no material impact. Table 2.1 reflects the cumulative-effect adjustments the Company recorded on January 1, 2023 for the adoption of ASC 326. Table 2.1: Impact of Adoption of ASC 326 January 1, 2023 (in thousands) Pre-ASC 326 Adoption Impact of ASC 326 Adoption Post-ASC 326 Adoption Assets: Allowance for Credit Losses - Loans $ ( 28,389 ) $ ( 5,262 ) $ ( 33,651 ) Allowance for Credit Losses - HTM Securities — ( 20 ) ( 20 ) Deferred Tax Asset (Interest receivable and other assets) 12,273 1,883 14,156 Liabilities: Reserve for Unfunded Commitments (Interest payable and other liabilities) ( 125 ) ( 1,092 ) ( 1,217 ) Shareholders’ Equity: Retained Earnings ( 46,736 ) 4,491 ( 42,245 ) 89 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. 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 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 Company has one reportable segment. The Company adopted ASU 2023-07 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 U.S. 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 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, 2026 for emerging growth companies electing not to opt out of the extended transition period 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 90 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, 2026 for emerging growth companies electing not to opt out of the extended transition period and is not expected to have a significant impact on the Company’s consolidated financial statements. On November 4, 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (“Subtopic 220-40”) : Disaggregation of Income Statement Expenses (“ASU 2024-03”). This standard responds to investor input by requiring public companies to disclose, in interim and annual reporting periods, additional information about certain expenses in the notes to the financial statements. This standard is effective for all entities that are subject to Subtopic 220-40, for annual periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027, but early adoption is permitted. ASU 2024-03 is not expected to have a significant impact on the Company’s consolidated financial statements. Note 3: Investment Securities The Company’s investment securities portfolio includes obligations of states and political subdivisions, securities issued by U.S. federal government agencies, such as the SBA, and securities issued by U.S. GSEs, such as the FNMA, the FHLMC, and the FHLB. The Company also invests in residential and commercial mortgage-backed securities, collateralized mortgage obligations issued or guaranteed by GSEs, and corporate bonds, as reflected in the following tables. A summary of the amortized cost and fair value related to securities held-to-maturity as of December 31, 2024 and 2023 is presented in Table 3.1. Securities held-to-maturity had a $ 20,000 allowance for credit losses as of December 31, 2024 and 2023. Table 3.1: Securities Held-to-Maturity (in thousands) Amortized Cost Gross Unrealized Fair Value Gains (Losses) 2024 Obligations of states and political subdivisions $ 2,720 $ — $ ( 367 ) $ 2,353 Total held-to-maturity $ 2,720 $ — $ ( 367 ) $ 2,353 2023 Obligations of states and political subdivisions $ 3,077 $ — $ ( 164 ) $ 2,913 Total held-to-maturity $ 3,077 $ — $ ( 164 ) $ 2,913 For securities issued by states and political subdivisions, for purposes of evaluating whether to recognize credit loss expense, management considers: (i) issuer and/or guarantor credit ratings; (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity; (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities; (iv) internal credit review of the financial information; and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers. The Company adopted ASC 326 on January 1, 2023, which affects accounting of credit loss expense on held-to-maturity and available-for-sale securities. As of December 31, 2024, the allowance for credit losses on held-to-maturity securities was $ 20,000 . The Company did not record an allowance for credit losses on available-for-sale securities as of December 31, 2024. Refer to Note 1, Basis of Presentation, for further detail. 91 A summary of the amortized cost and fair value related to securities available-for-sale as of December 31, 2024 and 2023 is presented in Table 3.2. Table 3.2: Securities Available-for-Sale (in thousands) Amortized Cost Gross Unrealized Fair Value Gains (Losses) 2024 U.S. government agency securities $ 8,293 $ 152 $ ( 100 ) $ 8,345 Mortgage-backed securities 62,397 6 ( 11,833 ) 50,570 Obligations of states and political subdivisions 42,762 1 ( 5,626 ) 37,137 Collateralized mortgage obligations 305 — ( 26 ) 279 Corporate bonds 2,000 — ( 137 ) 1,863 Total available-for-sale $ 115,757 $ 159 $ ( 17,722 ) $ 98,194 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 92 The amortized cost and fair value of investment securities by contractual maturity at December 31, 2024 and 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) 2024 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 $ 210 $ 182 $ — $ — $ 277 $ 263 $ — $ — After one but within five years 945 818 798 737 935 885 394 367 After five years through ten years 1,380 1,193 9,221 8,108 1,365 1,292 6,407 5,838 After ten years 185 160 32,743 28,292 500 473 36,487 32,254 Investment securities not due at a single maturity date: U.S. government agency securities — — 8,293 8,345 — — 10,548 10,541 Mortgage-backed securities — — 62,397 50,570 — — 68,585 56,973 Collateralized mortgage obligations — — 305 279 — — 367 332 Corporate bonds — — 2,000 1,863 — — 2,000 1,778 Total $ 2,720 $ 2,353 $ 115,757 $ 98,194 $ 3,077 $ 2,913 $ 124,788 $ 108,083 93 Sales of investment securities and gross gains and losses are shown in Table 3.4 . Table 3.4: Income Statement Impacts for Securities Available-for-Sale (in thousands) 2024 2023 2022 Available-for-sale: Sales proceeds $ — $ 737 $ 1,623 Gross realized (losses) gains — ( 167 ) 5 Pledged investment securities are shown in Table 3.5. Table 3.5: Pledged Investment Securities (in thousands) 2024 2023 Pledged to: The State of California, securing deposits of public funds and borrowings $ 49,477 $ 55,435 The Federal Reserve Discount Window, increasing borrowing capacity 45,576 48,964 Total pledged investment securities $ 95,053 $ 104,399 Table 3.6 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 December 31, 2024 and 2023. Table 3.6: 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) 2024 U.S. government agency securities $ 2,316 $ ( 11 ) $ 4,082 $ ( 89 ) $ 6,398 $ ( 100 ) Mortgage-backed securities — — 49,476 ( 11,833 ) 49,476 ( 11,833 ) Obligations of states and political subdivisions — — 35,630 ( 5,626 ) 35,630 ( 5,626 ) Collateralized mortgage obligations — — 279 ( 26 ) 279 ( 26 ) Corporate bonds — — 1,863 ( 137 ) 1,863 ( 137 ) Total temporarily impaired securities $ 2,316 $ ( 11 ) $ 91,330 $ ( 17,711 ) $ 93,646 $ ( 17,722 ) 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 December 31, 2024 and 2023, respectively. As of December 31, 2024, the investment portfolio included 141 investment securities that had been in a continuous loss position for twelve months or more and six investment securities that had been in a loss position for less than twelve months. 94 There was one held-to-maturity security in a continuous unrealized loss position at December 31, 2024 and 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. The Company’s investment in obligations of states and political subdivisions is 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 $ 15,000,000 of FHLB stock at December 31, 2024 and 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 December 31, 2024 and 2023. For the years ended December 31, 2024, 2023, and 2022, cash dividends received on FHLB capital stock in the amount of $ 1,320,000 , $ 970,000 , and $ 546,000 , respectively, were recorded as non-interest income in the consolidated statements of income. 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) December 31, 2024 December 31, 2023 Real estate: Commercial $ 2,857,173 $ 2,685,419 Commercial land and development 3,849 15,551 Commercial construction 111,318 62,863 Residential construction 4,561 15,456 Residential 32,774 25,893 Farmland 47,241 51,669 Commercial: Secured 170,548 165,109 Unsecured 27,558 23,850 Consumer and other 279,584 38,166 Subtotal 3,534,606 3,083,976 Net deferred loan fees ( 1,920 ) ( 2,257 ) Loans held for investment 3,532,686 3,081,719 Allowance for credit losses ( 37,791 ) ( 34,431 ) Loans held for investment, net of allowance for credit losses $ 3,494,895 $ 3,047,288 95 Underwriting Real estate loans : Real estate loans are subject to underwriting standards and processes similar to those for commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected than other loans by conditions in the real estate market or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria. Construction loans : With respect to construction loans that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans may be underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be 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. 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. 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. 96 Concentrations The Company’s customers are primarily located in the Greater Sacramento, North Valley, and San Francisco Bay Area regions of California. As of December 31, 2024, approximately 86 % of the Company’s loans were real estate related, 6 % were commercial, and 8 % were consumer. 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. 97 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 December 31, 2024 (in thousands) 2024 2023 2022 2021 2020 Prior Revolving Loans Revolving Converted to Term Total Real estate: Commercial Pass $ 427,209 $ 298,408 $ 881,675 $ 618,052 $ 202,356 $ 312,622 $ 3,688 $ — $ 2,744,010 Watch 641 8,193 42,531 31,895 16,969 6,316 1,391 — 107,936 Substandard — — — — — 2,585 — — 2,585 Total 427,850 306,601 924,206 649,947 219,325 321,523 5,079 — 2,854,531 Commercial land and development Pass 1,781 — 1,237 — 180 656 — — 3,854 Total 1,781 — 1,237 — 180 656 — — 3,854 Commercial construction Pass 13,757 72,933 13,112 — 11,231 — — — 111,033 Total 13,757 72,933 13,112 — 11,231 — — — 111,033 Residential construction Pass 4,560 — — — — — — — 4,560 Total 4,560 — — — — — — — 4,560 Residential Pass 6,080 4,783 2,869 9,483 2,201 6,246 1,134 — 32,796 Total 6,080 4,783 2,869 9,483 2,201 6,246 1,134 — 32,796 Farmland Pass 1,054 2,042 7,032 11,467 6,960 17,373 — — 45,928 Watch 501 — 791 — — — — — 1,292 Total 1,555 2,042 7,823 11,467 6,960 17,373 — — 47,220 Commercial: Secured Pass 26,536 20,427 21,142 9,607 9,144 14,400 55,914 — 157,170 Watch — 301 9,840 2,581 107 1,289 — — 14,118 Substandard — — — — — 48 — — 48 Total 26,536 20,728 30,982 12,188 9,251 15,737 55,914 — 171,336 Unsecured Pass 8,071 4,499 2,815 3,494 4,817 1,364 2,515 — 27,575 Total 8,071 4,499 2,815 3,494 4,817 1,364 2,515 — 27,575 Consumer and other Pass 232,420 33,453 7,874 5,812 6 207 — — 279,772 Substandard — — 9 — — — — — 9 Total 232,420 33,453 7,883 5,812 6 207 — — 279,781 Total Pass 721,468 436,545 937,756 657,915 236,895 352,868 63,251 — 3,406,698 Watch 1,142 8,494 53,162 34,476 17,076 7,605 1,391 — 123,346 Substandard — — 9 — — 2,633 — — 2,642 Total $ 722,610 $ 445,039 $ 990,927 $ 692,391 $ 253,971 $ 363,106 $ 64,642 $ — $ 3,532,686 98 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. All commercial borrowers with loans exceeding a certain dollar threshold are usually required to submit financials annually for review; this includes business financial statements, rent rolls, property income statements, and tax returns. 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. 99 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 December 31, 2024 Real estate: Commercial $ — $ — $ — $ — $ 2,854,531 $ 2,854,531 Commercial land and development — — — — 3,854 3,854 Commercial construction — — — — 111,033 111,033 Residential construction — — — — 4,560 4,560 Residential — — — — 32,796 32,796 Farmland — — — — 47,220 47,220 Commercial: Secured 1,107 — — 1,107 170,229 171,336 Unsecured — — — — 27,575 27,575 Consumer and other 67 — — 67 279,714 279,781 Total $ 1,174 $ — $ — $ 1,174 $ 3,531,512 $ 3,532,686 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 December 31, 2024 or 2023. No collateral dependent loans were in process of foreclosure at December 31, 2024 and 2023. The Company had one collateral dependent commercial real estate loan for which the borrower was experiencing financial difficulty outstanding as of December 31, 2024 and 2023 in the amounts of $ 1,750,000 and $ 1,893,000 , respectively. 100 Non-accrual loans, segregated by class, as of December 31, 2024 and 2023 are shown in Table 4.4. Table 4.4: Nonaccrual Loans (in thousands) 2024 2023 Real estate: Commercial $ 1,750 $ 1,893 Commercial: Secured 48 72 Total non-accrual loans $ 1,798 $ 1,965 No interest income was recognized on non-accrual loans in the years ended December 31, 2024, 2023, and 2022. Non-accrual real estate loans did not have an allowance for credit losses as of December 31, 2024, 2023, and 2022. 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 $ 167,000 , $ 95,000 , and $ 39,000 for the years ended December 31, 2024, 2023, and 2022, 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 Year ended December 31, 2024 Real estate: Commercial $ 29,015 $ — $ — $ — $ ( 3,151 ) $ 25,864 Commercial land and development 178 — — — ( 100 ) 78 Commercial construction 718 — — — 1,550 2,268 Residential construction 89 — — — ( 25 ) 64 Residential 151 — — — 119 270 Farmland 399 — — — 208 607 Commercial: Secured 3,314 — ( 4,737 ) 695 6,594 5,866 Unsecured 189 — ( 41 ) — 130 278 Consumer and other 378 — ( 373 ) 366 2,125 2,496 Total $ 34,431 $ — $ ( 5,151 ) $ 1,061 $ 7,450 $ 37,791 Year ended December 31, 2023 Real estate: Commercial $ 19,216 $ 7,606 $ — $ — $ 2,193 $ 29,015 Commercial land and development 54 74 — — 50 178 Commercial construction 645 882 — — ( 809 ) 718 Residential construction 49 81 — — ( 41 ) 89 Residential 175 3 — — ( 27 ) 151 Farmland 644 ( 396 ) — — 151 399 Commercial: Secured 7,098 ( 3,060 ) ( 3,496 ) 423 2,349 3,314 101 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 Unsecured 116 37 ( 6 ) — 42 189 Consumer and other 347 80 ( 1,106 ) 995 62 378 Unallocated 45 ( 45 ) — — — — Total $ 28,389 $ 5,262 $ ( 4,608 ) $ 1,418 $ 3,970 $ 34,431 Year ended December 31, 2022 Real estate: Commercial $ 12,869 $ — $ — $ — $ 6,347 $ 19,216 Commercial land and development 50 — — — 4 54 Commercial construction 371 — — — 274 645 Residential construction 50 — — — ( 1 ) 49 Residential 192 — — — ( 17 ) 175 Farmland 645 — — — ( 1 ) 644 Commercial: Secured 6,859 — ( 1,690 ) 204 1,725 7,098 Unsecured 207 — ( 2 ) — ( 89 ) 116 PPP — — ( 21 ) 21 — — Consumer and other 889 — ( 906 ) 840 ( 476 ) 347 Unallocated 1,111 — — — ( 1,066 ) 45 Total $ 23,243 $ — $ ( 2,619 ) $ 1,065 $ 6,700 $ 28,389 Unfunded Loan Commitment Reserves Unfunded loan commitment reserves are included in “Interest payable and other liabilities” in the consolidated balance sheets. Provisions for unfunded loan commitments are included in “Provision for credit losses” in the consolidated statements of income. Table 4.6: Unfunded Loan Commitment Reserves (in thousands) 2024 2023 2022 Balance at January 1 $ 1,247 $ 125 $ 100 Effect of adoption of ASC 326 — 1,092 — Provision ( 500 ) 30 25 Balance at December 31 $ 747 $ 1,247 $ 125 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 $ 1,850,910,000 and $ 1,658,262,000 at December 31, 2024 and 2023, respectively. In addition, the Company pledges eligible tenants in common loans, which totaled $ 1,201,864,000 and $ 1,167,644,000 at December 31, 2024 and 2023, respectively, to secure its borrowing capacity with the Federal Reserve Discount Window. See Note 9, Long Term Debt and Other Borrowings, for further discussion of these borrowings. 102 Note 5: Premises and Equipment, Net Table 5.1 shows the composition of premises and equipment, net, as of December 31, 2024 and 2023. Table 5.1: Premises and Equipment, Net (in thousands) 2024 2023 Furniture, fixtures, and equipment $ 4,587 $ 4,111 Tenant improvements 2,210 2,125 Bank automobiles 125 123 6,922 6,359 Accumulated depreciation and amortization ( 5,338 ) ( 4,736 ) Premises and equipment, net $ 1,584 $ 1,623 Depreciation and amortization expense for occupancy, furniture, fixtures, and equipment was $ 667,000 , $ 673,000 , and $ 649,000 for the years ended December 31, 2024, 2023, and 2022, respectively. Note 6: Bank-owned Life Insurance The Company owns life insurance policies on the lives of certain current and former officers designated by the board of directors to fund its employee benefit programs. Death benefits provided under the specific terms of these insurance policies are estimated to be $ 41,673,000 at December 31, 2024. The benefits to employees’ beneficiaries are limited to each employee’s active service period. The investment in BOLI policies is reported at their cash surrender value, net of surrender charges, of $ 19,375,000 and $ 17,180,000 at December 31, 2024 and 2023, respectively. The cash surrender value includes both the original premiums paid for the life insurance policies and the accumulated accretion of policy income since inception of the policies, net of mortality costs and other fees. Income of $ 644,000 , $ 510,000 , and $ 412,000 was recognized on these life insurance policies for the years ended December 31, 2024, 2023, and 2022, respectively. Note 7: Interest Receivable and Other Assets The composition of interest receivable and other assets as of December 31, 2024 and 2023 is shown in Table 7.1. Table 7.1: Interest Receivable and Other Assets (in thousands) 2024 2023 Interest receivable $ 10,293 $ 8,970 Equity investments 8,889 6,801 Servicing assets 1,726 2,161 Low income housing tax credits 14,081 13,612 Other assets 20,565 25,148 Interest receivable and other assets $ 55,554 $ 56,692 Servicing assets represent the assets related to servicing loans for others, including collecting payments, maintaining escrow accounts, disbursing payments to investors, and conducting foreclosure proceedings. The Company serviced loans with unpaid principal balances of $ 159,078,000 and $ 191,551,000 as of December 31, 2024 and 2023, respectively, on behalf of others. 103 Note 8: Interest-Bearing Deposits Table 8.1 shows the composition of interest-bearing deposits as of December 31, 2024 and 2023. Table 8.1: Interest-Bearing Deposits (in thousands) 2024 2023 Interest-bearing transaction accounts $ 315,217 $ 320,356 Savings accounts 124,702 126,498 Money market accounts 1,525,292 1,282,369 Time accounts, $ 250 or more 344,129 344,694 Other time accounts 326,025 121,878 Total interest-bearing deposits $ 2,635,365 $ 2,195,795 Time deposits totaled $ 670,154,000 and $ 466,572,000 as of December 31, 2024 and 2023, respectively. There were $ 299,961,000 of brokered time deposits as of December 31, 2024 and $ 100,128,000 of brokered time deposits as of December 31, 2023. Scheduled maturities of time deposits as of December 31, 2024 for the next five years are shown in Table 8.2. Table 8.2: Scheduled Maturities of Time Deposits (in thousands) 2025 $ 666,875 2026 3,041 2027 102 2028 136 2029 — Total time deposits $ 670,154 Total deposits include deposits offered through the IntraFi Network (formerly Promontory Interfinancial 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 December 31, 2024 and 2023. The composition of network deposits as of December 31, 2024 and 2023 is shown in Table 8.3. Table 8.3: Network Deposits (in thousands) 2024 2023 CDARS $ 19,292 $ 16,325 ICS 674,453 620,199 Total network deposits $ 693,745 $ 636,524 104 Table 8.4 presents interest expense recognized on interest-bearing deposits for the years ended December 31, 2024, 2023, and 2022. Table 8.4: Interest Expense Recognized on Interest-Bearing Deposits (in thousands) 2024 2023 2022 Interest-bearing transaction accounts $ 4,716 $ 3,321 $ 425 Savings accounts 3,584 3,073 376 Money market accounts 53,750 33,932 6,477 Time accounts, $ 250 or more 12,329 12,686 2,804 Other time accounts 8,019 4,849 841 Total interest expense on interest-bearing deposits $ 82,398 $ 57,861 $ 10,923 Note 9: Long Term Debt and Other Borrowings Subordinated notes : On August 17, 2022, the Company completed a private placement of $ 75,000,000 of fixed-to-floating rate subordinated notes to certain qualified investors, of which $ 19,250,000 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 ( 7.93 % as of December 31, 2024) until maturity. The notes include a right of prepayment, on or after August 17, 2027 or, in certain limited circumstances, before that date. The indebtedness evidenced by the subordinated notes, including principal and interest, is unsecured and subordinate and junior in right to payment to general and secured creditors and depositors of the Company. The subordinated notes have been structured to qualify as Tier 2 capital for the Company for regulatory capital purposes. Eligible amounts will be phased out by 20% per year beginning five years before the maturity date of the notes. Debt issuance costs incurred in conjunction with the notes were $ 1,454,000 , of which $ 350,000 has been amortized through December 31, 2024. The Company reflects debt issuance costs as a direct deduction from the face of the note. The debt issuance costs are amortized into interest expense through the maturity period. At December 31, 2024 and 2023, the carrying value of the Company’s subordinated notes was $ 73,895,000 and $ 73,749,000 , 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 9.1. Table 9.1: Financing Availability with the FHLB (in thousands) 2024 2023 Total financing ability from the FHLB $ 1,212,209 $ 996,712 Less: outstanding borrowings — 170,000 Less: LCs pledged to secure State of California deposits 281,500 271,500 Less: LCs pledged to secure local agency deposits 420,000 410,000 Total LCs issued 701,500 681,500 Available borrowing capacity with the FHLB $ 510,709 $ 145,212 At December 31, 2024 and 2023, the Company had the ability to borrow from the Federal Reserve Discount Window. The borrowings were available at an interest rate of 4.50 % as of December 31, 2024. At December 31, 2024 and 2023, the borrowing capacity under this arrangement was $ 862,136,000 and $ 770,572,000 , respectively. There were no amounts outstanding at December 31, 2024 and 2023. The borrowing line is secured by certain liens on the Company’s loans and certain available-for-sale securities. 105 At December 31, 2024 and 2023, the Company had five unsecured federal funds lines of credit totaling $ 175,000,000 with five of its correspondent banks. The borrowings were available at interest rates ranging from 4.55 % to 5.70 % as of December 31, 2024. There were no amounts outstanding at December 31, 2024 and 2023 . Note 10: 401(k) Benefit Plan A 401(k) benefit plan covers substantially all employees and allows voluntary employee contributions up to the lesser of 80% of compensation or the annually adjusted IRS dollar limit. These voluntary contributions are matched equal to 100 % of the first 3 % of the employee’s compensation contributed and 50 % of contributions exceeding 3 % of eligible compensation, not to exceed 5 % of the total eligible compensation. The employees’ voluntary contributions and the Company’s matching contributions are 100 % vested immediately. The expense related to matching employees’ contributions for 2024, 2023, and 2022 was $ 835,000 , $ 787,000 , and $ 634,000 , respectively. Note 11: Income Taxes The provision for income tax for the years ended December 31, 2024, 2023, and 2022 differs from the statutory federal rate of 21.00% due to the items shown in Table 11.1. Table 11.1: Difference Between Provision for Income Tax and Statutory Federal Rate (in thousands) 2024 2023 2022 Statutory U.S. federal income tax $ 13,591 $ 13,989 $ 13,200 Increase (decrease) resulting from: State taxes 5,219 5,048 5,381 Other 240 ( 155 ) ( 524 ) Provision for income taxes $ 19,050 $ 18,882 $ 18,057 Table 11.2 shows the components of the consolidated provision for income taxes for the years indicated. Table 11.2: Components of Consolidated Provision for Income Taxes (in thousands) 2024 2023 2022 Current tax expense: Federal $ 12,382 $ 13,234 $ 13,167 State 6,911 6,439 6,837 Total current tax expense 19,293 19,673 20,004 Deferred tax benefit: Federal ( 66 ) ( 741 ) ( 1,762 ) State ( 177 ) ( 50 ) ( 185 ) Total deferred tax benefit ( 243 ) ( 791 ) ( 1,947 ) Provision for income taxes $ 19,050 $ 18,882 $ 18,057 106 Deferred tax assets and liabilities were due to the items listed in Table 11.3 as of December 31, 2024, 2023, and 2022. Table 11.3: Components of Deferred Tax Assets and Liabilities (in thousands) 2024 2023 2022 Deferred tax assets: Allowance for credit losses $ 11,241 $ 10,820 $ 9,039 Supplemental employee retirement plan 343 409 507 Gain on available-for-sale assets 943 303 152 Net unrealized loss on securities available-for-sale 5,192 4,938 5,647 State tax 1,268 751 1,044 Right of use liability 1,999 1,759 1,351 Other 334 1,891 749 Total deferred tax assets 21,320 20,871 18,489 Deferred tax liabilities: Deferred loan fees ( 3,723 ) ( 4,063 ) ( 4,006 ) Depreciation ( 145 ) ( 411 ) ( 405 ) ROUA ( 1,821 ) ( 1,648 ) ( 1,268 ) Other ( 801 ) ( 416 ) ( 537 ) Total deferred tax liabilities ( 6,490 ) ( 6,538 ) ( 6,216 ) Net deferred tax asset $ 14,830 $ 14,333 $ 12,273 No deferred tax asset valuation allowance was established during 2024, 2023, or 2022, as management believes it is more likely than not the Company will realize the benefits of these deductible differences as of December 31, 2024, 2023, and 2022. Table 11.4 details items the Company recognized as components of tax expense, taxable losses and amortization expense relating to investments in Qualified Affordable Housing Projects for the periods indicated. Table 11.4: Tax Impacts of Investments in Qualified Affordable Housing Projects (in thousands) 2024 2023 2022 Taxable loss - decrease in tax expense $ ( 963 ) $ ( 1,626 ) $ — Amortization - increase in tax expense 1,050 291 — Qualified Affordable Housing Tax Credits - decrease in tax expense ( 1,046 ) — — The total capital contributed, net of amortization , for the Low Income Housing Tax Credit Funds was $ 11,052,000 as of December 31, 2024. As of December 31, 2024, the Company has committed to make additional capital contributions to the Low Income Housing Tax Credit Funds in the amount of $ 3,029,000 and these contributions are expected to be made in 2025. No unrecognized tax benefits were outstanding as of December 31, 2024, 2023, or 2022. The Company files tax returns in the U.S. federal and state jurisdictions where the Company has material nexus. The Company is no longer subject to examinations for federal and state tax purposes for the years before 2021 and 2020, respectively. There were no material interest or penalties in 2024, 2023, and 2022. It is the Company’s policy to record such accruals in its income tax accounts. During 2022, the Company paid approximately $ 4,953,000 on March 17, 2022 to shareholders of record as of May 3, 2021, for the final payout of the AAA under the Company’s Tax Sharing Agreement in connection with the Company’s conversion to a C Corporation as of May 5, 2021. The AAA represents previously taxed, but undistributed, earnings. 107 Note 12: Related Party Transactions During the normal course of business, the Company may enter into transactions with related parties, including directors, executive officers, principal shareholders, and their businesses or affiliates. In accordance with applicable regulations and Bank policies, these loans are granted on substantially the same terms, including interest rates and collateral on loans, as those prevailing at the same time for comparable transactions with persons not related to the Company. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Table 12.1 is a summary of loans to related parties in 2024, 2023, and 2022. Table 12.1: Related Party Loans (in thousands) 2024 2023 2022 Beginning balance $ 5,455 $ 6,250 $ 9,418 New loans or advances 9,400 1,275 340 Repayments ( 358 ) ( 2,070 ) ( 3,146 ) Transfers out 1 — — ( 362 ) Ending balance $ 14,497 $ 5,455 $ 6,250 1 As a result of a change in employment with the Company, a loan balance belonging to a previously related party was transferred out of the classification of related party loans. The change was not the result of any disagreement with the Company or due to any matter relating to its operations, policies, or practices. At December 31, 2024, 2023, and 2022, deposits from related parties (directors, executive officers, and principal shareholders) totaled $ 53,607,000 , $ 37,201,000 , and $ 51,960,000 , respectively. The Company leases an administrative office from a partnership comprised of certain shareholders and members of the board of directors, which is further described in Note 15, Commitments and Contingencies. Property management fees totaling $ 1,000 in 2024, 2023, and 2022 were paid to the entity that owns this property. Note 13: Equity Incentive Plan In April 2021, the Company’s board of directors and shareholders approved the Five Star Bancorp 2021 Equity Incentive Plan (the “Equity Incentive Plan”). The Equity Incentive Plan provides for the grant of stock options, stock appreciation rights, performance awards, restricted stock, restricted stock units, and other stock-based awards that the Compensation Committee determines are consistent with the purpose of the Equity Incentive Plan and the interests of the Company. Awards may be granted to the Company’s executives and other key employees, directors, and other service providers and are designed to align the interests of the Equity Incentive Plan’s participants with the interests of the Company’s shareholders. The stock options granted under the Equity Incentive Plan may be either non-statutory stock options or incentive stock options. There were no stock options outstanding at December 31, 2024 or 2023. The total number of shares of the Company’s common stock reserved and available for grant and issuance pursuant to the Equity Incentive Plan will not exceed 1,700,000 shares, less RSAs granted, plus any RSAs that become available upon forfeiture. Each of these shares may be issued as an incentive stock option. At December 31, 2024, 1,410,164 shares remained available for issuance pursuant to grant awards under the Plan. The Equity Incentive Plan does not contain an “evergreen” provision pursuant to which shares authorized for issuance may be automatically replenished. Stock-Based Compensation 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 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, 108 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 years ended December 31, 2024, 2023, and 2022 was $ 1,156,000 , $ 962,000 , and $ 1,099,000 , respectively. The total fair value of restricted shares vested during the years ended December 31, 2024, 2023, and 2022 was $ 1,101,000 , $ 953,000 , and $ 1,286,000 , respectively. Tax benefits for vested restricted shares are recorded as tax benefits in the consolidated statements of income with a corresponding decrease to current taxes payable and were immaterial for the years ended December 31, 2024, 2023, and 2022. In 2024, the Company granted as compensation to members of the board of directors a total of 16,380 shares scheduled to cliff vest as of December 31, 2024 contingent on continued service. In 2023, the Company granted as compensation to members of the board of directors a total of 13,882 shares scheduled to cliff vest as of December 31, 2023 contingent on continued service. In 2022, the Company granted as compensation to members of the board of directors a total of 15,156 shares scheduled to vest monthly in equal installments over one year contingent on continued service. As of December 31, 2024, there was approximately $ 2,027,000 of unrecognized compensation expense related to the 120,577 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 3.28 years as of December 31, 2024. The impact of tax benefits for dividends paid on unvested restricted stock on the Company’s consolidated statements of income for the years ended December 31, 2024, 2023, and 2022 was immaterial. Table 13.1 summarizes information about unvested restricted shares. Table 13.1: Unvested Restricted Share Activity 2024 2023 2022 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 69,338 $ 20.53 96,826 $ 20.34 127,751 $ 19.95 Shares granted 96,380 21.97 16,978 28.52 23,639 28.29 Shares vested ( 43,358 ) 21.38 ( 42,553 ) 23.07 ( 48,003 ) 23.07 Shares forfeited ( 1,783 ) 21.66 ( 1,913 ) 25.62 ( 6,561 ) 21.29 End of the period balance 120,577 $ 21.36 69,338 $ 20.53 96,826 $ 20.34 Note 14: Shareholders’ Equity Dividends During the year ended December 31, 2024, the Company declared cash dividends on its common shares totaling $ 16,243,000 . During the year ended December 31, 2023, the Company declared cash dividends on its common shares totaling $ 12,943,000 . During the year ended December 31, 2022, the Company declared cash dividends on its common shares totaling $ 15,301,000 . Of those total dividends, during 2022, $ 4,953,000 was paid out for certain shareholders affected by the Company’s termination of its S corporation status. This distribution was for the remaining balance on the Company’s federal AAA for previously taxed, but undistributed, earnings. 109 Note 15: 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 credit 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 consolidated balance sheets are shown in Table 15.1. Table 15.1: Unfunded Loan Commitments and Standby Letters of Credit (in thousands) 2024 2023 Commercial lines of credit $ 230,063 $ 181,855 Undisbursed commercial real estate loans 98,508 107,712 Undisbursed construction loans 74,671 134,828 Agricultural lines of credit 21,155 24,635 Undisbursed residential real estate loans 7,225 6,538 Undisbursed agricultural real estate loans — 1,200 Other 1,973 2,119 Total commitments and standby letters of credit $ 433,595 $ 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 $ 747,000 and $ 1,247,000 as of December 31, 2024 and 2023, respectively, which is recorded in “Interest payable and other liabilities” in the 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 86.41 % of the Company’s loan portfolio at December 31, 2024 and 92.30 % of the Company’s loan portfolio at December 31, 2023. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectability of these loans. Personal and business incomes represent the primary source of repayment for the majority of these loans. Deposit concentrations : At December 31, 2024, the Company had 104 deposit relationships that exceeded $ 5,000,000 each, totaling $ 2,166,080,000 , or approximately 60.88 % of total deposits. The Company’s largest single deposit relationship at December 31, 2024 totaled $ 300,000,000 , or approximately 8.43 % 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. 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 $ 29,154,000 and $ 22,348,000 at December 31, 2024 and 2023, respectively. Equity investments : The Company has committed to and is invested in a limited number of venture funds. As of December 31, 2024 and 2023, the estimated remaining commitment for these funds totaled $ 10,833,000 and $ 10,903,000 , respectively. 110 Leases The Company leases office space for its banking operations under non-cancelable operating leases of various terms. The leases expire at dates through 2035 and provide for renewal options from three to five years . In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties. All leases include predefined rental increases over the term of the lease. The Company has a sublease agreement for space adjacent to the Redding location. The sublease has renewal terms extended to December 31, 2025. The Company leases its Sacramento administrative office from a partnership comprised of certain shareholders and members of the Company’s board of directors. The Sacramento administrative office lease extends through May 2026. Rent expense paid to the partnership was $ 32,000 , $ 28,000 , and $ 30,000 for the years ended December 31, 2024, 2023, and 2022, respectively, under this lease. Until the opening of a full service branch in San Francisco in September 2024, the Company leased a temporary administrative office in San Francisco from an entity affiliated with a member of our board of directors. Rent expense paid to this entity was $ 40,000 and $ 19,000 for the years ended December 31, 2024 and 2023, respectively. There was no rent expense paid to this entity for the year ended December 31, 2022. As of December 31, 2024, the Company’s ROUA and lease liability were $ 6,245,000 and $ 6,857,000 , respectively. Table 15.2 presents the components of lease expense for the years shown. Table 15.2: Components of Lease Expense (in thousands) 2024 2023 2022 Operating lease expense $ 1,609 $ 1,261 $ 1,129 Sublease income ( 26 ) ( 22 ) ( 21 ) Total lease expense $ 1,583 $ 1,239 $ 1,108 Table 15.3 presents the weighted average operating lease term, discount rate, and operating cash flows at the dates indicated. Table 15.3: Other Lease Information (in thousands, except for average remaining lease term and discount rate) December 31, 2024 December 31, 2023 Weighted average remaining lease term 6.33 years 5.28 years Weighted average discount rate 4.99 % 4.11 % Operating cash flows for operating leases $ 916 $ 900 ROUA obtained in exchange for operating lease liabilities 2,170 2,281 111 Table 15.4 shows the future minimum lease payments under the Company’s operating lease arrangements as of December 31, 2024. Table 15.4: Future Minimum Lease Payments (in thousands) December 31, 2024 2025 $ 1,577 2026 1,537 2027 1,204 2028 1,129 2029 774 Thereafter 1,989 Total expected operating lease payments 8,210 Discount for present value of expected cash flows ( 1,353 ) Lease liability at December 31, 2024 $ 6,857 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 16: Capital Requirements and Restrictions on Retained Earnings The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements as set forth in Tables 16.1 and 16.2 can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and the Bank’s prompt corrective action classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are generally not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in Tables 16.1 and 16.2) of total capital, Tier 1 capital, and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets and of Tier 1 capital to average assets. The Company and Bank are required to meet a common equity Tier 1 capital to risk-weighted assets ratio of at least 7.00 % (a minimum of 4.50 % plus a capital conservation buffer of 2.50 %), a Tier 1 capital to risk-weighted assets ratio of at least 8.50 % (a minimum of 6.00 % plus a capital conservation buffer of 2.50 %), a total capital to risk-weighted assets ratio of at least 10.50 % (a minimum of 8.00 % plus a capital conservation buffer of 2.50 %), and a Tier 1 leverage ratio of at least 4.00 %. Management believes that, as of December 31, 2024, the Company and the Bank met all capital adequacy requirements to which they are subject. As of December 31, 2024, the Bank was categorized as “well-capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well-capitalized,” an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in Table 16.2. There are no conditions or events since that categorization that management believes have changed the Bank’s category. The principal source of cash for the Company is dividends from the Bank. Dividends from the Bank to the Company are restricted under California law to the lesser of: (i) the Bank’s retained earnings; or (ii) the Bank’s net income for the latest three fiscal years, less dividends previously declared during that period. As of December 31, 2024 and 2023, the maximum amount available for dividend distribution under this restriction was approximately $ 94,595,000 and $ 62,951,000 , respectively. If a proposed dividend exceeds the limit, the Bank may still pay a dividend to the Holding Company if it 112 obtains approval from the DFPI and the dividend does not exceed the greater of: (i) the retained earnings of the Bank; (ii) the net income of the Bank for its last fiscal year; or (iii) the net income of the Bank for its current fiscal year. The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2024 and 2023 are presented in Tables 16.1 and 16.2. As of December 31, 2024 and 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. Table 16.1: Capital Ratios for Bancorp (dollars in thousands) Actual Ratio Required for Capital Adequacy Purposes 1 Ratio to be Well-Capitalized under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2024 Total capital (to risk-weighted assets) $ 519,722 13.99 % $ 332,622 8.00 % N/A N/A Tier 1 capital (to risk-weighted assets) $ 409,514 11.02 % $ 222,940 6.00 % N/A N/A Common equity tier 1 capital (to risk-weighted assets) $ 409,514 11.02 % $ 167,205 4.50 % N/A N/A Tier 1 leverage $ 409,514 10.05 % $ 162,960 4.00 % N/A N/A December 31, 2023 Total capital (to risk-weighted assets) $ 404,829 12.30 % $ 259,090 8.00 % N/A N/A Tier 1 capital (to risk-weighted assets) $ 298,749 9.07 % $ 197,534 6.00 % N/A N/A Common equity tier 1 capital (to risk-weighted assets) $ 298,749 9.07 % $ 148,150 4.50 % N/A N/A Tier 1 leverage $ 298,749 8.73 % $ 136,953 4.00 % N/A N/A Table 16.2: Capital Ratios for the Bank (dollars in thousands) Actual Ratio Required for Capital Adequacy Purposes 1 Ratio to be Well-Capitalized under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio December 31, 2024 Total capital (to risk-weighted assets) $ 504,896 13.59 % $ 297,216 8.00 % $ 371,520 10.00 % Tier 1 capital (to risk-weighted assets) $ 468,584 12.61 % $ 222,912 6.00 % $ 297,216 8.00 % Common equity tier 1 capital (to risk-weighted assets) $ 468,584 12.61 % $ 167,184 4.50 % $ 241,488 6.50 % Tier 1 leverage $ 468,584 11.50 % $ 162,942 4.00 % $ 203,677 5.00 % December 31, 2023 Total capital (to risk-weighted assets) $ 392,114 11.93 % $ 262,947 8.00 % $ 328,684 10.00 % Tier 1 capital (to risk-weighted assets) $ 359,783 10.95 % $ 197,211 6.00 % $ 262,947 8.00 % Common equity tier 1 capital (to risk-weighted assets) $ 359,783 10.95 % $ 147,908 4.50 % $ 213,645 6.50 % Tier 1 leverage $ 359,783 10.52 % $ 136,757 4.00 % $ 170,946 5.00 % 1 The listed capital adequacy ratios exclude capital conservation buffers. 113 Note 17: Fair Value of Assets and Liabilities Table 17.1 summarizes the Company’s assets and liabilities that were required to be recorded at fair value on a recurring basis. Table 17.1: 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 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 $ 98,194 $ — $ 98,194 $ — OCI 2023 Assets: Securities available-for-sale: U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds $ 108,083 $ — $ 108,083 $ — OCI Derivatives – interest rate swap 10 — 10 — NI Liabilities: Derivatives – interest rate swap 10 — 10 — NI Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1 inputs) are used to determine the fair value of available-for-sale securities. If quoted market prices are not available, management obtains pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity, and credit spreads (Level 2 inputs). Level 2 securities include U.S. agencies’ or government-sponsored agencies’ debt securities, mortgage-backed securities, government agency-issued bonds, privately issued collateralized mortgage obligations, and corporate bonds. Level 3 securities are based on unobservable inputs that are supported by little or no market activity. In addition, values use discounted cash flow models and may include significant management judgment and estimation. As of December 31, 2024 and 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. The Company’s investment portfolio service bureau has developed a model for pricing available-for-sale debt securities. Information such as historical and current performance of the underlying collateral, deferral/default rates, collateral coverage ratios, break-even yield calculations, cash flow projections, liquidity, and credit premiums required by a market participant, as well as financial trend analysis with respect to the individual issuing financial institutions and insurance companies, are utilized in determining individual security valuations. Due to current market conditions, as well as the limited trading activity of the securities, the market value of the securities is highly sensitive to assumption changes and market volatility. 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 114 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. There was no carrying value or fair value for interest rate swaps as of December 31, 2024. The fair value of collateral dependent impaired loans and other real estate is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Management also incorporates assumptions regarding market trends or other relevant factors and selling and commission costs ranging from 5.00 % to 7.00 %. Such adjustments and assumptions are typically significant and result in a Level 3 classification of the inputs for determining fair value. 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 OREO. As of December 31, 2024 and 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 17.2 is a summary of fair value estimates for financial instruments as of December 31, 2024 and 2023. These estimates are made at a specific point in time based on relevant market data and information about the financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the fair values presented. The carrying amounts in Table 17.2 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 17.2: Fair Value Estimates for Financial Instruments (in thousands) December 31, 2024 December 31, 2023 Carrying Amounts Fair Value Fair Value Hierarchy Carrying Amounts Fair Value Fair Value Hierarchy Financial assets: Cash and cash equivalents $ 352,343 $ 352,343 Level 1 $ 321,576 $ 321,576 Level 1 Time deposits in banks 4,121 4,121 Level 1 5,858 5,858 Level 1 Securities available-for-sale 98,194 98,194 Level 2 108,083 108,083 Level 2 Securities held-to-maturity 2,720 2,353 Level 3 3,077 2,913 Level 3 Loans held for sale 3,247 3,597 Level 2 11,464 12,626 Level 2 Loans held for investment, net of allowance for credit losses 3,494,895 3,412,032 Level 3 3,047,288 2,891,925 Level 3 FHLB stock and other investments 23,889 N/A N/A 21,801 N/A N/A Interest rate swap — — Level 2 10 10 Level 2 Financial liabilities: Interest rate swap $ — $ — Level 2 $ 10 $ 10 Level 2 Time deposits 670,154 669,078 Level 2 466,572 465,205 Level 2 Subordinated notes 73,895 73,371 Level 3 73,749 72,693 Level 3 Other borrowings — — Level 2 170,000 170,000 Level 2 115 The Company used the following methods and assumptions to estimate the fair value of its financial instruments at December 31, 2024 and 2023: Cash and cash equivalents and time deposits in banks : The carrying amount is estimated to be fair value due to the liquid nature of the assets and their short-term maturities. Investment securities : See discussion above for the methods and assumptions used by the Company to estimate the fair value of investment securities. Fair value of held-to-maturity securities is estimated by calculating the net present value of future cash flows based on observable market data, such as interest rates and yield curves (observable at commonly quoted intervals) as provided by an independent third party. Loans held for sale : The fair value is based on what secondary markets are currently offering for portfolios with similar characteristics. Loans held for investment, net of allowance for credit losses : For variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, which use interest rates being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness without considering widening credit spreads due to market illiquidity, which approximates the exit price notion. The allowance for credit losses is considered to be a reasonable estimate of loan discount for credit quality concerns. FHLB stock and other investments : Carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and do not have a readily determinable market value. 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 18: Parent Company Only Condensed Financial Information CONDENSED BALANCE SHEETS December 31, 2024 and 2023 Table 18.1: Condensed Balance Sheets (in thousands) 2024 2023 ASSETS Cash and cash equivalents $ 8,794 $ 9,141 Investment in banking subsidiary 455,693 346,809 Other assets 7,826 5,408 Total assets $ 472,313 $ 361,358 LIABILITIES AND SHAREHOLDERS’ EQUITY Subordinated notes and other liabilities $ 75,690 $ 75,584 Shareholders’ equity 396,623 285,774 Total liabilities and shareholders’ equity $ 472,313 $ 361,358 116 CONDENSED STATEMENTS OF INCOME Years ended December 31, 2024, 2023, and 2022 Table 18.2: Condensed Statements of Income (in thousands) 2024 2023 2022 Dividends from banking subsidiary $ 22,223 $ 19,643 $ 16,301 Interest expense 4,646 4,646 3,740 Other expense 2,636 2,500 2,836 Income before income tax and undistributed banking subsidiary income 14,941 12,497 9,725 Income tax benefit 2,112 2,244 2,094 Equity in undistributed banking subsidiary income 28,618 32,993 32,982 Net income $ 45,671 $ 47,734 $ 44,801 CONDENSED STATEMENTS OF CASH FLOWS Years ended December 31, 2024, 2023, and 2022 Table 18.3: Condensed Statements of Cash Flows (in thousands) 2024 2023 2022 Cash flows from operating activities: Net income $ 45,671 $ 47,734 $ 44,801 Adjustments to reconcile net income to net cash provided by operating activities: Stock compensation expense 1,156 962 1,099 Equity in undistributed banking subsidiary income ( 28,618 ) ( 32,993 ) ( 32,984 ) Amortization of subordinated note issuance costs 146 144 122 Extinguishment of redeemed subordinated note issuance costs — — 302 Change in other assets ( 2,418 ) ( 2,319 ) ( 2,168 ) Change in accrued expenses and other liabilities ( 41 ) ( 132 ) 1,385 Net cash provided by operating activities 15,896 13,396 12,557 Cash flows from investing activities: Investment in subsidiary ( 80,870 ) — ( 39,000 ) Net cash used in investing activities ( 80,870 ) — ( 39,000 ) Cash flows from financing activities: Proceeds from issuance of stock, net of issuance costs 80,870 — — Cash dividends paid ( 16,243 ) ( 12,943 ) ( 15,301 ) Proceeds from subordinated note issuance — — 75,000 Subordinated note issuance costs — — ( 1,454 ) Subordinated note redemption — — ( 28,750 ) Net cash provided by financing activities 64,627 ( 12,943 ) 29,495 Net change in cash and cash equivalents ( 347 ) 453 3,052 Cash and cash equivalents at beginning of period 9,141 8,688 5,636 Cash and cash equivalents at end of period $ 8,794 $ 9,141 $ 8,688 Note 19: Subsequent Events On January 16, 2025, the board of directors declared a $ 0.20 per common share dividend for shareholders of record as of February 3, 2025, which was paid on February 10, 2025 in the amount of $ 4,266,000 . 117 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.