UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~(Mark One)~~

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, ~~2022~~2023

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~__________________~~________ to ~~__________________~~________

Commission File Number 001-40379

FIVE STAR BANCORP

(Exact name of Registrant as specified in its charter)


California						75-3100966
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification No.)

~~3100 Zinfandel Drive~~

~~Suite 100~~

~~Rancho Cordova~~

~~95670~~

~~(Address of principal executive office)~~

~~(Zip~~3100 Zinfandel Drive, Suite 100 Rancho Cordova, CA 95670

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code: (916) 626-5000

~~Not Applicable~~

~~(Former name, former address and formal fiscal year, if changed since last report)~~

Securities registered pursuant to 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, no par value per share	FSBC	The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	o	Accelerated filer	o
Non-accelerated Filer	x	Smaller reporting company	x
Emerging growth company	x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

As of May ~~6, 2022,~~5, 2023, there were ~~17,245,449~~17,258,737 shares of the registrant’s common stock, no par value, outstanding.

Table of Contents

TABLE OF CONTENTS

FIVE STAR BANCORP AND SUBSIDIARY

Quarterly Report on Form 10-Q

March 31, 2023


PART I	FINANCIAL INFORMATION	51

ITEM 1.	Financial Statements (unaudited)	51

	Consolidated Balance Sheets ~~(unaudited)~~	51

	Consolidated Statements of Income ~~(unaudited)~~	62

	Consolidated Statements of Comprehensive Income ~~(unaudited)~~	73

	Consolidated Statements of ~~Changes in~~ Shareholders’ Equity ~~(unaudited)~~	84

	Consolidated Statements of Cash Flows ~~(unaudited)~~	95

	Notes to Consolidated Financial Statements (unaudited)	106

ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3628

ITEM 3.	Quantitative and Qualitative Disclosure About Market Risk	7059

ITEM 4.	Controls and Procedures	7059

PART II	OTHER INFORMATION	7160

ITEM 1.	Legal Proceedings	7160

ITEM 1A.	Risk Factors	7160

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7160

ITEM 3.	Defaults Upon Senior Securities	7160

ITEM 4.	Mine Safety Disclosures	7160

ITEM 5.	Other Information	7160

ITEM 6.	Exhibits	7261

SIGNATURES		7362

Table of ~~Contents~~

~~Cautionary Note Regarding Forward-Looking Statements~~

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of our beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Such forward-looking statements are based on various assumptions (some of which may be beyond our control) and are subject to risks and uncertainties, which change over time, and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to:

•~~uncertain market conditions and economic trends nationally, regionally, and particularly in Northern California and California, including as a result of the coronavirus, and variants thereof;~~

•~~risks related to the concentration of our business in California, and specifically within Northern California, including risks associated with any downturn in the real estate sector;~~

•~~the occurrence or impact of climate change or natural or man-made disasters or calamities, such as wildfires, droughts, and earthquakes;~~

•~~risks related to the impact of the COVID-19 pandemic on our business and operations;~~

•~~changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;~~

•~~risks related to our strategic focus on lending to small to medium-sized businesses;~~

•~~the sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses and the value of loan collateral and securities;~~

•~~our ability to attract and retain executive officers and key employees and their customer and community relationships;~~

•~~the risks associated with our loan portfolios, and specifically with our commercial real estate loans;~~

•~~our level of nonperforming assets and the costs associated with resolving problem loans, if any, and complying with government-imposed foreclosure moratoriums;~~

•~~our ability to maintain adequate liquidity and to maintain capital necessary to fund our growth strategy and operations and to satisfy minimum regulatory capital levels;~~

•~~the effects of increased competition from a wide variety of local, regional, national, and other providers of financial and investment services;~~

•~~risks associated with unauthorized access, cyber-crime, and other threats to data security;~~

•~~our ability to comply with various governmental and regulatory requirements applicable to financial institutions, including supervisory actions by federal and state banking agencies;~~

•the impact of recent and future legislative and regulatory changes, including changes in banking, securities, and tax laws and regulations and their application by our regulators, and economic stimulus programs;

•~~governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve");~~

~~Table of~~ ~~Contents~~

•~~changes in the U.S. economy, including an economic slowdown, inflation, deflation, housing prices, employment levels, rate of growth, and general business conditions;~~

•~~our ability to implement, maintain, and improve effective internal controls; and~~

•~~other factors that are discussed in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”~~

The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this report, including those discussed in the section entitled “Risk Factors.” Additional factors that could cause results or performance to materially differ from those expressed in our forward-looking statements are detailed in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, and other filings we may make with the Securities and Exchange Commission ("SEC"), copies of which are available from us at no charge. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We disclaim any duty to revise or update the forward-looking statements, whether written or oral, to reflect actual results or changes in the factors affecting the forward-looking statements, except as specifically required by law.

~~Table of~~ Contents

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

~~As of March 31, 2022 and December 31, 2021~~

(Unaudited)

~~(In thousands, except share data)~~


		March 31, 2022		December 31, 2021
(in thousands, except share amounts)						(in thousands, except share amounts)	March 31, 2023		December 31, 2022
ASSETS	ASSETS					ASSETS

Cash and due from financial institutions	Cash and due from financial institutions	$	66,747	$	136,074	Cash and due from financial institutions	$	26,556	$	32,561
Interest-bearing deposits in banks	Interest-bearing deposits in banks	438,217		289,255		Interest-bearing deposits in banks	321,383		227,430
Cash and cash equivalents	Cash and cash equivalents	504,964		425,329		Cash and cash equivalents	347,939		259,991

Time deposits in banks	Time deposits in banks	14,464		14,464		Time deposits in banks	9,617		9,849
Securities available-for-sale, at fair value	Securities available-for-sale, at fair value	134,813		148,807		Securities available-for-sale, at fair value	115,140		115,988
Securities held-to-maturity, at amortized cost (fair value of $4,459 and $5,197 at March 31, 2022 and December 31, 2021, respectively)		4,486		4,946
Securities held-to-maturity, at amortized cost (fair value of $3,323 and $3,432 at March 31, 2023 and December 31, 2022, respectively)						Securities held-to-maturity, at amortized cost (fair value of $3,323 and $3,432 at March 31, 2023 and December 31, 2022, respectively)	3,514		3,756
Loans held for sale	Loans held for sale	10,386		10,671		Loans held for sale	11,315		9,416
Loans held for investment	Loans held for investment	2,080,158		1,934,460		Loans held for investment	2,869,848		2,791,326
Allowance for loan losses		(23,904)		(23,243)
Loans held for investment, net of allowance for loan losses		2,056,254		1,911,217

Federal Home Loan Bank of San Francisco (“FHLB”) stock		6,667		6,723
Operating leases, right-of-use asset ("ROUA")		4,718		—
Allowance for credit losses - loans						Allowance for credit losses - loans	(34,172)		(28,389)
Loans held for investment, net of allowance for credit losses						Loans held for investment, net of allowance for credit losses	2,835,676		2,762,937
FHLB stock						FHLB stock	10,890		10,890
Operating leases, right-of-use asset, net						Operating leases, right-of-use asset, net	5,175		3,981
Premises and equipment, net	Premises and equipment, net	1,836		1,773		Premises and equipment, net	1,677		1,605
Bank-owned life insurance ("BOLI"), net		14,343		11,203
Bank-owned life insurance						Bank-owned life insurance	16,771		14,669
Interest receivable and other assets	Interest receivable and other assets	25,318		21,628		Interest receivable and other assets	39,594		34,077
		$	2,778,249	$	2,556,761
Total assets						Total assets	$	3,397,308	$	3,227,159

LIABILITIES AND SHAREHOLDERS’ EQUITY	LIABILITIES AND SHAREHOLDERS’ EQUITY					LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits
Deposits:						Deposits:
Non-interest-bearing	Non-interest-bearing	$	941,285	$	902,118	Non-interest-bearing	$	836,673	$	971,246
Interest-bearing	Interest-bearing	1,561,807		1,383,772		Interest-bearing	2,083,733		1,810,758
Total deposits	Total deposits	2,503,092		2,285,890		Total deposits	2,920,406		2,782,004

Subordinated notes, net		28,403		28,386
Borrowings:						Borrowings:
FHLB advances						FHLB advances	120,000		100,000
Subordinated debt, net						Subordinated debt, net	73,640		73,606
Operating lease liability	Operating lease liability	4,987		—		Operating lease liability	5,433		4,243
Interest payable and other liabilities	Interest payable and other liabilities	10,706		7,439		Interest payable and other liabilities	17,173		14,481
Total liabilities	Total liabilities	2,547,188		2,321,715		Total liabilities	3,136,652		2,974,334

Commitments and contingencies (Note 11)		0		0

Commitments and contingencies (Note 8)						Commitments and contingencies (Note 8)
Shareholders’ equity	Shareholders’ equity					Shareholders’ equity
Preferred stock, no par value; 10,000,000 shares authorized; zero issued and outstanding at March 31, 2022 and December 31, 2021		—		—
Common stock, no par value; 100,000,000 shares authorized; 17,246,199 shares issued and outstanding at March 31, 2022; 17,224,848 shares issued and outstanding at December 31, 2021		218,721		218,444
Preferred stock, no par value; 10,000,000 shares authorized; zero issued and outstanding at March 31, 2023 and December 31, 2022						Preferred stock, no par value; 10,000,000 shares authorized; zero issued and outstanding at March 31, 2023 and December 31, 2022	—		—
Common stock, no par value; 100,000,000 shares authorized; 17,258,904 shares issued and outstanding at March 31, 2023; 17,241,926 shares issued and outstanding at December 31, 2022						Common stock, no par value; 100,000,000 shares authorized; 17,258,904 shares issued and outstanding at March 31, 2023; 17,241,926 shares issued and outstanding at December 31, 2022	219,785		219,543
Retained earnings	Retained earnings	19,558		17,168		Retained earnings	52,817		46,736
Accumulated other comprehensive loss, net	Accumulated other comprehensive loss, net	(7,218)		(566)		Accumulated other comprehensive loss, net	(11,946)		(13,454)
Total shareholders’ equity	Total shareholders’ equity	231,061		235,046		Total shareholders’ equity	260,656		252,825
		$	2,778,249	$	2,556,761
Total liabilities and shareholders’ equity						Total liabilities and shareholders’ equity	$	3,397,308	$	3,227,159

See accompanying notes to the unaudited consolidated financial statements.

~~Table of~~ ~~Contents~~

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

~~(In thousands, except per share data)~~

Three Months Ended
March 31,
2022 2021
Interest and fee income
Loans, including fees $ 22,091 $ 18,613
Taxable securities 390 259
Nontaxable securities 177 214
Interest-bearing deposits in other banks 192 104
22,850 19,190
Interest expense
Deposits 545 699
Subordinated notes 443 443
988 1,142
Net interest income 21,862 18,048
Provision for loan losses 950 200
Net interest income after provision for loan losses 20,912 17,848
Non-interest income
Service charges on deposit accounts 108 90
Net gain on sale of securities available-for-sale 5 182
Gain on sale of loans 918 931
Loan-related fees 617 260
FHLB stock dividends 102 78
Earnings on BOLI 90 52
Other 345 23
2,185 1,616
Non-interest expense
Salaries and employee benefits 5,675 4,697
Occupancy and equipment 520 451
Data processing and software 716 629
Federal Deposit Insurance Corporation ("FDIC") insurance 165 280
Professional services 554 1,532
Advertising and promotional 344 170
Loan-related expenses 278 229
Other operating expenses 1,323 816
9,575 8,804
Income before provision for income taxes 13,522 10,660
Provision for income taxes 3,660 382
Net income $ 9,862 $ 10,278
Basic earnings per share $ 0.58 $ 0.93
Diluted earnings per share $ 0.58 $ 0.93


	Three Months Ended March 31,
(in thousands, except per share amounts)	2023		2022
Interest and fee income:
Loans, including fees	$	37,494	$	22,112
Taxable securities	466		390
Nontaxable securities	184		177
Interest-bearing deposits in other banks	2,167		192
Total interest and fee income	40,311		22,871

Interest expense:
Deposits	9,378		545
FHLB advances	624		—
Subordinated debt	1,161		443
Total interest expense	11,163		988

Net interest income	29,148		21,883
Provision for credit losses	900		950
Net interest income after provision for credit losses	28,248		20,933

Non-interest income:
Service charges on deposit accounts	117		108
Net gain on sale of securities available-for-sale	—		5
Gain on sale of loans	598		918
Loan-related fees	308		596
FHLB stock dividends	193		102
Earnings on BOLI	102		90
Other	53		345
Total non-interest income	1,371		2,164

Non-interest expense:
Salaries and employee benefits	6,618		5,675
Occupancy and equipment	523		520
Data processing and software	872		716
FDIC insurance	402		165
Professional services	631		554
Advertising and promotional	418		344
Loan-related expenses	255		278
Other operating expenses	1,399		1,323
Total non-interest expense	11,118		9,575

Income before provision for income taxes	18,501		13,522

Provision for income taxes	5,340		3,660

Net income	$	13,161	$	9,862

Basic earnings per common share	$	0.77	$	0.58
Diluted earnings per common share	$	0.77	$	0.58

See accompanying notes to unaudited consolidated financial statements.

~~Table of~~ ~~Contents~~

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

~~(In thousands)~~


		Three Months Ended March 31,					Three Months Ended March 31,
		2022		2021
(in thousands)						(in thousands)	2023		2022
Net income	Net income	$	9,862	$	10,278	Net income	$	13,161	$	9,862

Net unrealized holding loss on securities available-for-sale during the period		(9,438)		(1,614)
Unrealized gain (loss) on securities:						Unrealized gain (loss) on securities:
Net unrealized holding gain (loss) on securities available-for-sale during the period						Net unrealized holding gain (loss) on securities available-for-sale during the period	2,140		(9,438)
Reclassification adjustment for net realized gains included in net income	Reclassification adjustment for net realized gains included in net income	(5)		(185)		Reclassification adjustment for net realized gains included in net income	—		(5)

Income tax benefit related to other comprehensive loss		(2,791)		(64)

Other comprehensive loss		(6,652)		(1,735)
Income tax expense (benefit) related to items of other comprehensive income						Income tax expense (benefit) related to items of other comprehensive income	632		(2,791)
Other comprehensive income (loss)						Other comprehensive income (loss)	1,508		(6,652)

Total comprehensive income	Total comprehensive income	$	3,210	$	8,543	Total comprehensive income	$	14,669	$	3,210

See accompanying notes to the unaudited consolidated financial statements.

~~Table of~~ ~~Contents~~

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF ~~CHANGES IN~~ SHAREHOLDERS’ EQUITY

For the Three ~~months ended~~Months Ended March 31, ~~2022~~2023 and ~~2021~~2022

(Unaudited)

~~(In thousands, except share and per share data)~~


		Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Taxes		Total			Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
		Shares	Amount
Three months ended March 31, 2021
Balance at December 31, 2020		11,000,273	$	110,082	$	22,348	$	1,345	$	133,775
(in thousands, except per share amounts)											(in thousands, except per share amounts)	Shares	Amount		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance at December 31, 2021											Balance at December 31, 2021	17,224,848	$	218,444
Cumulative effect of adoption of ASC 842 on retained earnings											Cumulative effect of adoption of ASC 842 on retained earnings	—	—				68			—			68
Net income	Net income	—	—		10,278		—		10,278		Net income	—	—		9,862			—			9,862
Other comprehensive loss	Other comprehensive loss	—	—		—		(1,735)		(1,735)		Other comprehensive loss	—	—		—			(6,652)			(6,652)
Stock issued under stock award plans, net											Stock issued under stock award plans, net	22,201	—		—			—			—
Stock compensation expense											Stock compensation expense	—	277		—			—			277
Stock forfeitures											Stock forfeitures	(850)	—		—			—			—
Cash dividends paid ($0.60 per share)											Cash dividends paid ($0.60 per share)	—	—		(7,540)			—			(7,540)
Balance at March 31, 2022											Balance at March 31, 2022	17,246,199	$	218,721	$	19,558		$	(7,218)		$	231,061

Balance at December 31, 2022											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											Cumulative effect of adoption of ASC 326 on retained earnings	—	—		(4,491)			—			(4,491)
Net income											Net income	—	—		13,161			—			13,161
Other comprehensive income											Other comprehensive income	—	—		—			1,508			1,508
Stock issued under stock award plans, net											Stock issued under stock award plans, net	16,978	—		—			—			—
Stock compensation expense	Stock compensation expense	—	62		—		—		62		Stock compensation expense	—	242		—			—			242

Stock issued under stock award plans		9,454	—		—		—		—
Stock forfeitures		(2,722)	—		—		—		—

Cash dividends paid ($1.00 per share)		—	—		(11,003)		—		(11,003)
Balance at March 31, 2021		11,007,005	$	110,144	$	21,623	$	(390)	$	131,377

Three months ended March 31, 2022
Balance at December 31, 2021		17,224,848	$	218,444	$	17,168	$	(566)	$	235,046
Net income		—	—		9,862		—		9,862
Other comprehensive loss		—	—		—		(6,652)		(6,652)
Stock compensation expense		—	169		—		—		169
Director stock compensation expense		—	108		—		—		108
Stock issued under stock award plans		22,201	—		—		—		—
Stock forfeitures		(850)	—		—		—		—

Cumulative effect of adoption of ASC 842 on retained earnings		—	—		68		—		68
Cash dividends paid ($0.60 per share)		—	—		(7,540)		—		(7,540)
Balance at March 31, 2022		17,246,199	$	218,721	$	19,558	$	(7,218)	$	231,061
Cash dividends paid ($0.15 per share)											Cash dividends paid ($0.15 per share)	—	—		(2,589)			—			(2,589)
Balance at March 31, 2023											Balance at March 31, 2023	17,258,904	$	219,785	$	52,817		$	(11,946)		$	260,656

See accompanying notes to the unaudited consolidated financial statements.

~~Table of~~ ~~Contents~~

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~Three months ended March 31, 2022 and 2021~~

(Unaudited)

~~(In thousands, except share and per share data)~~

Three months ended March 31,
2022 2021
Cash flows from operating activities:
Net income $ 9,862 $ 10,278
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 950 200
Loans originated for sale (21,173) (13,021)
Gain on sale of loans (918) (931)
Proceeds from sale of loans 11,705 10,892
Net gain on sale of securities available-for-sale (5) (182)
Earnings on BOLI (90) (52)
Stock compensation expense 169 62
Director stock compensation expense 108 —
Change in deferred loan fees (365) 2,087
Amortization and accretion of security premiums and discounts 358 361
Amortization of subordinated notes issuance costs 17 16
Depreciation and amortization 161 131
Decrease in operating lease liability (234) —
Amortization of operating lease ROUA 250 —
Deferred taxes (2,777) —
Net changes in:
Interest receivable and other assets 1,880 (1,485)
Interest payable and other liabilities 3,588 245
Net cash provided by operating activities 3,486 8,601
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale 1,623 11,456
Maturities, prepayments, and calls of securities available-for-sale 4,731 4,520
Purchases of securities available-for-sale (1,642) (28,761)
Increase in time deposits in banks — (1,991)
Loan originations, net of repayments (134,951) (37,719)
Purchase of premises and equipment (224) (113)
Purchase of BOLI (3,050) —
Net cash used in investing activities (133,513) (52,608)
Cash flows from financing activities:
Net change in deposits 217,202 199,109
Cash dividends paid (7,540) (11,003)
Net cash provided by financing activities 209,662 188,106
Net change in cash and cash equivalents 79,635 144,099
Cash and cash equivalents at beginning of period 425,329 290,493
Cash and cash equivalents at end of period $ 504,964 $ 434,592
Supplemental disclosure of cash flow information:
Interest paid $ 932 $ 1,170
Supplemental disclosure of noncash investing and financing activities:
Transfer from loans held for investment to loans held for sale $ 10,671 $ 4,820
Unrealized (loss) gain on securities $ (9,438) $ 1,797
Operating lease liabilities recorded in conjunction with adoption of ASC 842 $ 5,221 $ —
ROUA recorded in conjunction with adoption of ASC 842 $ 4,974 $ —
Cumulative effect of adoption of ASC 842 on retained earnings $ 68 $ —


	Three Months Ended March 31,
(in thousands)	2023		2022
Cash flows from operating activities:
Net income	$	13,161	$	9,862
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	900		950
Depreciation and amortization	419		411
Amortization of deferred loan fees and costs	(36)		(365)
Amortization of premiums and discounts on securities	313		358
Amortization of subordinated debt issuance costs	34		17
Stock compensation expense	242		277
Earnings on BOLI	(102)		(90)
Deferred tax provision	62		(2,777)
Loans originated for sale	(24,006)		(21,173)
Gain on sale of loans	(598)		(918)
Proceeds from sale of loans	13,289		11,705
Net gain on sale of securities available-for-sale	—		(5)
Decrease in operating lease liability	(233)		(234)
Net changes in:
Interest receivable and other assets	(4,331)		1,880
Interest payable and other liabilities	1,580		3,588
Net cash provided by operating activities	694		3,486
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale	—		1,623
Maturities, prepayments, and calls of securities available-for-sale	2,899		4,731
Purchases of securities available-for-sale	—		(1,642)
Net change in time deposits in banks	232		—
Loan originations, net of repayments	(69,450)		(134,951)
Purchase of premises and equipment	(240)		(224)

Purchase of BOLI	(2,000)		(3,050)
Net cash used in investing activities	(68,559)		(133,513)
Cash flows from financing activities:
Net change in deposits	138,402		217,202

FHLB advances	20,000		—
Cash dividends paid	(2,589)		(7,540)


Net cash provided by financing activities	155,813		209,662
Net change in cash and cash equivalents	87,948		79,635
Cash and cash equivalents at beginning of period	259,991		425,329
Cash and cash equivalents at end of period	$	347,939	$	504,964

Supplemental disclosure of cash flow information:
Interest paid	$	471	$	932

Supplemental disclosure of noncash items:
Transfer from loans held for sale to loans held for investment	9,416		10,671
Unrealized gain (loss) on securities	2,140		(9,438)
Operating lease liabilities recorded in conjunction with adoption of ASC 842	—		5,221
Operating lease liabilities exchanged for ROUAs	1,423		—
ROUA recorded in conjunction with adoption of ASC 842	—		4,974
ROUA acquired	(1,444)		—
Cumulative effect of adoption of ASC 842 on retained earnings	—		68
Cumulative effect of adoption of ASC 326 on retained earnings	(4,491)		—

See accompanying notes to the unaudited consolidated financial statements.

~~Table of~~ ~~Contents~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1: Basis of Presentation and Summary of Significant Accounting Policies

~~Nature of Operations and Principles of Consolidation~~(a) Organization

Five Star Bank (the “Bank”) was chartered on October 26, 1999 and began operations on December 20, 1999. Five Star Bancorp (“Bancorp” or the “Company”) was incorporated on September 16, 2002 and subsequently obtained approval from the Federal Reserve to be a bank holding company in connection with its acquisition of the Bank. The Company became the sole shareholder of the Bank on June 2, 2003 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.

The Company, through the Bank, provides financial services to customers who are predominately small and middle-market businesses, professionals, and individuals residing in the Northern California region. The ~~Company's~~Company’s primary loan products are commercial real estate loans, land development loans, construction loans, and operating lines of credit, and its primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts. The Bank currently has seven branch offices in Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, and Yuba City, and ~~two~~one loan production ~~offices~~office in ~~Santa Rosa and~~ Sacramento.

The Company terminated its status as a Subchapter S corporation as of May 5, 2021, in connection with the Company’s Initial Public Offering (“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.

On April 9, 2021, the Company publicly filed a Registration Statement on Form S-1 with the SEC in connection with its IPO (the “Registration Statement”), which was subsequently amended on April 26, 2021 and May 3, 2021. The Registration Statement 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 $111.2 million. The net proceeds less other related expenses, including audit fees, legal fees, listing fees, and other expenses, totaled $109.1 million.

(b) Basis of Financial Statement Presentation and Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) ~~Accounting Standards Codification (“ASC”)~~ASC and the rules and regulations of the SEC, including the instructions to Regulation S-X. These interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, ~~2021,~~2022, and the notes thereto, ~~as filed~~included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”), which was filed with the SEC on February ~~25, 2022.~~24, 2023.

The unaudited consolidated financial statements include Five Star Bancorp and its wholly owned subsidiary, Five Star Bank. All significant intercompany transactions and balances are eliminated in consolidation.

The results of operations for the three months ended March 31, ~~2022~~2023 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, ~~2022.~~2023.

The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.

Certain amounts reported in previous consolidated financial statements have been reclassified to conform to current period presentation. These reclassifications did not affect previously reported amounts of net income, total assets, or total shareholders’ equity.

While the Company’s chief decision-makers monitor the revenue streams of the various products and services, operations are managed, and financial performance is evaluated, on a Company-wide basis. Discrete financial information is not available other than on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

~~The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.~~

~~Table of~~ ~~Contents~~

(d) Emerging Growth Company

The Company qualifies as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, and, as such, may take advantage of specified reduced reporting requirements and deferred accounting standards adoption dates, and is relieved of other significant requirements that are otherwise generally applicable to other public companies. The Company will remain an Emerging Growth Company for five years after its IPO date, unless one of the following

~~Use~~

occurs: (i) total annual gross revenues are $1.235 billion or more; (ii) the Company issues more than $1 billion in non-convertible debt; or (iii) the Company becomes a large accelerated filer with a public float of ~~Estimates~~more than $0.7 billion.

~~Management~~(e) Significant Accounting Policies

The Company’s significant accounting policies are included in Note 1, Basis of Presentation on the 2022 Annual Report on Form 10-K. There have been no changes to these significant accounting policies during the first three months of 2023 other than adoption of 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”) as discussed below in this Note, which impacted the following policies:

Allowance for Credit Losses (“ACL”)

The ACL is ~~required~~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, ~~make~~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 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 Federal Financial Institutions Examination Council to provide statistically meaningful support in the models developed. The Company further stratified the C&I portfolio into traditional C&I loans and SBA loans, as the loans in these pools have different repayment structures and credit risk characteristics. The Company also stratified C&I loans and consumer loans that do not require reserves as the Company has third party agreements in place to cover loan losses. The Company has identified the following pools subject to an estimate of credit loss: (1) 1-4 Family Construction; (2) Other Construction; (3) Farmland; (4) Revolving Secured by 1-4 Family; (5) Residential Secured by First Liens; (6) Residential Secured by Junior Liens; (7) Multifamily; (8) CRE Owner Occupied; (9) CRE Non-Owner Occupied; (10) Agriculture; (11) C&I; (12) C&I SBA; (13) Consumer; and (14) Municipal.

The Company has determined, given its limited loss experience, that peer data and other external data to support loss history provides the best basis for its assessment of expected credit losses. The Company believes that the use of peer loss data from 2008 to 2019 presents loss histories that appropriately reflect a full economic cycle, reflects asset-specific risk characteristics at each pool level identified, and includes a historical look-back period that is objective and reflective of future expected credit losses. Loss data from 2020 to 2021 was excluded from the data set to exclude pandemic-related data in the models.

The method for determining the estimate of lifetime credit losses includes, among other things, the following main components: (1) the use of Probability of Default (“PD”) and Loss Given Default (“LGD”) assumptions under a Discounted Cash Flow model; (2) a multi-scenario macroeconomic forecast; (3) an initial and reasonable and supportable forecast period of one year for all loan segments; and (4) 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 ~~reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date~~collectibility of the ~~consolidated financial statements~~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 ~~reported amounts~~volume and severity of ~~revenues~~adversely classified or graded loans; and ~~expenses during~~

•External – the ~~reporting period. These estimates~~effect of other external factors, such as competition and ~~assumptions affect~~legal and regulatory requirements on the ~~amounts reported~~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.

Accrued Interest

Accrued interest receivable is excluded from amortized cost of all financial ~~statements~~instrument types and included in “Interest receivable and other assets” in the ~~disclosures~~unaudited 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.

Individually Assessed Loans

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: (1) present value of future expected cash flows, discounted at the loan’s effective interest rate; (2) amount by which carrying value of the loan exceeds the loan’s observable market price; or (3) 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 ~~and actual results could differ. The~~substantially through the operation or sale of the collateral.

Available-for-sale (“AFS”) Debt Securities

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 AFS 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 AFS 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 AFS 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. As of March 31, 2023, the Company’s portfolio of AFS debt securities is comprised primarily of debt, mortgage-backed securities, and collateralized mortgage obligations issued by the U.S. government, its agencies, or government-sponsored enterprises, which are either explicitly or implicitly guaranteed by the U.S. government. The remainder of the portfolio is primarily comprised of

obligations of state and political subdivisions, which are generally rated as high grade. The history of minimal credit losses from these issuers indicates that expectation of non-payment of the amortized cost basis is zero. As such, the Company determined that the unrealized loss positions in AFS securities were not due to credit losses, but instead related to changes in interest rates and general market conditions and therefore, no credit loss expense was recognized.

Loan Commitments

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 ~~losses~~commitments is the ~~most significant accounting estimate reflected~~same as it is on loans. Unfunded loan commitment reserves are included in “Interest payable and other liabilities” in the unaudited consolidated balance sheets.

Held-to-maturity Debt Securities

The Company’s ~~consolidated financial statements.~~

~~Earnings Per Share (“EPS”)~~

~~Basic EPS~~process for determining the estimate of credit loss on held-to-maturity debt securities is ~~net income divided by~~substantially similar to what it is on loans, with segmenting not being applicable. As the ~~weighted average number~~amount of ~~common shares outstanding during~~held-to-maturity debt securities that the ~~period less average unvested restricted stock awards (“RSAs”). Diluted EPS includes~~Company carries is limited and given the ~~dilutive effect of additional potential common shares related to unvested RSAs using the treasury stock method. The Company has two forms of outstanding common stock: common stock~~determination that expected credit loss was immaterial, an immaterial amount was recognized in allowance for credit loss upon adoption and unvested RSAs. Holders of unvested RSAs receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings, and therefore the RSAs are considered participating securities. However, under the two-class method, the difference in EPS is not significantno credit loss expense was recorded for ~~these participating securities.~~

Three months ended
(in thousands, except per share data) March 31,
2022 March 31,
2021
Net income $ 9,862 $ 10,278
Weighted average basic common shares outstanding 17,102,508 10,998,041
Add: Dilutive effects of assumed vesting of restricted stock 62,011 —
Weighted average diluted common shares outstanding 17,164,519 10,998,041
Income per common share:
Basic EPS $ 0.58 $ 0.93
Diluted EPS $ 0.58 $ 0.93

~~During~~ the three months ended March 31, ~~2022~~2023.

TDRs

In accordance with the adoption of ASC 326, which includes ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and ~~2021, there were no outstanding stock options. Anti-dilutive shares, which are excluded from the dilutive EPS calculation, were deemed~~Vintage Disclosures, accounting guidance for TDRs for creditors has been eliminated. New guidance with respect to ~~be immaterial.~~

~~Table~~recognition, measurement, and disclosures of ~~Contents~~

~~For the three months ended~~loans for borrowers experiencing financial difficulties supersedes guidance on TDRs. As of March 31, ~~2021, pro forma EPS is calculated by applying a C Corporation effective tax~~2023, the amount of loans modified for borrowers due to experiencing financial difficulties under criteria of principal forgiveness, interest rate of 29.56% to net income before provision for income taxes and using the determined pro forma net income balance to calculate EPS. For the three months ended March 31, 2022, pro forma EPS is actual EPS given that the Companyreduction, other-than-insignificant payment delay, or term extension was ~~a C Corporation for the entire three-month period. The following reconciliation table provides a detailed calculation of pro forma EPS:~~

Three months ended
(in thousands, except per share data) March 31,
2022 March 31,
2021
Net income before provision for income taxes - GAAP $ 13,522 $ 10,660
Less: Actual/pro forma provision for income taxes 3,660 3,151
Actual/pro forma net income $ 9,862 $ 7,509
Weighted average basic common shares outstanding 17,102,508 10,998,041
Add: Dilutive effects of assumed vesting of restricted stock 62,011 —
Weighted average diluted common shares outstanding 17,164,519 10,998,041
Income per common share:
Basic EPS (actual/pro forma) $ 0.58 $ 0.68
Diluted EPS (actual/pro forma) $ 0.58 $ 0.68

~~Reclassifications~~

immaterial.

~~Note 2:~~(f) Recently Issued Accounting Standards

The following ~~reflect~~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~~The Company qualifies as an emerging growth company, and as such, has elected to use the extended transition period for complying with new or revised accounting standards and is not subject to the new or revised accounting standards applicable to public companies during the extended transition period. The accounting standards discussed below ~~reflect~~indicate effective dates for the Company as an emerging growth company ~~with~~using the extended transition period.

Accounting Standards Adopted

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842)~~. ASU 2016-02, which, among other things, requires lessees to recognize most leases on the balance sheet, thus increasing reported assets and liabilities. Lessor accounting remains substantially similar to historical GAAP. The FASB has issued incremental guidance to Topic 842 standard through ASU No. 2018-10, 2018-11, and 2021-05. The Company has elected to use the transition relief approach as provided in ASU 2018-11, which permitsOn January 1, 2023, the Company ~~to use January 1, 2022 as both~~adopted ASC 326, which replaces the application date and the adoption date, rather than the modified retrospective approach. The Company also elected certain relief options offered within the new standard, which include the package of practical expedients, the option not to recognize an ROUA and lease liability that arise from short-term leases (i.e., leases with terms of 12 months or less), and the option of hindsight when determining lease term. Substantially all of the Company’s lease agreements are considered operating leases and were not previously recognized on the Company’s balance sheets. As of January 1, 2022, the Company recorded an ROUA and corresponding lease liability for all applicable operating leases. While the guidance increased the Company’s gross assets and liabilities, the adoption of ASU 2016-02 did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 11, Commitments and Contingencies, for more information.

~~Table of~~ ~~Contents~~

~~In August 2017, the FASB issued ASU No. 2017-12,~~ ~~Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.~~ The primary objective of the amendments in this update is to simplify the application of hedge accounting. More specifically, the amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Furthermore, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, amendments in this update require an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. Hedge ineffectiveness is no longer separately measured and reported. The amendments in this update were effective for the Company beginning on January 1, 2022. The impact of adopting this ASU was immaterial to the Company’s consolidated financial statements.

~~Accounting Standards Not Yet Adopted~~

~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard will replace the~~current “incurred loss” model for recognizing credit losses with ~~a “current expected credit~~an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model. The CECL model ~~will apply~~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. The CECL model is based on lifetime expected losses, rather than incurred losses, and requires the recognition of credit loss expense in the consolidated statement of income and a related allowance for credit losses on the consolidated statement of condition at the time of origination or purchase of a loan receivable or held-to-maturity debt security. Likewise, subsequent changes in this estimate are recorded through credit loss expense and related allowance. The CECL model requires the use of not only relevant historical experience and current conditions, but reasonable and supportable forecasts of future events and circumstances, incorporating a broad range of information in developing credit loss estimates, which could result in significant changes to both the timing and amount of credit loss expense and allowance. Under ~~ASU 2016-13,~~ASC 326, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized ~~cost. Estimated~~cost, with any estimated credit losses ~~are~~ 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 ASU also expands the disclosure requirements regarding assumptions, models, and methods for estimating the allowance for loan losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. In March 2022, the FASB issued ASU No. 2022-02, which eliminates the recognition and measurement guidance on troubled debt restructurings and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulties. ASU 2016-13, and subsequently, ASU 2022-02, are effective for the Company ~~for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply~~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 is ~~effective. While~~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, we have 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 ~~believes~~also adopted ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which had no material impact.

The table that follows reflects the ~~change from an incurred loss model to a CECL model has the potential to increase the allowance for loan losses at the adoption date,~~cumulative-effect adjustments the Company ~~cannot reasonably quantify the impact of~~recorded on January 1, 2023 for the 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	$	(28,389)	$	(5,282)	$	(33,671)
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)

Accounting Standards Issued But Not Yet Adopted

For the amendments to its financial condition or results of operations at this time due to the complexity of and extensive changes resulting from these amendments. The Company is working with a third-party vendor to identify data gaps and determine the appropriate methodologies and resources to utilize in preparation for its transition to thefiscal year beginning January 1, 2023, there have been no new accounting ~~standard, including~~standards issued but not ~~limited to the use of certain tools to forecast future economic conditions~~yet adopted that ~~affect the cash flows of loans over their lifetime.~~

~~In March 2020, the FASB issued ASU No. 2020-04,~~ ~~Reference Rate Reform (Topic 848). The amendments in this ASU~~ are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be ~~discontinued because of reference rate reform. Additionally, in January 2021,~~material to the ~~FASB issued ASU No. 2021-01,~~ ~~Reference Rate Reform (Topic 848),~~ which refines the scope of ASC 848 and clarifies its guidance, permitting entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. The amendments in these ASUs may be elected as of March 12, 2020 through December 31, 2022. An entity may choose to elect the amendments in these updates at an interim period subsequent to March 12, 2020, with adoption methods varying based on transaction type. The Company has not elected to apply these amendments; however, the Company is assessing the applicability of the ASUs and continues to monitor guidance for reference rate reform from FASB and its impact on the Company’s consolidated financial statements.

Company.

~~Table of~~ ~~Contents~~

Note 3:2: Fair Value of Assets and Liabilities

Fair Value Hierarchy and Fair Value Measurement

Accounting standards require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

~~Table of~~ ~~Contents~~

The following table summarizes the Company’s assets and liabilities that were required to be recorded at fair value on a recurring basis.


(in thousands)	(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 In1	(in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Measurement Categories: Changes in Fair Value Recorded In
March 31, 2022
March 31, 2023											March 31, 2023
Assets:	Assets:										Assets:
Securities available-for-sale:	Securities available-for-sale:										Securities available-for-sale:
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds	U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds	$	134,813	$	—	$	134,813	$	—	OCI	U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds	$	115,140	$	—	$	115,140	$	—	OCI
Derivatives – interest rate swap	Derivatives – interest rate swap	58		—		58		—		NI	Derivatives – interest rate swap	16		—		16		—		NI
Liabilities:	Liabilities:										Liabilities:
Derivatives – interest rate swap	Derivatives – interest rate swap	58		—		58		—		NI	Derivatives – interest rate swap	16		—		16		—		NI

December 31, 2021
December 31, 2022											December 31, 2022
Assets:	Assets:										Assets:
Securities available-for-sale:	Securities available-for-sale:										Securities available-for-sale:
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds	U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds	$	148,807	$	—	$	148,807	$	—	OCI	U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds	$	115,988	$	—	$	115,988	$	—	OCI
Derivatives – interest rate swap	Derivatives – interest rate swap	92		—		92		—		NI	Derivatives – interest rate swap	16		—		16		—		NI
Liabilities:	Liabilities:										Liabilities:
Derivatives – interest rate swap	Derivatives – interest rate swap	92		—		92		—		NI	Derivatives – interest rate swap	16		—		16		—		NI

1~~Other comprehensive income (“OCI”) or net income (“NI”).~~

Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1)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)2 inputs). Level 2 securities include U.S. ~~agencies'~~agencies’ or government-sponsored ~~enterprises’ ("GSEs")~~agencies’ debt securities, mortgage-backed securities, government ~~agency issued~~agency-issued bonds, privately issued collateralized mortgage obligations, and corporate bonds.Level 3 securities are based on unobservable inputs that are supported by little or no market activity. In addition, values use discounted cash flow models and may include significant management judgment and estimation. As of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, there were no Level 1 available-for-sale securities and no transfers between Level 1 and Level 2 classifications for assets or ~~Level 3 available-for-sale securities.~~liabilities measured at fair value on a recurring basis.

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both the Company’s credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to the Company.

Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as collateral dependent ~~impaired~~ loans and other real estate ~~owned (“OREO”).~~owned. As of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the ~~Company did not carry any~~amount carried of assets measured at fair value on a non-recurring ~~basis.~~basis was immaterial to the Company.

1511

~~Table of~~ ~~Contents~~

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. The carrying amounts in the following table are recorded in the consolidated balance sheets under the indicated captions. Further, management has not disclosed the fair value of financial instruments specifically excluded from disclosure requirements, such as BOLI.


		March 31, 2022					December 31, 2021						March 31, 2023					December 31, 2022
(in thousands)	(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy	(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	504,964	$	504,964	Level 1	$	425,329	$	425,329	Level 1	Cash and cash equivalents	$	347,939	$	347,939	Level 1	$	259,991	$	259,991	Level 1
Time deposits in banks	Time deposits in banks	14,464		14,464		Level 1	14,464		14,464		Level 1	Time deposits in banks	9,617		9,617		Level 1	9,849		9,849		Level 1
Securities available-for-sale	Securities available-for-sale	134,813		134,813		Level 2	148,807		148,807		Level 2	Securities available-for-sale	115,140		115,140		Level 2	115,988		115,988		Level 2
Securities held-to-maturity	Securities held-to-maturity	4,486		4,459		Level 3	4,946		5,197		Level 3	Securities held-to-maturity	3,514		3,323		Level 3	3,756		3,432		Level 3
Loans held for sale	Loans held for sale	10,386		11,063		Level 2	10,671		11,217		Level 2	Loans held for sale	11,315		12,500		Level 2	9,416		9,785		Level 2
Loans held for investment, net of allowance for loan losses		2,056,254		1,993,626		Level 3	1,911,217		1,893,431		Level 3
Loans held for investment, net of allowance for credit losses												Loans held for investment, net of allowance for credit losses	2,835,676		2,657,245		Level 3	2,762,937		2,570,176		Level 3
FHLB stock and other investments	FHLB stock and other investments	12,383		N/A		N/A	12,464		N/A		N/A	FHLB stock and other investments	17,652		N/A		N/A	16,570		N/A		N/A
Interest receivable	Interest receivable	5,547		5,547		Level 2	5,332		5,332		Level 2	Interest receivable	7,743		7,743		Level 2	7,454		7,454		Level 2
Interest rate swap	Interest rate swap	58		58		Level 2	92		92		Level 2	Interest rate swap	16		16		Level 2	16		16		Level 2
Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits	2,503,092		2,349,536		Level 2	2,285,890		2,210,555		Level 2	Deposits	2,920,406		2,715,580		Level 2	2,782,004		2,562,600		Level 2
Interest payable	Interest payable	79		79		Level 2	23		23		Level 2	Interest payable	941		941		Level 2	1,568		1,568		Level 2
Interest rate swap	Interest rate swap	58		58		Level 2	92		92		Level 2	Interest rate swap	16		16		Level 2	16		16		Level 2
FHLB advances												FHLB advances	120,000		120,000		Level 2	100,000		100,000		Level 2
Subordinated notes	Subordinated notes	28,403		28,403		Level 3	28,386		28,386		Level 3	Subordinated notes	73,640		72,326		Level 3	73,606		72,273		Level 3

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

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.

Loans held for sale: For 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:~~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 ~~loan~~credit losses is considered to be a reasonable estimate of loan discount for credit quality concerns.

Interest receivable and payable: For interest receivable and payable, the carrying amount is estimated to be fair value.

Derivatives - interest rate swap: See above for a discussion of the methods and assumptions used by the Company to estimate the fair value of derivatives.

Deposits: The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date, as represented by their carrying amount. Fair values for fixed rate certificates of deposit are estimated using a

discounted cash flow analysis that uses interest rates being offered at each reporting date by the Company for certificates with similar remaining maturities. For variable rate time deposits, cost approximates fair value.

~~Table of~~ ~~Contents~~

Subordinated ~~Notes~~notes: The fair value is estimated by discounting the future cash flow using the current three-month ~~LIBOR.~~London Inter-Bank Offered Rate. The ~~Company's~~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.

Note 4:3: 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 ~~Small Business Administration (the “SBA”),~~SBA, and securities issued by U.S. GSEs, such as ~~the Federal National Mortgage Association (the “FNMA”), the Federal Home Loan Mortgage Corporation (the “FHLMC”),~~FNMA, FHLMC, and ~~the~~ FHLB. The Company also invests in residential and commercial mortgage-backed securities, collateralized mortgage obligations issued or guaranteed by ~~the GSEs,~~government sponsored entities, and corporate bonds, as reflected in the following tables.

A summary of the amortized cost and fair value related to securities held-to-maturity as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 is presented below.


(in thousands)	(in thousands)			Gross Unrealized						(in thousands)			Gross Unrealized
		Amortized Cost		Gains		(Losses)		Fair Value			Amortized Cost		Gains		(Losses)		Fair Value
March 31, 2022
March 31, 2023										March 31, 2023
Obligations of states and political subdivisions	Obligations of states and political subdivisions	$	4,486	$	—	$	(27)	$	4,459	Obligations of states and political subdivisions	$	3,514	$	—	$	(191)	$	3,323
Total held-to-maturity	Total held-to-maturity	$	4,486	$	—	$	(27)	$	4,459	Total held-to-maturity	$	3,514	$	—	$	(191)	$	3,323
December 31, 2021
December 31, 2022										December 31, 2022
Obligations of states and political subdivisions	Obligations of states and political subdivisions	$	4,946	$	251	$	—	$	5,197	Obligations of states and political subdivisions	$	3,756	$	—	$	(324)	$	3,432
Total held-to-maturity	Total held-to-maturity	$	4,946	$	251	$	—	$	5,197	Total held-to-maturity	$	3,756	$	—	$	(324)	$	3,432

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,~~ratings; (ii) historical probability of default and loss given default rates for given bond ratings and remaining ~~maturity,~~maturity; (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the ~~securities,~~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. Refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, and Note 2, Fair Value of Assets and Liabilities, for further detail.

A summary of the amortized cost and fair value related to securities available-for-sale as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 is presented below.


(in thousands)	(in thousands)	Amortized Cost			Gross Unrealized					Fair Value		(in thousands)		Amortized Cost		Gross Unrealized				Fair Value
				Gains			(Losses)						Gains			(Losses)
March 31, 2022
March 31, 2023												March 31, 2023
U.S. government agencies	U.S. government agencies	$	18,241		$	95		$	(257)	$	18,079	U.S. government agencies		$	13,211	$	93	$	(157)	$	13,147
Mortgage-backed securities	Mortgage-backed securities	79,694			8			(6,210)		73,492		Mortgage-backed securities		71,880		—		(10,911)		60,969
Obligations of states and political subdivisions	Obligations of states and political subdivisions	44,621			23			(3,713)		40,931		Obligations of states and political subdivisions		44,590		25		(5,744)		38,871
Collateralized mortgage obligations	Collateralized mortgage obligations	504			—			(21)		483		Collateralized mortgage obligations		419		—		(35)		384
Corporate bonds	Corporate bonds	2,000			—			(172)		1,828		Corporate bonds		2,000		—		(231)		1,769
Total available-for-sale	Total available-for-sale	$	145,060		$	126		$	(10,373)	$	134,813	Total available-for-sale		$	132,100	$	118	$	(17,078)	$	115,140
December 31, 2021
December 31, 2022												December 31, 2022
U.S. government agencies	U.S. government agencies	$	19,824		$	60		$	(202)	$	19,682	U.S. government agencies		$	14,317	$	81	$	(225)	$	14,173
Mortgage-backed securities	Mortgage-backed securities	82,517			94			(1,098)		81,513		Mortgage-backed securities		73,111		1		(11,841)		61,271
Obligations of states and political subdivisions	Obligations of states and political subdivisions	44,732			525			(120)		45,137		Obligations of states and political subdivisions		45,223		21		(6,818)		38,426
Collateralized mortgage obligations	Collateralized mortgage obligations	537			3			—		540		Collateralized mortgage obligations		436		—		(41)		395
Corporate bonds	Corporate bonds	2,000			—			(65)		1,935		Corporate bonds		2,000		—		(277)		1,723
Total available-for-sale	Total available-for-sale	$	149,610		$	682		$	(1,485)	$	148,807	Total available-for-sale		$	135,087	$	103	$	(19,202)	$	115,988

1714

~~Table of~~ ~~Contents~~

The amortized cost and fair value of investment debt securities by contractual maturity at March 31, ~~2022~~2023 and December 31, ~~2021~~2022 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.


(in thousands)	(in thousands)	March 31, 2022								December 31, 2021								(in thousands)	March 31, 2023								December 31, 2022
		Held-to-Maturity				Available-for-Sale				Held-to-Maturity				Available-for-Sale					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			Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	Within one year	$	456	$	454	$	—	$	—	$	491	$	516	$	—	$	—	Within one year	$	354	$	334	$	—	$	—	$	417	$	381	$	501	$	501
After one but within five years	After one but within five years	1,115		1,108		505		514		951		999		507		522		After one but within five years	950		899		—		—		1,015		927		—		—
After five years through ten years	After five years through ten years	1,590		1,580		3,684		3,458		3,504		3,682		3,697		3,748		After five years through ten years	1,375		1,300		5,818		5,307		1,470		1,343		5,320		4,761
After ten years	After ten years	1,325		1,317		40,432		36,959		—		—		40,528		40,867		After ten years	835		790		38,772		33,564		854		781		39,402		33,164

Investment securities not due at a single maturity date:	Investment securities not due at a single maturity date:																	Investment securities not due at a single maturity date:
U.S. government agencies	U.S. government agencies	—		—		18,241		18,079		—		—		19,824		19,682		U.S. government agencies	—		—		13,211		13,147		—		—		14,317		14,173
Mortgage-backed securities	Mortgage-backed securities	—		—		79,694		73,492		—		—		82,517		81,513		Mortgage-backed securities	—		—		71,880		60,969		—		—		73,111		61,271
Collateralized mortgage obligations	Collateralized mortgage obligations	—		—		504		483		—		—		537		540		Collateralized mortgage obligations	—		—		419		384		—		—		436		395
Corporate bonds	Corporate bonds	—		—		2,000		1,828		—		—		2,000		1,935		Corporate bonds	—		—		2,000		1,769		—		—		2,000		1,723
Total	Total	$	4,486	$	4,459	$	145,060	$	134,813	$	4,946	$	5,197	$	149,610	$	148,807	Total	$	3,514	$	3,323	$	132,100	$	115,140	$	3,756	$	3,432	$	135,087	$	115,988

1815

~~Table of~~ ~~Contents~~

Sales of investment securities and gross gains and losses are shown in the following table:

(in thousands) For the three months ended
March 31,
2022 March 31,
2021
Available-for-sale:
Sales proceeds $ 1,623 $ 11,456
Gross realized gains 5 182


(in thousands)	For the three months ended
	March 31, 2023		March 31, 2022
Available-for-sale:
Sales proceeds	$	—	$	1,623
Gross realized gains	—		5

Pledged investment securities are shown in the following table:


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Pledged to the State of California:
Secure deposits of public funds and borrowings		$	57,423	$	63,363
Pledged to:						Pledged to:
The State of California, securing deposits of public funds and borrowings						The State of California, securing deposits of public funds and borrowings	$	40,196	$	40,465
The Federal Reserve Discount Window, increasing borrowing capacity						The Federal Reserve Discount Window, increasing borrowing capacity	53,660		—
Total pledged investment securities	Total pledged investment securities	$	57,423	$	63,363	Total pledged investment securities	$	93,856	$	40,465

The following table details the gross unrealized losses and fair values aggregated by investment category and length of time that individual available-for-sale securities have been in a continuous unrealized loss position at March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:


															Less than 12 months				12 months or more				Total securities in a loss position
(in thousands)	(in thousands)	< 12 continuous months				≥ 12 continuous months				Total securities in a loss position				(in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
March 31, 2022
March 31, 2023														March 31, 2023
U.S. government agencies	U.S. government agencies	$	2,275	$	(77)	$	12,371	$	(180)	$	14,646	$	(257)	U.S. government agencies	$	1,750	$	(1)	$	8,785	$	(156)	$	10,535	$	(157)
Mortgage-backed securities	Mortgage-backed securities	62,090		(5,122)		10,969		(1,088)		73,059		(6,210)		Mortgage-backed securities	176		(3)		60,570		(10,908)		60,746		(10,911)
Obligations of states and political subdivisions	Obligations of states and political subdivisions	37,803		(3,540)		1,791		(173)		39,594		(3,713)		Obligations of states and political subdivisions	257		(11)		37,063		(5,733)		37,320		(5,744)
Collateralized mortgaged obligations		483		(21)		—		—		483		(21)
Collateralized mortgage obligations														Collateralized mortgage obligations	—		—		384		(35)		384		(35)
Corporate bonds	Corporate bonds	1,828		(172)		—		—		1,828		(172)		Corporate bonds	—		—		1,769		(231)		1,769		(231)
Total temporarily impaired securities		$	104,479	$	(8,932)	$	25,131	$	(1,441)	$	129,610	$	(10,373)
															$	2,183	$	(15)	$	108,571	$	(17,063)	$	110,754	$	(17,078)
December 31, 2021

December 31, 2022														December 31, 2022
U.S. government agencies	U.S. government agencies	$	—	$	—	$	13,399	$	(202)	$	13,399	$	(202)	U.S. government agencies	$	3,090	$	(125)	$	8,392	$	(100)	$	11,482	$	(225)
Mortgage-backed securities	Mortgage-backed securities	73,972		(1,046)		1,400		(52)		75,372		(1,098)		Mortgage-backed securities	4,360		(470)		56,908		(11,371)		61,268		(11,841)
Obligations of states and political subdivisions	Obligations of states and political subdivisions	14,014		(112)		407		(8)		14,421		(120)		Obligations of states and political subdivisions	24,707		(4,097)		11,670		(2,721)		36,377		(6,818)
Collateralized mortgage obligations														Collateralized mortgage obligations	395		(41)		—		—		395		(41)
Corporate bonds	Corporate bonds	1,935		(65)		—		—		1,935		(65)		Corporate bonds	—		—		1,723		(277)		1,723		(277)
Total temporarily impaired securities		$	89,921	$	(1,223)	$	15,206	$	(262)	$	105,127	$	(1,485)
															$	32,552	$	(4,733)	$	78,693	$	(14,469)	$	111,245	$	(19,202)

There were ~~150 and 91~~151 and 152 available-for-sale securities in unrealized loss positions at March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. As of March 31, ~~2022,~~2023, the investment portfolio included 24147 investment securities that had been in a continuous loss position for twelve months or more and ~~126~~four investment securities that had been in a loss position for less than twelve months.

1916

~~Table of~~ ~~Contents~~

The Company periodically evaluates each available-for-sale investment security in an unrealized loss position to determine if the impairment is temporary or other than temporary and has determined that no investment security is other than temporarily impaired. The unrealized losses are due primarily to interest rate changes. The Company does not intend, and it is more likely than not that the Company will not be required, to sell the securities before the earlier of the forecasted recovery or the maturity of the underlying debt security.

There was 1one held-to-maturity security in a continuous unrealized loss position at March 31, ~~2022. This security was in an unrealized loss position for less than 12 months. There were no held-to-maturity securities~~2023, which had been in a continuous loss position ~~at December 31, 2021.~~for more than twelve months.

Obligations issued or guaranteed by government agencies such as 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 are deemed credit worthy after management’s comprehensive analysis of the issuers’ latest financial information, credit ratings by major credit agencies, and/or credit enhancements.

Non-Marketable Securities Included in Other Assets

FHLB capital stock: As a member of the FHLB, the Company is required to maintain a minimum investment in FHLB capital stock determined by the board of directors of the FHLB. The minimum investment requirements can increase in the event the Company increases its total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $100 per share par value. The Company held ~~$6.7~~$10.9 million and $10.9 million of FHLB stock at March 31, ~~2022~~2023 and December 31, ~~2021. The~~2022, respectively. The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and do not have a readily determinable market value. Based on management’s analysis of the FHLB’s financial condition and certain qualitative factors, management determined that the FHLB stock was not impaired at March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. On February ~~16, 2022,~~22, 2023, the FHLB announced a cash dividend for the fourth quarter of ~~2021~~2022 at an annualized dividend rate of ~~6.00%~~7.00%, which was paid on March 10, ~~2022. For~~2023. Cash dividends received on FHLB capital stock amounted to $0.2 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively, and ~~2021, cash dividends received on FHLB capital stock in the amount of $0.1 million~~ were recorded as non-interest income on the unaudited consolidated statements of income.

Note 5:4: Loans and Allowance for ~~Loan~~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 ~~with~~through strong ~~underwriting. As of March 31, 2022 and December 31, 2021, the carrying value of total loans held for investment amounted to $2.1 billion and $1.9 billion, respectively.~~underwriting practices. The following table presents the balance of each major product type within the Company’s portfolio as of the dates indicated.

~~Table of~~ ~~Contents~~


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Real estate:	Real estate:					Real estate:
Commercial	Commercial	$	1,760,551	$	1,586,232	Commercial	$	2,442,520	$	2,394,674
Commercial land and development	Commercial land and development	9,090		7,376		Commercial land and development	15,475		7,477
Commercial construction	Commercial construction	59,293		54,214		Commercial construction	98,415		88,669
Residential construction	Residential construction	5,540		7,388		Residential construction	9,410		6,693
Residential	Residential	28,921		28,562		Residential	23,862		24,230
Farmland	Farmland	49,903		54,805		Farmland	51,616		52,478
Commercial:	Commercial:					Commercial:
Secured	Secured	124,930		137,062		Secured	173,500		165,186
Unsecured	Unsecured	22,599		21,136		Unsecured	24,776		25,431
Paycheck Protection Program (“PPP”)		1,528		22,124

Consumer and other	Consumer and other	19,044		17,167		Consumer and other	32,378		28,628
Subtotal	Subtotal	2,081,399		1,936,066		Subtotal	2,871,952		2,793,466
Less: Net deferred loan fees	Less: Net deferred loan fees	1,241		1,606		Less: Net deferred loan fees	2,104		2,140
Less: Allowance for loan losses		23,904		23,243
Loans held for investment, net of allowance for loan losses		$	2,056,254	$	1,911,217
Less: Allowance for credit losses						Less: Allowance for credit losses	34,172		28,389
Loans held for investment, net of allowance for credit losses						Loans held for investment, net of allowance for credit losses	$	2,835,676	$	2,762,937

Underwriting

Commercial ~~loans:~~loans: Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Real estate ~~loans:~~loans: Real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected than other loans by conditions in the real estate market or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria.

Construction ~~loans:~~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 are 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 ~~complete~~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 byusing 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.

~~Table of~~ ~~Contents~~

Residential real estate ~~loans:~~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:~~loans: Farmland loans are generally made to producers and processors of crops and livestock. Repayment is primarily from the sale of an agricultural product or service. Farmland loans are secured by real property and are susceptible to changes in market demand for specific commodities. This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles, as well as adverse weather conditions.

Consumer ~~loans:~~loans: The Company purchased consumer loans underwritten utilizing credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

Credit Quality Indicators

The Company has established a loan risk rating system to measure and monitor the quality of the loan portfolio. All loans are assigned a risk rating from the inception of the loan until the loan is paid off. The primary loan grades are as follows:

Loans rated pass: These are loans to borrowers with satisfactory financial support, repayment capacity, and credit strength. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Company’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts. 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 are expected to 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. ~~The substandard loan category includes loans that management has determined not to be impaired, as well as loans that are impaired.~~

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.

2219

~~Table of~~ ~~Contents~~

The ~~following table summarizes the credit quality indicators related to~~amortized cost basis of the Company’s loans by ~~class~~origination year, where origination is defined as the later of origination or renewal date, and credit quality indicator as of March 31, ~~2022:~~2023 was as follows (disclosure not comparative due to adoption of ASC 326 on January 1, 2023 – refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, for further details):


													Amortized Cost Basis by Origination Year
(in thousands)	(in thousands)	Pass		Watch		Substandard		Doubtful		Total		(in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Converted to Term		Total
Real estate:	Real estate:											Real estate:
Commercial	Commercial	$	1,751,563	$	8,087	$	901	$	—	$	1,760,551	Commercial
Pass												Pass	$	72,905	$	981,387	$	725,336	$	245,756	$	131,860	$	262,890	$	2,966	$	—	$	2,423,100
Watch												Watch	—		2,500		—		7,044		—		5,734		1,393		—		16,671
Substandard												Substandard	—		—		—		—		—		102		—		—		102
Doubtful												Doubtful	—		—		—		—		—		—		—		—		—
Total												Total	72,905		983,887		725,336		252,800		131,860		268,726		4,359		—		2,439,873
Commercial land and development	Commercial land and development	9,090		—		—		—		9,090		Commercial land and development
Pass												Pass	8,376		4,553		1,296		187		—		1,019		—		—		15,431
Watch												Watch	—		—		—		—		—		—		—		—		—
Substandard												Substandard	—		—		—		—		—		—		—		—		—
Doubtful												Doubtful	—		—		—		—		—		—		—		—		—
Total												Total	8,376		4,553		1,296		187		—		1,019		—		—		15,431
Commercial construction	Commercial construction	53,393		5,900		—		—		59,293		Commercial construction
Pass												Pass	757		32,079		47,673		11,725		—		—		—		—		92,234
Watch												Watch	—		—		—		—		—		5,900		—		—		5,900
Substandard												Substandard	—		—		—		—		—		—		—		—		—
Doubtful												Doubtful	—		—		—		—		—		—		—		—		—
Total												Total	757		32,079		47,673		11,725		—		5,900		—		—		98,134
Residential construction	Residential construction	5,540		—		—		—		5,540		Residential construction
Pass												Pass	—		3,209		6,201		—		—		—		—		—		9,410
Watch												Watch	—		—		—		—		—		—		—		—		—
Substandard												Substandard	—		—		—		—		—		—		—		—		—
Doubtful												Doubtful	—		—		—		—		—		—		—		—		—
Total												Total	—		3,209		6,201		—		—		—		—		—		9,410
Residential	Residential	28,744		—		177		—		28,921		Residential
Pass												Pass	628		4,048		6,399		2,336		2,299		6,605		1,407		—		23,722
Watch												Watch	—		—		—		—		—		—		—		—		—
Substandard												Substandard	—		—		—		—		—		175		—		—		175
Doubtful												Doubtful	—		—		—		—		—		—		—		—		—
Total												Total	628		4,048		6,399		2,336		2,299		6,780		1,407		—		23,897
Farmland	Farmland	49,903		—		—		—		49,903		Farmland
Pass												Pass	—		8,157		12,811		8,129		12,753		9,731		—		—		51,581
Watch												Watch	—		—		—		—		—		—		—		—		—
Substandard												Substandard	—		—		—		—		—		—		—		—		—
Doubtful												Doubtful	—		—		—		—		—		—		—		—		—
Total												Total	—		8,157		12,811		8,129		12,753		9,731		—		—		51,581
Commercial:	Commercial:											Commercial:
Secured	Secured	122,996		14		1,920		—		124,930		Secured
Unsecured		22,599		—		—		—		22,599
PPP		1,528		—		—		—		1,528
Consumer		19,032		—		12		—		19,044
Pass												Pass	4,196		52,454		25,275		17,792		12,243		15,668		44,634		—		172,262
Watch												Watch	—		610		8		38		13		906		—		—		1,575
Substandard												Substandard	—		—		—		—		56		62		—		—		118
Doubtful												Doubtful	—		—		—		—		—		—		—		—		—
Total	Total	$	2,064,388	$	14,001	$	3,010	$	—	$	2,081,399	Total	4,196		53,064		25,283		17,830		12,312		16,636		44,634		—		173,955

~~The following table summarizes the credit quality indicators related to the Company’s loans by class as of December 31, 2021:~~

(in thousands) Pass Watch Substandard Doubtful Total
Real estate:
Commercial $ 1,575,006 $ 1,970 $ 9,256 $ — $ 1,586,232
Commercial land and development 7,376 — — — 7,376
Commercial construction 48,288 5,926 — — 54,214
Residential construction 7,388 — — — 7,388
Residential 28,384 — 178 — 28,562
Farmland 54,805 — — — 54,805
Commercial:
Secured 135,131 751 1,180 — 137,062
Unsecured 21,136 — — — 21,136
PPP 22,124 — — — 22,124
Consumer 17,167 — — — 17,167
Total $ 1,916,805 $ 8,647 $ 10,614 $ — $ 1,936,066


	Amortized Cost Basis by Origination Year
(in thousands)	2023		2022		2021		2020		2019		Prior		Revolving Loans		Revolving Converted to Term		Total
Commercial:
Unsecured
Pass	4,243		3,362		4,560		4,965		2,680		67		4,953		—		24,830
Watch	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total	4,243		3,362		4,560		4,965		2,680		67		4,953		—		24,830
Consumer and other
Pass	6,155		15,636		10,563		—		—		360		—		—		32,714
Watch	—		—		—		—		—		—		—		—		—
Substandard	—		23		—		—		—		—		—		—		23
Doubtful	—		—		—		—		—		—		—		—		—
Total	6,155		15,659		10,563		—		—		360		—		—		32,737
Total
Pass	97,260		1,104,885		840,114		290,890		161,835		296,340		53,960		—		2,845,284
Watch	—		3,110		8		7,082		13		12,540		1,393		—		24,146
Substandard	—		23		—		—		56		339		—		—		418
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	97,260	$	1,108,018	$	840,122	$	297,972	$	161,904	$	309,219	$	55,353	$	—	$	2,869,848

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 ranging from monthly to annually depending on credit size, risk, and complexity. In addition, investor commercial real estate borrowers with loans exceeding a certain dollar threshold are usually required to submit rent rolls or property income statements annually. Management monitors construction loans monthly and reviews ~~other~~ consumer loans based on delinquency. Management also reviews loans graded “watch” or worse, regardless of loan type, no less than quarterly.

~~Table of~~ ~~Contents~~

The age analysis of past due loans by class as of March 31, ~~2022~~2023 consisted of the following:


(in thousands)	(in thousands)	Past Due										(in thousands)	Past Due
		30-89 Days		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable			30-89 Days		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable
Real estate:	Real estate:											Real estate:
Commercial	Commercial	$	—��	$	—	$	—	$	1,760,551	$	1,760,551	Commercial	$	—	$	—	$	—	$	2,439,873	$	2,439,873
Commercial land and development	Commercial land and development	—		—		—		9,090		9,090		Commercial land and development	—		—		—		15,431		15,431
Commercial construction	Commercial construction	—		—		—		59,293		59,293		Commercial construction	—		—		—		98,134		98,134
Residential construction	Residential construction	—		—		—		5,540		5,540		Residential construction	—		—		—		9,410		9,410
Residential	Residential	—		—		—		28,921		28,921		Residential	—		175		175		23,722		23,897
Farmland	Farmland	—		—		—		49,903		49,903		Farmland	—		—		—		51,581		51,581
Commercial:	Commercial:											Commercial:
Secured	Secured	422		—		422		124,508		124,930		Secured	46		—		46		173,909		173,955
Unsecured	Unsecured	—		—		—		22,599		22,599		Unsecured	—		—		—		24,830		24,830
PPP		—		—		—		1,528		1,528

Consumer and other	Consumer and other	127		—		127		18,917		19,044		Consumer and other	81		—		81		32,656		32,737
Total	Total	$	549	$	—	$	549	$	2,080,850	$	2,081,399	Total	$	127	$	175	$	302	$	2,869,546	$	2,869,848

There were no loans between 60-89 days past due nor any loans greater than 90 days past due and still accruing as of March 31, ~~2022.~~2023.

The age analysis of past due loans by class as of December 31, ~~2021~~2022 consisted of the following:


(in thousands)	(in thousands)	Past Due				Total Past Due		Current		Total Loans Receivable		(in thousands)			Past Due					Total Past Due		Current		Total Loans Receivable
		30-89 Days		Greater Than 90 Days									30-89 Days				Greater Than 90 Days
Real estate:	Real estate:													Real estate:
Commercial	Commercial	$	—	$	—	$	—	$	1,586,232	$	1,586,232	Commercial			$	—		$	—	$	—	$	2,392,053	$	2,392,053
Commercial land and development	Commercial land and development	—		—		—		7,376		7,376		Commercial land and development			—			—		—		7,447		7,447
Commercial construction	Commercial construction	—		—		—		54,214		54,214		Commercial construction			—			—		—		88,314		88,314
Residential construction	Residential construction	—		—		—		7,388		7,388		Residential construction			—			—		—		6,693		6,693
Residential	Residential	—		—		—		28,562		28,562		Residential			175			—		175		24,088		24,263
Farmland	Farmland	—		—		—		54,805		54,805		Farmland			—			—		—		52,446		52,446
Commercial:	Commercial:											Commercial:
Secured	Secured	—		—		—		137,062		137,062		Secured			—			—		—		165,609		165,609
Unsecured	Unsecured	—		—		—		21,136		21,136		Unsecured			—			—		—		25,488		25,488
PPP		—		—		—		22,124		22,124

Consumer and other	Consumer and other	334		—		334		16,833		17,167		Consumer and other			194			—		194		28,819		29,013
Total	Total	$	334	$	—	$	334	$	1,935,732	$	1,936,066	Total			$	369		$	—	$	369	$	2,790,957	$	2,791,326

There were no loans between 60-89 days past due nor any loans greater than 90 days past due and still accruing as of December 31, ~~2021.~~2022.

~~Table of~~ ~~Contents~~

~~Impaired Loans~~

~~Information related to impaired loans as of March 31, 2022 and December 31, 2021 consisted of the following:~~

March 31, 2022 December 31, 2021
(in thousands) Recorded
Investment Unpaid
Principal
Balance Related
Allowance Recorded
Investment Unpaid
Principal
Balance Related
Allowance
With no related allowance recorded:
Real estate:
Commercial $ 118 $ 118 $ — $ 122 $ 122 $ —
Residential 177 177 — 178 178 —
Commercial:
Secured 111 111 — 116 116 —
Consumer and other 12 12 — — — —
$ 418 $ 418 $ — $ 416 $ 416 $ —
With an allowance recorded:
Commercial:
Secured $ 922 $ 922 $ 639 $ 172 $ 172 $ 172
$ 922 $ 922 $ 639 $ 172 $ 172 $ 172
Total by category:
Real estate:
Commercial $ 118 $ 118 $ — $ 122 $ 122 $ —
Residential 177 177 — 178 178 —
Commercial:
Secured 1,033 1,033 639 288 288 172
Consumer and other 12 12 — — — —
Total impaired loans $ 1,340 $ 1,340 $ 639 $ 588 $ 588 $ 172

NoOne collateral dependent ~~loans were~~loan was in process of foreclosure at March 31, ~~2022 or~~2023: a commercial term loan secured by a single family residence with an unpaid principal balance of $175.0 thousand and no related allowance.

Non-accrual loans, segregated by class, were as follows as of March 31, 2023 and December 31, ~~2021.~~2022:

~~Table of~~ ~~Contents~~


(in thousands)	March 31, 2023		December 31, 2022
Real estate:
Commercial	$	102	$	106
Residential	175		175
Commercial:
Secured	118		123
Consumer and other	23		—
Total non-accrual loans	$	418	$	404

~~Information related to impaired~~No interest income was recognized on non-accrual loans ~~for~~in the three months ended March 31, ~~2022 and 2021 consisted of the following:~~

Three months ended
March 31, 2022 March 31, 2021
(in thousands) Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized
With no related allowance recorded:
Real estate:
Commercial $ 120 $ — $ 136 $ —
Residential 178 — 182 —
Commercial:
Secured 174 — 129 —
Consumer and other 25 — — —
$ 497 $ — $ 447 $ —
With an allowance recorded:
Commercial:
Secured $ 947 $ — $ — $ —
Consumer and other — — 36 —
$ 947 $ — $ 36 $ —
Total by category:
Real estate:
Commercial $ 120 $ — $ 136 $ —
Residential 178 — 182 —
Commercial:
Secured 1,121 — 129 —
Consumer and other 25 — 36 —
Total impaired loans $ 1,444 $ — $ 483 $ —

2023 or March 31, 2022. Non-accrual real estate loans ~~segregated by class, are as follows~~did not have an allowance for credit losses as of March 31, ~~2022 and December 31, 2021:~~

(in thousands) March 31,
2022 December 31,
2021
Real estate:
Commercial $ 118 $ 122
Residential 177 178
Commercial:
Secured 1,033 288
Total non-accrual loans $ 1,328 $ 588
2023. 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 ~~$18.3 thousand and $6.8~~$9.1 thousand for the three months ended March 31, ~~2022 and 2021, respectively.~~2023, compared to $18.3 thousand for the three months ended March 31, 2022.

2622

~~Table of~~ ~~Contents~~

~~Troubled Debt Restructuring~~

~~The Company’s loan portfolio may include certain loans that have been modified in a troubled debt restructuring (“TDR”), which are loans~~Allowance for which concessions in terms have been granted because of the borrowers’ financial difficulties. These concessions typically result from the Company’s loss mitigation activities and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are placed on non-accrual status at the time of restructure and may only be returned to accruing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months.

When a loan is modified, it is measured based upon the present value of future cash flows discounted at the effective interest rate of the original loan agreement or the fair value of collateral less selling costs if the loan is collateral dependent. If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off of the loan.

~~There were no loans outstanding with a TDR designation at March 31, 2022 or December 31, 2021.~~

Section 4013 of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as subsequently amended by the Consolidated Appropriations Act, 2021, provided TDR relief for borrowers affected by the COVID-19 pandemic. Specifically, the CARES Act, as amended, specified that to be eligible not to be considered a TDR, a loan modification must be (i) related to the COVID-19 pandemic; (ii) executed on a loan that was not more than 30 days past due as of December 31, 2020; and (iii) executed between March 1, 2020, and the earlier of (a) 60 days after the date of termination of the federal national emergency; or (b) January 1, 2022. In accordance with section 4013 of the CARES Act, the Company elected to apply the temporary accounting relief provisions for loan modifications that met certain criteria, which would otherwise be designated TDRs under existing GAAP. As of March 31, 2022 and December 31, 2021, 6 borrowing relationships with 6 loans totaling $12.2 million were continuing to benefit from payment relief. The Company accrues and recognizes interest income on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued interest is fully paid.

~~Table of~~ ~~Contents~~

Credit Losses

The following table discloses activity in the allowance for ~~loan~~credit losses for the ~~periods presented.~~three months ended March 31, 2023.

Real Estate Commercial
(in thousands) Comml Comml
Land and
Devel Comml
Const Resid
Const Resid Farm-
land Secured Unsec PPP Consu Unal Total
Three months ended March 31, 2022
Beginning balance $ 12,869 $ 50 $ 371 $ 50 $ 192 $ 645 $ 6,859 $ 207 $ — $ 889 $ 1,111 $ 23,243
Charge-offs — — — — — — (309) — — (67) — (376)
Recoveries — — — — — — 46 — — 41 — 87
Provision (recapture) 999 16 59 (10) 16 (34) 443 39 — 225 (803) 950
Ending balance $ 13,868 $ 66 $ 430 $ 40 $ 208 $ 611 $ 7,039 $ 246 $ — $ 1,088 $ 308 $ 23,904
Three months ended March 31, 2021
Beginning balance $ 9,358 $ 77 $ 821 $ 87 $ 220 $ 615 $ 9,476 $ 179 $ — $ 632 $ 724 $ 22,189
Charge-offs — — — — — — (255) — — — — (255)
Recoveries — — — — — — 87 — — 50 — 137
Provision (recapture) 861 3 (317) (30) (32) (37) (390) 16 — (82) 208 200
Ending balance $ 10,219 $ 80 $ 504 $ 57 $ 188 $ 578 $ 8,918 $ 195 $ — $ 600 $ 932 $ 22,271

~~Table of~~ ~~Contents~~


(in thousands)	Beginning Balance		Effect of Adoption of ASC 326		Charge-offs		Recoveries		Provision (Benefit)		Ending Balance
Real estate:
Commercial	$	19,216	$	7,606	$	—	$	—	$	24	$	26,846
Commercial land and development	54		74		—		—		96		224
Commercial construction	645		882		—		—		(104)		1,423
Residential construction	49		81		—		—		43		173
Residential	175		3		—		—		1		179
Farmland	644		(396)		—		—		(31)		217
Commercial:
Secured	7,098		(3,060)		(488)		92		573		4,215
Unsecured	116		37		—		—		(3)		150

Consumer and other	347		80		(384)		401		(44)		400
Unallocated	45		(45)		—		—		345		345
Total	$	28,389	$	5,262	$	(872)	$	493	$	900	$	34,172

The following table ~~summarizes the allocation of~~discloses activity in the allowance for ~~loan~~credit losses ~~by impairment methodology~~ for the ~~periods presented.~~three months ended March 31, 2022.

Real Estate Commercial
(in thousands) Comml Comml
Land and
Devel Comml
Const Resid
Const Resid Farm-
land Secured Unsec PPP Consu Unal Total
As of March 31, 2022:
Ending allowance balance allocated to:
Loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ 639 $ — $ — $ — $ — $ 639
Loans collectively evaluated for impairment 13,868 66 430 40 208 611 6,400 246 — 1,088 308 23,265
Ending balance $ 13,868 $ 66 $ 430 $ 40 $ 208 $ 611 $ 7,039 $ 246 $ — $ 1,088 $ 308 $ 23,904
Loans:
Ending balance individually evaluated for impairment $ 118 $ — $ — $ — $ 177 $ — $ 1,034 $ — $ — $ 12 $ — $ 1,341
Ending balance collectively evaluated for impairment 1,760,433 9,090 59,293 5,540 28,744 49,903 123,896 22,599 1,528 19,032 — 2,080,058
Ending balance $ 1,760,551 $ 9,090 $ 59,293 $ 5,540 $ 28,921 $ 49,903 $ 124,930 $ 22,599 $ 1,528 $ 19,044 $ — $ 2,081,399
As of December 31, 2021:
Ending allowance balance allocated to:
Loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ 172 $ — $ — $ — $ — $ 172
Loans collectively evaluated for impairment 12,869 50 371 50 192 645 6,687 207 — 889 1,111 23,071
Ending balance $ 12,869 $ 50 $ 371 $ 50 $ 192 $ 645 $ 6,859 $ 207 $ — $ 889 $ 1,111 $ 23,243
Loans:
Ending balance individually evaluated for impairment $ 122 $ — $ — $ — $ 178 $ — $ 288 $ — $ — $ — $ — $ 588
Ending balance collectively evaluated for impairment 1,586,110 7,376 54,214 7,388 28,384 54,805 136,774 21,136 22,124 17,167 — 1,935,478
Ending balance $ 1,586,232 $ 7,376 $ 54,214 $ 7,388 $ 28,562 $ 54,805 $ 137,062 $ 21,136 $ 22,124 $ 17,167 $ — $ 1,936,066


(in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (Benefit)		Ending Balance
Real estate:
Commercial	$	12,869	$	—	$	—	$	999	$	13,868
Commercial land and development	50		—		—		16		66
Commercial construction	371		—		—		59		430
Residential construction	50		—		—		(10)		40
Residential	192		—		—		16		208
Farmland	645		—		—		(34)		611
Commercial:
Secured	6,859		(309)		46		443		7,039
Unsecured	207		—		—		39		246

Consumer and other	889		(67)		41		225		1,088
Unallocated	1,111		—		—		(803)		308
Total	$	23,243	$	(376)	$	87	$	950	$	23,904

2923

~~Table~~

Unfunded Loan Commitment Reserves

Unfunded loan commitment reserves are included in “Interest payable and other liabilities” in the unaudited consolidated balance sheets. Provisions for the unfunded loan commitments are included in “Other operating expenses” in the unaudited consolidated statements of ~~Contents~~income.


	Three months ended
(in thousands)	March 31, 2023		March 31, 2022
Balance at January 1	$	125	$	102
Effect of adoption of ASC 326	1,092		—



Balance at March 31	$	1,217	$	102

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 ~~$1.2~~$1.7 billion and ~~$941.2 million~~$1.6 billion at March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. In addition, the Company pledges eligible tenants in common loans, which totaled ~~$29.7~~$46.0 million and ~~$33.4~~$41.9 million at March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively, to secure its borrowing capacity with the Federal Reserve Bank of San Francisco. See Note 8,6, Long Term Debt and Other Borrowings, for further discussion of these borrowings.

~~Related Party Loans~~

The Company has, and expects to have in the future, banking transactions in the ordinary course of its business with directors, officers, principal shareholders, and their businesses or associates. 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. Loan commitment to insiders and affiliates, net of cash collateral, totaled $8.9 million at March 31, 2022 and $9.7 million at December 31, 2021.

Note 6:5: Interest-Bearing Deposits

Interest-bearing deposits consisted of the following as of March 31, ~~2022~~2023 and December 31, ~~2021:~~2022:

(in thousands) March 31,
2022 December 31,
2021
Savings $ 92,370 $ 88,536
Money market 919,281 912,558
Interest checking 371,122 278,406
Time, $250 or more 152,877 77,868
Other time 26,157 26,404
Total interest-bearing deposits $ 1,561,807 $ 1,383,772


(in thousands)	March 31, 2023		December 31, 2022
Interest-bearing transaction accounts	$	273,703	$	240,131
Savings accounts	143,110		154,581
Money market accounts	1,294,350		1,073,532
Time accounts, $250 or more	229,040		198,159
Other time accounts	143,530		144,355
Total interest-bearing deposits	$	2,083,733	$	1,810,758

Time deposits totaled ~~$179.0~~$372.6 million and ~~$104.3~~$342.5 million as of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. As of March 31, ~~2022,~~2023, scheduled maturities of time deposits for the next five years were as follows:


(in thousands)	(in thousands)			(in thousands)
2022		$	177,996
2023	2023	599		2023	$	331,773
2024	2024	438		2024	38,560
2025	2025	—		2025	916
2026	2026	1		2026	1,321
2027				2027	—
Total time deposits	Total time deposits	$	179,034	Total time deposits	$	372,570

3024

~~Table of~~ ~~Contents~~

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 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. ~~The following table shows the composition of network deposits for March 31, 2022 and December 31, 2021.~~ There were no one-way deposits at March 31, ~~2022~~2023 and December 31, ~~2021. The~~2022. The composition of network deposits as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 was as follows:

(in thousands) March 31,
2022 December 31,
2021
CDARS $ 22,160 $ 22,411
ICS 327,384 307,636
Total network deposits $ 349,544 $ 330,047

~~At March 31, 2022 and December 31, 2021, deposits from related parties (directors, executive officers, and principal shareholders) totaled $39.6 million and $32.4 million, respectively.~~


(in thousands)	March 31, 2023		December 31, 2022
CDARS	$	13,046	$	13,248
ICS	512,716		272,719
Total network deposits	$	525,762	$	285,967

Interest expense recognized on interest-bearing deposits for periods ended March 31, ~~2022,~~2023 and ~~2021~~2022 consisted of the following:

Three months ended
(in thousands) March 31,
2022 March 31,
2021
Savings $ 25 $ 15
Money market 367 582
Interest checking 70 38
Time, $250 or more 59 7
Other time 24 57
Total interest expense on interest-bearing deposits $ 545 $ 699


	Three months ended
(in thousands)	March 31, 2023		March 31, 2022
Interest-bearing transaction accounts	$	430	$	70
Savings accounts	545		25
Money market accounts	5,439		367
Time accounts, $250 or more	1,963		59
Other time accounts	1,001		24
Total interest expense on interest-bearing deposits	$	9,378	$	545

~~Note 7: Leases~~

~~The Company leases office space for its banking operations under non-cancelable operating leases of various terms. The leases expire at dates through 2032 and provide for renewal options from~~ ~~zero~~ 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. One of the leases provides for increases in future minimum annual rental payments based on defined increases in the Consumer Price Index, while the remaining leases include pre-defined 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, 2022.~~

The Company leases its Sacramento loan production office from a partnership comprised of some of the Company’s shareholders and certain members of its board of directors. The Sacramento loan production office lease extends through April 2023. Additionally, the Company leased its Natomas branch from the same partnership of related parties until July 13, 2021, at which time ownership of the property was transferred to an unrelated third-party landlord. Rent expense paid to the partnership under these leases was insignificant for the three months ended March 31, 2022 and $0.1 million for the three months ended March 31, 2021.

~~Table of~~ ~~Contents~~

~~The Company adopted ASU 2016-02,~~ ~~Leases(Topic 842)~~ as of January 1, 2022, which requires the Company to record an ROUA on 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 is also required to record a lease liability on 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 were 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, such as changes in the Consumer Price Index, are included as variable lease costs. Additionally, expected variable payments for common area maintenance, taxes, and insurance were unknown and not determinable at lease commencement and, therefore, were not included in the determination of the Company’s ROUA or 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. For operating leases existing prior to January 1, 2022, the rate for the remaining lease term as of January 1, 2022 was used. 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.

~~The following table presents the components of lease expense for the three months ended March 31, 2022:~~


~~(in thousands)~~	~~Three months ended~~ ~~March 31, 2022~~
~~Operating lease cost~~	$	~~285~~
~~Short-term lease cost~~	—
~~Variable lease cost~~	—
~~Sublease income~~	~~(5)~~
~~Total lease cost~~	$	~~280~~

Prior to the adoption of ASU 2016-02, rent expense under operating leases was $0.3 million during the three months ended March 31, 2021. Rent expense was partially offset by rent income of $5.2 thousand during the three months ended March 31, 2021.

~~The following table presents the weighted average operating lease term and discount rate at March 31, 2022:~~


	~~March 31, 2022~~
~~Weighted average remaining lease term (in years)~~	~~5.87 years~~
~~Weighted average discount rate~~	~~2.14~~	%

~~Table of~~ ~~Contents~~

~~The following table shows the future expected operating lease payments under the Company's operating lease agreements as of March 31, 2022:~~

(in thousands)
2022 $ 803
2023 1,009
2024 984
2025 767
2026 665
Thereafter 1,107
Total expected operating lease payments 5,335
Discount for present value of expected cash flows (348)
Lease liability at March 31, 2022 $ 4,987

Note 8:6: Long Term Debt and Other Borrowings

Subordinated notes: On ~~November 8, 2019,~~August 17, 2022, the Company completed a private placement of ~~$3.8~~$75.0 million of fixed-to-floating rate subordinated notes to certain qualified ~~investors. All~~investors, of ~~the debt~~which $19.3 million was purchased by ~~four~~ existing or former members of the board of directors orand their affiliates. The notes ~~were~~will be used for capital management and general corporate purposes, ~~capital management, and to support future growth.~~including, without limitation, the redemption of existing subordinated notes. The subordinated notes have a maturity date of September ~~15, 2027~~1, 2032 and bear interest, payable semi-annually, at the rate of ~~5.50%~~6.00% per annum until September ~~15, 2022.~~1, 2027. On that date, the interest rate will be adjusted to float at a rate equal to the three-month ~~LIBOR~~Term SOFR plus ~~354.4~~329.0 basis points ~~(4.38%~~(8.18% as of March 31, ~~2022)~~2023) until maturity. The notes include a right of prepayment, on or after ~~September 15, 2022~~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.

On September 28, 2017, the Company completed a private placement of $25.0 million of fixed-to-floating rate subordinated notes to certain qualified investors, of which $8.0 million is owned by an entity that is controlled by a member of the board of directors and three principal shareholders. The notes were used for general corporate purposes, capital management, and to support future growth. The subordinated notes have a maturity date of September 15, 2027 and bear interest, payable semi-annually, at the rate of 6.00% per annum until September 15, 2022. On that date, the interest rate will be adjusted to float at a rate equal to the three-month LIBOR plus 404.4 basis points (4.88% as of March 31, 2022) until maturity. The notes include a right of prepayment, on or after September 15, 2022 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 ~~$0.6~~$1.5 million, of which ~~$0.3~~$0.1 million has been amortized ~~through~~as of March 31, ~~2022.~~2023. The Company reflects debt issuance costs as a direct deduction from the face of the note. The debt issuance costs are amortized into interest expense through the maturity period. At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company’s subordinated debt outstanding was ~~$28.4 million.~~$73.6 million and $73.6 million, respectively.

Other ~~borrowings:~~borrowings: In 2005, and through an amendment in 2014, the Company entered into an agreement with the FHLB which granted the FHLB a blanket lien on all loans receivable (except for construction and agricultural loans) as collateral for a borrowing line. Based on the dollar volume of qualifying loan collateral, the Company had a total financing availability of ~~$855.9 million~~$1.1 billion at March 31, ~~2022~~2023 and ~~$696.3 million~~$1.0 billion at December 31, ~~2021.~~2022. At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had no$120.0 million and $100.0 million of outstanding ~~borrowings.~~borrowings, respectively. As of March 31, ~~2022~~ 2023

and December 31, ~~2021,~~2022, the Company had letters of credit (“LCs”) issued on its behalf totaling ~~$495.5~~$666.5 million and ~~$420.5~~$686.5 million, respectively, as discussed below.

At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, LCs totaling ~~$155.5~~$186.5 million and ~~$80.5~~$206.5 million, respectively, were pledged to secure State of California deposits, and ~~$340.0~~LCs totaling $480.0 million and $480.0 million, respectively, were pledged to secure local agency deposits. The LCs issued reduced the Company’s available borrowing capacity to ~~$360.4~~$278.1 million and ~~$275.8~~$216.3 million as of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

At March 31, 2023 and December 31, ~~2021,~~2022, the Company had 5seven unsecured federal funds lines of credit totaling ~~$150.0~~$190.0 million with 5 of its correspondent banks, respectively. During the quarter ended March 31, 2022, the borrowing capacity of 1 of the Company's existing unsecured federal funds lines of credit was increased by $10.0 million. As a result, at March 31, 2022, the Company had 5 unsecured federal funds lines of credit totaling $160.0 million with 5seven of its correspondent banks, respectively. There were no amounts outstanding at March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.

At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the Company had the ability to borrow from the Federal Reserve Discount Window. At March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, the borrowing capacity under this arrangement was ~~$18.0~~$76.7 million and ~~$17.0~~$21.9 million, respectively. There were no amounts outstanding at March 31, ~~2022~~2023 and December 31, ~~2021.~~2022. The borrowing line is secured by liens on the Company’s construction and agricultural loan ~~portfolios.~~portfolios and certain available-for-sale securities.

~~Note 9: Income Taxes~~

The Company terminated its status as a Subchapter S Corporation as of May 5, 2021, in connection with the 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. As such, any periods prior to May 5, 2021 will only reflect a state income tax rate and corresponding tax expense. Pro forma net income is calculated by adding back S Corporation tax to net income and using a combined C Corporation statutory tax rate for federal and state income taxes of 29.56%. For the 2022 period presented below, the tax rate reflects the actual effective tax rate for the three months ended March 31, 2022, as the Company was a C Corporation for the entire period. The following reconciliation table provides a detailed calculation of pro forma provision for income taxes:

For the three months ended
(in thousands) March 31,
2022 March 31,
2021
Net income before provision for income taxes $ 13,522 $ 10,660
Effective/pro forma tax rate 27.07 % 29.56 %
Actual/pro forma provision for income taxes $ 3,660 $ 3,151

The provision for income tax for the three months ended March 31, 2022 and 2021 differs from the statutory federal rate of 21.00% due to the following items, which relate primarily to the Company’s conversion from an S Corporation to a C Corporation during the second quarter of 2021:

For the three months ended
(in thousands) March 31,
2022 March 31,
2021
Statutory U.S. federal income tax $ 2,840 $ 2,239
Increase (decrease) resulting from:
Benefit of S Corporation status — (2,239)
State taxes 1,157 382
Other (337) —
Provision for income taxes $ 3,660 $ 382

For the three months ended March 31, 2022, the Company’s federal and state statutory tax rate, net of federal benefit, of 29.56%, differed from the statutory California tax rate of 3.50% used for the three months ended March 31, 2021 due to the termination of the Company's Subchapter S Corporation status as of May 5, 2021.

Note ~~10:~~7: Shareholders’ Equity

(a) EPS

Basic EPS is net income divided by the weighted average number of common shares outstanding during the period less average unvested restricted stock awards (“RSAs”). Diluted EPS includes the dilutive effect of additional potential common shares related to unvested RSAs using the treasury stock method. The Company has two forms of outstanding common stock: common stock and unvested RSAs. Holders of unvested RSAs receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings, and therefore the RSAs are considered participating securities. However, under the two-class method, the difference in EPS is not significant for these participating securities.


	Three months ended
(in thousands, except share count and earnings per common share)	March 31, 2023		March 31, 2022
Net income	$	13,161	$	9,862
Weighted average basic common shares outstanding	17,150,174		17,102,508
Add: Dilutive effects of assumed vesting of restricted stock	44,710		62,011
Weighted average diluted common shares outstanding	17,194,884		17,164,519
Earnings per common share:
Basic EPS	$	0.77	$	0.58
Diluted EPS	$	0.77	$	0.58

The Company did not have any anti-dilutive shares at March 31, 2023 or March 31, 2022.

(b) Dividends

On January ~~20, 2022,~~19, 2023, the board of directors declared a $0.15 per common share dividend, totaling $2.6 million. On March 17, 2022, based on the filing of the Company's final S Corporation tax return, the board of directors declared a $0.45 per common share dividend to shareholders of record as of May 3, 2021, totaling $4.9 million, which was the remaining balance of the Company's accumulated adjustments account, and is described in further detail in the Company’s Proxy Statement filed with the SEC and mailed to shareholders on April 6, 2022.

~~Table of~~ ~~Contents~~

The Company’s stock-based compensation consists of RSAs granted under its historical stock-based incentive arrangement (the “Historical Incentive Plan”) and RSAs issued under the Five Star Bancorp 2021 Equity Incentive Plan (the ~~"Equity~~“Equity Incentive ~~Plan"~~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 ~~loan~~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 employees, officers, executives, and non-employee directors. Shares granted to non-employee directors vested immediately upon grant, while shares granted to 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 executives and directors, which vest annually over three years and ~~monthly~~ over one year, respectively. All RSAs were granted at the fair value of common stock at the time of the award. The RSAs are considered fixed awards as the number of shares and fair value are known at the date of grant and the fair value at the grant date is amortized over the service period.

The Company granted 22,201 and 9,454 restricted shares during the three months ended March 31, 2022 and 2021, respectively. In addition, 850 and 2,722 restricted shares were forfeited during the three months ended March 31, 2022 and 2021, respectively. Non-cash stock compensation expense recognized for the three months ended March 31, 2023 and 2022 ~~and 2021~~ was ~~$0.3~~$0.2 million and ~~$0.1~~$0.3 million, respectively.

At March 31, ~~2022~~2023 and ~~2021, respectively,~~2022, there were ~~138,856~~108,363 and ~~6,296~~138,856 unvested restricted ~~shares.~~shares, respectively. As of March 31, ~~2022,~~2023, there was approximately ~~$2.5~~$1.9 million of unrecognized compensation expense related to the ~~138,856~~108,363 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 the weighted average term remaining on the unvested restricted shares of 3.05 years as of March 31, 2023. The impact of tax benefits for dividends paid on unvested restricted stock on the Company’s unaudited consolidated statements of income for the three months ended March 31, ~~2022~~2023 and ~~2021~~2022 was immaterial.

The following table summarizes ~~information about unvested~~activity related to restricted ~~shares:~~shares for the periods indicated:


		For the three months ended March 31,							For the three months ended March 31,
		2022			2021				2023			2022
		Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value			Shares	Weighted Average Grant Date Fair Value		Shares	Weighted Average Grant Date Fair Value
Beginning of the period balance	Beginning of the period balance	127,751	$	19.95	11,568	$	21.25	Beginning of the period balance	96,826	$	20.34	127,751	$	19.95
Shares granted	Shares granted	22,201	28.50		9,454	18.00		Shares granted	16,978	28.52		22,201	28.50
Shares vested	Shares vested	(10,246)	24.85		(12,004)	20.45		Shares vested	(5,441)	24.28		(10,246)	24.85
Shares forfeited	Shares forfeited	(850)	20.00		(2,722)	18.88		Shares forfeited	—	—		(850)	20.00
End of the period balance	End of the period balance	138,856	$	20.95	6,296	$	18.91	End of the period balance	108,363	$	21.43	138,856	$	20.95

Note ~~11:~~8: Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Substantially all of these commitments are at variable interest rates, based on an index, and have fixed expiration dates.

~~Table of~~ ~~Contents~~

Off-balance sheet risk to loan loss exists up to the face amount of these instruments, although material losses are not anticipated. The Company uses the same credit policies in making commitments to originate loans and lines of credit as it does for on-balance sheet instruments, including obtaining collateral at exercise of the commitment. The contractual

amounts of unfunded loan commitments and standby letters of credit not reflected in the unaudited consolidated balance sheets ~~are~~were as follows:


(in thousands)	(in thousands)	March 31, 2022		December 31, 2021		(in thousands)	March 31, 2023		December 31, 2022
Commercial lines of credit	Commercial lines of credit	$	116,857	$	137,354	Commercial lines of credit	$	155,762	$	147,021
Undisbursed commercial real estate loans						Undisbursed commercial real estate loans	82,286		79,121
Undisbursed construction loans	Undisbursed construction loans	48,918		46,584		Undisbursed construction loans	70,599		80,726
Undisbursed commercial real estate loans		65,592		47,793
Agricultural lines of credit	Agricultural lines of credit	11,608		9,955		Agricultural lines of credit	14,449		10,399
Undisbursed residential real estate loans						Undisbursed residential real estate loans	9,300		8,945
Undisbursed agricultural real estate loans	Undisbursed agricultural real estate loans	3,428		3,427		Undisbursed agricultural real estate loans	946		1,068
Other	Other	3,040		3,764		Other	1,734		1,868
Total commitments and standby letters of credit	Total commitments and standby letters of credit	$	249,443	$	248,877	Total commitments and standby letters of credit	$	335,076	$	329,148

The Company records an allowance for ~~loan~~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 ~~loan~~credit losses on unfunded commitments totaled ~~$0.1~~$1.2 million as of March 31, ~~2022~~2023 and $0.1 million as of December 31, ~~2021,~~2022, which is recorded in ~~interest~~“Interest payable and other ~~liabilities~~liabilities” in the unaudited consolidated balance sheets.

Concentrations of credit risk: The Company grants real estate mortgage, real estate construction, commercial, and consumer loans to customers primarily in Northern California. Although the Company has a diversified loan portfolio, a substantial portion is secured by commercial and residential real estate.

In management’s judgment, a concentration of loans exists in real estate related loans, which represented approximately ~~91.98%~~91.61% of the Company’s ~~loans held for investment~~loan portfolio at March 31, ~~2022~~2023 and ~~89.87%~~91.84% of the Company’s ~~loans held for investment~~loan portfolio at December 31, ~~2021.~~2022. Although management believes such concentrations have no more than the normal risk of collectability, a substantial decline in the economy in general, or a decline in real estate values in the Company’s primary market areas in particular, could have an adverse impact on the collectability of these loans. Personal and business incomes represent the primary source of repayment for the majority of these loans.

Deposit concentrations: At March 31, ~~2022,~~2023, the Company had 6684 deposit relationships that exceeded $5.0 million each, totaling ~~$1.2~~$1.9 billion, or approximately ~~46.75%~~64.32% of total deposits. The Company’s largest single deposit relationship at March 31, ~~2022~~2023 totaled ~~$182.4~~$220.9 million, or approximately ~~7.29%~~7.56% of total deposits. Management maintains the Company’s liquidity position and lines of credit with correspondent banks to mitigate the risk of large withdrawals by this group of large depositors.

Contingencies: The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company.

Correspondent banking agreements: The Company maintains funds on deposit with other FDIC-insured financial institutions under correspondent banking agreements. Uninsured deposits through these agreements totaled ~~$77.3~~$22.0 million and ~~$147.2~~$16.2 million at March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

Litigation Matters

The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to such actions will not materially affect the consolidated financial position or results of operations of the Company.

Note ~~12:~~9: Subsequent Events

On April ~~21, 2022,~~20, 2023, the ~~board~~Board of ~~directors declared~~Directors of the Company authorized a ~~$0.15~~cash dividend of $0.20 per common share, ~~dividend, totaling $2.6 million.~~payable on May 15, 2023 to shareholders of record on May 8, 2023.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion presents management’s perspective on our results of operations and financial condition on a consolidated basis. However, because we conduct all of our material business operations through our bank subsidiary, Five Star Bank (the ~~"Bank"~~“Bank”), the discussion and analysis relates to activities primarily conducted by the Bank.

Management’s discussion of the financial condition and results of operations, which is unaudited, should be read in conjunction with the related unaudited consolidated financial statements and accompanying notes in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and accompanying notes included in the ~~Company’s~~2022 Annual Report on Form 10-K, ~~for the year ended December 31, 2021,~~ which was filed with the ~~U.S. Securities and Exchange Commission (“SEC”)~~SEC on February ~~25, 2021.~~24, 2023. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

Unless otherwise indicated, references in this report to “we,” “our,” “us,” “the Company,” or “Bancorp” refer to Five Star Bancorp and our consolidated subsidiary. All references to “the Bank” refer to Five Star Bank, our wholly owned subsidiary.

Cautionary Note Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of our beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. ~~In addition to containing historical information, this discussion contains~~We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that ~~involve~~are subject to change based on factors which are, in many instances, beyond our control. Such forward-looking statements are based on various assumptions (some of which may be beyond our control) and are subject to risks and uncertainties, which change over time, and ~~assumptions that~~other factors which could cause actual results to differ materially from ~~management’s expectations. Factors~~those currently anticipated. Such risks and uncertainties include, but are not limited to:

•risks related to the concentration of our business in California, and specifically within Northern California, including risks associated with any downturn in the real estate sector;

•changes in market interest rates that ~~could cause~~affect the pricing of our loans and deposits, our net interest income, and our borrowers’ ability to repay loans;

•changes in the U.S. economy, including an economic slowdown, inflation, deflation, housing prices, employment levels, rate of growth, and general business conditions, including uncertainty regarding the federal government's debt limit or a prolonged shutdown of the federal government;

•uncertain market conditions and economic trends nationally, regionally, and particularly in Northern California and California;

•the impacts related to or resulting from recent bank failures and other economic and industry volatility, including potential increased regulatory requirements and costs and potential impacts to macroeconomic conditions;

•the effects of increased competition from a wide variety of local, regional, national, and other providers of financial and investment services;

•the risks associated with our loan portfolios, and specifically with our commercial real estate loans;

•our ability to maintain adequate liquidity and to maintain capital necessary to fund our growth strategy and operations and to satisfy minimum regulatory capital levels;

•risks related to our strategic focus on lending to small to medium-sized businesses;

•the sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses and the value of loan collateral and securities;

•our level of nonperforming assets and the costs associated with resolving problem loans, if any, and complying with government-imposed foreclosure moratoriums;

•our ability to comply with various governmental and regulatory requirements applicable to financial institutions, including supervisory actions by federal and state banking agencies;

•governmental monetary and fiscal policies, including the policies of the Federal Reserve;

•risks associated with unauthorized access, cyber-crime, and other threats to data security;

•our ability to implement, maintain, and improve effective internal controls;

•our ability to attract and retain executive officers and key employees and their customer and community relationships;

•the occurrence or impact of climate change or natural or man-made disasters or calamities, such ~~differences~~as wildfires, droughts, and earthquakes; and

•other factors that are discussed in the section entitled ~~“Cautionary Note Regarding Forward-Looking Statements” herein~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” ~~in the Company's~~of our 2022 Annual Report on Form 10-K, and other filings we may make with the SEC, copies of which are available from us at no charge. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us. If one or more of the ~~year ended December 31, 2021.~~factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We ~~assume no obligation~~disclaim any duty to revise or update ~~any of these~~the forward-looking statements, whether written or oral, to reflect actual results or changes in the factors affecting the forward-looking statements, except ~~to the extent~~as specifically required by law.

Unless otherwise indicated, references in this report to “we”, “our”, “us”, “the Company”, or “Bancorp” refer to Five Star Bancorp and our consolidated subsidiary. All references to “the Bank” refer to Five Star Bank, our wholly owned subsidiary.

Company Overview

Headquartered in the greater Sacramento metropolitan area of California, Five Star Bancorp is a bank holding company that operates through its wholly owned subsidiary, Five Star Bank, a California state-chartered non-member bank. We provide a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through seven branch offices and ~~two~~one loan production ~~offices.~~office. Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy. We are dedicated to serving real estate, agricultural, faith-based, and small to medium-sized enterprises. We aim to consistently deliver value that meets or exceeds the expectations of our shareholders, customers, employees, business partners, and community. We refer to our mission as “purpose-driven and integrity-centered banking.” At March 31, ~~2022,~~2023, we had total assets of ~~$2.8~~$3.4 billion, total loans held for investment, net of allowance for ~~loan~~credit losses, of ~~$2.1~~$2.8 billion, and total deposits of ~~$2.5~~$2.9 billion.

~~Table of~~ ~~Contents~~

~~Factors Affecting Comparability of Financial Results~~

~~S Corporation Status~~

Beginning at our inception, we elected to be taxed for U.S. federal income tax purposes as an S Corporation. In conjunction with our initial public offering (“IPO”), we filed consents from the requisite amount of our shareholders to revoke our S Corporation election with the Internal Revenue Service (“IRS”), resulting in the commencement of our taxation as a C Corporation for U.S. federal and California state income tax purposes in the second quarter of fiscal year 2021. Prior to such revocation, our earnings were not subject to, and we did not pay, U.S. federal income tax, and we were not required to make any provision or recognize any liability for U.S. federal income tax in our consolidated financial statements. While we were not subject to, and did not pay, U.S. federal income tax, we were subject to, and paid, California S Corporation income tax at a current rate of 3.50%. Upon the termination of our status as an S Corporation, we commenced paying U.S. federal income tax and a higher California state income tax on our taxable earnings for each year (including the short year beginning on the date our status as an S Corporation terminated), and our consolidated financial statements reflect a provision for U.S. federal income tax and a higher California state income tax from that date forward. As a result of this change, the net income and earnings per share (“EPS”) data presented in our historical financial statements for periods prior to the termination of our S Corporation status, and the other related financial information set forth in this filing, which (unless otherwise specified) do not include any provision for U.S. federal income tax or the higher California state income tax rate, will not be comparable with our net income and EPS in periods after we commenced being taxed as a C Corporation. As a C Corporation, our net income is calculated by including a provision for U.S. federal income tax and a higher California state income tax rate at a combined statutory rate of 29.56%.

The termination of our status as an S Corporation may also affect our financial condition and cash flows. Historically, we made quarterly cash distributions to our shareholders in amounts estimated by us to be sufficient for them to pay estimated individual U.S. federal and California state income tax liabilities resulting from our taxable income that was “passed through” to them. However, these distributions were not consistent, as sometimes the distributions were less than or in excess of the shareholders’ estimated U.S. federal and California state income tax liabilities resulting from their ownership of our stock. In addition, these estimates were based on individual income tax rates, which may differ from the rates imposed on the income of C Corporations. As a C Corporation, no income is “passed through” to any shareholders, but, as noted above, we commenced paying U.S. federal income tax and a higher California state income tax. However, in the event of an adjustment to our reported taxable income for periods prior to the termination of our S Corporation status, it is possible that our pre-IPO shareholders would be liable for additional income taxes for those prior periods. Pursuant to the Tax Sharing Agreement we entered into with such shareholders, upon our filing any tax return (amended or otherwise), in the event of any restatement of our taxable income or pursuant to a determination by, or a settlement with, a taxing authority, for any period during which we were an S Corporation, depending on the nature of the adjustment, we may be required to make a payment to such shareholders, who accepted distribution of the estimated balance of our federal accumulated adjustments account of $31.9 million under the Tax Sharing Agreement, in an amount equal to such shareholders’ incremental tax liability (including interest and penalties). In addition, the Tax Sharing Agreement provides that we will indemnify such shareholders with respect to unpaid income tax liabilities (including interest and penalties) to the extent that such unpaid income tax liabilities are attributable to an adjustment to our taxable income for any period after our S Corporation status terminated. The amounts that we have historically distributed to our shareholders may not be indicative of the amount of U.S. federal and California state income tax that we will be required to pay going forward. Depending on our effective tax rate and our future dividend rate, our future cash flows and financial condition could be positively or adversely affected compared to our historical cash flows and financial condition.

Furthermore, deferred tax assets and liabilities will be recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of our existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C Corporation was recognized in net income in the three months ended June 30, 2021.

Refer to the highlights of the financial results table within the section entitled “—Executive Summary” below for the impact of being taxed as a C Corporation on our net income, EPS, and various other financial measures for the three months ended March 31, 2022 and 2021.

~~Table of~~ ~~Contents~~

~~Public Company Costs~~

Following the completion of our IPO, we began to, and will continue to, incur additional costs associated with operating as a public company. These costs include additional personnel, legal, consulting, regulatory, insurance, accounting, investor relations, and other expenses that we did not incur as a private company.

The Sarbanes-Oxley Act, as well as rules adopted by the SEC, the Federal Deposit Insurance Corporation (“FDIC”), and national securities exchanges, require public companies to implement specified corporate governance practices that were inapplicable to us as a private company. These additional rules and regulations have increased, and are expected to continue to increase, our legal, regulatory, and financial compliance costs and will make some activities more time-consuming and costly.

Critical Accounting Estimates

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Quarterly Reports on Form 10-Q and, therefore, do not include all footnotes as would be necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity, and cash flows in conformity with ~~accounting principles generally accepted in the United States of America (“GAAP”)~~GAAP as contained within the ~~Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”)~~FASB's ASC and the rules and regulations of the SEC, including the instructions to Regulation S-X. However, these interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as filed in our 2022 Annual Report on Form 10-K ~~as of and for the year ended December 31, 2021,~~ and the notes thereto.

Our most significant accounting policies and our critical accounting estimates are described in greater detail in Note 1, Basis of Presentation, in our audited consolidated financial statements and Item 7. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates included in the 2022 Annual Report on Form ~~10-K for the year ended December 31, 2021.~~10-K. We have identified accounting policies and estimates ~~discussed below,~~ that, due to the difficult, subjective, or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our unaudited consolidated financial statements to those judgments and assumptions, are critical to an understanding of our consolidated financial condition and results of operations. We believe that the judgments, estimates, and assumptions used in the

preparation of our financial statements are reasonable and appropriate, based on the information available at the time they were made. However, actual results may differ from those estimates, and these differences may be material. There have been no significant changes concerning our critical accounting estimates as described in our 2022 Annual Report on Form 10-K.

Pursuant to the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), as an emerging growth company, we can elect to opt out of the extended transition period for adopting any new or revised accounting standards. We have elected not to opt out of the extended transition period, which means that when a standard is issued or revised and it has different application dates for public and private companies, we may adopt the standard on the application date for private companies.

We have elected to take advantage of the scaled disclosures and other relief under the JOBS Act, and we may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us under the JOBS Act, so long as we qualify as an emerging growth company.

3830

~~Table of~~ ~~Contents~~

Executive Summary

Net income for the three months ended March 31, ~~2022~~2023 totaled ~~$9.9~~$13.2 million, compared to net income of ~~$10.3~~$9.9 million for the three months ended March 31, ~~2021.~~2022.

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

•~~Assets.~~ Total assets were $2.8 billion at March 31, 2022, representing a $221.5 million, or 8.66%, increase compared to $2.6 billion at December 31, 2021. The primary drivers of this increase are discussed below.

•~~Loans.~~ Total loans held for investment were $2.1 billion at March 31, 2022, compared to $1.9 billion at December 31, 2021, an increase of $145.7 million, or 7.53%. The increase was primarily attributed to a $174.3 million net increase in commercial real estate loans, partially offset by a $20.6 million net decrease in Paycheck Protection Program (“PPP”) loans, and a $12.1 million net decrease in commercial secured loans.

•~~PPP Loans.~~ As of March 31, 2022, there were five PPP loans outstanding totaling $1.5 million. Two of these PPP loans, or 40.00% of total PPP loans as of March 31, 2022, totaling $0.1 million were less than or equal to $0.15 million and had access to streamlined forgiveness processing. As of March 31, 2022, 1,424 PPP loan forgiveness applications had been submitted to the SBA and forgiveness payments had been received on 1,422 of these PPP loans, totaling $353.2 million in principal and interest. We expect full forgiveness, or repayment by the borrower, on all PPP loans to be completed in the near future.

•~~COVID-19 Deferments.~~ As of March 31, 2022, six borrowing relationships with six loans totaling $12.2 million were on COVID-19 deferment. All loans that ended COVID-19 deferments in the quarter ended March 31, 2022 returned to their contractual payment structures prior to the COVID-19 pandemic with no risk rating downgrades to classified nor any troubled debt restructuring ("TDR"), and we anticipate that the remaining loans on COVID-19 deferment will return to their pre-COVID-19 contractual payment statuses after their COVID-19 deferments end.

•~~Non-accrual Loans.~~ Credit quality remains strong, with non-accrual loans representing $1.3 million, or 0.06% of total loans held for investment, at March 31, 2022, compared to $0.6 million, or 0.03% of total loans held for investment, at December 31, 2021. The ratio of allowance for loan losses to total loans held for investment, or total loans at period end, was 1.15% at March 31, 2022 and 1.20% at December 31, 2021.

•~~Return on Average Assets (“ROAA”) and Return on Average Equity (“ROAE”).~~ ROAA and ROAE were 1.53% and 17.07%, respectively, for the quarter ended March 31, 2022, as compared to ROAA of 2.05% and ROAE of 32.08% for the quarter ended March 31, 2021. Pro forma ROAA and ROAE for the quarter ended March 31, 2022 were equal to actual ROAA and ROAE of 1.53% and 17.07%, respectively, as compared to pro forma ROAA of 1.49% and ROAE of 23.67% for the quarter ended March 31, 2021.

•~~Net Interest Margin.~~ Net interest margin was 3.60% and 3.83% for the three months ended March 31, 2022 and 2021, respectively. The fluctuations period-over-period were primarily attributable to decreases in average loan yields and increases in the Company’s interest-earning assets.

•~~Efficiency Ratio.~~ Efficiency ratio was 39.82% for the three months ended March 31, 2022, down from 44.77% for the corresponding period of 2021. The decrease was primarily attributable to an increase in net interest income period-over-period.

•Deposits. Total deposits increased by ~~$217.2~~$138.4 million from ~~$2.3~~$2.8 billion at December 31, ~~2021~~2022 to ~~$2.5~~$2.9 billion at March 31, ~~2022.~~2023. Deposit increases were primarily attributable to an increase in the number of new deposit relationships, as well as normal fluctuations in some of our large existing accounts. Non-interest-bearing deposits ~~increased~~decreased by ~~$39.2~~$134.6 million in the first three months of ~~2021~~2023 to ~~$941.3~~$836.7 million, and represented ~~37.60%~~28.65% of total deposits at March 31, ~~2022,~~2023, compared to ~~39.46%~~34.91% of total deposits at December 31, ~~2021.~~2022. Our loan to deposit ratio was ~~83.52%~~98.66% at March 31, ~~2022,~~2023, compared to ~~85.09%~~100.67% at December 31, ~~2021.~~2022.

39•Assets. Total assets were $3.4 billion at March 31, 2023, representing a $170.1 million, or 5.27%, increase compared to $3.2 billion at December 31, 2022.

~~Table~~•Loans. Total loans held for investment were $2.9 billion at March 31, 2023, compared to $2.8 billion at December 31, 2022, an increase of ~~Contents~~$78.5 million, or 2.81%. The increase was primarily attributable to a $47.8 million increase in commercial real estate loans, a $9.7 million increase in commercial construction loans, an $8.3 million increase in commercial secured loans, and an $8.0 million increase in commercial land and development loans.

•Non-accrual Loans. Credit quality remains strong, with non-accrual loans representing $0.4 million, or 0.01% of total loans held for investment, at March 31, 2023, compared to $0.4 million, or 0.01% of total loans held for investment, at December 31, 2022. The ratio of allowance for credit losses to total loans held for investment, or total loans at period end, was 1.19% at March 31, 2023 and 1.02% at December 31, 2022.

•ROAA and ROAE. ROAA and ROAE were 1.65% and 20.94%, respectively, for the three months ended March 31, 2023, as compared to ROAA of 1.53% and ROAE of 17.07% for the three months ended March 31, 2022.

•Net Interest Margin. Net interest margin was 3.75% for the three months ended March 31, 2023, and 3.60% for the three months ended March 31, 2022. The increase in net interest margin for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 was primarily attributable to interest income resulting from yields earned and loan growth quarter over quarter, which more than offset increases to interest expense from rates paid and deposit growth.

•Efficiency Ratio. Efficiency ratio was 36.43% for the three months ended March 31, 2023, down from 39.82% for the corresponding period of 2022. The decrease was primarily attributable to the change in net interest income more than offsetting the change in non-interest expense period-over-period.

•Capital Ratios. All capital ratios were above well-capitalized regulatory thresholds as of March 31, ~~2022.~~2023. The total risk-based capital ratio for the Company was ~~13.07%~~12.50% at March 31, ~~2022,~~2023, compared to ~~13.98%~~12.46% at December 31, ~~2021.~~2022. The ~~ratio of~~ Tier 1 ~~capital to average assets~~leverage ratio was ~~9.02%~~8.53% at March 31, ~~2022,~~2023, compared to ~~9.47%~~8.60% at December 31, ~~2021.~~2022. For additional information about the regulatory capital requirements applicable to the Company and the Bank, see the section entitled “—Financial Condition Summary—Capital Adequacy” below.

•Dividends. The board of directors declared a cash dividend of $0.15 per share on January 20, 2022. Additionally, on March 17, 2022, based on the filing of the Company's final S Corporation tax return, the board of directors declared a $0.45 per common share dividend to shareholders of record as of May 3, 2021, totaling $4.9 million.19, 2023.

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


(dollars in thousands)	March 31, 2023			December 31, 2022
Selected financial condition data:
Total assets	$	3,397,308		$	3,227,159
Total loans held for investment	2,869,848			2,791,326
Total deposits	2,920,406			2,782,004
Total subordinated notes, net	73,640			73,606
Total shareholders’ equity	260,656			252,825
Asset quality ratios:
Allowance for credit losses to total loans held for investment	1.19		%	1.02		%

Allowance for credit losses to nonperforming loans	8,167.68		%	7,026.98		%
Nonperforming loans to total loans held for investment	0.01		%	0.01		%
Capital ratios:
Total capital (to risk-weighted assets)	12.50		%	12.46		%
Tier 1 capital (to risk-weighted assets)	9.02		%	8.99		%
Common equity Tier 1 capital (to risk-weighted assets)	9.02		%	8.99		%
Tier 1 leverage	8.53		%	8.60		%
Total shareholders’ equity to total assets	7.67		%	7.83		%
Tangible shareholders’ equity to tangible assets1	7.67		%	7.83		%

(dollars in thousands) March 31, 2022 December 31, 2021
Selected financial condition data:
Total assets $ 2,778,249 $ 2,556,761
Total loans held for investment 2,080,158 1,934,460
Total deposits 2,503,092 2,285,890
Total subordinated notes, net 28,403 28,386
Total shareholders’ equity 231,061 235,046
Asset quality ratios:
Allowance for loan losses to total loans held for investment 1.15 % 1.20 %
Allowance for loan losses to total loans held for investment, excluding PPP loans1
1.15 % 1.22 %
Allowance for loan losses to non-accrual loans 1,799.99 % 3,954.30 %
Non-accrual loans to total loans held for investment 0.06 % 0.03 %
Capital ratios:
Total capital (to risk-weighted assets) 13.07 % 13.98 %
Tier 1 capital (to risk-weighted assets) 10.70 % 11.44 %
Common equity Tier 1 capital (to risk-weighted assets) 10.70 % 11.44 %
Tier 1 leverage 9.02 % 9.47 %
Total shareholders’ equity to total assets ratio 8.32 % 9.19 %
Tangible shareholders’ equity to tangible assets2
8.32 % 9.19 %

~~Table of~~ ~~Contents~~


		For the three months ended							For the three months ended
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	March 31, 2022			March 31, 2021			(dollars in thousands, except per share data)	March 31, 2023			March 31, 2022
Selected operating data:	Selected operating data:							Selected operating data:
Net interest income	Net interest income	$	21,862		$	18,048		Net interest income	$	29,148		$	21,883
Provision for loan losses		950			200
Provision for credit losses								Provision for credit losses	900			950
Non-interest income	Non-interest income	2,185			1,616			Non-interest income	1,371			2,164
Non-interest expense	Non-interest expense	9,575			8,804			Non-interest expense	11,118			9,575
Net income	Net income	9,862			10,278			Net income	13,161			9,862
Net income per common share:
Basic		$	0.58		$	0.93
Diluted		$	0.58		$	0.93
Selected pro forma operating data:
Pro forma net income3		9,862			7,509
Pro forma provision for income taxes3		3,660			3,151
Pro forma net income per common share3:
Earnings per common share:								Earnings per common share:
Basic	Basic	$	0.58		$	0.68		Basic	$	0.77		$	0.58
Diluted	Diluted	$	0.58		$	0.68		Diluted	$	0.77		$	0.58
Performance and other financial ratios:	Performance and other financial ratios:							Performance and other financial ratios:
ROAA	ROAA	1.53		%	2.05		%	ROAA	1.65		%	1.53		%
ROAE	ROAE	17.07		%	32.08		%	ROAE	20.94		%	17.07		%
Net interest margin	Net interest margin	3.60		%	3.83		%	Net interest margin	3.75		%	3.60		%
Cost of funds	Cost of funds	0.17		%	0.24		%	Cost of funds	1.53		%	0.17		%
Efficiency ratio	Efficiency ratio	39.82		%	44.77		%	Efficiency ratio	36.43		%	39.82		%
Cash dividend payout ratio on common stock4		25.86		%	107.10		%
Selected pro forma ratios:
Pro forma ROAA3,5		1.53		%	1.49		%
Pro forma ROAE3,5		17.07		%	23.67		%
Cash dividend payout ratio on common stock2								Cash dividend payout ratio on common stock2	19.48		%	25.86		%

1The allowance for loan losses to total loans held for investment, excluding PPP loans, is considered a non-GAAP financial measure. See the section entitled “Non-GAAP Financial Measures” for a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measure. Allowance for loan losses to total loans held for investment, excluding PPP loans, is defined as allowance for loan losses, divided by total loans held for investment less PPP loans. The most directly comparable GAAP financial measure is allowance for loan losses to total loans held for investment.

2Tangible shareholders’ equity to tangible assets is considered ~~to be~~ a non-GAAP financial measure. See the section entitled “Non-GAAP Financial Measures” for a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measure. Tangible shareholders’ equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets. The most directly comparable GAAP financial measure is total shareholders’ equity to total assets. We had no goodwill or other intangible assets as of any of the dates indicated. As a result, tangible shareholders’ equity to tangible assets is the same as total shareholders’ equity to total assets at the end of each of the periods indicated.

3For the three months ended March 31, 2021, we calculate our pro forma net income, provision for income taxes, net income per common share, ROAA, and ROAE by adding back our S Corporation tax to net income and applying a combined C Corporation effective tax rate for U.S. federal and California state income taxes of 29.56%. This calculation reflects only the change in our status as an S Corporation and does not give effect to any other transaction. For the three months ended March 31, 2022, our pro forma provision for income tax expense is the same as our actual C Corporation provision, given that the Company was taxed as a C Corporation for the entirety of the three month period, and thus pro forma calculations for the three months ended March 31, 2022 are equal to actuals.

42Cash dividend payout ratio on common stock is calculated as dividends on common shares divided by basic ~~net income~~earnings per common share.

5~~Pro forma ROAA and ROAE are calculated using pro forma net income balances, with no adjustments to average assets and average equity balances~~.

4132

~~Table of~~ ~~Contents~~

RESULTS OF OPERATIONS

The following discussion of our results of operations compares the three months ended March 31, ~~2022~~2023 to the three months ended March 31, ~~2021.~~2022. The results of operations for the three months ended March 31, ~~2022~~2023 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2022.~~2023.

Net Interest Income

Net interest income is the most significant contributor to our net income. Net interest income represents interest income from interest-earning assets, such as loans and investments, less interest expense on interest-bearing liabilities, such as deposits, FHLB advances, subordinated notes, and other borrowings, which are used to fund those assets. In evaluating our net interest income, we measure and monitor yields on our interest-earning assets and interest-bearing liabilities as well as trends in our net interest margin. Net interest margin is a ratio calculated as net interest income divided by total interest-earning assets for the same period. We manage our earning assets and funding sources in order to maximize this margin while limiting credit risk and interest rate sensitivity to our established risk appetite levels. Changes in market interest rates and competition in our market typically have the largest impact on periodic changes in our net interest margin.

~~Three months ended March 31, 2022 compared to three months ended March 31, 2021~~

~~Net interest income increased by $3.8 million, or 21.13%, to $21.9 million for the quarter ended March 31, 2022 from $18.0 million for the quarter ended March 31, 2021.~~ Our net interest margin of 3.60% for the quarter ended March 31, 2022 decreased from our net interest margin of 3.83% for the quarter ended March 31, 2021, primarily due to a decrease in average loan yields, which decreased from 4.95%3.75% for the three months ended March 31, ~~2021 to 4.53%~~2023 increased from 3.60% for the three months ended March 31, 2022. ~~These decreases were~~The increase was primarily due to ~~changes~~a 142 basis point increase in the ~~macroeconomic environment,~~average yield on interest-earning assets, which ~~caused a majority of the Company’s fixed-rate loans funded in the current quarter to recognize yields lower than those recognized in prior quarters. The rates associated with the index utilized~~increased from 3.76% for ~~a significant portion of the Company’s variable rate loans, the United States 5 Year Treasury index, were higher during~~ the three months ended March 31, 2022 ~~as compared~~ to 5.18% for the three months ended March 31, ~~2021, but~~2023, partially offset by a ~~majority of these loans were not scheduled to reprice during~~193 basis point increase in average rates paid on interest-bearing liabilities, which increased from 0.28% for the three months ended March 31, 2022 ~~also contributing~~ to ~~the downward trend in average loan yields. New loan originations drove increases in the average daily balance of loans from~~2.21% for the three months ended March 31, ~~2021 to the three months ended March 31, 2022, which partially offset the aforementioned declining average loan yields.~~

~~Table of~~ ~~Contents~~

2023.

Average balance sheet, interest, and yield/rate analysis. The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yield earned ~~and~~or rates paid for each period reported. The average balances are daily averages and include both performing and nonperforming loans.


		For the three months ended March 31, 2022						For the three months ended March 31, 2021							For the three months ended March 31, 2023						For the three months ended March 31, 2022
(dollars in thousands)	(dollars in thousands)	Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate		(dollars in thousands)	Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate
Assets	Assets													Assets
Interest-earning deposits with banks1	Interest-earning deposits with banks1	$	339,737	$	192	0.23	%	$	263,120	$	104	0.16	%	Interest-earning deposits with banks1	$	200,541	$	2,167	4.38	%	$	339,737	$	192	0.23	%
Investment securities2	Investment securities2	148,736		567		1.54	%	121,862		473		1.57	%	Investment securities2	119,489		650		2.21	%	148,736		567		1.54	%
Loans held for investment and sale1,3	Loans held for investment and sale1,3	1,977,509		22,091		4.53	%	1,526,130		18,613		4.95	%	Loans held for investment and sale1,3	2,836,070		37,494		5.36	%	1,977,509		22,112		4.53	%
Total interest-earning assets1	Total interest-earning assets1	2,465,982		22,850		3.76	%	1,911,112		19,190		4.07	%	Total interest-earning assets1	3,156,100		40,311		5.18	%	2,465,982		22,871		3.76	%
Interest receivable and other assets, net	Interest receivable and other assets, net	150,116						125,981						Interest receivable and other assets, net	69,253						150,116
Total assets	Total assets	$	2,616,098					$	2,037,093					Total assets	$	3,225,353					$	2,616,098
Liabilities and shareholders’ equity	Liabilities and shareholders’ equity													Liabilities and shareholders’ equity
Interest-bearing transaction accounts	Interest-bearing transaction accounts	$	276,690	$	70	0.10	%	$	154,678	$	38	0.10	%	Interest-bearing transaction accounts	$	379,593	$	433	0.46	%	$	276,690	$	70	0.10	%
Savings accounts	Savings accounts	90,815		25		0.11	%	60,885		16		0.11	%	Savings accounts	155,233		545		1.42	%	90,815		25		0.11	%
Money market accounts	Money market accounts	920,767		367		0.16	%	867,374		581		0.27	%	Money market accounts	1,087,122		5,436		2.03	%	920,767		367		0.16	%
Time accounts	Time accounts	128,183		83		0.26	%	46,171		64		0.56	%	Time accounts	300,952		2,964		3.99	%	128,183		83		0.26	%
Subordinated debt1		28,393		443		6.33	%	28,326		443		6.36	%
Subordinated debt and other borrowings1														Subordinated debt and other borrowings1	125,691		1,785		5.76	%	28,393		443		6.33	%
Total interest-bearing liabilities	Total interest-bearing liabilities	1,444,848		988		0.28	%	1,157,434		1,142		0.40	%	Total interest-bearing liabilities	2,048,591		11,163		2.21	%	1,444,848		988		0.28	%
Demand accounts	Demand accounts	922,128						745,605						Demand accounts	901,491						922,128
Interest payable and other liabilities	Interest payable and other liabilities	14,800						5,418						Interest payable and other liabilities	20,344						14,800
Shareholders’ equity	Shareholders’ equity	234,322						128,636						Shareholders’ equity	254,927						234,322
Total liabilities and shareholders’ equity	Total liabilities and shareholders’ equity	$	2,616,098					$	2,037,093					Total liabilities and shareholders’ equity	$	3,225,353					$	2,616,098
Net interest spread4	Net interest spread4					3.48	%					3.67	%	Net interest spread4					2.97	%					3.48	%
Net interest income/margin5	Net interest income/margin5			$	21,862	3.60	%			$	18,048	3.83	%	Net interest income/margin5			$	29,148	3.75	%			$	21,883	3.60	%

1Interest income/expense is divided by the actual number of days in the period multiplied by the actual number of days in the year to correspond to stated interest rate terms, where applicable.

2Yields on available-for-sale securities are calculated based on ~~amortized cost balances rather than~~ fair ~~value, as changes in fair value are reflected as a component of shareholders’ equity.~~value. Investment security interest is earned on 30/360 day basis monthly. Yields are not calculated on a tax-equivalent basis.

3Average loan balance includes both loans held for investment and loans held for sale. Non-accrual loans are included in total loan balances. No adjustment has been made for these loans in the yield calculations. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs.

4Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.

5Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets, then annualized based on the number of days in the given period.

~~Table of~~ ~~Contents~~

Analysis of changes in interest income and expenses. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average yields/~~interest~~ rates. The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the current period’s average yield/rate. The effect of rate changes is calculated by multiplying the change in average yield/rate by the previous period’s volume. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.


		For the three months ended March 31, 2022 compared to the three months ended March 31, 2021							For the three months ended March 31, 2023 compared to the three months ended March 31, 2022
(dollars in thousands)	(dollars in thousands)	Volume		Yield/Rate		Total		(dollars in thousands)	Volume		Yield/Rate		Total
Interest-earning deposits with banks	Interest-earning deposits with banks	$	43	$	45	$	88	Interest-earning deposits with banks	$	(1,504)	$	3,479	$	1,975
Investment securities	Investment securities	101		(7)		94		Investment securities	(160)		243		83
Loans held for investment and sale	Loans held for investment and sale	5,063		(1,585)		3,478		Loans held for investment and sale	11,122		4,260		15,382
Total interest-earning assets	Total interest-earning assets	5,207		(1,547)		3,660		Total interest-earning assets	9,458		7,982		17,440
Interest-bearing transaction accounts	Interest-bearing transaction accounts	31		1		32		Interest-bearing transaction accounts	117		246		363
Savings accounts	Savings accounts	9		—		9		Savings accounts	226		294		520
Money market accounts	Money market accounts	22		(236)		(214)		Money market accounts	832		4,237		5,069
Time accounts	Time accounts	52		(33)		19		Time accounts	1,702		1,179		2,881
Subordinated debt		—		—		—
Subordinated debt and other borrowings								Subordinated debt and other borrowings	1,382		(40)		1,342
Total interest-bearing liabilities	Total interest-bearing liabilities	114		(268)		(154)		Total interest-bearing liabilities	4,259		5,916		10,175
Changes in net interest income/margin	Changes in net interest income/margin	$	5,093	$	(1,279)	$	3,814	Changes in net interest income/margin	$	5,199	$	2,066	$	7,265

~~Total~~Factors affecting interest income and yields

Interest income increased by ~~$3.7~~$17.4 million, or ~~19.07%~~76.25%, to ~~$22.9~~$40.3 million for the three months ended March 31, ~~2022~~2023 from ~~$19.2~~$22.9 million for the corresponding period of 2022 due to the following:

•Rates. The average yields on interest-earning assets were 5.18% and 3.76% for ~~2021. For~~ the three months ended March 31, 2023 and March 31, 2022, ~~interest income from~~respectively. The increase in yields period-over-period was primarily due to increased rates earned on loans held for investment and sale originated in the current environment of rising rates, and increases in yields earned on interest-earning deposits with banks.

•Volume. Average interest-earning assets increased by ~~$3.5~~approximately $690.1 million ~~to $22.1 million, as~~period-over-period, driven by new loan originations which drove increases in the average daily ~~balance~~balances of loans for the three months ended March 31, 2023.

Factors affecting interest expense and rates

Interest expense increased by ~~$451.4~~$10.2 million, or ~~29.58%~~1,029.86%, ~~compared~~ to $11.2 million for the three months ended March 31, 2023 from $1.0 million for the same period of ~~2021. This~~2022 due to the following:

•Rates. The average costs of interest-bearing liabilities were 2.21% and 0.28% for the three months ended March 31, 2023 and March 31, 2022, respectively. The increase in ~~interest income~~cost period-over-period was due to increases in the rates paid on interest-bearing deposit accounts, with the most significant increases in time and money market accounts. The average cost of subordinated debt and other borrowings decreased from ~~greater average loan balances was offset by a 42 basis point decrease in loan yield~~6.33% to ~~4.53%~~5.76% for the three months ended March 31, 2022 and March 31, 2023, respectively, due to a reduction of interest expenses as ~~compared~~a percentage of the average balance during the three months ended March 31, 2023. Additionally, the cost of funds increased from 0.17% for the quarter ended March 31, 2022 to 1.53% for the ~~same period~~quarter ended March 31, 2023.

•Volume. Average interest-bearing liabilities increased by $603.7 million period-over-period, primarily driven by increases in average balances for interest-bearing deposit accounts, with the most substantial average balance increases in time accounts. Average subordinated debt and other borrowings increased by $97.3 million period-over-period, consisting of ~~2021, as discussed above. Additionally, $0.6 million of PPP income from forgiven PPP loans was recognized in~~FHLB advances which did not occur during the three months ended March 31, 2022, compared to $2.0 million during the same period of 2021. Excluding PPP loans, average loans held for investment and sale increased by $618.9 million to $2.0 billion, and the related yield declined by 44 basis points for the three months ended March 31, 2022 compared to the same period of 2021. Average loans held for investment and sale, excluding PPP loans, and average loan yield, excluding PPP loans, are considered to be non-GAAP financial measures. See the section entitled “Non-GAAP Financial Measures” for a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measure.

Total interest expense decreased by $0.2 million to $1.0 million for the three months ended March 31, 2022 from $1.1 million for the same period of 2021. Interest expense on customer deposits decreased by $0.2 million to $0.5 million for the three months ended March 31, 2022 from $0.7 million for the same period of 2021. This decrease is due to the cost of interest-bearing liabilities declining by 12 basis points to 0.28% for the three months ended March 31, 2022 from 0.40% for the same period of 2021, reflecting reductionscombined with an increase in the ~~rates offered on money market and maturing deposit products during the period.~~average balance of subordinated debt.

~~Table of~~ ~~Contents~~

Provision for ~~Loan~~Credit Losses

The provision for ~~loan~~credit losses is based on management’s assessment of the adequacy of our allowance for ~~loan~~credit losses. Factors impacting the provision include inherent risk characteristics in our loan portfolio, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of the change in collateral values, and the funding probability on unfunded lending commitments. The provision for ~~loan~~credit losses is charged against earnings in order to maintain our allowance for ~~loan~~credit losses, which reflects management’s best estimate of ~~probable~~forecasted life of loan losses ~~inherent~~ in our loan portfolio at the balance sheet date.

~~Three months ended March 31, 2022 compared to three months ended March 31, 2021~~

We recorded a ~~$1.0~~$0.9 million provision for ~~loan~~credit losses in the first quarter of ~~2022,~~2023, compared to a ~~$0.2~~$1.0 million provision for ~~loan~~credit losses recorded for the same period of ~~2021.~~2022. The ~~increase~~decrease of ~~$0.8~~$0.1 million ~~for the provision period-over-period~~ was primarily due to a decline in loan growth ~~bolstered by improvements in the economy, including improved economic conditions related to the impact of the COVID-19 pandemic~~ during the first quarter of ~~2022 as compared to the first quarter of 2021. Additionally, the Company had a decrease in~~2023. This decline was partially offset by provisions required for loans designated as watch and substandard, which increased from ~~$60.5 million as of March 31, 2021 to~~ $17.0 million as of March 31, ~~2022.~~2022 to $24.6 million as of March 31, 2023.

Beginning January 1, 2023, we 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 allowance model calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions. Under the CECL model, the calculated allowance for credit losses was $5.3 million higher on January 1, 2023 than the allowance under the incurred loss model. Utilizing CECL may have an impact on our allowance for credit losses going forward and resulted in a lack of comparability between the 2022 and 2023 quarterly periods.

Non-interest Income

Non-interest income is a secondary contributor to our net income. Non-interest income consists ~~primarily~~ of ~~net gain~~service charges on ~~sale of loans,~~deposit accounts, net gain on sale of securities, ~~FHLB dividends,~~gain on sale of loans, loan-related fees, FHLB stock dividends, earnings on BOLI, and other income.

~~Three months ended March 31, 2022 compared to three months ended March 31, 2021~~

The following table details the components of non-interest income for the periods ~~indicated.~~indicated for the three months ended March 31, 2023 compared to three months ended March 31, 2022.


		For the three months ended				Amount		%			For the three months ended
(dollars in thousands)	(dollars in thousands)	March 31, 2022		March 31, 2021		Increase (Decrease)		Increase (Decrease)		(dollars in thousands)	March 31, 2023		March 31, 2022		$ Change		% Change
Service charges on deposit accounts	Service charges on deposit accounts	$	108	$	90	$	18	20.00	%	Service charges on deposit accounts	$	117	$	108	$	9	8.33	%
Net gain on sale of securities	Net gain on sale of securities	5		182		(177)		(97.25)	%	Net gain on sale of securities	—		5		(5)		(100.00)	%
Gain on sale of loans	Gain on sale of loans	918		931		(13)		(1.40)	%	Gain on sale of loans	598		918		(320)		(34.86)	%
Loan-related fees	Loan-related fees	617		260		357		137.31	%	Loan-related fees	308		596		(288)		(48.32)	%
FHLB stock dividends	FHLB stock dividends	102		78		24		30.77	%	FHLB stock dividends	193		102		91		89.22	%
Earnings on bank-owned life insurance		90		52		38		73.08	%
Earnings on BOLI										Earnings on BOLI	102		90		12		13.33	%
Other income	Other income	345		23		322		1400.00	%	Other income	53		345		(292)		(84.64)	%
Total non-interest income	Total non-interest income	$	2,185	$	1,616	$	569	35.21	%	Total non-interest income	$	1,371	$	2,164	$	(793)	(36.65)	%

~~Net~~Gain on sale of loans. The decrease in gain on sale of ~~securities.~~ ~~The decrease~~loans related primarily to an overall decline in ~~net gain~~the effective yields on ~~sale of securities was primarily due to the sale of one $1.5 million municipal security for a gain of $5.3 thousand~~loans sold during the three months ended March 31, ~~2022,~~2023 compared to ~~$11.5 million of municipal securities sold in~~ the three months ended March 31, ~~2021 for a total gain recognized~~2022. During the three months ended March 31, 2023, approximately $12.7 million of ~~$0.2 million.~~loans were sold with an effective yield of 4.72%, as compared to approximately $11.7 million of loans sold with an effective yield of 7.84% during the three months ended March 31, 2022.

Loan-related ~~fees~~fees.. The ~~increase~~decrease in loan-related fees was primarily ~~related to~~a result of $0.3 million of swap referral fees recognized during the three months ended March 31, 2022 which did not ~~occur~~recur in the three months ended March 31, ~~2021.~~

2023.

Other ~~income~~income.. The ~~increase~~decrease in other income resulted primarily from a $0.3 million gain recorded on a distribution received on an investment in a venture-backed fund ~~which did not occur~~ during the three months ended March 31, ~~2021.~~2022 which did not recur during the three months ended March 31, 2023.

~~Table of~~ ~~Contents~~

Non-interest Expense

Non-interest expense includes salaries and employee benefits, occupancy and equipment, data processing and software, FDIC insurance, professional services, advertising and promotional, loan-related expenses, and other operating expenses. In evaluating our level of non-interest expense, we closely monitor ~~our~~the Company’s efficiency ~~ratio. The efficiency~~ ratio, which is calculated as non-interest expense divided by the sum of net interest income and non-interest income. We constantly seek to identify ways to streamline our business and operate more efficiently, ~~which has enabled us~~ to reduce our non-interest expense ~~in both absolute terms and~~over time as a percentage of our revenue, while continuing to achieve growth in total loans and assets.

Over the past several years, we have invested significant resources in personnel, technology, and infrastructure. ~~Additionally, to support corporate organizational matters leading up to the IPO,~~As we ~~experienced increased audit, consulting, and legal costs. As a result,~~execute initiatives based on growth, we expect non-interest expense ~~is increasing in~~to grow. Non-interest expense has increased throughout the periods presented below; however, ~~we do not anticipate incurring significant costs of this type in future periods, and~~ we expect our efficiency ratio will improve going forward due, in part, to our past investment in infrastructure.

~~Three months ended March 31, 2022 compared to three months ended March 31, 2021~~

The following table details the components of non-interest expense for ~~the periods indicated.~~three months ended March 31, 2023 compared to three months ended March 31, 2022.

For the three months ended Amount %
(dollars in thousands) March 31, 2022 March 31, 2021 Increase
(Decrease) Increase
(Decrease)
Salaries and employee benefits $ 5,675 $ 4,697 $ 978 20.82 %
Occupancy and equipment 520 451 69 15.30 %
Data processing and software 716 629 87 13.83 %
FDIC insurance 165 280 (115) (41.07) %
Professional services 554 1,532 (978) (63.84) %
Advertising and promotional 344 170 174 102.35 %
Loan-related expenses 278 229 49 21.40 %
Other operating expenses 1,323 816 507 62.13 %
Total non-interest expense $ 9,575 $ 8,804 $ 771 8.76 %


	For the three months ended
(dollars in thousands)	March 31, 2023		March 31, 2022		$ Change		% Change
Salaries and employee benefits	$	6,618	$	5,675	$	943	16.62	%
Occupancy and equipment	523		520		3		0.58	%
Data processing and software	872		716		156		21.79	%
FDIC insurance	402		165		237		143.64	%
Professional services	631		554		77		13.90	%
Advertising and promotional	418		344		74		21.51	%
Loan-related expenses	255		278		(23)		(8.27)	%
Other operating expenses	1,399		1,323		76		5.74	%
Total non-interest expense	$	11,118	$	9,575	$	1,543	16.11	%

Salaries and employee benefits. The increase in salaries and employee benefits was primarily a result of: (i) a $0.7 million increase in salaries, insurance, and benefits as a result of a ~~$1.1 million increase related to an 18.24%~~7.10% increase in headcount and recognition of employer taxes and 401(k) contributions recorded for bonuses and commissions paid during the three months ended March 31, ~~2022,~~2023, as compared to the three months ended March 31, ~~2021, combined with~~2022; (ii) a ~~$0.6~~$0.7 million decrease in loan origination costs due to lower loan production; and (iii) a $0.3 million increase in ~~commissions from~~estimated bonus expense based on increased headcount and salaries. These increases were partially offset by $0.7 million of lower commission expenses due to lower loan production during the three months ended March 31, ~~2021 to the three months ended March 31, 2022. These increases were partially offset by a $0.6 million increase in deferred loan origination costs from the three months ended March 31, 2021~~2023, as compared to the three months ended March 31, 2022.

Data processing and software. Data processing and software expenses increased, primarily due to: (i) increased usage of our digital banking platform; (ii) higher transaction volumes related to the increased number of loan and deposit accounts; and (iii) increased number of licenses required for new users on our loan origination and documentation system.

FDIC ~~insurance~~insurance.. The increase in FDIC insurance ~~decreased,~~related primarily ~~due~~ to ~~an improvement in the leverage ratio used in~~a final rule adopted by the FDIC to increase initial base deposit insurance assessment ~~calculation as a result of~~rates for insured depository institutions by two basis points, beginning with the ~~Company’s IPO~~first quarterly assessment period in ~~May 2021.~~

~~Professional services. Professional services decreased, primarily as a result of expenses recognized during~~2023. FDIC insurance also increased for the three months ended March 31, ~~2021 related~~2023 compared to the ~~increased audit, consulting, and legal costs incurred~~three months ended March 31, 2022 due to ~~support corporate organizational matters leading up~~a $539.7 million increase in the assessment base period-over-period.

Provision for Income Taxes

The provision for income tax was $5.3 million for the three months ended March 31, 2023, compared to $3.7 million for the three months ended March 31, 2022. Additionally, the provision for income taxes for the three months ended March 31, 2022 included a provision to tax return true-up of approximately $0.3 million relating to the ~~IPO,~~2021 tax return filed in 2022, which did not recur during the three months ended March 31, ~~2022.~~

~~Advertising and promotional~~. The increase in advertising and promotional was primarily related to increases in business development, marketing, and sponsorship expenses due to more in-person participation at events held during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021.

~~Other operating expenses~~. Other operating expenses increased, primarily due to $0.1 million of stock compensation expense recorded for restricted stock granted to members of the board of directors during the three months ended March 31, 2022, which did not occur during the three months ended March 31, 2021, combined with the net effect of individually immaterial items, including increases in expenses related to travel, insurance, dues and subscriptions, data, and telephone, which increased as a result of an increase in volume of customers and employees period-over-period.

~~Table of~~ ~~Contents~~

~~Provision for Income Taxes~~

~~The Company terminated its status as a “Subchapter S” corporation effective May 5, 2021, in connection with the Company’s IPO~~, ~~and became a C Corporation. Prior to that date, as an S Corporation, the Company had no U.S. federal~~2023. Effective income tax ~~expense. The provision recorded~~rates for the three months ended March 31, 2023 and 2022 ~~yielded an~~were 28.86% and 27.07%, respectively. Differences between the Company’s effective tax rate and federal and state blended statutory rates are due to certain items, such as tax-exempt income from municipal securities, earnings on BOLI, non-deductible expenses, vesting of ~~27.07%. Refer to the section entitled “—Pro Forma C Corporation Income Tax Expense” below for a discussion on what the Company’s income~~stock awards, and benefits from tax ~~expense and net income would have been had the Company been taxed as a C Corporation during the three months ended March 31, 2021.~~

~~Three months ended March 31, 2022 compared to three months ended March 31, 2021~~

~~The provision for income taxes for the quarter ended March 31, 2022 increased by $3.3 million to $3.7 million,~~credits as compared to $0.4 million during the quarter ended March 31, 2021. This increase is due to the change in the statutory tax rate from 3.50% for the quarter ended March 31, 2021 to 29.56%, as applied to estimated taxable income for the quarter ended March 31, 2022.pre-tax income.

~~Pro Forma C Corporation Income Tax Expense~~

Because of the Company’s status as a Subchapter S Corporation prior to May 5, 2021, no U.S. federal income tax expense was recorded for the entirety of the three months ended March 31, 2021. Had the Company been taxed as a C Corporation and paid U.S. federal income tax for that period, the combined statutory income tax rate would have been 29.56%. For the three months ended March 31, 2021, the pro forma statutory rate reflects a U.S. federal income tax rate of 21.00% and a California state income tax rate of 8.56%, after adjustment for the federal tax benefit, on corporate taxable income. Had the Company been subject to U.S. federal income tax for this period, on a statutory income tax rate pro forma basis, the provision for combined federal and state income tax would have been $3.2 million for the three months ended March 31, 2021. As a result of the foregoing factors, the Company’s pro forma net income (after U.S. federal and California state income tax) would have been $7.5 million for the three months ended March 31, 2021.

FINANCIAL CONDITION SUMMARY

The following discussion compares our financial condition as of March 31, ~~2022~~2023 to our financial condition as of December 31, ~~2021.~~2022. The following table summarizes selected components of our unaudited consolidated balance ~~sheet~~sheets as of March 31, ~~2022~~2023 and December 31, ~~2021.~~2022.


(dollars in thousands)		March 31, 2022		December 31, 2021
(in thousands)						(in thousands)	March 31, 2023		December 31, 2022
Total assets	Total assets	$	2,778,249	$	2,556,761	Total assets	$	3,397,308	$	3,227,159
Cash and cash equivalents	Cash and cash equivalents	$	504,964	$	425,329	Cash and cash equivalents	347,939		259,991
Total investments	Total investments	$	139,299	$	153,753	Total investments	118,654		119,744
Loans held for investment	Loans held for investment	$	2,080,158	$	1,934,460	Loans held for investment	2,869,848		2,791,326
Total deposits	Total deposits	$	2,503,092	$	2,285,890	Total deposits	2,920,406		2,782,004
Subordinated notes, net	Subordinated notes, net	$	28,403	$	28,386	Subordinated notes, net	73,640		73,606
Total shareholders’ equity	Total shareholders’ equity	$	231,061	$	235,046	Total shareholders’ equity	260,656		252,825

Total Assets

At March 31, ~~2022,~~2023, total assets were ~~$2.8~~$3.4 billion, an increase of ~~$221.5~~$170.1 million from ~~$2.6~~$3.2 billion at December 31, ~~2021,~~2022, primarily due to ~~increases~~an increase in cash and cash equivalents of $87.9 million and in loans held for investment ~~as discussed below.~~of $78.5 million.

~~Table of~~ ~~Contents~~

Cash and Cash Equivalents

Total cash and cash equivalents were ~~$505.0~~$347.9 million at March 31, ~~2022,~~2023, an increase of ~~$79.6~~$87.9 million ~~as compared to $425.3~~from $260.0 million at December 31, ~~2021.~~2022. The increase in cash and cash equivalents was primarily ~~a result~~due to an increase in deposits of ~~net income recognized of $9.9 million, proceeds from sale of loans of $11.7~~$138.4 million and an increase in ~~deposits~~FHLB advances of ~~$217.2 million. These increases were~~$20.0 million, partially offset by ~~loans originated for sale of $21.2 million,~~ loan originations, ~~and advances,~~ net of ~~principal collected,~~repayments, of ~~$135.0 million, and cash distributions of $7.5 million during the three months ended March 31, 2022.~~$69.5 million.

Investment Portfolio

Our investment portfolio is primarily comprised of ~~guaranteed~~ U.S. government agency securities, mortgage-backed securities, and obligations of states and political subdivisions, which are high-quality liquid investments. We manage our investment portfolio according to written investment policies approved by our board of directors. Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk and interest rate risk that is reflective of the yields obtained on those securities. Most of our securities are classified as available-for-sale, although we have one long-term, fixed rate municipal security classified as held-to-maturity.

Our total securities available-for-sale and held-to-maturity ~~and available-for-sale~~ amounted to ~~$139.3~~$118.7 million at March 31, ~~2022~~2023 and ~~$153.8~~$119.7 million at December 31, ~~2021,~~2022, representing a decrease of ~~$14.5 million.~~$1.0 million period-over-period. The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $2.9 million, partially offset by an unrealized ~~loss (tax effected)~~gain on ~~securities~~securities of ~~$7.2~~$2.1 million, with the remainder of ~~which $4.4~~the change due to amortization on premiums. For the quarter, other comprehensive income increased by $1.5 million, ~~and $2.6 million related to~~primarily from our mortgage-backed and municipal securities portfolios, resulting in tax-effected increases from each of those portfolios of $0.7 million and $0.8 million, respectively. This unrealized ~~loss~~gain was ~~recognized as a result of~~attributable to interest rate ~~hikes~~changes that occurred during the ~~quarter.~~period.

The following table presents the carrying value of our investment portfolio as of the dates indicated:


		As of									As of
		March 31, 2022				December 31, 2021					March 31, 2023				December 31, 2022
(dollars in thousands)	(dollars in thousands)	Carrying Value		% of Total		Carrying Value		% of Total		(dollars in thousands)	Carrying Value		% of Total		Carrying Value		% of Total
Available-for-sale (at fair value):	Available-for-sale (at fair value):									Available-for-sale (at fair value):
U.S. government agencies	U.S. government agencies	$	18,079	12.98	%	$	19,682	12.80	%	U.S. government agencies	$	13,147	11.09	%	$	14,173	11.84	%
Mortgage-backed securities	Mortgage-backed securities	73,492		52.76	%	81,513		53.02	%	Mortgage-backed securities	60,969		51.38	%	61,271		51.17	%
Obligations of states and political subdivisions	Obligations of states and political subdivisions	40,931		29.38	%	45,137		29.36	%	Obligations of states and political subdivisions	38,871		32.76	%	38,426		32.09	%
Collateralized mortgage obligations	Collateralized mortgage obligations	483		0.35	%	540		0.35	%	Collateralized mortgage obligations	384		0.32	%	395		0.33	%
Corporate bonds	Corporate bonds	1,828		1.31	%	1,935		1.26	%	Corporate bonds	1,769		1.49	%	1,723		1.44	%
Total available-for-sale	Total available-for-sale	134,813		96.78	%	148,807		96.79	%	Total available-for-sale	115,140		97.04	%	115,988		96.87	%

Held-to-maturity (at amortized cost):	Held-to-maturity (at amortized cost):									Held-to-maturity (at amortized cost):
Obligations of states and political subdivisions	Obligations of states and political subdivisions	4,486		3.22	%	4,946		3.21	%	Obligations of states and political subdivisions	3,514		2.96	%	3,756		3.13	%
		$	139,299	100.00	%	$	153,753	100.00	%
Total										Total	$	118,654	100.00	%	$	119,744	100.00	%

4839

~~Table of~~ ~~Contents~~

The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of March 31, ~~2022:~~2023:


		Due in one year or less				Due after one year through five years				Due after five years through ten years				Due after ten years				Total					Due in one year or less				Due after one year through five years				Due after five years through ten years				Due after ten years				Total
(dollars in thousands)	(dollars in thousands)	Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		(dollars in thousands)	Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield
Available-for-sale:	Available-for-sale:																					Available-for-sale:
U.S. government agencies	U.S. government agencies	$	—	—	%	$	1,154	1.92	%	$	3,489	1.01	%	$	13,436	0.45	%	$	18,079	0.65	%	U.S. government agencies	$	—	—	%	$	1,004	3.09	%	$	2,094	4.84	%	$	10,049	4.48	%	$	13,147	4.43	%
Mortgage-backed securities	Mortgage-backed securities	—		—	%	—		—	%	3		6.91	%	73,489		1.63	%	73,492		1.63	%	Mortgage-backed securities	—		—	%	—		—	%	2		6.94	%	60,967		1.68	%	60,969		1.68	%
Obligations of states and political subdivisions	Obligations of states and political subdivisions	—		—	%	514		2.80	%	3,458		1.58	%	36,959		1.70	%	40,931		1.70	%	Obligations of states and political subdivisions	—		—	%	—		—	%	5,307		1.62	%	33,564		1.76	%	38,871		1.74	%
Collateralized mortgage obligations	Collateralized mortgage obligations	—		—	%	—		—	%	—		—	%	483		1.75	%	483		1.75	%	Collateralized mortgage obligations	—		—	%	—		—	%	384		1.76	%	—		—	%	384		1.76	%
Corporate bonds	Corporate bonds	—		—	%	1,828		1.25	%	—		—	%	—		—	%	1,828		1.25	%	Corporate bonds	—		—	%	1,769		1.25	%	—		—	%	—		—	%	1,769		1.25	%
Total available-for-sale	Total available-for-sale	—		—	%	3,496		1.70	%	6,950		1.29	%	124,367		1.53	%	134,813		1.52	%	Total available-for-sale	—		—	%	2,773		1.91	%	7,787		2.49	%	104,580		1.98	%	115,140		2.01	%

Held-to-maturity:	Held-to-maturity:																					Held-to-maturity:
Obligations of states and political subdivisions	Obligations of states and political subdivisions	456		6.00	%	1,115		6.00	%	1,590		6.00	%	1,325		6.00	%	4,486		6.00	%	Obligations of states and political subdivisions	354		6.00	%	950		6.00	%	1,375		6.00	%	835		6.00	%	3,514		6.00	%
Total	Total	$	456	6.00	%	$	4,611	2.74	%	$	8,540	2.17	%	$	125,692	1.57	%	$	139,299	1.66	%	Total	$	354	6.00	%	$	3,723	2.96	%	$	9,162	3.02	%	$	105,415	2.01	%	$	118,654	2.13	%

4940

~~Table of~~ ~~Contents~~

The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of December 31, ~~2021:~~2022:


		Due in one year or less				Due after one year through five years				Due after five years through ten years				Due after ten years				Total					Due in one year or less				Due after one year through five years				Due after five years through ten years				Due after ten years				Total
(dollars in thousands)	(dollars in thousands)	Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		(dollars in thousands)	Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield
Available-for-sale:	Available-for-sale:																					Available-for-sale:
U.S. government agencies	U.S. government agencies	$	—	—	%	$	1,591	1.97	%	$	3,814	0.69	%	$	14,277	0.19	%	$	19,682	0.43	%	U.S. government agencies	$	—	—	%	$	849	1.98	%	$	2,625	3.61	%	$	10,699	2.90	%	$	14,173	2.98	%
Mortgage-backed securities	Mortgage-backed securities	—		—	%	—		—	%	3		6.90	%	81,510		1.51	%	81,513		1.51	%	Mortgage-backed securities	—		—	%	—		—	%	2		6.94	%	61,269		1.67	%	61,271		1.67	%
Obligations of states and political subdivisions	Obligations of states and political subdivisions	—		—	%	522		2.80	%	3,748		1.56	%	40,867		1.69	%	45,137		1.69	%	Obligations of states and political subdivisions	501		2.80	%	—		—	%	4,761		1.63	%	33,164		1.76	%	38,426		1.76	%
Collateralized mortgage obligations	Collateralized mortgage obligations	—		—	%	—		—	%	—		—	%	540		1.73	%	540		1.73	%	Collateralized mortgage obligations	—		—	%	—		—	%	—		—	%	395		1.76	%	395		1.76	%
Corporate bonds	Corporate bonds	—		—	%	1,935		1.25	%	—		—	%	—		—	%	1,935		1.25	%	Corporate bonds	—		—	%	1,723		1.25	%	—		—	%	—		—	%	1,723		1.25	%
Total available-for-sale	Total available-for-sale	—		—	%	4,048		1.73	%	7,565		1.12	%	137,194		1.43	%	148,807		1.42	%	Total available-for-sale	501		2.80	%	2,572		1.49	%	7,388		2.33	%	105,527		1.82	%	115,988		1.85	%

Held-to-maturity:	Held-to-maturity:																					Held-to-maturity:
Obligations of states and political subdivisions	Obligations of states and political subdivisions	491		6.00	%	951		6.00	%	3,504		6.00	%	—		—	%	4,946		6.00	%	Obligations of states and political subdivisions	417		6.00	%	1,015		6.00	%	1,470		6.00	%	854		6.00	%	3,756		6.00	%
Total	Total	$	491	6.00	%	$	4,999	2.54	%	$	11,069	2.67	%	$	137,194	1.43	%	$	153,753	1.57	%	Total	$	918	4.25	%	$	3,587	2.77	%	$	8,858	2.94	%	$	106,381	1.86	%	$	119,744	1.98	%

Weighted average yield for securities available-for-sale is the projected yield to maturity given current cash flow projections for U.S. government agency securities, mortgage-backed securities, and collateralized mortgage ~~obligations and is a yield to worst for~~obligations. For callable municipal securities and corporate ~~bonds.~~bonds, weighted average yield is a yield to worst. Weighted average yield for securities held-to-maturity is the stated coupon of the bond.

5041

~~Table of~~ ~~Contents~~

~~A summary of the amortized cost and fair value related to securities as of March 31, 2022 and December 31, 2021 is presented below.~~

Gross Unrealized
(dollars in thousands) Amortized Cost Gains (Losses) Fair Value
March 31, 2022
Available-for-sale:
U.S. government agencies $ 18,241 $ 95 $ (257) $ 18,079
Mortgage-backed securities 79,694 8 (6,210) 73,492
Obligations of states and political subdivisions 44,621 23 (3,713) 40,931
Collateralized mortgage obligations 504 — (21) 483
Corporate bonds 2,000 — (172) 1,828
Total available-for-sale $ 145,060 $ 126 $ (10,373) $ 134,813
Held-to-maturity:
Obligations of states and political subdivisions $ 4,486 $ — $ (27) $ 4,459
December 31, 2021
Available-for-sale:
U.S. government agencies $ 19,824 $ 60 $ (202) $ 19,682
Mortgage-backed securities 82,517 94 (1,098) 81,513
Obligations of states and political subdivisions 44,732 525 (120) 45,137
Collateralized mortgage obligations 537 3 — 540
Corporate bonds 2,000 — (65) 1,935
Total available-for-sale $ 149,610 $ 682 $ (1,485) $ 148,807
Held-to-maturity:
Obligations of states and political subdivisions $ 4,946 $ 251 $ — $ 5,197

The unrealized losses on securities are attributable to interest rate changes, rather than the marketability of the securities or the issuer’s ability to honor redemption of the obligations, as the securities with losses are all obligations of or guaranteed by agencies sponsored by the U.S. government. We have adequate liquidity and the ability and intent to hold these securities to maturity, resulting in full recovery of the indicated impairment. Accordingly, none of the unrealized losses on these securities have been determined to be other than temporary.

~~Table of~~ ~~Contents~~

Loan Portfolio

Our loan portfolio is our largest class of ~~earning~~interest-earning assets and typically provides higher yields than other types of ~~earning~~interest-earning assets. Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting. As of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, our total loans amounted to ~~$2.1~~$2.9 billion and ~~$1.9~~$2.8 billion, respectively. The following table presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.


		As of									As of
		March 31, 2022				December 31, 2021					March 31, 2023				December 31, 2022
(dollars in thousands)	(dollars in thousands)	Amount		% of Loans		Amount		% of Loans		(dollars in thousands)	Amount		% of Loans		Amount		% of Loans
Loans held for investment:	Loans held for investment:									Loans held for investment:
Real estate:	Real estate:									Real estate:
Commercial	Commercial	$	1,760,551	84.18	%	$	1,586,232	81.48	%	Commercial	$	2,442,520	84.71	%	$	2,394,674	85.44	%
Commercial land and development	Commercial land and development	9,090		0.43	%	7,376		0.38	%	Commercial land and development	15,475		0.54	%	7,477		0.27	%
Commercial construction	Commercial construction	59,293		2.83	%	54,214		2.78	%	Commercial construction	98,415		3.41	%	88,669		3.16	%
Residential construction	Residential construction	5,540		0.26	%	7,388		0.38	%	Residential construction	9,410		0.33	%	6,693		0.24	%
Residential	Residential	28,921		1.38	%	28,562		1.47	%	Residential	23,862		0.83	%	24,230		0.86	%
Farmland	Farmland	49,903		2.39	%	54,805		2.82	%	Farmland	51,616		1.79	%	52,478		1.87	%
Commercial:	Commercial:									Commercial:
Secured	Secured	124,930		5.97	%	137,062		7.03	%	Secured	173,500		6.02	%	165,186		5.89	%
Unsecured	Unsecured	22,599		1.08	%	21,136		1.09	%	Unsecured	24,776		0.86	%	25,431		0.91	%
PPP		1,528		0.07	%	22,124		1.14	%

Consumer and other	Consumer and other	19,044		0.91	%	17,167		0.88	%	Consumer and other	32,378		1.12	%	28,628		1.02	%
Loans held for investment, gross	Loans held for investment, gross	2,081,399		99.50	%	1,936,066		99.45	%	Loans held for investment, gross	2,871,952		99.61	%	2,793,466		99.66	%

Loans held for sale:	Loans held for sale:									Loans held for sale:
Commercial	Commercial	10,386		0.50	%	10,671		0.55	%	Commercial	11,315		0.39	%	9,416		0.34	%
Total loans, gross	Total loans, gross	2,091,785		100.00	%	1,946,737		100.00	%	Total loans, gross	2,883,267		100.00	%	2,802,882		100.00	%
Net deferred loan fees	Net deferred loan fees	(1,241)				(1,606)				Net deferred loan fees	(2,104)				(2,140)
Total loans	Total loans	$	2,090,544			$	1,945,131			Total loans	$	2,881,163			$	2,800,742

Commercial real estate loans consist of term loans secured by a mortgage lien on the real property, such as office and industrial buildings, manufactured home communities, self-storage facilities, hospitality properties, faith-based properties, retail shopping centers, and apartment buildings, as well as commercial real estate construction loans that are offered to builders and developers.

Commercial land and development and commercial construction loans consist of loans made to fund commercial land acquisition and development and commercial ~~construction.~~construction, respectively. The real estate purchased with these loans is generally located in or near our market.

Commercial loans consist of financing for commercial purposes in various lines of business, including manufacturing, service industry, and professional service areas. Commercial loans can be secured or unsecured but are generally secured with the assets of the company and/or the personal guaranty of the business ~~owners.~~owner(s).

Residential real estate and construction real estate loans consist of loans secured by single-family and multifamily residential properties, which are both owner-occupied and ~~investor owned.~~investor-owned.

5242

~~Table of~~ ~~Contents~~

The following tables present the commercial real estate loan balance, associated percentage of commercial real estate concentrations, ~~by collateral type,~~ estimated real estate collateral values, and related loan-to-value (“LTV”) ranges by collateral type as of the dates indicated. ~~Collateral values and LTVs included in the table below reflect real estate collateral and do not include personal property collateral.~~ Revolving lines of credit with zero balance and 0.00% LTV are excluded from this table. Collateral values are determined at origination using third-party real estate appraisals or evaluations. Updated appraisals, which are included in the table below, are obtained for loans that are downgraded to watch or substandard. Loans over $1.0 million are reviewed annually, at which time an internal assessment of collateral values is completed.


(dollars in thousands)	(dollars in thousands)	Loan Balance		% of Commercial Real Estate		Collateral Value		Minimum LTV		Maximum LTV		(dollars in thousands)	Loan Balance		% of Commercial Real Estate		Collateral Value		Minimum LTV		Maximum LTV
March 31, 2022
March 31, 2023												March 31, 2023
Manufactured home community	Manufactured home community	$	598,014	33.97	%	$	986,229	14.16	%	82.73	%	Manufactured home community	$	709,015	29.03	%	$	1,230,431	17.03	%	77.99	%
RV Park												RV Park	304,840		12.48	%	524,891		18.56	%	80.67	%
Retail	Retail	192,575		10.94	%	353,059		16.75	%	75.00	%	Retail	266,740		10.92	%	494,906		14.55	%	82.95	%
Multifamily	Multifamily	167,103		9.49	%	356,971		11.88	%	76.49	%	Multifamily	201,562		8.25	%	402,384		13.93	%	75.00	%
Industrial	Industrial	145,598		8.27	%	336,803		10.96	%	89.41	%	Industrial	171,456		7.02	%	410,282		9.67	%	75.00	%
Mini storage												Mini storage	157,339		6.44	%	305,885		19.15	%	70.00	%
Faith-based												Faith-based	151,632		6.21	%	404,559		2.43	%	73.12	%
Office	Office	141,318		8.03	%	310,162		1.05	%	81.55	%	Office	141,501		5.79	%	305,301		4.88	%	74.23	%
Faith-based		130,036		7.39	%	340,498		3.71	%	83.19	%
Mini storage		95,172		5.41	%	175,615		20.63	%	69.72	%
All other types1	All other types1	290,735		16.50	%	627,368		0.75	%	107.83	%	All other types1	338,435		13.86	%	699,599		4.00	%	152.76	%
Total	Total	$	1,760,551	100.00	%	$	3,486,705	0.75	%	107.83	%	Total	$	2,442,520	100.00	%	$	4,778,238	2.43	%	152.76	%

December 31, 2021
December 31, 2022												December 31, 2022
Manufactured home community	Manufactured home community	$	518,910	32.71	%	$	849,269	14.22	%	78.00	%	Manufactured home community	$	673,891	28.14	%	$	1,174,642	17.10	%	78.19	%
RV Park												RV Park	292,886		12.23	%	506,041		18.64	%	77.89	%
Retail	Retail	166,960		10.53	%	307,376		5.10	%	75.00	%	Retail	264,599		11.05	%	490,291		16.48	%	73.93	%
Multifamily	Multifamily	152,412		9.61	%	350,953		5.13	%	75.00	%	Multifamily	202,203		8.44	%	459,695		14.19	%	75.00	%
Industrial	Industrial	135,401		8.54	%	318,875		1.43	%	74.51	%	Industrial	166,403		6.95	%	366,291		10.77	%	75.00	%
Mini storage												Mini storage	158,650		6.63	%	289,820		20.20	%	70.04	%
Faith-based												Faith-based	146,740		6.13	%	383,321		3.19	%	73.55	%
Office	Office	134,728		8.49	%	294,367		1.67	%	75.00	%	Office	145,899		6.09	%	310,248		6.66	%	74.68	%
Faith-based		108,718		6.85	%	272,383		4.59	%	80.14	%
Mini storage		85,712		5.40	%	159,810		20.76	%	69.05	%
Mixed use		83,270		5.25	%	155,961		1.04	%	71.98	%
All other types1	All other types1	200,121		12.62	%	473,952		8.00	%	94.97	%	All other types1	343,403		14.34	%	704,984		—	%	152.96	%
Total	Total	$	1,586,232	100.00	%	$	3,182,946	1.04	%	94.97	%	Total	$	2,394,674	100.00	%	$	4,685,333	—	%	152.96	%

1Types of collateral in the “all other types” category are those that individually make up less than 5.00% commercial real estate concentration and include hospitality properties, auto dealerships, car washes, assisted living communities, country clubs, gas stations/convenience stores, medical offices, special purpose properties, mortuaries, restaurants, and schools.

~~The weighted average loan-to-value of impaired, collateral dependent loans was approximately 133.38% at March 31, 2022 and 70.67% at December 31, 2021.~~

Over the past ~~few~~several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed ~~significantly (when PPP loans are excluded).~~significantly. Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes ~~87.91%~~89.08% of loans held for investment at March 31, ~~2022.~~2023. Commercial secured lending ~~(consisting primarily of SBA 7(a) loans under $350,000)~~ represents ~~6.01%~~6.05% of loans held for investment at March 31, ~~2022.~~2023. We sell the guaranteed portion of all SBA 7(a) ~~loans, excluding PPP~~ loans in the secondary market and will continue to do so as long as market conditions continue to be favorable.

~~Table of~~ ~~Contents~~

We recognize that our commercial real estate loan concentration is significant within our balance sheet. Commercial real estate loan balances as a percentage of risk-based capital were ~~634.02%~~673.90% and ~~577.92%~~680.34% as of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively. We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (e.g., manufactured home communities, self-storage, hospitality, etc.). All loan sectors were within our established limits as of March 31, ~~2022.~~2023. Additionally, our loans are geographically concentrated with borrowers and collateral properties primarily in California.

We believe that our past success is attributable to focusing on products and markets where we have significant expertise. Given our concentrations, we have established strong risk management practices, including risk-based lending standards, self-established product and geographical limits, annual evaluations of income property loans, and semi-annual top-down and bottom-up stress testing. We expect to continue growing our loan portfolio. We do not expect our product or geographic concentrations to materially change.

The following table sets forth the contractual maturities of our loan portfolio as of March 31, ~~2022:~~2023:


(dollars in thousands)		Due in 1 year or less		Due after 1 year through 5 years		Due after 5 years through 15 years		Due after 15 years		Total
(in thousands)												(in thousands)	Due in 1 year or less		Due after 1 year through 5 years		Due after 5 years through 15 years		Due after 15 years		Total
Real estate:	Real estate:											Real estate:
Commercial	Commercial	$	24,776	$	227,918	$	1,464,938	$	42,919	$	1,760,551	Commercial	$	18,853	$	233,844	$	2,126,171	$	63,652	$	2,442,520
Commercial land and development	Commercial land and development	1,204		5,732		2,154		—		9,090		Commercial land and development	1,536		13,132		807		—		15,475
Commercial construction	Commercial construction	3,725		21,155		34,413		—		59,293		Commercial construction	2,978		41,325		54,112		—		98,415
Residential construction	Residential construction	2,784		2,364		392		—		5,540		Residential construction	1,443		6,267		1,700		—		9,410
Residential	Residential	1,170		6,613		20,109		1,029		28,921		Residential	37		6,611		16,225		989		23,862
Farmland	Farmland	1,017		6,986		41,900		—		49,903		Farmland	1,431		4,490		45,695		—		51,616
Commercial:	Commercial:											Commercial:
Secured	Secured	20,749		27,208		83,418		3,941		135,316		Secured	39,609		44,504		97,487		3,215		184,815
Unsecured	Unsecured	1,475		4,372		16,752		—		22,599		Unsecured	696		10,644		13,436		—		24,776
PPP		598		930		—		—		1,528
Consumer and other	Consumer and other	41		6,238		12,754		11		19,044		Consumer and other	1,338		7,742		23,298		—		32,378
Total	Total	$	57,539	$	309,516	$	1,676,830	$	47,900	$	2,091,785	Total	$	67,921	$	368,559	$	2,378,931	$	67,856	$	2,883,267

The following table sets forth the contractual maturities of our loan portfolio as of December 31, ~~2021:~~2022:


(dollars in thousands)		Due in 1 year or less		Due after 1 year through 5 years		Due after 5 years through 15 years		Due after 15 years		Total
(in thousands)												(in thousands)	Due in 1 year or less		Due after 1 year through 5 years		Due after 5 years through 15 years		Due after 15 years		Total
Real estate:	Real estate:											Real estate:
Commercial	Commercial	$	32,107	$	170,222	$	1,343,367	$	40,536	$	1,586,232	Commercial	$	19,406	$	227,519	$	2,083,818	$	63,931	$	2,394,674
Commercial land and development	Commercial land and development	1,209		6,167		—		—		7,376		Commercial land and development	1,611		5,053		813		—		7,477
Commercial construction	Commercial construction	3,418		17,575		32,131		1,090		54,214		Commercial construction	1,957		37,510		49,202		—		88,669
Residential construction	Residential construction	5,609		1,779		—		—		7,388		Residential construction	594		4,783		1,316		—		6,693
Residential	Residential	1,183		8,246		17,871		1,262��		28,562		Residential	348		6,635		16,248		999		24,230
Farmland	Farmland	3,876		8,116		42,813		—		54,805		Farmland	992		5,685		45,801		—		52,478
Commercial:	Commercial:											Commercial:
Secured	Secured	31,436		29,880		82,526		3,891		147,733		Secured	36,154		46,814		88,418		3,216		174,602
Unsecured	Unsecured	1,182		3,976		15,978		—		21,136		Unsecured	55		10,347		15,029		—		25,431
PPP		598		21,526		—		—		22,124

Consumer and other	Consumer and other	35		3,619		13,513		—		17,167		Consumer and other	1,321		8,234		19,067		6		28,628
Total	Total	$	80,653	$	271,106	$	1,548,199	$	46,779	$	1,946,737	Total	$	62,438	$	352,580	$	2,319,712	$	68,152	$	2,802,882

5444

~~Table of~~ ~~Contents~~

The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of March 31, ~~2022:~~2023:


(dollars in thousands)		Fixed Interest Rates		Floating or Adjustable Rates		Total
(in thousands)								(in thousands)	Fixed Interest Rates		Floating or Adjustable Rates		Total
Real estate:	Real estate:							Real estate:
Commercial	Commercial	$	473,725	$	1,286,826	$	1,760,551	Commercial	$	558,746	$	1,883,774	$	2,442,520
Commercial land and development	Commercial land and development	1,543		7,547		9,090		Commercial land and development	1,502		13,973		15,475
Commercial construction	Commercial construction	—		59,293		59,293		Commercial construction	1,405		97,010		98,415
Residential construction	Residential construction	—		5,540		5,540		Residential construction	3,593		5,817		9,410
Residential	Residential	2,181		26,740		28,921		Residential	1,363		22,499		23,862
Farmland	Farmland	4,062		45,841		49,903		Farmland	5,802		45,814		51,616
Commercial:	Commercial:							Commercial:
Secured	Secured	34,216		101,100		135,316		Secured	40,740		144,075		184,815
Unsecured	Unsecured	20,625		1,974		22,599		Unsecured	19,829		4,947		24,776
PPP		1,528		—		1,528

Consumer and other	Consumer and other	19,044		—		19,044		Consumer and other	32,378		—		32,378
Total	Total	$	556,924	$	1,534,861	$	2,091,785	Total	$	665,358	$	2,217,909	$	2,883,267

The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of December 31, ~~2021:~~2022:


(dollars in thousands)		Fixed Interest Rates		Floating or Adjustable Rates		Total
(in thousands)								(in thousands)	Fixed Interest Rates		Floating or Adjustable Rates		Total
Real estate:	Real estate:							Real estate:
Commercial	Commercial	$	394,648	$	1,191,584	$	1,586,232	Commercial	$	552,206	$	1,842,468	$	2,394,674
Commercial land and development	Commercial land and development	722		6,654		7,376		Commercial land and development	1,514		5,963		7,477
Commercial construction	Commercial construction	—		54,214		54,214		Commercial construction	1,405		87,264		88,669
Residential construction	Residential construction	—		7,388		7,388		Residential construction	3,366		3,327		6,693
Residential	Residential	2,222		26,340		28,562		Residential	1,531		22,699		24,230
Farmland	Farmland	4,183		50,622		54,805		Farmland	6,261		46,217		52,478
Commercial:	Commercial:							Commercial:
Secured	Secured	34,771		112,962		147,733		Secured	37,517		137,085		174,602
Unsecured	Unsecured	19,841		1,295		21,136		Unsecured	20,607		4,824		25,431
PPP		22,124		—		22,124

Consumer and other	Consumer and other	17,167		—		17,167		Consumer and other	28,628		—		28,628
Total	Total	$	495,678	$	1,451,059	$	1,946,737	Total	$	653,035	$	2,149,847	$	2,802,882

Asset Quality

We manage the quality of our loans based upon trends at the overall loan portfolio level as well as within each product type. We measure and monitor key factors that include the level and trend of classified, delinquent, non-accrual, and nonperforming assets, collateral coverage, credit scores, and debt service coverage, where applicable. These metrics directly impact our evaluation of the adequacy of our allowance for ~~loan~~credit losses.

~~Table of~~ ~~Contents~~

Our primary objective is to maintain a high level of asset quality in our loan portfolio. We believe our underwriting practices and policies, established by experienced professionals, appropriately govern the risk profile for our loan portfolio. These policies are continually evaluated and updated as necessary. All loans are assessed and assigned a risk classification at origination based on underlying characteristics of the transaction, such as collateral cash flow, collateral coverage, and borrower strength. We believe that we have a comprehensive methodology to proactively monitor our credit quality after the origination process. Particular emphasis is placed on our commercial portfolio, where risk assessments are reevaluated as a result of reviewing commercial property operating statements and borrower financials. On an ongoing basis, we also monitor payment performance, delinquencies, and tax and property insurance compliance. We design our practices to facilitate the early detection and remediation of problems within our loan portfolio. Assigned risk classifications are an integral part of ~~management assessing~~management’s assessment of the adequacy of our allowance for ~~loan~~credit losses. We periodically employ the

use of an independent consulting firm to evaluate our underwriting and risk assessment process. Like other financial institutions, we are subject to the risk that our loan portfolio will be exposed to increasing pressures from deteriorating borrower credit due to general economic ~~conditions.~~conditions and rising interest rates.

Nonperforming Assets

Our nonperforming assets consist of nonperforming loans and foreclosed real estate, if any. Nonperforming loans consist of non-accrual loans and loans contractually past due by 90 days or more and still accruing. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by 90 days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued, but not collected, is reversed against current period interest income. Income on such loans is then recognized only to the extent that cash is received and where the future collection of principal is probable. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.

~~Troubled Debt Restructurings~~

We consider a loan to be a TDR when we have granted a concession and the borrower is experiencing financial difficulty. In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under our internal underwriting policy. A TDR loan generally is kept on non-accrual status until, among other criteria, the borrower has paid for six consecutive months with no payment defaults, at which time the TDR may be placed back on accrual status.

~~COVID-19 Deferments~~

The CARES Act, as amended by the Consolidated Appropriations Act, specified that COVID-19 related loan modifications executed between March 1, 2020 and the earlier of: (i) 60 days after the date of termination of the national emergency declared by the President; and (ii) January 1, 2022, on loans that were current as of December 31, 2019 are not TDRs. Additionally, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs under ASC Subtopic 310-40, “Troubled Debt Restructuring by Creditors.” These modifications include short-term modifications (e.g., up to six months) such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. We elected to apply these temporary accounting provisions to loans under payment relief beginning in March 2020. As of March 31, 2022, six borrowing relationships with six loans totaling $12.2 million, or 0.59% of loans held for investment, were in a COVID-19 deferment period, and one loan totaling $0.1 million had been in a COVID-19 deferment period in the fourth quarter of 2021 but was not in such deferment as of March 31, 2022. Two of the loans that received COVID-19 deferments in the first quarter of 2022 had the principal portion deferred to the respective maturity of the loan. We accrue and recognize interest income on loans under payment relief based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued interest is fully paid.

~~Table of~~ ~~Contents~~

~~SBA 7(a) Payments Made Under the CARES Act~~

Section 1112 of the CARES Act required the SBA to make payments on new and existing 7(a) loans for up to six months. The Consolidated Appropriations Act amended this section of the CARES Act to extend the payment on 7(a) loans in existence on March 27, 2020, beginning on February 1, 2021 for up to eight or eleven months, depending on the borrower’s industry code, and to require the SBA to make up to three months of payments on new 7(a) loans approved between February 1, 2021 and September 30, 2021. These payments are not deferments but rather full payments of principal and interest that the borrower will not be responsible for in the future. In the first three months of 2022, the SBA made payments under this program on 25 of our SBA 7(a) loans, totaling $0.1 million in principal and interest. As of March 31, 2022, the principal outstanding on loans that received one or more of these payments under the CARES Act was $2.6 million.

~~Table of~~ ~~Contents~~

SBA Loans

During the ~~first quarter of 2022,~~three months ended March 31, 2023, the Company sold 5055 SBA 7(a) loans with government guaranteed portions totaling ~~$11.7~~$12.7 million. OfThe Company received gross proceeds of $13.3 million on the loans sold during the ~~quarter, the Company received gross proceeds of $12.6 million~~three months ended March 31, 2023, resulting in athe recognition of net ~~gain~~gains on sale of ~~$0.9 million. The Company did not sell any PPP loans in~~$0.6 million during the ~~first quarter of 2022.~~same period.

Non-accrual Loans

The following table provides details of our nonperforming and restructured assets and certain other related information as of the dates presented:


		As of							As of
(dollars in thousands)	(dollars in thousands)	March 31, 2022			December 31, 2021			(dollars in thousands)	March 31, 2023			December 31, 2022
Non-accrual loans:	Non-accrual loans:							Non-accrual loans:
Real estate:	Real estate:							Real estate:
Commercial	Commercial	$	118		$	122		Commercial	$	102		$	106

Residential	Residential	177			178			Residential	175			175

Commercial:								Commercial:
Secured	Secured	1,033			288			Secured	118			123

Consumer and other								Consumer and other	23			—
Total non-accrual loans	Total non-accrual loans	1,328			588			Total non-accrual loans	418			404

Loans past due 90 days or more and still accruing:	Loans past due 90 days or more and still accruing:							Loans past due 90 days or more and still accruing:

Total loans past due and still accruing	Total loans past due and still accruing	—			—			Total loans past due and still accruing	—			—
Total nonperforming loans	Total nonperforming loans	1,328			588			Total nonperforming loans	418			404

Real estate owned	Real estate owned	—			—			Real estate owned	—			—
Total nonperforming assets	Total nonperforming assets	$	1,328		$	588		Total nonperforming assets	$	418		$	404
COVID-19 deferments		$	12,202		$	12,156

Performing TDRs (not included above)		$	—		$	—
Performing LMs (not included above)								Performing LMs (not included above)	$	—		$	—

Allowance for loan losses to period end nonperforming loans		1,799.99		%	3,954.30		%
Allowance for credit losses to period end nonperforming loans								Allowance for credit losses to period end nonperforming loans	8,167.68		%	7,026.98		%
Nonperforming loans to loans held for investment1	Nonperforming loans to loans held for investment1	0.06		%	0.03		%	Nonperforming loans to loans held for investment1	0.01		%	0.01		%
Nonperforming assets to total assets	Nonperforming assets to total assets	0.05		%	0.02		%	Nonperforming assets to total assets	0.01		%	0.01		%
Nonperforming loans plus performing TDRs to loans held for investment1		0.06		%	0.03		%
COVID-19 deferments to loans held for investment1		0.59		%	0.63		%
Nonperforming loans plus performing LMs to loans held for investment1								Nonperforming loans plus performing LMs to loans held for investment1	0.01		%	0.01		%

1Loans held for investment are equivalent to total loans outstanding at period end.

The ratio of nonperforming loans to loans held for investment ~~increased from 0.03%~~remained consistent at 0.01% as of December 31, ~~2021 to 0.06% as of~~2022 and March 31, ~~2022, primarily due to an increase in commercial secured nonperforming loans.~~

The ratio of the allowance for loan losses to nonperforming loans decreased from 3,954.30% as of December 31, 2021 to 1,799.99% as of March 31, 2022. The decrease was primarily due to a relatively flat allowance for loan losses from December 31, 2021 to March 31, 2022, while commercial secured non-accrual loans increased by $0.7 million from December 31, 2021 to March 31, 2022.

~~Table of~~ ~~Contents~~

2023.

Potential Problem Loans

We utilize a risk grading system for our loans to aid us in evaluating the overall credit quality of our real estate loan portfolio and assessing the adequacy of our allowance for ~~loan~~credit losses. All loans are grouped into a risk category at the time of origination. Commercial real estate loans over $1.0 million are reevaluated at least annually for proper classification in conjunction with our review of property and borrower financial information. All loans are reevaluated for proper risk grading as new information such as payment patterns, collateral condition, and other relevant information comes to our attention.

The banking industry defines loans graded substandard or doubtful as “classified” loans. The following table shows our levels of classified loans as of the periods indicated:


(dollars in thousands)		Pass		Watch		Substandard		Doubtful		Total
March 31, 2022
(in thousands)												(in thousands)	Pass		Watch		Substandard		Doubtful		Total
March 31, 2023												March 31, 2023
Real estate:	Real estate:											Real estate:
Commercial	Commercial	$	1,751,563	$	8,087	$	901	$	—	$	1,760,551	Commercial	$	2,425,747	$	16,671	$	102	$	—	$	2,442,520
Commercial land and development	Commercial land and development	9,090		—		—		—		9,090		Commercial land and development	15,475		—		—		—		15,475
Commercial construction	Commercial construction	53,393		5,900		—		—		59,293		Commercial construction	92,515		5,900		—		—		98,415
Residential construction	Residential construction	5,540		—		—		—		5,540		Residential construction	9,410		—		—		—		9,410
Residential	Residential	28,744		—		177		—		28,921		Residential	23,687		—		175		—		23,862
Farmland	Farmland	49,903		—		—		—		49,903		Farmland	51,616		—		—		—		51,616
Commercial:	Commercial:											Commercial:
Secured	Secured	122,996		14		1,920		—		124,930		Secured	171,807		1,575		118		—		173,500
Unsecured	Unsecured	22,599		—		—		—		22,599		Unsecured	24,776		—		—		—		24,776
PPP		1,528		—		—		—		1,528
Consumer	Consumer	19,032		—		12		—		19,044		Consumer	32,355		—		23		—		32,378
Total	Total	$	2,064,388	$	14,001	$	3,010	$	—	$	2,081,399	Total	$	2,847,388	$	24,146	$	418	$	—	$	2,871,952

December 31, 2021
December 31, 2022												December 31, 2022
Real estate:	Real estate:											Real estate:
Commercial	Commercial	$	1,575,006	$	1,970	$	9,256	$	—	$	1,586,232	Commercial	$	2,379,766	$	14,802	$	106	$	—	$	2,394,674
Commercial land and development	Commercial land and development	7,376		—		—		—		7,376		Commercial land and development	7,477		—		—		—		7,477
Commercial construction	Commercial construction	48,288		5,926		—		—		54,214		Commercial construction	82,769		5,900		—		—		88,669
Residential construction	Residential construction	7,388		—		—		—		7,388		Residential construction	6,693		—		—		—		6,693
Residential	Residential	28,384		—		178		—		28,562		Residential	24,055		—		175		—		24,230
Farmland	Farmland	54,805		—		—		—		54,805		Farmland	52,478		—		—		—		52,478
Commercial:	Commercial:											Commercial:
Secured	Secured	135,131		751		1,180		—		137,062		Secured	163,879		1,184		123		—		165,186
Unsecured	Unsecured	21,136		—		—		—		21,136		Unsecured	25,431		—		—		—		25,431
PPP		22,124		—		—		—		22,124
Consumer	Consumer	17,167		—		—		—		17,167		Consumer	28,602		—		26		—		28,628
Total	Total	$	1,916,805	$	8,647	$	10,614	$	—	$	1,936,066	Total	$	2,771,150	$	21,886	$	430	$	—	$	2,793,466

Loans designated as watch and substandard, which are not considered adversely classified, ~~decreased~~increased to ~~$17.0~~$24.6 million at March 31, ~~2022~~2023 from ~~$19.3~~$22.3 million at December 31, ~~2021, which~~2022. Loans designated as watch increased while loans designated substandard decreased period-over-period due to additional commercial real estate loans designated as watch at March 31, 2023, partly offset by an improvement in the risk grade of some commercial real estate loans designated as watch at December 31, 2022. This resulted in ~~a decrease~~an increase in the reserve overall. There were no loans with doubtful risk grades at March 31, ~~2022~~2023 or December 31, ~~2021.~~2022.

5947

~~Table of~~ ~~Contents~~

Allowance for ~~Loan~~Credit Losses

The allowance for ~~loan~~credit losses is established through a provision for ~~loan~~credit losses charged to operations. Loans are charged against the allowance for ~~loan~~credit losses when management believes that the collectability of the principal is unlikely. Subsequent recoveries of previously charged-off amounts, if any, are credited to the allowance for ~~loan~~credit losses.

The allowance for ~~loan~~credit losses is evaluated on a regular basis by management and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

At March 31, 2023, the Company’s allowance for credit losses was $34.2 million, as compared to $28.4 million at December 31, 2022. The $5.8 million increase in the allowance is due to a $5.3 million adjustment recorded in connection with the adoption of ASC 326 and a $0.9 million provision for credit losses recorded during the three months ended March 31, 2023, partially offset by net charge-offs of $0.4 million during the same period.

While the entire allowance for ~~loan~~credit losses is available to absorb losses from any and all loans, the following table represents management’s allocation of our allowance for ~~loan~~credit losses by loan category, and the percentage of the allowance for ~~loan~~credit losses in each category, for the periods indicated.

At March 31, 2022, the Company’s allowance for loan losses was $23.9 million, as compared to $23.2 million at December 31, 2021. The $0.7 million increase is due to a $1.0 million provision for loan losses recorded during the quarter ended March 31, 2022, offset by net charge-offs of $0.3 million during the quarter.

~~The following table is a summary of the allowance for loan losses by loan class as of the periods indicated:~~


		March 31, 2022				December 31, 2021					March 31, 2023				December 31, 2022
(dollars in thousands)		Dollars		% of Total		Dollars		% of Total
Collectively evaluated for impairment:
(in thousands)										(in thousands)	Amount		% of Total		Amount		% of Total
Real estate:	Real estate:									Real estate:
Commercial	Commercial	$	13,868	58.01	%	$	12,869	55.37	%	Commercial	$	26,846	78.56	%	$	19,216	67.69	%
Commercial land and development	Commercial land and development	66		0.28	%	50		0.22	%	Commercial land and development	224		0.66	%	54		0.19	%
Commercial construction	Commercial construction	430		1.80	%	371		1.60	%	Commercial construction	1,423		4.16	%	645		2.27	%
Residential construction	Residential construction	40		0.17	%	50		0.22	%	Residential construction	173		0.51	%	49		0.17	%
Residential	Residential	208		0.87	%	192		0.83	%	Residential	179		0.52	%	175		0.62	%
Farmland	Farmland	611		2.56	%	645		2.78	%	Farmland	217		0.64	%	644		2.27	%
Commercial:	Commercial:									Commercial:
Secured	Secured	6,400		26.77	%	6,687		28.77	%	Secured	4,215		12.33	%	7,098		25.00	%
Unsecured	Unsecured	246		1.03	%	207		0.89	%	Unsecured	150		0.44	%	116		0.41	%
PPP		—		—	%	—		—	%
Consumer and other	Consumer and other	1,088		4.55	%	889		3.82	%	Consumer and other	400		1.17	%	347		1.22	%
Unallocated	Unallocated	308		1.29	%	1,111		4.78	%	Unallocated	345		1.01	%	45		0.16	%
		23,265		97.33	%	23,071		99.28	%
Individually evaluated for impairment		639		2.67	%	172		0.72	%
Total allowance for loan losses		$	23,904	100.00	%	$	23,243	100.00	%
Total allowance for credit losses										Total allowance for credit losses	$	34,172	100.00	%	$	28,389	100.00	%

The ratio of allowance for ~~loan~~credit losses to total loans held for investment was ~~1.15%~~1.19% at March 31, ~~2022,~~2023, compared to ~~1.20%~~1.02% at December 31, 2021. Excluding SBA-guaranteed PPP loans, the ratio of the allowance for loan losses to total loans held for investment was 1.15% and 1.22% at March 31, 2022 and December 31, 2021, respectively. See the section entitled “Non-GAAP Financial Measures” for a reconciliation of our non-GAAP financial measures to the most directly comparable GAAP financial measure. Non-accrual2022. Nonperforming loans totaled ~~$1.3~~$0.4 million, or ~~0.06%~~0.01% of total loans held for investment, at both March 31, ~~2022, increasing from $0.6 million, or 0.03% of total loans held for investment, at~~2023 and December 31, ~~2021.~~2022.

6048

~~Table of~~ ~~Contents~~

The following table provides information on the activity within the allowance for ~~loan~~credit losses as of and for the periods indicated:

As of and for the three months ended
March 31, 2022 March 31, 2021
(dollars in thousands) Activity % of
Average Loans Held for Investment Activity % of
Average Loans Held for Investment
Average loans held for investment $ 1,970,311 $ 1,523,754
Allowance for loan losses (beginning of period) $ 23,243 $ 22,189

Net (charge-offs) recoveries:
Real estate:
Commercial — — % — — %
Commercial land and development — — % — — %
Commercial construction — — % — — %
Residential construction — — % — — %
Residential — — % — — %
Farmland — — % — — %
Commercial:
Secured (263) (0.01) % (168) (0.01) %
Unsecured — — % — — %
PPP — — % — — %
Consumer and other (26) — % 50 — %
Net charge-offs (289) (0.01) % (118) (0.01) %

Provision for loan losses 950 200

Allowance for loan losses (end of period) $ 23,904 $ 22,271
Loans held for investment $ 2,080,158 $ 1,543,493
Allowance for loan losses to loans held for investment 1.15 % 1.44 %


	As of and for the three months ended
	March 31, 2023					March 31, 2022
(dollars in thousands)	Activity			% of Average Loans Held for Investment		Activity			% of Average Loans Held for Investment
Average loans held for investment	$	2,826,035				$	1,970,311

Allowance for credit losses (beginning of period)	$	28,389				$	23,243
Effect of adoption of ASC 326	5,262					—

Net (charge-offs) recoveries:







Commercial:
Secured	(396)			(0.01)	%	(263)			(0.01)	%


Consumer and other	17			—	%	(26)			—	%
Net charge-offs	(379)			(0.01)	%	(289)			(0.01)	%

Provision for credit losses	900					950

Allowance for credit losses (end of period)	$	34,172				$	23,904

Loans held for investment	$	2,869,848				$	2,080,158
Allowance for credit losses to loans held for investment	1.19		%			1.15		%

The allowance for loan losses to loans held for investment decreased from 1.44% as of March 31, 2021 to 1.15% as of March 31, 2022. The decrease was primarily due to (i) loan growth; (ii) improvements in the economy, including improved economic conditions related to the impact of the COVID-19 pandemic during the first quarter of 2022 as compared to the first quarter of 2021; and (iii) a decrease in loans designated as watch and substandard from $60.5 million as of March 31, 2021 to $17.0 million as of March 31, 2022.

Net charge-offs as a percent of average loans held for investment remained stable at 0.01% for the three months ended March 31, 2021 and March 31, 2022. The net charge-off rate related to the commercial secured portfolio remained stable at 0.01% for the three months ended March 31, 2021 and March 31, 2022. The net recovery related to the consumer portfolio for the three months ended March 31, 2021 reversed to a charge-off for the three months ended March 31, 2022, but both were insignificant as a percent of average loans held for investment during the periods indicated.

~~Table of~~ ~~Contents~~

Liabilities

During the first three months of ~~2022,~~2023, total liabilities increased by ~~$225.5~~$162.3 million from ~~$2.3~~$3.0 billion as of December 31, ~~2021~~2022 to ~~$2.5~~$3.1 billion as of March 31, ~~2022.~~2023. This increase was primarily due to an increase in total deposits of ~~$217.2~~$138.4 million, comprised of ~~increases~~an increase of ~~$39.2~~$273.0 million in interest-bearing deposits, partially offset by a decrease of $134.6 million in non-interest-bearing deposits, ~~and $178.0 million~~as well as increases in ~~interest-bearing deposits.~~FHLB advances of $20.0 million.

Deposits

Representing ~~98.27%~~93.11% of our total liabilities as of March 31, ~~2022,~~2023, deposits are our primary source of funding for our business operations.

Total deposits increased by ~~$217.2~~$138.4 million, or ~~9.50%~~4.97%, to ~~$2.5~~$2.9 billion at March 31, ~~2022~~2023 from ~~$2.3~~$2.8 billion ~~as of~~at December 31, ~~2021.~~2022. Deposit increases were primarily ~~attributed~~attributable to an increase in the number of new relationships, as well as normal fluctuations in some of our ~~large~~larger accounts. Non-interest-bearing deposits ~~increased~~decreased by ~~$39.2~~$134.6 million ~~in the first three months of~~from December 31, 2022 to ~~$941.3~~$836.7 million and represented ~~37.60%~~28.65% of total deposits at March 31, ~~2022,~~2023, compared to ~~39.46%~~34.91% of total deposits at December 31, ~~2021.~~2022. Our loan to deposit ratio was ~~83.52%~~98.66% at March 31, ~~2022,~~2023, as compared to ~~85.09%~~100.67% at December 31, ~~2021.~~2022. We intend to continue to operate our business with a loan to deposit ratio ~~similar to~~within the range of these levels.

The following tables summarize our deposit composition by average deposits and average rates paid for the periods indicated:

For the three months ended
March 31, 2022 March 31, 2021
(dollars in thousands) Average Amount
Average
Rate Paid %
of Interest-bearing Deposits Average
Amount
Average
Rate Paid %
of Interest-bearing Deposits
Interest checking $ 276,690 0.10 % 19.53 % $ 154,678 0.10 % 13.70 %
Money market and savings 1,011,582 0.16 % 71.42 % 928,259 0.26 % 82.21 %
Time 128,183 0.26 % 9.05 % 46,171 0.56 % 4.09 %
Total interest-bearing deposits $ 1,416,455 0.16 % 100.00 % $ 1,129,108 0.25 % 100.00 %


	For the three months ended
	March 31, 2023						March 31, 2022
(dollars in thousands)	Average Amount		Average Rate Paid		% of Total Deposits		Average Amount		Average Rate Paid		% of Total Deposits
Interest-bearing transaction accounts	$	379,593	0.46	%	13.44	%	$	276,690	0.10	%	11.83	%
Money market and savings accounts	1,242,355		1.95	%	43.98	%	1,011,582		0.16	%	43.26	%
Time accounts	300,952		3.99	%	10.66	%	128,183		0.26	%	5.48	%
Demand accounts	901,491		—	%	31.92	%	922,128		—	%	39.43	%
Total deposits	$	2,824,391	1.35	%	100.00	%	$	2,338,583	0.10	%	100.00	%

Uninsured and uncollateralized deposits totaled ~~$1.5~~$1.0 billion and ~~$1.3~~$1.2 billion at March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, respectively.

As of March 31, ~~2022,~~2023, our 1840 largest deposit relationships, each accounting for more than $10.0 million, totaled ~~$876.9 million,~~$1.6 billion, or ~~35.03%~~54.40% of our total deposits. The average age on deposit relationships of more than $10.0 million was 10.6 years. As of December 31, ~~2021,~~2022, our 2640 largest deposit relationships, each accounting for more than $10.0 million, totaled ~~$912.7 million,~~$1.5 billion, or ~~39.93%~~52.15% of our total deposits. Overall, our large deposit relationships have been relatively consistent over time and have helped to continue to grow our deposit base. Our large deposit relationships are comprised of the following entity types as of the periods indicated:


(dollars in thousands)		March 31, 2022		December 31, 2021
(in thousands)						(in thousands)	March 31, 2023		December 31, 2022
Municipalities	Municipalities	$	447,585	$	424,483	Municipalities	$	641,795	$	601,968
Non-profits	Non-profits	219,341		181,080		Non-profits	232,065		195,996
Businesses	Businesses	210,004		307,132		Businesses	589,138		527,921
Brokered deposits						Brokered deposits	125,617		124,993
Total	Total	$	876,930	$	912,695	Total	$	1,588,615	$	1,450,878

Our largest single deposit relationship ~~relates~~at March 31, 2023 related to a non-profit association that supports hospitals and health systems. The balances for this customer were ~~$182.4~~$220.9 million, or ~~7.29%~~approximately 7.56% of total deposits, ~~at March~~as of that date. At December 31, 2022, our largest single deposit relationship related to a government agency and ~~$155.0~~had balances of $180.0 million, or ~~6.78%~~6.47% of total deposits ~~at December 31, 2021.~~

~~Table~~as of ~~Contents~~

that date.

The following ~~tables set~~table sets forth the maturity of time deposits as of March 31, ~~2022:~~2023:


(dollars in thousands)		$250,000 or Greater		Less than $250,000		Total		Uninsured Portion
(in thousands)										(in thousands)	$250,000 or Greater		Less than $250,000		Total		Uninsured Portion
Remaining maturity:	Remaining maturity:									Remaining maturity:
Three months or less	Three months or less	$	76,698	$	21,543	$	98,241	$	74,698	Three months or less	$	134,161	$	139,154	$	273,315	$	131,161
Over three through six months	Over three through six months	75,000		1,392		76,392		74,750		Over three through six months	55,434		699		56,133		52,434
Over six through twelve months	Over six through twelve months	741		2,622		3,363		241		Over six through twelve months	5,142		2,863		8,005		3,392
Over twelve months	Over twelve months	438		600		1,038		188		Over twelve months	34,303		814		35,117		32,303
Total	Total	$	152,877	$	26,157	$	179,034	$	149,877	Total	$	229,040	$	143,530	$	372,570	$	219,290

FHLB Advances and Other Borrowings

From time to time, we utilize short-term collateralized FHLB borrowings to maintain adequate liquidity. There were no borrowings of $120.0 million outstanding as of March 31, ~~2022~~2023 and borrowings of $100.0 million outstanding as of December 31, ~~2021.~~2022.

In ~~2017 and 2019,~~2022, we issued subordinated notes of ~~$25.0 million and $3.8 million, respectively.~~$75.0 million. This debt was issued to investors in private placement transactions. See Note 8,6, Long Term Debt and Other Borrowings, in the notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding these subordinated notes. The proceeds of the notes qualify as Tier 2 capital for the Company under the regulatory capital rules of the federal banking agencies. The following table is a summary of our outstanding subordinated notes as of March 31, ~~2022:~~2023:

~~(dollars in thousands)~~

~~Issuance Date~~

~~Amount of Notes~~

~~Prepayment Right~~

~~Maturity Date~~

~~Subordinated notes~~

~~September 2017~~

~~25,000~~

~~September 28, 2022~~

~~September 15, 2027~~

~~Fixed at 6.00% through September 15, 2022, then three-month London Inter-bank Offered Rate ("LIBOR") plus 404.4 basis points (4.88% as of March 31, 2022) through maturity~~

~~Subordinated notes~~

~~November 2019~~

~~3,750~~

~~September 30, 2022~~

~~September 15, 2027~~

~~Fixed at 5.50% through September 15, 2022, then three-month LIBOR plus 354.4 basis points (4.38% as of March 31, 2022) through maturity~~

(in thousands)

Issuance Date

Amount of Notes

Prepayment Right

Maturity Date

Subordinated notes

August 2022

75,000

August 17, 2027

September 1, 2032

Fixed at 6.00% through September 1, 2027, then three-month Term SOFR plus 329.0 basis points (8.18% as of March 31, 2023) through maturity

Shareholders’ Equity

Shareholders’ equity totaled ~~$231.1~~$260.7 million at March 31, ~~2022~~2023 and ~~$235.0~~$252.8 million at December 31, ~~2021.~~2022. The ~~decrease~~increase in shareholders’ equity was primarily attributable to net income recognized of ~~$9.9~~$13.2 million ~~offset by a net decline of $6.7~~and $1.5 million in other comprehensive income, partially offset by a decrease of $4.5 million to retained earnings, net of tax effect, relating to the adoption of ASC 326 on January 1, 2023 and ~~$7.5~~$2.6 million in cash distributions paid during the three months ended March 31, ~~2022.~~2023.

Liquidity and Capital Resources

Liquidity Management

We manage liquidity based upon factors that include the level of diversification of our funding sources, the composition of our deposit types, the availability of unused funding sources, our off-balance sheet obligations, the amount of cash and liquid securities we hold, and the availability of assets to be readily converted into cash without undue loss. As the primary federal regulator of the Bank, the FDIC evaluates ~~the~~our liquidity ~~of the Bank~~ on a stand-alone basis pursuant to applicable guidance and policies.

~~Table of~~ ~~Contents~~

Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities, and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds, and the ability to convert assets into cash. Changes in economic conditions or exposure to borrower credit ~~market,~~quality, capital markets, and operational, legal, or reputational risks could also affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity management.

The Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its subordinated debt. The Company’s main source of cash flow is dividends declared and paid to it by the Bank. There are statutory and regulatory limitations that affect the ability of the Bank to pay dividends to the Company, including various legal and regulatory provisions that limit the amount of dividends the Bank can pay to the Company without regulatory approval. Under the California Financial Code, payment of a dividend from the Bank to the Company without advance regulatory approval is restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net income from the previous three fiscal years less the amount of dividends paid during that period. We believe that these limitations will not impact our ability to meet our ongoing short-term cash obligations. For contingency purposes, the Company maintains a minimum level of cash to fund one year’s projected operating cash flow needs plus two years’ subordinated notes debt service. We continually monitor our liquidity position in order to meet all reasonably foreseeable short-term, long-term, and strategic liquidity demands. Management has established a comprehensive process for identifying, measuring, monitoring, and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management

processes. Critical elements of our liquidity risk management include effective corporate governance, consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems, including stress tests, that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments that can be used to meet liquidity needs in stress situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity risk management process.

Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances, and the principal and interest payments we receive on loans and investment securities. Cash on hand, cash at third-party banks, investments available-for-sale, and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail and wholesale deposits, advances from the FHLB, and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve ~~Bank of San Francisco discount window,~~Discount Window, draws on established federal funds lines from unaffiliated commercial banks, and the issuance of debt or equity securities. We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary.

In addition, we have a shelf registration statement on file with the SEC registering $250.0 million for any combination of equity or debt securities, depository shares, warrants, purchase contracts, purchase units, subscription rights, and units in one or more offerings. Specific information on the terms of and the securities being offered will be provided at the time of the offering. Proceeds from any future offerings are expected to be used for corporate purposes or other purposes to be disclosed at the time of the offering.

Sources and Uses of Cash

Our executive officers and board of directors review our sources and potential uses of cash in connection with our annual budgeting process. Generally speaking, our principal funding source is cash from ~~gathering of~~ deposits, and our principal uses of cash include funding of loans, operating expenses, income taxes, and dividend payments, as described below. ~~In 2021, we also had significant cash inflows as a result of our IPO.~~As of March 31, ~~2022,~~2023, management believes the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.

~~IPO~~

On May 7, 2021, we completed our IPO at a price of $20.00 per share. We raised approximately $111.2 million in net proceeds after deducting underwriting discounts and commissions of approximately $8.5 million and certain estimated offering expenses payable by us of approximately of $1.3 million. The net proceeds less $2.1 million in other related expenses, including audit fees, legal fees, listing fees, and other expenses totaled $109.1 million.

~~Table of~~ ~~Contents~~

Loans

Loans are a significant use of cash in daily operations, and a source of cash as customers make payments on their loans or as loans are sold to other financial institutions. Cash flows from loans are affected by the timing and amount of customer payments and prepayments, changes in interest rates, the general economic environment, competition, and the political environment.

During the three months ended March 31, ~~2022,~~2023, we had cash outflows of ~~$135.0~~$69.5 million in loan originations and advances, net of principal collected, and ~~$21.2~~$24.0 million in loans originated for sale.

Additionally, we enter into commitments to extend credit in the ordinary course of business, such as commitments to fund new loans and undisbursed construction funds. While these commitments represent contractual cash requirements, a portion of these commitments to extend credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. At March 31, ~~2022,~~2023, total off-balance sheet commitments totaled ~~$249.4~~$335.1 million. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth, and liquid assets.

Deposits

Deposits are our primary source of funding for our business operations, and the cost of deposits has a significant impact on our net interest income and net interest margin.

Our deposits are primarily made up of ~~primarily non-interest~~money market, interest checking, time deposits, and ~~money market~~non-interest-bearing demand deposits. Aside from commercial and business clients, a significant portion of our deposits are from municipalities and

non-profit organizations. Cash flows from deposits are impacted by the timing and amount of customer deposits, changes in market rates, and collateral availability.

During the three months ended March 31, ~~2022,~~2023, we had significant cash inflows related to an increase in deposits of ~~$217.2~~$138.4 million, primarily as a result of an increase in the number of new relationships and fluctuations in existing accounts.

Over the next twelve months, approximately ~~$178.0~~$337.5 million of time deposits are expected to mature. ~~As these time deposits mature, some of these~~These deposits may not renew due to ~~the competition in the Bank’s marketplace.~~general competition. However, based on our historical runoff experience, we expect the outflow will not be significant and can be replenished through our organic growth in deposits. We believe our emphasis on local deposits, combined with our liquid investment portfolio, provides a stable funding base.

At March 31, 2023, cash and cash equivalents represented 11.91% of total deposits.

Investment Securities

Our investment securities ~~excluding held-to-maturity securities,~~ totaled ~~$134.8~~$118.7 million at March 31, ~~2022. At March 31, 2022, 52.76% and 29.38% of our investment portfolio consisted of mortgage-backed~~2023. Mortgage-backed securities and obligations of states and political subdivisions comprised 51.38% and 32.76% of our investment portfolio, respectively. Cash proceeds from mortgage-backed securities result from payments of principal and interest by borrowers. Cash proceeds from obligations of states and political subdivisions occur when these securities are called or mature. Assuming the current prepayment speed and interest rate environment, we expect to receive approximately ~~$14.4~~$8.2 million from our securities ~~during 2022.~~over the next 12 months. In future periods, we expect to maintain approximately the same level of cash flows from our securities. Depending on market yield and our liquidity, we may purchase securities as a use of cash in our interest-earning asset portfolio.

During the ~~quarter~~three months ended March 31, ~~2022,~~2023, we had cash proceeds from sales, maturities, ~~and/or~~calls, and prepayments of securities of ~~$6.4 million, offset by cash outflows of $1.6 million related to investment securities purchased.~~$2.9 million. Additionally, at March 31, ~~2022,~~2023, securities available-for-sale totaled ~~$134.8~~$115.1 million, of which ~~$57.4~~$93.9 million have been pledged as collateral for borrowings and other commitments.

~~Table of~~ ~~Contents~~

~~Future Contractual Obligations~~

Our estimated future obligations as of March 31, 2022 include both current and long-term obligations. Under our operating leases as discussed in Note 7, Leases, in the notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, we have a current obligation of $0.8 million and a long-term obligation of $4.5 million. We also have a current obligation of $178.0 million and a long-term obligation of $1.0 million related to time deposits, as discussed in Note 6, Interest-Bearing Deposits, in the notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q. We have subordinated notes of $28.4 million, all of which are long-term obligations. Finally, we have one significant, long-term contract for core processing services. While the actual obligation is unknown and dependent on certain factors, including volume and activities, we estimate that our current obligation under this contract is $1.2 million and our long-term obligation is $0.2 million, which is estimated using 2021 average monthly expense extrapolated over the remaining life of the contract.

FHLB Financing

~~Further, the~~The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. At March 31, ~~2022,~~2023, the Bank had outstanding borrowings of $120.0 million and a total financing availability of ~~$360.4~~$278.1 million, net of letters of credit issued of ~~$495.5~~$666.5 million.

Federal Reserve Discount Window and Correspondent Bank Lines of Credit

At March 31, 2023, unused and available amounts for borrowing from the Federal Reserve discount window and correspondent bank lines of credit were $76.7 million and $190.0 million, respectively.

Total Liquidity

~~Dividends~~Total liquidity (consisting of cash and cash equivalents and unused and available borrowing capacity as set forth below) was approximately $892.7 million as of March 31, 2023.


	March 31, 2023				Available
(in thousands)	Line of Credit		Borrowings
FHLB advances	$	398,145	$	120,000	$	278,145
Federal Reserve discount window	76,665		—		76,665
Correspondent bank lines of credit	190,000		—		190,000

Cash and cash equivalents	—		—		347,939
Total	$	664,810	$	120,000	$	892,749

Future Contractual Obligations

Our estimated future contractual obligations as of March 31, 2023 include both current and long-term obligations. Under our operating leases, we have an operating lease liability of $5.4 million. We also have a current obligation of $331.8 million and a long-term obligation of $40.8 million related to time deposits, as discussed in Note 5, Interest-Bearing

~~A use~~Deposits. We have net subordinated notes of ~~liquidity for the Company is shareholder dividends.~~ $73.6 million, all of which are long-term obligations. We also had contractual obligations on unfunded loan commitments and standby letters of credit totaling $335.1 million.

Dividends

The Company paid dividends to its shareholders totaling ~~$7.5~~$2.6 million during the ~~quarter, including a cash distribution in the amount of $4.9 million paid on~~three months ended March 17, 2022 to shareholders of record as of May 3, 2021, for the Company's final accumulated adjustments account payout, which is described in further detail in the Company’s Proxy Statement filed with the SEC and mailed to shareholders on April 6, 2022.

31, 2023.

We expect to continue our current practice of paying quarterly cash dividends inwith respect to our common stock, subject to our board of directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. We believe our quarterly dividend rate per share, as approved by our board of directors, enables us to balance our multiple objectives of managing our business and returning a portion of our earnings to our shareholders. Assuming continued payment during ~~2022~~the rest of 2023 at a rate of ~~$0.15~~$0.20 per share, ~~which is the rate of each of our last four quarterly dividend payments,~~ our average total dividend paid each quarter would be approximately ~~$2.6~~$3.5 million based on the number of ~~current~~currently outstanding shares ~~which assumes~~if there are no increases or decreases in the number of shares, and ~~considering~~given that unvested RSAs share equally in dividends with outstanding common stock.

Impact of Inflation

Our unaudited consolidated financial statements and related notes have been prepared in accordance with GAAP, which require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods or services.

Historical Information

The following table summarizes our consolidated cash flow activities:

Three months ended March 31, Amount
(dollars in thousands) 2022 2021 Increase (Decrease)
Net cash provided by operating activities $ 3,486 $ 8,601 $ (5,115)
Net cash used in investing activities (133,513) (52,608) (80,905)
Net cash provided by financing activities 209,662 188,106 21,556

~~Table of~~ ~~Contents~~


	Three months ended March 31,
(in thousands)	2023		2022		$ Change
Net cash provided by operating activities	$	694	$	3,486	$	(2,792)
Net cash used in investing activities	(68,559)		(133,513)		64,954
Net cash provided by financing activities	155,813		209,662		(53,849)

Operating Activities

Net cash provided by operating activities decreased by ~~$5.1~~$2.8 million for the three months ended March 31, ~~2022~~2023 as compared to the three months ended March 31, ~~2021, primarily due to an increase in loans originated for sale, offset by an increase in proceeds from sale of loans. Various other, less material items made up the remainder of the change.~~2022. Cash provided by operating activities is subject to variability period-over-period as a result of timing differences, including with respect to the collection of receivables and payments of interest expense, accounts payable, and bonuses.

Investing Activities

Net cash used in investing activities ~~increased~~decreased by ~~$80.9~~$65.0 million for the three months ended March 31, ~~2022~~2023 as compared to the three months ended March 31, ~~2021,~~2022, primarily due to ~~an increase in~~decreased loan ~~originations, net of repayments, partially offset by a decrease in proceeds from the sale of securities available-for-sale and a decrease in purchases of securities available-for-sale.~~

origination growth.

Financing Activities

Net cash provided by financing activities ~~increased~~decreased by ~~$21.6~~$53.8 million for the three months ended March 31, ~~2022~~2023 as compared to the three months ended March 31, ~~2021,~~2022, primarily due to ~~growth in~~decreased deposit ~~account balances, partially offset by a decrease in cash dividends paid.~~growth.

Capital Adequacy

We manage our capital by tracking our level and quality of capital with consideration given to our overall financial condition, our asset quality, our level of allowance for ~~loan~~credit losses, our geographic and industry concentrations, and other risk factors on our balance sheet, including interest rate sensitivity.

Bancorp and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our unaudited consolidated financial statements. As

Historically, as a bank holding company with less than $3.0 billion in total consolidated assets and that ~~meets~~met certain other criteria, we ~~currently operate~~had been operating under the Small Bank Holding Company Policy Statement, ~~and, accordingly, are exempt~~which provides an exemption from the ~~Board of Governors of the~~ Federal ~~Reserve System’s (“Federal Reserve”)~~Reserve’s generally applicable risk-based capital ratio and leverage ratio requirements. ~~The~~Having passed this threshold as of September 30, 2022, we are no longer subject to this policy statement and our capital adequacy is evaluated relative to the Federal Reserve's generally applicable capital requirements. Bancorp's total consolidated assets were not in excess of $3.0 billion as of June 30, 2022, and so it has prepared and filed financial reports with the Federal Reserve as a small bank holding company. If the Company’s total consolidated assets remain in excess of $3.0 billion as of June 30, 2023, then starting in March 2024, the Company will cease filing financial reports with the Federal Reserve as though it were a small holding company.

Under federal regulations implementing the Basel III framework, the Bank is subject to minimum risk-based and leverage capital ~~requirements under federal regulations implementing the Basel III framework, and~~requirements. The Bank also is subject to regulatory thresholds that must be met for an insured depository institution to be classified as “well-capitalized” under the prompt corrective action framework. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices. Capital amounts for Bancorp and the Bank, and the Bank’s prompt corrective action classification, are also subject to qualitative judgments by the regulators about components of capital, risk weightings, and other factors. As of March 31, ~~2022,~~2023, both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank qualified as “well-capitalized” under the prompt corrective action framework.

Management reviews capital ratios on a regular basis to ensure that capital exceeds the prescribed regulatory minimums and is adequate to meet our anticipated future needs. For all periods presented, the Bank’s ratios exceed the regulatory definition of “well-capitalized” under the regulatory framework for prompt corrective action, and Bancorp’s ratios exceed the minimum ratios that would be required for it to be considered a well-capitalized bank holding company.

~~Table of~~ ~~Contents~~

The capital adequacy ratios as of March 31, ~~2022~~2023 and December 31, ~~2021~~2022 for Bancorp and the Bank are presented in the following tables. As of March 31, ~~2022~~2023 and December 31, ~~2021,~~2022, Bancorp’s Tier 2 capital included subordinated debt, which was not included at the Bank level. Eligible amounts of subordinated debt included in Tier 2 capital will be phased out by 20% per year beginning five years before the maturity date of the notes.


Capital Ratios for Bancorp	Capital Ratios for Bancorp	Actual Ratio				Required for Capital Adequacy Purposes1				Ratio to be Well- Capitalized under Prompt Corrective Action Provisions		Capital Ratios for Bancorp	Actual Ratio				Required for Capital Adequacy Purposes1				Ratio to be Well-Capitalized under Prompt Corrective Action Provisions
(dollars in thousands)	(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount	Ratio	(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount	Ratio
March 31, 2022
March 31, 2023												March 31, 2023
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)	$	288,468	13.07	%	$	176,568	≥ 8.00	%	N/A	N/A	Total capital (to risk-weighted assets)	$	379,344	12.50	%	$	242,780	8.00	%	N/A	N/A
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)	$	236,059	10.70	%	$	132,369	≥ 6.00	%	N/A	N/A	Tier 1 capital (to risk-weighted assets)	$	273,662	9.02	%	$	182,037	6.00	%	N/A	N/A
Common equity tier 1 capital (to risk-weighted assets)	Common equity tier 1 capital (to risk-weighted assets)	$	236,059	10.70	%	$	99,277	≥ 4.50	%	N/A	N/A	Common equity tier 1 capital (to risk-weighted assets)	$	273,662	9.02	%	$	136,528	4.50	%	N/A	N/A
Tier 1 leverage	Tier 1 leverage	$	236,059	9.02	%	$	104,682	≥ 4.00	%	N/A	N/A	Tier 1 leverage	$	273,662	8.53	%	$	128,329	4.00	%	N/A	N/A
December 31, 2021
December 31, 2022												December 31, 2022
Total capital (to risk-weighted assets)	Total capital (to risk-weighted assets)	$	285,128	13.98	%	$	163,177	≥ 8.00	%	N/A	N/A	Total capital (to risk-weighted assets)	$	366,113	12.46	%	$	235,065	8.00	%	N/A	N/A
Tier 1 capital (to risk-weighted assets)	Tier 1 capital (to risk-weighted assets)	$	233,397	11.44	%	$	122,382	≥ 6.00	%	N/A	N/A	Tier 1 capital (to risk-weighted assets)	$	263,993	8.99	%	$	176,191	6.00	%	N/A	N/A
Common equity tier 1 capital (to risk-weighted assets)	Common equity tier 1 capital (to risk-weighted assets)	$	233,397	11.44	%	$	91,787	≥ 4.50	%	N/A	N/A	Common equity tier 1 capital (to risk-weighted assets)	$	263,993	8.99	%	$	132,144	4.50	%	N/A	N/A
Tier 1 leverage	Tier 1 leverage	$	233,397	9.47	%	$	98,600	≥ 4.00	%	N/A	N/A	Tier 1 leverage	$	263,993	8.60	%	$	122,788	4.00	%	N/A	N/A

Capital Ratios for the Bank
Actual Ratio
Required for Capital
Adequacy Purposes Ratio to be Well-
Capitalized under Prompt
Corrective Action
Provisions
(dollars in thousands) Amount
Ratio
Amount Ratio Amount Ratio
March 31, 2022
Total capital (to risk-weighted assets) $ 282,897 12.83 % $ 176,397 ≥ 8.00 % $ 220,497 ≥ 10.00 %
Tier 1 capital (to risk-weighted assets) $ 258,891 11.74 % $ 132,312 ≥ 6.00 % $ 176,416 ≥ 8.00 %
Common equity tier 1 capital (to risk-weighted assets) $ 258,891 11.74 % $ 99,234 ≥ 4.50 % $ 143,338 ≥ 6.50 %
Tier 1 leverage $ 258,891 9.89 % $ 104,708 ≥ 4.00 % $ 130,885 ≥ 5.00 %
December 31, 2021
Total capital (to risk-weighted assets) $ 279,152 13.69 % $ 163,078 ≥ 8.00 % $ 203,848 ≥ 10.00 %
Tier 1 capital (to risk-weighted assets) $ 255,807 12.55 % $ 122,309 ≥ 6.00 % $ 163,078 ≥ 8.00 %
Common equity tier 1 capital (to risk-weighted assets) $ 255,807 12.55 % $ 91,731 ≥ 4.50 % $ 132,501 ≥ 6.50 %
Tier 1 leverage $ 255,807 10.38 % $ 98,555 ≥ 4.00 % $ 123,193 ≥ 5.00 %


Capital Ratios for the Bank	Actual Ratio				Required for Capital Adequacy Purposes				Ratio to be Well-Capitalized under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2023
Total capital (to risk-weighted assets)	$	370,001	12.21	%	$	242,425	8.00	%	$	303,031	10.00	%
Tier 1 capital (to risk-weighted assets)	$	337,959	11.15	%	$	181,861	6.00	%	$	242,482	8.00	%
Common equity tier 1 capital (to risk-weighted assets)	$	337,959	11.15	%	$	136,396	4.50	%	$	197,016	6.50	%
Tier 1 leverage	$	337,959	10.54	%	$	128,258	4.00	%	$	160,322	5.00	%
December 31, 2022
Total capital (to risk-weighted assets)	$	356,301	12.14	%	$	234,795	8.00	%	$	293,494	10.00	%
Tier 1 capital (to risk-weighted assets)	$	327,788	11.17	%	$	176,072	6.00	%	$	234,763	8.00	%
Common equity tier 1 capital (to risk-weighted assets)	$	327,788	11.17	%	$	132,054	4.50	%	$	190,745	6.50	%
Tier 1 leverage	$	327,788	10.69	%	$	122,652	4.00	%	$	153,315	5.00	%

1~~Presented as if Bancorp were subject to Basel III capital requirements.~~ The ~~Company operates under the Small Bank Holding Company Policy Statement and therefore is not currently subject to generally applicable~~listed capital adequacy ~~requirements.~~ratios exclude capital conservation buffers.

Non-GAAP Financial Measures

Some of the financial measures discussed herein are non-GAAP financial measures. In accordance with SEC rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP in our consolidated statements of income, balance sheets, statements of shareholders’ equity, or statements of cash flows.

~~Table of~~ ~~Contents~~

Tangible shareholders’ equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets. The most directly comparable GAAP financial measure is total shareholders’ equity to total assets. We had no goodwill or other intangible assets at the end of any period indicated. As a result, tangible shareholders’ equity to tangible assets is the same as total shareholders’ equity to total assets at the end of each of the periods indicated.

Allowance for loan losses to total loans held for investment, excluding PPP loans, is defined as allowance for loan losses, divided by total loans held for investment less PPP loans. The most directly comparable GAAP financial measure is allowance for loan losses to total loans held for investment.

Average loans held for investment and sale, excluding PPP loans, is defined as the daily average loans held for investment and sale, excluding the daily average PPP loans, and includes both performing and nonperforming loans. The most directly comparable GAAP measure is average loans held for investment and sale.

Average loan yield, excluding PPP loans, is defined as the daily average loan yield, excluding PPP loans, and includes both performing and nonperforming loans. The most directly comparable GAAP financial measure is average loan yield.

We believe that these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations, and cash flows computed in accordance with GAAP. However, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these disclosures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those we use for the non-GAAP financial measures we disclose, but may calculate them differently. You should understand how we and other companies each calculate ~~their~~our non-GAAP financial measures when making comparisons.

Recent Legislative and Regulatory Developments

Potential Regulatory Reform in Response to Recent Bank Failures

The ~~following reconciliation table provides~~recent failures of Silicon Valley Bank (Santa Clara, California), Signature Bank (New York, New York), and First Republic Bank (San Francisco, California) in March and April of this year may lead to regulatory changes and initiatives that could impact the Company. For example, the FDIC has stated that it plans to impose a ~~more detailed analysis~~special deposit insurance assessment on banks in order to recover losses that the FDIC's Deposit Insurance Fund incurred to support uninsured depositors of these ~~non-GAAP financial measures, along with their most directly comparable financial measures calculated~~institutions. In addition, President Biden has encouraged the federal banking agencies to adopt various reforms, including the completion of an incentive compensation rule for bank executives pursuant to Section 956 of the Dodd-Frank Act, in ~~accordance with GAAP.~~

Allowance for loan losses to total loans held for investment, excluding PPP loans
(dollars in thousands) March 31,
2022 December 31,
2021
Allowance for loan losses (numerator) $ 23,904 $ 23,243
Total loans held for investment 2,080,158 1,934,460
Less: PPP loans 1,528 22,124
Total loans held for investment, excluding PPP loans (denominator) $ 2,078,630 $ 1,912,336
Allowance for loan losses to total loans held for investment, excluding PPP loans 1.15 % 1.22 %

For the three months ended
Average loans held for investment and sale, excluding PPP loans
(dollars in thousands) March 31,
2022 March 31,
2021
Average loans held for investment and sale $ 1,977,509 $ 1,526,130
Less: average PPP loans 8,886 176,384
Average loans held for investment and sale, excluding PPP loans $ 1,968,623 $ 1,349,746
response to these failures. On April 28, 2023, the Federal Reserve and the FDIC issued reports on the potential causes of failures of Silicon Valley Bank and Signature Bank, respectively. Among the changes discussed, the Federal Reserve and the FDIC highlighted potential changes needed to supervisory approaches for banks of all sizes as well

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~~Table of~~ ~~Contents~~

For the three months ended
Average loan yield, excluding PPP loans
(dollars in thousands) March 31,
2022 March 31,
2021
Interest and fee income on loans $ 22,091 $ 18,613
Less: interest and fee income on PPP loans 610 2,400
Interest and fee income on loans, excluding PPP loans $ 21,481 $ 16,213
Annualized interest and fee income on loans, excluding PPP loans (numerator) $ 87,117 $ 65,753

Average loans held for investment and sale $ 1,977,509 $ 1,526,130
Less: average PPP loans 8,886 176,384
Average loans held for investment and sale, excluding PPP loans (denominator) $ 1,968,623 $ 1,349,746
Average loan yield, excluding PPP loans 4.43 % 4.87 %
as to regulatory requirements. Currently, it is unclear what actions federal regulatory agencies will take as a result of these failures.

Bank Term Funding Program

The Federal Reserve created the Bank Term Funding Program (the “BTFP”) in response to recent concerns over liquidity in the banking sector. This program provides funding to eligible depository institutions to help ensure that banks can meet the needs of all depositors. The BTFP offers one-year loans to banks pledging any collateral eligible for purchase by the Federal Reserve Banks in open market operations, such as U.S. Treasury securities, U.S. agency securities, and U.S. agency mortgage-backed securities. At March 31, 2023, the Company had not participated in the BTFP.

Small Business Lending Data Collection Rule

On March 30, 2023, the Consumer Financial Protection Bureau finalized a rule under Section 1071 of the Dodd-Frank Act requiring lenders to collect and report data regarding small business lending activity. The Company is evaluating the impact of the new rule.

Glossary of Acronyms, Abbreviations, and Terms

The terms identified below are used in various sections of this Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 and the unaudited Consolidated Financial Statements and Notes to the Financial Statements in Item 1 of this Form 10-Q.

2022 Annual Report on Form 10-K

Company’s Annual Report on Form 10-K for the year ended December 31, 2022

Federal Reserve

Board of Governors of the Federal Reserve System

ACL

Allowance for Credit Losses

FRB

Federal Reserve Bank of San Francisco

ASC

Accounting Standards Codification

GAAP

Generally Accepted Accounting Principles in the U.S.

ASU

Accounting Standards Update

GNMA

Government National Mortgage Association

AFS

Available-for-Sale

GSE

Government sponsored entity

Bancorp

Five Star Bancorp and its subsidiary

HTM

Held-to-Maturity

Bank

Five Star Bank

ICS

Insured Cash Sweep®

Basel III

A capital framework and rules for U.S. banking organizations

IPO

Initial Public Offering

BOLI

Bank-Owned Life Insurance

Modifications to loans to borrowers experiencing financial difficulty

CDARS

Certificate of Deposit Account Registry Service®

Net income

CECL

Current expected credit loss model for recognition of credit losses under ASC 326

NIM

Net Interest Margin

C&I

Commercial & Industrial

OCI

Other comprehensive income

CRE

Commercial Real Estate

ROAA

Return on Average Assets, annualized

EPS

Earnings per Share

ROAE

Return on Average Equity, annualized

FASB

Financial Accounting Standards Board

ROUA

Right-of-Use Asset

FDIC

Federal Deposit Insurance Corporation

SBA

U.S. Small Business Administration

FHLB

Federal Home Loan Bank of San Francisco

SEC

Securities and Exchange Commission

FHLMC

Federal Home Loan Mortgage Corporation

SOFR

Secured Overnight Financing Rate

FNMA

Federal National Mortgage Association

TDR

Troubled Debt Restructuring

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable for a smaller reporting company.

ITEM 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness as of March 31, ~~2022~~2023 of our disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the fiscal quarter covered by this Quarterly Report on Form 10-Q.

~~Changes~~On January 1, 2023, the Company adopted ASC 326. As a result, the Company made changes to and incorporated new policies, processes, and controls over the estimation of the allowance for credit losses. There were changes implemented to account for the additional complexity of the credit loss models, review of economic forecasts, and other assumptions used in ~~Internal Control over Financial Reporting~~

~~There was no change~~the estimation process. These changes were not undertaken in ~~our~~response to any identified deficiency in the Company’s internal control over financial ~~reporting (as such term is defined~~reporting. There have been no other changes in ~~Rule 13a-15(f) under~~ the ~~Exchange Act) that occurred during the three months ended March 31, 2022 that has materially affected, or is reasonably likely to materially affect, such controls.~~Company’s internal control.

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PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

From time to time, we are a party to various litigation matters incidental to the conduct of our business. We do not believe that any currently pending legal proceedings will have a material adverse effect on our business, financial condition, or results of operations.

ITEM 1A. Risk Factors

There have been no material changes to the risk factors previously disclosed under Item 1A of the Company’s 2022 Annual ~~report~~Report on Form 10-K, ~~for the year ended December 31, 2021,~~ previously filed with the ~~SEC.~~SEC, except for the addition of the following risk factor:

A failure, or the perceived risk of a failure, to raise the statutory debt limit of the United States could have an adverse effect on our business, financial condition, and results of operations.

The inability of U.S. lawmakers to pass legislation to raise the U.S. government's debt limit of $31.4 trillion has increased the possibility of a default by the U.S. government on its debt obligations, which could have an adverse impact on financial markets, interest rates, and economic conditions in the United States and worldwide. The U.S. government reached its debt limit of $31.4 trillion in January 2023. Since then, the U.S. Department of Treasury has implemented extraordinary measures to prevent default.

It is unclear if Congress and the President will reach an agreement to increase the U.S. government's debt limit in a timely manner. The political stalemate over legislation to fund U.S. government operations and raise the U.S. government's debt limit may increase the possibility of a default by the U.S. government on its debt obligations and related credit-rating downgrades. This creates uncertainty in the U.S. financial markets and domestic political conditions, which could have an adverse impact on our business, financial condition, and results of operations. If the United States is unable to increase the U.S. government's debt limit in a timely manner, the U.S. government could shut down for a period of time and the United States could default or delay on payment of its obligations or both, which could have an adverse impact on financial markets and economic conditions in the United States and worldwide and an adverse effect on our business, financial condition, and results of operations.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)Unregistered Sales of Equity Securities

None.

(b)Use of Proceeds

Not applicable.

(c)Issuer Purchases of Equity Securities

None.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

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ITEM 6. Exhibits

The following exhibits are filed as part of this report or hereby incorporated by references to filings previously made with the SEC.

Incorporated by Reference
Exhibit Number Exhibit Description Form File No. Exhibit Filing Date Herewith
3.1
Amended and Restated Articles of Incorporation of Five Star Bancorp
10-Q 001-40379 3.1 June 17, 2021
3.2
Amended and Restated Bylaws of Five Star Bancorp
10-K 001-40379 3.2 February 25, 2022
4.1
Form of Common Stock Certificate of Five Star Bancorp
S-1 333-255143 4.1 April 26, 2021
10.1*
Executive Employment Agreement, dated March 23, 2022, between Five Star Bank and James Beckwith, effective January 3, 2022
Filed
10.2*
Five Star Bank Salary Continuation Agreement, dates September 1, 2007, as amended, between Five Star Bank and James Beckwith (included as Exhibit A to the Executive Employment Agreement filed herewith as Exhibit 10.1)
Filed
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Filed
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Filed
32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002
Filed
101 Inline XBRL Interactive Data Filed
104 Cover Page Interactive Data File (embedded within the Inline XBRL document in Exhibit 101) Filed

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Herewith

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Filed

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Filed

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002

Filed

101

Inline XBRL Interactive Data

Filed

104

Cover Page Interactive Data File (embedded within the Inline XBRL document in Exhibit 101)

Filed

*Management contract or compensatory plan, contract, or arrangement.

7261

~~Table of~~ ~~Contents~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


									Five Star Bancorp
									(registrant)

			May ~~12, 2022~~10, 2023						/s/ James E. Beckwith
			Date						James E. Beckwith
									President &
									Chief Executive Officer
									(Principal Executive Officer)

			May ~~12, 2022~~10, 2023						/s/ Heather C. Luck
			Date						Heather C. Luck
									Senior Vice President &
									Chief Financial Officer
									(Principal Financial Officer)

7362


	Three months ended
(in thousands, except per share data)	March 31, 2022		March 31, 2021
Net income	$	9,862	$	10,278
Weighted average basic common shares outstanding	17,102,508		10,998,041
Add: Dilutive effects of assumed vesting of restricted stock	62,011		—
Weighted average diluted common shares outstanding	17,164,519		10,998,041
Income per common share:
Basic EPS	$	0.58	$	0.93
Diluted EPS	$	0.58	$	0.93


	Real Estate												Commercial
(in thousands)	Comml		Comml Land and Devel		Comml Const		Resid Const		Resid		Farm- land		Secured		Unsec		PPP		Consu		Unal		Total
Three months ended March 31, 2022
Beginning balance	$	12,869	$	50	$	371	$	50	$	192	$	645	$	6,859	$	207	$	—	$	889	$	1,111	$	23,243
Charge-offs	—		—		—		—		—		—		(309)		—		—		(67)		—		(376)
Recoveries	—		—		—		—		—		—		46		—		—		41		—		87
Provision (recapture)	999		16		59		(10)		16		(34)		443		39		—		225		(803)		950
Ending balance	$	13,868	$	66	$	430	$	40	$	208	$	611	$	7,039	$	246	$	—	$	1,088	$	308	$	23,904
Three months ended March 31, 2021
Beginning balance	$	9,358	$	77	$	821	$	87	$	220	$	615	$	9,476	$	179	$	—	$	632	$	724	$	22,189
Charge-offs	—		—		—		—		—		—		(255)		—		—		—		—		(255)
Recoveries	—		—		—		—		—		—		87		—		—		50		—		137
Provision (recapture)	861		3		(317)		(30)		(32)		(37)		(390)		16		—		(82)		208		200
Ending balance	$	10,219	$	80	$	504	$	57	$	188	$	578	$	8,918	$	195	$	—	$	600	$	932	$	22,271


			Gross Unrealized
(dollars in thousands)	Amortized Cost		Gains		(Losses)		Fair Value
March 31, 2022
Available-for-sale:
U.S. government agencies	$	18,241	$	95	$	(257)	$	18,079
Mortgage-backed securities	79,694		8		(6,210)		73,492
Obligations of states and political subdivisions	44,621		23		(3,713)		40,931
Collateralized mortgage obligations	504		—		(21)		483
Corporate bonds	2,000		—		(172)		1,828
Total available-for-sale	$	145,060	$	126	$	(10,373)	$	134,813
Held-to-maturity:
Obligations of states and political subdivisions	$	4,486	$	—	$	(27)	$	4,459

December 31, 2021
Available-for-sale:
U.S. government agencies	$	19,824	$	60	$	(202)	$	19,682
Mortgage-backed securities	82,517		94		(1,098)		81,513
Obligations of states and political subdivisions	44,732		525		(120)		45,137
Collateralized mortgage obligations	537		3		—		540
Corporate bonds	2,000		—		(65)		1,935
Total available-for-sale	$	149,610	$	682	$	(1,485)	$	148,807
Held-to-maturity:
Obligations of states and political subdivisions	$	4,946	$	251	$	—	$	5,197


	For the three months ended
Average loan yield, excluding PPP loans (dollars in thousands)	March 31, 2022			March 31, 2021
Interest and fee income on loans	$	22,091		$	18,613
Less: interest and fee income on PPP loans	610			2,400
Interest and fee income on loans, excluding PPP loans	$	21,481		$	16,213
Annualized interest and fee income on loans, excluding PPP loans (numerator)	$	87,117		$	65,753

Average loans held for investment and sale	$	1,977,509		$	1,526,130
Less: average PPP loans	8,886			176,384
Average loans held for investment and sale, excluding PPP loans (denominator)	$	1,968,623		$	1,349,746
Average loan yield, excluding PPP loans	4.43		%	4.87		%