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, including the Delta variant (“COVID-19”), pandemic;

●

~~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, 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;~~

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

•uncertain market conditions and economic trends nationally, regionally, and particularly in Northern California and California, including as a result of the coronavirus, and variants thereof ("COVID-19");

●

~~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.”~~

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");

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•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 ~~Registration Statement on Form S-1, which was declared effective by the U.S. Securities and Exchange Commission (“SEC”) on May 4, 2021, and our Quarterly~~Annual Report on Form ~~10-Q~~10-K for the ~~quarter~~year ended ~~June 30,~~December 31, 2021, and other filings we may make with the ~~SEC,~~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.

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PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements

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FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
As

(Unaudited)

(In thousands, except share data)

June 30,
2022 December 31,
2021
ASSETS
Cash and due from financial institutions $ 66,423 $ 136,074
Interest-bearing deposits in banks 204,335 289,255
Cash and cash equivalents 270,758 425,329
Time deposits in banks 10,841 14,464
Securities available-for-sale, at fair value 122,426 148,807
Securities held-to-maturity, at amortized cost (fair value of $4,332 and $5,197 at June 30, 2022 and December 31, 2021, respectively) 4,477 4,946
Loans held for sale 12,985 10,671
Loans held for investment 2,380,511 1,934,460
Allowance for loan losses (25,786) (23,243)
Loans held for investment, net of allowance for loan losses 2,354,725 1,911,217
Federal Home Loan Bank of San Francisco (“FHLB”) stock 10,890 6,723
Operating leases, right-of-use asset ("ROUA") 4,472 —
Premises and equipment, net 1,768 1,773
Bank-owned life insurance ("BOLI"), net 14,444 11,203
Interest receivable and other assets 28,285 21,628
$ 2,836,071 $ 2,556,761
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing $ 1,006,066 $ 902,118
Interest-bearing 1,495,245 1,383,772
Total deposits 2,501,311 2,285,890
Subordinated notes, net 28,420 28,386
FHLB advances 60,000 —
Operating lease liability 4,739 —
Interest payable and other liabilities 8,401 7,439
Total liabilities 2,602,871 2,321,715
Commitments and contingencies (Note 11) 0 0
Shareholders’ equity
Preferred stock, no par value; 10,000,000 shares authorized; zero issued and outstanding at June 30, 2022 and December 31, 2021 — —
Common stock, no par value; 100,000,000 shares authorized; 17,245,983 shares issued and outstanding at June 30, 2022; 17,224,848 shares issued and outstanding at December 31, 2021 219,023 218,444
Retained earnings 26,924 17,168
Accumulated other comprehensive loss, net (12,747) (566)
Total shareholders’ equity 233,200 235,046
$ 2,836,071 $ 2,556,761

See accompanying notes to unaudited consolidated financial statements.

Table of ~~September~~Contents
FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Interest and fee income
Loans, including fees $ 24,841 $ 18,626 $ 46,932 $ 37,239
Taxable securities 423 338 813 597
Nontaxable securities 179 219 356 433
Interest-bearing deposits in other banks 518 125 710 229
25,961 19,308 48,811 38,498
Interest expense
Deposits 1,021 568 1,566 1,267
FHLB advances 5 — 5 —
Subordinated notes 444 444 887 887
1,470 1,012 2,458 2,154
Net interest income 24,491 18,296 46,353 36,344
Provision for loan losses 2,250 — 3,200 200
Net interest income after provision for loan losses 22,241 18,296 43,153 36,144
Non-interest income
Service charges on deposit accounts 130 106 238 196
Net gain on sale of securities available-for-sale — 92 5 274
Gain on sale of loans 831 1,091 1,749 2,022
Loan-related fees 795 369 1,412 629
FHLB stock dividends 99 92 201 170
Earnings on BOLI 101 60 191 112
Other 41 36 386 59
1,997 1,846 4,182 3,462
Non-interest expense
Salaries and employee benefits 5,553 4,939 11,228 9,636
Occupancy and equipment 513 441 1,033 892
Data processing and software 739 598 1,455 1,227
Federal Deposit Insurance Corporation ("FDIC") insurance 245 150 410 430
Professional services 568 1,311 1,122 2,843
Advertising and promotional 484 265 828 435
Loan-related expenses 389 218 667 447
Other operating expenses 1,714 1,658 3,037 2,474
10,205 9,580 19,780 18,384
Income before provision for income taxes 14,033 10,562 27,555 21,222
Provision for income taxes 4,080 734 7,740 1,116
Net income $ 9,953 $ 9,828 $ 19,815 $ 20,106
Basic earnings per common share $ 0.58 $ 0.67 $ 1.15 $ 1.57
Diluted earnings per common share $ 0.58 $ 0.67 $ 1.15 $ 1.57
See accompanying notes to unaudited consolidated financial statements.
7
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FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended
June 30, Six Months Ended
June 30,
2022 2021 2022 2021
Net income $ 9,953 $ 9,828 $ 19,815 $ 20,106
Net unrealized holding (loss) gain on securities available-for-sale during the period (7,849) 903 (17,287) (711)
Reclassification adjustment for net realized gains included in net income — (92) (5) (274)
Income tax (benefit) expense related to other comprehensive loss (2,320) 133 (5,111) 72
Other comprehensive (loss) income (5,529) 678 (12,181) (1,057)
Total comprehensive income $ 4,424 $ 10,506 $ 7,634 $ 19,049
See accompanying notes to unaudited consolidated financial statements.
8
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FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

Three months ended June 30, ~~2021~~2022 and ~~December 31, 2020~~
2021

(Unaudited)

(In thousands, except share and per share data)

September 30, December 31,
2021 2020

ASSETS

Cash and due from financial institutions $ 89,951 $ 46,028
Interest-bearing deposits in banks 440,881 244,465
Cash and cash equivalents 530,832 290,493

Time deposits in banks 17,204 23,705
Securities available-for-sale, at fair value 153,821 114,949
Securities held-to-maturity, at amortized cost (fair value of $5,211 and $8,755 at September 30, 2021 and December 31, 2020, respectively) 4,955 7,979
Loans held for sale 5,267 4,820
Loans, net of allowance for loan losses of $21,848 and $22,189 at September 30, 2021 and December 31, 2020, respectively 1,682,868 1,480,970
Federal Home Loan Bank of San Francisco (“FHLB”) stock 6,723 6,232
Premises and equipment, net 1,630 1,663
Bank owned life insurance 11,142 8,662
Interest receivable and other assets 20,051 14,292
Assets $ 2,434,493 $ 1,953,765

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits
Non-interest-bearing $ 895,468 $ 695,687
Interest-bearing 1,272,926 1,088,314
Total deposits 2,168,394 1,784,001

Subordinated notes, net 28,370 28,320
Interest payable and other liabilities 11,091 7,669
Total liabilities 2,207,855 1,819,990

Commitments and contingencies (Note 10)

Shareholders’ equity
Preferred stock, 0 par value; 10,000,000 shares authorized; 0 issued and outstanding at September 30, 2021 and December 31, 2021 — —
Common stock, 0 par value; 100,000,000 shares authorized; 17,223,808 shares issued and outstanding at September 30, 2021; 11,000,273 shares issued and outstanding at December 31, 2020 218,216 110,082
Retained earnings 8,442 22,348
Accumulated other comprehensive (loss) income, net (20 ) 1,345
Total shareholders’ equity 226,638 133,775
Liabilities and Shareholders’ Equity $ 2,434,493 $ 1,953,765

~~The~~


	Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Taxes		Total
	Shares	Amount
Three months ended June 30, 2021
Balance at March 31, 2021	11,007,005	$	110,144	$	21,623	$	(390)	$	131,377
Net income	—	—		9,828		—		9,828
Other comprehensive income	—	—		—		678		678
Stock offering	6,054,750	111,243		—		—		111,243
Stock issued under stock award plans	123,253	—		—		—		—
Stock compensation expense	—	150		—		—		150
Director stock compensation expense	40,500	810		—		—		810
Reclassification of retained deficit	—	(4,321)		4,321		—		—
Cash dividends paid ($3.25 per share)	—	—		(35,772)		—		(35,772)
Balance at June 30, 2021	17,225,508	$	218,026	$	—	$	288	$	218,314

Three months ended June 30, 2022
Balance at March 31, 2022	17,246,199	$	218,721	$	19,558	$	(7,218)	$	231,061
Net income	—	—		9,953		—		9,953
Other comprehensive loss	—	—		—		(5,529)		(5,529)
Stock issued under stock award plans	1,438	—		—		—		—
Stock compensation expense	—	161		—		—		161
Director stock compensation expense	—	141		—		—		141
Stock forfeitures	(1,654)	—		—		—		—

Cash dividends paid ($0.15 per share)	—	—		(2,587)		—		(2,587)
Balance at June 30, 2022	17,245,983	$	219,023	$	26,924	$	(12,747)	$	233,200

See accompanying notes ~~are an integral part of these~~to unaudited consolidated financial ~~statements (unaudited).~~

statements.

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FIVE STAR BANCORP AND SUBSIDIARY

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

Six months ended June 30, 2022 and 2021

(Unaudited)

(In thousands, except share and per share data)

For the three months
ended September 30, For the nine months
ended September 30,
2021 2020 2021 2020
Interest and dividend income
Loans, including fees $ 20,086 $ 17,734 $ 57,325 $ 51,318
Taxable securities 377 347 974 1,062
Nontaxable securities 194 154 627 285
Interest-bearing deposits in other banks 175 199 404 1,073
Interest and dividend income 20,832 18,434 59,330 53,738
Interest expense
Deposits 480 1,764 1,747 6,390
Subordinated notes 443 443 1,330 1,330
Interest expense 923 2,207 3,077 7,720

Net interest income 19,909 16,227 56,253 46,018

Provision for loan losses — 1,850 200 6,000

Net interest income after provision for loan losses 19,909 14,377 56,053 40,018

Non-interest income
Service charges on deposit accounts 112 93 308 269
Net gain on sale of securities available-for-sale 435 275 709 1,241
Gain on sale of loans 988 1,194 3,010 2,635
Loan-related fees 87 710 420 1,875
FHLB stock dividends 100 74 270 227
Earnings on bank owned life insurance 68 59 180 174
Other 238 130 593 341
Noninterest Income 2,028 2,535 5,490 6,762
Non-interest expense
Salaries and employee benefits 4,980 3,969 14,616 10,444
Occupancy and equipment 502 447 1,394 1,239
Data processing and software 611 529 1,838 1,433
Federal deposit insurance 110 320 540 867
Professional services 505 447 3,348 1,154
Advertising and promotional 366 264 801 766
Loan-related expenses 462 185 909 510
Other operating expenses 1,105 1,073 3,579 2,933
Noninterest expense 8,641 7,234 27,025 19,346

Income before provision for income taxes 13,296 9,678 34,518 27,434

Provision for income taxes 2,270 341 3,386 968

Net income $ 11,026 $ 9,337 $ 31,132 $ 26,466

Basic earnings per share $ 0.64 $ 0.94 $ 2.18 $ 2.72
Diluted earnings per share $ 0.64 $ 0.94 $ 2.18 $ 2.72

~~The~~


	Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss), Net of Taxes		Total
	Shares	Amount
Six months ended June 30, 2021
Balance at December 31, 2020	11,000,273	$	110,082	$	22,348	$	1,345	$	133,775
Net income	—	—		20,106		—		20,106
Other comprehensive loss	—	—		—		(1,057)		(1,057)
Stock offering	6,054,750	111,243		—		—		111,243
Stock issued under stock award plans	132,707	—		—		—		—
Stock compensation expense	—	212		—		—		212
Director stock compensation expense	40,500	810		—		—		810
Stock forfeitures	(2,722)	—		—		—		—
Reclassification of retained deficit	—	(4,321)		4,321		—		—
Cash dividends paid ($4.25 per share)	—	—		(46,775)		—		(46,775)
Balance at June 30, 2021	17,225,508	$	218,026	$	—	$	288	$	218,314

Six months ended June 30, 2022
Balance at December 31, 2021	17,224,848	$	218,444	$	17,168	$	(566)	$	235,046
Net income	—	—		19,815		—		19,815
Other comprehensive loss	—	—		—		(12,181)		(12,181)
Stock issued under stock award plans	23,639	—		—		—		—
Stock compensation expense	—	330		—		—		330
Director stock compensation expense	—	249		—		—		249
Stock forfeitures	(2,504)	—		—		—		—

Cumulative effect of adoption of Acounting Standards Codification ("ASC") 842 on retained earnings	—	—		68		—		68
Cash dividends paid ($0.75 per share)	—	—		(10,127)		—		(10,127)
Balance at June 30, 2022	17,245,983	$	219,023	$	26,924	$	(12,747)	$	233,200

See accompanying notes ~~are an integral part of these~~to unaudited consolidated financial ~~statements (unaudited).~~

statements.

Table of Contents

FIVE STAR BANCORP AND SUBSIDIARY

~~CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~
~~(Unaudited)~~
~~(In thousands, except share and per share data)~~

For the three months
ended September 30, For the nine months
ended September 30,
2021 2020 2021 2020
Net income $ 11,026 $ 9,337 $ 31,132 $ 26,466

Net unrealized holding (loss) gain on securities available-for-sale during the period (4 ) (83 ) (713 ) 2,129
Reclassification adjustment for net realized gains included in net income (435 ) (275 ) (709 ) (1,241 )

Income tax (benefit) expense related to other comprehensive income (loss) (131 ) (12 ) (57 ) 32

Other comprehensive (loss) income (308 ) (346 ) (1,365 ) 856

Total comprehensive income $ 10,718 $ 8,991 $ 29,767 $ 27,322

~~The accompanying notes are an integral part of these consolidated financial statements (unaudited).~~

~~FIVE STAR BANCORP AND SUBSIDIARY~~

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

~~For the three months ended September 30, 2021 and 2020~~
(Unaudited)
(In thousands, except share and per share data)

Accumulated
Other
Comprehensive
Common Stock Retained Income (Loss),
Shares Amount Earnings Net of Taxes Total
For the three months ended September 30, 2020
Balance at June 30, 2020 9,683,023 $ 96,243 $ 18,304 $ 1,176 $ 115,723
Net income — — 9,337 — 9,337
Other comprehensive loss — — — (346 ) (346 )
Stock offering 1,250,000 12,500 — — 12,500
Stock issued under stock award plans 1,250 — — — —
Stock compensation expense — 123 — — 123
Stock issued to directors 16,000 252 — — 252
Common stock issued 50,000 900 — — 900
Cash dividends paid ($0.75 per share) — — (7,276 ) — (7,276 )
Balance at September 30, 2020 11,000,273 $ 110,018 $ 20,365 $ 830 $ 131,213

For the three months ended September 30, 2021
Balance at June 30, 2021 17,225,508 $ 218,026 $ — $ 288 $ 218,314
Net income — — 11,026 — 11,026
Other comprehensive loss — — — (308 ) (308 )
Stock compensation expense — 190 — — 190
Stock forfeitures (1,700 ) — — — —
Cash dividends paid ($0.15 per share) — — (2,584 ) — (2,584 )
Balance at September 30, 2021 17,223,808 $ 218,216 $ 8,442 $ (20 ) $ 226,638

~~The accompanying notes are an integral part of these consolidated financial statements (unaudited).~~

~~FIVE STAR BANCORP AND SUBSIDIARY~~

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

~~For the nine months ended September 30, 2021 and 2020~~
(Unaudited)
(In thousands, except share and per share data)

Accumulated
Other
Comprehensive
Common Stock Retained Income (Loss),
Shares Amount Earnings Net of Taxes Total
For the nine months ended September 30, 2020
Balance at December 31, 2019 9,674,875 $ 96,114 $ 12,789 $ (26 ) $ 108,877
Net income — — 26,466 — 26,466
Other comprehensive income — — — 856 856
Stock offering 1,250,000 12,500 — — 12,500
Stock issued under stock award plans 9,398 — — — —
Stock compensation expense — 252 — — 252
Stock issued to directors 16,000 252 — — 252
Common stock issued 50,000 900 — — 900
Cash dividends paid ($1.95 per share) — — (18,890 ) — (18,890 )
Balance at September 30, 2020 11,000,273 $ 110,018 $ 20,365 $ 830 $ 131,213

For the nine months ended September 30, 2021
Balance at December 31, 2020 11,000,273 $ 110,082 $ 22,348 $ 1,345 $ 133,775
Net income — — 31,132 — 31,132
Other comprehensive loss — — — (1,365 ) (1,365 )
Stock offering 6,054,750 111,243 — — 111,243
Stock issued under stock award plans 132,707 — — — —
Stock compensation expense — 402 — — 402
Stock issued to directors 40,500 810 — — 810
Stock forfeitures (4,422 ) — — — —
Reclassification of retained deficit — (4,321 ) 4,321 — —
Cash dividends paid ($4.40 per share) — — (49,359 ) — (49,359 )
Balance at September 30, 2021 17,223,808 $ 218,216 $ 8,442 $ (20 ) $ 226,638

~~The accompanying notes are an integral part of these consolidated financial statements (unaudited).~~

~~FIVE STAR BANCORP AND SUBSIDIARY~~

CONSOLIDATED STATEMENTS OF CASH FLOWS

~~For the nine~~

Six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~
2021

(Unaudited)

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

September 30,
2021 September 30,
2020
Cash flows from operating activities:
Net income $ 31,132 $ 26,466
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 200 6,000
Loans originated for sale (34,211 ) (60,188 )
Gain on sale of loans (3,010 ) (2,635 )
Proceeds from sales of loans 31,954 48,958
Net gain on sale of securities available-for-sale (709 ) (1,241 )
Earnings on bank owned life insurance (180 ) (174 )
Stock compensation expense 402 252
Director stock compensation expense 810 252
Change in deferred loan fees (997 ) 5,932
Amortization and accretion of security premiums and discounts 1,120 744
Amortization of subordinated notes issuance costs 50 50
Depreciation and amortization 408 333
Net changes in:
Interest receivable and other assets (5,702 ) (3,939 )
Interest payable and other liabilities 3,422 318
Net cash provided by operating activities 24,689 21,128
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale 40,772 39,940
Maturities, prepayments, and calls of securities available-for-sale 13,639 11,804
Purchases of securities available-for-sale (92,093 ) (82,571 )
Increase (decrease) in time deposits in banks 6,501 (2,255 )
Loan originations, net of repayments (196,280 ) (371,499 )
Purchase of premises and equipment (375 ) (714 )
Purchase of FHLB stock (491 ) (1,152 )
Purchase of bank owned life insurance (2,300 ) —
Net cash used in investing activities (230,627 ) (406,447 )
Cash flows from financing activities:
Net change in deposits 384,393 579,835
Proceeds from issuance of stock 111,243 13,400
FHLB repayment — (25,000 )
Cash dividends paid (49,359 ) (18,890 )
Net cash provided by financing activities 446,277 549,345
Net change in cash and cash equivalents 240,339 164,026
Cash and cash equivalents at beginning of period 290,493 177,366
Cash and cash equivalents at end of period $ 530,832 $ 341,392
Supplemental disclosure of cash flow information:
Interest paid $ 3,090 $ 8,181
Income taxes paid $ 5,150 $ 1,045
Supplemental disclosure of noncash investing and financing activities:
Transfer from loans held for investment to loans held for sale $ 4,820 $ 6,527
Unrealized (loss) gain on securities $ (1,365 ) $ 856

~~The~~thousands)


	Six months ended June 30,
	2022		2021
Cash flows from operating activities:
Net income	$	19,815	$	20,106
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	3,200		200
Loans originated for sale	(36,964)		(22,355)
Gain on sale of loans	(1,749)		(2,022)
Proceeds from sale of loans	25,728		22,037
Net gain on sale of securities available-for-sale	(5)		(274)
Earnings on BOLI	(191)		(112)
Stock compensation expense	330		212
Director stock compensation expense	249		810
Change in deferred loan fees	158		843
Amortization and accretion of security premiums and discounts	659		736
Amortization of subordinated notes issuance costs	34		27
Depreciation and amortization	316		265
Decrease in operating lease liability	(482)		—
Amortization of operating lease ROUA	496		—
Deferred taxes	—		(4,727)
Net changes in:
Interest receivable and other assets	(1,557)		(1,223)
Interest payable and other liabilities	1,295		7,246
Net cash provided by operating activities	11,332		21,769
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale	1,623		16,182
Maturities, prepayments, and calls of securities available-for-sale	8,977		7,822
Purchases of securities available-for-sale	(1,641)		(69,070)
Net change in time deposits in banks	3,623		4,254
Loan originations, net of repayments	(436,195)		(78,562)
Purchase of premises and equipment	(311)		(245)
Purchase of FHLB stock	(4,223)		(491)
Purchase of BOLI	(3,050)		(2,300)
Net cash used in investing activities	(431,197)		(122,410)
Cash flows from financing activities:
Net change in deposits	215,421		282,284
Proceeds from issuance of stock	—		111,243
FHLB advances	60,000		—
Cash dividends paid	(10,127)		(46,775)
Net cash provided by financing activities	265,294		346,752
Net change in cash and cash equivalents	(154,571)		246,111
Cash and cash equivalents at beginning of period	425,329		290,493
Cash and cash equivalents at end of period	$	270,758	$	536,604
Supplemental disclosure of cash flow information:
Interest paid	$	1,345	$	2,217
Income taxes paid	$	5,200	$	1,050
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 on securities	$	(17,287)	$	(711)
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	$	—

See accompanying notes ~~are an integral part of these~~to unaudited consolidated financial ~~statements (unaudited).~~

statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

Note 1: Basis of Presentation

Nature of Operations and Principles of Consolidation

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 ~~Board of Governors of the~~ Federal Reserve ~~System (“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~~1 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. ~~Its~~The Company's primary loan products are commercial real estate loans, land development loans, construction loans, and operating lines of ~~credit;~~credit, and its primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts. The Bank currently has ~~seven~~7 branch offices in Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, and Yuba City, and ~~two~~1 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 U.S. Securities and Exchange Commission (“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 ~~Stock~~Global Select Market ~~LLC~~ 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.

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”) 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, ~~2020,~~2021, and the notes thereto, as filed in the Company’s ~~Registration Statement,~~Annual Report on Form 10-K, which was ~~declared effective by~~filed with the SEC on ~~May 4, 2021.~~

February 25, 2022.

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 and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 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, ~~2021.~~

2022.

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~~1 reportable operating segment.

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

The Company qualifies as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, and, as such, may take advantage of specified reduced reporting requirements and deferred accounting standards adoption dates, and is relieved of other significant requirements that are otherwise generally applicable to other public companies.

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Use of Estimates

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited consolidated financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses is the most significant accounting estimate reflected in the Company’s consolidated financial statements.

Earnings Per Share (“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.

~~Schedule of Earning Per Share~~

For the three months ended For the nine months ended
(in thousands, except per share data) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Net income $ 11,026 $ 9,337 $ 31,132 $ 26,466
Weighted average basic common shares outstanding 17,095,957 9,902,952 14,256,993 9,747,896
Add: Dilutive effects of assumed vesting of restricted stock 27,225 — 15,538 —
Weighted average diluted common shares outstanding 17,123,182 9,902,952 14,272,531 9,747,896
Income per common share:
Basic EPS $ 0.64 $ 0.94 $ 2.18 $ 2.72
Diluted EPS $ 0.64 $ 0.94 $ 2.18 $ 2.72


	Three months ended				Six months ended
(in thousands, except share and per share data)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Net income	$	9,953	$	9,828	$	19,815	$	20,106
Weighted average basic common shares outstanding	17,125,715		14,650,208		17,114,169		12,824,125
Add: Dilutive effects of assumed vesting of restricted stock	23,734		17,596		42,872		8,841
Weighted average diluted common shares outstanding	17,149,449		14,667,804		17,157,041		12,832,966
Earnings per common share:
Basic EPS	$	0.58	$	0.67	$	1.15	$	1.57
Diluted EPS	$	0.58	$	0.67	$	1.15	$	1.57

During the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020,~~2021, there were no outstanding stock options. ~~Anti-dilutive~~Additionally, the Company did not have any anti-dilutive shares ~~which are excluded from the dilutive EPS calculation, were deemed to be immaterial.~~

at June 30, 2022.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, pro forma EPS is calculated by applying a C Corporation ~~effective~~statutory tax 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 and six months ended ~~September~~June 30, ~~2021,~~2022, pro forma EPS is actual EPS given that the Company was a C Corporation for the entire three-month period. For the nine months ended September 30, 2021, pro forma EPS is calculated by applying an effective tax rate of 23.25%, which is the actual effective tax rate, excluding the effects of the discrete deferred tax adjustment of $4.6 million, as discussed in Note 8.three- and six-month periods. The following reconciliation table provides a detailed calculation of pro forma EPS:


	Three months ended				Six months ended
(in thousands, except share and per share data)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Net income before provision for income taxes - GAAP	$	14,033	$	10,562	$	27,555	$	21,222
Less: Actual/pro forma provision for income taxes	4,080		3,122		7,740		6,273
Actual/pro forma net income	$	9,953	$	7,440	$	19,815	$	14,949

Weighted average basic common shares outstanding	17,125,715		14,650,208		17,114,169		12,824,125
Add: Dilutive effects of assumed vesting of restricted stock	23,734		17,596		42,872		8,841
Weighted average diluted common shares outstanding	17,149,449		14,667,804		17,157,041		12,832,966

Earnings per common share:
Basic EPS (actual/pro forma)	$	0.58	$	0.51	$	1.15	$	1.17
Diluted EPS (actual/pro forma)	$	0.58	$	0.51	$	1.15	$	1.16

~~Schedule~~Table of ~~Pro forma Earning Per Share~~Contents

Reclassifications

For the three months ended For the nine months ended
(in thousands, except per share data) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Net income before provision for income taxes - GAAP $ 13,296 $ 9,678 $ 34,518 $ 27,434
Actual/pro forma provision for income taxes (2,270 ) (2,861 ) (8,024 ) (8,109 )
Actual/pro forma net income 11,026 6,817 26,494 19,325
Weighted average basic common shares outstanding 17,095,957 9,902,952 14,256,993 9,747,896
Add: Dilutive effects of assumed vesting of restricted stock 27,225 — 15,538 —
Weighted average diluted common shares outstanding 17,123,182 9,902,952 14,272,531 9,747,896
Income per common share:
Basic EPS $ 0.64 $ 0.69 $ 1.86 $ 1.98
Diluted EPS $ 0.64 $ 0.69 $ 1.86 $ 1.98

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.

Note 2: Recently Issued Accounting Standards

The following reflect recent accounting standards that have been adopted or are pending adoption by the Company. As discussed in Note 1, Basis of Presentation, the Company qualifies as an emerging growth company, and as such, has elected 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 the extended transition period.

Accounting Standards ~~Not Yet~~ Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Among other things, ASU 2016-02 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 ~~amendments in this~~FASB has issued incremental guidance to Topic 842 standard through ASU ~~intend to increase transparency~~No. 2018-10, 2018-11, and ~~comparability among organizations by recognizing an asset, which represents the right~~2021-05. The Company has elected to use the ~~asset for~~transition relief approach as provided in ASU 2018-11, which permits the ~~lease term,~~Company to use January 1, 2022 as both the application date and athe 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 ~~which is a lessee’s obligation to make~~that arise from short-term leases (i.e., leases with terms of 12 months or less), and the option of hindsight when determining lease ~~payments measured~~term. Substantially all of the Company’s lease agreements are considered operating leases and were not previously recognized on ~~a discounted basis. This ASU generally applies to leasing arrangements exceeding a twelve-month term.~~the Company’s balance sheets. As ~~amended by ASU 2020-05,~~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 ~~is effective~~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 ~~annual periods, including interim periods within those annual periods beginning after December 15, 2021 and requires a modified retrospective method of adoption.~~ more information.

In ~~July 2018, the FASB issued two amendments to ASU 2016-02: ASU No. 2018-10,~~ ~~Codification Improvements to Topic 842, Leases~~~~, which provides various corrections and clarifications to ASU 2016-02; and ASU No. 2018-11,~~ ~~Leases (Topic 842): Targeted Improvements~~~~, which provides a new optional transition method and provides a lessor with practical expedients for separating lease and non-lease components of a lease. In July 2021,~~August 2017, the FASB issued ASU No. ~~2021-05, which amends ASU 2016-02~~2017-12, Derivatives and ~~requires a lessor~~Hedging (Topic 815): Targeted Improvements to ~~classify a lease with variable lease payments that do not depend on an index or rate as an operating lease on the commencement date~~Accounting for Hedging Activities. The primary objective of the ~~lease if specified criteria are met. Entities will apply a modified retrospective approach at either~~amendments in this update is to simplify the ~~beginning~~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 ~~earliest period presented or at the beginning~~effects of the ~~period~~hedging instrument and the hedged item in the financial statements. Additionally, amendments in this update require an entity to present the earnings effect of ~~adoption through a cumulative-effect adjustment to retained earnings.~~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 ~~is currently evaluating the effect that~~beginning on January 1, 2022. The impact of adopting this ASU ~~will have on its~~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 “incurred loss” model with a “current expected credit loss” (“CECL”) model. The CECL model will apply 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, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost. 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

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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, isand 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 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 the Company believes 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, the Company cannot reasonably quantify the impact of the adoption of the amendments toon 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 ~~its~~a third-party vendor to identify data gaps and determine the appropriate methodologies and resources to utilize in preparation for its transition to the new accounting standard, including but not limited to the use of certain tools to forecast future economic conditions that affect the cash flows of loans over their lifetime.

~~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 will be effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted in any interim period. The impact of adopting this ASU is expected to be immaterial to the Company’s consolidated financial statements.

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, 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~~these ASUs and continues to monitor guidance for reference rate reform from the FASB and its impact on the Company’s consolidated financial statements.

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Note 3: 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).

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)	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
June 30, 2022
Assets:
Securities available-for-sale:
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds	$	122,426	$	—	$	122,426	$	—	OCI
Derivatives – interest rate swap	40		—		40		—		NI
Liabilities:
Derivatives – interest rate swap	40		—		40		—		NI

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

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

~~Schedule of Fair Value Assets and Liabilities on Recurring Basis~~

(in thousands) Carrying
Value Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant
Other
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Measurement
Categories: Changes
in Fair Value Recorded
In¹
September 30, 2021
Assets:
Securities available-for-sale:
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds $ 153,821 $ — $ 153,821 $ — OCI
Derivatives – interest rate swap 108 — 108 — NI
Liabilities:
Derivatives – interest rate swap 108 — 108 — NI

December 31, 2020
Assets:
Securities available-for-sale:
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, and collateralized mortgage obligations $ 114,949 $ — $ 114,949 $ — OCI
Derivatives – interest rate swap 149 — 149 — NI
Liabilities:
Derivatives – interest rate swap 149 — 149 $ — 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,

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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 ~~agencies’~~enterprises’ ("GSEs") debt securities, mortgage-backed securities, government agency issued bonds, privately issued collateralized mortgage obligations, and corporate bonds. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, there were no Level 1 or Level 3 available-for-sale securities. The discounted cash flow model is used to determine the fair value of held-to-maturity securities.

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. ~~For further discussion on the Company’s methodology in valuing its derivative financial instruments, refer to Note 11, Derivative Financial Instruments and Hedging Activities.~~

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 ~~that are collateral dependent~~ and other real estate owned (“OREO”). As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company did not carry any assets measured at fair value on a non-recurring basis.

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. 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 ~~bank owned life insurance policies (“BOLI”).~~

~~Schedule of fair value estimates for financial instruments~~

September 30, 2021 December 31, 2020
(in thousands) Carrying
Amounts Fair
Value Fair Value
Hierarchy Carrying
Amounts Fair
Value Fair Value
Hierarchy
Financial assets (recorded at amortized cost)
Cash and cash equivalents $ 530,832 $ 530,832 Level 1 $ 290,493 $ 290,493 Level 1
Time deposits in banks 17,204 17,204 Level 1 23,705 23,705 Level 1
Securities available-for-sale 153,821 153,821 Level 2 114,949 114,949 Level 2
Securities held-to-maturity 4,955 5,211 Level 3 7,979 8,755 Level 3
Loans held for sale 5,267 5,507 Level 2 4,820 5,012 Level 2
Loans held for investment 1,682,868 1,689,036 Level 3 1,480,970 1,464,794 Level 3
Interest receivable 5,170 5,170 Level 2 5,422 5,422 Level 2
Financial liabilities (recorded at amortized cost)
Deposits 2,168,394 2,120,785 Level 2 1,784,001 1,785,944 Level 2
Interest payable 19 19 Level 2 75 75 Level 2
Subordinated notes 28,370 28,370 Level 3 28,320 28,320 Level 3

BOLI.


	June 30, 2022					December 31, 2021
(in thousands)	Carrying Amounts		Fair Value		Fair Value Hierarchy	Carrying Amounts		Fair Value		Fair Value Hierarchy
Financial assets:
Cash and cash equivalents	$	270,758	$	270,758	Level 1	$	425,329	$	425,329	Level 1
Time deposits in banks	10,841		10,841		Level 1	14,464		14,464		Level 1
Securities available-for-sale	122,426		122,426		Level 2	148,807		148,807		Level 2
Securities held-to-maturity	4,477		4,332		Level 3	4,946		5,197		Level 3
Loans held for sale	12,985		13,616		Level 2	10,671		11,217		Level 2
Loans held for investment, net of allowance for loan losses	2,354,725		2,215,450		Level 3	1,911,217		1,893,431		Level 3
FHLB stock and other investments	16,636		N/A		N/A	12,464		N/A		N/A
Interest receivable	6,260		6,260		Level 2	5,332		5,332		Level 2
Interest rate swap	40		40		Level 2	92		92		Level 2
Financial liabilities:
Deposits	2,501,311		2,300,572		Level 2	2,285,890		2,210,555		Level 2
Interest payable	249		249		Level 2	23		23		Level 2
Interest rate swap	40		40		Level 2	92		92		Level 2
Subordinated notes	28,420		28,420		Level 3	28,386		28,386		Level 3

The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~

2021:

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.

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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 loan losses: For ~~variable-rate~~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, ~~using~~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 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.

Subordinated Notes: The fair value is estimated by discounting the future cash flow using the current ~~3-month LIBOR rate. Both~~three-month LIBOR. The Company's subordinated notes are not registered securities and were issued through private placements, resulting in a Level 3 classification. ~~Both~~The notes are recorded at carrying value.

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

A summary of the amortized cost and fair value related to securities held-to-maturity as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 is presented below.

~~Schedule of Securities Held-To-Maturity~~

Gross Unrealized
(in thousands) Amortized
Cost Gains (Losses) Fair
Value
September 30, 2021
Obligations of states and political subdivisions 4,955 256 — 5,211
Total held-to-maturity $ 4,955 $ 256 $ — $ 5,211
December 31, 2020
Obligations of states and political subdivisions 7,979 776 — 8,755
Total held-to-maturity $ 7,979 $ 776 $ — $ 8,755


(in thousands)			Gross Unrealized
	Amortized Cost		Gains		(Losses)		Fair Value
June 30, 2022
Obligations of states and political subdivisions	$	4,477	$	—	$	(145)	$	4,332
Total held-to-maturity	$	4,477	$	—	$	(145)	$	4,332
December 31, 2021
Obligations of states and political subdivisions	$	4,946	$	251	$	—	$	5,197
Total held-to-maturity	$	4,946	$	251	$	—	$	5,197

For securities issued by states and political subdivisions, management ~~considers~~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,~~information; and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers.

A summary of the amortized cost and fair value related to securities available-for-sale as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 is presented below.


(in thousands)	Amortized Cost		Gross Unrealized				Fair Value
			Gains		(Losses)
June 30, 2022
U.S. government agencies	$	17,114	$	86	$	(242)	$	16,958
Mortgage-backed securities	76,442		3		(10,369)		66,076
Obligations of states and political subdivisions	44,490		9		(7,335)		37,164
Collateralized mortgage obligations	475		—		(27)		448
Corporate bonds	2,000		—		(220)		1,780
Total available-for-sale	$	140,521	$	98	$	(18,193)	$	122,426
December 31, 2021
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

~~Schedule~~Table of ~~Securities Available-for-Sale~~Contents

Gross Unrealized
(in thousands) Amortized
Cost Gains (Losses) Fair
Value
September 30, 2021
U.S. government agencies $ 21,780 $ 108 $ (234 ) $ 21,654
Mortgage-backed securities 78,301 198 (572 ) 77,927
Collateralized mortgage obligations 580 12 — 592
Obligations of states and political subdivisions 51,189 661 (197 ) 51,653
Corporate bonds 2,000 — (5 ) 1,995
Total available-for-sale $ 153,850 $ 979 $ (1,008 ) $ 153,821
December 31, 2020
U.S. government agencies $ 32,069 $ 111 $ (352 ) $ 31,828
Mortgage-backed securities 23,601 338 (7 ) 23,932
Collateralized mortgage obligations 748 21 — 769
Obligations of states and political subdivisions 57,137 1,291 (8 ) 58,420
Total available-for-sale $ 113,555 $ 1,761 $ (367 ) $ 114,949

The amortized cost and fair value of investment debt securities by contractual maturity at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 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)	June 30, 2022								December 31, 2021
	Held-to-Maturity				Available-for-Sale				Held-to-Maturity				Available-for-Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	447	$	433	$	504	$	508	$	491	$	516	$	—	$	—
After one but within five years	1,115		1,079		—		—		951		999		507		522
After five years through ten years	1,590		1,538		4,330		3,888		3,504		3,682		3,697		3,748
After ten years	1,325		1,282		39,656		32,768		—		—		40,528		40,867

Investment securities not due at a single maturity date:
U.S. government agencies	—		—		17,114		16,958		—		—		19,824		19,682
Mortgage-backed securities	—		—		76,442		66,076		—		—		82,517		81,513
Collateralized mortgage obligations	—		—		475		448		—		—		537		540
Corporate bonds	—		—		2,000		1,780		—		—		2,000		1,935
Total	$	4,477	$	4,332	$	140,521	$	122,426	$	4,946	$	5,197	$	149,610	$	148,807

~~Schedule~~Table of ~~Investment Securities by Contractual Maturity~~Contents

September 30, 2021 December 31, 2020
Held-to-Maturity Available-for-Sale Held-to-Maturity Available-for-Sale
(in thousands) Amortized
Cost Fair Value Amortized
Cost Fair Value Amortized
Cost Fair Value Amortized
Cost Fair Value
Within one year $ 795 $ 836 $ — $ — $ 494 $ 543 $ — $ —
After one but within five years 2,700 2,840 508 528 2,143 2,351 1,141 1,206
After five years through ten years 1,460 1,535 4,488 4,610 2,755 3,023 8,340 8,599
After ten years — — 46,193 46,515 2,587 2,838 47,656 48,615

Investment securities not due at a single maturity date:
U.S. government agencies — — 21,780 21,654 — — 32,069 31,828
Mortgage-backed securities — — 78,301 77,927 — — 23,601 23,932
Collateralized mortgage obligations — — 580 592 — — 748 769
Corporate bonds — — 2,000 1,995 — — — —
Total $ 4,955 $ 5,211 $ 153,850 $ 153,821 $ 7,979 $ 8,755 $ 113,555 $ 114,949

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

~~Schedule of Investment Securities Available-for-Sale Gross Realized Gain and Losses~~

For the three months ended For the nine months ended
(in thousands) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Available-for-sale:
Sales proceeds $ 24,590 $ 7,706 $ 40,772 $ 39,940
Gross realized gains 435 275 709 1,241


(in thousands)	For the three months ended				For the six months ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Available-for-sale:
Sales proceeds	$	—	$	4,726	$	1,623	$	16,182
Gross realized gains	—		92		5		274

Pledged investment securities are shown in the following table:

(in thousands) September 30,
2021 December 31,
2020
Pledged to the State of California:
Secure deposits of public funds and borrowings $ 68,050 $ 52,897
Total pledged investment securities $ 68,050 $ 52,897


(in thousands)	June 30, 2022		December 31, 2021
Pledged to the State of California:
Securing deposits of public funds and borrowings	$	21,667	$	63,363
Total pledged investment securities	$	21,667	$	63,363

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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~

~~Schedule of securities in a continuous unrealized loss position aggregated by investment category and length of time~~

(in thousands) < 12 continuous months ≥ 12 continuous months Total securities
in a loss position
Fair Value Unrealized Loss Fair Value Unrealized Loss Fair Value Unrealized Loss
September 30, 2021
U.S. government agencies $ — $ — $ 14,866 $ (234 ) $ 14,866 $ (234 )
Mortgage-backed securities 56,020 (530 ) 1,421 (42 ) 57,441 (572 )
Obligations of states and political subdivisions 20,846 (184 ) 1,063 (13 ) 21,909 (197 )
Corporate bonds 995 (5 ) — — 995 (5 )
Total temporarily impaired securities $ 77,861 $ (719 ) $ 17,350 $ (289 ) $ 95,211 $ (1,008 )

December 31, 2020
U.S. government agencies $ 10,800 $ (56 ) $ 15,195 $ (296 ) $ 25,995 $ (352 )
Mortgage-backed securities 1,786 (7 ) — — 1,786 (7 )
Obligations of states and political subdivisions 3,922 (8 ) — — 3,922 (8 )
Total temporarily impaired securities $ 16,508 $ (71 ) $ 15,195 $ (296 ) $ 31,703 $ (367 )

2021:


(in thousands)	< 12 continuous months				≥ 12 continuous months				Total securities in a loss position
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
June 30, 2022
U.S. government agencies	$	2,105	$	(115)	$	11,556	$	(127)	$	13,661	$	(242)
Mortgage-backed securities	55,937		(8,671)		9,723		(1,698)		65,660		(10,369)
Obligations of states and political subdivisions	34,470		(7,029)		1,648		(306)		36,118		(7,335)
Collateralized mortgaged obligations	448		(27)		—		—		448		(27)
Corporate bonds	1,780		(220)		—		—		1,780		(220)
Total temporarily impaired securities	$	94,740	$	(16,062)	$	22,927	$	(2,131)	$	117,667	$	(18,193)

December 31, 2021
U.S. government agencies	$	—	$	—	$	13,399	$	(202)	$	13,399	$	(202)
Mortgage-backed securities	73,972		(1,046)		1,400		(52)		75,372		(1,098)
Obligations of states and political subdivisions	14,014		(112)		407		(8)		14,421		(120)
Corporate bonds	1,935		(65)		—		—		1,935		(65)
Total temporarily impaired securities	$	89,921	$	(1,223)	$	15,206	$	(262)	$	105,127	$	(1,485)

There were 93151 and 3191 available-for-sale securities in unrealized loss positions at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020, respectively, which were all classified as available-for-sale.~~2021, respectively. As of ~~September~~June 30, ~~2021,~~2022, the investment portfolio included 1824 investment securities that had been in a continuous loss position for twelve months or more and 75127 investment securities that had been in a loss position for less than twelve months.

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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 1 held-to-maturity security in a continuous unrealized loss position at June 30, 2022. This security was in an unrealized loss position for less than 12 months. There were no held-to-maturity securities in a continuous loss position at ~~September 30, 2021 or~~ December 31, ~~2020.~~

2021.

Obligations issued or guaranteed by government agencies such as ~~GNMA~~the Government National Mortgage Association ("GNMA") and SBA or GSEs under conservatorship such as FNMA and 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 ~~$6.2~~$6.7 million of FHLB stock at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. On ~~July 29, 2021,~~April 28, 2022, FHLB announced a cash dividend for the ~~second~~first quarter of ~~2021~~2022 at an annualized dividend rate of 6.00%, which was paid on ~~August 10, 2021. For the three and nine months ended September 30, 2021, cash~~May 11, 2022. Cash dividends received on FHLB capital stock ~~in the amount of~~amounted to $0.1 million for the three months ended June 30, 2022 and ~~$0.3~~2021 and $0.2 million ~~respectively,~~for the six months ended June 30, 2022 and 2021, and were recorded as non-interest income on the consolidated statements of income.

Note 5: Loans and Allowance for Loan 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 strong underwriting. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the carrying value of total loans held for investment amounted to ~~$1.7~~$2.4 billion and ~~$1.5~~$1.9 billion, respectively. The following table presents the balance of each major product type within the Company’s portfolio as of the dates indicated.

~~Schedule~~Table of ~~Loan Portfolio~~Contents

(in thousands) September 30,
2021 December 31,
2020
Real estate:
Commercial $ 1,317,060 $ 1,002,497
Commercial land and development 15,726 10,600
Commercial construction 47,511 91,760
Residential construction 8,438 11,914
Residential 29,354 30,431
Farmland 55,077 50,164
Commercial:
Secured 137,165 138,676
Unsecured 21,655 17,526
Paycheck Protection Program (“PPP”) 61,499 147,965
Consumer and other 13,528 4,921
Subtotal 1,707,013 1,506,454
Less: Net deferred loan fees 2,297 3,295
Less: Allowance for loan losses 21,848 22,189
Total loans, net $ 1,682,868 $ 1,480,970


(in thousands)	June 30, 2022		December 31, 2021
Real estate:
Commercial	$	2,036,559	$	1,586,232
Commercial land and development	9,439		7,376
Commercial construction	70,404		54,214
Residential construction	7,075		7,388
Residential	26,246		28,562
Farmland	50,434		54,805
Commercial:
Secured	136,155		137,062
Unsecured	24,262		21,136
Paycheck Protection Program (“PPP”)	—		22,124
Consumer and other	21,701		17,167
Subtotal	2,382,275		1,936,066
Less: Net deferred loan fees	1,764		1,606
Less: Allowance for loan losses	25,786		23,243
Loans held for investment, net of allowance for loan losses	$	2,354,725	$	1,911,217

Underwriting

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

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

Construction loans: With respect to construction loans that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans 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.

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Residential real estate loans: Residential real estate loans are underwritten based upon the borrower’s income, credit history, and collateral. To monitor and manage residential loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.

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

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

Credit Quality Indicators

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

Loans rated pass: These are loans to borrowers with satisfactory financial support, repayment capacity, and credit strength. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Company’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts. 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: ~~(a)~~(i) a history of losses or events that threaten the borrower’s ~~viability, (b)~~viability; (ii) a property with significant depreciation and/or marketability ~~concerns,~~concerns; or ~~(c)~~(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.

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The following table summarizes the credit quality indicators related to the Company’s loans by class as of ~~September~~June 30, ~~2021:~~

~~Schedule of Loan by credit quality~~

(in thousands) Pass Watch Substandard Doubtful Total
Real estate:
Commercial $ 1,266,349 $ 15,223 $ 35,488 $ — $ 1,317,060
Commercial land and development 15,726 — — — 15,726
Commercial construction 41,611 5,900 — — 47,511
Residential construction 8,438 — — — 8,438
Residential 29,175 — 179 — 29,354
Farmland 55,077 — — — 55,077

Commercial:
Secured 136,011 — 1,154 — 137,165
Unsecured 21,655 — — — 21,655
PPP 61,499 — — — 61,499

Consumer 13,528 — — — 13,528

Total loans $ 1,649,069 $ 21,123 $ 36,821 $ — $ 1,707,013

2022:


(in thousands)	Pass		Watch		Substandard		Doubtful		Total
Real estate:
Commercial	$	2,020,665	$	15,006	$	888	$	—	$	2,036,559
Commercial land and development	9,439		—		—		—		9,439
Commercial construction	64,504		5,900		—		—		70,404
Residential construction	7,075		—		—		—		7,075
Residential	26,070		—		176		—		26,246
Farmland	50,434		—		—		—		50,434
Commercial:
Secured	135,071		932		152		—		136,155
Unsecured	24,262		—		—		—		24,262
PPP	—		—		—		—		—
Consumer	21,674		—		27		—		21,701
Total	$	2,359,194	$	21,838	$	1,243	$	—	$	2,382,275

The following table summarizes the credit quality indicators related to the Company’s loans by class as of December 31, ~~2020:~~

(in thousands) Pass Watch Substandard Doubtful Total
Real estate:
Commercial $ 950,118 $ 16,836 $ 35,543 $ — $ 1,002,497
Commercial land and development 10,600 — — — 10,600
Commercial construction 85,860 5,900 — — 91,760
Residential construction 11,914 — — — 11,914
Residential 30,248 — 183 — 30,431
Farmland 50,164 — — — 50,164

Commercial:
Secured 136,992 1,552 132 — 138,676
Unsecured 17,526 — — — 17,526
PPP 147,965 — — — 147,965

Consumer 4,921 — — — 4,921

Total loans $ 1,446,308 $ 24,288 $ 35,858 $ — $ 1,506,454

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

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 ~~September~~June 30, ~~2021~~2022 consisted of the following:

~~Schedule of Age Analysis of Past Due Loan~~

Past Due
(in thousands) 30-89
Days Greater Than
90 Days Total Past
Due Current Total Loans
Receivable
Real estate:
Commercial $ — $ — $ — $ 1,317,060 $ 1,317,060
Commercial land and development — — — 15,726 15,726
Commercial construction — — — 47,511 47,511
Residential construction — — — 8,438 8,438
Residential — — — 29,354 29,354
Farmland — — — 55,077 55,077

Commercial:
Secured — — — 137,165 137,165
Unsecured — — — 21,655 21,655
PPP — — — 61,499 61,499

Consumer and other 286 — 286 13,242 13,528

Total loans $ 286 $ — $ 286 $ 1,706,727 $ 1,707,013


(in thousands)	Past Due
	30-89 Days		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable
Real estate:
Commercial	$	—	$	—	$	—	$	2,036,559	$	2,036,559
Commercial land and development	—		—		—		9,439		9,439
Commercial construction	—		—		—		70,404		70,404
Residential construction	—		—		—		7,075		7,075
Residential	—		—		—		26,246		26,246
Farmland	—		—		—		50,434		50,434
Commercial:
Secured	—		—		—		136,155		136,155
Unsecured	—		—		—		24,262		24,262
PPP	—		—		—		—		—
Consumer and other	129		—		129		21,572		21,701
Total	$	129	$	—	$	129	$	2,382,146	$	2,382,275

There were 14no loans ~~with balances totaling $0.1 million~~ between 60-89 days past due ~~but no~~nor any loans greater than 90 days past due and still accruing as of ~~September~~June 30, ~~2021.~~

2022.

The age analysis of past due loans by class as of December 31, ~~2020~~2021 consisted of the following:

Past Due
(in thousands) 30-89
Days Greater Than
90 Days Total Past Due Current Total Loans
Receivable
Real estate:
Commercial $ — $ — $ — $ 1,002,497 $ 1,002,497
Commercial land and development — — — 10,600 10,600
Commercial construction — — — 91,760 91,760
Residential construction — — — 11,914 11,914
Residential — — — 30,431 30,431
Farmland — — — 50,164 50,164

Commercial:
Secured — — — 138,676 138,676
Unsecured — — — 17,526 17,526
PPP — — — 147,965 147,965

Consumer and other 137 — 137 4,784 4,921

Total loans $ 137 $ — $ 137 $ 1,506,317 $ 1,506,454


(in thousands)	Past Due				Total Past Due		Current		Total Loans Receivable
	30-89 Days		Greater Than 90 Days
Real estate:
Commercial	$	—	$	—	$	—	$	1,586,232	$	1,586,232
Commercial land and development	—		—		—		7,376		7,376
Commercial construction	—		—		—		54,214		54,214
Residential construction	—		—		—		7,388		7,388
Residential	—		—		—		28,562		28,562
Farmland	—		—		—		54,805		54,805
Commercial:
Secured	—		—		—		137,062		137,062
Unsecured	—		—		—		21,136		21,136
PPP	—		—		—		22,124		22,124
Consumer and other	334		—		334		16,833		17,167
Total	$	334	$	—	$	334	$	1,935,732	$	1,936,066

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, ~~2020.~~

2021.

Table of Contents

Impaired Loans

Information related to impaired loans as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 consisted of the following:

~~Schedule of Impaired Loans by class of Loans~~

(in thousands) Recorded
Investment Unpaid
Principal
Balance Related
Allowance Average
Recorded
Investment Interest
Income
Recognized
September 30, 2021
Commercial real estate $ 126 $ 126 $ — $ 132 $ —
Residential real estate 179 179 — 181 —
Commercial secured 252 252 134 265 —
Total impaired loans $ 557 $ 557 $ 134 $ 578 $ —
December 31, 2020
Commercial real estate $ 137 $ 137 $ — $ 69 $ —
Residential real estate 183 183 — 92 —
Commercial secured 132 132 — 65 —
Total impaired loans $ 452 $ 452 $ — $ 226 $ —


	June 30, 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	$	114	$	114	$	—	$	122	$	122	$	—
Residential	176		176		—		178		178		—
Commercial:
Secured	—		—		—		116		116		—
Consumer and other	12		12		—		—		—		—
	302		302		—		416		416		—

With an allowance recorded:
Commercial:
Secured	152		152		152		172		172		172
	152		152		152		172		172		172

Total by category:
Real estate:
Commercial	114		114		—		122		122		—
Residential	176		176		—		178		178		—
Commercial:
Secured	152		152		152		288		288		172
Consumer and other	12		12		—		—		—		—
Total impaired loans	$	454	$	454	$	152	$	588	$	588	$	172

No collateral dependent loans were in process of foreclosure at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020. In addition,~~2021.

Table of Contents

Information related to impaired loans for the ~~weighted average loan-to-value~~three months ended June 30, 2022 and 2021 consisted of the following:


	Three months ended June 30,
	2022				2021
(in thousands)	Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate:
Commercial	$	116	$	—		$	132	$	—
Residential	177		—			181		—
Commercial:
Secured	—		—			122		—
Consumer and other	27		—			—		—
	320		—			435		—

With an allowance recorded:
Commercial:
Secured	566		—			—		—
	566		—			—		—

Total by category:
Real estate:
Commercial	116		—			132		—
Residential	177		—			181		—
Commercial:
Secured	566		—			122		—
Consumer and other	27		—			—		—
Total impaired loans	$	886	$	—		$	435	$	—

Table of Contents

Information related to impaired ~~collateral dependent~~ loans ~~was approximately 42.99% at September~~for the six months ended June 30, 2022 and 2021 ~~and 50.51% at December 31, 2020.~~

consisted of the following:


	Six months ended June 30,
	2022				2021
(in thousands)	Average Recorded Investment		Interest Income Recognized			Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Real estate:
Commercial	$	118	$	—		$	134	$	—
Residential	177		—			182		—
Commercial:
Secured	58		—			126		—
Consumer and other	28		—			—		—
	381		—			442		—

With an allowance recorded:
Commercial:
Secured	651		—			—		—
Consumer and other	13		—			36		—
	664		—			36		—

Total by category:
Real estate:
Commercial	118		—			134		—
Residential	177		—			182		—
Commercial:
Secured	709		—			126		—
Consumer and other	41		—			36		—
Total impaired loans	$	1,045	$	—		$	478	$	—

Non-accrual loans, segregated by class, ~~are~~were as follows as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~

~~Schedule of Nonaccural Loans, segregated by class~~

(in thousands) September 30,
2021 December 31,
2020
Real estate:
Commercial $ 126 $ 137
Residential 179 183
Commercial secured 252 132
Total non-accrual loans $ 557 $ 452

2021:


(in thousands)	June 30, 2022		December 31, 2021
Real estate:
Commercial	$	114	$	122
Residential	176		178
Commercial:
Secured	152		288
Total non-accrual loans	$	442	$	588

The amount of foregone interest income related to non-accrual loans was $~~8,193~~ ~~for the three months ended September 30, 2021~~$6.9 thousand and $~~21,773~~ ~~for the nine months ended September 30, 2021, compared to $20,287~~ ~~and $38,151~~$25.1 thousand for the three and ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2022, respectively, compared to $6.8 thousand and $13.6 thousand for the three and six months ended June 30, 2021, respectively.

Table of Contents

Troubled Debt Restructuring

~~The Company’s loan portfolio includes certain loans that have been modified in a troubled debt restructuring (“TDR”~~ ("TDR"), which are loans 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 contractual 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 ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020. At September 30, 2020, there was one loan outstanding with a TDR designation.~~

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 (1)~~be: (i) related to the COVID-19 pandemic; ~~(2)~~(ii) executed on a loan that was not more than 30 days past due as of December 31, ~~2019;~~2020; and ~~(3)~~(iii) executed between March 1, 2020, and the earlier ofof: (a) 60 days after the date of termination of the federal national ~~emergency,~~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 ~~September~~June 30, ~~2021, eight~~2022, 2 borrowing relationships with ~~eight~~2 loans totaling ~~$12.2~~$0.1 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

The following table discloses activity in the allowance for loan losses for the periods presented.


	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 June 30, 2022
Beginning balance	$	13,868	$	66	$	430	$	40	$	208	$	611	$	7,039	$	246	$	—	$	1,088	$	308	$	23,904
Charge-offs	—		—		—		—		—		—		(273)		—		(21)		(259)		—		(553)
Recoveries	—		—		—		—		—		—		40		—		—		145		—		185
Provision (recapture)	2,753		2		78		11		(20)		5		(522)		19		21		(437)		340		2,250
Ending balance	$	16,621	$	68	$	508	$	51	$	188	$	616	$	6,284	$	265	$	—	$	537	$	648	$	25,786
Three months ended June 30, 2021
Beginning balance	$	10,219	$	80	$	504	$	57	$	188	$	578	$	8,918	$	195	$	—	$	600	$	932	$	22,271
Charge-offs	—		—		—		—		—		—		(183)		—		—		(72)		—		(255)
Recoveries	—		—		—		—		—		—		47		—		—		90		—		137
Provision (recapture)	(111)		(5)		(13)		(11)		—		16		412		14		—		(134)		(168)		—
Ending balance	$	10,108	$	75	$	491	$	46	$	188	$	594	$	9,194	$	209	$	—	$	484	$	764	$	22,153

Six months ended June 30, 2022
Beginning balance	$	12,869	$	50	$	371	$	50	$	192	$	645	$	6,859	$	207	$	—	$	889	$	1,111	$	23,243
Charge-offs	—		—		—		—		—		—		(582)		—		(21)		(326)		—		(929)
Recoveries	—		—		—		—		—		—		85		—		—		187		—		272
Provision (recapture)	3,752		18		137		1		(4)		(29)		(78)		58		21		(213)		(463)		3,200
Ending balance	$	16,621	$	68	$	508	$	51	$	188	$	616	$	6,284	$	265	$	—	$	537	$	648	$	25,786
Six months ended June 30, 2021
Beginning balance	$	9,358	$	77	$	821	$	87	$	220	$	615	$	9,476	$	179	$	—	$	632	$	724	$	22,189
Charge-offs	—		—		—		—		—		—		(440)		—		—		(72)		—		(512)
Recoveries	—		—		—		—		—		—		134		—		—		142		—		276
Provision (recapture)	750		(2)		(330)		(41)		(32)		(21)		24		30		—		(218)		40		200
Ending balance	$	10,108	$	75	$	491	$	46	$	188	$	594	$	9,194	$	209	$	—	$	484	$	764	$	22,153

~~Schedule~~Table of ~~activity in the allowance for loan losses~~Contents

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 September 30, 2021
Beginning balance $ 10,108 $ 75 $ 491 $ 46 $ 188 $ 594 $ 9,194 $ 209 $ — $ 484 $ 764 $ 22,153
Charge-offs — — — — — — (347 ) — — (85 ) — (432 )
Recoveries — — — — — — 84 — — 43 — 127
Provision (recapture) 1,587 37 (148 ) 14 19 72 (1,537 ) 9 — 196 (249 ) —
Ending balance $ 11,695 $ 112 $ 343 $ 60 $ 207 $ 666 $ 7,394 $ 218 $ — $ 638 $ 515 $ 21,848
Three months ended September 30, 2020
Beginning balance $ 7,501 $ 111 $ 961 $ 115 $ 218 $ 881 $ 7,086 $ 119 $ — $ 876 $ 37 $ 17,905
Charge-offs — — — — — — (280 ) — — — — (280 )
Recoveries — — — — — — 31 — — 46 — 77
Provision (recapture) 549 (1 ) (228 ) (1 ) (14 ) (377 ) 1,940 11 — (185 ) 156 1,850
Ending balance $ 8,050 $ 110 $ 733 $ 114 $ 204 $ 504 $ 8,777 $ 130 $ — $ 737 $ 193 $ 19,552

Nine months ended September 30, 2021
Beginning balance $ 9,358 $ 77 $ 821 $ 87 $ 220 $ 615 $ 9,476 $ 179 $ — $ 632 $ 724 $ 22,189
Charge-offs — — — — — — (786 ) — — (157 ) — (943 )
Recoveries — — — — — — 219 — — 184 — 403
Provision (recapture) 2,337 35 (478 ) (27 ) (13 ) 51 (1,515 ) 39 — (21 ) (209 ) 199
Ending balance $ 11,695 $ 112 $ 343 $ 60 $ 207 $ 666 $ 7,394 $ 218 $ — $ 638 $ 515 $ 21,848
Nine months ended September 30, 2020
Beginning balance $ 6,331 $ 109 $ 661 $ 116 $ 224 $ 1,382 $ 4,976 $ 88 $ — $ 601 $ 427 $ 14,915
Charge-offs — — — — — — (1,217 ) — — (486 ) — (1,703 )
Recoveries — — — — 90 — 147 — — 102 — 339
Provision (recapture) 1,719 1 72 (2 ) (110 ) (878 ) 4,871 42 — 520 (234 ) 6,001
Ending balance $ 8,050 $ 110 $ 733 $ 114 $ 204 $ 504 $ 8,777 $ 130 $ — $ 737 $ 193 $ 19,552

The following table summarizes the allocation of the allowance for loan losses by impairment methodology for the periods presented.


	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 June 30, 2022:
Ending allowance balance allocated to:
Loans individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	152	$	—	$	—	$	—	$	—	$	152
Loans collectively evaluated for impairment	16,621		68		508		51		188		616		6,132		265		—		537		648		25,634
Ending balance	$	16,621	$	68	$	508	$	51	$	188	$	616	$	6,284	$	265	$	—	$	537	$	648	$	25,786
Loans:
Ending balance individually evaluated for impairment	$	114	$	—	$	—	$	—	$	176	$	—	$	152	$	—	$	—	$	12	$	—	$	454
Ending balance collectively evaluated for impairment	2,036,445		9,439		70,404		7,075		26,070		50,434		136,003		24,262		—		21,689		—		2,381,821
Ending balance	$	2,036,559	$	9,439	$	70,404	$	7,075	$	26,246	$	50,434	$	136,155	$	24,262	$	—	$	21,701	$	—	$	2,382,275

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

As of June 30, 2021:
Ending allowance balance allocated to:
Loans individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Loans collectively evaluated for impairment	10,108		75		491		46		188		594		9,194		209		—		484		764		22,153
Ending balance	$	10,108	$	75	$	491	$	46	$	188	$	594	$	9,194	$	209	$	—	$	484	$	764	$	22,153
Loans:
Ending balance: individually evaluated for impairment	$	130	$	—	$	—	$	—	$	181	$	—	$	120	$	—	$	—	$	—	$	—	$	431
Ending balance: collectively evaluated for impairment	1,153,470		10,472		67,984		6,362		26,266		48,888		127,117		20,772		120,936		6,902		—		1,589,169
Ending balance	$	1,153,600	$	10,472	$	67,984	$	6,362	$	26,447	$	48,888	$	127,237	$	20,772	$	120,936	$	6,902	$	—	$	1,589,600

Table of Contents

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 September 30, 2021:
Ending allowance balance allocated to:
Loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ 134 $ — $ — $ — $ — $ 134
Loans collectively evaluated for impairment 11,695 112 343 60 207 666 7,260 218 — 638 515 21,714
Ending balance $ 11,695 $ 112 $ 343 $ 60 $ 207 $ 666 $ 7,394 $ 218 $ — $ 638 $ 515 $ 21,848
Loans:
Ending balance individually evaluated for impairment $ 126 $ — $ — $ — $ 179 $ — $ 252 $ — $ — $ — $ — $ 557
Ending balance collectively evaluated for impairment 1,316,934 15,726 47,511 8,438 29,175 55,077 136,913 21,655 61,499 13,528 — 1,706,456
Ending balance $ 1,317,060 $ 15,726 $ 47,511 $ 8,438 $ 29,354 $ 55,077 $ 137,165 $ 21,655 $ 61,499 $ 13,528 $ — $ 1,707,013

As of December 31, 2020:
Ending allowance balance allocated to:
Loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ — $ — $ — $ — $ — $ —
Loans collectively evaluated for impairment 9,358 77 821 87 220 615 9,476 179 — 632 724 22,189
Ending balance $ 9,358 $ 77 $ 821 $ 87 $ 220 $ 615 $ 9,476 $ 179 $ — $ 632 $ 724 $ 22,189
Loans:
Ending balance individually evaluated for impairment $ 137 $ — $ — $ — $ 183 $ — $ 132 $ — $ — $ — $ — $ 452
Ending balance collectively evaluated for impairment 1,002,360 10,600 91,760 11,914 30,248 50,164 138,544 17,526 147,965 4,921 — 1,506,002
Ending balance $ 1,002,497 $ 10,600 $ 91,760 $ 11,914 $ 30,431 $ 50,164 $ 138,676 $ 17,526 $ 147,965 $ 4,921 $ — $ 1,506,454

As of September 30, 2020:
Ending allowance balance allocated to:
Loans individually evaluated for impairment $ — $ — $ — $ — $ — $ — $ 63 $ — $ — $ 15 $ — $ 78
Loans collectively evaluated for impairment 8,050 110 733 114 204 504 8,714 130 — 722 193 19,474
Ending balance $ 8,050 $ 110 $ 733 $ 114 $ 204 $ 504 $ 8,777 $ 130 $ — $ 737 $ 193 $ 19,552
Loans:
Ending balance: individually evaluated for impairment $ 911 $ — $ — $ — $ 186 $ — $ 370 $ — $ — $ 15 $ — $ 1,482
Ending balance: collectively evaluated for impairment 948,689 15,485 97,344 16,034 28,604 52,352 126,424 12,933 252,790 5,767 — 1,556,422
Ending balance $ 949,600 $ 15,485 $ 97,344 $ 16,034 $ 28,790 $ 52,352 $ 126,794 $ 12,933 $ 252,790 $ 5,782 $ — $ 1,557,904

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 $~~713.3~~$1.3 billion and $941.2 million ~~and $1.1 billion~~ at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. In addition, the Company pledges eligible ~~Tenants~~tenants in ~~Common~~common loans, which totaled $~~25.3~~$33.4 million ~~and $61.6 million~~ at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020, respectively,~~2021, to secure its borrowing capacity with the Federal Reserve Bank of San Francisco. See Note 7,8, Long Term Debt and Other Borrowings, for further discussion of these borrowings.

Related Party Loans

The Company has, and expects to continue 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 ~~us.~~the Company. Likewise, these transactions do not involve more than the normal risk of collectability or present other unfavorable features. Loan ~~commitment~~commitments to insiders and affiliates, net of cash collateral, totaled $~~9.6~~$8.9 million at ~~September~~June 30, ~~2021~~2022 and $~~1.6~~$9.7 million at December 31, ~~2020.~~

2021.

Note 6: Interest-Bearing Deposits

Interest-bearing deposits consisted of the following as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020:~~

~~Schedule of Interest-bearing deposits.~~

(in thousands) September 30,
2021 December 31,
2020
Savings $ 78,955 $ 49,714
Money market 984,155 844,445
Interest checking accounts 155,881 146,553
Time, $250 or more 27,870 7,568
Other time 26,065 40,034
Total interest-bearing deposits $ 1,272,926 $ 1,088,314

2021:


(in thousands)	June 30, 2022		December 31, 2021
Interest-bearing transaction accounts	$	221,024	$	278,406
Savings accounts	94,122		88,536
Money market accounts	976,093		912,558
Time accounts, $250 or more	187,628		77,868
Other time accounts	16,378		26,404
Total interest-bearing deposits	$	1,495,245	$	1,383,772

Time deposits totaled ~~$53.9~~$204.0 million and $~~47.6~~$104.3 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. As of ~~September~~June 30, ~~2021,~~2022, scheduled maturities of time deposits for the next five years were as follows:


(in thousands)
2022	$	188,847
2023	14,500
2024	120
2025	538
2026	1
Total time deposits	$	204,006

~~Schedule~~Table of ~~Maturities of Time Deposits~~Contents

(in thousands) September 30,
2021
Year
2021 $ 52,970
2022 574
2023 391
2024 —
2025 —
Total time deposits $ 53,935

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 ~~Federal Deposit Insurance Corporation (“FDIC”) insured~~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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~ 2021. There were no one-way deposits at ~~September~~June 30, ~~2021~~2022 and December ~~30, 2020.~~31, 2021. The composition of network deposits as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 was as follows:

~~Schedule of Composition of Network Deposits~~

(in thousands) September 30,
2021 December 31,
2020
CDARS $ 22,405 $ 35,534
ICS 363,827 266,519
Total network deposits $ 386,232 $ 302,053

~~As of September~~


(in thousands)	June 30, 2022		December 31, 2021
CDARS	$	12,388	$	22,411
ICS	321,899		307,636
Total network deposits	$	334,287	$	330,047

At June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, deposits from related parties (directors, executive officers, and principal shareholders) totaled $~~60.7~~$35.8 million and $~~42.5~~$32.4 million,, respectively.

Interest expense recognized on interest-bearing deposits for periods ended ~~September~~June 30, ~~2021,~~2022 and ~~2020~~2021 consisted of the following:


	Three months ended				Six months ended
(in thousands)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Interest-bearing transaction accounts	$	66	$	37	$	136	$	75
Savings accounts	38		19		63		34
Money market accounts	679		475		1,045		1,057
Time accounts, $250 or more	226		8		286		15
Other time accounts	12		29		36		86
Total interest expense on interest-bearing deposits	$	1,021	$	568	$	1,566	$	1,267

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 and six months ended June 30, 2022, and $0.1 million for the three and six months ended June 30, 2021.

Table of Contents

The Company adopted ASU 2016-02, Leases

For the three months ended For the nine months ended
(in thousands) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Savings $ 19 $ 18 $ 53 $ 80
Money market 390 1,476 1,447 4,883
Interest checking accounts 37 96 113 315
Time, $250 or more 11 62 26 780
Other time 23 112 108 332
Total interest expense on interest-bearing deposits $ 480 $ 1,764 $ 1,747 $ 6,390

(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 and lease liability.

The value of the ROUA and lease liability is impacted by the amount of the periodic payment required, length of the lease term, and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROUA and lease liability. ASC 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. 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 and six months ended June 30, 2022:


(in thousands)	Three months ended June 30, 2022		Six months ended June 30, 2022
Operating lease cost	$	278	$	563
Short-term lease cost	—		—
Variable lease cost	—		—
Sublease income	(5)		(11)
Total lease cost	$	273	$	552

Prior to the adoption of ASU 2016-02, rent expense under operating leases was $0.3 million and $0.5 million during the three and six months ended June 30, 2021, respectively. Rent expense was partially offset by rent income of $5.2 thousand and $10.4 thousand during the three and six months ended June 30, 2021, respectively.

The following table presents the weighted average operating lease term and discount rate at June 30, 2022:

27
	June 30, 2022
Weighted average remaining lease term (in years)	5.72 years
Weighted average discount rate	2.15	%

Table of Contents

The following table shows the future expected operating lease payments under the Company's operating lease agreements as of June 30, 2022:


(in thousands)
2022	$	534
2023	1,009
2024	984
2025	767
2026	665
Thereafter	1,107
Total expected operating lease payments	5,066
Discount for present value of expected cash flows	(327)
Lease liability at June 30, 2022	$	4,739

Note 7: 8: Long Term Debt and Other Borrowings

Subordinated notes: On November 8, 2019, the Company completed a private placement of $~~3.75~~$3.8 million of fixed-to-floating rate subordinated notes to certain qualified investors. All of the debt was purchased by ~~four~~4 existing or former members of the board of directors or their affiliates. 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 5.50% 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 ~~rate~~ plus 354.4 basis points (~~3.66%~~(5.54% as of ~~September~~June 30, ~~2021)~~2022) until maturity. The notes include a right of prepayment, on or after September ~~15,~~30, 2022 ~~and,~~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~~

On September 28, 2017, the Company ~~has $25.0~~completed a private placement of $25.0 million ~~in principal~~ 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~~3 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 ~~rate~~ plus 404.4 basis points (~~4.16%~~(6.04% as of ~~September~~June 30, ~~2021)~~2022) until maturity. The notes include a right of prepayment, on or after September ~~15,~~28, 2022 ~~and,~~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. Debt issuance costs incurred in conjunction with the notes were $0.6 million, of which $0.3 million has been amortized ~~through September~~as of June 30, ~~2021.~~2022. 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 ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company’s subordinated debt outstanding was $28.4 ~~million and $28.3 million, respectively.~~million.

Other 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 ~~$523.3~~ $885.5 million at ~~September~~June 30, ~~2021~~2022 and ~~$519.3~~$696.3 million at December 31, ~~2020.~~ 2021. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had $60.0 million and no outstanding ~~borrowings. As~~borrowings, respectively. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had letters of credit (“~~LC”~~LCs”) issued on its behalf totaling $~~319.5~~ $545.5 million and $~~293.5~~$420.5 million,, respectively, as discussed below.

~~As of September~~At June 30, 2022 and December 31, 2021, LCs totaling ~~$29.5~~$155.5 million and $80.5 million, respectively, were pledged to secure State of California deposits, and ~~$290.0~~LCs totaling $390.0 million ~~were pledged to secure local agency deposits. As of December 31, 2020, LCs totaling $13.5~~and $340.0 million, ~~were pledged to secure State of California deposits and $280.0 million~~respectively, were pledged to secure local agency deposits. The LCs issued reduced the Company’s available borrowing capacity to ~~$203.8~~$280.0 million and ~~$284.8~~$275.8 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

At December 31, 2020, the Company had three unsecured federal funds lines of credit totaling $75.0 million with three of its correspondent banks, respectively. During the quarter ended September 30, 2021, the Company entered into two new unsecured federal funds lines of credit, totaling $25.0 million and $50.0 million, respectively. As a result, at September 30, 2021, the Company had ~~five~~5 unsecured federal funds lines of credit totaling $150.0 million with ~~five~~5 of its correspondent banks, respectively. During the six months ended June 30, 2022, the borrowing capacity of one of the Company's existing unsecured federal funds lines of credit was increased by $10.0 million. As a result, at June 30, 2022, the Company had 5 unsecured federal funds lines of credit totaling $160.0 million with 5 of its correspondent banks, respectively. There were no amounts outstanding at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021.

At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the Company had the ability to borrow from the ~~Federal~~Federal Reserve Discount Window. At ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, the borrowing capacity under this arrangement was ~~$14.8~~$17.6 million and ~~$25.9~~$17.0 million, respectively. There were no amounts outstanding at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~2021. The borrowing line is secured by liens on the Company’s construction and agricultural loan portfolios.

Note 8: 9: Income Taxes

The Company terminated its status as a Subchapter S ~~corporation~~Corporation as of May 5, 2021, in connection with ~~the~~its 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 ~~an effective~~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 ~~effective~~statutory tax rate for federal and state income taxes of 29.56%. For the ~~2021~~2022 periods presented below, the tax rate reflects the actual effective tax rate for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021. The effective tax rate~~2022, as the Company was a C Corporation for the ~~nine months ended September 30, 2021 excludes the effect~~entirety of ~~the discrete deferred tax adjustment of $4.6 million, discussed in detail below, which offset the provision for income taxes.~~each period. The following reconciliation table provides a detailed calculation of the pro forma provision for income taxes:

~~Schedule of Pro forma provision of income taxes~~

For the three months ended For the nine months ended
(in thousands) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Net income before provision for income taxes $ 13,296 $ 9,678 $ 34,518 $ 27,434
Effective/pro forma tax rate 17.07 % 29.56 % 23.25 % 29.56 %
Pro forma provision for income taxes $ 2,270 $ 2,861 $ 8,024 $ 8,109

In conjunction with the termination of the Subchapter S corporation status, the C Corporation deferred tax assets and liabilities were estimated for future tax consequences attributable to differences between the financial statement carrying amounts of the Company’s existing assets and liabilities and their respective tax bases. The deferred tax assets and liabilities were 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 as a net deferred tax asset of $5.4 million and a reduction to the provision for income taxes of $4.6 million during the nine months ended September 30, 2021.


	For the three months ended						For the six months ended
(in thousands)	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Net income before provision for income taxes	$	14,033		$	10,562		$	27,555		$	21,222
Effective/pro forma tax rate	29.07		%	29.56		%	28.09		%	29.56		%
Actual/pro forma provision for income taxes	$	4,080		$	3,122		$	7,740		$	6,273

The provision for income tax for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~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:~~

For the three months ended For the nine months ended
(in thousands) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Statutory U.S. federal income tax $ 2,792 $ 2,032 $ 7,249 $ 5,761
Increase (decrease) resulting from:
Benefit of S Corporation status (964 ) (2,032 ) (3,968 ) (5,761 )
State taxes 1,138 341 2,963 968
C Corp conversion federal rate change — — 1,484 —
Deferred tax asset adjustment — — (4,638 ) —
Other (696 ) — 296 —
Provision for income taxes $ 2,270 $ 341 $ 3,386 $ 968

Corporation during the second quarter of 2021:


	For the three months ended				For the six months ended
(in thousands)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Statutory U.S. federal income tax	$	2,947	$	2,218	$	5,787	$	4,457
Increase (decrease) resulting from:
Benefit of S Corporation status	—		(766)		—		(3,004)
State taxes	1,201		1,444		2,358		1,825
C Corp conversion federal rate change	—		1,484		—		1,484
Deferred tax asset adjustment	—		(4,638)		—		(4,638)
Other	(68)		992		(405)		992
Provision for income taxes	$	4,080	$	734	$	7,740	$	1,116

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, the Company’s federal and state statutory tax rate, net of federal benefit, of 29.56%, differed from the effective tax rate ~~differed from~~of 20.77% used for the three and six months ended June 30, 2021 due to the termination of the Company's Subchapter S Corporation status as of May 5, 2021. For the three and six months ended June 30, 2021, the statutory California tax rate of 3.50% ~~used prior to May 5, 2021~~ and the ~~statutory~~ federal and state ~~tax~~statutory rate, net of federal benefit, of 29.56% ~~used May 5, 2021 and after, as~~, were applied to the ~~effective tax rate primarily represents the weighted average rate between the S Corporation tax rate of 3.50% and the C Corporation tax rate of 29.56%~~Company's income based on the number of days the Company was each type of corporation during 2021.

Table of Contents

Note 9: 10: Shareholders’ Equity

Dividends

On ~~July 6, 2021,~~April 21, 2022, the board of directors declared a $~~0.15~~$0.15 per common share dividend, totaling $~~2.6 million~~.

$2.6 million.

Stock-Based Incentive Arrangement

The Company’s stock-based compensation consists of RSAs ~~issued~~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 including the Chief Executive Officer, Chief Operating Officer, Chief Credit Officer, Chief Regulatory Officer, and Chief Banking Officer.~~Company. The arrangement ~~which may be renewed annually at the sole discretion of the board of directors, provides~~provided that these executive officers ~~will~~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, that vest over three years.~~objectives. These objectives ~~include,~~included, but ~~are~~were not limited to, net income adjusted for the provision for loan 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~~ 0~~restricted shares during the three months ended September 30, 2021 and 2020, and~~ ~~173,207~~ ~~and~~ ~~8,148~~ ~~restricted shares during the nine months ended September 30, 2021 and 2020, respectively. In addition,~~ ~~1,700~~ ~~and no~~ ~~restricted shares were forfeited during the three months ended September 30, 2021 and 2020, respectively, and~~ ~~4,422~~ ~~and no restricted shares were forfeited during the nine months ended September 30, 2021 and 2020, respectively.~~

Non-cash stock compensation expense recognized for the three months ended ~~September~~June 30, 2022 and 2021 was $0.3 million and ~~2020 was $0.2~~$1.0 million,~~and $0.4 million~~, respectively. Non-cash stock compensation expense recognized for the ~~nine~~six months ended ~~September~~June 30, 2022 and 2021 was $0.6 million and ~~2020 was $1.2~~$1.0 million, respectively.

At June 30, 2022 and $~~0.5 million, respectively.~~

~~At September 30,~~ 2021, ~~and 2020,~~ respectively, there were ~~127,851~~107,824 and ~~11,568~~129,551 unvested restricted shares. As of ~~September~~June 30, ~~2021,~~2022, there was approximately ~~$2.4~~$2.2 million of unrecognized compensation expense related to the ~~127,851~~107,824 unvested restricted shares. The holders of unvested RSAs are entitled to dividends onat 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. The impact of tax benefits for dividends paid on unvested restricted stock on the Company’s consolidated statements of income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021 was immaterial.

The following table summarizes ~~information about unvested~~activity related to restricted ~~shares:~~

shares for the periods indicated:


	For the three months ended June 30,						For the six months ended June 30,
	2022			2021			2022			2021
	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	138,856	$	20.95	6,296	$	18.91	127,751	$	19.95	11,568	$	21.25
Shares granted	1,438	25.02		163,755	20.00		23,639	28.29		173,207	19.89
Shares vested	(30,816)	21.25		(40,500)	20.00		(41,062)	22.15		(52,502)	20.10
Shares forfeited	(1,654)	23.79		—	—		(2,504)	22.50		(2,722)	18.88
End of the period balance	107,824	$	20.88	129,551	$	19.95	107,824	$	20.88	129,551	$	19.95

~~Schedule~~Table of ~~Restricted Shares~~Contents

For the three months ended September 30, For the nine months ended September 30,
2021 2020 2021 2020
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 129,551 $ 19.95 11,568 $ 21.25 11,568 $ 21.25 15,794 $ 21.03
Shares granted — — 0 0 173,207 19.89 8,148 21.00
Shares vested — — — 0 (52,502 ) 20.10 (12,374 ) 20.81
Shares forfeited (1,700 ) 20.00 — 0 (4,422 ) 19.31 — —
End of the period balance 127,851 19.95 11,568 21.25 127,851 19.95 11,568 21.25

Note ~~10:~~ 11: Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

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

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

~~Schedule of Unfunded Loan Commitments and Standby Letter of Credit~~

(in thousands) September 30,
2021 December 31,
2020
Commercial lines of credit $ 118,902 $ 107,231
Undisbursed construction loans 30,481 50,442
Undisbursed commercial real estate loans 40,653 39,946
Agricultural lines of credit 6,948 11,553
Undisbursed agricultural real estate loans 3,426 5,945
Other 3,214 920
Total commitments and standby letters of credit $ 203,624 $ 216,037


(in thousands)	June 30, 2022		December 31, 2021
Commercial lines of credit	$	117,592	$	137,354
Undisbursed construction loans	70,545		46,584
Undisbursed commercial real estate loans	76,768		47,793
Agricultural lines of credit	11,768		9,955
Undisbursed agricultural real estate loans	1,063		3,427
Other	2,261		3,764
Total commitments and standby letters of credit	$	279,997	$	248,877

The Company records an allowance for loan 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 losses on unfunded commitments totaled $0.1 million as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, which is recorded in interest payable and other liabilities in the consolidated balance sheets.

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

In management’s judgment, a concentration of loans exists in real estate related loans, which represented approximately ~~86.04%~~92.42% of the Company’s ~~loan portfolio~~loans held for investment at ~~September~~June 30, ~~2021~~2022 and ~~79.23%~~89.87% of the Company’s ~~loan portfolio~~loans held for investment at December 31, ~~2020.~~2021. 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 ~~September~~June 30, ~~2021,~~2022, the Company had 6478 deposit relationships that exceeded $5.0 million each, totaling ~~$1.1~~$1.3 billion, or approximately ~~51.32%~~52.14% of total deposits. The Company’s largest single deposit relationship at ~~September~~June 30, ~~2021~~2022 totaled $~~190.2~~$175.5 million,, or approximately ~~8.77%~~7.02% 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 ~~$250.1~~$132.0 million and ~~$118.0~~$147.2 million at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

~~Leases~~

~~The Company leases office space for its banking operations under non-cancelable operating leases~~Table 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.Contents

~~The Company has a sublease agreement for space adjacent to the Redding location. The sublease has renewal terms extended to December 31, 2021.~~

The Company leases its Sacramento loan production office from a partnership comprised of some of the Company’s shareholders and certain members of the 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 was insignificant for the three months ended September 30, 2021, $~~0.1 million~~ ~~for the nine months ended September 30, 2021, and $0.1 million~~ ~~and $0.2 million~~ ~~for the three and nine months ended September 30, 2020, respectively, under these leases.~~

~~The following table shows the future minimum lease payments and weighted average remaining lease terms under the Company’s operating lease arrangements as of September 30, 2021.~~

~~Schedule of Future Minimum Lease Payment and Weighted Average Remaining Lease~~

(in thousands) September 30,
2021
2021 $ 261
2022 1,078
2023 1,009
2024 984
2025 768
Thereafter 1,755
Total $ 5,855
Weighted average remaining term (in years) 4.90

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 11:~~ ~~Derivative Financial Instruments and Hedging Activities~~

The Company has a lending arrangement with one of its borrowers that contains a structured prepayment provision and interest rate swap, which for accounting purposes is considered a derivative. The transaction between the Company and the borrower in effect is a floating rate loan combined with a pay floating/receive fixed interest rate swap. To offset the interest rate risk of this lending arrangement, management entered into a separate interest rate swap with a separate counterparty that mirrors the interest rate swap with the borrower. The net economic effect of the arrangement for the borrower is a fixed rate loan of 7.81%, and for the Company is a floating rate loan of LIBOR plus 2.35%, adjusting monthly. The loan balance as of September 30, 2021 and December 31, 2020 was $0.8 million, with monthly amortization through its maturity in April 2027. The notional amounts of the two interest rate swaps are the same as the loan balance, and they amortize and mature similarly. The notional amounts of the interest rate swap transactions do not represent amounts exchanged by the parties. The amounts exchanged are determined by reference to the notional amounts and the other terms of the individual interest rate swap agreements. The two derivatives are carried at fair value and $0.1 million and $0.1 million were reported in other assets at September 30, 2021 and December 31, 2020, respectively. The related liabilities of $0.1 million and $0.1 million were reported in other liabilities at September 30, 2021 and December 31, 2020, respectively.

Note 12: Subsequent Events

On ~~October 5, 2021,~~July 21, 2022, the board of directors declared a $~~0.15~~$0.15 per common share dividend, totaling $~~2.6 million~~.

$2.6 million.

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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"), 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 ~~Registration Statement~~Annual Report on Form ~~S-1 filed in connection with its IPO (the “Registration Statement”),~~10-K for the year ended December 31, 2021, which was ~~declared effective by~~filed with the U.S. Securities and Exchange Commission (“SEC”) on ~~May 4, 2021.~~February 25, 2022. Average balances, including balances used in calculating certain financial ratios, are generally comprised of average daily balances.

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 forward-looking statements that involve risks, uncertainties, and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the ~~sections~~section entitled “Cautionary Note Regarding Forward-Looking Statements” herein and in the section entitled “Risk ~~Factors.”~~Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. We assume no obligation to update any of these forward-looking statements, except to the extent required by law. 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 discussion and analysis relates to activities primarily conducted by the Bank.

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 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 ~~September~~June 30, ~~2021,~~2022, we had total assets of ~~$2.4~~$2.8 billion, total loans held for investment, net of allowance for loan losses, of ~~$1.7~~$2.4 billion, and total deposits of ~~$2.2~~$2.5 billion.

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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 ~~2020~~ 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 ~~$27.0~~$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 and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020.~~2021.

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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”~~), the California Department of Financial Protection and Innovation (“DFPI”~~), 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 ~~Policies and~~ 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”) as contained within the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“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 Annual Report on Form 10-K as of and for the year ended December 31, ~~2020,~~2021, and the notes thereto.

Our most significant accounting policies and our critical accounting estimates are described in greater detail in Note 1, ~~Summary~~Basis of ~~Significant Accounting Policies,~~Presentation, in our audited consolidated financial statements and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates included in the ~~Registration Statement.~~Annual Report on Form 10-K for the year ended December 31, 2021. 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.~~

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 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.

~~Loans and Allowance for Loan Losses~~

The allowance for loan losses represents the estimated probable incurred loan losses in our loan portfolio. The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectabilityTable of ~~the principal is unlikely. Subsequent recoveries of previously charged-off amounts, if any, are credited to the allowance for loan losses.~~Contents

The allowance for loan 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 specifically impacting each loan type by purpose and by geography. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

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.

We consider an originated loan to be impaired when it is probable that the collection of all amounts due, according to the contractual terms, is unlikely. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all the facts and circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Interest income is recognized on impaired loans in the same manner as non-accrual loans.

We consider a loan to be a troubled debt restructuring (“TDR”) when we have granted a concession and the borrower is experiencing financial difficulty. 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.

The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), as amended by the Consolidated Appropriations Act, 2021 (“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 (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant.

~~Fair Value Measurement~~

~~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).

Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) 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). Level 2 securities include U.S. agencies or government-sponsored agencies’ debt securities, mortgage-backed securities, government agency issued bonds, privately issued collateralized mortgage obligations, and corporate bonds.

~~Stock-Based Compensation~~

Compensation cost is recognized for stock options and restricted stock awards (“RSAs”) issued to executives and directors based on the fair value of these awards at the date of grant. The fair value of RSAs is determined by considering projections of discounted cash flows available to shareholders (paid in the form of dividends) as well as comparable values for publicly traded banks of similar size and complexity. A Black-Scholes model is utilized to estimate the grant date fair value of stock options, while the estimated fair value of our common stock at the date of grant is used for RSAs. Compensation cost is recognized over the requisite service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

~~Securities Impairment~~

At each consolidated financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other than temporary. Various factors are considered in the assessment, including the nature of the investment, the cause of the impairment, the severity and duration of the impairment, credit ratings and other credit related factors such as third-party guarantees, and volatility of the security’s fair value. This assessment also includes a determination as to whether we intend to, or if it is more likely than not that we will be required to, sell the security before recovery of its amortized cost basis less any current-period credit losses. If we intend to sell a security or if it is more likely than not that we will be required to sell the security before recovery, an other-than-temporary impairment (“OTTI”) write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value.

Executive Summary

Net income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 totaled ~~$11.0~~$10.0 million and ~~$31.1~~$19.8 million, respectively, compared to net income of ~~$9.3~~$9.8 million and ~~$26.5~~$20.1 million for the three and ~~nine~~six months ended ~~September 30, 2020, respectively. Diluted EPS was $0.64 and $2.18 for the three and nine months ended September~~June 30, 2021, ~~compared to $0.94 and $2.72 for the corresponding periods in 2020.~~

respectively.

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

•

Assets. Total assets were $2.8 billion at June 30, 2022, representing a $279.3 million, or 10.92%, increase compared to $2.6 billion at December 31, 2021. The primary drivers of this increase are discussed below.

•Loans.

●

~~Assets.~~ Total assets were $2.4 billion as of September 30, 2021, representing a $480.7 million, or 24.61%, increase compared to $2.0 billion as of December 31, 2020. The primary drivers of this increase are discussed below.

●

~~Loans.~~ Total gross loans were $1.7 billion at September 30, 2021, compared to $1.5 billion at December 31, 2020, an increase of $202.0 million, or 13.40%. The increase was primarily attributed to a $275.4 million net increase in commercial real estate, commercial land and development, and commercial construction loans, partially offset by an $86.5Total loans held for investment were $2.4 billion at June 30, 2022, compared to $1.9 billion at December 31, 2021, an increase of $446.1 million, or 23.06%. The increase was primarily attributable to a $450.3 million net increase in commercial real estate loans and a $16.2 million net increase in commercial construction loans, partially offset by a $22.1 million net decrease in Paycheck Protection Program (“PPP”) ~~loans, and an $11.6 million net increase in all other non-PPP, non-commercial real estate~~ loans.

●

~~PPP Loans.~~ As of September 30, 2021, there were 183 PPP loans outstanding totaling $61.5 million, which included 180 loans totaling $54.4 million funded during the first nine months of 2021 under the second round of the PPP stimulus plan. Approximately 72 of these PPP loans, or 39.34% of total PPP loans as of September 30, 2021, totaling $4.3 million were less than or equal to $0.15 million and had access to streamlined forgiveness processing. As of September 30, 2021, 1,258 PPP loan forgiveness applications had been submitted to the Small Business Administration (“SBA”) and forgiveness payments had been received on 1,245 of these PPP loans, totaling $292.7 million in principal and interest. We expect full forgiveness of the first round of PPP loans to be completed in the near future.

●

~~COVID-19 Deferments.~~ As of September 30, 2021, eight borrowing relationships with eight loans totaling $12.2 million were on COVID-19 deferment. All loans that ended COVID-19 deferments in the quarter ended September 30, 2021 returned to their contractual payment structures prior to the COVID-19 pandemic with no risk rating downgrades to classified nor any 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 $0.6 million, or 0.03% of total loans, at September 30, 2021, compared to $0.5 million, or 0.03% of total loans, at December 31, 2020. The ratio of allowance for loan losses to total loans was 1.28% at September 30, 2021 and 1.47% at December 31, 2020.

●

~~Return on Average Assets (“ROAA”) and Return on Average Equity (“ROAE”).~~ ROAA and ROAE were 1.85% and 19.26%, respectively, for the quarter ended September 30, 2021, as compared to ROAA of 1.81% and ROAE of 32.33% for the quarter ended September 30, 2020. Pro forma ROAA and ROAE for the quarter ended September 30, 2021 were equal to actual ROAA and ROAE of 1.85% and 19.26%, respectively, as compared to pro forma ROAA of 1.32% and ROAE of 23.61% for the quarter ended September 30, 2020. ROAA and ROAE were 1.88% and 24.01%, respectively, for the nine months ended September 30, 2021, which decreased from ROAA of 1.97% and ROAE of 31.87% for the nine months ended September 30, 2020. Pro forma ROAA and ROAE were 1.60% and 20.43%, respectively, for the nine months ended September 30, 2021, as compared to pro forma ROAA of 1.44% and ROAE of 23.27% for the nine months ended September 30, 2020.

●

~~Net Interest Margin.~~ Net interest margin was 3.60% and 3.30% in the three months ended September 30, 2021 and 2020, respectively, and 3.63% and 3.53% for the nine months ended September 30, 2021 and 2020, respectively. The fluctuations period-over-period were primarily attributed to increases in the Company’s interest-earning assets.

•PPP Loans. All PPP loans had been forgiven, paid off by the borrower, or charged off as of June 30, 2022.

●

~~Efficiency Ratio.~~ Efficiency ratio was 39.39% and 43.77% for the three and nine months ended September 30, 2021, respectively, up from 38.56% and 36.65% for the corresponding periods in 2020. The increase was primarily attributed to expenses incurred in the three and nine months ended September 30, 2021 to support organizational matters leading up to the IPO and an increase in salaries and employee benefits as a result of an increase in headcount period-over-period.

•

●

~~Deposits.~~ Total deposits increased by $384.4 million from $1.8 billion at December 31, 2020 to $2.2 billion at September 30, 2021. Deposit increases were attributed to increases in PPP borrower-related balances and normal fluctuations in some of our large existing accounts. Non-interest-bearing deposits increased by $199.8 million in the first nine months of 2021 to $895.5 million, and represented 41.30% of total deposits at September 30, 2021, compared to 39.00% of total deposits at December 31, 2020. Our loan to deposit ratio was 78.86% at September 30, 2021, compared to 84.50% at December 31, 2020.

Coronavirus Disease ("COVID-19") Deferments.

●

~~Capital Ratios~~. All capital ratios were above well-capitalized regulatory thresholds as of September 30, 2021. The total risk-based capital ratio for the Company was 15.66% at September 30, 2021, compared to 12.18% at December 31, 2020. The ratio of tier 1 capital to average assets was 9.50% at September 30, 2021, compared to 6.58% at December 31, 2020. 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.

As of June 30, 2022, two borrowing relationships with two loans totaling $0.1 million were on COVID-19 deferment. All but one of the loans that ended COVID-19 deferments during the quarter ended June 30, 2022 have returned to their pre-COVID-19 contractual payment structures with no risk rating downgrades to classified, nor any troubled debt restructuring ("TDR"). Of the loans that ended COVID-19 deferments in the quarter ended June 30, 2022, one is non-accrual and returned to its pre-COVID-19 risk rating of classified as of June 30, 2022. 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.

●

~~Dividends.~~ ~~The board of directors declared a cash dividend of $0.15 per share on July 6, 2021.~~

•

Non-accrual Loans. Credit quality remains strong, with non-accrual loans representing $0.4 million, or 0.02% of total loans held for investment, at June 30, 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 1.08% at June 30, 2022 and 1.20% at December 31, 2021.

•Return on Average Assets (“ROAA”) and Return on Average Equity (“ROAE”). ROAA and ROAE were 1.45% and 17.20%, respectively, for the three months ended June 30, 2022, as compared to ROAA of 1.75% and ROAE of 24.25% for the three months ended June 30, 2021. Pro forma ROAA and ROAE for the three months ended June 30, 2022 were equal to actual ROAA and ROAE of 1.45% and 17.20%, respectively, as compared to pro forma ROAA of 1.33% and pro forma ROAE of 18.36% for the three months ended June 30, 2021. ROAA and ROAE were 1.49% and 17.07%, respectively, for the six months ended June 30, 2022, as compared to ROAA of 1.89% and ROAE of 27.78% for the six months ended June 30, 2021. Pro forma ROAA and ROAE for the six months ended June 30, 2022 were equal to actual ROAA and ROAE of 1.49% and 17.07%, respectively, as compared to pro forma ROAA of 1.41% and pro forma ROAE of 20.66% for the six months ended June 30, 2021.

•Net Interest Margin. Net interest margin was 3.70% and 3.65% for the three and six months ended June 30, 2022, respectively, and 3.48% and 3.65% for the three and six months ended June 30, 2021, respectively. The increase in net interest margin for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 was primarily attributable to increases in yields on interest-earning deposits with banks and investment securities, partially offset by decreases in average loan yields.

•Efficiency Ratio. Efficiency ratio was 38.53% for the three months ended June 30, 2022, down from 47.56% for the corresponding period of 2021. Additionally, efficiency ratio was 39.14% for the six months ended June 30, 2022, down from 46.18% for the corresponding period of 2021. The decreases were primarily attributable to increases in net interest income period-over-period.

•Deposits. Total deposits increased by $215.4 million from $2.3 billion at December 31, 2021 to $2.5 billion at June 30, 2022. 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 by $103.9 million in the first six months of 2022 to $1.0 billion, and represented 40.22% of total deposits at June 30, 2022, compared to 39.46% of total deposits at December 31, 2021. Our loan to deposit ratio was 95.69% at June 30, 2022, compared to 85.09% at December 31, 2021.

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•Capital Ratios. All capital ratios were above well-capitalized regulatory thresholds as of June 30, 2022. The total risk-based capital ratio for the Company was 11.77% at June 30, 2022, compared to 13.98% at December 31, 2021. The Tier 1 leverage ratio was 8.81% at June 30, 2022, compared to 9.47% at December 31, 2021. 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 April 21, 2022.

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

As of
(dollars in thousands) September 30,
2021 December 31,
2020
Selected financial condition data:
Total assets $ 2,434,493 $ 1,953,765
Total loans, net 1,688,135 1,485,790
Total deposits 2,168,394 1,784,001
Total subordinated notes, net 28,370 28,320
Total shareholders’ equity 226,638 133,775
Asset quality ratios:
Allowance for loan losses to total loans 1.28 % 1.47 %
Allowance for loan losses to total loans, excluding SBA PPP loans¹ 1.33 % 1.63 %
Allowance for loan losses to non-accrual loans 39.24 x 49.09 x
Non-accrual loans to total loans 0.03 % 0.03 %
Capital ratios:
Total capital (to risk-weighted assets) 15.66 % 12.18 %
Tier 1 capital (to risk-weighted assets) 12.79 % 8.98 %
Common equity Tier 1 capital (to risk-weighted assets) 12.79 % 8.98 %
Tier 1 capital (to average assets) 9.50 % 6.58 %
Total shareholders’ equity to total assets ratio 9.31 % 6.85 %
Tangible shareholders’ equity to tangible assets² 9.31 % 6.85 %

For the three months ended For the nine months ended
(dollars in thousands, except per share data) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Selected operating data:
Net interest income $ 19,909 $ 16,227 $ 56,253 $ 46,018
Provision for loan losses — 1,850 200 6,000
Non-interest income 2,028 2,535 5,490 6,762
Non-interest expense 8,641 7,234 27,025 19,346
Net income 11,026 9,337 31,132 26,466
Net income per common share:
Basic $ 0.64 $ 0.94 $ 2.18 $ 2.72
Diluted $ 0.64 $ 0.94 $ 2.18 $ 2.72
Selected pro forma operating data:
Pro forma net income³ 11,026 6,817 26,494 19,325
Pro forma provision for income taxes³ 2,270 2,861 8,024 8,109
Pro forma net income per common share³:
Basic $ 0.64 $ 0.69 $ 1.86 $ 1.98
Diluted $ 0.64 $ 0.69 $ 1.86 $ 1.98
Performance and other financial ratios:
ROAA 1.85 % 1.81 % 1.88 % 1.97 %
ROAE 19.26 % 32.33 % 24.01 % 31.87 %
Net interest margin 3.60 % 3.30 % 3.63 % 3.53 %
Cost of funds 0.17 % 0.46 % 0.20 % 0.61 %
Efficiency ratio 39.39 % 38.56 % 43.77 % 36.65 %
Cash dividend payout ratio on common stock⁴ 23.29 % 79.55 % 201.50 % 71.82 %
Selected pro forma ratios:
Pro forma ROAA^3,5 1.85 % 1.32 % 1.60 % 1.44 %
Pro forma ROAE^3,5 19.26 % 23.61 % 20.43 % 23.27 %

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

Tangible 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 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 as of each of the dates indicated.

For the three months ended September 30, 2020, 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 September 30, 2021, 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 September 30, 2021 are equal to actuals. For the nine months ended September 30, 2021, we calculate our pro forma net income, provision for income taxes, net income per common share, ROAA, and ROAE using an effective tax rate of 23.25%, which is the actual effective tax rate, excluding the effects of the discrete deferred tax adjustment of $4.6 million, discussed in the section entitled “Provision for Income Taxes” below.

⁴

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


(dollars in thousands)	June 30, 2022			December 31, 2021
Selected financial condition data:
Total assets	$	2,836,071		$	2,556,761
Total loans held for investment	2,380,511			1,934,460
Total deposits	2,501,311			2,285,890
Total subordinated notes, net	28,420			28,386
Total shareholders’ equity	233,200			235,046
Asset quality ratios:
Allowance for loan losses to total loans held for investment	1.08		%	1.20		%
Allowance for loan losses to total loans held for investment, excluding PPP loans1	1.08		%	1.22		%
Allowance for loan losses to non-accrual loans	5,834.88		%	3,954.30		%
Non-accrual loans to total loans held for investment	0.02		%	0.03		%
Capital ratios:
Total capital (to risk-weighted assets)	11.77		%	13.98		%
Tier 1 capital (to risk-weighted assets)	9.62		%	11.44		%
Common equity Tier 1 capital (to risk-weighted assets)	9.62		%	11.44		%
Tier 1 leverage	8.81		%	9.47		%
Total shareholders’ equity to total assets ratio	8.22		%	9.19		%
Tangible shareholders’ equity to tangible assets2	8.22		%	9.19		%

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For the three months ended For the six months ended
(dollars in thousands, except per share data) June 30, 2022 June 30, 2021 June 30, 2022 June 30, 2021
Selected operating data:
Net interest income $ 24,491 $ 18,296 $ 46,353 $ 36,344
Provision for loan losses 2,250 — 3,200 200
Non-interest income 1,997 1,846 4,182 3,462
Non-interest expense 10,205 9,580 19,780 18,384
Net income 9,953 9,828 19,815 20,106
Net income per common share:
Basic $ 0.58 $ 0.67 $ 1.15 $ 1.57
Diluted $ 0.58 $ 0.67 $ 1.15 $ 1.57
Selected pro forma operating data:
Pro forma net income3
9,953 7,440 19,815 14,949
Pro forma provision for income taxes3
4,080 3,122 7,740 6,273
Pro forma net income per common share3:
Basic $ 0.58 $ 0.51 $ 1.15 $ 1.17
Diluted $ 0.58 $ 0.51 $ 1.15 $ 1.16
Performance and other financial ratios:
ROAA 1.45 % 1.75 % 1.49 % 1.89 %
ROAE 17.20 % 24.25 % 17.07 % 27.78 %
Net interest margin 3.70 % 3.48 % 3.65 % 3.65 %
Cost of funds 0.24 % 0.20 % 0.20 % 0.22 %
Efficiency ratio 38.53 % 47.56 % 39.14 % 46.18 %
Cash dividend payout ratio on common stock4
25.86 % 484.46 % 26.09 % 271.08 %
Selected pro forma ratios:
Pro forma ROAA3,5
1.45 % 1.33 % 1.49 % 1.41 %
Pro forma ROAE3,5
17.20 % 18.36 % 17.07 % 20.66 %

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 and six months ended June 30, 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 and six months ended June 30, 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- and six-month periods, and thus pro forma calculations for the three and six months ended June 30, 2022 are equal to actuals.

4Cash dividend payout ratio on common stock is calculated as dividends on common shares divided by basic net income per common share.

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

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RESULTS OF OPERATIONS

The following discussion of our results of operations compares the three and six months ended ~~September~~June 30, ~~2021~~2022 to the three and six months ended ~~September~~June 30, ~~2020 and the nine months ended September 30, 2021 to the nine months ended September 30, 2020.~~2021. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, ~~2021.~~

2022.

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~~Federal Home Loan Bank of San Francisco ("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 ~~September~~June 30, ~~2021~~2022 compared to three months ended ~~September~~June 30, ~~2020~~

2021

Net interest income increased by ~~$3.7~~$6.2 million, or ~~22.69%~~33.86%, to ~~$19.9~~$24.5 million for the ~~quarter~~three months ended ~~September~~June 30, ~~2021~~2022 from ~~$16.2~~$18.3 million for the ~~quarter~~three months ended ~~September~~June 30, ~~2020.~~2021. Our net interest margin of ~~3.60% for the quarter ended September 30, 2021 increased from our net interest margin of 3.30% for the quarter ended September 30, 2020, primarily due to~~ ~~an increase in interest-earning assets, which increased from an average balance of $2.0 billion~~3.70% for the three months ended ~~September~~June 30, ~~2020 to an average balance of $2.2 billion~~2022 increased from 3.48% for the three months ended ~~September~~June 30, 2021, primarily due to an increase in average yields on interest-earning deposits with banks and investment securities. Yields on interest-earning deposits with banks increased due to three Federal Reserve rate increases totaling 1.50% that occurred between June 30, 2021 and June 30, 2022. Additionally, yields on investment securities increased as a result of the Federal Reserve rate hikes discussed above, as U.S. government agencies are indexed to the prime rate, which resets quarterly and changes commensurate with changes that occur to Federal Reserve rates. These increases were partially offset by a decrease in average loan yields, which decreased from 4.73% for the three months ended June 30, 2021 to 4.47% for the three months ended June 30, 2022. This decrease was primarily due to changes in the macroeconomic environment, which caused a majority of the Company’s fixed-rate loans to recognize lower yields in the current quarter than those recognized in the same quarter of 2021. The rates associated with the index utilized 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 June 30, 2022, as compared to the three months ended June 30, 2021, but a majority of these loans were not scheduled to reprice during the three months ended June 30, 2022, which also contributed to the downward trend in average loan yields. New loan originations drove increases in the average daily balance of loans from the three months ended June 30, 2021 to the three months ended June 30, 2022, which partially offset the aforementioned declining average loan yields.

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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 rates paid for each period reported. The average balances are daily averages and include both performing and nonperforming loans.

For the three months ended For the three months ended
September 30, 2021 September 30, 2020
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets
Interest-earning deposits with banks¹ $ 412,953 $ 175 0.17 % $ 311,349 $ 199 0.25 %
Investment securities² 157,305 571 1.44 % 102,820 501 1.94 %
Loans^{1, 3} 1,625,995 20,086 4.90 % 1,539,239 17,734 4.58 %
Total interest-earning assets¹ 2,196,253 20,832 3.76 % 1,953,408 18,434 3.75 %
Interest receivable and other assets, net 168,906 94,412
Total assets $ 2,365,159 $ 2,047,820
Liabilities and shareholders’ equity
Interest-bearing transaction accounts $ 149,479 $ 38 0.10 % $ 146,700 $ 98 0.27 %
Savings accounts 76,669 19 0.10 % 41,063 17 0.17 %
Money market accounts 966,629 389 0.16 % 1,018,594 1,476 0.58 %
Time accounts 54,314 34 0.25 % 94,896 173 0.73 %
Subordinated debt¹ 28,359 443 6.20 % 28,292 443 6.23 %
Total interest-bearing liabilities 1,275,450 923 0.29 % 1,329,545 2,207 0.67 %
Demand accounts 853,017 597,097
Interest payable and other liabilities 9,537 6,289
Shareholders’ equity 227,155 114,889
Total liabilities & shareholders’ equity $ 2,365,159 $ 2,047,820
Net interest spread⁴ 3.48 % 3.09 %
Net interest income/margin⁵ $ 19,909 3.60 % $ 16,227 3.30 %

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

Yields 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. Investment security interest is earned on 30/360 day basis monthly. Yields are not calculated on a tax-equivalent basis.

Average 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.

⁴

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

⁵

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


	For the three months ended June 30, 2022						For the three months ended June 30, 2021
(dollars in thousands)	Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate
Assets
Interest-earning deposits with banks1	$	294,491	$	518	0.71	%	$	378,000	$	125	0.13	%
Investment securities2	132,975		602		1.82	%	149,814		557		1.49	%
Loans held for investment and sale1,3	2,227,215		24,841		4.47	%	1,578,438		18,626		4.73	%
Total interest-earning assets1	2,654,681		25,961		3.92	%	2,106,252		19,308		3.68	%
Interest receivable and other assets, net	98,972						140,757
Total assets	$	2,753,653					$	2,247,009
Liabilities and shareholders’ equity
Interest-bearing transaction accounts	$	255,665	$	66	0.10	%	$	150,852	$	37	0.10	%
Savings accounts	96,867		38		0.16	%	75,424		19		0.10	%
Money market accounts	981,366		679		0.28	%	949,448		475		0.20	%
Time accounts	174,991		238		0.55	%	36,773		37		0.40	%
Subordinated debt and other borrowings1	29,618		449		6.07	%	28,339		444		6.27	%
Total interest-bearing liabilities	1,538,507		1,470		0.38	%	1,240,836		1,012		0.33	%
Demand accounts	969,053						827,992
Interest payable and other liabilities	13,937						15,621
Shareholders’ equity	232,156						162,560
Total liabilities and shareholders’ equity	$	2,753,653					$	2,247,009
Net interest spread4					3.54	%					3.35	%
Net interest income/margin5			$	24,491	3.70	%			$	18,296	3.48	%

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. 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.

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 ~~interest~~ yields/rates. The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the current period’s average yield/rate. The effect of rate changes is calculated by

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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
September 30, 2021 compared to
the three months ended September 30, 2020
(dollars in thousands) Volume Yield/Rate Total
Interest-earning deposits with banks $ 43 $ (67 ) $ (24 )
Investment securities 199 (128 ) 71
Loans 1,094 1,257 2,351
Total interest-earning assets 2,354 44 2,398
Interest-bearing transaction accounts (1 ) 61 60
Savings accounts (9 ) 7 (2 )
Money market accounts 21 1,065 1,086
Time accounts 25 114 139
Subordinated debt (1 ) 1 —
Total interest-bearing liabilities 39 1,245 1,284
Changes in net interest income/margin $ 2,393 $ 1,289 $ 3,682


	For the three months ended June 30, 2022 compared to the three months ended June 30, 2021
(dollars in thousands)	Volume		Yield/Rate		Total
Interest-earning deposits with banks	$	(146)	$	539	$	393
Investment securities	(74)		119		45
Loans held for investment and sale	7,239		(1,024)		6,215
Total interest-earning assets	7,019		(366)		6,653
Interest-bearing transaction accounts	29		—		29
Savings accounts	8		11		19
Money market accounts	21		183		204
Time accounts	187		14		201
Subordinated debt and other borrowings	17		(12)		5
Total interest-bearing liabilities	262		196		458
Changes in net interest income/margin	$	6,757	$	(562)	$	6,195

Total interest income increased by ~~$2.4~~$6.7 million, or ~~13.01%~~34.46%, to ~~$20.8~~$26.0 million for the three months ended ~~September~~June 30, ~~2021 as compared to $18.4~~2022 from $19.3 million for the corresponding period ~~for 2020.~~of 2021. For the three months ended ~~September~~June 30, ~~2021,~~2022, interest income from loans increased by ~~$2.4~~$6.2 million to ~~$20.1~~$24.8 million, as the average daily balance of loans increased by ~~$86.8~~$648.8 million, or ~~5.64%~~41.10%, compared to the same period of ~~2020.~~2021. This increase in interest income from greater average loan balances was ~~complemented~~partially offset by a 3226 basis ~~points increase~~point decrease in loan yield to ~~4.90%~~4.47% for the three months ended ~~September~~June 30, ~~2021~~2022 as compared to the same period of ~~2020.~~2021, as discussed above. Additionally, ~~$1.8 million~~$24.0 thousand of ~~fee~~ income from forgiven PPP loans was recognized in the three months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$1.0~~$1.4 million during the same period of ~~2020.~~2021. Excluding PPP loans, average ~~loan balances~~loans held for investment and sale increased by ~~$250.7~~$806.9 million to ~~$1.5~~$2.2 billion, and the related yield declined by 3129 basis points for the three months ended ~~September~~June 30, ~~2021 compared to~~2022 from the ~~same~~corresponding period of ~~2020.~~2021. Average ~~loan balance,~~loans held for investment and sale, excluding PPP loans, isand average loan yield, excluding PPP loans, are considered to be a non-GAAP financial ~~measure.~~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~~increased by ~~$1.3~~$0.5 million to ~~$0.9~~$1.5 million for the three months ended ~~September~~June 30, ~~2021~~2022 from ~~$2.2~~$1.0 million for the same period of ~~2020.~~2021. Interest expense on customer deposits ~~decreased~~increased by ~~$1.3~~$0.5 million to ~~$0.5~~$1.0 million for the three months ended ~~September~~June 30, ~~2021~~2022 from ~~$1.8~~$0.6 million for the same period of ~~2020.~~2021. This ~~decrease~~increase is due to the cost of interest-bearing liabilities ~~declining~~increasing by 385 basis points to 0.38% for the three months ended ~~September~~June 30, ~~2021~~2022 from ~~0.67%~~0.33% for the same period of ~~2020,~~2021, reflecting increases in the ~~decline in overall interest~~ rates offered on savings, money market, and maturing deposit products during the period.

~~Nine~~

Six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~nine~~six months ended ~~September~~June 30, ~~2020~~

2021

Net interest income increased by ~~$10.2~~$10.0 million, or ~~22.24%~~27.54%, to ~~$56.3~~$46.4 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 from ~~$46.0~~$36.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021. Our net interest margin of ~~3.63%~~3.65% for the ~~nine~~six months ended ~~September~~June 30, ~~2021 increased from~~2022 remained constant with our net interest margin of ~~3.53%~~3.65% for the ~~nine~~six months ended ~~September~~June 30, ~~2020,~~2021, primarily due to ~~an increase~~a decrease in average loan yields, offset by increases in average yields on interest-earning ~~assets,~~deposits with banks and investment securities. Yields on interest-earning deposits with banks increased due to three Federal Reserve rate increases totaling 1.50% that occurred between June 30, 2021 and June 30, 2022. Additionally, yields on investment securities increased as a result of the Federal Reserve rate hikes discussed above, as U.S. government agencies are indexed to the prime rate, which ~~increased~~resets quarterly and changes commensurate with changes that occur to Federal Reserve rates. Average loan yields decreased from an4.84% for the six months ended June 30, 2021 to 4.50% for the six months ended June 30, 2022. This decrease was primarily due to changes in the macroeconomic environment, which caused a majority of the Company’s fixed-rate loans to recognize lower yields in the first half of 2022 than those recognized in the first half of 2021. The rates associated with the index utilized for a significant portion of the Company’s variable rate loans, the United States 5 Year Treasury index, were higher during the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, but a majority of these loans were not scheduled to reprice during the six months ended June 30, 2022, which also contributed to the downward trend in average loan yields. New loan originations drove increases in the

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average daily balance of ~~$1.7 billion for~~loans from the ~~nine~~six months ended ~~September~~June 30, ~~2020~~2021 to ~~an average balance of $2.1 billion for~~ the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~

2022, which partially offset the aforementioned declining average loan yields.

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 rates paid for each period reported. The average balances are daily averages and include both performing and nonperforming loans.


	For the six months ended June 30, 2022						For the six months ended June 30, 2021
(dollars in thousands)	Average Balance		Interest Income/ Expense		Average Yield/ Rate		Average Balance		Interest Income/ Expense		Average Yield/ Rate
Assets
Interest-earning deposits with banks1	$	316,590	$	710	0.45	%	$	320,734	$	229	0.14	%
Investment securities2	140,857		1,169		1.67	%	136,041		1,030		1.53	%
Loans held for investment and sale1,3	2,102,382		46,932		4.50	%	1,552,364		37,239		4.84	%
Total interest-earning assets1	2,559,829		48,811		3.85	%	2,009,139		38,498		3.86	%
Interest receivable and other assets, net	124,565						133,394
Total assets	$	2,684,394					$	2,142,533
Liabilities and shareholders’ equity
Interest-bearing transaction accounts	$	265,962	$	136	0.10	%	$	152,694	$	75	0.10	%
Savings accounts	93,842		63		0.14	%	68,223		34		0.10	%
Money market accounts	951,012		1,046		0.22	%	908,621		1,058		0.23	%
Time accounts	151,454		321		0.43	%	41,430		100		0.49	%
Subordinated debt and other borrowings1	29,005		892		6.20	%	28,332		887		6.31	%
Total interest-bearing liabilities	1,491,275		2,458		0.33	%	1,199,300		2,154		0.36	%
Demand accounts	945,511						786,955
Interest payable and other liabilities	13,551						10,338
Shareholders’ equity	234,057						145,940
Total liabilities and shareholders’ equity	$	2,684,394					$	2,142,533
Net interest spread4					3.52	%					3.50	%
Net interest income/margin5			$	46,353	3.65	%			$	36,344	3.65	%

For the nine months ended For the nine months ended
September 30, 2021 September 30, 2020
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
(dollars in thousands) Balance Expense Rate Balance Expense Rate
Assets
Interest-earning deposits with banks¹ $ 351,812 $ 404 0.15 % $ 245,565 $ 1,073 0.58 %
Investment securities² 143,207 1,601 1.49 % 86,343 1,347 2.08 %
Loans^{1, 3} 1,577,177 57,325 4.86 % 1,408,877 51,318 4.87 %
Total interest-earning assets¹ 2,072,196 59,330 3.83 % 1,740,785 53,738 4.12 %
Interest receivable and other assets, net 145,362 58,008
Total assets $ 2,217,558 $ 1,798,793
Liabilities and shareholders’ equity
Interest-bearing transaction accounts $ 151,611 $ 113 0.10 % $ 141,281 $ 318 0.30 %
Savings accounts 71,069 53 0.10 % 36,994 79 0.28 %
Money market accounts 928,170 1,447 0.21 % 851,722 4,880 0.77 %
Time accounts 45,772 134 0.39 % 116,466 1,113 1.28 %
Subordinated debt¹ 28,341 1,330 6.27 % 28,275 1,330 6.28 %
Total interest-bearing liabilities 1,224,963 3,077 0.34 % 1,174,738 7,720 0.88 %
Demand accounts 809,216 509,565
Interest payable and other liabilities 9,993 3,580
Shareholders’ equity 173,386 110,910
Total liabilities & shareholders’ equity $ 2,217,558 $ 1,798,793
Net interest spread⁴ 3.49 % 3.24 %
Net interest income/margin⁵ $ 56,253 3.63 % $ 46,018 3.53 %

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

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

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

⁴

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

⁵

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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 nine months ended
September 30, 2021 compared to
the nine months ended September 30, 2020
(dollars in thousands) Volume Yield/Rate Total
Interest-earning deposits with banks $ 122 $ (791 ) $ (669 )
Investment securities 635 (380 ) 255
Loans 6,074 (68 ) 6,006
Total interest-earning assets 9,446 (3,854 ) 5,592
Interest-bearing transaction accounts (9 ) 214 205
Savings accounts (26 ) 51 25
Money market accounts (119 ) 3,554 3,435
Time accounts 208 770 978
Subordinated debt (2 ) 2 —
Total interest-bearing liabilities (125 ) 4,768 4,643
Changes in net interest income/margin $ 9,321 $ 914 $ 10,235


	For the six months ended June 30, 2022 compared to the six months ended June 30, 2021
(dollars in thousands)	Volume		Yield/Rate		Total
Interest-earning deposits with banks	$	(9)	$	490	$	481
Investment securities	41		98		139
Loans held for investment and sale	12,295		(2,602)		9,693
Total interest-earning assets	12,327		(2,014)		10,313
Interest-bearing transaction accounts	61		—		61
Savings accounts	17		12		29
Money market accounts	21		(33)		(12)
Time accounts	233		(12)		221
Subordinated debt and other borrowings	18		(13)		5
Total interest-bearing liabilities	350		(46)		304
Changes in net interest income/margin	$	11,977	$	(1,968)	$	10,009

Total interest income increased by ~~$5.6~~$10.3 million, or ~~10.41%~~26.79%, to ~~$59.3~~$48.8 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021 as compared to $53.7~~2022 from $38.5 million for the ~~same~~corresponding period ~~for 2020.~~of 2021. For the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, interest income from loans increased by ~~$6.0~~$9.7 million to ~~$57.3~~$46.9 million, as the average daily balance of loans increased by ~~$168.3~~$550.0 million, or ~~11.95%~~35.43%, compared to the same period of ~~2020.~~2021. This increase in interest income ~~increase~~ from greater average loan balances was partially offset by a 4334 basis ~~points~~point decrease in loan yield ~~on interest-earning deposits with banks~~to 4.50% for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 as compared to the same period of ~~2020.~~2021, as discussed above. Additionally, ~~$5.2~~$0.6 million of ~~fee~~ income from forgiven PPP loans was recognized in the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022, compared to ~~$1.8~~$3.3 million during the same period of ~~2020.~~2021. Excluding PPP loans, average ~~loan balances~~loans held for investment and sale increased by ~~$180.8~~$712.7 million to ~~$1.4~~$2.1 billion, and the related yield declined by 3936 basis points for the ~~nine~~six months ended ~~September~~June 30, ~~2021 compared to~~2022 from the ~~same~~corresponding period of ~~2020.~~2021. Average ~~loan balance~~loans held for investment and sale, excluding PPP loans, isand average loan yield, excluding PPP loans, are considered to be a non-GAAP financial ~~measure.~~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~~increased by ~~$4.6~~$0.3 million to ~~$3.1~~$2.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 from ~~$7.7~~$2.2 million for the same period of ~~2020.~~2021. Interest expense on customer deposits ~~decreased~~increased by ~~$4.6~~$0.3 million to ~~$1.7~~$1.6 million for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 from ~~$6.4~~$1.3 million for the same period of ~~2020.~~2021. This ~~decrease~~increase is primarily due to the ~~cost~~average daily balance of interest-bearing liabilities ~~declining~~increasing by ~~54 basis points for the nine months ended September 30, 2021 from 0.88% for~~$292.0 million, or 24.35%, compared to the same period of ~~2020, reflecting the decline in overall interest rates as well as a shift from interest-bearing deposits to non-interest-bearing demand deposits during the period.~~2021.

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Provision for Loan Losses

The provision for loan losses is based on management’s assessment of the adequacy of our allowance for loan 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 losses is charged against earnings in order to maintain our allowance for loan losses, which reflects management’s best estimate of probable losses inherent in our loan portfolio at the balance sheet date.

Three months ended ~~September~~June 30, ~~2021~~2022 compared to three months ended ~~September~~June 30, ~~2020~~

2021

We recorded no a $2.3 million provision for loan losses in the ~~third~~second quarter of 2022, compared to no provision for loan losses recorded for the same period of 2021. The increase of $2.3 million for the provision period-over-period was primarily due to increased reserves based on loan growth and economic conditions during the second quarter of 2022, while improved economic conditions related to the impact of the COVID-19 pandemic during the second quarter of 2021 provided favorable economic conditions for our borrowers, which resulted in no provision for the period. The Company had a decrease in loans designated as watch and substandard from $57.8 million as of June 30, 2021 to $23.1 million as of June 30, 2022, causing a reduction in related reserves, which partially offset the increase in provision for loan losses period-over-period.

Six months ended June 30, 2022 compared to six months ended June 30, 2021

We recorded a $3.2 million provision for loan losses in the first six months of 2022, compared to a ~~$1.9~~$0.2 million provision for loan losses for the same period of ~~2020.~~2021. The ~~decline~~increase of ~~$1.9~~$3.0 million for the provision period-over-period was primarily due to ~~improvements in~~increased reserves based on loan growth and economic conditions during the ~~economy overall, as~~second quarter of 2022, while improved economic conditions related to the impact of the COVID-19 pandemic ~~began to decline in significance within California and other states where our collateral is located, resulting in~~during the first six months of 2021 provided favorable economic conditions for our ~~borrowers.~~

~~Nine months ended September~~borrowers, which resulted in a less significant provision for the period. The Company had a decrease in loans designated as watch and substandard from $57.8 million as of June 30, 2021 ~~compared~~ to ~~nine months ended September~~$23.1 million as of June 30, ~~2020~~

~~We recorded~~2022, causing a ~~$0.2 million~~reduction in related reserves, which partially offset the increase in provision for loan losses in the first nine months of 2021, compared to a $6.0 million provision for loan losses for the same period of 2020. The decline of $5.8 million for the provision, period-over-period, was primarily due to improvements in the economy overall, as the impact of the COVID-19 pandemic began to decline in significance within California and other states where our collateral is located, resulting in favorable economic conditions for our borrowers.

period-over-period.

Non-interest Income

Non-interest income is a secondary contributor to our net income. Non-interest income consists ~~primarily~~ of service charges on deposit accounts, net gain on sale of ~~loans, net~~securities, gain on ~~the~~ sale of ~~securities,~~loans, loan-related fees, FHLB stock dividends, earnings on bank-owned life insurance ("BOLI"), and other ~~fee income, including loan-related fees and fees related to customer deposits.~~

income.

Three months ended ~~September~~June 30, ~~2021~~2022 compared to three months ended ~~September~~June 30, ~~2020~~

~~Non-interest income decreased by $0.5 million, or 20.00%, during the three months ended September 30,~~ 2021 ~~to $2.0 million, compared to $2.5 million for the three months ended September 30, 2020.~~

The following table details the components of non-interest income for the periods indicated.


	For the three months ended
(dollars in thousands)	June 30, 2022		June 30, 2021		$ Change		% Change
Service charges on deposit accounts	$	130	$	106	$	24	22.64	%
Net gain on sale of securities	—		92		(92)		(100.00)	%
Gain on sale of loans	831		1,091		(260)		(23.83)	%
Loan-related fees	795		369		426		115.45	%
FHLB stock dividends	99		92		7		7.61	%
Earnings on BOLI	101		60		41		68.33	%
Other income	41		36		5		13.89	%
Total non-interest income	$	1,997	$	1,846	$	151	8.18	%

Gain on sale of loans.

For the three months ended Amount %
(dollars in thousands) September 30,
2021 September 30,
2020 Increase
(Decrease) Increase
(Decrease)
Service charges on deposit accounts $ 112 $ 93 $ 19 20.43 %
Net gain on sale of securities 435 275 160 58.18 %
Gain on sale of loans 988 1,194 (206 ) (17.25 )%
Loan-related fees 87 710 (623 ) (87.75 )%
FHLB stock dividends 100 74 26 35.14 %
Earnings on bank owned life insurance 68 59 9 15.25 %
Other income 238 130 108 83.08 %
Total non-interest income $ 2,028 $ 2,535 $ (507 ) (20.00 )%

~~Net~~The decrease in gain on sale of ~~securities.~~ ~~Gain on sale of securities increased by $0.2 million, or 58.18%,~~loans related primarily to ~~$0.4 million for the three months ended September 30, 2021 compared to $0.3 million for the three months ended September 30, 2020. The increase is related to a higher volume of securities sold~~an overall decline in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020. During the three months ended September 30, 2021, approximately $24.6 million of municipal securities, mortgage-backed securities, and U.S. government treasuries were sold, compared to approximately $7.7 million of municipal and mortgage-backed securities which wereeffective yields on loans sold during the three months ended ~~September~~June 30, ~~2020.~~

~~Gain on sale of loans.~~ ~~Gain on sale of loans decreased by $0.2 million, or 17.25%,~~2021 compared to ~~$1.0 million for~~ the three months ended ~~September~~June 30, ~~2021, as compared~~2022, from 9.82% to ~~$1.2 million for~~4.64%. The decrease in effective yields related to uncertainty surrounding the timing of rising interest rates and due to

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premiums received on loans sold during the three months ended ~~September~~June 30, 2020. The decline in gain on sale of loans is related to a change in the fiscal transfer agent in the SBA’s 7(a) loan guarantee program, effective August 30, 2021. The change in transfer agent slowed the Company’s ability to sell loans in September 2021, ~~thus resulting in a decline in gain on sale of loans. Additionally, the decline in gain on sale of loans resulted from lower volumes period over period.~~

~~Loan-related fees~~. Loan-related fees are primarily comprised of appraisal fees, insurance and taxes, loan-related legal fees, Uniform Commercial Code (“UCC”) filing fees, credit report fees, inspection fees, and amortization of servicing assets. Loan-related fees declined by $0.6 million, or 87.75%, to $0.1 million forwhich did not recur during the three months ended ~~September~~June 30, ~~2021, compared to $0.7 million for~~2022. Additionally, the volume of loans sold during the three months ended ~~September~~June 30, ~~2020.~~2021 increased from the volume of loans sold during the three months ended June 30, 2022, from $11.1 million to $17.9 million, due to several large dollar value loans (funded in prior periods) reaching the end of their interest-only periods, allowing for sale in the second quarter of 2022.

Loan-related fees. The ~~decrease~~increase in loan-related fees resulted primarily from ~~a $0.3~~the recognition of $0.4 million ~~decrease~~ in swap referral fees ~~recognized in~~during the ~~quarter~~three months ended ~~September~~June 30, ~~2021,~~2022, as compared to ~~the quarter ended September 30, 2020. Such fees are recognized when borrowers seeking fixed rate loans are referred to a counterparty who places the swap for the borrower. Additionally, $0.4~~$0.1 million of ~~loan-related~~swap referral fees ~~were earned~~recognized during the ~~quarter~~three months ended ~~September 30, 2020 for processing micro-loans to businesses in the local area in response to COVID-19, which did not recur in the quarter ended September~~June 30, 2021.

~~Nine~~

Six months ended ~~September~~June 30, ~~2021~~2022 compared to ~~nine~~six months ended ~~September~~June 30, ~~2020~~

~~Non-interest income decreased by $1.3 million, or 18.81%, during the nine months ended September 30,~~ 2021 ~~to $5.5 million, compared to $6.8 million for the nine months ended September 30, 2020.~~

The following table details the components of non-interest income for the periods indicated.


	For the six months ended
(dollars in thousands)	June 30, 2022		June 30, 2021		$ Change		% Change
Service charges on deposit accounts	$	238	$	196	$	42	21.43	%
Net gain on sale of securities	5		274		(269)		(98.18)	%
Gain on sale of loans	1,749		2,022		(273)		(13.50)	%
Loan-related fees	1,412		629		783		124.48	%
FHLB stock dividends	201		170		31		18.24	%
Earnings on BOLI	191		112		79		70.54	%
Other income	386		59		327		554.24	%
Total non-interest income	$	4,182	$	3,462	$	720	20.80	%

For the nine months ended Amount %
(dollars in thousands) September 30,
2021 September 30,
2020 Increase
(Decrease) Increase
(Decrease)
Service charges on deposit accounts $ 308 $ 269 $ 39 14.50 %
Net gain on sale of securities 709 1,241 (532 ) (42.87 )%
Gain on sale of loans 3,010 2,635 375 14.23 %
Loan-related fees 420 1,875 (1,455 ) (77.60 )%
FHLB stock dividends 270 227 43 18.94 %
Earnings on bank owned life insurance 180 174 6 3.45 %
Other income 593 341 252 73.90 %
Total non-interest income $ 5,490 $ 6,762 $ (1,272 ) (18.81 )%

Net gain on sale of securities. ~~Gain~~The decrease in net gain on sale of securities ~~declined~~was due to a lower volume of securities sold during the ~~nine~~six months ended ~~September~~June 30, ~~2021 by $0.5 million, or 42.87%, to $0.7 million compared to $1.2 million for~~2022 than sold during the ~~nine months ended September 30, 2020. During the nine months ended September 30, 2021, approximately $24.4~~corresponding period of 2021. $1.5 million of municipal securities ~~and $10.2~~were sold for a gain of $5.3 thousand during the six months ended June 30, 2022, while $15.4 million of ~~U.S. government treasuries~~municipal securities were sold for a net gain of ~~$0.6 million compared to approximately $18.4 million of municipal securities and $13.5 million of corporate bonds which were sold for a net gain of $1.0~~$0.3 million during the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Gain on sale of loans. ~~Gain~~The decrease in gain on sale of loans ~~increased by $0.4 million, or 14.23%,~~related primarily to ~~$3.0 million~~an overall decline in the effective yields on loans sold period-over-period. The effective yield on loans sold during the ~~nine~~six months ended ~~September~~June 30, ~~2021,~~2022 was 6.80%, as compared to ~~$2.6 million~~an effective yield of 8.85% for ~~the nine months ended September 30, 2021. The aggregate principal balance of SBA 7(a) guaranteed portions~~loans sold during the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2021. This fluctuation was ~~$31.7~~due to uncertainty surrounding the timing of rising interest rates and premiums received on loans sold.

Loan-related fees. The increase in loan-related fees primarily related to $0.7 million of swap referral fees recognized during the six months ended June 30, 2022, as compared to ~~$49.0~~$0.1 million recognized in the ~~nine~~six months ended ~~September~~June 30, ~~2020.~~2021.

Other income. The ~~weighted average premium~~increase in other income resulted primarily from a $0.3 million gain recorded on a distribution received ~~was 9.49% during the nine months ended September 30, 2021 compared to 5.38% during the nine months ended September 30, 2020.~~

~~Loan-related fees~~. Loan-related fees decreased by $1.5 million, or 77.60%, to $0.4 million for the nine months ended September 30, 2021, compared to $1.9 million during the nine months ended September 30, 2020, of which $1.2 million of the decline related toon an investment in a decrease in swap referral fees. Additionally, loan-related fees of $0.4 million were earned during the nine months ended September 30, 2020 for processing micro-loans to businesses in the local area in response to COVID-19venture-backed fund, which did not ~~recur~~occur during the ~~nine~~six months ended ~~September~~June 30, 2021.

~~Other income.~~ Other income increased $0.3 million, or 73.90%, to $0.6 million for the nine months ended September 30, 2021, compared to $0.3 million during the nine months ended September 30, 2020, of which $0.2 million of the increase related to an increase in fee income earned on SBA loans for the nine months ended September 30, 2021 compared to September 30, 2020.

Non-interest Expense

Non-interest expense includes salaries and employee benefits, occupancy and equipment, ~~costs,~~ data processing and software, ~~fees,~~ FDIC insurance, ~~expense,~~ professional services, advertising and promotional, ~~expense,~~ loan-related ~~fees,~~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 over time, in both absolute terms and 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 and infrastructure. Additionally, to support corporate organizational matters leading up to the IPO, we experienced increased audit, consulting, and legal ~~costs, particularly during the nine months ended September 30, 2021.~~costs. As a result, non-interest expense ~~is increasing in~~has increased throughout the periods presented below; however, we do not anticipate incurring

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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 ~~September~~June 30, ~~2021~~2022 compared to three months ended ~~September~~June 30, ~~2020~~

~~Non-interest expense increased by $1.4 million, or 19.45%, to $8.6 million for the three months ended September 30,~~ 2021 ~~compared to $7.2 million for the three months ended September 30, 2020.~~

The following table details the components of non-interest expense for the periods indicated.


	For the three months ended
(dollars in thousands)	June 30, 2022		June 30, 2021		$ Change		% Change
Salaries and employee benefits	$	5,553	$	4,939	$	614	12.43	%
Occupancy and equipment	513		441		72		16.33	%
Data processing and software	739		598		141		23.58	%
FDIC insurance	245		150		95		63.33	%
Professional services	568		1,311		(743)		(56.67)	%
Advertising and promotional	484		265		219		82.64	%
Loan-related expenses	389		218		171		78.44	%
Other operating expenses	1,714		1,658		56		3.38	%
Total non-interest expense	$	10,205	$	9,580	$	625	6.52	%

For the three months ended Amount %
(dollars in thousands) September 30,
2021 September 30,
2020 Increase
(Decrease) Increase
(Decrease)
Salaries and employee benefits $ 4,980 $ 3,969 $ 1,011 25.47 %
Occupancy and equipment 502 447 55 12.30 %
Data processing and software 611 529 82 15.50 %
FDIC insurance 110 320 (210 ) (65.63 )%
Professional services 505 447 58 12.98 %
Advertising and promotional 366 264 102 38.64 %
Loan-related expenses 462 185 277 149.73 %
Other operating expenses 1,105 1,073 32 2.98 %
Total non-interest expense $ 8,641 $ 7,234 $ 1,407 19.45 %

Salaries and employee ~~benefits~~~~. Salaries~~benefits. The increase in salaries and employee benefits ~~increased by $1.0 million, or 25.47%, to $5.0 million for the quarter ended September 30, 2021 from $4.0 million for the same period in 2020. The increase~~ was primarily related to an increase in the number of employees from September 30, 2020 to September 30, 2021, increased commissions related to our loan and deposit growth for the quarter ended September 30, 2021 as compared to September 30, 2020, and restricted stock compensation expense recognized for employee grants of $0.2 million during the three months ended September 30, 2021 that did not occur in the corresponding period of 2020.

~~FDIC insurance.~~ Our FDIC deposit insurance premium decreased by approximately $0.2 million, or 65.63%, for the quarter ended September 30, 2021 as compared to the same period in 2020. This decrease is primarily the result of an improved leverage ratio used in the FDIC assessment as a result of ~~the Company’s IPO~~a $1.0 million increase in ~~May 2021.~~

~~Loan-related expenses~~~~. Loan-related expense increased by approximately $0.3 million, or 149.73%, period-over-period to $0.5 million for the quarter ended September 30, 2021, primarily~~salaries, insurance, and benefits as a result of a ~~$0.2 million accrual for an SBA matter in the normal course of business.~~

~~Nine months ended September 30, 2021 compared to nine months ended September 30, 2020~~

~~Non-interest expense increased by $7.7 million to $27.0 million for the nine months ended September 30, 2021, compared to $19.3 million for the nine months ended September 30, 2020.~~

~~The following table details the components of non-interest expense for the periods indicated.~~

For the nine months ended Amount %
(dollars in thousands) September 30,
2021 September 30,
2020 Increase
(Decrease) Increase
(Decrease)
Salaries and employee benefits $ 14,616 $ 10,444 $ 4,172 39.95 %
Occupancy and equipment 1,394 1,239 155 12.51 %
Data processing and software 1,838 1,433 405 28.26 %
FDIC insurance 540 867 (327 ) (37.72 )%
Professional services 3,348 1,154 2,194 190.12 %
Advertising and promotional 801 766 35 4.57 %
Loan-related expenses 909 510 399 78.24 %
Other operating expenses 3,579 2,933 646 22.03 %
Total non-interest expense $ 27,025 $ 19,346 $ 7,679 39.69 %

~~Salaries and employee benefits~~. Salaries and employee benefits increased by $4.2 million, or 39.95%, to $14.6 million for the nine months ended September 30, 2021 from $10.4 million for the same period in 2020. The increase was primarily related to an14.94% increase in ~~the number of employees from September 30, 2020 to September~~headcount between June 30, 2021 and ~~increased~~June 30, 2022, combined with a $0.6 million increase in commissions ~~related to our loan~~ and ~~deposit growth for~~bonuses from the ~~nine~~three months ended ~~September~~June 30, 2021 ~~as compared~~ to the ~~nine~~three months ended ~~September~~June 30, ~~2020.~~2022. These increases were partially offset by a ~~$0.8~~$0.9 million increase in deferred loan origination costs ~~from $2.4 million to $3.2 million for~~between the ~~nine~~three months ended ~~September~~June 30, ~~2020~~2022 and ~~2021, respectively.~~

~~Occupancy and equipment.~~ ~~Occupancy and equipment increased by $0.2 million, or 12.51% to $1.4 million for~~ the ~~nine~~three months ended September 30, 2021 from $1.2 million for the same period in 2020, primarily related to an increase in depreciation expense as a result of an increase in fixed assets to support the increase in headcount and an increase in leasehold improvements completed during the nine months ended SeptemberJune 30, 2021.

Data processing and software.Data processing and software ~~expenses~~ increased, ~~by $0.4 million, or 28.26%, period-over-period to $1.8 million for the nine months ended September 30, 2021. The increase was~~ primarily due toto: (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 costs related to improved collateral tracking, electronic statements, and mobile payment solutions; and (iv)~~an increased number of licenses required for new users on our loan origination and documentation system.

Professional services.

~~FDIC insurance.~~ ~~Our FDIC deposit insurance premium declined by $0.3 million, or 37.72%, period-over-period to $0.5 million for~~Professional services decreased, primarily as a result of expenses recognized during the ~~nine~~three months ended ~~September~~June 30, 2021 related to the increased audit, consulting, and legal costs incurred to support corporate organizational matters leading up to the IPO. These expenses did not recur during the three months ended June 30, 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 in events held during the three months ended June 30, 2022, as compared to the ~~same period~~three months ended June 30, 2021.

Loan-related expenses. Loan-related expenses increased, primarily due to increased expenses for legal services, environmental reports, UCC fees, and inspections to support increased loan production.

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Six months ended June 30, 2022 compared to six months ended June 30, 2021

The following table details the components of non-interest expense for the periods indicated.


	For the six months ended
(dollars in thousands)	June 30, 2022		June 30, 2021		$ Change		% Change
Salaries and employee benefits	$	11,228	$	9,636	$	1,592	16.52	%
Occupancy and equipment	1,033		892		141		15.81	%
Data processing and software	1,455		1,227		228		18.58	%
FDIC insurance	410		430		(20)		(4.65)	%
Professional services	1,122		2,843		(1,721)		(60.53)	%
Advertising and promotional	828		435		393		90.34	%
Loan-related expenses	667		447		220		49.22	%
Other operating expenses	3,037		2,474		563		22.76	%
Total non-interest expense	$	19,780	$	18,384	$	1,396	7.59	%

Salaries and employee benefits. The increase in ~~2020. This decrease is~~salaries and employee benefits was primarily a result of a $2.0 million increase in salaries and overtime pay as a result of a 14.94% increase in headcount between June 30, 2021 and June 30, 2022, combined with a $0.9 million increase in commissions from the six months ended June 30, 2021 to the six months ended June 30, 2022. These increases were partially offset by a $1.6 million increase in deferred loan origination costs from the six months ended June 30, 2021 to the six months ended June 30, 2022.

Occupancy and equipment. The increase in occupancy and equipment was primarily the result of an ~~improved leverage ratio.~~overall increase in depreciation recognized for furniture, fixtures, and equipment that was purchased to support the 14.94% increase in headcount described above, combined with an overall increase in occupancy expenses year-over-year.

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

Professional services. Professional services ~~increased by approximately $2.2 million, or 190.12%, period-over-period to $3.3 million for~~decreased, primarily as a result of expenses recognized during the ~~nine~~six months ended ~~September~~June 30, 2021 ~~which is due~~related to the increased audit, consulting, and legal costs incurred to support corporate organizational matters leading up to the IPO, ~~during the nine months ended September 30, 2021,~~ which did not ~~occur~~recur during the ~~same period of the prior year.~~

~~Loan-related expenses.~~ ~~Loan-related expenses increased by $0.4 million, or 78.24%, period-over-period to $0.9 million for the nine~~six months ended ~~September~~June 30, ~~2021.~~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 six months ended June 30, 2022, as compared to the six months ended June 30, 2021.

Loan-related expenses. The increase in loan-related expenses was primarily related to an overall net increase in loan expenses incurred to support loan production in the six months ended June 30, 2022, as compared to the six months ended June 30, 2021, primarily due to increased expenses for legal services, UCC fees, and inspections.

Other operating expenses. The increase in other operating expenses was primarily due to ~~an overall~~a $0.5 million increase in travel expenses related to ~~support our loan growth combined with a $0.2 million accrual for an SBA matter in~~attendance of professional events, conferences, and other business-related travel during the ~~normal course of business.~~

~~Other operating expenses.~~ ~~Other operating expenses increased by approximately $0.6 million, or 22.03%, period-over-period to $3.6 million for the nine~~six months ended ~~September~~June 30, ~~2021 as~~2022, compared to the ~~nine~~six months ended ~~September~~June 30, 2020. The increase was primarily a result of stock compensation expense recognized for director grants of $0.8 million, which were related to the IPO during the nine months ended September 30, 2021 and did not occur in the corresponding period of the 2020.2021.

Provision for Income Taxes

The Company terminated its status as a ~~Subchapter S~~“Subchapter S” corporation ~~as of~~effective May 5, 2021, in connection with ~~its~~the Company’s IPO, and became a C Corporation. Prior to that date, as an S Corporation, the Company had no U.S. federal income tax expense. The provision recorded for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021 was calculated using an~~2022 yielded effective tax ~~rate~~rates of ~~20.77%~~29.07% and 28.09%, representing the weighted average rate between the S Corporation tax rate of 3.50% and the C Corporation tax rate of 29.56% based on the number of days as each type of corporation during 2021. As such, a $2.4 million adjustment to increase tax expense for the S Corporation period was required.respectively. Refer to the section entitled ~~“Pro~~“—Pro Forma C Corporation Income Tax Expense” below for a discussion on what the Company’s income tax expense and net income would have been had the Company been taxed as a C Corporation during the three and ~~nine~~six months ended ~~September 30, 2020 and during the nine months ended September~~June 30, 2021.

~~In conjunction with the termination~~Table of the Subchapter S corporation status as of May 5, 2021, the C Corporation deferred tax assets and liabilities were estimated for future tax consequences attributable to differences between the financial statement carrying amounts of the Company’s existing assets and liabilities and their respective tax bases. The deferred tax assets and liabilities were 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 as a net deferred tax asset of $5.4 million and a reduction to the provision for income taxes of $4.6 million during the nine months ended September 30, 2021.Contents

Three months ended ~~September~~June 30, 2022 compared to three months ended June 30, 2021

The provision for income taxes increased by $3.3 million, or 455.86%, to $4.1 million for the ~~quarter~~three months ended ~~September~~June 30, ~~2021 increased by $1.9 million, to $2.3 million~~2022, as compared to ~~$0.3~~$0.7 million ~~during~~for the ~~quarter~~three months ended ~~September~~June 30, ~~2020.~~2021. This increase is due to the change in the ~~annual~~ effective tax rate ~~used~~ from ~~3.50% to 20.77%, as noted above, as applied to estimated taxable income during~~6.95% for the ~~quarter ended September 30, 2021.~~

~~Nine~~three months ended ~~September~~June 30, 2021

~~The provision~~ to 29.07% for ~~income taxes increased by $2.4 million to $3.4 million during~~ the ~~nine~~three months ended ~~September~~June 30, ~~2021 as compared to $1.0 million for the nine months ended September 30, 2020.~~2022. This increase ~~is due to the change in the annual effective tax rate used from 3.50% to 20.77%, as noted above, which~~ was partially offset by a $4.6 million reduction to the provision for income taxes relating to the adjustment of net deferred tax assets due to the termination of the Company's S Corporation status during the three months ended June 30, 2021, which did not recur during the three months ended June 30, 2022, .

Six months ended June 30, 2022 compared to six months ended June 30, 2021

The provision for income taxes for the six months ended June 30, 2022 increased by $6.6 million, or 593.55%, to $7.7 million, as compared to $1.1 million during the six months ended June 30, 2021. This increase is due to the change in the effective tax rate from 5.26% for the six months ended June 30, 2021 to 28.09% for the six months ended June 30, 2022. This increase was partially offset by a $4.6 million reduction to the provision for income taxes, which did not recur during the six months ended June 30, 2022, relating to the adjustment of the net deferred tax assets due to the termination of the ~~Company’s~~Company's S Corporation ~~status.~~

status during the six months ended June 30, 2021.

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 a portion of the ~~nine~~three and six months ended ~~September~~June 30, ~~2021 and for the entirety of the three and nine months ended September 30, 2020.~~2021. Had the Company been taxed as a C Corporation and paid U.S. federal income tax for ~~such~~the entirety of those periods, the combined statutory income tax rate would have been 29.56% ~~in each period.~~. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2020, these~~2021, the pro forma statutory ~~rates reflect~~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 ~~each~~the entirety of ~~these periods,~~the three and six months ended June 30, 2021, on a statutory income tax rate pro forma basis, the provision for combined federal and state income tax would have been ~~$2.9~~$3.1 million and ~~$8.1~~$6.3 million, ~~for the three and nine months ended September 30, 2020,~~ respectively. 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 ~~$6.8~~$7.4 million and ~~$19.3~~$14.9 million for the three and ~~nine~~six months ended ~~September 30, 2020, respectively. The pro forma statutory rates for the nine months ended September~~June 30, 2021, are calculated using an effective tax rate of 23.25%, which is the actual effective tax rate, excluding the effects of the discrete deferred tax adjustment of $4.6 million, discussed above. As a result, the Company’s pro forma provision for income taxes and pro forma net income for the nine months ended September 30, 2021 are $8.0 million and $26.5 million, respectively.

FINANCIAL CONDITION SUMMARY

The following discussion compares our financial condition as of ~~September~~June 30, ~~2021~~2022 to our financial condition as of December 31, ~~2020.~~2021. The following table summarizes selected components of our balance sheet as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~

(dollars in thousands) September 30,
2021 December 30,
2020
Total assets $ 2,434,493 $ 1,953,765
Cash and cash equivalents $ 530,832 $ 290,493
Total investments $ 158,776 $ 122,928
Total loans, net $ 1,688,135 $ 1,485,790
Total deposits $ 2,168,394 $ 1,784,001
Total subordinated notes, net $ 28,370 $ 28,320
Total shareholders’ equity $ 226,638 $ 133,775

2021.

(dollars in thousands) June 30,
2022 December 31,
2021
Total assets $ 2,836,071 $ 2,556,761
Cash and cash equivalents $ 270,758 $ 425,329
Total investments $ 126,903 $ 153,753
Loans held for investment $ 2,380,511 $ 1,934,460
Total deposits $ 2,501,311 $ 2,285,890
Subordinated notes, net $ 28,420 $ 28,386
Total shareholders’ equity $ 233,200 $ 235,046

Total Assets

At ~~September~~June 30, ~~2021,~~2022, total assets were ~~$2.4~~$2.8 billion, an increase of ~~$480.7~~$279.3 million from ~~$2.0~~$2.6 billion at December 31, ~~2020,~~2021, primarily due to increases in cash and cash equivalents and ~~the loan portfolio,~~loans held for investment, as discussed below.

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Cash and Cash Equivalents

Total cash and cash equivalents were ~~$530.8~~$270.8 million at ~~September~~June 30, ~~2021, an increase~~2022, a decrease of ~~$240.3~~$154.6 million ~~as compared to $290.5~~from $425.3 million at December 31, ~~2020.~~2021. The ~~increase~~decrease in cash and cash equivalents was primarily a result of ~~net income recognized~~loans originated for sale of $31.1 million, an increase in deposits of $384.4 million, and net proceeds of $111.2 million from the issuance of 6,054,750 shares of common stock in our IPO. These increases were partially offset by purchases of securities of $92.1$37.0 million, loan originations and advances, net of principal collected, of ~~$201.9~~$436.2 million, and cash distributions of ~~$49.4~~$10.1 million during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~

2022. These decreases were partially offset by net income recognized of $19.8 million, proceeds from sale of loans of $25.7 million, an increase in deposits of $215.4 million, and cash received from an FHLB advance of $60.0 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 ~~held for investment~~held-to-maturity and available-for-sale amounted to ~~$158.8~~$126.9 million at ~~September~~June 30, ~~2021 and $122.9~~2022 and $153.8 million at December 31, ~~2020, an increase~~2021, representing a decrease of ~~$35.9~~$26.9 million. The ~~increase~~decrease was primarily due to ~~purchases~~an unrealized loss (tax effected) on securities of ~~$92.1~~$12.7 million, primarily in our mortgage-backed and municipal securities portfolios, resulting in decreases to each of ~~mortgage-backed securities, obligations~~those portfolios of ~~states~~$11.8 million and ~~political subdivisions, and U.S. government treasuries to deploy excess cash into interest-earning assets in~~$7.8 million, respectively. This unrealized loss was recognized as a ~~more favorable~~result of interest rate ~~environment and was partially offset by~~hikes that occurred during the ~~sale of $40.8 million of low-yielding obligations of states and political subdivisions, and paydowns, calls, and maturities of $13.6 million.~~period.

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


	As of
	June 30, 2022				December 31, 2021
(dollars in thousands)	Carrying Value		% of Total		Carrying Value		% of Total
Available-for-sale (at fair value):
U.S. government agencies	$	16,958	13.36	%	$	19,682	12.80	%
Mortgage-backed securities	66,076		52.07	%	81,513		53.02	%
Obligations of states and political subdivisions	37,164		29.29	%	45,137		29.36	%
Collateralized mortgage obligations	448		0.35	%	540		0.35	%
Corporate bonds	1,780		1.40	%	1,935		1.26	%
Total available-for-sale	122,426		96.47	%	148,807		96.79	%

Held-to-maturity (at amortized cost):
Obligations of states and political subdivisions	4,477		3.53	%	4,946		3.21	%
	$	126,903	100.00	%	$	153,753	100.00	%

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As of
(dollars in thousands) September 30, 2021 December 31, 2020
Carrying
Value % of Total Carrying
Value % of Total
Available-for-sale (at fair value):
U.S. government agencies $ 21,654 13.64 % $ 31,828 25.89 %
Mortgage-backed securities 77,927 49.08 % 23,932 19.47 %
Obligations of states and political subdivisions 51,653 32.53 % 58,420 47.52 %
Collateralized mortgage obligations 592 0.37 % 769 0.63 %
Corporate bonds 1,995 1.26 % — —
Total available-for-sale 153,821 96.88 % 114,949 93.51 %

Held-to-maturity (at amortized cost):
Obligations of states and political subdivisions 4,955 3.12 % 7,979 6.49 %
$ 158,776 100.00 % $ 122,928 100.00 %

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 ~~September~~June 30, ~~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
(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
Available-for-sale:
U.S. government agencies	$	—	—	%	$	1,127	1.98	%	$	3,214	1.29	%	$	12,617	1.30	%	$	16,958	1.34	%
Mortgage-backed securities	—		—	%	—		—	%	2		6.94	%	66,074		1.66	%	66,076		1.66	%
Obligations of states and political subdivisions	508		2.80	%	—		—	%	3,888		1.62	%	32,768		1.69	%	37,164		1.70	%
Collateralized mortgage obligations	—		—	%	—		—	%	—		—	%	448		1.76	%	448		1.76	%
Corporate bonds	—		—	%	1,780		1.25	%	—		—	%	—		—	%	1,780		1.25	%
Total available-for-sale	508		2.80	%	2,907		1.53	%	7,104		1.47	%	111,907		1.63	%	122,426		1.62	%

Held-to-maturity:
Obligations of states and political subdivisions	447		6.00	%	1,115		6.00	%	1,590		6.00	%	1,325		6.00	%	4,477		6.00	%
Total	$	955	4.30	%	$	4,022	2.77	%	$	8,694	2.30	%	$	113,232	1.68	%	$	126,903	1.78	%

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Due in one year
or less Due after one
year through five years Due after five
years through ten years Due after ten years Total
(dollars in thousands) Carrying
Value Weighted
Avg
Yield Carrying
Value Weighted
Avg
Yield Carrying
Value Weighted
Avg
Yield Carrying
Value Weighted
Avg
Yield Carrying
Value Weighted
Avg
Yield
Available-for-sale:
U.S. government agencies $ — — $ 1,618 1.91 % $ 4,338 0.67 % $ 15,698 0.67 % $ 21,654 0.76 %
Mortgage-backed securities — — — — 3 6.89 % 77,924 1.43 % 77,927 1.43 %
Obligations of states and political subdivisions — — 528 2.80 % 4,610 1.67 % 46,515 1.66 % 51,653 1.67 %
Collateralized mortgage obligations — — — — — — 592 1.72 % 592 1.72 %
Corporate bonds — — 1,995 1.25 % — — — — 1,995 1.25 %
Total available-for-sale — — 4,141 1.71 % 8,951 1.19 % 140,729 1.42 % 153,821 1.42 %

Held-to-maturity:
Obligations of states and political subdivisions — — — — 4,955 6.00 % — — 4,955 6.00 %
$ — — $ 4,141 1.71 % $ 13,906 2.90 % $ 140,729 1.42 % $ 158,776 1.56 %

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, ~~2020:~~

Due in one year
or less Due after one
year through five years Due after five
years through ten years Due after ten years Total
(dollars in thousands) Carrying
Value Weighted
Avg
Yield Carrying
Value Weighted
Avg
Yield Carrying
Value Weighted
Avg
Yield Carrying
Value Weighted
Avg
Yield Carrying
Value Weighted
Avg
Yield
Available-for-sale:
U.S. government agencies $ — — $ — — $ 7,708 1.22 % $ 24,120 0.97 % $ 31,828 1.03 %
Mortgage-backed securities — — — — — — 23,932 1.12 % 23,932 1.12 %
Obligations of states and political subdivisions — — 1,206 2.52 % 8,599 1.57 % 48,615 1.65 % 58,420 1.66 %
Collateralized mortgage obligations — — — — — — 769 1.70 % 769 1.70 %
Total available-for-sale — — 1,206 2.52 % 16,307 1.40 % 97,436 1.35 % 114,949 1.37 %

Held-to-maturity:
Obligations of states and political subdivisions — — — — — — 7,979 6.00 % 7,979 6.00 %
$ — — $ 1,206 2.52 % $ 16,307 1.40 % $ 105,415 1.70 % $ 122,928 1.67 %

2021:


	Due in one year or less				Due after one year through five years				Due after five years through ten years				Due after ten years				Total
(dollars in thousands)	Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield		Carrying Value		Weighted Avg Yield
Available-for-sale:
U.S. government agencies	$	—	—	%	$	1,591	1.97	%	$	3,814	0.69	%	$	14,277	0.19	%	$	19,682	0.43	%
Mortgage-backed securities	—		—	%	—		—	%	3		6.90	%	81,510		1.51	%	81,513		1.51	%
Obligations of states and political subdivisions	—		—	%	522		2.80	%	3,748		1.56	%	40,867		1.69	%	45,137		1.69	%
Collateralized mortgage obligations	—		—	%	—		—	%	—		—	%	540		1.73	%	540		1.73	%
Corporate bonds	—		—	%	1,935		1.25	%	—		—	%	—		—	%	1,935		1.25	%
Total available-for-sale	—		—	%	4,048		1.73	%	7,565		1.12	%	137,194		1.43	%	148,807		1.42	%

Held-to-maturity:
Obligations of states and political subdivisions	491		6.00	%	951		6.00	%	3,504		6.00	%	—		—	%	4,946		6.00	%
Total	$	491	6.00	%	$	4,999	2.54	%	$	11,069	2.67	%	$	137,194	1.43	%	$	153,753	1.57	%

Weighted average yield for securities available-for-sale is the projected yield to maturity given current cash flow projections for U.S. government ~~agencies,~~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.

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A summary of the ~~book value~~amortized cost and fair value related to securities as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020~~2021 is presented below.

Gross Unrealized
(dollars in thousands) Book Value Gains (Losses) Fair Value
September 30, 2021
Available-for-sale:
U.S. government agencies $ 21,780 $ 108 $ (234 ) $ 21,654
Mortgage-backed securities 78,301 198 (572 ) 77,927
Obligations of states and political subdivisions 51,189 661 (197 ) 51,653
Collateralized mortgage obligations 580 12 — 592
Corporate bonds 2,000 — (5 ) 1,995
Total available-for-sale $ 153,850 $ 979 $ (1,008 ) $ 153,821
Held-to-maturity:
Obligations of states and political subdivisions $ 4,995 $ 256 $ — $ 5,211
December 31, 2020
Available-for-sale:
U.S. government agencies $ 32,069 $ 111 $ (352 ) $ 31,828
Mortgage-backed securities 23,601 338 (7 ) 23,932
Obligations of states and political subdivisions 57,137 1,291 (8 ) 58,420
Collateralized mortgage obligations 748 21 — 769
Total available-for-sale $ 113,555 $ 1,761 $ (367 ) $ 114,949
Held-to-maturity:
Obligations of states and political subdivisions $ 7,979 $ 776 $ — $ 8,755


			Gross Unrealized
(dollars in thousands)	Amortized Cost		Gains		(Losses)		Fair Value
June 30, 2022
Available-for-sale:
U.S. government agencies	$	17,114	$	86	$	(242)	$	16,958
Mortgage-backed securities	76,442		3		(10,369)		66,076
Obligations of states and political subdivisions	44,490		9		(7,335)		37,164
Collateralized mortgage obligations	475		—		(27)		448
Corporate bonds	2,000		—		(220)		1,780
Total available-for-sale	$	140,521	$	98	$	(18,193)	$	122,426
Held-to-maturity:
Obligations of states and political subdivisions	$	4,477	$	—	$	(145)	$	4,332

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 ~~attributed~~primarily attributable to interest rate changes, rather than the marketability of the securities or the issuer’s ability to honor redemption of the obligations, as a majority of the securities with unrealized 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.

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Loan Portfolio

Our loan portfolio is our 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 we attempt to mitigate with strong underwriting. As of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, our total loans amounted to ~~$1.7~~$2.4 billion and ~~$1.5~~$1.9 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
September 30, 2021 December 31, 2020
(dollars in thousands) Amount % of Loans Amount % of Loans
Loans held for investment:
Real estate:
Commercial $ 1,317,060 76.93 % $ 1,002,497 66.33 %
Commercial land and development 15,726 0.92 % 10,600 0.70 %
Commercial construction 47,511 2.77 % 91,760 6.07 %
Residential construction 8,438 0.49 % 11,914 0.79 %
Residential 29,354 1.71 % 30,431 2.01 %
Farmland 55,077 3.22 % 50,164 3.32 %
Commercial:
Secured 137,165 8.01 % 138,676 9.18 %
Unsecured 21,655 1.26 % 17,526 1.16 %
PPP 61,499 3.59 % 147,965 9.79 %
Consumer and other 13,528 0.79 % 4,921 0.33 %
Total loans held for investment 1,707,013 99.69 % 1,506,454 99.68 %

Loans held for sale:
Commercial 5,267 0.31 % 4,820 0.32 %
Total loans before deferred fees 1,712,280 100.00 % 1,511,274 100.00 %
Net deferred loan fees (2,297 ) (3,295 )
Total loans $ 1,709,983 $ 1,507,979


	As of
	June 30, 2022				December 31, 2021
(dollars in thousands)	Amount		% of Loans		Amount		% of Loans
Loans held for investment:
Real estate:
Commercial	$	2,036,559	85.02	%	$	1,586,232	81.48	%
Commercial land and development	9,439		0.39	%	7,376		0.38	%
Commercial construction	70,404		2.94	%	54,214		2.78	%
Residential construction	7,075		0.30	%	7,388		0.38	%
Residential	26,246		1.10	%	28,562		1.47	%
Farmland	50,434		2.11	%	54,805		2.82	%
Commercial:
Secured	136,155		5.68	%	137,062		7.03	%
Unsecured	24,262		1.01	%	21,136		1.09	%
PPP	—		—	%	22,124		1.14	%
Consumer and other	21,701		0.91	%	17,167		0.88	%
Loans held for investment, gross	2,382,275		99.46	%	1,936,066		99.45	%

Loans held for sale:
Commercial	12,985		0.54	%	10,671		0.55	%
Total loans, gross	2,395,260		100.00	%	1,946,737		100.00	%
Net deferred loan fees	(1,764)				(1,606)
Total loans	$	2,393,496			$	1,945,131

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

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

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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 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~~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) Loan Balance % of
Commercial
Real Estate Collateral
Value Minimum
LTV Maximum
LTV
September 30, 2021
Manufactured home community $ 390,662 29.67 % $ 645,009 14.29 % 78.33 %
Office 114,077 8.66 % 241,077 2.27 % 75.00 %
Multifamily 143,064 10.86 % 326,793 5.13 % 75.00 %
Retail 117,518 8.92 % 221,076 7.75 % 74.94 %
Faith-based 98,929 7.51 % 246,843 4.87 % 80.62 %
Industrial 91,982 6.98 % 227,263 1.56 % 94.30 %
Mixed use 77,743 5.90 % 144,016 1.29 % 72.82 %
Mini storage 82,000 6.23 % 152,950 20.88 % 69.34 %
All other types¹ 201,085 15.27 % 452,883 8.49 % 95.18 %
Total $ 1,317,060 100.00 % $ 2,657,910 1.29 % 95.18 %

December 31, 2020
Manufactured home community $ 244,156 24.35 % $ 421,048 12.12 % 73.64 %
Office 115,913 11.56 % 237,837 4.05 % 75.00 %
Retail 104,878 10.46 % 208,632 4.52 % 76.14 %
Faith-based 92,885 9.27 % 242,148 3.23 % 73.18 %
Mini storage 69,973 6.98 % 120,010 21.19 % 70.00 %
Industrial 69,153 6.90 % 174,140 1.93 % 75.55 %
Multifamily 66,113 6.59 % 171,411 0.33 % 75.00 %
Mixed use 62,531 6.24 % 119,333 2.87 % 75.00 %
All other types¹ 176,895 17.65 % 413,381 6.89 % 84.89 %
Total $ 1,002,497 100.00 % $ 2,107,940 0.33 % 84.89 %

Types 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, auto dealerships, car washes, assisted living communities, country clubs, gas stations/convenience stores, medical offices, special purpose property, mortuaries, restaurants, and schools.


(dollars in thousands)	Loan Balance		% of Commercial Real Estate		Collateral Value		Minimum LTV		Maximum LTV
June 30, 2022
Manufactured home community	$	747,123	36.69	%	$	1,230,952	—	%	77.04	%
Retail	197,420		9.69	%	363,899		16.66	%	74.64	%
Multifamily	175,535		8.62	%	373,351		11.50	%	75.00	%
Industrial	162,421		7.98	%	380,163		10.90	%	75.00	%
Office	143,314		7.04	%	311,287		0.43	%	90.37	%
Faith-based	142,901		7.02	%	384,535		2.55	%	74.38	%
Mini storage	140,403		6.89	%	255,085		20.51	%	70.00	%
All other types1	327,442		16.07	%	680,152		0.50	%	153.40	%
Total	$	2,036,559	100.00	%	$	3,979,424	—	%	153.40	%

December 31, 2021
Manufactured home community	$	518,910	32.71	%	$	849,269	14.22	%	78.00	%
Retail	166,960		10.53	%	307,376		5.10	%	75.00	%
Multifamily	152,412		9.61	%	350,953		5.13	%	75.00	%
Industrial	135,401		8.54	%	318,875		1.43	%	74.51	%
Office	134,728		8.49	%	294,367		1.67	%	75.00	%
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	200,121		12.62	%	473,952		8.00	%	94.97	%
Total	$	1,586,232	100.00	%	$	3,182,946	1.04	%	94.97	%

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 LTV of impaired, collateral dependent loans was approximately 86.33% at June 30, 2022 and approximately 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). Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes ~~80.61%~~88.91% of ~~our portfolio~~loans held for investment at ~~September~~June 30, ~~2021.~~2022. Commercial secured lending (consisting primarily of SBA 7(a) loans under $350,000) represents ~~8.01%~~5.72% of ~~our portfolio~~loans held for investment at ~~September~~June 30, ~~2021.~~2022. 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.

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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 ~~500.53%~~710.21% and ~~624.70%~~577.92% as of ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector ~~(i.e.~~(e.g., manufactured home communities, self-storage, hospitality, etc.). All loan sectors were within our established limits as of ~~September~~June 30, ~~2021.~~2022. 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 ~~September~~June 30, ~~2021:~~

(dollars in thousands) Due in 1
year or less Due after 1
year through
5 years Due after 5
years through
15 years Due after
15 years Total
Real estate:
Commercial $ 40,822 $ 138,762 $ 1,100,706 $ 36,675 $ 1,316,965
Commercial land and development 7,207 8,094 425 — 15,726
Commercial construction 2,910 5,869 38,732 — 47,511
Residential construction 6,919 1,519 — — 8,438
Residential 2,793 6,105 18,728 1,728 29,354
Farmland 4,278 6,100 44,699 — 55,077
Commercial:
Secured 42,368 28,754 66,200 5,087 142,409
Unsecured 418 2,441 18,914 — 21,773
PPP 7,067 54,432 — — 61,499
Consumer and other 66 3,724 9,738 — 13,528
Total loans $ 114,848 $ 255,800 $ 1,298,142 $ 43,490 $ 1,712,280

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
Real estate:
Commercial	$	24,605	$	205,120	$	1,730,927	$	75,907	$	2,036,559
Commercial land and development	821		5,656		2,962		—		9,439
Commercial construction	3,725		30,881		35,798		—		70,404
Residential construction	2,965		3,384		726		—		7,075
Residential	1,243		8,098		15,886		1,019		26,246
Farmland	908		6,898		42,628		—		50,434
Commercial:
Secured	29,510		27,830		87,988		3,812		149,140
Unsecured	1,217		6,871		16,174		—		24,262
PPP	—		—		—		—		—
Consumer and other	906		7,095		13,700		—		21,701
Total	$	65,900	$	301,833	$	1,946,789	$	80,738	$	2,395,260

The following table sets forth the contractual maturities of our loan portfolio as of December 31, ~~2020:~~

(dollars in thousands) Due in 1
year or less Due after 1
year through
5 years Due after 5
years through
15 years Due after
15 years Total
Real estate:
Commercial $ 46,579 $ 100,882 $ 821,130 $ 33,906 $ 1,002,497
Commercial land and development 7,248 2,672 680 — 10,600
Commercial construction 12,358 15,883 63,519 — 91,760
Residential construction 5,754 6,160 — — 11,914
Residential 1,462 4,905 22,205 1,859 30,431
Farmland 410 13,060 36,694 — 50,164
Commercial:
Secured 44,230 36,055 63,211 — 143,496
Unsecured 1,580 1,692 14,254 — 17,526
PPP — 147,965 — — 147,965
Consumer and other 51 3,835 1,035 — 4,921
Total loans $ 119,672 $ 333,109 $ 1,022,728 $ 35,765 $ 1,511,274

2021:


(dollars in thousands)	Due in 1 year or less		Due after 1 year through 5 years		Due after 5 years through 15 years		Due after 15 years		Total
Real estate:
Commercial	$	32,107	$	170,222	$	1,343,367	$	40,536	$	1,586,232
Commercial land and development	1,209		6,167		—		—		7,376
Commercial construction	3,418		17,575		32,131		1,090		54,214
Residential construction	5,609		1,779		—		—		7,388
Residential	1,183		8,246		17,871		1,262		28,562
Farmland	3,876		8,116		42,813		—		54,805
Commercial:
Secured	31,436		29,880		82,526		3,891		147,733
Unsecured	1,182		3,976		15,978		—		21,136
PPP	598		21,526		—		—		22,124
Consumer and other	35		3,619		13,513		—		17,167
Total	$	80,653	$	271,106	$	1,548,199	$	46,779	$	1,946,737

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The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of ~~September~~June 30, ~~2021:~~

(dollars in thousands) Fixed
Interest
Rates Floating or
Adjustable
Rates Total
Real estate:
Commercial $ 219,208 $ 1,097,757 $ 1,316,965
Commercial land and development 727 14,999 15,726
Commercial construction 1,490 46,021 47,511
Residential construction — 8,438 8,438
Residential 2,265 27,089 29,354
Farmland 4,256 50,821 55,077
Commercial:
Secured 29,607 112,802 142,409
Unsecured 19,767 2,006 21,773
PPP 61,499 — 61,499
Consumer and other 13,528 — 13,528
Total loans $ 352,347 $ 1,359,933 $ 1,712,280

2022:


(dollars in thousands)	Fixed Interest Rates		Floating or Adjustable Rates		Total
Real estate:
Commercial	$	517,542	$	1,519,017	$	2,036,559
Commercial land and development	1,533		7,906		9,439
Commercial construction	3,031		67,373		70,404
Residential construction	—		7,075		7,075
Residential	2,143		24,103		26,246
Farmland	3,890		46,544		50,434
Commercial:
Secured	36,221		112,919		149,140
Unsecured	20,575		3,687		24,262
PPP	—		—		—
Consumer and other	21,701		—		21,701
Total	$	606,636	$	1,788,624	$	2,395,260

The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of December 31, ~~2020:~~

(dollars in thousands) Fixed
Interest
Rates Floating or
Adjustable
Rates Total
Real estate:
Commercial $ 134,029 $ 868,468 $ 1,002,497
Commercial land and development 743 9,857 10,600
Commercial construction 15,527 76,233 91,760
Residential construction — 11,914 11,914
Residential 2,737 27,694 30,431
Farmland 4,464 45,700 50,164
Commercial:
Secured 28,241 115,255 143,496
Unsecured 14,882 2,644 17,526
PPP 147,965 — 147,965
Consumer and other 4,921 — 4,921
Total loans $ 353,509 $ 1,157,765 $ 1,511,274

2021:

(dollars in thousands) Fixed
Interest
Rates Floating or
Adjustable
Rates Total
Real estate:
Commercial $ 394,648 $ 1,191,584 $ 1,586,232
Commercial land and development 722 6,654 7,376
Commercial construction — 54,214 54,214
Residential construction — 7,388 7,388
Residential 2,222 26,340 28,562
Farmland 4,183 50,622 54,805
Commercial:
Secured 34,771 112,962 147,733
Unsecured 19,841 1,295 21,136
PPP 22,124 — 22,124
Consumer and other 17,167 — 17,167
Total $ 495,678 $ 1,451,059 $ 1,946,737

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. ~~The~~These metrics directly impact our evaluation of the adequacy of our allowance for loan losses.

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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 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.

Nonperforming ~~assets~~: 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~~: Debt Restructurings

We consider a loan to be in 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~~: Deferments

The CARES Act, as amended by the Consolidated Appropriations Act, specified that ~~COVID-19 related~~COVID-19-related loan modifications executed between March 1, 2020 and the earlier ofof: (i) 60 days after the date of termination of the national emergency declared by the ~~President~~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 ~~loans~~ beginning in March 2020. As of ~~September~~June 30, ~~2021, eight~~2022, two borrowing relationships with ~~eight~~two loans totaling ~~$12.2~~$0.1 million ~~or 0.72% of the loan portfolio,~~ were in a COVID-19 deferment period, and ~~six~~four loans totaling ~~$0.7~~$12.1 million had been in a COVID-19 deferment period in the ~~second~~first quarter of ~~2021~~2022 but were not in such deferment as of ~~September~~June 30, ~~2021.~~2022. None of the loans that received COVID-19 deferments in the ~~third~~second quarter of ~~2021~~2022 had the principal portion deferred to the respective maturity of the loan. ~~Some of the borrowers that received interest-only deferments received a PPP loan that included loan funds to make their interest-only payments.~~ 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.

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SBA 7(a) ~~payments made under~~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 ~~nine~~six months of ~~2021,~~2022, the SBA made payments under this program on ~~1,061~~29 of our SBA 7(a) loans, totaling ~~$7.2~~$0.2 million in principal and ~~interest, of which approximately $0.3 million was paid during the three months ended September 30, 2021.~~interest. As of ~~September~~June 30, ~~2021,~~2022, the principal outstanding on loans that received one or more of these payments under the CARES Act was ~~$46.7 million, representing a majority of our~~$5.7 million.

SBA Loans

During the three and six months ended June 30, 2022, the Company sold 41 and 91 SBA 7(a) loans, asrespectively, with government guaranteed portions totaling $14.0 million and $25.7 million, respectively. The Company received gross proceeds of ~~September~~$14.9 million and $27.5 million, respectively, on the loans sold during the three and six months ended June 30, ~~2021.~~

2022, resulting in the recognition of net gains on sale of $0.8 million and $1.7 million during the three and six months ended June 30, 2022, respectively. The Company did not sell any PPP loans during 2022.

Non-accrual Loans

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


	As of
(dollars in thousands)	June 30, 2022			December 31, 2021
Non-accrual loans:
Real estate:
Commercial	$	114		$	122



Residential	176			178

Commercial:
Secured	152			288



Total non-accrual loans	442			588

Loans past due 90 days or more and still accruing:












Total loans past due and still accruing	—			—
Total nonperforming loans	442			588

Real estate owned	—			—
Total nonperforming assets	$	442		$	588
COVID-19 deferments	$	81		$	12,156

Performing TDRs (not included above)	$	—		$	—

Allowance for loan losses to period end nonperforming loans	5,834.88		%	3,954.30		%
Nonperforming loans to loans held for investment1	0.02		%	0.03		%
Nonperforming assets to total assets	0.02		%	0.02		%
Nonperforming loans plus performing TDRs to loans held for investment1	0.02		%	0.03		%
COVID-19 deferments to loans held for investment1	—		%	0.63		%

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

As of
(dollars in thousands) September 30,
2021 December 31,
2020
Non-accrual loans
Real estate:
Commercial $ 126 $ 137
Commercial land and development — —
Commercial construction — —
Residential construction — —
Residential 179 183
Farmland — —
Commercial:
Secured 252 132
Unsecured — —
PPP — —
Consumer and other — —
Total non-accrual loans 557 452

Loans past due 90 days or more and still accruing
Real estate:
Commercial — —
Commercial land and development — —
Commercial construction — —
Residential construction — —
Residential — —
Farmland — —
Commercial:
Secured — —
Unsecured — —
PPP — —
Consumer and other — —
Total loans past due and still accruing — —
Total nonperforming loans 557 452

Real estate owned — —
Total nonperforming assets $ 557 $ 452
COVID-19 deferments $ 12,249 $ 41,439

Performing TDRs (not included above) $ — $ —

Allowance for loan losses to period end nonperforming loans 3,923.67 % 4,909.07 %
Nonperforming loans to period end loans 0.03 % 0.03 %
Nonperforming assets to total assets 0.02 % 0.02 %
Nonperforming loans plus performing TDRs to period end loans 0.03 % 0.03 %
COVID-19 deferments to period end loans 0.72 % 2.75 %

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The ratio of nonperforming loans to ~~period end~~ loans ~~was unchanged at~~held for investment decreased from 0.03% as of December 31, ~~2020~~2021 to 0.02% as of June 30, 2022, primarily due to a decrease in nonperforming commercial secured loans and ~~September 30, 2021.~~

overall loan growth period-over-period.

The ratio of the allowance for loan losses to nonperforming loans ~~decreased~~increased from ~~4,909.07%~~3,954.30% as of December 31, ~~2020~~2021 to ~~3,923.67%~~5,834.88% as of ~~September~~June 30, ~~2021.~~2022. The ~~decrease~~increase was primarily due to ~~a relatively flat~~an increase in the allowance for loan losses from December 31, ~~2020~~2021 to ~~September~~June 30, ~~2021 while~~2022 related to increased reserves based on loan growth and economic conditions during the six months ended June 30, 2022, combined with a decrease in commercial secured non-accrual loans ~~increased by $0.1 million~~ from December 31, ~~2020~~2021 to ~~September~~June 30, ~~2021.~~

2022.

Potential ~~problem loans~~: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 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.

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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
September 30, 2021
Real estate:
Commercial $ 1,266,349 $ 15,223 $ 35,488 $ — $ 1,317,060
Commercial land and development 15,726 — — — 15,726
Commercial construction 41,611 5,900 — — 47,511
Residential construction 8,438 — — — 8,438
Residential 29,175 — 179 — 29,354
Farmland 55,077 — — — 55,077

Commercial:
Secured 136,011 — 1,154 — 137,165
Unsecured 21,655 — — — 21,655
PPP 61,499 — — — 61,499

Consumer 13,528 — — — 13,528
Total loans $ 1,649,069 $ 21,123 $ 36,821 $ — $ 1,707,013

December 31, 2020
Real estate:
Commercial $ 950,118 $ 16,836 $ 35,543 $ — $ 1,002,497
Commercial land and development 10,600 — — — 10,600
Commercial construction 85,860 5,900 — — 91,760
Residential construction 11,914 — — — 11,914
Residential 30,248 — 183 — 30,431
Farmland 50,164 — — — 50,164

Commercial:
Secured 136,992 1,552 132 — 138,676
Unsecured 17,526 — — — 17,526
PPP 147,965 — — — 147,965

Consumer 4,921 — — — 4,921
Total loans
$ 1,446,308 $ 24,288 $ 35,858 $ — $ 1,506,454


(dollars in thousands)	Pass		Watch		Substandard		Doubtful		Total
June 30, 2022
Real estate:
Commercial	$	2,020,665	$	15,006	$	888	$	—	$	2,036,559
Commercial land and development	9,439		—		—		—		9,439
Commercial construction	64,504		5,900		—		—		70,404
Residential construction	7,075		—		—		—		7,075
Residential	26,070		—		176		—		26,246
Farmland	50,434		—		—		—		50,434
Commercial:
Secured	135,071		932		152		—		136,155
Unsecured	24,262		—		—		—		24,262
PPP	—		—		—		—		—
Consumer	21,674		—		27		—		21,701
Total	$	2,359,194	$	21,838	$	1,243	$	—	$	2,382,275

December 31, 2021
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

Loans designated as watch and substandard, which are not considered adversely classified, ~~decreased slightly~~increased to ~~$57.9~~$23.1 million at ~~September~~June 30, ~~2021~~2022 from ~~$60.1~~$19.3 million at December 31, ~~2020, which did not have an impact on~~2021. Loans designated as watch increased while loans designated substandard decreased period-over-period, resulting in a decrease in the reserve ~~overall.~~overall since substandard loan designations are less favorable than watch designations, and therefore result in more significant reserves. There were no loans with doubtful risk grades at ~~September~~June 30, ~~2021~~2022 or December 31, ~~2020.~~

2021.

Allowance for ~~loan losses~~: Loan Losses

The allowance for loan losses is established through a provision for loan losses charged to operations. Loans are charged against the allowance for loan 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 losses.

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

In the third quarter of 2021, our methodology for evaluating allowance for loan losses continued to be affected by the COVID-19 pandemic, resulting in sustained higher reserve levels, primarily related to our commercial real estate portfolio, but lower than levels for the corresponding period of 2020. Reserves on the commercial real estate portfolio were increased due to higher uncertainty related to the COVID-19 pandemic and related economic effects.

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

At June 30, 2022, the Company’s allowance for loan losses was $25.8 million, as compared to $23.2 million at December 31, 2021. The $2.6 million increase is due to a $3.2 million provision for loan losses recorded for the six months ended June 30, 2022, partially offset by net charge-offs of $0.7 million during the first six months of 2022.

As of
September 30, 2021 December 31, 2020
(dollars in thousands) Dollars % of Total Dollars % of Total
Collectively evaluated for impairment:
Real estate:
Commercial $ 11,695 53.53 % $ 9,358 42.17 %
Commercial land and development 112 0.51 % 77 0.35 %
Commercial construction 343 1.57 % 821 3.70 %
Residential construction 60 0.27 % 87 0.39 %
Residential 207 0.95 % 220 0.99 %
Farmland 666 3.05 % 615 2.77 %
Commercial:
Secured 7,260 33.23 % 9,476 42.71 %
Unsecured 218 1.00 % 179 0.81 %
PPP — 0.00 % — 0.00 %
Consumer and other 638 2.92 % 632 2.85 %
Unallocated 515 2.36 % 724 3.26 %
21,714 99.39 % 22,189 100.00 %
Individually evaluated for impairment 134 0.61 % — 0.00 %
134 0.61 % — 0.00 %
Total allowance for loan losses $ 21,848 100.00 % $ 22,189 100.00 %

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


	June 30, 2022				December 31, 2021
(dollars in thousands)	Dollars		% of Total		Dollars		% of Total
Collectively evaluated for impairment:
Real estate:
Commercial	$	16,621	64.46	%	$	12,869	55.37	%
Commercial land and development	68		0.26	%	50		0.22	%
Commercial construction	508		1.97	%	371		1.60	%
Residential construction	51		0.20	%	50		0.22	%
Residential	188		0.73	%	192		0.83	%
Farmland	616		2.39	%	645		2.78	%
Commercial:
Secured	6,132		23.78	%	6,687		28.77	%
Unsecured	265		1.03	%	207		0.89	%
PPP	—		—	%	—		—	%
Consumer and other	537		2.08	%	889		3.82	%
Unallocated	648		2.51	%	1,111		4.78	%
	25,634		99.41	%	23,071		99.28	%
Individually evaluated for impairment	152		0.59	%	172		0.72	%
Total allowance for loan losses	$	25,786	100.00	%	$	23,243	100.00	%

The ratio of allowance for loan losses to total loans held for investment was ~~1.28%~~1.08% at ~~September~~June 30, ~~2021,~~2022, compared to ~~1.47%~~1.20% at December 31, ~~2020.~~2021. Excluding ~~SBA-guaranteed~~ PPP loans, the ~~ratio~~ratios of the allowance for loan losses to total loans ~~was 1.33%~~held for investment were 1.08% and ~~1.63%~~1.22% at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020,~~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-accrual loans totaled $0.4 million, or 0.02% of total loans held for investment, at June 30, 2022, decreasing from $0.6 million, or 0.03% of total loans ~~at September 30, 2021, remaining largely unchanged from $0.5 million, or 0.03% of total loans,~~held for investment, at December 31, ~~2020.~~

2021.

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


	As of and for the three months ended
	June 30, 2022					June 30, 2021
(dollars in thousands)	Activity			% of Average Loans Held for Investment		Activity			% of Average Loans Held for Investment
Average loans held for investment	$	2,217,426				$	1,575,243

Allowance for loan losses (beginning of period)	$	23,904				$	22,271

Net (charge-offs) recoveries:
Real estate:
Commercial	—			—	%	—			—	%
Commercial land and development	—			—	%	—			—	%
Commercial construction	—			—	%	—			—	%
Residential construction	—			—	%	—			—	%
Residential	—			—	%	—			—	%
Farmland	—			—	%	—			—	%
Commercial:
Secured	(233)			(0.01)	%	(136)			(0.01)	%
Unsecured	—			—	%	—			—	%
PPP	(21)			—	%	—			—	%
Consumer and other	(114)			(0.01)	%	18			—	%
Net charge-offs	(368)			(0.02)	%	(118)			(0.01)	%

Provision for loan losses	2,250					—

Allowance for loan losses (end of period)	$	25,786				$	22,153

Loans held for investment	$	2,380,511				$	1,585,462
Allowance for loan losses to loans held for investment	1.08		%			1.40		%

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As of and for the three months ended
September 30, 2021 September 30, 2020
(dollars in thousands) Activity % of
Period
End Loans Activity % of
Period
End Loans
Loans held for investment $ 1,707,013 $ 1,557,904

Allowance for loan losses (beginning of period) $ 22,153 $ 17,905

Net (charge-offs) recoveries:
Real estate:
Commercial — 0.00 % — 0.00 %
Commercial land and development — 0.00 % — 0.00 %
Commercial construction — 0.00 % — 0.00 %
Residential construction — 0.00 % — 0.00 %
Residential — 0.00 % — 0.00 %
Farmland — 0.00 % — 0.00 %
Commercial:
Secured (263 ) (0.19 )% (249 ) (0.20 )%
Unsecured — 0.00 % — 0.00 %
PPP — 0.00 % — 0.00 %
Consumer and other (42 ) (0.31 )% 46 0.79 %
Net charge-offs (305 ) (0.02 )% (203 ) (0.01 )%

Provision for loan losses — 1,850

Allowance for loan losses (end of period) $ 21,848 $ 19,552

Allowance for loan losses to period end loans held for investment 1.28 % 1.26 %

As of and for the nine months ended
September 30, 2021 September 30, 2020
(dollars in thousands) Activity % of
Period
End Loans Activity % of
Period
End Loans
Loans held for investment $ 1,707,013 $ 1,557,904

Allowance for loan losses (beginning of period) $ 22,189 $ 14,915

Net (charge-offs) recoveries:
Real estate:
Commercial — 0.00 % — 0.00 %
Commercial land and development — 0.00 % — 0.00 %
Commercial construction — 0.00 % — 0.00 %
Residential construction — 0.00 % — 0.00 %
Residential — 0.00 % 90 0.31 %
Farmland — 0.00 % — 0.00 %
Commercial:
Secured (569 ) (0.41 )% (1,070 ) (0.84 )%
Unsecured — 0.00 % — 0.00 %
PPP — 0.00 % — 0.00 %
Consumer and other 27 0.20 % (383 ) (6.63 )%
Net charge-offs (542 ) (0.03 )% (1,363 ) (0.09 )%

Provision for loan losses 200 6,000

Allowance for loan losses (end of period) $ 21,847 $ 19,552

Allowance for loan losses to period end loans held for investment 1.28 % 1.26 %


	As of and for the six months ended
	June 30, 2022					June 30, 2021
(dollars in thousands)	Activity			% of Average Loans Held for Investment		Activity			% of Average Loans Held for Investment
Average loans held for investment	$	2,093,891				$	1,549,580

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	(497)			(0.02)	%	(306)			(0.02)	%
Unsecured	—			—	%	—			—	%
PPP	(21)			—	%	—			—	%
Consumer and other	(139)			(0.01)	%	70			—	%
Net charge-offs	(657)			(0.03)	%	(236)			(0.02)	%

Provision for loan losses	3,200					200

Allowance for loan losses (end of period)	$	25,786				$	22,153

Loans held for investment	$	2,380,511				$	1,585,462
Allowance for loan losses to loans held for investment	1.08		%			1.40		%

The allowance for loan losses to ~~period end~~loans held for investment decreased from 1.40% as of June 30, 2021 to 1.08% as of June 30, 2022. The decrease was primarily due to a 50.15% increase in loans held for investment period-over-period, while the allowance for loan losses increased by only 16.40% period-over-period. Increases in the allowance for loan losses as a result of overall loan growth were partially offset by a reduction in reserves related to loans designated as watch and substandard between June 30, 2021 and June 30, 2022.

Net charge-offs as a percent of average loans held for investment increased from 1.26% as of September 30, 2020 to 1.28% as of September 30, 2021. The increase was primarily due to higher reserves related to our commercial real estate portfolio which increased by $3.6 million, or 45.29%, from September 30, 2020 to September 30, 2021. Reserves on these portfolios were increased due to higher uncertainty related to the COVID-19 pandemic and related economic effects.

~~Net charge-offs as a percent of period end loans increased slightly from~~ 0.01% ~~for the three months ended September 30, 2020~~ to 0.02% for the three months ended ~~September~~June 30, 2021 ~~but improved from 0.09% for the nine months ended September~~and June 30, 2020 to 0.03% for the nine months ended September 30, 2021. The net recovery rate related to the residential real estate portfolio was 0.00% for both the three months ended September 30, 2020 and three months ended September 30, 2021, but went from 0.31% in the nine months ended September 30, 2020 to 0.00% in the nine months ended September 30, 2021.2022, respectively. The net charge-off rate related to the commercial secured portfolio ~~improved from 0.20% in~~remained stable at 0.01% for the three months ended ~~September 30, 2020 to 0.19% in the three months ended September~~June 30, 2021 and ~~improved from 0.84% in~~2022, while the ~~nine months ended September 30, 2020 to 0.41% in the nine months ended September 30, 2021. The~~ net ~~recovery~~charge-off rate related to the consumer and other portfolio ~~reversed~~increased to 0.01% period-over-period.

Net charge-offs as a percent of average loans held for investment increased from ~~0.79% in~~0.02% to 0.03% for the ~~three~~six months ended ~~September~~June 30, ~~2020 to a~~2021 and June 30, 2022, respectively. The net charge-off rate ~~of 0.31% in~~related to the ~~three~~commercial secured portfolio remained stable at 0.02% for the six months ended ~~September~~June 30, 2021 and ~~also reversed from a 6.63%~~2022, while the net charge-off rate inrelated to the ~~nine months ended September 30, 2020~~consumer and other portfolio increased to ~~a net recovery rate~~0.01% period-over-period.

Table of ~~0.20% in the nine months ended September 30, 2021.~~Contents

Liabilities

~~Liabilities~~

During the first ~~nine~~six months of ~~2021,~~2022, total liabilities increased by ~~$387.9~~$281.2 million from ~~$1.8~~$2.3 billion as of December 31, ~~2020~~2021 to ~~$2.2~~$2.6 billion as of ~~September~~June 30, ~~2021.~~2022. This increase was primarily due to an increase in total deposits of ~~$384.4~~$215.4 million, comprised of increases of ~~$199.8~~$103.9 million in non-interest-bearing deposits and ~~$184.6~~$111.5 million in interest-bearing ~~deposits.~~

deposits, as well as an increase in FHLB advances of $60.0 million.

Deposits

Representing ~~98.21%~~96.10% of our total liabilities as of ~~September~~June 30, ~~2021,~~2022, deposits are our primary source of funding for our business operations.

Total deposits increased by ~~$384.4~~$215.4 million, or ~~21.55%~~9.42%, to ~~$2.2~~$2.5 billion at ~~September~~June 30, ~~2021~~2022 from ~~$1.8~~$2.3 billion ~~as of~~at December 31, ~~2020.~~2021. Deposit increases were ~~attributed~~primarily attributable to an increase in the number of new relationships, ~~and~~as well as normal fluctuations in some of our ~~large~~larger accounts. Non-interest-bearing deposits increased by ~~$199.8~~$103.9 million ~~in the first nine months of~~from December 31, 2021 to ~~$895.5 million,~~$1.0 billion and represented ~~41.30%~~40.22% of total deposits at ~~September~~June 30, ~~2021,~~2022, compared to ~~39.00%~~39.46% of total deposits at December 31, ~~2020.~~2021. Our loan to deposit ratio was ~~78.86%~~95.69% at ~~September~~June 30, ~~2021~~2022, as compared to ~~84.50%~~85.09% at December 31, ~~2020.~~2021. We intend to continue to operate our business with a loan to deposit ratio similar to 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
September 30, 2021 September 30, 2020
(dollars in thousands) Average Amount Weighted
Average
Rate Paid %
of Total Deposits Average
Amount Weighted
Average
Rate Paid %
of Total Deposits
Transaction accounts $ 150,536 0.10 % 12.32 % $ 143,406 0.27 % 11.72 %
Money market and savings 1,021,388 0.16 % 83.58 % 975,124 0.61 % 79.66 %
Time 50,066 0.27 % 4.10 % 105,562 0.65 % 8.62 %
Total deposits $ 1,221,990 0.16 % 100.00 % $ 1,224,092 0.57 % 100.00 %

For the nine months ended
September 30, 2021 September 30, 2020
(dollars in thousands) Average Amount Weighted
Average
Rate Paid %
of Total Deposits Average
Amount Weighted
Average
Rate Paid %
of Total Deposits
Transaction accounts $ 151,609 0.10 % 12.67 % $ 140,040 0.30 % 12.23 %
Money market and savings 999,239 0.20 % 83.50 % 888,715 0.75 % 77.60 %
Time 45,772 0.39 % 3.83 % 116,466 1.28 % 10.17 %
Total deposits $ 1,196,620 0.20 % 100.00 % $ 1,145,221 0.74 % 100.00 %


	For the three months ended
	June 30, 2022						June 30, 2021
(dollars in thousands)	Average Amount		Average Rate Paid		% of Total Deposits		Average Amount		Average Rate Paid		% of Total Deposits
Interest-bearing transaction accounts	$	255,665	0.10	%	10.32	%	$	150,732	0.10	%	7.39	%
Money market and savings accounts	1,078,233		0.27	%	43.51	%	1,024,895		0.19	%	50.23	%
Time accounts	174,991		0.55	%	7.06	%	36,741		0.40	%	1.80	%
Demand accounts	969,053		—	%	39.11	%	827,992		—	%	40.58	%
Total deposits	$	2,477,942	0.17	%	100.00	%	$	2,040,360	0.11	%	100.00	%


	For the six months ended
	June 30, 2022						June 30, 2021
(dollars in thousands)	Average Amount		Average Rate Paid		% of Total Deposits		Average Amount		Average Rate Paid		% of Total Deposits
Interest-bearing transaction accounts	$	265,962	0.10	%	11.05	%	$	152,694	0.10	%	7.80	%
Money market and savings accounts	1,044,854		0.21	%	43.39	%	976,844		0.23	%	49.89	%
Time accounts	151,454		0.43	%	6.29	%	41,430		0.49	%	2.12	%
Demand accounts	945,511		—	%	39.27	%	786,955		—	%	40.19	%
Total deposits	$	2,407,781	0.13	%	100.00	%	$	1,957,923	0.13	%	100.00	%

Uninsured ~~non-time~~ deposits totaled ~~$1.1~~$1.4 billion and $1.3 billion at ~~September~~June 30, ~~2021~~2022 and December 31, ~~2020.~~

2021, respectively.

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As of ~~September~~June 30, ~~2021,~~2022, our 2330 largest deposit relationships, each accounting for more than $10.0 million, ~~accounted for $832.6~~totaled $966.1 million, or ~~38.40%,~~38.62% of our total deposits. As of December 31, ~~2020,~~2021, our 1826 largest deposit relationships, each accounting for more than $10.0 million, ~~accounted for $641.2~~totaled $912.7 million, or ~~35.90%,~~39.93% 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:

As of
(dollars in thousands) September 30,
2021 December 31,
2020
Municipalities $ 392,642 $ 318,357
Non-Profit 202,101 165,046
Business 237,827 157,757
Total $ 832,570 $ 641,160


(dollars in thousands)	June 30, 2022		December 31, 2021
Municipalities	$	476,131	$	424,483
Non-profits	195,963		181,080
Businesses	294,005		307,132
Total	$	966,099	$	912,695

Our largest single deposit relationship relates to a non-profit association that supports hospitals and health systems. The balances for this customer were ~~$190.2~~$175.5 million, or ~~8.77%~~7.02% of total deposits, at ~~September~~June 30, ~~2021~~2022 and ~~$133.3~~$155.0 million, or ~~7.50%,~~6.78% of total deposits, at December 31, ~~2020.~~

2021.

The following ~~tables set~~table sets forth the maturity of time deposits as of ~~September~~June 30, ~~2021:~~

(dollars in thousands) $250,000
or Greater Less
than $250,000 Total Uninsured
Portion
Remaining maturity:
Three months or less $ 27,565 $ 25,404 $ 52,969 $ 25,315
Over three through six months 305 268 573 109
Over six through twelve months — 393 393 —
Over twelve months — — — —
Total $ 27,870 $ 26,065 $ 53,935 $ 25,424

2022:

(dollars in thousands) $250,000
or Greater Less
than $250,000 Total Uninsured
Portion
Remaining maturity:
Three months or less $ 180,001 $ 4,095 $ 184,096 $ 178,751
Over three through six months — 4,751 4,751 —
Over six through twelve months 7,189 6,854 14,043 5,189
Over twelve months 438 678 1,116 188
Total $ 187,628 $ 16,378 $ 204,006 $ 184,128

FHLB Advances and Other Borrowings

From time to time, we utilize short-term collateralized FHLB borrowings to maintain adequate liquidity. There were borrowings of $60.0 million outstanding as of June 30, 2022 and no borrowings outstanding as of ~~September 30, 2021 and~~ December 31, ~~2020.~~

2021.

In 2017 and 2019, we issued subordinated notes of $25.0 million and ~~$3.75~~$3.8 million, respectively. This debt was issued to investors in private placement transactions. See Note 7,8, 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 ~~September~~June 30, ~~2021:~~2022:

(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 (6.04% as of June 30, 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 (5.54% as of June 30, 2022) through maturity

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(dollars in thousands) Issuance Date Amount of Notes Prepayment Right Maturity Date
Subordinated notes September 2017 $ 25,000 September 15, 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 (4.16% as of September 30, 2021) through maturity

Subordinated notes November 2019 $ 3,750 September 15, 2022 September 15, 2027

Fixed at 5.50% through September 15, 2022, then three-month LIBOR plus 354.4 basis points (3.66% as of September 30, 2021) through maturity

Shareholders’ Equity

Shareholders’ equity totaled ~~$226.6~~$233.2 million at ~~September~~June 30, ~~2021~~2022 and ~~$133.8~~$235.0 million at December 31, ~~2020.~~2021. The ~~increase~~decrease in shareholders’ equity was primarily attributable to net ~~proceeds of $111.2 million from the issuance of 6,054,750 shares of common stock in our IPO and net~~ income recognized of ~~$31.1~~$19.8 million, offset by ~~$49.4~~a net decline of $12.2 million in other comprehensive income and $10.1 million in cash distributions paid during the ~~nine~~six months ended ~~September~~June 30, ~~2021.~~

~~Off-Balance Sheet Arrangements~~

In the normal course of business, we enter into various transactions that are not included in our consolidated balance sheets in accordance with GAAP. These transactions include commitments to extend credit in the ordinary course of business, such as commitments to fund new loans2022.

Liquidity 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. The following is a summary of our off-balance sheet commitments outstanding as of the dates presented.

As of
(dollars in thousands) September 30,
2021 December 31,
2020
Commitments to fund loans held for investment $ 203,624 $ 216,037

With the exception of the items detailed above, we have no other off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect material to investors with respect to our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

Capital Resources

~~Contractual Obligations~~

The following table presents, as of September 30, 2021, our significant contractual obligations to third parties on debt and lease agreements and service obligations. For more information about our contractual obligations, see Note 7, Long Term Debt and Other Borrowings, and Note 10, Commitments and Contingencies, in the notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.

(dollars in thousands) Total Due in one
year or less Due after one year
through two years Due after two years
through five years Due after
five years
Time deposits¹ $ 53,935 $ 52,970 $ 574 $ 391 $ —
Subordinated notes¹ 28,353 — — — 28,353
Operating leases, net 5,855 261 1,078 2,761 1,755
Significant contracts² 1,472 883 589 — —
$ 89,632 $ 54,114 $ 2,241 $ 3,152 $ 30,125

¹	~~Amounts exclude interest.~~

We have one significant, long-term contract for core processing services. Actual obligation is unknown and dependent on certain factors including volume and activities. For purposes of this disclosure, future obligations are estimated using 2021 average monthly expense extrapolated over the remaining life of the contract.

We believe that will we be able to meet our contractual obligations as they come due. Adequate cash levels are expected through profitability, repayments from loans and securities, deposit gathering activity, access to borrowing sources, and periodic loan sales.

~~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 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. We operate under the Small Bank Holding Company Policy Statement, and accordingly are exempt from the Board of Governors of the Federal Reserve System’s (“Federal Reserve”) generally applicable risk-based capital ratio and leverage ratio requirements. The Bank is subject to minimum risk-based and leverage capital requirements under federal regulations implementing the Basel III framework, and 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. Bancorp’s and the Bank’s capital amounts, 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 September 30, 2021, 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.

The capital adequacy ratios as of September 30, 2021 and December 31, 2020 for Bancorp and the Bank are presented in the following tables. As of September 30, 2021 and December 31, 2020, Bancorp’s Tier 2 capital included subordinated debt, which was not included at the Bank level.

Capital Ratios for Bancorp
(dollars in thousands) Actual Ratio Required for Capital
Adequacy Purposes¹ Ratio to be Well-
Capitalized under Prompt
Corrective Action
Provisions
Amount Ratio Amount Ratio Amount Ratio
September 30, 2021
Total capital (to risk-weighted assets) $ 274,796 15.66 % $ 140,391 ≥ 8.00 % N/A N/A
Tier 1 capital (to risk-weighted assets) $ 224,476 12.79 % $ 105,294 ≥ 6.00 % N/A N/A
Common equity tier 1 capital (to risk-weighted assets) $ 224,476 12.79 % $
78,970
≥ 4.50 % N/A N/A
Tier 1 capital (to average assets) $ 224,476 9.50 % $ 94,539 ≥ 4.00 % N/A N/A
December 31, 2020
Total capital (to risk-weighted assets) $ 176,861 12.18 % $ 116,138 ≥ 8.00 % N/A N/A
Tier 1 capital (to risk-weighted assets) $ 130,347 8.98 % $ 87,103 ≥ 6.00 % N/A N/A
Common equity tier 1 capital (to risk-weighted assets) $ 130,347 8.98 % $ 65,327 ≥ 4.50 % N/A N/A
Tier 1 capital (to average assets) $ 130,347 6.58 % $ 79,204 ≥ 4.00 % N/A N/A

Capital Ratios for the Bank
(dollars in thousands) Actual Ratio Required for Capital
Adequacy Purposes Ratio to be Well-
Capitalized under Prompt
Corrective Action
Provisions
Amount Ratio Amount Ratio Amount Ratio
September 30, 2021
Total capital (to risk-weighted assets) $
269,015
15.34 % $ 140,304 ≥ 8.00 % $ 175,380 ≥ 10.00 %
Tier 1 capital (to risk-weighted assets) $
247,065
14.09 % $ 105,228 ≥ 6.00 % $ 140,304 ≥ 8.00 %
Common equity tier 1 capital (to risk-weighted assets) $
247,065
14.09 % $ 78,921 ≥ 4.50 % $
113,997
≥ 6.50 %
Tier 1 capital (to average assets) $
247,065
10.46 % $ 94,497 ≥ 4.00 % $ 118,121 ≥ 5.00 %
December 31, 2020
Total capital (to risk-weighted assets) $ 174,002 11.99 % $ 116,114 ≥ 8.00 % $ 145,143 ≥ 10.00 %
Tier 1 capital (to risk-weighted assets) $ 155,808 10.73 % $ 87,086 ≥ 6.00 % $ 116,114 ≥ 8.00 %
Common equity tier 1 capital (to risk-weighted assets) $ 155,808 10.73 % $ 65,314 ≥ 4.50 % $ 94,343 ≥ 6.50 %
Tier 1 capital (to average assets) $ 155,808 7.87 % $ 79,199 ≥ 4.00 % $ 98,998 ≥ 5.00 %

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 capital adequacy requirements.

~~Impact of Inflation and Changing Prices~~

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.

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 liquidity of the Bank on a stand-alone basis pursuant to applicable guidance and policies.

Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities, and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds, and the ability to convert assets into cash. Changes in economic conditions or exposure to credit, market, operational, legal, ~~and~~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 ~~senior notes and junior~~ 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 ~~Bancorp~~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 ~~to ensure that our assets and liabilities are managed~~ 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 ~~(“FRBSF”)~~ 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.

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Sources and Uses of Cash

~~The most~~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 ~~source of liquidity during the first nine months of 2021 was an increase in deposits of $384.4 million and an increase in~~ cash ~~and cash equivalents~~inflows as a result of ~~net proceeds~~our IPO.As of ~~$111.2 million from~~June 30, 2022, management believes the ~~IPO. The increase in deposits was primarily due to increases in PPP borrower-related balances and normal fluctuations in some of our large accounts. Other~~above-mentioned sources ofwill provide adequate liquidity during the ~~first nine~~next twelve months for the Bank to meet its operating needs.

IPO

On May 7, 2021, we completed our IPO at a price of ~~2021 included proceeds from sales, maturities, and/or prepayments of securities of $54.4 million, and $24.7~~$20.00 per share. We raised approximately $111.2 million in net ~~cash provided~~proceeds after deducting underwriting discounts and commissions of approximately $8.5 million and certain estimated offering expenses payable by ~~operating activities.~~

~~Significant uses~~us of ~~liquidity during the first nine months~~approximately of ~~2021 were $92.1~~$1.3 million. The net proceeds less $2.1 million in ~~investment securities purchased, $196.3~~other related expenses, including audit fees, legal fees, listing fees, and other expenses totaled $109.1 million.

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 six months ended June 30, 2022, we had cash outflows of $436.2 million in loan originations and advances, net of principal collected, ~~$28.9~~and $37.0 million in loans originated for ~~sale, and $49.4 million~~sale.

Additionally, we enter into commitments to extend credit in ~~cash distributions paid on common stock to our shareholders. Refer to~~ the ~~Consolidated Statement~~ordinary course of Cash Flows included in our unaudited consolidated financial statements in this Quarterly Report on Form 10-Q for additional information on our sources and uses of liquidity. Management anticipates that our current strong liquidity position and core deposit base are sufficientbusiness, such as commitments to fund ~~our operations.~~

~~Total~~new loans and undisbursed construction funds. While these commitments ~~and standby letters~~represent contractual cash requirements, a portion of these commitments to extend credit ~~as discussed in Note 10, Commitments and Contingencies, in~~may expire without being drawn upon. Therefore, the ~~notes to our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q,~~total commitment amounts do not necessarily represent future cash requirements. At June 30, 2022, total off-balance sheet commitments totaled ~~$203.6 million at September 30, 2021.~~$280.0 million. We expect to fund these commitments to the extent utilized primarily through the repayment of existing loans, deposit growth, and liquid assets.

Deposits

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

Our deposits are primarily made up of money market and non-interest-bearing demand deposits. Aside from commercial and business clients, a significant portion of our deposits are from municipalities and non-profit organizations. Cash flows from deposits are impacted by the timing and amount of customer deposits, changes in market rates, and collateral availability.

During the six months ended June 30, 2022, we had significant cash inflows related to an increase in deposits of $215.4 million, primarily as a result of an increase in the number of new relationships and fluctuations in existing accounts.

Over the next twelve months, ~~$53.9~~approximately $202.9 million of time deposits are expected to mature. As these time deposits mature, some of these deposits may not renew due to the competition in the Bank’s marketplace. 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.

Investment Securities

~~An additional source~~

Our investment securities totaled $126.9 million at June 30, 2022. At June 30, 2022, 52.07% and 29.29% of our investment portfolio consisted of mortgage-backed securities and obligations of states and political subdivisions, 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 $4.4 million from our securities for the remainder of 2022. In future periods, we expect to maintain approximately the same level of cash flows from our securities. Depending on market yield and our liquidity, iswe may purchase securities as a use of cash in our interest-earning asset portfolio.

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During the ~~sale~~six months ended June 30, 2022, we had cash proceeds from sales, maturities, calls, and prepayments of ~~liquid assets, which consists~~securities of ~~loans held for sale and~~$10.6 million, offset by cash outflows of $1.6 million related to investment securities ~~available-for-sale. At September~~purchased. Additionally, at June 30, ~~2021, loans held for sale totaled $5.3 million and~~2022, securities available-for-sale totaled ~~$153.8~~$122.4 million, of which ~~$68.0~~$21.7 million ~~has~~have been pledged as collateral for borrowings and other commitments.

Future Contractual Obligations

Our estimated future obligations as of June 30, 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 $0.5 million and a long-term obligation of $4.5 million. We also have a current obligation of $188.8 million and a long-term obligation of $15.2 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 contract for core processing services. While the actual obligation is unknown and dependent on certain factors, including volume and activity, when using our 2021 average monthly expense extrapolated over the remaining life of the contract, we estimate that our current obligation under this contract is $1.1 million and our long-term obligation is zero until the contract is renewed.

~~Further, the~~

FHLB Financing

The Bank is a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. At ~~September~~June 30, ~~2021,~~2022, the Bank had outstanding borrowings of $60.0 million and a total financing availability of ~~$203.8~~$280.0 million, net of letters of credit issued of ~~$319.5~~$545.5 million.

Dividends

~~As of September 30, 2021, management believes the above-mentioned sources will provide adequate liquidity during the next twelve months for the Bank to meet its operating needs.~~

~~The significant uses~~

A use of liquidity for ~~Bancorp are~~the Company is shareholder ~~dividends and ordinary operating expenses.~~dividends. The ~~Bank paid dividends to Bancorp totaling $22.4 million during the first nine months of 2021. Bancorp~~Company paid dividends to its shareholders totaling ~~$49.4~~$2.6 million during the ~~first nine~~three months ~~of 2021,~~ ended June 30, 2022, and $10.1 million during the six months ended June 30, 2022, including a cash distribution in the amount of ~~$27.0~~$4.9 million paid on ~~May 21, 2021~~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 ~~Registration Statement.~~ Proxy Statement filed with the SEC and mailed to shareholders on April 6, 2022.

We expect to continue our current practice of paying quarterly cash dividends with respect to our common stock subject to our board of directors’ discretion to modify or terminate this practice at any time and for any reason without prior notice. We believe our quarterly dividend rate per share, as approved by our board of directors, enables us to balance our multiple objectives of managing our business and returning a portion of our earnings to our shareholders. Assuming continued payment during 2022 at a rate of $0.15 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 million based on the number of current outstanding shares if there are no increases or decreases in the number of shares, and given that unvested RSAs share equally in dividends with outstanding common stock.

Impact of Inflation

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Historical Information

The following table summarizes our consolidated cash flow activities:


	Six months ended June 30,
(dollars in thousands)	2022		2021		$ Change
Net cash provided by operating activities	$	11,332	$	21,769	$	(10,437)
Net cash used in investing activities	(431,197)		(122,410)		(308,787)
Net cash provided by financing activities	265,294		346,752		(81,458)

Operating Activities

Net cash provided by operating activities decreased by $10.4 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to increases in loans originated for sale and deferred taxes, partially offset by an increase in proceeds from sale of loans and the provision for loan losses. Various other, less material items made up the remainder of the change. Cash provided by operating activities is subject to variability period-over-period as a result of timing differences, including with respect to the collection of receivables and payments of interest expense, accounts payable, and bonuses.

Investing Activities

Net cash used in investing activities increased by $308.8 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily due to an increase in loan originations, net of repayments, and a decrease in proceeds from the sale of securities available-for-sale, partially offset by a decrease in purchases of securities available-for-sale.

Financing Activities

Net cash provided by financing activities decreased by $81.5 million for the six months ended June 30, 2022 as compared to the six months ended June 30, 2021, primarily from proceeds from issuance of stock during our IPO that occurred during the six months ended June 30, 2021, but did not recur during the six months ended June 30, 2022.

Capital Adequacy

Bancorp ~~held $5.3 million~~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 a bank holding company with less than $3.0 billion in total consolidated assets and that meets certain other criteria, we currently operate under the Small Bank Holding Company Policy Statement and, accordingly, are exempt from the Board of ~~cash~~Governors of the Federal Reserve System’s generally applicable risk-based capital ratio and ~~cash equivalents~~leverage ratio requirements. The Bank is subject to minimum risk-based and leverage capital requirements under federal regulations implementing the Basel III framework, and 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 June 30, 2022, 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.

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The capital adequacy ratios as of ~~September~~June 30, ~~2021. Management anticipates that there will be sufficient earnings~~2022 and December 31, 2021 for Bancorp and the Bank are presented in the following tables. As of June 30, 2022 and December 31, 2021, Bancorp’s Tier 2 capital included subordinated debt, which was not included at the Bank ~~level~~level.


Capital Ratios for Bancorp	Actual Ratio				Required for Capital Adequacy Purposes1				Ratio to be Well- Capitalized under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount	Ratio
June 30, 2022
Total capital (to risk-weighted assets)	$	297,999	11.77	%	$	202,548	≥ 8.00	%	N/A	N/A
Tier 1 capital (to risk-weighted assets)	$	243,668	9.62	%	$	151,976	≥ 6.00	%	N/A	N/A
Common equity tier 1 capital (to risk-weighted assets)	$	243,668	9.62	%	$	113,982	≥ 4.50	%	N/A	N/A
Tier 1 leverage	$	243,668	8.81	%	$	110,632	≥ 4.00	%	N/A	N/A
December 31, 2021
Total capital (to risk-weighted assets)	$	285,128	13.98	%	$	163,177	≥ 8.00	%	N/A	N/A
Tier 1 capital (to risk-weighted assets)	$	233,397	11.44	%	$	122,382	≥ 6.00	%	N/A	N/A
Common equity tier 1 capital (to risk-weighted assets)	$	233,397	11.44	%	$	91,787	≥ 4.50	%	N/A	N/A
Tier 1 leverage	$	233,397	9.47	%	$	98,600	≥ 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
June 30, 2022
Total capital (to risk-weighted assets)	$	292,350	11.55	%	$	202,494	≥ 8.00	%	$	253,117	≥ 10.00	%
Tier 1 capital (to risk-weighted assets)	$	266,439	10.53	%	$	151,817	≥ 6.00	%	$	202,423	≥ 8.00	%
Common equity tier 1 capital (to risk-weighted assets)	$	266,439	10.53	%	$	113,863	≥ 4.50	%	$	164,468	≥ 6.50	%
Tier 1 leverage	$	266,439	9.64	%	$	110,555	≥ 4.00	%	$	138,194	≥ 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	%

1Presented as if Bancorp were subject to ~~provide dividends~~Basel III capital requirements. The Company operates under the Small Bank Holding Company Policy Statement and therefore is not currently subject to ~~Bancorp which enable it to meet its funding requirements for the foreseeable future.~~generally applicable capital adequacy requirements.

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,

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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.

Allowance for loan losses to total loans, excluding SBA-guaranteed PPP loans, average loan balance, excluding PPP loans, and tangible shareholders’ equity to tangible assets are non-GAAP financial measures. Allowance for loan losses to total loans, excluding SBA-guaranteed PPP loans, is defined as allowance for loan losses, divided by total loans less SBA-guaranteed PPP loans. The most directly comparable GAAP financial measure is allowance for loan losses to total loans. Average loan balance, excluding PPP loans, is defined as the daily average loan balance, excluding PPP loans, and includes both performing and nonperforming loans. The most directly comparable GAAP financial measure is average loan balance. 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 asat the end of any ~~of the dates~~period indicated. As a result, tangible shareholders’ equity to tangible assets is the same as total shareholders’ equity to total assets asat the end of each of the ~~dates~~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.

The following reconciliation table provides a more detailed analysis of these non-GAAP financial measures, along with their most directly comparable financial measures calculated in accordance with GAAP.


Allowance for loan losses to total loans held for investment, excluding PPP loans (dollars in thousands)	June 30, 2022			December 31, 2021
Allowance for loan losses (numerator)	$	25,786		$	23,243
Total loans held for investment	2,380,511			1,934,460
Less: PPP loans	—			22,124
Total loans held for investment, excluding PPP loans (denominator)	$	2,380,511		$	1,912,336
Allowance for loan losses to total loans held for investment, excluding PPP loans	1.08		%	1.22		%


	For the three months ended				For the six months ended
Average loans held for investment and sale, excluding PPP loans (dollars in thousands)	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
Average loans held for investment and sale	$	2,227,215	$	1,578,438	$	2,102,382	$	1,552,364
Less: average PPP loans	427		158,568		4,641		167,362
Average loans held for investment and sale, excluding PPP loans	$	2,226,788	$	1,419,870	$	2,097,741	$	1,385,002

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	For the three months ended						For the six months ended
Average loan yield, excluding PPP loans (dollars in thousands)	June 30, 2022			June 30, 2021			June 30, 2022			June 30, 2021
Interest and fee income on loans	$	24,841		$	18,626		$	46,932		$	37,239
Less: interest and fee income on PPP loans	25			1,771			635			4,172
Interest and fee income on loans, excluding PPP loans	24,816			16,855			46,297			33,067
Annualized interest and fee income on loans, excluding PPP loans (numerator)	$	99,537		$	67,605		$	93,361		$	66,682

Average loans held for investment and sale	$	2,227,215		$	1,578,438		$	2,102,382		$	1,552,364
Less: average PPP loans	427			158,568			4,641			167,362
Average loans held for investment and sale, excluding PPP loans (denominator)	$	2,226,788		$	1,419,870		$	2,097,741		$	1,385,002
Average loan yield, excluding PPP loans	4.47		%	4.76		%	4.45		%	4.81		%

(dollars in thousands) September 30,
2021 December 31,
2020
Allowance for loan losses to total loans, excluding SBA PPP loans
Allowance for loan losses (numerator) $ 21,848 $ 22,189
Total loans 1,709,983 1,507,979
Less: SBA PPP loans 61,499 147,965
Total loans, excluding SBA PPP loans (denominator) $ 1,648,484 $ 1,360,014
Allowance for loan losses to total loans, excluding SBA PPP loans 1.33 % 1.63 %

Recent Legislative and Regulatory Developments

For the three months ended For the nine months ended
(dollars in thousands) September 30,
2021 September 30,
2020 September 30,
2021 September 30,
2020
Average loan balance, excluding SBA PPP loans
Average total loans $ 1,625,995 $ 1,539,239 $ 1,577,177 $ 1,408,877
Less: Average SBA PPP loans 89,436 253,366 141,101 153,619
Average loan balance, excluding SBA PPP loans $ 1,536,559 $ 1,285,873 $ 1,436,076 $ 1,255,258

On June 21, 2022, the FDIC issued a proposed rule to increase initial base deposit insurance assessment rates for insured depository institutions by two basis points, beginning with the first quarterly assessment period of 2023. The proposed assessment rate schedules would remain in effect unless and until the reserve ratio of the Deposit Insurance Fund meets or exceeds two percent. If the proposed rule is finalized as proposed, the FDIC insurance costs of insured depository institutions, including the Bank, would generally increase.

(dollars in thousands) September 30,
2021 December 31,
2020
Tangible shareholders’ equity to tangible assets
Tangible shareholders’ equity (numerator) $ 226,638 $ 133,775
Tangible assets (denominator) 2,434,493 1,953,765
Tangible shareholders’ equity to tangible assets 9.31 % 6.85 %

On May 5, 2022, the federal banking agencies issued a proposed rule that would substantially revise how they evaluate an insured depository institution’s record of satisfying the credit needs of its entire community, including low- and moderate-income individuals and neighborhoods, under the Community Reinvestment Act. Management is evaluating the potential impact of the proposed rule on the Bank.

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 ~~September~~June 30, ~~2021~~2022 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 in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the three months ended ~~September~~June 30, ~~2021~~2022 that has materially affected, or is reasonably likely to materially affect, such controls.

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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

~~Certain factors may~~

There have an adverse effect on our business, financial condition, and results of operations. You should carefully consider the following risks, together with all of the other information contained in this Quarterly Report on Form 10-Q, including the sections entitled “Cautionary Note Regarding Forward-Looking Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes included in this Quarterly Report on Form 10-Q. Any of the following risks could have an adverse effect on our business, financial condition, and results of operations and could cause the trading price of our common stock to decline, which would cause you to lose all or part of your investment. Our business, financial condition, and results of operations could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material.

~~Risk Factor Summary~~

~~The most significant risks that may have an adverse effect on our business, financial condition, and results of operations are summarized below.~~

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~~Our business and operations are concentrated in Northern California, and we are sensitive to adverse changes in the local economy.~~

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~~We operate in a highly competitive market and face increasing competition from traditional and new financial services providers.~~

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We are subject to the various risks associated with our banking business and operations, including, among others, credit, market, liquidity, interest rate, and compliance risks, which may have an adverse effect on our business, financial condition, and results of operations if we are unable to manage such risks.

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~~We may be unable to effectively manage our growth, which could have an adverse effect on our business, financial condition, and results of operations.~~

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We operate in a highly regulated industry, and the current regulatory framework and any future legislative and regulatory changes, may have an adverse effect on our business, financial condition, and results of operations.

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We are subject to regulatory requirements, including stringent capital requirements, consumer protection laws, and anti-money laundering laws, and failure to comply with these requirements could have an adverse effect on our business, financial condition, and results of operations.

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We are subject to laws regarding privacy, information security, and protection of personal information, and any violation of these laws or incidents involving personal, confidential, or proprietary information of individuals, including, among others, system failures or cybersecurity breaches of our network security, could damage our reputation and otherwise adversely affect our business, financial condition, and results of operation.

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We recently terminated our status as an S Corporation for federal income tax purposes in connection with our IPO and may be subject to claims from taxing authorities related to our prior S Corporation status.

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Our charter documents contain certain provisions, including anti-takeover and exclusive forum provisions, that limit the ability of our shareholders to take certain actions and could delay or discourage takeover attempts that shareholders may consider favorable.

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~~We are subject to risks associated with the COVID-19 pandemic, which could have an adverse effect on our business, financial condition, and results of operations.~~

~~Risks Related to Our Business~~

Our business and operations are concentrated in California, specifically Northern California, and we are more sensitive than our more geographically diversified competitors to adverse changes in the local economy.

Unlike many of our larger competitors that maintain significant operations located outside our market, substantially all of our customers are individuals and businesses located and doing business in the state of California. As of September 30, 2021, approximately 74.04% of our real estate loans measured by dollar amount were secured by collateral located in California, substantially all of which is in Northern California. Therefore, our success will depend upon the general economic conditions and real estate activity in these areas, which we cannot predict with certainty. As a result, our operations and profitability may be more adversely affected by a local economic downturn than those of large, more geographically diverse competitors. A downturn in the local economy could make it more difficult for our borrowers to repay their loans, may lead to loan losses that are not offset by operations in other markets, and may also reduce the ability of depositors to make or maintain deposits with us. In addition, businesses operating in Northern California, and Sacramento in particular, depend on California state government employees for business, and reduced spending activity by such employees in the event of furloughing or termination of such employees could have an adverse impact on the success or failure of these businesses, some of which are current or could become future customers of the Bank. For these reasons, any regional or local economic downturn could have an adverse effect on our business, financial condition, and results of operations.

~~The small to medium-sized businesses to which we lend may have fewer resources to weather adverse business developments, which may impair a borrower’s ability to repay a loan.~~

We target our business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete, and may experience substantial volatility in operating results, any of which may impair their ability as a borrower to repay a loan. These factors may be especially true given the effects of the COVID-19 pandemic. In addition, the success of small and medium-sized businesses often depends on the management skills, talents, and efforts of one or two people or a small group of people, and the death, disability, or resignation of one or more of these people could have an adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the markets in which we operate or any of our borrowers otherwise are affected by adverse business developments, our small to medium-sized borrowers may be disproportionately affected and their ability to repay outstanding loans may be negatively affected, resulting in an adverse effect on our business, financial condition, and results of operations.

~~Our business is significantly dependent on the real estate markets in which we operate, as a significant percentage of our loan portfolio is secured by real estate.~~

As of September 30, 2021, approximately 86.04% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral, with substantially all of these real estate loans concentrated in Northern California. Real property values in our market may be different from, and in some instances worse than, real property values in other markets or in the United States as a whole and may be affected by a variety of factors outside of our control and the control of our borrowers, including national and local economic conditions, generally. Declines in real estate values, including prices for homes and commercial properties, could result in a deterioration of the credit quality of our borrowers, an increase in the number of loan delinquencies, defaults, and charge-offs, and reduced demand for our products and services, generally. Our commercial real estate loans may have a greater risk of loss than residential mortgage loans, in part because these loans are generally larger or more complex to underwrite. In particular, real estate construction and acquisition and development loans have risks not present in other types of loans, including risks associated with construction cost overruns, project completion risk, general contractor credit risk, and risks associated with the ultimate sale or use of the completed construction. In addition, declines in real property values in California could reduce the value of any collateral we realize following a default on these loans and could adversely affect our ability to continue to grow our loan portfolio consistent with our underwriting standards. We may have to foreclose on real estate assets if borrowers default on their loans, in which case we are required to record the related asset to the then fair market value of the collateral, which may ultimately result in a loss. An increase in the level of nonperforming assets increases our risk profile and may affect the capital levels regulators believe are appropriate in light of the ensuing risk profile. Our failure to effectively mitigate these risks could have an adverse effect on our business, financial condition, and results of operations.

~~We are subject to interest rate risk, which could adversely affect our profitability.~~

Our profitability, like that of most financial institutions of our type, depends to a large extent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in interest rates can increase or decrease our net interest income because different types of assets and liabilities may react differently, and at different times, to market interest rate changes.

Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected, or prolonged change in market interest rates could have an adverse effect on our business, financial condition, and results of operations. As of September 30, 2021, 78.17% of our earning assets and 95.86% of our interest-bearing liabilities were variable rate, where our variable rate liabilities reprice at a slower rate than our variable rate assets.

In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the demand for loans, decreasing the ability of borrowers to repay their current loan obligations, and increasing early withdrawals on term deposits. These circumstances could not only result in increased loan defaults, foreclosures, and charge-offs, but also reduce collateral values and necessitate further increases to the allowance for loan losses, which could have an adverse effect on our business, financial condition, and results of operations. The Federal Reserve has indicated that it will maintain the target range for the federal funds rate at low levels for some time to come, butbeen no material changes to the ~~target range are unpredictable. A decrease in the general level of interest rates, including the Federal Reserve’s sharp reduction in interest rates in response to the economic and financial effects~~risk factors previously disclosed under Item 1A of the ~~COVID-19 pandemic, may affect us through, among other things, increased prepayments~~Company’s Annual report on our loan portfolio, and our cost of funds may not fall as quickly as yields on earning assets. Our asset-liability management strategy may not be effective in mitigating exposure to the risks related to changes in market interest rates.

~~We operate in a highly competitive market and face increasing competition from a variety of traditional and new financial services providers.~~

We have many competitors. Our principal competitors are commercial and community banks, credit unions, savings and loan associations, mortgage banking firms and online mortgage lenders, and consumer finance companies, including large national financial institutions that operate in our market. Many of these competitors are larger than us, have significantly more resources, greater brand recognition, and more extensive and established branch networks or geographic footprints than we do, and may be able to attract customers more effectively than we can. Because of their scale, many of these competitors can be more aggressive than we can on loan and deposit pricing and may better afford and make broader use of media advertising, support services, and electronic technology than we do. Also, many of our non-bank competitors have fewer regulatory constraints and may have lower cost structures. We compete with these other financial institutions both in attracting deposits and making loans. We expect competition to continue to increase as a result of legislative, regulatory, and technological changes, the continuing trend of consolidation in the financial services industry and the emergence of alternative banking sources. Our profitability in large part depends upon our continued ability to compete successfully with traditional and new financial services providers, some of which maintain a physical presence in our market and others of which maintain only a virtual presence. Increased competition could require us to increase the rates we pay on deposits or lower the rates that we offer on loans, which could reduce our profitability.

Additionally, like many of our competitors, we rely on customer deposits as our primary source of funding for our lending activities, and we continue to seek and compete for customer deposits to maintain this funding base. Our future growth will largely depend on our ability to retain and grow our deposit base. As of September 30, 2021, we had $2.2 billion in deposits and a loan to deposit ratio of 78.86%. As of the same date, using deposit account related information such as tax identification numbers, account vesting, and account size, we estimated that $1.1 billion of our deposits exceeded the FDIC deposit insurance limits. Additionally, we have $334.7 million of governmental deposits secured by collateral. Although we have historically maintained a high deposit customer retention rate, these deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of our control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, customer perceptions of our financial health and general reputation, or a loss of confidence by customers in us or the banking sector generally, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits. Additionally, any such loss of funds could result in lower loan originations, which could have an adverse effect on our business, financial condition, and results of operations. Our failure to compete effectively in our market could restrain our growth or cause us to lose market share, which could have an adverse effect on our business, financial condition, and results of operations.

~~Failure to keep up with the rapid technological changes in the financial services industry could have an adverse effect on our competitive position and profitability.~~

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. Our future success will depend, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements than we do. We may not be able to implement new technology-driven products and services effectively or be successful in marketing these products and services to our customers. Failure to keep pace successfully with technological change affecting the financial services industry could harm our ability to compete effectively and could have an adverse effect on our business, financial condition, and results of operations. As these technologies improve in the future, we may be required to make significant capital expenditures in order to remain competitive, which may increase our overall expenses and have an adverse effect on our business, financial condition, and results of operations.

~~We are dependent on the use of data and modeling in both our management’s decision-making generally and in meeting regulatory expectations in particular.~~

The use of statistical and quantitative models and other quantitatively based analyses is endemic to bank decision making and regulatory compliance processes, and the employment of such analyses is becoming increasingly widespread in our operations. Liquidity stress testing, interest rate sensitivity analysis, allowance for loan loss measurement, portfolio stress testing, and the identification of possible violations of anti-money laundering regulations are examples of areas in which we are dependent on models and the data that underlie them. We anticipate that model-derived insights will be used more widely in our decision making in the future. While these quantitative techniques and approaches improve our decision making, they also create the possibility that faulty data or flawed quantitative approaches could yield adverse outcomes or regulatory scrutiny. Secondarily, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision making, which could have an adverse effect on our business, financial condition, and results of operations.

~~We may not be able to measure and limit our credit risk adequately, which could adversely affect our profitability.~~

Our business depends on our ability to successfully measure and manage credit risk. As a lender, we are exposed to the risk that the principal of, or interest on, a loan will not be paid timely or at all or that the value of any collateral supporting a loan will be insufficient to cover our outstanding exposure. In addition, we are exposed to risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting, risks resulting from changes in economic and industry conditions, and risks inherent in dealing with individual loans and borrowers. The creditworthiness of a borrower is affected by many factors, including local market conditions and general economic conditions. Many of our loans are made to small to medium-sized businesses that are less able to withstand competitive, economic, and financial pressures than larger borrowers. If the overall economic climate in the United States, generally, or in our market specifically, experiences material disruption, particularly due to the continuing effects of the COVID-19 pandemic, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs, and delinquencies could rise and require significant additional provisions for loan losses. Additional factors related to the credit quality of multifamily residential, real estate construction, and other commercial real estate loans include the quality of management of the business and tenant vacancy rates.

Our risk management practices, such as monitoring the concentration of our loans within specific markets and our credit approval, review, and administrative practices, may not adequately reduce credit risk, and our credit administration personnel, policies, and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. A failure to effectively measure and limit the credit risk associated with our loan portfolio may result in loan defaults, foreclosures, and additional charge-offs, and may necessitate that we significantly increase our allowance for loan losses, each of which could adversely affect our net income. As a result, our inability to successfully manage credit risk could have an adverse effect on our business, financial condition, and results of operations.

~~We are exposed to higher credit risk by our commercial real estate and commercial land development loans.~~

Commercial real estate, commercial land and construction, commercial construction, and farmland-based lending usually involve higher credit risks than other types of mortgage loans. As of September 30, 2021, the following loan types accountedForm 10-K for the stated percentages of our loan portfolio: commercial real estate (both owner-occupied and non-owner-occupied)—76.92%; and commercial land and construction—3.69%. These types of loans also involve larger loan balances to a single borrower or groups of related borrowers. These higher credit risks are further heightened when the loans are concentrated in a small number of larger borrowers leading to relationship exposure.

Non-owner-occupied commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, in addition to the factors affecting residential real estate borrowers. These loans also involve greater risk because they generally are not fully amortizing over the loan period but have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in a timely manner.

Banking regulators closely supervise banks’ commercial real estate lending activities and may require banks with higher levels of commercial real estate loans to implement improved underwriting, internal controls, risk management policies, and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of commercial real estate lending growth and exposures.

Commercial land development loans and owner-occupied commercial real estate loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the assets securing the loans have the following characteristics: (i) they depreciate over time, (ii) they are difficult to appraise and liquidate, and (iii) they fluctuate in value based on the success of the business.

Commercial real estate loans, commercial and industrial loans, and construction loans are more susceptible to a risk of loss during a downturn in the business cycle. In particular, the COVID-19 pandemic could have adverse effects on our loans for office and hospitality space, which are dependent for repayment on the successful operation and management of the associated commercial real estate. Our underwriting, review, and monitoring cannot eliminate all the risks related to these loans.

We also make both secured and unsecured loans to our commercial clients. Secured commercial loans are generally collateralized by real estate, accounts receivable, inventory, equipment, or other assets owned by the borrower, or may include a personal guaranty of the business owner. Unsecured loans generally involve a higher degree of risk of loss than do secure loans because, without collateral, repayment is wholly dependent upon the success of the borrowers’ businesses. Because of this lack of collateral, we are limited in our ability to collect on defaulted unsecured loans. Furthermore, the collateral that secures our secured commercial and industrial loans typically includes inventory, accounts receivable, and equipment, which, if the business is unsuccessful, usually has a value that is insufficient to satisfy the loan without a loss.

Real estate construction loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.

As of September 30, 2021, real estate construction loans comprised 3.27% of our total loan portfolio and such lending involves additional risks because funds are advanced based on the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all the unpaid balance of, and accrued interest on, the loan, as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

~~The non-guaranteed portion of SBA loans that we retain on our balance sheet as well as the guaranteed portion of SBA loans that we sell could expose us to various credit and default risks.~~

As of September 30, 2021, our total commercial SBA loan portfolio held for investment, excluding PPP loans, was $51.6 million, representing 3.02% of total loans held for investment. As of September 30, 2021, we sold 130 SBA loans with government-guaranteed portions totaling $28.9 million. The non-guaranteed portion of SBA loans have a higher degree of risk of loss as compared to the guaranteed portion of such loans, and these non-guaranteed loan portions make up a substantial majority of our remaining SBA loans.

When we sell the guaranteed portion of SBA loans in the ordinary course of business, we are required to make certain representations and warranties to the purchaser about the SBA loan and the manner in which it was originated. Under these agreements, we may be required to repurchase the guaranteed portion of the SBA loan if we have breached any of these representations or warranties, in which case we may record a loss. In addition, if repurchase and indemnity demands increase on loans that we sell from our portfolios, our liquidity, results of operations, and financial condition could be adversely affected. Further, we generally retain the non-guaranteed portions of the SBA loans that we originate and sell, and to the extent the borrowers of such loans experience financial difficulties, our financial condition and results of operations could be adversely impacted.

~~Curtailment of government-guaranteed loan programs could affect a segment of our business.~~

A significant segment of our business consists of originating and periodically selling U.S. government-guaranteed loans, in particular those guaranteed by the SBA. Pursuant to the Consolidated Appropriations Act, the SBA guaranteed 90% of the principal amount of each qualifying SBA loan originated under the SBA’s 7(a) loan program (excluding PPP loans) through October 1, 2021. The SBA presently guarantees 75% to 85% of the principal amount of qualifying loans originated under the 7(a) loan program (excluding PPP loans). The U.S. government may not maintain the SBA 7(a) loan program, and even if it does, the guaranteed portion may not remain at its current or anticipated level. In addition, from time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee future loans. In addition, these agencies may change their rules for qualifying loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan guarantee programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small business and industrial borrowers of the types that now qualify for government-guaranteed loans could decline. Also, the profitability of the sale of the guaranteed portion of these loans could decline as a result of market displacements due to increases in interest rates, and premiums realized on the sale of the guaranteed portions could decline from current levels. As the funding and sale of the guaranteed portion of SBA 7(a) loans is a major portion of our business and a significant portion of our non-interest income, any significant changes to the SBA 7(a) loan program, such as its funding or eligibility requirements, may have an unfavorable impact on our prospects, future performance, and results of operations. The aggregate principal balance of SBA 7(a) guaranteed portions sold during the quarteryear ended ~~September 30, 2021 was $7.5 million compared to $21.8 million for the same quarter in 2020.~~

~~As a participating lender in the SBA’s PPP, we are subject to added risks, including credit, fraud, and litigation risks.~~

In April 2020, we began processing loan applications under the PPP as an eligible lender with the benefit of a government guarantee of loans to small business clients, many of whom may face difficulties even after being granted such a loan. PPP loans have contributed to our loan growth since March 31, 2020. On March 30, 2021, the PPP Extension Act of 2021 (“PPP Extension Act”), which extended the deadline to apply for a PPP loan through May 31, 2021, was signed into law.

As a participant in the PPP, we face increased risks, particularly in terms of credit, fraud, and litigation. The PPP opened to borrower applications shortly after the enactment of its authorizing legislation, and, as a result, there is some ambiguity in the laws, rules, and guidance regarding the program’s operation. Subsequent rounds of legislation and associated agency guidance have not provided needed clarity in all instances and in certain other instances have potentially created additional inconsistencies and ambiguities. Accordingly, we are exposed to risks relating to compliance with PPP requirements, including the risk of becoming the subject of governmental investigations, enforcement actions, private litigation, and negative publicity.

We have additional credit risk with respect to PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or serviced, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules, and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guarantee, reduce the amount of the guarantee, or, if it has already paid under the guarantee, seek recovery of any loss related to the deficiency from the Bank.

Also, PPP loans are fixed, low interest rate loans that are guaranteed by the SBA and subject to numerous other regulatory requirements, and a borrower may apply to have all or a portion of the loan forgiven. If PPP borrowers fail to qualify for loan forgiveness, we face a heightened risk of holding these loans at unfavorable interest rates for an extended period of time.

Furthermore, since the launch of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP, and we may be exposed to the risk of litigation, from both customers and non-customers that approached us regarding PPP loans, relating to these or other matters. Also, many financial institutions throughout the country have been named in putative class actions regarding the alleged nonpayment of fees that may be due to certain agents who facilitated PPP loan applications. Although many of these actions have been resolved in favor of banks participating in the PPP, the costs and effects of litigation related to PPP participation could have an adverse effect on our business, financial condition, and results of operations.

~~Farmland real estate loans and volatility in commodity prices may adversely affect our financial condition and results of operations.~~

As of September 30, 2021, farmland loans were $55.1 million, or 3.22% of our total loan portfolio. Farmland lending involves a greater degree of risk and typically involves higher principal amounts than many other types of loans. Repayment is dependent upon the successful operation of the business, which is greatly dependent on many things outside the control of either us or the borrowers. These factors include adverse weather conditions that prevent the planting of crops or limit crop yields (such as hail, drought, fires, and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products (both domestically and internationally), and the impact of government regulations (including changes in price supports, subsidies, and environmental regulations). Volatility in commodity prices could adversely impact the ability of borrowers in these industries to perform under the terms of their borrowing arrangements with us, and, as a result, a severe and prolonged decline in commodity prices may have an adverse effect on our business, financial condition, and results of operations. It is also difficult to project future commodity prices, as they are dependent upon many different factors beyond our control. In addition, many farms are dependent on a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. Consequently, farmland real estate loans may involve a greater degree of risk than other types of loans.

~~Liquidity risk could impair our ability to fund operations and meet our obligations as they become due.~~

Liquidity is essential to our business, and we monitor our liquidity and manage our liquidity risk at the holding company and bank levels. We require sufficient liquidity to fund asset growth, meet customer loan requests, facilitate customer deposit maturities and withdrawals, make payments on our debt obligations as they come due, and fulfill other cash commitments under both normal operating conditions and other unpredictable circumstances, including events causing industry or general financial market stress. Liquidity risk can increase due to a number of factors, which include, but are not limited to, an over-reliance on a particular source of funding, changes in the liquidity needs of our depositors, adverse regulatory actions against us, or a downturn in the markets in which our loans are concentrated.

Market conditions or other events could also negatively affect the level or cost of funding, affecting our ongoing ability to accommodate liability maturities and deposit withdrawals, meet contractual obligations, and fund asset growth and new business transactions at a reasonable cost, in a timely manner, and without adverse consequences. Our inability to raise funds through deposits, borrowings, the sale of loans, and other sources could have an adverse effect on our business, financial condition, and results of operations, and could result in the closure of the Bank.

Other primary sources of funds consist of cash flows from operations, maturities and sales of investment securities, and proceeds from issuance and sale of our equity and debt securities. Additional liquidity is provided by the ability to borrow from the FHLB and the FRBSF to fund our operations. We may also borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance our activities or on acceptable terms could be impaired by factors that affect our organization specifically or the financial services industry or economy in general. Our access to funding sources could also be affected by a decrease in the level of our business activity as a result of a downturn in our primary market or by one or more adverse regulatory actions against us.

Any substantial, unexpected, and/or prolonged change in the level or cost of liquidity could impair our ability to fund operations and meet our obligations as they become due and could have an adverse effect on our business, financial condition, and results of operations. Although we have historically been able to replace maturing deposits and advances if desired, we may not be able to replace such funds in the future if our financial condition, the financial condition of the FHLB, or market conditions change. FHLB borrowings and other current sources of liquidity may not be available or, if available, may not be sufficient to provide adequate funding for operations and to support our continued growth. The unavailability of sufficient funding could have an adverse effect on our business, financial condition, and results of operations.

~~We may be adversely affected by the soundness of other financial institutions.~~

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies may be interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties through transactions with counterparties in the financial services industry, including broker-dealers, commercial banks, investment banks, and other financial intermediaries. As a result, defaults by, declines in the financial condition of, or even rumors or questions about one or more financial services companies, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or other institutions. These losses could have an adverse effect on our business, financial condition, and results of operations.

~~Our risk management framework may not be effective in mitigating risks and/or losses to us.~~

Our risk management framework is comprised of various processes, systems, and strategies, and is designed to manage the types of risk to which we are subject, including, among others, credit, market, liquidity, interest rate, and compliance. Our framework also includes financial or other modeling methodologies that involve management assumptions and judgment. Our risk management framework may not be effective under all circumstances. Our risk management framework may not adequately mitigate any risk or loss to us. If our risk management framework is not effective, we could suffer unexpected losses and our business, financial condition, and results of operations could be adversely affected. We may also be subject to potentially adverse regulatory consequences.

We engage in lending secured by real estate and may be forced to foreclose on the collateral and own the underlying real estate, subjecting us to the costs and potential risks associated with the ownership of real property, or consumer protection initiatives or changes in state or federal law may substantially raise the cost of foreclosure or prevent us from foreclosing at all.

Since we originate loans secured by real estate, we may have to foreclose on the collateral property to protect our investment and may thereafter own and operate such property, in which case we would be exposed to the risks inherent in the ownership of real estate. The amount that we, as a mortgagee, may realize after a foreclosure depends on factors outside of our control, including, but not limited to, general or local economic conditions, environmental cleanup liabilities, assessments, interest rates, real estate tax rates, operating expenses of the mortgaged properties, our ability to obtain and maintain adequate occupancy of the properties, zoning laws, governmental and regulatory rules, and natural disasters. Our inability to manage the amount of costs or size of the risks associated with the ownership of real estate, or write-downs in the value of other real estate owned (“OREO”) could have an adverse effect on our business, financial condition, and results of operations.

Additionally, consumer protection initiatives or changes in state or federal law may substantially increase the time and expenses associated with the foreclosure process or prevent us from foreclosing at all. A number of states in recent years have either considered or adopted foreclosure reform laws that make it substantially more difficult and expensive for lenders to foreclose on properties in default. Additionally, federal and state regulators and state attorneys general have prosecuted or pursued enforcement action against a number of mortgage servicing companies for alleged consumer law violations. If new federal or state laws or regulations are ultimately enacted that significantly raise the cost of foreclosure or raise outright barriers to foreclosure, they could have an adverse effect on our business, financial condition, and results of operations.

~~Regulatory requirements affecting our loans secured by commercial real estate could limit our ability to leverage our capital and adversely affect our growth and profitability.~~

The federal banking agencies have issued guidance regarding concentrations in commercial real estate lending for institutions that are deemed to have particularly high concentrations of commercial real estate loans within their lending portfolios. Under this guidance, an institution that has (i) total reported loans for construction, land development, and other land which represent 100% or more of the institution’s total risk-based capital; or (ii) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital, where the outstanding balance of the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months, is identified as having potential commercial real estate concentration risk. An institution that is deemed to have concentrations in commercial real estate lending is expected to employ heightened levels of risk management with respect to its commercial real estate portfolios and may be required to maintain higher levels of capital. We have a concentration in commercial real estate loans, and we have experienced significant growth in our commercial real estate portfolio in recent years. From September 30, 2020 through September 30, 2021, our commercial real estate loan balances have increased by $317.9 million. As of September 30, 2021, commercial real estate loans represent 500.53% of our total risk-based capital. We cannot guarantee that any risk management practices we implement will be effective to prevent losses relating to our commercial real estate portfolio. Management has extensive experience in commercial real estate lending and has implemented and continues to maintain heightened portfolio monitoring and reporting, and strong underwriting criteria with respect to our commercial real estate portfolio. Nevertheless, we could be required to maintain higher levels of capital as a result of our commercial real estate concentration, which could limit our growth, require us to obtain additional capital, and have an adverse effect on our business, financial condition, and results of operations.

~~We could be subject to environmental risks and associated costs on our foreclosed real estate assets.~~

Our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing loans. There is a risk that hazardous or toxic substances could be found on these properties and that we could be liable for remediation costs, as well as personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to sell the affected property. The remediation costs and any other financial liabilities associated with an environmental hazard could have an adverse effect on our business, financial condition, and results of operations.

~~Our recovery on commercial real estate loans could be further reduced by a lack of a liquid secondary market for such mortgage loans and mortgage-backed securities.~~

Our current business strategy includes an emphasis on commercial real estate lending. Although we sold $28.9 million of loans in the nine months ended September 30, 2021, none of which were commercial real estate loans, we may decide to sell more loans in the future. A secondary market for most types of commercial real estate loans is not readily liquid, so we have less opportunity to mitigate credit risk by selling part or all of our interest in these loans. As a result of these characteristics, if we foreclose on a commercial real estate loan, our holding period for the collateral typically is longer than for residential mortgage loans because there are fewer potential purchasers of the collateral. Accordingly, charge-offs on commercial real estate loans may be larger as a percentage of the total principal outstanding than those incurred with our residential or consumer loan portfolios.

~~The appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property and OREO may not accurately reflect the net value of the asset.~~

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and as real estate values may change significantly in value in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately reflect the net value of the collateral after the loan is made. As a result, we may not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other valuation techniques to establish the value of OREO that we acquire through foreclosure proceedings and to determine loan impairments. If any of these valuations are inaccurate, our consolidated financial statements may not reflect the correct value of our OREO, if any, and our allowance for loan losses may not reflect accurate loan impairments. Inaccurate valuation of OREO or inaccurate provisioning for loan losses could have an adverse effect on our business, financial condition, and results of operations.

~~Federal, state, and local consumer lending laws may restrict our or our partners’ ability to originate certain loans or increase our risk of liability with respect to such loans.~~

Federal, state, and local laws have been adopted that are intended to prevent certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans, and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy to determine borrowers’ ability to repay and not to make predatory loans. Nonetheless, the law and related rules create the potential for increased liability with respect to our lending and loan investment activities. Compliance with these laws increases our cost of doing business.

Additionally, consumer protection initiatives or changes in state or federal law, including the CARES Act and its automatic loan forbearance provisions, may substantially increase the time and expenses associated with the foreclosure process or prevent us from foreclosing at all. A number of states in recent years have either considered or adopted foreclosure reform laws that make it substantially more difficult and expensive for lenders to foreclose on properties in default, and we cannot be certain that the state in which we operate will not adopt similar legislation in the future. Additionally, federal regulators have prosecuted or pursued enforcement actions against a number of mortgage servicing companies for alleged consumer law violations. If new state or federal laws or regulations are ultimately enacted that significantly raise the cost of foreclosure or raise outright barriers to foreclosure, such laws or regulations could have an adverse effect on our business, financial condition, and results of operations.

~~Our largest loan relationships make up a material percentage of our total loan portfolio, and credit risks relating to these would have a disproportionate impact.~~

As of September 30, 2021, our 30 largest borrowing relationships ranged from approximately $12.0 million to $47.3 million (including unfunded commitments) and totaled approximately $637.1 million in total commitments (representing, in the aggregate, 37.32% of our total loans held for investment as of September 30, 2021). Each of the loans associated with these relationships has been underwritten in accordance with our underwriting policies and limits. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this concentration of borrowers presents a risk that, if one or more of these relationships were to become delinquent or suffer default, we could be exposed to material losses. The allowance for loan losses may not be adequate to cover losses associated with any of these relationships, and any loss or increase in the allowance would negatively affect our earnings and capital. Even if these loans are adequately collateralized, an increase in classified assets could harm our reputation with our regulators and inhibit our ability to execute our business plan.

Our largest deposit relationships currently make up a material percentage of our deposits and the withdrawal of deposits by our largest depositors could force us to fund our business through more expensive and less stable sources.

At September 30, 2021, our 23 largest deposit relationships, each accounting for more than $10.0 million, accounted for $832.6 million, or 38.40%, of our total deposits. This includes $392.6 million of our total deposits from municipalities, of which we conduct a monthly review. Withdrawals of deposits by any one of our largest depositors or by one of our related customer groups could force us to rely more heavily on borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net interest margin and results of operations. If a significant amount of these deposits were withdrawn within a short period of time, it could have a negative impact on our short-term liquidity and have an adverse impact on our earnings. We may also be forced, as a result of withdrawals of deposits, to rely more heavily on other, potentially more expensive and less stable, funding sources. Additionally, such circumstances could require us to raise deposit rates in an attempt to attract new deposits, which would adversely affect our results of operations, and/or to raise funding through brokered deposits. Under applicable regulations, if the Bank were no longer “well-capitalized,” the Bank would not be able to accept brokered deposits without the approval of the FDIC.

~~Our allowance for loan losses may be inadequate to absorb losses inherent in the loan portfolio.~~

Experience in the banking industry indicates that a portion of our loans will become delinquent, and that some may only be partially repaid or may never be repaid at all. We may experience losses for reasons beyond our control, such as the impact of general economic conditions on customers and their businesses. Accordingly, we maintain an allowance for loan losses that represents management’s judgment of probable losses and risks inherent in our loan portfolio. In determining the size of our allowance for loan losses, we rely on an analysis of our loan portfolio that considers historical loss experience, volume and types of loans, trends in classification, volume and trends in delinquencies and non-accruals, economic conditions, and other pertinent information. The determination of the appropriate level of the allowance for loan losses is inherently highly subjective and requires us to make significant estimates of and assumptions regarding current credit risk and future trends, all of which may change materially. Although we endeavor to maintain our allowance for loan losses at a level adequate to absorb any inherent losses in the loan portfolio, these estimates of loan losses are necessarily subjective, and their accuracy depends on the outcome of future events. At September 30, 2021, the allowance for loan losses was $21.8 million.

Deterioration of economic conditions affecting borrowers, new information regarding existing loans, inaccurate management assumptions, identification of additional problem loans, temporary modifications, loan forgiveness, automatic forbearance, and other factors, both within and outside of our control, may result in our experiencing higher levels of nonperforming assets and charge-offs, and incurring loan losses in excess of our current allowance for loan losses, requiring us to make material additions to our allowance for loan losses, which could have an adverse effect on our business, financial condition, and results of operations.

Additionally, federal and state banking regulators, as an integral part of their supervisory function, periodically review the allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. If we need to make significant and unanticipated increases in the loss allowance in the future, or to take additional charge-offs for which we have not established adequate reserves, our business, financial condition, and results of operations could be adversely affected at that time.

Finally, the FASB has issued a new accounting standard for establishing allowances for loan and lease losses that will replace the current approach under GAAP, which generally considers only past events and current conditions, with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first originated or acquired. As an emerging growth company relying on the extended transition period for new accounting standards, this standard, referred to as Current Expected Credit Loss (“CECL”), will be effective for us on January 1, 2023. The CECL standard will require us to record, at the time of origination, credit losses expected throughout the life of the asset portfolio on loans and held-to-maturity securities, as opposed to the current practice of recording losses when it is probable that a loss event has occurred. We are currently evaluating the impact the CECL standard will have on our accounting and regulatory capital position. The adoption of the CECL standard will materially affect how we determine allowance for loan losses and could require us to significantly increase the allowance. Moreover, the CECL standard may create more volatility in the level of allowance for loan losses. If we are required to materially increase the level of our allowance for loan losses for any reason, such increase could have an adverse effect on our business, financial condition, and results of operations.

~~We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.~~

As of September 30, 2021, the book value of our investment securities portfolio was approximately $158.8 million. As of the same date, 13.64% of our investments were U.S. government agency securities. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and instability in the capital markets. Any of these factors, among others, could cause OTTIs, realized and/or unrealized losses in future periods, and declines in other comprehensive income, which could have an adverse effect on our business, financial condition, and results of operations. The process for determining whether impairment of a security is OTTI usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer, any collateral underlying the security, and our intent and ability to hold the security for a sufficient period of time to allow for any anticipated recovery in fair value, in order to assess the probability of receiving all contractual principal and interest payments on the security. Our failure to correctly and timely assess any impairments or losses with respect to our securities could have an adverse effect on our business, financial condition, and results of operations.

~~We depend on the accuracy and completeness of information provided by customers and counterparties.~~

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished by or on behalf of customers and counterparties, including financial information. We may also rely on representations of customers and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon customers’ representations that their financial statements conform to GAAP and present fairly the financial condition, results of operations, and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our customers. Our business, financial condition, and results of operations could be adversely affected if we rely on misleading, false, inaccurate, or fraudulent information.

~~Risks Related to Our Industry and Regulation~~

~~Our industry is highly regulated, and the regulatory framework, together with any future legislative or regulatory changes, may have a materially adverse effect on our operations.~~

The banking industry is highly regulated and supervised under both federal and state laws and regulations that are intended primarily for the protection of depositors, customers, the public, the banking system as a whole, or the FDIC Deposit Insurance Fund (“DIF”), not for the protection of our shareholders and creditors. We are subject to regulation and supervision by the Federal Reserve, and our Bank is subject to regulation and supervision by the FDIC and the DFPI. Compliance with these laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance costs. The Dodd-Frank Act, which imposed significant regulatory and compliance changes on financial institutions, is an example of this type of federal law. The laws and regulations applicable to us govern a variety of matters, including permissible types, amounts and terms of loans and investments we may make, the maximum interest rate that may be charged, the amount of reserves we must hold against deposits we take, the types of deposits we may accept and the rates we may pay on such deposits, maintenance of adequate capital and liquidity, changes in control of us and our Bank, transactions between us and our Bank, handling of nonpublic information, restrictions on dividends, and establishment of new offices. We must obtain approval from our regulators before engaging in certain activities, and there is risk that such approvals may not be granted, either in a timely manner or at all. These requirements may constrain our operations, and the adoption of new laws and changes to or repeal of existing laws may have an adverse effect on our business, financial condition, and results of operations. Also, the burden imposed by those federal and state regulations may place banks in general, including our Bank in particular, at a competitive disadvantage compared to their non-bank competitors. Compliance with current and potential regulation, as well as supervisory scrutiny by our regulators, may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital, and limit our ability to pursue business opportunities in an efficient manner by requiring us to expend significant time, effort, and resources to ensure compliance and respond to any regulatory inquiries or investigations. Our failure to comply with any applicable laws or regulations, or regulatory policies and interpretations of such laws and regulations, could result in sanctions by regulatory agencies, civil money penalties, and/or damage to our reputation, all of which could have an adverse effect on our business, financial condition, and results of operations.

Applicable laws, regulations, interpretations, enforcement policies, and accounting principles have been subject to significant changes in recent years and may be subject to significant future changes. Additionally, federal and state regulatory agencies may change the manner in which existing regulations are applied. We cannot predict the substance or effect of pending or future legislation or regulation or changes to the application of laws and regulations to us. Future changes may have an adverse effect on our business, financial condition, and results of operations.

In addition, given the current economic and financial environment, regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, risk management, or other operational practices for financial service companies in a manner that impacts our ability to implement our strategy and could affect us in substantial and unpredictable ways, and could have an adverse effect on our business, financial condition, and results of operations. Furthermore, the regulatory agencies have broad discretion in their interpretation of laws and regulations and their assessment of the quality of our loan portfolio, securities portfolio, and other assets. Based on our regulators’ assessment of the quality of our assets, operations, lending practices, investment practices, capital structure, or other aspects of our business, we may be required to take additional charges or undertake, or refrain from taking, actions that could have an adverse effect on our business, financial condition, and results of operations.

~~Monetary policies and regulations of the Federal Reserve could have an adverse effect on our business, financial condition, and results of operations.~~

Our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate, and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments, and deposits. Their use also affects interest rates charged on loans or paid on deposits.

The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition, and results of operations cannot be predicted.

~~Federal and state regulators periodically examine our business and may require us to remediate adverse examination findings or may take enforcement action against us.~~

The Federal Reserve, the FDIC, and the DFPI periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, the Federal Reserve, the FDIC, or the DFPI were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, they may take a number of different remedial actions as they deem appropriate. These actions may include requiring us to remediate any such adverse examination findings.

In addition, these agencies have the power to take enforcement action against us to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation of law or regulation or unsafe or unsound practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to direct the sale of subsidiaries or other assets, to limit dividends and distributions, to restrict our growth, to assess civil money penalties against us or our officers or directors, to remove officers and directors, and, if it is concluded that such conditions cannot be corrected or there is imminent risk of loss to depositors, to terminate our deposit insurance and place our Bank into receivership or conservatorship. Any regulatory enforcement action against us could have an adverse effect on our business, financial condition, and results of operations.

~~We are subject to stringent capital requirements, which could have an adverse effect on our operations.~~

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and define different forms of capital for calculating these ratios. The capital rules generally require bank holding companies and banks to maintain a common equity Tier 1 capital to risk-weighted assets ratio of at least 7.00% (a minimum of 4.50% plus a capital conservation buffer of 2.50%), a Tier 1 capital to risk-weighted assets ratio of at least 8.50% (a minimum of 6.00% plus a capital conservation buffer of 2.50%), a total capital to risk-weighted assets ratio of at least 10.50% (a minimum of 8.00% plus a capital conservation buffer of 2.50%), and a leverage ratio of Tier 1 capital to total consolidated assets of at least 4.00%. An institution’s failure to exceed the capital conservation buffer with common equity Tier 1 capital would result in limitations on an institution’s ability to make capital distributions and discretionary bonus payments. In addition, for an insured depository institution to be “well-capitalized” under the banking agencies’ prompt corrective action framework, it must have a common equity Tier 1 capital ratio of at least 6.50%, Tier 1 capital ratio of at least 8.00%, a total capital ratio of at least 10.00%, and a leverage ratio of at least 5.00%, and must not be subject to any written agreement, order or capital directive, or prompt corrective action directive issued by its primary federal or state banking regulator to meet and maintain a specific capital level for any capital measure.

We operate under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts from the Federal Reserve’s risk-based capital and leverage rules bank holding companies with total consolidated assets of less than $3.0 billion that are not engaged in significant nonbanking activities, do not conduct significant off-balance sheet activities, and do not have a material amount of debt or equity securities registered with the SEC. Historically, the Federal Reserve has not usually deemed a bank holding company ineligible for application of this policy statement solely because its common stock is registered under the Exchange Act. However, there can be no assurance that the Federal Reserve will continue this practice, and changes to this practice may result in the loss of our status as a small bank holding company for these purposes.

Any new or revised standards adopted in the future may require us to maintain materially more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities to comply with formulaic capital requirements. We may not be able to raise additional capital at all, or on terms acceptable to us. Failure to maintain capital to meet current or future regulatory requirements could have an adverse effect on our business, financial condition, and results of operations.

We are subject to numerous “fair and responsible banking” laws and other laws and regulations designed to protect consumers, and failure to comply with these laws could lead to a wide variety of sanctions.

The Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations, including state laws and regulations, prohibit discriminatory lending practices by financial institutions. The Federal Trade Commission Act prohibits unfair or deceptive acts or practices, and the Dodd-Frank Act prohibits unfair, deceptive, or abusive acts or practices by financial institutions. The U.S. Department of Justice, federal and state banking agencies, and other federal and state agencies, including the Consumer Financial Protection Bureau (“CFPB”), are responsible for enforcing these fair and responsible banking laws and regulations. Smaller banks, including the Bank, are subject to rules promulgated by the CFPB but continue to be examined and supervised by federal banking agencies for compliance with federal consumer protection laws and regulations. Accordingly, CFPB rulemaking has the potential to have a significant impact on the operations of the Bank.

A challenge to an institution’s compliance with fair and responsible banking laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private litigation, including through class action litigation. Such actions could have an adverse effect on our business, financial condition, and results of operations.

We are subject to laws regarding the privacy, information security, and protection of personal information, and any violation of these laws or other incident involving personal, confidential, or proprietary information of individuals could damage our reputation and otherwise adversely affect our business.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information (“PII”), in various information systems that we maintain and in those maintained by third-party service providers. We also maintain important internal company data such as PII about our employees and information relating to our operations. We are subject to complex and evolving laws and regulations governing the privacy and protection of PII of individuals (including customers, employees, and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act, which, among other things: (i) imposes certain limitations on our ability to share nonpublic PII about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing, and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement, and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various federal and state banking regulators and states have also enacted data breach notification requirements with varying levels of individual, consumer, regulatory, or law enforcement notification in the event of a security breach. The California Consumer Privacy Act grants California residents the rights to know about personal information collected about them, to delete certain of this personal information, to opt-out of the sale of personal information, and to non-discrimination for exercising these rights.

Ensuring that our collection, use, transfer, and storage of PII complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that customers and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential, or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under privacy and data protection laws and regulations. Concerns regarding the effectiveness of our measures to safeguard PII, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations, and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines, or penalties, and could damage our reputation and otherwise adversely affect our business, financial condition, and results of operations.

~~We are a bank holding company and are dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted.~~

We are a bank holding company with no material activities other than activities incidental to holding the common stock of the Bank. Our principal source of funds to pay distributions on our common stock and service any of our obligations, other than further issuances of securities, is dividends received from the Bank. Furthermore, the Bank is not obligated to pay dividends to us, and any dividends paid to us would depend on the earnings or financial condition of the Bank, various business considerations, and applicable law and regulation. As is generally the case for banking institutions, the profitability of the Bank is subject to the fluctuating cost and availability of money, changes in interest rates, and economic conditions in general. In addition, various federal and state statutes and regulations limit the amount of dividends that the Bank may pay to the Company without regulatory approval.

~~The Federal Reserve may require us to commit capital resources to support the Bank.~~

The Federal Reserve requires a bank holding company to act as a source of financial and managerial strength to its subsidiary banks and to commit resources to support its subsidiary banks. Under the “source of strength” doctrine that was codified by the Dodd-Frank Act, the Federal Reserve may require a bank holding company to make capital injections into a subsidiary bank, including at times when the bank holding company may not be inclined to do so, and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. Accordingly, we could be required to provide financial assistance to the Bank if it experiences financial distress.

A capital injection may be required at a time when our resources are limited, and we may be required to borrow the funds or raise capital to make the required capital injection. Any loan by a bank holding company to its subsidiary bank is subordinate in right of payment to deposits and certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of any note obligations. Thus, any borrowing by a bank holding company for the purpose of making a capital injection to a subsidiary bank may become more difficult and expensive relative to other corporate borrowings.

~~We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.~~

The Bank Secrecy Act of 1970, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. Our federal and state banking regulators, the Financial Crimes Enforcement Network, and other government agencies are authorized to impose significant civil money penalties for violations of anti-money laundering requirements. We are also subject to increased scrutiny of compliance with the regulations issued and enforced by the U.S. Department of the Treasury’s Office of Foreign Assets Control, which is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. If our program is deemed deficient, we could be subject to liability, including fines, civil money penalties, and other regulatory actions, which may include restrictions on our business operations and our ability to pay dividends, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have significant reputational consequences for us. Any of these circumstances could have an adverse effect on our business, financial condition, and results of operations.

~~Our Bank’s FDIC deposit insurance premiums and assessments may increase.~~

Our Bank’s deposits are insured by the FDIC up to legal limits and, accordingly, our Bank is subject to insurance assessments based on our Bank’s average consolidated total assets less its average tangible equity. Our Bank’s regular assessments are determined by its CAMELS composite rating (a supervisory rating system developed to classify a bank’s overall condition by taking into account capital adequacy, assets, management capability, earnings, liquidity, and sensitivity to market and interest rate risk), taking into account other factors and adjustments. In order to maintain a strong funding position and the reserve ratios of the DIF required by statute and FDIC estimates of projected requirements, the FDIC has the power to increase deposit insurance assessment rates and impose special assessments on all FDIC-insured financial institutions. Any future increases or special assessments could reduce our profitability and could have an adverse effect on our business, financial condition, and results of operations.

~~The planned discontinuation of LIBOR as a benchmark interest rate and a transition to an alternative reference interest rate could present operational problems and result in market disruption.~~

The administrator of the LIBOR will publish most tenors of LIBOR for U.S. dollars (“USD”) through June 30, 2023 and permanently cease publication of the 1-week and 2-month USD LIBOR settings following December 31, 2021. The Federal Reserve and other federal banking agencies have encouraged banks to transition away from LIBOR as soon as practicable but no later than December 31, 2021, and have emphasized the expectation that supervised institutions with LIBOR exposure continue to progress toward an orderly transition away from LIBOR. Although we expect that the capital and debt markets will cease to use LIBOR as a benchmark in the near future, we cannot predict what impact such a transition may have on our business, financial condition, and results of operations.

The Federal Reserve, based on the recommendations of the Federal Reserve Bank of New York’s Alternative Reference Rate Committee, has begun publishing the Secured Overnight Financing Rate (“SOFR”) which is intended to replace LIBOR. Additionally, on April 6, 2021, New York Governor Cuomo signed into law legislation that provides for the substitution of SOFR in any LIBOR-based contract governed by New York state law that does not include clear fallback language, once LIBOR is discontinued. Although SOFR appears to be the preferred replacement rate for LIBOR, it is unclear if other benchmarks may emerge or if other rates will be adopted outside of the United States. The replacement of LIBOR also may result in economic mismatches between different categories of instruments that now consistently rely on the LIBOR benchmark. Markets are slowly developing in response to these new rates, and questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value transfer at the time of transition remain a significant concern. We cannot predict whether the SOFR or another alternative rate will become the market benchmark in place of LIBOR.

Certain of our financial products are tied to LIBOR. We are currently monitoring the actions of LIBOR’s regulator and the implementation of alternative reference rates in advance of the expected discontinuation of LIBOR to determine any potential impact on our financial products and our subordinated notes. Inconsistent approaches to a transition from LIBOR to an alternative rate among different market participants and for different financial products may cause market disruption and operational problems, which could adversely affect us, including by exposing us to increased basis risk and resulting costs in connection, and by creating the possibility of disagreements with counterparties.

~~Risks Related to Ownership of Our Common Stock~~

Our stock price may be volatile, and we may not be able to meet investor or analyst expectations. You may not be able to resell your shares at or above the price you paid and may lose part or all of your investment as a result.

Stock price volatility may negatively impact the price at which our common stock may be sold and may also negatively impact the timing of any sale. We cannot assure you that the market price of our shares on the Nasdaq Stock Market LLC (“Nasdaq”) will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time before our IPO. Our stock price may fluctuate widely in response to a variety of factors including the risk factors described herein and, among other things:

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~~actual or anticipated variations in quarterly or annual operating results, financial conditions, or credit quality;~~

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~~changes in business or economic conditions;~~

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~~changes in accounting standards, policies, guidance, interpretations, or principles;~~

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~~changes in recommendations or research reports about us or the financial services industry in general published by securities analysts;~~

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~~the failure of securities analysts to cover, or to continue to cover, us;~~

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~~changes in financial estimates or publication of research reports and recommendations by financial analysts or actions taken by rating agencies with respect to us or other financial institutions;~~

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~~news reports relating to trends, concerns, and other issues in the financial services industry;~~

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~~reports related to the impact of natural or manmade disasters in our market;~~

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~~perceptions in the marketplace regarding us and or our competitors;~~

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~~sudden increases in the demand for our common stock, including as a result of any “short squeezes”;~~

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~~significant acquisitions or business combinations, strategic partnerships, joint ventures, or capital commitments by or involving us or our competitors;~~

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~~additional investments from third parties;~~

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~~additions or departures of key personnel;~~

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~~future sales or issuance of additional shares of common stock;~~

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~~fluctuations in the stock price and operating results of our competitors;~~

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~~changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting our business, or enforcement of these laws or regulations;~~

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~~new technology used, or services offered, by competitors;~~

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~~additional investments from third parties; or~~

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~~geopolitical conditions such as acts or threats of terrorism, pandemics, or military conflicts.~~

In particular, the realization of any of the risks described in this section could have an adverse effect on the market price of our common stock and cause the value of your investment to decline. In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock over the short, medium, or long term, regardless of our actual performance.

We are an “emerging growth company,” as defined in the JOBS Act, and a “smaller reporting company,” as defined in Rule 12b-2 in the Exchange Act, and are able to avail ourselves of reduced disclosure requirements applicable to emerging growth companies and smaller reporting companies, which could make our common stock less attractive to investors and adversely affect the market price of our common stock.

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of certain exemptions from various requirements generally applicable to public companies. These exemptions allow us, among other things, to present only two years of audited financial statements and discuss our results of operations for only two years in related Management’s Discussions and Analyses; not to provide an auditor attestation of our internal control over financial reporting; to take advantage of an extended transition period to complypreviously filed with the new or revised accounting standards applicable to public companies; to provide reduced disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and certain other disclosure regarding our executive compensation; and not to seek a non-binding advisory vote on executive compensation or golden parachute arrangements.

We may take advantage of these exemptions until we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest of: (i) the first fiscal year following the fifth anniversary of our IPO; (ii) the first fiscal year after our annual gross revenues are $1.07 billion or more; (iii) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt securities; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Even after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” as defined in Rule 12b-2 in the Exchange Act, which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to provide an auditor attestation of our internal control over financial reporting and reduced disclosure regarding our executive compensation arrangements in our periodic reports and proxy statements.

We cannot predict whether investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile or decline.

~~Our significant shareholders have the ability to control significant corporate activities and our significant shareholders’ interests may not coincide with yours.~~

Upon the closing of our IPO, our directors, executive officers, and principal shareholders beneficially owned an aggregate of 5,881,682 shares, or approximately 34.47% of our issued and outstanding shares of common stock. Consequently, our directors, executive officers, and principal shareholders are able to significantly affect our affairs and policies, including the outcome of the election of directors and the potential outcome of other matters submitted to a vote of our shareholders, such as mergers, the sale of substantially all of our assets, and other extraordinary corporate matters. This influence may also have the effect of delaying or preventing changes of control or changes in management or limiting the ability of our other shareholders to approve transactions that they may deem to be in the best interests of our Company. The interests of these insiders could conflict with the interests of our other shareholders, including you.

Our management has broad discretion in allocating the net proceeds of our IPO. Our failure to effectively utilize such net proceeds may have an adverse effect on our financial performance and the value of our common stock.

Following the distributions to certain of our shareholders in May 2021, we may use the net proceeds of our IPO to increase the capital of the Bank in order to support our organic growth strategies, including expanding our overall market share, to strengthen our regulatory capital and for working capital and other general corporate purposes. However, we are not required to apply any portion of the net proceeds of our IPO for any particular purpose, and our management could use them for purposes other than those contemplated at the time of the IPO. Accordingly, our management will have broad discretion in the application of the net proceeds from the IPO, and you will be relying on the judgment of our management regarding the application of these proceeds. You will not have the opportunity to assess whether we are using the proceeds appropriately. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. If we do not invest or apply the net proceeds from our IPO in ways that enhance shareholder value, we may fail to achieve expected financial results, which could cause our stock price to decline.

~~If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.~~

The trading market for our common stock depends in part on the research and reports that securities or industry analysts publish about us or our business. We may be unable to attract or sustain research coverage by securities and industry analysts. If no securities or industry analysts cover our company, the trading price for our stock would likely be negatively impacted. If we obtain securities or industry analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If we fail to meet the expectations of analysts for our operating results, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

~~We may not pay dividends on our common stock in the future, and our ability to pay dividends is subject to certain restrictions.~~

Holders of our common stock are entitled to receive only such dividends as our board of directors may declare out of funds legally available for such payments. Our board of directors may, in its sole discretion, change the amount or frequency of dividends or discontinue the payment of dividends entirely. In addition, we are a bank holding company, and our ability to declare and pay dividends is dependent on federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. It is the policy of the Federal Reserve that bank holding companies should generally pay dividends on common stock only out of earnings, and only if prospective earnings retention is consistent with the organization’s expected future needs, asset quality, and financial condition, and that bank holding companies should inform and consult with the Federal Reserve in advance of declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid.

The holders of our debt obligations and preferred stock, if any, have priority over our common stock with respect to payment in the event of liquidation, dissolution, or winding up and with respect to the payment of interest and dividends.

In any liquidation, dissolution, or winding up of the Company, our common stock would rank below all claims of debt holders against us as well as any preferred stock that has been issued. As of September 30, 2021, we had outstanding an aggregate of $28.4 million of subordinated notes, net of debt issuance costs, and we did not have any outstanding preferred stock or trust preferred securities. We could incur such debt obligations or issue preferred stock in the future to raise additional capital. In such event, holders of our common stock will not be entitled to receive any payment or other distribution of assets upon the liquidation, dissolution, or winding up of the Company until after all of our obligations to the debt holders are satisfied and holders of subordinated debt and senior equity securities, including preferred shares, if any, have received any payment or distribution due to them. In addition, we will be required to pay interest on the subordinated notes and dividends on the trust preferred securities and preferred stock before we will be able to pay any dividends on our common stock.

California law and the provisions of our amended and restated articles of incorporation and amended and restated bylaws may have an anti-takeover effect, and there are substantial regulatory limitations on changes of control of bank holding companies.

California corporate law and provisions of our amended and restated articles of incorporation (“amended articles of incorporation”) and our amended and restated bylaws (“amended bylaws”) could make it more difficult for a third party to acquire us, even if doing so would be perceived to be beneficial by our shareholders. Furthermore, with certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring 10% or more (5% or more if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our Company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors must comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. Collectively, provisions of our amended articles of incorporation and amended bylaws and other statutory and regulatory provisions may delay, prevent, or deter a merger, acquisition, tender offer, proxy contest, or other transaction that might otherwise result in our shareholders receiving a premium over the market price for their common stock. Moreover, the combination of these provisions effectively inhibits certain business combinations, which, in turn, could adversely affect the market price of our common stock.

Our amended bylaws have an exclusive forum provision, which could limit a shareholder’s ability to obtain a favorable judicial forum for disputes with us or our directors, officers, or other employees.

Our amended bylaws have an exclusive forum provision providing that, unless we consent in writing to the selection of an alternative forum, the United States District Court for the Northern District of California (or, in the event that the United States District Court for the Northern District of California does not have jurisdiction, any federal or state court of California) shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of any duty owed by any director, officer, or other employee to us or to our shareholders, (iii) any action asserting a claim against us or any of our directors or officers or other employees arising pursuant to any provision of the General Corporation Law of California or the amended articles of incorporation or the amended bylaws or (iv) any action asserting a claim against us or any of our directors, officers, or other employees that is governed by the internal affairs doctrine. Our amended bylaws will further provide that, unless we consent in writing to the selection of an alternative forum, the federal district courts of the United States of America will, to the fullest extent permitted by applicable law, be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the federal securities laws, including the applicable rules and regulations promulgated thereunder. Any person purchasing or otherwise acquiring any interest in any shares of our capital stock will be deemed to have notice of and to have consented to this provision of our amended bylaws. The exclusive forum provision may limit a shareholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or other employees, which may discourage such lawsuits. Alternatively, if a court were to find the exclusive forum provision to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could have an adverse effect on our business, financial condition, results of operations, and growth prospects.

~~Prior to our IPO, we were treated as an S Corporation, and claims of taxing authorities related to our prior status as an S Corporation could adversely affect us.~~

Immediately prior to the consummation of our IPO, our status as an S Corporation terminated and we commenced treatment as a C Corporation under the provisions of Sections 301 through 385 of the Internal Revenue Code, which treat the corporation as an entity that is subject to U.S. federal income tax. If the unaudited, open tax years in which we were an S Corporation are audited by the IRS, and we are determined not to have qualified for, or to have violated any requirement for maintaining, our S Corporation status, we will be obligated to pay back taxes, interest, and penalties. The amounts that we would be obligated to pay could include taxes on all our taxable income while we were an S Corporation. Any such claims could result in additional costs to us and could have an adverse effect on our business, financial condition, and results of operations.

We have entered into a Tax Sharing Agreement with most of our shareholders who owned our common stock prior to our IPO and could become obligated to make payments to such shareholders for any additional federal, state, or local income taxes assessed against them for tax periods prior to the completion of our IPO.

We historically were treated as an S Corporation for U.S. federal income tax purposes, and our shareholders prior to our IPO were taxed on our net income. Therefore, such shareholders received distributions, referred to as tax distributions, from us that were generally intended to equal the amount of tax the existing shareholders were required to pay with respect to our income. In connection with our IPO, our S Corporation status terminated, and we are now subject to federal and increased California state income taxes. In the event of an adjustment to our reported taxable income for periods prior to termination of our S Corporation status, it is possible that our shareholders who owned our common stock prior to our IPO would be liable for additional income taxes for those prior periods. Pursuant to the Tax Sharing Agreement, 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 our shareholders who owned our common stock prior to our IPO, who accepted distribution of the estimated balance of our federal accumulated adjustments account under the Tax Sharing Agreement, in an amount equal to such shareholders’ incremental tax liability (including interest and penalties), which amount may be material. 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. In both cases the amount of the payment will be based on the assumption that our shareholders are taxed at the highest federal and state income tax rates applicable to married individuals filing jointly and residing in California for the relevant periods. Our shareholders who owned our common stock prior to our IPO and accepted distribution of the estimated balance of our federal accumulated adjustments account under the Tax Sharing Agreement will, severally and not jointly, indemnify us with respect to our unpaid income tax liabilities (including interest and penalties) to the extent that such unpaid income tax liabilities are attributable to a decrease in any such shareholder’s taxable income for any tax period and a corresponding increase in our taxable income for any period (but only to the extent of the amount by which the shareholder’s tax liability is reduced).

~~An investment in our common stock is not an insured deposit.~~

An investment in our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described herein and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire our common stock, you could lose some or all of your investment.

~~The requirements of being a public company may strain our resources and divert management’s attention.~~

As a public company, we incur significant legal, accounting, insurance, and other expenses. We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, and applicable securities rules and regulations. These laws and regulations increase the scope, complexity, and cost of corporate governance, reporting, and disclosure practices over those of non-public or non-reporting companies. Despite our conducting business in a highly regulated environment, these laws and regulations have different requirements for compliance than we experienced prior to becoming a public company. Among other things, the Exchange Act requires that we file annual, quarterly, and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. As a Nasdaq-listed company, we are required to prepare and file proxy materials which meet the requirements of the Exchange Act and the SEC’s proxy rules. Compliance with these rules and regulations has, and will continue to, increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company” as defined in the JOBS Act. In order to maintain, appropriately document and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet the standards required by the Sarbanes-Oxley Act, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Additionally, any failure by us to file our periodic reports with the SEC in a timely manner could harm our reputation and cause our investors and potential investors to lose confidence in us, and restrict trading in, and reduce the market price of, our common stock, and potentially impact our ability to access the capital markets.

If we fail to design, implement, and maintain effective internal control over financial reporting or remediate any future material weakness in our internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Effective internal control over financial reporting is necessary for us to provide reliable reports and prevent fraud. We may not be able to identify all significant deficiencies and/or material weaknesses in our internal control over financial reporting in the future, and our failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have an adverse effect on our business, financial condition, and results of operations.

In the normal course of our operations, we may identify deficiencies that would have to be remediated to satisfy the SEC rules for certification of our internal control over financial reporting. A material weakness is defined by the standards issued by the Public Company Accounting Oversight Board as a deficiency, or combination of deficiencies, in internal control over financial reporting that results in a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. As a consequence, we would have to disclose in periodic reports we file with the SEC any material weakness in our internal control over financial reporting. The existence of a material weakness would preclude management from concluding that our internal control over financial reporting is effective and, when we cease to be an emerging growth company under the JOBS Act, preclude our independent registered public accounting firm from rendering their report addressing an assessment of the effectiveness of our internal control over financial reporting. In addition, disclosures of deficiencies of this type in our SEC reports could cause investors to lose confidence in our financial reporting, may negatively affect the market price of our common stock, and could result in the delisting of our securities from the securities exchanges on which they trade. Moreover, effective internal controls are necessary to produce reliable financial reports and to prevent fraud. If we have deficiencies in our disclosure controls and procedures or internal control over financial reporting, such deficiencies may adversely affect us.

~~General Risk Factors~~

~~The COVID-19 pandemic and the impact of actions to mitigate the spread of the virus could adversely affect our business, financial condition, and results of operations.~~

Federal, state, and local governments enacted various restrictions in an attempt to limit the spread of COVID-19. Such measures disrupted economic activity and contributed to job losses and reductions in consumer and business spending. In response to the economic and financial effects of COVID-19, the Federal Reserve sharply reduced interest rates (which we expect will likely remain low in the near term) and instituted quantitative easing measures as well as domestic and global capital market support programs. In addition, the current and prior presidential administrations, Congress, various federal agencies, and state governments took measures to address the economic and social consequences of the pandemic, including the passage of the CARES Act, which was enacted on March 27, 2020, the Consolidated Appropriations Act, which was enacted on December 27, 2020, and the American Rescue Plan Act of 2021 (“American Rescue Plan Act”), which was enacted on March 11, 2021. The CARES Act provided wide-ranging economic relief for individuals and businesses impacted by COVID-19, and the Consolidated Appropriations Act and American Rescue Plan Act extended some of these relief provisions in certain respects as well as provided other forms of relief.

The CARES Act established and provided $349 billion in funding for the PPP, a loan program administered by the SBA. Under the PPP, small businesses, sole proprietorships, independent contractors, and self-employed individuals were able to apply for forgivable loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. Congress appropriated additional funding to the PPP on April 24, 2020, and amended the PPP on June 5, 2020 to make the terms of the PPP loans and loan forgiveness more flexible. The Consolidated Appropriations Act provided additional funding for the PPP and allowed eligible borrowers, including certain borrowers who had already received a PPP loan, to apply for PPP loans through March 31, 2021. The American Rescue Plan Act expanded the eligibility criteria for both first and second draw PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness. On March 30, 2021, the PPP Extension Act, which extended the deadline to apply for a PPP loan through May 31, 2021, was signed into law. In April 2020, we began processing loan applications under the PPP.

In addition, the CARES Act and related guidance from the federal banking agencies provided financial institutions the option to temporarily suspend requirements under GAAP related to classification of certain loan modifications as TDRs to account for the effects of COVID-19. 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 (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. We made a high level of loan modifications under our deferred payment program. Further, our loan portfolio includes loans that are in forbearance but which are not classified as TDRs because they were current at the time forbearance began. When the forbearance periods end, we may be required to classify a substantial portion of these COVID-19 deferments as TDRs.

The CARES Act and the Consolidated Appropriations Act also included a range of other provisions designed to support the U.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various programs and measures that the U.S. Department of the Treasury, the Federal Reserve, and other federal agencies may be or are required to implement. Among other provisions, sections 4022 and 4023 of the CARES Act provide mortgage loan forbearance relief to certain borrowers experiencing financial hardship during the COVID-19 emergency. The full impact on our lending and other business activities as a result of new government and regulatory policies, programs and guidelines, as well as regulators’ reaction to such activities, remains uncertain.

While the impact of the COVID19 pandemic has begun to decrease in significance, its economic effects on financial markets and key market indices continue to impact overall economic activity. The uncertainty regarding the duration of the pandemic and the resulting economic disruption caused increased market volatility and led to an economic recession and a significant decrease in consumer confidence and business generally, the long-term effects of which remain uncertain. The continuation of these conditions (including whether due to a resurgence or additional waves or variants of COVID-19 infections, particularly as the geographic areas in which we operate determine whether and when to re-open, and how quickly and to what extent normal economic and operating conditions can resume, especially as a vaccine is now widely available), as well as the impacts of the CARES Act and other federal and state measures, specifically with respect to loan forbearances, has adversely affected our business, financial condition, and results of operations, and has and can be expected to further adversely impact our business, financial condition, and results of operations and the operations of our borrowers, customers, and business partners. In particular, these events have had, and/or can be expected to continue to have, the following effects, among others:

●

~~impair the ability of borrowers to repay outstanding loans or other obligations, resulting in increases in delinquencies and modifications to loans;~~

●

~~impair the value of collateral securing loans (particularly with respect to real estate);~~

●

~~impair the value of our assets, including our securities portfolio, goodwill, and intangible assets;~~

●

~~require an increase in our allowance for credit losses;~~

●

~~adversely affect the stability of our deposit base or otherwise impair our liquidity;~~

●

~~reduce our revenues from fee-based services;~~

●

~~negatively impact our self-insurance healthcare costs;~~

●

result in increased compliance risk as we become subject to new regulatory and other requirements, including new and changing guidance, associated with the PPP and other new programs in which we have participated;

●

~~impair the ability of loan guarantors to honor commitments;~~

●

~~negatively impact our regulatory capital ratios;~~

	●	negatively impact the productivity and availability of key personnel necessary to conduct our business and third-party service providers who perform critical services for us, or otherwise cause operational failures due to changes in our normal business practices necessitated by the pandemic and related governmental actions;

	●	~~changes in local, regional, and global business, including employment levels and supply chain shortages; and~~

●

~~increase cyber and payment fraud risk and other operational risks, given increased online and remote activity.~~

Prolonged measures by health or other governmental authorities encouraging or requiring significant restrictions on travel, assembly, or other core business practices could further harm our business and those of our customers, in particular our small to medium-sized business customers. Although we have business continuity plans and other safeguards in place, there is no assurance that they will be effective.

While the ultimate impact of these factors over the longer term is uncertain and we do not yet know the full extent of the impacts on our business, our operations, or the global economy as a whole, nor the pace of continued economic recovery when the COVID-19 pandemic subsides, the decline in economic conditions generally, and a prolonged negative impact on small to medium-sized businesses in particular, due to COVID-19 is likely to result in an adverse effect on our business, financial condition, and results of operations in future periods, and may heighten many of our known risks.

~~We are dependent on our management team and key employees.~~

Our success depends, in large part, on the retention of our management team and key employees. Our management team and other key employees, including those who conduct our loan origination and other business development activities, have significant industry experience. We cannot ensure that we will be able to retain the services of any members of our management team or other key employees. Though we have employment agreements in place with certain members of our management team, they may still elect to leave at any time. The loss of any of our management team or our key employees could adversely affect our ability to execute our business strategy, and we may not be able to find adequate replacements on a timely basis, or at all.

Our future success also depends on our continuing ability to attract, develop, motivate, and retain key employees. Qualified individuals are in high demand, and we may incur significant costs to attract and retain them. Because the market for qualified individuals is highly competitive, we may not be able to attract and retain qualified officers or candidates. Failure to attract and retain a qualified management team and qualified key employees could have an adverse effect on our business, financial condition, and results of operations.

~~Our success is largely dependent upon our ability to successfully execute our business strategy.~~

There can be no assurance that we will be able to continue to grow and to remain profitable in future periods, or, if profitable, that our overall earnings will remain consistent with our prior results of operations, or increase in the future. A downturn in economic conditions in our market, particularly in the real estate market, heightened competition from other financial services providers, an inability to retain or grow our core deposit base, regulatory and legislative considerations, and failure to attract and retain high-performing talent, among other factors, could limit our ability to grow assets, or increase profitability, as rapidly as we have in the past. Sustainable growth requires that we manage our risks by following prudent loan underwriting standards, balancing loan and deposit growth without materially increasing interest rate risk or compressing our net interest margin, maintaining more than adequate capital at all times, managing a growing number of customer relationships, scaling technology platforms, hiring and retaining qualified employees, and successfully implementing our strategic initiatives. We must also successfully implement improvements to, or integrate, our management information and control systems, procedures, and processes in an efficient and timely manner and identify deficiencies in existing systems and controls. In particular, our controls and procedures must be able to accommodate an increase in loan volume in various markets and the infrastructure that comes with expanding operations, including new branches. Our growth strategy may require us to incur additional expenditures to expand our administrative and operational infrastructure. If we are unable to effectively manage and grow our banking franchise, we may experience compliance and operational problems, have to slow the pace of growth, or have to incur additional expenditures beyond current projections to support such growth. We may not have, or may not be able to develop, the knowledge or relationships necessary to be successful in new markets. Our failure to sustain our historical rate of growth, adequately manage the factors that have contributed to our growth, or successfully enter new markets could have an adverse effect on our earnings and profitability and, therefore, on our business, financial condition, and results of operations.

~~We may pursue strategic acquisitions in the future, and we may not be able to overcome risks associated with such transactions.~~

Although we plan to continue to grow our business organically, we may explore opportunities to invest in, or to acquire, other financial institutions and businesses that we believe would complement our existing business.

~~Our investment or acquisition activities could be material to our business and involve a number of risks including the following:~~

●

investing time and incurring expense associated with identifying and evaluating potential investments or acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business;

●

~~the lack of history among our management team in working together on acquisitions and related integration activities;~~

●

~~the time, expense, and difficulty of integrating the operations and personnel of the combined businesses;~~

●

~~unexpected asset quality problems with acquired companies;~~

●

~~inaccurate estimates and judgments used to evaluate credit, operations, management, and market risks with respect to the target institution or assets;~~

●

~~risks of impairment to goodwill or OTTI of investment securities;~~

●

~~potential exposure to unknown or contingent liabilities of banks and businesses we acquire;~~

●

~~an inability to realize expected synergies or returns on investment;~~

●

~~potential disruption of our ongoing banking business; and~~

●

~~loss of key employees or key customers following our investment or acquisition.~~

We may not be successful in overcoming these risks or other problems encountered in connection with potential investments or acquisitions. Our inability to overcome these risks could have an adverse effect on our ability to implement our business strategy and enhance shareholder value, which, in turn, could have an adverse effect on our business, financial condition, and results of operations. Additionally, if we record goodwill in connection with any acquisition, our business, financial condition, and results of operations may be adversely affected if that goodwill is determined to be impaired, which would require us to take an impairment charge.

~~New lines of business, products, product enhancements, or services may subject us to additional risk.~~

From time to time, we may implement new lines of business or offer new products and product enhancements as well as new services within our existing lines of business. There are substantial risks and uncertainties associated with these efforts. In developing, implementing, or marketing new lines of business, products, product enhancements, or services, we may invest significant time and resources. We may underestimate the appropriate level of resources or expertise necessary to make new lines of business or products successful or to realize their expected benefits. We may not achieve the milestones set in initial timetables for the development and introduction of new lines of business, products, product enhancements, or services, and price and profitability targets may not prove feasible. External factors, such as new or changing regulations, competitive alternatives, and shifting market preferences, may also impact the ultimate implementation of a new line of business or offerings of new products, product enhancements, or services. Any new line of business, product, product enhancement, or service could have a significant impact on the effectiveness of our system of internal controls. We may also decide to discontinue businesses or products due to lack of customer acceptance or unprofitability. Failure to successfully manage these risks in the development and implementation of new lines of business or offerings of new products, product enhancements, or services could have an adverse effect on our business, financial condition, and results of operations.

~~Our reputation is critical to our business, and damage to it could have an adverse effect on us.~~

A key differentiating factor for our business is the strong reputation we are building in our market. Maintaining a positive reputation is critical to attracting and retaining customers and employees. Adverse perceptions of us could make it more difficult for us to execute on our strategy. Harm to our reputation can arise from many sources, including actual or perceived employee misconduct, errors or misconduct by our third-party vendors or other counterparties, litigation or regulatory actions, our failure to meet our high customer service, and quality standards, and compliance failures.

In particular, it is not always possible to prevent employee error or misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon processing systems to record and process transactions and our large transaction volume may further increase the risk that employee errors, tampering, or manipulation of those systems will result in losses that are difficult to detect. Employee error or misconduct could also subject us to financial claims. If our internal control systems fail to prevent or detect an occurrence, or if any resulting loss is not insured, exceeds applicable insurance limits, or if insurance coverage is denied or not available, it could have an adverse effect on our business, financial condition, and results of operations.

Additionally, as a financial institution, we are inherently exposed to operational risk in the form of theft and other fraudulent activity by employees, customers, and other third parties targeting us and our customers or data. Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering, and other dishonest acts. Although we devote substantial resources to maintaining effective policies and internal controls to identify and prevent such incidents, given the increasing sophistication of possible perpetrators, we may experience financial losses or reputational harm as a result of fraud.

~~Negative publicity about us, whether or not accurate, may also damage our reputation, which could have an adverse effect on our business, financial condition, and results of operations.~~

~~Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services, or fail to comply with banking regulations.~~

We outsource some of our operational activities and accordingly depend on relationships with third-party providers for services such as core systems support, informational website hosting, internet services, online account opening, and other processing services. Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems, many of which also depend on third-party providers. The failure of these systems, a cybersecurity breach involving any of our third-party service providers, or the termination or change in terms of a third-party software license or service agreement on which any of these systems is based could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity, or such third-party systems fail or experience interruptions. Replacing vendors or addressing other issues with our third-party service providers could entail significant delay, expense, and disruption of service.

As a result, if these third-party service providers experience difficulties, are subject to cybersecurity breaches, or terminate their services, and we are unable to replace them with other service providers, particularly on a timely basis, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition, and results of operations could be adversely affected. Even if we are able to replace third-party service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition, and results of operations.

Furthermore, third-party service providers, and banking organizations’ relationships with those providers, are subject to demanding regulatory requirements and attention by bank regulators. Our regulators may hold us responsible for any deficiencies in our oversight or control of our third-party service providers and in the performance of the parties with which we have these relationships. As a result, if our regulators assess that we have not exercised adequate oversight and control over our third-party service providers or that such providers have not performed adequately, we could be subject to administrative penalties, fines, or other forms of regulatory enforcement action as well as requirements for consumer remediation, any of which could have an adverse effect on our business, financial condition, and results of operations.

~~System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation, damage to our reputation, and other potential losses.~~

Failures in, or breaches of, our computer systems and network infrastructure, or those of our third-party vendors or other service providers, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure, or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our business, financial condition, and results of operations. In addition, our operations are dependent upon our ability to protect our computer systems and network infrastructure, including our internet banking activities, against damage from physical break-ins, cybersecurity breaches, and other disruptive problems caused by the internet or other users. Cybersecurity breaches and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and damage to our reputation and may discourage current and potential customers from using our internet banking services. Our security measures, including firewalls and penetration testing, may not prevent or detect future potential losses from system failures or cybersecurity breaches.

In the normal course of business, we collect, process, and retain sensitive and confidential information regarding our customers. Although we devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of our third-party service providers, are vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. We and our third-party service providers have experienced these types of events in the past and expect to continue to experience them in the future. These events could interrupt our business or operations or result in significant legal and financial exposure, supervisory criticism, regulatory enforcement action, damage to our reputation, loss of customers and business, or a loss of confidence in the security of our systems, products, and services. Although the impact to date from these events has not had an adverse effect on us, we cannot be sure this will be the case in the future. Any of these occurrences could have an adverse effect on our business, financial condition, and results of operations.

Information security risks for financial institutions like us have increased recently in part because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions that are designed to disrupt key business services, such as consumer-facing web sites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. Our early detection and response mechanisms may be thwarted by sophisticated attacks and malware designed to avoid detection.

~~Our ability to conduct our business could be disrupted by natural or man-made disasters or the effects of climate change.~~

All of our offices, a significant portion of the real estate securing loans we make, and many of our borrowers’ business operations in general, are located in California. California has had and will continue to have major earthquakes in areas where a significant portion of the collateral and assets of our borrowers are concentrated. California is also prone to fires, mudslides, floods, and other natural disasters, such as the recent fires that impacted several counties in California, including Orange and Napa. Additionally, acts of terrorism, war, civil unrest, violence, other man-made disasters, or the effects of climate change could also cause disruptions to our business or to the economy as a whole. The occurrence of natural or man-made disasters or the effects of climate change could destroy, or cause a decline in the value of, mortgaged properties or other assets that serve as our collateral and increase the risk of delinquencies, defaults, foreclosures and losses on our loans, damage our banking facilities and offices, negatively impact regional economic conditions, result in a decline in loan demand and loan originations, result in drawdowns of deposits by customers impacted by disasters and negatively impact the implementation of our growth strategy. Natural or man-made disasters or the effects of climate change could also disrupt our business operations more generally. We have implemented a business continuity program that allows us to move critical functions to a backup data center in the event of a catastrophe. Although this program has been tested, we cannot guarantee its effectiveness in any disaster scenarios. Regardless of the effectiveness of our disaster recovery and business continuity plan, the occurrence of any natural or man-made disaster or the effects of climate change could have an adverse effect on our business, financial condition, and results of operations.

Litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines, penalties, judgments, or other requirements resulting in increased expenses or restrictions on our business activities.

From time to time, in the normal course of business, we have in the past been and may in the future be named as a defendant in various legal actions, arising in connection with our current and/or prior business activities. Legal actions could include claims for substantial compensatory or punitive damages or claims for indeterminate amounts of damages. Further, in the future our regulators may impose consent orders, civil money penalties, matters requiring attention, or similar types of supervisory criticism. We may also, from time to time, be the subject of subpoenas, requests for information, reviews, investigations, and proceedings (both formal and informal) by governmental agencies regarding our current and/or prior business activities. Any such legal or regulatory actions may subject us to substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices, or other requirements resulting in increased expenses, diminished income, and damage to our reputation. Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business. Further, any settlement, consent order, or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations, or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have an adverse effect on our business, financial condition, and results of operations.

~~We are subject to an extensive body of accounting rules and best practices. Periodic changes to such rules may change the treatment and recognition of critical financial line items.~~

The nature of our business makes us sensitive to the large body of accounting rules in the United States. From time to time, the governing bodies that oversee changes to accounting rules and reporting requirements may release new guidance for the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some instances, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements. Changes which have been approved for future implementation, or which are currently proposed or expected to be proposed or adopted include requirements that we: (i) calculate the allowance for loan losses on the basis of the current expected loan losses over the lifetime of our loans, which is expected to be applicable to us beginning in 2023, and may result in increases in our allowance for loan losses and future provisions for loan losses; and (ii) record the value of and liabilities relating to operating leases on our balance sheet, which is expected to be applicable to us beginning in 2022. These changes could adversely affect our capital, regulatory capital ratios, ability to make larger loans, earnings, and performance metrics. Any such changes could have an adverse effect on our business, financial condition, and results of operations.

~~The accuracy of our consolidated financial statements and related disclosures could be affected if the judgments, assumptions, or estimates used in our critical accounting policies are inaccurate.~~

The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our critical accounting policies, which are included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions, and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events or regulatory views concerning such analysis differ significantly from the judgments, assumptions, and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures, in each case resulting in our possible need to revise or, if in error, restate prior period financial statements, cause damage to our reputation and the price of our common stock and adversely affect 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

On May 7, 2021 we completed our IPO of 6,054,750 shares of our common stock at an IPO price of $20.00 per share, including 789,750 shares pursuant to the exercise of the underwriters’ option to purchase additional shares of our common stock. 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.~~ Keefe, Bruyette & Woods, Inc. acted as bookrunner for the IPO, and Stephens Inc. and D.A. Davidson acted as co-managers. None of the expenses associated with the IPO were paid to directors, officers, affiliates, persons owning 10% or more of any class of equity securities, or their associates.

All of the shares issued and sold in our IPO were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No. 333-255143), which was declared effective by the SEC on May 4, 2021. There has been no material change in the planned use of proceeds from our IPO from those disclosed in our final prospectus dated as of May 4, 2021 and filed with the SEC pursuant to Rule 424(b)(4) on May 6, 2021, including a cash distribution in the amount of $27.0 million to our shareholders of record as of May 3, 2021, paid on May 21, 2021.

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.~~

None.

Table of Contents

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-Q 001-40379 3.2 June 17, 2021
4.1 Form of Common Stock Certificate of Five Star Bancorp S-1 333-255143 4.1 April 26, 2021
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
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

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

Filed

4.1

Form of Common Stock Certificate of Five Star Bancorp

S-1

333-255143

4.1

April 26, 2021

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.

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)

August 11, 2022

~~November 10, 2021~~

/s/ James Beckwith

Date

James Beckwith

President &

Chief Executive Officer

(Principal Executive Officer)

August 11, 2022

~~November 10, 2021~~

/s/ Heather Luck

Date

Heather Luck

Senior Vice President &

Chief Financial Officer

(Principal Financial Officer)

~~100~~


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

~~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	~~FSBC~~	The Nasdaq Stock Market LLC


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

~~PART I~~	~~FINANCIAL INFORMATION~~	5
PART I			FINANCIAL INFORMATION	5
~~ITEM 1.~~			~~Financial Statements~~	5
ITEM 1.			Financial Statements	5

			Consolidated Balance Sheets (unaudited)	56

			Consolidated Statements of Income (unaudited)	67

			Consolidated Statements of Comprehensive Income (unaudited)	78

			Consolidated Statements of Changes in Shareholders’ Equity (unaudited)	89

			Consolidated Statements of Cash Flows (unaudited)	10 11

			Notes to Consolidated Financial Statements (unaudited)	1112

ITEM 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations	3340

ITEM 3.			Quantitative and Qualitative Disclosure About Market Risk	6779

ITEM 4.			Controls and Procedures	6779

PART II			OTHER INFORMATION	6880

ITEM 1.			Legal Proceedings	6880

ITEM 1A.			Risk Factors	6880

ITEM 2.			Unregistered Sales of Equity Securities and Use of Proceeds	9880

ITEM 3.			Defaults Upon Senior Securities	9880

ITEM 4.			Mine Safety Disclosures	9880

ITEM 5.			Other Information	9880

ITEM 6.			Exhibits	9981

SIGNATURES				~~100~~82


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
Interest and fee income
Loans, including fees	$	24,841	$	18,626	$	46,932	$	37,239
Taxable securities	423		338		813		597
Nontaxable securities	179		219		356		433
Interest-bearing deposits in other banks	518		125		710		229
	25,961		19,308		48,811		38,498
Interest expense
Deposits	1,021		568		1,566		1,267
FHLB advances	5		—		5		—
Subordinated notes	444		444		887		887
	1,470		1,012		2,458		2,154

Net interest income	24,491		18,296		46,353		36,344

Provision for loan losses	2,250		—		3,200		200

Net interest income after provision for loan losses	22,241		18,296		43,153		36,144

Non-interest income
Service charges on deposit accounts	130		106		238		196
Net gain on sale of securities available-for-sale	—		92		5		274
Gain on sale of loans	831		1,091		1,749		2,022
Loan-related fees	795		369		1,412		629
FHLB stock dividends	99		92		201		170
Earnings on BOLI	101		60		191		112
Other	41		36		386		59
	1,997		1,846		4,182		3,462
Non-interest expense
Salaries and employee benefits	5,553		4,939		11,228		9,636
Occupancy and equipment	513		441		1,033		892
Data processing and software	739		598		1,455		1,227
Federal Deposit Insurance Corporation ("FDIC") insurance	245		150		410		430
Professional services	568		1,311		1,122		2,843
Advertising and promotional	484		265		828		435
Loan-related expenses	389		218		667		447
Other operating expenses	1,714		1,658		3,037		2,474
	10,205		9,580		19,780		18,384

Income before provision for income taxes	14,033		10,562		27,555		21,222

Provision for income taxes	4,080		734		7,740		1,116

Net income	$	9,953	$	9,828	$	19,815	$	20,106

Basic earnings per common share	$	0.58	$	0.67	$	1.15	$	1.57
Diluted earnings per common share	$	0.58	$	0.67	$	1.15	$	1.57

	September 30,			December 31,
	2021			2020

ASSETS

Cash and due from financial institutions	$	89,951		$	46,028
Interest-bearing deposits in banks		440,881			244,465
Cash and cash equivalents		530,832			290,493

Time deposits in banks		17,204			23,705
Securities available-for-sale, at fair value		153,821			114,949
Securities held-to-maturity, at amortized cost (fair value of $5,211 and $8,755 at September 30, 2021 and December 31, 2020, respectively)		4,955			7,979
Loans held for sale		5,267			4,820
Loans, net of allowance for loan losses of $21,848 and $22,189 at September 30, 2021 and December 31, 2020, respectively		1,682,868			1,480,970
Federal Home Loan Bank of San Francisco (“FHLB”) stock		6,723			6,232
Premises and equipment, net		1,630			1,663
Bank owned life insurance		11,142			8,662
Interest receivable and other assets		20,051			14,292
Assets	$	2,434,493		$	1,953,765

LIABILITIES AND SHAREHOLDERS’ EQUITY

Deposits
Non-interest-bearing	$	895,468		$	695,687
Interest-bearing		1,272,926			1,088,314
Total deposits		2,168,394			1,784,001

Subordinated notes, net		28,370			28,320
Interest payable and other liabilities		11,091			7,669
Total liabilities		2,207,855			1,819,990

Commitments and contingencies (Note 10)

Shareholders’ equity
Preferred stock, 0 par value; 10,000,000 shares authorized; 0 issued and outstanding at September 30, 2021 and December 31, 2021		—			—
Common stock, 0 par value; 100,000,000 shares authorized; 17,223,808 shares issued and outstanding at September 30, 2021; 11,000,273 shares issued and outstanding at December 31, 2020		218,216			110,082
Retained earnings		8,442			22,348
Accumulated other comprehensive (loss) income, net		(20	)		1,345
Total shareholders’ equity		226,638			133,775
Liabilities and Shareholders’ Equity	$	2,434,493		$	1,953,765


	For the three months ended September 30,				For the nine months ended September 30,
	2021		2020		2021		2020
Interest and dividend income
Loans, including fees	$	20,086	$	17,734	$	57,325	$	51,318
Taxable securities		377		347		974		1,062
Nontaxable securities		194		154		627		285
Interest-bearing deposits in other banks		175		199		404		1,073
Interest and dividend income		20,832		18,434		59,330		53,738
Interest expense
Deposits		480		1,764		1,747		6,390
Subordinated notes		443		443		1,330		1,330
Interest expense		923		2,207		3,077		7,720

Net interest income		19,909		16,227		56,253		46,018

Provision for loan losses		—		1,850		200		6,000

Net interest income after provision for loan losses		19,909		14,377		56,053		40,018

Non-interest income
Service charges on deposit accounts		112		93		308		269
Net gain on sale of securities available-for-sale		435		275		709		1,241
Gain on sale of loans		988		1,194		3,010		2,635
Loan-related fees		87		710		420		1,875
FHLB stock dividends		100		74		270		227
Earnings on bank owned life insurance		68		59		180		174
Other		238		130		593		341
Noninterest Income		2,028		2,535		5,490		6,762
Non-interest expense
Salaries and employee benefits		4,980		3,969		14,616		10,444
Occupancy and equipment		502		447		1,394		1,239
Data processing and software		611		529		1,838		1,433
Federal deposit insurance		110		320		540		867
Professional services		505		447		3,348		1,154
Advertising and promotional		366		264		801		766
Loan-related expenses		462		185		909		510
Other operating expenses		1,105		1,073		3,579		2,933
Noninterest expense		8,641		7,234		27,025		19,346

Income before provision for income taxes		13,296		9,678		34,518		27,434

Provision for income taxes		2,270		341		3,386		968

Net income	$	11,026	$	9,337	$	31,132	$	26,466

Basic earnings per share	$	0.64	$	0.94	$	2.18	$	2.72
Diluted earnings per share	$	0.64	$	0.94	$	2.18	$	2.72

									Accumulated
									Other
									Comprehensive
	Common Stock					Retained			Income (Loss),
	Shares			Amount		Earnings			Net of Taxes			Total
For the three months ended September 30, 2020
Balance at June 30, 2020		9,683,023		$	96,243	$	18,304		$	1,176		$	115,723
Net income		—			—		9,337			—			9,337
Other comprehensive loss		—			—		—			(346	)		(346	)
Stock offering		1,250,000			12,500		—			—			12,500
Stock issued under stock award plans		1,250			—		—			—			—
Stock compensation expense		—			123		—			—			123
Stock issued to directors		16,000			252		—			—			252
Common stock issued		50,000			900		—			—			900
Cash dividends paid ($0.75 per share)		—			—		(7,276	)		—			(7,276	)
Balance at September 30, 2020		11,000,273		$	110,018	$	20,365		$	830		$	131,213

For the three months ended September 30, 2021
Balance at June 30, 2021		17,225,508		$	218,026	$	—		$	288		$	218,314
Net income		—			—		11,026			—			11,026
Other comprehensive loss		—			—		—			(308	)		(308	)
Stock compensation expense		—			190		—			—			190
Stock forfeitures		(1,700	)		—		—			—			—
Cash dividends paid ($0.15 per share)		—			—		(2,584	)		—			(2,584	)
Balance at September 30, 2021		17,223,808		$	218,216	$	8,442		$	(20	)	$	226,638

	September 30, 2021			September 30, 2020
Cash flows from operating activities:
Net income	$	31,132		$	26,466
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		200			6,000
Loans originated for sale		(34,211	)		(60,188	)
Gain on sale of loans		(3,010	)		(2,635	)
Proceeds from sales of loans		31,954			48,958
Net gain on sale of securities available-for-sale		(709	)		(1,241	)
Earnings on bank owned life insurance		(180	)		(174	)
Stock compensation expense		402			252
Director stock compensation expense		810			252
Change in deferred loan fees		(997	)		5,932
Amortization and accretion of security premiums and discounts		1,120			744
Amortization of subordinated notes issuance costs		50			50
Depreciation and amortization		408			333
Net changes in:
Interest receivable and other assets		(5,702	)		(3,939	)
Interest payable and other liabilities		3,422			318
Net cash provided by operating activities		24,689			21,128
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale		40,772			39,940
Maturities, prepayments, and calls of securities available-for-sale		13,639			11,804
Purchases of securities available-for-sale		(92,093	)		(82,571	)
Increase (decrease) in time deposits in banks		6,501			(2,255	)
Loan originations, net of repayments		(196,280	)		(371,499	)
Purchase of premises and equipment		(375	)		(714	)
Purchase of FHLB stock		(491	)		(1,152	)
Purchase of bank owned life insurance		(2,300	)		—
Net cash used in investing activities		(230,627	)		(406,447	)
Cash flows from financing activities:
Net change in deposits		384,393			579,835
Proceeds from issuance of stock		111,243			13,400
FHLB repayment		—			(25,000	)
Cash dividends paid		(49,359	)		(18,890	)
Net cash provided by financing activities		446,277			549,345
Net change in cash and cash equivalents		240,339			164,026
Cash and cash equivalents at beginning of period		290,493			177,366
Cash and cash equivalents at end of period	$	530,832		$	341,392
Supplemental disclosure of cash flow information:
Interest paid	$	3,090		$	8,181
Income taxes paid	$	5,150		$	1,045
Supplemental disclosure of noncash investing and financing activities:
Transfer from loans held for investment to loans held for sale	$	4,820		$	6,527
Unrealized (loss) gain on securities	$	(1,365	)	$	856


	For the three months ended				For the nine months ended
(in thousands, except per share data)	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
Net income	$	11,026	$	9,337	$	31,132	$	26,466
Weighted average basic common shares outstanding		17,095,957		9,902,952		14,256,993		9,747,896
Add: Dilutive effects of assumed vesting of restricted stock		27,225		—		15,538		—
Weighted average diluted common shares outstanding		17,123,182		9,902,952		14,272,531		9,747,896
Income per common share:
Basic EPS	$	0.64	$	0.94	$	2.18	$	2.72
Diluted EPS	$	0.64	$	0.94	$	2.18	$	2.72

(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
September 30, 2021
Assets:
Securities available-for-sale:
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds	$	153,821	$	—	$	153,821	$	—		OCI
Derivatives – interest rate swap		108		—		108		—		NI
Liabilities:
Derivatives – interest rate swap		108		—		108		—		NI

December 31, 2020
Assets:
Securities available-for-sale:
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, and collateralized mortgage obligations	$	114,949	$	—	$	114,949	$	—		OCI
Derivatives – interest rate swap		149		—		149		—		NI
Liabilities:
Derivatives – interest rate swap		149		—		149	$	—		NI

(in thousands)	September 30, 2021		December 31, 2020
Pledged to the State of California:
Secure deposits of public funds and borrowings	$	68,050	$	52,897
Total pledged investment securities	$	68,050	$	52,897

(in thousands)	September 30, 2021
Year
2021	$	52,970
2022		574
2023		391
2024		—
2025		—
Total time deposits	$	53,935

	For the three months ended September 30,									For the nine months ended September 30,
	2021					2020				2021					2020
	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		129,551		$	19.95		11,568	$	21.25		11,568		$	21.25		15,794		$	21.03
Shares granted		—			—		0		0		173,207			19.89		8,148			21.00
Shares vested		—			—		—		0		(52,502	)		20.10		(12,374	)		20.81
Shares forfeited		(1,700	)		20.00		—		0		(4,422	)		19.31		—			—
End of the period balance		127,851			19.95		11,568		21.25		127,851			19.95		11,568			21.25

	For the three months ended						For the nine months ended
(dollars in thousands, except per share data)	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Selected operating data:
Net interest income	$	19,909		$	16,227		$	56,253		$	46,018
Provision for loan losses		—			1,850			200			6,000
Non-interest income		2,028			2,535			5,490			6,762
Non-interest expense		8,641			7,234			27,025			19,346
Net income		11,026			9,337			31,132			26,466
Net income per common share:
Basic	$	0.64		$	0.94		$	2.18		$	2.72
Diluted	$	0.64		$	0.94		$	2.18		$	2.72
Selected pro forma operating data:
Pro forma net income³		11,026			6,817			26,494			19,325
Pro forma provision for income taxes³		2,270			2,861			8,024			8,109
Pro forma net income per common share³:
Basic	$	0.64		$	0.69		$	1.86		$	1.98
Diluted	$	0.64		$	0.69		$	1.86		$	1.98
Performance and other financial ratios:
ROAA		1.85	%		1.81	%		1.88	%		1.97	%
ROAE		19.26	%		32.33	%		24.01	%		31.87	%
Net interest margin		3.60	%		3.30	%		3.63	%		3.53	%
Cost of funds		0.17	%		0.46	%		0.20	%		0.61	%
Efficiency ratio		39.39	%		38.56	%		43.77	%		36.65	%
Cash dividend payout ratio on common stock⁴		23.29	%		79.55	%		201.50	%		71.82	%
Selected pro forma ratios:
Pro forma ROAA^3,5		1.85	%		1.32	%		1.60	%		1.44	%
Pro forma ROAE^3,5		19.26	%		23.61	%		20.43	%		23.27	%

(dollars in thousands)	September 30, 2021		December 30, 2020
Total assets	$	2,434,493	$	1,953,765
Cash and cash equivalents	$	530,832	$	290,493
Total investments	$	158,776	$	122,928
Total loans, net	$	1,688,135	$	1,485,790
Total deposits	$	2,168,394	$	1,784,001
Total subordinated notes, net	$	28,370	$	28,320
Total shareholders’ equity	$	226,638	$	133,775

			Gross Unrealized
(dollars in thousands)	Book Value		Gains		(Losses)			Fair Value
September 30, 2021
Available-for-sale:
U.S. government agencies	$	21,780	$	108	$	(234	)	$	21,654
Mortgage-backed securities		78,301		198		(572	)		77,927
Obligations of states and political subdivisions		51,189		661		(197	)		51,653
Collateralized mortgage obligations		580		12		—			592
Corporate bonds		2,000		—		(5	)		1,995
Total available-for-sale	$	153,850	$	979	$	(1,008	)	$	153,821
Held-to-maturity:
Obligations of states and political subdivisions	$	4,995	$	256	$	—		$	5,211
December 31, 2020
Available-for-sale:
U.S. government agencies	$	32,069	$	111	$	(352	)	$	31,828
Mortgage-backed securities		23,601		338		(7	)		23,932
Obligations of states and political subdivisions		57,137		1,291		(8	)		58,420
Collateralized mortgage obligations		748		21		—			769
Total available-for-sale	$	113,555	$	1,761	$	(367	)	$	114,949
Held-to-maturity:
Obligations of states and political subdivisions	$	7,979	$	776	$	—		$	8,755

	As of and for the three months ended
	September 30, 2021						September 30, 2020
(dollars in thousands)	Activity			% of Period End Loans			Activity			% of Period End Loans
Loans held for investment	$	1,707,013					$	1,557,904

Allowance for loan losses (beginning of period)	$	22,153					$	17,905

Net (charge-offs) recoveries:
Real estate:
Commercial		—			0.00	%		—			0.00	%
Commercial land and development		—			0.00	%		—			0.00	%
Commercial construction		—			0.00	%		—			0.00	%
Residential construction		—			0.00	%		—			0.00	%
Residential		—			0.00	%		—			0.00	%
Farmland		—			0.00	%		—			0.00	%
Commercial:
Secured		(263	)		(0.19	)%		(249	)		(0.20	)%
Unsecured		—			0.00	%		—			0.00	%
PPP		—			0.00	%		—			0.00	%
Consumer and other		(42	)		(0.31	)%		46			0.79	%
Net charge-offs		(305	)		(0.02	)%		(203	)		(0.01	)%

Provision for loan losses		—						1,850

Allowance for loan losses (end of period)	$	21,848					$	19,552

Allowance for loan losses to period end loans held for investment		1.28	%					1.26	%

	As of and for the nine months ended
	September 30, 2021						September 30, 2020
(dollars in thousands)	Activity			% of Period End Loans			Activity			% of Period End Loans
Loans held for investment	$	1,707,013					$	1,557,904

Allowance for loan losses (beginning of period)	$	22,189					$	14,915

Net (charge-offs) recoveries:
Real estate:
Commercial		—			0.00	%		—			0.00	%
Commercial land and development		—			0.00	%		—			0.00	%
Commercial construction		—			0.00	%		—			0.00	%
Residential construction		—			0.00	%		—			0.00	%
Residential		—			0.00	%		90			0.31	%
Farmland		—			0.00	%		—			0.00	%
Commercial:
Secured		(569	)		(0.41	)%		(1,070	)		(0.84	)%
Unsecured		—			0.00	%		—			0.00	%
PPP		—			0.00	%		—			0.00	%
Consumer and other		27			0.20	%		(383	)		(6.63	)%
Net charge-offs		(542	)		(0.03	)%		(1,363	)		(0.09	)%

Provision for loan losses		200						6,000

Allowance for loan losses (end of period)	$	21,847					$	19,552

Allowance for loan losses to period end loans held for investment		1.28	%					1.26	%

(dollars in thousands)	$250,000 or Greater		Less than $250,000		Total		Uninsured Portion
Remaining maturity:
Three months or less	$	27,565	$	25,404	$	52,969	$	25,315
Over three through six months		305		268		573		109
Over six through twelve months		—		393		393		—
Over twelve months		—		—		—		—
Total	$	27,870	$	26,065	$	53,935	$	25,424

(dollars in thousands)	Total		Due in one year or less		Due after one year through two years		Due after two years through five years		Due after five years
Time deposits¹	$	53,935	$	52,970	$	574	$	391	$	—
Subordinated notes¹		28,353		—		—		—		28,353
Operating leases, net		5,855		261		1,078		2,761		1,755
Significant contracts²		1,472		883		589		—		—
	$	89,632	$	54,114	$	2,241	$	3,152	$	30,125

Capital Ratios for Bancorp (dollars in thousands)	Actual Ratio					Required for Capital Adequacy Purposes¹					Ratio to be Well- Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2021
Total capital (to risk-weighted assets)	$	274,796		15.66	%	$	140,391		≥ 8.00	%		N/A		N/A
Tier 1 capital (to risk-weighted assets)	$	224,476		12.79	%	$	105,294		≥ 6.00	%		N/A		N/A
Common equity tier 1 capital (to risk-weighted assets)	$	224,476		12.79	%	$	78,970		≥ 4.50	%		N/A		N/A
Tier 1 capital (to average assets)	$	224,476		9.50	%	$	94,539		≥ 4.00	%		N/A		N/A
December 31, 2020
Total capital (to risk-weighted assets)	$	176,861		12.18	%	$	116,138		≥ 8.00	%		N/A		N/A
Tier 1 capital (to risk-weighted assets)	$	130,347		8.98	%	$	87,103		≥ 6.00	%		N/A		N/A
Common equity tier 1 capital (to risk-weighted assets)	$	130,347		8.98	%	$	65,327		≥ 4.50	%		N/A		N/A
Tier 1 capital (to average assets)	$	130,347		6.58	%	$	79,204		≥ 4.00	%		N/A		N/A

Capital Ratios for the Bank (dollars in thousands)	Actual Ratio					Required for Capital Adequacy Purposes					Ratio to be Well- Capitalized under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2021
Total capital (to risk-weighted assets)	$	269,015		15.34	%	$	140,304		≥ 8.00	%	$	175,380		≥ 10.00	%
Tier 1 capital (to risk-weighted assets)	$	247,065		14.09	%	$	105,228		≥ 6.00	%	$	140,304		≥ 8.00	%
Common equity tier 1 capital (to risk-weighted assets)	$	247,065		14.09	%	$	78,921		≥ 4.50	%	$	113,997		≥ 6.50	%
Tier 1 capital (to average assets)	$	247,065		10.46	%	$	94,497		≥ 4.00	%	$	118,121		≥ 5.00	%
December 31, 2020
Total capital (to risk-weighted assets)	$	174,002		11.99	%	$	116,114		≥ 8.00	%	$	145,143		≥ 10.00	%
Tier 1 capital (to risk-weighted assets)	$	155,808		10.73	%	$	87,086		≥ 6.00	%	$	116,114		≥ 8.00	%
Common equity tier 1 capital (to risk-weighted assets)	$	155,808		10.73	%	$	65,314		≥ 4.50	%	$	94,343		≥ 6.50	%
Tier 1 capital (to average assets)	$	155,808		7.87	%	$	79,199		≥ 4.00	%	$	98,998		≥ 5.00	%

		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-Q	001-40379	3.2	June 17, 2021
4.1	Form of Common Stock Certificate of Five Star Bancorp	S-1	333-255143	4.1	April 26, 2021
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
101	Inline XBRL Interactive Data					Filed
104	Cover Page Interactive Data File (embedded within the Inline XBRL document in Exhibit 101)					Filed