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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-40379
FIVE STAR BANCORP
(Exact name of Registrant as specified in its charter)
California75-3100966
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
3100 Zinfandel Drive, Suite 100 Rancho Cordova, CA 95670
(Address of principal executive office) (Zip Code)
Registrant’s telephone number, including area code: (916) 626-5000
Securities registered pursuant to 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common stock, no par value per shareFSBC
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated fileroAccelerated filerx
Non-accelerated fileroSmaller reporting companyo
Emerging growth companyx
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of May 3, 2024, there were 21,320,083 shares of the registrant’s common stock, no par value, outstanding.


TABLE OF CONTENTS
FIVE STAR BANCORP AND SUBSIDIARY
Quarterly Report on Form 10-Q
March 31, 2024


PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)March 31, 2024December 31, 2023
ASSETS
Cash and due from financial institutions$29,750 $26,986 
Interest-bearing deposits in banks155,575 294,590 
Cash and cash equivalents185,325 321,576 
Time deposits in banks5,878 5,858 
Securities available-for-sale, at fair value, net of allowance for credit losses of $0 at March 31, 2024 and December 31, 2023 (amortized cost of $122,667 and $124,788 at March 31, 2024 and December 31, 2023, respectively)
105,006 108,083 
Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $20 at March 31, 2024 and December 31, 2023 (fair value of $2,828 and $2,913 at March 31, 2024 and December 31, 2023, respectively)
3,000 3,077 
Loans held for sale10,243 11,464 
Loans held for investment3,104,130 3,081,719 
Allowance for credit losses - loans(34,653)(34,431)
Loans held for investment, net of allowance for credit losses 3,069,477 3,047,288 
FHLB stock15,000 15,000 
Operating leases, right-of-use asset, net6,932 5,284 
Premises and equipment, net1,569 1,623 
Bank-owned life insurance18,872 17,180 
Interest receivable and other assets55,058 56,692 
Total assets$3,476,360 $3,593,125 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing$817,388 $831,101 
Interest-bearing2,138,384 2,195,795 
Total deposits2,955,772 3,026,896 
Borrowings:
Subordinated notes, net73,786 73,749 
Other borrowings120,000 170,000 
Operating lease liability7,320 5,603 
Interest payable and other liabilities26,902 31,103 
Total liabilities3,183,780 3,307,351 
Commitments and contingencies (Note 8)
Shareholders’ equity:
Preferred stock, no par value; 10,000,000 shares authorized; zero issued and outstanding at March 31, 2024 and December 31, 2023
  
Common stock, no par value; 100,000,000 shares authorized; 17,353,251 shares issued and outstanding at March 31, 2024; 17,256,989 shares issued and outstanding at December 31, 2023
220,804 220,505 
Retained earnings
84,216 77,036 
Accumulated other comprehensive loss, net of taxes
(12,440)(11,767)
Total shareholders’ equity
292,580 285,774 
Total liabilities and shareholders equity
$3,476,360 $3,593,125 
See accompanying notes to the unaudited consolidated financial statements.
1


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
(in thousands, except per share amounts)20242023
Interest and fee income:
Loans, including fees$43,786 $37,494 
Taxable securities477 466 
Nontaxable securities176 184 
Interest-bearing deposits in banks
3,102 2,167 
Total interest and fee income47,541 40,311 
Interest expense:
Deposits19,511 9,378 
Subordinated notes1,161 1,161 
Other borrowings125 624 
Total interest expense20,797 11,163 
Net interest income
26,744 29,148 
Provision for credit losses900 900 
Net interest income after provision for credit losses
25,844 28,248 
Non-interest income:
Service charges on deposit accounts188 117 
Gain on sale of loans369 598 
Loan-related fees429 308 
FHLB stock dividends332 193 
Earnings on BOLI142 102 
Other373 53 
Total non-interest income1,833 1,371 
Non-interest expense:
Salaries and employee benefits7,577 6,618 
Occupancy and equipment626 523 
Data processing and software1,157 872 
FDIC insurance400 402 
Professional services707 631 
Advertising and promotional460 418 
Loan-related expenses297 255 
Other operating expenses1,492 1,399 
Total non-interest expense12,716 11,118 
Income before provision for income taxes
14,961 18,501 
Provision for income taxes
4,330 5,340 
Net income
$10,631 $13,161 
Basic earnings per common share$0.62 $0.77 
Diluted earnings per common share$0.62 $0.77 
See accompanying notes to unaudited consolidated financial statements.
2


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
(in thousands)2024 2023
Net income
$10,631 $13,161 
Unrealized (loss) gain on securities:
Net unrealized holding (loss) gain on securities available-for-sale during the period
(955)2,140 
Less: Income tax (benefit) expense related to items of other comprehensive (loss) income
(282)632 
Other comprehensive (loss) income
(673)1,508 
Total comprehensive income
$9,958 $14,669 
See accompanying notes to the unaudited consolidated financial statements.
3


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2024 and 2023
(Unaudited)
Common Stock
Retained Earnings
Accumulated Other Comprehensive Loss
Total Shareholders’ Equity
(in thousands, except per share amounts)Shares Amount
Balance at December 31, 202217,241,926 $219,543 $46,736 $(13,454)$252,825 
Cumulative effect of adoption of ASC 326 on retained earnings— — (4,491)— (4,491)
Net income— — 13,161 — 13,161 
Other comprehensive income— — — 1,508 1,508 
Stock issued under stock award plans, net16,978 — — —  
Stock compensation expense— 242 — — 242 
Cash dividends paid ($0.15 per share)
— — (2,589)— (2,589)
Balance at March 31, 202317,258,904 $219,785 $52,817 $(11,946)$260,656 
Balance at December 31, 202317,256,989 $220,505 $77,036 $(11,767)$285,774 
Net income— — 10,631 — 10,631 
Other comprehensive loss— — — (673)(673)
Stock issued under stock award plans, net96,380 — — —  
Stock compensation expense— 299 — — 299 
Stock forfeitures(118)— — —  
Cash dividends paid ($0.20 per share)
— — (3,451)— (3,451)
Balance at March 31, 202417,353,251 $220,804 $84,216 $(12,440)$292,580 
See accompanying notes to the unaudited consolidated financial statements.
4


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
(in thousands)20242023
Cash flows from operating activities:
Net income$10,631 $13,161 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses900 900 
Depreciation and amortization472 419 
Amortization of deferred loan fees and costs(127)(36)
Amortization of premiums and discounts on securities246 313 
Amortization of subordinated note issuance costs36 34 
Stock compensation expense299 242 
Earnings on BOLI(142)(102)
Deferred tax provision6 62 
Loans originated for sale(15,453)(24,006)
Gain on sale of loans(369)(598)
Gross proceeds from sale of loans5,580 13,289 
Gain on partial sale of equity investment300  
Net changes in:
Interest receivable and other assets2,050 (4,331)
Interest payable and other liabilities(3,941)1,580 
Operating lease liability(241)(233)
Net cash provided by operating activities247 694 
Cash flows from investing activities:
Maturities, prepayments, and calls of securities available-for-sale1,953 2,899 
Capital call for equity investment(1,000) 
Proceeds received from equity investment300  
Net change in time deposits in banks(20)232 
Loan originations, net of repayments(11,498)(69,450)
Purchase of premises and equipment(108)(240)
Purchase of BOLI(1,550)(2,000)
Net cash used in investing activities(11,923)(68,559)
Cash flows from financing activities:
Net change in deposits(71,124)138,402 
(Payments) advances on other borrowings(50,000)20,000 
Cash dividends paid(3,451)(2,589)
Net cash (used in) provided by financing activities(124,575)155,813 
Net change in cash and cash equivalents(136,251)87,948 
Cash and cash equivalents at beginning of period321,576 259,991 
Cash and cash equivalents at end of period$185,325 $347,939 
Supplemental disclosure of cash flow information:
Interest paid$22,568$471 
Income taxes paid144 
Supplemental disclosure of noncash items:
Transfer from loans held for sale to loans held for investment11,464 9,416 
Unrealized (loss) gain on securities(955)2,140 
Operating lease liabilities exchanged for ROUA1,958 1,423 
ROUA acquired(1,958)(1,444)
See accompanying notes to the unaudited consolidated financial statements.
5


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation and Summary of Significant Accounting Policies
(a) Organization
Five Star Bank (the “Bank”) was chartered on October 26, 1999 and began operations on December 20, 1999. Five Star Bancorp (“Bancorp” or the “Company”) was incorporated on September 16, 2002 and subsequently obtained approval from the Federal Reserve to be a bank holding company in connection with its acquisition of the Bank. The Company became the sole shareholder of the Bank on June 2, 2003 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.
The Company, through the Bank, provides financial services to customers who are predominately small and middle-market businesses, professionals, and individuals residing in the Northern California region. The Company’s primary loan products are commercial real estate loans, land development loans, construction loans, and operating lines of credit, and its primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts. The Bank currently has seven branch offices in Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, and Yuba City.
(b) Basis of Financial Statement Presentation and Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) ASC and the rules and regulations of the SEC, including the instructions to Regulation S-X. These interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2023, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report on Form 10-K”), which was filed with the SEC on February 23, 2024.
The unaudited consolidated financial statements include Bancorp and its wholly owned subsidiary, the Bank. All significant intercompany transactions and balances are eliminated in consolidation.
The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2024.
The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.
(c) Segments
While the Company’s chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Discrete financial information is not available other than on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
(d) Emerging Growth Company
The Company qualifies as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, and, as such, may take advantage of specified reduced reporting requirements and deferred accounting standards adoption dates, and is relieved of other significant requirements that are otherwise generally applicable to other public companies. The Company will remain an emerging growth company for five years after its IPO date of May 5, 2021, unless one of the following occurs: (i) total annual gross revenues are $1.235 billion or more; (ii) the Company issues more than $1 billion in non-convertible debt; or (iii) the Company becomes a large accelerated filer with a public float of more than $0.7 billion.
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(e) Significant Accounting Policies
The Company’s significant accounting policies are included in Note 1, Basis of Presentation in the notes to our audited consolidated financial statements included in the 2023 Annual Report on Form 10-K.
(f) Recently Issued Accounting Standards
The following information reflects recent accounting standards that have been adopted or are pending adoption by the Company. The Company qualifies as an emerging growth company and, as such, has elected to use the extended transition period for complying with new or revised accounting standards and is not subject to the new or revised accounting standards applicable to public companies during the extended transition period. The accounting standards discussed below indicate effective dates for the Company as an emerging growth company using the extended transition period.
Accounting Standards Adopted in 2024
In March 2023, the FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (“ASU 2023-02”). Under current GAAP, an entity can only elect to apply the proportional amortization method to investments in low income housing tax credit (“LIHTC”) structures. The amendments in ASU 2023-02 allow entities to elect to account for equity investments made primarily for the purpose of receiving income tax credits using the proportional amortization method, regardless of the tax credit program through which the investment earns income tax credits, if certain conditions are met. ASU 2023-02 provides amendments to paragraph ASC 323-740-25-1, which sets forth the conditions needed to apply the proportional amortization method. The amendments make certain limited changes to those conditions to clarify their application to a broader group of tax credit investment programs. However, the conditions in substance remain consistent with current GAAP. The amendments in ASU 2023-02 also eliminate certain LIHTC-specific guidance to align the accounting more closely with the accounting for other equity investments in tax credit structures and require that the delayed equity contribution guidance in paragraph ASC 323-740-25-3 apply only to tax equity investments accounted for using the proportional amortization method. The Company adopted ASU 2023-02 on January 1, 2024, which did not have a significant impact on the Company’s consolidated financial statements.
Accounting Standards Issued But Not Yet Adopted
In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative (“ASU 2023-06”), amending disclosure or presentation requirements related to various subtopics in the FASB’s ASC. ASU 2023-06 was issued in response to the SEC’s initiative to update and simplify disclosure requirements. The SEC identified 27 disclosure requirements that were incremental to those in the ASC and referred them to the FASB for potential incorporation into GAAP. To avoid duplication, the SEC intended to eliminate those disclosure requirements from existing SEC regulations as the FASB incorporated them into the relevant ASC subtopics. ASU 2023-06 adds 14 of the 27 identified disclosure or presentation requirements to the ASC. ASU 2023-06 is to be applied prospectively, and early adoption is prohibited. For reporting entities subject to the SEC’s existing disclosure requirements, the effective dates of ASU 2023-06 will be the date on which the SEC’s removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective. If by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from the ASC and will not become effective for any entities. ASU 2023-06 is not expected to have a significant impact on the Company’s consolidated financial statements.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) - Improvements to Reportable Segment Disclosures (“ASU 2023-07”), amending disclosure requirements related to segment reporting primarily through enhanced disclosure about significant segment expenses and by requiring disclosure of segment information on an annual and interim basis. ASU 2023-07 is effective January 1, 2024 and for interim periods beginning after December 15, 2024. The key amendments: (i) require that a public entity disclose, on an annual and interim basis, significant segment expenses that are regularly provided to the chief operating decision maker (the “CODM”) and included within each reported measure of segment profit or loss; (ii) require that a public entity disclose, on an annual and interim basis, an amount for other segment items by reportable segment and a description of its composition; (iii) require that a public entity provide all annual disclosures about a reportable segment’s profit or loss currently required by GAAP in interim periods as well; (iv) clarify that if the CODM uses more than one measure of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources, an entity may report one or more of those additional measures of segment profit; (v) require that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the
7


reported measure of segment profit or loss in assessing segment performance and deciding how to allocate resources; and (vi) require that a public entity that has a single reportable segment provide all the disclosures required by the amendments in the ASU and all existing segment disclosures. The requirements of this standard for such entities will apply beginning with the Company’s annual report for the year ending December 31, 2024. The Company has one reportable segment and ASU 2023-07 is not expected to have a significant impact on the Company’s consolidated financial statements.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures (“ASU 2023-09”), which enhances the transparency and decision usefulness of income tax disclosures. ASU 2023-09 will require disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. Entities will also be required to disclose income/(loss) from continuing operations before income tax expense/(benefit) disaggregated between domestic and foreign, as well as income tax expense/(benefit) from continuing operations disaggregated by federal, state, and foreign. ASU 2023-09 is effective January 1, 2025 and is not expected to have a significant impact on the Company’s consolidated financial statements.
In March 2024, the FASB issued ASU 2024-02, Codification Improvements - Amendments to Remove References to the Concepts Statements (“ASU 2024-02”). ASU 2024-02 contains amendments to the ASC that remove references to various Concepts Statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior Statements to provide guidance in certain topical areas. FASB Concepts Statements are nonauthoritative. Removing all references to Concepts Statements in the guidance is intended to simplify the ASC and draw a distinction between authoritative and nonauthoritative literature. ASU 2024-02 is effective January 1, 2025 and is not expected to have a significant impact on the Company’s consolidated financial statements.
Note 2: Fair Value of Assets and Liabilities
Fair Value Hierarchy and Fair Value Measurement
Accounting standards require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
8


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 ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Measurement Categories: Changes in Fair Value Recorded In
March 31, 2024
Assets:
Securities available-for-sale:
U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds$105,006 $ $105,006 $ OCI
Derivatives – interest rate swap6  6  NI
Liabilities:
Derivatives – interest rate swap6  6  NI
December 31, 2023
Assets:
Securities available-for-sale:
U.S. government agency securities, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds$108,083 $ $108,083 $ OCI
Derivatives – interest rate swap10  10  NI
Liabilities:
Derivatives – interest rate swap10  10  NI
Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1 inputs) are used to determine the fair value of available-for-sale securities. If quoted market prices are not available, management obtains pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity, and credit spreads (Level 2 inputs). Level 2 securities include U.S. agencies’ or government-sponsored agencies’ debt securities, mortgage-backed securities, government agency-issued bonds, privately issued collateralized mortgage obligations, and corporate bonds. Level 3 securities are based on unobservable inputs that are supported by little or no market activity. In addition, values use discounted cash flow models and may include significant management judgment and estimation. As of March 31, 2024 and December 31, 2023, there were no Level 1 available-for-sale securities and no transfers between Level 1 and Level 2 classifications for assets or liabilities measured at fair value on a recurring basis.
On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both the Company’s credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to the Company.
Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as collateral dependent loans and other real estate owned. As of March 31, 2024 and December 31, 2023, the carrying amount of assets measured at fair value on a non-recurring basis was immaterial to the Company.
9


Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments as of March 31, 2024 and December 31, 2023. The carrying amounts in the following table are recorded in the consolidated balance sheets under the indicated captions. Further, management has not disclosed the fair value of financial instruments specifically excluded from disclosure requirements, such as BOLI.
March 31, 2024December 31, 2023
(in thousands)Carrying AmountsFair ValueFair Value HierarchyCarrying AmountsFair ValueFair Value Hierarchy
Financial assets:
Cash and cash equivalents$185,325 $185,325 Level 1$321,576 $321,576 Level 1
Time deposits in banks5,878 5,878 Level 15,858 5,858 Level 1
Securities available-for-sale105,006 105,006 Level 2108,083 108,083 Level 2
Securities held-to-maturity3,000 2,828 Level 33,077 2,913 Level 3
Loans held for sale10,243 11,357 Level 211,464 12,626 Level 2
Loans held for investment, net of allowance for credit losses3,069,477 2,920,533 Level 33,047,288 2,891,925 Level 3
FHLB stock and other investments22,801 N/AN/A21,801 N/AN/A
Interest rate swap6 6 Level 210 10 Level 2
Financial liabilities:
Interest rate swap$6 $6 Level 2$10 $10 Level 2
Time deposits
288,168 287,246 Level 2466,572 465,205 Level 2
Subordinated notes73,786 72,740 Level 373,749 72,693 Level 3
Other borrowings120,000 120,000 Level 2170,000 170,000 Level 2
The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at March 31, 2024 and December 31, 2023:
Cash and cash equivalents and time deposits in banks: The carrying amount is estimated to be fair value due to the liquid nature of the assets and their short-term maturities.
Investment securities: See discussion above for the methods and assumptions used by the Company to estimate the fair value of investment securities. Fair value of held-to-maturity securities is estimated by calculating the net present value of future cash flows based on observable market data, such as interest rates and yield curves (observable at commonly quoted intervals) as provided by an independent third party.
Loans held for sale: The fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.
Loans held for investment, net of allowance for credit losses: For variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, which use interest rates being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness without considering widening credit spreads due to market illiquidity, which approximates the exit price notion. The allowance for credit losses is considered to be a reasonable estimate of loan discount for credit quality concerns.
FHLB stock and other investments: Carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and do not have a readily determinable market value.
Derivatives - interest rate swap: See above for a discussion of the methods and assumptions used by the Company to estimate the fair value of derivatives.
10


Commitments to extend credit: These are primarily for adjustable rate loans and there are no differences between the committed amounts and their fair values. Commitments to fund fixed rate loans are at rates which approximate fair value at each reporting date.
Time deposits: The fair value is estimated using a discounted cash flow analysis that uses interest rates offered at each reporting date by the Company for certificates with similar remaining maturities, resulting in a Level 2 classification.
Subordinated notes: The fair value is estimated by discounting the future cash flow using the current three-month CME Term SOFR. The Company’s subordinated notes are not registered securities and were issued through private placements, resulting in a Level 3 classification. The notes are recorded at carrying value.
Other borrowings: The carrying amount is estimated to be fair value.
Note 3: Investment Securities
The Company’s investment securities portfolio includes obligations of states and political subdivisions, securities issued by U.S. federal government agencies, such as the SBA, and securities issued by U.S. GSEs, such as the FNMA, the FHLMC, and the FHLB. The Company also invests in residential and commercial mortgage-backed securities, collateralized mortgage obligations issued or guaranteed by GSEs, and corporate bonds, as reflected in the following tables.
A summary of the amortized cost and fair value related to securities held-to-maturity as of March 31, 2024 and December 31, 2023 is presented below.
(in thousands)Amortized CostGross UnrealizedFair Value
Gains(Losses)
March 31, 2024
Obligations of states and political subdivisions$3,000 $ $(172)$2,828 
Total held-to-maturity$3,000 $ $(172)$2,828 
December 31, 2023
Obligations of states and political subdivisions$3,077 $ $(164)$2,913 
Total held-to-maturity$3,077 $ $(164)$2,913 
For securities issued by states and political subdivisions, for purposes of evaluating whether to recognize credit loss expense, management considers: (i) issuer and/or guarantor credit ratings; (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity; (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities; (iv) internal credit review of the financial information; and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers.
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A summary of the amortized cost and fair value related to securities available-for-sale as of March 31, 2024 and December 31, 2023 is presented below.
(in thousands)Amortized CostGross Unrealized Fair Value
Gains(Losses)
March 31, 2024
U.S. government agency securities$9,912 $148 $(131)$9,929 
Mortgage-backed securities67,246 2 (12,303)54,945 
Obligations of states and political subdivisions43,158 6 (5,141)38,023 
Collateralized mortgage obligations351  (34)317 
Corporate bonds2,000  (208)1,792 
Total available-for-sale$122,667 $156 $(17,817)$105,006 
December 31, 2023
U.S. government agency securities$10,548 $142 $(149)$10,541 
Mortgage-backed securities68,585 7 (11,619)56,973 
Obligations of states and political subdivisions43,288 12 (4,841)38,459 
Collateralized mortgage obligations367  (35)332 
Corporate bonds2,000  (222)1,778 
Total available-for-sale$124,788 $161 $(16,866)$108,083 
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The amortized cost and fair value of investment securities by contractual maturity at March 31, 2024 and December 31, 2023 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)March 31, 2024December 31, 2023
Held-to-MaturityAvailable-for-SaleHeld-to-MaturityAvailable-for-Sale
Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
Within one year$245 $231 $ $ $277 $263 $ $ 
After one but within five years920 867 391 362 935 885 394 367 
After five years through ten years1,340 1,263 7,692 6,908 1,365 1,292 6,407 5,838 
After ten years495 467 35,075 30,753 500 473 36,487 32,254 
Investment securities not due at a single maturity date:
U.S. government agency securities  9,912 9,929   10,548 10,541 
Mortgage-backed securities  67,246 54,945   68,585 56,973 
Collateralized mortgage obligations  351 317   367 332 
Corporate bonds  2,000 1,792   2,000 1,778 
Total$3,000 $2,828 $122,667 $105,006 $3,077 $2,913 $124,788 $108,083 
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There were no purchases or sales of investment securities during the three months ended March 31, 2024 and March 31, 2023.
Pledged investment securities are shown in the following table:
(in thousands)March 31, 2024December 31, 2023
Pledged to:
The State of California, securing deposits of public funds and borrowings$53,418 $55,435 
The Federal Reserve Discount Window, increasing borrowing capacity47,939 48,964 
Total pledged investment securities$101,357 $104,399 
The following table details the gross unrealized losses and fair values aggregated by investment category and length of time that individual available-for-sale securities have been in a continuous unrealized loss position at March 31, 2024 and December 31, 2023:
Less than 12 months 12 months or moreTotal securities in a loss position
(in thousands)Fair ValueUnrealized Loss Fair ValueUnrealized Loss Fair ValueUnrealized Loss
March 31, 2024
U.S. government agency securities$1,926 $(6)$5,761 $(125)$7,687 $(131)
Mortgage-backed securities1  53,592 (12,303)53,593 (12,303)
Obligations of states and political subdivisions  36,501 (5,141)36,501 (5,141)
Collateralized mortgage obligations  317 (34)317 (34)
Corporate bonds  1,792 (208)1,792 (208)
Total temporarily impaired securities
$1,927 $(6)$97,963 $(17,811)$99,890 $(17,817)
December 31, 2023
U.S. government agency securities$1,130 $(14)$7,081 $(135)$8,211 $(149)
Mortgage-backed securities  55,609 (11,619)55,609 (11,619)
Obligations of states and political subdivisions  36,930 (4,841)36,930 (4,841)
Collateralized mortgage obligations  332 (35)332 (35)
Corporate bonds  1,778 (222)1,778 (222)
Total temporarily impaired securities
$1,130 $(14)$101,730 $(16,852)$102,860 $(16,866)
There were 150 and 149 available-for-sale securities in unrealized loss positions at March 31, 2024 and December 31, 2023, respectively. As of March 31, 2024, the investment portfolio included 144 investment securities that had been in a continuous loss position for twelve months or more and six investment securities that had been in a loss position for less than twelve months.
There was one held-to-maturity security in a continuous unrealized loss position at March 31, 2024 and December 31, 2023, which had been in a continuous loss position for more than twelve months.
Obligations issued or guaranteed by government agencies such as the GNMA and the SBA or GSEs under conservatorship such as the FNMA and the FHLMC, are guaranteed or sponsored by agencies of the U.S. government and have strong credit profiles. The Company therefore expects to receive all contractual interest payments on time and believes the risk of credit losses on these securities is remote.
14


The Company’s investment in obligations of states and political subdivisions are deemed credit worthy after management’s comprehensive analysis of the issuers’ latest financial information, credit ratings by major credit agencies, and/or credit enhancements.
Non-Marketable Securities Included in Other Assets
FHLB capital stock: As a member of the FHLB, the Company is required to maintain a minimum investment in FHLB capital stock determined by the board of directors of the FHLB. The minimum investment requirements can increase in the event the Company increases its total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $100 per share par value. The Company held $15.0 million of FHLB stock at March 31, 2024 and December 31, 2023. The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and do not have a readily determinable market value. Based on management’s analysis of the FHLB’s financial condition and certain qualitative factors, management determined that the FHLB stock was not impaired at March 31, 2024 and December 31, 2023.
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Note 4: Loans and Allowance for Credit Losses
The Company’s loan portfolio is its largest class of earning assets and typically provides higher yields than other types of earning assets. Associated with the higher yields is an inherent amount of credit risk which the Company attempts to mitigate through strong underwriting practices. The following table presents the balance of each major product type within the Company’s portfolio as of the dates indicated.
(in thousands)March 31, 2024December 31, 2023
Real estate:
Commercial$2,687,456 $2,685,419 
Commercial land and development14,678 15,551 
Commercial construction62,513 62,863 
Residential construction18,141 15,456 
Residential28,685 25,893 
Farmland51,422 51,669 
Commercial:
Secured143,273 165,109 
Unsecured26,175 23,850 
Consumer and other73,917 38,166 
Subtotal3,106,260 3,083,976 
Net deferred loan fees(2,130)(2,257)
Loans held for investment
3,104,130 3,081,719 
Allowance for credit losses - loans(34,653)(34,431)
Loans held for investment, net of allowance for credit losses$3,069,477 $3,047,288 
Underwriting
Commercial loans: Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay its obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected, and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.
Real estate loans: Real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected than other loans by conditions in the real estate market or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry. Management monitors and evaluates commercial real estate loans based on collateral, geography, and risk grade criteria.
Construction loans: With respect to construction loans that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans may be underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates, and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the completed project. These estimates may be
16


inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the ultimate success of the project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property, or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored using on-site inspections and are generally considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions, and the availability of long-term financing.
Residential real estate loans: Residential real estate loans are underwritten based upon the borrower’s income, credit history, and collateral. To monitor and manage residential loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.
Farmland loans: Farmland loans are generally made to producers and processors of crops and livestock. Repayment is primarily from the sale of an agricultural product or service. Farmland loans are secured by real property and are susceptible to changes in market demand for specific commodities. This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles, as well as adverse weather conditions.
Consumer loans: The Company purchased consumer loans underwritten utilizing credit scoring analysis to supplement the underwriting process. To monitor and manage consumer loan risk, policies and procedures are developed and modified, as needed. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, collection remedies, the number of such loans a borrower can have at one time, and documentation requirements.
Credit Quality Indicators
The Company has established a loan risk rating system to measure and monitor the quality of the loan portfolio. All loans are assigned a risk rating from the inception of the loan until the loan is paid off. The primary loan grades are as follows:
Loans rated pass: These are loans to borrowers with satisfactory financial support, repayment capacity, and credit strength. Borrowers in this category demonstrate fundamentally sound financial positions, repayment capacity, credit history, and management expertise. Loans in this category must have an identifiable and stable source of repayment and meet the Company’s policy regarding debt service coverage ratios. These borrowers are capable of sustaining normal economic, market, or operational setbacks without significant financial impacts and their financial ratios and trends are acceptable. Negative external industry factors are generally not present. The loan may be secured, unsecured, or supported by non-real estate collateral for which the value is more difficult to determine and/or marketability is more uncertain.
Loans rated watch: These are loans which have deficient loan quality and potentially significant issues, but losses do not appear to be imminent, and the issues may be temporary in nature. The significant issues are typically: (i) a history of losses or events that threaten the borrower’s viability; (ii) a property with significant depreciation and/or marketability concerns; or (iii) poor or deteriorating credit, occasional late payments, and/or limited reserves but the loan is generally kept current. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date.
Loans rated substandard: These are loans which are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged (if any). Loans so classified exhibit a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Loans are characterized by the distinct possibility that the Company may sustain some loss if the deficiencies are not corrected.
Loans rated doubtful: These are loans for which the collection or liquidation of the entire debt is highly questionable or improbable. Typically, the possibility of loss is extremely high. The losses on these loans are deferred until all pending factors have been addressed.
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The amortized cost basis of the Company’s loans by origination year, where origination is defined as the later of origination or renewal date, and credit quality indicator as of the period indicated was as follows:
Amortized Cost Basis by Origination Year as of March 31, 2024
(in thousands)20242023202220212020PriorRevolving LoansRevolving Converted to TermTotal
Real estate:
Commercial
Pass$71,988 $329,126 $971,602 $670,590 $236,866 $360,603 $4,850 $ $2,645,625 
Watch  11,517 15,855 4,699 5,178   37,249 
Substandard     1,849   1,849 
Doubtful         
Total71,988 329,126 983,119 686,445 241,565 367,630 4,850  2,684,723 
Commercial land and development
Pass1,663 9,899 2,217  183 714   14,676 
Watch         
Substandard         
Doubtful         
Total1,663 9,899 2,217  183 714   14,676 
Commercial construction
Pass110 7,124 37,899  11,230 5,897   62,260 
Watch         
Substandard         
Doubtful         
Total110 7,124 37,899  11,230 5,897   62,260 
Residential construction
Pass14,229   3,913     18,142 
Watch         
Substandard         
Doubtful         
Total14,229   3,913     18,142 
Residential
Pass3,203 4,828 3,896 6,195 2,259 6,925 1,409  28,715 
Watch         
Substandard         
Doubtful         
Total3,203 4,828 3,896 6,195 2,259 6,925 1,409  28,715 
Farmland
Pass690 2,302 8,030 12,669 7,826 19,884 3  51,404 
Watch