Five Star Bancorp (NASDAQ:FSBC) Q2 2023 Earnings Conference Call July 25, 2023 1:00 PM ET Company Participants James Beckwith - President, CEO & Director Heather Luck - SVP & CFO Conference Call Participants Robert Terrell - Stephens Inc. Gary Tenner - D.A. Davidson & Co. Wood Lay - KBW Operator Good day, everyone. Welcome to the Five Star Bancorp Second Quarter Earnings Webcast. [Operator Instructions]. Before we get started, let me remind you that today's meeting will include some forward-looking statemen ...

Table of Contents 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, 2023 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) (State or other jurisdic ...

Five Star Bancorp (NASDAQ:FSBC) Q1 2023 Results Conference Call April 25, 2023 1:00 PM ET Company Participants James Beckwith - President, CEO Heather Luck - SVP, CFO Operator Good day, and welcome to the Five Star Bancorp First Quarter Earnings Webcast. Please note, this is a closed conference call and you are encouraged to listen via the webcast. After today’s presentation, there will be an opportunity for those provided with a dial-in numbers to ask question. [Operator Instructions]. Before we get starte ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 or o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 95670 (Zip Code) For the transition period from _____ to _____ Commission file number: 001-40379 FIVE STAR BANCORP (Exact name of registrant as specified in its charter) California (State or oth ...

Five Star Bancorp (NASDAQ:FSBC) Q4 2022 Earnings Conference Call January 31, 2023 1:00 PM ET Company Participants James Beckwith - President and CEO Heather Luck - Senior Vice President and CFO Conference Call Participants Andrew Terrell - Stephens Clark Wright - D.A. Davidson Woody Lay - KBW Operator Welcome to the Five Star Bancorp Fourth Quarter and Year End Earnings Webcast. Please note, this is a closed conference call and you are encouraged to listen via the webcast. After today’s presentation, there ...

Fourth Quarter 2022 Investor Presentation | 11 Consistent Loan Growth Michael Rizzo Senior Vice President and Chief Banking Officer Five Star since 2005 Mike Lee Senior Vice President and Chief Regulatory Officer Five Star since 2005 Brett Wait Senior Vice President and Chief Information Officer Five Star since 2011 Heather Luck Senior Vice President and Chief Financial Officer Five Star since 2018 Shelley Wetton Senior Vice President and Chief Marketing Officer Five Star since 2015 Financial Highlights FIV ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 OR Not Applicable (Former name, former address and formal fiscal year, if changed since last report) Securities registered pursuant to 12(b) of the Act: o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transitio ...

Five Star Bancorp (NASDAQ:FSBC) Q3 2022 Earnings Conference Call October 25, 2022 1:00 PM ET Company Participants James Beckwith - President and CEO Heather Luck - Senior Vice President and CFO Conference Call Participants Andrew Terrell - Stephens Gary Tenner - D.A. Davidson Woody Lay - KBW Operator Good day, everyone. And welcome to the Five Star Bancorp Third Quarter Earnings Webcast. Please note, this is a closed conference call and you are encouraged to listen via the webcast. After today’s presentatio ...

PART I FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for Five Star Bancorp, covering financial condition, results of operations, and related disclosures [ITEM 1. Financial Statements](index=5&type=section&id=ITEM%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements of Five Star Bancorp and its subsidiary for the periods ended June 30, 2022, and December 31, 2021, including balance sheets, statements of income, comprehensive income, changes in shareholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and financial instrument details [Consolidated Balance Sheets (unaudited)](index=6&type=section&id=Consolidated%20Balance%20Sheets%20(unaudited)) This table presents the unaudited consolidated balance sheets, detailing assets, liabilities, and shareholders' equity for June 30, 2022, and December 31, 2021 | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------------------------------ | :----------------------------- | :------------------------------- | | **ASSETS** | | | | Cash and cash equivalents | $270,758 | $425,329 | | Securities available-for-sale, at fair value | $122,426 | $148,807 | | Loans held for investment, net | $2,354,725 | $1,911,217 | | Total assets | $2,836,071 | $2,556,761 | | **LIABILITIES AND SHAREHOLDERS' EQUITY** | | | | Total deposits | $2,501,311 | $2,285,890 | | FHLB advances | $60,000 | $0 | | Total liabilities | $2,602,871 | $2,321,715 | | Total shareholders' equity | $233,200 | $235,046 | [Consolidated Statements of Income (unaudited)](index=7&type=section&id=Consolidated%20Statements%20of%20Income%20(unaudited)) This table presents the unaudited consolidated statements of income, outlining revenues, expenses, and net income for the three and six months ended June 30, 2022, and 2021 | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Interest and fee income | $25,961 | $19,308 | $48,811 | $38,498 | | Interest expense | $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 | $0 | $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 | | 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 | [Consolidated Statements of Comprehensive Income (unaudited)](index=8&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income%20(unaudited)) This table presents the unaudited consolidated statements of comprehensive income, including net income and other comprehensive income components for the three and six months ended June 30, 2022, and 2021 | Metric | Three Months Ended June 30, 2022 (in thousands) | Three Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net income | $9,953 | $9,828 | $19,815 | $20,106 | | Net unrealized holding (loss) gain on securities available-for-sale | $(7,849) | $903 | $(17,287) | $(711) | | Other comprehensive (loss) income | $(5,529) | $678 | $(12,181) | $(1,057) | | Total comprehensive income | $4,424 | $10,506 | $7,634 | $19,049 | [Consolidated Statements of Changes in Shareholders' Equity (unaudited)](index=9&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Shareholders'%20Equity%20(unaudited)) This section details the unaudited consolidated statements of changes in shareholders' equity, reflecting movements in common stock, retained earnings, and comprehensive loss - Shareholders' equity decreased to **$233.2 million** at June 30, 2022, from **$235.0 million** at December 31, 2021, primarily due to a net decline of **$12.2 million** in accumulated other comprehensive loss and **$10.1 million** in cash dividends paid, partially offset by **$19.8 million** in net income[15](index=15&type=chunk)[25](index=25&type=chunk)[281](index=281&type=chunk) | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------------------------------ | :----------------------------- | :------------------------------- | | Common stock | $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** | [Consolidated Statements of Cash Flows (unaudited)](index=11&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows%20(unaudited)) This table presents the unaudited consolidated statements of cash flows, categorizing cash movements from operating, investing, and financing activities for the six months ended June 30, 2022, and 2021 | Cash Flow Activity | Six Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2021 (in thousands) | | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Net cash provided by operating activities | $11,332 | $21,769 | | Net cash used in investing activities | $(431,197) | $(122,410) | | 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 end of period | $270,758 | $536,604 | [Notes to Consolidated Financial Statements (unaudited)](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20(unaudited)) This section provides detailed notes explaining the basis of presentation, significant accounting policies, and financial instrument details supporting the consolidated financial statements [Note 1: Basis of Presentation](index=12&type=section&id=Note%201:%20Basis%20of%20Presentation) This note describes the Company's business operations, its conversion to a C Corporation, and its status as an emerging growth company - Five Star Bancorp, through Five Star Bank, provides financial services primarily to small and middle-market businesses, professionals, and individuals in Northern California, focusing on commercial real estate, land development, construction, and operating lines of credit[29](index=29&type=chunk) - The Company terminated its Subchapter S corporation status and became a taxable C Corporation on May 5, 2021, in connection with its IPO, receiving **$111.2 million** in net proceeds[30](index=30&type=chunk)[31](index=31&type=chunk) - The Company qualifies as an emerging growth company and has elected to use the extended transition period for complying with new or revised financial accounting standards[35](index=35&type=chunk) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income (in thousands) | $9,953 | $9,828 | $19,815 | $20,106 | | Basic EPS | $0.58 | $0.67 | $1.15 | $1.57 | | Diluted EPS | $0.58 | $0.67 | $1.15 | $1.57 | [Note 2: Recently Issued Accounting Standards](index=14&type=section&id=Note%202:%20Recently%20Issued%20Accounting%20Standards) This note outlines the adoption of new accounting standards, including ASU No. 2016-02 (Leases) and ASU No. 2017-12 (Derivatives and Hedging), and preparations for ASU No. 2016-13 (CECL model) - The Company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2022, recognizing Right-of-Use Assets (ROUA) and corresponding lease liabilities for operating leases, which did not materially impact consolidated statements of income or cash flows[42](index=42&type=chunk) - The Company adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815), on January 1, 2022, with an immaterial impact on its consolidated financial statements[43](index=43&type=chunk) - The Company is preparing for the adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (CECL model), effective for fiscal years beginning after December 15, 2022, which has the potential to increase the allowance for loan losses at adoption[44](index=44&type=chunk)[45](index=45&type=chunk) [Note 3: Fair Value of Assets and Liabilities](index=16&type=section&id=Note%203:%20Fair%20Value%20of%20Assets%20and%20Liabilities) This note categorizes fair value measurements into Level 1, Level 2, and Level 3 inputs, detailing the valuation methods for various financial instruments - The Company categorizes fair value measurements into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)[48](index=48&type=chunk)[49](index=49&type=chunk) - As of June 30, 2022, and December 31, 2021, all available-for-sale securities and derivatives were valued using Level 2 inputs, while held-to-maturity securities, loans held for investment, and subordinated notes were valued using Level 3 inputs[51](index=51&type=chunk)[56](index=56&type=chunk) | Financial Instrument | June 30, 2022 Fair Value (in thousands) | December 31, 2021 Fair Value (in thousands) | Fair Value Hierarchy (June 30, 2022) | | :------------------------------------ | :-------------------------------------- | :---------------------------------------- | :----------------------------------- | | Securities available-for-sale | $122,426 | $148,807 | Level 2 | | Securities held-to-maturity | $4,332 | $5,197 | Level 3 | | Loans held for investment, net | $2,215,450 | $1,893,431 | Level 3 | | Deposits | $2,300,572 | $2,210,555 | Level 2 | | Subordinated notes | $28,420 | $28,386 | Level 3 | [Note 4: Investment Securities](index=19&type=section&id=Note%204:%20Investment%20Securities) This note details the Company's investment portfolio, including available-for-sale and held-to-maturity securities, and discusses unrealized gains and losses - The Company's investment portfolio includes obligations of states and political subdivisions, U.S. federal government agencies, and GSEs, with most securities classified as available-for-sale[64](index=64&type=chunk)[228](index=228&type=chunk) | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--------------------------------- | :------------ | :---------------- | | Amortized Cost | $4,477 | $4,946 | | Fair Value | $4,332 | $5,197 | | Gross Unrealized Losses | $(145) | $0 | | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :--------------------------------- | :------------ | :---------------- | | Amortized Cost | $140,521 | $149,610 | | Fair Value | $122,426 | $148,807 | | Gross Unrealized Losses | $(18,193) | $(1,485) | - Unrealized losses on available-for-sale securities increased significantly to **$(18.2) million** at June 30, 2022, from **$(1.5) million** at December 31, 2021, primarily due to interest rate changes, but are not considered other than temporarily impaired[68](index=68&type=chunk)[73](index=73&type=chunk)[235](index=235&type=chunk) - Pledged investment securities decreased from **$63.4 million** at December 31, 2021, to **$21.7 million** at June 30, 2022, securing deposits of public funds and borrowings[72](index=72&type=chunk) [Note 5: Loans and Allowance for Loan Losses](index=23&type=section&id=Note%205:%20Loans%20and%20Allowance%20for%20Loan%20Losses) This note details the composition and growth of the loan portfolio, credit quality metrics, and the allowance for loan losses, including non-accrual loans and COVID-19 deferments - Total loans held for investment increased by **$446.1 million**, or **23.06%**, to **$2.4 billion** at June 30, 2022, from **$1.9 billion** at December 31, 2021, primarily driven by commercial real estate loans[78](index=78&type=chunk)[80](index=80&type=chunk)[166](index=166&type=chunk) | Loan Type | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Commercial Real Estate | $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 | | Commercial Unsecured | $24,262 | $21,136 | | PPP | $0 | $22,124 | | Consumer and Other | $21,701 | $17,167 | | **Total Loans Held for Investment** | **$2,382,275** | **$1,936,066** | - Credit quality remains strong, with non-accrual loans at **$0.4 million** (**0.02%** of total loans) at June 30, 2022, down from **$0.6 million** (**0.03%**) at December 31, 2021[166](index=166&type=chunk)[257](index=257&type=chunk) | Metric | June 30, 2022 | December 31, 2021 | | :------------------------------------------ | :------------ | :---------------- | | Allowance for Loan Losses (in thousands) | $25,786 | $23,243 | | Allowance for Loan Losses to Total Loans Held for Investment | 1.08% | 1.20% | | Allowance for Loan Losses to Non-accrual Loans | 5,834.88% | 3,954.30% | - The provision for loan losses increased to **$2.3 million** for the three months ended June 30, 2022, compared to no provision in the prior year, primarily due to loan growth and economic conditions[192](index=192&type=chunk) - As of June 30, 2022, two borrowing relationships totaling **$0.1 million** were on COVID-19 deferment, a significant decrease from **$12.2 million** at December 31, 2021[166](index=166&type=chunk)[257](index=257&type=chunk) [Note 6: Interest-Bearing Deposits](index=33&type=section&id=Note%206:%20Interest-Bearing%20Deposits) This note details the composition and growth of interest-bearing deposits, including transaction, savings, money market, and time accounts, and discusses related interest expense - Total interest-bearing deposits increased to **$1.5 billion** at June 30, 2022, from **$1.38 billion** at December 31, 2021[110](index=110&type=chunk) | Deposit Type | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------------- | :----------------------------- | :------------------------------- | | Interest-bearing transaction accounts | $221,024 | $278,406 | | Savings accounts | $94,122 | $88,536 | | Money market accounts | $976,093 | $912,558 | | Time accounts | $204,006 | $104,272 | | **Total Interest-Bearing Deposits** | **$1,495,245** | **$1,383,772** | - Total network deposits (CDARS and ICS) increased to **$334.3 million** at June 30, 2022, from **$330.0 million** at December 31, 2021[112](index=112&type=chunk) - Interest expense on interest-bearing deposits increased to **$1.0 million** for the three months ended June 30, 2022, from **$0.6 million** in the prior year, reflecting higher rates on savings, money market, and maturing deposit products[113](index=113&type=chunk)[181](index=181&type=chunk) [Note 7: Leases](index=35&type=section&id=Note%207:%20Leases) This note describes the Company's operating lease commitments and the impact of adopting ASU 2016-02 (Topic 842) on its financial statements - The Company leases office space under non-cancelable operating leases expiring through 2032, with renewal options[114](index=114&type=chunk) - Following the adoption of ASU 2016-02 (Topic 842) on January 1, 2022, the Company recorded a Right-of-Use Asset (ROUA) of **$4.47 million** and a corresponding lease liability of **$4.74 million** on its balance sheet[15](index=15&type=chunk)[42](index=42&type=chunk)[117](index=117&type=chunk) | Metric | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :------------------ | :------------------------------- | :----------------------------- | | Operating lease cost | $278 | $563 | | Sublease income | $(5) | $(11) | | **Total lease cost** | **$273** | **$552** | [Note 8: Long Term Debt and Other Borrowings](index=37&type=section&id=Note%208:%20Long%20Term%20Debt%20and%20Other%20Borrowings) This note details the Company's long-term debt, including subordinated notes and FHLB advances, and outlines available lines of credit - The Company has **$28.4 million** in subordinated notes outstanding, issued in 2017 and 2019, which qualify as Tier 2 capital and bear fixed-to-floating interest rates[123](index=123&type=chunk)[124](index=124&type=chunk)[125](index=125&type=chunk) - FHLB advances increased to **$60.0 million** at June 30, 2022, from zero at December 31, 2021, with total financing availability of **$885.5 million**[15](index=15&type=chunk)[126](index=126&type=chunk) - The Company had **$160.0 million** in unsecured federal funds lines of credit and **$17.6 million** in Federal Reserve Discount Window borrowing capacity, with no outstanding amounts at June 30, 2022[128](index=128&type=chunk)[129](index=129&type=chunk) [Note 9: Income Taxes](index=38&type=section&id=Note%209:%20Income%20Taxes) This note explains the significant increase in income tax provision due to the Company's conversion to a C Corporation and provides pro forma tax expense for prior periods - The Company's provision for income taxes increased significantly to **$4.1 million** for Q2 2022 (effective tax rate **29.07%**) and **$7.7 million** for H1 2022 (effective tax rate **28.09%**), compared to **$0.7 million** and **$1.1 million** in the prior year periods, due to its conversion from an S Corporation to a C Corporation in May 2021[17](index=17&type=chunk)[131](index=131&type=chunk)[221](index=221&type=chunk)[222](index=222&type=chunk) - Pro forma income tax expense for Q2 2021 and H1 2021, assuming C Corporation status, would have been **$3.1 million** and **$6.3 million**, respectively, at a combined statutory rate of **29.56%**[131](index=131&type=chunk)[223](index=223&type=chunk) [Note 10: Shareholders' Equity](index=39&type=section&id=Note%2010:%20Shareholders'%20Equity) This note details dividend declarations, non-cash stock compensation expense, and unrecognized compensation expense related to unvested restricted shares - The board of directors declared a **$0.15** per common share dividend, totaling **$2.6 million**, on April 21, 2022[133](index=133&type=chunk) - Non-cash stock compensation expense was **$0.3 million** for Q2 2022 and **$0.6 million** for H1 2022, down from **$1.0 million** for both periods in 2021[136](index=136&type=chunk) - As of June 30, 2022, there were **107,824** unvested restricted shares with **$2.2 million** in unrecognized compensation expense[137](index=137&type=chunk) [Note 11: Commitments and Contingencies](index=40&type=section&id=Note%2011:%20Commitments%20and%20Contingencies) This note outlines unfunded loan commitments, standby letters of credit, and significant concentrations of credit risk in real estate-related loans and large deposit relationships - Total unfunded loan commitments and standby letters of credit increased to **$280.0 million** at June 30, 2022, from **$248.9 million** at December 31, 2021[140](index=140&type=chunk) - The Company has a significant concentration of credit risk in real estate-related loans, representing **92.42%** of loans held for investment at June 30, 2022[142](index=142&type=chunk) - Deposit concentrations include **78** relationships exceeding **$5.0 million**, totaling **$1.3 billion** (**52.14%** of total deposits) at June 30, 2022, with the largest single relationship at **$175.5 million** (**7.02%**)[143](index=143&type=chunk) [Note 12: Subsequent Events](index=41&type=section&id=Note%2012:%20Subsequent%20Events) This note reports the declaration of a quarterly cash dividend by the board of directors subsequent to the reporting period - On July 21, 2022, the board of directors declared a **$0.15** per common share dividend, totaling **$2.6 million**[147](index=147&type=chunk) [ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=42&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Five Star Bancorp's financial condition and results of operations, highlighting key performance indicators, asset quality, liquidity, and capital adequacy for the periods ended June 30, 2022, and December 31, 2021, with comparisons to the prior year [Company Overview](index=42&type=section&id=Company%20Overview) This section provides an overview of Five Star Bancorp's business, its primary market, and key financial metrics as of June 30, 2022 - Five Star Bancorp operates through its wholly-owned subsidiary, Five Star Bank, providing banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California[153](index=153&type=chunk) - As of June 30, 2022, the Company had total assets of **$2.8 billion**, total loans held for investment (net of allowance for loan losses) of **$2.4 billion**, and total deposits of **$2.5 billion**[153](index=153&type=chunk) [Factors Affecting Comparability of Financial Results](index=43&type=section&id=Factors%20Affecting%20Comparability%20of%20Financial%20Results) This section discusses factors impacting the comparability of financial results, including the Company's conversion from S Corporation to C Corporation status and increased public company costs - The Company's financial results are affected by its conversion from an S Corporation to a C Corporation in Q2 2021, leading to U.S. federal and higher California state income tax expenses, making prior period comparisons non-comparable[155](index=155&type=chunk) - As a public company post-IPO, the Company incurs additional costs for personnel, legal, consulting, regulatory, insurance, accounting, and investor relations[159](index=159&type=chunk)[160](index=160&type=chunk) - The Company, as an emerging growth company, has elected to use the extended transition period for adopting new accounting standards[163](index=163&type=chunk) [S Corporation Status](index=43&type=section&id=S%20Corporation%20Status) This subsection explains how the Company's revocation of S Corporation status and subsequent C Corporation taxation impacts financial comparability - The Company's revocation of S Corporation status in Q2 2021 means it now pays U.S. federal and higher California state income taxes, impacting net income and EPS comparability with prior periods[155](index=155&type=chunk) - A Tax Sharing Agreement with pre-IPO shareholders addresses potential liabilities for additional income taxes from prior S Corporation periods[156](index=156&type=chunk) [Public Company Costs](index=44&type=section&id=Public%20Company%20Costs) This subsection details the increased operational and compliance costs incurred by the Company as a public entity post-IPO - Post-IPO, the Company incurs increased costs for personnel, legal, consulting, regulatory, insurance, accounting, and investor relations due to public company operational and compliance requirements[159](index=159&type=chunk)[160](index=160&type=chunk) [Critical Accounting Estimates](index=44&type=section&id=Critical%20Accounting%20Estimates) This subsection identifies the allowance for loan losses as the most significant accounting estimate and notes the Company's election for extended transition periods for new accounting standards - The allowance for loan losses is identified as the most significant accounting estimate, requiring difficult, subjective judgments and assumptions[36](index=36&type=chunk)[162](index=162&type=chunk) - The Company, as an emerging growth company, has elected to take advantage of the extended transition period for adopting new or revised accounting standards[163](index=163&type=chunk) [Executive Summary](index=45&type=section&id=Executive%20Summary) This section provides a high-level overview of the Company's financial performance and condition, including key income statement and balance sheet metrics | Metric | Q2 2022 (in thousands) | Q2 2021 (in thousands) | H1 2022 (in thousands) | H1 2021 (in thousands) | | :--------------------------------- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Net interest income | $24,491 | $18,296 | $46,353 | $36,344 | | Provision for loan losses | $2,250 | $0 | $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 | | Basic EPS | $0.58 | $0.67 | $1.15 | $1.57 | | Diluted EPS | $0.58 | $0.67 | $1.15 | $1.57 | | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :--------------------------------- | :------ | :------ | :------ | :------ | | 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% | | Metric | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------------------------------ | :----------------------------- | :------------------------------- | | 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 shareholders' equity | $233,200 | $235,046 | | Allowance for loan losses to total loans held for investment | 1.08% | 1.20% | | Non-accrual loans to total loans held for investment | 0.02% | 0.03% | | Total capital (to risk-weighted assets) | 11.77% | 13.98% | | Tier 1 leverage | 8.81% | 9.47% | [RESULTS OF OPERATIONS](index=48&type=section&id=RESULTS%20OF%20OPERATIONS) This section analyzes the Company's financial performance, focusing on net interest income, provision for loan losses, non-interest income, non-interest expense, and income taxes [Net Interest Income](index=48&type=section&id=Net%20Interest%20Income) This subsection analyzes the drivers of net interest income and net interest margin, including changes in interest-earning assets and interest-bearing liabilities - Net interest income increased by **$6.2 million** (**33.86%**) to **$24.5 million** for Q2 2022 and by **$10.0 million** (**27.54%**) to **$46.4 million** for H1 2022, driven by higher yields on interest-earning deposits and investment securities[174](index=174&type=chunk)[182](index=182&type=chunk) - Net interest margin increased to **3.70%** for Q2 2022 (from **3.48%** in Q2 2021) and remained constant at **3.65%** for H1 2022, despite a decrease in average loan yields[174](index=174&type=chunk)[182](index=182&type=chunk) - Average loan yields decreased from **4.73%** to **4.47%** for Q2 and from **4.84%** to **4.50%** for H1, primarily due to macroeconomic changes affecting fixed-rate loans and variable-rate loans not repricing[174](index=174&type=chunk)[182](index=182&type=chunk) | Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 | | :------------------ | :------ | :------ | :------ | :------ | | Net interest income | $24,491 | $18,296 | $46,353 | $36,344 | | Net interest margin | 3.70% | 3.48% | 3.65% | 3.65% | [Provision for Loan Losses](index=53&type=section&id=Provision%20for%20Loan%20Losses) This subsection discusses the provision for loan losses, attributing changes to loan growth, economic conditions, and shifts in loan classifications - The Company recorded a **$2.3 million** provision for loan losses in Q2 2022 (vs. **$0** in Q2 2021) and **$3.2 million** in H1 2022 (vs. **$0.2 million** in H1 2021), primarily due to loan growth and economic conditions[192](index=192&type=chunk)[193](index=193&type=chunk) - A decrease in loans designated as "watch" and "substandard" from **$57.8 million** (June 30, 2021) to **$23.1 million** (June 30, 2022) partially offset the increase in provision[192](index=192&type=chunk)[193](index=193&type=chunk) [Non-interest Income](index=53&type=section&id=Non-interest%20Income) This subsection analyzes changes in non-interest income, including gains on loan sales, loan-related fees, and other income sources - Total non-interest income increased by **8.18%** to **$2.0 million** for Q2 2022 and by **20.80%** to **$4.2 million** for H1 2022[196](index=196&type=chunk)[200](index=200&type=chunk) - Gain on sale of loans decreased by **23.83%** for Q2 and **13.50%** for H1, primarily due to a decline in effective yields on loans sold and lower sales volume in Q2 2022[196](index=196&type=chunk)[197](index=197&type=chunk)[200](index=200&type=chunk)[201](index=201&type=chunk) - Loan-related fees increased significantly, driven by **$0.4 million** in swap referral fees in Q2 2022 and **$0.7 million** in H1 2022[198](index=198&type=chunk)[202](index=202&type=chunk) - Other income for H1 2022 saw a substantial increase of **554.24%** due to a **$0.3 million** gain from a venture-backed fund distribution[200](index=200&type=chunk)[202](index=202&type=chunk) [Non-interest Expense](index=54&type=section&id=Non-interest%20Expense) This subsection examines changes in non-interest expenses, including salaries, professional services, advertising, and the resulting impact on the efficiency ratio - Total non-interest expense increased by **6.52%** to **$10.2 million** for Q2 2022 and by **7.59%** to **$19.8 million** for H1 2022[207](index=207&type=chunk)[213](index=213&type=chunk) - Salaries and employee benefits increased due to a **14.94%** increase in headcount and higher commissions/bonuses, partially offset by deferred loan origination costs[207](index=207&type=chunk)[213](index=213&type=chunk) - Professional services decreased significantly (**56.67%** for Q2, **60.53%** for H1) as IPO-related audit, consulting, and legal costs did not recur in 2022[209](index=209&type=chunk)[216](index=216&type=chunk) - Advertising and promotional expenses increased due to more in-person business development and marketing events[210](index=210&type=chunk)[217](index=217&type=chunk) - The efficiency ratio improved to **38.53%** for Q2 2022 (from **47.56%** in Q2 2021) and **39.14%** for H1 2022 (from **46.18%** in H1 2021), primarily due to increased net interest income[166](index=166&type=chunk) [Provision for Income Taxes](index=56&type=section&id=Provision%20for%20Income%20Taxes) This subsection details the significant increase in the provision for income taxes and effective tax rates, primarily due to the Company's conversion to a C Corporation - The provision for income taxes increased by **$3.3 million** (**455.86%**) to **$4.1 million** for Q2 2022 and by **$6.6 million** (**593.55%**) to **$7.7 million** for H1 2022, reflecting the Company's C Corporation status[221](index=221&type=chunk)[222](index=222&type=chunk) - Effective tax rates were **29.07%** for Q2 2022 and **28.09%** for H1 2022, compared to **6.95%** and **5.26%** for the prior year periods (which included S Corporation status)[221](index=221&type=chunk)[222](index=222&type=chunk) [Pro Forma C Corporation Income Tax Expense](index=57&type=section&id=Pro%20Forma%20C%20Corporation%20Income%20Tax%20Expense) This subsection presents pro forma income tax expense and net income for prior periods, assuming the Company had C Corporation status for comparability - Had the Company been a C Corporation for the entirety of Q2 and H1 2021, the pro forma provision for combined federal and state income tax would have been **$3.1 million** and **$6.3 million**, respectively, at a **29.56%** statutory rate[223](index=223&type=chunk) - Pro forma net income for Q2 and H1 2021 would have been **$7.4 million** and **$14.9 million**, respectively, under C Corporation taxation[223](index=223&type=chunk) [FINANCIAL CONDITION SUMMARY](index=57&type=section&id=FINANCIAL%20CONDITION%20SUMMARY) This section summarizes the Company's financial position, including total assets, cash, investment portfolio, loan portfolio, asset quality, liabilities, and shareholders' equity [Total Assets](index=57&type=section&id=Total%20Assets) This subsection details the increase in total assets, primarily driven by growth in cash and loans held for investment - Total assets increased by **$279.3 million** (**10.92%**) to **$2.8 billion** at June 30, 2022, from **$2.6 billion** at December 31, 2021, primarily due to increases in cash and cash equivalents and loans held for investment[166](index=166&type=chunk)[226](index=226&type=chunk) [Cash and Cash Equivalents](index=58&type=section&id=Cash%20and%20Cash%20Equivalents) This subsection explains the decrease in cash and cash equivalents, primarily due to loan originations, partially offset by deposit increases and FHLB advances - Cash and cash equivalents decreased by **$154.6 million** to **$270.8 million** at June 30, 2022, from **$425.3 million** at December 31, 2021[15](index=15&type=chunk)[227](index=227&type=chunk) - The decrease was primarily due to loan originations (**$436.2 million**) and loans originated for sale (**$37.0 million**), partially offset by deposit increases (**$215.4 million**) and FHLB advances (**$60.0 million**)[227](index=227&type=chunk) [Investment Portfolio](index=58&type=section&id=Investment%20Portfolio) This subsection details the decrease in the investment portfolio, primarily due to unrealized losses on securities resulting from interest rate changes - Total investment securities decreased by **$26.9 million** to **$126.9 million** at June 30, 2022, from **$153.8 million** at December 31, 2021[229](index=229&type=chunk) - The decrease was primarily due to a **$12.7 million** unrealized loss (tax effected) on securities, mainly in mortgage-backed and municipal securities, resulting from interest rate hikes[229](index=229&type=chunk) | Security Type | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :------------------------------------ | :----------------------------- | :------------------------------- | | U.S. government agencies | $16,958 | $19,682 | | Mortgage-backed securities | $66,076 | $81,513 | | Obligations of states and political subdivisions | $37,164 | $45,137 | | Collateralized mortgage obligations | $448 | $540 | | Corporate bonds | $1,780 | $1,935 | | **Total Available-for-Sale** | **$122,426** | **$148,807** | | Obligations of states and political subdivisions (HTM) | $4,477 | $4,946 | | **Total Investments** | **$126,903** | **$153,753** | [Loan Portfolio](index=62&type=section&id=Loan%20Portfolio) This subsection describes the growth and composition of the loan portfolio, with a focus on commercial real estate lending and its concentration relative to risk-based capital - Total loans held for investment increased to **$2.4 billion** at June 30, 2022, from **$1.9 billion** at December 31, 2021[237](index=237&type=chunk) - Commercial real estate lending remains the primary focus, constituting **88.91%** of loans held for investment at June 30, 2022[244](index=244&type=chunk) - Commercial real estate loan balances as a percentage of risk-based capital were **710.21%** at June 30, 2022, up from **577.92%** at December 31, 2021, but all loan sectors were within established internal concentration limits[245](index=245&type=chunk) | Loan Type | Fixed Interest Rates (June 30, 2022) (in thousands) | Floating or Adjustable Rates (June 30, 2022) (in thousands) | Total (June 30, 2022) (in thousands) | | :-------------------------------- | :----------------------------------- | :------------------------------------------- | :----------------------------------- | | Commercial Real Estate | $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 | $0 | $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 | | Commercial Unsecured | $20,575 | $3,687 | $24,262 | | PPP | $0 | $0 | $0 | | Consumer and Other | $21,701 | $0 | $21,701 | | **Total** | **$606,636** | **$1,788,624** | **$2,395,260** | [Asset Quality](index=65&type=section&id=Asset%20Quality) This subsection evaluates the Company's asset quality, including nonperforming assets, troubled debt restructurings, COVID-19 deferments, SBA loans, and the allowance for loan losses [Nonperforming Assets](index=66&type=section&id=Nonperforming%20Assets) This subsection details the decrease in nonperforming loans, primarily due to a reduction in commercial secured nonperforming loans - Nonperforming loans decreased to **$0.4 million** (**0.02%** of total loans) at June 30, 2022, from **$0.6 million** (**0.03%**) at December 31, 2021, primarily due to a decrease in nonperforming commercial secured loans[257](index=257&type=chunk)[258](index=258&type=chunk) | Loan Type | June 30, 2022 (in thousands) | December 31, 2021 (in thousands) | | :---------------- | :----------------------------- | :------------------------------- | | Commercial Real Estate | $114 | $122 | | Residential | $176 | $178 | | Commercial Secured | $152 | $288 | | **Total Non-accrual Loans** | **$442** | **$588** | [Troubled Debt Restructurings](index=66&type=section&id=Troubled%20Debt%20Restructurings) This subsection confirms that no loans were designated as Troubled Debt Restructurings during the reported periods - No loans were designated as Troubled Debt Restructurings (TDR) at June 30, 2022, or December 31, 2021[101](index=101&type=chunk) [COVID-19 Deferments](index=66&type=section&id=COVID-19%20Deferments) This subsection highlights the significant reduction in loans under COVID-19 deferment as of June 30, 2022 - As of June 30, 2022, only two borrowing relationships with two loans totaling **$0.1 million** were on COVID-19 deferment, a significant reduction from **$12.2 million** at December 31, 2021[166](index=166&type=chunk)[257](index=257&type=chunk) [SBA 7(a) Payments Made Under the CARES Act](index=67&type=section&id=SBA%207(a)%20Payments%20Made%20Under%20the%20CARES%20Act) This subsection reports on SBA principal and interest payments made under the CARES Act and the outstanding principal on affected loans - In H1 2022, the SBA made **$0.2 million** in principal and interest payments on **29** SBA 7(a) loans under the CARES Act[255](index=255&type=chunk) - As of June 30, 2022, the principal outstanding on loans that received these payments was **$5.7 million**[255](index=255&type=chunk) [SBA Loans](index=67&type=section&id=SBA%20Loans) This subsection details the sale of SBA 7(a) loans and the status of PPP loans, including recognized gains on sale - The Company sold **41** SBA 7(a) loans (government guaranteed portion **$14.0 million**) in Q2 2022 and **91** SBA 7(a) loans (government guaranteed portion **$25.7 million**) in H1 2022, recognizing net gains on sale of **$0.8 million** and **$1.7 million**, respectively[256](index=256&type=chunk) - No PPP loans were sold during 2022, and all PPP loans had been forgiven, paid off, or charged off as of June 30, 2022[166](index=166&type=chunk)[256](index=256&type=chunk) [Non-accrual Loans](index=67&type=section&id=Non-accrual%20Loans) This subsection reports on the decrease in non-accrual loans and the increase in the ratio of allowance for loan losses to nonperforming loans - Non-accrual loans decreased to **$0.4 million** at June 30, 2022, from **$0.6 million** at December 31, 2021, primarily due to a decrease in commercial secured non-accrual loans[257](index=257&type=chunk)[258](index=258&type=chunk) - The ratio of allowance for loan losses to nonperforming loans increased to **5,834.88%** at June 30, 2022, from **3,954.30%** at December 31, 2021, due to increased allowance and decreased non-accrual loans[259](index=259&type=chunk) [Potential Problem Loans](index=68&type=section&id=Potential%20Problem%20Loans) This subsection discusses changes in loans designated as 'watch' and 'substandard' risk grades and confirms the absence of 'doubtful' risk grades - Loans designated as "watch" and "substandard" increased to **$23.1 million** at June 30, 2022, from **$19.3 million** at December 31, 2021, but the overall reserve decreased as substandard loans (less favorable) decreased[262](index=262&type=chunk) - No loans had "doubtful" risk grades at June 30, 2022, or December 31, 2021[262](index=262&type=chunk) [Allowance for Loan Losses](index=69&type=section&id=Allowance%20for%20Loan%20Losses) This subsection details the increase in the allowance for loan losses, its ratio to total loans, and net charge-offs as a percentage of average loans - The allowance for loan losses increased by **$2.6 million** to **$25.8 million** at June 30, 2022, from **$23.2 million** at December 31, 2021, driven by a **$3.2 million** provision for loan losses, partially offset by net charge-offs[266](index=266&type=chunk) - The ratio of allowance for loan losses to total loans held for investment decreased to **1.08%** at June 30, 2022, from **1.20%** at December 31, 2021, primarily due to a **50.15%** increase in loans held for investment while the allowance increased by **16.40%**[270](index=270&type=chunk) - Net charge-offs as a percentage of average loans held for investment increased to **0.02%** for Q2 2022 (from **0.01%** in Q2 2021) and **0.03%** for H1 2022 (from **0.02%** in H1 2021)[271](index=271&type=chunk)[272](index=272&type=chunk) [Liabilities](index=73&type=section&id=Liabilities) This subsection reviews the Company's liabilities, focusing on deposit growth and composition, FHLB advances, and other borrowings [Deposits](index=73&type=section&id=Deposits) This subsection details the increase in total deposits, the growth of non-interest-bearing deposits, the loan-to-deposit ratio, and concentrations of uninsured and large deposit relationships - Total deposits increased by **$215.4 million** (**9.42%**) to **$2.5 billion** at June 30, 2022, from **$2.3 billion** at December 31, 2021, primarily from new relationships and existing account fluctuations[275](index=275&type=chunk) - Non-interest-bearing deposits increased by **$103.9 million** to **$1.0 billion**, representing **40.22%** of total deposits at June 30, 2022[275](index=275&type=chunk) - The loan to deposit ratio increased to **95.69%** at June 30, 2022, from **85.09%** at December 31, 2021[275](index=275&type=chunk) - Uninsured deposits totaled **$1.4 billion** at June 30, 2022, up from **$1.3 billion** at December 31, 2021[276](index=276&type=chunk) - The **30** largest deposit relationships (over **$10.0 million** each) totaled **$966.1 million** (**38.62%** of total deposits) at June 30, 2022, with municipalities, non-profits, and businesses as key entity types[277](index=277&type=chunk) [FHLB Advances and Other Borrowings](index=74&type=section&id=FHLB%20Advances%20and%20Other%20Borrowings) This subsection reports on the increase in FHLB borrowings and the outstanding subordinated notes, which qualify as Tier 2 capital - FHLB borrowings increased to **$60.0 million** outstanding at June 30, 2022, from zero at December 31, 2021[279](index=279&type=chunk) - The Company has **$28.4 million** in subordinated notes outstanding, issued in private placements in 2017 and 2019, which qualify as Tier 2 capital[280](index=280&type=chunk) [Shareholders' Equity](index=75&type=section&id=Shareholders'%20Equity) This subsection explains the decrease in shareholders' equity, primarily due to a decline in other comprehensive income and cash distributions, partially offset by net income - Shareholders' equity decreased to **$233.2 million** at June 30, 2022, from **$235.0 million** at December 31, 2021, primarily due to a **$12.2 million** net decline in other comprehensive income and **$10.1 million** in cash distributions, partially offset by **$19.8 million** in net income[281](index=281&type=chunk) [Liquidity and Capital Resources](index=75&type=section&id=Liquidity%20and%20Capital%20Resources) This subsection discusses the Company's liquidity management strategies, sources and uses of cash, and capital adequacy, including regulatory compliance [Liquidity Management](index=75&type=section&id=Liquidity%20Management) This subsection outlines the Company's approach to managing liquidity through diversified funding, deposit composition, and liquid assets to meet cash obligations - The Company manages liquidity through diversified funding sources, deposit composition, unused funding sources, and liquid assets, aiming to meet cash obligations at a reasonable cost[282](index=282&type=chunk)[283](index=283&type=chunk) - The Company's main source of cash flow is dividends from the Bank, subject to statutory and regulatory limitations[284](index=284&type=chunk) - The Company maintains a minimum cash level to fund one year's projected operating cash flow needs plus two years' subordinated notes debt service[284](index=284&type=chunk) [Sources and Uses of Cash](index=76&type=section&id=Sources%20and%20Uses%20of%20Cash) This subsection identifies the principal funding sources, such as deposit gathering, and primary uses of cash, including funding loans and operating expenses - Principal funding sources include deposit gathering, while principal uses include funding loans, operating expenses, income taxes, and dividend payments[286](index=286&type=chunk) [IPO](index=76&type=section&id=IPO) This subsection notes the completion of the Company's IPO and the net proceeds raised - The Company completed its IPO on May 7, 2021, raising approximately **$111.2 million** in net proceeds[287](index=287&type=chunk) [Loans](index=76&type=section&id=Loans) This subsection details cash outflows for loan originations and advances, as well as total off-balance sheet commitments - In H1 2022, cash outflows included **$436.2 million** for loan originations and advances (net of principal collected) and **$37.0 million** for loans originated for sale[289](index=289&type=chunk) - Total off-balance sheet commitments, including unfunded loan commitments, totaled **$280.0 million** at June 30, 2022[290](index=290&type=chunk) [Deposits](index=76&type=section&id=Deposits) This subsection reports on cash inflows from deposits and the expected maturity and replenishment of time deposits - In H1 2022, cash inflows from deposits increased by **$215.4 million**[293](index=293&type=chunk) - Approximately **$202.9 million** of time deposits are expected to mature over the next twelve months, with the Company anticipating replenishment through organic growth[294](index=294&type=chunk) [Investment Securities](index=76&type=section&id=Investment%20Securities) This subsection details cash proceeds from sales, maturities, calls, and prepayments of securities, offset by purchases, and expected proceeds for the remainder of the year - In H1 2022, cash proceeds from sales, maturities, calls, and prepayments of securities totaled **$10.6 million**, offset by **$1.6 million** in purchases[296](index=296&type=chunk) - Approximately **$4.4 million** is expected from securities for the remainder of 2022[295](index=295&type=chunk) [Future Contractual Obligations](index=77&type=section&id=Future%20Contractual%20Obligations) This subsection outlines future contractual obligations, including operating leases, time deposits, and subordinated notes - Future obligations include **$0.5 million** current and **$4.5 million** long-term for operating leases, **$188.8 million** current and **$15.2 million** long-term for time deposits, and **$28.4 million** long-term for subordinated notes[297](index=297&type=chunk) [FHLB Financing](index=77&type=section&id=FHLB%20Financing) This subsection reports on outstanding FHLB borrowings and total financing availability - At June 30, 2022, the Bank had **$60.0 million** in outstanding FHLB borrowings and **$280.0 million** in total financing availability (net of letters of credit)[298](index=298&type=chunk) [Dividends](index=77&type=section&id=Dividends) This subsection details dividend payments made during the period and expected future quarterly cash dividends - The Company paid **$2.6 million** in dividends during Q2 2022 and **$10.1 million** during H1 2022, including a **$4.9 million** final accumulated adjustments account payout[299](index=299&type=chunk) - The Company expects to continue quarterly cash dividends at **$0.15** per share, totaling approximately **$2.6 million** per quarter[300](index=300&type=chunk) [Impact of Inflation](index=77&type=section&id=Impact%20of%20Inflation) This subsection explains that interest rates have a greater impact on the Company's performance than general inflation due to the monetary nature of its assets and liabilities - Interest rates have a greater impact on the Company's performance than general inflation, as nearly all assets and liabilities are monetary[301](index=301&type=chunk) [Historical Information](index=78&type=section&id=Historical%20Information) This subsection provides a historical summary of cash flow activities, including operating, investing, and financing, for the six months ended June 30, 2022, and 2021 | Metric | H1 2022 (in thousands) | H1 2021 (in thousands) | $ Change (in thousands) | | :-------------------------------- | :--------------------- | :--------------------- | :---------------------- | | 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](index=78&type=section&id=Operating%20Activities) This subsection analyzes the decrease in net cash provided by operating activities, primarily due to increases in loans originated for sale and deferred taxes - Net cash provided by operating activities decreased by **$10.4 million** in H1 2022 compared to H1 2021, mainly due to increases in loans originated for sale and deferred taxes, partially offset by higher proceeds from loan sales and provision for loan losses[304](index=304&type=chunk) [Investing Activities](index=78&type=section&id=Investing%20Activities) This subsection details the increase in net cash used in investing activities, primarily driven by increased loan originations and decreased proceeds from securities sales - Net cash used in investing activities increased by **$308.8 million** in H1 2022 compared to H1 2021, primarily due to increased loan originations (net of repayments) and decreased proceeds from available-for-sale securities sales[305](index=305&type=chunk) [Financing Activities](index=78&type=section&id=Financing%20Activities) This subsection explains the decrease in net cash provided by financing activities, mainly due to the non-recurrence of IPO stock issuance proceeds from the prior year - Net cash provided by financing activities decreased by **$81.5 million** in H1 2022 compared to H1 2021, mainly due to the non-recurrence of IPO stock issuance proceeds from the prior year[306](index=306&type=chunk) [Capital Adequacy](index=78&type=section&id=Capital%20Adequacy) This subsection confirms the Company's and the Bank's compliance with regulatory capital requirements and the Bank's 'well-capitalized' status - Both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements and the Bank qualified as "well-capitalized" under the prompt corrective action framework as of June 30, 2022[308](index=308&type=chunk)[309](index=309&type=chunk) | Capital Ratio | June 30, 2022 | December 31, 2021 | Required for Capital Adequacy | | :------------------------------------ | :------------ | :---------------- | :---------------------------- | | Total capital (to risk-weighted assets) | 11.77% | 13.98% | ≥ 8.00% | | Tier 1 capital (to risk-weighted assets) | 9.62% | 11.44% | ≥ 6.00% | | Common equity tier 1 capital (to risk-weighted assets) | 9.62% | 11.44% | ≥ 4.50% | | Tier 1 leverage | 8.81% | 9.47% | ≥ 4.00% | | Capital Ratio | June 30, 2022 | December 31, 2021 | Required for Capital Adequacy | Ratio to be Well Capitalized | | :------------------------------------ | :------------ | :---------------- | :---------------------------- | :--------------------------- | | Total capital (to risk-weighted assets) | 11.55% | 13.69% | ≥ 8.00% | ≥ 10.00% | | Tier 1 capital (to risk-weighted assets) | 10.53% | 12.55% | ≥ 6.00% | ≥ 8.00% | | Common equity tier 1 capital (to risk-weighted assets) | 10.53% | 12.55% | ≥ 4.50% | ≥ 6.50% | | Tier 1 leverage | 9.64% | 10.38% | ≥ 4.00% | ≥ 5.00% | [Non-GAAP Financial Measures](index=77&type=section&id=Non-GAAP%20Financial%20Measures) This subsection explains the use of non-GAAP financial measures to provide supplementary information to investors and clarifies the equivalence of tangible shareholders' equity to tangible assets - The Company uses non-GAAP financial measures like "Allowance for loan losses to total loans held for investment, excluding PPP loans" and "Average loan yield, excluding PPP loans" to provide supplementary information to investors[315](index=315&type=chunk)[317](index=317&type=chunk)[318](index=318&type=chunk) - Tangible shareholders' equity to tangible assets is equivalent to total shareholders' equity to total assets, as the Company had no goodwill or other intangible assets[314](index=314&type=chunk) | Metric | June 30, 2022 | December 31, 2021 | | :---------------------------------------------------------- | :------------ | :---------------- | | Allowance for loan losses (in thousands) | $25,786 | $23,243 | | Total loans held for investment, excluding PPP loans (in thousands) | $2,380,511 | $1,912,336 | | **Ratio** | **1.08%** | **1.22%** | [Recent Legislative and Regulatory Developments](index=81&type=section&id=Recent%20Legislative%20and%20Regulatory%20Developments) This subsection discusses proposed changes by the FDIC to deposit insurance assessment rates and revisions to the Community Reinvestment Act evaluation framework - The FDIC proposed increasing initial base deposit insurance assessment rates by two basis points starting Q1 2023, which would generally increase the Bank's FDIC insurance costs[322](index=322&type=chunk) - Federal banking agencies proposed substantial revisions to the Community Reinvestment Act evaluation framework, which management is currently evaluating for potential impact[323](index=323&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosure About Market Risk](index=79&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosure%20About%20Market%20Risk) This section is not applicable for a smaller reporting company [ITEM 4. Controls and Procedures](index=79&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management, with CEO and CFO participation, evaluated the effectiveness of disclosure controls and procedures as of June 30, 2022, concluding they were effective. No material changes in internal control over financial reporting occurred during the quarter [Evaluation of Disclosure Controls and Procedures](index=79&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This subsection confirms the effectiveness of the Company's disclosure controls and procedures as evaluated by management, including the CEO and CFO - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of June 30, 2022[325](index=325&type=chunk) [Changes in Internal Control over Financial Reporting](index=79&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This subsection reports that no material changes occurred in internal control over financial reporting during the three months ended June 30, 2022 - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2022[326](index=326&type=chunk) PART II OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, equity sales, and exhibits [ITEM 1. Legal Proceedings](index=80&type=section&id=ITEM%201.%20Legal%20Proceedings) The Company is subject to various legal proceedings and claims in the ordinary course of business, but management believes the ultimate liability will not materially affect its financial position or results of operations [ITEM 1A. Risk Factors](index=80&type=section&id=ITEM%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=80&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities, and this section is not applicable for the use of proceeds or issuer purchases of equity securities [ITEM 3. Defaults Upon Senior Securities](index=80&type=section&id=ITEM%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities [ITEM 4. Mine Safety Disclosures](index=80&type=section&id=ITEM%204.%20Mine%20Safety%20Disclosures) This section is not applicable [ITEM 5. Other Information](index=80&type=section&id=ITEM%205.%20Other%20Information) No other information is reported in this section [ITEM 6. Exhibits](index=81&type=section&id=ITEM%206.%20Exhibits) This section lists the exhibits filed as part of the report, including articles of incorporation, bylaws, common stock certificate form, and certifications from the CEO and CFO SIGNATURES This section contains the required signatures for the report, certifying its accuracy and completeness

Five Star Bancorp (NASDAQ:FSBC) Q2 2022 Earnings Conference Call July 26, 2022 1:00 PM ET Company Participants James Beckwith - President & CEO Heather Luck - SVP & CFO Conference Call Participants Andrew Terrell - Stephens Gary Tenner - D.A. Davidson Stuart Lotz - KBW Operator Welcome to the Five Star Bancorp Second Quarter Earnings Webcast. Please note, this is a closed conference call and you are encouraged to listen via the webcast. After today's presentation, there will be an opportunity for those prov ...