FIVE STAR BANCORP

Previous wording

The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” of our 2023 Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the three months ended March 31, 2024, and other filings we may make with the SEC, copies of which are available from us at no charge. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We disclaim any duty to revise or update the forward-looking statements, whether written or oral, to reflect actual results or changes in the factors affecting the forward-looking statements, except as specifically required by law.

Current wording

The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” of our 2023 Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for the three months ended March 31, 2024 and June 30, 2024, and other filings we may make with the SEC, copies of which are available from us at no charge. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We disclaim any duty to revise or update the forward-looking statements, whether written or oral, to reflect actual results or changes in the factors affecting the forward-looking statements, except as specifically required by law.

Previous wording

Headquartered in the greater Sacramento metropolitan area of California, Five Star Bancorp is a bank holding company that operates through its wholly owned subsidiary, Five Star Bank, a California state-chartered non-member bank. We provide a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through seven branch offices. Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy. We are dedicated to serving real estate, agricultural, faith-based, and small to medium-sized enterprises. We aim to consistently deliver value that meets or exceeds the expectations of our shareholders, customers, employees, business partners, and community. We refer to our mission as “purpose-driven and integrity-centered banking.” At June 30, 2024, we had total assets of $3.6 billion, total loans held for investment, net of allowance for credit losses, of $3.2 billion, and total deposits of $3.1 billion.

Current wording

Headquartered in the greater Sacramento metropolitan area of California, Five Star Bancorp is a bank holding company that operates through its wholly owned subsidiary, Five Star Bank, a California state-chartered non-member bank. We provide a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through eight branch offices. Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy. We are dedicated to serving real estate, agricultural, faith-based, and small to medium-sized enterprises. We aim to consistently deliver value that meets or exceeds the expectations of our shareholders, customers, employees, business partners, and community. We refer to our mission as “purpose-driven and integrity-centered banking.” At September 30, 2024, we had total assets of $3.9 billion, total loans held for investment of $3.5 billion, and total deposits of $3.4 billion.

Previous wording

During the three months ended June 30, 2024, we refined our methodology of measuring the ACL on two pools of loans: Multifamily and C&I SBA. Within the Multifamily pool, the MHC loans were segregated from traditional Multifamily as we identified a data source to provide sufficient historical peer loss data specific to MHC loans. This segregation now adjusts for differences in the risk characteristics and performance of MHC loans compared to traditional Multifamily properties. We used calculations of individual probability of default and loss given default on a loan-by-loan basis to derive an estimated loss rate. Applying this adjusted loss rate led to a decrease in the ACL for the Multifamily pool as of June 30, 2024 of approximately $5.8 million. During routine monitoring of charge-off activity within the C&I SBA pool, we identified an increased level of charge-offs during the first six months of 2024, reflecting a change in the credit quality of the pool. In response to this, we increased the expected loss rates be more in line with net charge-off rates during the first six months of 2024, as this time period reflects what is expected based on our current economic outlook for loans in the C&I SBA pool. This adjustment reflects our estimate for future loss rates and increased the required reserves related to the C&I SBA pool by approximately $4.6 million.

Current wording

During the three months ended September 30, 2024, we refined our methodology of measuring the ACL on CRE Non-Owner Occupied loans. Within the CRE Non-Owner Occupied portfolio, RV Park loans were segregated from traditional CRE Non-Owner Occupied loans as we identified a data source to provide sufficient historical peer loss data specific to RV Park loans. This segregation now adjusts for differences in the risk characteristics and performance of RV Park loans compared to traditional CRE Non-Owner Occupied properties. We used calculations of individual probability of default and loss given default on a loan-by-loan basis to derive an estimated loss rate. Applying this adjusted loss rate led to a decrease in the ACL for the RV Park pool of approximately $3.3 million as of September 30, 2024.

Previous wording

Net income for the three and six months ended June 30, 2024 totaled $10.8 million and $21.4 million, respectively, as compared to net income of $12.7 million and $25.9 million for the three and six months ended June 30, 2023, respectively.

Current wording

Net income for the three and nine months ended September 30, 2024 totaled $10.9 million and $32.4 million, respectively, as compared to net income of $11.0 million and $36.9 million for the three and nine months ended September 30, 2023, respectively.

Previous wording

•Deposits. Total deposits increased by $122.7 million from $3.03 billion at December 31, 2023 to $3.15 billion at June 30, 2024. Non-wholesale deposits increased by $230.4 million in the first six months of 2024 to $2.90 billion. Wholesale deposits, which the Company defines as brokered deposits and public time deposits, decreased by $107.6 million in the first six months of 2024 to $252.5 million. Non-interest-bearing deposits decreased by $5.4 million in the first six months of 2024 to $825.7 million, and represented 26.22% of total deposits at June 30, 2024, as compared to 27.46% of total deposits at December 31, 2023. Our loan to deposit ratio was 103.87% at June 30, 2024, as compared to 102.19% at December 31, 2023.

Current wording

•Deposits. Total deposits increased by $373.1 million from $3.0 billion at December 31, 2023 to $3.4 billion at September 30, 2024. Non-wholesale deposits increased by $323.3 million in the first nine months of 2024 to $3.0 billion. Wholesale deposits, which the Company defines as brokered deposits and public time deposits, increased by $49.8 million in the first nine months of 2024 to $409.9 million. Non-interest-bearing deposits increased by $75.8 million in the first nine months of 2024 to $906.9 million, and represented 26.67% of total deposits at September 30, 2024, as compared to 27.46% of total deposits at December 31, 2023. Our loan to deposit ratio was 101.87% at September 30, 2024, as compared to 102.19% at December 31, 2023.

Previous wording

•Assets. Total assets were $3.63 billion at June 30, 2024, representing a $41.1 million, or 1.14%, increase compared to $3.59 billion at December 31, 2023.

Current wording

•Assets. Total assets were $3.9 billion at September 30, 2024, representing a $293.9 million, or 8.18%, increase compared to $3.6 billion at December 31, 2023.

Previous wording

•Loans. Total loans held for investment were $3.27 billion at June 30, 2024, as compared to $3.08 billion at December 31, 2023, an increase of $184.6 million, or 5.99%. The increase was primarily attributable to increases of $114.4 million in consumer and other loans and $88.6 million in commercial real estate loans, partially offset by decreases in commercial secured and commercial land and development loans of $11.0 million and $10.8 million, respectively.

Current wording

•Loans. Total loans held for investment were $3.5 billion at September 30, 2024, as compared to $3.1 billion at December 31, 2023, an increase of $378.8 million, or 12.29%. The increase was primarily attributable to increases of $232.6 million in consumer and other loans, $127.2 million in commercial real estate loans, and $30.0 million in commercial construction loans, partially offset by decreases in residential construction and commercial land and development loans of $12.0 million and $10.8 million, respectively.

Previous wording

•Credit Quality. Credit quality remains strong, with non-accrual loans representing $1.9 million, or 0.06% of total loans held for investment, at June 30, 2024, as compared to $2.0 million, or 0.06% of total loans held for investment, at December 31, 2023. The ratio of the allowance for credit losses to total loans held for investment was 1.08% at June 30, 2024 and 1.12% December 31, 2023.

Current wording

•Credit Quality. Credit quality remains strong, with non-accrual loans representing $1.8 million, or 0.05% of total loans held for investment, at September 30, 2024, as compared to $2.0 million, or 0.06% of total loans held for investment, at December 31, 2023. The ratio of the allowance for credit losses to total loans held for investment was 1.09% at September 30, 2024 and 1.12% December 31, 2023.

Previous wording

•Efficiency Ratio. Efficiency ratio was 44.07% for the three months ended June 30, 2024, up from 39.41% for the corresponding period of 2023 due to the Company’s expansion into the San Francisco Bay Area beginning late in the second quarter of 2023.

Current wording

•Efficiency Ratio. Efficiency ratio was 43.37% for the three months ended September 30, 2024, up from 41.63% for the corresponding period of 2023, mainly due to increased expenses for employees hired since September 2023 to support expansion into the San Francisco Bay Area.

Previous wording

•Capital Ratios. All capital ratios were above well-capitalized regulatory thresholds as of June 30, 2024 and reflect additional common stock of approximately $80.9 million issued through the public offering that closed in April 2024. The total risk-based capital ratio for the Company was 14.38% at June 30, 2024, as compared to 12.30% at December 31, 2023. The Tier 1 leverage ratio was 11.05% at June 30, 2024, as compared to 8.73% at December 31, 2023. For additional information about the regulatory capital requirements applicable to the Company and the Bank, see the section entitled “—Financial Condition Summary—Capital Adequacy” below.

Current wording

•Capital Ratios. All capital ratios were above well-capitalized regulatory thresholds as of September 30, 2024. The total risk-based capital ratio for the Company was 13.94% at September 30, 2024, as compared to 12.30% at December 31, 2023. The Tier 1 leverage ratio was 10.83% at September 30, 2024, as compared to 8.73% at December 31, 2023. For additional information about the regulatory capital requirements applicable to the Company and the Bank, see the section entitled “—Financial Condition Summary—Capital Adequacy” below.

Previous wording

The following discussion of our results of operations compares the three and six months ended June 30, 2024 to the three and six months ended June 30, 2023. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024.

Current wording

The following discussion of our results of operations compares the three and nine months ended September 30, 2024 to the three and nine months ended September 30, 2023. The results of operations for the three and nine months ended September 30, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024.

Previous wording

Net interest income increased $1.5 million to $29.1 million for the three months ended June 30, 2024 compared to June 30, 2023 while our net interest margin of 3.39% for the three months ended June 30, 2024 decreased from 3.45% for the three months ended June 30, 2023. The increase in net interest income was primarily due to loan growth at higher yields, partially offset by deposit growth at higher rates. These changes related to the change in the effective Federal Funds rate from 5.08% at June 30, 2023 to 5.33% at June 30, 2024. Additional detail relating to net interest margin in each period is provided below.

Current wording

Net interest income increased $2.9 million to $30.4 million for the three months ended September 30, 2024 compared to September 30, 2023 and our net interest margin of 3.37% for the three months ended September 30, 2024 increased from 3.31% for the three months ended September 30, 2023. The increase was primarily due to an increase in interest income driven by higher yields on new and repriced loans, partially offset by an increase in interest expense due to larger average deposit balances at higher rates. Additional detail relating to net interest margin in each period is provided below.

Previous wording

Net interest income decreased $0.9 million and net interest margin decreased 32 basis points for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease in net interest income is primarily attributable to deposit growth at higher interest rates that exceeded loan growth at higher yields. Interest expense increased by $14.3 million compared to the same period of the prior year. The cost of interest-bearing deposits increased 107 basis points compared to the same period of the prior year due to increases in interest rates and an increase in average balances of $244.9 million, or 12.22%. In addition, the average balance of non-interest-bearing deposits decreased by $35.1 million, or 4.06% compared to the same period of the prior year. The increase in interest expense was partially offset by an additional $13.4 million in interest income compared to the same period of the prior year. The average yield on loans increased 34 basis points compared to the same period of the prior year due to increases in interest rates and an increase in average balances of $264.7 million, or 9.20%.

Current wording

Net interest income increased $2.9 million and net interest margin increased six basis points for the three months ended September 30, 2024 compared to the same quarter of the prior year. The increase in net interest income is primarily attributable to higher yields on new and repriced loans, partially offset by larger average deposit balances at higher interest rates. Interest income increased by $7.6 million compared to the same quarter of the prior year. The average yield on loans increased 41 basis points compared to the same quarter of the prior year due to increases in interest rates and an increase in average balances of $371.9 million, or 12.47%. The increase in interest income was partially offset by an additional $4.7 million in interest expense compared to the same quarter of the prior year. The average cost of total deposits increased 45 basis points compared to the same quarter of the prior year, due to increases in interest rates and an increase in average balances of $200.6 million, or 6.72%.

Previous wording

Net interest income decreased $0.9 million, or 1.57%, to $55.8 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, and our net interest margin of 3.27% for the six months ended June 30, 2024 decreased 32 basis points when compared to the same period in 2023. The decrease was primarily due to deposit growth at higher rates exceeding loan growth at higher yields. These changes related to the change in the effective Federal Funds rate from 5.08% at June 30, 2023 to 5.33% at June 30, 2024. Additional detail relating to net interest margin in each period is provided below.

Current wording

Net interest income increased $2.0 million, or 2.40%, to $86.2 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, while our net interest margin of 3.30% for the nine months ended September 30, 2024 decreased 20 basis points when compared to the same period in 2023. The increase in net interest income was primarily due to an increase in interest income driven by higher yields on new and repriced loans, partially offset by an increase in interest expense due to larger average deposit balances at higher rates. Additional detail relating to net interest margin in each period is provided below.

Previous wording

Net interest income increased $1.5 million while net interest margin decreased 6 basis points for the three months ended June 30, 2024 compared to the same quarter of the prior year. The increase in net interest income is primarily attributable to loan growth at higher yields, partially offset by deposit growth at higher interest rates. Interest income increased by $6.2 million, as compared to the same quarter of the prior year. The average yield on loans increased 33 basis points compared to the same quarter of the prior year due to increases in interest rates and an increase in average balances of $283.5 million, or 9.73%. The increase in interest income was partially offset by an additional $4.7 million in interest expense compared to the same quarter of the prior year. The average cost of total deposits, including wholesale deposits, increased 55 basis points compared to the same quarter of the prior year, due to increases in interest rates and an increase in average balances of $137.0 million, or 4.70%. Average cost of wholesale deposits, individually, increased 23 basis points compared to the same quarter of the prior year, while average balances decreased 29.52%. In addition, the average balance of non-interest-bearing deposits decreased by $11.1 million compared to the same quarter of the prior year. While the increase in total interest income more than offset the increase in total interest expense, net interest income relative to interest-earning assets decreased compared to the same period of the prior year.

Current wording

Net interest income increased $2.0 million, while net interest margin decreased 20 basis points for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase in net interest income was primarily due to an increase in interest income driven by higher yields on new and repriced loans, partially offset by an increase in interest expense due to larger average deposit balances at higher rates. Interest income increased by $21.0 million compared to the same period of the prior year. The average yield on loans increased 36 basis points compared to the same period of the prior year due to an increase in average balances of $300.5 million, or 10.32%, and increased interest rates on new and repriced loans. The increase in interest income was partially offset by an additional $19.0 million in interest expense compared to the same period of the prior year. The cost of interest-bearing deposits increased 90 basis points compared to the same period of the prior year due to increases in interest rates and an increase in average balances of $220.5 million, or 10.73%. In addition, the average balance of non-interest-bearing deposits decreased by $14.0 million, or 1.64%, compared to the same period of the prior year. While the increase in total interest income more than offset the increase in total interest expense, net interest income relative to interest-earning assets decreased compared to the same period of the prior year.

Previous wording

We recorded a $2.0 million provision for credit losses in the second quarter of 2024, as compared to a $1.3 million provision for credit losses for the same period of 2023. The provision recorded during the three months ended June 30, 2024 was the net effect of charge-offs and recoveries, and net increases in quantitative and qualitative reserves.

Current wording

We recorded a $2.8 million provision for credit losses in the third quarter of 2024, as compared to a $1.1 million provision for credit losses for the same period of 2023. The provision recorded during the three months ended September 30, 2024 reflects loan growth and continued risks associated with general economic forecasts.

Previous wording

We recorded a $2.9 million provision for credit losses in the first six months of 2024, as compared to a $2.2 million provision for credit losses for the same period of 2023. The provision recorded during the first six months of 2024 was the net effect of charge-offs and recoveries, and net increases in quantitative and qualitative reserves.

Current wording

We recorded a $5.7 million provision for credit losses in the first nine months of 2024, as compared to a $3.2 million provision for credit losses for the same period of 2023. The provision recorded during the first nine months of 2024 reflects loan growth and continued risks associated with general economic forecasts.

Previous wording

Gain on sale of loans. The decrease related primarily to an overall decline in the volume of loans sold, partially offset by an improvement in the effective yield of loans sold. During the three months ended June 30, 2024, approximately $6.8 million of loans were sold with an effective yield of 6.60%, as compared to approximately $10.9 million of loans sold with an effective yield of 5.89% during the three months ended June 30, 2023.

Current wording

Gain on sale of loans. The decrease related primarily to an overall decline in the volume of loans sold, partially offset by an improvement in the effective yield of loans sold. During the three months ended September 30, 2024, approximately $4.4 million of loans were sold with an effective yield of 7.03%, as compared to approximately $7.0 million of loans sold with an effective yield of 5.63% during the three months ended September 30, 2023.

Previous wording

Service charges on deposit accounts. The increase resulted primarily from a $0.1 million increase in wire transfer fees recognized during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Current wording

Service charges on deposit accounts. The increase resulted primarily from a $0.1 million increase in wire transfer fees recognized during the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.

Previous wording

Gain on sale of loans. The decrease related primarily to an overall decline in the volume of loans sold, partially offset by an improvement in the effective yield of loans sold during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. During the six months ended June 30, 2024, approximately $12.0 million of loans were sold with an effective yield of 6.81%, as compared to approximately $23.6 million of loans sold with an effective yield of 5.26% during the six months ended June 30, 2023.

Current wording

Gain on sale of loans. The decrease related primarily to an overall decline in the volume of loans sold, partially offset by an improvement in the effective yield of loans sold period over period. During the nine months ended September 30, 2024, approximately $16.4 million of loans were sold with an effective yield of 6.87%, as compared to approximately $30.6 million of loans sold with an effective yield of 5.34% during the nine months ended September 30, 2023.

Previous wording

Loan-related fees. The increase primarily related to an increase of $0.1 million in swap referral fees recognized during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.

Current wording

Loan-related fees. The increase primarily related to an increase of $0.1 million in swap referral fees recognized during the nine months ended September 30, 2024, as compared to the nine months ended September 30, 2023.

Previous wording

Other income. The decrease resulted primarily from the difference between a $1.3 million gain recorded for distributions received on equity investments in venture-backed funds during the six months ended June 30, 2023 compared to a $0.3 million gain recorded during the six months ended June 30, 2024.

Current wording

Other income. The decrease resulted primarily from the difference between a $1.3 million gain from distributions received on equity investments in venture-backed funds during the nine months ended September 30, 2023 compared to a $0.2 million gain during the nine months ended September 30, 2024.

Previous wording

Salaries and employee benefits. The increase was primarily a result of: (i) a $1.9 million increase in salaries, benefits, and bonus expense for new employees hired since June 2023 to support expansion into the San Francisco Bay Area, partially offset by a $0.4 million decrease in salaries, benefits, and bonus expense related to a 6.67% decrease in headcount outside of the San Francisco Bay Area; (ii) a $0.3 million decrease in loan origination costs due to lower loan originations, net of purchased consumer loans, period-over-period; and (iii) a $0.5 million increase in commission expense.

Current wording

Salaries and employee benefits. The increase related primarily to: (i) a $1.0 million increase in salaries, benefits, and bonus expense, mainly for employees hired since September 2023 to support expansion into the San Francisco Bay Area; and (ii) a $0.2 million increase in commissions paid, primarily to new employees in the San Francisco Bay Area. This was partially offset by a $0.1 million increase in loan origination costs due to a higher number of loan originations, net of purchased consumer loans, period-over-period.

Previous wording

Professional services. The increase was primarily due to: (i) a $0.1 million increase of audit fees for 2024 audits; and (ii) a $0.1 million increase in IT consulting services due to an overall increase in service charges.

Current wording

Professional services. The increase was primarily due to a $0.1 million increase in fees for 2024 audits and examinations.

Previous wording

Salaries and employee benefits. The increase related primarily to: (i) a $0.9 million increase in salaries, benefits, and bonus expense for new employees hired since June 2023 to support expansion into the San Francisco Bay Area; (ii) a $0.3 million increase in commissions earned, largely due to commissions paid to the San Francisco Bay Area team, which did not occur during the three months ended June 30, 2023; and (iii) a $0.2 million decrease in loan origination costs due to lower loan originations, net of purchased consumer loans, period-over-period.

Current wording

Salaries and employee benefits. The increase was primarily a result of: (i) a $2.5 million increase in salaries, benefits, and bonus expense for new employees hired since September 2023 to support expansion into the San Francisco Bay Area; (ii) a $0.7 million increase in commission expense, primarily due to commissions paid to new employees in the San Francisco Bay Area; and (iii) a $0.2 million decrease in loan origination costs due to fewer loan originations, net of purchased consumer loans, period-over-period.

Previous wording

Occupancy and equipment. The increase related to rent expense for temporary office space to support the San Francisco Bay Area expansion during the six months ended June 30, 2024, which did not exist during the six months ended June 30, 2023.

Current wording

Occupancy and equipment. The increase related to rent expense for the San Francisco branch office during the nine months ended September 30, 2024, which did not exist for the nine months ended September 30, 2023.

Previous wording

Professional services. The increase was primarily due to: (i) a $0.1 million increase of audit fees for 2024 audits; and (ii) a $0.1 million increase in IT consulting services due to an overall increase in service charges.

Current wording

Professional services. The increase was primarily due to: (i) a $0.3 million increase of audit fees for 2024 audits; and (ii) a $0.2 million increase in IT consulting services due to an overall increase in service charges and product enhancements to existing platforms.

Previous wording

The provision for income taxes was $4.4 million for the three months ended June 30, 2024, a $0.1 million decrease from the three months ended June 30, 2023. The decrease was primarily driven by a $0.5 million state tax benefit recorded during the three months ended June 30, 2023 relating to an overall reduction in the state tax blended rate for the Company since its transition to a C Corporation, which did not occur during the three months ended June 30, 2024. The effective tax rates for the three months ended June 30, 2024 and 2023 were 28.84% and 25.86%, respectively.

Current wording

The provision for income taxes was $4.3 million for the three months ended September 30, 2024, a $0.5 million decrease from the three months ended September 30, 2023. This decline was primarily driven by an overall decrease in pre-tax income combined with a $0.2 million adjustment to the provision during the three months ended September 30, 2023 to true-up the year-to-date effective tax rate, which did not occur during the three months ended September 30, 2024. The effective tax rates for the three months ended September 30, 2024 and 2023 were 28.21% and 30.07%, respectively.

Previous wording

The provision for income taxes was $8.7 million for the six months ended June 30, 2024, as compared to $9.8 million for the six months ended June 30, 2023. The decrease was primarily due to an overall decrease in pre-tax income period-over-period, partially offset by a $0.5 million state tax benefit recorded during the six months ended June 30, 2023 relating to an overall reduction in the state tax blended rate for the Company since its transition to a C Corporation. No such benefit was recorded during the six months ended June 30, 2024. The effective tax rates for the six months ended June 30, 2024 and 2023 were 28.89% and 27.42%, respectively.

Current wording

The provision for income taxes was $13.0 million for the nine months ended September 30, 2024, as compared to $14.5 million for the nine months ended September 30, 2023. The decrease was primarily due to an overall decrease in pre-tax income period-over-period, partially offset by a $0.5 million state tax benefit recorded during the nine months ended September 30, 2023 relating to an overall reduction in the state tax blended rate for the Company since its transition to a C Corporation. No such benefit was recorded during the nine months ended September 30, 2024. The effective tax rates for the nine months ended September 30, 2024 and 2023 were 28.66% and 28.23%, respectively.

Previous wording

At June 30, 2024, total assets were $3.63 billion, an increase of $41.1 million from $3.59 billion at December 31, 2023, primarily due to a $184.6 million increase in total loans held for investment, partially offset by a $131.2 million decrease in cash and cash equivalents. The $184.6 million increase in total loans held for investment included a purchase of loans within the consumer concentration of the loan portfolio, representing $73.3 million.

Current wording

At September 30, 2024, total assets were $3.9 billion, an increase of $293.9 million from $3.6 billion at December 31, 2023, primarily due to a $378.8 million increase in total loans held for investment, partially offset by a $70.7 million decrease in cash and cash equivalents. The $378.8 million increase in total loans held for investment included $254.7 million in purchases of loans within the consumer concentration of the loan portfolio.

Previous wording

Total cash and cash equivalents were $190.4 million at June 30, 2024, a decrease of $131.2 million from $321.6 million at December 31, 2023. The decrease in cash and cash equivalents was primarily due to a decrease in borrowings of $170.0 million and $192.4 million in loan originations, net of repayments, partially offset by increases in deposits of $122.7 million and pre-tax income of $30.1 million.

Current wording

Total cash and cash equivalents were $250.9 million at September 30, 2024, a decrease of $70.7 million from $321.6 million at December 31, 2023. The decrease in cash and cash equivalents was primarily due to a decrease in borrowings of $170.0 million and $389.1 million in loan originations, net of repayments, partially offset by an increase in deposits of $373.1 million, $80.9 million in net proceeds from the 2024 Public Offering (as defined below), and pre-tax income of $45.4 million.

Previous wording

Our total securities available-for-sale and held-to-maturity amounted to $106.2 million at June 30, 2024 and $111.2 million at December 31, 2023, representing a decrease of $5.0 million period-over-period. The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $3.8 million and an unrealized loss on securities of $0.7 million, with the remainder of the change due to amortization of premiums. For the six months ended June 30, 2024, other comprehensive loss was $0.5 million, primarily due to rate changes and other market conditions on securities.

Current wording

Our total securities available-for-sale and held-to-maturity amounted to $107.0 million at September 30, 2024 and $111.2 million at December 31, 2023, representing a decrease of $4.2 million period-over-period. The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $6.4 million and an unrealized gain on securities of $2.9 million, with the remainder of the change due to amortization of premiums. For the nine months ended September 30, 2024, other comprehensive gain was $2.0 million, primarily due to rate changes and other market conditions on securities.

Previous wording

Our loan portfolio is our largest class of interest-earning assets and typically provides higher yields than other types of interest-earning assets. Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting standards. As of June 30, 2024 and December 31, 2023, our total loans amounted to $3.27 billion and $3.09 billion, respectively. Table 14 presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.

Current wording

Our loan portfolio is our largest class of interest-earning assets and typically provides higher yields than other types of interest-earning assets. Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting standards. As of September 30, 2024 and December 31, 2023, our total loans amounted to $3.5 billion and $3.1 billion, respectively. Table 14 presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.

Previous wording

Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed materially. Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 87.20% of loans held for investment at June 30, 2024. Commercial secured lending represents 4.73% of loans held for investment at June 30, 2024. We sell the guaranteed portion of all SBA 7(a) loans in the secondary market and will continue to do so as long as market conditions continue to be favorable.

Current wording

Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed materially. Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 84.01% of loans held for investment at September 30, 2024. Commercial secured lending represents 4.99% of loans held for investment at September 30, 2024. We sell the guaranteed portion of all SBA 7(a) loans in the secondary market and will continue to do so as long as market conditions continue to be favorable.

Previous wording

We recognize that our commercial real estate loan concentration is significant within our balance sheet. Commercial real estate loan balances as a percentage of risk-based capital were 568.36% and 682.72% as of June 30, 2024 and December 31, 2023, respectively. We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (e.g., manufactured home communities, self-storage, hospitality, etc.). All loan sectors were within our established limits as of June 30, 2024. Additionally, our loans are geographically concentrated with borrowers and collateralized properties primarily in California.

Current wording

We recognize that our commercial real estate loan concentration is significant within our balance sheet. Commercial real estate loan balances as a percentage of risk-based capital were 569.86% and 682.72% as of September 30, 2024 and December 31, 2023, respectively. We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (e.g., manufactured home communities, self-storage, hospitality, etc.). All loan sectors were within our established limits as of September 30, 2024. Additionally, our loans are geographically concentrated with borrowers and collateralized properties primarily in California.

Previous wording

During the three and six months ended June 30, 2024, the Company sold 22 and 40 SBA 7(a) loans, respectively, with government-guaranteed portions totaling $6.8 million and $12.0 million, respectively. The Company received gross proceeds of $7.2 million and $12.8 million on the loans sold during the three and six months ended June 30, 2024, respectively, resulting in the recognition of net gains on sale of $0.4 million and $0.8 million during the respective periods.

Current wording

During the three and nine months ended September 30, 2024, the Company sold 10 and 50 SBA 7(a) loans, respectively, with government-guaranteed portions totaling $4.4 million and $16.4 million, respectively. The Company received gross proceeds of $4.7 million and $17.5 million on the loans sold during the three and nine months ended September 30, 2024, respectively, resulting in the recognition of net gains on sale of $0.3 million and $1.1 million during the respective periods.

Previous wording

The ratio of nonperforming loans to loans held for investment was 0.06% at June 30, 2024 and December 31, 2023.

Current wording

The ratio of nonperforming loans to loans held for investment was 0.05% at September 30, 2024, decreasing from 0.06% at December 31, 2023.

Previous wording

Loans designated as watch and substandard, which are not considered adversely classified, increased to $59.9 million at June 30, 2024 from $41.6 million at December 31, 2023. There were no loans with doubtful risk grades at June 30, 2024 or December 31, 2023.

Current wording

Loans designated as watch and substandard, which are not considered adversely classified, increased to $92.7 million at September 30, 2024 from $41.6 million at December 31, 2023. There were no loans with doubtful risk grades at September 30, 2024 or December 31, 2023.

Previous wording

At June 30, 2024, the Company’s allowance for credit losses was $35.4 million, as compared to $34.4 million at December 31, 2023. The $1.0 million increase in the allowance is due to a $3.0 million provision for credit losses recorded during the six months ended June 30, 2024, partially offset by net charge-offs of $2.0 million, mainly attributable to commercial and industrial loans, during the same period.

Current wording

At September 30, 2024, the Company’s allowance for credit losses was $37.6 million, as compared to $34.4 million at December 31, 2023. The $3.2 million increase in the allowance is due to a $6.0 million provision for credit losses recorded during the nine months ended September 30, 2024, partially offset by net charge-offs of $2.8 million, mainly attributable to commercial and industrial loans, during the same period.

Previous wording

The ratio of the allowance for credit losses to total loans held for investment was 1.08% at June 30, 2024, as compared to 1.12% at December 31, 2023.

Current wording

The ratio of the allowance for credit losses to total loans held for investment was 1.09% at September 30, 2024, as compared to 1.12% at December 31, 2023.