# FIVE STAR BANCORP (FSBC) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FIVE STAR BANCORP's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1275168/000155278122000215/e22095_fsbc-10k.htm
Accession: 0001552781-22-000215
Filing date: 2022-02-25
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FSBC/
All MD&A years: /company/FSBC/mda/
Next year: /company/FSBC/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following
discussion and analysis presents management’s perspective on our financial condition and results of operations on a consolidated
basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relate
to activities primarily conducted by the Bank. This discussion and analysis should be read in conjunction with the audited consolidated
financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K. Average balances, including
balances used in calculating certain financial ratios, are generally comprised of average daily balances.

To
the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative
of our future financial outcomes. In addition to containing historical information, this discussion contains forward-looking statements
that involve risks, uncertainties, and assumptions that could cause results to differ materially from management’s expectations.
Factors that could cause such differences are discussed in the sections entitled “Cautionary Note Regarding Forward-Looking Statements”
and “Part I, Item 1A. Risk Factors.” We assume no obligation to update any of these forward-looking statements, except to
the extent required by law.

Company Overview

Headquartered
in the greater Sacramento metropolitan area of California, Five Star Bancorp is a bank holding company that operates through its
wholly owned subsidiary, Five Star Bank, a California state-chartered non-member bank. We provide a broad range of banking products
and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through seven
branch offices and two loan production 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 December 31, 2021, we had total assets of $2.6 billion, total loans, net of allowance for loan losses, of $1.9
billion, and total deposits of $2.3 billion.

Key Factors Affecting our Business

COVID-19

The
COVID-19 pandemic and the impact of actions to mitigate the spread of the virus affected our business, financial condition, and
results of operations in the year ended December 31, 2021. During the year, we maintained our focus on relationship-based banking
and made the health and safety of our customers and employees our priority. To help protect our customers and their finances during
the pandemic, while all of our branches were open, we took into account guidelines from public health officials, and encouraged
our customers to conduct business with us via phone, online banking, and mobile apps.

Our
financial results for the year ended December 31, 2021 were also impacted by the COVID-19 pandemic. On March 27, 2020, the CARES
Act was enacted, providing wide ranging economic relief for individuals and businesses impacted by COVID-19, including the Paycheck
Protection Program (“PPP”), a loan program administered by the SBA. The Consolidated Appropriations Act, 2021 (the
“Consolidated Appropriations Act”) enacted on December 27, 2020, extended some of these relief provisions in certain
respects, and the PPP Extension Act of 2021, enacted on March 30, 2021, extended the deadline to apply for a PPP loan through
May 31, 2021. Under the PPP if a loan is fully forgiven, the SBA will repay the lending bank in full. If a loan is partially forgiven
or not forgiven at all, a lender must look to the borrower for repayment of unforgiven principal and interest. If the borrower
defaults, in part or in full, the loan is guaranteed by the SBA.

Our
responsiveness and certainty of execution resulted in our ability to quickly provide 1,602 PPP loans to 1,239 customers nationwide,
approximately 39% of which were new customers as of December 31, 2021. Because of our relationship-based banking approach, the
influx of new customers contributed to a corresponding increase in deposits in the year ended December 31, 2020, which continued
into the year ended December 31, 2021. Our balance of PPP loans at December 31, 2021 was $22.1 million, or 1.14% of total loans.

46

Additionally,
the uncertainty and economic downturn caused by the COVID-19 pandemic affected our overall existing loan portfolio. In 2020, our
methodology for evaluating the allowance for loan losses was affected by the COVID-19 pandemic, resulting in higher reserve levels
primarily related to our commercial secured portfolio. In 2021, we continued to monitor higher risk concentrations identified
in the loan portfolio for ongoing effects from COVID-19 and the impact on the economy. During 2021, reserve amounts were positively
impacted by improved economic conditions and reductions to reserves required for classified and watch loans, which was offset
by additional provisions required for loan growth during the year. We also recognized COVID-19 deferments and related modifications
on our loan portfolio more generally. The CARES Act, as amended by the Consolidated Appropriations Act, specified that COVID-19
related loan modifications executed between March 1, 2020 and the earlier of: (i) 60 days after the date of termination of the
national emergency declared by the President; and (ii) January 1, 2022, on loans that were current as of December 31, 2019 are
not TDRs. Additionally, under guidance from the federal banking agencies, other short-term modifications made on a good faith
basis in response to COVID-19 to borrowers that were current prior to any relief are not troubled debt restructurings (“TDRs”)
under ASC Subtopic 310-40, “Troubled Debt Restructuring by Creditors.” These modifications include short-term (e.g.,
up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that
are insignificant. We elected to apply these temporary accounting provisions to loans under payment relief beginning in March
2020. As of December 31, 2021, six loans totaling $12.2 million, or 0.63% of the loan portfolio, were in a COVID-19 deferment
period and three loans totaling $0.1 million had been in a COVID-19 deferment in the third quarter of 2021 but were not in such
deferment as of December 31, 2021. None of the loans that received COVID-19 deferments in the fourth quarter of 2021 had the principal
portion deferred to the respective maturity of the loan. We accrue and recognize interest income on loans under payment relief
based on the original contractual interest rates. When payments resume at the end of the relief period, the payments will generally
be applied to accrued interest due until accrued interest is fully paid.

Interest
Rates

Net
interest income is the most significant contributor to our net income and is the difference between the interest and fees earned
on interest-earning assets and the interest expense incurred in connection with interest-bearing liabilities. Net interest income
is primarily a function of the average balances and yields of these interest-earning assets and interest-bearing liabilities.
These factors are influenced by internal considerations such as product mix and risk appetite as well as external influences such
as economic conditions, competition for loans and deposits and market interest rates.

The
cost of our deposits and short-term borrowings is primarily based on short-term interest rates, which are largely driven by the
Federal Reserve’s actions and market competition. The yields generated by our loans and securities are typically affected
by short-term and long-term interest rates, which are driven by market competition and market rates often impacted by the Federal
Reserve’s actions. The level of net interest income is influenced by movements in such interest rates and the pace at which
such movements occur.

We
anticipate that interest rates may rise over the next few years. Based on our asset sensitivity, a steepened yield curve could
have a beneficial impact on our net interest income. Additionally, a continued flat yield curve would be expected to maintain
our net interest income.

Factors Affecting Comparability
of Financial Results

S Corporation
Status

Beginning at
our inception, we elected to be taxed for U.S. federal income tax purposes as an S Corporation. In conjunction with our IPO, we
filed consents from the requisite amount of our shareholders to revoke our S Corporation election with the Internal Revenue Service
(the “IRS”), resulting in the commencement of our taxation as a C Corporation for U.S. federal and California state
income tax purposes in the second quarter of fiscal year 2021. Prior to such revocation, our earnings were not subject to, and
we did not pay, U.S. federal income tax, and we were not required to make any provision or recognize any liability for U.S. federal
income tax in our consolidated financial statements. While we were not subject to, and did not pay, U.S. federal income tax, we
were subject to, and paid, California S Corporation income tax at a current rate of 3.50%. Upon the termination of our status
as an S Corporation, we commenced paying U.S. federal income tax and a higher California state income tax on our taxable earnings
for each year (including the short year beginning on the date our status as an S Corporation terminated), and our consolidated
financial statements reflect a provision for U.S. federal income tax and a higher California state income tax from that date forward.
As a result of this change, the net income and earnings per share (“EPS”) data presented in our historical 2020 financial
statements and the other related financial information set forth in this Annual Report on Form 10-K, which (unless otherwise specified)
do not include any provision for U.S. federal income tax or the higher California state income tax rate, will not be comparable
with our net income and EPS in periods after we commenced being taxed as a C Corporation. As a C Corporation, our net income is
calculated by including a provision for U.S. federal income tax and a higher California state income tax rate at a combined statutory
rate of 29.56%.

47

The termination
of our status as an S Corporation may also affect our financial condition and cash flows. Historically, we made quarterly cash
distributions to our shareholders in amounts estimated by us to be sufficient for them to pay estimated individual U.S. federal
and California state income tax liabilities resulting from our taxable income that was “passed through” to them. However,
these distributions were not consistent, as sometimes the distributions were less than or in excess of the shareholders’
estimated U.S. federal and California state income tax liabilities resulting from their ownership of our stock. In addition, these
estimates were based on individual income tax rates, which may differ from the rates imposed on the income of C Corporations.
As a C Corporation, no income is “passed through” to any shareholders, but, as noted above, we commenced paying U.S.
federal income tax and a higher California state income tax. However, in the event of an adjustment to our reported taxable income
for periods prior to the termination of our S Corporation status, it is possible that our pre-IPO shareholders would be liable
for additional income taxes for those prior periods. Pursuant to the Tax Sharing Agreement we entered into with such shareholders,
upon our filing any tax return (amended or otherwise), in the event of any restatement of our taxable income or pursuant to a
determination by, or a settlement with, a taxing authority, for any period during which we were an S Corporation, depending on
the nature of the adjustment, we may be required to make a payment to such shareholders, who accepted distribution of the estimated
balance of our federal accumulated adjustments account of $27.0 million under the Tax Sharing Agreement, in an amount equal to
such shareholders’ incremental tax liability (including interest and penalties). In addition, the Tax Sharing Agreement
provides that we will indemnify such shareholders with respect to unpaid income tax liabilities (including interest and penalties)
to the extent that such unpaid income tax liabilities are attributable to an adjustment to our taxable income for any period after
our S Corporation status terminated. The amounts that we have historically distributed to our shareholders may not be indicative
of the amount of U.S. federal and California state income tax that we will be required to pay going forward. Depending on our
effective tax rate and our future dividend rate, our future cash flows and financial condition could be positively or adversely
affected compared to our historical cash flows and financial condition.

Furthermore,
deferred tax assets and liabilities were recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of our existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming
a C Corporation was recognized in net income in the year ended December 31, 2021.

Refer to the highlights of the financial results table within the section entitled “—Executive Summary” below
for the impact of being taxed as a C Corporation on our net income, EPS, and various other financial measures for the years ended
December 31, 2021 and 2020.

Public Company
Costs

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

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

Critical
Accounting Estimates

Our consolidated
financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. The
preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported
amounts of our assets, liabilities, revenue, and expenses. We have identified certain policies and estimates as critical to our
business operations and the understanding of our past or present consolidated financial condition and results of operations. These
policies and estimates are considered critical because they have a material impact, or they have the potential to have a material
impact, on our consolidated financial statements and because they require us to make significant judgments, assumptions, or estimates.
We believe that the judgments, estimates, and assumptions used in the preparation of our financial statements are reasonable and
appropriate, based on the information available at the time they were made. However, actual results may differ from those estimates,
and these differences may be material.

48

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

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

Provision
and Allowance for Loan Losses

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

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

A
significant amount of the allowance for loan losses is measured on a collective (pool) basis by loan type when similar risk characteristics
exist. For loans evaluated collectively, the allowance for loan losses is determined using historical losses adjusted for qualitative
and environmental factors to reflect current conditions. The most significant components of qualitative and environmental factors used
to estimate the allowance for loan losses are adjustments relating to prevailing economic conditions and volume of the loan portfolio. The
prevailing economic conditions factor is estimated based on a range of potential economic conditions and is applied at both the portfolio
and individual concentration level based on various factors. This estimate is subject to significant judgment and could potentially add
$7.5 million based on existing loan balances, if not more, to the allowance for loan losses in pessimistic economic conditions. The volume
of the loan portfolio is estimated based on growth rates in the prior year combined with an assessment of underwriting and credit standards.
This estimate is subject to significant judgment and could potentially add $2.9 million based on existing loan balances, if not more,
to the allowance for loan losses based on growth due to significant changes to underwriting standards. The concentrations estimate of
qualitative and environmental factors is determined by the overall market outlook and is focused on significant concentrations within
the loan portfolio. This estimate is subject to significant judgment and could potentially add $5.3 million based on existing loan balances,
if not more, to the allowance for loan losses based on a pessimistic market outlook for the specifically identified concentration.

Income Taxes 

Income
tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of
assets and liabilities, computed using tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
These estimates are determined using information available in the current year and are subject to change. As of December 31, 2021, the
estimated net deferred tax asset was approximately $4.9 million and was estimated using an estimated blended statutory tax rate of 29.56%.
Actual enacted tax rates upon recognition of the tax asset could vary significantly from our initial estimate.

Uncertain tax
positions are recognized as a benefit only if it is “more likely than not” that the tax position would be sustained
in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit
that has a likelihood greater than 50% of being realized on examination. For tax positions not meeting the “more likely
than not” test, no tax benefit is recorded. As of December 31, 2021, the Company did not recognize any uncertain tax positions.

49

Executive Summary

Our strategic focus is to continue
to grow organically by leveraging our existing core competencies and positioning our business for success in the evolving banking
landscape. In leveraging our core competencies, we intend to:

[[GREPCENT_TABLE]]
[["","\u00b7","continue our organic lending growth in our market through our \u201cpurpose-driven and integrity-centered\u201d approach to banking;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","continue to focus and grow each of the diverse industry clusters throughout our market areas;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","build upon the strength of our brand to deepen and broaden client relationships and grow our deposit base;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","attract additional banking professionals with track records of driving revenue growth;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","maintain our disciplined credit underwriting and robust risk management;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","enhance our disciplined cost management culture;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","leverage our technology platforms to improve our efficiency; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u00b7","further engage in the economic development of our communities and market areas."]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","December 31, 2021","","","December 31, 2020"],["Selected financial condition data:"],["Total assets","","$","2,556,761","","","$","1,953,765"],["Total loans, net","","","1,921,888","","","","1,485,790"],["Total deposits","","","2,285,890","","","","1,784,001"],["Total subordinated notes, net","","","28,386","","","","28,320"],["Total shareholders\u2019 equity","","","235,046","","","","133,775"],["Asset quality ratios:"],["Allowance for loan losses to total loans","","","1.20","%","","","1.47","%"],["Allowance for loan losses to total loans, excluding PPP loans1","","","1.21","%","","","1.63","%"],["Allowance for loan losses to period end nonperforming loans","","","39.54","x","","","49.09","x"],["Non-accrual loans to period end loans","","","0.03","%","","","0.03","%"],["Capital ratios:"],["Total capital (to risk-weighted assets)","","","13.98","%","","","12.18","%"],["Tier 1 capital (to risk-weighted assets)","","","11.44","%","","","8.98","%"],["Common equity Tier 1 capital (to risk-weighted assets)","","","11.44","%","","","8.98","%"],["Tier 1 leverage ratio","","","9.47","%","","","6.58","%"],["Total shareholders\u2019 equity to total assets ratio","","","9.19","%","","","6.85","%"],["Tangible shareholders\u2019 equity to tangible assets2","","","9.19","%","","","6.85","%"]]
[[/GREPCENT_TABLE]]

50

[[GREPCENT_TABLE]]
[["","","For the year ended"],["(dollars in thousands, except share and per share data)","","December 31, 2021","","","December 31, 2020"],["Selected operating data:"],["Net interest income","","$","77,611","","","$","65,210"],["Provision for loan losses","","","1,700","","","","9,000"],["Non-interest income","","","7,280","","","","9,302"],["Non-interest expense","","","36,043","","","","28,257"],["Net income","","","42,441","","","","35,928"],["Earnings per common share:"],["Basic","","$","2.83","","","$","3.57"],["Diluted","","$","2.83","","","$","3.57"],["Book value per share","","$","13.65","","","$","12.16"],["Tangible book value per share3","","$","13.65","","","$","12.16"],["Weighted average basic common shares outstanding","","","14,972,637","","","","10,063,183"],["Weighted average diluted common shares outstanding","","","14,995,213","","","","10,063,183"],["Shares outstanding at end of period","","","17,224,848","","","","11,000,273"],["Selected pro forma operating data:"],["Pro forma net income4","","","37,813","","","","26,242"],["Pro forma provision for income taxes4","","","9,335","","","","11,013"],["Pro forma earnings per common share4:"],["Basic","","$","2.53","","","$","2.61"],["Diluted","","$","2.52","","","$","2.61"],["Performance and other financial ratios:"],["Return on average assets (\u201cROAA\u201d)","","","1.86","%","","","1.95","%"],["Return on average equity (\u201cROAE\u201d)","","","22.49","%","","","31.16","%"],["Net interest margin","","","3.64","%","","","3.68","%"],["Cost of funds","","","0.19","%","","","0.54","%"],["Efficiency ratio","","","42.46","%","","","37.92","%"],["Average equity to average assets","","","8.28","%","","","6.25","%"],["Cash dividend payout ratio on common stock5","","","160.52","%","","","73.66","%"],["Selected pro forma ratios:"],["Pro forma ROAA4, 6","","","1.66","%","","","1.42","%"],["Pro forma ROAE4, 6","","","20.03","%","","","22.75","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","The allowance for loan losses to total loans, excluding PPP loans, is considered a non-GAAP financial measure. See the section entitled \u201cNon-GAAP Financial Measures\u201d for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. Allowance for loan losses to total loans, excluding PPP loans, is defined as allowance for loan losses, divided by total loans less PPP loans. The most directly comparable GAAP financial measure is allowance for loan losses to total loans."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["2","Tangible shareholders\u2019 equity to tangible assets is considered a non-GAAP financial measure. See the section entitled \u201cNon-GAAP Financial Measures\u201d for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. Tangible shareholders\u2019 equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets. The most directly comparable GAAP financial measure is total shareholders\u2019 equity to total assets. We had no goodwill or other intangible assets as of any of the dates indicated. As a result, tangible shareholders\u2019 equity to tangible assets is the same as total shareholders\u2019 equity to total assets at the end of each of the periods indicated."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["3","Tangible book value per share is considered a non-GAAP financial measure. See the section entitled \u201cNon-GAAP Financial Measures\u201d for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure. Tangible book value per share is defined as total shareholders\u2019 equity less goodwill and other intangible assets, divided by the outstanding number of common shares at the end of the period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets at the end of any of the dates indicated. As a result, tangible book value per share is the same as book value per share at the end of each of the periods indicated."]]
[[/GREPCENT_TABLE]]

51

[[GREPCENT_TABLE]]
[["4","For the year ended December 31, 2020, we calculate our pro forma net income, provision for income taxes, net income per common share, ROAA, and ROAE by adding back our S Corporation tax to net income and applying a combined C Corporation effective tax rate for U.S. federal and California state income taxes of 29.56%. This calculation reflects only the change in our status as an S Corporation and does not give effect to any other transaction. For the year ended December 31, 2021, we calculate our pro forma net income, provision for income taxes, net income per common share, ROAA, and ROAE using an effective tax rate of 19.80%, which is the actual effective tax rate, excluding the effects of the discrete deferred tax adjustment of $4.6 million, discussed in the section entitled \u201cProvision for Income Taxes\u201d below."],["5","Cash dividend payout ratio on common stock is calculated as dividends on common shares divided by basic net income per common share."],["6","Pro forma ROAA and ROAE are calculated using pro forma net income balances, with no adjustments to average assets and average equity balances."]]
[[/GREPCENT_TABLE]]

RESULTS OF OPERATIONS

The following discussion of our results
of operations compares the year ended December 31, 2021 to the year ended December 31, 2020.

Net Interest Income

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

Our
net interest margin of 3.64% for the year ended December 31, 2021 decreased from 3.68% for the year ended December 31, 2020. This decrease
was primarily due to a 37 basis point decrease in yields on interest-earning assets, which decreased from 4.20% for the year ended December
31, 2020 to 3.83% for the year ended December 31, 2021, partially offset by a 46 basis point decrease in yields on interest-bearing liabilities,
which decreased from 0.78% for the year ended December 31, 2020 to 0.32% for the year ended December 31, 2021.

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

52

[[GREPCENT_TABLE]]
[["","","For the year ended","","","For the year ended"],["","","December 31, 2021","","","December 31, 2020"],["","","","","","Interest","","","Average","","","","","","Interest","","","Average"],["","","Average","","","Income/","","","Yield/","","","Average","","","Income/","","","Yield/"],["(dollars in thousands)","","Balance","","","Expense","","","Rate","","","Balance","","","Expense","","","Rate"],["Assets"],["Interest-earning deposits with banks1","","$","346,522","","","$","547","","","","0.16","%","","$","237,815","","","$","1,198","","","","0.50","%"],["Investment securities2","","","147,519","","","","2,142","","","","1.45","%","","","95,158","","","","1,787","","","","1.88","%"],["Loans1, 3","","","1,637,280","","","","78,894","","","","4.82","%","","","1,439,380","","","","71,405","","","","4.96","%"],["Total interest-earning assets1","","","2,131,321","","","","81,583","","","","3.83","%","","","1,772,353","","","","74,390","","","","4.20","%"],["Interest receivable and other assets, net","","","148,830","","","","","","","","","","","","72,628"],["Total assets","","$","2,280,151","","","","","","","","","","","$","1,844,981"],["Liabilities and shareholders\u2019 equity"],["Interest-bearing transaction accounts","","$","155,163","","","$","155","","","","0.10","%","","$","141,293","","","$","374","","","","0.26","%"],["Savings accounts","","","74,402","","","","74","","","","0.10","%","","","39,182","","","","94","","","","0.24","%"],["Money market accounts","","","935,445","","","","1,798","","","","0.19","%","","","867,417","","","","5,750","","","","0.66","%"],["Time accounts","","","53,222","","","","172","","","","0.32","%","","","102,890","","","","1,189","","","","1.16","%"],["Subordinated debt1","","","28,350","","","","1,773","","","","6.25","%","","","28,364","","","","1,773","","","","6.25","%"],["Total interest-bearing liabilities","","","1,246,582","","","","3,972","","","","0.32","%","","","1,179,146","","","","9,180","","","","0.78","%"],["Demand accounts","","","835,834","","","","","","","","","","","","546,048"],["Interest payable and other liabilities","","","8,984","","","","","","","","","","","","4,496"],["Shareholders\u2019 equity","","","188,751","","","","","","","","","","","","115,291"],["Total liabilities & shareholders\u2019 equity","","$","2,280,151","","","","","","","","","","","$","1,844,981"],["Net interest spread4","","","","","","","","","","","3.51","%","","","","","","","","","","","3.42","%"],["Net interest income/margin5","","","","","","$","77,611","","","","3.64","%","","","","","","$","65,210","","","","3.68","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["2","Yields on available-for-sale securities are calculated based on amortized cost balances rather than fair value, as changes in fair value are reflected as a component of shareholders\u2019 equity. Investment security interest is earned on 30/360 day basis monthly. Yields are not calculated on a tax-equivalent basis."]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["4","Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities."]]
[[/GREPCENT_TABLE]]

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

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

53

[[GREPCENT_TABLE]]
[["","","For the year ended December 31, 2021 compared to the year ended December 31, 2020"],["","","Variance due to"],["(dollars in thousands)","","Volume","","","Yield/Rate","","","Total"],["Interest-earning deposits with banks","","$","171","","","$","(822",")","","$","(651",")"],["Investment securities","","","760","","","","(405",")","","","355"],["Loans","","","9,536","","","","(2,047",")","","","7,489"],["Total interest-earning assets","","","10,467","","","","(3,274",")","","","7,193"],["Interest-bearing transaction accounts","","","(14",")","","","233","","","","219"],["Savings accounts","","","(35",")","","","55","","","","20"],["Money market accounts","","","(131",")","","","4,083","","","","3,952"],["Time accounts","","","161","","","","856","","","","1,017"],["Subordinated debt","","","1","","","","(1",")","","","\u2014"],["Total interest-bearing liabilities","","","(18",")","","","5,226","","","","5,208"],["Changes in net interest income/margin","","$","10,449","","","$","1,952","","","$","12,401"]]
[[/GREPCENT_TABLE]]

Net interest
income increased while net interest margin decreased for the year ended December 31, 2021 as compared to the year ended December
31, 2020. The increase in net interest income was driven primarily by a $7.5 million increase in interest income from loans to
$78.9 million for the year ended December 31, 2021, as the average daily balance of loans increased by $197.9 million, or 13.75%,
as compared to the year ended December 31, 2020. The four basis point decrease in net interest margin to 3.64% for the year ended
December 31, 2021, as compared to the year ended December 31, 2020, was primarily attributable to a 14 basis point decrease in
average loan yields to 4.82% for the year ended December 31, 2021, as compared to 4.96% for the year ended December 31, 2020 and
a 39 basis point decrease in average loan yields, excluding PPP loans, to 4.70% for the year ended December 31, 2021, as compared
to 5.09% for the year ended December 31, 2020. Average total loans and average loan yield, excluding PPP loans, respectively,
are considered non-GAAP financial measures. See the section entitled “Non-GAAP Financial Measures” for a reconciliation
of our non-GAAP measures to the most directly comparable GAAP financial measure. Decreases in market interest rates and increases
in market competition caused a majority of the Company’s current fixed rate loans funded in 2021 to recognize yields lower
than those recognized in the year ended December 31, 2020, contributing to the aforementioned decrease in average loan yields.
Additionally, the rates associated with the index utilized for a significant portion of the Company’s variable rate loans,
the United States 5 Year Treasury index, were higher during the year ended December 31, 2021 than during the prior year, but a
majority of these loans were not scheduled to reprice during the year ended December 31, 2021, contributing to the downward trend
in average loan yields. Partially offsetting the declining average loan yields was $6.2 million of fee income resulting from PPP
loans being forgiven and repaid by the SBA that was recognized in the year ended December 31, 2021, as compared to $4.9 million
during the year ended December 31, 2020. As a result, yields on PPP loans increased from 3.95% for the year ended December 31,
2020 to 6.36% for the year ended December 31, 2021.

Interest expense
decreased for the year ended December 31, 2021, when compared to the year ended December 31, 2020. The decline in interest expense
was primarily attributed to reductions in the rates offered on deposit products. In addition, the growth of non-interest-bearing
deposits continues to benefit the cost of funds as compared to historical periods. Specifically, the ratio of average total non-interest-bearing
deposits to average total deposits was 40.69% in the year ended December 31, 2021, as compared to 32.18% in the year ended December
31, 2020. As a result, the cost of interest-bearing liabilities decreased by 46 basis points at December 31, 2021 to 0.32%, from
0.78% at December 31, 2020, and the cost of funds decreased to 0.19% at December 31, 2021, as compared to 0.54% at December 31,
2020.

Provision for Loan Losses

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

54

We recorded
a $1.7 million provision for loan losses in the year ended December 31, 2021, compared to a $9.0 million provision for loan losses
for the year ended December 31, 2020. The decline of $7.3 million for the provision year-over-year was primarily due to improvements
in general economic conditions, albeit at a pace slower than expected due to unforeseen disruptions in the supply chain and increasing
energy prices. The level of government assistance provided through the PPP and other programs during 2021, as well as the less
significant impact of the COVID-19 pandemic, as compared to 2020, within California and other states where our collateral is located,
resulted in favorable economic conditions for our borrowers.

Non-interest Income

Non-interest
income is a secondary contributor to our net income. Non-interest income consists primarily of gain on sale of loans, net gain
on sale of securities, FHLB dividends, and other fee income, including loan-related fees and fees related to customer deposits.

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

[[GREPCENT_TABLE]]
[["","","For the year ended","","","$","","","%"],["(dollars in thousands)","","December 31, 2021","","","December 31, 2020","","","Increase (Decrease)","","","Increase (Decrease)"],["Service charges on deposit accounts","","$","424","","","$","367","","","$","57","","","","15.53","%"],["Net gain on sale of securities","","","724","","","","1,438","","","","(714",")","","","(49.65",")%"],["Gain on sale of loans","","","4,082","","","","4,145","","","","(63",")","","","(1.52",")%"],["Loan-related fees","","","639","","","","2,309","","","","(1,670",")","","","(72.33",")%"],["FHLB stock dividends","","","372","","","","321","","","","51","","","","15.89","%"],["Earnings on bank-owned life insurance","","","237","","","","220","","","","17","","","","7.73","%"],["Other income","","","802","","","","502","","","","300","","","","59.76","%"],["Total non-interest income","","$","7,280","","","$","9,302","","","$","(2,022",")","","","(21.74",")%"]]
[[/GREPCENT_TABLE]]

Net
gain on sale of securities. The decrease in net gain on sale of securities was primarily due to a decrease in the gain recognized
on the sale of approximately $47.1 million of municipal securities, U.S. government agencies, and U.S. government treasuries during the
year ended December 31, 2021, as compared to the gain recognized on the sale of approximately $46.4 million of municipal securities,
mortgage-backed securities, and corporate bonds during the year ended December 31, 2020. Of the securities sold during the year ended
December 31, 2020, approximately $18.7 million were sold prior to the shutdowns enacted in response to the COVID-19 pandemic, representing
approximately $0.5 million of the gain, and the remaining balance of the securities were sold throughout the remainder of the year in
response to market fluctuations.

Loan-related
fees. The decrease in loan-related fees resulted primarily from a $1.4 million decrease in swap referral fees recognized in the year
ended December 31, 2021, as compared to the year ended December 31, 2020, combined with $0.4 million of loan-related fees earned during
the year ended December 31, 2020 for processing micro-loans on behalf of a local government agency to businesses in the local area in
response to the COVID-19 pandemic, which did not recur in the year ended December 31, 2021.

Non-interest Expense

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

Over the past
several years, we have invested significant resources in personnel and infrastructure. Additionally, to support corporate organizational
matters leading up to the IPO, we experienced increased audit, consulting, and legal costs, particularly during the year ended
December 31, 2021. As a result, non-interest expense is increasing in the periods presented below; however, we do not anticipate
incurring significant costs of this type in future periods, and we expect our efficiency ratio will improve going forward due,
in part, to our past investment in infrastructure.

55

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

[[GREPCENT_TABLE]]
[["","","For the year ended","","","$","","","%"],["(dollars in thousands)","","December 31, 2021","","","December 31, 2020","","","Increase (Decrease)","","","Increase (Decrease)"],["Salaries and employee benefits","","$","19,825","","","$","16,084","","","$","3,741","","","","23.26","%"],["Occupancy and equipment","","","1,938","","","","1,715","","","","223","","","","13.00","%"],["Data processing and software","","","2,494","","","","1,982","","","","512","","","","25.83","%"],["FDIC insurance","","","700","","","","1,137","","","","(437",")","","","(38.43",")%"],["Professional services","","","3,792","","","","1,960","","","","1,832","","","","93.47","%"],["Advertising and promotional","","","1,300","","","","1,102","","","","198","","","","17.97","%"],["Loan-related expenses","","","1,045","","","","732","","","","313","","","","42.76","%"],["Other operating expenses","","","4,949","","","","3,545","","","","1,404","","","","39.61","%"],["Total non-interest expense","","$","36,043","","","$","28,257","","","$","7,786","","","","27.55","%"]]
[[/GREPCENT_TABLE]]

Salaries
and employee benefits. The increase in salaries and employee benefits year-over-year was primarily related to an increase of employees
and increased commissions related to our loan and deposit growth for the year ended December 31, 2021, as compared to the year ended
December 31, 2020, as well as an increase in restricted stock compensation expense recognized for employee restricted share grants of
$0.3 million during the year ended December 31, 2021, compared to the year ended December 31, 2020. These increases were partially
offset by a $1.7 million increase in deferred loan origination costs for the year ended December 31, 2021, as compared to the year ended
December 31, 2020, from increased loan originations.

Data
processing and software. Data processing and software increased, primarily as a result of: (i) increased usage of our
digital banking platform; (ii) higher transaction volumes related to the increased number of loan and deposit accounts; (iii)
increased number of licenses for new users on our loan origination and documentation system; and (iv) increased costs related
to improved collateral tracking, electronic statements, and mobile payment solutions.

Professional
services. Professional services increased, primarily as a result of increased audit, consulting, and legal costs incurred
to support corporate organizational matters leading up to the IPO during the year ended December 31, 2021, as compared to the
year ended December 31, 2020.

Other
operating expenses. Other operating expenses are comprised of travel, insurance, postage and supplies, director fees, other
employee expenses, armored car expenses, courier services, and other miscellaneous administrative expenses. The increase in other
operating expenses year-over-year was primarily related to stock compensation expense recognized for director restricted share
grants of $0.8 million, which were related to the IPO, during the year ended December 31, 2021. These expenses did not occur in
the year ended December 31, 2020. Additionally, other operating expenses increased as a result of increased director fees and
expenses combined with increases in expenses related to travel, insurance, dues and subscriptions, data, and telephone, which
increased as a result of an increase in volume of customers and employees period-over-period.

Provision
for Income Taxes

The
Company terminated its status as a Subchapter S corporation as of May 5, 2021, in connection with its IPO, and became a C Corporation.
Prior to that date, as an S Corporation, the Company had no U.S. federal income tax expense. The provision recorded for the year ended
December 31, 2021 yielded an effective tax rate of 9.98%. Refer to the section entitled “Pro Forma C Corporation Income Tax Expense”
below for a discussion on what the Company’s income tax expense and net income potentially could have been had the Company been
taxed as a C Corporation for the year ended December 31, 2021 and for the year ended December 31, 2020.

In
conjunction with the termination of the Subchapter S corporation status as of May 5, 2021, the C Corporation deferred tax assets and
liabilities were estimated for future tax consequences attributable to differences between the financial statement carrying amounts of
the Company’s existing assets and liabilities and their respective tax bases. The deferred tax assets and liabilities were measured
using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C Corporation was recognized
by increasing the net deferred tax asset to $5.4 million through a reduction to the provision for income taxes of $4.6 million during
the year ended December 31, 2021. Provision for income taxes increased by $3.4 million, or 254.71%, to $4.7 million for the year ended
December 31, 2021, as compared to $1.3 million for the year ended December 31, 2020. This increase is due to the change in the tax rate
as a result of the Company’s conversion from an S Corporation to a C Corporation, which was partially offset by the $4.6 million
reduction to the provision for income taxes for the adjustment of the net deferred tax assets due to the termination of the Company’s
S Corporation status, recorded during the year ended December 31, 2021.

56

Pro Forma C Corporation Income
Tax Expense

Because of the
Company’s status as a Subchapter S Corporation prior to May 5, 2021, no U.S. federal income tax expense was recorded for
a portion of the year ended December 31, 2021 and the entirety of the year ended December 31, 2020. Had the Company been taxed
as a C Corporation and paid U.S. federal income tax for such periods, the combined statutory income tax rate would have been 29.56%
in each period. These pro forma statutory rates reflect a U.S. federal income tax rate of 21.00% and a California income tax rate
of 8.56%, after adjustment for the federal tax benefit, on corporate taxable income. Had the Company been subject to U.S. federal
income tax for each of these periods, on a statutory income tax rate pro forma basis, the provision for combined federal and state
income tax would have been $11.0 million for the year ended December 31, 2020. As a result of the foregoing factors, the Company’s
pro forma net income (after U.S. federal and California state income tax) would have been $26.2 million for the year ended December
31, 2020. The pro forma statutory rates for the year ended December 31, 2021 are calculated using an effective tax rate of 19.80%,
which is the actual effective tax rate, excluding the effects of the discrete deferred tax adjustment of $4.6 million, discussed
above. As a result, the Company’s pro forma provision for income taxes and pro forma net income for the year ended December
31, 2021 are $9.3 million and $37.8 million, respectively.

FINANCIAL
CONDITION SUMMARY

The following
discussion compares our financial condition as of December 31, 2021 to our financial condition as of December 31, 2020. The following
table summarizes selected components of our consolidated balance sheet as of December 31, 2021 and December 31, 2020.

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","December 31, 2021","","","December 31, 2020"],["Total assets","","$","2,556,761","","","$","1,953,765"],["Cash and cash equivalents","","$","425,329","","","$","290,493"],["Total investments","","$","153,753","","","$","122,928"],["Total loans held for investment, net of deferred loan fees","","$","1,934,460","","","$","1,503,159"],["Total deposits","","$","2,285,890","","","$","1,784,001"],["Subordinated notes, net","","$","28,386","","","$","28,320"],["Total shareholders\u2019 equity","","$","235,046","","","$","133,775"]]
[[/GREPCENT_TABLE]]

Total Assets

At
December 31, 2021, total assets were $2.6 billion, an increase of $603.0 million from $2.0 billion at December 31, 2020, primarily due
to increases in cash and cash equivalents, total investments, and total loans held for investment, net of deferred loan fees, as discussed
below.

Cash and
Cash Equivalents

Total
cash and cash equivalents were $425.3 million at December 31, 2021, an increase of $134.8 million, as compared to $290.5 million at December
31, 2020. The increase in cash and cash equivalents since December 31, 2020 was primarily a result of net income recognized of $42.4
million, proceeds from the sale of securities of $47.1 million, cash inflows of $18.7 million related to maturities, prepayments, and
calls of available-for-sale securities, an increase in deposits of $501.9 million, and net proceeds of $111.2 million from the issuance
of 6,054,750 shares of common stock in our IPO. These increases were partially offset by a decrease of $99.7 million related to purchases
of securities, an increase in total loans held for investment, net of deferred loan fees, of $431.3 million, and cash dividends paid
of $51.9 million during the same period.

57

Investment Portfolio

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

Our total securities
held for investment and available-for-sale amounted to $153.8 million at December 31, 2021 and $122.9 million at December 31,
2020, an increase of $30.8 million year-over-year. The increase was primarily due to purchases of $99.7 million of mortgage-backed
securities, obligations of states and political subdivisions, and U.S. government treasuries to deploy excess cash into interest-earning
assets in a more favorable interest rate environment and was partially offset by the sale of $47.1 million of low-yielding securities,
and paydowns, calls, and maturities of $18.7 million.

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

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020"],["(dollars in thousands)","","Carrying Value","","","% of Total","","","Carrying Value","","","% of Total"],["Available-for-sale (at fair value):"],["U.S. government agencies","","$","19,682","","","","12.80","%","","$","31,828","","","","25.89","%"],["Mortgage-backed securities","","","81,513","","","","53.02","%","","","23,932","","","","19.47","%"],["Obligations of states and political subdivisions","","","45,137","","","","29.36","%","","","58,420","","","","47.52","%"],["Collateralized mortgage obligations","","","540","","","","0.35","%","","","769","","","","0.63","%"],["Corporate bonds","","","1,935","","","","1.26","%","","","\u2014","","","","\u2014"],["Total available-for-sale","","","148,807","","","","96.79","%","","","114,949","","","","93.51","%"],["Held-to-maturity (at amortized cost):"],["Obligations of states and political subdivisions","","","4,946","","","","3.21","%","","","7,979","","","","6.49","%"],["","","$","153,753","","","","100.00","%","","$","122,928","","","","100.00","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","Due in one year or less","","","Due after one year through five years","","","Due after five years through ten years","","","Due after ten years","","","Total"],["(dollars in thousands)","","Carrying Value","","","Weighted Avg Yield","","","Carrying Value","","","Weighted Avg Yield","","","Carrying Value","","","Weighted Avg Yield","","","Carrying Value","","","Weighted Avg Yield","","","Carrying Value","","","Weighted Avg Yield"],["Available-for-sale:"],["U.S. government agencies","","$","\u2014","","","","\u2014","","","$","1,591","","","","1.97","%","","$","3,814","","","","0.69","%","","$","14,277","","","","0.19","%","","$","19,682","","","","0.43","%"],["Mortgage-backed securities","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","3","","","","6.90","%","","","81,510","","","","1.51","%","","","81,513","","","","1.51","%"],["Obligations of states and political subdivisions","","","\u2014","","","","\u2014","","","","522","","","","2.80","%","","","3,748","","","","1.56","%","","","40,867","","","","1.69","%","","","45,137","","","","1.69","%"],["Collateralized mortgage obligations","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","540","","","","1.73","%","","","540","","","","1.73","%"],["Corporate bonds","","","\u2014","","","","\u2014","","","","1,935","","","","1.25","%","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","1,935","","","","1.25","%"],["Total available-for-sale","","","\u2014","","","","\u2014","","","","4,048","","","","1.73","%","","","7,565","","","","1.12","%","","","137,194","","","","1.43","%","","","148,807","","","","1.42","%"],["Held-to-maturity:"],["Obligations of states and political subdivisions","","","491","","","","6.00","%","","","951","","","","6.00","%","","","3,504","","","","6.00","%","","","\u2014","","","","\u2014","","","","4,946","","","","6.00","%"],["","","$","491","","","","6.00","%","","$","4,999","","","","2.54","%","","$","11,069","","","","2.67","%","","$","137,194","","","","1.43","%","","$","153,753","","","","1.57","%"]]
[[/GREPCENT_TABLE]]

58

The following
table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each
maturity range, at December 31, 2020:

[[GREPCENT_TABLE]]
[["","","Due in one year or less","","","Due after one year through five years","","","Due after five years through ten years","","","Due after ten years","","","Total"],["(dollars in thousands)","","Carrying Value","","","Weighted Avg Yield","","","Carrying Value","","","Weighted Avg Yield","","","Carrying Value","","","Weighted Avg Yield","","","Carrying Value","","","Weighted Avg Yield","","","Carrying Value","","","Weighted Avg Yield"],["Available-for-sale:"],["U.S. government agencies","","$","\u2014","","","","\u2014","","","$","\u2014","","","","\u2014","","","$","7,708","","","","1.22","%","","$","24,120","","","","0.97","%","","$","31,828","","","","1.03","%"],["Mortgage-backed securities","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","23,932","","","","1.12","%","","","23,932","","","","1.12","%"],["Obligations of states and political subdivisions","","","\u2014","","","","\u2014","","","","1,206","","","","2.52","%","","","8,599","","","","1.57","%","","","48,615","","","","1.65","%","","","58,420","","","","1.66","%"],["Collateralized mortgage obligations","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","\u2014","","","","769","","","","1.70","%","","","769","","","","1.70","%"],["Total available-for-sale","","","\u2014","","","","\u2014","","","","1,206","","","","2.52","%","","","16,307","","","","1.40","%","","","97,436","","","","1.35","%","","","114,949","","","","1.37","%"],["Held-to-maturity:"],["Obligations of states and political subdivisions","","","494","","","","6.00","%","","","2,143","","","","6.00","%","","","2,755","","","","6.00","%","","","2,587","","","","6.00","%","","","7,979","","","","6.00","%"],["","","$","494","","","","6.00","%","","$","3,349","","","","4.75","%","","$","19,062","","","","2.07","%","","$","100,023","","","","1.47","%","","$","122,928","","","","1.67","%"]]
[[/GREPCENT_TABLE]]

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

A summary of
the book value and fair value related to securities at December 31, 2021 and December 31, 2020 is presented below.

[[GREPCENT_TABLE]]
[["","","","","","Gross Unrealized"],["(dollars in thousands)","","Amortized Cost","","","Gains","","","(Losses)","","","Fair Value"],["December 31, 2021"],["Available-for-sale:"],["U.S. government agencies","","$","19,824","","","$","60","","","$","(202",")","","$","19,682"],["Mortgage-backed securities","","","82,517","","","","94","","","","(1,098",")","","","81,513"],["Obligations of states and political subdivisions","","","44,732","","","","525","","","","(120",")","","","45,137"],["Collateralized mortgage obligations","","","537","","","","3","","","","\u2014","","","","540"],["Corporate bonds","","","2,000","","","","\u2014","","","","(65",")","","","1,935"],["Total available-for-sale","","$","149,610","","","$","682","","","$","(1,485",")","","$","148,807"],["Held-to-maturity:"],["Obligations of states and political subdivisions","","$","4,946","","","$","251","","","$","\u2014","","","$","5,197"],["December 31, 2020"],["Available-for-sale:"],["U.S. government agencies","","$","32,069","","","$","111","","","$","(352",")","","$","31,828"],["Mortgage-backed securities","","","23,601","","","","338","","","","(7",")","","","23,932"],["Obligations of states and political subdivisions","","","57,137","","","","1,291","","","","(8",")","","","58,420"],["Collateralized mortgage obligations","","","748","","","","21","","","","\u2014","","","","769"],["Total available-for-sale","","$","113,555","","","$","1,761","","","$","(367",")","","$","114,949"],["Held-to-maturity:"],["Obligations of states and political subdivisions","","$","7,979","","","$","776","","","$","\u2014","","","$","8,755"]]
[[/GREPCENT_TABLE]]

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

59

Loan Portfolio

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.
As of December 31, 2021 and December 31, 2020, our total loans amounted to $1.9 billion and $1.5 billion, respectively. The following
table presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020"],["(dollars in thousands)","","Amount","","","% of Loans","","","Amount","","","% of Loans"],["Loans held for investment:"],["Real estate:"],["Commercial","","$","1,586,232","","","","81.48","%","","$","1,002,497","","","","66.33","%"],["Commercial land and development","","","7,376","","","","0.38","%","","","10,600","","","","0.70","%"],["Commercial construction","","","54,214","","","","2.78","%","","","91,760","","","","6.07","%"],["Residential construction","","","7,388","","","","0.38","%","","","11,914","","","","0.79","%"],["Residential","","","28,562","","","","1.47","%","","","30,431","","","","2.01","%"],["Farmland","","","54,805","","","","2.82","%","","","50,164","","","","3.32","%"],["Commercial:"],["Secured","","","137,062","","","","7.03","%","","","138,676","","","","9.18","%"],["Unsecured","","","21,136","","","","1.09","%","","","17,526","","","","1.16","%"],["PPP","","","22,124","","","","1.14","%","","","147,965","","","","9.79","%"],["Consumer and other","","","17,167","","","","0.88","%","","","4,921","","","","0.33","%"],["Total loans held for investment","","","1,936,066","","","","99.45","%","","","1,506,454","","","","99.68","%"],["Loans held for sale:"],["Commercial","","","10,671","","","","0.55","%","","","4,820","","","","0.32","%"],["Total loans before deferred fees","","","1,946,737","","","","100.00","%","","","1,511,274","","","","100.00","%"],["Net deferred loan fees","","","(1,606",")","","","","","","","(3,295",")"],["Total loans","","$","1,945,131","","","","","","","$","1,507,979"]]
[[/GREPCENT_TABLE]]

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

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

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

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

The following
tables present the commercial real estate loan balance, associated percentage of commercial real estate concentrations by collateral
type, estimated collateral values, and related loan-to-value (“LTV”) ranges as of the dates indicated. Revolving lines
of credit with zero balance and 0.00% LTV are excluded from this table. Collateral values are determined at origination using
third party real estate appraisals or evaluations. Updated appraisals, which are included in the table below, are obtained for
loans that are downgraded to watch or substandard. Loans over $1.0 million are reviewed annually, at which time an internal assessment
of collateral values is completed. 

60

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Loan Balance","","","% of Commercial Real Estate","","","Collateral Value","","","Minimum LTV","","","Maximum LTV"],["December 31, 2021"],["Manufactured home community","","$","518,910","","","","32.71","%","","$","849,269","","","","14.22","%","","","78.00","%"],["Office","","","166,960","","","","10.53","%","","","307,376","","","","5.10","%","","","75.00","%"],["Multifamily","","","152,412","","","","9.61","%","","","350,953","","","","5.13","%","","","75.00","%"],["Retail","","","135,401","","","","8.54","%","","","318,875","","","","1.43","%","","","74.51","%"],["Faith-based","","","134,728","","","","8.49","%","","","294,367","","","","1.67","%","","","75.00","%"],["Industrial","","","108,718","","","","6.85","%","","","272,383","","","","4.59","%","","","80.14","%"],["Mixed use","","","85,712","","","","5.40","%","","","159,810","","","","20.76","%","","","69.05","%"],["Mini storage","","","83,270","","","","5.25","%","","","155,961","","","","1.04","%","","","71.98","%"],["All other types1","","","200,121","","","","12.62","%","","","473,952","","","","8.00","%","","","94.97","%"],["Total","","$","1,586,232","","","","100.00","%","","$","3,182,946","","","","1.04","%","","","94.97","%"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["1","Types of collateral in the \u201call other types\u201d category are those that individually make up less than 5.00% commercial real estate concentration and include hospitality, auto dealerships, car washes, assisted living communities, country clubs, gas stations/convenience stores, medical offices, special purpose property, mortuaries, restaurants, and schools."]]
[[/GREPCENT_TABLE]]

Over
the past few years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio
has not changed significantly (when PPP loans are excluded). Our primary focus remains commercial real estate lending (including commercial,
commercial land and development, and commercial construction), which constitutes 84.64% of our portfolio at December 31, 2021. Commercial
secured lending (consisting primarily of SBA 7(a) loans under $350,000) represents 7.03% of our portfolio at December 31, 2021. We sell
the guaranteed portion of all SBA 7(a) loans, excluding PPP loans, in the secondary market and will continue to do so as long as market
conditions continue to be favorable.

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 577.92% and 624.70% as of December 31, 2021 and December 31, 2020, respectively. We
have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (i.e., manufactured
home communities, self-storage, hospitality, etc.). All loan sectors were within our established limits as of December 31, 2021.
Additionally, our loans are geographically concentrated with borrowers and collateral properties primarily in California.

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

61

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

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Due in 1 year or less","","","Due after 1 year through 5 years","","","Due after 5 years through 15 years","","","Due after 15 years","","","Total"],["Real estate:"],["Commercial","","$","32,107","","","$","170,222","","","$","1,343,367","","","$","40,536","","","$","1,586,232"],["Commercial land and development","","","1,209","","","","6,167","","","","\u2014","","","","\u2014","","","","7,376"],["Commercial construction","","","3,418","","","","17,575","","","","32,131","","","","1,090","","","","54,214"],["Residential construction","","","5,609","","","","1,779","","","","\u2014","","","","\u2014","","","","7,388"],["Residential","","","1,183","","","","8,246","","","","17,871","","","","1,262","","","","28,562"],["Farmland","","","3,876","","","","8,116","","","","42,813","","","","\u2014","","","","54,805"],["Commercial:"],["Secured","","","31,436","","","","29,880","","","","82,526","","","","3,891","","","","147,733"],["Unsecured","","","1,182","","","","3,976","","","","15,978","","","","\u2014","","","","21,136"],["PPP","","","598","","","","21,526","","","","\u2014","","","","\u2014","","","","22,124"],["Consumer and other","","","35","","","","3,619","","","","13,513","","","","\u2014","","","","17,167"],["Total loans","","$","80,653","","","$","271,106","","","$","1,548,199","","","$","46,779","","","$","1,946,737"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Due in 1 year or less","","","Due after 1 year through 5 years","","","Due after 5 years through 15 years","","","Due after 15 years","","","Total"],["Real estate:"],["Commercial","","$","46,579","","","$","100,882","","","$","821,130","","","$","33,906","","","$","1,002,497"],["Commercial land and development","","","7,248","","","","2,672","","","","680","","","","\u2014","","","","10,600"],["Commercial construction","","","12,358","","","","15,883","","","","63,519","","","","\u2014","","","","91,760"],["Residential construction","","","5,754","","","","6,160","","","","\u2014","","","","\u2014","","","","11,914"],["Residential","","","1,462","","","","4,905","","","","22,205","","","","1,859","","","","30,431"],["Farmland","","","410","","","","13,060","","","","36,694","","","","\u2014","","","","50,164"],["Commercial:"],["Secured","","","44,230","","","","36,055","","","","63,211","","","","\u2014","","","","143,496"],["Unsecured","","","1,580","","","","1,692","","","","14,254","","","","\u2014","","","","17,526"],["PPP","","","\u2014","","","","147,965","","","","\u2014","","","","\u2014","","","","147,965"],["Consumer and other","","","51","","","","3,835","","","","1,035","","","","\u2014","","","","4,921"],["Total loans","","$","119,672","","","$","333,109","","","$","1,022,728","","","$","35,765","","","$","1,511,274"]]
[[/GREPCENT_TABLE]]

62

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

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Fixed Interest Rates","","","Floating or Adjustable Rates","","","Total"],["Real estate:"],["Commercial","","$","394,648","","","$","1,191,584","","","$","1,586,232"],["Commercial land and development","","","722","","","","6,654","","","","7,376"],["Commercial construction","","","\u2014","","","","54,214","","","","54,214"],["Residential construction","","","\u2014","","","","7,388","","","","7,388"],["Residential","","","2,222","","","","26,340","","","","28,562"],["Farmland","","","4,183","","","","50,622","","","","54,805"],["Commercial:"],["Secured","","","34,771","","","","112,962","","","","147,733"],["Unsecured","","","19,841","","","","1,295","","","","21,136"],["PPP","","","22,124","","","","\u2014","","","","22,124"],["Consumer and other","","","17,167","","","","\u2014","","","","17,167"],["Total loans","","$","495,678","","","$","1,451,059","","","$","1,946,737"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Fixed Interest Rates","","","Floating or Adjustable Rates","","","Total"],["Real estate:"],["Commercial","","$","134,029","","","$","868,468","","","$","1,002,497"],["Commercial land and development","","","743","","","","9,857","","","","10,600"],["Commercial construction","","","15,527","","","","76,233","","","","91,760"],["Residential construction","","","\u2014","","","","11,914","","","","11,914"],["Residential","","","2,737","","","","27,694","","","","30,431"],["Farmland","","","4,464","","","","45,700","","","","50,164"],["Commercial:"],["Secured","","","28,241","","","","115,255","","","","143,496"],["Unsecured","","","14,882","","","","2,644","","","","17,526"],["PPP","","","147,965","","","","\u2014","","","","147,965"],["Consumer and other","","","4,921","","","","\u2014","","","","4,921"],["Total loans","","$","353,509","","","$","1,157,765","","","$","1,511,274"]]
[[/GREPCENT_TABLE]]

Asset Quality

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

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

63

Nonperforming
Assets 

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

Troubled
Debt Restructurings 

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

COVID-19
Deferments

The CARES Act,
as amended by the Consolidated Appropriations Act, specified that COVID-19 related loan modifications executed between March 1,
2020 and the earlier of: (i) 60 days after the date of termination of the national emergency declared by the President; and (ii)
January 1, 2022, on loans that were current as of December 31, 2019 are not TDRs. Additionally, under guidance from the federal
banking agencies, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current
prior to any relief are not TDRs under ASC Subtopic 310-40, “Troubled Debt Restructuring by Creditors.” These modifications
include short-term modifications (e.g., up to six months) such as payment deferrals, fee waivers, extensions of repayment terms,
or delays in payment that are insignificant. We elected to apply these temporary accounting provisions to loans under payment
relief beginning in March 2020. As of December 31, 2021, six borrowing relationships with six loans totaling $12.2 million, or
0.63% of the loan portfolio, were in a COVID-19 deferment period and three loans totaling $0.1 million had been in a COVID-19
deferment period in the third quarter of 2021 but were not in a deferment period as of December 31, 2021. None of the loans that
received COVID-19 deferments in the fourth quarter of 2021 had the principal portion deferred to the respective maturity of the
loan. We accrue and recognize interest income on loans under payment relief based on the original contractual interest rates.
When payments resume at the end of the relief period, the payments will generally be applied to accrued interest due until accrued
interest is fully paid.

PPP Loan
Forgiveness

At December
31, 2021, there were 60 PPP loans outstanding totaling $22.1 million, which included 59 loans totaling $21.5 million funded during
2021 under the second round of the PPP stimulus plan. Approximately 11 of these PPP loans, or 18.33% of total PPP loans at December
31, 2021, totaling $0.6 million, were less than or equal to $0.15 million and had access to streamlined forgiveness processing.
At December 31, 2021, 1,370 PPP loan forgiveness applications had been submitted to the SBA and forgiveness payments had been
received on 1,367 of these PPP loans, totaling $332.4 million in principal and interest. The Company has submitted all forgiveness
applications on the first round of PPP loans and received payment on all but one pending application. We expect full forgiveness
of the second round of PPP loans to be completed in the near term.

SBA
7(a) Payments Made Under the CARES Act

Section 1112
of the CARES Act required the SBA to make payments on new and existing 7(a) loans for up to six months. The Consolidated Appropriations
Act amended this section of the CARES Act to extend the payment on 7(a) loans in existence on March 27, 2020, beginning on February
1, 2021, for up to eight or eleven months, depending on the borrower’s industry code, and to require the SBA to make up
to three months of payments on new 7(a) loans approved between February 1, 2021 and September 30, 2021. These payments are not
deferments but rather full payments of principal and interest that the borrower will not be responsible for in the future. In
the year ended December 31, 2021, the SBA made payments under this program on 1,099 of our SBA 7(a) loans, totaling $7.6 million
in principal and interest. As of December 31, 2021, 25 loans totaling $2.9 million were still eligible to receive these payments
under the CARES Act.

64

SBA
Loans

During 2021,
the Company sold 169 SBA 7(a) loans with government guaranteed portions totaling $41.4 million. Of the loans sold in 2021, the
Company received gross proceeds of $45.3 million resulting in a net gain on sale of $3.9 million. The Company did not sell any
PPP loans in 2021.

During 2020,
the Company sold 373 SBA 7(a) loans with government guaranteed portions totaling $71.3 million. Of the loans sold in 2020, the
Company received gross proceeds of $79.7 million resulting in a net gain on sale of $4.0 million. Additionally, the company sold
157 PPP loans with balances of $10.6 million resulting in a gain of $0.2 million.

Non-accrual
Loans

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

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","December 31, 2021","","","December 31, 2020"],["Non-accrual loans"],["Real estate:"],["Commercial","","$","122","","","$","137"],["Commercial land and development","","","\u2014","","","","\u2014"],["Commercial construction","","","\u2014","","","","\u2014"],["Residential construction","","","\u2014","","","","\u2014"],["Residential","","","178","","","","183"],["Farmland","","","\u2014","","","","\u2014"],["Commercial:"],["Secured","","","288","","","","132"],["Unsecured","","","\u2014","","","","\u2014"],["PPP","","","\u2014","","","","\u2014"],["Consumer and other","","","\u2014","","","","\u2014"],["Total non-accrual loans","","","588","","","","452"],["Loans past due 90 days or more and still accruing"],["Real estate:"],["Commercial","","","\u2014","","","","\u2014"],["Commercial land and development","","","\u2014","","","","\u2014"],["Commercial construction","","","\u2014","","","","\u2014"],["Residential construction","","","\u2014","","","","\u2014"],["Residential","","","\u2014","","","","\u2014"],["Farmland","","","\u2014","","","","\u2014"],["Commercial:"],["Secured","","","\u2014","","","","\u2014"],["Unsecured","","","\u2014","","","","\u2014"],["PPP","","","\u2014","","","","\u2014"],["Consumer and other","","","\u2014","","","","\u2014"],["Total loans past due and still accruing","","","\u2014","","","","\u2014"],["Total nonperforming loans","","","588","","","","452"],["Real estate owned","","","\u2014","","","","\u2014"],["Total nonperforming assets","","$","588","","","$","452"],["COVID-19 deferments","","$","12,156","","","$","41,439"],["Performing TDRs (not included above)","","$","\u2014","","","$","\u2014"],["Allowance for loan losses to period end non-accrual loans","","","3,954.30","%","","","4,909.07","%"],["Non-accrual loans to period end loans","","","0.03","%","","","0.03","%"],["Nonperforming assets to total assets","","","0.02","%","","","0.02","%"],["Nonperforming loans plus performing TDRs to period end loans","","","0.03","%","","","0.03","%"],["COVID-19 deferments to period end loans","","","0.63","%","","","2.75","%"]]
[[/GREPCENT_TABLE]]

65

The
ratio of non-accrual loans to period end loans was unchanged at 0.03% as of December 31, 2020 and December 31, 2021, partially due to
the stability of our non-accrual loans.

The
ratio of the allowance for loan losses to period end non-accrual loans decreased from 4,909.07% as of December 31, 2020 to 3,954.30%
as of December 31, 2021. The decrease was primarily due to an increase in the allowance for loan losses of 4.75% from December 31, 2020
to December 31, 2021, coupled with a 30.04% increase in period end non-accrual loans from December 31, 2020 to December 31, 2021, which
was primarily due to an increase of $0.2 million in commercial secured non-accrual loans from December 31, 2020 to December 31, 2021.
The rate at which the allowance for loan losses increased was significantly less than the rate at which non-accrual loans increased year-over-year,
thus causing a decrease in the ratio of allowance for loan losses to period end non-accrual loans year-over-year.

Potential
Problem Loans

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

The banking
industry defines loans graded substandard or doubtful as “classified” loans. Loans by credit quality risk rating were
as follows as of the periods indicated: 

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Pass","","","Watch","","","Substandard","","","Doubtful","","","Total"],["December 31, 2021"],["Real estate:"],["Commercial","","$","1,575,006","","","$","1,970","","","$","9,256","","","$","\u2014","","","$","1,586,232"],["Commercial land and development","","","7,376","","","","\u2014","","","","\u2014","","","","\u2014","","","","7,376"],["Commercial construction","","","48,288","","","","5,926","","","","\u2014","","","","\u2014","","","","54,214"],["Residential construction","","","7,388","","","","\u2014","","","","\u2014","","","","\u2014","","","","7,388"],["Residential","","","28,384","","","","\u2014","","","","178","","","","\u2014","","","","28,562"],["Farmland","","","54,805","","","","\u2014","","","","\u2014","","","","\u2014","","","","54,805"],["Commercial:"],["Secured","","","135,131","","","","751","","","","1,180","","","","\u2014","","","","137,062"],["Unsecured","","","21,136","","","","\u2014","","","","\u2014","","","","\u2014","","","","21,136"],["PPP","","","22,124","","","","\u2014","","","","\u2014","","","","\u2014","","","","22,124"],["Consumer","","","17,167","","","","\u2014","","","","\u2014","","","","\u2014","","","","17,167"],["Total loans","","$","1,916,805","","","$","8,647","","","$","10,614","","","$","\u2014","","","$","1,936,066"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","Pass","","","Watch","","","Substandard","","","Doubtful","","","Total"],["December 31, 2020"],["Real estate:"],["Commercial","","$","950,118","","","$","16,836","","","$","35,543","","","$","\u2014","","","$","1,002,497"],["Commercial land and development","","","10,600","","","","\u2014","","","","\u2014","","","","\u2014","","","","10,600"],["Commercial construction","","","85,860","","","","5,900","","","","\u2014","","","","\u2014","","","","91,760"],["Residential construction","","","11,914","","","","\u2014","","","","\u2014","","","","\u2014","","","","11,914"],["Residential","","","30,248","","","","\u2014","","","","183","","","","\u2014","","","","30,431"],["Farmland","","","50,164","","","","\u2014","","","","\u2014","","","","\u2014","","","","50,164"],["Commercial:"],["Secured","","","136,992","","","","1,552","","","","132","","","","\u2014","","","","138,676"],["Unsecured","","","17,526","","","","\u2014","","","","\u2014","","","","\u2014","","","","17,526"],["PPP","","","147,965","","","","\u2014","","","","\u2014","","","","\u2014","","","","147,965"],["Consumer","","","4,921","","","","\u2014","","","","\u2014","","","","\u2014","","","","4,921"],["Total loans","","$","1,446,308","","","$","24,288","","","$","35,858","","","$","\u2014","","","$","1,506,454"]]
[[/GREPCENT_TABLE]]

Loans designated
as watch and substandard, which are not considered adversely classified, decreased to $19.3 million at December 31, 2021 from
$60.1 million at December 31, 2020, reducing reserves related to classified and watch loans by $0.5 million, which was offset
by additional provision for loan growth. There were no loans with doubtful risk grades at December 31, 2021 or December 31, 2020.

66

Allowance
for Loan Losses

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

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

In the year
ended December 31, 2021, our methodology for evaluating allowance for loan losses continued to be affected by the COVID-19 pandemic,
resulting in sustained higher reserve levels, primarily related to our commercial real estate portfolio. Reserves on the commercial
real estate portfolio increased period-over-period due to higher uncertainty related to the COVID-19 pandemic and related economic
effects. 

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

The allowance
for loan losses was $23.2 million at December 31, 2021, as compared to $22.2 million at December 31, 2020. The $1.1 million increase
is due to a $1.7 million provision for loan losses recorded during the year ended December 31, 2021, offset by net charge-offs
of $0.6 million during the year ended December 31, 2021.

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

[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020"],["(dollars in thousands)","","Dollars","","","% of Total","","","Dollars","","","% of Total"],["Collectively evaluated for impairment:"],["Real estate:"],["Commercial","","$","12,869","","","","55.37","%","","$","9,358","","","","42.17","%"],["Commercial land and development","","","50","","","","0.22","%","","","77","","","","0.35","%"],["Commercial construction","","","371","","","","1.60","%","","","821","","","","3.70","%"],["Residential construction","","","50","","","","0.22","%","","","87","","","","0.39","%"],["Residential","","","192","","","","0.83","%","","","220","","","","0.99","%"],["Farmland","","","645","","","","2.78","%","","","615","","","","2.77","%"],["Commercial:"],["Secured","","","6,687","","","","28.77","%","","","9,476","","","","42.71","%"],["Unsecured","","","207","","","","0.89","%","","","179","","","","0.81","%"],["PPP","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%"],["Consumer and other","","","889","","","","3.82","%","","","632","","","","2.85","%"],["Unallocated","","","1,111","","","","4.78","%","","","724","","","","3.26","%"],["","","","23,071","","","","99.28","%","","","22,189","","","","100.00","%"],["Individually evaluated for impairment","","","172","","","","0.72","%","","","\u2014","","","","0.00","%"],["","","","172","","","","0.72","%","","","\u2014","","","","0.00","%"],["Total allowance for loan losses","","$","23,243","","","","100.00","%","","$","22,189","","","","100.00","%"]]
[[/GREPCENT_TABLE]]

67

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

[[GREPCENT_TABLE]]
[["","","As of and for the year ended"],["","","December 31, 2021","","","December 31, 2020"],["(dollars in thousands)","","Activity","","","% of Period End Loans","","","Activity","","","% of Period End Loans"],["Loans held for investment","","$","1,936,066","","","","","","","$","1,506,454"],["Allowance for loan losses (beginning of period)","","$","22,189","","","","","","","$","14,915"],["Net (charge-offs) recoveries:"],["Real estate:"],["Commercial","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%"],["Commercial land and development","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%"],["Commercial construction","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%"],["Residential construction","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%"],["Residential","","","\u2014","","","","0.00","%","","","90","","","","0.30","%"],["Farmland","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%"],["Commercial:"],["Secured","","","(559",")","","","(0.41",")%","","","(1,428",")","","","(1.03",")%"],["Unsecured","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%"],["PPP","","","\u2014","","","","0.00","%","","","\u2014","","","","0.00","%"],["Consumer and other","","","(87",")","","","(0.51",")%","","","(388",")","","","(7.88",")%"],["Net charge-offs","","","(646",")","","","(0.03",")%","","","(1,726",")","","","(0.11",")%"],["Provision for loan losses","","","1,700","","","","","","","","9,000"],["Allowance for loan losses (end of period)","","$","23,243","","","","","","","$","22,189"],["Allowance for loan losses to total loans","","","1.20","%","","","","","","","1.47","%"]]
[[/GREPCENT_TABLE]]

The
ratio of allowance for loan losses to total loans was 1.20% at December 31, 2021, compared to 1.47% at December 31, 2020. The decrease
was primarily due to an improvement in economic conditions for commercial secured loans during fiscal year 2021 and increased loan growth
year-over-year. Excluding PPP loans, the ratio of the allowance for loan losses to total loans was 1.21% and 1.63% at December 31, 2021
and 2020, respectively. See the section entitled “Non-GAAP Financial Measures” for a reconciliation of our non-GAAP measures
to the most directly comparable GAAP financial measure. Non-accrual loans totaled $0.6 million, or 0.03% of total loans, at December
31, 2021, remaining largely unchanged from $0.5 million, or 0.03% of total loans, at December 31, 2020.

68

Net
charge-offs as a percent of period end loans decreased slightly from 0.11% for the year ended December 31, 2020 to 0.03% for the year
ended December 31, 2021. The net recovery rate related to the residential real estate portfolio was 0.30% for the year ended December
31, 2020 and 0.00% for the year ended December 31, 2021. The net charge-off rate related to the commercial secured portfolio improved
from 1.03% in the year ended December 31, 2020 to 0.41% in the year ended December 31, 2021. The net charge-off rate related to the consumer
portfolio improved from 7.88% in the year ended December 31, 2020 to 0.51% in the year ended December 31, 2021.

Liabilities

During 2021,
total liabilities increased by $501.7 million from $1.8 billion at December 31, 2020 to $2.3 billion at December 31, 2021. This
increase was primarily due to an increase in total deposits of $501.9 million, comprised of increases of $201.0 million in non-interest-bearing
deposits and $300.9 million in interest-bearing deposits.

Deposits

Representing
98.46% of our total liabilities as of December 31, 2021, deposits are our primary source of funding for our business operations.

Total deposits
increased by $501.9 million, or 28.13%, to $2.3 billion at December 31, 2021 from $1.8 billion as of December 31, 2020. Deposit
increases were attributed to an increase in the number of new relationships, as well as fluctuations in our existing accounts.
Non-interest-bearing deposits increased by $201.0 million in 2021 to $902.1 million, and represented 39.46% of total deposits
at December 31, 2021, compared to 39.30% of total deposits at December 31, 2020. Our loan to deposit ratio was 85.09% at December
31, 2021 compared to 84.50% at December 31, 2020. We intend to continue to operate our business with a loan to deposit ratio similar
to these levels.

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

[[GREPCENT_TABLE]]
[["","","For the year ended"],["","","December 31, 2021","","","December 31, 2020"],["(dollars in thousands)","","Average Amount","","","Average Rate Paid","","","% of Total Deposits","","","Average Amount","","","Average Rate Paid","","","% of Total Deposits"],["Transaction accounts","","$","155,163","","","","0.10","%","","","12.74","%","","$","141,293","","","","0.26","%","","","12.28","%"],["Money market and savings","","","1,009,847","","","","0.19","%","","","82.89","%","","","906,599","","","","0.64","%","","","78.78","%"],["Time","","","53,222","","","","0.32","%","","","4.37","%","","","102,890","","","","1.16","%","","","8.94","%"],["Total deposits","","$","1,218,232","","","","0.18","%","","","100.00","%","","$","1,150,782","","","","0.64","%","","","100.00","%"]]
[[/GREPCENT_TABLE]]

Uninsured
deposits, excluding time deposits, totaled $1.3 billion and $1.1 billion at December 31, 2021 and 2020, respectively.

As
of December 31, 2021, our 26 largest deposit relationships, each accounting for more than $10.0 million, totaled $912.7 million, or 39.93%
of our total deposits. As of December 31, 2020, our 18 largest deposit relationships, each accounting for more than $10.0 million, totaled
$641.2 million, or 35.90% of our total deposits. Overall, our large deposit relationships have been relatively consistent over time and
have helped to continue to grow our deposit base. Our large deposit relationships are comprised of the following entity types as of the
periods indicated:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","December 31, 2021","","","December 31, 2020"],["Municipalities","","$","424,483","","","$","318,357"],["Non-Profit","","","181,080","","","","165,046"],["Business","","","307,132","","","","157,757"],["Total","","$","912,695","","","$","641,160"]]
[[/GREPCENT_TABLE]]

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

69

The following
table sets forth the maturity of time deposits as of December 31, 2021:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","$250,000 or Greater","","","Less than $250,000","","","Total","","","Uninsured Portion"],["Remaining maturity:"],["Three months or less","","$","77,563","","","$","25,771","","","$","103,334","","","$","75,063"],["Over three through six months","","","305","","","","606","","","","911","","","","109"],["Over six through twelve months","","","\u2014","","","","26","","","","26","","","","\u2014"],["Over twelve months","","","\u2014","","","","1","","","","1","","","","\u2014"],["Total","","$","77,868","","","$","26,404","","","$","104,272","","","$","75,172"]]
[[/GREPCENT_TABLE]]

FHLB Advances
and Other Borrowings

From time to
time, we utilize short-term collateralized FHLB borrowings to maintain adequate liquidity. There were no borrowings outstanding
as of December 31, 2021 and December 31, 2020.

In
2017 and 2019, we issued subordinated notes of $25.0 million and $3.75 million, respectively. This debt was issued to investors in private
placement transactions. See Note 9, Long Term Debt and Other Borrowings, in the notes to our consolidated financial statements included
in this Annual Report on Form 10-K for additional information regarding these subordinated notes. The proceeds of the notes constitute
Tier 2 capital under the regulatory capital rules of the federal banking agencies. The following table is a summary of our outstanding
subordinated notes as of December 31, 2021:

[[GREPCENT_TABLE]]
[["(dollars in thousands)","","Issuance Date","","","Amount of Notes","","","Prepayment Right","","","Maturity Date"],["Subordinated notes","","September 2017","","","$","25,000","","","September 28, 2022","","","September 15, 2027"],["Fixed at 6.00% through September 15, 2022, then three-month London Inter-bank Offered Rate (\u201cLIBOR\u201d) plus 404.4 basis points (4.25% as of December 31, 2021) through maturity"],["Subordinated notes","","November 2019","","","$","3,750","","","September 30, 2022","","","September 15, 2027"],["Fixed at 5.50% through September 15, 2022, then three-month LIBOR plus 354.4 basis points (3.75% as of December 31, 2021) through maturity"]]
[[/GREPCENT_TABLE]]

Shareholders’
Equity

Shareholders’
equity totaled $235.0 million at December 31, 2021 and $133.8 million at December 31, 2020. The increase in shareholders’ equity
was primarily attributable to net proceeds of $111.2 million from the issuance of 6,054,750 shares of common stock in our IPO and net
income recognized of $42.4 million, partially offset by $51.9 million in cash dividends paid during the year ended December 31, 2021.

Liquidity and Capital Resources

Liquidity
Management

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

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

70

The
Company is a corporation separate and apart from the Bank and, therefore, must provide for its own liquidity, including liquidity required
to meet its debt service requirements on its subordinated debt. The Company’s main source of cash flow is dividends declared and
paid to it by the Bank. There are statutory and regulatory limitations that affect the ability of the Bank to pay dividends to the Company,
including various legal and regulatory provisions that limit the amount of dividends the Bank can pay to the Company without regulatory
approval. Under the California Financial Code, payment of a dividend from the Bank to Bancorp without advance regulatory approval is
restricted to the lesser of the Bank’s retained earnings or the amount of the Bank’s net income from the previous three fiscal
years less the amount of dividends paid during that period. We believe that these limitations will not impact our ability to meet our
ongoing short-term cash obligations. For contingency purposes, the Company maintains a minimum level of cash to fund one year’s
projected operating cash flow needs plus two years’ subordinated notes debt service. We continually monitor our liquidity position
in order to meet all reasonably foreseeable short-term, long-term, and strategic liquidity demands. Management has established a comprehensive
process for identifying, measuring, monitoring, and controlling liquidity risk. Because of its critical importance to the viability of
the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management
include effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate
strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and
monitoring systems including stress tests that are commensurate with the complexity of our business activities; active management of
intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of
highly liquid marketable securities free of legal, regulatory, or operational impediments that can be used to meet liquidity needs in
stress situations; comprehensive contingency funding plans that sufficiently address potential adverse liquidity events and emergency
cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity
risk management process.

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

Sources and
Uses of Cash

Our
executive officers and board of directors review our sources and potential uses of cash in connection with our annual budgeting process.
Generally speaking, our principal funding source is cash from gathering of deposits, and our principal uses of cash include funding of
loans, operating expenses, income taxes, and dividend payments, as described below. In 2021, we also had significant cash inflows as
a result of our IPO.

Based
on our current capital allocation objectives, during 2022, we project expending approximately $0.5 million to $1.5 million of cash related
to continued buildout of our IT systems and processes and $10.3 million of cash for dividends on our common stock (based on the assumptions
described below). We project an additional distribution to shareholders of record as of May 3, 2021 of approximately $4.9 million for
the final distribution of the Accumulated Adjustments Account (“AAA”) payout under the Company’s Tax Sharing Agreement,
which represents previously taxed but undistributed earnings. The final AAA distribution amount is subject to adjustment upon completion
of the 2021 tax return, which could be material.

For
the 12-month period ending December 31, 2022, we project that our fixed commitments could potentially include: (i) approximately $249.0
million to fund off balance sheet commitments outstanding at December 31, 2021; (ii) $5.0 million for IT services, IT support and compliance
expenditures; and (iii) $1.0 million for operating leases. In future years, we expect that our main sources and uses of cash will relate
primarily to regular operating activities.

As
of December 31, 2021, management believes the above-mentioned sources will provide adequate liquidity during the next twelve months
for the Bank to meet its operating needs.

71

IPO

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

Loans

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

During the year
ended December 31, 2021, we had cash outflows of $426.9 million in loan originations and advances, net of principal collected,
and $48.2 million in loans originated for sale.

Additionally,
we enter into commitments to extend credit in the ordinary course of business, such as commitments to fund new loans and undisbursed
construction funds. While these commitments represent contractual cash requirements, a portion of these commitments to extend credit
may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. At
December 31, 2021, total off-balance sheet commitments totaled $248.9 million. We expect to fund these commitments to the extent utilized
primarily through the repayment of existing loans, deposit growth, and liquid assets.

Deposits

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

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

During the year
ended December 31, 2021, we had significant cash inflows related to an increase in deposits of $501.9 million, primarily as a
result of an increase in the number of new relationships and fluctuations in existing accounts.

Over
the next twelve months, $103.3 million of time deposits are expected to mature. Additionally, we expect to obtain a new time deposit
in the amount of $75.0 million with a state organization. We expect $0.9 million of time deposits to mature through 2026. As these time
deposits mature, some of these deposits may not renew due to market competition. However, based on our historical runoff experience,
we expect the outflow will not be significant and can be replenished through our organic growth in deposits. We believe our emphasis
on local deposits, combined with our liquid investment portfolio, as discussed below, provides a stable funding base.

Investment
Securities

Our
investment securities, excluding held-to-maturity securities, totaled $148.8 million at December 31, 2021. At December 31, 2021, 53.02%
and 32.57% of our investment portfolio consisted of mortgage-backed securities and obligations of states and political subdivisions,
respectively. Cash proceeds from mortgage-backed securities result from payments of principal and interest by borrowers. Cash proceeds
from obligations of states and political subdivisions occur when these securities are called or mature. Assuming the current prepayment
speed and interest rate environment, we expect to receive approximately $14.4 million from our securities over the next 12 months. In
future periods, we expect to maintain approximately the same level of cash flows from our securities. Depending on market yield and our
liquidity, we may purchase securities as a use of cash in our interest-earning asset portfolio.

During the year
ended December 31, 2021, we had cash proceeds from sales, maturities, and/or prepayments of securities of $65.8 million, offset
by cash outflows of $99.7 million related to investment securities purchased. Additionally, at December 31, 2021, securities available-for-sale
totaled $148.8 million, of which $63.4 million has been pledged as collateral for borrowings and other commitments.

72

Future Contractual
Obligations

Our
estimated future obligations as of December 31, 2021 include both current and long-term obligations. Under our operating leases as discussed
in Note 15, Commitments and Contingencies, we have a current obligation of $1.0 million and a long-term obligation of $4.4 million. We
also have a current obligation of $103.3 million and a long-term obligation of $0.9 million related to time deposits, as discussed in
Note 8, Interest-Bearing Deposits. We have subordinated notes of $28.4 million, all of which are long-term obligations. Finally, we have
one significant, long-term contract for core processing services. While the actual obligation is unknown and dependent on certain factors,
including volume and activities, we estimate that our current obligation under this contract is $1.2 million and our long-term obligation
is $0.5 million, which is estimated using 2021 average monthly expense extrapolated over the remaining life of the contract.

FHLB Financing

The Bank is
a shareholder of the FHLB, which enables the Bank to have access to lower-cost FHLB financing when necessary. At December 31,
2021, the Bank had a total financing availability of $275.8 million, net of letters of credit issued of $420.5 million.

Impact of
Inflation

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

Dividends

A
use of liquidity for the Company is shareholder dividends. Bancorp paid dividends to its shareholders totaling $51.9 million during the
year ended December 31, 2021, including a cash distribution in the amount of $27.0 million paid
on May 21, 2021 to shareholders of record as of May 3, 2021, for the AAA payout, which is described in further detail in the Company’s
Registration Statement on Form S-1.

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

Historical Information

The following table summarizes our
consolidated cash flow activities:

[[GREPCENT_TABLE]]
[["","","For the year ended","","","Amount"],["(dollars in thousands)","","December 31, 2021","","","December 31, 2020","","","Increase (Decrease)"],["Net cash provided by operating activities","","$","28,657","","","$","51,475","","","$","(22,818",")"],["Net cash used in investing activities","","","(455,011",")","","","(372,630",")","","","(82,381",")"],["Net cash provided by financing activities","","","561,190","","","","434,282","","","","126,908"]]
[[/GREPCENT_TABLE]]

Operating Activities

Net
cash provided by operating activities decreased by $22.8 million for the year ended December 31, 2021 as compared to the year
ended December 31, 2020, primarily due to a decrease in loans originated for sale, offset by a decrease in proceeds from sale
of loans. Various other, less material items made up the remainder of the change. Cash provided by operating activities is subject
to variability period-over-period as a result of timing differences, including with respect to the collection of receivables and
payments of interest expense, accounts payable, and bonuses.

For
additional information about our operating results, see “Results of Operations” above.

73

Investing Activities

Net
cash used in investing activities increased by $82.4 million for the year ended December 31, 2021 as compared to the year ended
December 31, 2020, primarily due to an increase in loan originations, net of repayments, an increase in purchases of available-for-sale
securities, and an increase in purchases of bank-owned life insurance, partially offset by decreases in time deposits in banks.

Financing Activities

Net
cash provided by financing activities increased by $126.9 million for the year ended December 31, 2021 as compared to the year ended
December 31, 2020, primarily due to proceeds received in connection with the IPO during the year and growth in deposit account balances,
partially offset by an increase in cash dividends paid, including a cash dividend payout from the Company’s AAA.

Capital Adequacy

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

Bancorp and
the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure
to meet minimum capital requirements as set forth in the following tables can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a material effect on our consolidated financial statements.
We operate under the Small Bank Holding Company Policy Statement, and, accordingly, are exempt from the Federal Reserve’s
generally applicable risk-based capital ratio and leverage ratio requirements. The Bank is subject to minimum risk-based and leverage
capital requirements under federal regulations implementing the Basel III framework, and to regulatory thresholds that must be
met for an insured depository institution to be classified as “well-capitalized” under the prompt corrective action
framework. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items, as calculated
under regulatory accounting practices. Capital amounts for Bancorp and the Bank, as well as the Bank’s prompt corrective
action classification, are also subject to qualitative judgments by the regulators about components of capital, risk weightings,
and other factors. As of December 31, 2021, both Bancorp and the Bank were in compliance with all applicable regulatory capital
requirements, and the Bank qualified as “well-capitalized” under the prompt corrective action framework.

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

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

[[GREPCENT_TABLE]]
[["Capital Ratios for Bancorp","","Actual Ratio","","Required for Capital Adequacy Purposes1","","Ratio to be Well- Capitalized under Prompt Corrective Action Provisions"],["(dollars in thousands)","","Amount","","Ratio","","Amount","","Ratio","","Amount","","Ratio"],["December 31, 2021"],["Total capital (to risk-weighted assets)","","$","285,128","","","13.98","%","$","163,177","","","\u2265 8.00","%","","N/A","","","N/A"],["Tier 1 capital (to risk-weighted assets)","","$","233,397","","","11.44","%","$","122,382","","","\u2265 6.00","%","","N/A","","","N/A"],["Common equity tier 1 capital (to risk-weighted assets)","","$","233,397","","","11.44","%","$","91,787","","","\u2265 4.50","%","","N/A","","","N/A"],["Tier 1 leverage","","$","233,397","","","9.47","%","$","98,600","","","\u2265 4.00","%","","N/A","","","N/A"],["December 31, 2020"],["Total capital (to risk-weighted assets)","","$","176,861","","","12.18","%","$","116,138","","","\u2265 8.00","%","","N/A","","","N/A"],["Tier 1 capital (to risk-weighted assets)","","$","130,347","","","8.98","%","$","87,103","","","\u2265 6.00","%","","N/A","","","N/A"],["Common equity tier 1 capital (to risk-weighted assets)","","$","130,347","","","8.98","%","$","65,327","","","\u2265 4.50","%","","N/A","","","N/A"],["Tier 1 leverage","","$","130,347","","","6.58","%","$","79,204","","","\u2265 4.00","%","","N/A","","","N/A"]]
[[/GREPCENT_TABLE]]

74

[[GREPCENT_TABLE]]
[["Capital Ratios for the Bank","","Actual Ratio","","Required for Capital Adequacy Purposes","","Ratio to be Well- Capitalized under Prompt Corrective Action Provisions"],["(dollars in thousands)","","Amount","","Ratio","","Amount","","Ratio","","Amount","","Ratio"],["December 31, 2021"],["Total capital (to risk-weighted assets)","","$","279,152","","","13.69","%","$","163,078","","","\u2265 8.00","%","$","203,848","","","\u2265 10.00","%"],["Tier 1 capital (to risk-weighted assets)","","$","255,807","","","12.55","%","$","122,309","","","\u2265 6.00","%","$","163,078","","","\u2265 8.00","%"],["Common equity tier 1 capital (to risk-weighted assets)","","$","255,807","","","12.55","%","$","91,731","","","\u2265 4.50","%","$","132,501","","","\u2265 6.50","%"],["Tier 1 leverage","","$","255,807","","","10.38","%","$","98,555","","","\u2265 4.00","%","$","123,193","","","\u2265 5.00","%"],["December 31, 2020"],["Total capital (to risk-weighted assets)","","$","174,002","","","11.99","%","$","116,114","","","\u2265 8.00","%","$","145,143","","","\u2265 10.00","%"],["Tier 1 capital (to risk-weighted assets)","","$","155,808","","","10.73","%","$","87,086","","","\u2265 6.00","%","$","116,114","","","\u2265 8.00","%"],["Common equity tier 1 capital (to risk-weighted assets)","","$","155,808","","","10.73","%","$","65,314","","","\u2265 4.50","%","$","94,343","","","\u2265 6.50","%"],["Tier 1 leverage","","$","155,808","","","7.87","%","$","79,199","","","\u2265 4.00","%","$","98,998","","","\u2265 5.00","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["1","Presented as if Bancorp were subject to Basel III capital requirements. The Company operates under the Small Bank Holding Company Policy Statement and therefore is not currently subject to generally applicable capital adequacy requirements."]]
[[/GREPCENT_TABLE]]

Recent Accounting
Pronouncements

For
a discussion of the expected impact of accounting pronouncements recently adopted and accounting pronouncements recently issued but not
yet adopted by us as of December 31, 2021, see Note 2, Recently Issued Accounting Standards, of our audited consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.

Non-GAAP
Financial Measures

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

Allowance
for loan losses to total loans, excluding PPP loans, average loans, excluding PPP loans, average loan yield, excluding PPP loans,
tangible shareholders’ equity to tangible assets, and tangible book value per share are non-GAAP financial measures.

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

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

Average
loan yield, excluding PPP loans, is defined as the interest income on loans, excluding interest income on PPP loans, divided by
the average total loans, excluding average PPP loans. The most directly comparable GAAP financial measure is average loan yield.

75

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

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

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

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

[[GREPCENT_TABLE]]
[["Allowance for loan losses to total loans, excluding PPP loans (dollars in thousands)","","December 31, 2021","","","December 31, 2020"],["Allowance for loan losses (numerator)","","$","23,243","","","$","22,189"],["Total loans","","","1,945,131","","","","1,507,979"],["Less: PPP loans","","","22,124","","","","147,965"],["Total loans, excluding PPP loans (denominator)","","$","1,923,007","","","$","1,360,014"],["Allowance for loan losses to total loans, excluding PPP loans","","","1.21","%","","","1.63","%"],["","","For the year ended"],["Average loans, excluding PPP loans (dollars in thousands)","","December 31, 2021","","","December 31, 2020"],["Average total loans","","$","1,637,280","","","$","1,439,380"],["Less: Average PPP Loans","","","116,652","","","","165,414"],["Average total loans, excluding PPP loans","","","1,520,628","","","","1,273,966"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","","For the year ended"],["Average loan yield, excluding PPP loans (dollars in thousands)","","December 31, 2021","","","December 31, 2020"],["Interest income on loans","","$","78,894","","","$","71,405"],["Less: interest income on PPP loans","","","7,417","","","","6,535"],["Interest income on loans, excluding PPP loans (numerator)","","","71,477","","","","64,870"],["Average total loans","","","1,637,280","","","","1,439,380"],["Less: average PPP loans","","","116,652","","","","165,414"],["Average total loans, excluding PPP loans (denominator)","","$","1,520,628","","","$","1,273,966"],["Average loan yield, excluding PPP loans","","","4.70","%","","","5.09","%"]]
[[/GREPCENT_TABLE]]