FSBC 10-K & 10-Q changes, risk factors and insider trading

Unlike many of our larger competitors that maintain significant operations located outside our market, substantially all of our customers are individuals and businesses located and doing business in the state of California. As of December 31, 2024,2025, approximately 57.66%56.89% of our real estate loans measured by dollar amount were secured by collateral located in California, substantiallya allmajority of which is in Northern California. Therefore, our success will depend upon the general economic conditions and real estate activity in these areas, which we cannot predict with certainty. As a result, our operations and profitability may be more adversely affected by a local economic downturn than those of larger, more geographically diverse competitors. A downturn in the local economy could make it more difficult for our borrowers to repay their loans, may lead to credit losses that are not offset by operations in other markets, and may also reduce the ability of depositors to make or maintain deposits with us. In addition, businesses operating in Northern California, and Sacramento in particular, depend on California state government employees for business, and reduced spending activity by such employees in the event of furloughing or termination of such employees could have an adverse impact on the success or failure of these businesses, some of which are current or could become future customers of the Bank. For these reasons, any regional or local economic downturn could have an adverse effect on our business, financial condition, and results of operations.

As of December 31, 2024,2025, a significantsubstantial majorityportion of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral, with a majority of these real estate loans concentrated in Northern California. Real property values in our market may be different from, and in some instances worse than, real property values in other markets or in the United States as a whole and may be affected by a variety of factors outside of our control and the control of our borrowers, including national and local economic conditions, generally. Declines in real estate values, including prices for homes and commercial properties, could result in a deterioration of the credit quality of our borrowers, an increase in the number of loan delinquencies, defaults, and charge-offs, and reduced demand for our products and services, generally. Our commercial real estate loans may have a greater risk of loss than residential mortgage loans, in part because these loans are generally larger or more complex to underwrite. In particular, real estate construction and land acquisition and development loans have risks not present in other types of loans, including risks associated with construction cost overruns, project completion risk, general contractor credit risk, and risks associated with the ultimate sale or use of the completed construction. In addition, declines in real property values in California could reduce the value of any collateral we realize following a default on these loans and could adversely affect our ability to continue to grow our loan portfolio consistent with our underwriting standards. We may have to foreclose on real estate assets if borrowers default on their loans, in which case we are required to record the related asset to the then-fair market value of the collateral, which may ultimately result in a loss. An increase in the level of nonperforming assets increases our risk profile and may affect the capital levels regulators believe are appropriate in light of the ensuing risk profile. Our failure to effectively mitigate these risks could have an adverse effect on our business, financial condition, and results of operations.

Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve,Reserve. whichChanges has raisedin interest rates significantlycan in 2022 and 2023. As interest rates have increased, so haveincrease competitive pressures on the deposit cost of deposit funds. ThisThese haspressures have been exacerbated by the bank failures in the first half of 2023 and the resulting heightened competition for deposits, which has also affected the interest we pay on deposits. It is not possible to predict the pace and magnitude of changes in interest rates, or the impact rate changes will have on our results of operations. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings. Any substantial, unexpected, or prolonged change in market interest rates could have an adverse effect on our business, financial condition, and results of operations. As of December 31, 2024,2025, significant portions of our interest-bearing liabilities were variable rate, where our variable rate liabilities reprice at a faster rate than our variable rate assets.

In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the demand for loans, decreasing the ability of borrowers to repay their current loan obligations, and increasing early withdrawals on term deposits. These circumstances could not only result in increased loan defaults, foreclosures, and charge-offs, but also reduce collateral values and necessitate further increases to the allowance for credit losses, which could have an adverse effect on our business, financial condition, and results of operations. TheConversely, Federal Reserve has indicated that it expects to continue to lower the target range for the federal funds rate in 2025. Aa decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan portfolio, and our cost of funds may not fall as quickly as yields on interest-earning assets. Our asset-liability management strategy may not be effective in mitigating exposure to the risks related to changes in market interest rates.

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

Additionally, like many of our competitors, we rely on customer deposits as our primary source of funding for our lending activities, and we continue to seek and compete for customer deposits to maintain this funding base. Our future growth will largely depend on our ability to retain and grow our deposit base. Although we have historically maintained a high deposit customer retention rate, these deposits are subject to potentially dramatic fluctuations in availability or price due to certain factors outside of our control, such as increasing competitive pressures for deposits, changes in interest rates and returns on other investment classes, customer perceptions of our financial health and general reputation, and a loss of confidence by customers in us or the banking sector generally, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits. Additionally, any such loss of funds could result in lower loan originations, which could have an adverse effect on our business, financial condition, and results of operations. Our failure to compete effectively in our market could restrain our growth or cause us to lose market share, which could have an adverse effect on our business, financial condition, and results of operations.

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

One component of our business consists of originating and periodically selling U.S. government-guaranteed loans, in particular those guaranteed by the SBA. Pursuant to the Consolidated Appropriations Act, 2021, the SBA guaranteed 90% of the principal amount of each qualifying SBA loan originated under the SBA’sits 7(a) loan program through October 1, 2021.program. The SBA presently guarantees 75% to 90% of the principal amount of qualifying loans originated under the 7(a) loan program. The U.S. government may not maintain the SBA 7(a) loan program, and even if it does, the guaranteed portion may not remain at its current or anticipated level. In addition, from time to time, the governmentSBA agencies that guarantee these loansmay reach theirits internalfunding limits and cease to guarantee future loans. In addition, thesethe agenciesSBA may change theirits rules for qualifying loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan guarantee programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small business and industrial borrowers of the types that now qualify for government-guaranteed loans could decline. Also, the profitability of the sale of the guaranteed portion of these loans could decline as a result of market displacements due to increases in interest rates, and premiums realized on the sale of the guaranteed portions could decline from current levels. As the funding and sale of the guaranteed portion of SBA 7(a) loans is a major portion of our business and a significant portion of our non-interest income, any significant changes to the SBA 7(a) loan program, such as its funding or eligibility requirements, may have an unfavorable impact on our prospects, future performance, and results of operations. The aggregate principal balance of SBA 7(a) guaranteed portions sold during the year ended December 31, 2024 was approximately $18.3 million, compared to approximately $36.5 million for the year ended December 31, 2023.

The rapid rise in interest rates during 2022 and 2023 andWhile the resulting industry-wide reduction in the fair value of securities portfolios, among other events, have resulted in a current state of volatility and uncertainty with respect to the health of the United States banking system.system Therehas isabated somewhat since the bank failures that occurred in the spring of 2023, there remains heightened awareness around liquidity, uninsured deposits, deposit composition, unrecognized investment losses, and capital.capital among counterparties, customers, and regulators. We are exposed to different industries and counterparties through transactions with counterparties in the financial services industry, including broker-dealers, commercial banks, investment banks, and other financial intermediaries. As a result, defaults by, declines in the financial condition of, or even rumors or questions about one or more financial services companies, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or other institutions. These losses could adversely affect our business, financial condition, and results of operations.

Our largest deposit relationships currently make up a material percentage of our deposits and the withdrawal of deposits by our largest depositorsdepositors, or withdrawals of other large deposits over a short period of time, could force us to fund our business through more expensive and less stable sources.

At December 31, 2024,2025, our 4953 largest deposit relationships, each accounting for more than $10.0 million, amounted to $1.8$2.0 billion, or 50.35%47.82% of our total deposits. This includes $674.1$789.6 million in deposits from municipalities, of which we conduct a monthly review. Withdrawals of deposits by any one of our largest depositors or by one of our related customer groups could force us to rely more heavily on borrowings and other sources of funding for our business and withdrawal demands, adversely affecting our net interest margin and results of operations. If a significant amount of these deposits, or other large deposits, including deposits that exceed applicable FDIC insurance limits, were withdrawn within a short period of time, it could have a negative impact on our short-term liquidity and have an adverse impact on our earnings. The ease and speed of the electronic withdrawals may increase this risk. We may also be forced, as a result of withdrawals of deposits, to rely more heavily on other, potentially more expensive and less stable, funding sources. Additionally, such circumstances could require us to raise deposit rates in an attempt to attract new deposits, which would adversely affect our results of operations, and/or to raise funding through brokered deposits. Moreover, obtaining adequate funding to meet our deposit obligations may be more challenging during periods of elevated interest rates and financial industry instability. Our ability to attract depositors during a time of actual or perceived distress or instability in the marketplace may be limited. Under applicable regulations, if the Bank were no longer “well-capitalized,” the Bank would not be able to accept brokered deposits without the approval of the FDIC.

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

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

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

TheWe are subject to extensive and evolving federal and state fair lending laws and regulations. For example, the Equal Credit Opportunity Act, the Fair Housing Act, and other fair lending laws and regulations, including state laws and regulations, prohibit discriminatory lending practices by financial institutions. The Federal Trade Commission Act prohibits unfair or deceptive acts or practices, and the Dodd-Frank Act prohibits unfair, deceptive, or abusive acts or practices by financial institutions. The FDIC, the U.S. Department of Justice, federal and state banking agencies, and/or other federal and state agencies, including the CFPB,agencies are responsible for enforcing these fair and responsible banking laws and regulations. Banks with no more than $10.0 billion in total consolidated assets, including the Bank, are subject to rules promulgated by the CFPB but are examined and supervised by federal banking agencies for compliance with federal consumer protection laws and regulations. The CFPB has issued rules that restrict or place conditions on various fees that financial institutions can charge consumers, including credit card late fees and overdraft fees. Although these rules have been challenged in court, and leadership of the CFPB during the Trump Administration has taken steps to curtail the CFPB’s regulatory activities, in general CFPB rulemaking has the potential to have a significant impact on the operations of the Bank.

A successful regulatory challenge to an institution’s compliance with fair andlending responsibleor bankingconsumer protection laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private litigation, including through class action litigation. In addition, an institution’s receipt of a less-than-Satisfactory CRA rating, which could result from a violation of fair lending or consumer protection laws or from an unsatisfactory record of meeting the credit needs of low- and moderate-income communities, could similarly result in an inability of the institution to engage in mergers or other expansionary activity. Such actions and limitations could have ana material adverse effect on our business, financial condition, and results of operations.

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

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

•geopolitical conditions suchor as actsnatural or threatsman ofmade terrorism, pandemics, or military conflicts.disasters.

Upon the closing of our IPO, our directors, executive officers, and principal shareholders beneficially owned an aggregate of 5,881,682 shares, or approximately 34.47% of our issued and outstanding shares of common stock at the time. As of December 31, 2025, our directors, executive officers, and principal shareholders beneficially owned an aggregate of 9,955,654, or approximately 46.59% of our issued and outstanding shares of common stock. Consequently, our directors, executive officers, and principal shareholders are able to significantly affect our affairs and policies, including the outcome of the election of directors and the potential outcome of other matters submitted to a vote of our shareholders, such as mergers, the sale of substantially all of our assets, and other extraordinary corporate matters. This influence may also have the effect of delaying or preventing changes of control or changes in management or limiting the ability of our other shareholders to approve transactions that they may deem to be in the best interests of our Company. The interests of these insiderssignificant shareholders could conflict with the interests of our other shareholders, including you.

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

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

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

Ensuring that our collection, use, transfer, and storage of PII complies with all applicable laws and regulations can increase our costs. Furthermore, we may not be able to ensure that customers and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to personal, confidential, or proprietary information of customers or othersothers, or if that data were otherwise to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under privacy and data protection laws and regulations. Concerns regarding the effectiveness of our measures to safeguard PII, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations, and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines, penalties, regulatory enforcement actions, and/or penalties,criminal prosecution and could damage our reputation and otherwise adversely affect our business, financial condition, and results of operations. Depending on the circumstances giving rise to the breach, this liability may not be subject to a contractual limit or an exclusion of consequential or indirect damages.

Information security risks for financial institutions like us have increased recently in part because of new technologies, such as artificial intelligence, the use of the internet, cloud, and telecommunications technologies (including mobile devices) to conduct financial and other business transactions, and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists, and others. Additionally, like many large enterprises, we have introduced more remote work arrangements for our employees. The increase in remote work arrangements over the past few years has introduced potential new vulnerabilities to cyber threats. We also face increased cybersecurity risk as we deploy additional technologies and digital solutions, including our website and digital banking platform with complementary treasury management solutions. Moreover, any cyber-attack or other security breach may persist for an extended period of time without detection. We endeavor to design and implement policies and procedures to identify such cyber-attacks or breaches as quickly as possible; however, we expect that any investigation of a cyber-attack or breach would take substantial amounts of time, and that there may be extensive delays before we obtain full and reliable information. During such time we would not necessarily know the extent of the harm or how best to remediate it, and certain errors or actions could be repeated or compounded before they are discovered and remediated, all of which would further increase the costs and consequences of such an attack or breach. Notwithstanding the strength of defensive measures, cybersecurity threats and the tactics, techniques, and procedures used in cyberattacks change, develop, and evolve rapidly and continuously, including from emerging technologies, such as artificial intelligence, which may be used to enhance the tactics, techniques, and procedures described above and facilitate new cyber threats.

Headquartered in the greater Sacramento metropolitan area of California, Five Star Bancorp (“Bancorp” or the “Company”) 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 eightnine branch offices. Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy. We are dedicated to serving real estate, agricultural, faith-based, and small to medium-sized enterprises. We aim to consistently deliver value that meets or exceeds the expectations of our shareholders, customers, employees, business partners, and community. We refer to our mission as “purpose-driven and integrity-centered banking.” At December 31, 2024,2025, we had total assets of $4.1$4.8 billion, total loans held for investment of $3.5$4.1 billion, and total deposits of $3.6$4.2 billion.

Interest rates have risen significantly following the historically low levels during the COVID-19 pandemic. Due to elevated levels of inflation and corresponding pressure to raise interest rates, the Federal Reserve announced in January 2022 that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time. The Federal Open Market Committee (“FOMC”) then increased the target range eleven times throughout 2022 and 2023. During 2024,2024 and 2025, the Federal Reserve decreased the federal funds rate three times.times each year. As of December 31, 2024,2025, the target range for the federal funds rate had been decreased to 4.25%3.50% to 4.50%,3.75%, and the FOMC signaledprojects thatone currentadditional economic data and the interest rate environment are more balanced, projecting two decreasesdecrease in 2025,2026, as part of a strategy to return inflation to normalized levels.levels while keeping unemployment low.

We anticipate that interest rates may be lowered over the next few years. Based on our liabilitysensitivity sensitivity,analysis, a steepened yield curve could have a beneficialslight negative impact on our net interest income.income over the next year. Additionally, a continued flat yield curve would be expected to maintain our net interest income.income over the next year.

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. However, we may early adopt certain accounting standards, as the JOBS Act does not preclude an emerging growth company from adopting a new or revised accounting standard earlier than the time that such standard applies to private companies to the extent early adoption is permitted.

A significant amount of the ACL is measured on a collective (pool) basis by loan and investment security type when similar risk characteristics exist. Pools are determined based primarily on regulatory reporting codes as the loans and investment securities within each pool share similar risk characteristics and there is sufficient historical peer loss data from the FFIEC to provide statistically meaningful support in the models developed. Reserves for credit losses identified on a pooled basis are then adjusted for qualitative and other environmental factors to reflect current conditions. The most significant components of qualitative and environmental factors used to estimate the allowance for credit losses are adjustments relating to prevailing economic conditions, concentrations within the loan portfolio, and external factors. These qualitative factors are subject to significant judgment and carry a higher degree of uncertainty. 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 $2.4$3.2 million based on existing loan balances, if not more,balances to the allowance for credit losses while using severely adverse economic conditions in the estimate. The concentrations within the loan portfolio factor is estimated based on concentrations at the loan pool level. This estimate is subject to significant judgment and could potentially add $9.4$12.0 million based on existing loan balances, if not more,balances to the allowance for credit losses while using a severely adverse market outlook for the specifically identified concentrations. The external factor is estimated based on current external factors, such as environmental factors, which could impact the loan portfolio. This estimate is subject to significant judgment and could potentially add $6.9$9.5 million based on existing loan balances, if not more,balances to the allowance for credit losses while using severely adverse external factors in the estimate. Other qualitative factors within the ACL relate to items which carry a lower degree of judgment using internally generated data. These factors include, but are not limited to, policy exception rates, volume of loan growth, and results of internal and external audits.

•continue our organic lending growth in our market through our “purpose-driven and integrity-centered” approach to banking;

•continue to focus on and growexpand eachour operations in our unique lines of the diverse industry clustersbusiness throughout our marketgeographic service areas;

Net interest income increased by $8.8$32.2 million, or 7.96%,26.89%, for the year ended December 31, 2024,2025, compared to the year ended December 31, 2023,2024, while our net interest margin decreasedincreased 1023 basis points during the same period. The increase in net interest income was primarily due to an increase in interest income driven by higher average balances and yields on loans, partially offset by an increase in interest expense due to higher average balances and rates onof deposits. Additional detail relating to net interest margin in each period is provided below.

Net interest income during the year ended December 31, 20242025 increased $8.8$32.2 million, or 7.96%,26.89%, to $119.7$151.9 millionmillion, as compared to $110.9$119.7 million during the year ended December 31, 2023.2024. Net interest margin totaled 3.32%3.55% for the year ended December 31, 2024,2025, aan decreaseincrease of 1023 basis points compared to the prior year. The increase in net interest income is primarily attributable to an additional $30.6$35.9 million in loan interest income due to a $336.3$483.3 million, or 11.41%,14.72% increase in the average balance of loans and a 3719 basis point improvement in the average yield on loans as compared to the prior year. The increase in interest income was partially offset by an additional $24.5$10.0 million in deposit interest expense due to a $293.4$627.4 million, or 10.00%,19.45% increase in the average balance of deposits and a 58 basis point increase induring the year. The average cost of deposits was 2.40% for the year ended December 31, 2025, a decrease of 16 basis points compared to the prior year.year which helped to moderate the increase in interest expense related to deposits.

We recorded a $7.0$9.7 million provision for credit losses in the year ended December 31, 2024,2025 compared to a $4.0$7.0 million provision for credit losses for the year ended December 31, 2023.2024. The provision for credit losses increased $3.0$2.8 million, or 73.75%,39.57%, primarily due to increases in loan growth asand loanan originationsoverall increase in loss rates related to the yearannual CECL model refresh during the three months ended December 31, 20242025, wereas almostcompared double those forto the yearprior ended December 31, 2023.year.

Non-interest income is a secondary contributor to our net income, following interest income. Non-interest income consists of service charges on deposit accounts, net gain on sale of securities, gain on sale of loans, loan-related fees, FHLB stock dividends, earnings on BOLI, and other income.

Gain on sale of loans. The decrease related primarily to an overall decline in the volume of loans sold due to a strategic, intentional reduction in originations of loans held for sale during the second half of the year ended December 31, 2024 compared to the year ended December 31, 2023.2025. During the year ended December 31, 2024, 56 SBA 7(a) loans with government guaranteed portions totaling2025, approximately $18.3$3.3 million of loans were sold with an effective yield of 6.96%,7.41%, as compared to approximately $36.5$18.3 million of loans sold with an effective yield of 5.35%6.96% during the year ended December 31, 2023.2024.

Loan-related fees. The decreaseincrease was primarily a result of a $0.5 million increase in fees from swap referrals and a $0.2 million net decreaseincrease in income earned from the credit card program,activity, partially offset by a small$0.1 increasemillion decrease in loanfees feefrom incomeSBA earned7(a) on various loan types and services.loans.

Other income. The decreaseincrease resultedrelated primarily fromto $0.5an millionoverall improvement in incomeearnings receivedrelated onto equity investments in venture-backed funds during the year ended December 31, 2024, as2025 compared to $1.7 million in income received on equity investments in venture-backed funds during the year ended December 31, 2023.2024.

Over the past several years, we have investedcontinued to invest significant resources in personnel, technology, and infrastructure. As we execute initiatives based on growth, we expect non-interest expense to continue to grow. Non-interest expense has increased throughout the periods presented below; however, we expect our efficiency ratio will improve going forward due, in part, to our past investment in infrastructure.

Salaries and employee benefits. The increase was the result of: (i) a $3.5$6.5 million increase in salaries, benefits, and bonuses,bonus of which approximately $3.3 millionexpense, related to employees hired to support expansion into the San13.66% Franciscoincrease Bayin Areaemployee headcount between December 31, 2024 and December 31, 2025; and (ii) a $1.4$1.2 million increase in commissions paid,expense primarilydue to employeeshigher inloan the San Francisco Bay Area.production. The increase was partially offset by a $0.3$1.5 million increase in deferred loan origination costs due to higher loan production, net of purchased consumer loans,production period-over-period.

ProfessionalLoan-related services.expenses. The increase was due to an increase of $0.1 million in audit,inspection IT support,fees and otheran consultingincrease feesof for$0.1 servicesmillion providedin forloan-related thelegal yearexpenses, endedboth due to loan growth between December 31, 2024 compared to the year endedand December 31, 2023.2025.

At December 31, 2024,2025, total assets were $4.1$4.8 billion, an increase of $460.2$701.6 million from $3.6$4.1 billion at December 31, 2023,2024, primarily due to a $451.0$542.2 million increase in total loans held for investment and a $30.8$154.5 million increase in cash and cash equivalents, partially offset by a $10.2 million decrease in investments.equivalents.

Our investment portfolio is primarily comprised of U.S. government agency securities, mortgage-backed securities, and obligations of states and political subdivisions, which are high-quality liquid investments. We manage our investment portfolio according to written investment policies approved by our board of directors. Our investment strategy aimsis designed 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 available-for-sale and held-to-maturity amounted to $96.9 million at December 31, 2025 and $100.9 million at December 31, 2024 and $111.2 million at December 31, 2023,2024, a decrease of $10.2$4.0 million year-over-year. The decrease was primarily due to principalmaturities, paydownsprepayments, and amortizationcalls of $9.0$9.3 million, partially offset by a purchase of a $1.0 million security and an improvement in the unrealized lossgain on securities of $0.9$5.1 million, with the remainder of the change due to amortization of premiums. For the year ended December 31, 2025, other comprehensive gain was $3.2 million, primarily indue our municipal securities portfolios. The improvement in the unrealized loss was recognized as a result of interestto rate decreaseschanges thatand occurredother market conditions on securities during the period.

Weighted average yield for securities available-for-sale is the projected yield to maturity given current cash flow projections for U.S. government agency securities, mortgage-backed securities, and collateralized mortgage obligations. For callable municipal securities and corporate bonds, weighted average yield is a yield to worst. Weighted average yield for securities held-to-maturity is the stated coupon of the bond. Yields on tax-exempt securities are not presented on a tax-equivalent basis.

Table 1211 sets forth the contractual maturities and sensitivity to interest rate changes of our loan portfolio as of the dates shown.

The ratio of nonperforming loans to loans held for investment was 0.05%0.08% at December 31, 2024,2025, decreasingincreasing from 0.06%0.05% as of December 31, 2023.2024. The ratio of non-accrual loans to loans held for investment was also 0.08% at December 31, 2025, increasing from 0.05% as of December 31, 2024.

The ratio of the allowance for credit losses to period end nonperforming loans increaseddecreased from 1,752.70% as of December 31, 2023 to 2,101.78% as of December 31, 2024.2024 to 1,434.40% as of December 31, 2025. This increasedecrease was due to: (i) a 9.76%72.19% increase in nonperforming loans year-over-year, partially offset by a 17.51% increase in the allowance for credit losses year-over-year;year-over-year. andThe (ii) an 8.50% decreaseincrease in nonperforming loans year-over-year.resulted mainly from the occurrence of two separate faith-based real estate loans entering nonperforming status.

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 ACL.allowance for credit losses. All loans are grouped into a risk category at the time of origination. Commercial real estate loans over $2.0 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.

TheLoans banking industry defines loans graded substandard or doubtfuldesignated as “classifiedwatch” loans.are internal bank designations and are not considered adversely classified. However, loans designated as “substandard” or “doubtful” are considered adversely classified. Table 1413 shows loans by credit quality risk rating as of the periods indicated.

Loans designated as watch anddecreased substandard,from which$123.4 are not considered adversely classified, increasedmillion to $126.0$101.9 million atbetween December 31, 2024 from $41.6 million atand December 31, 2023.2025. The increase related primarily to an $83.8 million increase inConsequently, loans designated as watchsubstandard forincreased loansfrom which$2.6 havemillion indicatorsto $22.3 million between December 31, 2024 and December 31, 2025, primarily attributable to the downgrade of deficientone borrower experiencing financial difficulty with a special purpose commercial real estate loan quality and potentiala significantcommercial issuesline whichof are expected to be temporary in nature.credit. There were no loans with doubtful risk grades at December 31, 20242025 or December 31, 2023.2024.

The allowance for credit 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. Historical loss rates within the commercial secured pool are also evaluated by management on a regular basis to estimate the allowance for credit losses. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

At December 31, 2024,2025, the Company’s allowance for credit losses was $37.8$44.4 million,million compared to $34.4$37.8 million at December 31, 2023.2024. The $3.4$6.6 million increase in the allowance is due to a $7.5$9.8 million provision for credit losses, partially offset by net charge-offs of $4.1$3.1 million during the year ended December 31, 2024,2025, mainly attributable to commercial and industrial loans, during the same period.

While the entire allowance for credit losses is available to absorb losses from any and all loans, Table 1514 represents management’s allocation of our allowance for credit losses by loan category, the allocation of our allowance for credit losses as a percent of the total allowance for credit losses, and the balance of loans in each category as a percentage of total loans, for the periods indicated.

The allowance for credit losses to loans held for investment decreasedincreased from 1.12% as of December 31, 2023 to 1.07% as of December 31, 2024.2024 to 1.09% as of December 31, 2025. Net charge-offs as a percent of average loans held for investment increaseddecreased from 0.11%0.12% to 0.12%0.08% for the years ended December 31, 20232024 and December 31, 2024,2025, respectively.

During 2024,2025, total liabilities increased by $349.3$652.4 million from $3.3 billion at December 31, 2023 to $3.7 billion at December 31, 2024.2024 to $4.3 billion at December 31, 2025. This increase was primarily attributable to an increase in deposits of $531.1 million, partially offset by a decrease in other borrowings of $170.0$643.1 million. The $531.1$643.1 million increase in deposits was largely due to increases in money market, time,non-interest-bearing demand, interest-bearing transaction, and non-interest-bearing demandsavings deposits of $242.9$553.3 million, $203.6$161.9 million, $29.0 million, and $91.5$14.5 million, respectively,respectively. These increases were partially offset by decreases in interest-bearing transaction and savingstime deposits of $5.1$115.5 million, largely driven by a $95.0 million anddecrease $1.8in million,wholesale respectively.deposits.

Total deposits increased by $531.1$643.1 million, or 17.55%,18.07%, to $3.6$4.2 billion at December 31, 20242025 from $3.0$3.6 billion as of December 31, 2023.2024. Deposit increases were primarily attributable to an increase in the number of new relationships, as well as normal fluctuations in our existing accounts. Non-interest-bearing deposits increased by $91.5$161.9 million in 20242025 to $922.6$1.1 million,billion, and represented 25.82% of total deposits at December 31, 2025, compared to 25.93% of total deposits at December 31, 2024, compared to 27.46% of total deposits at December 31, 2023.2024. Our loan to deposit ratio was 97.00% at December 31, 2025, compared to 99.38% at December 31, 2024, compared to 102.19% at December 31, 2023.2024. We closely monitor the loan to deposit ratio for purposes of both operational objectives and regulatory capital compliance. We intend to continue to operate our business with close monitoring of the loan to deposit ratio.

Our largest single deposit relationship at December 31, 20242025 related to brokereda deposits.government agency. The balance for this customer was $300.0$290.0 million, or approximately 6.90% of total deposits as of December 31, 2025. At December 31, 2024, our largest single deposit relationship related to brokered deposits and had a balance of $300.0 million, or 8.43% of total deposits as of December 31, 2024. At December 31, 2023, our largest single deposit relationship related to a government agency and had a balance of $260.0 million, or 8.59% of total deposits as of December 31, 2023. As our demand deposits fluctuate, we have purchased brokered deposits as needed to supplement liquidity. We do not consider brokered deposits as core deposits, but as another deposit funding source for our loan growth.

From time to time, we utilize short-term collateralized FHLB borrowings to maintain adequate liquidity. There were no borrowings outstanding as of December 31, 20242025 and borrowings of $170.0 million outstanding from the FHLB as of December 31, 2023.2024, respectively.

Shareholders’ equity totaled $445.8 million at December 31, 2025 and $396.6 million at December 31, 2024 and $285.8 million at December 31, 2023.2024. The increase in shareholders’ equity was primarily a result of $80.9 million of additional common stock issued and outstanding in 2024 and net income recognized of $45.7$61.6 million, partially offset by $16.2$17.1 million in cash dividends paid during the period.

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, Federal Reserve Discount Window advances, 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 the Federal Reserve Discount Window, and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from established federal funds lines from unaffiliated commercial banks, and the issuance of debt or equity securities. We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary.

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of our beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate, or imply future results, performance, or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phasesphrases of similar meaning. 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. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Such forward-looking statements are based on various assumptions (some of which may be beyond our control) and are subject to risks and uncertainties, which change over time, and other factors which could cause actual results to differ materially from those currently anticipated. Such risks and uncertainties include, but are not limited to:

•our ability to implement, maintain, and improve an effective risk management framework, disclosure controls and procedures, and internal controls over financial reporting;

The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” of our 2025 Annual Report on Form 10-K10-K, our Quarterly Report on Form 10-Q for the three months ended March 31, 2026, and other filings we may make with the SEC, copies of which are available from us at no charge. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We disclaim any duty to revise or update the forward-looking statements, whether written or oral, to reflect actual results or changes in the factors affecting the forward-looking statements, except as specifically required by law.

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 nine branch offices.offices, with a tenth branch opening in Lodi in July 2026. 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 MarchJune 31,30, 2026, we had total assets of $5.0$5.4 billion, total loans held for investment of $4.2$4.5 billion, and total deposits of $4.5$4.8 billion.

The allowance for credit losses represents the estimated expected credit losses in our loan and investment portfolios and is estimated as of MarchJune 31,30, 2026 using Current Expected Credit Loss (“CECL”). The allowance for credit losses is established through a provision for credit losses charged to operations. Loans and investments are charged against the allowance for credit 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 credit losses.

Net income for the three and six months ended MarchJune 31,30, 2026 totaled $18.6$19.4 million and $38.0 million, respectively, as compared to net income of $13.1$14.5 million and $27.6 million for the three and six months ended MarchJune 31,30, 2025.2025, respectively.

•Deposits. Total deposits increased by $268.3$598.3 million, or 6.39%,14.24%, from $4.2 billion at December 31, 2025 to $4.5$4.8 billion at MarchJune 31,30, 2026. Non-wholesale deposits increased by $350.2$813.3 million in the first threesix months of 2026 to $4.1$4.5 billion at MarchJune 31,30, 2026. Wholesale deposits, which the Company defines as brokered deposits and California Time Deposit Program deposits, decreased by $81.9$215.0 million in the first threesix months of 2026 to $383.1$250.0 million. Non-interest-bearing deposits increased by $148.2$89.9 million in the first threesix months of 2026 to $1.2 billion, and represented 27.58%24.47% of total deposits at MarchJune 31,30, 2026, as compared to 25.82% of total deposits at December 31, 2025. Our loan to deposit ratio was 94.27%94.17% at MarchJune 31,30, 2026, as compared to 97.00% at December 31, 2025.

•Assets. Total assets were $5.0$5.4 billion at MarchJune 31,30, 2026, representing a $276.9$622.2 million, or 5.82%,13.09%, increase compared to $4.8 billion at December 31, 2025.

•Loans. Total loans held for investment were $4.2$4.5 billion at MarchJune 31,30, 2026, as compared to $4.1 billion at December 31, 2025, an increase of $138.5$444.8 million, or 3.40%.10.91%. The increase was a result of $389.0$1.0 millionbillion in loan originations and advances, partially offset by $67.9$162.1 million and $182.6$421.9 million in loan payoffs and paydowns, respectively.

•Credit Quality. Credit quality remains strong, with non-accrual loans representing $2.8$13.4 million, or 0.07%0.30% of total loans held for investment at MarchJune 31,30, 2026, as compared to $3.1 million, or 0.08% of total loans held for investment at December 31, 2025. This increase was due to a $10.3 million, or 331.20% increase in nonperforming loans due to one Community Reinvestment Act loan that was placed on non-accrual status during the period. The balance of the loan is $11.4 million as of June 30, 2026, and it was originally downgraded to substandard in 2025. This was partially offset by improvements across the remainder of the nonperforming loan portfolio. The ratio of the allowance for credit losses to total loans held for investment was 1.10%1.05% at MarchJune 31,30, 2026 and 1.09% at December 31, 2025.

•Net Interest Margin. Net interest margin was 3.70%3.63% and 3.66%, respectively, for the three and six months ended MarchJune 31,30, 2026, and 3.45%3.53% and 3.49%, respectively, for the three and six months ended MarchJune 31,30, 2025. The increase in net interest margin for the three and six months ended MarchJune 31,30, 2026 compared to the three and six months ended MarchJune 31,30, 2025 is primarilydriven dueby tobalance an increase in interest income related to loansheet growth and ana improvementfavorable shift in thefunding averagemix, yieldwhich onmore loans, partiallythan offset bypressure anfrom increasedeclining infederal interestfunds expenserates drivenover bythe deposit growth.periods.

•Efficiency Ratio. Efficiency ratio was 38.57%40.91% for the three months ended MarchJune 31,30, 2026, down from 42.58%41.03% for the corresponding period of 2025, mainly due to a $9.5$9.6 million, or 27.90%,26.20%, increase in net interest income during the same period.period, partially offset by a $3.9 million, or 24.74%, increase in non-interest expense. Additionally, efficiency ratio was 39.77% for the six months ended June 30, 2026, down from 41.77% for the corresponding period of 2025, mainly due to a $19.0 million, or 27.02%, increase in net interest income.

•Capital Ratios. All capital ratios were above well-capitalized regulatory thresholds as of MarchJune 31,30, 2026. The total risk-based capital ratio for the Company was 13.17%12.50% at MarchJune 31,30, 2026, as compared to 13.33% at December 31, 2025. The Tier 1 leverage ratio was 9.56%9.21% at MarchJune 31,30, 2026, as compared to 9.70% at December 31, 2025. For additional information about the regulatory capital requirements applicable to the Company and the Bank, see the section entitled “—Financial Condition Summary—Capital Adequacy” below.

•Dividends. The board of directors declared a cash dividend of $0.25 per share on JanuaryApril 15,16, 2026.

The following discussion of our results of operations compares the three and six months ended MarchJune 31,30, 2026 to the three and six months ended MarchJune 31,30, 2025. The results of operations for the three and six months ended MarchJune 31,30, 2026 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2026.

Net interest income increased by $9.5$9.6 million, or 27.90%,26.20%, for the three months ended MarchJune 31,30, 2026 compared to the three months ended MarchJune 31,30, 2025, and our net interest margin increased by 2510 basis points during the same period. The increase in net interest income is primarily attributabledue to an increase in interest income driven by loan growth and anhigher improvementinterest-earning deposits in the average yield on loans,banks, partially offset by an increase in interest expense driven by deposit growth.growth, though moderated by a decrease in the average cost of deposits. Additional detail relating to net interest margin in each period is provided below.

As compared to the three months ended MarchJune 31,30, 2025, net interest income during the three months ended MarchJune 31,30, 2026 increased by $9.5$9.6 million, or 27.90%,26.20%, to $43.5$46.1 million from $34.0$36.5 million. Net interest margin totaled 3.70%3.63% for the three months ended MarchJune 31,30, 2026, an increase of 2510 basis points compared to the same quarter of the prior year. The improvement was driven by balance sheet growth and a favorable shift in funding mix, which more than offset pressure from declining federal funds rates over the same period. The increase in net interest income is primarily attributable to an additional $10.3$11.7 million increase in interest income, mainly due to a $582.5$636.7 million, or 16.32%,17.25%, increase in the average balance of loans and a five$315.3 basismillion, pointor improvement87.13%, increase in the average yieldbalance onof loansinterest-earning duringdeposits thein threebanks months(deposits endedplaced Marchwith 31,other 2026,financial as comparedinstitutions to theearn sameinterest). quarter of the prior year. TheThis increase in interest income was partially offset by a $0.8$2.2 million increase in interest expenseexpense, duestemming tofrom a $734.4$914.3 million, or 20.48%,24.47%, increase in the average balance of deposits during the three months ended MarchJune 31,30, 2026.2026, Themoderated by a 30 basis point decrease in average cost of deposits during the three months ended March 31, 2026 was 2.13%, a decrease of 35 basis points compared to the same quarter of the prior year,year. whichFurther helped to moderatesupporting the increasedecreasing inaverage interestcost expenseof related to deposits. In addition,deposits, the average balance of non-interest-bearing deposits increased by $211.1$207.0 million, or 23.17%,21.62%, compared to the same period of the prior year.

We recorded a $2.7$2.3 million provision for credit losses in the firstsecond quarter of 2026, compared to a $1.9$2.5 million provision for credit losses for the same period of 2025. The increasedecrease in the provision for credit losses in the firstsecond quarter of 2026 is mainly due to increaseslower innet loan growth and an overall increase in loss ratescharge-offs in the three months ended MarchJune 31,30, 2026 compared to the three months ended MarchJune 31,30, 2025.

Gain on sale of loans. The decrease related to an overall decline in the volume of SBA loans sold due to a strategic, intentional reduction in originations of loans held for sale. During the three months ended MarchJune 31,30, 2026, no SBA loans were sold, as compared to approximately $1.7$1.6 million of SBA loans sold with an effective yield of 7.24%7.60% during the three months ended MarchJune 31,30, 2025.

Loan-related fees. The increase resulted primarily from an increase of $0.8$0.1 million in loan referral income, combined with an increase of $0.1 million in fees from swap referrals during the three months ended MarchJune 31,30, 2026, as compared to the three months ended MarchJune 31,30, 2025.

FHLB stock dividends. The increasedecrease related primarily to the FHLB’s transition to a $0.4 million special cashtier-based dividend fromstructure, which lowered the FHLBBank’s duringeffective thedividend threerate months ended March 31, 2026 that did not occur during the three months ended March 31, 2025.received.

Other income.Other. The decreaseincrease related primarily to an overall lossimprovement in earnings related to investments in venture-backed funds during the three months ended MarchJune 31,30, 2026 compared to the three months ended MarchJune 31,30, 2025.

Salaries and employee benefits. The increase related primarily to: (i) a $2.3$2.8 million increase in salaries, benefits, and bonus expense, mainly related to a 17.48%13.30% increase in headcount between MarchJune 31,30, 2025 and MarchJune 31,30, 2026; and (ii) a $0.5$0.7 million increase in commissions paid.primarily due to higher loan originations period-over-period. This increase was partially offset by a $0.6$0.9 million increase in deferred loan origination costs due to higher loan productionoriginations period-over-period.

Occupancy and equipment. The increase was primarily due to expenses for the Walnut Creek branch office and Newport Beach non-depository office during the three months ended MarchJune 31,30, 2026, which did not exist for the three months ended MarchJune 31,30, 2025.

Advertising and promotional. The increase relatedwas primarily due to additional expenses incurred to support the expansion of the Bank’s business development teams, including $0.1$0.2 million related to business development expenses and $0.1 million related to donation, sponsorship,advertising and advertisingmarketing expenses.

The provision for income taxes was $6.4$6.7 million for the three months ended MarchJune 31,30, 2026, a $1.1 million increase from the three months ended MarchJune 31,30, 2025. This increase was primarily driven by an increase in taxable income, partially offset by a $0.2 million benefit recorded during the three months ended MarchJune 31,30, 2026 related to the purchase of transferable tax credits that did not occur during the three months ended MarchJune 31,30, 2025. The effective tax rates were 25.61%25.64% and 28.71%27.82% for the three months ended MarchJune 31,30, 2026 and MarchJune 31,30, 2025, respectively.

The following discussion compares our financial condition as of MarchJune 31,30, 2026 to our financial condition as of December 31, 2025. Table 711 summarizes selected components of our unaudited consolidated balance sheets as of MarchJune 31,30, 2026 and December 31, 2025.

At MarchJune 31,30, 2026, total assets were $5.0$5.4 billion, an increase of $276.9$622.2 million from $4.8 billion at December 31, 2025. The increase was primarily comprised of a $138.5$444.8 million increase in total loans held for investment and a $137.5$178.2 million increase in cash and cash equivalents. The $138.5$444.8 million increase in total loans held for investment between December 31, 2025 and MarchJune 31,30, 2026 was a result of $389.0$1.0 millionbillion in loan originations and advances, partially offset by $67.9$162.1 million and $182.6$421.9 million in loan payoffs and paydowns, respectively. The $444.8 million increase in total loans held for investment included $145.0 million in purchased loans within the consumer section of the loan portfolio.

Total cash and cash equivalents were $644.4$685.1 million at MarchJune 31,30, 2026, an increase of $137.5$178.2 million from $506.9 million at December 31, 2025. The increase in cash and cash equivalents was primarily due to the net increase in cash inflows from growth in total deposits of $268.3$598.3 million and cash outflows from growth in total loans held for investment of $138.5$444.8 million.