Redwood Capital Bancorp : 2023 Audited Financial Statements

Audited Financial Statements

December 31, 2023

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r11 Redwood

WcapitalBancorp

April 5, 2024

Dear Shareholders,

2023 was another record year for Redwood Capital Bancorp ("the Company") and Redwood Capital Bank ("the Bank"). As we acknowledge the Bank's seventeenth consecutive year ofprofitability, the Board of Directors and senior management remain encouraged by the Bank's continued success. With shareholder value and community service as core values, the Company's strong performance and financial position continue to increase our ability to serve all ofour stakeholders.

On March 24, 2024, Redwood Capital Bank marked its 20-year milestone! We have certainly come a long way from where we began, with one main branch and 16 founding employees, to now, four, full-service branch locations and 80 employees strong. While much has changed over the past 20 years, we continue to take great pride in our relationship-focused business model and remain honored to serve our customers and shareholders as Humboldt County's local choice for community banking.

Last year, the Bank garnered four prestigious awards for its financial performance and customer service. The Bank received the distinction ofbeing one ofCalifornia's Super Premier Performing Banks by The Findley Reports and the 5-Star designation from Bauer Financial, Inc. These are the highest ratings available from both well-known and respected bank rating firms. Locally, readers ofthe Times-Standard voted Redwood Capital Bank as the "Best Bank" in their annual Best ofthe North Coast Reader's Choice Awards. In 2023, the Bank was named the #1 SBA Lender in Humboldt County for the 8th consecutive year. Additionally, the Bank received the following recognition from the Humboldt County Listeners' Choice awards this past January: Gold Medal Best Bank, Gold Medal Best Commercial Lender, Gold Medal Best Mortgage Lending and Silver Medal Best Place to Work. We are grateful to be recognized by these reputable organizations and these distinctions are another demonstration ofour financial strength and security.

At year-end 2023, the Company's net income after taxes was $7 million, or $3.58 per common share, fully diluted. A strong balance sheet and expense control were key drivers for the Company's earnings. Total loans grew by 2.38%. As a result ofcontinued excellent credit quality, in 2023 the Loan Loss Reserves increased 2.44% to $6 million. Loan Loss Reserves equal 1.58% oftotal loans as ofyear-end 2023. Deposits decreased 2.34% for the year, increasing the Bank's Leverage Capital Ratio to 12.09% compared to 10.62% at year-end 2022, exceeding the regulatory benchmark: for well-capitalized institutions of5.00%. The balance sheet remains very strong and is well positioned.

Maximizing shareholder wealth continues to be a top priority for the Company. In June of2012, the Company paid its first quarterly cash dividend of$0.05 per share. As ofthird quarter 2023, the Company paid its 47th consecutive quarterly cash dividend, of$0.08 per share. As ofyear-end 2023, the Company's stock was trading at $22.55 per share with a book value per share of$23.57.

On behalfofour staff, senior management team and Board ofDirectors, thank you for the trust you have placed in us and the relationships we have developed over the past 20 years. Taking care ofour shareholders and customers is paramount to how we do business. We look forward to seeing you in-person at our Annual Shareholder Meeting on Wednesday, May 15, 2024, at 6:00 p.m. at the Sequoia Conference Center, located at 901 Myrtle Avenue in Eureka.

Sincerely,

REDWOOD CAPITAL BANCORP

John E. Dalby

President and CEO

P.O. Box 1401 Eureka, CA 95502 TEL [phone] FAX [phone]

402 G Street Eureka, CA 95501 www.redwoodcapitalbank.com

550 Howe Avenue, Suite 210

Sacramento, California 95825

Telephone: [phone]

FAX: [phone]

INDEPENDENT AUDITOR'S REPORT

The Shareholders and

Board of Directors

Redwood Capital Bancorp and Subsidiary

Eureka, California

Opinion

We have audited the accompanying consolidated financial statements of Redwood Capital Bancorp and Subsidiary, which comprise the consolidated balance sheets as of December 31, 2023 and 2022, and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for the years then ended, and the related notes to the financial statements.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Redwood Capital Bancorp and Subsidiary, as of December 31, 2023 and 2022, and the results of their operations, comprehensive income and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Basis for Opinion

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Statements section of our report. We are required to be independent of Redwood Capital Bancorp and Subsidiary, and to meet our other ethical responsibilities in accordance with the relevant ethical requirements relating to our audits. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Responsibilities of Management for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, and for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated financial statements, management is required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about Redwood Capital Bancorp and Subsidiary's ability to continue as a going concern within one year after the date that the consolidated financial statements are available to be issued.

Auditor's Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not absolute assurance and therefore is not a guarantee that an audit conducted in accordance with generally accepted auditing standards will always detect a material misstatement when it exists. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Misstatements are considered material if there is a substantial likelihood that, individually or in the aggregate, they would influence the judgement made by a reasonable user based on the financial statements.

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The Shareholders and

Board of Directors

Redwood Capital Bancorp and Subsidiary

In performing an audit in accordance with generally accepted auditing standards, we:

• Exercise professional judgement and maintain professional skepticism throughout the audit.
• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and design and perform audit procedures responsive to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Redwood Capital Bancorp and Subsidiary's internal control. Accordingly, no such opinion is expressed.
• Evaluate the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluate the overall presentation of the consolidated financial statements.
• Conclude whether, in our judgement, there are conditions or events, considered in the aggregate, that raise substantial doubt about Redwood Capital Bancorp and Subsidiary's ability to continue as a going concern for a reasonable period of time.

We are required to communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit, significant audit findings, and certain internal control related matters that we identified during the audit.

March 25, 2024

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REDWOOD CAPITAL BANCORP

AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2023 and 2022

ASSETS		2023			2022
Cash and due from banks	$	9,371,495	$	9,489,411
Federal funds sold		9,930,000			12,383,000
Interest-bearing deposits in other financial institutions		11,039,245			24,022,971
Cash and cash equivalents		30,340,740			45,895,382
Investment securities available-for-sale, at fair value		74,481,931			74,203,349
Mortgages held for sale
Loans, net of allowance of $6,121,650 and $5,975,752 as of December 31,
2023 and 2022, respectively		382,302,539			373,517,277
Premises and equipment, net		8,464,863			6,658,880
Cash surrender value of life insurance		12,558,634			12,176,256
Mortgage servicing rights, at fair value		1,846,500			1,931,990
Accrued interest receivable and other assets		11,444,876			10,768,921
TOTAL ASSETS	$	521,440,083	$	525,152,055
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Non interest-bearing	$	135,327,613	$	148,684,626
Interest-bearing		325,106,864			322,749,983
Total deposits		460,434,477			471,434,609
Borrowings		11,000,000			11,000,000
Accrued interest payable and other liabilities		4,296,973			4,073,394
TOTAL LIABILITIES		475,731,450			486,508,003
Commitments and contingencies (see accompanying notes)
SHAREHOLDERS' EQUITY
Common stock, no par value; 30,000,000 shares authorized; 1,939,192
and 1,977,596 shares issued and outstanding in 2023 and 2022		13,137,268			13,846,227
Additional paid-in capital		301,452			291,738
Retained earnings		38,578,904			32,159,216
Accumulated other comprehensive loss		(6,308,991)			(7,653,129)
TOTAL SHAREHOLDERS' EQUITY		45,708,633			38,644,052
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	521,440,083	$	525,152,055

The accompanying notes are an integral part of these financial statements.

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REDWOOD CAPITAL BANCORP

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2023 and 2022

		2023			2022
INTEREST INCOME
Interest and fees on loans	$	18,367,127	$	15,472,307
Interest on taxable investment securities		1,813,905			1,401,398
Dividend income		204,800			154,697
Interest on federal funds sold		748,914			282,989
Interest on deposits in banks		506,593			961,579
Total interest income		21,641,339			18,272,970
INTEREST EXPENSE
Interest on deposits		1,450,359			396,818
Interest on other borrowings		651,717			623,738
Total interest expense		2,102,076			1,020,556
NET INTEREST INCOME		19,539,263			17,252,414
Credit loss expense - Loans		57,501			240,000
NET INTEREST INCOME AFTER CREDIT LOSS EXPENSE		19,481,762			17,012,414
OTHER INCOME
Service charges and fees on deposit accounts		1,442,689			1,400,590
Mortgage banking revenue, net		431,059			1,231,411
Other income		2,314,003			1,420,033
Total other income		4,187,751			4,052,034
OTHER EXPENSES
Salaries and employee benefits		8,100,632			7,318,250
Occupancy and equipment		1,628,168			1,472,510
Other		4,194,445			3,917,830
Total other expenses		13,923,245			12,708,590
INCOME BEFORE PROVISION FOR INCOME TAXES		9,746,268			8,355,858
Provision for income taxes		2,702,470			2,334,568
NET INCOME	$	7,043,798	$	6,021,290
NET INCOME PER SHARE
$	3.61	$	3.06
NET INCOME PER SHARE - ASSUMING DILUTION
$	3.58	$	3.03

The accompanying notes are an integral part of these financial statements.

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REDWOOD CAPITAL BANCORP

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Years Ended December 31, 2023 and 2022

		2023		2022
NET INCOME	$	7,043,798	$ 6,021,290
Other comprehensive income, net of tax
Available for sale securities
Unrealized losses arising during the year, net of
tax benefit expense of $546,062 and $(3,059,418) as of
2023 and 2022, respectively		1,344,138	(7,290,443)
Total other comprehensive income		1,344,138		(7,290,443)
COMPREHENSIVE INCOME	$	8,387,936	$ (1,269,153)

The accompanying notes are an integral part of these financial statements.

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REDWOOD CAPITAL BANCORP

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

For the Years Ended December 31, 2023 and 2022

	Common Stock						Accumulated
		Additional				Other		Total
						Paid-In		Retained	Comprehensive	Shareholders'
Balance at	Shares		Amount			Capital		Earnings	Income (Loss)		Equity
January 01, 2022	1,958,002	$ 13,540,971	$	290,684	$ 26,708,686	$	(362,686)	$	40,177,655
Cash dividends on common
stock ($0.29 per share)							(570,760)				(570,760)
Redemption and retirement
of stock	(7,456)	(142,390)									(142,390)
Restricted stock expense						448,700						448,700
Restricted stock vested	27,050	447,646			(447,646)
Net income							6,021,290				6,021,290
Other comprehensive gain,
net of taxes										(7,290,443)		(7,290,443)
Balance at
December 31, 2022	1,977,596	13,846,227			291,738	32,159,216		(7,653,129)		38,644,052
Cash dividends on common
stock ($0.32 per share)							(624,110)				(624,110)
Redemption and retirement
of stock	(65,454)	(1,158,994)									(1,158,994)
Restricted stock expense						459,749						459,749
Restricted stock vested	27,050	450,035			(450,035)
Net income							7,043,798				7,043,798
Other comprehensive gain,
net of taxes										1,344,138		1,344,138
Balance at
December 31, 2023	1,939,192	$ 13,137,268	$	301,452	$ 38,578,904	$	(6,308,991)	$	45,708,633

The accompanying notes are an integral part of these financial statements.

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REDWOOD CAPITAL BANCORP

AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2023 and 2022

OPERATING ACTIVITIES		2023			2022
Net income	$	7,043,798	$	6,021,290
Adjustments to reconcile net income to net
cash provided by operating activities:
Credit loss expense		145,898			240,000
Deferred loan origination fees and costs, net		(85,077)			(252,395)
Depreciation and amortization		544,625			630,062
Loss (Gain) on sale of assets		373,556			(24,529)
Change in mortgage servicing rights carried at fair value		85,490			(530,413)
Stock-based compensation expense		459,749			448,700
Net change in loans held for sale					480,000
Earnings on cash surrender value of life insurance		(354,860)			(300,469)
Net change in accrued interest receivable and other assets		(719,317)			44,009
Net change in accrued interest payable and other liabilities		223,579			733,281
NET CASH PROVIDED BY OPERATING ACTIVITIES		7,717,441			7,489,536
INVESTING ACTIVITIES
Purchase of available-for-sale investment securities		(3,968,897)			(25,696,630)
Proceeds from maturity of available-for-sale investment securities					1,150,000
Proceeds from paydowns on mortgage-backed securities		5,521,974			7,766,475
Purchase of Federal Home Loan Bank stock		(520,700)			(131,200)
Purchases of life insurance		(27,519)			(27,519)
Loan originations and payments, net		(8,846,083)			(47,269,739)
Proceeds from sale of premises and equipment		649,682			59,705
Purchases of premises and equipment		(3,297,304)			(211,233)
NET CASH USED BY INVESTING ACTIVITIES		(10,488,847)			(64,360,141)
FINANCING ACTIVITIES
Net increase in deposits		(11,000,132)			(70,121,017)
Repurchase of common stock		(1,158,994)			(142,390)
Dividends paid on common stock		(624,110)			(570,760)
NET CASH USED BY FINANCING ACTIVITIES		(12,783,236)			(70,834,167)
DECREASE IN CASH AND CASH EQUIVALENTS		(15,554,642)			(127,704,772)
Cash and cash equivalents at beginning of year		45,895,382			173,600,154
CASH AND CASH EQUIVALENTS AT END OF YEAR	$	30,340,740	$	45,895,382

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