Related–Party Transactions Policy

PSB FINANCIAL, INC.

RELATED-PARTY TRANSACTIONS POLICY

The Board of Directors of PSB Financial, Inc. (the “Company”), acting upon the recommendation of its Audit Committee (the “Committee”), has adopted the following policy with regard to Related-Party Transactions, as defined below.

Policy. All Related-Party Transactions are must be approved or ratified by the Committee in accordance with this Policy. A Related-Party Transaction entered into without pre-approval of the Committee shall not be deemed to violate this Policy, or be invalid or unenforceable, so long as the transaction is brought to the Committee as promptly as reasonably practical after it is entered into and thereafter approved or ratified by the Committee in accordance with this Policy.

Background. Pursuant to Item 404 of Regulation S-K promulgated under the Securities Exchange Act of 1934, as amended, certain transactions involving the Company and certain related persons need to be disclosed in the Company’s filings with the Securities and Exchange Commission (“SEC”). Applicable regulations require our Board to assess whether relationships or transactions exist that may impair the independence of our outside directors. This Policy is intended to provide guidance and direction on Related-Party Transactions.

Definition.

“Related-Party Transaction” includes any transaction or relationship directly or indirectly involving any Related Party that would need to be disclosed under Item 404 of Regulation S-K, and any material amendment or modification to an existing Related-Party Transaction.

“Related Party” means any of the following: a director (which term when used herein includes any director nominee), an executive officer, a person known by the Company to be the beneficial owner of more than 5% of the Company’s common stock (a “5% shareholder”) or a person known by the Company to be an immediate family member1 of any of the foregoing.

“Ordinary Course Loans” include loans made by the Company or a subsidiary that

  1. are not disclosed as nonaccrual, past due, restructured or potential problems;
  2. were made in the ordinary course of business;
  • were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to the Company;
  1. did not involve more than the normal risk of collectability or present other unfavorable features; and
  2. are covered by Regulation O of the Board of Governors of the Federal Reserve System (“Reg O”).

Identification of Potential Related-Party Transactions. Executive officers, directors and 5% shareholders must bring Related-Party Transactions to the attention of the Company’s Chief Executive Officer or the Chair of Company’s Audit Committee.

Ordinary Course Loans are subject to limited disclosure under Item 404, and therefore constitute Related-Party Transactions under this Policy. However, executive officers, directors and 5% shareholders may satisfy their obligation to report Ordinary Course Loans by complying with the policies and procedures of the Company and its subsidiaries regarding loans covered by Reg O.

Any potential Related-Party Transactions that are brought to the attention of Chief Executive Officer will be analyzed by the Chief Executive in consultation with outside counsel, as appropriate, to determine whether the transaction or relationship does, in fact, constitute a Related-Party Transaction requiring compliance with this Policy.

Review and Approval of Related-Party Transactions. At each of its meetings, the Committee will be provided with the details of each new or proposed Related-Party Transaction (other than Ordinary Course Loans), including the terms of the transaction, the business purpose of the transaction and the benefits to the Company and to the relevant Related Party. In determining whether to approve such a Related-Party Transaction, the Committee will consider, among other factors, the following factors to the extent relevant to the Related-Party Transaction:

  1. whether the terms of the Related-Party Transaction are fair to the Company and on the same basis as would apply if the transaction did not involve a Related Party;
  2. whether there are business reasons for the Company to enter into the Related-Party Transaction;
  • whether the Related-Party Transaction would impair the independence of an outside director; and
  1. whether the Related-Party Transaction would present an improper conflict of interest for any director or executive officer of the Company, taking into account the size of the transaction, the overall financial position of the director, executive officer or Related Party, the direct or indirect nature of the director’s, executive officer’s or other Related Party’s interest in the transaction and the ongoing nature of any proposed relationship, and any other factors the Committee deems relevant.

Any member of the Committee who has an interest in the transaction under discussion will abstain from voting on the approval of the Related-Party Transaction, but may, if so requested by the Chairperson of the Committee, participate in some or all of the Committee’s discussions of the Related-Party Transaction.

Ordinary Course Loans shall be reviewed, approved or ratified by the Company in accordance with the policies and procedures of the Company and its subsidiaries for extensions of credit covered by Reg O. Review, approval or ratification of Ordinary Course Loans in accordance with such policies and procedures shall constitute review, approval or ratification under this Policy.

1 “Immediate family member” has the meaning used in Item 404(a) of Regulation S-K. Immediate family members of a person include any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law of the person and any other person sharing the household of the first person.