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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to __________________
Commission File Number 001-40379
FIVE STAR BANCORP
(Exact name of Registrant as specified in its charter)
California75-3100966
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
3100 Zinfandel Drive
Suite 100
Rancho Cordova
CA
95670
(Address of principal executive office)(Zip Code)
Registrant’s telephone number, including area code: (916) 626-5000
Not Applicable
(Former name, former address and formal fiscal year, if changed since last report)
Securities registered pursuant to 12(b) of the Act:
Title of each classTrading symbolName of each exchange on which registered
Common stock, no par value per shareFSBC
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated fileroAccelerated filero
Non-accelerated FilerxSmaller reporting companyx
Emerging growth companyx
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of May 6, 2022, there were 17,245,449 shares of the registrant’s common stock, no par value, outstanding.
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TABLE OF CONTENTS
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Cautionary Note Regarding Forward-Looking Statements
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 phases of similar meaning. 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:
uncertain market conditions and economic trends nationally, regionally, and particularly in Northern California and California, including as a result of the coronavirus, and variants thereof;
risks related to the concentration of our business in California, and specifically within Northern California, including risks associated with any downturn in the real estate sector;
the occurrence or impact of climate change or natural or man-made disasters or calamities, such as wildfires, droughts, and earthquakes;
risks related to the impact of the COVID-19 pandemic on our business and operations;
changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;
risks related to our strategic focus on lending to small to medium-sized businesses;
the sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses and the value of loan collateral and securities;
our ability to attract and retain executive officers and key employees and their customer and community relationships;
the risks associated with our loan portfolios, and specifically with our commercial real estate loans;
our level of nonperforming assets and the costs associated with resolving problem loans, if any, and complying with government-imposed foreclosure moratoriums;
our ability to maintain adequate liquidity and to maintain capital necessary to fund our growth strategy and operations and to satisfy minimum regulatory capital levels;
the effects of increased competition from a wide variety of local, regional, national, and other providers of financial and investment services;
risks associated with unauthorized access, cyber-crime, and other threats to data security;
our ability to comply with various governmental and regulatory requirements applicable to financial institutions, including supervisory actions by federal and state banking agencies;
the impact of recent and future legislative and regulatory changes, including changes in banking, securities, and tax laws and regulations and their application by our regulators, and economic stimulus programs;
governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve");
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changes in the U.S. economy, including an economic slowdown, inflation, deflation, housing prices, employment levels, rate of growth, and general business conditions;
our ability to implement, maintain, and improve effective internal controls; and
other factors that are discussed in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”
The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this report, including those discussed in the section entitled “Risk Factors.” Additional factors that could cause results or performance to materially differ from those expressed in our forward-looking statements are detailed in the section entitled “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2021, and other filings we may make with the Securities and Exchange Commission ("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.
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PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
As of March 31, 2022 and December 31, 2021
(Unaudited)
(In thousands, except share data)
March 31,
2022
December 31,
2021
ASSETS
Cash and due from financial institutions$66,747 $136,074 
Interest-bearing deposits in banks438,217 289,255 
Cash and cash equivalents504,964 425,329 
Time deposits in banks14,464 14,464 
Securities available-for-sale, at fair value134,813 148,807 
Securities held-to-maturity, at amortized cost (fair value of $4,459 and $5,197 at March 31, 2022 and December 31, 2021, respectively)
4,486 4,946 
Loans held for sale10,386 10,671 
Loans held for investment2,080,158 1,934,460 
Allowance for loan losses(23,904)(23,243)
Loans held for investment, net of allowance for loan losses 2,056,254 1,911,217 
Federal Home Loan Bank of San Francisco (“FHLB”) stock6,667 6,723 
Operating leases, right-of-use asset ("ROUA")4,718  
Premises and equipment, net1,836 1,773 
Bank-owned life insurance ("BOLI"), net14,343 11,203 
Interest receivable and other assets25,318 21,628 
$2,778,249 $2,556,761 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing$941,285 $902,118 
Interest-bearing1,561,807 1,383,772 
Total deposits2,503,092 2,285,890 
Subordinated notes, net28,403 28,386 
Operating lease liability4,987  
Interest payable and other liabilities10,706 7,439 
Total liabilities2,547,188 2,321,715 
Commitments and contingencies (Note 11)
Shareholders’ equity
Preferred stock, no par value; 10,000,000 shares authorized; zero issued and outstanding at March 31, 2022 and December 31, 2021
  
Common stock, no par value; 100,000,000 shares authorized; 17,246,199 shares issued and outstanding at March 31, 2022; 17,224,848 shares issued and outstanding at December 31, 2021
218,721 218,444 
Retained earnings19,558 17,168 
Accumulated other comprehensive loss, net(7,218)(566)
Total shareholders’ equity231,061 235,046 
$2,778,249 $2,556,761 
See accompanying notes to unaudited consolidated financial statements.
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FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31,
20222021
Interest and fee income
Loans, including fees$22,091 $18,613 
Taxable securities390 259 
Nontaxable securities177 214 
Interest-bearing deposits in other banks192 104 
22,850 19,190 
Interest expense
Deposits545 699 
Subordinated notes443 443 
988 1,142 
Net interest income21,862 18,048 
Provision for loan losses950 200 
Net interest income after provision for loan losses20,912 17,848 
Non-interest income
Service charges on deposit accounts108 90 
Net gain on sale of securities available-for-sale5 182 
Gain on sale of loans918 931 
Loan-related fees617 260 
FHLB stock dividends102 78 
Earnings on BOLI90 52 
Other345 23 
2,185 1,616 
Non-interest expense
Salaries and employee benefits5,675 4,697 
Occupancy and equipment520 451 
Data processing and software716 629 
Federal Deposit Insurance Corporation ("FDIC") insurance165 280 
Professional services554 1,532 
Advertising and promotional344 170 
Loan-related expenses278 229 
Other operating expenses1,323 816 
9,575 8,804 
Income before provision for income taxes13,522 10,660 
Provision for income taxes3,660 382 
Net income$9,862 $10,278 
Basic earnings per share$0.58 $0.93 
Diluted earnings per share$0.58 $0.93 
See accompanying notes to unaudited consolidated financial statements.
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FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended
March 31,
2022 2021
Net income$9,862 $10,278 
Net unrealized holding loss on securities available-for-sale during the period(9,438)(1,614)
Reclassification adjustment for net realized gains included in net income(5)(185)
Income tax benefit related to other comprehensive loss(2,791)(64)
Other comprehensive loss(6,652)(1,735)
Total comprehensive income$3,210 $8,543 
See accompanying notes to unaudited consolidated financial statements.
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FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three months ended March 31, 2022 and 2021
(Unaudited)
(In thousands, except share and per share data)
Common StockRetained
Earnings
Accumulated
Other
Comprehensive
Income (Loss),
Net of Taxes
Total
Shares Amount
Three months ended March 31, 2021
Balance at December 31, 202011,000,273 $110,082 $22,348 $1,345 $133,775 
Net income— — 10,278 — 10,278 
Other comprehensive loss— — — (1,735)(1,735)
Stock compensation expense— 62 — — 62 
Stock issued under stock award plans9,454 — — —  
Stock forfeitures(2,722)— — —  
Cash dividends paid ($1.00 per share)
— — (11,003)— (11,003)
Balance at March 31, 202111,007,005 $110,144 $21,623 $(390)$131,377 
Three months ended March 31, 2022
Balance at December 31, 202117,224,848 $218,444 $17,168 $(566)$235,046 
Net income— — 9,862 — 9,862 
Other comprehensive loss— — — (6,652)(6,652)
Stock compensation expense— 169 — — 169 
Director stock compensation expense— 108 — — 108 
Stock issued under stock award plans22,201 — — —  
Stock forfeitures(850)— — —  
Cumulative effect of adoption of ASC 842 on retained earnings— — 68 — 68 
Cash dividends paid ($0.60 per share)
— — (7,540)— (7,540)
Balance at March 31, 202217,246,199 $218,721 $19,558 $(7,218)$231,061 
See accompanying notes to unaudited consolidated financial statements.
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FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2022 and 2021
(Unaudited)
(In thousands, except share and per share data)
Three months ended March 31,
20222021
Cash flows from operating activities:
Net income$9,862 $10,278 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses950 200 
Loans originated for sale(21,173)(13,021)
Gain on sale of loans(918)(931)
Proceeds from sale of loans11,705 10,892 
Net gain on sale of securities available-for-sale(5)(182)
Earnings on BOLI(90)(52)
Stock compensation expense169 62 
Director stock compensation expense108  
Change in deferred loan fees(365)2,087 
Amortization and accretion of security premiums and discounts358 361 
Amortization of subordinated notes issuance costs17 16 
Depreciation and amortization161 131 
Decrease in operating lease liability(234) 
Amortization of operating lease ROUA250  
Deferred taxes(2,777) 
Net changes in:
Interest receivable and other assets1,880 (1,485)
Interest payable and other liabilities3,588 245 
Net cash provided by operating activities3,486 8,601 
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale1,623 11,456 
Maturities, prepayments, and calls of securities available-for-sale4,731 4,520 
Purchases of securities available-for-sale(1,642)(28,761)
Increase in time deposits in banks (1,991)
Loan originations, net of repayments(134,951)(37,719)
Purchase of premises and equipment(224)(113)
Purchase of BOLI(3,050) 
Net cash used in investing activities(133,513)(52,608)
Cash flows from financing activities:
Net change in deposits217,202 199,109 
Cash dividends paid(7,540)(11,003)
Net cash provided by financing activities209,662 188,106 
Net change in cash and cash equivalents79,635 144,099 
Cash and cash equivalents at beginning of period425,329 290,493 
Cash and cash equivalents at end of period$504,964 $434,592 
Supplemental disclosure of cash flow information:
Interest paid$932 $1,170 
Supplemental disclosure of noncash investing and financing activities:
Transfer from loans held for investment to loans held for sale$10,671 $4,820 
Unrealized (loss) gain on securities$(9,438)$1,797 
Operating lease liabilities recorded in conjunction with adoption of ASC 842$5,221 $ 
ROUA recorded in conjunction with adoption of ASC 842$4,974 $ 
Cumulative effect of adoption of ASC 842 on retained earnings$68 $ 
See accompanying notes to unaudited consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation
Nature of Operations and Principles of Consolidation
Five Star Bank (the “Bank”) was chartered on October 26, 1999 and began operations on December 20, 1999. Five Star Bancorp (“Bancorp” or the “Company”) was incorporated on September 16, 2002 and subsequently obtained approval from the Federal Reserve to be a bank holding company in connection with its acquisition of the Bank. The Company became the sole shareholder of the Bank on June 2, 2003 in a statutory merger, pursuant to which each outstanding share of the Bank’s common stock was exchanged for one share of common stock of the Company.
The Company, through the Bank, provides financial services to customers who are predominately small and middle-market businesses, professionals, and individuals residing in the Northern California region. The Company's primary loan products are commercial real estate loans, land development loans, construction loans, and operating lines of credit, and its primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts. The Bank currently has seven branch offices in Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, and Yuba City, and two loan production offices in Santa Rosa and Sacramento.
The Company terminated its status as a Subchapter S corporation as of May 5, 2021, in connection with the Company’s Initial Public Offering (“IPO”) and became a taxable C Corporation. Prior to that date, as an S Corporation, the Company had no U.S. federal income tax expense.
On April 9, 2021, the Company publicly filed a Registration Statement on Form S-1 with the SEC in connection with its IPO (the “Registration Statement”), which was subsequently amended on April 26, 2021 and May 3, 2021. The Registration Statement was declared effective by the SEC on May 4, 2021. In connection with the IPO, the Company issued 6,054,750 shares of common stock, no par value, which included 789,750 shares sold pursuant to the underwriters’ exercise of their option to purchase additional shares. The securities were sold to the public at a price of $20.00 per share and began trading on the Nasdaq Global Select Market on May 5, 2021. On May 7, 2021, the closing date of the IPO, the Company received total net proceeds of $111.2 million. The net proceeds less other related expenses, including audit fees, legal fees, listing fees, and other expenses, totaled $109.1 million.
Basis of Financial Statement Presentation and Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as contained within the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) and the rules and regulations of the SEC, including the instructions to Regulation S-X. These interim unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments and accruals) which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and comprehensive income, changes in shareholders’ equity, and cash flows for the interim periods presented. These unaudited consolidated financial statements have been prepared on a basis consistent with, and should be read in conjunction with, the audited consolidated financial statements as of and for the year ended December 31, 2021, and the notes thereto, as filed in the Company’s Annual Report on Form 10-K, which was filed with the SEC on February 25, 2022.
The unaudited consolidated financial statements include Five Star Bancorp and its wholly owned subsidiary, Five Star Bank. All significant intercompany transactions and balances are eliminated in consolidation.
The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results of operations that may be expected for any other interim period or for the year ending December 31, 2022.
While the Company’s chief decision-makers monitor the revenue streams of the various products and services, operations are managed, and financial performance is evaluated, on a Company-wide basis. Discrete financial information is not available other than on a Company-wide basis. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.
The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.
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The Company qualifies as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, and, as such, may take advantage of specified reduced reporting requirements and deferred accounting standards adoption dates, and is relieved of other significant requirements that are otherwise generally applicable to other public companies.
Use of Estimates
Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited consolidated financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses is the most significant accounting estimate reflected in the Company’s consolidated financial statements.
Earnings Per Share (“EPS”)
Basic EPS is net income divided by the weighted average number of common shares outstanding during the period less average unvested restricted stock awards (“RSAs”). Diluted EPS includes the dilutive effect of additional potential common shares related to unvested RSAs using the treasury stock method. The Company has two forms of outstanding common stock: common stock and unvested RSAs. Holders of unvested RSAs receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings, and therefore the RSAs are considered participating securities. However, under the two-class method, the difference in EPS is not significant for these participating securities.
Three months ended
(in thousands, except per share data)March 31,
2022
March 31,
2021
Net income$9,862 $10,278 
Weighted average basic common shares outstanding17,102,508 10,998,041 
Add: Dilutive effects of assumed vesting of restricted stock62,011  
Weighted average diluted common shares outstanding17,164,519 10,998,041 
Income per common share:
Basic EPS$0.58 $0.93 
Diluted EPS$0.58 $0.93 
During the three months ended March 31, 2022 and 2021, there were no outstanding stock options. Anti-dilutive shares, which are excluded from the dilutive EPS calculation, were deemed to be immaterial.
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For the three months ended March 31, 2021, pro forma EPS is calculated by applying a C Corporation effective tax rate of 29.56% to net income before provision for income taxes and using the determined pro forma net income balance to calculate EPS. For the three months ended March 31, 2022, pro forma EPS is actual EPS given that the Company was a C Corporation for the entire three-month period. The following reconciliation table provides a detailed calculation of pro forma EPS:
Three months ended
(in thousands, except per share data)March 31,
2022
March 31,
2021
Net income before provision for income taxes - GAAP$13,522 $10,660 
Less: Actual/pro forma provision for income taxes3,660 3,151 
Actual/pro forma net income$9,862 $7,509 
Weighted average basic common shares outstanding17,102,508 10,998,041 
Add: Dilutive effects of assumed vesting of restricted stock62,011  
Weighted average diluted common shares outstanding17,164,519 10,998,041 
Income per common share:
Basic EPS (actual/pro forma)$0.58 $0.68 
Diluted EPS (actual/pro forma)$0.58 $0.68 
Reclassifications

Certain amounts reported in previous consolidated financial statements have been reclassified to conform to current period presentation. These reclassifications did not affect previously reported amounts of net income, total assets, or total shareholders’ equity.
Note 2: Recently Issued Accounting Standards
The following reflect recent accounting standards that are pending adoption by the Company. As discussed in Note 1, Basis of Presentation, the Company qualifies as an emerging growth company, and as such, has elected to use the extended transition period for complying with new or revised accounting standards and is not subject to the new or revised accounting standards applicable to public companies during the extended transition period. The accounting standards discussed below reflect effective dates for the Company as an emerging growth company with the extended transition period.
Accounting Standards Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02, which, among other things, requires lessees to recognize most leases on the balance sheet, thus increasing reported assets and liabilities. Lessor accounting remains substantially similar to historical GAAP. The FASB has issued incremental guidance to Topic 842 standard through ASU No. 2018-10, 2018-11, and 2021-05. The Company has elected to use the transition relief approach as provided in ASU 2018-11, which permits the Company to use January 1, 2022 as both the application date and the adoption date, rather than the modified retrospective approach. The Company also elected certain relief options offered within the new standard, which include the package of practical expedients, the option not to recognize an ROUA and lease liability that arise from short-term leases (i.e., leases with terms of 12 months or less), and the option of hindsight when determining lease term. Substantially all of the Company’s lease agreements are considered operating leases and were not previously recognized on the Company’s balance sheets. As of January 1, 2022, the Company recorded an ROUA and corresponding lease liability for all applicable operating leases. While the guidance increased the Company’s gross assets and liabilities, the adoption of ASU 2016-02 did not have a material impact on the consolidated statements of income or the consolidated statements of cash flows. See Note 11, Commitments and Contingencies, for more information.
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In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The primary objective of the amendments in this update is to simplify the application of hedge accounting. More specifically, the amendments in this update better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. Furthermore, the amendments expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. Additionally, amendments in this update require an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. Hedge ineffectiveness is no longer separately measured and reported. The amendments in this update were effective for the Company beginning on January 1, 2022. The impact of adopting this ASU was immaterial to the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard will replace the “incurred loss” model with a “current expected credit loss” (“CECL”) model. The CECL model will apply to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost. The CECL model is based on lifetime expected losses, rather than incurred losses, and requires the recognition of credit loss expense in the consolidated statement of income and a related allowance for credit losses on the consolidated statement of condition at the time of origination or purchase of a loan receivable or held-to-maturity debt security. Likewise, subsequent changes in this estimate are recorded through credit loss expense and related allowance. The CECL model requires the use of not only relevant historical experience and current conditions, but reasonable and supportable forecasts of future events and circumstances, incorporating a broad range of information in developing credit loss estimates, which could result in significant changes to both the timing and amount of credit loss expense and allowance. Under ASU 2016-13, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost. Estimated credit losses are recorded through a credit loss expense and an allowance, rather than a write-down of the investment. Changes in fair value that are not credit-related will continue to be recorded in other comprehensive income. The ASU also expands the disclosure requirements regarding assumptions, models, and methods for estimating the allowance for loan losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. In March 2022, the FASB issued ASU No. 2022-02, which eliminates the recognition and measurement guidance on troubled debt restructurings and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulties. ASU 2016-13, and subsequently, ASU 2022-02, are effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. While the Company believes the change from an incurred loss model to a CECL model has the potential to increase the allowance for loan losses at the adoption date, the Company cannot reasonably quantify the impact of the adoption of the amendments to its financial condition or results of operations at this time due to the complexity of and extensive changes resulting from these amendments. The Company is working with a third-party vendor to identify data gaps and determine the appropriate methodologies and resources to utilize in preparation for its transition to the new accounting standard, including but not limited to the use of certain tools to forecast future economic conditions that affect the cash flows of loans over their lifetime.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848). The amendments in this ASU are elective and provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform. The amendments in this ASU provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. Additionally, in January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which refines the scope of ASC 848 and clarifies its guidance, permitting entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. The amendments in these ASUs may be elected as of March 12, 2020 through December 31, 2022. An entity may choose to elect the amendments in these updates at an interim period subsequent to March 12, 2020, with adoption methods varying based on transaction type. The Company has not elected to apply these amendments; however, the Company is assessing the applicability of the ASUs and continues to monitor guidance for reference rate reform from FASB and its impact on the Company’s consolidated financial statements.
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Note 3: Fair Value of Assets and Liabilities
Fair Value Hierarchy and Fair Value Measurement
Accounting standards require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).
14

The following table summarizes the Company’s assets and liabilities that were required to be recorded at fair value on a recurring basis.
(in thousands)Carrying
Value
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Measurement
Categories: Changes
in Fair Value Recorded
In1
March 31, 2022
Assets:
Securities available-for-sale:
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds$134,813 $ $134,813 $ OCI
Derivatives – interest rate swap58  58  NI
Liabilities:
Derivatives – interest rate swap58  58  NI
December 31, 2021
Assets:
Securities available-for-sale:
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds$148,807 $ $148,807 $ OCI
Derivatives – interest rate swap92  92  NI
Liabilities:
Derivatives – interest rate swap92  92  NI
1Other comprehensive income (“OCI”) or net income (“NI”).
Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. If quoted market prices are not available, management obtains pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity, and credit spreads (Level 2). Level 2 securities include U.S. agencies' or government-sponsored enterprises’ ("GSEs") debt securities, mortgage-backed securities, government agency issued bonds, privately issued collateralized mortgage obligations, and corporate bonds. As of March 31, 2022 and December 31, 2021, there were no Level 1 or Level 3 available-for-sale securities.
On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both the Company’s credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to the Company.
Certain financial assets may be measured at fair value on a non-recurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets, such as collateral dependent impaired loans and other real estate owned (“OREO”). As of March 31, 2022 and December 31, 2021, the Company did not carry any assets measured at fair value on a non-recurring basis.
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Disclosures about Fair Value of Financial Instruments
The table below is a summary of fair value estimates for financial instruments as of March 31, 2022 and December 31, 2021. The carrying amounts in the following table are recorded in the consolidated balance sheets under the indicated captions. Further, management has not disclosed the fair value of financial instruments specifically excluded from disclosure requirements, such as BOLI.
March 31, 2022December 31, 2021
(in thousands)Carrying
Amounts
Fair
Value
Fair Value
Hierarchy
Carrying
Amounts
Fair
Value
Fair Value
Hierarchy
Financial assets:
Cash and cash equivalents$504,964 $504,964 Level 1$425,329 $425,329 Level 1
Time deposits in banks14,464 14,464 Level 114,464 14,464 Level 1
Securities available-for-sale134,813 134,813 Level 2148,807 148,807 Level 2
Securities held-to-maturity4,486 4,459 Level 34,946 5,197 Level 3
Loans held for sale10,386 11,063 Level 210,671 11,217 Level 2
Loans held for investment, net of allowance for loan losses2,056,254 1,993,626 Level 31,911,217 1,893,431 Level 3
FHLB stock and other investments12,383 N/AN/A12,464 N/AN/A
Interest receivable5,547 5,547 Level 25,332 5,332 Level 2
Interest rate swap58 58 Level 292 92 Level 2
Financial liabilities:
Deposits2,503,092 2,349,536 Level 22,285,890 2,210,555 Level 2
Interest payable79 79 Level 223 23 Level 2
Interest rate swap58 58 Level 292 92 Level 2
Subordinated notes28,403 28,403 Level 328,386 28,386 Level 3
The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at March 31, 2022 and December 31, 2021:
Cash and cash equivalents and time deposits in banks: The carrying amount is estimated to be fair value due to the liquid nature of the assets and their short-term maturities.
Investment securities: See discussion above for the methods and assumptions used by the Company to estimate the fair value of investment securities.
Loans held for sale: For loans held for sale, the fair value is based on what secondary markets are currently offering for portfolios with similar characteristics.
Loans held for investment: For variable rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, which use interest rates being offered at each reporting date for loans with similar terms to borrowers of comparable creditworthiness without considering widening credit spreads due to market illiquidity, which approximates the exit price notion. The allowance for loan losses is considered to be a reasonable estimate of loan discount for credit quality concerns.
Interest receivable and payable: For interest receivable and payable, the carrying amount is estimated to be fair value.
Derivatives - interest rate swap: See above for a discussion of the methods and assumptions used by the Company to estimate the fair value of derivatives.
Deposits: The fair values for demand deposits are, by definition, equal to the amount payable on demand at the reporting date represented by their carrying amount. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow analysis that uses interest rates being offered at each reporting date by the Company for certificates with similar remaining maturities. For variable rate time deposits, cost approximates fair value.
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Subordinated Notes: The fair value is estimated by discounting the future cash flow using the current three-month LIBOR. The Company's subordinated notes are not registered securities and were issued through private placements, resulting in a Level 3 classification. The notes are recorded at carrying value.
Note 4: Investment Securities
The Company’s investment securities portfolio includes obligations of states and political subdivisions, securities issued by U.S. federal government agencies such as the Small Business Administration (the “SBA”), and securities issued by U.S. GSEs, such as the Federal National Mortgage Association (the “FNMA”), the Federal Home Loan Mortgage Corporation (the “FHLMC”), and the FHLB. The Company also invests in residential and commercial mortgage-backed securities, collateralized mortgage obligations issued or guaranteed by the GSEs, and corporate bonds, as reflected in the following tables.
A summary of the amortized cost and fair value related to securities held-to-maturity as of March 31, 2022 and December 31, 2021 is presented below.
(in thousands)Gross Unrealized
Amortized
Cost
Gains(Losses)Fair
Value
March 31, 2022
Obligations of states and political subdivisions$4,486 $ $(27)$4,459 
Total held-to-maturity$4,486 $ $(27)$4,459 
December 31, 2021
Obligations of states and political subdivisions$4,946 $251 $ $5,197 
Total held-to-maturity$4,946 $251 $ $5,197 
For securities issued by states and political subdivisions, management considers: (i) issuer and/or guarantor credit ratings, (ii) historical probability of default and loss given default rates for given bond ratings and remaining maturity, (iii) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, (iv) internal credit review of the financial information; and (v) whether or not such securities have credit enhancements such as guarantees, contain a defeasance clause, or are pre-refunded by the issuers.
A summary of the amortized cost and fair value related to securities available-for-sale as of March 31, 2022 and December 31, 2021 is presented below.
(in thousands)Amortized
Cost
Gross Unrealized Fair
Value
Gains(Losses)
March 31, 2022
U.S. government agencies$18,241 $95 $(257)$18,079 
Mortgage-backed securities79,694 8 (6,210)73,492 
Obligations of states and political subdivisions44,621 23 (3,713)40,931 
Collateralized mortgage obligations504  (21)483 
Corporate bonds2,000  (172)1,828 
Total available-for-sale$145,060 $126 $(10,373)$134,813 
December 31, 2021
U.S. government agencies$19,824 $60 $(202)$19,682 
Mortgage-backed securities82,517 94 (1,098)81,513 
Obligations of states and political subdivisions44,732 525 (120)45,137 
Collateralized mortgage obligations537 3  540 
Corporate bonds2,000  (65)1,935 
Total available-for-sale$149,610 $682 $(1,485)$148,807 
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The amortized cost and fair value of investment debt securities by contractual maturity at March 31, 2022 and December 31, 2021 are shown below. Expected maturities may differ from contractual maturities if the issuers of the securities have the right to call or prepay obligations with or without call or prepayment penalties.
(in thousands)March 31, 2022December 31, 2021
Held-to-MaturityAvailable-for-SaleHeld-to-MaturityAvailable-for-Sale
Amortized
Cost
Fair ValueAmortized
Cost
Fair ValueAmortized
Cost
Fair ValueAmortized
Cost
Fair Value
Within one year$456 $454 $ $ $491 $516 $ $ 
After one but within five years1,115 1,108 505 514 951 999 507 522 
After five years through ten years1,590 1,580 3,684 3,458 3,504 3,682 3,697 3,748 
After ten years1,325 1,317 40,432 36,959   40,528 40,867 
Investment securities not due at a single maturity date:
U.S. government agencies  18,241 18,079   19,824 19,682 
Mortgage-backed securities  79,694 73,492   82,517 81,513 
Collateralized mortgage obligations  504 483   537 540 
Corporate bonds  2,000 1,828   2,000 1,935 
Total$4,486