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Table of Contents
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
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
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 November 3, 2023, there were 17,257,023 shares of the registrant’s common stock, no par value, outstanding.


Table of Contents
TABLE OF CONTENTS
FIVE STAR BANCORP AND SUBSIDIARY
Quarterly Report on Form 10-Q
September 30, 2023


Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)September 30, 2023December 31, 2022
ASSETS
Cash and due from financial institutions$26,744 $32,561 
Interest-bearing deposits in banks296,804 227,430 
Cash and cash equivalents323,548 259,991 
Time deposits in banks6,971 9,849 
Securities available-for-sale, at fair value, net of allowance for credit losses of $0 at September 30, 2023 and December 31, 2022 (amortized cost of $126,703 and $135,087 at September 30, 2023 and December 31, 2022, respectively)
104,086 115,988 
Securities held-to-maturity, at amortized cost, net of allowance for credit losses of $20 at September 30, 2023 and $0 at December 31, 2022 (fair value of $2,811 and $3,432 at September 30, 2023 and December 31, 2022, respectively)
3,104 3,756 
Loans held for sale9,326 9,416 
Loans held for investment3,009,930 2,791,326 
Allowance for credit losses - loans(34,028)(28,389)
Loans held for investment, net of allowance for credit losses 2,975,902 2,762,937 
FHLB stock15,000 10,890 
Operating leases, right-of-use asset, net4,799 3,981 
Premises and equipment, net1,564 1,605 
Bank-owned life insurance17,023 14,669 
Interest receivable and other assets43,717 34,077 
Total assets$3,505,040 $3,227,159 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing$833,434 $968,749 
Interest-bearing2,198,776 1,813,255 
Total deposits3,032,210 2,782,004 
Borrowings:
FHLB advances90,000 100,000 
Subordinated debt, net73,713 73,606 
Operating lease liability5,043 4,243 
Interest payable and other liabilities30,050 14,481 
Total liabilities3,231,016 2,974,334 
Commitments and contingencies (Note 8)
Shareholders’ equity
Preferred stock, no par value; 10,000,000 shares authorized; zero issued and outstanding at September 30, 2023 and December 31, 2022
  
Common stock, no par value; 100,000,000 shares authorized; 17,257,357 shares issued and outstanding at September 30, 2023; 17,241,926 shares issued and outstanding at December 31, 2022
220,266 219,543 
Retained earnings
69,689 46,736 
Accumulated other comprehensive loss, net
(15,931)(13,454)
Total shareholders’ equity
274,024 252,825 
Total liabilities and shareholders equity
$3,505,040 $3,227,159 
See accompanying notes to the unaudited consolidated financial statements.
1


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands, except per share amounts)2023202220232022
Interest and fee income:
Loans, including fees$41,861 $29,886 $119,284 $76,877 
Taxable securities472 439 1,401 1,252 
Nontaxable securities181 176 548 532 
Interest-bearing deposits in other banks2,584 1,145 6,969 1,855 
Total interest and fee income45,098 31,646 128,202 80,516 
Interest expense:
Deposits16,386 2,817 39,733 4,383 
FHLB advances75 47 783 52 
Subordinated debt1,161 1,259 3,484 2,146 
Total interest expense17,622 4,123 44,000 6,581 
Net interest income
27,476 27,523 84,202 73,935 
Provision for credit losses1,050 2,250 3,200 5,450 
Net interest income after provision for credit losses
26,426 25,273 81,002 68,485 
Non-interest income:
Service charges on deposit accounts158 132 410 370 
Net gain on sale of securities available-for-sale   5 
Gain on sale of loans396 548 1,635 2,297 
Loan-related fees355 447 1,052 1,800 
FHLB stock dividends274 152 656 353 
Earnings on BOLI127 102 355 293 
Other74 52 1,467 438 
Total non-interest income1,384 1,433 5,575 5,556 
Non-interest expense:
Salaries and employee benefits6,876 5,645 19,915 16,873 
Occupancy and equipment561 515 1,635 1,548 
Data processing and software1,020 797 2,905 2,252 
FDIC insurance375 195 1,187 605 
Professional services700 792 1,917 1,914 
Advertising and promotional535 512 1,686 1,340 
Loan-related expenses345 262 924 929 
Other operating expenses1,603 1,454 4,943 4,491 
Total non-interest expense12,015 10,172 35,112 29,952 
Income before provision for income taxes
15,795 16,534 51,465 44,089 
Provision for income taxes
4,750 4,830 14,530 12,570 
Net income
$11,045 $11,704 $36,935 $31,519 
Basic earnings per common share$0.64 $0.68 $2.15 $1.84 
Diluted earnings per common share$0.64 $0.68 $2.15 $1.84 
See accompanying notes to unaudited consolidated financial statements.
2


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)2023 202220232022
Net income
$11,045 $11,704 $36,935 $31,519 
Unrealized (losses) on securities:
Net unrealized holding (losses) on securities available-for-sale during the period
(4,195)(4,718)(3,516)(22,005)
Reclassification adjustment for net realized (losses) included in net income
   (5)
Income tax (benefit) related to items of other comprehensive income
(1,240)(1,395)(1,039)(6,506)
Other comprehensive (loss)
(2,955)(3,323)(2,477)(15,504)
Total comprehensive income
$8,090 $8,381 $34,458 $16,015 
See accompanying notes to the unaudited consolidated financial statements.
3


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Three Months Ended September 30, 2023 and 2022
(Unaudited)
Common Stock
Retained Earnings
Accumulated Other Comprehensive Loss
Total Shareholders’ Equity
(in thousands, except per share amounts)Shares Amount
Balance at June 30, 202217,245,983 $219,023 $26,924 $(12,747)$233,200 
Net income— — 11,704 — 11,704 
Other comprehensive loss— — — (3,323)(3,323)
Stock compensation expense— 263 — — 263 
Cash dividends paid ($0.15 per share)
— — (2,586)— (2,586)
Balance at September 30, 202217,245,983 $219,286 $36,042 $(16,070)$239,258 
Balance at June 30, 202317,257,357 $220,021 $62,095 $(12,976)$269,140 
Net income— — 11,045 — 11,045 
Other comprehensive loss— — — (2,955)(2,955)
Stock compensation expense— 245 — — 245 
Cash dividends paid ($0.20 per share)
— — (3,451)— (3,451)
Balance at September 30, 202317,257,357 $220,266 $69,689 $(15,931)$274,024 
See accompanying notes to the unaudited consolidated financial statements.
4


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2023 and 2022
(Unaudited)
Common Stock
Retained Earnings
Accumulated Other Comprehensive Loss
Total Shareholders’ Equity
(in thousands, except per share amounts)Shares Amount
Balance at December 31, 202117,224,848 $218,444 $17,168 $(566)$235,046 
Cumulative effect of adoption of ASC 842 on retained earnings— — 68 — 68 
Net income— — 31,519 — 31,519 
Other comprehensive loss— — — (15,504)(15,504)
Stock issued under stock award plans23,639 — — —  
Stock compensation expense— 842 — — 842 
Stock forfeitures(2,504)— — —  
Cash dividends paid ($0.90 per share)
— — (12,713)— (12,713)
Balance at September 30, 202217,245,983 $219,286 $36,042 $(16,070)$239,258 
Balance at December 31, 202217,241,926 $219,543 $46,736 $(13,454)$252,825 
Cumulative effect of adoption of ASC 326 on retained earnings— — (4,491)— (4,491)
Net income— — 36,935 — 36,935 
Other comprehensive loss— — — (2,477)(2,477)
Stock issued under stock award plans16,978 — — —  
Stock compensation expense— 723 — — 723 
Stock forfeitures(1,547)— — —  
Cash dividends paid ($0.55 per share)
— — (9,491)— (9,491)
Balance at September 30, 202317,257,357 $220,266 $69,689 $(15,931)$274,024 
See accompanying notes to unaudited consolidated financial statements.
5


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
(in thousands)20232022
Cash flows from operating activities:
Net income$36,935 $31,519 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses3,200 5,450 
Depreciation and amortization1,227 1,226 
Amortization of deferred loan fees and costs125 338 
Amortization of premiums and discounts on securities886 962 
Amortization of subordinated debt issuance costs107 96 
Stock compensation expense723 842 
Earnings on BOLI(355)(293)
Deferred tax provision79 13 
Loans originated for sale(39,915)(44,993)
Gain on sale of loans(1,635)(2,297)
Proceeds from sale of loans32,224 36,275 
Net gain on sale of securities available-for-sale (5)
Decrease in operating lease liability(714)(729)
Cost method of investment-related gain(1,274) 
Net changes in:
Interest receivable and other assets(5,523)(3,240)
Interest payable and other liabilities14,457 2,342 
Net cash provided by operating activities40,547 27,506 
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale 1,623 
Maturities, prepayments, and calls of securities available-for-sale8,134 13,052 
Purchases of securities available-for-sale (1,641)
Net change in time deposits in banks2,878 4,248 
Loan originations, net of repayments(212,137)(639,040)
Purchase of premises and equipment(470)(406)
Purchase of FHLB stock(4,110)(4,223)
Purchase of BOLI(2,000)(3,054)
Net cash used in investing activities(207,705)(629,441)
Cash flows from financing activities:
Net change in deposits250,206 328,442 
FHLB advances (payments)(10,000)105,000 
Cash dividends paid(9,491)(12,713)
Proceeds from subordinated note issuance 75,000 
Subordinated note issuance costs (1,454)
Net cash provided by financing activities230,715 494,275 
Net change in cash and cash equivalents63,557 (107,660)
Cash and cash equivalents at beginning of period259,991 425,329 
Cash and cash equivalents at end of period$323,548 $317,669 
Supplemental disclosure of cash flow information:
Interest paid$43,817$3,057 
Income taxes paid1,4805,200 
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Supplemental disclosure of noncash items:
Transfer from loans held for sale to loans held for investment$9,416 $10,671 
Unrealized loss on securities(3,516)(22,005)
Operating lease liabilities recorded in conjunction with adoption of ASC 842 5,221 
ROUA recorded in conjunction with adoption of ASC 842— 4,974 
Operating lease liabilities exchanged for ROUA1,513 — 
ROUA acquired(1,534) 
Cumulative effect of adoption of ASC 842 on retained earnings, net of tax— 68 
Cumulative effect of adoption of ASC 326 on retained earnings, net of tax(4,491)— 
See accompanying notes to the unaudited consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1: Basis of Presentation and Summary of Significant Accounting Policies
(a) Organization
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 one loan production office in Sacramento.
(b) 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”) 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, 2022, and the notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Annual Report on Form 10-K”), which was filed with the SEC on February 24, 2023.
The unaudited consolidated financial statements include Bancorp and its wholly owned subsidiary, the Bank. All significant intercompany transactions and balances are eliminated in consolidation.
The results of operations for the three and nine months ended September 30, 2023 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, 2023.
The Company’s accounting and reporting policies conform to GAAP and to general practices within the banking industry.
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.
(c) Segments
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.
(d) Emerging Growth Company
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. The Company will remain an Emerging Growth Company for five years after its IPO date of May 5, 2021, unless one of the following occurs: (i) total annual gross revenues are $1.235 billion or more; (ii) the Company issues more than
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$1 billion in non-convertible debt; or (iii) the Company becomes a large accelerated filer with a public float of more than $0.7 billion.
(e) Significant Accounting Policies
The Company’s significant accounting policies are included in Note 1, Basis of Presentation on the 2022 Annual Report on Form 10-K. There have been no changes to these significant accounting policies during the first nine months of 2023 other than adoption of ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and all subsequent amendments that modified ASU 2016-13 (collectively, “ASC 326”) as discussed below in this Note, which impacted the following policies:
Allowance for Credit Losses (“ACL”)
The ACL is a valuation account that offsets the amortized cost basis of loans receivable and certain other financial assets, including unfunded loan commitments and held-to-maturity debt securities. Under ASC 326, amortized cost basis is the basis on which the ACL is determined. Amortized cost basis on loans receivable is principal outstanding, net of any purchase premiums and discounts, and net of any deferred loan fees and costs.
Credit losses are charged off when management believes that the collectability of at least some portion of outstanding principal is unlikely. These charge-offs are recorded as a reversal to, thereby reducing, the allowance for credit losses. Subsequent recoveries of previously charged-off amounts, if any, are recorded as a provision to, thereby increasing, the allowance for credit losses. The allowance for credit losses is maintained at a level to absorb expected credit losses over the contractual life, including consideration of prepayments. Determining the adequacy of the allowance is complex and requires judgments that are inherently subjective, as it requires estimates that are susceptible to revision as additional information becomes available. While the Company has determined an allowance for credit losses it considers appropriate, there can be no assurance that the allowance will be sufficient to absorb future losses.
The Company’s process for determining expected lifetime credit losses entails a loan-level, model-based approach and considers a broad range of information, including historical loss experience, current conditions, and reasonable and supportable forecasts. Credit loss is estimated for all loans. Accordingly, the Company has stratified the full loan population into segments sharing similar characteristics to perform the evaluation of the credit loss collectively. The Company can also further stratify loans of similar types, risk attributes, and methods for credit risk monitoring.
The Company has determined pools based primarily on regulatory reporting codes as the loans within each pool share similar risk characteristics and there is sufficient historical peer loss data from the Federal Financial Institutions Examination Council to provide statistically meaningful support in the models developed. The Company further stratified the C&I portfolio into traditional C&I loans and SBA loans, as the loans in these pools have different repayment structures and credit risk characteristics. The Company also stratified C&I loans and consumer loans that do not require reserves, as the Company has third party agreements in place to cover loan losses. The Company has identified the following pools subject to an estimate of credit loss: (1) 1-4 Family Construction; (2) Other Construction; (3) Farmland; (4) Revolving Secured by 1-4 Family; (5) Residential Secured by First Liens; (6) Residential Secured by Junior Liens; (7) Multifamily; (8) CRE Owner Occupied; (9) CRE Non-Owner Occupied; (10) Agriculture; (11) C&I; (12) C&I SBA; (13) Consumer; and (14) Municipal.
The Company has determined, given its limited loss experience, that peer data and other external data to support loss history provides the best basis for its assessment of expected credit losses. The Company believes that the use of peer loss data from 2008 to 2019 presents loss histories that appropriately reflect a full economic cycle, reflects asset-specific risk characteristics at each pool level identified, and includes a historical look-back period that is objective and reflective of future expected credit losses. Loss data from 2020 to 2021 was excluded from the data set to exclude pandemic-related data in the models.
The method for determining the estimate of lifetime credit losses includes, among other things, the following main components: (i) the use of Probability of Default (“PD”) and Loss Given Default (“LGD”) assumptions under a Discounted Cash Flow model; (ii) a multi-scenario macroeconomic forecast; (iii) an initial and reasonable and supportable forecast period of one year for all loan segments; and (iv) a reversion period of one year using a linear transition method to historical loss rates.
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Given the inherent limitations of a quantitative-only model, qualitative adjustments are included to factor in data points not captured from a quantitative analysis alone.
Qualitative criteria that can be considered includes, among other things, the following:
Concentrations – the existence and effect of any concentrations of credit, and changes in the level of such concentrations;
Volume – changes in the nature and volume of the portfolio and in the terms of the loans;
Economic – changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;
Policy – changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;
Quality – changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; and
External – the effect of other external factors, such as competition and legal and regulatory requirements on the level of estimated credit losses in the Company’s loan portfolio.
Management reviews current information on a quarterly basis to assess the forecasted future economic impact for purposes of evaluating the adequacy of the ACL. The forecasted direction and magnitude of change with respect to future economic conditions is then assessed against the estimate in the model. Any changes resulting from the quarterly assessment are recorded in “Provision for credit losses” in the unaudited consolidated statements of income.
Accrued Interest
Accrued interest receivable is excluded from amortized cost of all financial instrument types and included in “Interest receivable and other assets” in the unaudited consolidated balance sheets. Accrued interest receivable is not subject to an estimate for credit loss, as the Company has a policy to charge off accrued interest deemed uncollectible in a timely manner. When a loan is placed on non-accrual status, which occurs within 90 days of a borrower becoming delinquent, interest previously accrued but not collected is reversed against current period income.
Individually Assessed Loans
If an individual loan’s characteristics have deteriorated to below a range of the overall pool, the loan would be individually assessed. Individually assessed loans are measured for credit loss based on one of the following methods: (i) present value of future expected cash flows, discounted at the loan’s effective interest rate; (ii) amount by which carrying value of the loan exceeds the loan’s observable market price; or (iii) the fair value of the collateral, less estimated selling costs, if the loan is collateral dependent. The Company applies the practical expedient and defines collateral dependent loans as those where the borrower is experiencing financial difficulty and on which payment is expected to be provided substantially through the operation or sale of the collateral.
Available-for-sale (“AFS”) Debt Securities
Unrealized credit losses are recognized through an allowance for credit losses instead of an adjustment to amortized cost basis, eliminating the other-than-temporary impairment concept. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of amortized cost basis. If either criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For AFS debt securities that do not meet the above conditions, the Company evaluates at the individual security level whether the decrease in fair value has resulted from credit factors or non-credit factors. If assessment determines that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis of the security, then a credit loss would be recognized, limited to the amount by which the fair value is less than the amortized cost basis. All other changes in fair value of an AFS debt security are recognized in other comprehensive income, net of applicable taxes. Changes in the allowance for credit losses, if any, are recognized as a provision for (or reversal of) credit losses. As of September 30, 2023, the Company’s portfolio of AFS debt securities is comprised primarily of debt, mortgage-backed securities, and collateralized mortgage obligations issued by the U.S. government, its agencies, or government-sponsored enterprises, which are either explicitly or implicitly guaranteed by the U.S. government. The remainder of the portfolio is primarily
10


comprised of obligations of state and political subdivisions, which are generally rated as high grade. The history of minimal credit losses from these issuers indicates that expectation of non-payment of the amortized cost basis is zero. As such, the Company determined that the unrealized loss positions in AFS securities were not due to credit losses, but instead related to changes in interest rates and general market conditions and therefore, no credit loss expense was recognized.
Loan Commitments
Loan commitments not unconditionally cancellable are subject to an estimate of credit loss under the CECL model. The Company’s process for determining the estimate of credit loss on loan commitments is the same as it is on loans. Unfunded loan commitment reserves are included in “Interest payable and other liabilities” in the unaudited consolidated balance sheets.
Held-to-Maturity Debt Securities
The Company’s process for determining the estimate of credit loss on held-to-maturity debt securities is substantially similar to what it is on loans, with segmenting not being applicable. As the amount of held-to-maturity debt securities that the Company carries is limited and given the determination that expected credit loss was immaterial, an immaterial amount was recognized in the ACL upon adoption and no credit loss expense was recorded for the three and nine months ended September 30, 2023.
TDRs and Other Loan Modifications
In accordance with the adoption of ASC 326, which includes ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, accounting guidance for TDRs for creditors has been eliminated. New guidance with respect to recognition, measurement, and disclosures of loans for borrowers experiencing financial difficulties supersedes guidance on TDRs. As of September 30, 2023, the amount of loans modified for borrowers due to experiencing financial difficulties under criteria of principal forgiveness, interest rate reduction, other-than-insignificant payment delay, or term extension was immaterial.
(f) Recently Issued Accounting Standards
The following information reflects recent accounting standards that have been adopted or are pending adoption by the Company. 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 indicate effective dates for the Company as an emerging growth company using the extended transition period.
Accounting Standards Adopted
On January 1, 2023, the Company adopted ASC 326, which replaces the current “incurred loss” model for recognizing credit losses with an “expected loss” model referred to as the Current Expected Credit Loss (“CECL”) model. The CECL model applies to estimated credit losses on loans receivable, held-to-maturity debt securities, unfunded loan commitments, and certain other financial assets measured at amortized cost. Under ASC 326, available-for-sale debt securities are evaluated for impairment if fair value is less than amortized cost, with any estimated credit losses 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 Company adopted this standard using 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 was effective for financial assets measured at amortized cost. For certain new disclosures required under ASC 326, such as credit quality indicators by year of origination, we have not restated comparative financial information before January 1, 2023 to conform under ASC 326. This adoption method is considered a change in accounting principle requiring additional disclosure of the nature and reason for the change, which is solely due to adoption of ASC 326. On January 1, 2023, the Company also adopted ASU No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which had no material impact.
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The following table reflects the cumulative-effect adjustments the Company recorded on January 1, 2023 for the adoption of ASC 326.
January 1, 2023
(in thousands)Pre-ASC 326 AdoptionImpact of ASC 326 AdoptionPost-ASC 326 Adoption
Assets:
Allowance for Credit Losses$(28,389)$(5,282)$(33,671)
Deferred Tax Asset (Interest receivable and other assets)12,273 1,883 14,156 
Liabilities:
Reserve for Unfunded Commitments (Interest payable and other liabilities)(125)(1,092)(1,217)
Shareholders’ Equity:
Retained Earnings(46,736)4,491 (42,245)
Accounting Standards Issued But Not Yet Adopted
For the fiscal year beginning January 1, 2023, there have been no new accounting standards issued but not yet adopted that are expected to be material to the Company. There are also no accounting standards issued before January 1, 2023 yet to be adopted.
Note 2: 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).

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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 ValueQuoted 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 In
September 30, 2023
Assets:
Securities available-for-sale:
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, collateralized mortgage obligations, and corporate bonds$104,086 $ $104,086 $ OCI
Derivatives – interest rate swap5  5  NI
Liabilities:
Derivatives – interest rate swap5  5  NI
December 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$115,988 $ $115,988 $ OCI
Derivatives – interest rate swap16  16  NI
Liabilities:
Derivatives – interest rate swap16  16  NI
Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1 inputs) 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 inputs). Level 2 securities include U.S. agencies’ or government-sponsored agencies’ debt securities, mortgage-backed securities, government agency-issued bonds, privately issued collateralized mortgage obligations, and corporate bonds. Level 3 securities are based on unobservable inputs that are supported by little or no market activity. In addition, values use discounted cash flow models and may include significant management judgment and estimation. As of September 30, 2023 and December 31, 2022, there were no Level 1 available-for-sale securities and no transfers between Level 1 and Level 2 classifications for assets or liabilities measured at fair value on a recurring basis.
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 loans and other real estate owned. As of September 30, 2023 and December 31, 2022, the carrying amount of assets measured at fair value on a non-recurring basis was immaterial to the Company.
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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 September 30, 2023 and December 31, 2022. 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.
September 30, 2023December 31, 2022
(in thousands)Carrying AmountsFair ValueFair Value HierarchyCarrying AmountsFair ValueFair Value Hierarchy
Financial assets:
Cash and cash equivalents$323,548 $323,548 Level 1$259,991 $259,991 Level 1
Time deposits in banks6,971 6,971 Level 19,849 9,849 Level 1
Securities available-for-sale104,086 104,086 Level 2115,988 115,988 Level 2
Securities held-to-maturity3,104 2,811 Level 33,756 3,432 Level 3
Loans held for sale9,326 10,286 Level 29,416 9,785 Level 2
Loans held for investment, net of allowance for credit losses2,975,902 2,773,007 Level 32,762,937 2,570,176 Level 3
FHLB stock and other investments21,693 N/AN/A16,570 N/AN/A
Interest rate swap5 5 Level 216 16 Level 2
Financial liabilities:
Interest rate swap$5 $5 Level 2$16 $16 Level 2
FHLB advances90,000 90,000 Level 2100,000 100,000 Level 2
Subordinated notes73,713 72,632 Level 373,606 72,273 Level 3
The following methods and assumptions were used by the Company to estimate the fair value of its financial instruments at September 30, 2023 and December 31, 2022:
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. Fair value of held-to-maturity securities is estimated by calculating the net present value of future cash flows based on observable market data, such as interest rates and yield curves (observable at commonly quoted intervals) as provided by an independent third party.
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, net of allowance for credit losses: 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 credit losses is considered to be a reasonable estimate of loan discount for credit quality concerns.
FHLB stock and other investments: Carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and do not have a readily determinable market 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.
FHLB advances: For FHLB advances, the carrying amount is estimated to be fair value.
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Subordinated notes: The fair value is estimated by discounting the future cash flow using the current three-month CME Term SOFR. 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 3: 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 SBA, and securities issued by U.S. GSEs, such as the FNMA, the FHLMC, and the FHLB. The Company also invests in residential and commercial mortgage-backed securities, collateralized mortgage obligations issued or guaranteed by government sponsored entities, 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 September 30, 2023 and December 31, 2022 is presented below.
(in thousands)Amortized CostGross UnrealizedFair Value
Gains(Losses)
September 30, 2023
Obligations of states and political subdivisions$3,104 $ $(293)$2,811 
Total held-to-maturity$3,104 $ $(293)$2,811 
December 31, 2022
Obligations of states and political subdivisions$3,756 $ $(324)$3,432 
Total held-to-maturity$3,756 $ $(324)$3,432 
For securities issued by states and political subdivisions, for purposes of evaluating whether to recognize credit loss expense, 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.
The Company adopted ASC 326 on January 1, 2023, which affects accounting of credit loss expense on held-to-maturity and available-for-sale securities. Refer to Note 1, Basis of Presentation and Summary of Significant Accounting Policies, for further detail.
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A summary of the amortized cost and fair value related to securities available-for-sale as of September 30, 2023 and December 31, 2022 is presented below.
(in thousands)Amortized CostGross Unrealized Fair Value
Gains(Losses)
September 30, 2023
U.S. government agencies$11,281 $110 $(182)$11,209 
Mortgage-backed securities68,715  (14,252)54,463 
Obligations of states and political subdivisions44,325  (7,974)36,351 
Collateralized mortgage obligations382  (45)337 
Corporate bonds2,000  (274)1,726 
Total available-for-sale$126,703 $110 $(22,727)$104,086 
December 31, 2022
U.S. government agencies$14,317 $81 $(225)$14,173 
Mortgage-backed securities73,111 1 (11,841)61,271 
Obligations of states and political subdivisions45,223 21 (6,818)38,426 
Collateralized mortgage obligations436  (41)395 
Corporate bonds2,000  (277)1,723 
Total available-for-sale$135,087 $103 $(19,202)$115,988 
16


The amortized cost and fair value of investment securities by contractual maturity at September 30, 2023 and December 31, 2022 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)September 30, 2023December 31, 2022
Held-to-MaturityAvailable-for-SaleHeld-to-MaturityAvailable-for-Sale
Amortized CostFair ValueAmortized CostFair ValueAmortized CostFair ValueAmortized CostFair Value
Within one year$304 $275 $ $ $417 $381 $501 $501 
After one but within five years935 847 397 355 1,015 927   
After five years through ten years1,365 1,236 6,424 5,510 1,470 1,343 5,320 4,761 
After ten years500 453 37,504 30,486 854 781 39,402 33,164 
Investment securities not due at a single maturity date:
U.S. government agencies  11,281 11,209   14,317 14,173 
Mortgage-backed securities  68,715 54,463   73,111 61,271 
Collateralized mortgage obligations  382 337   436 395 
Corporate bonds  2,000 1,726   2,000 1,723 
Total$3,104 $2,811 $126,703 $104,086 $3,756 $3,432 $135,087 $115,988 

17


Sales of investment securities and gross gains and losses are shown in the following table:
(in thousands)For the three months ended
For the nine months ended
September 30, 2023September 30, 2022September 30, 2023September 30, 2022
Available-for-sale:
Sales proceeds$ $ $ $1,623 
Gross realized gains   5 
Pledged investment securities are shown in the following table:
(in thousands)September 30, 2023December 31, 2022
Pledged to:
The State of California, securing deposits of public funds and borrowings$54,076 $40,465 
The Federal Reserve Discount Window, increasing borrowing capacity49,128  
Total pledged investment securities$103,204 $40,465 
The following table details the gross unrealized losses and fair values aggregated by investment category and length of time that individual available-for-sale securities have been in a continuous unrealized loss position at September 30, 2023 and December 31, 2022:
Less than 12 months 12 months or moreTotal securities in a loss position
(in thousands)Fair ValueUnrealized Loss Fair ValueUnrealized Loss Fair ValueUnrealized Loss
September 30, 2023
U.S. government agencies$839 $(19)$7,455 $(163)$8,294 $(182)
Mortgage-backed securities214 (2)54,249 (14,250)54,463 (14,252)
Obligations of states and political subdivisions1,486 (34)34,864 (7,940)36,350 (7,974)
Collateralized mortgage obligations  337 (45)337 (45)
Corporate bonds  1,726 (274)1,726 (274)
$2,539 $(55)$98,631 $(22,672)$101,170 $(22,727)
December 31, 2022
U.S. government agencies$3,090 $(125)$8,392 $(100)$11,482 $(225)
Mortgage-backed securities4,360 (470)56,908 (11,371)61,268 (11,841)
Obligations of states and political subdivisions24,707 (4,097)11,670 (2,721)36,377 (6,818)
Collateralized mortgage obligations395 (41)  395 (41)
Corporate bonds  1,723 (277)1,723 (277)
$32,552 $(4,733)$78,693 $(14,469)$111,245 $(19,202)
There were 154 and 152 available-for-sale securities in unrealized loss positions at September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, the investment portfolio included 148 investment securities that had been in a continuous loss position for twelve months or more and six investment securities that had been in a loss position for less than twelve months.
There was one held-to-maturity security in a continuous unrealized loss position at September 30, 2023, which had been in a continuous loss position for more than twelve months.
18


Obligations issued or guaranteed by government agencies such as the GNMA and the SBA or GSEs under conservatorship such as the FNMA and the FHLMC, are guaranteed or sponsored by agencies of the U.S. government and have strong credit profiles. The Company therefore expects to receive all contractual interest payments on time and believes the risk of credit losses on these securities is remote.
The Company’s investment in obligations of states and political subdivisions are deemed credit worthy after management’s comprehensive analysis of the issuers’ latest financial information, credit ratings by major credit agencies, and/or credit enhancements.
Non-Marketable Securities Included in Other Assets
FHLB capital stock: As a member of the FHLB, the Company is required to maintain a minimum investment in FHLB capital stock determined by the board of directors of the FHLB. The minimum investment requirements can increase in the event the Company increases its total asset size or borrowings with the FHLB. Shares cannot be purchased or sold except between the FHLB and its members at the $100 per share par value. The Company held $15.0 million and $10.9 million of FHLB stock at September 30, 2023 and December 31, 2022, respectively. The carrying amounts of these investments are reasonable estimates of fair value because the securities are restricted to member banks and do not have a readily determinable market value. Based on management’s analysis of the FHLB’s financial condition and certain qualitative factors, management determined that the FHLB stock was not impaired at September 30, 2023 and December 31, 2022. On July 27, 2023, the FHLB announced a cash dividend for the second quarter of 2023 at an annualized dividend rate of 7.75%, which was paid on August 10, 2023. Cash dividends received on FHLB capital stock amounted to $0.3 million and $0.2 million for the three months ended September 30, 2023 and 2022, respectively, and $0.7 million and $0.4 million for the nine months ended September 30, 2023 and 2022, respectively, and were recorded as non-interest income on the unaudited consolidated statements of income.
19


Note 4: Loans and Allowance for Credit Losses
The Company’s loan portfolio is its largest class of earning assets and typically provides higher yields than other types of earning assets. Associated with the higher yields is an inherent amount of credit risk which the Company attempts to mitigate through strong underwriting practices. The following table presents the balance of each major product type within the Company’s portfolio as of the dates indicated.
(in thousands)September 30, 2023December 31, 2022
Real estate:
Commercial$2,599,616 $2,394,674 
Commercial land and development15,482 7,477 
Commercial construction95,352 88,669 
Residential construction13,922