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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 September 30, 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 November 4, 2022, there were 17,245,650 shares of the registrant’s common stock, no par value, outstanding.
1

TABLE OF CONTENTS
2

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 ("COVID-19");
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, our net interest income, and our borrowers' ability to repay loans;
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");
3

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 section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The foregoing factors that could cause results or performance to materially differ from those expressed in our forward-looking statements should not be considered exhaustive and should be read together with other cautionary statements that are included in this report, including those discussed 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.
4

PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
5

FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share data)
September 30,
2022
December 31,
2021
ASSETS
Cash and due from financial institutions$33,280 $136,074 
Interest-bearing deposits in banks284,389 289,255 
Cash and cash equivalents317,669 425,329 
Time deposits in banks10,216 14,464 
Securities available-for-sale, at fair value114,041 148,807 
Securities held-to-maturity, at amortized cost (fair value of $3,441 and $5,197 at September 30, 2022 and December 31, 2021, respectively)
3,764 4,946 
Loans held for sale11,015 10,671 
Loans held for investment2,582,978 1,934,460 
Allowance for loan losses(27,838)(23,243)
Loans held for investment, net of allowance for loan losses 2,555,140 1,911,217 
Federal Home Loan Bank of San Francisco (“FHLB”) stock10,890 6,723 
Operating leases, right-of-use asset ("ROUA")4,227  
Premises and equipment, net1,694 1,773 
Bank-owned life insurance ("BOLI"), net14,550 11,203 
Interest receivable and other assets31,364 21,628 
$3,074,570 $2,556,761 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest-bearing$1,020,625 $902,118 
Interest-bearing1,593,707 1,383,772 
Total deposits2,614,332 2,285,890 
Subordinated notes, net102,028 28,386 
FHLB advances105,000  
Operating lease liability4,492  
Interest payable and other liabilities9,460 7,439 
Total liabilities2,835,312 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 September 30, 2022 and December 31, 2021
  
Common stock, no par value; 100,000,000 shares authorized; 17,245,983 shares issued and outstanding at September 30, 2022; 17,224,848 shares issued and outstanding at December 31, 2021
219,286 218,444 
Retained earnings
36,042 17,168 
Accumulated other comprehensive loss, net
(16,070)(566)
Total shareholders’ equity
239,258 235,046 
$3,074,570 $2,556,761 
See accompanying notes to unaudited consolidated financial statements.
6

FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Interest and fee income
Loans, including fees$29,787 $20,086 $76,719 $57,325 
Taxable securities439 377 1,252 974 
Nontaxable securities176 194 532 627 
Interest-bearing deposits in other banks1,145 175 1,855 404 
31,547 20,832 80,358 59,330 
Interest expense
Deposits2,817 480 4,383 1,747 
FHLB advances47  52  
Subordinated notes1,259 443 2,146 1,330 
4,123 923 6,581 3,077 
Net interest income
27,424 19,909 73,777 56,253 
Provision for loan losses2,250  5,450 200 
Net interest income after provision for loan losses
25,174 19,909 68,327 56,053 
Non-interest income
Service charges on deposit accounts132 112 370 308 
Net gain on sale of securities available-for-sale 435 5 709 
Gain on sale of loans548 988 2,297 3,010 
Loan-related fees546 285 1,958 914 
FHLB stock dividends152 100 353 270 
Earnings on BOLI102 68 293 180 
Other52 40 438 99 
1,532 2,028 5,714 5,490 
Non-interest expense
Salaries and employee benefits5,645 4,980 16,873 14,616 
Occupancy and equipment515 502 1,548 1,394 
Data processing and software797 611 2,252 1,838 
Federal Deposit Insurance Corporation ("FDIC") insurance195 110 605 540 
Professional services792 505 1,914 3,348 
Advertising and promotional512 366 1,340 801 
Loan-related expenses262 462 929 909 
Other operating expenses1,454 1,105 4,491 3,579 
10,172 8,641 29,952 27,025 
Income before provision for income taxes
16,534 13,296 44,089 34,518 
Provision for income taxes
4,830 2,270 12,570 3,386 
Net income
$11,704 $11,026 $31,519 $31,132 
Basic earnings per common share$0.68 $0.64 $1.84 $2.18 
Diluted earnings per common share$0.68 $0.64 $1.84 $2.18 
See accompanying notes to unaudited consolidated financial statements.
7

FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022 202120222021
Net income
$11,704 $11,026 $31,519 $31,132 
Net unrealized holding loss on securities available-for-sale during the period
(4,718)(4)(22,005)(713)
Reclassification adjustment for net realized gains included in net income
 (435)(5)(709)
Income tax benefit related to other comprehensive loss
(1,395)(131)(6,506)(57)
Other comprehensive loss
(3,323)(308)(15,504)(1,365)
Total comprehensive income
$8,381 $10,718 $16,015 $29,767 
See accompanying notes to unaudited consolidated financial statements.
8

FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Three months ended September 30, 2022 and 2021
(Unaudited)
(In thousands, except share and per share data)
Common Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss),
Net of Taxes
Total
Shares Amount
Three months ended September 30, 2021
Balance at June 30, 202117,225,508 $218,026 $ $288 $218,314 
Net income— — 11,026 — 11,026 
Other comprehensive loss— — — (308)(308)
Stock compensation expense— 190 — — 190 
Stock forfeitures(1,700)  —  
Cash dividends paid ($0.15 per share)
— — (2,584)— (2,584)
Balance at September 30, 202117,223,808 $218,216 $8,442 $(20)$226,638 
Three months ended September 30, 2022
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— 164 — — 164 
Director stock compensation expense— 99 — — 99 
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 
See accompanying notes to unaudited consolidated financial statements.
9

FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Nine months ended September 30, 2022 and 2021
(Unaudited)
(In thousands, except share and per share data)
Common Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss),
Net of Taxes
Total
Shares Amount
Nine months ended September 30, 2021
Balance at December 31, 202011,000,273 $110,082 $22,348 $1,345 $133,775 
Net income— — 31,132 — 31,132 
Other comprehensive loss— — — (1,365)(1,365)
Stock offering6,054,750 111,243 — — 111,243 
Stock issued under stock award plans132,707 — — —  
Stock compensation expense— 402 — — 402 
Director stock compensation expense40,500 810 — — 810 
Stock forfeitures(4,422)— — —  
Reclassification of retained deficit— (4,321)4,321 —  
Cash dividends paid ($4.40 per share)
— — (49,359)— (49,359)
Balance at September 30, 202117,223,808 $218,216 $8,442 $(20)$226,638 
Nine months ended September 30, 2022
Balance at December 31, 202117,224,848 $218,444 $17,168 $(566)$235,046 
Net income— — 31,519 — 31,519 
Other comprehensive loss— — — (15,504)(15,504)
Stock issued under stock award plans23,639 — — —  
Stock compensation expense— 494 — — 494 
Director stock compensation expense— 348 — — 348 
Stock forfeitures(2,504)— — —  
Cumulative effect of adoption of Accounting Standards Codification ("ASC") 842 on retained earnings— — 68 — 68 
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 
See accompanying notes to unaudited consolidated financial statements.
10

FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2022 and 2021
(Unaudited)
(In thousands)
Nine months ended September 30,
20222021
Cash flows from operating activities:
Net income$31,519 $31,132 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses5,450 200 
Loans originated for sale(44,993)(34,211)
Gain on sale of loans(2,297)(3,010)
Proceeds from sale of loans36,275 31,954 
Net gain on sale of securities available-for-sale(5)(709)
Earnings on BOLI(293)(180)
Stock compensation expense494 402 
Director stock compensation expense348 810 
Change in deferred loan fees338 (997)
Amortization and accretion of security premiums and discounts962 1,120 
Amortization of subordinated notes issuance costs96 50 
Depreciation and amortization485 408 
Decrease in operating lease liability(729) 
Amortization of operating lease ROUA741  
Deferred tax provision13 (4,283)
Net changes in:
Interest receivable and other assets(3,240)(1,419)
Interest payable and other liabilities2,342 3,422 
Net cash provided by operating activities27,506 24,689 
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale1,623 40,772 
Maturities, prepayments, and calls of securities available-for-sale13,052 13,639 
Purchases of securities available-for-sale(1,641)(92,093)
Net change in time deposits in banks4,248 6,501 
Loan originations, net of repayments(639,040)(196,280)
Purchase of premises and equipment(406)(375)
Purchase of FHLB stock(4,223)(491)
Purchase of BOLI(3,054)(2,300)
Net cash used in investing activities(629,441)(230,627)
Cash flows from financing activities:
Net change in deposits328,442 384,393 
Proceeds from issuance of stock 111,243 
FHLB advances105,000  
Cash dividends paid(12,713)(49,359)
Proceeds from subordinated note issuance75,000  
Subordinated note issuance costs(1,454) 
Net cash provided by financing activities494,275 446,277 
Net change in cash and cash equivalents(107,660)240,339 
Cash and cash equivalents at beginning of period425,329 290,493 
Cash and cash equivalents at end of period$317,669 $530,832 
Supplemental disclosure of cash flow information:
Interest paid$1,345 $3,090 
Income taxes paid$5,200 $5,150 
11

Supplemental disclosure of noncash investing and financing activities:
Transfer from loans held for investment to loans held for sale$10,671 $4,820 
Unrealized loss on securities$(22,005)$(1,365)
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.
12

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 one loan production office in 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.
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, included 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 and nine months ended September 30, 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.
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.
13

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 endedNine months ended
(in thousands, except share and per share data)September 30,
2022
September 30,
2021
September 30,
2022
September 30,
2021
Net income$11,704 $11,026 $31,519 $31,132 
Weighted average basic common shares outstanding17,140,435 17,095,957 17,123,016 14,256,993 
Add: Dilutive effects of assumed vesting of restricted stock28,012 27,225 37,794 15,538 
Weighted average diluted common shares outstanding17,168,447 17,123,182 17,160,810 14,272,531 
Earnings per common share:
Basic EPS$0.68 $0.64 $1.84 $2.18 
Diluted EPS$0.68 $0.64 $1.84 $2.18 
The Company did not have any anti-dilutive shares at September 30, 2022 or September 30, 2021.
14

For the three months ended September 30, 2021 and the three and nine months ended September 30, 2022, pro forma EPS is actual EPS given that the Company was a C Corporation for the entirety of each period. For the nine months ended September 30, 2021, pro forma EPS is calculated by applying an effective tax rate of 23.25%, which is the actual effective tax rate, excluding the effects of the discrete deferred tax adjustment of $4.6 million, as discussed in Note 9. The following reconciliation table provides a detailed calculation of pro forma EPS:
Three months endedNine months ended
(in thousands, except share and per share data)September 30,
2022
September 30,
2021
September 30,
2022
September 30,
2021
Net income before provision for income taxes - GAAP$16,534 $13,296 $44,089 $34,518 
Less: Actual/pro forma provision for income taxes4,830 2,270 12,570 8,024 
Actual/pro forma net income$11,704 $11,026 $31,519 $26,494 
Weighted average basic common shares outstanding17,140,435 17,095,957 17,123,016 14,256,993 
Add: Dilutive effects of assumed vesting of restricted stock28,012 27,225 37,794 15,538 
Weighted average diluted common shares outstanding17,168,447 17,123,182 17,160,810 14,272,531 
Earnings per common share:
Basic EPS (actual/pro forma)$0.68 $0.64 $1.84 $1.86 
Diluted EPS (actual/pro forma)$0.68 $0.64 $1.84 $1.86 
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 have been adopted or 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 indicate 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). Among other things, ASU 2016-02 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 7, Leases, for more information.
15

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 on 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 these ASUs and continues to monitor guidance for reference rate reform from the FASB and its impact on the Company’s consolidated financial statements.
16

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). 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
September 30, 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$114,041 $ $114,041 $ OCI
Derivatives – interest rate swap21  21  NI
Liabilities:
Derivatives – interest rate swap21  21  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 $