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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 March 31, 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 May 5, 2023, there were 17,258,737 shares of the registrant’s common stock, no par value, outstanding.


TABLE OF CONTENTS
FIVE STAR BANCORP AND SUBSIDIARY
Quarterly Report on Form 10-Q
March 31, 2023


PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)

(in thousands, except share amounts)March 31,
2023
December 31,
2022
ASSETS
Cash and due from financial institutions$26,556 $32,561 
Interest-bearing deposits in banks321,383 227,430 
Cash and cash equivalents347,939 259,991 
Time deposits in banks9,617 9,849 
Securities available-for-sale, at fair value115,140 115,988 
Securities held-to-maturity, at amortized cost (fair value of $3,323 and $3,432 at March 31, 2023 and December 31, 2022, respectively)
3,514 3,756 
Loans held for sale11,315 9,416 
Loans held for investment2,869,848 2,791,326 
Allowance for credit losses - loans(34,172)(28,389)
Loans held for investment, net of allowance for credit losses 2,835,676 2,762,937 
FHLB stock10,890 10,890 
Operating leases, right-of-use asset, net5,175 3,981 
Premises and equipment, net1,677 1,605 
Bank-owned life insurance16,771 14,669 
Interest receivable and other assets39,594 34,077 
Total assets$3,397,308 $3,227,159 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Non-interest-bearing$836,673 $971,246 
Interest-bearing2,083,733 1,810,758 
Total deposits2,920,406 2,782,004 
Borrowings:
FHLB advances120,000 100,000 
Subordinated debt, net73,640 73,606 
Operating lease liability5,433 4,243 
Interest payable and other liabilities17,173 14,481 
Total liabilities3,136,652 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 March 31, 2023 and December 31, 2022
  
Common stock, no par value; 100,000,000 shares authorized; 17,258,904 shares issued and outstanding at March 31, 2023; 17,241,926 shares issued and outstanding at December 31, 2022
219,785 219,543 
Retained earnings
52,817 46,736 
Accumulated other comprehensive loss, net
(11,946)(13,454)
Total shareholders’ equity
260,656 252,825 
Total liabilities and shareholders equity
$3,397,308 $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
March 31,
(in thousands, except per share amounts)20232022
Interest and fee income:
Loans, including fees$37,494 $22,112 
Taxable securities466 390 
Nontaxable securities184 177 
Interest-bearing deposits in other banks2,167 192 
Total interest and fee income40,311 22,871 
Interest expense:
Deposits9,378 545 
FHLB advances624  
Subordinated debt1,161 443 
Total interest expense11,163 988 
Net interest income
29,148 21,883 
Provision for credit losses900 950 
Net interest income after provision for credit losses
28,248 20,933 
Non-interest income:
Service charges on deposit accounts117 108 
Net gain on sale of securities available-for-sale 5 
Gain on sale of loans598 918 
Loan-related fees308 596 
FHLB stock dividends193 102 
Earnings on BOLI102 90 
Other53 345 
Total non-interest income1,371 2,164 
Non-interest expense:
Salaries and employee benefits6,618 5,675 
Occupancy and equipment523 520 
Data processing and software872 716 
FDIC insurance402 165 
Professional services631 554 
Advertising and promotional418 344 
Loan-related expenses255 278 
Other operating expenses1,399 1,323 
Total non-interest expense11,118 9,575 
Income before provision for income taxes
18,501 13,522 
Provision for income taxes
5,340 3,660 
Net income
$13,161 $9,862 
Basic earnings per common share$0.77 $0.58 
Diluted earnings per common share$0.77 $0.58 
See accompanying notes to unaudited consolidated financial statements.
2


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
(in thousands)2023 2022
Net income
$13,161 $9,862 
Unrealized gain (loss) on securities:
Net unrealized holding gain (loss) on securities available-for-sale during the period
2,140 (9,438)
Reclassification adjustment for net realized gains included in net income
 (5)
Income tax expense (benefit) related to items of other comprehensive income
632 (2,791)
Other comprehensive income (loss)
1,508 (6,652)
Total comprehensive income
$14,669 $3,210 
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 March 31, 2023 and 2022
(Unaudited)
Common Stock
Retained Earnings
Accumulated Other Comprehensive Income (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— — 9,862 — 9,862 
Other comprehensive loss— — — (6,652)(6,652)
Stock issued under stock award plans, net22,201 — — —  
Stock compensation expense— 277 — — 277 
Stock forfeitures(850)— — —  
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 
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— — 13,161 — 13,161 
Other comprehensive income— — — 1,508 1,508 
Stock issued under stock award plans, net16,978 — — —  
Stock compensation expense— 242 — — 242 
Cash dividends paid ($0.15 per share)
— — (2,589)— (2,589)
Balance at March 31, 202317,258,904 $219,785 $52,817 $(11,946)$260,656 
See accompanying notes to the unaudited consolidated financial statements.
4


FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
(in thousands)20232022
Cash flows from operating activities:
Net income$13,161 $9,862 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses900 950 
Depreciation and amortization419 411 
Amortization of deferred loan fees and costs(36)(365)
Amortization of premiums and discounts on securities313 358 
Amortization of subordinated debt issuance costs34 17 
Stock compensation expense242 277 
Earnings on BOLI(102)(90)
Deferred tax provision62 (2,777)
Loans originated for sale(24,006)(21,173)
Gain on sale of loans(598)(918)
Proceeds from sale of loans13,289 11,705 
Net gain on sale of securities available-for-sale (5)
Decrease in operating lease liability(233)(234)
Net changes in:
Interest receivable and other assets(4,331)1,880 
Interest payable and other liabilities1,580 3,588 
Net cash provided by operating activities694 3,486 
Cash flows from investing activities:
Proceeds from sale of securities available-for-sale 1,623 
Maturities, prepayments, and calls of securities available-for-sale2,899 4,731 
Purchases of securities available-for-sale (1,642)
Net change in time deposits in banks232  
Loan originations, net of repayments(69,450)(134,951)
Purchase of premises and equipment(240)(224)
Purchase of BOLI(2,000)(3,050)
Net cash used in investing activities(68,559)(133,513)
Cash flows from financing activities:
Net change in deposits138,402 217,202 
FHLB advances20,000  
Cash dividends paid(2,589)(7,540)
Net cash provided by financing activities155,813 209,662 
Net change in cash and cash equivalents87,948 79,635 
Cash and cash equivalents at beginning of period259,991 425,329 
Cash and cash equivalents at end of period$347,939 $504,964 
Supplemental disclosure of cash flow information:
Interest paid$471$932 
Supplemental disclosure of noncash items:
Transfer from loans held for sale to loans held for investment9,416 10,671 
Unrealized gain (loss) on securities2,140 (9,438)
Operating lease liabilities recorded in conjunction with adoption of ASC 842 5,221 
Operating lease liabilities exchanged for ROUAs1,423 — 
ROUA recorded in conjunction with adoption of ASC 842— 4,974 
ROUA acquired(1,444) 
Cumulative effect of adoption of ASC 842 on retained earnings— 68 
Cumulative effect of adoption of ASC 326 on retained earnings(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 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, 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, unless one of the following
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occurs: (i) total annual gross revenues are $1.235 billion or more; (ii) the Company issues more than $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 three 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: (1) the use of Probability of Default (“PD”) and Loss Given Default (“LGD”) assumptions under a Discounted Cash Flow model; (2) a multi-scenario macroeconomic forecast; (3) an initial and reasonable and supportable forecast period of one year for all loan segments; and (4) a reversion period of one year using a linear transition method to historical loss rates.
7


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 collectibility 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: (1) present value of future expected cash flows, discounted at the loan’s effective interest rate; (2) amount by which carrying value of the loan exceeds the loan’s observable market price; or (3) 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 March 31, 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 comprised of
8


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 allowance for credit loss upon adoption and no credit loss expense was recorded for the three months ended March 31, 2023.
TDRs
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 March 31, 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 is 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 table that follows 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.
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
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 In
March 31, 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$115,140 $ $115,140 $ OCI
Derivatives – interest rate swap16  16  NI
Liabilities:
Derivatives – interest rate swap16  16  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 March 31, 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 March 31, 2023 and December 31, 2022, the amount carried 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 March 31, 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.
March 31, 2023December 31, 2022
(in thousands)Carrying
Amounts
Fair
Value
Fair Value
Hierarchy
Carrying
Amounts
Fair
Value
Fair Value
Hierarchy
Financial assets:
Cash and cash equivalents$347,939 $347,939 Level 1$259,991 $259,991 Level 1
Time deposits in banks9,617 9,617 Level 19,849 9,849 Level 1
Securities available-for-sale115,140 115,140 Level 2115,988 115,988 Level 2
Securities held-to-maturity3,514 3,323 Level 33,756 3,432 Level 3
Loans held for sale11,315 12,500 Level 29,416 9,785 Level 2
Loans held for investment, net of allowance for credit losses2,835,676 2,657,245 Level 32,762,937 2,570,176 Level 3
FHLB stock and other investments17,652 N/AN/A16,570 N/AN/A
Interest receivable7,743 7,743 Level 27,454 7,454 Level 2
Interest rate swap16 16 Level 216 16 Level 2
Financial liabilities:
Deposits2,920,406 2,715,580 Level 22,782,004 2,562,600 Level 2
Interest payable941 941 Level 21,568 1,568 Level 2
Interest rate swap16 16 Level 216 16 Level 2
FHLB advances120,000 120,000 Level 2100,000 100,000 Level 2
Subordinated notes73,640 72,326 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 March 31, 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.
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.
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, as represented by their carrying amount. Fair values for fixed rate certificates of deposit are estimated using a
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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.
Subordinated notes: The fair value is estimated by discounting the future cash flow using the current three-month London Inter-Bank Offered Rate. 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 FNMA, FHLMC, and 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 March 31, 2023 and December 31, 2022 is presented below.
(in thousands)Gross Unrealized
Amortized
Cost
Gains(Losses)Fair
Value
March 31, 2023
Obligations of states and political subdivisions$3,514 $ $(191)$3,323 
Total held-to-maturity$3,514 $ $(191)$3,323 
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, and Note 2, Fair Value of Assets and Liabilities, for further detail.
13


A summary of the amortized cost and fair value related to securities available-for-sale as of March 31, 2023 and December 31, 2022 is presented below.
(in thousands)Amortized
Cost
Gross Unrealized Fair
Value
Gains(Losses)
March 31, 2023
U.S. government agencies$13,211 $93 $(157)$13,147 
Mortgage-backed securities71,880  (10,911)60,969 
Obligations of states and political subdivisions44,590 25 (5,744)38,871 
Collateralized mortgage obligations419  (35)384 
Corporate bonds2,000  (231)1,769 
Total available-for-sale$132,100 $118 $(17,078)$115,140 
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 
14


The amortized cost and fair value of investment debt securities by contractual maturity at March 31, 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)March 31, 2023December 31, 2022
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$354 $334 $ $ $417 $381 $501 $501 
After one but within five years950 899   1,015 927   
After five years through ten years1,375 1,300 5,818 5,307 1,470 1,343 5,320 4,761 
After ten years835 790 38,772 33,564 854 781 39,402 33,164 
Investment securities not due at a single maturity date:
U.S. government agencies  13,211 13,147   14,317 14,173 
Mortgage-backed securities  71,880 60,969   73,111 61,271 
Collateralized mortgage obligations  419 384   436 395 
Corporate bonds  2,000 1,769   2,000 1,723 
Total$3,514 $3,323 $132,100 $115,140 $3,756 $3,432 $135,087 $115,988 

15


Sales of investment securities and gross gains and losses are shown in the following table:
(in thousands)For the three months ended
March 31,
2023
March 31,
2022
Available-for-sale:
Sales proceeds$ $1,623 
Gross realized gains 5 
Pledged investment securities are shown in the following table:
(in thousands)March 31,
2023
December 31,
2022
Pledged to:
The State of California, securing deposits of public funds and borrowings$40,196 $40,465 
The Federal Reserve Discount Window, increasing borrowing capacity53,660  
Total pledged investment securities$93,856 $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 March 31, 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
March 31, 2023
U.S. government agencies$1,750 $(1)$8,785 $(156)$10,535 $(157)
Mortgage-backed securities176 (3)60,570 (10,908)60,746 (10,911)
Obligations of states and political subdivisions257 (11)37,063