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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 June 30, 2021

 

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)

 

California   75-3100966
(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 class Trading symbol Name of each exchange on which registered
Common stock, no par value per share FSBC 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 filer o   Accelerated filer o
Non-accelerated Filer x   Smaller reporting company x
Emerging growth company x      

 

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 August 9, 2021, there were 17,225,508 shares of the registrant’s common stock, no par value, outstanding.

1

 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION 5
     
ITEM 1. Financial Statements 5
     
  Consolidated Balance Sheets 5
     
  Consolidated Statements of Income 6
     
  Consolidated Statements of Comprehensive Income 7
     
  Consolidated Statements of Changes in Shareholders’ Equity 8
     
  Consolidated Statements of Cash Flows 10
     
  Notes to Consolidated Financial Statements 11
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
     
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 67
     
ITEM 4. Controls and Procedures 67
     
PART II OTHER INFORMATION 68
     
ITEM 1. Legal Proceedings 68
     
ITEM 1A. Risk Factors 68
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 98
     
ITEM 3. Defaults Upon Senior Securities 98
     
ITEM 4. Mine Safety Disclosures 98
     
ITEM 5. Other Information 98
     
ITEM 6. Exhibits 99
     
SIGNATURES 100

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, including the Delta variant (“COVID-19”), pandemic;

 

  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 of significant natural disasters, including fires and earthquakes;

 

  risks related to the impact of the COVID-19 pandemic on our business and operations;

 

  changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;

 

  risks related to our strategic focus on lending to small to medium-sized businesses;

 

  the sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses and the value of loan collateral and securities;

 

  our ability to attract and retain executive officers and key employees and their customer and community relationships;

 

  the risks associated with our loan portfolios, and specifically with our commercial real estate loans;

 

  our level of nonperforming assets and the costs associated with resolving problem loans, if any, and complying with government-imposed foreclosure moratoriums;

 

  our ability to maintain adequate liquidity and to maintain capital necessary to fund our growth strategy and operations and 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;

3

 

 

  our ability to implement, maintain, and improve effective internal controls; and

 

  other factors that are discussed in the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.”

 

The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this report, including those discussed in the section entitled “Risk Factors.” Additional factors that could cause results or performance to materially differ from those expressed in our forward-looking statements are detailed in the section entitled “Risk Factors” of our Registration Statement on Form S-1, which was declared effective by the U.S. Securities and Exchange Commission (“SEC”) on May 4, 2021, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, and other filings we may make with the 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

 

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
As of June 30, 2021 and December 31, 2020

(In thousands, except share and per share data)

 

    June 30, 2021     December 31,  
   

(Unaudited)

    2020  
             
ASSETS                
                 
Cash and due from financial institutions   $ 165,927     $ 46,028  
Interest-bearing deposits in banks     370,677       244,465  
Cash and cash equivalents     536,604       290,493  
                 
Time deposits in banks     19,451       23,705  
Securities – available-for-sale, at fair value     160,074       114,949  
Securities – held-to-maturity, at amortized cost (fair value of $6,858 and $8,755 at June 30, 2021 and December 31, 2020, respectively)     6,473       7,979  
Loans held for sale     2,340       4,820  
Loans, net of allowance for loan losses of $22,153 and $22,189 at June 30, 2021 and December 31, 2020, respectively     1,563,309       1,480,970  
Federal Home Loan Bank of San Francisco (“FHLB”) stock     6,723       6,232  
Premises and equipment, net of accumulated depreciation of $3,686 and $3,421 at June 30, 2021 and December 31, 2020, respectively     1,649       1,663  
Bank owned life insurance     11,074       8,662  
Interest receivable and other assets     20,170       14,292  
Assets   $ 2,327,867     $ 1,953,765  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
                 
Deposits                
Non-interest-bearing   $ 829,036     $ 695,687  
Interest-bearing     1,237,249       1,088,314  
Total deposits     2,066,285       1,784,001  
                 
Subordinated notes, net     28,353       28,320  
Interest payable and other liabilities     14,915       7,669  
Total liabilities     2,109,553       1,819,990  
                 
Commitments and contingencies (Note 10)                
                 
Shareholders’ equity                
Common stock, no par value; 50,000,000 shares authorized; 17,225,508 shares issued and outstanding as of June 30, 2021; 11,000,273 shares issued and outstanding as of December 31, 2020     218,026       110,082  
Retained earnings           22,348  
Accumulated other comprehensive income, net     288       1,345  
Total shareholders’ equity     218,314       133,775  
Liabilities and Shareholders’ Equity   $ 2,327,867     $ 1,953,765  

 

The accompanying notes are an integral part of these consolidated financial statements (unaudited). 

5

 

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except share and per share data)

 

   For the three months
ended June 30,
   For the six months
ended June 30,
 
   2021   2020   2021   2020 
Interest and dividend income                    
Loans, including fees  $18,626   $17,523   $37,239   $33,584 
Taxable securities   338    329    597    715 
Nontaxable securities   219    63    433    131 
Interest-bearing deposits in other banks   125    370    229    874 
Interest and dividend income   19,308    18,285    38,498    35,304 
Interest expense                    
Deposits   568    2,259    1,267    4,626 
Subordinated notes   444    443    887    887 
Interest expense   1,012    2,702    2,154    5,513 
                     
Net interest income   18,296    15,583    36,344    29,791 
                     
Provision for loan losses       1,550    200    4,150 
                     
Net interest income after provision for loan losses   18,296    14,033    36,144    25,641 
                     
Non-interest income                    
Service charges on deposit accounts   106    76    196    176 
Net gains on sales of securities available-for-sale   92    434    274    966 
Gain on sale of loans   1,091    802    2,022    1,441 
Loan-related fees   211    947    333    1,165 
FHLB stock dividends   92    64    170    153 
Earnings on bank-owned life insurance   60    58    112    115 
Other   194    93    355    211 
Noninterest Income   1,846    2,474    3,462    4,227 
Non-interest expense                    
Salaries and employee benefits   4,939    3,029    9,636    6,475 
Occupancy and equipment   441    412    892    792 
Data processing and software   598    452    1,227    904 
Federal deposit insurance   150    342    430    547 
Professional services   1,311    368    2,843    707 
Advertising and promotional   265    247    435    502 
Loan-related expenses   218    194    447    325 
Other operating expenses   1,658    972    2,474    1,860 
Noninterest expense   9,580    6,016    18,384    12,112 
                     
Income before provision for income taxes   10,562    10,491    21,222    17,756 
                     
Provision for income taxes   734    368    1,116    627 
                     
Net income  $9,828   $10,123   $20,106   $17,129 
                     
Basic earnings per share  $0.67   $1.05   $1.57   $1.77 
Diluted earnings per share  $0.67   $1.05   $1.57   $1.77 

 

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

6

 

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except share and per share data)

 

   For the three months
ended June 30,
   For the six months
ended June 30,
 
   2021   2020   2021   2020 
Net income  $9,828   $10,123   $20,106   $17,129 
                     
Net unrealized holding gains (losses) on securities available-for-sale during the period   903    1,464    (711)   2,213 
Reclassification adjustment for net realized gains included in net income   (92)   (434)   (274)   (966)
                     
Income tax expense related to other comprehensive income   133    37    72    45 
                     
Other comprehensive income (loss)   678    993    (1,057)   1,202 
                     
Total comprehensive income  $10,506   $11,116   $19,049   $18,331 

 

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

7

 

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

For the three months ended June 30, 2021 and 2020
(Unaudited)
(In thousands, except share and per share data)

 

                      Accumulated        
    Common Stock           Other        
                      Comprehensive        
                Retained     (Loss) Income,        
(in thousands, except share data; unaudited)   Shares     Amount     Earnings     Net of Taxes     Total  
For the three months ended June 30, 2021                                        
Balance at March 31, 2021     11,007,005     $ 110,114     $ 21,623     $ (390 )   $ 131,377  
Net income                 9,828             9,828  
Other comprehensive income                       678       678  
Stock offering     6,054,750       111,243                   111,243  
Stock issued under stock award plans     123,253                          
Stock compensation expense           150                   150  
Stock issued to directors     40,500       810                   810  
Reclassification of retained deficit           (4,321)       4,321              
Cash dividends paid ($3.25 per share)                 (35,772 )           (35,772 )
Balance at June 30, 2021     17,225,508     $ 218,026     $     $ 288     $ 218,314  
For the three months ended June 30, 2020                                        
Balance at March 31, 2020     9,683,023     $ 96,178     $ 13,023     $ 183     $ 109,384  
Net income                 10,123             10,123  
Other comprehensive income                       993       993  
Stock compensation expense           65                   65  
Cash dividends paid ($0.50 per share)                 (4,842 )           (4,842 )
Balance at June 30, 2020     9,683,023     $ 96,243     $ 18,304     $ 1,176     $ 115,723  

 

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

8

 

FIVE STAR BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the six months ended June 30, 2021 and 2020

(Unaudited)
(In thousands, except share and per share data)

 

                      Accumulated        
    Common Stock            Other        
                      Comprehensive        
                Retained     Income (Loss),        
(in thousands, except share data; unaudited)   Shares     Amount     Earnings     Net of Taxes     Total  
For the six months ended June 30, 2021                                        
Balance at December 31, 2020     11,000,273     $ 110,082     $ 22,348     $ 1,345     $ 133,775  
Net income                 20,106             20,106  
Other comprehensive loss                       (1,057 )     (1,057 )
Stock offering     6,054,750       111,243                   111,243  
Stock issued under stock award plans     132,707                          
Stock compensation expense           212                   212  
Stock issued to directors     40,500       810                   810  
Stock forfeitures     (2,722 )                        
Reclassification of retained deficit           (4,321)       4,321              
Cash dividends paid ($4.25 per share)                 (46,775 )           (46,775 )
Balance at June 30, 2021     17,225,508     $ 218,026     $     $ 288     $ 218,314  
For the six months ended June 30, 2020                                        
Balance at December 31, 2019     9,674,875     $ 96,114     $ 12,789     $ (26 )   $ 108,877  
Net income                 17,129             17,129  
Other comprehensive income                       1,202       1,202  
Stock compensation expense           129                   129  
Stock issued under stock award plans     8,148                          
Cash dividends paid ($1.20 per share)                 (11,614 )           (11,614 )
Balance at June 30, 2020     9,683,023     $ 96,243     $ 18,304     $ 1,176     $ 115,723  

 

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

9

 

FIVE STAR BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended June 30, 2021 and 2020
(Unaudited)
(In thousands, except share and per share data)

 

    June 30, 2021     June 30, 2020  
Cash Flows from Operating Activities:                
Net income   $ 20,106     $ 17,129  
Adjustments to reconcile net income to net cash provided by operating activities:                
Provision for loan losses     200       4,150  
Loans originated for sale     (22,355 )     (29,008 )
Gain on sale of loans     (2,022 )     (1,441 )
Proceeds from sales of loans     22,037       27,081  
Net gains on sales of securities available-for-sale     (274 )     (966 )
Earnings on bank owned life insurance     (112 )     (115 )
Stock compensation expense     212       129  
Director stock compensation expense     810        
Change in deferred loan fees     843       6,988  
Amortization and accretion of security premiums and discounts     736       488  
Amortization of subordinated notes issuance costs     27       33  
Depreciation and amortization     265       208  
Net changes in:                
Interest receivable and other assets     (5,950 )     (1,582 )
Interest payable and other liabilities     7,246       (286 )
Net cash provided by operating activities     21,769       22,808  
Cash Flows from Investing Activities:                
Proceeds on sale of available-for-sale securities     16,182       32,234  
Maturities, prepayments, and calls of securities available-for-sale     7,822       7,769  
Purchases of securities available-for-sale     (69,070 )     (32,641 )
Increase in time deposits in banks     4,254       8,363  
Loan originations, net of repayments     (78,562 )     (339,713 )
Purchase of premises and equipment     (245 )     (421 )
Purchase of FHLB stock     (491 )     (1,152 )
Purchase of bank owned life insurance     (2,300 )      
Net cash used in investing activities     (122,410 )     (325,561 )
Cash Flows from Financing Activities:                
Net change in deposits     282,284       647,065  
Proceeds from issuance of stock     111,243        
FHLB repayment           (25,000 )
Cash dividends paid     (46,775 )     (11,614 )
Net cash provided by financing activities     346,752       610,451  
Net change in cash and cash equivalents     246,111       307,698  
Cash and cash equivalents at beginning of period     290,493       177,366  
Cash and cash equivalents at end of period   $ 536,604     $ 485,064  
Supplemental disclosure of cash flow information:                
Interest paid   $ 2,217     $ 5,783  
Income taxes paid   $ 1,050     $ 930  
Supplemental disclosure of noncash investing and financing activities:                
Transfer from loans held for investment to loans held for sale   $ 4,820     $ 6,527  
Unrealized (loss) gains on securities   $ (1,057 )   $ 1,202  

 

The accompanying notes are an integral part of these consolidated financial statements (unaudited).

10

 

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 Board of Governors of the Federal Reserve System (“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. Its primary loan products are commercial real estate loans, land development loans, construction loans, and operating lines of credit; and its primary deposit products are checking accounts, savings accounts, money market accounts, and term certificate accounts. The Bank currently has seven branch offices in Roseville, Natomas, Rancho Cordova, Redding, Elk Grove, Chico, and Yuba City, and two loan production offices in Santa Rosa and Sacramento.

 

The Company terminated its status as a Subchapter S corporation as of May 5, 2021, in connection with the Company’s Initial Public Offering (“IPO”) and became a taxable C Corporation. Prior to that date, as an S Corporation, the Company had no U.S. federal income tax expense.

 

On April 9, 2021, the Company publicly filed a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission (“SEC”) in connection with its IPO (the “Registration Statement”), which was subsequently amended on April 26, 2021 and May 3, 2021. The Registration Statement was declared effective by the SEC on May 4, 2021. In connection with the IPO, the Company issued 6,054,750 shares of common stock, no par value, which included 789,750 shares sold pursuant to the underwriters’ exercise of their option to purchase additional shares. The securities were sold to the public at a price of $20.00 per share and began trading on the Nasdaq Stock Market LLC 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 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, 2020, and the notes thereto, as filed in the Company’s Form S-1, which was declared effective by the SEC on May 4, 2021.

 

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 six months ended June 30, 2021 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, 2021.

11

 

While the 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 is relieved of other significant requirements that are otherwise generally applicable to other public companies.

 

Use of Estimates

 

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions affect the amounts reported in the unaudited consolidated financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses is the most significant accounting estimate reflected in the Company’s consolidated financial statements.

 

Earnings Per Share (“EPS”)

 

Basic EPS is net income divided by the weighted average number of common shares outstanding during the period less average unvested restricted stock awards. Diluted EPS includes the dilutive effect of additional potential common shares related to unvested restricted stock awards using the treasury stock method. The Company has two forms of outstanding common stock: common stock and unvested restricted stock awards. Holders of unvested restricted stock awards receive non-forfeitable dividends at the same rate as common shareholders and they both share equally in undistributed earnings, and therefore are considered participating securities. However, under the two-class method, the difference in EPS is not significant for these participating securities.

 

   For the three months ended   For the six months ended 
(in thousands, except per share data)  June 30, 2021   June 30, 2020   June 30, 2021   June 30, 2020 
Net income  $9,828   $10,123   $20,106   $17,129 
Weighted average basic common shares outstanding   14,650,208    9,671,455    12,824,125    9,670,361 
Add: Dilutive effects of assumed vesting of restricted stock   17,596        8,841     
Weighted average diluted common shares outstanding   14,667,804    9,671,455    12,832,966    9,670,361 
Income per common share:                    
Basic EPS  $0.67   $1.05   $1.57   $1.77 
Diluted EPS  $0.67   $1.05   $1.57   $1.77 

 

During the three and six months ended June 30, 2021 and 2020, there were no outstanding stock options. Anti-dilutive shares, which are excluded from the dilutive EPS calculation, were deemed to be immaterial.

 

Pro forma EPS is calculated by applying a C Corporation effective tax rate of 29.56% to net income before provision for income taxes and using the determined pro forma net income balance to calculate EPS. The following reconciliation table provides a detailed calculation of pro forma EPS:

 

   For the three months ended   For the six months ended 
(in thousands, except per share data)  June 30, 2021   June 30, 2020   June 30, 2021   June 30, 2020 
Net income before provision for income taxes - GAAP  $10,562   $10,491   $21,222   $17,756 
Pro forma provision for income taxes   (3,122)   (3,101)   (6,273)   (5,249)
Pro forma net income   7,440    7,390    14,949    12,507 
Weighted average basic common shares outstanding   14,650,208    9,671,455    12,824,125    9,670,361 
Add: Dilutive effects of assumed vesting of restricted stock   17,586        8,841     
Weighted average diluted common shares outstanding   14,667,794    9,671,455    12,832,966    9,670,361 
Income per common share:                    
Basic EPS  $0.51   $0.76   $1.17   $1.29 
Diluted EPS  $0.51   $0.76   $1.16   $1.29 

 

Note 2: Recently Issued Accounting Standards

 

The following reflect recent accounting standards that are pending adoption by the Company. As discussed in Note 1, Basis of Presentation, the Company qualifies as an emerging growth company, and as such, has elected to use the extended transition period for complying with new or revised accounting standards and is not subject to the new or revised accounting standards applicable to public companies during the extended transition period. The accounting standards discussed below reflect effective dates for the Company as an emerging growth company with the extended transition period.

12

 

Accounting Standards Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The amendments in this ASU intend to increase transparency and comparability among organizations by recognizing an asset, which represents the right to use the asset for the lease term, and a lease liability, which is a lessee’s obligation to make lease payments measured on a discounted basis. This ASU generally applies to leasing arrangements exceeding a twelve-month term. As amended by ASU 2020-05, ASU 2016-02 is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2021 and requires a modified retrospective method of adoption. In July 2018, the FASB issued two amendments to ASU 2016-02: ASU No. 2018-10, Codification Improvements to Topic 842, Leases, which provides various corrections and clarifications to ASU 2016-02; and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides a new optional transition method and provides a lessor with practical expedients for separating lease and non-lease components of a lease. Entities will apply a modified retrospective approach at either the beginning of the earliest period presented or at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. The Company is currently evaluating the effect that the ASU will have on its financial condition or results of operations.

 

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. ASU 2016-13 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Entities will apply a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. While the Company believes the change from an incurred loss model to a CECL model has the potential to increase the allowance for loan losses at the adoption date, the Company cannot reasonably quantify the impact of the adoption of the amendments to its financial condition or results of operations at this time due to the complexity and extensive changes from these amendments. The Company is working with its third-party vendor to identify data gaps and determine the appropriate methodologies and resources to utilize in preparation for 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 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 will be effective for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted in any interim period. The impact of adopting this ASU is expected to be immaterial to the Company’s consolidated financial statements.

13

 

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, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities under way in global financial markets. The amendments in these ASUs may be elected as of March 12, 2020 through December 31, 2022. An entity may choose to elect the amendments in these updates at an interim period subsequent to March 12, 2020, with adoption methods varying based on transaction type. The Company has not elected to apply these amendments; however, the Company is assessing the applicability of the ASUs and continues to monitor guidance for reference rate reform from FASB and its impact on the Company’s financial condition and results of operations.

 

Note 3: Fair Value of Assets and Liabilities

 

Fair Value Hierarchy and Fair Value Measurement

 

Accounting standards require the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs).

14

 

The following table summarizes the Company’s assets and liabilities that were required to be recorded at fair value on a recurring basis.

 

(in thousands)   Carrying
Value
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
    Significant
Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
    Measurement
Categories: Changes
in Fair Value Recorded
In1
June 30, 2021                                    
Assets:                                    
Securities available-for-sale:                                    
U.S. government treasuries, U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, and collateralized mortgage obligations   $ 160,074     $     $ 160,074     $     OCI
Derivatives – interest rate swap     119             119           NI
Liabilities:                                    
Derivatives – interest rate swap     119             119           NI
                                     
December 31, 2020                                    
Assets:                                    
Securities available-for-sale:                                    
U.S. government agencies, mortgage-backed securities, obligations of states and political subdivisions, and collateralized mortgage obligations   $ 114,949     $     $ 114,949     $     OCI
Derivatives – interest rate swap     149             149           NI
Liabilities:                                    
Derivatives – interest rate swap     149             149     $     NI

 

  1 Other comprehensive income (“OCI”) or net income (“NI”).

 

Available-for-sale securities are recorded at fair value on a recurring basis. When available, quoted market prices (Level 1) are used to determine the fair value of available-for-sale securities. If quoted market prices are not available, management obtains pricing information from a reputable third-party service provider, who may utilize valuation techniques that use current market-based or independently sourced parameters, such as bid/ask prices, dealer-quoted prices, interest rates, benchmark yield curves, prepayment speeds, probability of default, loss severity, and credit spreads (Level 2). Level 2 securities include U.S. agencies or government-sponsored agencies’ debt securities, mortgage-backed securities, government agency issued bonds, privately issued collateralized mortgage obligations, and corporate bonds. As of June 30, 2021 and December 31, 2020, there were no Level 1 or Level 3 securities.

 

On a recurring basis, derivative financial instruments are recorded at fair value, which is based on the income approach using observable Level 2 market inputs, reflecting market expectations of future interest rates as of the measurement date. Standard valuation techniques are used to calculate the present value of the future expected cash flows assuming an orderly transaction. Valuation adjustments may be made to reflect both the Company’s credit risk and the counterparties’ credit risk in determining the fair value of the derivatives. A similar credit risk adjustment, correlated to the credit standing of the counterparty, is made when collateral posted by the counterparty does not fully cover their liability to the Company. For further discussion on the Company’s methodology in valuing its derivative financial instruments, refer to Note 11, Derivative Financial Instruments and Hedging Activities.

 

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 impaired loans that are collateral dependent and other real estate owned (“OREO”). As of June 30, 2021 and December 31, 2020, the Company did not carry any assets measured at fair value on a non-recurring basis.

15

 

Disclosures about Fair Value of Financial Instruments

 

The table below is a summary of fair value estimates for financial instruments as of June 30, 2021 and December 31, 2020. 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 bank-owned life insurance policies (“BOLI”).

                                         
    June 30, 2021   December 31, 2020
(in thousands)   Carrying
Amounts
    Fair
Value
    Fair Value
Hierarchy
  Carrying
Amounts
    Fair
Value
    Fair Value
Hierarchy
Financial assets (recorded at amortized cost)        
Cash and cash equivalents   $ 536,604     $ 536,604     Level 1   $ 290,493     $ 290,493     Level 1
Time deposits in banks     19,451       19,581     Level 1     23,705       23,705     Level 1
Securities – available-for-sale     160,074       160,074     Level 2     114,949       114,949     Level 2
Securities – held-to-maturity     6,473       6,858     Level 3     7,979       8,755     Level 3
Loans – held for sale     2,340       2,447     Level 2     4,820       5,012     Level 2
Loans – held for investment     1,563,309       1,525,826     Level 3     1,480,970       1,464,794     Level 3
Interest receivable     5,774       5,774     Level 3     5,422       5,422     Level 3
Financial liabilities (recorded at amortized cost)        
Deposits     2,066,285       2,050,244     Level 2     1,784,001