RANCHO CORDOVA, Calif., Oct. 30, 2023 (GLOBE NEWSWIRE) -- Five Star Bancorp (Nasdaq: FSBC) (the "Company" or "Five Star"), the holding company for Five Star Bank (the "Bank"), today reported net income of $11.0 million for the three months ended September 30, 2023, as compared to $12.7 million for the three months ended June 30, 2023 and $11.7 million for the three months ended September 30, 2022.
Third Quarter Highlights
Performance and operating highlights for the Company for the periods noted below included the following:
| Three months ended | |||||||||||
| (in thousands, except per share and share data) | September 30, 2023 | June 30, 2023 | September 30, 2022 | ||||||||
| Return on average assets ("ROAA") | 1.30 | % | 1.55 | % | 1.60 | % | |||||
| Return on average equity ("ROAE") | 16.09 | % | 19.29 | % | 19.35 | % | |||||
| Pre-tax income | $ | 15,795 | $ | 17,169 | $ | 16,534 | |||||
| Pre-tax, pre-provision income(1) | 16,845 | 18,419 | 18,784 | ||||||||
| Net income | 11,045 | 12,729 | 11,704 | ||||||||
| Basic earnings per common share | $ | 0.64 | $ | 0.74 | $ | 0.68 | |||||
| Diluted earnings per common share | 0.64 | 0.74 | 0.68 | ||||||||
| Weighted average basic common shares outstanding | 17,175,034 | 17,165,344 | 17,140,435 | ||||||||
| Weighted average diluted common shares outstanding | 17,194,825 | 17,168,995 | 17,168,447 | ||||||||
| Shares outstanding at end of period | 17,257,357 | 17,257,357 | 17,245,983 | ||||||||
(1) See the section entitled "Non-GAAP Reconciliation (Unaudited)" for a reconciliation of this non-GAAP financial measure.
James E. Beckwith, President and Chief Executive Officer, commented on the financial results:
"Despite ongoing headwinds in the market, we maintained momentum as we continued to onboard new customers and enhance existing relationships. Pressures on deposit pricing exist, yet Five Star Bank's total loans and deposits increased in the 3rd Quarter of 2023. We remain focused on the future and our long-term strategy. As such, we expanded our presence in the San Francisco Bay Area with the onboarding of a new team of seasoned professionals, and we declared another cash dividend to shareholders, exemplifying our commitment to shareholder value.
This Quarter, we were pleased to be listed among Piper Sandler's Sm-All Stars for 2023 which recognizes outperformance in several metrics including growth, profitability, asset quality, and capital. We were also among the Sacramento Business Journal's Best Places to Work. We believe these successes serve as the strongest testimony to our people, technology, operating efficiencies, conservative underwriting practices, exceptional credit quality, and prudent approach to portfolio management. While uncertainty exists relative to recessionary concerns and a turbulent geopolitical climate, we will remain vigilant and focused on disciplined business practices. We thank our employees for their outstanding commitment to ensuring Five Star Bank remains a safe, trusted, and steadfast banking partner."
- The Company's reliance on brokered deposits and short-term FHLB borrowings decreased by $45.0 million, or 21.43%, during the three months ended September 30, 2023.
- The Company's new San Francisco Bay Area team increased to nine employees who generated $28.9 million of deposits during the third quarter ended September 30, 2023.
- Cash and cash equivalents were $323.5 million, representing 10.67% of total deposits at September 30, 2023, compared to 10.24% at June 30, 2023.
- Total deposits increased by $102.5 million, or 3.50%, during the three months ended September 30, 2023. Non-brokered deposits increased by $137.5 million, or 4.87%, over the same period.
- Consistent, disciplined management of expenses contributed to our efficiency ratio of 41.63% for the three months ended September 30, 2023.
- Net interest margin was 3.31% for the three months ended September 30, 2023, 3.45% for the three months ended June 30, 2023, and 3.86% for the three months ended September 30, 2022. The effective Federal Funds rate increased to 5.33% as of September 30, 2023, from 5.08% as of June 30, 2023 and 3.08% as of September 30, 2022.
- Other comprehensive loss was $3.0 million during the three months ended September 30, 2023. Unrealized losses, net of tax effect, on available-for-sale securities were $15.9 million as of September 30, 2023. Total held-to-maturity and available-for-sale securities represented 0.09% and 3.03% of total interest-earning assets, respectively, as of September 30, 2023.
- The Company's common equity Tier 1 capital ratio was 9.07% and 9.05% as of September 30, 2023 and June 30, 2023, respectively. The Bank continues to meet all requirements to be considered "well-capitalized" under applicable regulatory guidelines.
- Loan and deposit growth in the three months ended September 30, 2023 was as follows:
| (in thousands) | September 30, 2023 | June 30, 2023 | $ Change | % Change | ||||||||||
| Loans held for investment | $ | 3,009,930 | $ | 2,927,411 | $ | 82,519 | 2.82 | % | ||||||
| Non-interest-bearing deposits | 833,434 | 832,641 | 793 | 0.10 | % | |||||||||
| Interest-bearing deposits | 2,198,776 | 2,097,098 | 101,678 | 4.85 | % | |||||||||
| (in thousands) | September 30, 2023 | September 30, 2022 | $ Change | % Change | ||||||||||
| Loans held for investment | $ | 3,009,930 | $ | 2,582,978 | $ | 426,952 | 16.53 | % | ||||||
| Non-interest-bearing deposits | 833,434 | 1,019,063 | (185,629 | ) | (18.22 | )% | ||||||||
| Interest-bearing deposits | 2,198,776 | 1,595,269 | 603,507 | 37.83 | % | |||||||||
- The ratio of nonperforming loans to loans held for investment at period end increased to 0.07% at September 30, 2023, from 0.01% at June 30, 2023.
- The Company's Board of Directors declared, and the Company subsequently paid, a cash dividend of $0.20 per share during the three months ended September 30, 2023. The Company's Board of Directors subsequently declared another cash dividend of $0.20 per share on October 19, 2023.
Summary Results
Three months ended September 30, 2023, as compared to three months ended June 30, 2023
The Company's net income was $11.0 million for the three months ended September 30, 2023, compared to $12.7 million for the three months ended June 30, 2023. Net interest income decreased by $0.1 million as increases in interest expense more than offset increases in interest income, with increases in rates paid on interest-bearing liabilities as the leading driver. The provision for credit losses decreased by $0.2 million as loan originations in the three months ended September 30, 2023 were less than those for the three months ended June 30, 2023. Non-interest income decreased by $1.4 million, primarily due to a $1.3 million gain from distributions on investments in venture-backed funds during the three months ended June 30, 2023 that did not recur during the three months ended September 30, 2023. Non-interest expense increased by $36.0 thousand as the increase in salaries and employee benefits more than offset decreases in advertising, promotional, and other operating expenses.
Three months ended September 30, 2023, as compared to three months ended September 30, 2022
The Company's net income was $11.0 million for the three months ended September 30, 2023, compared to $11.7 million for the three months ended September 30, 2022. Net interest income decreased by $47.0 thousand as increases in interest expense more than offset increases in interest income, with increases in rates paid on interest-bearing liabilities as the leading driver. The provision for credit losses decreased by $1.2 million as loan originations in the three months ended September 30, 2023 were less than those for the three months ended September 30, 2022. Non-interest income decreased by $49.0 thousand, primarily due to a decrease in gain on sale of loans recognized during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. Non-interest expense increased by $1.8 million with an increase in salaries and employee benefits as the leading driver. The Company had 15 more full-time employees at September 30, 2023 than at September 30, 2022, nine of whom support the Company's recent expansion into the San Francisco Bay Area.
The following is a summary of the components of the Company's operating results and performance ratios for the periods indicated:
| Three months ended | |||||||||||||||
| (in thousands, except per share data) | September 30, 2023 | June 30, 2023 | $ Change | % Change | |||||||||||
| Selected operating data: | |||||||||||||||
| Net interest income | $ | 27,476 | $ | 27,578 | $ | (102 | ) | (0.37 | )% | ||||||
| Provision for credit losses | 1,050 | 1,250 | (200 | ) | (16.00 | )% | |||||||||
| Non-interest income | 1,384 | 2,820 | (1,436 | ) | (50.92 | )% | |||||||||
| Non-interest expense | 12,015 | 11,979 | 36 | 0.30 | % | ||||||||||
| Pre-tax income | 15,795 | 17,169 | (1,374 | ) | (8.00 | )% | |||||||||
| Provision for income taxes | 4,750 | 4,440 | 310 | 6.98 | % | ||||||||||
| Net income | $ | 11,045 | $ | 12,729 | $ | (1,684 | ) | (13.23 | )% | ||||||
| Earnings per common share: | |||||||||||||||
| Basic | $ | 0.64 | $ | 0.74 | $ | (0.10 | ) | (13.51 | )% | ||||||
| Diluted | 0.64 | 0.74 | (0.10 | ) | (13.51 | )% | |||||||||
| Performance and other financial ratios: | |||||||||||||||
| ROAA | 1.30 | % | 1.55 | % | |||||||||||
| ROAE | 16.09 | % | 19.29 | % | |||||||||||
| Net interest margin | 3.31 | % | 3.45 | % | |||||||||||
| Cost of funds | 2.28 | % | 2.04 | % | |||||||||||
| Efficiency ratio | 41.63 | % | 39.41 | % | |||||||||||
| Three months ended | |||||||||||||||
| (in thousands, except per share data) | September 30, 2023 | September 30, 2022 | $ Change | % Change | |||||||||||
| Selected operating data: | |||||||||||||||
| Net interest income | $ | 27,476 | $ | 27,523 | $ | (47 | ) | (0.17 | )% | ||||||
| Provision for credit losses | 1,050 | 2,250 | (1,200 | ) | (53.33 | )% | |||||||||
| Non-interest income | 1,384 | 1,433 | (49 | ) | (3.42 | )% | |||||||||
| Non-interest expense | 12,015 | 10,172 | 1,843 | 18.12 | % | ||||||||||
| Pre-tax income | 15,795 | 16,534 | (739 | ) | (4.47 | )% | |||||||||
| Provision for income taxes | 4,750 | 4,830 | (80 | ) | (1.66 | )% | |||||||||
| Net income | $ | 11,045 | $ | 11,704 | $ | (659 | ) | (5.63 | )% | ||||||
| Earnings per common share: | |||||||||||||||
| Basic | $ | 0.64 | $ | 0.68 | $ | (0.04 | ) | (5.88 | )% | ||||||
| Diluted | 0.64 | 0.68 | (0.04 | ) | (5.88 | )% | |||||||||
| Performance and other financial ratios: | |||||||||||||||
| ROAA | 1.30 | % | 1.60 | % | |||||||||||
| ROAE | 16.09 | % | 19.35 | % | |||||||||||
| Net interest margin | 3.31 | % | 3.86 | % | |||||||||||
| Cost of funds | 2.28 | % | 0.62 | % | |||||||||||
| Efficiency ratio | 41.63 | % | 35.13 | % | |||||||||||
Balance Sheet Summary
| (in thousands) | September 30, 2023 | December 31, 2022 | $ Change | % Change | |||||||||||
| Selected financial condition data: | |||||||||||||||
| Total assets | $ | 3,505,040 | $ | 3,227,159 | $ | 277,881 | 8.61 | % | |||||||
| Cash and cash equivalents | 323,548 | 259,991 | 63,557 | 24.45 | % | ||||||||||
| Total loans held for investment | 3,009,930 | 2,791,326 | 218,604 | 7.83 | % | ||||||||||
| Total investments | 107,190 | 119,744 | (12,554 | ) | (10.48 | )% | |||||||||
| Total liabilities | 3,231,016 | 2,974,334 | 256,682 | 8.63 | % | ||||||||||
| Total deposits | 3,032,210 | 2,782,004 | 250,206 | 8.99 | % | ||||||||||
| Subordinated notes, net | 73,713 | 73,606 | 107 | 0.15 | % | ||||||||||
| Total shareholders' equity | 274,024 | 252,825 | 21,199 | 8.38 | % | ||||||||||
- Insured and collateralized deposits were approximately $2.0 billion, representing approximately 66.33% of total deposits as of September 30, 2023. Net uninsured deposits were approximately $1.0 billion as of September 30, 2023.
- Commercial and consumer deposit accounts constituted approximately 75% of total deposits. Deposit relationships of at least $5 million represented approximately 62% of total deposits and had an average age of approximately 8.68 years as of September 30, 2023.
- Cash and cash equivalents as of September 30, 2023 were $323.5 million, representing 10.67% of total deposits at September 30, 2023, compared to 10.24% as of June 30, 2023.
- In the first quarter of 2023, the Federal Reserve created the Bank Term Funding Program to provide depository institutions with additional funding, which allows any federally insured deposit institution to pledge its investment portfolio at par as collateral value. As of September 30, 2023, the Bank had neither used nor established borrowing capacity with the Bank Term Funding Program.
- Total liquidity (consisting of cash and cash equivalents and unused and immediately available borrowing capacity as set forth below) was approximately $859.7 million as of September 30, 2023.
| September 30, 2023 | Available | ||||||||||||||
| (in thousands) | Line of Credit | Letters of Credit Issued | Borrowings | ||||||||||||
| FHLB advances | $ | 1,053,625 | $ | 671,500 | $ | 90,000 | $ | 292,125 | |||||||
| Federal Reserve Discount Window | 69,012 | - | - | 69,012 | |||||||||||
| Correspondent bank lines of credit | 175,000 | - | - | 175,000 | |||||||||||
| Cash and cash equivalents | - | - | - | 323,548 | |||||||||||
| Total | $ | 1,297,637 | $ | 671,500 | $ | 90,000 | $ | 859,685 | |||||||
The increase in total assets from December 31, 2022 to September 30, 2023 was primarily due to a $63.6 million increase in cash and cash equivalents and a $218.6 million increase in total loans held for investment. The increase in cash and cash equivalents primarily resulted from net cash provided from financing and operating activities of $230.7 million and $40.5 million, respectively, partially offset by net cash used in investing activities of $207.7 million. The $218.6 million increase in total loans held for investment between December 31, 2022 and September 30, 2023 was a result of $524.0 million in loan originations, partially offset by $305.4 million in loan payoffs and paydowns.
The increase in total liabilities from December 31, 2022 to September 30, 2023 was primarily attributable to an increase in deposits of $250.2 million, largely due to increases in money market, time deposits over $250 thousand, and interest-bearing demand deposits of $262.0 million, $132.8 million, and $55.0 million, respectively, partially offset by decreases in non-interest-bearing, other time deposits, and savings deposits of $135.3 million, $47.7 million, and $16.6 million, respectively.
The increase in total shareholders' equity from December 31, 2022 to September 30, 2023 was primarily a result of net income recognized of $36.9 million, partially offset by $9.5 million in cash distributions paid during the period, a reduction to retained earnings of $4.5 million, net of tax effect, due to the adoption of Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASC 326"), and an increase of $2.5 million in accumulated other comprehensive loss.
Net Interest Income and Net Interest Margin
The following is a summary of the components of net interest income for the periods indicated:
| Three months ended | ||||||||||||||
| (in thousands) | September 30, 2023 | June 30, 2023 | $ Change | % Change | ||||||||||
| Interest and fee income | $ | 45,098 | $ | 42,793 | $ | 2,305 | 5.39 | % | ||||||
| Interest expense | 17,622 | 15,215 | 2,407 | 15.82 | % | |||||||||
| Net interest income | $ | 27,476 | $ | 27,578 | $ | (102 | ) | (0.37 | )% | |||||
| Net interest margin | 3.31 | % | 3.45 | % | ||||||||||
| Three months ended | ||||||||||||||
| (in thousands) | September 30, 2023 | September 30, 2022 | $ Change | % Change | ||||||||||
| Interest and fee income | $ | 45,098 | $ | 31,646 | $ | 13,452 | 42.51 | % | ||||||
| Interest expense | 17,622 | 4,123 | 13,499 | 327.41 | % | |||||||||
| Net interest income | $ | 27,476 | $ | 27,523 | $ | (47 | ) | (0.17 | )% | |||||
| Net interest margin | 3.31 | % | 3.86 | % | ||||||||||
The following table shows the components of net interest income and net interest margin for the quarterly periods indicated:
| Three months ended | |||||||||||||||||||||||||||||||||
| September 30, 2023 | June 30, 2023 | September 30, 2022 | |||||||||||||||||||||||||||||||
| (in thousands) | Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | Average Balance | Interest Income/ Expense | Yield/ Rate | ||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||
| Interest-earning deposits with banks | $ | 198,751 | $ | 2,584 | 5.16 | % | $ | 179,894 | $ | 2,218 | 4.95 | % | $ | 210,179 | $ | 1,145 | 2.16 | % | |||||||||||||||
| Investment securities | 112,154 | 653 | 2.31 | % | 116,107 | 646 | 2.23 | % | 126,733 | 615 | 1.93 | % | |||||||||||||||||||||
| Loans held for investment and sale | 2,982,140 | 41,861 | 5.57 | % | 2,914,388 | 39,929 | 5.50 | % | 2,494,468 | 29,886 | 4.75 | % | |||||||||||||||||||||
| Total interest-earning assets | 3,293,045 | 45,098 | 5.43 | % | 3,210,389 | 42,793 | 5.35 | % | 2,831,380 | 31,646 | 4.43 | % | |||||||||||||||||||||
| Interest receivable and other assets, net | 77,757 | 75,416 | 78,112 | ||||||||||||||||||||||||||||||
| Total assets | $ | 3,370,802 | $ | 3,285,805 | $ | 2,909,492 | |||||||||||||||||||||||||||
| Liabilities and shareholders' equity | |||||||||||||||||||||||||||||||||
| Interest-bearing demand | $ | 296,230 | $ | 972 | 1.30 | % | $ | 290,404 | $ | 825 | 1.14 | % | $ | 213,926 | $ | 115 | 0.21 | % | |||||||||||||||
| Savings | 134,920 | 880 | 2.59 | % | 139,522 | 758 | 2.18 | % | 103,142 | 65 | 0.25 | % | |||||||||||||||||||||
| Money market | 1,328,290 | 9,536 | 2.85 | % | 1,283,353 | 8,136 | 2.54 | % | 1,015,698 | 1,780 | 0.69 | % | |||||||||||||||||||||
| Time | 399,514 | 4,998 | 4.96 | % | 370,864 | 4,250 | 4.60 | % | 208,678 | 857 | 1.63 | % | |||||||||||||||||||||
| Subordinated debt and other borrowings | 79,085 | 1,236 | 6.20 | % | 80,192 | 1,246 | 6.23 | % | 72,195 | 1,306 | 7.18 | % | |||||||||||||||||||||
| Total interest-bearing liabilities | 2,238,039 | 17,622 | 3.12 | % | 2,164,335 | 15,215 | 2.82 | % | 1,613,639 | 4,123 | 1.01 | % | |||||||||||||||||||||
| Demand accounts | 825,254 | 828,748 | 1,041,222 | ||||||||||||||||||||||||||||||
| Interest payable and other liabilities | 35,123 | 28,034 | 14,687 | ||||||||||||||||||||||||||||||
| Shareholders' equity | 272,386 | 264,688 | 239,944 | ||||||||||||||||||||||||||||||
| Total liabilities & shareholders' equity | $ | 3,370,802 | $ | 3,285,805 | $ | 2,909,492 | |||||||||||||||||||||||||||
| Net interest spread | 2.31 | % | 2.53 | % | 3.42 | % | |||||||||||||||||||||||||||
| Net interest income/margin | $ | 27,476 | 3.31 | % | $ | 27,578 | 3.45 | % | $ | 27,523 | 3.86 | % | |||||||||||||||||||||
Net interest income during the three months ended September 30, 2023 decreased $0.1 million as compared to the three months ended June 30, 2023. In addition, net interest margin decreased 14 basis points compared to the prior quarter. The decrease in net interest income is primarily attributable to an additional $2.4 million in deposit interest expense due to increases in interest rates as compared to the prior quarter. The cost of interest-bearing deposits increased 32 basis points as compared to the prior quarter, while average balances increased 3.59%. In addition, the average balance of non-interest-bearing deposits decreased by $3.5 million quarter-over-quarter. The increase to interest expense was partially offset by an increase in total interest income of $2.3 million. Average loan yields increased 7 basis points as compared to the prior quarter, while average balances increased 2.32%.
As compared to the three months ended September 30, 2022, net interest income decreased $47.0 thousand and net interest margin decreased 55 basis points. The decrease in net interest income is primarily attributable to an additional $13.6 million in deposit interest expense due to increases in interest rates and average balances as compared to the same quarter of the prior year. The cost of interest-bearing deposits increased 228 basis points as compared to the same quarter of the prior year, while average balances increased 40.06%. In addition, the average balance of non-interest-bearing deposits decreased by $216.0 million as compared to the same quarter of the prior year. The increase in deposit interest expense was partially offset by an increase in total interest income of $13.5 million, as compared to the same quarter of the prior year. Average loan yields increased 82 basis points as compared to the same quarter of the prior year, while average balances increased 19.55%.
Loans by Type
The following table provides loan balances, excluding deferred loan fees, by type as of September 30, 2023:
| (in thousands) | |||
| Commercial Term Real Estate Non-Owner Occupied | $ | 1,115,896 | |
| Commercial Term Multifamily | 991,360 | ||
| Commercial Term Real Estate Owner Occupied | 482,629 | ||
| Commercial Construction Real Estate | 95,352 | ||
| Commercial Secured | 88,589 | ||
| SBA 7A Secured | 49,177 | ||
| Commercial Term Agricultural Real Estate | 51,921 | ||
| Others | 137,271 | ||
| Total loans, excluding deferred loan fees | $ | 3,012,195 | |
Interest-bearing Deposits
The following table provide interest-bearing deposit balances by type as of September 30, 2023:
| (in thousands) | |||
| Interest-bearing demand accounts | $ | 297,678 | |
| Money market accounts | 1,335,545 | ||
| Savings accounts | 138,029 | ||
| Time accounts | 427,524 | ||
| Total interest-bearing deposits | $ | 2,198,776 | |
Asset Quality
Allowance for Credit Losses - Loans
Beginning January 1, 2023, the Company adopted ASC 326, which replaced the former "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the Current Expected Credit Loss ("CECL") model. Utilizing CECL may have an impact on our allowance for credit losses going forward and result in a lack of comparability between 2022 and 2023 quarterly periods. Refer to information below on the provision for credit losses recorded during the nine months ended September 30, 2023.
At September 30, 2023, the Company's allowance for credit losses was $34.0 million, as compared to $28.4 million at December 31, 2022. The $5.6 million increase in the allowance is due to a $5.3 million adjustment recorded in connection with the adoption of CECL and a $2.9 million provision for credit losses recorded during the nine months ended September 30, 2023, partially offset by net charge-offs of $2.5 million, mainly attributable to commercial and industrial loans, during the same period.
The Company's ratio of nonperforming loans to loans held for investment increased from 0.01% at December 31, 2022 to 0.07% at September 30, 2023. The provision for credit losses recorded during the nine months ended September 30, 2023 was primarily related to loan growth, loan type mix, and updates in the macroeconomic environment. Loans designated as substandard increased from $0.4 million to $2.0 million between December 31, 2022 and September 30, 2023. There were no loans with doubtful risk grades at September 30, 2023 or December 31, 2022.
A summary of the allowance for credit losses by loan class is as follows:
| September 30, 2023 | December 31, 2022 | |||||||||||||
| (in thousands) | Amount | % of Total | Amount | % of Total | ||||||||||
| Real estate: | ||||||||||||||
| Commercial | $ | 27,901 | 82.00 | % | $ | 19,216 | 67.69 | % | ||||||
| Commercial land and development | 198 | 0.58 | % | 54 | 0.19 | % | ||||||||
| Commercial construction | 1,220 | 3.59 | % | 645 | 2.27 | % | ||||||||
| Residential construction | 115 | 0.34 | % | 49 | 0.17 | % | ||||||||
| Residential | 151 | 0.44 | % | 175 | 0.62 | % | ||||||||
| Farmland | 393 | 1.15 | % | 644 | 2.27 | % | ||||||||
| 29,978 | 88.10 | % | 20,783 | 73.21 | % | |||||||||
| Commercial: | ||||||||||||||
| Secured | 3,461 | 10.17 | % | 7,098 | 25.00 | % | ||||||||
| Unsecured | 213 | 0.63 | % | 116 | 0.41 | % | ||||||||
| 3,674 | 10.80 | % | 7,214 | 25.41 | % | |||||||||
| Consumer and other | 376 | 1.10 | % | 347 | 1.22 | % | ||||||||
| Unallocated | - | - | % | 45 | 0.16 | % | ||||||||
| Total allowance for credit losses | $ | 34,028 | 100.00 | % | $ | 28,389 | 100.00 | % | ||||||
The ratio of allowance for credit losses to loans held for investment was 1.13% at September 30, 2023, as compared to 1.02% at December 31, 2022.
Non-interest Income
The following table presents the key components of non-interest income for the periods indicated:
| Three months ended | |||||||||||||||
| (in thousands) | September 30, 2023 | June 30, 2023 | $ Change | % Change | |||||||||||
| Service charges on deposit accounts | $ | 158 | $ | 135 | $ | 23 | 17.04 | % | |||||||
| Gain on sale of loans | 396 | 641 | (245 | ) | (38.22 | )% | |||||||||
| Loan-related fees | 355 | 389 | (34 | ) | (8.74 | )% | |||||||||
| FHLB stock dividends | 274 | 189 | 85 | 44.97 | % | ||||||||||
| Earnings on bank-owned life insurance | 127 | 126 | 1 | 0.79 | % | ||||||||||
| Other income | 74 | 1,340 | (1,266 | ) | (94.48 | )% | |||||||||
| Total non-interest income | $ | 1,384 | $ | 2,820 | $ | (1,436 | ) | (50.92 | )% | ||||||
Gain on sale of loans. The decrease in gain on sale of loans primarily resulted from an overall decline in the volume of loans sold during the three months ended September 30, 2023, compared to the three months ended June 30, 2023. During the three months ended September 30, 2023, approximately $7.0 million of loans were sold with an effective yield of 5.63%, as compared to approximately $10.9 million of loans sold with an effective yield of 5.89% during the three months ended June 30, 2023.
FHLB stock dividends. The increase in FHLB stock dividends was primarily due to increased yields from dividends received of 7.75% for the three months ended September 30, 2023, as compared to 7.00% for the three months ended June 30, 2023.
Other income. The decrease in other income resulted primarily from a $1.3 million gain recorded for distributions received from venture-backed fund investments during the three months ended June 30, 2023, which did not recur during the three months ended September 30, 2023.
The following table presents the key components of non-interest income for the periods indicated:
| Three months ended | |||||||||||||||
| (in thousands) | September 30, 2023 | September 30, 2022 | $ Change | % Change | |||||||||||
| Service charges on deposit accounts | $ | 158 | $ | 132 | $ | 26 | 19.70 | % | |||||||
| Gain on sale of loans | 396 | 548 | (152 | ) | (27.74 | )% | |||||||||
| Loan-related fees | 355 | 447 | (92 | ) | (20.58 | )% | |||||||||
| FHLB stock dividends | 274 | 152 | 122 | 80.26 | % | ||||||||||
| Earnings on bank-owned life insurance | 127 | 102 | 25 | 24.51 | % | ||||||||||
| Other income | 74 | 52 | 22 | 42.31 | % | ||||||||||
| Total non-interest income | $ | 1,384 | $ | 1,433 | $ | (49 | ) | (3.42 | )% | ||||||
Gain on sale of loans. The decrease in gain on sale of loans related primarily to an overall decline in the volume of loans sold during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022. During the three months ended September 30, 2023, approximately $7.0 million of loans were sold with an effective yield of 5.63%, as compared to approximately $10.5 million of loans sold with an effective yield of 5.20% during the three months ended September 30, 2022.
FHLB stock dividends. The increase in FHLB stock dividends was primarily due to increased yields from dividends received of 7.75% for the three months ended September 30, 2023, as compared to 6.00% for the three months ended September 30, 2022.
Non-interest Expense
The following table presents the key components of non-interest expense for the periods indicated:
| Three months ended | |||||||||||||||
| (in thousands) | September 30, 2023 | June 30, 2023 | $ Change | % Change | |||||||||||
| Salaries and employee benefits | $ | 6,876 | $ | 6,421 | $ | 455 | 7.09 | % | |||||||
| Occupancy and equipment | 561 | 551 | 10 | 1.81 | % | ||||||||||
| Data processing and software | 1,020 | 1,013 | 7 | 0.69 | % | ||||||||||
| Federal Deposit Insurance Corporation ("FDIC") insurance | 375 | 410 | (35 | ) | (8.54 | )% | |||||||||
| Professional services | 700 | 586 | 114 | 19.45 | % | ||||||||||
| Advertising and promotional | 535 | 733 | (198 | ) | (27.01 | )% | |||||||||
| Loan-related expenses | 345 | 324 | 21 | 6.48 | % | ||||||||||
| Other operating expenses | 1,603 | 1,941 | (338 | ) | (17.41 | )% | |||||||||
| Total non-interest expense | $ | 12,015 | $ | 11,979 | $ | 36 | 0.30 | % | |||||||
Salaries and employee benefits. The increase in salaries and employee benefits was primarily a result of: (i) a $0.6 million decline in loan origination costs related to lower production and (ii) a $0.2 million increase in salaries and benefits for new employees hired to support expansion into the San Francisco Bay Area. These increases were partially offset by a $0.3 million reduction in commissions related to lower loan production during the three months ended September 30, 2023, as compared to the three months ended June 30, 2023.
Professional services. The increase was related primarily to expenses incurred of $0.1 million for surveillance rating services performed for the Company's outstanding subordinated notes during the three months ended September 30, 2023.
Advertising and promotional. The decrease related primarily to an overall decline in sponsorships and donations made, as fewer events were sponsored and attended during the three months ended September 30, 2023, as compared to the three months ended June 30, 2023.
Other operating expenses. The decrease in other operating expenses was primarily due to an overall decline in travel, conference fees, and professional membership fees during the three months ended September 30, 2023, as compared to the three months ended June 30, 2023.
The following table presents the key components of non-interest expense for the periods indicated:
| Three months ended | |||||||||||||||
| (in thousands) | September 30, 2023 | September 30, 2022 | $ Change | % Change | |||||||||||
| Salaries and employee benefits | $ | 6,876 | $ | 5,645 | $ | 1,231 | 21.81 | % | |||||||
| Occupancy and equipment | 561 | 515 | 46 | 8.93 | % | ||||||||||
| Data processing and software | 1,020 | 797 | 223 | 27.98 | % | ||||||||||
| FDIC insurance | 375 | 195 | 180 | 92.31 | % | ||||||||||
| Professional services | 700 | 792 | (92 | ) | (11.62 | )% | |||||||||
| Advertising and promotional | 535 | 512 | 23 | 4.49 | % | ||||||||||
| Loan-related expenses | 345 | 262 | 83 | 31.68 | % | ||||||||||
| Other operating expenses | 1,603 | 1,454 | 149 | 10.25 | % | ||||||||||
| Total non-interest expense | $ | 12,015 | $ | 10,172 | $ | 1,843 | 18.12 | % | |||||||
Salaries and employee benefits. The increase in salaries and employee benefits was primarily a result of: (i) a $0.8 million increase in salaries, insurance, and benefits as a result of a 8.72% increase in headcount during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022 and (ii) a $0.8 million decrease in loan origination costs due to lower loan production period-over-period. These increases were partially offset by $0.4 million of lower commission expenses due to lower loan production during the three months ended September 30, 2023, as compared to the three months ended September 30, 2022.
Data processing and software. The increase in data processing and software was primarily due to: (i) increased usage of our digital banking platform; (ii) higher transaction volumes related to the increased number of loan and deposit accounts; and (iii) an increased number of licenses required for new users on our loan origination and documentation system.
FDIC insurance. The increase related primarily to a final rule adopted by the FDIC to increase initial base deposit insurance assessment rates for insured depository institutions by two basis points, beginning with the first quarterly assessment period of 2023. FDIC insurance also increased for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, due to a $320.8 million increase in the assessment base period-over-period.
Other operating expenses. The increase in other operating expenses was primarily due to a $0.1 million increase in IntraFi Network fees resulting from an overall increase in balances carried in the network. The remainder of the increase related to an overall increase in travel, conference fees, and professional membership fees during the three months September 30, 2023, as compared to the three months ended September 30, 2022.
Provision for Income Taxes
Three months ended September 30, 2023, as compared to three months ended June 30, 2023
Provision for income taxes increased by $0.4 million, or 6.98%, to $4.8 million for the three months ended September 30, 2023 from $4.4 million for the three months ended June 30, 2023. During the three months ended June 30, 2023, the Company recorded a $0.5 million state tax benefit relating to an overall reduction in the state tax blended rate for the Company since its inception as a C Corporation, which did not recur during the three months ended September 30, 2023. This increase was partially offset by lower pre-tax income quarter-over-quarter and a $0.2 million adjustment to the provision recorded during the three months ended September 30, 2023 to true-up the year to date provision's effective tax rate. The effective tax rate was 30.07% and 25.86% for the three months ended September 30, 2023 and June 30, 2023, respectively.
Three months ended September 30, 2023, as compared to three months ended September 30, 2022
Provision for income taxes decreased by $0.1 million, or 1.66%, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily driven by an overall decrease in pre-tax income and a lower state tax rate period-over-period. These declines were partially offset by a $0.2 million adjustment to the provision recorded during the three months ended September 30, 2023 to true-up the year to date provision's effective tax rate. The effective tax rate was 30.07% and 29.21% for the three months ended September 30, 2023 and September 30, 2022, respectively.
Webcast Details
Five Star Bancorp will host a live webcast for analysts and investors on Tuesday, October 31, 2023 at 1:00 p.m. ET (10:00 a.m. PT) to discuss its third quarter financial results. To view the live webcast, visit the "News & Events" section of the Company's website under "Events" at https://investors.fivestarbank.com/news-events/events. The webcast will be archived on the Company's website for a period of 90 days.
About Five Star Bancorp
Five Star is a bank holding company headquartered in Rancho Cordova, California. Five Star operates through its wholly owned banking subsidiary, Five Star Bank. The Bank has seven branches and one loan production office in Northern California.
Forward-Looking Statements
This press release 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 the Company's 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. The Company cautions that the forward-looking statements are based largely on the Company's 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 the Company's control. Such forward-looking statements are based on various assumptions (some of which may be beyond the Company's 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. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how they will affect the Company. If one or more of the factors affecting the Company's forward-looking information and statements proves incorrect, then the Company's actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this press release. Therefore, the Company cautions you not to place undue reliance on the Company's forward-looking information and statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2022 and Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, in each case under the section entitled "Risk Factors," and other documents filed by the Company with the Securities and Exchange Commission from time to time.
The Company disclaims 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.
Condensed Financial Data (Unaudited)
| Three months ended | ||||||||||||
| (in thousands, except per share and share data) | September 30, 2023 | June 30, 2023 | September 30, 2022 | |||||||||
| Revenue and Expense Data | ||||||||||||
| Interest and fee income | $ | 45,098 | $ | 42,793 | $ | 31,646 | ||||||
| Interest expense | 17,622 | 15,215 | 4,123 | |||||||||
| Net interest income | 27,476 | 27,578 | 27,523 | |||||||||
| Provision for credit losses | 1,050 | 1,250 | 2,250 | |||||||||
| Net interest income after provision | 26,426 | 26,328 | 25,273 | |||||||||
| Non-interest income: | ||||||||||||
| Service charges on deposit accounts | 158 | 135 | 132 | |||||||||
| Gain on sale of loans | 396 | 641 | 548 | |||||||||
| Loan-related fees | 355 | 389 | 447 | |||||||||
| FHLB stock dividends | 274 | 189 | 152 | |||||||||
| Earnings on bank-owned life insurance | 127 | 126 | 102 | |||||||||
| Other income | 74 | 1,340 | 52 | |||||||||
| Total non-interest income | 1,384 | 2,820 | 1,433 | |||||||||
| Non-interest expense: | ||||||||||||
| Salaries and employee benefits | 6,876 | 6,421 | 5,645 | |||||||||
| Occupancy and equipment | 561 | 551 | 515 | |||||||||
| Data processing and software | 1,020 | 1,013 | 797 | |||||||||
| FDIC insurance | 375 | 410 | 195 | |||||||||
| Professional services | 700 | 586 | 792 | |||||||||
| Advertising and promotional | 535 | 733 | 512 | |||||||||
| Loan-related expenses | 345 | 324 | 262 | |||||||||
| Other operating expenses | 1,603 | 1,941 | 1,454 | |||||||||
| Total non-interest expense | 12,015 | 11,979 | 10,172 | |||||||||
| Income before provision for income taxes | 15,795 | 17,169 | 16,534 | |||||||||
| Provision for income taxes | 4,750 | 4,440 | 4,830 | |||||||||
| Net income | $ | 11,045 | $ | 12,729 | $ | 11,704 | ||||||
| Comprehensive Income | ||||||||||||
| Net income | $ | 11,045 | $ | 12,729 | $ | 11,704 | ||||||
| Net unrealized holding loss on securities available-for-sale during the period | (4,195 | ) | (1,462 | ) | (4,718 | ) | ||||||
| Income tax benefit related to other comprehensive loss | (1,240 | ) | (432 | ) | (1,395 | ) | ||||||
| Other comprehensive loss | (2,955 | ) | (1,030 | ) | (3,323 | ) | ||||||
| Total comprehensive income | $ | 8,090 | $ | 11,699 | $ | 8,381 | ||||||
| Share and Per Share Data | ||||||||||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 0.64 | $ | 0.74 | $ | 0.68 | ||||||
| Diluted | 0.64 | 0.74 | 0.68 | |||||||||
| Book value per share | 15.88 | 15.60 | 13.87 | |||||||||
| Tangible book value per share(1) | 15.88 | 15.60 | 13.87 | |||||||||
| Weighted average basic common shares outstanding | 17,175,034 | 17,165,344 | 17,140,435 | |||||||||
| Weighted average diluted common shares outstanding | 17,194,825 | 17,168,995 | 17,168,447 | |||||||||
| Shares outstanding at end of period | 17,257,357 | 17,257,357 | 17,245,983 | |||||||||
| Credit Quality | ||||||||||||
| Allowance for credit losses to period end nonperforming loans | 1,699.35 | % | 11,839.25 | % | 6,483.87 | % | ||||||
| Nonperforming loans to loans held for investment | 0.07 | % | 0.01 | % | 0.02 | % | ||||||
| Nonperforming assets to total assets | 0.06 | % | 0.01 | % | 0.01 | % | ||||||
| Nonperforming loans plus performing loan modifications to loans held for investment | 0.07 | % | 0.01 | % | 0.02 | % | ||||||
| Selected Financial Ratios | ||||||||||||
| ROAA | 1.30 | % | 1.55 | % | 1.60 | % | ||||||
| ROAE | 16.09 | % | 19.29 | % | 19.35 | % | ||||||
| Net interest margin | 3.31 | % | 3.45 | % | 3.86 | % | ||||||
| Loan to deposit | 99.57 | % | 100.21 | % | 99.22 | % | ||||||
(1) See the section entitled "Non-GAAP Reconciliation (Unaudited)" for a reconciliation of this non-GAAP financial measure.
| (in thousands) | September 30, 2023 | June 30, 2023 | September 30, 2022 | |||||||||
| Balance Sheet Data | ||||||||||||
| Cash and due from financial institutions | $ | 26,744 | $ | 28,568 | $ | 33,280 | ||||||
| Interest-bearing deposits in banks | 296,804 | 271,555 | 284,389 | |||||||||
| Time deposits in banks | 6,971 | 7,343 | 10,216 | |||||||||
| Securities - available-for-sale, at fair value | 104,086 | 110,794 | 114,041 | |||||||||
| Securities - held-to-maturity, at amortized cost | 3,104 | 3,486 | 3,764 | |||||||||
| Loans held for sale | 9,326 | 8,559 | 11,015 | |||||||||
| Loans held for investment | 3,009,930 | 2,927,411 | 2,582,978 | |||||||||
| Allowance for credit losses - loans | (34,028 | ) | (33,984 | ) | (27,838 | ) | ||||||
| Loans held for investment, net of allowance for credit losses | 2,975,902 | 2,893,427 | 2,555,140 | |||||||||
| FHLB stock | 15,000 | 15,000 | 10,890 | |||||||||
| Operating leases, right-of-use asset | 4,799 | 5,032 | 4,227 | |||||||||
| Premises and equipment, net | 1,564 | 1,599 | 1,694 | |||||||||
| Bank-owned life insurance | 17,023 | 16,897 | 14,550 | |||||||||
| Interest receivable and other assets | 43,717 | 40,441 | 31,364 | |||||||||
| Total assets | $ | 3,505,040 | $ | 3,402,701 | $ | 3,074,570 | ||||||
| Non-interest-bearing deposits | $ | 833,434 | $ | 832,641 | $ | 1,019,063 | ||||||
| Interest-bearing deposits | 2,198,776 | 2,097,098 | 1,595,269 | |||||||||
| Total deposits | 3,032,210 | 2,929,739 | 2,614,332 | |||||||||
| Subordinated notes, net | 73,713 | 73,677 | 102,028 | |||||||||
| FHLB advances | 90,000 | 100,000 | 105,000 | |||||||||
| Operating lease liability | 5,043 | 5,275 | 4,492 | |||||||||
| Interest payable and other liabilities | 30,050 | 24,870 | 9,460 | |||||||||
| Total liabilities | 3,231,016 | 3,133,561 | 2,835,312 | |||||||||
| Common stock | 220,266 | 220,021 | 219,286 | |||||||||
| Retained earnings | 69,689 | 62,095 | 36,042 | |||||||||
| Accumulated other comprehensive loss, net | (15,931 | ) | (12,976 | ) | (16,070 | ) | ||||||
| Total shareholders' equity | 274,024 | 269,140 | 239,258 | |||||||||
| Total liabilities and shareholders' equity | $ | 3,505,040 | $ | 3,402,701 | $ | 3,074,570 | ||||||
| Quarterly Average Balance Data | ||||||||||||
| Average loans held for investment and sale | $ | 2,982,140 | $ | 2,914,388 | $ | 2,494,468 | ||||||
| Average interest-earning assets | 3,293,045 | 3,210,389 | 2,831,380 | |||||||||
| Average total assets | 3,370,802 | 3,285,805 | 2,909,492 | |||||||||
| Average deposits | 2,984,208 | 2,912,891 | 2,582,666 | |||||||||
| Average total equity | 272,386 | 264,688 | 239,944 | |||||||||
| Capital Ratios | ||||||||||||
| Total shareholders' equity to total assets | 7.82 | % | 7.91 | % | 7.78 | % | ||||||
| Tangible shareholders' equity to tangible assets(1) | 7.82 | % | 7.91 | % | 7.78 | % | ||||||
| Total capital (to risk-weighted assets) | 12.37 | % | 12.43 | % | 13.94 | % | ||||||
| Tier 1 capital (to risk-weighted assets) | 9.07 | % | 9.05 | % | 9.21 | % | ||||||
| Common equity Tier 1 capital (to risk-weighted assets) | 9.07 | % | 9.05 | % | 9.21 | % | ||||||
| Tier 1 leverage ratio | 8.58 | % | 8.66 | % | 8.66 | % | ||||||
(1) See the section entitled "Non-GAAP Reconciliation (Unaudited)" for a reconciliation of this non-GAAP financial measure.
Non-GAAP Reconciliation (Unaudited)
The Company uses financial information in its analysis of the Company's performance that is not in conformity with accounting principles generally accepted in the United States of America ("GAAP"). The Company believes that these non-GAAP financial measures provide useful information to management and investors that is supplementary to the Company's financial condition, results of operations, and cash flows computed in accordance with GAAP. However, the Company acknowledges that its non-GAAP financial measures have a number of limitations. As such, investors should not view these disclosures as a substitute for results determined in accordance with GAAP. Additionally, these non-GAAP measures are not necessarily comparable to non-GAAP financial measures that other banking companies use. Other banking companies may use names similar to those the Company uses for the non-GAAP financial measures the Company discloses, but may calculate them differently. Investors should understand how the Company and other companies each calculate their non-GAAP financial measures when making comparisons.
Tangible shareholders' equity to tangible assets is defined as total equity less goodwill and other intangible assets, divided by total assets less goodwill and other intangible assets. The most directly comparable GAAP financial measure is total shareholders' equity to total assets. We had no goodwill or other intangible assets at the end of any period indicated. As a result, tangible shareholders' equity to tangible assets is the same as total shareholders' equity to total assets at the end of each of the periods indicated.
Tangible book value per share is defined as total shareholders' equity less goodwill and other intangible assets, divided by the outstanding number of common shares at the end of the period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets at the end of any period indicated. As a result, tangible book value per share is the same as book value per share at the end of each of the periods indicated.
Pre-tax, pre-provision income is defined as pre-tax income plus provision for credit losses. The most directly comparable GAAP financial measure is pre-tax income.
The following reconciliation table provides a more detailed analysis of this non-GAAP financial measure:
| Three months ended | ||||||||||||
| (in thousands) | September 30, 2023 | June 30, 2023 | September 30, 2022 | |||||||||
| Pre-tax, pre-provision income | ||||||||||||
| Pre-tax income | $ | 15,795 | $ | 17,169 | $ | 16,534 | ||||||
| Add: provision for credit losses | 1,050 | 1,250 | 2,250 | |||||||||
| Pre-tax, pre-provision income | $ | 16,845 | $ | 18,419 | $ | 18,784 | ||||||
Media Contact:
Heather C. Luck, Chief Financial Officer
Five Star Bancorp
(916) 626-5008
hluck@fivestarbank.com
Shelley R. Wetton, Chief Marketing Officer
Five Star Bancorp
(916) 284-7827
swetton@fivestarbank.com
