RANCHO CORDOVA, Calif., July 25, 2022 (GLOBE NEWSWIRE) — Five Star Bancorp (Nasdaq: FSBC) (the “Company” or “Five Star”), the holding company for Five Star Bank, today reported net income of $10.0 million for the three months ended June 30, 2022, as compared to $9.9 million for the three months ended March 31, 2022 and $9.8 million for the three months ended June 30, 2021.
Financial Highlights
During the second quarter of 2021, the Company terminated its status as a “Subchapter S” corporation in connection with its initial public offering (“IPO”). As such, results presented for the three months ended June 30, 2022 and March 31, 2022 were calculated using the actual effective tax rates of 29.07% and 27.07%, respectively, while the results for the three months ended June 30, 2021 have been calculated using a weighted average tax rate of 20.77%, as noted in the section titled "Provision for Income Taxes" herein, which represents the weighted average rate between the S Corporation tax rate of 3.50% and the C Corporation tax rate of 29.56% based on the number of days the Company was each type of corporation during the period. Performance highlights and other developments for the Company for the periods noted below included the following:
- Pre-tax net income, pre-tax, pre-provision net income, and earnings per share were as follows for the periods indicated:
| Three months ended | ||||||||
| June 30, 2022 |
March 31, 2022 |
June 30, 2021 |
||||||
| Pre-tax net income | 14,033 | 13,522 | 10,562 | |||||
| Pre-tax, pre-provision net income(1) | $ | 16,283 | $ | 14,472 | $ | 10,562 | ||
| Basic earnings per common share | $ | 0.58 | $ | 0.58 | $ | 0.67 | ||
| Diluted earnings per common share | $ | 0.58 | $ | 0.58 | $ | 0.67 | ||
| Weighted average basic common shares outstanding | 17,125,715 | 17,102,508 | 14,650,208 | |||||
| Weighted average diluted common shares outstanding | 17,149,449 | 17,164,519 | 14,667,804 | |||||
| Shares outstanding at end of period | 17,245,983 | 17,246,199 | 17,225,508 | |||||
(1) See the section entitled “Non-GAAP Reconciliation (Unaudited)” for a reconciliation of this non-GAAP financial measure.
- Loan and deposit growth was as follows at the dates indicated:
| (dollars in thousands) | June 30, 2022 |
March 31, 2022 |
$ Change | % Change | ||||||||
| Loans held for investment | $ | 2,380,511 | $ | 2,080,158 | $ | 300,353 | 14.44 | % | ||||
| Loans held for investment, excluding Paycheck Protection Program (“PPP”) loans(1) | 2,380,511 | 2,078,630 | 301,881 | 14.52 | % | |||||||
| PPP loans | — | 1,528 | (1,528 | ) | (100.00 | )% | ||||||
| PPP deferred fees | — | 42 | (42 | ) | (100.00 | )% | ||||||
| Non-interest-bearing deposits | 1,006,066 | 941,285 | 64,781 | 6.88 | % | |||||||
| Interest-bearing deposits | 1,495,245 | 1,561,807 | (66,562 | ) | (4.26 | )% | ||||||
| (dollars in thousands) | June 30, 2022 |
June 30, 2021 |
$ Change | % Change | ||||||||
| Loans held for investment | $ | 2,380,511 | $ | 1,585,462 | $ | 795,049 | 50.15 | % | ||||
| Loans held for investment, excluding PPP loans(1) | 2,380,511 | 1,464,526 | 915,985 | 62.54 | % | |||||||
| PPP loans | — | 120,936 | (120,936 | ) | (100.00 | )% | ||||||
| PPP deferred fees | — | 3,534 | (3,534 | ) | (100.00 | )% | ||||||
| Non-interest-bearing deposits | 1,006,066 | 834,672 | 171,394 | 20.53 | % | |||||||
| Interest-bearing deposits | 1,495,245 | 1,231,613 | 263,632 | 21.41 | % | |||||||
(1) Loans held for investment, excluding PPP loans is a non-GAAP measure. For reconciliation to the closest GAAP measure, loans held for investment, see table above.
- PPP income recognized for the three months ended June 30, 2022 totaled $24.0 thousand, as compared to $0.6 million for the three months ended March 31, 2022 and $1.4 million for the three months ended June 30, 2021.
- At June 30, 2022, the Company reported total loans held for investment, total assets, and total deposits of $2.4 billion, $2.8 billion, and $2.5 billion, respectively, as compared to $1.9 billion, $2.6 billion, and $2.3 billion, respectively, at December 31, 2021.
- The ratio of nonperforming loans to loans held for investment, or total loans at period end, decreased from 0.03% at December 31, 2021 to 0.02% at June 30, 2022.
- The Company’s Board of Directors declared, and the Company subsequently paid, a cash dividend of $0.15 per share during the three months ended June 30, 2022.
“The Company’s differentiated customer experience and reputation continue to power demand for our services and resulted in another record quarter of loan funding and balance sheet growth,” said President and Chief Executive Officer, James Beckwith. “In the second quarter, we successfully executed on our strategic plan and are pleased to report strong earnings while maintaining vigorous and conservative underwriting practices and a prudent approach to credit portfolio management. This quarter, we also declared another dividend to shareholders which exemplifies our continued focus on shareholder value. To safeguard this value, we diligently monitor changing market conditions and are confident in the Company’s resilience in any interest rate environment. We will remain focused on our organic growth strategy which is guided by disciplined business practices which we believe will continue to benefit our customers, employees, community and shareholders.”
Summary Results
Three months ended June 30, 2022, as compared to three months ended March 31, 2022
The increase in the Company’s net income from the three months ended March 31, 2022 to the three months ended June 30, 2022 was primarily due to an increase in net interest income of $2.6 million as a result of loan growth, partially offset by an increase in the provision for loan losses of $1.3 million as a result of loan growth, and an increase in non-interest expense of $0.6 million as a result of increased business development activity. The increase in average assets was largely the result of an increase in average loans held for investment and sale due to an increase in average interest-bearing liabilities and demand accounts, which provided for loan growth, while average equity decreased due to a net decline in other comprehensive income during the period.
Three months ended June 30, 2022, as compared to three months ended June 30, 2021
The increase in the Company’s net income from the three months ended June 30, 2021 to the three months ended June 30, 2022 was primarily due to an increase in net interest income of $6.2 million as a result of loan growth, partially offset by an increase in the provision for loan losses of $2.3 million as a result of loan growth, and an increase in the provision for income taxes of $3.3 million as a result of the Company’s conversion to a C Corporation during the second quarter of 2021. The increase in average assets was largely the result of an increase in average loans held for investment and sale due to an increase in average interest-bearing liabilities and demand accounts, which provided for loan growth, and the increase in average equity was primarily the result of a decrease in cash dividends paid, as the Company declared and paid a previously disclosed aggregate distribution of $27.0 million for the accumulated adjustments account payout during the three months ended June 30, 2021 in connection with its C Corporation conversion, which did not recur during the three months ended June 30, 2022.
The following is a summary of the components of the Company’s operating results and performance ratios for the periods indicated:
| Three months ended | |||||||||||||||
| (dollars in thousands, except per share data) | June 30, 2022 |
March 31, 2022 |
$ Change | % Change | |||||||||||
| Selected operating data: | |||||||||||||||
| Net interest income | $ | 24,491 | $ | 21,862 | $ | 2,629 | 12.03 | % | |||||||
| Provision for loan losses | 2,250 | 950 | 1,300 | 136.84 | % | ||||||||||
| Non-interest income | 1,997 | 2,185 | (188 | ) | (8.60 | )% | |||||||||
| Non-interest expense | 10,205 | 9,575 | 630 | 6.58 | % | ||||||||||
| Pre-tax net income | 14,033 | 13,522 | 511 | 3.78 | % | ||||||||||
| Provision for income taxes | 4,080 | 3,660 | 420 | 11.48 | % | ||||||||||
| Net income | 9,953 | 9,862 | 91 | 0.92 | % | ||||||||||
| Earnings per common share: | |||||||||||||||
| Basic | $ | 0.58 | $ | 0.58 | $ | — | — | % | |||||||
| Diluted | $ | 0.58 | $ | 0.58 | $ | — | — | % | |||||||
| Performance and other financial ratios: | |||||||||||||||
| ROAA | 1.45 | % | 1.53 | % | |||||||||||
| ROAE | 17.20 | % | 17.07 | % | |||||||||||
| Net interest margin | 3.70 | % | 3.60 | % | |||||||||||
| Cost of funds | 0.24 | % | 0.17 | % | |||||||||||
| Three months ended | |||||||||||||||
| (dollars in thousands, except per share data) | June 30, 2022 |
June 30, 2021 |
$ Change | % Change | |||||||||||
| Selected operating data: | |||||||||||||||
| Net interest income | $ | 24,491 | $ | 18,296 | $ | 6,195 | 33.86 | % | |||||||
| Provision for loan losses | 2,250 | — | 2,250 | 100.00 | % | ||||||||||
| Non-interest income | 1,997 | 1,846 | 151 | 8.18 | % | ||||||||||
| Non-interest expense | 10,205 | 9,580 | 625 | 6.52 | % | ||||||||||
| Pre-tax net income | 14,033 | 10,562 | 3,471 | 32.86 | % | ||||||||||
| Provision for income taxes | 4,080 | 734 | 3,346 | 455.86 | % | ||||||||||
| Net income | 9,953 | 9,828 | 125 | 1.27 | % | ||||||||||
| Earnings per common share: | |||||||||||||||
| Basic | $ | 0.58 | $ | 0.67 | $ | (0.09 | ) | (13.43 | )% | ||||||
| Diluted | $ | 0.58 | $ | 0.67 | $ | (0.09 | ) | (13.43 | )% | ||||||
| Performance and other financial ratios: | |||||||||||||||
| ROAA | 1.45 | % | 1.75 | % | |||||||||||
| ROAE | 17.20 | % | 24.25 | % | |||||||||||
| Net interest margin | 3.70 | % | 3.48 | % | |||||||||||
| Cost of funds | 0.24 | % | 0.20 | % | |||||||||||
Balance Sheet Summary
| (dollars in thousands) | June 30, 2022 |
December 31, 2021 |
$ Change | % Change | |||||||||
| Selected financial condition data: | |||||||||||||
| Total assets | $ | 2,836,071 | $ | 2,556,761 | $ | 279,310 | 10.92 | % | |||||
| Cash and cash equivalents | 270,758 | 425,329 | (154,571 | ) | (36.34 | )% | |||||||
| Total loans held for investment | 2,380,511 | 1,934,460 | 446,051 | 23.06 | % | ||||||||
| Total investments | 126,903 | 153,753 | (26,850 | ) | (17.46 | )% | |||||||
| Total liabilities | 2,602,871 | 2,321,715 | 281,156 | 12.11 | % | ||||||||
| Total deposits | 2,501,311 | 2,285,890 | 215,421 | 9.42 | % | ||||||||
| Subordinated notes, net | 28,420 | 28,386 | 34 | 0.12 | % | ||||||||
| Total shareholders’ equity | 233,200 | 235,046 | (1,846 | ) | (0.79 | )% | |||||||
The increase in assets from December 31, 2021 to June 30, 2022 was primarily due to a $446.1 million increase in total loans held for investment, partially offset by a $154.6 million decrease in cash and cash equivalents. The $446.1 million increase in total loans held for investment between December 31, 2021 and June 30, 2022 was a result of $753.6 million in non-PPP loan originations, partially offset by $22.1 million in PPP loan forgiveness, payoffs, or charge-offs, and $285.4 million in non-PPP loan payoffs and paydowns.
The increase in total liabilities from December 31, 2021 to June 30, 2022 was primarily attributable to an increase in Federal Home Loan Bank of San Francisco ("FHLB") advances of $60.0 million and an increase in deposits of $215.4 million, largely due to increases in time deposits over $250 thousand and non-interest-bearing deposits of $109.8 million and $103.9 million.
Total shareholders’ equity decreased by $1.8 million from $235.0 million at December 31, 2021 to $233.2 million at June 30, 2022, The decrease in total shareholders’ equity from December 31, 2021 to June 30, 2022 was primarily a result of net income recognized of $19.8 million, offset by a net decline of $12.2 million in other comprehensive income and $10.1 million in cash distributions paid during the six months ended June 30, 2022.
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 | ||||||||||||||
| (dollars in thousands) | June 30, 2022 |
March 31, 2022 |
$ Change | % Change | ||||||||||
| Interest and fee income | $ | 25,961 | $ | 22,850 | $ | 3,111 | 13.61 | % | ||||||
| Interest expense | 1,470 | 988 | 482 | 48.79 | % | |||||||||
| Net interest income | $ | 24,491 | $ | 21,862 | $ | 2,629 | 12.03 | % | ||||||
| Net interest margin | 3.70 | % | 3.60 | % | ||||||||||
| Three months ended | ||||||||||||||
| (dollars in thousands) | June 30, 2022 |
June 30, 2021 |
$ Change | % Change | ||||||||||
| Interest and fee income | $ | 25,961 | $ | 19,308 | $ | 6,653 | 34.46 | % | ||||||
| Interest expense | 1,470 | 1,012 | 458 | 45.26 | % | |||||||||
| Net interest income | $ | 24,491 | $ | 18,296 | $ | 6,195 | 33.86 | % | ||||||
| Net interest margin | 3.70 | % | 3.48 | % | ||||||||||
The following table shows the components of net interest income and net interest margin for the quarterly periods indicated:
| Three months ended | |||||||||||||||||||||||||||
| June 30, 2022 | March 31, 2022 | June 30, 2021 | |||||||||||||||||||||||||
| (dollars 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 | $ | 294,491 | $ | 518 | 0.71 | % | $ | 339,737 | $ | 192 | 0.23 | % | $ | 378,000 | $ | 125 | 0.13 | % | |||||||||
| Investment securities | 132,975 | 602 | 1.82 | % | 148,736 | 567 | 1.54 | % | 149,814 | 557 | 1.49 | % | |||||||||||||||
| Loans held for investment and sale | 2,227,215 | 24,841 | 4.47 | % | 1,977,509 | 22,091 | 4.53 | % | 1,578,438 | 18,626 | 4.73 | % | |||||||||||||||
| Total interest-earning assets | 2,654,681 | 25,961 | 3.92 | % | 2,465,982 | 22,850 | 3.76 | % | 2,106,252 | 19,308 | 3.68 | % | |||||||||||||||
| Interest receivable and other assets, net | 98,972 | 150,116 | 140,757 | ||||||||||||||||||||||||
| Total assets | $ | 2,753,653 | $ | 2,616,098 | $ | 2,247,009 | |||||||||||||||||||||
| Liabilities and shareholders’ equity | |||||||||||||||||||||||||||
| Interest-bearing transaction accounts | $ | 255,665 | $ | 66 | 0.10 | % | $ | 276,690 | $ | 70 | 0.10 | % | $ | 150,852 | $ | 37 | 0.10 | % | |||||||||
| Savings accounts | 96,867 | 38 | 0.16 | % | 90,815 | 25 | 0.11 | % | 75,424 | 19 | 0.10 | % | |||||||||||||||
| Money market accounts | 981,366 | 679 | 0.28 | % | 920,767 | 367 | 0.16 | % | 949,448 | 475 | 0.20 | % | |||||||||||||||
| Time accounts | 174,991 | 238 | 0.55 | % | 128,183 | 83 | 0.26 | % | 36,773 | 37 | 0.40 | % | |||||||||||||||
| Subordinated debt and other borrowings | 29,618 | 449 | 6.07 | % | 28,393 | 443 | 6.33 | % | 28,339 | 444 | 6.27 | % | |||||||||||||||
| Total interest-bearing liabilities | 1,538,507 | 1,470 | 0.38 | % | 1,444,848 | 988 | 0.28 | % | 1,240,836 | 1,012 | 0.33 | % | |||||||||||||||
| Demand accounts | 969,053 | 922,128 | 827,992 | ||||||||||||||||||||||||
| Interest payable and other liabilities | 13,937 | 14,800 | 15,621 | ||||||||||||||||||||||||
| Shareholders’ equity | 232,156 | 234,322 | 162,560 | ||||||||||||||||||||||||
| Total liabilities & shareholders’ equity | $ | 2,753,653 | $ | 2,616,098 | $ | 2,247,009 | |||||||||||||||||||||
| Net interest spread | 3.54 | % | 3.48 | % | 3.35 | % | |||||||||||||||||||||
| Net interest income/margin | $ | 24,491 | 3.70 | % | $ | 21,862 | 3.60 | % | $ | 18,296 | 3.48 | % | |||||||||||||||
Factors affecting interest income and yields
Key drivers in the increase in interest income and yields during the periods indicated above were increases in average yields on interest-earning deposits with banks and investment securities. These increases were partially offset by declining loan yields over the same periods. Average loan yields decreased from 4.73% during the three months ended June 30, 2021, to 4.53% during the three months ended March 31, 2022, to 4.47% during the three months ended June 30, 2022. These decreases were primarily due to changes in the macroeconomic environment, which caused a majority of the Company’s fixed-rate loans funded in the aforementioned quarters to recognize yields lower than those recognized in prior quarters. The rates associated with the index utilized for a significant portion of the Company’s variable rate loans, the United States 5 Year Treasury index, were higher during the three months ended June 30, 2022, as compared to the three months ended March 31, 2022 and the three months ended June 30, 2021, but a majority of these loans were not scheduled to reprice during the three months ended June 30, 2022, also contributing to the downward trend in average loan yields. New loan originations drove increases in the average daily balance of loans for each of the periods above, which partially offset the aforementioned declining average loan yields. Additionally, yields on PPP loans increased from 4.48% for the three months ended June 30, 2021, to 27.85% and 23.33% for the quarters ended March 31, 2022 and June 30, 2022, respectively, due to an acceleration of deferred fee accretion resulting from PPP loans being forgiven by the Small Business Administration (“SBA”) and repaid, which also helped to offset declining average loan yields.
Factors affecting interest expense and rates
Increased average daily balances of, and increased rates paid on, interest-bearing liabilities during the three months ended June 30, 2022, as compared to the quarters ended March 31, 2022 and June 30, 2021, drove the increase in interest expense during the most recent quarter. As a result, the cost of interest-bearing liabilities also increased over each of the respective periods. Additionally, the cost of funds decreased from 0.20% for the quarter ended June 30, 2021 to 0.17% for the quarter ended March 31, 2022, with an increase to 0.24% for the quarter ended June 30, 2022.
Asset Quality
SBA PPP
All PPP loans had been forgiven, paid off by the borrower, or charged off as of June 30, 2022.
COVID-19 Deferments
Pursuant to federal guidance, the Company implemented loan programs to allow certain consumers and businesses impacted by the COVID-19 pandemic to defer loan principal and interest payments. At June 30, 2022, two borrowing relationships with two loans totaling $0.1 million were on COVID-19 deferment. All but one of the loans that ended COVID-19 deferments in the quarter ended June 30, 2022 have returned to their pre-COVID-19 contractual payment structures with no risk rating downgrades to classified, nor any troubled debt restructuring (“TDR”). Of the loans that ended COVID-19 deferments in the quarter ended June 30, 2022, one is non-accrual and returned to a pre-COVID-19 risk rating of classified as of June 30, 2022. We anticipate that the remaining loans on COVID-19 deferment will return to their pre-COVID-19 contractual payment status after their COVID-19 deferments end.
Allowance for Loan Losses
At June 30, 2022, the Company’s allowance for loan losses was $25.8 million, as compared to $23.2 million at December 31, 2021. The $2.6 million increase is due to a $3.2 million provision for loan losses recorded during the six months ended June 30, 2022, partially offset by net charge-offs of $0.7 million during the first six months of 2022. At June 30, 2022, the Company’s ratio of nonperforming loans to loans held for investment decreased from 0.03% at December 31, 2021 to 0.02%, primarily due to a decrease in the Company’s nonperforming commercial secured loans. Loans designated as substandard decreased to $1.2 million at June 30, 2022, from $10.6 million at December 31, 2021. This resulted in a net reduction of $0.1 million in reserves related to classified loans that was offset by an increase in the provision related to loan growth that occurred during the first six months of 2022. There were no loans with doubtful risk grades at June 30, 2022 or December 31, 2021.
A summary of the allowance for loan losses by loan class is as follows:
| June 30, 2022 | December 31, 2021 | |||||||||||
| (dollars in thousands) | Amount | % of Total | Amount | % of Total | ||||||||
| Collectively evaluated for impairment: | ||||||||||||
| Real estate: | ||||||||||||
| Commercial | $ | 16,621 | 64.46 | % | $ | 12,869 | 55.37 | % | ||||
| Commercial land and development | 68 | 0.26 | % | 50 | 0.22 | % | ||||||
| Commercial construction | 508 | 1.97 | % | 371 | 1.60 | % | ||||||
| Residential construction | 51 | 0.20 | % | 50 | 0.22 | % | ||||||
| Residential | 188 | 0.73 | % | 192 | 0.83 | % | ||||||
| Farmland | 616 | 2.39 | % | 645 | 2.78 | % | ||||||
| Commercial: | ||||||||||||
| Secured | 6,132 | 23.78 | % | 6,687 | 28.77 | % | ||||||
| Unsecured | 265 | 1.03 | % | 207 | 0.89 | % | ||||||
| PPP | — | — | % | — | — | % | ||||||
| Consumer and other | 537 | 2.08 | % | 889 | 3.82 | % | ||||||
| Unallocated | 648 | 2.51 | % | 1,111 | 4.78 | % | ||||||
| 25,634 | 99.41 | % | 23,071 | 99.28 | % | |||||||
| Individually evaluated for impairment: | ||||||||||||
| Commercial secured | 152 | 0.59 | % | 172 | 0.72 | % | ||||||
| Total allowance for loan losses | $ | 25,786 | 100.00 | % | $ | 23,243 | 100.00 | % | ||||
The ratio of allowance for loan losses to loans held for investment, or total loans at period end, was 1.08% at June 30, 2022, as compared to 1.20% at December 31, 2021. Excluding PPP loans, the ratio of the allowance for loan losses to loans held for investment was 1.08% and 1.22% at June 30, 2022 and December 31, 2021, respectively. The decline in the ratio of allowance to loans held for investment period-over-period is primarily due to a significant decline in classified loans and improvement in the risk level for retail commercial real estate loans, partially offset by increased reserves based on economic conditions during the six months ended June 30, 2022. The ratio of the allowance for loan losses to loans held for investment, excluding PPP loans, is considered a non-GAAP financial measure. See the section entitled “Non-GAAP Reconciliation (Unaudited)” for a reconciliation of our non-GAAP measures to the most directly comparable GAAP financial measure.
Non-interest Income
Three months ended June 30, 2022, as compared to three months ended March 31, 2022
The following table presents the key components of non-interest income for the periods indicated:
| Three months ended | |||||||||||||
| (dollars in thousands) | June 30, 2022 |
March 31, 2022 |
$ Change | % Change | |||||||||
| Service charges on deposit accounts | $ | 130 | $ | 108 | $ | 22 | 20.37 | % | |||||
| Net gain on sale of securities | — | 5 | (5 | ) | (100.00 | )% | |||||||
| Gain on sale of loans | 831 | 918 | (87 | ) | (9.48 | )% | |||||||
| Loan-related fees | 795 | 617 | 178 | 28.85 | % | ||||||||
| FHLB stock dividends | 99 | 102 | (3 | ) | (2.94 | )% | |||||||
| Earnings on bank-owned life insurance | 101 | 90 | 11 | 12.22 | % | ||||||||
| Other income | 41 | 345 | (304 | ) | (88.12 | )% | |||||||
| Total non-interest income | $ | 1,997 | $ | 2,185 | $ | (188 | ) | (8.60 | )% | ||||
Loan-related fees. The increase in loan-related fees resulted primarily from the recognition of $0.4 million in swap referral fees during the three months ended June 30, 2022 compared to $0.3 million in swap referral fees recognized during the three months ended March 31, 2022.
Other income. The decrease in other income resulted primarily from a $0.3 million gain recorded on a distribution received on an investment in a venture-backed fund during the three months ended March 31, 2022, which did not recur in the three months ended June 30, 2022.
Three months ended June 30, 2022, as compared to three months ended June 30, 2021
The following table presents the key components of non-interest income for the periods indicated:
| Three months ended | |||||||||||||
| (dollars in thousands) | June 30, 2022 |
June 30, 2021 |
$ Change | % Change | |||||||||
| Service charges on deposit accounts | $ | 130 | $ | 106 | $ | 24 | 22.64 | % | |||||
| Net gain on sale of securities | — | 92 | (92 | ) | (100.00 | )% | |||||||
| Gain on sale of loans | 831 | 1,091 | (260 | ) | (23.83 | )% | |||||||
| Loan-related fees | 795 | 369 | 426 | 115.45 | % | ||||||||
| FHLB stock dividends | 99 | 92 | 7 | 7.61 | % | ||||||||
| Earnings on bank-owned life insurance | 101 | 60 | 41 | 68.33 | % | ||||||||
| Other income | 41 | 36 | 5 | 13.89 | % | ||||||||
| Total non-interest income | $ | 1,997 | $ | 1,846 | $ | 151 | 8.18 | % | |||||
Gain on sale of loans. The decrease in gain on sale of loans related primarily to an overall decline in the effective yields on loans sold during the three months ended June 30, 2022 compared to the three months ended June 30, 2021 due to uncertainty surrounding the timing of rising interest rates and due to premiums received on loans sold during the three months ended June 30, 2021, which did not recur during the three months ended June 30, 2022. Additionally, the volume of loans sold during the three months ended June 30, 2022 increased compared to the three months ended June 30, 2021, as several large dollar value loans funded in prior periods reached the end of their interest-only periods, allowing for sale. During the three months ended June 30, 2022, approximately $17.9 million of loans were sold with an effective yield of 4.64%, as compared to approximately $11.1 million of loans sold with an effective yield of 9.82% during the three months ended June 30, 2021.
Loan-related fees. The increase in loan-related fees resulted primarily from the recognition of $0.4 million in swap referral fees during the three months ended June 30, 2022, as compared to $0.1 million of swap referral fees recognized during the three months ended June 30, 2021.
Non-interest Expense
Three months ended June 30, 2022, as compared to three months ended March 31, 2022
The following table presents the key components of non-interest expense for the periods indicated:
| Three months ended | |||||||||||||
| (dollars in thousands) | June 30, 2022 |
March 31, 2022 |
$ Change | % Change | |||||||||
| Salaries and employee benefits | $ | 5,553 | $ | 5,675 | $ | (122 | ) | (2.15 | )% | ||||
| Occupancy and equipment | 513 | 520 | (7 | ) | (1.35 | )% | |||||||
| Data processing and software | 739 | 716 | 23 | 3.21 | % | ||||||||
| Federal Deposit Insurance Corporation (“FDIC”) insurance | 245 | 165 | 80 | 48.48 | % | ||||||||
| Professional services | 568 | 554 | 14 | 2.53 | % | ||||||||
| Advertising and promotional | 484 | 344 | 140 | 40.70 | % | ||||||||
| Loan-related expenses | 389 | 278 | 111 | 39.93 | % | ||||||||
| Other operating expenses | 1,714 | 1,323 | 391 | 29.55 | % | ||||||||
| Total non-interest expense | $ | 10,205 | $ | 9,575 | $ | 630 | 6.58 | % | |||||
Salaries and employee benefits. The decrease in salaries and employee benefits was primarily a result of a decline of $0.6 million related to: (i) a $0.4 million increase in deferred loan origination costs related to loan production during the three months ended June 30, 2022, as compared to the three months ended March 31, 2022 and (ii) a $0.2 million decline in employer taxes paid during the three months ended June 30, 2022 compared to the three months ended March 31, 2022, as executive bonus payments were made during the three months ended March 31, 2022 and did not recur in the three months ended June 30, 2022. These declines in salaries and employee benefits were partially offset by a $0.5 million increase in salaries and overtime, primarily related to a 1.72% increase in headcount during the three months ended June 30, 2022, as compared to the three months ended March 31, 2022.
Advertising and promotional. The increase in advertising and promotional is primarily related to slight increases in donations and sponsorships due to the timing of events held during the three months ended June 30, 2022, as compared to the three months ended March 31, 2022.
Loan-related expenses. Loan-related expenses increased, primarily as a result of a net overall increase in loan expenses incurred to support loan production during the three months ended June 30, 2022, as compared to the three months ended March 31, 2022, including increased expenses for legal services, environmental reports, Uniform Commercial Code ("UCC") fees, and inspections.
Other operating expenses. The increase in other operating expenses was primarily due to a $0.3 million increase in travel related to attendance of professional events, conferences, and other business-related travel during the three months ended June 30, 2022, as compared to the three months ended March 31, 2022.
Three months ended June 30, 2022, as compared to three months ended June 30, 2021
The following table presents the key components of non-interest expense for the periods indicated:
| Three months ended | |||||||||||||
| (dollars in thousands) | June 30, 2022 |
June 30, 2021 |
$ Change | % Change | |||||||||
| Salaries and employee benefits | $ | 5,553 | $ | 4,939 | $ | 614 | 12.43 | % | |||||
| Occupancy and equipment | 513 | 441 | 72 | 16.33 | % | ||||||||
| Data processing and software | 739 | 598 | 141 | 23.58 | % | ||||||||
| FDIC insurance | 245 | 150 | 95 | 63.33 | % | ||||||||
| Professional services | 568 | 1,311 | (743 | ) | (56.67 | )% | |||||||
| Advertising and promotional | 484 | 265 | 219 | 82.64 | % | ||||||||
| Loan-related expenses | 389 | 218 | 171 | 78.44 | % | ||||||||
| Other operating expenses | 1,714 | 1,658 | 56 | 3.38 | % | ||||||||
| Total non-interest expense | $ | 10,205 | $ | 9,580 | $ | 625 | 6.52 | % | |||||
Salaries and employee benefits. The increase in salaries and employee benefits was primarily a result of a $1.0 million increase in salaries, insurance, and benefits as a result of a 14.94% increase in headcount during the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, combined with a $0.6 million increase in commissions and bonuses the three months ended June 30, 2021 to the three months ended June 30, 2022. These increases were partially offset by a $0.9 million increase in deferred loan origination costs when comparing the three months ended June 30, 2022 to the three months ended June 30, 2021.
Data processing and software. Data processing and software increased, 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) increased number of licenses required for new users on our loan origination and documentation system.
Professional services. Professional services decreased, primarily as a result of expenses recognized during the three months ended June 30, 2021 related to the increased audit, consulting, and legal costs incurred to support corporate organizational matters leading up to the IPO. These expenses did not recur during the three months ended June 30, 2022.
Advertising and promotional. The increase in advertising and promotional was primarily related to increases in business development, marketing, and sponsorship expenses due to more in-person participation in events held during the three months ended June 30, 2022, as compared to the three months ended June 30, 2021.
Loan-related expenses. Loan-related expenses increased, primarily as a result of an overall net increase in loan expenses incurred to support loan production in the three months ended June 30, 2022, as compared to the three months ended June 30, 2021, primarily due to increased expenses for legal services, environmental reports, UCC fees, and inspections.
Provision for Income Taxes
The Company terminated its status as a “Subchapter S” corporation effective May 5, 2021, in connection with the Company’s IPO, and became a C Corporation. Prior to that date, as an S Corporation, the Company had no U.S. federal income tax expense. As a result, the provision recorded for the three months ended June 30, 2021 yielded an effective tax rate of 20.77%, representing the weighted average rate between the S Corporation tax rate of 3.50% and the C Corporation tax rate of 29.56% based on the number of days as each type of corporation during 2021. The provisions recorded for the three months ended June 30, 2022 and March 31, 2022 yielded effective tax rates of 29.07% and 27.07%, respectively.
Three months ended June 30, 2022, as compared to three months ended March 31, 2022
Provision for income taxes for the quarter ended June 30, 2022 increased by $0.4 million, or 11.48%, to $4.1 million, as compared to $3.7 million for the quarter ended March 31, 2022. This increase was primarily due to the application of the full statutory income tax rate of 29.56% to taxable income, net of permanent items, for the quarter ended June 30, 2022. Additionally, the provision for income taxes for the quarter ended March 31, 2022 contained a return-to-provision true up adjustment of approximately $0.3 million related to tax-exempt loan interest income and tax-exempt municipal security interest income, which did not recur in the three months ended June 30, 2022.
Three months ended June 30, 2022, as compared to three months ended June 30, 2021
Provision for income taxes increased by $3.3 million, or 455.86%, to $4.1 million for the three months ended June 30, 2022, as compared to $0.7 million for the three months ended June 30, 2021. This increase is due to the change in the effective tax rate from 20.77% to 29.07%, partially offset by a $4.6 million reduction to the provision for income taxes, which did not recur during the three months ended June 30, 2022, relating to the adjustment of net deferred tax assets due to the termination of the Company’s S Corporation status during the three months ended June 30, 2021.
Webcast Details
Five Star Bancorp will host a webcast on Tuesday, July 26, 2022, at 1:00 p.m. ET (10:00 a.m. PT), to discuss its second quarter 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. Five Star 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, 2021 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 | ||||||||||||
| (dollars in thousands, except share and per share data) | June 30, 2022 |
March 31, 2022 |
June 30, 2021 |
|||||||||
| Revenue and Expense Data | ||||||||||||
| Interest and fee income | $ | 25,961 | $ | 22,850 | $ | 19,308 | ||||||
| Interest expense | 1,470 | 988 | 1,012 | |||||||||
| Net interest income | 24,491 | 21,862 | 18,296 | |||||||||
| Provision for loan losses | 2,250 | 950 | — | |||||||||
| Net interest income after provision | 22,241 | 20,912 | 18,296 | |||||||||
| Non-interest income: | ||||||||||||
| Service charges on deposit accounts | 130 | 108 | 106 | |||||||||
| Gain on sale of securities | — | 5 | 92 | |||||||||
| Gain on sale of loans | 831 | 918 | 1,091 | |||||||||
| Loan-related fees | 795 | 617 | 369 | |||||||||
| FHLB stock dividends | 99 | 102 | 92 | |||||||||
| Earnings on bank-owned life insurance | 101 | 90 | 60 | |||||||||
| Other income | 41 | 345 | 36 | |||||||||
| Total non-interest income | 1,997 | 2,185 | 1,846 | |||||||||
| Non-interest expense: | ||||||||||||
| Salaries and employee benefits | 5,553 | 5,675 | 4,939 | |||||||||
| Occupancy and equipment | 513 | 520 | 441 | |||||||||
| Data processing and software | 739 | 716 | 598 | |||||||||
| FDIC insurance | 245 | 165 | 150 | |||||||||
| Professional services | 568 | 554 | 1,311 | |||||||||
| Advertising and promotional | 484 | 344 | 265 | |||||||||
| Loan-related expenses | 389 | 278 | 218 | |||||||||
| Other operating expenses | 1,714 | 1,323 | 1,658 | |||||||||
| Total non-interest expense | 10,205 | 9,575 | 9,580 | |||||||||
| Total income before taxes | 14,033 | 13,522 | 10,562 | |||||||||
| Provision for income taxes | 4,080 | 3,660 | 734 | |||||||||
| Net income | $ | 9,953 | $ | 9,862 | $ | 9,828 | ||||||
| Share and Per Share Data | ||||||||||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 0.58 | $ | 0.58 | $ | 0.67 | ||||||
| Diluted | $ | 0.58 | $ | 0.58 | $ | 0.67 | ||||||
| Book value per share | $ | 13.52 | $ | 13.40 | $ | 12.67 | ||||||
| Tangible book value per share(1) | $ | 13.52 | $ | 13.40 | $ | 12.67 | ||||||
| Weighted average basic common shares outstanding | 17,125,715 | 17,102,508 | 14,650,208 | |||||||||
| Weighted average diluted common shares outstanding | 17,149,449 | 17,164,519 | 14,667,804 | |||||||||
| Shares outstanding at end of period | 17,245,983 | 17,246,199 | 17,225,508 | |||||||||
| Credit Quality | ||||||||||||
| Allowance for loan losses to period end nonperforming loans | 5,834.88 | % | 1,799.99 | % | 5,139.91 | % | ||||||
| Nonperforming loans to loans held for investment | 0.02 | % | 0.06 | % | 0.03 | % | ||||||
| Nonperforming assets to total assets | 0.02 | % | 0.05 | % | 0.02 | % | ||||||
| Nonperforming loans plus performing TDRs to loans held for investment | 0.02 | % | 0.06 | % | 0.03 | % | ||||||
| COVID-19 deferments to loans held for investment | — | % | 0.59 | % | 0.81 | % | ||||||
| Selected Financial Ratios | ||||||||||||
| ROAA | 1.45 | % | 1.53 | % | 1.75 | % | ||||||
| ROAE | 17.20 | % | 17.07 | % | 24.25 | % | ||||||
| Net interest margin | 3.70 | % | 3.60 | % | 3.48 | % | ||||||
| Loan to deposit | 95.69 | % | 83.52 | % | 76.84 | % | ||||||
(1) See the section entitled “Non-GAAP Reconciliation (Unaudited)” for a reconciliation of this non-GAAP financial measure.
| (dollars in thousands) | June 30, 2022 |
March 31, 2022 |
June 30, 2021 |
|||||||||
| Balance Sheet Data | ||||||||||||
| Cash and due from financial institutions | $ | 66,423 | $ | 66,747 | $ | 165,927 | ||||||
| Interest-bearing deposits in banks | 204,335 | 438,217 | 370,677 | |||||||||
| Time deposits in banks | 10,841 | 14,464 | 19,451 | |||||||||
| Securities – available-for-sale, at fair value | 122,426 | 134,813 | 160,074 | |||||||||
| Securities – held-to-maturity, at amortized cost | 4,477 | 4,486 | 6,473 | |||||||||
| Loans held for sale | 12,985 | 10,386 | 2,340 | |||||||||
| Loans held for investment | 2,380,511 | 2,080,158 | 1,585,462 | |||||||||
| Allowance for loan losses | (25,786 | ) | (23,904 | ) | (22,153 | ) | ||||||
| Loans held for investment, net of allowance for loan losses | 2,354,725 | 2,056,254 | 1,563,309 | |||||||||
| FHLB stock | 10,890 | 6,667 | 6,723 | |||||||||
| Operating leases, right-of-use asset | 4,472 | 4,718 | — | |||||||||
| Premises and equipment, net | 1,768 | 1,836 | 1,649 | |||||||||
| Bank-owned life insurance | 14,444 | 14,343 | 11,074 | |||||||||
| Interest receivable and other assets | 28,285 | 25,318 | 20,170 | |||||||||
| Total assets | $ | 2,836,071 | $ | 2,778,249 | $ | 2,327,867 | ||||||
| Non-interest-bearing deposits | $ | 1,006,066 | $ | 941,285 | $ | 834,672 | ||||||
| Interest-bearing deposits | 1,495,245 | 1,561,807 | 1,231,613 | |||||||||
| Total deposits | 2,501,311 | 2,503,092 | 2,066,285 | |||||||||
| Subordinated notes, net | 28,420 | 28,403 | 28,353 | |||||||||
| FHLB advances | 60,000 | — | — | |||||||||
| Operating lease liability | 4,739 | 4,987 | — | |||||||||
| Interest payable and other liabilities | 8,401 | 10,706 | 14,915 | |||||||||
| Total liabilities | 2,602,871 | 2,547,188 | 2,109,553 | |||||||||
| Common stock | 219,023 | 218,721 | 218,026 | |||||||||
| Retained earnings | 26,924 | 19,558 | — | |||||||||
| Accumulated other comprehensive loss, net | (12,747 | ) | (7,218 | ) | 288 | |||||||
| Total shareholders’ equity | $ | 233,200 | $ | 231,061 | $ | 218,314 | ||||||
| Quarterly Average Balance Data | ||||||||||||
| Average loans held for investment and sale | $ | 2,227,215 | $ | 1,977,509 | $ | 1,578,438 | ||||||
| Average interest-earning assets | $ | 2,654,681 | $ | 2,465,982 | $ | 2,106,252 | ||||||
| Average total assets | $ | 2,753,653 | $ | 2,616,098 | $ | 2,247,009 | ||||||
| Average deposits | $ | 2,477,942 | $ | 2,338,583 | $ | 2,040,489 | ||||||
| Average total equity | $ | 232,156 | $ | 234,322 | $ | 162,560 | ||||||
| Capital Ratio Data | ||||||||||||
| Total shareholders’ equity to total assets | 8.22 | % | 8.32 | % | 9.38 | % | ||||||
| Tangible shareholders’ equity to tangible assets(1) | 8.22 | % | 8.32 | % | 9.38 | % | ||||||
| Total capital (to risk-weighted assets) | 11.79 | % | 13.07 | % | 16.41 | % | ||||||
| Tier 1 capital (to risk-weighted assets) | 9.64 | % | 10.70 | % | 13.39 | % | ||||||
| Common equity Tier 1 capital (to risk-weighted assets) | 9.64 | % | 10.70 | % | 13.39 | % | ||||||
| Tier 1 leverage ratio | 8.81 | % | 9.02 | % | 9.59 | % | ||||||
(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 net income is defined as net income plus provision for income taxes and provision for loan losses. The most directly comparable GAAP measure is pre-tax net income.
Average loans held for investment and sale, excluding PPP loans, is defined as the daily average loans held for investment and sale, excluding the daily average PPP loans, and includes both performing and nonperforming loans. The most directly comparable GAAP financial measure is average loans held for investment and sale.
Allowance for loan losses to total loans held for investment, excluding PPP loans, is defined as allowance for loan losses, divided by total loans held for investment less PPP loans. The most directly comparable GAAP financial measure is allowance for loan losses to total loans held for investment.
The following reconciliation tables provide a more detailed analysis of these non-GAAP financial measures.
| Pre-tax, pre-provision net income (dollars in thousands) |
June 30, 2022 |
March 31, 2022 |
June 30, 2021 |
||||||
| Net income | $ | 9,953 | $ | 9,862 | $ | 9,828 | |||
| Add: provision for income taxes | 4,080 | 3,660 | 734 | ||||||
| Add: provision for loan losses | 2,250 | 950 | — | ||||||
| Pre-tax, pre-provision net income | $ | 16,283 | $ | 14,472 | $ | 10,562 | |||
| Three months ended | |||||||||
| Average loans held for investment and sale, excluding PPP loans (dollars in thousands) |
June 30, 2022 |
March 31, 2022 |
June 30, 2021 |
||||||
| Average loans held for investment and sale | $ | 2,227,215 | $ | 1,977,509 | $ | 1,578,438 | |||
| Less: average PPP loans | 427 | 8,886 | 158,568 | ||||||
| Average loans held for investment and sale, excluding PPP loans | $ | 2,226,788 | $ | 1,968,623 | $ | 1,419,870 | |||
| Allowance for loan losses to total loans held for investment, excluding PPP loans (dollars in thousands) |
June 30, 2022 |
December 31, 2021 |
||||||
| Allowance for loan losses (numerator) | $ | 25,786 | $ | 23,243 | ||||
| Total loans held for investment | $ | 2,380,511 | $ | 1,934,460 | ||||
| Less: PPP loans | — | 22,124 | ||||||
| Total loans held for investment, excluding PPP loans (denominator) | $ | 2,380,511 | $ | 1,912,336 | ||||
| Allowance for loan losses to total loans held for investment, excluding PPP loans | 1.08 | % | 1.22 | % | ||||
Media Contact:
Heather Luck, CFO
Five Star Bancorp
(916) 626-5008
hluck@fivestarbank.com
Shelley Wetton, CMO
Five Star Bancorp
(916) 284-7827
swetton@fivestarbank.com
