Five Star Bancorp Announces Quarterly Results

Oct 25, 2021

RANCHO CORDOVA, Calif., Oct. 25, 2021 (GLOBE NEWSWIRE) -- Five Star Bancorp (Nasdaq: FSBC) (the “Company” or “Five Star”), the holding company for Five Star Bank, today reported net income of $11.0 million for the quarter ended September 30, 2021, compared to $9.8 million during the quarter ended June 30, 2021 and $9.3 million during the quarter ended September 30, 2020.

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 September 30, 2020 have been calculated using a 3.50% S Corporation tax rate, while results presented for the three months ended June 30, 2021 and September 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. Performance highlights and other developments for the Company as of and for the three months ended September 30, 2021 included the following:

  • Diluted earnings per share was $0.64 for the third quarter of 2021, compared to $0.67 for the second quarter of 2021 and $0.94 for the third quarter of 2020. Earnings per share was as follows:

 For the three months ended
 Sep 30, 2021 Jun 30, 2021 Sep 30, 2020 
Basic earnings per common share$0.64 $0.67 $0.94 
Diluted earnings per common share$0.64 $0.67 $0.94 
Weighted average basic common shares outstanding 17,095,957  14,650,208  9,902,952 
Weighted average diluted common shares 17,123,182  14,667,804  9,902,952 
  • Loan and deposit growth as of September 30, 2021, as compared to June 30, 2021, were as follows:

 As of       
(dollars in thousands)Sep 30, 2021 Jun 30, 2021 $ Change % Change 
Total loans, excluding Paycheck Protection Program (“PPP”) loans$1,648,483 $1,466,866 $181,617  12.38%  
PPP loans 61,499  120,936  (59,437) (49.15)% 
PPP deferred fees 1,706  3,534  (1,828) (51.73)% 
Non-interest-bearing deposits 895,468  829,036  66,432  8.01%  
Interest-bearing deposits 1,272,926  1,237,249  35,677  2.88%  
  • PPP fee income recognized during the quarter ended September 30, 2021 totaled $1.8 million, as compared to $1.4 million and $1.0 million for the quarters ended June 30, 2021 and September 30, 2020, respectively.
  • As of September 30, 2021, the Company reported total loans, total assets, and total deposits of $1.7 billion, $2.4 billion, and $2.2 billion, respectively, as compared to $1.5 billion, $2.0 billion, and $1.8 billion, respectively, at December 31, 2020.
  • During the three months ended September 30, 2021 and the three months ended June 30, 2021, the Company did not record a provision for loan losses, as compared to a provision of $1.9 million recorded during the three months ended September 30, 2020.
  • As of September 30, 2021, the ratio of nonperforming loans to period end loans of 0.03% remained unchanged, as compared to December 31, 2020.
  • For the quarter ended September 30, 2021, net interest margin was 3.60%, as compared to 3.48% for the quarter ended June 30, 2021 and 3.30% for the quarter ended September 30, 2020.
  • 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 September 30, 2021.
  • For the three months ended September 30, 2021, the Company’s return on average assets (“ROAA”) was 1.85% and the return on average equity (“ROAE”) was 19.26%, as compared to ROAA and ROAE of 1.75% and 24.25%, respectively for the three months ended June 30, 2021, and 1.81% and 32.33%, respectively, for the three months ended September 30, 2020.

President and Chief Executive Officer James Beckwith commented, “We delivered strong earnings this quarter through the execution of our organic growth strategy following our IPO in May 2021, which gained momentum with the planned addition of new staff and seized market opportunities. We continue to manage expenses, execute on conservative underwriting practices, and onboard customers who appreciate a differentiated customer experience based on our commitment to their success. Building and sustaining trust with our customers and community partners resulted in both deposit and loan growth. This quarter, we also declared another dividend to shareholders which exemplifies our focus on shareholder value. As we benefit from an improved economic outlook which drives consumer confidence, we will continue to expand our verticals to meet the increased demand in the markets we serve. We expect the acceleration of our growth and our disciplined business practices, to benefit our customers, employees, and shareholders.”

Summary Results

For the three months ended September 30, 2021, the Company’s ROAA was 1.85% and the ROAE was 19.26%, as compared to 1.81% and 32.33%, respectively, for the three months ended September 30, 2020. The increase in ROAA is the result of 18.09% higher net income despite the higher effective tax rate used in the three months ended September 30, 2021. The decline in ROAE is the result of increased average equity balance during the quarter ended September 30, 2021, as compared to the quarter ended September 30, 2020.

The following is a summary of the components of the Company’s operating results and performance ratios for the periods indicated:

  For the three months ended   
(dollars in thousands, except per share data) Sep 30, 2021 Jun 30, 2021 $ Change % Change 
Selected operating data:             
Net interest income $19,909 $18,296 $1,613  8.82%  
Provision for loan losses        0.00%  
Non-interest income  2,028  1,846  182  9.86%  
Non-interest expense  8,641  9,580  (939) (9.80)% 
Net income  11,026  9,828  1,198  12.19%  
              
Earnings per common share:             
Basic $0.64 $0.67 $(0.03) (4.48)% 
Diluted  0.64  0.67  (0.03) (4.48)% 
              
Performance and other financial ratios:             
ROAA  1.85% 1.75%      
ROAE  19.26% 24.25%      
Net interest margin  3.60% 3.48%      
Cost of funds  0.17% 0.20%      


  For the three months ended   
(dollars in thousands, except per share data) Sep 30, 2021 Sep 30, 2020 $ Change % Change 
Selected operating data:             
Net interest income $19,909 $16,227 $3,682  22.69%  
Provision for loan losses    1,850  (1,850) (100.00)% 
Non-interest income  2,028  2,535  (507) (20.00)% 
Non-interest expense  8,641  7,234  1,407  19.45%  
Net income  11,026  9,337  1,689  18.09%  
              
Earnings per common share:             
Basic $0.64 $0.94 $(0.30) (31.91)% 
Diluted  0.64  0.94  (0.30) (31.91)% 
              
Performance and other financial ratios:             
ROAA  1.85% 1.81%      
ROAE  19.26% 32.33%      
Net interest margin  3.60% 3.30%      
Cost of funds  0.17% 0.46%      

Balance Sheet Summary

Total assets at September 30, 2021 were $2.4 billion, an increase of $480.7 million from $2.0 billion at December 31, 2020. The increase was primarily due to a $240.3 million increase in cash and cash equivalents, a $201.9 million increase in loans, net of allowance for loan losses, and a $35.8 million increase in total investments. The increase in cash and cash equivalents since December 30, 2020 was primarily a result of net income recognized of $31.1 million, proceeds from the sale of securities of $40.8 million, an increase in deposits of $384.4 million, and net proceeds of $111.2 million from the issuance of 6,054,750 shares of common stock in our IPO. These increases were partially offset by a decrease of $92.1 million related to sales of securities, total loan originations and advances, net of principal collected, of $201.9 million, and cash distributions of $49.4 million during the same period. Of the $201.9 million increase in total loans between December 31, 2020 and September 30, 2021, $102.5 million was related to PPP loan originations and $580.4 million was related to non-PPP loan originations, partially offset by $197.1 million in PPP loan forgiveness and $284.0 million in non-PPP loan payoffs and paydowns.

Total liabilities were $2.2 billion at September 30, 2021, an increase of $387.9 million from $1.8 billion at December 31, 2020. The increase in total liabilities was primarily attributable to growth in deposits of $384.4 million, largely due to increases in money market and non-interest-bearing deposits of $139.7 million and $199.8 million, respectively.

Total shareholders’ equity increased by $92.9 million, from $133.8 million at December 31, 2020 to $226.6 million at September 30, 2021, primarily as a result of net income recognized of $31.1 million and net proceeds of $111.2 million from the issuance of 6,054,750 shares of common stock in our IPO, partially offset by $49.4 million in cash distributions paid during the nine months ended September 30, 2021.

Balance Sheet Change             
Ending Balances As of       
(dollars in thousands) Sep 30, 2021 Dec 31, 2020 $ Change % Change 
Selected financial condition data:           
Total assets $2,434,493 $1,953,765 $480,728  24.61%
Cash and cash equivalents  530,832  290,493  240,339  82.73%
Total loans, net  1,682,868  1,480,970  201,898  13.63%
Total investments  158,776  122,928  35,848  29.16%
Total liabilities  2,207,855  1,819,990  387,865  21.31%
Total deposits  2,168,394  1,784,001  384,393  21.55%
Subordinated notes, net  28,370  28,320  50  0.18%
Total shareholders' equity  226,638  133,775  92,863  69.42%

Net Interest Income and Net Interest Margin

The following is a summary of the components of net interest income for the periods indicated:

  For the three months ended       
(dollars in thousands) Sep 30, 2021 Jun 30, 2021 $ Change % Change 
Interest income $20,832 $19,308 $1,524  7.89%  
Interest expense  923  1,012  (89) (8.79)% 
Net interest income  19,909  18,296  1,613  8.82%  
Net interest margin  3.60% 3.48%      


  For the three months ended       
(dollars in thousands) Sep 30, 2021 Sep 30, 2020 $ Change % Change 
Interest income $20,832 $18,434 $2,398  13.01%  
Interest expense  923  2,207  (1,284) (58.18)% 
Net interest income  19,909  16,227  3,682  22.69%  
Net interest margin  3.60% 3.30%      

The following table shows the components of net interest income and net interest margin for the quarterly periods indicated:

  Three months ended
September 30, 2021
 Three months ended
June 30, 2021
 Three months ended
September 30, 2020
 
(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 $412,953 $175  0.17%$378,000 $125  0.13%$311,349 $199  0.25%
Investment securities  157,305  571  1.44% 149,814  557  1.49% 102,820  501  1.94%
Loans  1,625,995  20,086  4.90% 1,578,438  18,626  4.73% 1,539,239  17,734  4.58%
Total interest-earning assets  2,196,253  20,832  3.76% 2,106,252  19,308  3.68% 1,953,408  18,434  3.75%
Other assets, net  168,906        140,757        94,412       
Total assets $2,365,159       $2,247,009       $2,047,820       
                             
Liability and Shareholders' Equity                            
Interest-bearing transaction accounts $149,479 $38  0.10%$150,852 $37  0.10%$146,700 $98  0.27%
Savings accounts  76,669  19  0.10% 75,424  19  0.10% 41,063  17  0.17%
Money market accounts  966,629  389  0.16% 949,448  475  0.20% 1,018,594  1,476  0.58%
Time accounts including CDARS  54,314  34  0.25% 36,773  37  0.40% 94,896  173  0.73%
Subordinated debenture  28,359  443  6.20% 28,339  444  6.27% 28,292  443  6.23%
Total interest-bearing liabilities  1,275,450  923  0.29% 1,240,836  1,012  0.33% 1,329,545  2,207  0.67%
Demand accounts  853,017        827,992        597,097       
Interest payable and other liabilities  9,537        15,621        6,289       
Shareholders' equity  227,155        162,560        114,889       
Total liabilities & shareholders' equity$ 2,365,159       $2,247,009       $2,047,820       
                             
Net interest spread        3.48%       3.35%       3.09%
Net interest income/margin    $19,909  3.60%   $18,296  3.48%   $16,227  3.30%

During the three months ended September 30, 2021, net interest income increased $1.6 million, or 8.82%, to $19.9 million, compared to $18.3 million during the three months ended June 30, 2021. Additionally, net interest margin increased 12 basis points to 3.60% during the three months ended September 30, 2021, as compared to 3.48% during the three months ended June 30, 2021. The increase in net interest margin was due primarily to an improving yield on interest-earning assets related to income earned, including origination fees, from PPP loans forgiven during the quarter, which was 3.76% for the quarter ended September 30, 2021, representing an increase of 8 basis points from 3.68% for the quarter ended June 30, 2021. Average loan yields increased 17 basis points from 4.73% during the three months ended June 30, 2021 to 4.90% during the three months ended September 30, 2021. Average loan yields, excluding PPP loans, decreased 10 basis points from 4.76% during the three months ended June 30, 2021 to 4.66% during the three months ended September 30, 2021. A reconciliation of this non-GAAP measure is set forth in the “Non-GAAP Reconciliation (Unaudited)” table included herein. The decline in interest expense is primarily attributed to the reduction in the cost of interest-bearing liabilities, which decreased by four basis points to 0.29% as of September 30, 2021 from 0.33% at June 30, 2021, as a direct result of the declining interest rate environment.

During the three months ended September 30, 2021, net interest income increased $3.7 million, or 22.68%, to $19.9 million, compared to $16.2 million during the three months ended September 30, 2020. Additionally, net interest margin increased 30 basis points to 3.60% during the three months ended September 30, 2021, as compared to 3.30% during the three months ended September 30, 2020. The increase in net interest margin was due primarily to an increase in interest-earning assets, which increased from an average balance of $2.0 billion for the three months ended September 30, 2020 to an average balance of $2.2 billion for the three months ended September 30, 2021. Average loan yields increased 32 basis points from 4.58% during the three months ended September 30, 2020 to 4.90% during the three months ended September 30, 2021. Average loan yields, excluding PPP loans, decreased 31 basis points from 4.97% during the three months ended September 30, 2020 to 4.66% during the three months ended September 30, 2021. A reconciliation of this non-GAAP measure is set forth in the “Non-GAAP Reconciliation (Unaudited)” table included herein. The decline in interest expense is primarily attributed to the reduction in the cost of interest-bearing liabilities, which decreased by 37 basis points to 0.29% as of September 30, 2021 from 0.67% at September 30, 2020, as a direct result of the declining interest rate environment.

Asset Quality

Small Business Administration (“SBA”) PPP

In March 2020, the SBA PPP was created to help small businesses keep workers employed during the COVID-19 pandemic. As an SBA Preferred Lender, the Company was able to provide PPP loans to small business customers. As of September 30, 2021, there were 183 PPP loans outstanding totaling $61.5 million, which included 180 loans totaling $54.4 million funded during the first nine months of 2021 under the second round of the PPP stimulus plan. Approximately 72 of these PPP loans, or 39.34% of total PPP loans as of September 30, 2021, totaling $4.3 million, were less than or equal to $0.15 million and had access to streamlined forgiveness processing. As of September 30, 2021, 1,258 PPP loan forgiveness applications had been submitted to the SBA and forgiveness payments had been received on 1,245 of these PPP loans, totaling $292.7 million in principal and interest. We expect full forgiveness of the first round of PPP loans to be completed in the near term.

COVID-19 Deferments

Following the passage of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)" was issued by federal bank regulators, which offers temporary relief from troubled debt restructuring (“TDR”) accounting for loan payment deferrals for certain customers whose businesses are experiencing economic hardship due to COVID-19. The Company is closely monitoring the effects of the pandemic on our loan and deposit customers. Our management team continues to be focused on assessing the risks in our loan portfolio and working with our customers to mitigate where possible the risk of potential losses. The Company implemented loan programs to allow certain consumers and businesses impacted by the pandemic to defer loan principal and interest payments. As of September 30, 2021, eight borrowing relationships with eight loans totaling $12.2 million were on COVID-19 deferment. All loans that ended COVID-19 deferments in the quarter ended September 30, 2021 returned to their contractual payment structures prior to the COVID-19 pandemic with no risk rating downgrades to classified nor any TDR, and 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 September 30, 2021, the Company’s allowance for loan losses was $21.8 million, as compared to $22.2 million at December 31, 2020. At September 30, 2021, the Company’s ratio of nonperforming loans to period end loans of 0.03% remained unchanged compared to December 31, 2020. At September 30, 2021, eight loans totaling $12.2 million, or 0.72% of the loan portfolio, were in a COVID-19 deferment period and six loans totaling $0.7 million had been in a COVID-19 deferment in the second quarter of 2021 but were not in such deferment as of September 30, 2021. Loans designated as watch and substandard decreased slightly to $57.9 million at September 30, 2021 from $60.1 million at December 31, 2020, which did not have an impact to the reserve overall. There were no loans with doubtful risk grades at September 30, 2021 or December 31, 2020. A summary of the allowance for loan losses by loan class is as follows:

  September 30, 2021 December 31, 2020 
(dollars in thousands) Amount % of Total Amount % of Total 
Collectively evaluated for impairment:             
Real Estate:             
Commercial $11,695  53.53%$9,358  42.17%
Commercial land and development  112  0.51% 77  0.35%
Commercial construction  343  1.57% 821  3.70%
Residential construction  60  0.27% 87  0.39%
Residential  207  0.95% 220  0.99%
Farmland  666  3.05% 615  2.77%
Commercial:             
Secured  7,260  33.23% 9,476  42.71%
Unsecured  218  1.00% 179  0.81%
PPP    0.00%   0.00%
Consumer and other  638  2.92% 632  2.85%
Unallocated  515  2.36% 724  3.26%
   21,714  99.39% 22,189  100.0%
Individually evaluated for impairment:             
Commercial Secured  134  0.61%   0.00%
              
Total allowance for loan losses $21,848  100.00%$22,189  100.00%

The ratio of allowance for loan losses to total loans was 1.28% at September 30, 2021, compared to 1.47% at December 31, 2020. Excluding SBA-guaranteed PPP loans, the ratio of the allowance for loan losses to total loans was 1.33% and 1.63% at September 30, 2021 and December 31, 2020, respectively. A reconciliation of this non-GAAP measure is set forth in the “Non-GAAP Reconciliation (Unaudited)” table included herein.

Non-interest Income

The following table presents the key components of non-interest income for the periods indicated:

  For the three months ended $ % 
(dollars in thousands) Sep 30, 2021 Jun 30, 2021 Change Change 
Service charges on deposit accounts $112 $106 $6  5.66%
Gain on sale of securities  435  92  343  372.83%
Gain on sale of loans  988  1,091  (103) (9.44)%
Loan-related fees  87  211  (124) (58.77)%
Dividends on FHLB stock  100  92  8  8.70%
Earnings on bank-owned life insurance  68  60  8  13.33%
Other income  238  194  44  22.68%
Total non-interest income $2,028 $1,846 $182  9.86%

Non-interest income during the three months ended September 30, 2021 increased $0.2 million, or 9.86%, to $2.0 million, compared to $1.8 million during the three months ended June 30, 2021. Gain on sale of securities increased by $0.3 million, or 372.83%, during the quarter, totaling $0.4 million during the three months ended September 30, 2021, as compared to $0.1 million during the three months ended June 30, 2021. This increase was primarily due to the sale of approximately $24.6 million of municipal securities, mortgage-backed securities, and U.S. government treasuries during the three months ended September 30, 2021. This increase was partially offset by a decrease in gain on sale of loans of $0.1 million, or 9.44%, and a decrease in loan-related fees of $0.1 million, or 58.77%, for the quarter ended September 30, 2021, as compared to the quarter ended June 30, 2021. The decline in gain on sale of loans related to a change in the fiscal transfer agent in the SBA’s 7a loan guarantee program, effective August 30, 2021. The change in transfer agent slowed the Company’s ability to sell loans in September 2021, thus resulting in a decline in gain on sale of loans. The decrease in loan-related fees resulted primarily from a decrease in swap referral fees recognized in the quarter ended September 30, 2021, as compared to the quarter ended June 30, 2021.   

The following table presents the key components of non-interest income for the periods indicated:

  For the three months ended $ % 
(dollars in thousands) Sep 30, 2021 Sep 30, 2020 Change Change 
Service charges on deposit accounts $112 $93 $19  20.43%
Gain on sale of securities  435  275  160  58.18%
Gain on sale of loans  988  1,194  (206) (17.25)%
Loan-related fees  87  710  (623) (87.75)%
Dividends on FHLB stock  100  74  26  35.14%
Earnings on bank-owned life insurance  68  59  9  15.25%
Other income  238  130  108  83.08%
Total non-interest income $2,028 $2,535 $(507) (20.00)%

Non-interest income during the three months ended September 30, 2021 decreased $0.5 million, or 20.00%, to $2.0 million, compared to $2.5 million during the three months ended September 30, 2020. Gain on sale of loans decreased by $0.2 million, or 17.25%, to $1.0 million for the three months ended September 30, 2021, as compared to $1.2 million for the three months ended September 30, 2020. The decline in gain on sale of loans related to a change in the fiscal transfer agent in the SBA’s 7a loan guarantee program, effective August 30, 2021. The change in transfer agent slowed the Company’s ability to sell loans in September 2021, thus resulting in a decline in gain on sale of loans. Additionally, the decline in gain on sale of loans resulted from lower volumes period over period. Loan-related fees decreased by $0.6 million, or 87.75%, to $0.1 million for the three months ended September 30, 2021, as compared to $0.7 million for the three months ended September 30, 2020. The decrease in loan-related fees resulted primarily from a $0.3 million decrease in swap referral fees recognized in the quarter ended September 30, 2021, as compared to the quarter ended September 30, 2020, combined with $0.4 million of loan-related fees earned during the quarter ended September 30, 2020 for processing micro-loans to businesses in the local area in response to COVID-19, which did not recur in the quarter ended September 30, 2021. These declines were partially offset by an increase in gain on sale of securities of approximately $0.2 million, or 58.18%, to $0.4 million for the three months ended September 30, 2021, as compared to $0.3 million for the three months ended September 30, 2020. This increase was primarily due to the sale of approximately $24.6 million of municipal securities, mortgage-backed securities, and U.S. government treasuries during the three months ended September 30, 2021, as compared to sales of approximately $7.7 million of municipal and mortgage-backed securities during the quarter ended September 30, 2020.

Non-interest Expense

The following table presents the key components of non-interest expense for the periods indicated:

  For the three months ended $ % 
(dollars in thousands) Sep 30, 2021 Jun 30, 2021 Change Change 
Salaries and employee benefits $4,980 $4,939 $41  0.83%
Occupancy and equipment  502  441  61  13.83%
Data processing and software  611  598  13  2.17%
Federal Deposit Insurance Corporation (“FDIC”) insurance  110  150  (40) (26.67)%
Professional services  505  1,311  (806) (61.48)%
Advertising and promotional  366  265  101  38.11%
Loan-related expenses  462  218  244  111.93%
Other operating expenses  1,105  1,658  (553) (33.35)%
Total non-interest expense $8,641 $9,580 $(939) 9.80%

Non-interest expense for the quarter ended September 30, 2021 decreased $0.9 million, or 9.80%, to $8.6 million, as compared to $9.6 million during the quarter ended June 30, 2021, primarily as a result of a $0.8 million, or 61.48%, decrease in professional services and a $0.6 million, or 33.35%, decrease in other operating expenses, partially offset by an increase of $0.2 million, or 111.93%, in loan-related expenses. The $0.8 million decrease in professional services was primarily a result of $0.7 million of audit, consulting, and legal costs incurred in the quarter ended June 30, 2021 to support corporate organizational matters leading up to the Company’s IPO in May 2021, which did not recur in the quarter ended September 30, 2021. Other operating expenses, which are comprised of travel, insurance, postage and supplies, director fees, other employee expenses, armored car expenses, courier services, and other miscellaneous administrative expenses, decreased by $0.6 million, primarily due to stock compensation expense recognized in the quarter ended June 30, 2021 for director grants of $0.8 million, which did not recur in the quarter ended September 30, 2021. Loan-related expenses increased by $0.2 million, primarily as a result of a $0.2 million accrual for an SBA matter in the normal course of business.

The following table presents the key components of non-interest expense for the periods indicated:

  For the three months ended $ % 
(dollars in thousands) Sep 30, 2021 Sep 30, 2020 Change Change 
Salaries and employee benefits $4,980 $3,969 $1,011  25.47%
Occupancy and equipment  502  447  55  12.30%
Data processing and software  611  529  82  15.50%
FDIC insurance  110  320  (210) (65.63)%
Professional services  505  447  58  12.98%
Advertising and promotional  366  264  102  38.64%
Loan-related expenses  462  185  277  149.73%
Other operating expenses  1,105  1,073  32  2.98%
Total non-interest expense $8,641 $7,234 $1,407  19.45%

Non-interest expense increased by $1.4 million, or 19.45%, to $8.6 million during the three months ended September 30, 2021, as compared to $7.2 million for the three months ended September 30, 2020, primarily as a result of a $1.0 million, or 25.47%, increase in salaries and employee benefits and a $0.3 million, or 149.73%, increase in loan-related expenses, partially offset by a $0.2 million, or 65.63%, decrease in FDIC insurance. Salaries and employee benefits increased by $1.0 million to $5.0 million during the three months ended September 30, 2021, as compared to $4.0 million for the three months ended September 30, 2020. This increase was primarily related to an increase of full-time equivalent employees, increased commissions related to our loan and deposit growth for the quarter ended September 30, 2021, compared to September 30, 2020, and restricted stock compensation expense recognized for employee grants of $0.2 million during the three months ended September 30, 2021. Loan-related expenses increased by $0.3 million period-over-period to $0.5 million for the quarter ended September 30, 2021, due to a $0.2 million accrual for an SBA matter in the normal course of business. FDIC insurance decreased from $0.3 million for the three months ended September 30, 2020 to $0.1 million for the three months ended September 30, 2021, primarily due to an improvement in the leverage ratio used in the FDIC assessment as a result of the Company’s IPO in May 2021.

Provision for Income Taxes

The Company terminated its status as a “Subchapter S” corporation as of 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. The provision recorded for the three months ended September 30, 2021 was calculated using 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. Refer to the section entitled “Pro Forma C Corporation Income Tax Expense” below for a discussion on what the Company’s income tax expense and net income would have been had the Company been taxed as a C Corporation for the quarters ended June 30, 2021 and September 30, 2020.

In conjunction with the termination of the Subchapter S corporation status as of May 5, 2021, the C Corporation deferred tax assets and liabilities were estimated for future tax consequences attributable to differences between the financial statement carrying amounts of the Company’s existing assets and liabilities and their respective tax bases. The deferred tax assets and liabilities were measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of the change in tax rates resulting from becoming a C Corporation was recognized as a net deferred tax asset of $5.4 million and a reduction to the provision for income taxes of $4.6 million during the three months ended June 30, 2021.

Provision for income taxes for the quarter ended September 30, 2021 increased by $1.5 million, or 209.26%, to $2.3 million, as compared to $0.7 million during the quarter ended June 30, 2021. This increase is due to the change in the annual effective tax rate used from 3.50% prior to the IPO to 20.77% after the IPO, as noted above, as applied to estimated taxable income during the quarter ended September 30, 2021. During the quarter ended June 30, 2021, the provision for income taxes was partially offset by the $4.6 million reduction to the provision for income taxes for the adjustment of the net deferred tax assets due to the termination of the Company’s S Corporation status.

Provision for income taxes increased by $1.9 million, or 565.69%, to $2.3 million during the three months ended September 30, 2021, as compared to $0.3 million for the three months ended September 30, 2020. This increase is due to the change in the effective tax rate used from 3.50% to 20.77%, as noted above, and as applied to estimated taxable income during the quarter ended September 30, 2021, as noted above.

Pro Forma C Corporation Income Tax Expense

Because of the Company’s status as a Subchapter S Corporation prior to May 5, 2021, no U.S. federal income tax expense was recorded for the S Corporation period of the three months ended June 30, 2021 and for the entirety of the three months ended September 30, 2020. Had the Company been taxed as a C Corporation and paid U.S. federal income tax for such periods, the combined statutory income tax rate would have been 29.56% in each period. These pro forma statutory rates reflect a U.S. federal income tax rate of 21.00% and a California income tax rate of 8.56%, after adjustment for the federal tax benefit, on corporate taxable income. Had the Company been subject to U.S. federal income tax for each of these periods, on a statutory income tax rate pro forma basis, the provision for combined federal and state income tax would have been $3.1 million and $2.9 million, for the three months ended June 30, 2021 and September 30, 2020, respectively. As a result of the foregoing factors, the Company’s pro forma net income (after U.S. federal and California state income tax) for the three months ended June 30, 2021 and September 30, 2020 would have been $7.4 million and $6.8 million, respectively.

Webcast Details

Five Star Bancorp will host a webcast on Tuesday, October 26, 2021, at 10:00 a.m. PT (1:00 p.m. ET), to discuss its third 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 two loan production offices throughout 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 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)

  For the three months ended 
(dollars in thousands, except share and per share data) September 30,
2021
 June 30,
2021
 September 30,
2020
 
Revenue and Expense Data          
Interest income $20,832 $19,308 $18,434 
Interest expense  923  1,012  2,207 
Net interest income  19,909  18,296  16,227 
Provision for loan losses      1,850 
Net interest income after provision  19,909  18,296  14,377 
Non-interest income:          
Service charges on deposit accounts  112  106  93 
Gain on sale of securities  435  92  275 
Gain on sale of loans  988  1,091  1,194 
Loan-related fees  87  211  710 
Dividends on FHLB stock  100  92  74 
Earnings on bank-owned life insurance  68  60  59 
Other income  238  194  130 
Total non-interest income  2,028  1,846  2,535 
Non-interest expense:          
Salaries and employee benefits  4,980  4,939  3,969 
Occupancy and equipment  502  441  447 
Data processing and software  611  598  529 
FDIC insurance  110  150  320 
Professional services  505  1,311  447 
Advertising and promotional  366  265  264 
Loan-related expenses  462  218  185 
Other operating expenses  1,105  1,658  1,073 
Total non-interest expense  8,641  9,580  7,234 
Total income before taxes  13,296  10,562  9,678 
Provision for income taxes  2,270  734  341 
Net income $11,026 $9,828 $9,337 
           
Share Data          
Earnings per common share:          
Basic $0.64 $0.67 $0.94 
Diluted $0.64 $0.67 $0.94 
Weighted average basic common shares outstanding  17,095,957  14,650,208  9,902,952 
Weighted average diluted common shares  17,123,182  14,667,804  9,902,952 
           
Credit Quality          
Allowance for loan losses to period end nonperforming loans  3923.67% 5139.91% 1319.30%
Nonperforming loans to period end loans  0.03% 0.03% 0.10%
Nonperforming assets to total assets  0.02% 0.02% 0.07%
Nonperforming loans plus performing TDRs to total loans  0.03% 0.03% 0.11%
COVID-19 deferments to period end loans  0.72% 0.81% 2.51%
           
Selected Financial Ratios          
ROAA  1.85% 1.75% 1.81%
ROAE  19.26% 24.25% 32.33%
Net interest margin  3.60% 3.48% 3.30%
Loan to deposit  78.86% 76.84% 82.73%


(dollars in thousands) September 30,
2021
 June 30,
2021
 December 31,
2020
 
Balance Sheet Data          
Cash and due from financial institutions $89,951 $165,927 $46,028 
Interest-bearing deposits  440,881  370,677  244,465 
Time deposits in banks  17,204  19,451  23,705 
Securities - available-for-sale, at fair value  153,821  160,074  114,949 
Securities - held-to-maturity, at amortized cost  4,955  6,473  7,979 
Loans held for sale  5,267  2,340  4,820 
Loans, gross  1,704,716  1,585,462  1,503,159 
Allowance for loan losses  (21,848) (22,153) (22,189)
Loans, net  1,682,868  1,563,309  1,480,970 
Federal Home Loan Bank stock  6,723  6,723  6,232 
Premises and equipment, net  1,630  1,649  1,663 
Bank owned life insurance  11,142  11,074  8,662 
Interest receivable and other assets  20,052  20,170  14,292 
Total assets $2,434,493 $2,327,867 $1,953,765 
           
Non-interest-bearing deposits $895,468 $829,036 $695,687 
Interest-bearing deposits  1,272,926  1,237,249  1,088,314 
Total deposits  2,168,394  2,066,285  1,784,001 
Subordinated notes, net  28,370  28,353  28,320 
Interest payable and other liabilities  11,091  14,915  7,669 
Total liabilities  2,207,855  2,109,553  1,819,990 
           
Common stock  218,026  218,026  110,082 
Retained earnings  8,442    22,348 
Accumulated other comprehensive income (loss), net  (20) 288  1,345 
Total shareholders’ equity $226,638 $218,314 $133,775 
           
Quarterly Average Balance Data          
Average loans $1,625,995 $1,578,438 $1,530,227 
Average interest-earning assets $2,196,253 $2,106,252 $1,866,372 
Average total assets $2,365,159 $2,247,009 $1,983,049 
Average deposits $2,100,108 $2,040,489 $1,818,360 
Average borrowings and subordinated debt $28,364 $28,339 $28,311 
Average total equity $227,155 $162,560 $129,762 
           
Capital Ratio Data          
Total shareholders’ equity to total assets  9.31% 9.38% 6.85%
Tangible common equity to tangible assets(1)  9.31% 9.38% 6.85%
Total capital (to risk-weighted assets)  15.70% 16.41% 12.18%
Tier 1 capital (to risk-weighted assets)  12.84% 13.39% 8.98%
Common equity Tier 1 capital (to risk-weighted assets)  12.84% 13.39% 8.98%
Tier 1 leverage ratio  9.54% 9.59% 6.58%

(1) See “Non-GAAP Reconciliation (Unaudited)” table for reconciliation of non-GAAP measure.

Non-GAAP Reconciliation (Unaudited)

The Company uses financial information in its analysis of the Company’s performance that are 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, and they 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 as of any of the dates indicated. As a result, tangible shareholders’ equity to tangible assets is the same as total shareholders’ equity to total assets as of each of the dates indicated.

Average loan yield, excluding PPP loans, is defined as the daily average loan yield, excluding SBA-guaranteed PPP loans, and includes both performing and nonperforming loans. The most directly comparable GAAP financial measure is average loan yield. 

Allowance for loan losses to total loans, excluding SBA-guaranteed PPP loans, is defined as allowance for loan losses, divided by total loans less SBA-guaranteed PPP loans. The most directly comparable GAAP financial measure is allowance for loan losses to total loans. 

The following reconciliation tables provide a more detailed analysis of these non-GAAP financial measures.

Tangible shareholders’ equity to tangible assets
(dollars in thousands)
 September 30,
2021
 June 30,
2021
 December 31,
2020
 
Tangible shareholders’ equity (numerator) $226,638 $218,314 $133,775 
Tangible assets (denominator)  2,434,493  2,327,867  1,953,765 
Tangible shareholders’ equity to tangible assets  9.31% 9.38% 6.85%


Average loan yield, excluding SBA PPP loans
(dollars in thousands)
 September 30,
2021
 June 30,
2021
 September 30,
2020
 
Interest income on loans $20,085 $18,626 $17,735 
Less: interest income on SBA PPP loans  2,054  1,771  1,663 
Interest income on loans, excluding SBA PPP loans  18,031  16,855  16,072 
Annualized interest income on loans, excluding SBA PPP loans (numerator)  71,536  67,605  63,939 
           
Average total loans $1,625,995 $1,578,438 $1,539,239 
Less: average SBA PPP loans  89,436  158,568  253,366 
Average total loans, excluding SBA PPP loans (denominator)  1,536,559  1,419,870  1,285,873 
Average loan yield, excluding SBA PPP loans  4.66% 4.76% 4.97%


Allowance for loan losses to total loans, excluding SBA PPP loans
(dollars in thousands)
 September 30, 2021 December 31, 2020  
Allowance for loan losses (numerator) $21,848  $22,189  
Total loans  1,709,982   1,507,979  
Less: SBA PPP loans  61,499   147,965  
Total loans, excluding SBA PPP loans (denominator)  1,648,483   1,360,014  
Allowance for loan losses to total loans, excluding SBA PPP loans  1.33%  1.63% 

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