Five Star Bancorp Announces Quarterly Results

Apr 25, 2022
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RANCHO CORDOVA, Calif., April 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 $9.9 million for the quarter ended March 31, 2022, as compared to $11.3 million for the quarter ended December 31, 2021 and $10.3 million for the quarter ended March 31, 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 March 31, 2022 and December 31, 2021 were calculated using the actual effective tax rates of 27.07% and 10.43%, respectively, while the results for the three months ended March 31, 2021 have been calculated using a 3.50% S Corporation tax rate. Performance highlights and other developments for the Company for the periods noted below included the following:

  • Pre-tax net income for the three months ended March 31, 2022, as compared to the three months ended December 31, 2021 and the three months ended March 31, 2021 were as follows:
 Three months ended
 March 31,
2022		 December 31,
2021		 March 31,
2021
Pre-tax net income$13,522 $12,630 $10,660
  • Earnings per share for the three months ended March 31, 2022, as compared to the three months ended December 31, 2021 and three months ended March 31, 2021 were as follows:
 Three months ended
 March 31,
2022		 December 31,
2021		 March 31,
2021
Basic earnings per common share$0.58 $0.66 $0.93
Diluted earnings per common share$0.58 $0.66 $0.93
Weighted average basic common shares outstanding 17,102,508  17,096,230  10,998,041
Weighted average diluted common shares outstanding 17,164,519  17,139,693  10,998,041
Shares outstanding at end of period 17,246,199  17,224,848  11,007,005
  • Loan and deposit growth at March 31, 2022, as compared to December 31, 2021 and March 31, 2021, were as follows:
(dollars in thousands)March 31,
2022		 December 31,
2021		 $ Change % Change
Loans held for investment$2,080,158 $1,934,460 $145,698  7.53%
Loans held for investment, excluding Paycheck Protection Program (“PPP”) loans(1) 2,078,630  1,912,336  166,294  8.70%
PPP loans 1,528  22,124  (20,596) (93.09)%
PPP deferred fees 42  628  (586) (93.31)%
Non-interest-bearing deposits 941,285  902,118  39,167  4.34%
Interest-bearing deposits 1,561,807  1,383,772  178,035  12.87%
        
(dollars in thousands)March 31,
2022		 March 31,
2021		 $ Change % Change
Loans held for investment$2,080,158 $1,543,493 $536,665  34.77%
Loans held for investment, excluding PPP loans(1) 2,078,630  1,360,617  718,013  52.77%
PPP loans 1,528  182,876  (181,348) (99.16)%
PPP deferred fees 42  4,761  (4,719) (99.12)%
Non-interest-bearing deposits 941,285  804,044  137,241  17.07%
Interest-bearing deposits 1,561,807  1,179,066  382,741  32.46%

(1) See the section entitled “Non-GAAP Reconciliation (Unaudited)” for a reconciliation of this non-GAAP financial measure.

  • PPP income recognized for the quarter ended March 31, 2022 totaled $0.6 million, as compared to $1.1 million for the quarter ended December 31, 2021 and and $2.0 million for the quarter ended March 31, 2021.
  • At March 31, 2022, the Company reported total loans held for investment, total assets, and total deposits of $2.1 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.
  • For the three months ended March 31, 2022, the Company recorded a provision for loan losses of $1.0 million, as compared to $1.5 million for the three months ended December 31, 2021 and $0.2 million for the three months ended March 31, 2021.
  • At March 31, 2022, the ratio of nonperforming loans to loans held for investment, or total loans at period end, of 0.06% increased from 0.03% at December 31, 2021.
  • For the quarter ended March 31, 2022, net interest margin was 3.60%, as compared to 3.67% for the quarter ended December 31, 2021 and 3.83% for the quarter ended March 31, 2021.
  • 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 March 31, 2022. Additionally, based on the filing of the Company's final S Corporation tax return during the quarter ended March 31, 2022, the Company paid an additional distribution, representing the remaining balance of the Company's accumulated adjustments account, of an aggregate balance of approximately $4.9 million, or $0.45 per share, to S Corporation shareholders of record as of May 3, 2021, in connection with the IPO.
  • For the three months ended March 31, 2022, the Company’s return on average assets (“ROAA”) was 1.53% and the return on average equity (“ROAE”) was 17.07%, as compared to ROAA and ROAE of 1.82% and 19.15%, respectively, for the three months ended December 31, 2021, and 2.05% and 32.08%, respectively, for the three months ended March 31, 2021.
  • Effective January 1, 2022, the Company adopted Accounting Standards Update ("ASU") 2016-02, Leases, ultimately recording a lease liability of approximately $5.2 million on its consolidated balance sheet upon adoption, along with a corresponding right-of-use asset.

“The strength of the Company's first quarter financial results is emblematic of a reputation built on an unwavering commitment to customers and community partners who rely on our speed to serve and certainty of execution for their own successes,” said President and Chief Executive Officer, James Beckwith. “This differentiated customer experience has led to great demand for our services and seized market opportunities evidenced by substantial growth in loans and deposits in the first quarter. Our people, technology, operating efficiencies, conservative underwriting practices, and expense management have also contributed to our robust organic growth. As we execute on the expansion of industry verticals and our presence in new geographies to meet customer demand, we expect the ongoing acceleration of our growth to benefit our customers, employees, and shareholders. We also expect our proven ability to adapt to changing economic conditions to serve us well into the future.”

Summary Results

For the three months ended March 31, 2022, the Company’s ROAA and ROAE were 1.53% and 17.07%, respectively, as compared to 1.82% and 19.15%, respectively, for the three months ended December 31, 2021, and 2.05% and 32.08%, respectively, for the three months ended March 31, 2021.

As compared to the three months ended December 31, 2021, net income for the three months ended March 31, 2022 decreased, while average assets increased and average equity remained largely unchanged. The decrease in net income from the three months ended December 31, 2021 to the three months ended March 31, 2022 was due to an increase in the provision for income taxes of $2.3 million as a result of a higher effective tax rate than that of the three months ended December 31, 2021. As compared to the three months ended December 31, 2021, the increase in average assets was largely the result of an increase in average loans held for investment and sale due to loan growth, while average equity remained stable due to offsetting impacts from the recognition of net income, distributions of cash during the period, and the recognition of other comprehensive loss during the period.

As compared to the three months ended March 31, 2021, net income for the three months ended March 31, 2022 decreased, while average assets and average equity increased. The decrease in net income was due to 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. As compared to the three months ended March 31, 2021, the increase in average assets was largely the result of an increase in average loans held for investment and sale due to loan growth, and the increase in average equity was primarily the result of net proceeds received from the issuance of additional shares of common stock in the Company’s IPO during the second quarter of 2021.
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) March 31,
2022		 December 31,
2021		 $ Change % Change
Selected operating data:        
Net interest income $21,862  $21,358  $504  2.36%
Provision for loan losses  950   1,500   (550) (36.67)%
Non-interest income  2,185   1,790   395  22.07%
Non-interest expense  9,575   9,018   557  6.18%
Pre-tax net income  13,522   12,630   892  7.06%
Provision for income taxes  3,660   1,321   2,339  177.06%
Net income  9,862   11,309   (1,447) (12.80)%
Earnings per common share:        
Basic $0.58  $0.66  $(0.08) (12.12)%
Diluted $0.58  $0.66  $(0.08) (12.12)%
Performance and other financial ratios:        
ROAA  1.53%  1.82%    
ROAE  17.07%  19.15%    
Net interest margin  3.60%  3.67%    
Cost of funds  0.17%  0.16%    
         
  Three months ended    
(dollars in thousands, except per share data) March 31,
2022		 March 31,
2021		 $ Change % Change
Selected operating data:        
Net interest income $21,862  $18,048  $3,814  21.13%
Provision for loan losses  950   200   750  375.00%
Non-interest income  2,185   1,616   569  35.21%
Non-interest expense  9,575   8,804   771  8.76%
Pre-tax net income  13,522   10,660   2,862  26.85%
Provision for income taxes  3,660   382   3,278  858.12%
Net income  9,862   10,278   (416) (4.05)%
Earnings per common share:        
Basic $0.58  $0.93  $(0.35) (37.63)%
Diluted $0.58  $0.93  $(0.35) (37.63)%
Performance and other financial ratios:        
ROAA  1.53%  2.05%    
ROAE  17.07%  32.08%    
Net interest margin  3.60%  3.83%    
Cost of funds  0.17%  0.24%    

Balance Sheet Summary

Total assets at March 31, 2022 were $2.8 billion, an increase of $221.5 million from $2.6 billion at December 31, 2021. The increase was primarily due to a $79.6 million increase in cash and cash equivalents and a $145.7 million increase in total loans held for investment. The $145.7 million increase in total loans held for investment between December 31, 2021 and March 31, 2022 was a result of $312.5 million in non-PPP loan originations, partially offset by $20.6 million in PPP loan forgiveness, $146.6 million in non-PPP loan payoffs and paydowns, and a decrease in deferred loan fees of $0.4 million.
Total liabilities were $2.5 billion at March 31, 2022, an increase of $225.5 million from $2.3 billion at December 31, 2021. The increase in total liabilities was primarily attributable to an increase in deposits of $217.2 million, largely due to increases in interest checking, time deposits over $250 thousand, and non-interest-bearing deposits of $92.7 million, $75.0 million, and $39.2 million, respectively.

Total shareholders’ equity decreased by $4.0 million from $235.0 million at December 31, 2021 to $231.1 million at March 31, 2022, primarily as a result of net income recognized of $9.9 million, offset by a net decline of $6.7 million in other comprehensive income and $7.5 million in cash distributions paid during the three months ended March 31, 2022.

(dollars in thousands) March 31,
2022		 December 31,
2021		 $ Change % Change
Selected financial condition data:        
Total assets $2,778,249 $2,556,761 $221,488  8.66%
Cash and cash equivalents  504,964  425,329  79,635  18.72%
Total loans held for investment  2,080,158  1,934,460  145,698  7.53%
Total investments  139,299  153,753  (14,454) (9.40)%
Total liabilities  2,547,188  2,321,715  225,473  9.71%
Total deposits  2,503,092  2,285,890  217,202  9.50%
Subordinated notes, net  28,403  28,386  17  0.06%
Total shareholders’ equity  231,061  235,046  (3,985) (1.70)%

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) March 31,
2022		 December 31,
2021		 $ Change % Change
Interest and fee income $22,850  $22,253  $597  2.68%
Interest expense  988   895   93  10.39%
Net interest income  21,862   21,358   504  2.36%
Net interest margin  3.60%  3.67%    
         
  Three months ended    
(dollars in thousands) March 31,
2022		 March 31,
2021		 $ Change % Change
Interest and fee income $22,850  $19,190  $3,660  19.07%
Interest expense  988   1,142   (154) (13.49)%
Net interest income  21,862   18,048   3,814  21.13%
Net interest margin  3.60%  3.83%    

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

  Three months ended
  March 31, 2022 December 31, 2021 March 31, 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 $339,737 $192 0.23% $330,825 $143 0.17% $263,120 $104 0.16%
Investment securities  148,736  567 1.54%  160,315  541 1.34%  121,862  473 1.57%
Loans held for investment and sale  1,977,509  22,091 4.53%  1,815,627  21,569 4.71%  1,526,130  18,613 4.95%
Total interest-earning assets  2,465,982  22,850 3.76%  2,306,767  22,253 3.83%  1,911,112  19,190 4.07%
Interest receivable and other assets, net  150,116      159,123      125,981    
Total assets $2,616,098     $2,465,890     $2,037,093    
                   
Liabilities and shareholders’ equity                  
Interest-bearing transaction accounts $276,690 $70 0.10% $165,709 $42 0.10% $154,678 $38 0.10%
Savings accounts  90,815  25 0.11%  84,290  21 0.10%  60,885  16 0.11%
Money market accounts  920,767  367 0.16%  957,030  351 0.15%  867,374  581 0.27%
Time accounts  128,183  83 0.26%  75,332  38 0.20%  46,171  64 0.56%
Subordinated debt  28,393  443 6.33%  28,376  443 6.20%  28,326  443 6.36%
Total interest-bearing liabilities  1,444,848  988 0.28%  1,310,737  895 0.27%  1,157,434  1,142 0.40%
Demand accounts  922,128      914,821      745,605    
Interest payable and other liabilities  14,800      5,988      5,418    
Shareholders’ equity  234,322      234,344      128,636    
Total liabilities & shareholders’ equity $2,616,098     $2,465,890     $2,037,093    
                   
Net interest spread     3.48%     3.56%     3.67%
Net interest income/margin   $21,862 3.60%   $21,358 3.67%   $18,048 3.83%

Net interest income increased during the three months ended March 31, 2022, as compared to the three months ended December 31, 2021 and the three months ended March 31, 2021. Net interest margin decreased 7 basis points to 3.60%, as compared to 3.67% in the quarter ended December 31, 2021, and decreased 23 basis points as compared to 3.83% in the quarter ended March 31, 2021. A key driver in the decrease in net interest margin during the periods indicated was a decrease in average loan yields. Loan yields decreased from 4.95% during the three months ended March 31, 2021, to 4.71% during the three months ended December 31, 2021, and to 4.53% during the three months ended March 31, 2022. Average loan yields, excluding PPP loans, decreased from 4.87% during the three months ended March 31, 2021, to 4.56% during the three months ended December 31, 2021, and to 4.43% during the three months ended March 31, 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. Average loan yields, 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. 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 March 31, 2022, as compared to the prior quarter and the three months ended March 31, 2021, but a majority of these loans were not scheduled to reprice during the three months ended March 31, 2022, also contributing to the downward trend in average loan yields. New loan originations drove increases in the average daily balance of loans from the three months ended March 31, 2021 to the three months ended December 31, 2021 and the three months ended March 31, 2022, which partially offset the aforementioned declining average loan yields. Additionally, yields on PPP loans increased from 5.51%, to 10.72%, to 27.85%, for the quarters ended March 31, 2021, December 31, 2021, and March 31, 2022, respectively, due to an acceleration of deferred fee accretion resulting from PPP loans being forgiven by the Small Business Administration (“SBA”) and repaid, also helping to offset declining average loan yields.

Interest expense increased for the three months ended March 31, 2022, as compared to the three months ended December 31, 2021, and decreased as compared to the three months ended March 31, 2021. Increased average daily balances and increased rates paid on interest-bearing liabilities during the quarter ended March 31, 2022, as compared to the quarter ended December 31, 2021, drove the increase in interest expense during the most recent quarter as compared to the previous quarter. The decline in interest expense for the quarter ended March 31, 2022 when compared to the quarter ended March 31, 2021 was primarily attributed to reductions in the rates offered on money market and maturing deposit products during that period. As a result, the cost of interest-bearing liabilities decreased to 0.28% for the quarter ended March 31, 2022 from 0.40% for the quarter ended March 31, 2021. In addition, the growth of non-interest-bearing deposits continues to benefit the cost of funds as compared to historical periods. Specifically, the cost of funds decreased from 0.24% for the quarter ended March 31, 2021 to 0.16% for the quarter ended December 31, 2021, with a slight increase to 0.17% for the quarter ended March 31, 2022.

Asset Quality

SBA PPP

At March 31, 2022, there were five PPP loans outstanding totaling $1.5 million. Two of these PPP loans, or 40.00% of the total number of PPP loans outstanding at March 31, 2022, totaling $0.1 million, were less than or equal to $0.15 million and had access to streamlined forgiveness processing. At March 31, 2022, 1,424 PPP loan forgiveness applications had been submitted to the SBA and forgiveness payments had been received on 1,422 of these PPP loans, totaling $353.2 million in principal and interest. The Company has submitted all forgiveness applications on the first round of PPP loans and all but three forgiveness applications on the second round of PPP loans. We expect full forgiveness, or repayment by the borrower, on all PPP loans to be completed in the near future.

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 March 31, 2022, six borrowing relationships with six loans totaling $12.2 million were on COVID-19 deferment. All loans that ended COVID-19 deferments in the quarter ended March 31, 2022 have returned to their pre-COVID-19 contractual payment structures with no risk rating downgrades to classified, nor any troubled debt restructuring (“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 March 31, 2022, the Company’s allowance for loan losses was $23.9 million, as compared to $23.2 million at December 31, 2021. The $0.7 million increase is due to a $1.0 million provision for loan losses recorded during the quarter ended March 31, 2022, offset by net charge-offs of $0.3 million during the quarter. At March 31, 2022, the Company’s ratio of nonperforming loans to loans held for investment increased from 0.03% at December 31, 2021 to 0.06%, primarily due to an increase in the Company’s commercial secured nonperforming loans. At March 31, 2022, six loans totaling $12.2 million, or 0.59% of loans held for investment, were in a COVID-19 deferment period, and one loan totaling $0.1 million had been in a COVID-19 deferment in the fourth quarter of 2021 but was not in such deferment at March 31, 2022. Loans designated as watch increased to $14.0 million and loans designated as substandard decreased to $3.0 million at March 31, 2022 from $8.6 million and $10.6 million, respectively, at December 31, 2021, which resulted in a net reduction of $0.1 million in reserves related to classified and watch loans that was offset by an additional provision for loan growth during the quarter. There were no loans with doubtful risk grades at March 31, 2022 or December 31, 2021. A summary of the allowance for loan losses by loan class is as follows:

  March 31, 2022 December 31, 2021
(dollars in thousands) Amount % of
Total		 Amount % of
Total
Collectively evaluated for impairment:        
Real estate:        
Commercial $13,868 58.01% $12,869 55.37%
Commercial land and development  66 0.28%  50 0.22%
Commercial construction  430 1.80%  371 1.60%
Residential construction  40 0.17%  50 0.22%
Residential  208 0.87%  192 0.83%
Farmland  611 2.56%  645 2.78%
Commercial:        
Secured  6,400 26.77%  6,687 28.77%
Unsecured  246 1.03%  207 0.89%
PPP  — —%  — —%
Consumer and other  1,088 4.55%  889 3.82%
Unallocated  308 1.29%  1,111 4.78%
  $23,265 97.33% $23,071 99.28%
Individually evaluated for impairment:        
Commercial secured  639 2.67%  172 0.72%
         
Total allowance for loan losses $23,904 100.00% $23,243 100.00%

The ratio of allowance for loan losses to loans held for investment, or total loans at period end, was 1.15% at March 31, 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 1.15% and 1.22% at March 31, 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 loans, offset by increased reserves based on economic conditions and loan growth realized during the three months ended March 31, 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 March 31, 2022, as compared to three months ended December 31, 2021

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

  Three months ended    
(dollars in thousands) March 31,
2022		 December 31,
2021		 $ Change % Change
Service charges on deposit accounts $108 $116 $(8) (6.90)%
Net gain on sale of securities  5  15  (10) (66.67)%
Gain on sale of loans  918  1,072  (154) (14.37)%
Loan-related fees  617  391  226  57.80%
FHLB stock dividends  102  102  —  —%
Earnings on bank-owned life insurance  90  57  33  57.89%
Other income  345  37  308  832.43%
Total non-interest income $2,185 $1,790 $395  22.07%

Gain on sale of loans. The decrease in gain on sale of loans was primarily due to a $0.2 million gain recognized during the three months ended December 31, 2021 on the sale of a $1.8 million consumer loan portfolio, which did not recur during the three months ended March 31, 2022. During the three months ended March 31, 2022, approximately $11.7 million of loans were sold with an effective yield of 7.84%, compared to approximately $9.7 million of loans sold with an effective yield of 9.38% during the three months ended December 31, 2021. The overall decline in the effective yields recorded quarter over quarter related primarily to declining premiums paid in the secondary market due to uncertain timing of rising interest rates.

Loan-related fees. The increase in loan-related fees resulted primarily from the recognition of $0.3 million in swap referral fees during the three months ended March 31, 2022, compared to $0.1 million of swap referral fees recognized during the three months ended December 31, 2021.

Other income. The increase in other income resulted primarily from a $0.3 million gain recorded on a distribution received on an investment in a venture-backed fund, which did not occur during the quarter ended December 31, 2021.

Three months ended March 31, 2022, as compared to three months ended March 31, 2021

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

  Three months ended   
(dollars in thousands) March 31,
2022		 March 31,
2021		 $ Change % Change
Service charges on deposit accounts $108 $90 $18  20.00%
Net gain on sale of securities  5  182 $(177) (97.25)%
Gain on sale of loans  918  931 $(13) (1.40)%
Loan-related fees  617  260 $357  137.31%
FHLB stock dividends  102  78 $24  30.77%
Earnings on bank-owned life insurance  90  52 $38  73.08%
Other income  345  23 $322  1400.00%
Total non-interest income $2,185 $1,616 $569  35.21%

Net gain on sale of securities. The decrease in net gain on sale of securities was primarily due to the sale of one $1.5 million municipal security for a gain of $5.3 thousand during the three months ended March 31, 2022, compared to $11.5 million of municipal securities sold in the three months ended March 31, 2021 for a total gain recognized of $0.2 million.

Loan-related fees. The increase in loan-related fees primarily related to $0.3 million of swap referral fees recognized during the three months ended March 31, 2022, which did not occur in the three months ended March 31, 2021.

Other income. The increase in other income resulted primarily from a $0.3 million gain recorded on a distribution received on an investment in a venture-backed fund, which did not occur during the three months ended March 31, 2021.

Non-interest Expense

Three months ended March 31, 2022, as compared to three months ended December 31, 2021

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

  Three months ended    
(dollars in thousands) March 31,
2022		 December 31,
2021		 $ Change % Change
Salaries and employee benefits $5,675 $5,209 $466  8.95%
Occupancy and equipment  520  544  (24) (4.41)%
Data processing and software  716  656  60  9.15%
Federal Deposit Insurance Corporation (“FDIC”) insurance  165  160  5  3.13%
Professional services  554  444  110  24.77%
Advertising and promotional  344  499  (155) (31.06)%
Loan-related expenses  278  136  142  104.41%
Other operating expenses  1,323  1,370  (47) (3.43)%
Total non-interest expense $9,575 $9,018 $557  6.18%

Salaries and employee benefits. The increase in salaries and employee benefits was primarily a result of a $0.4 million increase in salaries and benefits related to a 4.17% increase in headcount during the three months ended March 31, 2022, as compared to the three months ended December 31, 2021. In addition, the Company recognized a $0.2 million increase in employer taxes incurred for commission and executive bonus payments made during the three months ended March 31, 2022, and a decrease in deferred loan origination costs of $0.6 million during the three months ended March 31, 2022, as compared to the three months ended December 31, 2021. These increases were partially offset by a reduction of $0.4 million of commissions related to loan and deposit growth for the three months ended March 31, 2022, as compared to the three months ended December 31, 2021.

Professional services. The increase in professional services primarily related to a $0.1 million increase in audit fees recorded for the three months ended March 31, 2022, as compared to the three months ended December 31, 2021.

Advertising and promotional. The decrease in advertising and promotional is primarily related to slight declines in donations and sponsorships due to the timing of events held during the three months ended March 31, 2022, as compared to the three months ended December 31, 2021.

Loan-related expenses. Loan-related expenses increased, primarily as a result of a net overall increase in loan expenses incurred to support loan production in the three months ended March 31, 2022, as compared to the three months ended December 31, 2021, including increased expenses for insurance, taxes, and UCC fees.

Three months ended March 31, 2022, as compared to three months ended March 31, 2021

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

  Three months ended    
(dollars in thousands) March 31, 2022 March 31, 2021 $ Change % Change
Salaries and employee benefits $5,675 $4,697 $978  20.82%
Occupancy and equipment  520  451  69  15.30%
Data processing and software  716  629  87  13.83%
FDIC insurance  165  280  (115) (41.07)%
Professional services  554  1,532  (978) (63.84)%
Advertising and promotional  344  170  174  102.35%
Loan-related expenses  278  229  49  21.40%
Other operating expenses  1,323  816  507  62.13%
Total non-interest expense $9,575 $8,804 $771  8.76%

Salaries and employee benefits. The increase in salaries and employee benefits was primarily a result of a $1.1 million increase related to an 18.24% increase in headcount during the three months ended March 31, 2022, as compared to the three months ended March 31, 2021 combined with a $0.6 million increase in commissions when comparing the quarter ended March 31, 2022 to the three months ended March 31, 2021. These increases were partially offset by a $0.6 million increase in deferred loan origination costs when comparing the three months ended March 31, 2022 to March 31, 2021.

FDIC insurance. FDIC insurance decreased, primarily due to an improvement in the leverage ratio used in the FDIC assessment calculation as a result of the Company’s IPO in May 2021.

Professional services. Professional services decreased, primarily as a result of expenses recognized during the three months ended March 31, 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 March 31, 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 March 31, 2022, as compared to the three months ended March 31, 2021.

Other operating expenses. Other operating expenses increased, primarily due to $0.1 million of stock compensation expense recorded for restricted stock granted to members of the Board of Directors during the three months ended March 31, 2022, combined with the net effect of individually immaterial items, including increases in expenses related to travel, insurance, dues and subscriptions, data, and telephone, which increased as a result of an increase in volume of customers and employees period-over-period.

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. The provision recorded for the three months ended March 31, 2022 yielded an effective tax rate of 27.07%.

Three months ended March 31, 2022, as compared to three months ended December 31, 2021

Provision for income taxes for the quarter ended March 31, 2022 increased by $2.3 million, or 177.06%, to $3.7 million, as compared to $1.3 million for the quarter ended December 31, 2021. This increase was primarily due to the application of the full statutory income tax rate of 29.56% to taxable income for the quarter ended March 31, 2022, partially offset by a return-to-provision true up adjustment of approximately $0.3 million related to tax-exempt loan interest income. Additionally, the Company recorded a true up of certain permanent items in the quarter ended December 31, 2021, including tax-exempt municipal security interest income, which did not recur in the quarter ended March 31, 2022.

Three months ended March 31, 2022, as compared to three months ended March 31, 2021

Provision for income taxes increased by $3.3 million, or 858.12%, to $3.7 million for the three months ended March 31, 2022, as compared to $0.4 million for the three months ended March 31, 2021. This increase is due to the change in the effective tax rate from 3.50% to 27.07%.

Webcast Details

Five Star Bancorp will host a webcast on Tuesday, April 26, 2022, at 1:00 p.m. ET (10:00 a.m. PT), to discuss its first 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 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) March 31,
2022		 December 31,
2021		 March 31,
2021
Revenue and Expense Data      
Interest and fee income $22,850  $22,253  $19,190 
Interest expense  988   895   1,142 
Net interest income  21,862   21,358   18,048 
Provision for loan losses  950   1,500   200 
Net interest income after provision  20,912   19,858   17,848 
Non-interest income:      
Service charges on deposit accounts  108   116   90 
Gain on sale of securities  5   15   182 
Gain on sale of loans  918   1,072   931 
Loan-related fees  617   391   260 
FHLB stock dividends  102   102   78 
Earnings on bank-owned life insurance  90   57   52 
Other income  345   37   23 
Total non-interest income  2,185   1,790   1,616 
Non-interest expense:      
Salaries and employee benefits  5,675   5,209   4,697 
Occupancy and equipment  520   544   451 
Data processing and software  716   656   629 
FDIC insurance  165   160   280 
Professional services  554   444   1,532 
Advertising and promotional  344   499   170 
Loan-related expenses  278   136   229 
Other operating expenses  1,323   1,370   816 
Total non-interest expense  9,575   9,018   8,804 
Total income before taxes  13,522   12,630   10,660 
Provision for income taxes  3,660   1,321   382 
Net income $9,862  $11,309  $10,278 
       
Share and Per Share Data      
Earnings per common share:      
Basic $0.58  $0.66  $0.93 
Diluted $0.58  $0.66  $0.93 
Book value per share $13.40  $13.65  $11.94 
Tangible book value per share(1) $13.40  $13.65  $11.94 
Weighted average basic common shares outstanding  17,102,508   17,096,230   10,998,041 
Weighted average diluted common shares outstanding  17,164,519   17,139,693   10,998,041 
Shares outstanding at end of period  17,246,199   17,224,848   11,007,005 
       
Credit Quality      
Allowance for loan losses to period end nonperforming loans  1,799.99%  3,954.30%  4,341.52%
Nonperforming loans to loans held for investment  0.06%  0.03%  0.03%
Nonperforming assets to total assets  0.05%  0.02%  0.02%
Nonperforming loans plus performing TDRs to loans held for investment  0.06%  0.03%  0.03%
COVID-19 deferments to loans held for investment  0.59%  0.63%  1.11%
       
Selected Financial Ratios      
ROAA  1.53%  1.82%  2.05%
ROAE  17.07%  19.15%  32.08%
Net interest margin  3.60%  3.67%  3.83%
Loan to deposit  83.52%  85.09%  77.99%

(1) See the section entitled “Non-GAAP Reconciliation (Unaudited)” for a reconciliation of this non-GAAP financial measure.

(dollars in thousands) March 31,
2022		 December 31,
2021		 March 31,
2021
Balance Sheet Data      
Cash and due from financial institutions $66,747  $136,074  $44,720 
Interest-bearing deposits  438,217   289,255   389,872 
Time deposits in banks  14,464   14,464   25,696 
Securities - available-for-sale, at fair value  134,813   148,807   127,251 
Securities - held-to-maturity, at amortized cost  4,486   4,946   6,486 
Loans held for sale  10,386   10,671   3,060 
Loans held for investment  2,080,158   1,934,460   1,543,493 
Allowance for loan losses  (23,904)  (23,243)  (22,271)
Loans held for investment, net of allowance for loan losses  2,056,254   1,911,217   1,521,222 
Federal Home Loan Bank stock  6,667   6,723   6,232 
Operating leases, right-of-use asset  4,718   —   — 
Premises and equipment, net  1,836   1,773   1,645 
Bank-owned life insurance  14,343   11,203   8,714 
Interest receivable and other assets  25,318   21,628   15,839 
Total assets $2,778,249  $2,556,761  $2,150,737 
       
Non-interest-bearing deposits $941,285  $902,118  $804,044 
Interest-bearing deposits  1,561,807   1,383,772   1,179,066 
Total deposits  2,503,092   2,285,890   1,983,110 
Subordinated notes, net  28,403   28,386   28,336 
Operating lease liability  4,987   —   — 
Interest payable and other liabilities  10,706   7,439   7,914 
Total liabilities  2,547,188   2,321,715   2,019,360 
       
Common stock  218,721   218,444   110,144 
Retained earnings  19,558   17,168   21,623 
Accumulated other comprehensive loss, net  (7,218)  (566)  (390)
Total shareholders’ equity $231,061  $235,046  $131,377 
       
Quarterly Average Balance Data      
Average loans held for investment and sale $1,977,509  $1,815,627  $1,526,130 
Average interest-earning assets $2,465,982  $2,306,767  $1,911,112 
Average total assets $2,616,098  $2,465,890  $2,037,093 
Average deposits $2,338,583  $2,197,183  $1,874,713 
Average total equity $234,322  $234,344  $128,636 
       
Capital Ratio Data      
Total shareholders’ equity to total assets  8.32%  9.19%  6.11%
Tangible shareholders’ equity to tangible assets(1)  8.32%  9.19%  6.11%
Total capital (to risk-weighted assets)  13.09%  13.98%  12.09%
Tier 1 capital (to risk-weighted assets)  10.71%  11.44%  8.89%
Common equity Tier 1 capital (to risk-weighted assets)  10.71%  11.44%  8.89%
Tier 1 leverage ratio  9.02%  9.47%  6.37%

(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 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. 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.

Total loans held for investment, excluding PPP loans, is defined as total loans held for investment less PPP loans. The most directly comparable GAAP financial measure is total loans held for investment.

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 measure is average loans held for investment and sale.

Average loan yield, excluding PPP loans, is defined as the daily average loan yield, excluding 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 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.

Total loans held for investment, excluding PPP loans
(dollars in thousands)		 March 31,
2022		 December 31,
2021		 March 31,
2021
Total loans held for investment $2,080,158 $1,934,460 $1,543,493
Less: PPP loans  1,528  22,124  182,876
Total loans held for investment, excluding PPP loans $2,078,630 $1,912,336 $1,360,617


  Three months ended
Average loans held for investment and sale, excluding PPP loans
(dollars in thousands)		 March 31,
2022		 December 31,
2021		 March 31,
2021
Average loans held for investment and sale $1,977,509 $1,815,627 $1,526,130
Less: average PPP loans  8,886  44,101  176,384
Average loans held for investment and sale, excluding PPP loans $1,968,623 $1,771,526 $1,349,746


  Three months ended
Average loan yield, excluding PPP loans
(dollars in thousands)		 March 31,
2022		 December 31,
2021		 March 31,
2021
Interest and fee income on loans $22,091  $21,569  $18,613 
Less: interest and fee income on PPP loans  610   1,192   2,400 
Interest and fee income on loans, excluding PPP loans $21,481  $20,377  $16,213 
Annualized interest and fee income on loans, excluding PPP loans (numerator) $87,117  $80,844  $65,753 
       
Average loans held for investment and sale $1,977,509  $1,815,627  $1,526,130 
Less: average PPP loans  8,886   44,101   176,384 
Average loans held for investment and sale, excluding PPP loans (denominator) $1,968,623  $1,771,526  $1,349,746 
Average loan yield, excluding PPP loans  4.43%  4.56%  4.87%


Allowance for loan losses to total loans held for investment, excluding PPP loans
(dollars in thousands)		 March 31,
2022		 December 31,
2021
Allowance for loan losses (numerator) $23,904  $23,243 
Total loans held for investment $2,080,158  $1,934,460 
Less: PPP loans  1,528   22,124 
Total loans held for investment, excluding PPP loans (denominator) $2,078,630  $1,912,336 
Allowance for loan losses to total loans held for investment, excluding PPP loans  1.15%  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


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