Five Star Bancorp — Q3 2021 Form 10-Q
Business context and reporting period. Five Star Bancorp is a Northern California bank holding company serving businesses, professionals and individuals. This unaudited filing covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are with December 31, 2020. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $19.9 million | $16.2 million | $56.3 million | $46.0 million |
| Provision for loan losses | $0 | $1.9 million | $0.2 million | $6.0 million |
| Non-interest income | $2.0 million | $2.5 million | $5.5 million | $6.8 million |
| Non-interest expense | $8.6 million | $7.2 million | $27.0 million | $19.3 million |
| Net income | $11.0 million | $9.3 million | $31.1 million | $26.5 million |
| Diluted EPS | $0.64 | $0.94 | $2.18 | $2.72 |
| Net interest margin | 3.60% | 3.30% | 3.63% | 3.53% |
| Efficiency ratio | 39.39% | 38.56% | 43.77% | 36.65% |
- Balance sheet at September 30: assets were $2.43 billion, up 24.6% from year-end 2020; loans held for investment were $1.71 billion gross ($1.68 billion net of allowance and deferred fees), and deposits were $2.17 billion.
- Funding and liquidity: cash and cash equivalents were $530.8 million, up $240.3 million year to date. Deposits increased $384.4 million; non-interest-bearing deposits were $895.5 million, or 41.3% of deposits. The loan-to-deposit ratio was 78.86%, versus 84.50% at year-end.
- Cash flows, nine months: operating activities provided $24.7 million; investing activities used $230.6 million; financing activities provided $446.3 million. Net cash increased $240.3 million.
- Debt and capital: subordinated notes, net, totaled $28.4 million; there were no outstanding FHLB or other borrowings. Bancorp total risk-based capital was 15.66%; the Bank’s was 15.34%, and the Bank remained well-capitalized.
- Credit quality: allowance for loan losses was $21.8 million, or 1.28% of loans (1.33% excluding PPP loans). Non-accrual loans were $0.6 million, or 0.03% of loans; there were no loans over 90 days past due and still accruing.
Material changes and interpretation
- Quarterly net income rose 18% year over year, while diluted EPS fell from $0.94 to $0.64. The IPO substantially increased weighted-average shares; the filing’s tax-adjusted pro forma Q3 2020 EPS was $0.69, a more comparable reference.
- Nine-month net income increased, but comparison is affected by the conversion from S corporation to C corporation taxation on May 5, 2021. A $4.6 million deferred-tax adjustment reduced the 2021 nine-month tax provision. Excluding that discrete item, pro forma nine-month 2021 net income was $26.5 million and EPS was $1.86, versus pro forma 2020 net income of $19.3 million and EPS of $1.98.
- Loan growth was driven mainly by commercial real estate, land and development, and construction lending; gross loans rose $202.0 million year to date. PPP loans declined $86.5 million to $61.5 million as forgiveness progressed.
- Lower deposit costs and higher loan balances supported net interest income and margin. The cost of funds fell to 0.17% for Q3 from 0.46% a year earlier. However, higher payroll and IPO-related professional costs contributed to the higher efficiency ratio, particularly year to date.
- Reported nine-month return on average equity was 24.01%, down from 31.87%; comparison is affected by the larger equity base following the IPO and tax-status change.
Outlook, risks and unusual items
- Management expects continued loan-portfolio growth, believes liquidity is adequate for the next 12 months, and anticipates efficiency improvement as IPO-related costs abate. These are expectations, not quantified earnings guidance; the filing provides no specific forward financial targets.
- The July 2021 dividend was $0.15 per share; the board declared another $0.15 per share dividend on October 5, 2021. Nine-month shareholder distributions totaled $49.4 million, including a $27.0 million pre-IPO accumulated-adjustments-account distribution.
- Eight COVID-19 relief relationships, comprising eight loans totaling $12.2 million, remained on payment relief at quarter-end. Management said loans whose relief ended during the quarter returned to contractual payments without risk-grade downgrades or TDR classification.
- Real-estate-related loans represented approximately 86% of the portfolio, and commercial real estate loans equaled 500.53% of risk-based capital. Management cited local economic and property-market exposure, COVID-19 effects, borrower and deposit concentration, interest-rate sensitivity, and climate or natural-disaster risks.
- Deposit concentration is notable: 64 relationships above $5 million totaled $1.1 billion, about 51.3% of deposits; the largest relationship was $190.2 million, or 8.77%. Uninsured non-time deposits were reported at $1.1 billion.
- Unfunded loan commitments and standby letters of credit totaled $203.6 million. Management reported no pending legal matter expected to materially affect results; a $0.2 million accrual for an SBA matter was included in Q3 loan-related expenses.
- CECL adoption was expected January 1, 2023; management said the effect could increase the allowance but could not yet quantify it. Lease accounting changes were expected to apply beginning in 2022.
Important facts for investors to verify
- How much of the apparent earnings growth persists after separating the $4.6 million deferred-tax benefit, IPO-related share issuance, and nonrecurring public-company costs.
- Loan growth and allowance adequacy, particularly in commercial real estate, as COVID-19 relief ends and the portfolio remains concentrated in Northern California.
- Stability and pricing of large, uninsured and public-sector deposits, and the bank’s liquidity capacity if major relationships withdraw funds.
- Progress on PPP forgiveness and any SBA servicing, guarantee, or repurchase exposure, including the accrued SBA matter.
- Interest-rate sensitivity, including the effect of changing rates on the predominantly variable-rate loan portfolio, deposit costs, securities values, and LIBOR-linked contracts and notes.
- Future CECL impact, regulatory capital headroom, and the terms and dividend capacity associated with subordinated notes.