Five Star Bancorp — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The consolidated interim financial statements are unaudited. Five Star Bancorp operates Five Star Bank, serving businesses, professionals and individuals primarily in Northern California.
Financial results and condition
Amounts below are in millions of dollars except per-share data and ratios.
| Metric | Q2 2021 / June 30, 2021 | Comparable period / prior date |
|---|---|---|
| Net interest income | $18.3 | $15.6 in Q2 2020; up 17.4% |
| Net income | $9.8 | $10.1 in Q2 2020 |
| Diluted EPS | $0.67 | $1.05 in Q2 2020 |
| Pro forma C-corporation net income / diluted EPS | $7.4 / $0.51 | $7.4 / $0.76 in Q2 2020 |
| Net interest margin | 3.48% | 3.42% in Q2 2020 |
| Efficiency ratio | 47.56% | 33.32% in Q2 2020 |
| Total assets | $2,327.9 | $1,953.8 at December 31, 2020 |
| Gross loans held for investment | $1,589.6 | $1,506.5 at December 31, 2020 |
| Total deposits | $2,066.3 | $1,784.0 at December 31, 2020 |
| Cash and cash equivalents | $536.6 | $290.5 at December 31, 2020 |
| Allowance for loan losses | $22.2; 1.39% of loans | $22.2; 1.47% at December 31, 2020 |
| Subordinated notes, net | $28.4 | $28.3 at December 31, 2020 |
| Shareholders’ equity | $218.3 | $133.8 at December 31, 2020 |
- For the first six months, net interest income was $36.3 million versus $29.8 million; net income was $20.1 million versus $17.1 million; diluted EPS was $1.57 versus $1.77. Six-month net interest margin was 3.65% versus 3.69%, and the efficiency ratio was 46.18% versus 35.60%.
- Six-month cash flow: operating activities provided $21.8 million; investing activities used $122.4 million; financing activities provided $346.8 million. Cash and cash equivalents increased $246.1 million.
- The Bank reported no FHLB or federal funds borrowings outstanding. FHLB financing availability was $197.2 million after letters of credit; the Company also reported $75 million of unused correspondent-bank lines and $26.5 million of Federal Reserve Discount Window capacity.
- The Bank’s loan-to-deposit ratio was 76.84%, down from 84.50% at year-end 2020. Non-interest-bearing deposits were $829.0 million, or 40.12% of deposits.
- Regulatory capital was above applicable well-capitalized thresholds. The Company’s total risk-based capital ratio was 16.41%, compared with 12.18% at year-end; the Bank’s was 16.10%.
Material changes and drivers
- The May 2021 IPO issued 6,054,750 shares at $20 per share. The Company reported $111.2 million of net proceeds and $109.1 million after the specified related expenses. The share count rose to 17,225,508 from 11,000,273 at year-end.
- Loan growth was led by a $151.1 million increase in commercial real estate loans, partly offset by a $27.0 million decrease in PPP loans. Deposits increased $282.3 million, attributed to PPP borrower-related balances and normal movements in large accounts.
- Q2 net interest income increased as average loan balances grew and deposit funding costs declined. Interest expense fell to $1.0 million from $2.7 million. Six-month NIM edged lower as asset yields declined.
- Q2 non-interest expense rose 59.2% to $9.6 million, including higher staffing, professional services and IPO-related director stock compensation. Non-interest income declined 25.4% to $1.8 million, principally reflecting lower securities gains and loan-related fees.
- Net income comparisons are affected by the transition from S-corporation to C-corporation tax status on May 5, 2021. The Company recorded a $4.6 million tax benefit from the related deferred-tax adjustment. Pro forma C-corporation results are provided for comparability; share issuance also reduced reported EPS relative to the prior-year period.
Outlook, risks and contingencies
- Management said it expects the efficiency ratio to improve, partly because IPO-related audit, consulting and legal expenses are not expected to recur significantly. It expects to continue growing the loan portfolio and maintain product and geographic concentrations broadly similar to current levels. No numerical earnings or margin guidance was provided.
- Credit metrics were strong at quarter-end: nonaccrual loans were $0.4 million, or 0.03% of loans; there were no loans past due at June 30, 2021. Ten loans across eight borrowing relationships totaling $12.9 million remained in COVID-19 payment relief, down from $41.4 million at year-end. Management cautioned that borrower performance and collateral values remain sensitive to pandemic and economic conditions.
- Concentration is a key risk: approximately 82.53% of the loan portfolio was real-estate related, and commercial real estate loans equaled 467.17% of risk-based capital. The portfolio and deposit base are concentrated in Northern California; 62 deposit relationships above $5 million represented 51.28% of deposits, and the largest relationship was 8.50%.
- Unfunded loan commitments and standby letters of credit totaled $206.8 million. Letters of credit of $319.5 million supported public deposits and reduced available FHLB capacity. Management stated it believes liquidity is adequate, but noted the potential for large-depositor withdrawals and time-deposit runoff.
- The Company has $28.4 million of subordinated notes, due in 2027 and scheduled to move from fixed to floating rates in 2022. LIBOR transition, interest-rate movements, real-estate exposure, COVID-19 effects, competition, regulatory requirements and cybersecurity are among the disclosed risks.
- Management expects CECL adoption in 2023 could increase the allowance, but said the impact could not yet be reasonably quantified. The Company is also evaluating lease accounting changes. Management did not expect pending ordinary-course legal matters to materially affect financial position or results.
- After quarter-end, the board declared a $0.15-per-share dividend on July 6, 2021. Q2 included $46.8 million of cash distributions during the first half, including a $27.0 million accumulated-adjustments-account payout associated with the C-corporation conversion.
Important facts for investors to verify
- How much of earnings growth depends on PPP forgiveness fees, and how loan yields and funding costs respond to interest-rate changes.
- Whether IPO-related and other elevated operating expenses moderate as management expects, and the resulting trajectory of the efficiency ratio.
- Credit performance of commercial real estate and other concentrated exposures, including the $12.9 million still under COVID-19 payment relief and the adequacy of the loan-loss allowance.
- Deposit stability, especially large and uninsured balances, and the extent to which deposits associated with PPP borrowers persist.
- The sustainability of dividends and the impact of the S-to-C-corporation tax transition, including any obligations under the Tax Sharing Agreement.
- Future CECL estimates and the effects of LIBOR replacement, regulatory capital requirements and the disclosed commercial-real-estate concentration.