Five Star Bancorp(US:FSBC)2023-11-07 16:00PART I FINANCIAL INFORMATION ITEM 1. Financial Statements (unaudited) Presents unaudited consolidated financial statements, including balance sheets, income statements, comprehensive income, shareholders' equity, cash flows, and notes Consolidated Balance Sheets | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :------------------- | :------------------ | | Total assets | $3,505,040 | $3,227,159 | | Total deposits | $3,032,210 | $2,782,004 | | Total liabilities | $3,231,016 | $2,974,334 | | Total shareholders' equity | $274,024 | $252,825 | - Total assets increased by $277.9 million (8.61%) from December 31, 2022, to September 30, 2023, primarily driven by increases in loans held for investment and cash and cash equivalents89 Consolidated Statements of Income | Metric (in thousands, except per share) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net interest income | $27,476 | $27,523 | $84,202 | $73,935 | | Provision for credit losses | $1,050 | $2,250 | $3,200 | $5,450 | | Non-interest income | $1,384 | $1,433 | $5,575 | $5,556 | | Non-interest expense | $12,015 | $10,172 | $35,112 | $29,952 | | Net income | $11,045 | $11,704 | $36,935 | $31,519 | | Basic earnings per common share | $0.64 | $0.68 | $2.15 | $1.84 | | Diluted earnings per common share | $0.64 | $0.68 | $2.15 | $1.84 | - Net income for the three months ended September 30, 2023, decreased to $11.0 million from $11.7 million in the prior year, while for the nine months, it increased to $36.9 million from $31.5 million13 - Basic EPS followed a similar trend, decreasing to $0.64 for the quarter but increasing to $2.15 for the nine-month period13 Consolidated Statements of Comprehensive Income | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $11,045 | $11,704 | $36,935 | $31,519 | | Other comprehensive (loss) | $(2,955) | $(3,323) | $(2,477) | $(15,504) | | Total comprehensive income | $8,090 | $8,381 | $34,458 | $16,015 | - Total comprehensive income for the nine months ended September 30, 2023, significantly increased to $34.5 million from $16.0 million in the prior year, primarily due to a much lower other comprehensive loss in 202315 Consolidated Statements of Shareholders' Equity | Metric (in thousands) | Balance at Dec 31, 2022 | Balance at Sep 30, 2023 | | :-------------------- | :---------------------- | :---------------------- | | Common Stock | $219,543 | $220,266 | | Retained Earnings | $46,736 | $69,689 | | Accumulated Other Comprehensive Loss, net | $(13,454) | $(15,931) | | Total Shareholders' Equity | $252,825 | $274,024 | - Total shareholders' equity increased by $21.2 million from December 31, 2022, to September 30, 2023, driven by net income of $36.9 million, partially offset by cash dividends paid of $9.5 million and an increase in accumulated other comprehensive loss21 Consolidated Statements of Cash Flows | Metric (in thousands) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $40,547 | $27,506 | | Net cash used in investing activities | $(207,705) | $(629,441) | | Net cash provided by financing activities | $230,715 | $494,275 | | Net change in cash and cash equivalents | $63,557 | $(107,660) | | Cash and cash equivalents at end of period | $323,548 | $317,669 | - Net cash provided by operating activities increased by $13.0 million, while net cash used in investing activities decreased significantly by $421.7 million, primarily due to decreased loan origination growth24291292293 - Net cash provided by financing activities decreased by $263.6 million, mainly due to lower deposit growth and borrowings24291292293 Notes to Consolidated Financial Statements Note 1: Basis of Presentation and Summary of Significant Accounting Policies Outlines the Company's organization, financial statement presentation, and significant accounting policies, including the adoption of the CECL model - The Company adopted ASC 326 (CECL model) on January 1, 2023, replacing the 'incurred loss' model with an 'expected loss' model for credit losses on loans, held-to-maturity debt securities, and unfunded loan commitments3553 | Metric (in thousands) | Pre-ASC 326 Adoption | Impact of ASC 326 Adoption | Post-ASC 326 Adoption | | :-------------------- | :------------------- | :------------------------- | :-------------------- | | Allowance for Credit Losses | $(28,389) | $(5,282) | $(33,671) | | Deferred Tax Asset | $12,273 | $1,883 | $14,156 | | Reserve for Unfunded Commitments | $(125) | $(1,092) | $(1,217) | | Retained Earnings | $(46,736) | $4,491 | $(42,245) | - The adoption of ASC 326 resulted in a cumulative-effect adjustment to retained earnings of $4.491 million and increased the Allowance for Credit Losses by $5.282 million as of January 1, 20235356 Note 2: Fair Value of Assets and Liabilities Details the Company's fair value measurements, categorizing assets and liabilities into a three-level hierarchy based on input observability - Fair value measurements are categorized into Level 1 (quoted prices in active markets), Level 2 (significant other observable inputs), and Level 3 (significant unobservable inputs)5859 | Asset/Liability (in thousands) | September 30, 2023 Carrying Value | September 30, 2023 Fair Value Hierarchy | December 31, 2022 Carrying Value | December 31, 2022 Fair Value Hierarchy | | :----------------------------- | :-------------------------------- | :-------------------------------------- | :------------------------------- | :------------------------------------- | | Securities available-for-sale | $104,086 | Level 2 | $115,988 | Level 2 | | Derivatives – interest rate swap (Asset) | $5 | Level 2 | $16 | Level 2 | | Derivatives – interest rate swap (Liability) | $5 | Level 2 | $16 | Level 2 | - As of September 30, 2023, all recurring fair value assets (Securities available-for-sale and Derivatives) were classified as Level 2, indicating valuation based on observable market data rather than quoted prices in active markets62 Note 3: Investment Securities Details the Company's investment securities portfolio, comprising held-to-maturity (HTM) and available-for-sale (AFS) securities | Metric (in thousands) | Sep 30, 2023 Amortized Cost | Sep 30, 2023 Fair Value | Dec 31, 2022 Amortized Cost | Dec 31, 2022 Fair Value | | :-------------------- | :-------------------------- | :---------------------- | :-------------------------- | :---------------------- | | Total held-to-maturity | $3,104 | $2,811 | $3,756 | $3,432 | | Total available-for-sale | $126,703 | $104,086 | $135,087 | $115,988 | - Total investment securities decreased by $12.5 million from $119.7 million at December 31, 2022, to $107.2 million at September 30, 2023, primarily due to maturities, prepayments, and an unrealized loss on available-for-sale securities221 | Pledged To (in thousands) | September 30, 2023 | December 31, 2022 | | :------------------------ | :----------------- | :---------------- | | State of California | $54,076 | $40,465 | | Federal Reserve Discount Window | $49,128 | — | | Total pledged investment securities | $103,204 | $40,465 | - As of September 30, 2023, $103.2 million of investment securities were pledged, a significant increase from $40.5 million at December 31, 2022, primarily due to pledging to the Federal Reserve Discount Window83 Note 4: Loans and Allowance for Credit Losses Details the Company's loan portfolio, underwriting practices, credit quality indicators, and the Allowance for Credit Losses (ACL) | Loan Type (in thousands) | September 30, 2023 | December 31, 2022 | | :----------------------- | :----------------- | :---------------- | | Commercial Real Estate | $2,599,616 | $2,394,674 | | Commercial Land & Development | $15,482 | $7,477 | | Commercial Construction | $95,352 | $88,669 | | Residential Construction | $13,922 | $6,693 | | Residential | $25,028 | $24,230 | | Farmland | $51,921 | $52,478 | | Commercial Secured | $157,273 | $165,186 | | Commercial Unsecured | $23,997 | $25,431 | | Consumer and Other | $29,604 | $28,628 | | Total Loans Held for Investment | $3,009,930 | $2,791,326 | - Total loans held for investment increased by $218.6 million (7.83%) to $3.0 billion at September 30, 2023, primarily driven by growth in commercial real estate loans91165 | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :---------------- | | Non-accrual loans | $2,002 | $404 | | Total nonperforming loans | $2,002 | $404 | | Allowance for credit losses - loans | $34,028 | $28,389 | | ACL to total loans held for investment | 1.13% | 1.02% | - Non-accrual loans increased significantly to $2.0 million at September 30, 2023, from $0.4 million at December 31, 2022109242248250 - The Allowance for Credit Losses (ACL) increased by $5.6 million to $34.0 million, with the ACL to total loans held for investment ratio rising to 1.13% from 1.02%109242248250 Note 5: Interest-Bearing Deposits Details the composition and cost of the Company's interest-bearing deposits, its primary funding source | Deposit Type (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------------- | :----------------- | :---------------- | | Non-interest-bearing | $833,434 | $968,749 | | Interest-bearing | $2,198,776 | $1,813,255 | | Total deposits | $3,032,210 | $2,782,004 | - Total deposits increased by $250.2 million (8.99%) to $3.0 billion at September 30, 20239165255 - Non-interest-bearing deposits decreased by $135.3 million, now representing 27.49% of total deposits, down from 34.82% at December 31, 20229165255 | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total interest expense on interest-bearing deposits | $16,386 | $2,817 | $39,733 | $4,383 | - Interest expense on interest-bearing deposits significantly increased to $16.4 million for the three months and $39.7 million for the nine months ended September 30, 2023, compared to $2.8 million and $4.4 million respectively in the prior year, reflecting rising interest rates123 Note 6: Long Term Debt and Other Borrowings Outlines the Company's long-term debt and other borrowing arrangements, including subordinated notes and FHLB advances - The Company has $75.0 million in fixed-to-floating rate subordinated notes, issued in August 2022, maturing September 1, 2032, with an initial interest rate of 6.00% until September 1, 2027, then adjusting to three-month Term SOFR plus 329.0 basis points124 | Borrowing Type (in thousands) | September 30, 2023 | December 31, 2022 | | :---------------------------- | :----------------- | :---------------- | | FHLB advances | $90,000 | $100,000 | | Subordinated debt, net | $73,713 | $73,606 | - FHLB advances decreased to $90.0 million at September 30, 2023, from $100.0 million at December 31, 2022126128129 - The Company also has unsecured federal funds lines of credit totaling $175.0 million and Federal Reserve Discount Window borrowing capacity of $69.0 million, with no outstanding amounts126128129 Note 7: Shareholders' Equity Provides details on Earnings Per Share (EPS), dividends, and stock-based incentive arrangements | Metric (in thousands, except per share) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic earnings per common share | $0.64 | $0.68 | $2.15 | $1.84 | | Diluted earnings per common share | $0.64 | $0.68 | $2.15 | $1.84 | - The Board of Directors declared a cash dividend of $0.20 per common share on July 20, 2023, totaling $3.5 million132286 - Unrecognized compensation expense related to 82,324 unvested restricted shares was approximately $1.4 million as of September 30, 2023, with a weighted average remaining term of 2.67 years137 Note 8: Commitments and Contingencies Details the Company's off-balance sheet commitments, concentrations of credit and deposit risk, and legal contingencies | Commitment Type (in thousands) | September 30, 2023 | December 31, 2022 | | :----------------------------- | :----------------- | :---------------- | | Commercial lines of credit | $173,603 | $147,021 | | Undisbursed construction loans | $98,901 | $80,726 | | Undisbursed commercial real estate loans | $94,537 | $79,121 | | Total commitments and standby letters of credit | $401,934 | $329,148 | - Total off-balance sheet commitments and standby letters of credit increased to $401.9 million at September 30, 2023, from $329.1 million at December 31, 2022141 - A significant concentration of loans exists in real estate-related loans, representing approximately 92.71% of the loan portfolio at September 30, 2023143144 - The Company also has 86 deposit relationships exceeding $5.0 million, totaling $1.9 billion (61.64% of total deposits)143144 Note 9: Subsequent Events Reports a subsequent event regarding the declaration of a cash dividend by the Company's Board of Directors - On October 19, 2023, the Board of Directors authorized a cash dividend of $0.20 per common share, payable on November 13, 2023148 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, results of operations, asset quality, liquidity, capital, and regulatory developments Company Overview | Metric (in thousands) | September 30, 2023 | | :-------------------- | :----------------- | | Total assets | $3,500,000 | | Total loans held for investment, net of allowance for credit losses | $3,000,000 | | Total deposits | $3,000,000 | - Five Star Bancorp operates through its wholly-owned subsidiary, Five Star Bank, providing banking products and services primarily to small and medium-sized businesses, professionals, and individuals in Northern California155 - The Company's mission is 'purpose-driven and integrity-centered banking,' focusing on real estate, agricultural, faith-based, and small to medium-sized enterprises155 Critical Accounting Estimates - There have been no significant changes concerning the Company's critical accounting estimates as described in its 2022 Annual Report on Form 10-K159 - As an emerging growth company, the Company has elected not to opt out of the extended transition period for adopting new or revised accounting standards, allowing it to adopt standards on the application date for private companies160 Executive Summary | Metric (in thousands, except per share) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------------- | :----------- | :----------- | | Total assets | $3,505,040 | $3,227,159 | | Total loans held for investment | $3,009,930 | $2,791,326 | | Total deposits | $3,032,210 | $2,782,004 | | Net income (9 months) | $36,935 | $31,519 | | Basic EPS (9 months) | $2.15 | $1.84 | | Net interest margin (3 months) | 3.31% | 3.86% | | Efficiency ratio (3 months) | 41.63% | 35.13% | | Total capital ratio | 12.37% | 12.46% | | Nonperforming loans to total loans | 0.07% | 0.01% | - Total deposits increased by $250.2 million to $3.0 billion, while non-interest-bearing deposits decreased to 27.49% of total deposits165 - Total loans held for investment grew by $218.6 million (7.83%) to $3.0 billion165 - Net interest margin contracted to 3.31% for the three months ended September 30, 2023, from 3.86% in the prior year, primarily due to increased deposit costs165 - The efficiency ratio increased to 41.63% for the quarter165 RESULTS OF OPERATIONS Net Interest Income Net interest income remained consistent for the three months but increased for the nine-month period, though net interest margin contracted due to higher liability costs | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net interest income | $27,476 | $27,523 | $84,202 | $73,935 | | Net interest margin | 3.31% | 3.86% | 3.50% | 3.73% | | Cost of funds | 2.28% | 0.62% | 1.96% | 0.35% | - For the three months ended September 30, 2023, net interest income remained stable at $27.5 million, but net interest margin decreased by 55 basis points to 3.31%, primarily due to a 228 basis point increase in the cost of interest-bearing deposits172178 - For the nine months ended September 30, 2023, net interest income increased by $10.3 million (13.89%), but net interest margin decreased by 23 basis points to 3.50%, as the cost of interest-bearing deposits rose by 219 basis points179185 Provision for Credit Losses The provision for credit losses decreased for both the three and nine months ended September 30, 2023, influenced by loan growth, loan mix, macroeconomic conditions, and CECL adoption | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Provision for credit losses | $1,050 | $2,250 | $3,200 | $5,450 | - The provision for credit losses decreased to $1.1 million for the third quarter of 2023 from $2.3 million in the same period of 2022, and to $3.2 million for the first nine months of 2023 from $5.5 million in the prior year, influenced by loan growth and macroeconomic updates188189 - The adoption of ASC 326 (CECL model) on January 1, 2023, impacts the comparability of credit loss provisions between 2022 and 2023, as the new model calculates reserves over the life of the loan187 Non-interest Income Non-interest income saw a slight decrease for the three months but a marginal increase for the nine-month period, driven by changes in loan sale gains, loan-related fees, FHLB stock dividends, and other income | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total non-interest income | $1,384 | $1,433 | $5,575 | $5,556 | | Gain on sale of loans | $396 | $548 | $1,635 | $2,297 | | Loan-related fees | $355 | $447 | $1,052 | $1,800 | | FHLB stock dividends | $274 | $152 | $656 | $353 | | Other income | $74 | $52 | $1,467 | $438 | - Gain on sale of loans decreased by $152 thousand for the three months and $662 thousand for the nine months ended September 30, 2023, due to a decline in loan sale volume and yields192195 - FHLB stock dividends increased by $122 thousand for the three months and $303 thousand for the nine months, driven by higher yields and an increase in FHLB shares outstanding193196197 - Other income also saw a significant increase of $1.029 million for the nine months, primarily from venture-backed fund distributions193196197 Non-interest Expense Non-interest expense increased for both the three and nine months ended September 30, 2023, primarily due to higher salaries, employee benefits, data processing costs, and FDIC insurance premiums | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total non-interest expense | $12,015 | $10,172 | $35,112 | $29,952 | | Salaries and employee benefits | $6,876 | $5,645 | $19,915 | $16,873 | | Data processing and software | $1,020 | $797 | $2,905 | $2,252 | | FDIC insurance | $375 | $195 | $1,187 | $605 | - Salaries and employee benefits increased by $1.2 million for the three months and $3.0 million for the nine months, mainly due to an 8.72% increase in headcount, partially offset by lower loan origination costs and commission expenses202208 - Data processing and software expenses rose due to increased digital banking platform usage and higher transaction volumes203204209210 - FDIC insurance costs nearly doubled due to increased assessment rates and a larger assessment base203204209210 Provision for Income Taxes The provision for income taxes remained stable for the three months but increased for the nine months ended September 30, 2023, reflecting changes in pre-tax income and a state tax benefit | Metric (in thousands) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Provision for income taxes | $4,750 | $4,830 | $14,530 | $12,570 | | Effective income tax rate | 30.07% | 29.21% | 28.23% | 28.51% | - The nine-month provision for income taxes increased by $1.96 million to $14.5 million, primarily due to higher pre-tax income, partially offset by a $0.5 million state tax benefit from the Company's transition to a C Corporation214215 FINANCIAL CONDITION SUMMARY Total Assets Total assets for Five Star Bancorp increased significantly from December 31, 2022, to September 30, 2023, primarily driven by growth in loans and cash | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :---------------- | | Total assets | $3,505,040 | $3,227,159 | - Total assets increased by $277.9 million (8.61%) to $3.5 billion at September 30, 2023, primarily due to increases in cash and cash equivalents ($63.6 million) and loans held for investment ($218.6 million)218 Cash and Cash Equivalents The Company's cash and cash equivalents experienced a notable increase during the first nine months of 2023, driven by deposit growth and net income, partially offset by loan originations | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :---------------- | | Cash and cash equivalents | $323,548 | $259,991 | - Total cash and cash equivalents increased by $63.5 million to $323.5 million at September 30, 2023, primarily due to a $250.2 million increase in deposits and $36.9 million in net income, partially offset by $212.1 million in net loan originations219 Investment Portfolio The investment portfolio decreased in value due to maturities, prepayments, and unrealized losses, with a significant portion pledged as collateral | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :---------------- | | Total investments | $107,190 | $119,744 | | Total available-for-sale | $104,086 | $115,988 | | Total held-to-maturity | $3,104 | $3,756 | - The investment portfolio decreased by $12.5 million to $107.2 million at September 30, 2023, primarily due to $8.1 million in maturities, prepayments, and calls, and a $3.5 million unrealized loss on securities221 - Mortgage-backed securities and obligations of states and political subdivisions comprised 50.81% and 33.91% of the investment portfolio, respectively, at September 30, 2023221 Loan Portfolio The Company's loan portfolio continued to grow, maintaining a significant concentration in commercial real estate, with a high proportion of floating or adjustable rate loans sensitive to interest rate changes | Loan Type (in thousands) | September 30, 2023 Amount | September 30, 2023 % of Loans | December 31, 2022 Amount | December 31, 2022 % of Loans | | :----------------------- | :------------------------ | :---------------------------- | :----------------------- | :--------------------------- | | Commercial Real Estate | $2,599,616 | 86.03% | $2,394,674 | 85.44% | | Commercial Secured | $157,273 | 5.21% | $165,186 | 5.89% | | Total loans held for investment, gross | $3,012,195 | 99.69% | $2,793,466 | 99.66% | - The loan portfolio grew to $3.0 billion at September 30, 2023, with commercial real estate lending constituting 90.05% of loans held for investment, indicating a significant concentration225232 | Interest Rate Type (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :----------------- | :---------------- | | Fixed Interest Rates | $666,031 | $649,114 | | Floating or Adjustable Rates | $2,355,490 | $2,153,768 | | Total | $3,021,521 | $2,802,882 | - Approximately 78% ($2.355 billion) of the loan portfolio was at floating or adjustable interest rates as of September 30, 2023, making the portfolio sensitive to interest rate changes236 Asset Quality The Company's asset quality remains a key focus, with management actively monitoring credit risk through a robust risk grading system, as nonperforming loans and classified loans increased, while the Allowance for Credit Losses (ACL) also grew | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :---------------- | | Non-accrual loans | $2,002 | $404 | | Total nonperforming loans | $2,002 | $404 | | Nonperforming loans to loans held for investment | 0.07% | 0.01% | | Allowance for credit losses - loans | $34,028 | $28,389 | | ACL to loans held for investment | 1.13% | 1.02% | - Nonperforming loans increased to $2.0 million (0.07% of total loans) at September 30, 2023, from $0.4 million (0.01%) at December 31, 2022, due to financial challenges in a small subset of borrowers242 - Loans designated as 'watch' and 'substandard' increased to $35.6 million at September 30, 2023, from $22.3 million at December 31, 2022245248 - The Allowance for Credit Losses (ACL) increased by $5.6 million to $34.0 million, partly due to the ASC 326 adoption and a $2.9 million provision for credit losses245248 Liabilities Total liabilities for the Company increased during the first nine months of 2023, primarily driven by a significant increase in total deposits | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :---------------- | | Total liabilities | $3,231,016 | $2,974,334 | - Total liabilities increased by $256.7 million to $3.2 billion at September 30, 2023, primarily due to a $250.2 million increase in total deposits253 Deposits Deposits, the Company's primary funding source, increased overall, but there was a notable shift from non-interest-bearing to interest-bearing accounts, leading to higher interest expense | Deposit Type (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------------- | :----------------- | :---------------- | | Total deposits | $3,032,210 | $2,782,004 | | Non-interest-bearing deposits | $833,434 | $968,749 | | Interest-bearing deposits | $2,198,776 | $1,813,255 | - Total deposits increased by $250.2 million (8.99%) to $3.0 billion9255 - Non-interest-bearing deposits decreased by $135.3 million, now representing 27.49% of total deposits, down from 34.82% at December 31, 20229255 - The Company's 42 largest deposit relationships (over $10.0 million each) totaled $1.6 billion, or 51.37% of total deposits, with the largest single relationship being $250.0 million (8.24% of total deposits) from a government agency258 FHLB Advances and Other Borrowings The Company utilizes FHLB advances and has issued subordinated notes to manage liquidity and capital, with FHLB advances decreasing while subordinated notes remained stable | Borrowing Type (in thousands) | September 30, 2023 | December 31, 2022 | | :---------------------------- | :----------------- | :---------------- | | FHLB advances | $90,000 | $100,000 | | Subordinated notes, net | $73,713 | $73,606 | - FHLB advances decreased by $10.0 million to $90.0 million at September 30, 2023125126261262 - The $75.0 million subordinated notes issued in 2022 remained outstanding at $73.7 million, qualifying as Tier 2 capital125126261262 Shareholders' Equity Shareholders' equity increased during the first nine months of 2023, primarily driven by net income, partially offset by dividends and an increase in accumulated other comprehensive loss | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :---------------- | | Total shareholders' equity | $274,024 | $252,825 | - Shareholders' equity increased by $21.2 million to $274.0 million at September 30, 2023, primarily due to $36.9 million in net income, partially offset by a $2.5 million increase in accumulated other comprehensive loss and $9.5 million in cash dividends paid263 Liquidity and Capital Resources The Company actively manages its liquidity and capital to meet obligations and support growth, maintaining strong capital ratios above regulatory thresholds and relying on diverse funding sources - Total liquidity, comprising cash and cash equivalents and unused borrowing capacity, was approximately $859.7 million as of September 30, 2023283 | Liquidity Source (in thousands) | Available Capacity | | :------------------------------ | :----------------- | | FHLB advances | $292,125 | | Federal Reserve Discount Window | $69,012 | | Correspondent bank lines of credit | $175,000 | | Cash and cash equivalents | $323,548 | | Total Liquidity | $859,685 | | Capital Ratio (Bancorp) | Sep 30, 2023 | Dec 31, 2022 | | :---------------------- | :----------- | :----------- | | Total capital | 12.37% | 12.46% | | Tier 1 capital | 9.07% | 8.99% | | Common equity Tier 1 capital | 9.07% | 8.99% | | Tier 1 leverage | 8.58% | 8.60% | - Both Bancorp and the Bank were in compliance with all applicable regulatory capital requirements as of September 30, 2023, with the Bank qualifying as 'well-capitalized' under the prompt corrective action framework297298 Non-GAAP Financial Measures - The Company uses non-GAAP financial measures like 'tangible shareholders' equity to tangible assets' and 'tangible book value per share' to provide supplementary information to management and investors305 - Since the Company had no goodwill or other intangible assets, its tangible shareholders' equity to tangible assets and tangible book value per share are identical to their GAAP counterparts (total shareholders' equity to total assets and book value per share, respectively)303304 Recent Legislative and Regulatory Developments - Recent bank failures may lead to regulatory changes, with federal banking agencies considering reforms to capital, interest rate, and liquidity risk supervision306 - The Federal Reserve established the Bank Term Funding Program (BTFP) to provide liquidity to eligible depository institutions, though the Company had not utilized it as of September 30, 2023307 - New rules include the CFPB's Small Business Lending Data Collection Rule (effective August 29, 2023, with compliance dates in 2024-2026) and revised Community Reinvestment Act (CRA) framework (effective April 1, 2024, with provisions applying in 2026-2027)308309313 Glossary of Acronyms, Abbreviations, and Terms ITEM 3. Quantitative and Qualitative Disclosure About Market Risk Quantitative and qualitative disclosures about market risk are not applicable for the Company as it qualifies as a smaller reporting company - Quantitative and qualitative disclosures about market risk are not applicable for Five Star Bancorp as it is a smaller reporting company316 ITEM 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective, with changes implemented to internal controls over financial reporting due to ASC 326 adoption - The Company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023317 - Changes were made to internal controls over financial reporting to incorporate new policies, processes, and controls for estimating the allowance for credit losses following the adoption of ASC 326 on January 1, 2023318 PART II OTHER INFORMATION ITEM 1. Legal Proceedings The Company is involved in various legal proceedings in the ordinary course of business but does not anticipate any material adverse effects on its financial position or operations - The Company is subject to legal proceedings and claims arising in the ordinary course of business, but management believes the ultimate liability will not materially affect its consolidated financial position or results of operations320147 ITEM 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's 2022 Annual Report on Form 10-K and subsequent quarterly reports - No material changes have occurred to the risk factors previously disclosed in the Company's 2022 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the three months ended March 31, 2023, and June 30, 2023321 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that there were no unregistered sales of equity securities and no proceeds from such sales during the reporting period - There were no unregistered sales of equity securities and no use of proceeds from such sales during the period322323 ITEM 3. Defaults Upon Senior Securities The Company reported no defaults upon senior securities during the period - There were no defaults upon senior securities324 ITEM 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable to the Company325 ITEM 5. Other Information The Company reported no other information requiring disclosure in this section - No other information was reported in this section326 ITEM 6. Exhibits This section lists the exhibits filed as part of the report, including certifications from the CEO and CFO and XBRL interactive data - Exhibits filed include certifications from the Chief Executive Officer and Chief Financial Officer (pursuant to Rule 13a-14(a)/15d-14(a) and 18 U.S.C. Section 1350), as well as Inline XBRL Interactive Data329 SIGNATURES