RANCHO CORDOVA, Calif., Oct. 24, 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 $11.7 million for the three months ended September 30, 2022, as compared to $10.0 million for the three months ended June 30, 2022 and $11.0 million for the three months ended September 30, 2021.

Financial Highlights

Performance highlights and other developments for the Company for the periods noted below included the following:

Pre-tax net income, pre-tax, pre-provision net income, net income, and earnings per share were as follows for the periods indicated:

	Three months ended
(dollars in thousands, except share and per share data)	September 30, 2022		June 30, 2022		September 30, 2021
Pre-tax net income	$	16,534	$	14,033	$	13,296
Pre-tax, pre-provision net income⁽¹⁾	$	18,784	$	16,283	$	13,296
Net income	$	11,704	$	9,953	$	11,026
Basic earnings per common share	$	0.68	$	0.58	$	0.64
Diluted earnings per common share	$	0.68	$	0.58	$	0.64
Weighted average basic common shares outstanding		17,140,435		17,125,715		17,095,957
Weighted average diluted common shares outstanding		17,168,447		17,149,449		17,123,182
Shares outstanding at end of period		17,245,983		17,245,983		17,223,808

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

Loan and deposit growth was as follows at the dates indicated:

(dollars in thousands)	September 30, 2022		June 30, 2022		$ Change			% Change
Loans held for investment	$	2,582,978	$	2,380,511	$	202,467		8.51	%
Non-interest-bearing deposits		1,020,625		1,006,066		14,559		1.45	%
Interest-bearing deposits		1,593,707		1,495,245		98,462		6.59	%

(dollars in thousands)	September 30, 2022		September 30, 2021		$ Change			% Change
Loans held for investment	$	2,582,978	$	1,704,716	$	878,262		51.52	%
Loans held for investment, excluding Paycheck Protection Program ("PPP") loans⁽¹⁾		2,582,978		1,643,217		939,761		57.19	%
PPP loans		—		61,499		(61,499	)	(100.00	)%
Non-interest-bearing deposits		1,020,625		899,252		121,373		13.50	%
Interest-bearing deposits		1,593,707		1,269,142		324,565		25.57	%

(1) Loans held for investment, excluding PPP loans is a non-GAAP measure. For reconciliation to the closest GAAP measure, loans held for investment, see table above.

At September 30, 2022, the Company reported total loans held for investment, total assets, and total deposits of $2.6 billion, $3.1 billion, and $2.6 billion, respectively, as compared to $1.9 billion, $2.6 billion, and $2.3 billion, respectively, at December 31, 2021.
The ratio of nonperforming loans to loans held for investment, or total loans at period end, decreased from 0.03% at December 31, 2021 to 0.02% at September 30, 2022.
On August 17, 2022, the Company completed a private placement of $75.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due September 1, 2032. The subordinated notes bear interest at a fixed annual rate of 6.00% for the first five years and will reset quarterly thereafter to the then-current three-month Secured Overnight Financing Rate plus 329.0 basis points.
The Company's Board of Directors declared, and the Company subsequently paid, a cash dividend of $0.15 per share during the three months ended September 30, 2022.

"Five Star Bank's relationship-based and purpose-driven approach to banking continues to earn the trust and respect of those we serve," said President and Chief Executive Officer, James Beckwith. "In the third quarter, we onboarded new customers as a result of our consistency in service and reputation which resulted in exceptional earnings strength and loan growth. We believe this success serves as the strongest testimony to our people, technology, operating efficiencies, conservative underwriting practices, exceptional credit quality and prudent approach to portfolio management. This quarter, we declared another dividend to shareholders which exemplifies our commitment to shareholder value. As we lean-in to 2023, we will remain focused on an organic growth strategy guided by disciplined business practices which we believe will continue to benefit our customers, employees, community and shareholders."

Summary Results

Three months ended September 30, 2022, as compared to three months ended June 30, 2022

The increase in the Company's net income from the three months ended June 30, 2022 to the three months ended September 30, 2022 was primarily due to an increase in net interest income of $2.9 million driven by loan growth, partially offset by a $0.5 million decline in other income due to declines in gain on sale of loans and loan-related fees. The increase in average assets was largely the result of an increase in average loans held for investment and sale funded by increases in average interest-bearing liabilities, demand accounts, and subordinated debt and other borrowings, combined with an increase in average equity related to earnings during the period.

Three months ended September 30, 2022, as compared to three months ended September 30, 2021

The increase in the Company's net income from the three months ended September 30, 2021 to the three months ended September 30, 2022 was primarily due to an increase in net interest income of $7.5 million, driven by loan growth. This increase was partially offset by an increase in the provision for loan losses of $2.3 million as a result of loan growth and an increase in the provision for income taxes of $2.6 million related to the tax rate used during each quarter as a result of the Company's conversion to a C Corporation during the second quarter of 2021. The increase in average assets was largely the result of an increase in average loans held for investment and sale funded by an increase in average interest-bearing liabilities, demand accounts, and subordinated debt and other borrowings. The increase in average equity was primarily due to earnings growth, partially offset by an increase in accumulated other comprehensive loss period over period.

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)	September 30, 2022			June 30, 2022			$ Change			% Change
Selected operating data:
Net interest income	$	27,424		$	24,491		$	2,933		11.98	%
Provision for loan losses		2,250			2,250			—		—	%
Non-interest income		1,532			1,997			(465	)	(23.28	)%
Non-interest expense		10,172			10,205			(33	)	(0.32	)%
Pre-tax net income		16,534			14,033			2,501		17.82	%
Provision for income taxes		4,830			4,080			750		18.38	%
Net income	$	11,704		$	9,953		$	1,751		17.59	%
Earnings per common share:
Basic	$	0.68		$	0.58		$	0.10		17.24	%
Diluted	$	0.68		$	0.58		$	0.10		17.24	%
Performance and other financial ratios:
ROAA		1.60	%		1.45	%
ROAE		19.35	%		17.20	%
Net interest margin		3.84	%		3.70	%
Cost of funds		0.62	%		0.24	%

	Three months ended
(dollars in thousands, except per share data)	September 30, 2022			September 30, 2021			$ Change			% Change
Selected operating data:
Net interest income	$	27,424		$	19,909		$	7,515		37.75	%
Provision for loan losses		2,250			—			2,250		100.00	%
Non-interest income		1,532			2,028			(496	)	(24.46	)%
Non-interest expense		10,172			8,641			1,531		17.72	%
Pre-tax net income		16,534			13,296			3,238		24.35	%
Provision for income taxes		4,830			2,270			2,560		112.78	%
Net income	$	11,704		$	11,026		$	678		6.15	%
Earnings per common share:
Basic	$	0.68		$	0.64		$	0.04		6.25	%
Diluted	$	0.68		$	0.64		$	0.04		6.25	%
Performance and other financial ratios:
ROAA		1.60	%		1.85	%
ROAE		19.35	%		19.26	%
Net interest margin		3.84	%		3.60	%
Cost of funds		0.62	%		0.17	%

Balance Sheet Summary

(dollars in thousands)	September 30, 2022		December 31, 2021		$ Change			% Change
Selected financial condition data:
Total assets	$	3,074,570	$	2,556,761	$	517,809		20.25	%
Cash and cash equivalents		317,669		425,329		(107,660	)	(25.31	)%
Total loans held for investment		2,582,978		1,934,460		648,518		33.52	%
Total investments		117,805		153,753		(35,948	)	(23.38	)%
Total liabilities		2,835,312		2,321,715		513,597		22.12	%
Total deposits		2,614,332		2,285,890		328,442		14.37	%
Subordinated notes, net		102,028		28,386		73,642		259.43	%
Total shareholders' equity		239,258		235,046		4,212		1.79	%

The increase in total assets from December 31, 2021 to September 30, 2022 was primarily due to a $648.5 million increase in total loans held for investment, partially offset by a $107.7 million decrease in cash and cash equivalents and a $35.9 million decrease in investments. The $648.5 million increase in total loans held for investment between December 31, 2021 and September 30, 2022 was a result of $1.1 billion in non-PPP loan originations, partially offset by $22.1 million in PPP loan forgiveness and payoffs received, and $404.7 million in non-PPP loan payoffs and paydowns.

The increase in total liabilities from December 31, 2021 to September 30, 2022 was primarily attributable to an increase in Federal Home Loan Bank of San Francisco ("FHLB") advances of $105.0 million, an increase in subordinated notes, net, of $73.6 million, and an increase in deposits of $328.4 million, largely due to increases in time deposits over $250 thousand, money market deposits, and non-interest-bearing deposits of $139.3 million, $112.6 million, and $118.5 million, respectively.

Total shareholders' equity increased by $4.2 million from $235.0 million at December 31, 2021 to $239.3 million at September 30, 2022. The increase in total shareholders' equity from December 31, 2021 to September 30, 2022 was primarily a result of net income recognized of $31.5 million, offset by a net decline of $15.5 million in other comprehensive income and $12.7 million in cash distributions paid during the period.

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)	September 30, 2022			June 30, 2022			$ Change		% Change
Interest and fee income	$	31,547		$	25,961		$	5,586	21.52	%
Interest expense		4,123			1,470			2,653	180.48	%
Net interest income	$	27,424		$	24,491		$	2,933	11.98	%
Net interest margin		3.84	%		3.70	%

	Three months ended
(dollars in thousands)	September 30, 2022			September 30, 2021			$ Change		% Change
Interest and fee income	$	31,547		$	20,832		$	10,715	51.44	%
Interest expense		4,123			923			3,200	346.70	%
Net interest income	$	27,424		$	19,909		$	7,515	37.75	%
Net interest margin		3.84	%		3.60	%

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

	Three months ended
	September 30, 2022						June 30, 2022						September 30, 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	$	210,179	$	1,145	2.16	%	$	294,491	$	518	0.71	%	$	412,953	$	175	0.17	%
Investment securities		126,733		615	1.93	%		132,975		602	1.82	%		157,305		571	1.44	%
Loans held for investment and sale		2,494,468		29,787	4.74	%		2,227,215		24,841	4.47	%		1,625,995		20,086	4.90	%
Total interest-earning assets		2,831,380		31,547	4.42	%		2,654,681		25,961	3.92	%		2,196,253		20,832	3.76	%
Interest receivable and other assets, net		78,112						98,972						168,906
Total assets	$	2,909,492					$	2,753,653					$	2,365,159

Liabilities and shareholders' equity
Interest-bearing transaction accounts	$	213,883	$	115	0.21	%	$	255,665	$	66	0.10	%	$	149,479	$	38	0.10	%
Savings accounts		103,142		65	0.25	%		96,867		38	0.16	%		76,669		19	0.10	%
Money market accounts		1,015,698		1,780	0.69	%		981,366		679	0.28	%		966,629		389	0.16	%
Time accounts		208,678		857	1.63	%		174,991		238	0.55	%		54,314		34	0.25	%
Subordinated debt and other borrowings		72,195		1,306	7.18	%		29,618		449	6.07	%		28,359		443	6.20	%
Total interest-bearing liabilities		1,613,596		4,123	1.01	%		1,538,507		1,470	0.38	%		1,275,450		923	0.29	%
Demand accounts		1,041,265						969,053						853,017
Interest payable and other liabilities		14,687						13,937						9,537
Shareholders' equity		239,944						232,156						227,155
Total liabilities & shareholders' equity	$	2,909,492					$	2,753,653					$	2,365,159

Net interest spread					3.41	%					3.54	%					3.48	%
Net interest income/margin			$	27,424	3.84	%			$	24,491	3.70	%			$	19,909	3.60	%

Factors affecting interest income and yields

Interest income increased during the three months ended September 30, 2022, as compared to three months ended June 30, 2022 due to the following:

Rates. The average yields on interest-earning assets were 4.42% and 3.92% for the three months ended September 30, 2022 and June 30, 2022, respectively. The increase in yields period-over-period was primarily due to increases in yields earned on interest-earning deposits with banks, and increased rates earned on loans held for investment and sale originated in the current rising rate environment.
Volume. Average interest-earning assets increased by approximately $176.7 million period-over-period, primarily driven by new loan originations during the three months ended September 30, 2022 resulted in increases in the average daily balances of loans for the three months ended September 30, 2022, contributing to the increase in interest income.

Interest income increased during the three months ended September 30, 2022, as compared to three months ended September 30, 2021 due to the following:

Rates. The average yields on interest-earning assets were 4.42% and 3.76% for the three months ended September 30, 2022 and September 30, 2021, respectively. The increase in yields period-over-period was primarily due to increases in yields earned on interest-earning deposits with banks and investment securities. These increases were partially offset by an overall decline in loan portfolio yields from 4.90% to 4.74% for the three months ended September 30, 2022 and September 30, 2021, respectively. This decline was primarily due to yields earned on PPP loans forgiven during the three months ended September 30, 2021, which did not recur in the three months ended September 30, 2022. Yields on the commercial real estate portfolio increased by 0.12% to 4.62% from 4.50% for the three months ended September 30, 2022 and September 30, 2021, respectively, due to increased rates on commercial real estate loans originated in the current rising rate environment.
Volume. Average interest-earning assets increased by approximately $635.1 million period-over-period, primarily driven by new loan originations, which drove increases in the average daily balances of loans for the three months ended September 30, 2022, offsetting the decline in loan portfolio yield.

Factors affecting interest expense and rates

Interest expense increased during the three months ended September 30, 2022, as compared to three months ended June 30, 2022 due to the following:

Rates. The average cost of interest-bearing liabilities were 1.01% and 0.38% for the three months ended September 30, 2022 and June 30, 2022, respectively. The increase in cost period-over-period was primarily due to increases in the rates paid on interest-bearing deposit accounts, with the most significant increases in time and money market accounts, combined with an increase in rates paid on FHLB advances during the three months ended September 30, 2022. The rate paid on the new subordinated debt issuance remained relatively consistent with prior issuances. Additionally, the cost of funds increased from 0.24% for the quarter ended June 30, 2022, to 0.62% for the quarter ended September 30, 2022.
Volume. Average interest-bearing liabilities increased by $75.1 million period-over-period, primarily driven by the issuance of $75.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due September 1, 2032 on August 17, 2022, combined with increases in average balances for money market and time accounts period-over-period.

Interest expense increased during the three months ended September 30, 2022, as compared to three months ended September 30, 2021 due to the following:

Rates. The average costs of interest-bearing liabilities were 1.01% and 0.29% for the three months ended September 30, 2022 and September 30, 2021, respectively. The increase in cost period-over-period was primarily due to increases in the rates paid on interest-bearing deposit accounts, with the most significant increases in time and money market accounts, combined with an increase in rates paid on FHLB advances during the three months ended September 30, 2022. The rate paid on the new subordinated debt issuance remained relatively consistent with prior issuances. Additionally, the cost of funds increased from 0.17% for the quarter ended September 30, 2021 to 0.62% for the quarter ended September 30, 2022.
Volume. Average interest-bearing liabilities increased by $338.1 million period-over-period, primarily driven by the issuance of $75.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes due September 1, 2032 on August 17, 2022, combined with increases in average balances for all types of interest-bearing deposit accounts, with the most substantial increases in time, interest-bearing transaction, and money market accounts period-over-period.

Asset Quality

SBA PPP

All PPP loans had been forgiven or paid off by the borrower as of September 30, 2022.

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 September 30, 2022, there were no borrowing relationships on COVID-19 deferments. Of the loans that ended COVID-19 deferments in the quarter ended September 30, 2022, only one loan is on non-accrual status; the remaining loans have returned to their pre-COVID-19 contractual payment structures with no risk rating downgrades or modifications classified as a troubled debt restructuring ("TDR").

Allowance for Loan Losses

At September 30, 2022, the Company's allowance for loan losses was $27.8 million, as compared to $23.2 million at December 31, 2021. The $4.6 million increase is due to a $5.5 million provision for loan losses recorded during the nine months ended September 30, 2022, partially offset by net charge-offs of $0.9 million during the same period. At September 30, 2022, the Company's ratio of nonperforming loans to loans held for investment decreased from 0.03% at December 31, 2021 to 0.02%, primarily due to a decrease in the Company's nonperforming commercial secured loans. Loans designated as substandard decreased to $0.5 million at September 30, 2022, from $10.6 million at December 31, 2021. This resulted in a net reduction of $0.2 million in reserves related to classified loans offset by an increase in the provision related to loan growth that occurred during the first nine months of 2022. There were no loans with doubtful risk grades at September 30, 2022 or December 31, 2021.

A summary of the allowance for loan losses by loan class is as follows:

	September 30, 2022				December 31, 2021
(dollars in thousands)	Amount		% of Total		Amount		% of Total
Collectively evaluated for impairment:
Real estate:
Commercial	$	18,309	65.76	%	$	12,869	55.37	%
Commercial land and development		98	0.35	%		50	0.22	%
Commercial construction		546	1.96	%		371	1.60	%
Residential construction		41	0.15	%		50	0.22	%
Residential		175	0.63	%		192	0.83	%
Farmland		664	2.39	%		645	2.78	%
Commercial:
Secured		6,217	22.33	%		6,687	28.77	%
Unsecured		278	1.00	%		207	0.89	%
Consumer and other		536	1.93	%		889	3.82	%
Unallocated		829	2.98	%		1,111	4.78	%
		27,693	99.48	%		23,071	99.28	%
Individually evaluated for impairment:
Commercial secured		145	0.52	%		172	0.72	%

Total allowance for loan losses	$	27,838	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 1.08% at September 30, 2022, as compared to 1.20% at December 31, 2021. Excluding PPP loans, the ratios of the allowance for loan losses to loans held for investment were 1.08% and 1.22% at September 30, 2022 and December 31, 2021, respectively. The decline in the ratio of allowance for loan losses to loans held for investment period-over-period is primarily due to a decline in classified loans and improvement in the historical loss factors for the SBA portfolio during the nine months ended September 30, 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 September 30, 2022, as compared to three months ended June 30, 2022

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

	Three months ended
(dollars in thousands)	September 30, 2022		June 30, 2022		$ Change			% Change
Service charges on deposit accounts	$	132	$	130	$	2		1.54	%
Gain on sale of loans		548		831		(283	)	(34.06	)%
Loan-related fees		546		795		(249	)	(31.32	)%
FHLB stock dividends		152		99		53		53.54	%
Earnings on bank-owned life insurance		102		101		1		0.99	%
Other income		52		41		11		26.83	%
Total non-interest income	$	1,532	$	1,997	$	(465	)	(23.28	)%

Gain on sale of loans. The decrease in gain on sale of loans resulted primarily from a decline in the volume of loans sold. During the three months ended September 30, 2022, loans totaling $10.5 million were sold with an effective yield of 5.20% compared to the three months ended June 30, 2022, when loans totaling $14.0 million were sold with an effective yield of 5.93%.

Loan-related fees. The decrease in loan-related fees resulted primarily from the recognition of $0.1 million in swap referral fees during the three months ended September 30, 2022 compared to $0.4 million in swap referral fees recognized during the three months ended June 30, 2022.

Three months ended September 30, 2022, as compared to three months ended September 30, 2021

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

	Three months ended
(dollars in thousands)	September 30, 2022		September 30, 2021		$ Change			% Change
Service charges on deposit accounts	$	132	$	112	$	20		17.86	%
Net gain on sale of securities		—		435		(435	)	(100.00	)%
Gain on sale of loans		548		988		(440	)	(44.53	)%
Loan-related fees		546		285		261		91.58	%
FHLB stock dividends		152		100		52		52.00	%
Earnings on bank-owned life insurance		102		68		34		50.00	%
Other income		52		40		12		30.00	%
Total non-interest income	$	1,532	$	2,028	$	(496	)	(24.46	)%

Net gain on sale of securities. The decrease in net gain on sale of securities resulted primarily from the sale of approximately $24.6 million of municipal securities, mortgage-backed securities, and U.S. government treasuries during the three months ended September 30, 2021 resulting in a $0.4 million gain, which did not recur during the three months ended September 30, 2022.

Gain on sale of loans. The decrease in gain on sale of loans related primarily to an overall decline in the effective yields on loans sold due to uncertainty surrounding the timing of rising interest rates during the three months ended September 30, 2022 compared to the three months ended September 30, 2021. During the three months ended September 30, 2022, approximately $10.5 million of loans were sold with an effective yield of 5.20%, as compared to approximately $9.9 million of loans sold with an effective yield of 10.21% during the three months ended September 30, 2021.

Loan-related fees. The increase in loan-related fees was primarily a result of an increase of $0.2 million in program-related fees for credit card, merchant services, and consumer loan processing programs during the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Non-interest Expense

Three months ended September 30, 2022, as compared to three months ended June 30, 2022

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

	Three months ended
(dollars in thousands)	September 30, 2022		June 30, 2022		$ Change			% Change
Salaries and employee benefits	$	5,645	$	5,553	$	92		1.66	%
Occupancy and equipment		515		513		2		0.39	%
Data processing and software		797		739		58		7.85	%
Federal Deposit Insurance Corporation ("FDIC") insurance		195		245		(50	)	(20.41	)%
Professional services		792		568		224		39.44	%
Advertising and promotional		512		484		28		5.79	%
Loan-related expenses		262		389		(127	)	(32.65	)%
Other operating expenses		1,454		1,714		(260	)	(15.17	)%
Total non-interest expense	$	10,172	$	10,205	$	(33	)	(0.32	)%

Professional services. Professional services increased, primarily as a result of $0.2 million of legal expenses incurred to support corporate organizational matters during the three months ended September 30, 2022.

Loan-related expenses. Loan-related expenses decreased, primarily as a result of a net overall decrease in loan expenses incurred to support loan production during the three months ended September 30, 2022, as compared to the three months ended June 30, 2022, including decreased expenses for legal services, environmental reports, and inspections.

Other operating expenses. The decrease in other operating expenses was primarily due to a $0.3 million decrease in travel related to attendance of professional events, conferences, and other business-related travel during the three months ended September 30, 2022, as compared to the three months ended June 30, 2022.

Three months ended September 30, 2022, as compared to three months ended September 30, 2021

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

	Three months ended
(dollars in thousands)	September 30, 2022		September 30, 2021		$ Change			% Change
Salaries and employee benefits	$	5,645	$	4,980	$	665		13.35	%
Occupancy and equipment		515		502		13		2.59	%
Data processing and software		797		611		186		30.44	%
FDIC insurance		195		110		85		77.27	%
Professional services		792		505		287		56.83	%
Advertising and promotional		512		366		146		39.89	%
Loan-related expenses		262		462		(200	)	(43.29	)%
Other operating expenses		1,454		1,105		349		31.58	%
Total non-interest expense	$	10,172	$	8,641	$	1,531		17.72	%

Salaries and employee benefits. The increase in salaries and employee benefits was primarily a result of a $0.7 million increase in salaries, insurance, and benefits as a result of a 10.90% increase in headcount during the three months ended September 30, 2022, as compared to the three months ended September 30, 2021.

Data processing and software. Data processing and software increased, primarily due to: (i) increased usage of our digital banking platform; (ii) higher transaction volumes related to the increased number of loan and deposit accounts; and (iii) increased number of licenses required for new users on our loan origination and documentation system.

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 September 30, 2022, as compared to the three months ended September 30, 2021.

Loan-related expenses. Loan-related expenses decreased, primarily as a result of a $0.2 million accrual recorded during the three months ended September 30, 2021 for an SBA matter in the normal course of business, which did not recur during the three months ended September 30, 2022.

Other operating expenses. Other operating expenses increased, primarily due to a $0.2 million increase in operating expenses, including postage, printing, and other operational expenses, incurred to support the increased customer base for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The remainder of the increase relates to increased expenses for employee travel and event attendance due to more in-person participation in events held during the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Provision for Income Taxes

Three months ended September 30, 2022, as compared to three months ended June 30, 2022

Provision for income taxes for the quarter ended September 30, 2022 increased by $0.8 million, or 18.38%, to $4.8 million, as compared to $4.1 million for the quarter ended June 30, 2022, which was primarily due to the increase in taxable income recognized during the three months ended September 30, 2022.

Three months ended September 30, 2022, as compared to three months ended September 30, 2021

Provision for income taxes increased by $2.6 million, or 112.78%, to $4.8 million for the three months ended September 30, 2022, as compared to $2.3 million for the three months ended September 30, 2021. This increase is due to an increase in taxable income, combined with an increase in the effective tax rate used for each period, from 20.77% to 29.21% during the three months ended September 30, 2021 and September 30, 2022, respectively. The lower tax rate used during the three months ended September 30, 2021 was the result of the Company's termination of its Subchapter S Corporation status as of May 5, 2021. The 20.77% tax rate was calculated using the statutory California tax rate of 3.50% and the federal and state statutory rate, net of federal benefit, of 29.56% based on the number of days the Company was each type of corporation during 2021.

Webcast Details

Five Star Bancorp will host a webcast on Tuesday, October 25, 2022, at 1:00 p.m. ET (10:00 a.m. PT), to discuss its third quarter results. To view the live webcast, visit the "News & Events" section of the Company's website under "Events" at https://investors.fivestarbank.com/news-events/events. The webcast will be archived on the Company's website for a period of 90 days.

About Five Star Bancorp

Five Star is a bank holding company headquartered in Rancho Cordova, California. Five Star operates through its wholly owned banking subsidiary, Five Star Bank. Five Star has seven branches and one loan production office in 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)	September 30, 2022			June 30, 2022			September 30, 2021
Revenue and Expense Data
Interest and fee income	$	31,547		$	25,961		$	20,832
Interest expense		4,123			1,470			923
Net interest income		27,424			24,491			19,909
Provision for loan losses		2,250			2,250			—
Net interest income after provision		25,174			22,241			19,909
Non-interest income:
Service charges on deposit accounts		132			130			112
Gain on sale of securities		—			—			435
Gain on sale of loans		548			831			988
Loan-related fees		546			795			285
FHLB stock dividends		152			99			100
Earnings on bank-owned life insurance		102			101			68
Other income		52			41			40
Total non-interest income		1,532			1,997			2,028
Non-interest expense:
Salaries and employee benefits		5,645			5,553			4,980
Occupancy and equipment		515			513			502
Data processing and software		797			739			611
FDIC insurance		195			245			110
Professional services		792			568			505
Advertising and promotional		512			484			366
Loan-related expenses		262			389			462
Other operating expenses		1,454			1,714			1,105
Total non-interest expense		10,172			10,205			8,641
Total income before taxes		16,534			14,033			13,296
Provision for income taxes		4,830			4,080			2,270
Net income	$	11,704		$	9,953		$	11,026

Share and Per Share Data
Earnings per common share:
Basic	$	0.68		$	0.58		$	0.64
Diluted	$	0.68		$	0.58		$	0.64
Book value per share	$	13.87		$	13.52		$	13.16
Tangible book value per share⁽¹⁾	$	13.87		$	13.52		$	13.16
Weighted average basic common shares outstanding		17,140,435			17,125,715			17,095,957
Weighted average diluted common shares outstanding		17,168,447			17,149,449			17,123,182
Shares outstanding at end of period		17,245,983			17,245,983			17,223,808

Credit Quality
Allowance for loan losses to period end nonperforming loans		6,483.87	%		5,834.88	%		3,923.67	%
Nonperforming loans to loans held for investment		0.02	%		0.02	%		0.03	%
Nonperforming assets to total assets		0.01	%		0.02	%		0.02	%
Nonperforming loans plus performing TDRs to loans held for investment		0.02	%		0.02	%		0.03	%
COVID-19 deferments to loans held for investment		—	%		—	%		0.72	%

Selected Financial Ratios
ROAA		1.60	%		1.45	%		1.85	%
ROAE		19.35	%		17.20	%		19.26	%
Net interest margin		3.84	%		3.70	%		3.60	%
Loan to deposit		99.22	%		95.69	%		78.86	%

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

(dollars in thousands)	September 30, 2022			June 30, 2022			September 30, 2021
Balance Sheet Data
Cash and due from financial institutions	$	33,280		$	66,423		$	89,951
Interest-bearing deposits in banks		284,389			204,335			440,881
Time deposits in banks		10,216			10,841			17,204
Securities - available-for-sale, at fair value		114,041			122,426			153,821
Securities - held-to-maturity, at amortized cost		3,764			4,477			4,955
Loans held for sale		11,015			12,985			5,267
Loans held for investment		2,582,978			2,380,511			1,704,716
Allowance for loan losses		(27,838	)		(25,786	)		(21,848	)
Loans held for investment, net of allowance for loan losses		2,555,140			2,354,725			1,682,868
FHLB stock		10,890			10,890			6,723
Operating leases, right-of-use asset		4,227			4,472			—
Premises and equipment, net		1,694			1,768			1,630
Bank-owned life insurance		14,550			14,444			11,142
Interest receivable and other assets		31,364			28,285			20,051
Total assets	$	3,074,570		$	2,836,071		$	2,434,493

Non-interest-bearing deposits	$	1,020,625		$	1,006,066		$	899,252
Interest-bearing deposits		1,593,707			1,495,245			1,269,142
Total deposits		2,614,332			2,501,311			2,168,394
Subordinated notes, net		102,028			28,420			28,370
FHLB advances		105,000			60,000			—
Operating lease liability		4,492			4,739			—
Interest payable and other liabilities		9,460			8,401			11,091
Total liabilities		2,835,312			2,602,871			2,207,855

Common stock		219,286			219,023			218,216
Retained earnings		36,042			26,924			8,442
Accumulated other comprehensive loss, net		(16,070	)		(12,747	)		(20	)
Total shareholders' equity	$	239,258		$	233,200		$	226,638

Quarterly Average Balance Data
Average loans held for investment and sale	$	2,494,468		$	2,227,215		$	1,625,995
Average interest-earning assets	$	2,831,380		$	2,654,681		$	2,196,253
Average total assets	$	2,909,492		$	2,753,653		$	2,365,159
Average deposits	$	2,582,666		$	2,477,942		$	2,100,108
Average total equity	$	239,944		$	232,156		$	227,155

Capital Ratio Data
Total shareholders' equity to total assets		7.78	%		8.22	%		9.31	%
Tangible shareholders' equity to tangible assets⁽¹⁾		7.78	%		8.22	%		9.31	%
Total capital (to risk-weighted assets)		13.96	%		11.77	%		15.66	%
Tier 1 capital (to risk-weighted assets)		9.22	%		9.62	%		12.79	%
Common equity Tier 1 capital (to risk-weighted assets)		9.22	%		9.62	%		12.79	%
Tier 1 leverage ratio		8.65	%		8.81	%		9.50	%

(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 is 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.

Pre-tax, pre-provision net income is defined as net income plus provision for income taxes and provision for loan losses. The most directly comparable GAAP measure is pre-tax net income.

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 financial measure is average loans held for investment and sale.

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.

Pre-tax, pre-provision net income (dollars in thousands)	September 30, 2022		June 30, 2022		September 30, 2021
Net income	$	11,704	$	9,953	$	11,026
Add: provision for income taxes		4,830		4,080		2,270
Add: provision for loan losses		2,250		2,250		—
Pre-tax, pre-provision net income	$	18,784	$	16,283	$	13,296

	Three months ended
Average loans held for investment and sale, excluding PPP loans (dollars in thousands)	September 30, 2022		June 30, 2022		September 30, 2021
Average loans held for investment and sale	$	2,494,468	$	2,227,215	$	1,625,995
Less: average PPP loans		—		427		89,436
Average loans held for investment and sale, excluding PPP loans	$	2,494,468	$	2,226,788	$	1,536,559

Allowance for loan losses to total loans held for investment, excluding PPP loans (dollars in thousands)	September 30, 2022			December 31, 2021
Allowance for loan losses (numerator)	$	27,838		$	23,243
Total loans held for investment	$	2,582,978		$	1,934,460
Less: PPP loans		—			22,124
Total loans held for investment, excluding PPP loans (denominator)	$	2,582,978		$	1,912,336
Allowance for loan losses to total loans held for investment, excluding PPP loans		1.08	%		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

Five Star Bancorp Announces Quarterly Results