FIVE STAR BANCORP
For the period ended Jun 30, 2024. Filed Aug 6, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jun 30, 2024 · Filed Aug 6, 2024
FSBC$44.11+0.8%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-03-31; filed 2024-05-08.
0001275168-24-000094
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-06-30; filed 2024-08-06.
0001275168-24-000112
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 214 previous paragraphs and 239 current paragraphs.
127 unchanged; 77 reworded; 19 added; 7 removed; 3 previous and 16 current paragraphs rearranged.
Tables are not compared: 29 previous and 31 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (19)
Current report
Allowance for Credit Losses (“ACL”)
Current report
A significant amount of the ACL is measured on a collective (pool) basis by loan and investment security type when similar risk characteristics exist. Pools are determined based primarily on regulatory reporting codes as the loans and investment securities within each pool share similar risk characteristics and there is sufficient historical peer loss data from the FFIEC to provide statistically meaningful support in the models developed. Reserves for credit losses identified on a pooled basis are then adjusted for qualitative and other environmental factors to reflect current conditions.
Current report
During the three months ended June 30, 2024, we refined our methodology of measuring the ACL on two pools of loans: Multifamily and C&I SBA. Within the Multifamily pool, the MHC loans were segregated from traditional Multifamily as we identified a data source to provide sufficient historical peer loss data specific to MHC loans. This segregation now adjusts for differences in the risk characteristics and performance of MHC loans compared to traditional Multifamily properties. We used calculations of individual probability of default and loss given default on a loan-by-loan basis to derive an estimated loss rate. Applying this adjusted loss rate led to a decrease in the ACL for the Multifamily pool as of June 30, 2024 of approximately $5.8 million. During routine monitoring of charge-off activity within the C&I SBA pool, we identified an increased level of charge-offs during the first six months of 2024, reflecting a change in the credit quality of the pool. In response to this, we increased the expected loss rates be more in line with net charge-off rates during the first six months of 2024, as this time period reflects what is expected based on our current economic outlook for loans in the C&I SBA pool. This adjustment reflects our estimate for future loss rates and increased the required reserves related to the C&I SBA pool by approximately $4.6 million.
Current report
Net interest income increased $1.5 million while net interest margin decreased 6 basis points for the three months ended June 30, 2024 compared to the same quarter of the prior year. The increase in net interest income is primarily attributable to loan growth at higher yields, partially offset by deposit growth at higher interest rates. Interest income increased by $6.2 million, as compared to the same quarter of the prior year. The average yield on loans increased 33 basis points compared to the same quarter of the prior year due to increases in interest rates and an increase in average balances of $283.5 million, or 9.73%. The increase in interest income was partially offset by an additional $4.7 million in interest expense compared to the same quarter of the prior year. The average cost of total deposits, including wholesale deposits, increased 55 basis points compared to the same quarter of the prior year, due to increases in interest rates and an increase in average balances of $137.0 million, or 4.70%. Average cost of wholesale deposits, individually, increased 23 basis points compared to the same quarter of the prior year, while average balances decreased 29.52%. In addition, the average balance of non-interest-bearing deposits decreased by $11.1 million compared to the same quarter of the prior year. While the increase in total interest income more than offset the increase in total interest expense, net interest income relative to interest-earning assets decreased compared to the same period of the prior year.
Current report
Net interest income decreased $0.9 million, or 1.57%, to $55.8 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, and our net interest margin of 3.27% for the six months ended June 30, 2024 decreased 32 basis points when compared to the same period in 2023. The decrease was primarily due to deposit growth at higher rates exceeding loan growth at higher yields. These changes related to the change in the effective Federal Funds rate from 5.08% at June 30, 2023 to 5.33% at June 30, 2024. Additional detail relating to net interest margin in each period is provided below.
Current report
We recorded a $2.9 million provision for credit losses in the first six months of 2024, as compared to a $2.2 million provision for credit losses for the same period of 2023. The provision recorded during the first six months of 2024 was the net effect of charge-offs and recoveries, and net increases in quantitative and qualitative reserves.
Current report
Service charges on deposit accounts. The increase resulted primarily from a $0.1 million increase in wire transfer fees recognized during the six months ended June 30, 2024 compared to the six months ended June 30, 2023.
Current report
FHLB stock dividends. The increase was primarily due to increased yields on dividends received, combined with an increase in the average number of FHLB shares outstanding between June 30, 2023 and June 30, 2024.
Current report
Professional services. The increase was primarily due to: (i) a $0.1 million increase of audit fees for 2024 audits; and (ii) a $0.1 million increase in IT consulting services due to an overall increase in service charges.
Current report
Advertising and promotional. The decrease related primarily to an overall decline in sponsorships and donations made, as fewer events were sponsored and attended compared to the three months ended June 30, 2023.
Current report
Other operating expenses. The decrease was primarily due to a $0.2 million decrease in travel, conference fees, and professional membership fees, as compared to the three months ended June 30, 2023.
Current report
Salaries and employee benefits. The increase was primarily a result of: (i) a $1.9 million increase in salaries, benefits, and bonus expense for new employees hired since June 2023 to support expansion into the San Francisco Bay Area, partially offset by a $0.4 million decrease in salaries, benefits, and bonus expense related to a 6.67% decrease in headcount outside of the San Francisco Bay Area; (ii) a $0.3 million decrease in loan origination costs due to lower loan originations, net of purchased consumer loans, period-over-period; and (iii) a $0.5 million increase in commission expense.
Current report
Professional services. The increase was primarily due to: (i) a $0.1 million increase of audit fees for 2024 audits; and (ii) a $0.1 million increase in IT consulting services due to an overall increase in service charges.
Current report
The provision for income taxes was $4.4 million for the three months ended June 30, 2024, a $0.1 million decrease from the three months ended June 30, 2023. The decrease was primarily driven by a $0.5 million state tax benefit recorded during the three months ended June 30, 2023 relating to an overall reduction in the state tax blended rate for the Company since its transition to a C Corporation, which did not occur during the three months ended June 30, 2024. The effective tax rates for the three months ended June 30, 2024 and 2023 were 28.84% and 25.86%, respectively.
Current report
The provision for income taxes was $8.7 million for the six months ended June 30, 2024, as compared to $9.8 million for the six months ended June 30, 2023. The decrease was primarily due to an overall decrease in pre-tax income period-over-period, partially offset by a $0.5 million state tax benefit recorded during the six months ended June 30, 2023 relating to an overall reduction in the state tax blended rate for the Company since its transition to a C Corporation. No such benefit was recorded during the six months ended June 30, 2024. The effective tax rates for the six months ended June 30, 2024 and 2023 were 28.89% and 27.42%, respectively.
Current report
Allowance for Credit Losses
Current report
Table 23 shows the entity types making up our large deposit relationships at the dates indicated.
Current report
During the six months ended June 30, 2024, we had cash inflows related to an increase in deposits of $122.7 million.
Current report
There have been no material changes to the legislative and regulatory disclosures previously disclosed in the Company’s 2023 Annual Report on Form 10-K, previously filed with the SEC.
Removed paragraphs (7)
Previous report
Other operating expenses. The increase was primarily due to a $0.1 million increase in IntraFi Network fees resulting from an overall increase in balances carried in the network.
Previous report
The provision for income taxes was $4.3 million for the three months ended March 31, 2024, as compared to $5.3 million for the three months ended March 31, 2023. There was a decline in the provision due to an overall decrease in taxable income. The effective income tax rates for the three months ended March 31, 2024 and 2023 were 28.94% and 28.86%, respectively.
Previous report
Allowance for Credit Losses - Loans
Previous report
The following table provides information on the activity within the allowance for credit losses - loans as of and for the periods indicated:
Previous report
During the three months ended March 31, 2024, we had cash outflows related to a decrease in deposits of $71.1 million, primarily as a result of decreases in wholesale funding.
Previous report
Bank Merger Review
Previous report
On March 21, 2024, the FDIC published proposed revisions to its Statement of Policy on Bank Merger Transactions that may change the way the FDIC reviews bank merger applications. While the Federal Reserve has not issued a similar proposal, Federal Reserve Vice Chair for Supervision Michael Barr has stated that the Federal Reserve is working with the U.S. Department of Justice to update guidelines setting forth standards for the review of the competitive impact of a bank merger transaction. These pending regulatory revisions create uncertainty regarding the standards that the agencies may apply to their review of bank mergers and may make it more difficult and/or costly to obtain regulatory approval of a bank merger, or otherwise result in more burdensome conditions in approval orders than the agencies have previously imposed. Additionally, the agencies may begin to apply new standards in practice before they formally finalize changes to their merger policies. As a result, these new standards may limit banking organizations’ ability to grow through an acquisition or make it more costly or less beneficial for them to do so.
Reworded paragraphs (77)
Previous wording
The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” of our 2023 Annual Report on Form 10-K and other filings we may make with the SEC, copies of which are available from us at no charge. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We disclaim 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.
Current wording
The foregoing factors could cause results or performance to materially differ from those expressed in our forward-looking statements, should not be considered exhaustive, and should be read together with other cautionary statements that are included in this report and those discussed in the section entitled “Risk Factors” of our 2023 Annual Report on Form 10-K, our Quarterly Report on Form 10-Q for the three months ended March 31, 2024, and other filings we may make with the SEC, copies of which are available from us at no charge. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence or how they will affect us. If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance, or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Quarterly Report on Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. We disclaim 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.
Previous wording
Headquartered in the greater Sacramento metropolitan area of California, Five Star Bancorp is a bank holding company that operates through its wholly owned subsidiary, Five Star Bank, a California state-chartered non-member bank. We provide a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through seven branch offices. Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy. We are dedicated to serving real estate, agricultural, faith-based, and small to medium-sized enterprises. We aim to consistently deliver value that meets or exceeds the expectations of our shareholders, customers, employees, business partners, and community. We refer to our mission as “purpose-driven and integrity-centered banking.” At March 31, 2024, we had total assets of $3.5 billion, total loans held for investment, net of allowance for credit losses, of $3.1 billion, and total deposits of $3.0 billion.
Current wording
Headquartered in the greater Sacramento metropolitan area of California, Five Star Bancorp is a bank holding company that operates through its wholly owned subsidiary, Five Star Bank, a California state-chartered non-member bank. We provide a broad range of banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California through seven branch offices. Our mission is to strive to become the top business bank in all markets we serve through exceptional service, deep connectivity, and customer empathy. We are dedicated to serving real estate, agricultural, faith-based, and small to medium-sized enterprises. We aim to consistently deliver value that meets or exceeds the expectations of our shareholders, customers, employees, business partners, and community. We refer to our mission as “purpose-driven and integrity-centered banking.” At June 30, 2024, we had total assets of $3.6 billion, total loans held for investment, net of allowance for credit losses, of $3.2 billion, and total deposits of $3.1 billion.
Previous wording
Our most significant accounting policies and our critical accounting estimates are described in greater detail in Note 1, Basis of Presentation, in our audited consolidated financial statements and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates included in our 2023 Annual Report on Form 10-K. We have identified accounting policies and estimates that, due to the difficult, subjective, or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our unaudited consolidated financial statements to those judgments and assumptions, are critical to an understanding of our consolidated financial condition and results of operations. We believe that the judgments, estimates, and assumptions used in the preparation of our financial statements are reasonable and appropriate, based on the information available at the time they were made. However, actual results may differ from those estimates, and these differences may be material. There have been no significant changes concerning our critical accounting estimates as described in our 2023 Annual Report on Form 10-K.
Current wording
Our most significant accounting policies and our critical accounting estimates are described in greater detail in Note 1, Basis of Presentation, in our audited consolidated financial statements and Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates included in our 2023 Annual Report on Form 10-K. We have identified accounting policies and estimates that, due to the difficult, subjective, or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of our unaudited consolidated financial statements to those judgments and assumptions, are critical to an understanding of our consolidated financial condition and results of operations. We believe that the judgments, estimates, and assumptions used in the preparation of our financial statements are reasonable and appropriate, based on the information available at the time they were made. However, actual results may differ from those estimates, and these differences may be material. With the exception of the changes to the ACL described below, there have been no significant changes concerning our critical accounting estimates as described in our 2023 Annual Report on Form 10-K.
Previous wording
Net income for the three months ended March 31, 2024 totaled $10.6 million, as compared to net income of $13.2 million for the three months ended March 31, 2023.
Current wording
Net income for the three and six months ended June 30, 2024 totaled $10.8 million and $21.4 million, respectively, as compared to net income of $12.7 million and $25.9 million for the three and six months ended June 30, 2023, respectively.
Previous wording
•Deposits. Total deposits decreased by $71.1 million from $3.03 billion at December 31, 2023 to $2.96 billion at March 31, 2024, primarily due to significant decreases in wholesale deposits, which the Company defines as brokered deposits and public time deposits. In the first three months of 2024, brokered deposits and public time deposits decreased by $58.1 million and $125.0 million, respectively. Non-interest-bearing deposits decreased by $13.7 million in the first three months of 2024 to $817.4 million, and represented 27.65% of total deposits at March 31, 2024, as compared to 27.46% of total deposits at December 31, 2023. Non-wholesale deposits increased by $112.0 million in the first three months of 2024. Our loan to deposit ratio was 105.37% at March 31, 2024, as compared to 102.19% at December 31, 2023.
Current wording
•Deposits. Total deposits increased by $122.7 million from $3.03 billion at December 31, 2023 to $3.15 billion at June 30, 2024. Non-wholesale deposits increased by $230.4 million in the first six months of 2024 to $2.90 billion. Wholesale deposits, which the Company defines as brokered deposits and public time deposits, decreased by $107.6 million in the first six months of 2024 to $252.5 million. Non-interest-bearing deposits decreased by $5.4 million in the first six months of 2024 to $825.7 million, and represented 26.22% of total deposits at June 30, 2024, as compared to 27.46% of total deposits at December 31, 2023. Our loan to deposit ratio was 103.87% at June 30, 2024, as compared to 102.19% at December 31, 2023.
Previous wording
•Assets. Total assets were $3.5 billion at March 31, 2024, representing a $116.8 million, or 3.25%, decrease compared to $3.6 billion at December 31, 2023.
Current wording
•Assets. Total assets were $3.63 billion at June 30, 2024, representing a $41.1 million, or 1.14%, increase compared to $3.59 billion at December 31, 2023.
Previous wording
•Loans. Total loans held for investment were $3.10 billion at March 31, 2024, as compared to $3.08 billion at December 31, 2023, an increase of $22.4 million, or 0.73%. The increase was primarily attributable to increases of $35.8 million in consumer and other loans, $2.8 million in residential loans, and $2.7 million in residential construction loans, partially offset by a $21.8 million decrease in commercial secured loans.
Current wording
•Loans. Total loans held for investment were $3.27 billion at June 30, 2024, as compared to $3.08 billion at December 31, 2023, an increase of $184.6 million, or 5.99%. The increase was primarily attributable to increases of $114.4 million in consumer and other loans and $88.6 million in commercial real estate loans, partially offset by decreases in commercial secured and commercial land and development loans of $11.0 million and $10.8 million, respectively.
Previous wording
•Credit Quality. Credit quality remains strong, with non-accrual loans representing $1.9 million, or 0.06% of total loans held for investment, at March 31, 2024, as compared to $2.0 million, or 0.06% of total loans held for investment, at December 31, 2023. The ratio of the allowance for credit losses to total loans held for investment was 1.12% at March 31, 2024 and December 31, 2023.
Current wording
•Credit Quality. Credit quality remains strong, with non-accrual loans representing $1.9 million, or 0.06% of total loans held for investment, at June 30, 2024, as compared to $2.0 million, or 0.06% of total loans held for investment, at December 31, 2023. The ratio of the allowance for credit losses to total loans held for investment was 1.08% at June 30, 2024 and 1.12% December 31, 2023.
Previous wording
•Net Interest Margin. Net interest margin was 3.14% for the three months ended March 31, 2024, and 3.75% for the three months ended March 31, 2023. The decrease in net interest margin period-over-period was primarily due to an increase in deposit costs exceeding increases in yields on earning assets, as the effective Federal Funds rate increased from 4.83% at March 31, 2023 to 5.33% at March 31, 2024.
Current wording
•Net Interest Margin. Net interest margin was 3.39% and 3.27%, respectively, for the three and six months ended June 30, 2024, and 3.45% and 3.59%, respectively, for the three and six months ended June 30, 2023. The decrease in net interest margin period-over-period was primarily due to an increase in deposit costs exceeding increases in yields on earning assets, as the effective Federal Funds rate increased from 5.08% at June 30, 2023 to 5.33% at June 30, 2024.
Previous wording
•Efficiency Ratio. Efficiency ratio was 44.50% for the three months ended March 31, 2024, up from 36.43% for the corresponding period of 2023 due to the Company’s expansion into the San Francisco Bay Area beginning in the second quarter of 2023.
Current wording
•Efficiency Ratio. Efficiency ratio was 44.07% for the three months ended June 30, 2024, up from 39.41% for the corresponding period of 2023 due to the Company’s expansion into the San Francisco Bay Area beginning late in the second quarter of 2023.
Previous wording
•Capital Ratios. All capital ratios were above well-capitalized regulatory thresholds as of March 31, 2024. The total risk-based capital ratio for the Company was 12.34% at March 31, 2024, as compared to 12.30% at December 31, 2023. The Tier 1 leverage ratio was 8.63% at March 31, 2024, as compared to 8.73% at December 31, 2023. For additional information about the regulatory capital requirements applicable to the Company and the Bank, see the section entitled “—Financial Condition Summary—Capital Adequacy” below.
Current wording
•Capital Ratios. All capital ratios were above well-capitalized regulatory thresholds as of June 30, 2024 and reflect additional common stock of approximately $80.9 million issued through the public offering that closed in April 2024. The total risk-based capital ratio for the Company was 14.38% at June 30, 2024, as compared to 12.30% at December 31, 2023. The Tier 1 leverage ratio was 11.05% at June 30, 2024, as compared to 8.73% at December 31, 2023. For additional information about the regulatory capital requirements applicable to the Company and the Bank, see the section entitled “—Financial Condition Summary—Capital Adequacy” below.
Previous wording
The following discussion of our results of operations compares the three months ended March 31, 2024 to the three months ended March 31, 2023. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024.
Current wording
The following discussion of our results of operations compares the three and six months ended June 30, 2024 to the three and six months ended June 30, 2023. The results of operations for the three and six months ended June 30, 2024 are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2024.
Previous wording
Net interest income decreased $2.4 million to $26.7 million for the three months ended March 31, 2024 compared to March 31, 2023 and our net interest margin of 3.14% for the three months ended March 31, 2024 decreased from 3.75% for the three months ended March 31, 2023. The decrease in net interest income and contraction of our net interest margin was primarily due to higher rates paid on interest-bearing liabilities, which exceeded higher yields earned on interest-earning assets. These changes related to the change in the effective Federal Funds rate from 4.83% at March 31, 2023 to 5.33% at March 31, 2024. Additional detail relating to net interest margin in each period is provided below.
Current wording
Net interest income increased $1.5 million to $29.1 million for the three months ended June 30, 2024 compared to June 30, 2023 while our net interest margin of 3.39% for the three months ended June 30, 2024 decreased from 3.45% for the three months ended June 30, 2023. The increase in net interest income was primarily due to loan growth at higher yields, partially offset by deposit growth at higher rates. These changes related to the change in the effective Federal Funds rate from 5.08% at June 30, 2023 to 5.33% at June 30, 2024. Additional detail relating to net interest margin in each period is provided below.
Previous wording
Average balance sheet, interest, and yield/rate analysis. The following table presents average balance sheet information, interest income, interest expense, and the corresponding average yield earned or rate paid for each period reported. The average balances are daily averages and include both performing and nonperforming loans.
Current wording
Average balance sheet, interest, and yield/rate analysis. Table 3 presents average balance sheet information, interest income, interest expense, and the corresponding average yield earned or rate paid for each period reported. The average balances are daily averages and include both performing and nonperforming loans.
Previous wording
Analysis of changes in interest income and expenses. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average yields/rates. The following table shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the current period’s average yield/rate. The effect of rate changes is calculated by multiplying the change in average yield/rate by the previous period’s volume. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.
Current wording
Analysis of changes in interest income and expenses. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average yields/rates. Table 4 shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the current period’s average yield/rate. The effect of rate changes is calculated by multiplying the change in average yield/rate by the previous period’s volume. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.
Previous wording
Net interest income decreased $2.4 million and net interest margin decreased 61 basis points for the three months ended March 31, 2024 compared to the same quarter of the prior year. The decrease in net interest income is primarily attributable to an additional $10.1 million in deposit interest expense due to increases in interest rates and average balances compared to the same quarter of the prior year. The cost of interest-bearing deposits increased 148 basis points compared to the same quarter of the prior year, while average balances increased 17.78%. In addition, the average balance of non-interest-bearing deposits decreased by $59.4 million compared to the same quarter of the prior year. The increase in deposit interest expense was partially offset by an increase in total interest income of $7.2 million compared to the same quarter of the prior year. Average loan yields increased 35 basis points compared to the same quarter of the prior year, while average balances increased 8.68%.
Current wording
Net interest income decreased $0.9 million and net interest margin decreased 32 basis points for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The decrease in net interest income is primarily attributable to deposit growth at higher interest rates that exceeded loan growth at higher yields. Interest expense increased by $14.3 million compared to the same period of the prior year. The cost of interest-bearing deposits increased 107 basis points compared to the same period of the prior year due to increases in interest rates and an increase in average balances of $244.9 million, or 12.22%. In addition, the average balance of non-interest-bearing deposits decreased by $35.1 million, or 4.06% compared to the same period of the prior year. The increase in interest expense was partially offset by an additional $13.4 million in interest income compared to the same period of the prior year. The average yield on loans increased 34 basis points compared to the same period of the prior year due to increases in interest rates and an increase in average balances of $264.7 million, or 9.20%.
Previous wording
We recorded a $0.9 million provision for credit losses in the first quarter of 2024 and in the same period of 2023. The provision recorded during the three months ended March 31, 2024 was the net effect of charge-offs, recoveries, increases in quantitative reserves, and reductions in reserves for qualitative factors.
Current wording
We recorded a $2.0 million provision for credit losses in the second quarter of 2024, as compared to a $1.3 million provision for credit losses for the same period of 2023. The provision recorded during the three months ended June 30, 2024 was the net effect of charge-offs and recoveries, and net increases in quantitative and qualitative reserves.
Previous wording
The following table details the components of non-interest income for the periods indicated.
Current wording
Table 7 details the components of non-interest income for the periods indicated.
Previous wording
FHLB stock dividends. The increase related to a higher annualized dividend rate and total average shares outstanding from 7.00% and 108,901 shares for the three months ended March 31, 2023 to 8.75% and 150,000 for the three months ended March 31, 2024.
Current wording
FHLB stock dividends. The increase related to increases in the annualized dividend rate and total average shares outstanding to 8.75% and 150,000 for the three months ended June 30, 2024 from 7.00% and 108,901 shares for the three months ended June 30, 2023.
Previous wording
Other income. The increase related to a $0.3 million gain recorded for distributions received on equity investments in venture-backed funds during the three months ended March 31, 2024, which did not occur during the three months ended March 31, 2023.
Current wording
Other income. The decrease related to a $1.3 million gain from distributions received on equity investments in venture-backed funds during the three months ended June 30, 2023, which did not occur during the three months ended June 30, 2024.
Previous wording
Gain on sale of loans. The decrease related primarily to an overall decline in the volume of loans sold, partially offset by an improvement in the effective yield of loans sold during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. During the three months ended March 31, 2024, approximately $5.2 million of loans were sold with an effective yield of 7.08%, as compared to approximately $12.7 million of loans sold with an effective yield of 4.72% during the three months ended March 31, 2023.
Current wording
Gain on sale of loans. The decrease related primarily to an overall decline in the volume of loans sold, partially offset by an improvement in the effective yield of loans sold during the six months ended June 30, 2024 compared to the six months ended June 30, 2023. During the six months ended June 30, 2024, approximately $12.0 million of loans were sold with an effective yield of 6.81%, as compared to approximately $23.6 million of loans sold with an effective yield of 5.26% during the six months ended June 30, 2023.
Previous wording
Loan-related fees. The increase related to the recognition of $0.1 million of swap referral fees during the three months ended March 31, 2024, which did not occur during the three months ended March 31, 2023.
Current wording
Loan-related fees. The increase primarily related to an increase of $0.1 million in swap referral fees recognized during the six months ended June 30, 2024, as compared to the six months ended June 30, 2023.
Previous wording
The following table details the components of non-interest expense for the periods indicated.
Current wording
Table 9 details the components of non-interest expense for the periods indicated.
Previous wording
Salaries and employee benefits. The increase during the three months ended March 31, 2024, as compared to the three months ended March 31, 2023. related primarily to: (i) a $0.6 million increase in salaries and benefits for new employees hired since June 2023 to support expansion into the San Francisco Bay Area; (ii) a $0.2 million increase in commissions earned, largely due to commissions paid to the San Francisco Bay Area team, which did not exist during the three months ended March 31, 2023; and (iii) a $0.1 million decrease in loan origination costs due to lower loan production period-over-period.
Current wording
Salaries and employee benefits. The increase related primarily to: (i) a $0.9 million increase in salaries, benefits, and bonus expense for new employees hired since June 2023 to support expansion into the San Francisco Bay Area; (ii) a $0.3 million increase in commissions earned, largely due to commissions paid to the San Francisco Bay Area team, which did not occur during the three months ended June 30, 2023; and (iii) a $0.2 million decrease in loan origination costs due to lower loan originations, net of purchased consumer loans, period-over-period.
Previous wording
Occupancy and equipment. The $0.1 million increase related to rent expense for temporary office space to support the San Francisco Bay Area expansion during the three months ended March 31, 2024, which did not exist during the three months ended March 31, 2023.
Current wording
Occupancy and equipment. The increase related to rent expense for temporary office space to support the San Francisco Bay Area expansion during the six months ended June 30, 2024, which did not exist during the six months ended June 30, 2023.
Previous wording
The following discussion compares our financial condition as of March 31, 2024 to our financial condition as of December 31, 2023. The following table summarizes selected components of our unaudited consolidated balance sheets as of March 31, 2024 and December 31, 2023.
Current wording
The following discussion compares our financial condition as of June 30, 2024 to our financial condition as of December 31, 2023. Table 11 summarizes selected components of our unaudited consolidated balance sheets as of June 30, 2024 and December 31, 2023.
Previous wording
At March 31, 2024, total assets were $3.5 billion, a decrease of $116.8 million from $3.6 billion at December 31, 2023, primarily due to a $136.3 million decrease in cash and cash equivalents, partially offset by a $22.4 million increase in total loans held for investment.
Current wording
At June 30, 2024, total assets were $3.63 billion, an increase of $41.1 million from $3.59 billion at December 31, 2023, primarily due to a $184.6 million increase in total loans held for investment, partially offset by a $131.2 million decrease in cash and cash equivalents. The $184.6 million increase in total loans held for investment included a purchase of loans within the consumer concentration of the loan portfolio, representing $73.3 million.
Previous wording
Total cash and cash equivalents were $185.3 million at March 31, 2024, a decrease of $136.3 million from $321.6 million at December 31, 2023. The decrease in cash and cash equivalents was primarily due to decreases in deposits of $71.1 million, a decrease in borrowings of $50.0 million, and $27.0 million in loan originations, net of repayments, partially offset by income before provision for income taxes of $15.0 million.
Current wording
Total cash and cash equivalents were $190.4 million at June 30, 2024, a decrease of $131.2 million from $321.6 million at December 31, 2023. The decrease in cash and cash equivalents was primarily due to a decrease in borrowings of $170.0 million and $192.4 million in loan originations, net of repayments, partially offset by increases in deposits of $122.7 million and pre-tax income of $30.1 million.
Previous wording
Our total securities available-for-sale and held-to-maturity amounted to $108.0 million at March 31, 2024 and $111.2 million at December 31, 2023, representing a decrease of $3.2 million period-over-period. The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $2.0 million and an unrealized loss on securities of $1.0 million, with the remainder of the change due to amortization of premiums. For the three months ended March 31, 2024, other comprehensive loss was $0.7 million, primarily due to rate changes and other market conditions on securities.
Current wording
Our total securities available-for-sale and held-to-maturity amounted to $106.2 million at June 30, 2024 and $111.2 million at December 31, 2023, representing a decrease of $5.0 million period-over-period. The decrease to available-for-sale securities was primarily due to maturities, prepayments, and calls of $3.8 million and an unrealized loss on securities of $0.7 million, with the remainder of the change due to amortization of premiums. For the six months ended June 30, 2024, other comprehensive loss was $0.5 million, primarily due to rate changes and other market conditions on securities.
Previous wording
The following table presents the carrying value of our investment portfolio as of the dates indicated:
Current wording
Table 12 presents the carrying value of our investment portfolio as of the dates indicated.
Previous wording
The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of March 31, 2024:
Current wording
Table 13 presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of the dates shown.
Previous wording
Our loan portfolio is our largest class of interest-earning assets and typically provides higher yields than other types of interest-earning assets. Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting standards. As of March 31, 2024 and December 31, 2023, our total loans amounted to $3.11 billion and $3.09 billion, respectively. The following table presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.
Current wording
Our loan portfolio is our largest class of interest-earning assets and typically provides higher yields than other types of interest-earning assets. Associated with the higher yields is an inherent amount of credit risk, which we attempt to mitigate with strong underwriting standards. As of June 30, 2024 and December 31, 2023, our total loans amounted to $3.27 billion and $3.09 billion, respectively. Table 14 presents the balance and associated percentage of each major product type within our portfolio as of the dates indicated.
Previous wording
The following tables present the commercial real estate loan balance, associated percentage of commercial real estate concentrations, estimated real estate collateral values, and related loan-to-value (“LTV”) ranges by collateral type as of the dates indicated. Revolving lines of credit with zero balance and 0.00% LTV are excluded from this table. Collateral values are determined at origination using third-party real estate appraisals or evaluations. Updated appraisals, which are included in the table below, may be obtained for loans that are downgraded to watch or substandard. Loans over $2.0 million are reviewed annually, at which time an internal assessment of collateral values is completed.
Current wording
Table 15 presents the commercial real estate loan balance, associated percentage of commercial real estate concentrations, estimated real estate collateral values, and related loan-to-value (“LTV”) ranges by collateral type as of the dates indicated. Revolving lines of credit with zero balance and 0.00% LTV are excluded from this table. Collateral values are determined at origination using third-party real estate appraisals or evaluations. Updated appraisals, which are included in Table 15, may be obtained for loans that are downgraded to watch or substandard. Loans over $2.0 million are reviewed annually, at which time an internal assessment of collateral values is completed.
Previous wording
Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed materially. Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 88.97% of loans held for investment at March 31, 2024. Commercial secured lending represents 4.63% of loans held for investment at March 31, 2024. We sell the guaranteed portion of all SBA 7(a) loans in the secondary market and will continue to do so as long as market conditions continue to be favorable.
Current wording
Over the past several years, we have experienced significant growth in our loan portfolio, although the relative composition of the portfolio has not changed materially. Our primary focus remains commercial real estate lending (including commercial, commercial land and development, and commercial construction), which constitutes 87.20% of loans held for investment at June 30, 2024. Commercial secured lending represents 4.73% of loans held for investment at June 30, 2024. We sell the guaranteed portion of all SBA 7(a) loans in the secondary market and will continue to do so as long as market conditions continue to be favorable.
Previous wording
We recognize that our commercial real estate loan concentration is significant within our balance sheet. Commercial real estate loan balances as a percentage of risk-based capital were 669.49% and 682.72% as of March 31, 2024 and December 31, 2023, respectively. We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (e.g., manufactured home communities, self-storage, hospitality, etc.). All loan sectors were within our established limits as of March 31, 2024. Additionally, our loans are geographically concentrated with borrowers and collateralized properties primarily in California.
Current wording
We recognize that our commercial real estate loan concentration is significant within our balance sheet. Commercial real estate loan balances as a percentage of risk-based capital were 568.36% and 682.72% as of June 30, 2024 and December 31, 2023, respectively. We have established internal concentration limits in the loan portfolio for commercial real estate loans by sector (e.g., manufactured home communities, self-storage, hospitality, etc.). All loan sectors were within our established limits as of June 30, 2024. Additionally, our loans are geographically concentrated with borrowers and collateralized properties primarily in California.
Previous wording
The following table sets forth the contractual maturities of our loan portfolio as of March 31, 2024:
Current wording
Table 16 sets forth the contractual maturities of our loan portfolio as of the dates indicated.
Previous wording
The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of March 31, 2024:
Current wording
Table 17 sets forth the sensitivity to interest rate changes of our loan portfolio as of the dates shown.
Previous wording
During the three months ended March 31, 2024, the Company sold 18 SBA 7(a) loans with government-guaranteed portions totaling $5.2 million. The Company received gross proceeds of $5.6 million on the loans sold during the three months ended March 31, 2024, resulting in the recognition of net gains on sale of $0.4 million during the same period.
Current wording
During the three and six months ended June 30, 2024, the Company sold 22 and 40 SBA 7(a) loans, respectively, with government-guaranteed portions totaling $6.8 million and $12.0 million, respectively. The Company received gross proceeds of $7.2 million and $12.8 million on the loans sold during the three and six months ended June 30, 2024, respectively, resulting in the recognition of net gains on sale of $0.4 million and $0.8 million during the respective periods.
Previous wording
The following table provides details of our nonperforming and restructured assets and certain other related information as of the dates presented:
Current wording
Table 18 provides details of our nonperforming and restructured assets and certain other related information as of the dates presented.
Previous wording
The banking industry defines loans graded substandard or doubtful as “classified” loans. The following table shows our levels of classified loans as of the periods indicated:
Current wording
The banking industry defines loans graded substandard or doubtful as “classified” loans. Table 19 shows our levels of classified loans as of the periods indicated.
Showing the first 40 of 77 pairs. Open the source sections for the rest.
Rearranged current paragraphs (16)
Current report — wording carried from elsewhere
The ACL represents the estimated probable credit losses in our loan and investment portfolios and is estimated as of June 30, 2024 using CECL. The ACL is established through a provision for credit losses charged to operations. Loans and investments are charged against the ACL when management believes that the collectability of the principal is unlikely. Subsequent recoveries of previously charged-off amounts, if any, are credited to the ACL.
Current report — wording carried from elsewhere
The ACL is evaluated on a regular basis by management in consideration of optimistic, moderate, and pessimistic current conditions, and is based on management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions specifically impacting each loan type by purpose and by geography, and concentrations within the loan portfolio. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
Current report — wording carried from elsewhere
Average balance sheet, interest, and yield/rate analysis. Table 5 presents average balance sheet information, interest income, interest expense, and the corresponding average yield earned or rate paid for each period reported. The average balances are daily averages and include both performing and nonperforming loans.
Current report — wording carried from elsewhere
1 Interest income/expense is divided by the actual number of days in the period multiplied by the actual number of days in the year to correspond to stated interest rate terms, where applicable.
Current report — wording carried from elsewhere
2 Yields on available-for-sale securities are calculated based on fair value. Investment security interest is earned on a 30/360 day basis monthly. Yields are not calculated on a tax-equivalent basis.
Current report — wording carried from elsewhere
3 Non-accrual loans are included in total loan balances. No adjustment has been made for these loans in the yield calculations. Interest income on loans includes amortization of deferred loan fees, net of deferred loan costs. Allowance for credit losses is not included in total loan balances.
Current report — wording carried from elsewhere
4 Allowance for credit losses is included in interest receivable and other assets, net.
Current report — wording carried from elsewhere
5 Net interest spread represents the average yield earned on interest-earning assets minus the average rate paid on interest-bearing liabilities.
Current report — wording carried from elsewhere
6 Net interest margin is computed by calculating the difference between interest income and interest expense, divided by the average balance of interest-earning assets, then annualized based on the number of days in the given period.
Current report — wording carried from elsewhere
Analysis of changes in interest income and expenses. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average yields/rates. Table 6 shows the effect that these factors had on the interest earned from our interest-earning assets and interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the current period’s average yield/rate. The effect of rate changes is calculated by multiplying the change in average yield/rate by the previous period’s volume. Changes not solely attributable to volume or yields/rates have been allocated in proportion to the respective volume and yield/rate components.
Current report — wording carried from elsewhere
Gain on sale of loans. The decrease related primarily to an overall decline in the volume of loans sold, partially offset by an improvement in the effective yield of loans sold. During the three months ended June 30, 2024, approximately $6.8 million of loans were sold with an effective yield of 6.60%, as compared to approximately $10.9 million of loans sold with an effective yield of 5.89% during the three months ended June 30, 2023.
Current report — wording carried from elsewhere
Table 8 details the components of non-interest income for the periods indicated.
Current report — wording carried from elsewhere
Other income. The decrease resulted primarily from the difference between a $1.3 million gain recorded for distributions received on equity investments in venture-backed funds during the six months ended June 30, 2023 compared to a $0.3 million gain recorded during the six months ended June 30, 2024.
Current report — wording carried from elsewhere
Table 10 details the components of non-interest expense for the periods indicated.
Current report — wording carried from elsewhere
Data processing and software. The increase was 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) an increased number of licenses required for new users on our loan origination and documentation system.
Current report — wording carried from elsewhere
Table 25 is a summary of our outstanding subordinated notes as of June 30, 2024.
Rearranged previous paragraphs (3)
Previous report — wording carried elsewhere
The following table presents the carrying value of our securities by their stated maturities, as well as the weighted average yields for each maturity range, as of December 31, 2023:
Previous report — wording carried elsewhere
The following table sets forth the contractual maturities of our loan portfolio as of December 31, 2023:
Previous report — wording carried elsewhere
The following table sets forth the sensitivity to interest rate changes of our loan portfolio as of December 31, 2023: