Five Star Bancorp — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are against December 31, 2023. Five Star Bancorp operates Five Star Bank, serving businesses, professionals and individuals primarily in Northern California. The filing presents one reportable segment.
Key financial results
| Metric | Q1 2024 | Comparable period / prior date |
|---|---|---|
| Net interest income | $26.7 million | $29.1 million in Q1 2023 |
| Net interest margin | 3.14% | 3.75% in Q1 2023 |
| Net income | $10.6 million | $13.2 million in Q1 2023 |
| Diluted earnings per share | $0.62 | $0.77 in Q1 2023 |
| Net interest income after provision | $25.8 million | $28.2 million in Q1 2023 |
| Non-interest income / expense | $1.8 million / $12.7 million | $1.4 million / $11.1 million in Q1 2023 |
| Efficiency ratio | 44.50% | 36.43% in Q1 2023 |
| Operating cash flow | $0.2 million provided | $0.7 million provided in Q1 2023 |
| Investing / financing cash flow | $11.9 million used / $124.6 million used | $68.6 million used / $155.8 million provided in Q1 2023 |
Financial condition and liquidity
- Assets: $3.48 billion, down $116.8 million (3.25%) from year-end, principally reflecting a $136.3 million decline in cash and cash equivalents.
- Loans: Loans held for investment were $3.10 billion, up $22.4 million (0.73%). The portfolio is concentrated in real estate; real estate-related loans were approximately 91.86% of loans.
- Deposits: $2.96 billion, down $71.1 million (2.35%). Non-wholesale deposits rose $112.0 million, while brokered and public time deposits declined $58.1 million and $125.0 million, respectively. Non-interest-bearing deposits were $817.4 million, or 27.65% of deposits.
- Cash and borrowing capacity: Cash and cash equivalents were $185.3 million. Management reported total liquidity of approximately $1.48 billion, including available FHLB capacity of $411.4 million, Federal Reserve Discount Window capacity of $707.1 million and unused correspondent lines of $175.0 million. Outstanding borrowings were $120.0 million: $20.0 million from the FHLB and $100.0 million from the Discount Window.
- Funding and debt: The loan-to-deposit ratio increased to 105.37% from 102.19%. Subordinated notes, net, were $73.8 million; notes carry a 6.00% fixed rate through September 2027 and then float at Term SOFR plus 329 basis points.
- Capital: Bancorp’s total risk-based capital ratio was 12.34%; its Tier 1 leverage ratio was 8.63%. The Bank’s total risk-based capital ratio was 11.94%, above the 10.00% well-capitalized threshold. The Bank qualified as well-capitalized.
Changes, credit quality and notable items
- Net interest income fell $2.4 million year over year as interest expense rose faster than interest income. Deposit interest expense increased $10.1 million; the cost of interest-bearing deposits rose 148 basis points. Average loan yield increased 35 basis points, but deposit costs and a lower average balance of non-interest-bearing deposits pressured margin.
- Non-interest expense increased 14.37%, partly due to personnel, occupancy and technology costs supporting the San Francisco Bay Area expansion begun in Q2 2023. Management expects expenses to grow as it pursues growth, but said it expects the efficiency ratio to improve going forward.
- Non-accrual loans were $1.9 million, or 0.06% of loans; no loans were over 90 days past due and still accruing. The allowance for loan losses was $34.7 million, or 1.12% of loans. Watch and substandard loans increased to $53.9 million from $41.6 million at year-end. Q1 net charge-offs were $0.8 million.
- Available-for-sale securities had $17.8 million of gross unrealized losses at quarter-end, largely on mortgage-backed and municipal securities. The quarter recorded $0.7 million of other comprehensive loss.
- After quarter-end, the company issued 3,967,500 shares at $21.75 per share in an offering completed April 2 and April 10. Net proceeds were approximately $80.8 million after underwriting discounts, commissions and estimated expenses. This is a material capital and share-count change after the balance-sheet date.
- The board declared a $0.20-per-share dividend in January and authorized another $0.20 dividend in April, payable May 13, 2024. Management says it expects to continue quarterly dividends, subject to board discretion.
Outlook, risks and contingencies
No formal earnings or financial guidance is provided. Management expects loan portfolio growth and states that it expects approximately $284.9 million of time deposits to mature within 12 months; it expects any resulting outflow to be manageable and replenished through organic deposit growth. It also expects approximately $7.7 million of securities cash flows over the next 12 months.
Key risks include sensitivity to interest rates and deposit pricing; concentrated Northern California lending and commercial real estate exposure; reliance on large deposit relationships; real estate values and borrower repayment capacity; and the ability to maintain liquidity and capital. At March 31, 92 deposit relationships exceeding $5 million totaled $1.7 billion, or 57.63% of deposits; the largest was $200.9 million. Uninsured and uncollateralized deposits totaled $1.1 billion. Management reported $453.5 million of unfunded commitments and standby letters of credit. It does not expect ordinary-course litigation to have a material effect. The filing reports no material change in previously disclosed risk factors.
Investor verification priorities
- Track deposit mix, large depositor retention, upcoming time-deposit maturities and the loan-to-deposit ratio.
- Assess whether deposit-cost pressure moderates and net interest margin stabilizes as rates and funding mix change.
- Monitor commercial real estate concentrations, watch and classified loans, charge-offs and allowance adequacy.
- Review the impact of the April equity offering on share count, capital ratios, earnings per share and the company’s use of proceeds.
- Verify liquidity availability under stress, including collateral requirements and the continued accessibility of borrowing facilities.