FIVE STAR BANCORP quarterly report, Q2 FY2023

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Five Star Bancorp — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Five Star Bancorp operates Five Star Bank, serving businesses, professionals and individuals primarily in Northern California. Amounts below are in millions unless stated otherwise.

Financial performance

  • Q2 earnings: Net income was $12.7 million, up 27.9% from $10.0 million a year earlier; diluted EPS was $0.74 versus $0.58. For the first six months, net income was $25.9 million versus $19.8 million, and diluted EPS was $1.51 versus $1.15.
  • Net interest: Q2 net interest income rose 12.4% to $27.6 million, while net interest margin fell to 3.45% from 3.71%. Six-month net interest income increased 22.2% to $56.7 million; margin was 3.59% versus 3.65%. Management attributed margin pressure primarily to deposit costs rising faster than yields on earning assets. Q2 cost of funds increased to 2.04% from 0.24%.
  • Other income and expenses: Q2 non-interest income was $2.8 million, up $0.9 million, largely reflecting a $1.3 million gain from venture-backed fund distributions. Non-interest expense increased 17.4% to $12.0 million, including higher personnel, technology, FDIC insurance and business development costs. Q2 efficiency ratio was 39.41%, versus 38.53%.
  • Credit costs and taxes: Q2 provision for credit losses was $1.3 million, compared with $2.3 million; six-month provision was $2.2 million versus $3.2 million. Q2 effective tax rate was 25.86%, compared with 29.07%, including a $0.5 million state tax benefit.
  • Cash flow: For the first six months, operating activities provided $25.6 million, investing activities used $127.2 million, and financing activities provided $141.7 million. Cash and cash equivalents increased $40.1 million to $300.1 million.

Financial position, funding and capital

  • Total assets were $3.40 billion, up $175.5 million from year-end 2022. Loans held for investment increased $136.1 million, or 4.9%, to $2.93 billion; total deposits rose $147.7 million, or 5.3%, to $2.93 billion.
  • Non-interest-bearing deposits declined $137.5 million to $833.7 million, or 28.46% of deposits. Interest-bearing deposits increased $285.3 million. The loan-to-deposit ratio was 100.21%, versus 100.67% at year-end.
  • Reported total liquidity, including cash and immediately available borrowing capacity, was approximately $890.6 million. This included $300.1 million cash, $342.6 million available FHLB capacity, $72.8 million Federal Reserve Discount Window capacity and $175.0 million correspondent-bank lines.
  • Borrowings included $100.0 million of FHLB advances and $73.7 million of subordinated notes. The $75 million notes issued in 2022 carry a fixed 6.00% rate through September 2027, then float at three-month Term SOFR plus 329 basis points through maturity in 2032.
  • Shareholders’ equity was $269.1 million, up from $252.8 million at year-end. Bancorp’s total risk-based capital ratio was 12.43% and Tier 1 leverage ratio was 8.66%; the Bank was classified as well-capitalized. A $0.20-per-share dividend was declared in April; a further $0.20 dividend was authorized July 20.

Material changes, risks and outlook

  • Credit quality: Non-accrual loans were $0.3 million, or 0.01% of loans, compared with $0.4 million at year-end; no loans over 90 days past due were still accruing. The allowance for loan losses was $34.0 million, or 1.16% of loans, versus $28.4 million, or 1.02%, at year-end. Net charge-offs were $1.5 million for the first six months.
  • New CECL accounting: The company adopted the expected-credit-loss standard on January 1, 2023. Adoption increased the loan allowance by $5.3 million and reduced retained earnings by $4.5 million after tax, limiting comparability with 2022.
  • Concentrations and deposits: Real estate-related loans represented 92.44% of the loan portfolio; commercial real estate loans equaled 675.66% of risk-based capital. Uninsured and uncollateralized deposits totaled $1.0 billion. Eighty-six deposit relationships over $5 million totaled $1.8 billion, and the largest relationship was $210 million, or 7.17% of deposits. Management cites liquidity resources and monitoring as mitigants.
  • Rate and securities exposure: Available-for-sale securities had $18.5 million of gross unrealized losses at June 30, primarily attributed by management to interest rates and market conditions, not credit losses. Securities were $109.9 million pledged as collateral. AOCI remained a loss of $13.0 million.
  • Management outlook: No quantified earnings or financial guidance was provided. Management expects continued loan-portfolio growth, anticipates the product and geographic concentrations will not materially change, and expects the efficiency ratio to improve over time, while noting expenses may grow with business initiatives. Management expected approximately $353.6 million of time deposits to mature in the following 12 months and projected adequate liquidity for the next 12 months.
  • Contingencies and broader risks: Off-balance-sheet commitments and standby letters of credit totaled $450.3 million. Management did not expect ordinary-course litigation to materially affect results. Identified risks include interest-rate changes, Northern California and real-estate concentration, deposit competition and outflows, credit losses, liquidity and regulatory changes following recent bank failures. The company had not used or established borrowing capacity under the Bank Term Funding Program.

Important facts for investors to verify

  • Whether deposit pricing and mix continue to pressure net interest margin, particularly as time deposits mature and non-interest-bearing balances change.
  • Deposit concentration, uninsured balances, and the stability of the largest customer relationships and reciprocal network deposits.
  • Commercial real estate exposure, collateral values and sector concentrations, especially manufactured-home communities and other large property categories.
  • Future credit-loss allowance needs and net charge-offs under CECL, including the effect of loan growth and economic forecasts.
  • Whether available liquidity and borrowing capacity remain adequate under stressed deposit withdrawals, and whether pledged collateral or commitments constrain access.
  • How much of earnings growth reflects recurring banking operations versus the $1.3 million venture-fund distribution gain.