Five Star Bancorp — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. Five Star Bancorp operates Five Star Bank, serving businesses, professionals, and individuals primarily in Northern California.
Financial performance
| Metric | Q1 2021 | Comparable period / change |
|---|---|---|
| Net interest income | $18.0 million | Up 27.0% from $14.2 million |
| Net income | $10.3 million | Up from $7.0 million; reported EPS was $0.93 versus $0.72 |
| Provision for loan losses | $0.2 million | Down from $2.6 million |
| Non-interest income | $1.6 million | Down from $1.8 million |
| Non-interest expense | $8.8 million | Up 44.4% from $6.1 million |
| Net interest margin | 3.83% | Down from 4.02% |
| Efficiency ratio | 44.77% | Worsened from 38.19% |
Loan growth and lower deposit funding costs supported net interest income. Management attributed the margin decline to the lower-rate environment. The provision reduction reflected improved economic conditions, while increased personnel and IPO-related professional fees contributed to higher expenses. Return on average assets was 2.05% and return on average equity was 32.08%; both are reported on an S-corporation basis.
Financial position, cash flow, and liquidity
- Total assets were $2.15 billion, up 10.1% from year-end. Deposits rose $199.1 million, or 11.2%, to $1.98 billion; cash and cash equivalents increased to $434.6 million.
- Loans held for investment totaled $1.55 billion gross and $1.52 billion net of allowance. Total loans, including loans held for sale, were $1.55 billion before deferred fees. Commercial real estate was the largest portfolio category; PPP loans totaled $182.9 million.
- The allowance for loan losses was $22.3 million, or 1.44% of loans (1.63% excluding SBA-guaranteed PPP loans). Nonaccrual loans were $0.5 million, or 0.03% of loans; no loans were more than 90 days past due and accruing.
- Q1 operating cash flow was $8.6 million, versus cash used of $3.6 million in Q1 2020. Investing activities used $52.6 million; financing activities provided $188.1 million, principally from deposit growth. Cash dividends paid were $11.0 million.
- Subordinated notes, net, were $28.3 million; there were no outstanding FHLB advances or federal funds borrowings. Remaining FHLB borrowing availability, after letters of credit, was $178.3 million; additional reported facilities included $75 million of federal funds lines and $19.7 million of discount-window capacity.
- The Bank’s capital ratios exceeded well-capitalized regulatory thresholds. Its total risk-based capital ratio was 11.95%; Bancorp’s reported ratio was 12.09%.
Material changes and significant events
- Compared with Q1 2020, net income and net interest income increased, while NIM declined and the efficiency ratio worsened. Average loan balances rose substantially; interest expense fell as deposit costs declined. Non-interest expense increased, particularly salaries and professional services.
- From year-end, deposits and assets grew, while shareholders’ equity fell to $131.4 million from $133.8 million, reflecting dividends and a decline in accumulated other comprehensive income, partly offset by earnings.
- After quarter-end, the company completed its May 2021 IPO, issuing 6,054,750 shares at $20 per share and receiving $109.1 million in net proceeds. It began trading on Nasdaq on May 5 and converted from an S corporation to a C corporation. Management stated that future results will include federal and higher California corporate taxes; the stated combined statutory rate is 29.56%. On a pro forma basis, Q1 net income would have been $7.5 million rather than $10.3 million.
- After the quarter, the company paid a $27.0 million distribution to pre-IPO shareholders under its tax-sharing arrangements. It also declared a $0.80-per-share dividend on April 6.
Outlook, risks, and contingencies
- No quantified earnings, loan-growth, or margin guidance is provided. Management said it expects loan-portfolio growth to continue, does not expect material changes in product or geographic concentrations, and believes current liquidity and the core deposit base are adequate for operations.
- Credit exposure is concentrated in Northern California and real estate: real-estate-related loans were approximately 78.15% of the portfolio, and commercial real estate loans were 642.07% of risk-based capital. Management identifies local economic and property-market weakness, commercial real estate concentration, and borrower performance as key risks.
- Large-depositor concentration is material: 56 relationships above $5 million totaled $964.9 million, or 48.57% of deposits; the largest relationship was $160.4 million. Uninsured non-time deposits were $1.19 billion. Management cites liquidity resources and monitoring as mitigants.
- Six loans totaling $17.2 million remained on COVID-19 payment relief at March 31; one relationship totaling $2.5 million remained on relief as of May 31. The filing warns that pandemic effects, borrower repayment capacity, collateral values, and future credit-loss estimates remain uncertain.
- Other risks include interest-rate changes, competition, regulatory and cybersecurity risks, natural disasters, and transition from LIBOR. The company expects CECL adoption on January 1, 2023 and says the impact cannot yet be reasonably quantified; it believes the change could increase the allowance. Lease accounting adoption is expected after December 15, 2021.
- Unfunded loan commitments and standby letters of credit totaled $213.9 million. Management said material losses on these commitments are not anticipated. Ordinary-course litigation was not expected by management to materially affect financial position or results.
Most important facts to verify
- Post-IPO capital, share count, and use of the $109.1 million proceeds, including the $27.0 million shareholder distribution.
- Reported versus C-corporation after-tax earnings and the resulting effect of the 29.56% stated combined statutory rate.
- Credit performance of the concentrated commercial real estate portfolio and remaining COVID-19 payment-relief borrowers.
- Deposit stability, uninsured balances, and reliance on large deposit relationships as liquidity conditions change.
- Whether loan growth can be sustained without further NIM compression, higher operating costs, or increased credit provisioning.