Five Star Bancorp (FSBC) — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Five Star Bancorp operates Five Star Bank, serving businesses, professionals, and individuals primarily in Northern California.
Financial results and position
- Income: Interest and fee income was $40.3 million, up 76% from $22.9 million in Q1 2022. Net interest income rose 33% to $29.1 million. Net income increased 33% to $13.2 million from $9.9 million; diluted EPS was $0.77 versus $0.58.
- Margins and costs: Net interest margin was 3.75%, up from 3.60%; cost of funds increased to 1.53% from 0.17%. Efficiency ratio improved to 36.43% from 39.82%. Non-interest income fell 37% to $1.4 million, while non-interest expense rose 16% to $11.1 million. Effective tax rate was 28.86% versus 27.07%.
- Credit costs and quality: Provision for credit losses was $0.9 million versus $1.0 million. Allowance for credit losses was $34.2 million, or 1.19% of loans, compared with $28.4 million, or 1.02%, at year-end. Non-accrual loans were $0.4 million (0.01% of loans); watch and substandard loans totaled $24.6 million.
- Assets and lending: Total assets were $3.40 billion, up $170.1 million from year-end. Loans held for investment were $2.87 billion, up $78.5 million (2.8%). Commercial real estate represented 84.71% of loans held for investment; real-estate-related loans were 91.61% of the loan portfolio.
- Funding, debt, and liquidity: Deposits increased $138.4 million to $2.92 billion. Non-interest-bearing deposits declined $134.6 million to $836.7 million and were 28.65% of deposits, versus 34.91% at year-end. FHLB advances increased $20 million to $120 million; subordinated debt, net, was $73.6 million. Cash and cash equivalents were $347.9 million. Reported total liquidity, including cash and available borrowing capacity, was approximately $892.7 million.
- Cash flow: Operating activities provided $0.7 million, investing activities used $68.6 million, and financing activities provided $155.8 million. Cash and cash equivalents increased $87.9 million during the quarter.
- Capital and shareholder returns: Bancorp total risk-based capital ratio was 12.50%, Tier 1 leverage was 8.53%, and shareholders’ equity was $260.7 million. The company reported capital above applicable regulatory minimums; the Bank was classified as well-capitalized. A $0.15-per-share dividend was paid in Q1; a $0.20-per-share dividend was declared in April for payment in May.
Material changes and notable items
- Higher loan yields and loan growth drove income growth, partly offset by sharply higher deposit and borrowing costs. Average yield on interest-earning assets rose to 5.18% from 3.76%; average rates paid on interest-bearing liabilities rose to 2.21% from 0.28%.
- On January 1, 2023, the company adopted CECL (ASC 326). Adoption increased the loan allowance by $5.3 million and included a $1.1 million increase in the reserve for unfunded commitments; the net-of-tax retained-earnings adjustment was a $4.5 million reduction. This limits direct comparison of credit-loss reserves with prior periods.
- Available-for-sale securities had $17.1 million of gross unrealized losses at quarter-end, which management attributed to interest rates and market conditions rather than credit losses. The filing states that no credit-loss expense was recognized for these securities.
- Deposits grew overall, but the mix shifted toward interest-bearing accounts. Network deposits increased to $525.8 million. Uninsured and uncollateralized deposits totaled $1.0 billion; the largest deposit relationship was $220.9 million, or 7.56% of deposits. The 84 relationships exceeding $5 million totaled $1.9 billion.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management said it expects loan-portfolio growth and expects non-interest expense to grow with business initiatives, while anticipating efficiency-ratio improvement over time. Management believed liquidity sources were adequate for the next 12 months and expected roughly $337.5 million of time deposits to mature over that period; it said anticipated runoff could be replenished through organic deposit growth. These are forward-looking statements, not guarantees.
- Key exposures include Northern California and commercial real estate concentration, borrower repayment capacity, collateral values, rising rates, deposit competition and withdrawals, and continued increases in funding costs. Commercial real estate loans equaled 673.90% of risk-based capital.
- Management disclosed possible regulatory changes following recent bank failures, including a potential FDIC special assessment; the scope and timing were unclear. The company had not participated in the Federal Reserve’s Bank Term Funding Program as of March 31, 2023.
- The filing identifies potential effects from U.S. debt-limit uncertainty, economic and real-estate conditions, regulatory changes, and operational and cybersecurity risks. It reports no pending litigation expected to materially affect the company.
- Unfunded commitments and standby letters of credit totaled $335.1 million. The company reported no material expected losses on these commitments, but they represent potential funding and credit exposure.
Most important facts for investors to verify
- Whether deposits remain stable and diversify, especially among large, uninsured, municipal, and nonprofit relationships, and how deposit pricing affects margin.
- Whether loan growth, especially commercial real estate, remains consistent with underwriting standards and whether watch or classified loans and the CECL allowance change materially.
- How available liquidity and borrowing capacity evolve, including collateral and borrowing constraints, and the effect of deposit maturities and potential FDIC assessments.
- Whether higher interest expense, operating costs, and any future regulatory requirements offset continued loan-yield benefits and reported profitability.