Five Star Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Five Star Bancorp is a Northern California bank holding company serving businesses, professionals, and individuals, primarily through commercial real estate and business lending.
Financial performance
- Net income: $9.9 million versus $10.3 million in Q1 2021; diluted EPS was $0.58 versus $0.93. The comparison is affected by the 2021 S-corporation tax status: on a pro forma C-corporation basis, Q1 2021 net income was $7.5 million and EPS was $0.68. Q1 2022 net income therefore improved on that adjusted comparison.
- Revenue and margins: Net interest income rose 21% to $21.9 million. Net interest margin declined to 3.60% from 3.83%, as average loan yield fell to 4.53% from 4.95%; growth in average loan balances partly offset the lower yield. Non-interest income increased to $2.2 million from $1.6 million. Non-interest expense rose to $9.6 million from $8.8 million; the efficiency ratio improved to 39.82% from 44.77%.
- Credit costs: Provision for loan losses was $1.0 million versus $0.2 million. The allowance was $23.9 million, or 1.15% of loans held for investment, compared with $23.2 million, or 1.20%, at year-end.
- Cash flow: Operating activities provided $3.5 million, investing activities used $133.5 million, and financing activities provided $209.7 million. Cash and cash equivalents increased $79.6 million to $505.0 million.
Financial condition and material changes
- Total assets increased 8.7% from year-end to $2.78 billion. Loans held for investment rose 7.5% to $2.08 billion, largely from commercial real estate growth; deposits increased 9.5% to $2.50 billion.
- Deposits included $941.3 million of non-interest-bearing balances, 37.6% of total deposits. The loan-to-deposit ratio was 83.52%, down from 85.09%.
- Shareholders’ equity was $231.1 million, down from $235.0 million. Q1 net income was more than offset by $6.7 million of other comprehensive loss and $7.5 million of dividends/distributions.
- Available-for-sale securities had $10.4 million of gross unrealized losses at quarter-end, primarily attributed to interest-rate changes; the company recorded a $6.7 million after-tax other comprehensive loss. Management said it did not intend, and was not likely to be required, to sell the securities before recovery or maturity.
- Subordinated notes, net, totaled $28.4 million. There were no outstanding FHLB advances, federal funds line borrowings, or Federal Reserve discount-window borrowings. Reported FHLB availability, after letters of credit, was $360.4 million.
- Company capital ratios included 13.07% total risk-based capital and 9.02% Tier 1 leverage. The Bank met applicable requirements and was classified as well-capitalized.
Outlook, risks, and unusual items
- Management expects loan-portfolio growth to continue and said it intends to maintain a loan-to-deposit ratio near recent levels. It also expects to continue quarterly dividends, subject to board discretion; the stated current rate was $0.15 per share. No numerical earnings or margin guidance was provided.
- The board declared a separate $0.45-per-share distribution tied to the final S-corporation tax return, totaling $4.9 million, in addition to the regular $0.15-per-share dividend. A further $0.15-per-share dividend was declared on April 21, 2022.
- Credit quality indicators remained low but weakened in some respects: non-accrual loans rose to $1.3 million from $0.6 million, or 0.06% of loans from 0.03%. Six borrower relationships with $12.2 million of loans remained under COVID-19 payment relief. Management reported no loans past due 90 days or more and no outstanding troubled debt restructurings.
- Concentrations warrant attention: real estate-related loans were approximately 92% of loans held for investment. The 66 deposit relationships exceeding $5 million totaled $1.2 billion, or 46.75% of deposits; the largest relationship was $182.4 million. Uninsured deposits totaled approximately $1.5 billion.
- Management identified interest-rate changes, Northern California and real estate conditions, commercial real estate exposure, deposit concentration, liquidity, and credit-loss estimates among key risks. Adoption of CECL was expected for fiscal years beginning after December 15, 2022; management said the effect could increase the allowance but could not yet quantify it.
- The company adopted lease accounting guidance on January 1, 2022, recording a $4.7 million right-of-use asset and $5.0 million lease liability at quarter-end; management said adoption did not materially affect income or cash flows. A $0.3 million gain on a venture-fund distribution contributed to other income. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How loan growth, particularly commercial real estate growth, affects underwriting, credit quality, and the allowance for loan losses.
- Whether deposit growth is sustained and how large, uninsured, or concentrated relationships behave as rates and competition change.
- Potential effects of rising rates on net interest margin, loan repricing, and the unrealized losses in the securities portfolio.
- The eventual CECL adoption impact, and progress of borrowers still receiving COVID-19 payment relief.
- Whether the regular dividend remains supported by earnings, capital, and liquidity after the exceptional $0.45 distribution.