Five Star Bancorp — FY 2023 Form 10-K
Reporting period: Year ended December 31, 2023; comparisons are to FY 2022. Five Star Bancorp is a California bank holding company operating through Five Star Bank, focused primarily on small and medium-sized businesses and real-estate-related lending in Northern California. Financial statements were audited by Moss Adams LLP, which issued an unqualified opinion.
Key financial results
| Metric | FY 2023 / year-end | FY 2022 / year-end |
|---|---|---|
| Net interest income | $110.9 million | $103.1 million |
| Provision for credit losses | $4.0 million | $6.7 million |
| Non-interest income | $7.5 million | $7.2 million |
| Non-interest expense | $47.8 million | $40.7 million |
| Net income | $47.7 million | $44.8 million |
| Diluted EPS | $2.78 | $2.61 |
| Net interest margin | 3.42% | 3.75% |
| Cost of funds | 2.10% | 0.57% |
| ROAA / ROAE | 1.44% / 17.85% | 1.57% / 18.80% |
| Total assets | $3.59 billion | $3.23 billion |
| Loans held for investment, net of allowance | $3.05 billion | $2.76 billion |
| Deposits | $3.03 billion | $2.78 billion |
| Shareholders’ equity | $285.8 million | $252.8 million |
Performance and material changes
- Net interest income rose 7.6%, supported by loan growth and higher loan yields, but net interest margin contracted 33 basis points. Deposit interest expense increased substantially as rates and competition for funding rose; non-interest-bearing deposits also declined by $140.1 million.
- Non-interest expense increased 17.5%, led by salaries and benefits, technology costs, FDIC insurance, and expansion-related spending. The efficiency ratio worsened to 40.35% from 36.90%.
- Non-interest income increased modestly. A $1.7 million gain on venture-backed fund investments contributed to “other income”; gain on loan sales fell to $2.0 million from $2.9 million as guaranteed SBA loan sales declined to $36.5 million from $50.8 million.
- Cash provided by operating activities was $38.9 million, versus $46.0 million. Investing activities used $279.3 million, primarily reflecting net loan growth; financing activities provided $301.9 million. Cash and cash equivalents ended the year at $321.6 million.
- Loans held for investment grew $290.4 million. Commercial real estate loans were 86.76% of gross loans, and real-estate-related loans were approximately 92.3% of the portfolio.
Credit, funding, debt, and capital
- Nonperforming loans increased to $2.0 million from $0.4 million; non-accrual loans were 0.06% of loans, compared with 0.01%. Watch and substandard loans totaled $41.6 million, up from $22.3 million. Net charge-offs were $3.2 million, or 0.11% of average loans.
- The allowance for credit losses was $34.4 million, equal to 1.12% of loans held for investment, versus $28.4 million and 1.02% at year-end 2022. Adoption of CECL on January 1, 2023 increased the allowance by $5.3 million and reduced retained earnings by $4.5 million, net of tax.
- Non-interest-bearing deposits were 27.46% of deposits, down from 34.91%. Uninsured and uncollateralized deposits were $1.0 billion. The 40 largest deposit relationships represented 49.80% of deposits; the largest single relationship was $260.0 million, or 8.59%.
- The loan-to-deposit ratio was 102.19%. Reported total liquidity, including cash and unused immediately available borrowing capacity, was approximately $1.4 billion at year-end. This includes secured borrowing facilities and should not be viewed as cash alone.
- FHLB advances were $170.0 million. Subordinated notes, net, were $73.7 million; they bear 6.00% fixed interest through September 2027, then float at three-month Term SOFR plus 329 basis points, and mature in 2032.
- The Bank was classified as well-capitalized. Its year-end CET1, total capital, and Tier 1 leverage ratios were 10.95%, 11.93%, and 10.52%, respectively. Bancorp’s corresponding reported CET1, total capital, and leverage ratios were 9.07%, 12.30%, and 8.73%.
Outlook, risks, and unusual items
- Management gave no specific earnings or revenue guidance. It expects to continue organic lending and deposit growth, maintain underwriting and risk controls, and invest in technology and personnel. It expects a full-service Downtown San Francisco branch to open in the second half of 2024.
- Management stated that it anticipates interest rates may decline over the next few years. Rate changes may affect funding costs, asset yields, deposit retention, loan demand, and borrower repayment capacity; the filing does not provide a quantified earnings sensitivity here.
- For 2024, management projected $0.4 million of continued IT build-out spending and $13.8 million for common dividends. It estimated $458.9 million of outstanding off-balance-sheet commitments could be funded over the next 12 months, subject to utilization. Approximately $442.5 million of time deposits were scheduled to mature during 2024.
- Material risks include Northern California and real-estate concentration, interest-rate and deposit-retention risk, large depositor concentration, commercial real-estate credit risk, and competition. The filing also discusses cybersecurity, third-party service, regulatory, climate and natural-disaster risks. Management reported no cybersecurity incident that had materially affected strategy, results, or financial condition as of the filing date.
- Available-for-sale securities had $16.9 million of gross unrealized losses at year-end, largely associated with mortgage-backed securities and municipal securities. Management attributed fair-value changes primarily to market conditions and reported an improvement in unrealized losses during 2023.
- The company adopted CECL in 2023. Its results also reflect the 2023 venture-investment gain and lower SBA loan-sale volume. Legal proceedings were described as ordinary-course matters not expected by management to have a material adverse effect. The filing reports effective disclosure controls; the company did not provide an auditor attestation on internal control, citing its emerging-growth-company status.
Most important facts for investors to verify
- Whether deposit growth and retention can offset the decline in non-interest-bearing balances and the cost of funding, including the effect on net interest margin.
- Trends in CRE borrower performance, watch-list loans, non-accruals, charge-offs, collateral values, and the adequacy of the CECL allowance.
- The composition and stability of large, municipal, and uninsured deposits, and the availability and terms of reported contingent liquidity facilities.
- How the 2024 San Francisco expansion affects expenses, deposit gathering, loan growth, and progress toward management’s stated efficiency goals.
- Whether dividends remain sustainable given capital needs, regulatory restrictions, and the Bank’s ability to distribute funds to the holding company.
- The effects of securities valuation, future interest-rate movements, and the CECL adoption on capital, earnings, and comparability with prior periods.