Five Star Bancorp — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; comparisons are to FY2020. Five Star Bancorp is a California bank holding company operating Five Star Bank, focused on small and midsize businesses, professionals, and individuals, primarily in Northern California. The consolidated financial statements received an unqualified audit opinion.
Financial results and condition
| Metric | FY2021 / Dec. 31, 2021 | FY2020 / Dec. 31, 2020 |
|---|---|---|
| Total assets | $2.557 billion | $1.954 billion |
| Total loans, before allowance and deferred fees | $1.947 billion | $1.511 billion |
| Total deposits | $2.286 billion | $1.784 billion |
| Net interest income | $77.6 million | $65.2 million |
| Provision for loan losses | $1.7 million | $9.0 million |
| Non-interest income | $7.3 million | $9.3 million |
| Non-interest expense | $36.0 million | $28.3 million |
| Net income | $42.4 million | $35.9 million |
| Net interest margin | 3.64% | 3.68% |
| Efficiency ratio | 42.46% | 37.92% |
- Earnings and margins: Net interest income rose about 19%, supported by loan growth and lower funding costs. Net interest margin edged down 4 basis points as asset yields fell, partly offset by reduced deposit costs. GAAP net income increased about 18%; reported EPS declined from $3.57 to $2.83, alongside a substantial increase in weighted-average shares following the IPO. Comparisons are affected by the company’s conversion from S corporation to C corporation taxation in May 2021.
- Cash flow: Operating activities provided $28.7 million, versus $51.5 million in 2020. Investing activities used $455.0 million, principally reflecting net loan growth and securities purchases; financing activities provided $561.2 million, including deposit growth and IPO proceeds. Cash and cash equivalents ended the year at $425.3 million.
- Liquidity and funding: Deposits, the primary funding source, increased 28%. The loan-to-deposit ratio was 85.09%. Non-interest-bearing deposits were $902.1 million, or 39.46% of deposits. There were no FHLB advances or other borrowings outstanding at year-end; available FHLB borrowing capacity, net of letters of credit, was approximately $275.8 million.
- Credit quality: The allowance for loan losses was $23.2 million, or 1.20% of loans (1.21% excluding PPP loans), compared with $22.2 million, or 1.47%, in 2020. Non-accrual loans were $0.6 million, or 0.03% of loans; net charge-offs were 0.03% of period-end loans. Six loans totaling $12.2 million remained in COVID-19 deferment at year-end.
- Capital and debt: The Bank was classified as well-capitalized. Its CET1, Tier 1, total capital, and Tier 1 leverage ratios were 12.55%, 12.55%, 13.69%, and 10.38%, respectively. Subordinated notes, net, were $28.4 million; the notes are fixed-rate through September 2022 and then transition to floating rates tied to LIBOR.
Material changes and unusual items
- The May 2021 IPO issued 6,054,750 shares at $20 per share and generated $109.1 million of net proceeds after related expenses. Total shareholders’ equity rose to $235.0 million from $133.8 million. The company distributed $27.0 million to pre-IPO shareholders under its accumulated adjustments account (AAA) arrangement.
- Commercial real estate loans were $1.586 billion, 81.48% of loans, up from $1.002 billion in 2020. Real-estate-related lending represented about 89% of the portfolio; commercial real estate loans equaled 577.92% of risk-based capital. Management said it applies concentration limits, monitoring, and stress testing.
- PPP balances fell to $22.1 million from $148.0 million as loans were forgiven or repaid. PPP forgiveness generated $6.2 million in loan fee income in 2021, compared with $4.9 million in 2020.
- Non-interest income declined 22%, mainly because loan-related fees and securities-sale gains were lower. Non-interest expense rose 28%, including higher staffing, technology, and IPO-related audit, legal, and consulting costs. Management said it did not expect significant IPO-related costs to recur and expected efficiency to improve.
- Net income includes a $4.6 million tax benefit from establishing deferred tax balances upon conversion to C corporation status. The reported effective tax rate was 9.98%; management presented pro forma net income of $37.8 million for 2021 excluding the discrete tax adjustment, versus $26.2 million for 2020 under its pro forma tax calculation.
- Cash dividends paid totaled $51.9 million, including the AAA distribution. Management stated its intention to continue quarterly dividends, subject to board discretion, regulatory limits, and financial conditions.
Outlook, risks, and contingencies
- Management’s strategy emphasizes organic loan growth, expanding customer relationships and deposits, maintaining underwriting discipline, controlling costs, and investing in technology. It anticipated potentially higher interest rates and said its asset sensitivity could benefit net interest income if the yield curve steepened; this is not a quantified earnings forecast.
- Management projected $0.5–$1.5 million of 2022 cash spending on IT buildout, approximately $10.3 million in common dividends assuming continued payments at the then-current rate, and a further estimated $4.9 million AAA distribution, subject to tax-return adjustments. It also cited $248.9 million in off-balance-sheet commitments, which may not all be drawn.
- Key exposures include geographic concentration in Northern California, heavy commercial real estate and broader real-estate lending, borrower and depositor concentration, and sensitivity to interest rates, real estate values, local economic conditions, climate-related events, and COVID-19 impacts. The 26 largest deposit relationships represented 39.93% of deposits; uninsured deposits were estimated at $1.3 billion.
- CECL was scheduled to take effect for the company in 2023. Management could not quantify its effect and noted it could increase the allowance and introduce earnings volatility. The company also disclosed transition risk from LIBOR to alternative reference rates.
- Management stated that pending litigation was not expected to have a material adverse effect. Potential tax claims relating to prior S corporation periods and payments under the Tax Sharing Agreement remain contingencies; their ultimate amount is not clear from the filing.
Investor facts to verify
- Track commercial real estate concentration, sector and geographic exposures, criticized/watch loans, collateral values, and the adequacy of reserves as the portfolio expands.
- Assess deposit stability, particularly uninsured balances, the largest relationships, municipal funding, and the cost or availability of replacement funding.
- Separate recurring earnings from the one-time deferred-tax benefit, PPP fee income, securities gains, and IPO-related expenses; reconcile reported and pro forma EPS.
- Monitor the effect of rate changes on asset yields, deposit costs, securities values, and subordinated-note costs after their 2022 repricing date.
- Confirm the final AAA distribution and any related tax-sharing obligations, and review the timing and capital implications of CECL adoption.