Five Star Bancorp — Q2 2022 Form 10-Q
Business context and reporting period. Five Star Bancorp is a California bank holding company operating through Five Star Bank, serving businesses, professionals and individuals primarily in Northern California. The filing covers the quarter and six months ended June 30, 2022. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial results and condition
- Profit and revenue: Q2 net income was $10.0 million, versus $9.8 million a year earlier; diluted EPS was $0.58 versus $0.67. For the first half, net income was $19.8 million versus $20.1 million, and diluted EPS was $1.15 versus $1.57. Net interest income increased 34% in Q2 to $24.5 million and 28% in the first half to $46.4 million. Noninterest income was $2.0 million for Q2 and $4.2 million for the half.
- Comparability of earnings: The company became a taxable C corporation in May 2021. The 2021 reported periods include the transition from S corporation status and a $4.6 million deferred-tax adjustment. On a C-corporation pro forma basis, 2021 net income was $7.4 million for Q2 and $14.9 million for the first half, versus actual 2022 net income of $10.0 million and $19.8 million, respectively.
- Margins and expenses: Net interest margin was 3.70% in Q2, up from 3.48%; it was 3.65% for both first-half periods. Q2 efficiency ratio improved to 38.53% from 47.56%; first-half ratio improved to 39.14% from 46.18%. Loan yields declined year over year, while higher yields on bank deposits and securities supported the Q2 margin increase.
- Credit costs and quality: Provision for loan losses was $2.3 million in Q2 and $3.2 million for the first half, compared with zero and $0.2 million, respectively, in 2021. The allowance was $25.8 million, or 1.08% of loans held for investment. Nonaccrual loans were $0.4 million (0.02% of loans); there were no loans 90 days past due and still accruing.
- Balance sheet and funding: At June 30, assets were $2.84 billion, loans held for investment were $2.38 billion, and deposits were $2.50 billion. Since December 31, 2021, loans grew 23.1% and deposits 9.4%. Cash and cash equivalents fell to $270.8 million from $425.3 million. The loan-to-deposit ratio rose to 95.69% from 85.09%; noninterest-bearing deposits were 40.22% of deposits.
- Cash flow: First-half operating cash flow was $11.3 million, investing cash outflow was $431.2 million, and financing cash inflow was $265.3 million. Net cash and cash equivalents decreased by $154.6 million. Net loan originations and advances used $436.2 million; deposit growth provided $215.4 million and FHLB advances provided $60.0 million.
- Debt, capital and securities: The company had $60.0 million of FHLB advances and $28.4 million of subordinated notes. Regulatory capital ratios remained above stated minimums; the Bank’s total risk-based capital ratio was 11.55%, compared with the 10.00% well-capitalized threshold. Available-for-sale securities had $18.2 million of gross unrealized losses at quarter-end, primarily attributed to interest-rate changes; accumulated other comprehensive loss was $12.7 million after tax.
Material changes, outlook and risks
- Loan growth was concentrated in commercial real estate: commercial real estate loans were $2.04 billion, about 85% of held-for-investment loans. Real estate-related lending overall was approximately 92% of the portfolio. Management expects loan growth to continue and does not expect product or geographic concentrations to change materially.
- Management reported strong credit quality but noted higher loan-loss provision reflecting loan growth and economic conditions. Two borrower relationships, totaling about $0.1 million, remained on COVID-19 payment relief.
- Management said liquidity resources were adequate for the next 12 months and described deposits, FHLB capacity, liquid assets and other borrowing lines as available funding sources. Approximately $202.9 million of time deposits were expected to mature over the following 12 months; management expected runoff to be limited, but noted some deposits may not renew.
- The company expects to continue quarterly dividends, subject to board discretion. A $0.15-per-share dividend was declared in April; another $0.15 dividend was declared in July after quarter-end. No specific earnings or financial guidance was provided.
- Key risks include Northern California and California economic and real-estate exposure, commercial real-estate concentration, interest-rate changes and deposit pricing, large depositor relationships, liquidity, credit-loss estimation, and climate or natural disasters. Uninsured deposits were $1.4 billion; the largest deposit relationship was $175.5 million, or 7.02% of deposits. The filing reports no material change to previously disclosed risk factors and no legal proceedings expected to have a material adverse effect.
- Other notable items: the company adopted lease accounting in 2022, recording operating-lease right-of-use assets and liabilities; the impact on income and cash flows was not material. The company’s subordinated notes were scheduled to move from fixed to floating rates in September 2022. A proposed FDIC assessment-rate increase could raise insurance costs if adopted.
Important facts for investors to verify
- Whether rapid commercial real-estate loan growth and concentration remain within the company’s risk limits, and how collateral values and borrower performance evolve.
- Whether deposit growth and liquidity can support continued lending, particularly given concentrated and uninsured deposits, upcoming time-deposit maturities, and the higher loan-to-deposit ratio.
- How rising rates affect loan repricing, deposit costs, net interest margin, securities values and the planned floating-rate reset of subordinated debt.
- Whether provisioning and the allowance remain adequate as the portfolio grows and economic conditions change; also monitor the forthcoming CECL adoption impact, which the company could not yet quantify.
- Interpret year-over-year earnings and EPS alongside the 2021 S-to-C corporation transition, deferred-tax adjustment and increased share count, rather than relying on reported comparisons alone.