Five Star Bancorp — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY 2021. This is an annual report, not a standalone fourth-quarter report. Five Star Bancorp is a California bank holding company operating through Five Star Bank, focused mainly on small and midsize businesses in Northern California.
Financial performance and condition
| Metric | FY 2022 / year-end | FY 2021 / prior year-end |
|---|---|---|
| Net interest income | $103.1 million | $77.6 million |
| Net income | $44.8 million | $42.4 million |
| Diluted EPS | $2.61 | $2.83 |
| Net interest margin | 3.75% | 3.64% |
| Cost of funds | 0.57% | 0.19% |
| Non-interest income | $7.2 million | $7.3 million |
| Non-interest expense | $40.7 million | $36.0 million |
| Total assets | $3.23 billion | $2.56 billion |
| Loans held for investment | $2.79 billion | $1.93 billion |
| Total deposits | $2.78 billion | $2.29 billion |
| Cash and cash equivalents | $260.0 million | $425.3 million |
| Subordinated notes, net | $73.6 million | $28.4 million |
- Net interest income rose 32.5%, primarily from loan growth and higher yields; net interest margin increased 11 basis points. Funding costs rose as rates on deposits and borrowings repriced.
- Net income increased 5.6% as reported, but FY 2021 included the company’s S-corporation period and a $4.6 million deferred-tax benefit. On the company’s pro forma C-corporation basis, FY 2021 net income was $37.8 million and EPS was $2.53; the FY 2022 comparison is $44.8 million and $2.61.
- Provision for loan losses was $6.7 million versus $1.7 million. Year-end allowance was $28.4 million, or 1.02% of loans held for investment, down from 1.20%.
- Operating cash flow was $46.0 million, investing cash outflow was $836.9 million, and financing cash inflow was $625.6 million. Cash declined by $165.3 million, principally reflecting loan funding, partly offset by deposit growth and borrowings.
- Year-end loan-to-deposit ratio was 100.67%, up from 85.09%. Forty largest deposit relationships represented 52.15% of deposits; uninsured deposits, excluding time deposits, were $1.2 billion.
- At year-end, the Bank’s capital ratios were 11.17% CET1, 11.17% Tier 1, 12.14% total capital, and 10.69% Tier 1 leverage; the Bank was classified as well-capitalized. Bancorp’s consolidated ratios were lower than 2021, including CET1 of 8.99% versus 11.44%.
Material changes and notable items
- Loans increased approximately 44% and deposits increased 21.7%. Commercial real estate remained the principal concentration: 85.44% of gross loans were commercial real estate, and approximately 91.84% were real-estate-related.
- Nonperforming loans fell to $0.4 million from $0.6 million; non-accrual loans were 0.01% of loans. Watch and substandard loans together were $22.3 million, compared with $19.3 million.
- Rising rates reduced the fair value of available-for-sale securities. The company reported $12.9 million of after-tax other comprehensive loss for 2022; it reported no securities as other-than-temporarily impaired and said it did not expect to be forced to sell before recovery or maturity.
- The company issued $75 million of subordinated notes in August 2022, fixed at 6.00% through September 2027 and then floating at three-month SOFR plus 329 basis points; it redeemed $28.8 million of older notes in December. It also had $100 million of FHLB advances at year-end.
- Effective January 1, 2023, CECL replaced the incurred-loss method. Management estimated a $5–$7 million combined increase in the allowance for credit losses and unfunded-commitment reserve, reducing opening retained earnings after tax. The estimate was not final in the filing.
- Assets exceeded $3 billion in September 2022, ending the company’s eligibility for the Federal Reserve’s Small Bank Holding Company Policy Statement for capital adequacy purposes. Continued assets above $3 billion as of June 30, 2023 would affect its reporting status beginning in March 2024.
Outlook, risks and contingencies
Management’s stated strategy is organic growth in its markets, continued lending and deposit relationship expansion, disciplined underwriting and cost management, and investment in technology. The filing does not provide formal earnings, revenue, or margin guidance. Management anticipated that rates might continue rising; it said a steeper yield curve could benefit net interest income, while an inverted curve could be adverse. For 2023, management projected $1.3 million of IT-system spending and $12.3 million of common dividends, subject to board discretion. It also estimated $329.1 million of off-balance-sheet commitments could be funded if drawn.
- Key risks include geographic concentration in Northern California and substantial commercial real estate exposure; local economic weakness or property-value declines could affect borrower repayment and collateral.
- Funding and liquidity risks include concentrated large deposit relationships, rate competition, deposit withdrawals, and a loan-to-deposit ratio above 100%. The company cited available FHLB and correspondent-bank lines, but availability and costs may change.
- Interest-rate movements may affect asset yields, deposit costs, securities values, loan demand, and borrower repayment. Management disclosed that variable-rate liabilities repriced faster than variable-rate assets.
- Other identified risks include credit concentration in large borrowers, inflation and economic slowdown, regulatory and capital requirements, cybersecurity and third-party service providers, and California natural disasters.
- Management said pending litigation was not expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements; no auditor attestation of internal-control effectiveness was required, and management concluded disclosure controls were effective.
Investor verification priorities
- Track deposit retention, uninsured and large-depositor concentration, brokered funding, liquidity sources, and the loan-to-deposit ratio.
- Review commercial real estate sector and geographic exposures, borrower concentrations, collateral values, watch/substandard migration, and subsequent credit performance.
- Confirm the final CECL adoption adjustment and subsequent allowance, provision, and capital effects against management’s $5–$7 million estimate.
- Monitor deposit-cost repricing versus loan yields, net interest margin, and securities values as rates change.
- Reconcile reported year-over-year earnings with the S-to-C corporation tax transition and the FY 2021 pro forma comparator.
- Assess capital ratios and regulatory reporting implications if consolidated assets remain above $3 billion, along with dividend capacity and the terms of subordinated debt.