FSBC Financial Analysis

Analysis Date: 1/28/2025

Business Model

Five Star Bancorp operates as a community business bank, primarily generating revenue through net interest income from loans and investments, and non-interest income from services charges on deposit accounts, gain on sale of loans, loan-related fees, FHLB stock dividends, and earnings on bank-owned life insurance.

Revenue Sources

• Net Interest Income: The primary source of revenue, derived from the difference between interest earned on assets (primarily loans and investments) and interest paid on liabilities (deposits and borrowings).
• Non-Interest Income: Generated from various sources including service charges on deposit accounts, gain on sale of loans, loan-related fees, FHLB stock dividends, and earnings on bank-owned life insurance.

Income Statement Analysis

• Net interest income increased by 4.45% QoQ, driven by higher yields on new and repriced loans, offset by increased interest expense from higher deposit balances at higher rates. (Pro)
• Provision for credit losses increased significantly by 37.50% QoQ, relating to loan growth and net charge-offs. (Con)
• Non-interest income decreased by 12.21% QoQ, primarily due to a reduction in gains from loans sold. (Con)
• Non-interest expense increased slightly by 1.95% QoQ, mainly due to increases in salaries and employee benefits, and data processing and software. (Neutral)
• Efficiency ratio improved to 43.37% from 44.07% in the previous quarter, indicating better expense management. (Pro)

Balance Sheet Analysis

• Total assets increased by 8.18% since year-end 2023, driven by a significant increase in loans held for investment (12.29%). (Pro)
• Cash and cash equivalents decreased by 21.99% since year-end 2023, potentially due to increased loan deployment. (Neutral/Con - needs further context)
• Total deposits increased by 12.33% since year-end 2023, indicating strong deposit growth. (Pro)
• Shareholders' equity increased significantly by 36.45% since year-end 2023, likely due to additional common stock outstanding and net income. (Pro)
• Loan to deposit ratio is slightly high at 101.87% as of September 30, 2024, compared to 99.57% as of September 30, 2023. (Neutral - needs monitoring)

Cash Flow Analysis

• Operating cash flow decreased by 29.58% compared to the same period last year. (Con)
• Net cash outflow from investing activities increased by 13.79%, indicating increased investment in assets, likely loans. (Neutral/Con - needs more context)
• Cash inflow from financing activities increased significantly by 156.71%, likely due to increased capital issuance. (Pro - Equity raise)
• Overall, there was a net decrease in cash and cash equivalents, consistent with the balance sheet analysis, suggesting cash deployment into loan growth. (Neutral)

Capital Allocation

Five Star Bancorp has declared and paid cash dividends of $0.20 per share for Q1, Q2, and Q3 2024, demonstrating a commitment to shareholder returns through dividends. The increase in shareholders' equity suggests reinvestment in the business and/or capital raising activities. No information on share repurchases is available in the provided documents. The company is focused on organic growth through loan and deposit expansion as evidenced by the Q3 results and opening of a new office in San Francisco.

Management Commentary

We are pleased with strong third quarter results. Total loans held for investment increased by $194.3 million, or 5.95%, and total deposits increased by $250.3 million, or 7.95%, during the third quarter.

Our efficiency ratio decreased to 43.37% compared to 44.07% for the second quarter of 2024, exhibiting our ability to preserve disciplined business practices and expense management as we expand our footprint.

Although cost of funds increased 16 basis points to 2.72%, we were able to maintain net interest margin which decreased by only two basis points to 3.37% during the third quarter of 2024.

Provision for credit losses increased by $0.8 million, relating to loan growth and net charge-offs of $0.8 million in the three months ended September 30, 2024, as compared to the three months ended June 30, 2024.

Non-interest income decreased by $0.2 million, primarily due to a reduction in gains from loans sold during the three months ended September 30, 2024, as compared to the three months ended June 30, 2024.

Overall Sentiment: Positive. Management is pleased with the strong loan and deposit growth, improved efficiency ratio, and consistent dividend payouts, indicating confidence in the company's performance and future prospects. However, there are notes of caution with increased provision for credit losses and decreased non-interest income.

Recommendation

Rating: Hold

Reason for Rating: Neutral outlook based on mixed financial performance. Strong loan and deposit growth are positives, but increased provision for credit losses and decreased non-interest income raise concerns. The bank is performing steadily, but no strong catalyst for significant stock price appreciation is immediately apparent.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 1/28/2025, 5:48:21 AM