Business Overview and History
Five Star Bancorp (FSBC) is a bank holding company headquartered in Rancho Cordova, California, that operates through its wholly-owned subsidiary, Five Star Bank. The bank serves small to medium-sized businesses, professionals, and individuals primarily in Northern California, with a growing presence in the San Francisco Bay Area. Five Star Bancorp's mission is to become the top business bank in its markets through exceptional service, deep connectivity, and customer empathy - what it refers to as "purpose-driven and integrity-centered banking."
Five Star Bancorp was founded in 1999 when Five Star Bank was chartered and began operations on December 20, 1999. The company was incorporated on September 16, 2002 and subsequently obtained approval from the Federal Reserve to become a bank holding company in connection with its acquisition of the Bank. Five Star Bancorp became the sole shareholder of the Bank on June 2, 2003 in a statutory merger.
Initially, the company focused on providing banking products and services to small and medium-sized businesses, professionals, and individuals primarily in the greater Sacramento metropolitan area of California. Over time, Five Star Bancorp expanded its footprint, opening additional branch offices in other Northern California markets such as Roseville, Natomas, Redding, Elk Grove, Chico, and Yuba City.
In May 2021, the company completed an initial public offering, in connection with which it terminated its status as a Subchapter S corporation and became a taxable C Corporation. This transition resulted in the company beginning to pay U.S. federal income tax and a higher California state income tax on its taxable earnings starting in the second quarter of 2021.
The company's loan portfolio is primarily focused on commercial real estate, with additional exposure to commercial and industrial lending, construction, farmland, and consumer loans. As of December 31, 2024, commercial real estate loans made up 80.75% of the bank's total loan portfolio, down from 86.76% a year earlier as the company has worked to diversify its lending activities. The consumer and other loan category increased significantly from 1.23% of the portfolio in 2023 to 7.90% in 2024, largely due to the purchase of consumer loans.
Financial Performance and Condition
Financials
For the year ended December 31, 2024, Five Star Bancorp reported revenue of $206.95 million and net income of $45.7 million, a decrease from $47.7 million in 2023. Return on average assets (ROAA) was 1.23%, and return on average equity (ROAE) was 12.72%. The company's net interest margin decreased 10 basis points year-over-year to 3.32%.
In the fourth quarter of 2024, the company reported revenue of $57.70 million and net income of $13.32 million. Year-over-year revenue growth for the quarter was 1.59%.
Net interest income increased by 7.96% for the year ended December 31, 2024, compared to the prior year. The provision for credit losses increased by 73.75% primarily due to loan growth, as loan originations in 2024 were almost double those for 2023. The company's efficiency ratio, calculated as non-interest expense divided by the sum of net interest income and non-interest income, was 43.19% for the year ended December 31, 2024.
Five Star Bancorp has maintained a strong capital position, with a common equity Tier 1 capital ratio of 11.02% and a total risk-based capital ratio of 13.99% as of December 31, 2024. The bank was well-capitalized under regulatory guidelines, with all capital ratios exceeding the required minimums.
Liquidity
Liquidity remained robust, with total cash and cash equivalents of $352.3 million at the end of 2024. The bank's loan-to-deposit ratio was 99.38%, down from 102.19% in the prior year, indicating ample liquidity to support future loan growth.
The company's debt-to-equity ratio stood at 0.20 as of December 31, 2024. Five Star Bancorp has several sources of available credit, including $510.7 million in FHLB financing availability, $862.1 million in Federal Reserve Discount Window borrowing capacity, and $175.0 million in correspondent bank lines of credit.
Asset Quality and Credit Risk Management
Five Star Bancorp's asset quality metrics remained strong, with nonperforming loans at just 0.05% of total loans held for investment as of December 31, 2024, down from 0.06% a year earlier. The allowance for credit losses totaled $37.8 million, or 1.07% of total loans, at the end of 2024, compared to $34.4 million, or 1.12%, in 2023.
The company's conservative underwriting practices are reflected in the weighted average loan-to-value ratio of 49.92% on its commercial real estate portfolio as of December 31, 2024. Management closely monitors the bank's concentration in commercial real estate lending, which remains elevated but has declined year-over-year.
Loan Portfolio Composition
As of December 31, 2024, Five Star Bancorp's loan portfolio was composed of:
1. Commercial Real Estate Loans: $2.90 billion (80.75% of total loans) 2. Commercial Land and Construction Loans: $115.2 million (3.26%) 3. Residential Real Estate and Construction Loans: $37.3 million (1.06%) 4. Farmland Loans: $47.2 million (1.34%) 5. Commercial Loans: $198.1 million (5.60%) 6. SBA Loans: $42.8 million (1.21%) 7. Consumer and Other Loans: $279.6 million (7.90%)
Total loans held for investment amounted to $3.50 billion, while total deposits reached $3.60 billion.
Expansion into the San Francisco Bay Area
A key part of Five Star Bancorp's growth strategy has been its expansion into the San Francisco Bay Area market. In September 2024, the bank opened a full-service branch in San Francisco's financial district, complementing its existing presence in the region. To support this expansion, the company has added 18 seasoned banking professionals to its team over the past year.
The San Francisco market represents a significant opportunity for Five Star Bancorp, as the region has experienced disruption in the banking landscape following the failures of Silicon Valley Bank and First Republic Bank in early 2023. This has created an opening for the company to attract talented bankers and win new business from customers seeking a differentiated banking experience.
Management has highlighted the Bay Area expansion as a key priority, noting that the region's success has its own momentum in terms of business and talent attraction. The company plans to continue growing its presence in the East Bay, with a potential new location in Walnut Creek, as it seeks to capitalize on the disruption in the market.
Industry Trends
The banking industry in California has experienced a compound annual growth rate (CAGR) of 4.2% in deposits over the past three years. This trend has supported Five Star Bancorp's growth strategy and expansion efforts in Northern California.
Risks and Challenges
Despite its strong performance, Five Star Bancorp faces several risks and challenges that investors should consider:
1. Concentration in Commercial Real Estate Lending: The bank's high concentration in commercial real estate loans, although declining, exposes it to potential downturns in the real estate market or changes in economic conditions.
2. Intense Competition: Five Star Bancorp operates in a highly competitive banking environment, particularly as it expands into the San Francisco Bay Area, where it faces larger regional and national banks.
3. Interest Rate Risk: As with many banks, Five Star Bancorp's net interest margin and profitability are susceptible to changes in interest rates and the shape of the yield curve.
4. Regulatory Environment: The banking industry is subject to extensive regulation, and any changes in laws or enforcement could impact the company's operations and compliance costs.
5. Execution Risk: The successful integration of the bank's San Francisco expansion and its ability to continue attracting talent and winning new business will be critical to its future growth and performance.
2025 Guidance and Outlook
For 2025, Five Star Bancorp has provided the following guidance:
1. Loan and Deposit Growth: The company is targeting approximately 8% annual growth rate for both loans and deposits.
2. Margin Expansion: Management expects slight margin expansion, which they believe will largely contribute to the bottom line.
3. Operating Leverage: The company anticipates seeing some operating leverage as the investments made in 2024, especially in the San Francisco market, begin to pay off.
4. BHG Loan Purchases: Five Star Bancorp plans to maintain its $300 million balance in BHG loan purchases throughout 2025.
5. Wholesale Deposits: The company intends to keep its wholesale deposit book relatively consistent throughout 2025.
6. Expenses: Management expects the Q4 2024 expense level to be a good baseline for the first half of 2025, with the potential for additional investments in people and teams as opportunities arise.
Conclusion
Five Star Bancorp has demonstrated its ability to navigate a challenging environment, growing its presence in Northern California and now the San Francisco Bay Area through a differentiated approach to community banking. The company's focus on purpose-driven, integrity-centered banking has resonated with customers and allowed it to attract a talented team of banking professionals.
While the company faces risks common to the banking industry, its strong capital position, conservative underwriting, and diversification efforts position it well for the future. The successful execution of its expansion plans in the San Francisco market will be a key driver of the company's growth and profitability in the coming years.
Overall, Five Star Bancorp's unique positioning, financial strength, and experienced management team make it a compelling investment opportunity in the community banking space. With a positive outlook for 2025, including targeted growth in loans and deposits, expected margin expansion, and anticipated operating leverage, the company appears well-positioned to continue its trajectory of success in the Northern California banking market.