Expansion Into The Bay Area Will Drive New Banking Opportunities

Key Takeaways

• Expansion into the San Francisco Bay Area, supported by hiring seasoned professionals, is set to drive growth in core deposits and revenue.
  
• The strategic focus on conservative underwriting and leveraging market expertise is likely to enhance profits and market share sustainability.
  
• Rising credit risk, higher interest expenses, and increased noninterest expenses may pressure net margins and profitability amidst challenges in revenue diversification and credit loss provisions.

Catalysts

Operates as the bank holding company for Five Star Bank that provides banking products and services to small and medium-sized businesses, professionals, and individuals primarily in Northern California.

• Expansion into the San Francisco Bay Area, supported by hiring seasoned professionals, is expected to drive growth in new core deposit accounts and relationships, potentially increasing revenue.
  
• Improved net interest margin by 9 basis points through conservative underwriting and an increase in average loan yields, which is likely to positively impact earnings.
  
• The bullish outlook on loan growth, with a targeted expansion rate of 10% to 12% for the rest of the year, suggests a significant boost to the revenue stream.
  
• The strategic focus on maintaining a strong, experienced sales force to capture new relationships could enhance long-term revenue growth and increase market share.
  
• Strong pipeline in commercial real estate and anticipated retractions in the yield curve are expected to improve net margins and profitability.

Five Star Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Five Star Bancorp's revenue will grow by 19.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 38.5% today to 38.1% in 3 years time.
• Analysts expect earnings to reach $81.8 million (and earnings per share of $3.8) by about May 2028, up from $48.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, down from 12.3x today. This future PE is lower than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Five Star Bancorp Future Earnings Per Share Growth

Risks

• The increase in substandard or doubtful loans from $2.6 million to $3.7 million suggests rising credit risk, which could impact net margins and future earnings.
  
• The growth in wholesale deposits, which rose by $130 million or 23.21%, could lead to higher interest expenses, potentially impacting net interest margins and profitability.
  
• The decrease in noninterest income from $1.7 million to $1.4 million might indicate challenges in revenue diversification, affecting overall earnings.
  
• Additional provisions for credit losses due to changes in economic forecasts and increased reliance on economic models for allowance estimation could impact net income and profitability.
  
• The rise in noninterest expenses, partly due to increased salaries and employee benefits, may pressure net margins if revenue growth doesn’t match expense increases.

Valuation

• The analysts have a consensus price target of $34.625 for Five Star Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $38.5, and the most bearish reporting a price target of just $32.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $214.6 million, earnings will come to $81.8 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $27.7, the analyst price target of $34.62 is 20.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.