Expansion Into San Francisco Will Strengthen Market Presence And Customer Base

Key Takeaways

• Expanding into San Francisco and strategic hiring are expected to boost market presence and revenue through increased deposits and effective client management.
  
• A strong loan pipeline and low nonperforming loans should enhance earnings, net interest income, and maintain stable net margins amid interest rate shifts.
  
• Increased reliance on capped loans might limit future growth, while rising deposit costs and decreasing noninterest income pressure margins and earnings.

Catalysts

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

• The opening of a full-service office in San Francisco's Financial District is expected to enhance Five Star Bancorp's market presence and customer base, potentially driving future revenue growth from increased deposit accounts and loan originations.
  
• The addition of seasoned professionals and strategic hires is aimed at expanding business development, which can lead to an increase in revenue and possibly higher net margins due to more effective service and client management.
  
• A solid and diverse loan pipeline, mainly from consumer concentrations, is expected to contribute to continued loan growth, positively impacting earnings and net interest income in the upcoming quarters.
  
• Maintaining a strong asset quality with nonperforming loans at low levels supports stable earnings growth and reduces potential losses, thus protecting net margins.
  
• The strategy to use short-term broker deposits to fund new loans at higher average yields could improve net interest margin and net earnings as interest rates shift over the next few quarters.

Five Star Bancorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Five Star Bancorp's revenue will grow by 21.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 38.1% today to 38.6% in 3 years time.
• Analysts expect earnings to reach $77.7 million (and earnings per share of $3.51) by about December 2027, up from $43.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2027 earnings, down from 16.1x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 1.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.92%, as per the Simply Wall St company report.

Five Star Bancorp Future Earnings Per Share Growth

Risks

• The company has increased its reliance on loans purchased from Bankers Healthcare Group, which are capped and therefore might limit growth potential or diversification going forward, impacting future revenue growth.
  
• The cost of total deposits increased by 16 basis points, which could continue to put pressure on net margins if deposit costs rise faster than interest income.
  
• The noninterest income decreased due to a reduction in gains from loans sold, posing a risk to overall earnings if this trend continues.
  
• Despite solid asset quality, a $2.8 million provision for credit losses was recorded, reflecting ongoing risks associated with general economic trends, which may affect net margins and earnings negatively.
  
• The common equity Tier 1 ratio decreased during the quarter, indicating potential risks to capital adequacy, which could impact investor confidence and lead to constraints on future growth opportunities.

Valuation

• The analysts have a consensus price target of $36.33 for Five Star Bancorp based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $201.5 million, earnings will come to $77.7 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 5.9%.
• Given the current share price of $32.49, the analyst's price target of $36.33 is 10.6% 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.