KBRA Affirms Ratings for Five Star Bancorp

KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, and the short-term debt rating of K3 for Rancho Cordova, CA-based Five Star Bancorp (NASDAQ: FSBC) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for Five Star Bank ("the bank"), the main subsidiary. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings reflect the company’s solid earnings history supported by a comparatively higher loan-to-earning asset mix (89% for 2Q25) contributing to an above average NIM, further aided by the company’s branch-lite model, resulting in lower occupancy expenses with operating costs making up only 1.5% of average assets for 2Q25 and an efficiency ratio that ranges between low and mid 40%. However, FSBC is spread-reliant with less stable sources of fee revenue accounting for just 5% of total revenue. As such, the liability sensitive balance sheet has been impacted by the higher interest rate environment which has pressured FSBC’s earnings profile compared to historical levels, though NIM appears to have troughed in 1Q24 with incremental expansion throughout 2024 and 1H25 benefiting from strong organic loan growth paired with asset repricing. Going forward, we expect the margin to continue to benefit from management’s target of 10%-12% loan growth for the remainder of 2025. While FSBC is primarily core deposit funded comprising ~80% of the total funding base, we note that the bank’s deposit relationships are concentrated with those exceeding $5 million representing 60% of total deposits as of 2Q25. However, these are largely long-standing relationships with an average deposit relationship of ~8 years. Nevertheless, given the larger concentration, FSBC’s deposit costs track ~30 bps above peer averages at 2.46% for 2Q25. Management targets a loan-to-deposit ratio in the 90%-95% range (96.5% as of 2Q25), thus, we do not expect wholesale deposit reliance to materially increase. The company maintains an elevated concentration in CRE at ~576% of risk-based capital as of 1Q25 with manufactured housing community (MHC) and RV loans comprising more than 40% of the CRE portfolio. Low LTVs across the CRE portfolio (average 50%) and stringent risk controls and credit management practices help to offset some of the concentration risk. In addition, the MHC product tends to be counter-cyclical and performs better than other lending categories during periods of economic weakness. As such NPAs and NCOs track well below peers, averaging 0.04% and 0.09% over the past 5 years. Altogether, considering reserves, capital protection, and earnings, KBRA believes FSBC is well-positioned to absorb a reasonable level of potential credit losses. While FSBC's risk-based capital metrics have historically tracked below peer averages, following the company's common stock issuance in 2Q24, capital levels have improved, with the CET1 ratio at 10.9% as of 2Q25. Management aims to maintain the CET1 ratio within the 10%-11% range moving forward. While this target remains somewhat below similarly rated peers, it appears adequate given FSBC’s overall risk profile and credit track record.

Rating Sensitivities

A rating upgrade is not expected over the intermediate term, though continued geographic expansion, earnings and credit outperformance, and capital levels consistently in line with the higher rated category, may result in positive rating action over time. Additionally, a downgrade is not expected, though maintenance of capital ratios, specifically, CET1 well below 10%, or significant deterioration in credit quality with elevated credit costs that materially impact earnings over multiple quarters could pressure ratings.

To access ratings and relevant documents, click here.

Methodologies