On July 26, 2022, KBRA assigned a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 to Rancho Cordova, California-based Five Star Bancorp (NASDAQ: FSBC) (“Five Star” or “the company”). In addition, KBRA assigned deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 to Five Star Bank (“the bank”), the main subsidiary. The Outlook for all long-term ratings is Stable.

KBRA favorably views the company’s durable, branch-based deposit franchise located predominantly in Sacramento, CA, providing the bank access to public agency, nonprofit, and other association deposit customers. FSBC is a spread-heavy company with less durable sources of revenue, such as gain on sale SBA loans and loan- related fees, accounting for most of the noninterest income more recently. FSBC’s efficiency ratio (~40%) and tax-adjusted ROA (1.4% - 1.6%) are better than similarly rated peers, driven by the bank’s above peer average deposits per branch ($357 million) as overhead costs are half of the KBRA peer average (1.64% vs 3.39% of assets). The company’s solid deposit franchise, with core deposits to total funding in the 94% - 97% range, strengthened by NIB accounts of ~40% of total deposits, contributes to the company’s generally low total deposit funding costs pre-pandemic (peak 2Q19: 62 bps) and more recently (2Q22: 17 bps). Although funding costs are low by national industry standards, they are in line with KBRA rated California peers. FSBC has a very high concentration in investor commercial real estate (CRE) of 506% of risk-based capital, with MHC loans comprising more than one-third of the CRE portfolio. Low LTVs (average 51%) across the CRE portfolio 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. Overall capital levels have been negatively impacted by FSBC’s conversion to a C-corp that required the distribution of retained earnings from its prior S-corp legal status, as well as significant growth in risk weighted assets in 2Q22. However, KBRA expects the company to operate with a payout ratio of approximately 30%, providing a significant level of capital accretion going forward and the ability to quickly build capital to levels more consistent with rated peers.

The ratings are based on KBRA’s Bank & Bank Holding Company Global Rating Methodology published on November 8, 2021 and KBRA’s ESG Global Rating Methodology published on June 16, 2021.

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Disclosures

Further information on key credit considerations, sensitivity analyses that consider what factors can affect these credit ratings and how they could lead to an upgrade or a downgrade, and ESG factors (where they are a key driver behind the change to the credit rating or rating outlook) can be found in the full rating report referenced above.

A description of all substantially material sources that were used to prepare the credit rating and information on the methodology(ies) (inclusive of any material models and sensitivity analyses of the relevant key rating assumptions, as applicable) used in determining the credit rating is available in the Information Disclosure Form(s) located here.

Information on the meaning of each rating category can be located here.

Further disclosures relating to this rating action are available in the Information Disclosure Form(s) referenced above. Additional information regarding KBRA policies, methodologies, rating scales and disclosures are available at www.kbra.com.

About KBRA

Kroll Bond Rating Agency, LLC (KBRA) is a full-service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. Kroll Bond Rating Agency Europe Limited is registered as a CRA with the European Securities and Markets Authority. Kroll Bond Rating Agency UK Limited is registered as a CRA with the UK Financial Conduct Authority pursuant to the Temporary Registration Regime. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus. KBRA is also recognized by the National Association of Insurance Commissioners as a Credit Rating Provider.

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