Five Star Bancorp

Welcome to the Five Star Bancorp Fourth Quarter and Year Ends Earnings webcast. Please note this is a closed conference call and you are encouraged to listen via the webcast. After today's presentation, there will be an opportunity for those provided with a dial-in number to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Before we get started, let me remind you that today's meeting will include some forward-looking statements within the meaning of applicable securities laws. These forward-looking statements relate to, among other things, current plans, expectations, events, including the continuing impact of the COVID-19 pandemic, and industry trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties, and future activities and results may differ materially from these expectations. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from the company's forward-looking statements, please see the company's annual report on Form 10-K for the year ended December 31, 2021, and in particular, the information set forth in Item 1A, Risk Factors Therein. Please refer to slide two of the presentation, which includes disclaimers regarding forward-looking statements, industry data, and non-GAAP financial information included in this presentation, as well as reconciliations to non-GAAP financial measures to their most directly comparable GAAP figures, which is included in the appendix to the presentation. Please note, this event is being recorded. I would now like to turn the presentation over to James Beckwith, Five Star Bancorp President and CEO. Please go ahead, sir.

Thank you for joining us to review Five Star Bancorp's financial results for the fourth quarter and the year ended December 31, 2022. Joining me today is Heather Luck, Senior Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement released yesterday. To obtain a copy of the release, please visit our website at 5starbank.com and click on the Investor Relations tab. In the Company Overview section, we have provided a brief overview of our geographic footprint and our executive management team. The fourth quarter of 2022 exhibited continued execution of our growth strategy as evidenced by our earnings, expense management, and balance sheet trends during the quarter. Additionally, loans, deposits, and total assets have consistently grown since the prior periods. Our pipeline continues to remain strong at the end of 2022 within verticals we have historically operated in, as presented in the loan portfolio diversification slide. Loans held for investment increased during the quarter by $208.3 million or 8.07% from the prior quarter and increased by $856.9 million or 44.29% year over year, primarily within the commercial real estate concentration of the loan portfolio. Loan originations during the quarter were approximately $295.3 million and payoffs were 86.8 million. During 2022, loan originations were approximately 1.4 billion, and payoffs were 513.9 million. Asset quality continues to remain strong, with non-performing loans representing only 0.01% of the portfolio. slightly decreasing from the last several quarters. As of December 31, 2022, the allowance for loan losses totaled $28.4 million. We recorded a $1.3 million provision for loan losses during the fourth quarter, primarily related to loan growth. For a total provision for loan losses of $6.7 million, for the year, the ratio of the allowance for loan losses to total loans held for investment was 1.02% at year end. Loans designated as substandard totaled approximately 0.4 million at the end of 2022, representing a decrease in substandard loans of approximately 26,000 from the previous quarter and a decrease of approximately $10.2 million from the previous year end. Now that we have discussed the loan portfolio, I will hand it over to Heather to discuss deposits, capital, and the results of operations. Heather?

Thank you, James, and hello, everyone. During the fourth quarter, deposits increased by 167.7 million, or 6.41%, as compared to the previous quarter. During 2022, deposits increased by 496.1 million, or 21.7% since the end of the prior year, of which 69.1 million of the growth related to non-interest-bearing deposits. Non-interest-bearing deposits as a percent of total deposits at the end of the fourth quarter decreased to 34.9% from 39% at the end of the previous quarter and 39.5% at the end of the previous year. We've had strong deposit growth over the last several quarters with deposit balances increasing when compared to the prior quarter and year. Non-interest-bearing deposits decreased by 49.4 million while interest-bearing deposits increased by 217.1 million quarter over quarter. Cost of total deposits was 95 basis points during the fourth quarter and 43 basis points during 2022 overall. We continue to be well capitalized with all capital ratios well above regulatory thresholds for the quarter and the year. As disclosed in our prior quarter call, We redeemed $28.8 million of previously existing subordinated notes on December 15, 2022, with the proceeds received from our private placement of $75 million in aggregate principal amount of fixed uploading rate subordinate notes due on September 1, 2032, completed on August 17, 2022. Net income for the quarter was $13.3 million, return on average assets was 1.7%, and return on average equity was 21.5%. Net income for the year was $44.8 million, return on average assets was 1.57%, and return on average equity was 18.8%. New loan originations drove increases in the daily average balance of loans period over period. Average loan yield for the quarter was 5.12%, representing an increase of 37 basis points over the prior quarter. Average loan yield for 2022 was 4.75%, representing a decrease of 7 basis points over 2021. As a result of these factors, our net interest margin was 3.83% for the quarter, while net interest margin for the prior quarter was 3.86%. Our net interest margin was 3.75% for the year, while net interest margin for the prior year was 3.64%. The change in the yield curve as a result of interest rate hikes that occurred during the year had a negative impact on the company's accumulated other comprehensive income. The negative impact on the company's accumulated other comprehensive income improved slightly during the quarter into December 31, 2022, in the amount of $3.7 million, primarily in our mortgage-backed and municipal securities portfolios, resulting in lower unrealized losses in each of these portfolios of $1.5 million and $2.1 million, respectively. The negative impact caused a decline in tangible book value per share, which is a non-GAAP financial measure discussed in our press release. This decline was offset by increases to tangible book value per share due to an increase in equity as a result of net income earned in the quarter for a net increase in tangible book value per share of 79 cents. Non-interest income increased to $1.6 million in the fourth quarter from $1.4 million in the previous quarter due primarily to a $100,000 increase in gain-on-sale loans related to higher volumes of loans sold and a $100,000 increase in other income related to a gain on distribution received on an investment in a venture-backed fund earned during the quarter. Non-interest income decreased to $7.2 million in 2022 from $7.3 million in 2021 due primarily to increases in loan-related fees earned of $0.9 million and other income of $0.4 million from gains recorded on investments in venture-backed funds during the year. The remaining increases related to FHLP dividends and earnings on wholly during the year. These increases were partially offset by a decrease in gain-on-sales loans of $1.1 million related to lower yields on loan sales during the year and a $0.7 million reduction in the net gain-on-sale of securities year-over-year due to minimal sales of securities during 2022 compared to 2021. Non-interest expense remained relatively flat quarter-over-quarter with decreased professional services of $0.2 million related to legal expenses incurred for corporate organizational matters completed in Q3 2022, offset by increases in other operating expenses of 0.5 million, primarily related to $300,000 of expenses recognized on unamortized subordinated debt issuance costs upon the redemption of the subordinated notes in December 2022. Combined with increased expenses incurred related to travel and fees paid for attendance at professional events, conferences, and other business-related events during Q4 of 2022. Non-interest expense increased from 2021 to 2022 relating to increased salaries and employee benefits of $3.6 million due to a 9.2% increase in headcount. partially offset by $1 million in loan origination costs related to increased production during 2022. Other operating expenses also increased year-over-year related to the previously discussed expenses recognized on subordinated debt redemption and other employee travel and conference-related expenses. These increases were partially offset by a $1.3 million reduction in professional services due to increased audit, consulting, and legal costs incurred to support corporate organizational matters leading up to our IPO in 2021, which did not occur in 2022. Now that we've discussed the overall results of operations, I will now hand it back to James to provide some closing remarks.