Five Star Bancorp

Good day, everyone. Welcome to the Five Star Bancorp Second Quarter 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 the dial-in number to ask questions. To ask a question, you may press star and then one on your telephone keypad. To withdraw your questions, you may press star and 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, 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 those 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, 2022, and quarterly report on Form 10-Q for the quarter ending March 31, 2023. 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 today's event is being recorded. At this time, I'd like to turn the floor over to James Beckwith, Five Star Bancorp President and CEO. Sir, please go ahead.

Thank you for joining us to review Five Star Bancorp's financial results for the second quarter of 2023. 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. During the three months ended June 30, 2023, our return on average assets and return on average equity were 1.55% and 19.29% respectively. positioning us to remain near the top of our peer group. In the second quarter, we announced our expansion into the San Francisco Bay Area market. Our organic growth story also continued in the second quarter, with the addition of new deposit accounts and relationships, as seen in the growth of non-broker deposits of $25 million in the three months ended June 2023. Despite headwinds on the horizon, our ability to conservatively underwrite, manage expenses, and deliver value to shareholders continues. We believe we are well positioned to continue to endure and succeed as conditions change. In the company overview section, we have provided a brief overview of our geographic footprint and executive management team. The second quarter of 2023 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 solid at the end of the second quarter of 2023 within the verticals we have historically operated in, as presented in the loan portfolio diversification slide. Loans held for investment increased during the quarter by $57.6 million, or 2.01% from the prior quarter. primarily within the commercial real estate concentration of the loan portfolio. Loan originations during the quarter were approximately $254.4 million, and payoffs were $196.8 million. Asset quality continues to remain strong, with non-performing loans representing only 0.01% of the portfolio remaining largely unchanged from the last several quarters. At the end of the second quarter, the allowance for credit losses totaled $34 million. We recorded a $1.3 million provision for credit losses during the quarter, primarily related to loan growth, loan type mix, and updates to the macroeconomic environment. The ratio of the allowance for credit losses to total loans held for investment was 1.16% at quarter end. Loans designated as substandard totaled approximately 0.3 million at the end of the quarter, which was a decrease from 0.4 million at the end of previous quarter. Now that we've discussed the loan portfolio, we continue on to deposits and capital. During the second quarter, deposits increased by 9.3 million or 0.32% as compared to the previous quarter. Non-interest-bearing deposits as a percentage of total deposits at the end of the second quarter decreased slightly to 28.5% from 28.6% at the end of the previous quarter. To offer more detail on our deposit composition, I want to highlight that deposit relationships totaling at least $5 million constituted approximately 60% of total deposits. And the average age on these accounts was approximately nine years. Local agency depositors accounted for approximately 25% of deposits as of June 30, 2023. As noted earlier, We are pleased that we had a net deposit inflow for the three months ended June 30, 2023, including inflows during the month of June. Our ability to grow deposit accounts supports our differentiated customer-centric model that our customers trust and value, as seen through the mix of high dollar accounts and the duration of certain customer relationships, which we believe we have a reliable core deposit base. Overall, deposit balances have increased when compared to the prior quarter. Non-broker deposits increased by 25 million, interest-bearing deposits increased by 12.3 million, and non-interest-bearing deposits decreased by 3 million. The cost of total deposits was 192 basis points during the second quarter. We continue to be well capitalized with all capital ratios well above regulatory thresholds for the quarter. Our common equity tier one ratio increased from 9.02% to 9.07% between March 31, 2023 and June 30, 2023. On Friday, July 21st, we announced a declaration by our board of a cash dividend 20 cents per share on the company's voting common stock, expected to be paid on August 14, 2023, to shareholders of record as of August 7, 2023. On that note, I will hand it over to Heather to discuss results of operations. Heather?

Thank you, James, and hello, everyone. Net income for the quarter was $12.7 million. return on average assets was 1.55%, and return on average equity was 19.29%. Average loan yield for the quarter was 5.5%, representing an increase of 14 basis points over the prior quarter, as rate increases continued in May 2023 with a third increase this year. Our net interest margin was 3.45% for the quarter, while net interest margin for the prior quarter was 3.75%. The most recent Fed rate increases continue to put pressure on deposit costs. As a result of changes in interest rates and other factors, our other comprehensive loss was $1 million during the three months ended June 30, 2023, as unrealized losses net of tax effect increased on available for sale debt securities from $12 million as of March 31, 2023 to $13 million as of June 30, 2023. Non-interest income increased to $2.8 million in the second quarter from $1.4 million in the previous quarter due primarily to a $1.3 million gain in other income recognized on distributions received on investments in venture-backed funds during the three months ended June 30, 2023. Non-interest expense grew by 0.9 million in the three months ended June 30, 2023, as compared to the three months ended March 31, 2023, primarily due to increases of $500,000 in operating expenses, largely related to seasonal travel and conference fees, $300,000 in advertising and promotional for business development expenses, and $100,000 in data processing and software corresponding with growth of the bank, partially offset by a $200,000 decrease in salaries and employee benefits. Now that we've discussed the overall results of operations, I'll now hand it back to James to provide some closing remarks.