Five Star Bancorp

Welcome to the Five Star Bancorp Fourth Quarter and Year-End 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 1 on your telephone keypad. To withdraw your question, please press star then 2. 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 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 31st, 2022, and quarterly report on Form 10-Q for the quarter ended September 30th, 2023. And in particular, the information set forth in item 1A, risk factors in those reports. 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. Reconciliations of non-GAAP financial measures to their most directly comparable GAAP figures are included in the appendix to the presentation. Please note, this event is being recorded. I would now like to turn the conference over to James Beckwith, five-star Bancorp president and CEO. Please go ahead.

Thank you for joining us to review Five Star Bancorp's financial results for the fourth quarter and the year ended December 31, 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 fivestarbank.com and click on the Investor Relations tab. During the three months ended December 31st, 2023, our return on average assets and return on average equity were 1.26% and 15.45% respectively, positioning us to remain near the top of our peer group. During the year ended December 31st, 2023, our return on average assets and return on average equity were 1.44% and 17.85% respectively. Our organic growth story continued during 2023 with the addition of 10 seasoned professionals to support our expansion into the San Francisco Bay Area market. We also continued to add new deposit accounts and relationships as seen in the growth of non-broker deposits of $269.8 million during the year ended December 31, 2023. Despite expected headwinds on the horizon, our ability to conservatively underwrite and manage expenses with our 44% efficiency ratio and deliver value to our shareholders with our $0.20 per share dividend continue. We believe we are well positioned to continue to endure and succeed as conditions change. The fourth 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 and total assets have consistently grown since prior periods, while deposits have decreased slightly. Our pipeline continues to remain solid at the end of 2023 within verticals we have historically operated in, as presented in the portfolio diversification slide. Loans held for investment increased during the quarter by 71.8 million or 2.39% from the prior quarter and increased by 290.4 million or 10.40% year over year, primarily within the commercial real estate concentration of the loan portfolio. Loan originations during the quarter were approximately $144.1 million and payoffs were $72.3 million. During 2023, loan originations were approximately $668.2 million and payoffs were $377.8 million. Asset quality continues to remain strong. Though non-performing loans have increased over the last several quarters as a result of financial challenges experienced by a small subset of our borrowers, they represent only 0.06% of the portfolio. As of December 31st, 2023, the allowance for credit losses totaled $34.4 million. We recorded a $0.8 million provision for credit losses during the fourth quarter, primarily related to loan growth, for a total provision for credit losses of $4 million for the year ended December 31, 2023. The ratio of the allowance for credit losses to total loans held for investment was 1.12% at year end. Loans designated as substandard totaled approximately $2 million at the end of 2023, representing an increase of approximately $1.5 million from the previous year end, while remaining consistent with the prior quarter. During the fourth quarter, deposits decreased slightly by $5.3 million, or 0.18%, as compared to the previous quarter. During 2023, deposits increased by $244.9 million, or 8.8%, since the end of 2022. $208.8 million of this increase related to money market accounts. Non-interest-bearing deposits as a percent of total deposits at the end of the fourth quarter remained stable at 27.5%. as compared to the end of the previous quarter and decreased from 34.9% at the end of the previous year. To offer more detail on our deposit composition, I want to highlight that deposit relationships totaling at least $5 million constitute approximately 62% of our total deposits. And the average age on these accounts was approximately nine years. Local agency depositors accounted for approximately 27% of our deposits as of December 31st, 2023. As noted earlier, we are pleased that we've had net deposit inflows for the year ended December 31st, 2023. 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, we believe we have a reliable core deposit phase. Overall, deposit balances have decreased slightly when compared to the prior quarter. Non-interest-bearing deposits decreased by 2.3 million, while interest-bearing deposits decreased by 3.0 million quarter over quarter. Cost of total deposits was 239 basis points during the fourth quarter and 197 basis points during 2023 overall. We continue to be well capitalized with all capital ratios well above regulatory thresholds for the quarter and the year. Our common equity tier one ratio may remain constant at 9.07% between September 30, 2023 and December 31, 2023. On Friday, January 19, we announced a declaration by our Board of a cash dividend of $0.20 per share on the company's voting common stock expected to be paid on February 12, 2024 to shareholders of record as of February 5, 2024. On that note, I will hand it over to Heather to discuss the results of operations. Heather?

Thank you, James, and hello, everyone. Net income for the quarter was $10.8 million. Return on average assets was 1.26%, and return on average equity was 15.45%. Net income for the year was $47.7 million. Return on average assets was 1.44%. and return on average equity was 17.85%. Average loan yield for the quarter was 5.64%, representing an increase of seven basis points over the prior quarter. Average yield on loans for 2023 was 5.52%, representing an increase of 77 basis points over 2022. Our net interest margin was 3.19% for the quarter, while net interest margin for the prior quarter was 3.31%. Our net interest margin was 3.42 for the year, while net interest margin for the prior year was 3.75%. Fed rate increases in 2023 continue to put pressure on deposit costs. As a result of changes in interest rates and other factors, our other comprehensive income was 4.2 million, as unrealized losses net of tax effect decreased on available for sale debt securities from 15.9 million as of September 30th, 2023 to 11.8 million as of December 31st, 2023. Non-interest income increased to 1.9 million in the fourth quarter from 1.4 million in the previous quarter due primarily to gains from distributions on investments and venture-backed funds and the recognition of swap referral fees during the quarter. Non-interest income increased to $7.5 million in 2023 from $7.2 million in 2022 due primarily to gains from distributions on investments and venture-backed funds during the year. Non-interest expense increased to $12.7 million in the fourth quarter from $12 million in the previous quarter, primarily due to increased salaries, employee benefits, advertising, promotional, and other operating expenses related to the company's expansion into the San Francisco Bay Area. Noninterest expense increased from $40.7 million in 2022 to $47.8 million in 2023, driven primarily by a $1.2 million increase in salaries and employee benefits related to the expansion into the bay, a $2.7 million decline in loan origination costs, a $.7 million increase in FDIC insurance assessments, and an overall increase in expenses incurred to support a larger customer base as the leading drivers of this increase. Now that we've discussed the overall results of operations, I'll now hand it back to James to provide some closing remarks.