Five Star Bancorp

Good afternoon, everyone, and welcome to the Five Star Bancorp Second Quarter 2024 Earnings Webcast. Please note that this is a closed conference call. 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 and 1 using the telephone keypad. To withdraw your questions, you may press star and 2. Before we get started, let me remind you that today's meeting will include some forward-looking statements within the meeting 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 ending 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 the presentation. Reconciliations of non-GAAP financial measures to their most directly comparable GAAP figures are included in the appendix for the presentation. Please note this event is being recorded. At this time, I'd like to turn the conference call over to James Beckwith, Five Star Bank Corp President and CEO. Please go ahead.

Thank you for joining us to review Five Star Bancorp's financial results for the second quarter of 2024. 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. Our organic growth story continued in the second quarter with a successful close of our public offering, resulting in the issuance of 3,967,500 additional shares of common stock with net proceeds of approximately 80.9 million, allowing us to continue our momentum in the San Francisco Bay Area. We added five more seasoned professionals to support this expansion, and also continue to add new core deposit accounts and relationships, as seen in the increase of non-hostel deposits of $118.3 million during the three months ended June 30, 2024. Despite continued external headwinds, we maintain our ability to conservatively underwrite, as evidenced by a 50% loan-to-value on commercial real estate, manage expenses with our 44% efficiency ratio, and deliver value to our shareholders with our 20 cents per share dividend for the first and second quarters of 2024. The second quarter of 2024 exhibited continued execution of our growth strategy and efforts to position for future growth as evidenced by our earnings, expense management, and balance sheet trends during the quarter. Additionally, we saw a positive turn in margin compression, and loans, total assets, and deposits have grown since prior periods. Our pipeline continues to remain solid at the end of the second quarter of 2024 within verticals we have historically operated in. As presented in the loan portfolio diversification slide, Loans held for investment increased during the quarter by $162.2 million, or 5.2% from the prior quarter, primarily relating to the purchase of loans with the consumer concentration of the loan portfolio, representing $73.3 million of the increase. Total originations during the quarter were approximately $390 million, while payoffs and paydowns were $72.8 million, and $155 million, respectively. Asset quality continues to remain strong. Though non-performing loans increased in the beginning of the third quarter of 2023, they continue to represent only 0.06% of the portfolio at the end of the quarter. At the end of the second quarter, the allowance for credit losses totaled $35.4 million. We reported a $2 million provision for credit losses during the quarter, with loan growth and increases in net charge-offs as the leading drivers. The allowance for credit losses to total loans held for investment was 1.08% at quarter end. Loans designated as substandard totaled approximately $1.9 million at the end of the quarter, which is unchanged from the end of the previous quarter. During the second quarter, deposits increased by $193.9 million, or 6.56%, as compared to the previous quarter. Non-interest-bearing deposits as a percent of total deposits at the end of the second quarter decreased slightly from 26.2% to 26.2% from 27.7% at the end of the previous quarter. As noted earlier, we are pleased we had a net non-wholesale deposit inflows for the three months ended June 30, 2024. 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 had a reliable core deposit base. 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 of these accounts was approximately eight years. Local agency depositors accounted for approximately 22 percent of deposits as of June 30, 2024. Overall, deposit balances have increased when compared to the prior quarter. Wholesale deposits, which we defined as broker deposits and public time deposits, increased by 75.5 million. Non-wholesale deposits increased by 118.3 million, driven by a 110 million increase in non-wholesale interest-bearing deposits and an 8.3 million increase in non-interest-bearing deposits. Cost of total deposits was 247 basis points during the second quarter, a decrease of six basis points from the first quarter. We continue to be well capitalized, with all capital ratios well above regulatory thresholds for the quarter. The additional common stock issued through the public offering that closed in April of 2024 is noticeable in our capital ratios for the second quarter. Our common equity Tier 1 ratio increased from 9.13 percent to 11.28% between March 31, 2024 and June 30, 2024. On July 18, our Board declared a cash dividend of 20 cents per share on the company's Voting Commons stock, expected to be paid on August 12, 2024, to shareholders of record as of August 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 1.23%, and return on average equity was 11.72%. Average loan yield for the quarter was 5.83%, representing an increase of 12 basis points over the prior quarter. Our net interest margin was 3.39% for the quarter, while net interest margin for the prior quarter was 3.14%, with loan growth at higher yields and decreased reliance on wholesale deposits as the primary drivers. As a result of changes in interest rates and other factors, our other comprehensive income was 0.2 million during the three months ended June 30, 2024, As unreliable losses, net of tax effect decreased on available for sale debt securities from 12.4 million as of March 31st to 12.2 million as of June 30, 2024. Non-interest income decreased to 1.6 million in the second quarter from 1.8 million in the previous quarter. due primarily to a reduction in gains from distributions received on equity investments in venture-backed funds during the three months ended June 30, 2024. This decrease was partially offset by an increase in gains on the sale of loans during the three months ended June 30. Non-interest expense grew by 0.8 million in the three months ended June 30 compared to the three months ended March 31st. primarily due to increases in commissions related to higher loan production, travel, conferences, and professional membership fees, and sponsorships and donations during the quarter. Now that we've discussed the overall results of operations, I will now hand it back to James to provide some closing remarks.