Five Star Bancorp

Good day everyone and welcome to the 5 Star Bancor Third 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 a dial number to ask questions. To ask your question you may press star and then 1 using a telephone keypad. To withdraw your questions you may press star and 2. Before we get started we would like to 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 31, 2023 and quarterly reports on Form 10-Q for the three months ended March 31, 2024 and June 30, 2024. In particular, the information set forth in item 1A, risk factors in those reports. Please refer to slide 2 of the presentation which includes disclaimers regarding forward looking statements, industry data, unaudited financial data and non-GAAP financial information included in this presentation. Reconciliation 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 presentation 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 third 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 announcements released yesterday. To obtain a copy of the release, please visit our website at FiveStarBanc.com and click on the Investor Relations tab. Our organic growth story continued in the third quarter with the successful opening of our full service office in San Francisco's financial district on September 3rd, 2024, allowing us to continue our momentum in the San Francisco Bay Area. We added five more seasoned professionals to support this expansion and also continued to add new core deposit accounts and relationships, as seen in the increase of non-wholesale deposits of $92.9 million during the three months ended September 30th, 2024. In the third quarter, we maintained our ability to conservatively underwrite, as evidenced by a 50% loan to value on commercial real estate, managed expenses with our .37% efficiency ratio and delivered value to our shareholders with our 20 cents per share dividend for the first, second and third quarters of 2024. Additionally, we were able to maintain our net interest margin, which decreased by only two basis points and loans. Total assets and deposits have grown since prior periods. Our pipeline continues to remain solid at the end of the third quarter of 2024, within verticals we have historically operated in. As presented in the loan portfolio diversification slide, loans held for investments increased during the quarter by 194.3 million or .95% from the prior quarter, primarily related to the purchase of loans within the consumer concentration of the loan portfolio, representing 129.4 million of the increase. Loan originations during the quarter were 333.8 million, while payoffs and paydowns were 40.7 million and 98.8 million respectively. Asset quality continues to remain strong. Non-performing loans decreased to .05% of loans held for investment at period end, compared to 0.06 at the end of the prior quarter. At the end of the third quarter, the allowance for credit losses was 37.6 million. We recorded a 2.8 million provision for credit losses during the quarter, reflecting loan growth and continued risk associated with general economic trends and forecasts. The ratio of the allowance for credit losses to loans held for investment was .09% at quarter end. Loans designated as substandard or downfall totaled approximately 1.9 million at the end of the quarter, which is unchanged from the end of the previous quarter. During the third quarter, deposits increased by 250.3 million, or 7.95%, as compared to the previous quarter. -interest-bearing deposits as a percent of total deposits at the end of the third quarter increased slightly to .67% from .22% at the end of the previous quarter. As noted earlier, we are pleased we had net non-wholesale deposit inflows for the three months ended September 30, 2024. Our ability to grow deposit accounts support 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 base. To offer more detail on our deposit composition, I want to highlight that deposit relationships totaling at least 5 million constitute .58% of total deposits, and the average age on these accounts was approximately nine years as of September 30, 2024. Local agency deposits accounted for .77% of deposits as of September 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 157.4 million. Non-wholesale deposits increased by 92.9 million, driven by an 11.7 million increase in non-wholesale interest-bearing deposits and an 81.2 million increase in -interest-bearing deposits. The cost of total deposits was 263 basis points during the quarter, an increase of 16 basis points from the previous quarter. We continue to be well-capitalized, with all capital ratios well above regulatory thresholds for the quarter. Our Common Equity Tier 1 ratio decreased from .27% to .93% between June 30, 2024 and September 30, 2024. On October 17, our Board declared a cash dividend of 20 cents per share on the company's Voting Common Stock expected to be paid on November 12, 2024 to shareholders of record as of November 4, 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 10.9 million, return on average assets was 1.18%, and return on average equity was 11.31%. Average loan yields for the quarter was 5.98%, representing an increase of 15 basis points over the prior quarter. Our net interest margin was .37% for the quarter, while net interest margin for the quarter was 3.39%. As a result of changes in interest rates and other factors, our other comprehensive income was 2.5 million during the three months ended September 30, 2024, as unrealized losses, net of tax effects decreased on -for-sale debt securities from 12.2 million as of June 30, 2024 to 9.7 million as of September 30, 2024. Non-interest income decreased to 1.4 million in the third quarter from 1.6 million in the previous quarter. This is due primarily to a reduction in gains from loans sold during the three months ended September 30 compared to June 30, 2024. Non-interest expense grew by 0.3 million in the three months ended September 30 compared to three months ended June 30, primarily due to increases in salaries and employee benefits during the quarter. Now that we've discussed the overall results of operations, I will hand it back to James to provide some closing remarks.

Thank you, Heather. I want to thank everyone for joining us as we discuss third quarter results. Five Star Bank has a reputation built on trust, speed to serve, and certainty of execution, which support our client's success. Our financial performance is the result of a truly differentiated customer experience, which continues to power the demand for Five Star Bank's relationship-based services. We are very proud to have earned the trust of those we serve, including our shareholders. As we move into the fourth quarter of 2024, we are confident in the company's resilience in any environment and remain focused on the future and our long-term strategy. We will continue to execute on our organic growth and disciplined business practices, which we believe will benefit our customers, employees, community, and shareholders. We appreciate your time today. This concludes today's presentation. Now, Heather and I will be happy to take any questions that you might have.

Ladies and gentlemen, at this time, once again, we will begin that question and answer session. If you'd like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. And our first question today comes from... Woody Lay from KBW. Please go ahead with your question.

Hey, thanks for taking my questions. I wanted to start on the -interest-bearing deposit growth, as you mentioned in your opening comment. So, it was really impressive to see in the quarter. I was just curious, you know, was that pretty granular across your customer base, and do you think those balances can continue to move higher from here? Um,

let's see. We had one relationship that we've had for many years, probably five years, that grew their balances decently. Probably accounts for, well, I'm going to say 20% of that increase, and everything else has been pretty granular. Now... Got it. Does it feel like that? Go ahead. Yeah. We sense that we're hitting our stride somewhat with respect to growing our -interest-bearing deposits, pre-DDA as we call them here, and I think that is just a function of the number of accounts we've been opening as those balances build. And so we expect fourth quarter to see some increases there. Maybe not to the extent that we saw in the third quarter, but certainly noticeable.

Got it. Maybe shifting over to the loan side, I was just curious on what the purchase strategy is from here. Do you expect that to continue in the fourth quarter and into 25? And outside of the purchase strategy, just how does the pipeline look heading into the fourth quarter?

Sure. So, sure. You know, the purchase strategy was centered around loans that we purchased from Bankers Health Group, BHG. And so we've capped the number of loans that we're going to carry on our balance sheet with BHG to 300 million. And so I think as of today, we're there. I think we had maybe five, eight million dollars in October that we bought.

Yeah. At September 30, we were at 274.

Yeah. Oh, so it's a little bit more than that. So we've capped at 300 million. And so what you're going to see from here on out, there'll be some increase in Q4. But after that, it's just going to be maintained at a steady balance of 300 million. Now, in terms of our pipeline, we've seen some nice increases here in the last couple of weeks. So we expect loan growth in the fourth quarter, Woody, to probably be in the mid single digit level. And so what we'll see, we've got some big deals that we're looking at. But we like where our pipeline is, our loan pipeline is right now across all of our verticals and geographies.

That's helpful, Carl. Just last, turning to the NIM, just any near term expectations with the recent 50 basis point cut and just how that could impact the NIM in the fourth quarter?

Sure. So we fundamentally financed our increase in our purchase loans or our wholesale loan strategy with BHG, with broker deposits and state California deposits. Now, the broker deposits and the state of California deposits, we've kept them very short. So they're on three month repricing intervals. So over the next three to six months, we expect those yields that we have to pay, those rates, to come down very consistently with any Fed moves. So we kind of like that in terms of what it looks like in terms of what the cost of those deposits are. Probably won't see too much of an impact in Q4, but certainly in Q1 and Q2 you will, of 2025. Got

it. All right. Thanks for taking my question.

Sure. Our next question comes from Andrew Terrell from Stevens. Please go ahead with your question.

Hey, good morning.

Good

morning.

If I could just follow up a little bit on the margin line of questioning. On the CD portfolio specifically, it was like $326 million on average in the quarter at .08% cost. We obviously saw a pretty big build into the period end up at $490 or so, if I remember correctly. Do you have the CDs you were putting on during the quarter? Do you have the weighted average cost you were putting those on at, understanding that some of the broker and everything kind of reprices on a three month term?

Yeah, we don't have much CDs outside of our wholesale strategy. So we put on one large one with the state and that was at about 4.60. But as those CDs reprice, we'll see all the brokers reprice in Q4,

but

mostly in December.

Yeah, so we've got $275 million of brokers that that'll roll off in December. That's at a weighted average rate of $501.

So depending upon what Fed does in November and December, you can see a appreciable decline. At this point, we're planning to kind of re-up those CDs, Andrew. So we expect a pretty significant rate move on those.

Yeah, okay. And then maybe to help us on the asset side as well, just to understand the purchase strategy. If the wholesale funding kind of put on during the third quarter was .6% territory, what was the marginal loan yield for the loan purchases? Just so we can think about kind of the net margin of the more kind of wholesaler purchase strategy.

Sure, they were done at about 8.11.

Weighted?

Weighted average, 8.11.

Okay, great. I appreciate it. And then you said fixed?

Yeah, that was at a fixed rate. So we expect that margin to widen when our CDs reprice.

Got it. Okay, that makes sense. And then just for the purchases overall, you know, I think a lot you mentioned our bankers, healthcare group, can you just discuss maybe the liquidity profile for these these purchase pools? Are they liquid enough that you can kind of trade in and out of this portfolio similar to how you would a bond book? And the reason for kind of that specific question is just thinking about the next couple of years, if loan growth ramps in kind of the core business to the extent we saw back a couple of years ago, just trying to think through the kind of liquidity dynamics there to contemplate outside of deposit growth, your source of funds.

Well, we've been told that they're readily saleable to other folks in their network, and they've got a pretty broad network. So we believe that we'd be able to execute any type of exit strategy should we need to be, should we have to. But we don't expect that. I mean, these are pretty quick amortizing loans. So, you know, the balances, you know, we didn't maintain our outstanding with, you know, work. They would pay off fairly quickly. They probably have an average life. I'm going to say four years, four to five years. So, but they are that we can move them off our balance sheet to folks that are in the network. As we've been told now, Andrew never done that. But, you know, we feel confident that we would be able to do that if we have to.

Yeah, understood. Okay. Yeah, I just wanted to, I know deposit growth is obviously fantastic this quarter, but just want to throw that in.

I just want to reiterate, though, that the program for the BHGs are capped at 300 million. And so we're pretty close to that. All right. I just kind of want to make sure that you guys for your models know that that that's a cap on that. Yeah, we're

not going to do any more of

it. For sure. Okay. I appreciate that. And then the last one for me, just, you know, you're up to, I think the early 24 employees in the Bay Area. It's obviously, you know, a huge increase in lift when you think about, you know, starting this expansion out kind of mid of last year. Just talk about maybe, James, a big picture, what the framework in the market looks like today from a talent standpoint. Do you feel like, you know, most of the dislocated talent has found a new home at this point? And then just specifically about kind of your pipeline and higher expectations, you know, for the year ahead?

Sure. I think that the dynamics of, you know, the, you know, hiring opportunities have certainly changed from a general market perspective. But we've also changed, too. Now we're now we're a recognizable entity down in the Bay Area and people are seeking us out. Whereas maybe that wasn't the case a year ago. And so we've made a big splash. We've jumped in with both feet. So people are beginning to know who we are. We're getting involved in the communities, various communities, but in San Francisco in particular. And so what our hiring pipeline looks like right now, we've got three people that we're hiring that are all biz dev and then maybe one other, two other support folks. So the pipeline hiring pipeline remains very good. Again, we're attracting some really high quality folks. And not necessarily from the old First Republic, but other banks, whether it be Wells Fargo, and some major banks and some also some community banks. So we're we like where we are. We like our profile and and I think that we've done a good job at telling our story down there. And the folks that we've we've hired are very recognizable. And so that carries some cache with respect to future hires. So we're excited about what we what we see there.

Yep, very good. Okay. Thank you all for taking the questions. I appreciate it.

Thank you.

Our next question comes from Gary Tenner from the A. Davidson. Please go ahead with your question. Thanks. Good morning.

I

wanted to ask about the deposit growth in the quarter. If you look at the non wholesale and public funds balances in the quarter. You know, I think 75 or 80% of that growth would have been non-trespair and DDA and You know, it's a high class problem. So, you know, fantastic job. But I'm just curious about it just seems to be sort of a disconnect of having Such a sizable amount of that of the non wholesale growth and non-trespair. So can you talk to that a little bit? Obviously, a lot of success in the San Francisco market, etc. But just just wondering about the mix of what's coming in the door on a on a core deposit basis.

Sure, you know, a lot of accounts that we've opened this year. They're very relationship based. And as I mentioned previously, Gary, those balancers are beginning to build, you know, the typical cycle of, you know, Onboarding a new relationship, you open the accounts and then they start to populate and fund and that could take up to six to nine months sometimes. And so what we're seeing right now is the evidence of that. So to the extent that we continue to bring on new relationships and we have a very robust deposit pipeline. You know, we expect those balances to continue to grow. Now, I'm not sure if they're going to grow to the same extent they did in Q3 as we're looking, you know, out past Q4 and then into 2025. But we certainly expect them to continue to grow.

I appreciate that. James, are you seeing any within the again non wholesale interest bearing book any sort of churn or customers using those balances to, you know, pay down lines or just kind of what the trend is there.

No, not noticeably. I think that, you know, we have our normal amount of payoffs in our CRE book, especially in our mobile home park. Book of business and RV park as as folks take deals to agency. But that pipeline, the origination pipeline remains pretty robust. So if any use of liquidity to pay down loans, we're not seeing too much evidence of that.

Great. And one just one last question for me. If Heather, you have the September 30 cost of deposit spot rate. 266.

266. Okay, thank you.

Yep. Once again, if you would like to ask a question, please press star and then one to withdraw your questions, you may press star in two. And then showing no additional questions will conclude today's question and answer session. I like to turn the conference call back over to management for any closing remarks.

Great. Thank you. Five star band core is on a continued path of growth as we execute on strategic initiatives, which include growing our verticals and geographies while attracting and retaining talent. Our people technology operating efficiencies conservative underwriting practices and its expense management have also contributed to the successes we share with our employees and shareholders. These successes include numerous ratings and awards. In addition to the numerous awards received in the first half of 2024 five star band core was included among Piper Sandler small all star class of 2024. And is, and was also ranked number five by bank director magazines ranking banking study of the 2024 best US banks with assets less than 5 billion. Bank director magazines ranking banking study also ranked five star band core as the number 18 among the 2024 top 25 US banks. Our company leadership was recognized with the Sacramento business journals 40 under 40 award five star bank continues to be a driving force for economic development. A trusted resource for our customers and the committed advocate for our communities. We look forward to speaking with you again in January to discuss earnings for the fourth quarter of 2024 have a great day and thank you for listening.

And ladies and gentlemen, we'll with that will conclude today's conference call we do thank you for attending today's presentation, you may now disconnect your lines.