Q3 2023 Five Star Bancorp Earnings Call

Exceed as conditions change.

And the company overview section, we have provided a brief overview of our geographic footprint and executive management team.

In the third 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.

Additionally, loans deposits and total assets have consistently grown since the prior periods.

Our pipeline.

<unk> continues to remain solid at the end of the third quarter of 2023 within verticals, we have historically operated in.

As presented in the loan portfolio diversification slide.

Loans held for investment increased during the quarter by $82 5 million or 282% from the prior quarter.

Primarily within the commercial real estate concentration of the portfolio.

Loan originations during the quarter were approximately $134 6 million, while payoffs and Paydowns were $52 1 million.

Asset quality continues to remain strong.

So nonperforming assets have increased from the last several quarters as a result of financial challenges experienced by a small subset of our borrowers they represent 0.07 of the portfolio.

At the end of the third quarter the allowance for credit losses totaled 34.0 million, we recorded a $1 1 million provision for credit losses during the quarter primarily related to loan growth.

Loan type mix and updates to the macro environment.

The ratio of the allowance for credit losses to total loans held for investment was one 3% at quarter end.

Loans designated as substandard totaled approximately 2.0 million at the end of the quarter.

Which wasn't increase from $3 million at the end of the previous quarter.

Now that we have discussed the loan portfolio.

We will continue on to deposits and capital.

During the third quarter deposits increased $102 5 million or three 5% as compared to the previous quarter.

Noninterest bearing deposits as a percent of total posits at the end of the third quarter decreased slightly to $27 5 billion from 28, 4%.

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 62% of our total deposits and the average age on these accounts was approximately nine years.

Local agency depositors accounted for approximately 25% of deposits as of September 32023.

As noted earlier, we are pleased.

We have <unk>.

Net deposit inflows for the first three months.

For excuse me for the three months ended September 32023, 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 base.

Overall deposit balances have increased when compared to the prior quarter non broker deposits increased by $137 5 billion interest bearing deposits increased by $101 7 million and noninterest bearing deposits increased by.

$8 million.

Total cost of deposits was 218 basis points during the third 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 9.05% to 9.07% between June 32023 and September 32020.

Three.

On Friday October 28, we announced a declaration by our board of a cash dividend of <unk> 20 per share on the company's voting common stock expected to be paid on November 13, 2023 to shareholders of record as of November six 2023.

On that note I will hand, it over to Heather to discuss the results of operations Heather.

Thank you Jane and Hello, everyone.

Net income for the quarter was $11 million.

On average asset was one 3% and return on average equity was 16, 9%.

Average loan yield for the quarter with 557%, representing an increase of seven basis points over the prior quarter as rate increases continued with fourth increase this year taking place in July.

Our net interest margin was 331% for the quarter.

While net interest margin for the prior quarter with $3 four 5%.

The most recent fed rate increase continues to put pressure on deposit costs.

As a result of changes in interest rates and other factors.

Our other comprehensive loss was $3 million.

During the three months ended September 32023, as unrealized losses net of tax effect increased on available for sale debt securities.

<unk> 9 million as of June 30th at $15 9 million as of September 32023.

Noninterest income decreased to $1 4 million in the third quarter from $2 8 million in the previous quarter.

Primarily to a $1 3 million gain in other income recognized on distributions received an investment and venture backed funds. During the three months ended June 30th.

Non interest expense grew by $36000 in the three months ended September 30, as compared to the three months ended June 30th.

Primarily due to a $5 million increase in salaries and employee benefits, which.

Which was partially offset by decreases of <unk> 3 million and $2 million and other operating and advertising and promotional expenses.

Now let me discuss the overall results of operations I will now hand, it back to Jane 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 supports our clients' success our financial.

Performance is the result of a truly differentiated customer experience, which continues to power the demand for five star banks relationship based services.

We attribute sustained success to our prudent business model and treating customers within empathetic spirit understanding and care. We are very proud of earn the trust of those we serve including our shareholders in the third quarter. Our efforts were recognized as we were listed among.

Piper Sandler.

M. All stars for 2023, as a top performing small cap bank acknowledged.

Outperformance in several metrics, including growth profitability asset quality and capital.

We were also listed among sacramental business journal's best places to work.

Looking to the remainder of 2023, we will be guided by our continued focus on shareholder value as we monitor market conditions. 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 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 you may have.

We will now begin the question and answer session.

To ask a question that's out in the press Star one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing.

Keith.

So withdraw your question. Please press Star then two.

Questions will be taken in the order received.

The first question today comes from Gary Tenner with D. A Davidson. Please go ahead.

Thanks, Good morning.

I wanted to ask about.

Good morning, I wanted to ask about the loan growth this quarter.

Our real estate growth looked pretty concentrated between manufactured home community RV Park in multifamily. So just just wondering what you could tell us about kind of the ongoing demand, particularly in those loan areas and then maybe what the.

The new loans coming on board right now what they look like from a kind of a debt service coverage LTV any kind of underlying metrics around the new loan production.

Sure.

Gary things have slowed.

We expect to.

To see that in the fourth quarter, and probably well into the first quarter, given where cap rates are and interest rates are generally speaking.

Our underwriting underwriting for all of our loan portfolio.

New originations.

It's been very consistent over the years.

And we haven't changed anything.

We do have higher standards for out of state credit than in state credit. So it's been very consistent.

We continue to focus on manufactured home communities and RV parks, and we expect to see similar similar.

In the in the fourth quarter, but we are starting to grow our C&I book So.

We are hopefully that can be.

Attractive.

Business proposition for our prospects to come bank with US we do have a pretty significant effort going on Gary right now down in the Bay area, but also appear in the Sacramento and the capital region. If you will so.

Nothing has really changed from an underwriting perspective.

I think you can see in the deck what are our ltvs are and we're very much cash flow lenders.

So we always like to have a very nice cash flow I think $1 35 is at origination.

In terms of our mobile home Park.

Book of business.

But we've been very consistent over the years.

Great James I appreciate that and then second question I don't know that I saw it in the deck. So I apologize if I missed it but.

The deposit spot rate as of September 30, Heather.

Heather if you could provide that for us either interest bearing our total deposits.

Total total spotlighted $2 24.

Okay and the average was <unk> so was there a.

Kind of.

Notable slowdown in the pace of change over the course of the third quarter.

Yes, very much so there is still pressure.

But I think that.

The pace of change has slowed.

<unk>.

We're very.

A lot of our customers given that we have such a big book in <unk>.

And our local agency or <unk>.

Rate sensitive.

So it's really depending upon what the fed does well we could see some reaction there.

But.

The pace of change has slowed.

Thanks very much.

The next question comes from Andrew <unk> with Stephens. Please go ahead.

Hey, good morning.

Hey, good morning, Andrew.

I wanted to ask about.

Some of the recent expansion of the Bay area and it looked like that the.

Teams their data or the team there did $29 million of deposits in the third quarter. So obviously kind of hitting the ground running I was just curious are those mostly noninterest bearing deposits I know theres more C&I oriented focus there. So what are they mostly in ibs or was it across the board and then.

Separately, just anything on the loan production side from those teams this quarter and just how the pipeline is shaping up there for for both deposits and loans.

Sure.

Right now as we sit here today I think we've got about $38 million deposits from our our bay area of folks San Francisco folks I think that thats equal equally.

Split between noninterest bearing and interest bearing.

And the reason for that is the typical account that we're picking up right now we're getting their operating account.

Andrew but we're also getting their liquidity. So when you kind of most of those together, we're looking at anywhere depending upon the relationship of those balances.

Anywhere between two to two 5% all in.

So we expect that to be same or similar from a lending perspective, I think we've got $5 million credit book So far.

A lot of it is C&I theres, some CRE, but most of it is of it is lines of credit.

As we move forward, we expect same and similar in terms of credit, mostly C&I, but having some smattering of CRE in there and that really is.

Owner occupied whereas a distribution company has got a warehouse that they want us to finance and we want the entire relationship. So will take we'll pick up that piece of CRE.

Line of credit and of course, all of their operating accounts and their liquidity. So it's an all in relationship.

Yeah understood. Okay I appreciate it.

And then just going back to the point on loan growth I heard some of the commentary that maybe production was slowing down I think we certainly saw that this quarter at $935 million of our originations.

Would your expectation be that origination levels moderate from that 135 into the fourth quarter.

And then just overall could you share maybe your expectations for kind of net net balance sheet growth, both loan and deposit growth moving forward.

Sure.

We are.

We're seeing slowdown in loan production given market conditions.

So I don't expect that will originate that level in fourth quarter I would say.

Probably as we sit here today.

We probably are going to do probably something.

$10 million to $20 million less than that.

We do expect some pay offs.

So our net loan growth in fourth quarter, probably be no better than it was in the third quarter.

I think thats, probably a safe statement from a depository perspective, we've got a pretty substantial.

Pipeline.

More so than we've had in the last.

Six to nine months.

And we've got some potentially very some very large customers coming on.

And that.

Relate to some of the verticals in which we're in so we're excited about that.

But again these things take time.

We do expect.

We do expect our deposit.

Growth to exceed our loan growth in the fourth quarter.

I think you could see that we did that marginally in.

In the third quarter, and we expect similar similar results in the fourth quarter, but that reduced levels.

Certainly on the loan side, maybe not so much on the deposit side, but certainly on the loan side.

As we look through.

2024 also given this guidance before but we are still looking at 10% loan growth, 8% deposit growth or sorry, with that 10% deposit growth, 8% loan growth for the forecast period.

I think we're pretty much right on top of that year to date, maybe a little lower on deposits.

Right about that on on loans, but certainly deposit growth has exceeded loan growth.

Yes.

I appreciate it.

And then the last one from me that the $135 million of originations.

Made this quarter do you have what the weighted average.

Yield was for new originations.

Yes that was seven 7%.

7.7, now got it okay I'll step back in the queue. Thanks for taking my questions.

Thank you Andrew.

Again, if you have a question. Please press star one to enter the question queue.

The next question comes from Gary Tenner with global.

Go ahead.

Hey, Thanks for the follow up Heather I just wanted to clarify the comment you just made up on the loan and deposit growth that was relative to 2023.

Correct.

Correct.

Any kind of early thoughts on the kind.

Kind of similar metrics and outlook for 2024.

Yes, similar similar thing, 10% deposits, 8% loan.

Okay perfect. Thank you.

The next question comes from Andrew <unk> with Stifel. Please go ahead.

Hey, thanks for the follow up.

Heather I wanted to get an idea I mean, you guys have that's certainly.

We've done a good job in hiring this year, but when I look at expenses. The expense run rate is also have been I would call it pretty well contained.

I wanted to get your thoughts on maybe the expense run rate hanging heading into the fourth quarter and then any preliminary thoughts on expense growth in 2024.

So for <unk>.

Thank you for acknowledging that we are we're always mindful on our expenses right. We want to make sure that we are spending money effectively and efficiently.

For Q4, whenever we look at this.

I think if you add about $500000 to the noninterest expenses.

To give you a pretty good estimate we did hire new people and that they will continue to add more people.

But we also do have some one time events that happened in Q4, So I think.

About $500000, Ken can get you there for the rest of the year.

And then I think you could probably use that as a proxy for the first two quarters of next year.

Okay. So around 12 five.

Quarter level, Phil Scott, Yes, I think Thats, a pretty good estimate for now for the next three quarters.

Okay perfect.

And then maybe one more for James just.

To that point on hiring and the teams that you've added.

Certainly it's been it's been great to see.

Where do you feel like you stand today is there a need in your mind to continue hiring or continue to.

To continue building out the Bay area or do you feel like you have what you what you need there in place already today, and then anywhere else across your footprint, where you are seeing market opportunity and what's your kind of appetite to incrementally higher from here.

Well, we we think we have a little ways to go in the Bay area.

Andrew we're targeting probably.

Four to five more people.

When they come on they may come on in January.

And I.

I think or maybe at least one will be coming on here before the end of the quarter. So we think with that team.

We're going to be in very good shape in San Francisco proper proper and the surround now there are.

Several potential hires that are in the bay area, whether they'd be in the North Bay or in the East Bay that we have.

We're starting those dialogues. So ultimately we could have upwards of 20 people.

In the Bay that are covering all aspects of that market down there. So we just have to see how time goes right now and right now we have nine people.

And.

We've got some folks that are pretty near term right now in terms of potential hires we've met with them. Several times. There is a cycle that occurs down there given all the turmoil if you will.

Various stagings for I'm going to say stay bonuses and whatnot that we're sensitive to.

That you have to kind of taken into account and comprehend so.

I think that is.

As a consideration a driver in terms of timing.

So we just have to stay close and look for the best opportunities and we're getting some really quality people they are expensive.

They are of high quality.

Yes.

Very good I appreciate the color.

<unk>.

If I could sneak one more in just on the margin Heather.

I appreciate that.

Commentary on a spot rate and it does look like the deposit costs really kind of slowed in the quarter and I guess.

When you pair that with the other side of the balance sheet does it feel like the margin is kind of at a point of inflection heading into the fourth quarter or would you expect maybe some some further compression in <unk> or early <unk>.

Yes, we will see some compression there is definitely some pressure.

Targeting right now to be between $3 25, and $3 30 on our NIM.

And I think Thats, a pretty good assumption for Q4 in Q1.

Okay. So relatively stable to the <unk> levels may be off a few basis points or so.

That's correct.

Okay perfect. Thank you for the follow ups I appreciate it.

Again, if you have a question. Please press star one to enter the question queue.

This concludes our question and answer session I would like to turn the conference back over to management for any closing remarks.

Great. Thank you five Star Bank Corp 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 expense management have also contributed to the success, we share with our employees and shareholders.

We are very pleased with the recent industry recognition from Piper Sandler and the sacramental business Journal.

We are also pleased the company maintains a Bauer financial superior rating of five out of five stars and an IDC superior rating. The company is also Super performing bank with the Finley reports.

We are driving force for economic development, a trusted resource for our customers and a committed advocate for our community.

We look forward to speaking with you again in January to discuss earnings for the fourth quarter of 2023.

Have a great day and thank you for listening.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

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Yes.

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