Q2 2024 Five Star Bancorp Earnings Call

Good afternoon, everyone, and welcome to the Five Star Bancorp Second Quarter 2024 Earnings Webcast.

Operator: 24 Earnings Webcast. Please note that this is a closed conference call, and you are encouraged to listen via the webcam. 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 question, you may press star and 0.

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 two.

Operator: Before we get started, let me remind you that today's meeting will include some forward-looking statements within the meaning of applicable securities law. These four 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 performance. 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, 2022, and in particular the information set forth in Item 1A, Risk Factors and Measures.

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 four 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,

Speaker Change: 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 September 30, 2023.

And in particular, the information set forth in Item 1A, risk factors in those reports.

Operator: Please refer to slide 2 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 to 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 Bancorp President and CEO. Please go ahead.

Please refer to slide 2 of the presentation, which includes disclaimers regarding forward-looking statements, industry data, and non-GAAP financial information included in the presentation.

Speaker Change: Reconciliations of non-GAAP financial measures to their most directly comparable GAAP figures are included in the appendix to the presentation.

Speaker Change: Please note this event is being recorded.

Speaker Change: At this time, I'd like to turn the conference call over to James Beckwith, Five Star Bancorp President and CEO . Please go ahead.

James Eugene Beckwith: 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.

James Eugene Beckwith: Thank you for joining us to review Five Star Bancorp's financial results for the second quarter of 2024.

James Eugene Beckwith: Joining me today is Heather Luck, Senior Vice President and Chief Financial Officer.

James Eugene Beckwith: 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 the 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.

James Eugene Beckwith: 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.

James Eugene Beckwith: Our organic growth story continued in the second quarter with the successful close of our public offering.

James Eugene Beckwith: 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.

James Eugene Beckwith: We added five more seasoned professionals to support this expansion and also continue to add new core deposit accounts in the relationship, as seen in the increase of non-wholesale 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.

James Eugene Beckwith: We added five more seasoned professionals to support this expansion and also continue to add new core deposit accounts and relationships.

James Eugene Beckwith: as seen in the increase of non-wholesale deposits of $118.3 million during the three months ended June 30, 2024.

James Eugene Beckwith: Despite continued external headwinds, we maintain our ability to conservatively underwrite, as evidenced by a 50% loan to value on commercial real estate.

James Eugene Beckwith: 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.

James Eugene Beckwith: 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.

James Eugene Beckwith: 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.

James Eugene Beckwith: Additionally, we saw a positive turn in margin compression.

James Eugene Beckwith: and Loans, Total Assets, and Deposits Have Grown Since Prior Periods.

James Eugene Beckwith: Our pipeline continues to remain solid at the end of the second quarter of 2024, within verticals we have historically operated in.

James Eugene Beckwith: Within verticals, we have historically operated, as presented in the Loan Portfolio Diversification slide. Loans held for investment increased during the quarter by $162.2 million, or 5.22% 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. Acid quality continues to remain strong.

James Eugene Beckwith: as presented in the Loan Portfolio Diversification slide.

James Eugene Beckwith: Loans held for investment increased

James Eugene Beckwith: during the quarter by 162.2 million or 5.22 percent from the prior quarter.

James Eugene Beckwith: primarily relating to the purchase of loans with the consumer concentration of the loan portfolio, representing 73.3 million of the increase.

James Eugene Beckwith: Total originations during the quarter were approximately $390 million while payoffs and paydowns were $72.8 million and $155 million respectively.

James Eugene Beckwith: Though non-performing loans increased in the beginning of the third quarter of 2023, they continued 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 driver. The Allowance for Credit Losses to Total Loans Help for Investors 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.

James Eugene Beckwith: 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.

James Eugene Beckwith: At the end of the second quarter, the allowance for credit losses totaled $35.4 million.

James Eugene Beckwith: We reported a $2 million provision for credit losses during the quarter.

James Eugene Beckwith: with long growth and increases in net charge-offs as the leading drivers.

James Eugene Beckwith: The Allowance for Credit Losses to Total Loans Help for Investment

James Eugene Beckwith: was 1.08% at quarter end.

James Eugene Beckwith: Loans designated as substandard totaled approximately $1.9 million at the end of the quarter.

James Eugene Beckwith: which is unchanged from the end of the previous quarter.

James Eugene Beckwith: 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 inflow 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.

James Eugene Beckwith: During the second quarter, deposits increased by $193.9 million, or 6.56%, as compared to the previous quarter.

James Eugene Beckwith: 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.

James Eugene Beckwith: As noted earlier,

James Eugene Beckwith: We are pleased we had a net non-wholesale deposit inflows for the three months ended June 30, 2024.

James Eugene Beckwith: 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.

James Eugene Beckwith: 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.

James Eugene Beckwith: We believe we had a reliable core deposit base.

James Eugene Beckwith: 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.

James Eugene Beckwith: and the average age of these accounts was approximately 8 years.

James Eugene Beckwith: Local agency depositors accounted for approximately 22% of deposits as of June 30, 2024. Overall, deposit balances increased when compared to the prior quarter. Wholesale deposits, which we defined as broker deposits and public prime 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. The cost of total deposits was 247 basis points during the second quarter, a decrease of six basis points from the first quarter.

James Eugene Beckwith: Local agency depositors accounted for approximately 22% of deposits as of June 30, 2024.

James Eugene Beckwith: Overall deposit balances have increased when compared to the prior quarter. Wholesale deposits, which we defined as broker deposits and public prime deposits,

James Eugene Beckwith: increased by 75.5 million. Non-wholesale deposits increased by 118.3 million.

James Eugene Beckwith: driven by a $110 million increase in non-wholesale interest-bearing deposits.

James Eugene Beckwith: and an $8.3 million increase in non-interest bearing deposits.

James Eugene Beckwith: The cost of total deposits was 247 basis points during the second quarter, a decrease of six basis points from the first quarter.

James Eugene Beckwith: 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% to 11.28% between March 31, 2024, and June 30, 2024. On July 18th, our board declared a cash dividend of 20 cents per share on the company's loading common stock, expected to be paid on August 12th. 2024, two shareholders up from the record as of August 5th, 2024.

Speaker Change: 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.

Speaker Change: Our common equity Tier 1 ratio increased from 9.13% to 11.28% between March 31, 2024 and June 30, 2024.

Speaker Change: On July 18th, our board declared a cash given of $0.20 per share on the company's floating common stock, expected to be paid on August 12th.

Speaker Change: 2024, two shareholders of record as of August 5th, 2024.

Heather Christina Luck: On that note, I will hand it over to Heather to discuss the results of the operations. Heather? Thank you, James.

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

Heather Christina Luck: 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 the prior quarter's net interest margin was 3.14%, with loan growth at higher yields and decreased reliance on wholesale deposits as the primary drivers.

Heather Christina Luck: Thank you, James, and hello, everyone.

Heather Christina Luck: Net income for the quarter was $10.8 million, return on average assets was 1.23%, and return on average equity was 11.72%.

Speaker Change: Average loan yield for the quarter was 5.83% representing an increase of 12 basis points over the prior quarter.

Speaker Change: 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.

Heather Christina Luck: 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, the net of tax effect decreased on available for sale debt securities from $12.4 million as of March 31 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 and venture-backed funds during the three months ended June 30, 2024.

Speaker Change: As a result of changes in interest rates and other factors, our other comprehensive income was

Speaker Change: $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 31

Speaker Change: to $12.2 million as of June 30, 2024.

Speaker Change: 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 and venture-backed funds during the three months ended June 30, 2024.

Heather Christina Luck: 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 31, primarily due to increases in commissions related to higher loan production, travel, conferences, and professional membership fees, and sponsorships and donations during the quarter.

Speaker Change: This decrease was partially offset by an increase in gains on the sale of loans during the three months ended June 30.

Speaker Change: Non-interest expense grew by $0.8 million in the three months ended June 30 compared to the three months ended March 31st.

Speaker Change: primarily due to increases in commissions related to higher loan production, travel, conferences, and professional membership fees, and sponsorships and donations during the quarter.

James Eugene Beckwith: Now that we've discussed the overall results of operations, I will now hand it back to James to provide some closing remarks.

Speaker Change: Now that we've discussed the overall results of operations, I will now hand it back to James to provide some closing remarks.

James Eugene Beckwith: I want to thank everyone for joining us as we discussed the second quarter results. Five Star Bank has a reputation built on trust, be deserved, 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 Bank's relationship-based services. We attribute sustained success to our prudent business model and treating customers with an empathetic spirit, understanding, and care.

James Eugene Beckwith: Thank you, Heather.

James Eugene Beckwith: I want to thank everyone for joining us as we discussed second quarter results.

James Eugene Beckwith: Five Star Bank has a reputation built on trust, be deserved, and certainty of execution, which support our clients' success.

Speaker Change: 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.

Speaker Change: We attribute sustained success to our prudent business model and treating customers with an empathetic spirit, understanding, and care. We are very proud to have earned the trust of those

James Eugene Beckwith: We are very proud to have earned the trust of those we serve, including our shareholders. As we continue to lean into 2024, we are guided by a 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 on our organic growth and discipline of 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 may have.

Speaker Change: we serve, including our shareholders.

Speaker Change: As we continue to lean into 2024, we are guided by a continued focus on shareholder value as we monitor market conditions.

Speaker Change: We are confident in the company's resilience in any environment and remain focused on the future and our long-term strategy.

Speaker Change: We will continue to execute on our organic growth and disciplined business practices, which we believe will benefit our customers, employees, community, and shareholders.

Speaker Change: 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.

Speaker Change: And once again, if you would like to ask a question, please press star and one.

Operator: And once again, if you would like to ask a question, please press star and 1. Our first question today comes from... Andrew Terrell from Stevens. Please go ahead.

Speaker Change: Our first question today comes from...

Speaker Change: Andrew Terrell from Stevens. Please go ahead with your question.

Robert Andrew Terrell: Hey, good morning, Andrew. Maybe just to start off, can you talk a little bit about the consumer loan purchase in the quarter, kind of what these loans were specifically, what kind of yield and the credit profile looks like there, and then just more broadly talk about the strategy behind it, particularly kind of considering the recent capital raise and what it feels like as a ramping kind of organic growth profile? Sure.

Robert Andrew Terrell: Hey, good morning.

Heather Christina Luck: Hey, good morning, Andrew.

Robert Andrew Terrell: Maybe just to start off, can you talk a little bit about the consumer loan purchase in the quarter, kind of what these loans were specifically?

Speaker Change: What kind of a yield and the credit profile looks like there and then just more broadly talk about the strategy behind it Particularly kind of considering the recent capital raise and what it feels like is a ramping kind of organic growth profile

James Eugene Beckwith: These loans were originated by Bankers Health Group, BHG. Their credit profile is very strong; I think I'm going to say mid-750 FICO. These are professional individuals throughout the United States.

Speaker Change: Sure. These loans were originated by Bankers Health Group, BHG.

Speaker Change: Their credit profile is very strong. I think I'm going to say mid $750 FICO's.

Speaker Change: These are professional individuals throughout the United States. We've been involved with BHG for several years now and it had a really strong credit experience.

James Eugene Beckwith: We've been involved with BHG for several years now and have had really strong credit experiences with loans that we've purchased from them. We're buying them, Andrew, at an 8.25% yield. That was kind of the average yield for purchases in Q2, and they've been operating like this for several years now. A very strong franchise. A lot of banks throughout the United States utilize them. We first got into it by wanting to make sure that we had appropriate coverage for our small business loans from a CRA perspective, and that has expanded given our very favorable credit experience with them.

Speaker Change: with loans that we've purchased from them.

Speaker Change: We're buying them, Andrew, at an 8.25 percent yield. That was kind of the average yield for purchases in Q2.

Speaker Change: And they've been operating like this for several years now.

Robert Andrew Terrell: Very strong franchise.

Robert Andrew Terrell: A lot of banks throughout the United States utilize them.

Speaker Change: We first got into it by wanting to make sure that we had appropriate coverage for our small business loans from a CRA perspective. And that's expanded, given our very favorable credit experience with them.

James Eugene Beckwith: So it's a shot in the arm. Certainly, we're not going to rely on it in terms of, you know, overall growth of the loan portfolio, but it's additive, and it's coming on at a nice margin, a nice rate, a nice yield, and we like the credit characteristics.

Speaker Change: um

Speaker Change: So it's a shot in the arm, certainly we're not going to rely on it in terms of overall growth of the loan portfolio, but it's additive, it's coming on at a nice margin, nice rate, nice yield, and we like the credit characteristics.

James Eugene Beckwith: Yep, understood. Okay. And when was the purchase made? Do you have kind of a specific timing throughout the quarter just trying to get a better sense. I mean, loan yields were up 12 basis points in the quarter, and the 8.25 here obviously helps that. Just trying to get a sense of whether there's some carry forward on the loan yields into 3Q.

Speaker Change: Yep, understood. Okay, and was the purchase made, do you have kind of a specific timing throughout the quarter just trying to get...

Speaker Change: a better sense. I mean, loan yields were up 12 basis points in the quarter, and the aid in the quarter here obviously helps that. Just trying to get a sense of whether there's some some carry forward on the loan yields into 3Q.

James Eugene Beckwith: Yeah, you'll see that. It was pretty much done, pretty much done, in the last half of the quarter.

Speaker Change: Yeah, you'll see that. It was pretty much done.

Speaker Change: Pretty much done.

James Eugene Beckwith: And so I think that'll carry forward into Q3 of 2024. You know, we'll be looking at maybe doing some more of that, but time will tell. But certainly, it will carry forward in terms of overall and positively impacting overall loan yields. Now, there's a lot of other things that's affecting our loan yields, too. Loans that we're booking outside of the BHG purchase have rates from 7.5 to 8.25 also, and we had a pretty strong quarter for loan originations outside of this, what I would call a wholesale play. And we're also seeing some paydowns of the portfolio, lower rates being paid off. And so we're, you know, overall, that's really pushing loan yields up, as you can see in our Q2 numbers.

Speaker Change: the last half of the quarter.

Speaker Change: And so I think that'll carry forward into Q3 of 2024. You know, we'll be looking at...

Speaker Change: Maybe doing some more of that, but time will tell.

Speaker Change: But certainly it will carry forward in terms of In terms of overall and impacting positively overall loan yields now There's a lot of other things that's affecting our loan yields to that loans that were

Speaker Change: booking outside of the BHG purchase or have rates from 7 1?2 to 8 1?4 also. And we had a pretty strong quarter for loan originations outside of this, what I would call a wholesale play. And we're also seeing some paydowns.

Speaker Change: of the portfolio. Lower rates being paid off and so we're you know overall that's really pushing the loan yields up as you can see in our in our Q2 numbers.

James Eugene Beckwith: Yep, got it. Okay. And then last for me really quickly, just the SBA gain on sale income picked up this quarter. I was hoping you could maybe update us as to what you're seeing within that business. Is this kind of lift upward into Q durable and then just overall kind of expectations? Yeah, we

Speaker Change: Yep, got it. Okay. And then last for me really quickly, just the SBA gain on sale.

Speaker Change: income picked up this quarter. I was hoping you could just maybe update us as to what you're seeing within that business. Is this kind of lift upward into Q durable and then just overall kind of expectations?

James Eugene Beckwith: Yeah, we don't expect it to be durable. In fact, we've kind of trimmed the sails of the origination function. So our expectations about gains on a go-forward basis are certainly less in Q3 and Q4 than we saw in the first half of the year. So, um, we're, um... You know, we've diminished the import of that business. We're still an active lender, but we're not going to be originating any near the levels of volumes we've had historically.

Speaker Change: Yeah, we don't expect it to be durable. In fact, we've kind of turned the sails of the origination function.

Speaker Change: So, our expectations about gains on a go-forward basis are certainly less than Q3 and Q4 that we saw in the first half of the year.

Speaker Change: so we're

Speaker Change: We've diminished the import of that business. We're still an active lender.

Speaker Change: but we're not going to be originating any near the levels of volumes we've had historically.

James Eugene Beckwith: So, uh, we, we, uh, our efforts from a loan origination perspective are really what we're doing out in the Bay Area and what we're doing in all our other verticals in terms of putting on credit. So, gains on sales will definitely diminish. You know, you're probably running from, you know, 50 to 100 grand for the remainder of the year on a monthly basis.

Speaker Change: And so, uh, we, we, uh...

Speaker Change: Our efforts from a loan origination perspective are really, you know, what we're doing on in the Bay Area and what we're doing in all our other verticals in terms of putting on credit. So, gain on sales will definitely diminish.

Speaker Change: You're probably running from $50,000 to $100,000 for the remainder of the year on a monthly basis.

Speaker Change: Understood. Thank you for taking the questions. I'll step back in the queue.

Speaker Change: Thank you, Andrew.

Speaker Change: And our next question comes from Gary Tenner from DA Davidson. Please go ahead with your question.

Robert Andrew Terrell: Understood. Thank you for taking the questions. I'll step back in the queue.

Speaker Change: All finished, good morning.

Gary Peter Tenner: First off, I wanted to ask about the expense run rate. You know, decent quarter over quarter pickup. It doesn't look like there was anything particularly unusual in the numbers. So, I was curious for your thoughts for the back half of the year here.

Operator: First off, I wanted to ask you, hey,

Speaker Change: Yeah, so I was a little short I think whenever we did our estimate We had a few more events and just overall conferences that we attended in Q2 So that drove drove our expenses a little higher So I think for the run rate for the rest of the year if you can add about two hundred fifty thousand dollars

James Eugene Beckwith: Yeah, so I was a little short, I think, whenever we did our estimate. We had a few more events and just overall conferences that we attended in Q2, so that drove our expenses a little higher. So I think for the run rate for the rest of the year, if you can add about $250,000 per quarter to what we incurred in Q2, I think that'll be a good run rate for the rest of the year.

Speaker Change: per quarter to what we incurred in Q2. I think that'll be a good run rate for the rest of the year. You know, we do have some exciting things happening in Q3. You know, we'll do our big celebration for our grand opening of our San Francisco branch in September .

James Eugene Beckwith: You know, we do have some exciting things happening in Q3. We'll do our big celebration for the grand opening of our San Francisco branch in September. So we'll have that as an added expense and then employee celebrations and things like that. So I think $250,000 would be a good run rate each quarter for that as an added expense.

Speaker Change: So we'll have that as an added expense and then employee celebrations and things like that. So I think $250 would be a good run rate each quarter of an additional expense.

James Eugene Beckwith: Okay, I appreciate it. And then on the deposit side, [inaudible] Sure.

Speaker Change: Okay, I appreciate it. And then on the deposit side.

Speaker Change: You talked about the split between, you know, kind of the net growth in...

Speaker Change: non-wholesale deposits, which was positive for the quarter. But obviously, the loan growth well outpaced that. So I just, you know, trying to get a sense of kind of your target comfort level on wholesale funding percentage, where you are right now, and I guess similar question around the loan deposit ratio, which is a little over 100% right now.

James Eugene Beckwith: Sure, we'll continue to lean into wholesale deposits as a source of funding. We did put on a $75 million per-deposit cap towards the end of the quarter.

Speaker Change: Sure, we'll continue to lean into wholesale deposits as a source of funding.

Speaker Change: We did put on a $75 million broker deposit towards the end of the quarter. We're going to, and we do anticipate rates declining.

James Eugene Beckwith: We're going to, and we do anticipate rates declining. So that particular type of funding may be more attractive as we look at the remainder of the year. But it is a tool.

Speaker Change: So, that particular type of funding may be more attractive as we look at the remainder of the year.

James Eugene Beckwith: You know, we could, you know, Gary, if we wanted to, we could, you know, have a loan deposit ratio that's significantly less than what it is right now because we have the availability to do so. We're trying to make sure that we act prudently, really try to protect our margin, but also make sure we have appropriate liquidity to fund the loans that have come on. You know, historically, we've operated with less than a hundred percent loan-to-deposit ratio, and we're looking to kind of target a 95% loan-to-deposit ratio.

Speaker Change: but it is a tool you know we could

Speaker Change: You know, Gary, if we wanted to, we could, you know, have a loan deposit ratio that's significantly less than what it is right now, because we have the availability to do so. We're we're trying to make sure that we act prudently, really try to protect our margin.

Speaker Change: But also make sure we have appropriate liquidity to fund the loans that have come on. Historically, we've operated at less than...

Speaker Change: 100% loan-to-deposit ratio and

Speaker Change: You know, you know, we, you know, we're looking to kind of target, you know, 95% loan to deposit ratio. And we could get there tomorrow if we chose to. But we're really just trying to grow our core deposits and we've been successful in that.

James Eugene Beckwith: And we could get there tomorrow if we chose to, but we're really just trying to grow our core deposits, and we've been successful in that, but we need to continue to stay at it, and hopefully we'll see some more visibility of that in Q3 and Q4.

Speaker Change: We need to continue to stay at it and hopefully we'll see some more visibility of that in Q3 and Q4.

Speaker Change: Thank you very much.

Operator: And our next question comes from Woody Lay from KBW. Please go ahead with your question.

Speaker Change: And our next question comes from Woody Lay from KBW. Please go ahead with your question.

Wood Neblett Lay: Hey, thanks for taking my question. Hey, I wanted to start on the deposit growth you saw with the Bay Area team. I mean, it was really strong in the quarter. Could you just sort of walk through the traction you're getting in those markets and how you expect growth to trend in the back half of the year in the Bay Area?

Wood Neblett Lay: Hey, thanks for taking my question. Wanted to, uh, wanted to...

Wood Neblett Lay: Hey wanted to start on the deposit growth you saw with the Bay Area team. I mean, it was really strong in the quarter Could you just sort of walk through the the traction you're getting in those markets and and how you expect growth? It's a trend in the back half of the year in in the Bay Area

James Eugene Beckwith: Well, we expect it to be similar or even higher than it was in Q2, rolling into Q3 and Q4. You know, we've added a lot more talent and some pretty... pretty big producers, historically big producers at their previous financial institutions. So we kind of like where we're going in terms of the traction that we're getting within the Bay Area. It's still, you know, in San Francisco proper, and I'm going to say throughout the Bay Area, although you could argue there are, you know, down in San Jose in the South Bay, it's pretty stable, but it's still pretty much in turmoil, and that just creates opportunities for us.

Speaker Change: Well, we expect it to be similar or even higher than it was in Q2, rolling into Q3 and Q4. You know, we've added a lot more talent and some pretty...

Speaker Change: pretty big producers, historically big producers at their previous financial institutions.

Speaker Change: So, we kind of like where we're going in terms of the traction that we're getting.

Speaker Change: within the Bay Area. It's still, you know, in San Francisco proper, and I'm going to say throughout the Bay Area, although you could argue there's, you know, down in San Jose in the South Bay, it's pretty stable. But it's still pretty much in turmoil.

James Eugene Beckwith: You know, the conversion that JPM Chase had in the second quarter, I think it was over the Memorial Day weekend, Woody, from, you know, the old FRB platform into the Chase platform didn't go necessarily well from what we hear from our prospects. And so we think that we'll be able to continue to take advantage of that transition, and especially since we've hired a lot of folks who are ex-First Republic folks who have deep relationships, we're very excited about where we think we can take growth in that market, and we're spending a lot of time down there, you know, personally.

Speaker Change: And that just creates opportunities for us. You know, the conversion that JPM Chase,

Speaker Change: had in the second quarter, I think it was over in the Memorial Day weekend, Woody from, you know, the old FRB platform into the Chase's platform, that, you know, that didn't go necessarily well from what we hear from our prospects.

Speaker Change: And so we think that we'll be able to continue to take advantage of that transition, and especially since we've hired a lot of folks who are ex-

Speaker Change: for some Republic folks who have deep relationships.

Speaker Change: We're very excited about where we think we can take growth.

Speaker Change: in that market and we're spending a lot of time down there, you know, personally. Our grand opening is going to be the last week of September for our offices, which is in the downtown financial district of San Francisco.

James Eugene Beckwith: Our grand opening is going to be the last week of September for our offices in the downtown financial district of San Francisco. A lot of outreach is going on right now, and it's an exciting time for us down there.

Speaker Change: A lot of outreach is going on right now, and it's exciting times for us down there.

James Eugene Beckwith: That's, that's great to hear. Any commentary on the loan growth trends you're seeing in those markets?

Speaker Change: That's great to hear. Any commentary on the loan growth trends you're seeing in those markets?

James Eugene Beckwith: Let's see. We've had, you know, in terms of the teams that we brought in, total loan commitments of, what was that, Sarah? of 85 million total loan commitments. Now, that's not all outstanding, but that's what we're seeing. We do expect that operation to be a net contributor to liquidity of the overall entity. And with our pipelines, in terms of our composite pipelines down there, they are very strong, and our loan pipeline down there is very strong.

Speaker Change: Let's see.

Speaker Change: We've had, you know, in terms of the teams that we've brought in, total loan commitments of, what was that, Sarah?

Sarah: Eighty-five million total loan commitments, now that's not all outstanding, but...

Speaker Change: But that's what we're seeing. We do expect for that operation to be a net contributor to liquidity.

Speaker Change: of the overall entity and with our pipelines in terms of our composite pipelines down there are very strong and our loan pipe down pipeline down there is very strong so you know we're excited about the good work

James Eugene Beckwith: So, you know, we're excited about the good work that our new team members are putting in down there. And it's just a great group of new clients that we're bringing on, and it's awfully exciting to see that market traction down there. Our leader down there, DJ Curtsy, is doing a great job, and we appreciate what the whole team is doing down there.

DJ Curtsy: that we're bringing on. And it's awfully exciting to see that market traction down there. Our leader down there, DJ Curtsy, is doing a great job.

DJ Curtsy: And, you know, we appreciate what the whole team is doing down there.

Wood Neblett Lay: Yep. That's great to hear.

Speaker Change: Yeah, that's great to hear. Maybe shifting over to the margin, took a pretty sizable step up in the second quarter.

Wood Neblett Lay: Maybe shifting over to the margin, you know, took a pretty sizable step up in the second quarter. Just, what's the outlook for the third quarter? Just trying to get a sense of what the pull through could be in the third quarter. If we see another step up in the third quarter, just what are the expectations.

Speaker Change: What's the outlook for the third quarter? Just trying to get a sense of what the pull through could be in the third quarter. If we see another step up in the third quarter, what are the expectations?

James Eugene Beckwith: I think it's going to kind of moderate a little bit, so we're going to think 340 to 345, you know, as we, for the third quarter, hopefully, we'll be able to do better than that, but that's what our sense of it is right now. And we'll just have to see how that goes in terms of [inaudible] which is right now about 5.25%. So the extent that we do more of that will have an impact on our margin, but we hope that our core deposit generation will accelerate in the third quarter. But that's our sense of it right now. Woody is between 340 and 345.

Speaker Change: I think it's gonna kind of moderate a little bit so we're gonna we're thinking 340 to 345 you know as we for the third quarter you know hopefully we'll be able to do better than that but that's what our sense of it is right now

Speaker Change: And we'll just have to see how that goes. In terms of...

Speaker Change: You know, our margin, you know, it is impacted, you know, by, you know, a greater reliance or a greater outstanding of wholesale deposits because you're fundamentally getting those deposits right on the marginal cost.

Speaker Change: which is, you know, right now about five and a quarter.

Speaker Change: So the extent that we do more of that, you know, will have an impact on our margin, but we hope that, you know, our core deposit generation will.

Speaker Change: We'll accelerate in the third quarter But that's our sense of it right now. Woody is 340 to 345

Wood Neblett Lay: All right, thanks for taking my questions. Good luck with the Grand Open. Thank you.

Wood Neblett Lay: All right. Thanks for taking my questions. Good luck with the grand opening.

Operator: And once again, if you would like to ask a question, please press star and then one to withdraw your questions. You may press star and then a star and then one if you'd like to add to the question. And ladies and gentlemen, at this time, to ensure there are no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Speaker Change: Thank you.

Speaker Change: And once again, if you would like to ask a question, please press star and then 1. To withdraw your questions, you may press star and 2.

Speaker Change: and then a star and then one if you'd like to join the question queue.

Speaker Change: Ladies and gentlemen, at this time in showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

James Eugene Beckwith: Five Star Bancorp 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 successes we share with our employees and shareholders. These successes include numerous ratings and awards.

Speaker Change: Great, thank you.

Speaker Change: Five Star Bancorp 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.

Speaker Change: Our people, technology, operating efficiencies, conservative underwriting practices, and expense management have also contributed to the successes we share with our employees and shareholders.

Operator: In the first half of 2024, we were recognized with the 2024 Greater Sacramento Economic Council Sustainability Award and the 2023 Raymond James Community Bankers' Cup. In addition, we are listed among S&P Global Markets Intelligence' 2023 Top 20 Best Performing Community Banks in the nation. Our company leadership was also recognized in the first half of 2024 with the Sacramento Business Journal Women Who Mean Business Award, a Sacramento Business Journal C-Suite Award, a National Association of Women Business Owners Outstanding Women Leadership Executive Award, and Independent Community Bankers of America 40 Under 40.

Speaker Change: These successes include numerous ratings and awards. In the first half of 2024, we were recognized with the 2024 Greater Sacramento Economic Council Sustainability Award.

Speaker Change: and 2023 Raymond James Community Bankers' Cup. In addition, we are listed among S&P Global Markets Intelligence 2023 Top 20 Best Performing Community Banks in the nation.

Speaker Change: Our company leadership was also recognized in the first half of 2024 with the Sacramento Business Journal Women Who Mean Business Award.

Speaker Change: a Sacramento Business Journal C-Suite Award, a National Association of Women Business Owners Outstanding Women Leadership Executive Award,

Speaker Change: and Independent Community Bankers of America 40 Under 40 Emerging Community Bank Leaders Award. Five Star Bank continues to be a driving force of economic development, a trusted resource for our customers, and a committed advocate for our communities.

Operator: Emerging Community Bank Leaders Award. Five Star Bank continues to be a driving force of economic development, a trusted resource for our customers, and a committed advocate for our community. We look forward to speaking with you again in October to discuss earnings for the third quarter of 2024. Have a great day, and thank you for listening.

Speaker Change: We look forward to speaking with you again in October to discuss earnings for the third quarter of 2024.

Operator: Have a great day, and thank you for listening.

Speaker Change: Have a great day and thank you for listening.

Operator: Ladies and gentlemen, that does conclude today's conference following in presentation. We thank you for joining.

Operator: Ladies and gentlemen, that does conclude today's conference call and presentation. We thank you for joining us. You may now disconnect your lines.

Speaker Change: Ladies and gentlemen, that does conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.

Operator: You may now disconnect your lungs.