Q3 2024 Five Star Bancorp Earnings Call

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Speaker Change: Good day everyone and welcome to the 5 star bankour third quarter earnings webcast.

Speaker Change: Please note this is a close conference call and you are encouraged to listen via the webcast.

Speaker Change: After today's presentation there will be an opportunity for those provided with a dial and number to ask questions. That's your question you may press star and then one using a telephone keypad. So withdraw your questions you may press star in two.

Speaker Change: Before we get started, we would like to remind you that today's meeting will include some poor looking statements within the meeting of applicable securities laws.

Speaker Change: He's for looking statements relate to among other things, current plans, expectations, events, and industry trends that may affect the company's future operating results in financial position.

Speaker Change: Let's statement to involve risks and uncertainties and future activities and results made different materialy from these expectations.

Speaker Change: For a more complete discussion on the risks and uncertainties that may cause actual results to differ materially from the companies for looking statements.

Speaker Change: We see the company's annual report on Form 10K, but the year ended December 31, 2023. And quarterly reports on Form 10Q, but the three months ended March 31, 2024.

Speaker Change: and June 30, 2024, and in particular, the information set forth in item 1A, risk factors in those reports.

Speaker Change: Please refer to slide 2 of the presentation.

Speaker Change: which includes disclaimers regarding forward-looking statements, industry data, unaudited financial data, and non-GAAP financial information included in this 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 presentation over to James Beckwith, five-star Bancor President and CEO. Please go ahead.

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

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

James 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 5starbank.com and click on the Investor Relations tab.

Speaker Change: 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.

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

Speaker Change: As seen in the increase of non-wholesale deposits of $92.9 million during the three months ended September 30, 2024.

Speaker Change: In the third quarter, we maintained our ability to conservatively underwrite, as evidenced by a 50% reduction.

Speaker Change: Loan-to-Value on Commercial Real Estate, managed expenses with our 43.37% efficiency ratio, and deliver value to our shareholders with our $0.20 per share dividend for the first, second, and third quarters of 2024.

Speaker Change: Our pipeline continues to remain solid at the end of the third quarter of 2024 within verticals we have historically operated in.

Speaker Change: as presented in the Loan Portfolio Diversification slide.

Speaker Change: Loans held for investments increased during the quarter by $194.3 million, or 5.95% from the prior quarter.

Speaker Change: primarily related to the purchase of loans within the consumer concentration of the loan portfolio.

Speaker Change: representing 129.4 million of the increase.

Speaker Change: Loan originations during the quarter were $333.8 million.

Speaker Change: while payoffs and paydowns were $40.7 million and $98.8 million, respectively.

Speaker Change: Asset quality continues to remain strong. Non-performing loans decreased to 0.05% of loans held for investment at period end compared to 0.06% at the end of the prior quarter.

Speaker Change: At the end of the third quarter, the allowance for credit losses was $37.6 million.

Speaker Change: We recorded a $2.8 million provision for credit losses during the quarter, reflecting loan growth.

Speaker Change: and continued risk associated with general economic trends and forecasts.

Speaker Change: The ratio of the allowance for credit losses to loans held for investment was 1.09% at quarter end.

Speaker Change: Loans designated as substandard or doubtful approximately totaled approximately 1.9 million at the end of the quarter, which is unchanged from the end of the previous quarter.

Speaker Change: During the third quarter, deposits increased by 250.3 million, or 7.95%, as compared to the previous quarter.

Speaker Change: non-interest bearing deposits as a percent of total deposits at the end of the third quarter increased slightly to 26.67% from 26.22% at the end of the previous quarter

Speaker Change: As noted earlier, we are pleased we had net non-wholesale deposit inflows for the three months ended September 30, 2024.

Speaker Change: Our ability to grow deposit accounts support our differentiated, customer-centric model that our customers trust and value.

Speaker Change: To offer more detail on our deposit composition, I want to highlight that deposit relationships totaling at least $5 million constitute 60.58% of total deposits.

Speaker Change: A $81.2 million increase in non-interest bearing deposits.

Speaker Change: The cost of total deposits was 263 basis points during the quarter.

Speaker Change: an increase of 16 basis points from the previous quarter.

Speaker Change: We continue to be well capitalized, with all capital ratios well above regulatory thresholds for the quarter.

Speaker Change: This is due primarily to a reduction in gains from loans sold during the three months ended September 30 compared to June 30, 2024.

Speaker Change: Thank you, Heather.

Speaker Change: I want to thank everyone for joining us as we discuss third quarter results. Five Star Bank.

Speaker Change: We are very proud to have earned the trust of those we serve, including our shareholders.

Speaker Change: 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.

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: Woody Lay from KVW, please go ahead with your questions.

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

Woody Lay: Let's see, we had...

Speaker Change: Madam Chair.

Speaker Change: We sense that we're hitting our stride somewhat with respect to growing our non-interest bearing deposits, free 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.

Speaker Change: 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 strategies, just how does the pipeline look heading into the fourth quarter?

Speaker Change: Sure, so sure, you know, the purchase strategy was centered around loans that we purchased from Bankers Health Group, BHG.

Speaker Change: or Pipeline. We've seen some nice increases here in the last couple of weeks. So we expect long 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 Pipeline is, our lone Pipeline is right now across all of our verticals and geographies.

Speaker Change: 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.

Woody Lay: Yeah, we don't have much CDs outside of our wholesale strategy, so we put on one.

Woody Lay: One large one with the state and that was at about four point

Speaker Change: Yeah, okay, and then maybe to help us, you know on the on the asset side as well I just understand the purchase strategy, you know

Speaker Change: The loan purchase is just so we can think about kind of the net margin of the more kind of wholesaler purchase strategy.

Speaker Change: Okay, great. I appreciate it.

Speaker Change: Yeah, that was at a fixed rate, so we expect that margin to widen.

Speaker Change: So we believe that we'd be able to execute any type of exit strategy should we need to be, should we have to.

Speaker Change: But we don't expect that. I mean, these are pretty quick amortizing loans.

Speaker Change: So, you know, the balance is...

Speaker Change: you know, if we didn't maintain our outstandings, we would, you know, we're

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

Speaker Change: I just want to reiterate though that the program for the VHGs are capped at $300 million and so we're pretty close to that.

Speaker Change: I just kind of want to make sure that you guys for your models know that that that's a cap on that side Yeah, we're not going to do any more

Speaker Change: for sure. Okay. I appreciate that. And then the last one for me, just

Speaker Change: from a general market perspective, but we've also changed to, 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.

Speaker Change: And the folks that we've hired are very recognizable, and so that carries some cachet with respect to future hires.

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

Speaker Change: 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

Speaker Change: I think that we have our normal amount of payoffs in our CRE book, especially in our mobile home part, book of business and RV part, as folks take deals to agency.

Speaker Change: Great and one just one last question for me if Heather you have the September 30 cost of deposit spot rate?

Speaker Change: Okay, thank you.

Speaker Change: Thank you.

Speaker Change: 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: . . . . . . . . .

Speaker Change: And it's showing no additional questions.

Speaker Change: We'll conclude today's question and answer session. I'd like to turn the conference call back over to management for any closing remarks.

Speaker Change: Great, thank you. Five Star Bancorp is on a continued path of growth as we execute.

Speaker Change: 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.

Speaker Change: These successes include numerous

Speaker Change: ratings and awards, in addition to the numerous awards received in the first half of 2024.

Speaker Change: Five Star Band Corp. was included among Piper Sandler,

Speaker Change: Small all-star class of 2024 and was also ranked number five by Bank Director Magazine's ranking banking study of the 2024 best US banks with assets less than 5 billion

Speaker Change: Bank Director Magazine's Ranking Banking study also ranked Five Star Bancorp as the number 18.

Speaker Change: among the 2024 top 25 U.S. banks.

Speaker Change: Our company leadership was recognized with the Sacramento Business Journal's 40 Under 40 Award. Five Star Bank continues to be a driving force for economic development, a trusted resource for our customers.

Speaker Change: and a committed advocate for our communities.

Speaker Change: 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.

Speaker Change: Again, ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending today's presentation. You may now disconnect your lines.